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Small institutions anticipate minimal impact from interest rate hike

The long-anticipated interest rate increase announced Dec. 14 will not impact community banks and credit unions as much as subsequent rate moves in 2017 could, some industry participants say.

Federal Reserve officials on Wednesday announced that they raised the target range of the U.S. central bank's key interest rate by 25 basis points after their final monetary policy meeting of the year. Such a move in December had been anticipated for months.

And although the increase is welcome, some leaders of small lenders say the immediate impact will likely be minimal. Tuscaloosa, Ala.-based Alabama Credit Union President Stephen Swofford said that on the asset side, vehicle loan rates will probably remain stable due to competition. Mortgage rates have already moved up and probably will remain about where they are today, he said. "At our credit union, the biggest impact of the rate change will be to increase the yield on our adjustable securities and [adjustable-rate mortgage] loans," he said. Alabama CU holds several million dollars' worth of those mortgages, and rising rates will improve its revenue stream.

Even more significant to the credit union is that more than half of its securities portfolio, and about 20% of its assets, are adjustable SBA loans, which will immediately adjust upward.

Swofford is doubtful the rate bump will result in much of an increase ?on the credit union's cost of funds. He said there could be some minor increase in CD rates, but it is unlikely that Money Market rates will rise. "For us, the increase in asset yields will be way more significant than any marginal increase in liabilities, so we will experience an improvement in our bottom line," Swofford said.

Andover Bancorp Inc. Chairman and CEO Martin Cole said in an interview a 25-basis-point increase by the Fed will have little impact on consumer behavior. But subsequent rate increases next year, which are anticipated, may have an impact.

Cole said the longer-term market rates are beginning to move significantly, which will impact mortgage leading, and he anticipates a slowdown in refis. There may be some impact in small business lending, too, as the cost of borrowing increases due to increases in the prime rate. But Cole said he does not anticipate any significant changes in consumer savings patterns at least until the equities market changes. "If there becomes a pullback in the market, we may see an increase in deposit activity," he said.

National Association of Federal Credit Unions Chief Economist Curt Long said the impact of a quarter point rate hike on U.S. households should be minimal. But it will come as a relief if it is accompanied by a forecast for more increases in 2017. He said the Fed will not make any assumptions about President-elect Trump's economic agenda. "A large spending bill accompanied by tax cuts certainly has the potential to increase growth and inflation, paving the way for faster rate normalization in the coming years. But the Fed will stick to its wait-and-see approach," Long said.

Andover's Cole said each financial institution will be impacted differently depending upon their asset/liability management strategies. The Andover, Ohio-based bank has already seen a positive impact in its investment portfolio by about 70 basis points. That is significant for Andover Bank because of its low loans-to-asset ratio relative to its peers, Cole said. "Slow and moderate rate increases will be generally positive for us because we are asset sensitive in our asset/liabilities model," he said.

It is assumed that most financial institutions should benefit from moderate rate increases. Historically, financial institutions tend to move asset rates faster than deposit rates. Banks like Andover also benefit more from a traditional yield curve rather than a flat rate environment, Cole said.

Cole believes that a lot of what is happening currently in both the bond and equity markets is being fueled by speculation of policy changes in Washington and the subsequent perception that it would be positive for the economy. But at this point it is difficult to assess how much of the economic gains are real or perceived, Cole said. It is also difficult to assess what may actually be accomplished next year and/or their subsequent impacts.

Andover Bank is anticipating positive results for itself and its customers with the possibility of changes in compliance relief and subsequent changes in the regulatory process, especially the potential decrease of the role of the Consumer Financial Protection Bureau.

"There's a lot of uncertainty and speculation," Cole said. "It should be a very interesting year."