The Federal Reserve’s decision in December to raise interest rates has caused some local banks to increase their prime rates. But, what about credit unions?
What will higher rates mean for loan and deposits rates in Southern Nevada?
“The long anticipated and modest increase has had little impact on current rates offered by America First Credit Union,” Rex Rollo, executive vice president and CFO of AFCU told the Business Press in an email. “Rates are influenced by the Fed moves but are also market or competitively driven within geographic areas.”
Rollo said interest rates have been at historical lows for the past few years. If rates were to increase slowly as the Fed has suggested, loans would still be affordable. He said depositors would also benefit from extra earnings.
“Inflation or the price of goods has a bigger impact on our members than higher interest rates,” Rollo said. “Our members have seen very little impact with the modest increase in rates.”
The Fed’s December interest rate hike was the first in nearly a decade. That modest 25-basis-point increase sent analysts into overdrive as many predicted the Federal Reserve’s Open Market Committee would raise rates three to five times this year.
John Williams, president and CEO of the Federal Reserve Bank of San Francisco, told bankers last month that he expects more interest rate increases this year.
“The median projection of FOMC participants from our December meeting indicates four hikes being appropriate in 2016 and 2017,” Williams told a meeting of the California Bankers Association in Santa Barbara in a speech titled “After the First Rate Hike.”
For now, the Federal Reserve has left rates alone. In a unanimous vote on Jan. 27, the Federal Reserve left the range for its benchmark interest rate unchanged between 0.25 percent and 0.50 percent.
The next FOMC meeting is scheduled for March 15 and 16.
Dwight Johnston, chief economist with the Nevada Credit Union League, doesn’t expect a rate increase in March. But, he told the Business Press he does expect three more interest rate hikes by the end of 2016.
Three more rate hikes this year would leave the Federal Reserve’s benchmark interest rate at 1 percent.
“After the market tumult in January, there is a burgeoning camp of people who believe the Fed will not tighten at all this year,” he said. “With other central banks in the world easing, the Fed would risk a much stronger dollar if it were to tighten. At least that’s the current mindset and the reason that bond rates are down, not up, since the Fed’s December move. I am not in that camp.”
Rollo expected the Federal Reserve to be cautious “in light of weakness still in the economy since the Fed raised the rates in December.” Rollo said he was on the lower side of analyst expectations, expecting two moves this year.
Both Rollo and Johnston believe the impact of the Fed’s initial rate hike “seems to be minimal” on Southern Nevada.
“We’ve seen some credit unions nudge up short-term deposit rates, but the Fed’s move was minimal affecting only the overnight rate between banks,” Johnston said.
But in the longer-term, the Fed is expected to continue its tightening. Johnston said if the current fears abate about the global economy and the negative impact of that on the U.S, the Fed could continue to tighten.
“In this case, you could expect to see loan and deposit rates also rise, not because of what the Fed did, but because the market would adjust its outlook for the economy and inflation,” Johnston said. “Loan and deposit rates would rise more quickly as the market adjusts.”
Other financial products, like adjustable rate mortgages, credit cards, and auto loans could also become more expensive.
Johnston said after some first quarter weakness, he sees the U.S. economy picking up again. More importantly, he expects wages to rise and inflation expectations to shift higher.
But, he warned that the “risks to the downside on the global scene are real.”
Johnston said if he is right, auto lending and mortgage lending should be good for the first half of the year but taper off in the second half of 2016.
As for higher rates and their impact on Southern Nevada, Johnston said the region has recovered to the point that economic conditions are in line with other states.
He said while home prices are still well below their peak rates and in the affordable category, rising interest rates would sting a bit but not be as impactful as they would be in high-priced areas.
“Interest rates have been a non-story for years other than the rates on mortgages,” Johnston said. “If rates do rise this year, credit unions will need to be more sensitive and responsive.”
One Nevada nets $10.2M in 2015
One Nevada Credit Union recently posted its fourth consecutive profitable year. The state’s largest credit union reported net income of $10.2 million last year, compared with $7.06 million in 2014.
One Nevada earned $6.4 million in 2013, and $2.4 million in 2012. In 2011, the credit union posted a net loss of $4.8 million.
“We’re thrilled with our 2015 results,” said One Nevada CEO Brad Beal. “Although the Nevada economy improved in 2015, we still have a close eye on the local employment and housing numbers.”
Beal attributed last year’s earnings to record volumes in auto loans, credit cards and mortgage loans. The credit union also said its net worth ratio was 11.42 percent, and loan delinquency and provision for loan losses fell to pre-recession levels.
One Nevada also added 14,434 new members last year, and now has more than 76,681 members in Clark, Washoe, and Nye counties. As of Dec. 31, One Nevada had assets of $785 million.
Meadows Bank posts record income
Meadows Bank continues to post positive net income results. The Las Vegas-based community bank reported an after-tax profit of $8.4 million last year, compared with $6.5 million in 2014.
The bank attributed the growth in income primarily from a $4.3 million boost in net interest income and a $323,000 in noninterest income offset by $1.1 million in higher operating expenses and $1.3 million in additional income taxes.
“We were very encouraged by the growth in loan demand in Nevada and other markets and continued improvement in the quality of our loan portfolio, said William Bullard, chairman of Meadows Bank.
Bullard said the bank’s new Phoenix branch opened in January, as Meadows Bank ended 2015 with $530.7 million in assets, and $457.4 million in assets. The bank’s loan portfolio grew by $88.8 million to $466.1 million.