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Community Banks Prepare for Rate Hikes

NEW YORK ( TheStreet) -- With The Federal Reserve's second round of quantitative easing (QEII) set to end in June, community bank executives are ready for a rise in interest rates. But that could mean trouble for consumers.

"Most banks are prepared for rates to move up. Banks, generally speaking, are more likely to earn more," said New York Community Bancorp (NYB) CEO Joseph Ficalora.

"We expect the Fed to raise the rates soon," said First California Financial Group (FCAL) CEO C.G. Kum. "Interest rates on a ten year Treasury could be as high as four percent by the end of this year."

With interest rates at near zero levels since 2008, banks have been adding assets in anticipation of their eventual increase.

Flushing Financial (FFIC - Get Report), with $4.3 billion is assets, is one of those banks that has been building out its portfolio to take advantage of a rise of interest rates by transitioning to a commercial bank from a thrift bank. The bank has added to their mortgage portfolio, lends to small businesses and built a commerical banking revenue stream through an interent banking option.

"We are taking advantage of the low interest rate environment at the moment and will be protecting our selves as interest rates rise by getting into long liability products," Flushing Financial (FFIC - Get Report) CEO John Buran said at a recent American Bankers Association conference.

While a rise in rates helps banks' balance sheets, if they rise too rapidly it could potentially harm consumers, prompt foreclosures and decrease lending.

"The real question for us is how rapidly the rates will rise," says HF Financial Corp. (HFFC - Get Report) CEO Curtis Hage. "How the consumer will adapt to the shock and can they afford the rising rate is also a large concern," he added.

Hage says his bank, which has a market cap of $77 million, has grown in residential and consumer direct loans as well as interest bearing checking accounts since the crisis. While a rise in interest rates would be beneficial to the bank's bottom line, if rates rise too rapidly and consumers can't keep up with mortgage payment, it could trigger a round of premature foreclosures, he said.

"All loans would be at a higher rate and many consumers would not qualify to get a loan if rates rise too rapidly," said Ficalora. "There would be fewer consumers eligable to purchase a home, and when you have too few buyers housing prices go down."

--Written by Maria Woehr in New York.

To contact the writer of this article, click here: Maria Woehr.

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