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Tariff impacts on community banks & credit unions

Dave Koch
June 5, 2025
Read Time: 0 min
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Navigating economic uncertainty tied to the shifting trade landscape 

From heightened credit risk to potential impacts to liquidity, financial institutions are planning for the potential effects of tariffs and related economic uncertainty. 

Key topics covered in this post: 

Planning for tariff impacts on risk & performance

The announcement of new tariffs by President Trump on April 2 — dubbed "Liberation Day" — rattled the markets. Stocks plummeted, bond yields surged, and confidence in the administration’s economic strategy took a hit. Investors watched retirement accounts dip while analysts debated the broader implications. At first glance, the picture seemed bleak.

But in the weeks since, a more complex picture has emerged.

Market reactions initially centered on the chaos: an undefined shift in trade policy with unclear direction. We’ve since seen signs that these tariffs may be more about leverage — setting the table for trade negotiations. Pauses in implementation and selective carve-outs hint at a more calculated approach than a definitive new order.

Nevertheless, financial institutions — especially those in rural or industry-heavy regions — need to think carefully about the global and local ramifications of this evolving trade landscape. What impacts might it have on your bank or credit union’s risk, performance, and planning? Understanding and planning for the  potential ramifications of tariffs and the related uncertainty is essential.

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Watch for signs of heightened risk

The continuing tariff news has elevated overall economic uncertainty, affecting businesses and households alike. Higher prices on imported goods could put pressure on savings rates, compress consumer spending, and increase credit risk. Financial institutions should already be watching for delinquencies and slow-paying loans, and they may reconsider underwriting assumptions as the policy framework evolves.

Some businesses may front-load purchases to stay ahead of rising costs, but long-term capital investment is likely to slow.

Financial institutions with ag exposure are particularly vulnerable, so they need to stay especially sharp. Agriculture isn’t just a loan on the books in parts of the Midwest and South — it’s the local economic backbone. Beyond individual balance sheets, entire local economies reliant on crop yields, equipment purchases, and seasonal labor are exposed. Ag lenders should watch closely for early warning signs such as declining average deposit balances, altered loan payment patterns, and lower ACH transaction volumes.

Inflation and interest rates concerns

Inflation is another pressing concern with ramifications for banking.

A recent Dallas Fed Business Outlook Survey found that businesses increasingly expect higher input costs and plan to pass them along to consumers. That kind of pricing power shift can compress consumer spending and squeeze margins across the financial system.

And then there’s interest rates. Even a pause in rate cuts could keep interest expenses elevated — a burden for community financial institutions that recently moved out of non-maturity deposits and into higher-cost short-term CDs.

Additionally, we are beginning to see divergent lending behaviors, based on our conversations with financial institution leaders. In some areas, there has been a moderate uptick in revolving credit usage — possibly a sign of consumer liquidity stress. Some community financial institutions also report that they’re seeing commercial real estate deals that normally would go to regional banks, particularly in areas reliant on imported construction materials.

Watch for industry-specific stress tied to tariffs

On the ground, some industries are already feeling the squeeze, which could impact banks and credit unions.

Higher tariffs on materials like steel, aluminum, and lumber increase construction costs, which puts pressure on homebuilders. This hits particularly hard in urban growth corridors where housing starts had begun to rebound. For community FIs that generate fee income by originating and selling mortgages, this poses a serious challenge. With rising rates and low housing inventory already dampening recovery prospects, tariff-driven cost increases could delay any rebound and affect pipeline margins.

The auto sector’s also in the crosshairs. Tariffs on imported vehicles could shrink demand for new cars, shifting more buyers into the used car market. Credit unions — many of which rely heavily on direct and indirect auto lending — may need to explore new ways to deploy capital. According to early feedback from regional lenders, used auto loans have begun to show modest growth, but that creates both opportunity and risk, particularly around vehicle valuation and loan-to-value ratios.

As one community banker put it: “The average borrower is still making their payments — but just barely. If gas or grocery prices tick up even a little, I worry we’ll see a spike in credit card delinquencies and skipped auto payments.”

On the ag side, another financial institution leader shared: “We’re already stress-testing our agriculture portfolio for higher input costs. Fertilizer, feed, equipment — it’s all impacted. And when our farmers slow down, the rest of the town does too.”

Duncan Taylor, EVP at the Washington Bankers Association, noted early signs of weakening loan demand—an indicator that businesses might be holding off on projects that had been in the works. During a recent Abrigo podcast, Taylor said: “The impact on banking is that anytime commerce is affected, the banking industry is going to experience that viscerally because our fundamental business model is we build communities, and we facilitate the flow of commerce. That's banking in a nutshell.”

Also of note: some banks and credit unions are seeing a slowdown in deposit growth in suburban and rural branches. We saw the same thing during the post-COVID inflation cycle when households dipped into savings to cover higher prices. Institutions servicing communities that depend heavily on manufacturing or farming may especially see this slowdown.

Operational response for financial institutions: Rethinking risk

All of these situations point to the need for sharper risk management.

Institutions should revisit their stress testing scenarios and make sure they’re factoring in potential tariff-driven shifts in liquidity, loan performance, and rate sensitivity.

The COVID-era chase for yield led many institutions into long-term bonds at rock-bottom rates. That came back to bite some institutions with unrecognized losses once rates surged. It’s a good reminder that strategic ALM should focus on long-term strategy, not just short-term earnings.

Outlook: Planning amid volatility

Forecasting growth and margin in this kind of environment is never easy. But it’s not impossible as long as institutions stay rooted in strategic priorities and flexible enough to adjust as needed.

If there's a silver lining here, it’s that community FIs have one major advantage: proximity. You’re in the room with your borrowers. You’re in the neighborhoods where economic change shows up first. That kind of insight can be your edge — whether it’s identifying stress sooner or uncovering new lending opportunities before others.

We saw this during the pandemic, when community institutions led the way in digital transformation and the delivery of Paycheck Protection Program (PPP) loans. Today’s tariff-related uncertainty may push innovation again — this time in risk management and community-focused services and strategies.

Stay close to your data on loan payments, deposits, and ACH activity. Add tariff-related scenarios to your stress test models and review underwriting criteria in light of vulnerable industries and inflation trends. Re-evaluate interest rate risk considering possible interest rate curve inversion/reversion. Look for lending opportunities by considering which sectors may grow as others slow. Lean into community relationships that give you the clearest window into what’s happening locally.

Uncertainty isn’t new. But the combination of geopolitical risk, inflation, and rate pressure means FIs need to be sharper than ever. With disciplined planning and a strong read on your local economy, your institution can come through this even more resilient and better prepared for the next curveball.

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About the Author

Dave Koch

Director, Advisory Services
Since 1989, Dave has delivered educational programs on Asset/Liability Management and pricing topics to Federal Regulatory Agencies, national and state industry trade groups, Federal Home Loan Banks, and Corporate Credit Unions nationwide.

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About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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