Q2 – Recession or Not?

09/06/22

By Brian Ruisinger, President and CEO

The second quarter economic news was dominated by record inflation reports, rising interest rates and negative GDP numbers prompting a discussion of whether or not we are currently in a recession. The Federal Reserve raised its key interest rate by 1.25% in Q2 after the first raise in years in March of this year. The public perception is that rising rates are a boon for banks.

Over time, yes, in the short term it is actually detrimental. The typical commercial loan carries a fixed rate for some period of time, usually 3 to 5 years. So until a bank’s loans reach their repricing interval, they are yielding the same as when rates were lower. At the same time, depositors begin to demand higher rates to be paid on their accounts, thereby compressing banks’ interest margins and deteriorating profits. This cycle, rates have risen so sharply, so quickly that the economy hasn’t had time to absorb and digest the rate movements and banks are struggling to maintain their margins.

The Fed is compelled to raise rates quickly to head off the record inflation but we are already hearing rumblings of a strategy that indicates the Fed has learned from mistakes of the past and would look to begin lowering rates as early as June of 2023 in order to not choke off the economy as happened in the 1970s when rates remained elevated for too long resulting in a significant recession.

We are pleased that our core earnings increased 16% year-over-year as a result of our concentrated efforts on topline revenue and controlling interest expense. We continue to see good transaction flow while many of our customers are taking a cautious approach to the new economic and rate environment. RBAZ remains well capitalized and poised for continued growth in its mission to be the premier Arizona based bank, as reflected in our Bauer Five-Star bank rating.