Taking a Disciplined Approach to Setting Interest Rates

05/26/22

After our record loan growth of $14 million late in the fourth quarter, our Q1 loan production moved into an anticipated and natural quiet period. We also experienced some significant loan payoffs as our business owners took advantage of record valuations to sell their business assets.

Deposits continued to fuel our total asset growth with over $18 million in net increase while reducing cost of funding. Our earnings continue to be strong and on track with 2022 budget expectations as we saw a 29% increase in quarter over quarter core earnings.

As we see the tail end of the Paycheck Protection Program (PPP) final round paying off, we turn our focus to the economic impacts of rising interest rates and record inflation on our customers and local economy. You have all undoubtedly seen and heard about rising interest rates. The Federal Reserve has increased its benchmark rate twice this year already three quarters of a point, with predictions of raises at each of the remaining seven meetings this year in order to try and head off runaway inflation.

Why Deposit Rate Increases May Lag

So what does this mean for you and RBAZ? Rates have been at historically low levels for a decade now and we all became accustomed to low residential mortgage, commercial loan, and deposit rates at banks. The correlation between deposit rates rising at banks may be delayed because banks are loaded with deposits coming out of the pandemic and government assistance programs of the past two years.

This, combined with soft loan demand may signal that we do not see banks raising deposit rates in direct correlation with the Fed increases. At RBAZ, we monitor the deposit rates of all competitors in the Phoenix metro area on a weekly basis to insure we are priced competitively in the top 20% of all categories.

Banks must maintain a healthy spread, or margin, between their loan rates and deposit rates in order to be profitable. We will be disciplined in our approach to setting rates during this rapid action by the Fed. We have already seen our bell-weather 10 year treasury bond go from 1.75% to 3.00% in 60 days.

This is an historic rise in rates and just like the supply chain interruptions we are experiencing from the pandemic, it will take some time for the financial services industry to adjust and find a new leveling. Choppy waters are likely ahead for the rest of 2022 regarding interest rates.

Staffing remains a challenge to engage the right people to support our growth and expansion plans, but we remain vigilant and confident in our pursuit of finding the right bankers to join the RBAZ family. RBAZ remains well capitalized and poised for continued growth in its mission to be the premier Arizona-based community business bank, as reflected in our Bauer Five-Star bank rating.