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“If you lose a loan, that’s fine because we choose
the period that we’re working through right now.”
not to compete; that is also on me, not only on
But some banks have managed to weather this
you [the loan officer],” Yu says. “The philosophy
transition well and avoid the pain, and they have
is we’re one team — [lenders] don’t feel they’re
done so through fastidious balance sheet man-
penalized for losing that loan.”
agement. Two banks on the RankingBanking top
Yu says that the discipline to not compete for
25 list — Los Angeles-based Preferred Bank and
certain loans in this environment came from em-
Wilmington, Delaware-based The Bancorp — are
ployees’ previous experience in the 2008 credit
perennial top performers that have been profiled
crisis or even earlier, going back to lessons from
by Bank Director in the recent past. Both make
the savings and loan crisis in the 1980s. Through-
floating rate loans with price floors, making them
out the bank, he says, employees understood and
extremely asset sensitive as interest rates rise.
agreed that this approach would protect Preferred
They can reward depositors, producing a slightly
from a substantial rate and duration mismatch
higher cost of funds, without pressuring the mar-
between liabilities and assets once rates began to
gin too much. They have relatively small securities
rise in 2022.
portfolios. And in a year where all banks made
This discipline paid off. Net income for 2022
money, they made even more.
hit $128.8 million, compared to $95.2 million
“When you look at institutions that do well,
in 2021. The bank’s return on average assets for
they have fairly diversified business models. They
2022 was 2.08%, and its return on average equi-
execute well, they have better than average rates
ty was 21.31%. Loans still grew 14.7% over the
on their asset side of the portfolio, and they’ve got
year. Yu adds that about 85% of Preferred’s loan
good funding sources that are stable and at a rel-
portfolio was floating rate at the end of the first
atively low cost,” says Rick Childs, a partner at
quarter of 2023, a percentage he believes makes
Crowe LLP, speaking about banks broadly.
them one of the most asset sensitive banks in the
industry.
As rates rose in 2022, so did loan demand. Total loans and lease balances at banks increased by
The word “unprecedented” has been thrown
8.7%, or $979.9 billion, from 2021 to 2022, ac-
around a lot in the last three years, but 2022 saw
cording to the Federal Deposit Insurance Corp.’s
a truly unprecedented event in banking history:
fourth quarter 2022 banking profile.
a more than 400 basis point increase in interest
“The real question [of 2021 and early 2022]
rates. It generated record net interest income for
was, ‘How do we get yield, and where do we find
banks, but came with rising risk, costs and uncer-
it?’” says Patrick Vernon, senior manager, adviso-
tainty. It also caused a mountain of unrealized loss-
ry services at Crowe. “As we started to shift and
es in banks’ securities portfolios or other low-yield-
see rates rise, it became a game of, ‘How can we
ing assets, and it has pressured funding costs.
redeploy our balance sheet and operationalize the
“If you’d asked any banker a couple of years
capital we have to find those avenues of yield?’”
ago, ‘Would we be better off in a higher rate en-
The loans banks made in 2022 were at higher
vironment?’, the answer would be unequivocally,
rates relative to the last three years. As a result,
‘Yes,’” says Mark Fitzgibbon, managing director
bank net interest margins grew 82 basis points
and head of financial services research at Piper
year-over-year, to 3.37%, according to the FDIC
Sandler & Co. “The problem is [that] getting from
— the largest reported increase in the history of
a low rate environment to a higher rate environ-
the agency’s quarterly update.
ment is painful for almost everybody, and that’s
Banks making floating or variable-rate loans in