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Preferred Bank defends its deposit base by
months,” he says. “That’s why our NIM explodes.”
taking care of its depositors, which can generate
But the biggest change for bank balance sheets
a higher-than-peer cost of funds. But, executives
in 2022 arguably wasn’t on the loan or deposit
argue, the bank can afford to reward relationship
sides. It was in the securities portfolio, which is
deposits with an attractive interest rate because
normally a reliable source of yield or liquidity. In
of its higher asset yields. The bank’s total deposit
2022, it was neither.
costs for 2022 averaged 0.78%; it was 1.66%
As rates rose, low-yielding U.S. Treasuries that
for the fourth quarter, but NIM in the same period
banks purchased with excess pandemic stimulus
was 4.75%.
lost resale — or market — value, given the dif-
“If you want to keep your clients happy, you
ference between the rate they paid compared to
don’t want to shortchange them on a long-term
similar but newer bonds with higher interest rates.
basis,” Yu says. “We think we are paying a little
These unrealized losses totaled $620.4 billion at
bit above average in our deposits rate, so [clients]
year-end 2022, according to the FDIC. Of that,
feel their money is not being wasted and not being
$279.5 billion in unrealized losses on securities
shortchanged.”
marked “available for sale,” or AFS, showed up
Maintaining adequate liquidity in 2021 and
as accumulated other comprehensive income, or
2022 has allowed Preferred and Los Ange-
AOCI, in bank call report data and were deducted
les-based Hanmi Financial Corp., another bank in
from tangible common equity capital levels.
the RankingBanking top 25, to be “on the front
Executives at both Preferred and The Bancorp
foot” when it comes to serving customers and
say their bank has minimal securities portfolios
meeting their credit needs, says Timothy Coffey,
and manageable unrealized losses. Preferred’s in-
associate director of depository research at Jan-
vestment securities averaged $432.8 million for
ney Montgomery Scott, who covers both banks.
2022; its AOCI recorded a loss of $28.6 million.
“That’s one of the things I think about for these
Taxable investment securities at The Bancorp were
two banks: the way they focus on serving their cli-
$855.6 million at the end of the year; its AOCI had
ents, they have liquidity available to do it,” he says.
a loss of $30 million.
At The Bancorp, the deposits that come from
Fitzgibbon says the AOCI line item was the
the fintech partnerships and prepaid cards funded
“biggest single change to bank balance sheets in
more than 130 million insured small dollar ac-
2022.” Even with those mounting losses through-
counts at the end of March 2023. Kozlowski says
out 2022, most banks could hold these bonds
the bank passes on 42% of each federal funds rate
without needing to sell them at their lower values
increase to the fintech partner and keeps the rest
for additional liquidity. But the loss of bond val-
for itself, creating a predictable and immediate
ues contributed directly to the liquidation of La
rate of change. It keeps 100% of the rate change
Jolla, California-based Silvergate Bank and the
on its repriced assets, which lowers the overall
failure of Santa Clara, California-based Silicon
beta. The average rate of the bank’s $6.3 billion in
Valley Bank in March 2023. The deposit runs and
deposits at the end of 2022 was 82 basis points; it
instability caused by Silicon Valley Bank’s failure
was 1.68% in the fourth quarter. NIM was 4.21%
led to two more sizable bank failures, Signature
in the fourth quarter and 3.55% for 2022.
Bank in New York and San Francisco-based First
“That stable funding has no deposit beta; once
Republic Bank.
[the fed funds change], it changes that month,
It is now nearly impossible to divorce the impact
but we get a loan repricing over the next three
of high interest rates on bank balance sheets in