At the beginning of each year we look back and see what has changed for our clients from an interest rate risk standpoint.  As market conditions change and bank balance sheets adapt, interest rate risk profiles adjust as well. The world looked a lot different at the end of 2020 compared to the 12 months prior. The pandemic had an impact on seemingly everything. Interest rates and bank balances sheets were no exception.

From an interest rate perspective, the yield curve steepened and overall rates declined. The Fed Funds Target Rate fell 150 bps from a range of 1.50%-1.75% to a range of 0.00%-0.25%. Short term interest rates averaged about 145 basis points lower from December of 2019 to December of 2020 with the overall curve falling on average about 130 basis points.

From a composition standpoint, bank balance sheets became even more asset sensitive in 2020 as deposits poured in and cash balances ballooned. Cash is now making up a larger percentage of assets on bank balance sheets. Even with the addition of PPP loans at many banks, loan-to-asset ratios are down for our clients, as are securities to total assets.

MEDIAN Loans/Total Assets (%)

Less than $50 Million 42.90%
$50 Million to $100 Million 56.68%
$100 Million to $250 Million 58.79%
$250 Million to $500 Million 61.54%
Greater than $500 Million 73.00%
ALL RSA Clients 60.18%


MEDIAN Securities/Total Assets (%)
Less than $50 Million 30.95%
$50 Million to $100 Million 26.38%
$100 Million to $250 Million 24.82%
$250 Million to $500 Million 15.92%
Greater than $500 Million 10.69%
ALL RSA Clients 22.57%
Source: UMB Internal Data

Let’s take a look at how the balance sheet and interest rate changes have affected the interest rate risk profiles of banks. We compiled the results of all the Rate Sensitivity Analyses (RSA) performed for clients that have submitted thus far using December 31, 2020 data. We broke down the results by asset size for comparison purposes. It is important to remember that individual institution estimates may vary greatly based upon the underlying assumptions of the model. Sample size per stratum also has an impact on the results. We left space at the bottom of each table for you to input your institution’s results so that you can easily compare them to peer.

Earnings at risk

The results of the earnings-at-risk simulations show that, given the structure of their balance sheets as of December 31, 2020, most of our clients are positioned to see an increase in net interest income should market interest rates rise over the next 12 months. The higher overnight cash balances at the end of 2020 have resulted in earnings projections to increase by larger percentages in the rising interest rate shocks in 2020 compared to 2019. Falling rate declines are tempered given the current rate environment and instruments hitting natural floors fairly quickly.

Source: UMB Internal Data

The added steepness to the yield curve was not enough to counter-act the lower rate environment. The continued lower rate environment has led to lower net interest margins and return on assets across the board.

Source: UMB Internal Data

It’s not just the lower rate environment that is dragging the yield on earning assets down. Higher cash balances along with 1.00% Paycheck Protection Program (PPP) loans that were added to a lot of balance sheets are also contributing to the lower yields on earning assets.

Source: UMB Internal Data

Cost of Funds also declined significantly as banks reacted to falling rates.

Source: UMB Internal Data

Economic value of equity

The following tables show the results of the economic value of equity (EVE) simulations performed using December 31, 2020 data. (Note: Economic Value of Equity = Net Present Value of Assets – Net Present Value of Liabilities). Overall, EVE volatility has declined. This again can be attributed to the larger cash balances being held. This lowered the duration of assets which matches it more closely to liability duration, resulting in lower volatility. Most of our clients are showing a fairly stable EVE position. Overall, EVE volatility decreased over the year. Leverage ratios declined with larger balance sheets.

Source: UMB Internal Data

For an even broader comparison, the OCC released an Interest Rate Risk Statistics Report in October of 2020. This report summarizes the interest rate risk of 924 banks that they supervise. It should be noted that this data was compiled with report dates ranging from December of 2018 through June of 2020. Their report shows net interest income increasing in rising rate shocks and declining in falling rate shocks. It would be a good assumption that December 2020 results would show slightly larger gains in the rising rate shocks as larger cash balances on bank balance sheets is an industry wide trend.

Source: OCC Interest Rate Risk Statistics Report, Fall 2020

EVE trends presented in the OCC Interest Rate Risk Statistics Report show similar trends as those of UMB RSA clients.

Source: OCC Interest Rate Risk Statistics Report, Fall 2020

How does your bank compare? As you are considering future goals and strategies for your institution, remember to evaluate the impact to your interest rate risk. ALM modeling continues to serve as a valuable tool for better decision making and enhanced balance sheet management.

UMB Bank Capital Markets Division delivers a comprehensive suite of solutions, including market data and modeling, technology platforms and fixed income sales. Visit to learn how the UMB Bank Capital Markets Division can support your bank or organization, or contact us to be connected with a team member.

This communication is provided for informational purposes only. UMB Bank, n.a. and UMB Financial Corporation are not liable for any errors, omissions, or misstatements. This is not an offer or solicitation for the purchase or sale of any financial instrument, nor a solicitation to participate in any trading strategy, nor an official confirmation of any transaction. The information is believed to be reliable, but we do not warrant its completeness or accuracy. There are risks associated with all transactions involving investment securities. As with any investment, please read all offering information, prospectus, or any other required disclosures before initiating any transaction. Past performance is no indication of future results. The numbers cited are for illustrative purposes only. The opinions expressed herein are those of the author and do not necessarily represent the opinions of UMB Bank, n.a. or UMB Financial Corporation. Future results may vary.

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