Spring 2021isk Perspective Spring 202113Table 2Treasury RatesUS Treasury829201931720204120201229202030Y197163127110Y1501020620945Y1400660370372Y15304702301210Y2Y003055039082Source BloombergG ID: 892705
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1 Spring 2021 Semiannual R isk Perspective
Spring 2021 Semiannual R isk Perspective Spring 2021 13 Table 2 : Treasury Rates U.S. Treasury 8/29/2019 3/17/
2 2020 4/1/2020 12/29/2020 30Y 1.9
2020 4/1/2020 12/29/2020 30Y 1.97 1.63 1.27 1. 10Y 1.50 1.02 0.62 0.94 5Y 1.40 0.66 0.37 0
3 . 37 2Y 1.53 0.47 0.23 0.12
. 37 2Y 1.53 0.47 0.23 0.12 10 Y - 2Y - 0.03 0.55 0.39 0.82 Source: Bloomberg Generally, larger bank
4 s experienced significant NIM compressio
s experienced significant NIM compression in 2020. The median NIM at m idsize and l arge banks declined 61 basis points
5 ( bps ) to 2.69 percent and 71 bp
( bps ) to 2.69 percent and 71 bps to 2.30 percent , respectively. Large banks experienced a much more pronounced
6 decli ne in earning asset yields as lo
decli ne in earning asset yields as loan balances declined and nonmaturity deposits (NMD) increased . These cash flo
7 ws resulted in an increase of cash and
ws resulted in an increase of cash and due from banks , F ed F unds sold, and reverse repo balances from 13.5 perc
8 ent to 21 percent of total assets
ent to 21 percent of total assets in 2020 . Midsize banks experienced a similar increase in NMD growth during t
9 his time but saw lower loan balance decl
his time but saw lower loan balance declines and liquid asset increases due, in part, to PPP loan originations. Midsize a
10 nd l arge banks were also able to use
nd l arge banks were also able to use deposit increases to red uce exposures to higher cost certificates of deposit an
11 d borrowings , which helped to partia
d borrowings , which helped to partially offset NIM compression. Community banks experienced a more moderate NIM dec
12 line of 32 bps to 3.36 percent . PPP
line of 32 bps to 3.36 percent . PPP lending served as a primary mitigant to NIM comp ression in community banks . An
13 increasing but small number of communi
increasing but small number of community banks are holding investment types that were not held the prior year. New typ
14 es observed include municipal bonds and
es observed include municipal bonds and asset - backed securities, indicating a potential growing appetite fo r credit r
15 isk in investment and loan portfolios
isk in investment and loan portfolios as banks search for yield. Pre - provision net revenues as a percent of average
16 assets remained stable in community ban
assets remained stable in community banks through 2020 despite lower net interest income. Stable noninterest income, d
17 riven by gains on the sale of loans,
riven by gains on the sale of loans, was a key driver of this trend. Over the last 20 y ears , n oninterest expenses
18 as a percentage of average assets have
as a percentage of average assets have largely tracked NIM in community banks as banks strive to reduce operating expe
19 nses when the NIM contracts . The stab
nses when the NIM contracts . The stability and sustainability of these sources may be key to community bank ear nings
20 in the current low or potentially increa
in the current low or potentially increasing rate environment. The strategic risk associated with how banks manage NIM
21 compression and earnings carries additi
compression and earnings carries additional risks. Overhead cost reduction, investment portfolio duration extension, or i
22 ncreased credit risk in the investment
ncreased credit risk in the investment portfolio may offer opportunities to improve yield or mitigate NIM compression im
23 pact on earnings in the current rate and
pact on earnings in the current rate and lending environment. However, they also present new or increased risks that bank
24 s must appropriately man age and closely
s must appropriately man age and closely monitor. Given this complex environment, banks are employing a variety of stra
25 tegies including: Reducing costs: M e
tegies including: Reducing costs: M edian efficiency ratios spiked in the first quarter of 2020. The median large ban
26 k ratio remains elevated , but communi
k ratio remains elevated , but community and midsize ratios declined back down to pre - 2020 levels by year - end 2020