Commercial Loan and Deposit Pricing Market Update: August 2024
In this month’s update, we decided to look at how the market is reacting to increasing talk about an anticipated rate cut and how FIs are faring with revenue protection - by structure type and across segments.
In addition, we looked at what steps, if any, FIs are taking to address rate prepayment risk. We were also curious to see if deposit rates have been impacted by the potential rate drop.
Read on to get more details.
Data Notes:
- This market update is based on the previous month’s (July 2024) data in the Q2 PrecisionLender database.
- PrecisionLender uses an assumed marginal duration matched funding cost, not the bank’s actual average cost of funds, when referring to the Cost of Funds (COF) on loan pricing activity.
- We define Regional+ as insitutions with $8B+ in assets, while Community are <$8B.
Pricing volume rebounds slightly
After a marked drop in pricing volume in June, that had us considering whether this was perhaps a signal of increased deal selectivity, volume increased slightly in July, above the year-to-date average.
Priced Commercial Loan Volume in $
Indexed to January 2024 = 100
Spreads – is revenue improving?
We looked again at SOFR equivalent spreads by structure type. After drops across the board in June, spreads were for the most part static in July – with a slight uptick for spreads on Prime-based floating loans.
SOFR Equivalent Spread by Structure Type
Is the fixed-rate revenue opportunity being seized?
We again took a closer look at fixed-rate loans, and whether bankers are seizing a potential revenue opportunity. In theory, fixed-rate loans start out with a pricing advantage, thanks to funding costs that are 128 bps lower than their SOFR counterparts (4.79% to 6.07%).
All in COF by Month
Rolling Trend
But because of the lower spread, that advantage disappears, as indicated by a net interest margin (2.02%) on fixed-rate loans that is almost identical to what SOFR-based floating rate loans are getting (2.02%).
NIM by Month
Rolling Trend
However, it’s worth noting that the spread struggles for fixed-rate loans are primarily occurring at Regional+ institutions .Fixed-rate coupon for community institutions are on average 73 bps higher than their regional+ counterparts (though this gap has narrowed from 99 bps in February).
Spread variance by segment
The fixed-rate segment story was similar for both SOFR-based and Prime-based loans.
In both segments, community spread protection was stronger. The spread gap between community and regional+ widened to 61 bps on SOFR, with community institutions adding 11 bps, while regional+ was up just 1 bps month over month.
Spread to SOFR by Segment
Meanwhile, both segments improved on spreads to Prime, but the community segment increased by 13 bps, while regional+ increased by 8 bps.
An additional note – the increase in regional+ spreads to Prime moved that segment out of negative spreads and back up into positive territory (0.01%)
Spread to Prime
by Segment
FHLB curve inversion increases and widens
The FHLB Curve and other market curves - continue to drop at terms beyond 12 months. The FHLB curve is now at its biggest inversion point – even deeper than it was in December 2023. The drop could be in anticipation of an expected rate decrease – which could lead to more refinancing and repricing of fixed-rate loans. (Thus, our check-in on prepayment tactics in the previous section.)
While the drop is notable – 76 bps at the 60-month mark from the May 31 snapshot to an Aug 13 snapshot – we also wanted to call out that curve’s trough is widening. The curve has also dropped 69 bps at the 12-month mark, 86 basis points at the 24-month mark, and 85 basis points at the 36-month mark.
Meanwhile, the 1-month mark – a proxy for floating rates – continues to remain around 5.50%
FHLB Curve
Selected Dates
Prepayment efforts
The wider, deeper valleys in the curves have led to several recent conversations with pricing managers, in which they've voiced concern that fixed-rate loans are presenting a potential prepayment risk to their balance sheets and have wanted to know whether that risk is being managed in the pricing conversation. So we decided to take a look to see if that’s being addressed, and if so, in what way.
First, some context. The repayment option field is not required on the Q2 PrecisionLender pricing platform. Many institutions have standard prepayment language for bankers to employ, and it can obviate the need for using prepayment options within the PrecisionLender platform. In 2024, about half our clients include prepayment protection on their fixed-rate deals.
For our purposes, we looked at fixed-rate loans that recorded prepayment protection on the loan via the prepayment field and organized the degree of protection into “some” or “strongest”. We considered a blank prepayment field to be the same as indicating “no protection.”
We looked at how FIs were setting funding costs on these loans and the weighted average maturity (WAM) of the loans, in months. We found that overall FIs were incentivizing their bankers to include prepayment protection, by dropping the COF on these loans by approximately 25 bps if some level of protection was indicated. We also found that bankers were using the strongest level of protection (typically "make whole" or "Yield Maintenance") on longer-term loans—with the most risk—with a WAM of 113 for this group. We will continue to monitor this data point in the coming months.
Fixed Rate Loans Priced YTD
Deposit rate impact
The significant drop in the funding cover over the past 3+ months prompted us to examine what that might mean for deposit rates.
Thus far, there doesn’t appear to be any sort of an impact, as rates on interest-bearing non-timed products have remained very steady throughout 2024, for both the community and regional+ segments.
Interest Bearing Non-Time Rate Paid
(MMDA, CWI, Savings)
In the past deposit rates often moved lower in concert with rate drops. The lag at this time could be a matter of FIs waiting to see when the short-term rates are actually cut and/or who will blink and make the first move with a rate drop. Or, it could be that FIs are still pleased with what they’re getting for Deposit NIM and are reluctant to do anything that might impact that metric.
Deposit NIM vs Loan NIM
Got questions?
Our banking consultants and data scientists are combing through Q2 PrecisionLender pricing data every day. If there is anything you’d like to know about what they’re seeing, please send your questions to insights@q2.com.
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