Commercial Loan and Deposit Pricing Market Update: December 2024

Anna-Fay Lohn

For our December analysis of the Q2 PrecisionLender commercial loan and deposit pricing database, we looked back at 2024 as a whole and the trends that emerged during the year.

In particular, we examined whether bankers' stated goal of greater selectivity in 2024 actually came to fruition, as well as the impact of "higher for longer" rates. We also explored the inverted funding curves and the expected - and unexpected - effects they had on loan pricing.

Read on to get more details.

Data Notes:

This market update is based on the previous 11 months of data in the Q2 PrecisionLender database – January-November.
Q2 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 institutions with $8B+ in assets, while Community are <$8B.

Pricing volume belies stated selectivity goals

In late 2023 there were signs – both in Fed surveys and in Q2 PrecisionLender data – that 2024 could see a slowdown in commercial lending activity. Some bankers expressed a desire, in part driven by liquidity concerns, to be more selective in their appraoch to lending in 2024.

Those expectations were not supported by what we saw when tracking the volume of pricing activity in 2024. Volume picked up immediately in the first months of 2024 and rose to a high in October, with the rate cuts, before backing off a bit in November (though remaining still well above Q1 volume levels).

While we should note that pricing activity does not equal actual loans booked, it represents a proxy for market behavior.

Priced Commercial Loan Volume in $
Indexed to January 2024 = 100

FHLB curve inversion continues to shallow

The final snapshot of 2023 showed a -1.53 carry from the 1-month to the 60-month rate. That number fluctuated up and down in the first half of 2024 before reaching a low of -1.60 in the Aug. 31 snapshot. Since then, amid several fed rate cuts, the curve has shallowed considerably, with the 1- to 60-month carry reaching -0.38 by Dec. 12.

Often in the past, a rate cut would lead a downward shift in the entire curve. But interestingly, the recent rate cuts have had the opposite impact on fixed-rate terms.

Pricing managers have told us they are proactively changing their funding curves to adjust to this new environment.

FHLB Curve
Selected Dates

FHLB Carry
1 Month to 60 Months

All-in funding costs are converging

The opposing trends for floating and fixed rates in the funding curve also show up in the COF All-In charts. The SOFR funding costs track the curve, with a 75 bps drop since August. Meanwhile, fixed-rate COF All-In have risen 47 bps since September. The COF gap that was as wide as 180 bps in August is now down to just 72 bps. That’s well below the 147-bps gap at the start of 2024.

All In COF by Month
Rolling Trend

The fixed-rate discount is decreasing

Throughout 2024, one of the main storylines we tracked was the “discount” for fixed-rate loans relative to their floating-rate counterparts—one of the effects of the inverted curve and the “higher for longer” rate environment that held for much of 2024. The expectation during the first half of the year was that rate cuts would be coming just around the corner. Any fixed-rate loan originated before those cuts would look good by comparison; thus, the motivation to discount the price.

Once those rate cuts finally arrived in the latter portions of the year, bankers could have continued to cut fixed-rate pricing as well. Instead, they increased the coupons on those loans, and the “discount” decreased considerably—from 160 bps below SOFR structures in August to just 57 bps in November.

As a reminder, the rate-type mix in the regional bank space has leaned toward SOFR—at 59% as of November--over all other structures. Fixed structures represent 19% of the mix, down from 24% in January. The community space shows a more balanced rate-type mix, with fixed-rate structures making up 33% of the mix and SOFR 27%, as of November.

Coupon Rate by Month
Rolling Trend

Spreads had a mixed performance

Another visual that demonstrates the dwindling fixed-rate discount is the SOFR Equivalent Spread by Structure type chart.

Throughout 2024, fixed SOFR equivalent spreads on this chart have lagged below the “Fixed Coupon over COF” line. In August the gap between the two metrics was 103 bps. After November, it had shrunk to just 7 bps (1.84% for the Fixed Coupon over COF vs. 1.77% for fixed SOFR equivalent.) The comparative revenue discount for the fixed SOFR equivalent measure is now 57 bps, compared to 137 bps in January.

SOFR Equivalent Spread
by Structure Type

When looking in the chart below at fixed-rate spreads independent of their standing versus floating-rate spreads, we see that in 2024 bankers have generally worked with a limited range. Fixed-rate coupons over the COF began the year at 1.94%, bottomed out at 1.67% in June, and rose to a high of 2.05% in September before dropping back to 1.84% in November.

Fixed-Rate Coupon Over COF

Just staying steady was enough to decrease the fixed-rate discount relative to SOFR floating-rate structures, which lost 23 bps of spread in 2024. While there was some month-to-month variance, the chart below tells an overall story of decrease over the course of 2024.

Weighted Average Spread to SOFR

There’s less of a clear-cut story for prime spreads in 2024. November (0.02%) was 14 bps lower than January (0.16%), but in between prime spreads jumped up to 22 bps, then dropped down to 1 bps, then back up to 13 bps in October before dropping down in November.

Deposit rates are starting to drop

As the Fed funds rates began dropping earlier in the fall, we began to monitor the impact that might have on deposit rates. Rates dropped across the board, though the impact was stronger on the regional segment. November portfolio snapshots show acceleration in lower deposit rates paid compared to October. For example, Regional banks shed 14 bps in overall cost month over month.
Rates for interest-bearing non-time deposit products fell 44 bps from August to November at regional institutions, compared to 21 bps in the community segment.

Interest-Bearing Non-Time Rate Paid
(MMDA, CWI, Savings)

We also looked at CD portfolios for both segments and found a 30 bps drop in CD rates from August to November for regionals, compared to a 20 bps drop for community insitutions.

Finally, we examined the overall deposit rate paid, across the interest bearing and non-interest- bearing portfolios. There, the rates dropped 23 bps from August to November for regionals, while they fell 13 bps for community instituions. Both segments ended up close to where they began in January on this metric.

Overall Deposit Rate Paid

Includes NIB Base

Note: Deposit rate paid information is from portfolio snapshots sent from institutions throughout the month and is not a single month-end view.

NIM story shifts when Fed rate cuts occur

For much of 2024, the NIM for fixed-rate and SOFR structures move along essentially the same track, dropping steadily by about 20 bps from January through July. It was one of the potential explanations for the fixed-rate discount, as even with a lower coupon, bankers were still getting essentially the same NIM as they would for a floating rate structure.

Then, first in anticipation of rate cuts and then in the aftermath of them, fixed-rate NIM shot up, while SOFR NIM continued to drop. By the end of September, fixed-rate NIM was 40 bps higher than SOFR (2.35% to 1.95%). That gap has since closed though, in part because bankers were not able to move up the fixed-rate coupon faster than rising funding costs. By the end of November, the two measures were moving back closer to each other, with fixed-rate NIM retreating to 2.12% while SOFR NIM rose to 1.99%. Both structures finished the year down from their January NIM levels.

It all netted out to an 11 bps drop in fixed-rate NIM, after having added 33 bps over the previous two months. Meanwhile, SOFR NIM was unchanged over the same period, but remains 33 bps below its January 2024 mark.

NIM by Month
Rolling Trend

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.