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Commercial Loan and Deposit Pricing Market Update: March 2025

Author Anna-Fay Lohn

For our March analysis of the Q2 PrecisionLender commercial loan and deposit pricing database, we took a closer look at why spreads to SOFR had a sizable drop during the previous month. We also looked at the return of some curve inversion at the mid-section and gave an update on fixed-rate loan pricing in 2025: new vs. roll-off. 

Read on to get more details.

Data Notes:

  • When we discuss the cost of funds (COF) on loan pricing activity, we refer to the marginal duration matched funding cost employed in pricing, not the bank’s actual average cost of funds.
  •  We define Regional+ as institutions with $8B+ in assets, while Community are <$8B.

Pricing volume increases    

Pricing activity was up slightly month over month. February registered the second-highest level of pricing activity since July of 2024, behind only October 2024 volume. 

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

Reminder: Last month we shifted to July 2024 as the new index baseline for monthly volume comparison, as it is (obviously) more recent than January 2024 and is more accurate as it includes institutions added to the PrecisionLender database in the 1H 2024.

SOFR spreads continue to drop

Spreads on SOFR structures fell for the third straight month, with February spreads (2.22%) down 9 bps from January (2.31%). February is the new lowest record mark for SOFR spreads since we began tracking this metric in late 2021. 

Weighted Average Spread to SOFR

The continued drop in spreads to SOFR prompted us to look a bit deeper into the numbers. We found that the decline was similar for both loans over $25M (11 bps drop) and for loans between $10-25M (13 bps drop).  

Spread to SOFR on Floating Rate Loans by Commitment Amount

Meanwhile, Prime spreads dropped by 5 bps in February, down to 0.14%. Fixed-rate coupons over the cost of funds rebounded in February, increasing 10 bps from January (1.81%) to 1.91%. This improvement was caused more by lower funding costs than increases in coupon rate.  

Fixed Rate Coupon Over COF

Deposit rates remain steady

As part of our continued examination into a possible explanation for the SOFR spread drop, we next looked at deposit rates paid for February. But deposit rates were largely steady in February, with almost no change in the overall deposit rate or interest-bearing non-time time products and a slight drop in CD rates at community institutions (from 4.05% in January to 3.99% in February).

Overall Deposit Rate Paid
Includes NIB Base

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

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

The trough in the FHLB curve deepens

The FHLB curve also offered no real insight into the SOFR spread drop, as the 1-month rate was almost unchanged from the Jan. 31 snapshot (4.49%) to the Feb. 28 snapshot. (4.50%).

The curve did begin dropping at 12-month mark however, by 3 basis points (4.31% to 4.28%). Further out at the 60-month mark, the proxy for fixed-rate funding costs, the curve fell 19 bps (4.43% to 4.24%) month-over-month. These decreases signal that interest rates may be expected to be lower in the future, but they do not directly address the current give up in SOFR spreads.  

FHLB Curve, Selected Dates

Funding costs diverge for floating and fixed-rate structures

Pricing managers followed market rates with their all-in funding costs: SOFR structures rose slightly by 3 bps, from 4.96 to 4.99%. Note: liquidity costs have remained persistent over the past year or so, running in the mid-50 bps range.  

On fixed rate structures, all-in cost of funds dropped 14 bps in February to 4.55% reflecting the aforementioned changes in the FHLB curve. We will monitor this situation in which decreasing costs of funds appear to be embedded in pricing guidelines despite the lack of a downward shift in the rates paid for deposits. Recall that the trough of the market curves in 2024 did not reflect, at the time, pricing managers’ sentiment on true funding costs.  

All-In COF by Month
Rolling Trend

The SOFR coupon drop continues

With SOFR spreads down and funding costs relatively flat, the SOFR coupon dropped by 8 bps in February (6.60% to 6.52%). It is the seventh consecutive month in which SOFR coupons declined. During that time the coupon has fallen 122 bps, from 7.74% in July 2024. Stated differently, spreads are down 22 bps or so.  

The fixed coupon also fell in February, but by a smaller amount – down 4 bps to 6.46%. Bankers here showed some resistance to lowering their coupons despite market rates tumbling.   In August 2024, the gap between the SOFR and fixed coupons was 160 bps. But in the wake of Fed rate cuts and falling SOFR spreads, the coupon rates are nearly equivalent.  The SOFR premium is now just 6 bps. 

Coupon Rate by Month
Rolling Trend

The gap shrinks in fixed-rate pricing: new/renewed vs. roll-off

Last month we started monitoring how coupon rates coupon rates and resultant net interest margin (NIM) for pandemic-era loans rolling off the books in 2025 compare to the loans that are being priced/repriced now,  in a higher rate enviroment. 

For those who missed last month’s primer, here again are some of the rules of the road for the analysis:

  • The KPI will be the degree (+/-) to which original NIM compares with NIM for new and renewed loans. It is not a record-for-record match of matured loans and their replacement attributes.  
  • Using the December 2024 portfolio snapshot as the basis, we’ve aggregated  2025 roll off activity by quarter and presented static coupon measures associated with each quarter. These values may change as 2025 progresses due to early payoffs, curtailments, or other activity.    

NIM on new loans in February improved by 33 bps from January, rising from 1.51% to 1.84%. But this mark is still short of the NIM on the loans rolling off the books in Q1 2025 (2.07%). 

NEW NIM Compared to Roll-off NIM 
By Month

Overall the gap between new NIM and rolloff NIM in Q1 2025 now stands at 38 bps, down from 63 bps in January. The average coupon rate for new and repriced loans is 120 bps higher than the rate for the rolloff loans (6.30% to 5.10%).

NIM and Rates, Roll-Off vs. New
1Q25

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.