Reminder: Our market updates are listed by the month we publish them but are based on the previous month’s data in the Q2 PrecisionLender database. Thus, this March update is based on February pricing data.

Last month we uncovered what appeared to be some unusual trends within the pricing of fixed-rate commercial loans. Previously, the takeaway appeared to be that bankers were missing an opportunity to expand margins. 

But when we looked at the data by market segment, the fixed-rate story began to shift in an interesting way.

Read on to get the full story, and updates on other key market metrics. 

Pricing Activity Uptick Continues  

While fourth quarter activity in 2023 appeared to point to a potential slow down, the early months of 2024 have shown an uptick in pricing activity. February’s volume moved closer to the levels from last July. A reminder: July and August were the highest volume months in 2023. 

Priced Commercial Loan Volume in $
Indexed to July 2023 = 100

Fixed-Rate NIM Drops Below SOFR NIM   

Last month when we began to take a closer look at fixed-rate loan pricing, we noted that the NIM for fixed and SOFR was essentially the same (2.23% for SOFR vs. 2.22% for fixed) – while also noting the variance between the coupon rates.

But in February, fixed-rate loans suffered even more by comparison, as their NIM fell 8 points below SOFR NIM – 2.23 vs. 2.15.

NIM by Month, Rolling Trend

Diving Deeper Into NIM      

In our ongoing efforts to better understand what’s been happening with fixed-rate loans since Fall 2023, we decided to look deeper, at the segment level. When we did, a different fixed-rate story emerged. 

For all three major rate types, NIM was higher in the Community segment compared to the Regional+ segment. We expected this, because generally the Community segment assings lower cost structures than Regional+ institutions. What drew our attention though, was the level of variance for fixed-rate loans.

Fixed-rate loans priced by community banks achieved a NIM that was 124 bps higher than their counterparts at larger banks: 3.11% to 1.87%. By comparison, SOFR structures priced in the Community segment showed a 108 bps premium, while the NIM for Prime structures was 58 bps higher.   

NIM by Segment: February 2024 Snapshot

Coupon Deeper Dive

As we've shown in previous updates, the Community segment maintains lower cost assignments for fixed-rate loans (~ 40bps). To remove the effects of those cost assignments, we then turned to coupon rates and implicit spreads to examine distinctions in the relative revenue metrics across these segments.

We found that the Community segment discounts fixed-rate loans much less than the Regional+ segment and maintains a narrower relative coupon gap across other structures. As a result, community bankers are protecting the key revenue driver - coupon -  more successfully than their Regional+ counterparts.    

The fixed-rate coupon was 99 bps higher for community banks than their counterparts at regional and enterprise institutions. SOFR showed a 46 bps premium - thanks to a higher spread to index - for the Community segment. Prime structures were nearly at parity—indicated by spreads to index of 28 bps and 17 bps respectively.

In sum, community bankers appear to protect fixed-rate performance by grabbing coupon (remember fixed-rate structures represent about 38% of their lending activity) and at least tempering the trough of the inverted yield curve. The variation in coupons, from Prime on the high end to fixed-rate on the low end, was 140 bps  for the Community segment vs.  228 bps for Regional+. 

Coupons by Segment: February 2024 Snapshot

Fixed-Rate Funding Movement 

While funding costs for floating rate structures have been in a narrow range near 6% since the rate hike in July 2023, the fixed rate funding measures continue to move both up and down. In February, funding costs ticked higher by 14 bps, to 4.77%. That's virtually the same as the Dec. 29 snapshot (4.76%), but still well below the Oct. 31 snapshot (5.30%). In addition, the base cost and the FHLB reference rate returned to parity, which we had not seen since September.   

Trends in Fixed Funding Composition 

SOFR Spreads Continue to Converge

Finally, we checked in again on a metric several readers have asked about: SOFR spreads on floating-rate loans, by commitment amount. We found that, after moving apart in Q4 2023 – 47 bps by December – SOFR spreads on smaller ($10-25M) and larger ($25M+) commitments continued to converge in 2024, with the gap narrowing to 15 bps last month. That’s the narrowest it’s been since a 10 bps gap in September 2023.

Spreads to SOFR on Floating Rate Loans

By Commitment Amount

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.