Given the recent economic uncertainty, we’ve been getting quite a few questions from our clients, asking us what we’re seeing in commercial loan pricing activity when we examine the PrecisionLender dataset.
PrecisionLender’s data reflects actual commercial relationships (loans, deposits and other fee-based business) from more than 150 banks in the United States, ranging in size from small community banks to top 10 U.S. institutions. In addition to their variance in size, these banks are also geographically diverse, with borrowers in all 50 states.
In this post, we’re going to answer some of the most common questions we’ve received so far, looking at pricing data from the start of 2020 through the end of last week (March 20). If you’d like to see our previous weekly pricing market update, you can find it here.
Q: My bank’s priced volume spiked earlier this month. What have you seen across the market?
PrecisionLender’s pricing data shows a dip in volume last week. After a 59% increase from Week 8 of 2020 (Feb. 24-28) to Week 9 (March 2-6) and then a 15% increase from Week 9 to Week 10 (March 9-13), volume in Week 11 (March 16-20) dropped back down to Week 9 level.
Still, the overall March run rate remains considerably higher than the first 8 weeks of the year.
Commercial Pricing Volume Spikes In March
Q: Are interest rate type preferences shifting?
We’re continuing to see a moderate shift toward a fixed-rate preference and away from floating rates. After first noting this shift in last week’s update, we dug further into the details behind that shift.
With respect to floating rate loans, 1-month LIBOR indexed loans are down 25% from January to March on a % of total volume basis (28% down to 21%).
On the fixed rate side, there was a corresponding increase in volume, to 46% of the total in March, up from 41% in January.
1-Month LIBOR-Based Floating Loans Drop, Fixed-Rate Loans Increase
Q: What are you seeing re: maturities and amortization periods?
In January, the average maturity for fixed rate loans was 73 months. That has risen to 81 months thus far in March. Forty-five percent of fixed rate loans priced in March have had a maturity greater than 60 months. The comparable statistic for January was 34%.
The average amortization period for March (250 months) is still considerably higher than January (232 months). This is perhaps an indication of borrowers taking advantage of the very immediate interest rate environment. However, it’s also worth noting that amortizations last week (244 months) were shorter than those priced earlier in the month.
As for floating rate loans, the data does not show an extension: The average maturity was 39 months in January and has been 39 months thus far in March.
Fixed-Rate Maturities and Amortization Increasing in March
Q: What are you seeing with NIM?
This past week saw a contraction in margins for both fixed- and floating-rate loans priced.
NIM on fixed-rate loans last week (Mar. 16-20) dropped 21 bps when compared to the first two weeks of March (Mar. 1-13). All-in funding costs for fixed-rate loans increased over early March levels, from 1.39% up to 1.61%. This increase is likely a result of bankers responding to the March 15 rate cut with increased liquidity and/or funding curve adjustments. Meanwhile, with fixed rate yields, we saw a decrease of 9 bps, to 3.52% - an indication of bankers not chasing prices lower.
That week-to-week shift means that fixed-rate NIM overall in March (2.14%) is essentially unchanged from January (2.13%).
Fixed-Rate NIM:
Last Week's Decrease Brings March Down to January Level
For floating rate loans, last week’s funding costs fell by 47 bps to 1.11% from the first two weeks of March, while yields dropped 66 bps to 3.67%. As a result, the NIM average last week was 19 bps lower than the first two weeks of March, dropping the overall NIM for March by 7 bps, from 2.75% to 2.68%. As with fixed-rate NIM, floating-rate NIM for March is now essentially the same as January levels.
Note: We measure NIM with an assumed marginal funding cost, not the bank’s actual average cost of funds.
Floating-Rate NIM:
Last Week's Decrease Brings March Down to January Level
Q: What are you seeing with spreads on floating rate loans indexed to key market rates?
We have had several questions on this subject. We focused on prime-based and 1-month LIBOR-based pricing because these indexes were used in approximately 93% of the floating-rate volume YTD in the PrecisionLender data set.
The YTD 1-month LIBOR spread average is 2.33%. The first two weeks of March surpassed that average, before returning close to average last week.
Spreads on 1-Month LIBOR Spiked In First Two Weeks of March
Meanwhile, prime-based spread has been generally in the 25-30 bps range in 2020, with several weekly observations well above and below this run rate. Last week’s number (28 bps) was in line with the typical range.
Got Questions?
Our banking consultants and data scientists are combing through PrecisionLender pricing data every day. If there’s anything you’d like to know about what they’re seeing, please send along your questions to insights@precisionlender.com.
