Q2 PrecisionLender data for September showed that volume has contracted while coupon convergence continued and fixed-rate performance improved but still struggled. We also took a look at the Community segment compared to the Regional+ segment fixed-rate story.
Volume Drops in September While Coupons Converge Further
Volume pulled back in September by approximately 20% from the August level.
Priced Commercial Loan Volume by Month, Indexed to January 2022 = 100
Spread to the SOFR index continued moving within a narrow range of about 10 bps overall from 2.44% to 2.54% year to date. September spreads expanded by 10 bps month over month, are at the high end of the range, and contributed to an overall increase in SOFR coupon of 61 bps—increases in index and spread. On the other hand, Prime spreads gave up ground over the past five months to 17 bps in September, down from 37 bps in April. Importantly, the underlying coupon rate on Prime-based loans has moved higher in stair steps aligning with Fed interest rate hikes in recent months—approaching 6% overall for September activity.
Weighted Average Spread to SOFR
Weighted Average Spread to Prime
Coupons continue to converge well into 5% handles. For fixed-rate structures versus SOFR-based structures, the coupon spread is now 23 bps compared to 50 bps in July. Meanwhile, overall Prime-based coupons pushed toward 6% in September.
Back in December, Prime and fixed-rate coupons were aligned, but SOFR showed an approximate 100 bps discount. Because bankers have generally maintained the spread on SOFR loans year to date, the coupon curve tracks the increases in SOFR. In summary, borrowers face higher costs.
Coupon Rate by Month, Rolling Trend
Floating rate net interest margins have generally held, and SOFR has increased year to date to 2.55%. Fixed struggles to maintain its net interest margin in spite of coupon increases. Net interest margin is at 1.84% up from an April low of 1.65%. In addition, the comparative value of SOFR versus fixed-rate structures has shifted year to date. In December, SOFR showed an approximate 30 bps premium to fixed rates. In September, this spread has widened to 71 bps.
Net Interest Rate Margin by Month, Rolling Trend
Community Outpaces Regional+ in Fixed Rate Mix and Loan Amount
The Regional+ space has eased up year to date on fixed-rate appetite to 30% of total from 36%. Meanwhile, the Community space remained steady at 40%. We notice the median loan size is up 22% year to date in the Community space, while it's up only 11% in the Regional+ space—which may be contributing to mix results moving lower in the Regional+ group. Blog readers have asked about pricing concessions across banking segments, and we report here on the fixed-rate findings. SOFR was included in August's post.
Fixed Rate Loan Mix by Banking Segment
Median Fixed Rate Loan Amount Indexed to January 2022
Next, we took a look at the fixed-rate performance distinctions. We found that not much has changed year to date in terms of rate or coupon spread across segments. Both show coupon increases. The Regional+ segment is up 192 bps compared to 183 bps for Community. As a measure of value to the bank, the coupon spread indicates that Regional+ has dropped only 25 bps versus Community at 34 bps. There is a consistent premium on Community coupons compared to Regional+.
Fixed Rate Loans Coupon Trend
Fixed Rate Loans Coupon Less Cost of Funds (Coupon Spread) Trend
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 firstname.lastname@example.org.
About the Market Update
Since March 2020, we’ve posted regular updates on the commercial loan pricing markets based on what we’ve seen when examining the Q2 PrecisionLender dataset. We look at several popular metrics and point out areas in which there have been noteworthy changes.
Q2 PrecisionLender’s data reflects actual commercial opportunities priced (loans, deposits, and other fee-based business) by 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.
If you’d like to see our previous loan pricing market updates, you can find them here. If you have questions about metrics that have appeared in previous posts but not this latest one, please reach out to us at email@example.com.