Reminder: This market update is based on the previous month’s (April 2024) data in the Q2 PrecisionLender database.
In this month’s update, we continued to track the uptick in loan pricing activity thus far in 2024, as well as the impact that holding interest rates "higher for longer" is having on fixed-rate structure values.
Meanwhile, we took a look at how the deposits mix has shifted since the crisis in Spring 2023.
Read on to get the full story, and updates on other key market metrics.
Pricing Volume Continues to Rise
The rebound in 2024 loan pricing activity compared to Q4 2023 continued unabated in April, with the month registering the highest level of activity in the past 10 months – well above the 10-month average. The April increase is being driven primarily by Regional+ banks, as activity for community banks was flat month-over-month.
It is worth a reminder, though, that this is a measure of pricing activity, not closed loans.
Priced Commercial Loan Volume in $
Indexed to July 2023 = 100
Fixed-Rate Spreads Drop; Prime-Based Spreads Rise
While community pricing activity may have been flat in April, this segment led the way on pricing higher spreads to Prime, driving an overall bump upward of 8 bps, to 0.19%. SOFR spreads remained steady month over month, rising 1 bps, to 2.50%, and also showed little change by commitment size - at 2.68% for $10-25MM and 2.40% for >$25MM.
Weighted Average Spread to Prime
It was a far different story for fixed-rate spreads, which dropped 12 bps in April to 1.77%, their lowest point since February 2023. More on this below.
Weighted Average Fixed-Rate Spreads
Funding Costs Rise and the Curve Trough Shallows
Fixed-rate funding costs continued to move closer to their October 2023 levels, rebounding from their valley in December 2023. The FHLB curve snapshot at the end of April is now 83 bps higher than it was at the end of 2023, and just 20 bps below the October peak. The FHLB carry from 1-month to 60-months has gone from -1.54% on Dec. 29 to -0.71% on April 30.
Meanwhile, fixed all-in costs rose 33 basis points in April.
Trends in Fixed Funding Cost Composition
Adjustable-Rate Coupons Show More Agility Than Fixed-Rate
While fixed-rate funding costs rose significantly, the fixed-rate coupon was unable to keep pace, moving up just 21 bps. The lag accounts for the 12 bps drop in fixed-rate spreads, month-over-month.
The SOFR coupon was nearly unchanged and Prime-based structures gained, thanks to their higher spreads to index.
We note, however, that adjustable-rate coupons appear to be more elastic and better able to move with changes in market reference rates compared to fixed-rate structures. The adjustable structure coupons have increased 37 bps since December, while fixed-rate coupons have managed just a 10 bps lift. In addition, the adjustable-rate coupons have maintained higher levels than fixed-rate coupons throughout the past 10 months. (+65 bps in April 2024; +56 bps in July 2023).
Coupon Rate by Month, Rolling Trend
Top-Line Revenue Measures: Community vs. Regional+
Fixed-rate coupons at Regional+ institutions rose 25 bps and showed a greater reponse to the increase in funding costs. Meanwhile Community fixed-rate coupons only increased by 11 bps.
Fixed-Rate Coupons, by Segment
That coupon increase meant that the Regional+ segment suffered a smaller NIM drop in April (-9 bps) than the Community segment (-27 bps).
Fixed-Rate NIM, by Segment
As noted previously, 80 bps have been added back to market rates since the end of 2023, but only the Community segment has been able to adjust pricing to increase spreads on Prime-based structures (up 19 bps from January-April) and essentially maintain SOFR spreads (down just 3 bps from January to April).
Meanwhile, Prime spreads for the Regional+ segment have dwindled all the way down to 0.01%, while SOFR spreads have fallen 15 bps.
Spreads to Prime, by Segment
Spreads to SOFR, by Segment
Fixed-Rate Emphasis Varies Widely Across Segments
Given the variances we’ve previously noted seen in fixed-rate revenue performance between Community and Regional+ institutions, we looked at how much those structures factor into the overall mix for each segment.
Fixed-rate loans make up 33% of the mix for the Community segment, along with 15% for adjustable-rate loans and 52% for floating-rate - with Prime 23% and SOFR 24% making up surprisingly similar slices of the pie.
It’s a very different story for Regional+ institutions, which have 80% of their mix in floating-rate structures, and just 18% in fixed-rate.
Loan Balance Mix
(April 2024 Pricing Activity)
Shift in Deposit Balance Mix
Now that we’re more than a year past the March 2023 deposits crisis, we checked in to see how institutions have handled their deposits since then.
Overall, this cohort of institutions has been able to maintain their deposit levels, showing a modest 4% increase collectively.
Non-interest-bearing deposit incidence has declined from March 2023 – March 2024 for both Community (52 to 42%) and Regional+ (51% to 41%), while interesting-bearing deposit and CD incidence increased for both segments (48 to 58% for Community and 49 to 59% for Regional+).Community is more apt to use CDS (18% of mix) than Regional+ (11%).
Note: Due to changes in this cohort, after this point we’ll be sunsetting our March 2023-March 2024 tracking and will shift to tracking a cohort from the beginning of 2024 onward.
Deposit Balance Mix Comparison
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.
