October was an interesting month. Here are some key takeaways as we looked at Q2 PrecisionLender data for the month:
- Volume rebounded, and SOFR volume continues to grow comparatively more than other structures.
- Some spread has been given up, as SOFR is at the low end of its narrow range and Prime continues trending down.
- In the latter half of the year, the pace of deposit costs has increased significantly.
- SOFR is growing faster in the Regional+ segment, driving overall mix.
Volume Rebounds and SOFR Continues Strong Growth
Priced Commercial Loan Volume by Month, Indexed to January 2022=100
The overall mix on loans priced continues to lean into SOFR as the structure of choice. It now reaches 41% of overall volume compared to 23% at the beginning of the year. The inverse has occurred with fixed-rate structures. They have ebbed to 28% of volume down from 40% in January. Fixed-rate coupons are a premium to SOFR, so nominal borrowing costs, at least temporarily, are lower on SOFR structures. The spreads to SOFR and resultant net interest margin on these structures exceeds the performance of the fixed-rate group, representing greater value to lenders.
Rate Type Mix, Selected Months
Some Spread Has Been Given Up
As previously reported, SOFR spreads have been narrow across pricing activity so far this year. October dropped to 2.46% at the low end of the 10 bps range.
Weighted Average Spread to SOFR
Meanwhile, spreads to Prime picked up by 3 bps to 20 bps overall in October. We will monitor the next data series carefully with respect to how spreads absorb the 75 bps rate hike on November 2. Prime-based coupons and, therefore, borrowing costs remain above fixed-rate and SOFR structures.
Weighted Average Spread to Prime
Coupons overall pierce 6% handles and are up about 50 bps month over month for each rate type measured. Notice the difference between fixed and SOFR is 27 bps in October compared to 23 bps in September. Fixed-rate structures eked out 54 bps lift in overall coupon.
Coupon Rate by Month, Rolling Trend
Funding Costs Increase
We have heard concern from bankers related to fixed-rate structures with unexpected and unfamiliar results as a result of the inverted funding curve. The chart below points to the overall trend for all fixed and floating structures moving higher as market rates respond to ongoing Fed rate hikes. Within the fixed-rate arena, we examined funding costs for loans between 12 and 240 months in maturity. We found the following key results: For maturities up to 36 months, we found the highest COF at 4.70%, moving lower to 4.43% at the 60-month maturity and to 4.28% at the 180-month point.
Cost of Funds by Month, Rolling Trend
The aforementioned increase in funding costs during October hit the floating-rate structures more than fixed rate. For SOFR, the 10 bps decrease in spread to the index and 68 bps lift in cost of funds more than offset the increase in the SOFR index: net interest margin dropped 22 bps to 2.36%, and Prime structures had a similar decrease of 18 bps. Fixed-rate structures gained 5 bps in net interest margin, driven by the increase in coupon rate. However, we have heard from bankers and managers that there is some discomfort in fixed-rate results because of the inverted funding curve.
Net Interest Margin by Month, Rolling Trend
When looking at the pure coupon rate minus funding costs, it is clearer that fixed-rate structures are about 20 bps below January levels, while SOFR has dropped only 6 bps. This result reinforces financial institutions' apparent proclivity to turn away from fixed-rate structures as evidenced by the volume mix.
Coupon Minus Cost of Funds (Coupon Spread)
Pace of Deposit Costs Increases in Q3 and Q4
For the interest-bearing non-time deposits, there was a 34 bps increase in median rate of 63 bps in October compared to July. Using the two-year treasury as an overall proxy for the indeterminate Funds Transfer Pricing credit duration, we find 138 bps change over the same period. In contrast, January through June shows 7 bps for deposits compared to 233 bps for two-year treasury. The deposits didn't move much until July. The beta was low for the first half of the year, and in the second half of the year it's about .5.
Time Deposits Rate Paid
Interest-Bearing Non-Time Deposits Rate Paid
SOFR Growth in Regional+ Space Drives Overall Mix
We last reported in August on this comparative mix. Then, SOFR represented 68% of floating rate loans in the Regional+ segment. This measure has grown to 75% in October. The Community segment is little changed at 46% in October compared to 44% in August. The Community segment has maintained a premium spread to SOFR compared to the Regional+ group of 37 bps (versus 36 bps in August).
Mix of Floating Rate Loans Prices, by Banking Segment, October 2022
Median Floating Rate Loan Amount, $ in 000's, October 2022
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@precisionlender.com.
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 insights@precisionlender.com.
