Commercial Loan Pricing Market Update: August 2023

Note: Don’t worry! You haven’t missed one of our commercial loan pricing market updates. We’ve made a slight change to the title of these posts to clear up a bit of confusion with our readers. The title now reflects the month in which we’re sending you the update—so this is the Commercial Loan Pricing Update: August 2023.

As we examined  the Q2 PrecisionLender commercial loan pricing database in July, we found that signs of credit tightening are still mixed. We’re also continuing to monitor the degree to which bankers are protecting NIM in this environment—and this month, we found that lenders using prime-based pricing have had more success in maintaining NIM levels than those who priced SOFR-based deals. These findings—and more—are explored further below. 

Volume Dips

Pricing volume was down in July—with the lowest activity levels we’ve seen since April. But it’s still above January levels, as well as the year-to-date average. 

Priced Commercial Loan Volume in $

(Indexed to January 2023 = 100)

Equity Loads Increase While Lowest Pass Deals Are Less Frequent

As we continue to look for signs of potential credit tightening, we’ve introduced two new metrics to our updates. 

First, we examined equity load as a percentage of assets and found some initial upward movement here. For institutions that employ two-dimensional risk rating methodology (2DRR) for their credit risk measurement and mitigation, equity loads are more pronounced year to date. Those employing a collateral and guarantee methodology have not shown a meaningful change in capital so far in 2023. 

Equity Load as % of Average Assets

We looked further into the mix of loan pricing activity by a common* risk rating scale.  For the 2DRR group we found some evidence of “moving up the credit scale” as July activity posts 61% in Good and Satisfactory compared to 54% in 1Q23.  Conversely deals priced as “lowest pass” decreased to 38% of overall activity.  

These moves are admittedly small, but we’ll be watching closely for changes in equity assignments and mitigation measurements in the coming months.

2DRR Loan Balance Price Mix by Common Credit Scale

*Common risk rating scale considers changes of 1-year Probability of Default factors to create several broad banks of pass grade loans.      

Spreads Flat for SOFR

Despite pricing fewer deals bankers couldn’t seem to increase spreads to index when pricing SOFR floating rate structures - but perhaps the nominal decrease in credit risk mentioned above contributed. Those spreads remained essentially flat. 

Weighted Average Spread to SOFR

However, when we looked at SOFR spreads by different loan amounts we found some variance. Since March, SOFR spreads have increased the most on the largest deal sizes. In addition, note the shrinking gap in spreads between >$25M deals and $10-25M deals from January to July, down to 20 bps. 

Spreads to SOFR - Loan Amount Matters

Prime Spreads Continue to Rebound

Meanwhile, prime spreads have rebounded quite a bit in the past two months — contrary to our earlier predictions based on the comparative coupon advantages of prime-based deals — and are now at their highest levels for 2023, matching the mark set in January.

Weighted Average Spread to Prime 

1-Month Marks on Funding Curves Rise

The 25-bps Fed Rate hike in late July is evident in the 1-month rate for both the SOFR Swap and FHLB Curves—where the small positive carry from 1 month to 12 months nearly disappeared. 

One-month rates rose 21 bps on both the SOFR Swap and FHLB curves, while the 12-month costs were practically unchanged. At month’s end, SOFR Swap showed an 8-bps carry - down from 27  and the FHLB Curve saw a 5-bps carry - down from 26. And for fixed-rate funding, 60-month rates drifted higher—by about 13 bps for SOFR Swap and 7 bps for FHLB. 

SOFR Swap Curve, Selected Dates

FHLB Composite Curve, Selected Dates

We’re also continuing to monitor the liquidity premiums that some banks have applied as part of their funding costs calculation. While the premium for regional+ banks was flat month over month, we did see our first notable increase in liquidity premiums among community banks in July. 

Coupon Rates Keep Climbing

Given the increase in the Fed Funds rate (and the expectation for that increase during July), it’s no wonder coupon rates rose across the board last month. However, the coupon increase did not keep up with the spike in funding costs.

Coupon Rate by Month, Rolling Trend

NIM Story Varies for Prime vs. SOFR 

Thus, it’s no surprise that NIM on SOFR-based deals dipped by 9 bps in July. But Prime-based deals held steady on NIM, as their aforementioned increases in spread managed to offset rising funding costs. 

Finally, NIM on fixed-rate structures dropped just 3 bps from June to July, but that marks the fourth straight month of declining NIM - a 13 bps decrease during that time. 

NIM by Month, Rolling Trend

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  


Previous Article
Commercial Loan Pricing Market Update: September 2023
Commercial Loan Pricing Market Update: September 2023

A look at what Q2 PrecisionLender data tells us about the commercial loan pricing market in September 2023.

Next Article
Time to Increase Emphasis on Treasury Management?
Time to Increase Emphasis on Treasury Management?

Just how much is Treasury Management impacting relationship ROE? A great deal, as we found in research for ...