4 Aug, 2026
Six months into 2026, pricing activity is up, but spreads are compressed, fixed-rate margins are under pressure, and deposit balances aren't growing the way banks planned. Q2's Jim Young and Anna-Fay Lohn compare the year-end State of Commercial Banking data against mid-year market reality and talk through what commercial bankers and pricing managers should be paying attention to in the second half of the year.
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[Blog] Commercial Loan and Deposit Pricing Market Update
[Report] 2026 State of Commercial Banking
Transcript
Jim Young
Hi, and welcome to The Purposeful Banker, the podcast brought to you by Q2, where we discuss the big topics on the minds of today's best bankers. I'm your host, Jim Young. Welcome to the show.
Every month I get to do something that gives me a ton of insight and teaches me so much about commercial banking. I sit down with Anna-Fay Lohn and we look at the Q2 PrecisionLender data and what it's telling us about what's happening in the market.
Anna-Fay is a senior strategic business advisor at Q2 and the author of our monthly Commercial Loan and Deposit Pricing Market Update blog. And she's joining me in the studio today. Anna-Fay, welcome back.
Anna-Fay Lohn
Hi Jim, it's great to see you and thanks for having me join.
Jim Young
Well, Anna-Fay, we're at the midpoint of 2026, or you know, a little bit after of it, but basically roughly the midpoint of 2026. So it feels like a good moment to step back and think about what we've learned so far and get some indication of what the rest of the year may look like.
Back in January, we published the State of Commercial Banking report, which captured where the market stood at the end of 2025. Now you know a little over six months later, and you've been watching this data every single month. So I want to use today's conversation to sort of compare notes, what the full year picture looked like going in and what the monthly data has been showing us since then. Sound like a plan?
Anna-Fay Lohn
Yes, it does, and a couple of items seem to have definitely changed since year end, so we'll call those out. Please lead on.
Jim Young
Alrighty, for listeners who haven't read the Market Update before, Anna-Fay, can you just tell us what it is and what you're analyzing each month?
Anna-Fay Lohn
You bet. So the raw material is aggregations of loan pricing activity and the attributes of that activity. And all of this is saved by PrecisionLender users to sub in their banking operations, their banking books of business to support pipeline pricing activity. And in the Market Update, we focus on volume, revenue, and margin metrics to tell the story of market activity. And these metrics, these measures are nearly universally reflected across our client base.
Jim Young
OK, is there anything about that data that you think makes it particularly useful or distinctive compared to other market data sources?
Anna-Fay Lohn
You know, Jim, two things come to mind for me. One is the timeliness of it. So we've got a finger on the pulse of the bankers being active in the market day in, day out. The PrecisionLender application records all of that. And you and I work hard to keep the Market Update timely. We do not alter our methodology very frequently, and we're seeking run-rate high-level observations. So that's the one thing: timeliness and run rates.
The second is the consistency that we have to work with our detailed data. The PL data set is common across the platform, and so we can remark on things like index choices, marginal funding costs, fee income, and spreads with relative ease.
Jim Young
So I know this story, but I'm curious if you can share about, you know, how the Market Update came about and what was sort of that original idea behind it.
Anna-Fay Lohn
It was the coming together of two big events. We published the very first one in March of 2020 in response to the unprecedented Sunday night Fed rate cut early in March. It was 150 basis points as I remember, right as the pandemic began. And our mutual boss knew that I had developed an on-demand set of reports and dashboards on pricing activity, and he put me in touch with you.
And my memory of the story is we may have published the first one within 74-72 hours of that meeting. What did it feel like for you, Jim?
Jim Young
Tell you it on one sort of personal level, it felt good to be doing something because you know, for all of us now, six years later, can look back on it, that was a very scary time. And I know there were people wondering, like, how is the banking system even going to operate right now? And so it felt good just to have something to do, and that was actually part of that motivation was there was so much uncertainty out there that bankers were calling us and calling you and people saying, like, what what's happening? We feel kind of blind.
And that's really, I think, where a lot of the best content starts is in providing a service to your customers. And that's really what it was. The thing was, hey, we see stuff, so we can tell you guys because we've got enough customers out there that really it creates a market view, and we can give you that market view.
And also, selfishly, as a content marketer, that was something I had been pressing for. Man, I'd love to be able to produce some content on this. And then all of a sudden it was like, hey, Jim, do you want to do this with Anna-Fay? And so it was an absolutely … so you know, a little behind the scenes sort of thing, but it was and it became, I think, for both of us, a labor of love over the next, you know, six years or so.
Anna-Fay Lohn
That that's exactly right. That's exactly right. My children know not to bother me when I'm working on the blog. So there you have it. That's a great memory.
Jim Young
All right. Well let's dive into that data and let's start with what's happening at the activity level. Now the State of Commercial Banking report showed a real pickup in loan pricing activity in the second half of 2025. What has the market update been showing us for the first half of 2026?
Anna-Fay Lohn
It has been a continued upward ramp. There's been a couple of pullbacks, but we have grown month over month consistently. And the reason that is important in the work for the blog is we're looking for pockets of change in banker behavior and their conversations, their pipelines, those sorts of things, and we're just not seeing it.
So as we sit here at the end of July, the report in June showed that we were well above the average for the monthly observations of 2026 so far.
Jim Young
So you know, in the State of Commercial Banking we showed that, you know, senior loan officers, you know, were saying that they were getting positive about on demand expectations at the end of 2025. I know we talked about that pricing activity, that would be one thing, but does that data feel consistent with that optimism or is it more complicated?
Anna-Fay Lohn
You know, it's interesting because the loan portfolio growth has been about 1% quarter over quarter, Quarter 2 over Quarter 1 for our clients, and the deposit growth is essentially flat. And so the reason I bring that up now is we know from the State of Commercial Banking that pricing managers had deposit growth and deposit cost reduction in their plans for 2026. So those deposit plans may be behind schedule at this here. We are at the end of July for the year and may be tempering some of the loan growth.
On the other hand, I checked in with one of those measures we had at State of Commercial Banking at the end of the year with 77% of pricing activity being tagged as net new business versus renewals. And that measure has grown to 80% of the activity here in the second quarter. So that's an increase from the end of the year mark.
It seems like it's a function of competition. The early … the thing that distills, and you and I talk about this, it seems like heightened competition is what's keeping the pricing activity high, but the potential growth on the deposit side and the loan side somewhat tempered.
Jim Young
Well, that segues right into my next question here, which is that you know, you look at that data and you say, great, that pricing volume looks good, activity up. But then you look at what's happening to margins and that picture gets well, I'll say gets a little murkier. Can you sort of walk us through what the spread and NIM data has been showing us over the past few months?
Anna-Fay Lohn
Yeah, you bet. So let's take the spread item first. And I'm going to bifurcate this in terms of SOFR loans and fixed-rate loans. So the spread to SOFR, and SOFR has become the index of choice across our client base, and SOFR-based loans represent about 70% of pricing activity, and they are certainly in the mix of volume across PrecisionLender clients. The spread to that index has moved down about five basis points since January.
Now, what makes this drift—I'll call it a drift, it's not really a downtrend, a downdraft—counterintuitive is that bankers didn't really keep any of that revenue benefit for themselves following the 2025 rate cuts. So remember we had three rate cuts back toward the end of 2025. That reduces loan revenue on its face, and then the bankers here in 2026 have given away yet—that's too strong a word—but have drifted away another five basis points or so. So the overall picture there is loan revenue drops.
On the fixed-rate side, rates had been a discount to SOFR through 2025 thanks to that inverted curve. And so, as you know, we've moved into a positive slope territory, but the fixed-rate coupons have not really kept up with the market rate moves. And that outcome is that flat coupons and relatively lower spreads, which is one way bankers measure the value of revenue, has occurred. And so the phrase that you and I have developed, and it seems to be persisting here in the mid-year of 2026, lack of resilience on the revenue side.
As far as NIM goes, let me just add one other thing. In banking, it's very difficult to improve NIM consistently and over the long term when spreads are not leading the charge or at least contributing to the charge. And here's why. It's because index values are generally included in the marginal funding costs, either directly or indirectly.
So on the fixed-rate side, the cost has moved up much faster than the coupon, the outcome is NIM has compressed. And a similar but less meaningful move has happened on the SOFR side. The lack of traction on NIM is largely driven because of the lack of spread retention.
Jim Young
OK, so diving a little bit deeper, you mentioned with fixed rate that funding costs moving up faster than that coupon, or another way of putting it, coupons not keeping pace. Not great. And you and I have spent a lot of our time talking about fixed rate and what's going on with the pricing there. Can you kind of explain what's happening there in plain terms?
Anna-Fay Lohn
We'll give it a go. It's the underlying contributors are not entirely clear, but competition seems to be part of it. And we would have expected an uptick of 20, 25, 30 basis points in fixed-rate coupons year to date. But we've seen mixed movement. And we've heard anecdotally from pricing managers that the return of the positive curve is an improvement in the lending landscape.
I don't know of anyone who has had the opposite view of, dang it, I wish the inverted curve were still with us. But yet the pricing and the portfolio results are not showing the improvement in performance from the positive slope curve.
It is true we've picked up a little bit of coupon. I want to be very clear about that. We talked about that a moment ago, about five basis points, 10 basis points, something, but it's much lower than we would have expected on a relative value in performance. And it appears competition's got to be playing part of that role.
Jim Young
Yeah, I think the numbers we had just kind of general has been that, you know, the coupon spread over cost of funds dropped about 35 basis points since January and fixed rate NIM has, you know, fell to 1.7% in June. So yeah, not a great picture. I know a part of the challenge that we've looked at and that State of Commercial Banking touched on is that.
We had all those COVID-era fixed rate roll-offs, and we knew that was a challenge going into 2025. What's the dynamic that we've been seeing in 2026 related to that same repricing story where we've got all these fixed-rate loans priced at some of those really low, you know, low coupons at that point that needed to be repriced? Or have things … are we seeing a different dynamic there?
Anna-Fay Lohn
It's real. The COVID-era roll-off is real and the 2026 roll-off is at a coupon rate even lower than 2025. If we can think about 2021 versus 2020, that's when we were really at zero interest rates essentially. And the spreads had come down too. The whole market had reset by 2021.
So anyway, now these loans are coming due, and 2026, therefore, has a big hill to climb. And just to maintain the profitability measure, we were looking at about 135 basis points needed in a coupon lift just to maintain profitability. And that was before the year started. Now we could add 40 more basis points to that to maintain where the banking performance was.
So the potential rate shock to the borrower certainly may be requiring additional kinds of conversations, alternate structures, and different kinds of pricing on renewal.
Jim Young
OK, jumping around a little bit here, because I know you've touched on the funding curve when we were talking about the spreads and that, you know, change from inversion to sort of what I like to call in my layman's terms the normal-looking curve.
So this thing that we've been tracking closely is that return from inversion and that steepening of it. It's not something that really figured into State of Commercial Banking to the extent that it's really showing up in our monthly data now. So I know you touched on a little bit, can you kind of just take back, you know, set up for us again in terms of what's happened to that curve and why does that matter or maybe why should that matter to commercial bankers?
Anna-Fay Lohn
So the curve, you know, besides universal joy that we hear from everyone that it's positively sloped, and so that's a wonderful situation. It allows different kinds of pricing. One way I think about it is that loan structure is now beginning to play a larger role in pricing, and therefore in borrower alternatives, than this time last year.
It's almost like last year we had two flavors, two kinds of structures. They were very similar, except one put the interest rate risk on the bank, a fixed-rate option, and one put the interest rate risk on the borrower, a floating-rate option. Now, because there's that positive slope in the curve moving around different structures. What's the amortization schedule? What's the maturity? What might be the index choice? Because now there's so much variation because the curve has moved away from a flat level.
So bankers can consider options for their borrower needs and they can fine-tune rate reset options, index selections, and all of these can have price differentiation that the borrower can consider as the banker can put options in front of them. That's one thing that I see is possible now with a positive curve.
Jim Young
OK, and sort of hand in hand with that is, you know, fixed-rate all-in cost of funds—it finally exceeded floating rate cost of funds in the first time since late 2022. You probably touched on this a little bit, but what is that implication for bankers who are pricing that fixed-rate deal today?
Anna-Fay Lohn
So that's a great follow-up question because from a banker standpoint, that cost of funds being higher is the manifestation of the positive slur curve that we were just talking about. But let's put on the pricing manager's view. So this cost of funds being higher on the fixed rate side than floating should be signaling to them evaluation of that fixed-rate pipeline and potentially goal resets for profitability. Because remember the curve was flat at the beginning of the year when goals were set.
Jim Young
All right. OK. So let's shift over to the other side of the book here with deposits. And the State of Commercial Banking had a pretty clear story at the end of 2025. Deposits had recovered, financial institutions had successfully cut rates in line with the Fed. NIM was benefiting from that. You talked about a little bit that that story has evolved in 2026, first half. Can you can you again give us a little bit, some of the details there?
Anna-Fay Lohn
Yes, so we know that it was very clear at State of Commercial Banking that information from bank leadership included, as I said, not only volume on deposits. A reduction in cost of deposits was expected. And we found in our deposit portfolios two things so far this year, that the balances are essentially flat, and the rate paid on those deposits collectively is pretty darn flat since year end. There's been some reduction, but not materially.
So collectively, that tells us that competition is very strong for deposits. It's also true that the relative value of deposit funding would have increased relative to medium-term wholesale funding options. Why is that? It's because of the positive slope of the curve and because that marginal deposit costs have not increased, at least in our data set, at all. And certainly not in the same way as marginal funding costs have increased from the wholesale arena at 40 basis points or so year to date.
Jim Young
OK. And so your feeling is that I've—and that tell me if I'm paraphrasing this correctly—but like these things are valuable, it may be even more valuable, but there is … and that would maybe I guess essentially explain why the competition is still very much in play for these deposits.
Anna-Fay Lohn
Yes. It seems like the piece of the plan the planning was for growth and cost reduction. To me, the surprise actor in the scene might be the shape of the yield curve, which has reduced the ability of the cost reduction. That's a way to describe it. So yes, you did a great job.
Jim Young
OK. All right. It's not always … it's a little hit or miss sometimes, if I can get my paraphrase right on this. Someday we'll release the one and a half hour director's cut of our conversations when we go through these numbers and I try to explain what I think's happening and Anna-Fay gently corrects me. But we won't inflict that on our listeners.
Last sort of segment here, and then I'll let you go, and that is I think a really interesting part of this is we get these, again, we get these market numbers, but every once in a while we say, OK, well, but what does that look like if we take it down to a segment level and we pull out the community banks and we compare them to the regional plus? You know? And roughly we're talking about going to possibly be $10 billion and below versus $10 billion and above, essentially. And it's been interesting to me to sort of notice some of that divergence in pricing activity between those two segments. Can you tell us what you've been seeing there?
Anna-Fay Lohn
It is true that the community segment has done an air quotes better job of revenue retention as measured by their spreads compared to the regional segment in recent months. The SOFR view is that across the community segment it's been essentially flat. It is at a run rate premium to the overall market. We would expect that.
But the real story is on the fixed rate side again. Here, the community segment has actually been able to add basis points to its spread on fixed-rate loans tracking northward. I think it's been up about 30 basis points out of that 40 basis points I mentioned that would be the market benchmark.
So meanwhile, the broader market, the regional plus has barely been able to scrape out five, six, seven, eight basis points.
Jim Young
OK, so I lied. There's one more thing I want to ask you about, and that is let take a look. We just spent this entire podcast looking back at the first half of 2026. Let's try to look ahead a little bit. And I know you love trying to project things, but I'm going to try to just ask you what are two or three things you think in the second half of 2026 that commercial bankers and really particularly the pricing managers what they should be paying close attention to.
Anna-Fay Lohn
Well, for loans, it seems that it starts with spreads as a proxy for relative revenue. So the basic question might be, is the revenue that we're generating here going to meet the bank and banker goals? And if so, great. And if not, what non-credit revenue sources can be brought to bear, cross-sell, depth of services, other fee income, et cetera, to shore up that revenue gap?
Jim Young
OK. All right. And if a banker reads the Market Update every month and nothing else, first off we'd be flattered, but what is the single most important number or indicator you think they should be watching right now? We just ran through a whole bunch of them, but which one do you think, if you had to pick one, is the most important to be looking at right now?
Anna-Fay Lohn
Right now it's the roll on spread of their portfolios. That's a measure that is telling them what they're recording on their prospective income. It's assessing their go-forward performance and it provides information to measure and act on any shortfall that they may have to their goals. So the roll on spread is my personal favorite.
Jim Young
Alrighty, I'm going to let you off the hot seat now, Anna-Fay, at least until, you know, roughly this time next week when you and I are talking about the August Market Update. But for now, this has been a really useful midyear check-in. Anna-Fay, thanks so much for helping us, you know, make sense of what the data is telling us, and also thanks so much for doing this every month in that blog so bankers have somewhere to go when they want to know what's happening in the market.
Anna-Fay Lohn
Well, thank you. It is always nice to slow down and talk about this content together, and thanks so much for the invitation today.
Jim Young
And for our listeners, just a reminder, if you have not read the monthly Market Update, and that's sort of the smaller, the short term we use for that Commercial Loan and Deposit Pricing Market Update, you can find it at q2.com/blog. Just search for “market update” and you will find Anna-Fay’s latest analysis as well as previous months if you want to see how things have unfolded. And we'll make sure to share a link to that in the show notes.
And that will then do it for another episode of The Purposeful Banker. A reminder you can subscribe to the show wherever you listen to podcasts, including YouTube, Apple, and Spotify, and you can find our archive of episodes at q2.com/thepurposefulbanker. All one word there, all lowercase. As always, thanks so much for listening.