Showcasing Liquidity's Role: 2026 State of Commercial Banking Preview
In this episode of The Purposeful Banker, Jim Young sits down with Anna-Fay Lohn for a quick preview of the State of Commercial Banking analysis based on 2025 Q2 PrecisionLender data. They unpack the liquidity rebound, shifting deposit dynamics, accelerating pricing activity, spread compression, and what fixed-rate roll-offs mean for margins heading into 2026.
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[Webinar Registration] 1 p.m. February 10, 2026 State of Commercial Banking
[Blog] Monthly Commercial Loan and Deposit Pricing Market Updates
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 today's best bankers. I'm Jim Young, welcome to the show.
Today we're giving a glimpse of some of the Q2 PrecisionLender data on commercial loan and deposit pricing that we'll be sharing in our annual State of Commercial Banking webinar. As a reminder, that webinar will be held on February 10, 1 p.m. Central Time. We'll put a link to the registration page in the show notes, but you can also reach it just by going to hub.q2.com/webinars.
All right, now that the housekeeping is out of the way, I can introduce you to our guest for this preview. I'm joined in the studio by Anna-Fay Lohn, senior strategic business advisor and one of our resident experts on applying the proprietary data from Q2 PrecisionLender to identify market trends. Welcome Anna-Fay.
Anna-Fay Lohn
Thanks, Jim. It is always so much fun to be able to have a conversation with you when we're not quite so pressed for time. So, thanks for inviting me to the podcast today to talk about the preview, I appreciate it.
Jim Young
Yeah, Anna-Fay, I was going to introduce you basically as one of the contributing authors of this State of Commercial Banking report, and that you'll also be one of the presenters in the webinar. But as you just alluded to, many of our listeners will also know you as the brains behind our monthly Commercial Loan and Deposit Pricing Market Updates that you and I work on on a regular basis. So, just to kick us off, tell us a little bit about the methodology for the research, and then also give us a sense maybe of how the State of Commercial Banking report compares to those monthly updates.
Anna-Fay Lohn
That's a great question, you bet. So, the methodology for the research is specifically combining public sources of information around what's known around commercial banking. We lean heavily on Fed data and FDIC reporting, and we join that with our proprietary Q2 PrecisionLender data set, which has relationship information, it has booked loans, booked deposits, it has all kinds of pricing information. And combining all that we can gather insights into credit dynamics, margin dynamics, spread dynamics, these kinds of things, and so that's what comes together in the methodology for our foundation for our report.
And one of the distinctions between the State of Commercial Banking and the monthly Market Updates is that the updates are intended to be a much more immediate use of our database. And it's adding a single data point, if you will, to the story while the story is unfolding. So, as you know, we use as much speed as possible to get the Market Update published in a timely manner because it is helpful to our audience. With the State of Commercial Banking report, we get to take a pause, a breath, and consider overall themes that these data points have presented to us over the course of the year. So, that's the way I like to think of it.
Jim Young
OK, yeah, and that makes sense. So, let's go over some of the highlights in the report, give folks a little bit of a glimpse of what they're going to be getting without giving away the whole store. One of the key findings there was on liquidity levels, that they are continuing to rise. What are maybe some of the signals in the 2025 data that show that the market has truly moved past the 2023 liquidity crunch? Or I guess maybe there's a little bit of an assumption in that question. So, maybe part of the question would be is, does the data show that we've moved past that liquidity crunch?
Anna-Fay Lohn
At a minimum, moving past it. So, let's unpack that just a little bit. I like to think of it as two items: One is what is the actual availability of liquidity, and what does it cost? That's a package question, it is a two-part question, or a two-part facet. And we can glean that from the FDIC data, the public information. And then that piece of the information is signaling that deposits are at record levels and that price elasticity is greater than it was a year ago. And by that we mean that the sheer availability of the deposits it's up, and the cost is moving more in concert with market rates this year, particularly late this year, than it did last year, particularly in the fourth quarter of 2024. So, the elasticity has changed some, and the volume of availability has changed some. Those two combined to signal that at a minimum it would appear we've moved past some of those liquidity crunch concerns.
So, one other item, Jim, that I like to bring up at this point is that the liquidity situation for each financial institution comes into loan pricing managers' thinking, and we see them keeping a sharp eye on implied liquidity costs, and I'm going to talk more about that as we keep going. In other words, loan funding costs are elevated because pricing managers, they have a component from pricing managers that keeps an eye on, hey, liquidity costs are on our radar, and we are paying attention to them, and they have not relaxed much during the course of 2025.
Jim Young
OK. All right. So, let's talk a little bit then about how those deposit rates moved in comparison to Fed fund rates. Past rule of thumb on this sort of thing has been that those things move in lockstep with each other. Was that the case with what we saw in 2025?
Anna-Fay Lohn
In fact, it is the case. We can see that the most interest-sensitive section of deposit costs—and that would be the interest-bearing group, non-time deposits, things like money market accounts, indexed checking accounts, checking with interest—these are sensitive to market rates, and we saw that that group of funding, that type of deposit in fact dropped about 75 basis points on the year, which almost exactly equals the drop of Fed funds in 2025. What's interesting is some of that drop in cost, that means the rate paid to the depositor came before the change in Fed funds. That would be an indicia of the availability of the liquidity easing on the pricing. So, if we split the 75 basis points, we see about 20 basis points before the Fed cuts and the remainder in and during the Fed cuts in the fourth quarter of 2025.
Jim Young
OK, got it. So, this is kind of a big one, but I don't know, I don't know if it's one of those things you can draw a direct line on. But what impact do we see that that deposit rate movement had on NIM?
Anna-Fay Lohn
This is a great question. So, we're going to look at this through two lenses: the public lens and then the internal pricing manager treasurer type of lens. Externally, we see that the availability of liquidity in fact caused the net interest, or was a contributing factor to net interest margin improvement, as reported in FDIC numbers. And this seemed to be pretty deep across all financial institution segments by asset size, and the lower deposit costs contributed to a wider margin. So, that's externally. Internally, usually performance is measured with a funds transfer pricing mechanism, which allows for assets to be measured by their interest rate risk neutral marginal cost, which is different than the overall cost of deposits. So, in that regard, on a risk-adjusted basis, the margin for loans has not improved by internal measuring yardsticks, typically, is what we've seen this year.
So, the point of my comparison there is to remind our listeners that the internal measuring system, which includes the treasurer's assessment of both liquidity and funding options and interest rate risk, has not shown that the loans have improved their margin, even though from a public FDIC reported standpoint, that would be the conclusion.
Jim Young
OK, well then a little bit of rain on that net interest margin parade. Let's take a look actually at pricing activity or rather basically loan pricing activity, the amount of it, and it jumped late in the year. In a little bit of context, if you haven't been reading our Monthly Updates, when we do those, we index those pricing amounts to the January 2025 total, which we set as 100. It's just an easier way for us to talk about the increases or decreases month to month. Based off of that, the final four months of 2025 had an average volume index of 123. So, Anna-Fay, what sort of changed in banker borrower behavior as those rate cuts resumed?
Anna-Fay Lohn
So, that's a really good question, and two observations come to mind, and you already brought forward one of them: the volume in that Q4 2025 time slot, that was an unusual data point for us. Typically, we don't see that kind of lift in the fourth quarter, and in fact, the individual pattern was different than we normally see, with December being stronger than November.
That said, we also took a peek at the estimated new business behind each of the quarters of pricing activity. Now, within PrecisionLender, tagging pricing activity with respect to new business or renewal is in the hands of the banker largely. And so, this is a fairly consistent measure that we can rely on, and have relied on in the past, but what we saw is that the Q4 2025 lifted to a new high.
And so, the tip-off for me in looking at that data point was some of this activity in the fourth quarter could in fact be borrower-led, potentially another contributor being lower interest rates for the borrowers to consider bringing them to the table with net new business. So, that is one way we're looking at that fourth quarter activity, and it does imply, Jim, that we'll be starting off 2026 from a higher starting point.
Jim Young
Got it. OK. So, that sort of, I guess, and to some extent, and we're going to loop back a little bit into some of the things you said about NIM here, but you've got that increased lending activity, but when we looked at spread compression that was ... Sorry, I just gave it away. When we looked at spread, we saw compression is what I should say. What exactly did we see there, and what does that tell us, if anything, about bankers’ pricing discipline?
Anna-Fay Lohn
This is really the package question; it's got it all. So, it's a good one. I'm just going to recap a couple of things for us. So, we're entering 2026 with tighter asset spreads, and so that, the tighter asset spreads, and you and I saw this during the course of the year, where spreads to SOFR, spreads on fixed-rate loans, we challenged it as a lack of resilience, and bankers appeared to be unable to increase those relative revenue drivers compared to the indices themselves, and that's what we mean by spread compression. And that measure rolls into that internal net interest margin that I mentioned a few moments ago, where the treasurer is now getting involved and measuring your performance against an interest rate neutral and liquidity adjusted funding costs. And it's on that dimension that the bankers have not expanded their spreads, and therefore have really not expanded their NIMS.
That's on the one hand. But the deposit cost coming down, that offers a little bit of relief to this challenge. And then, the pricing activity increase is signaling fuller pipelines, and the funding needs for those pipelines may work to slow any additional deposit cost easing. Which now brings us to the fact that the deposit margins are exceeding the loan margins. And the reason I want to say that is it's because of, again, of that internal measuring stick that is used to separate the actual margin into that which is associated with deposit-gathering activities and loan-gathering activities, or loan-generating activities.
So, to answer your question, I'm thinking, how does pricing discipline show up? It might be led by a stay the course from loan pricing managers taking their cue from the availability of deposits being the funding source of choice, and then that is along with their cost elasticity. And so, since the 2023 crisis, loan pricing managers, and you know this, Jim, have kept attention on those liquidity costs that they expect bankers to cover above the interest rate risk neutral costs. And as we move into 2026, we haven't yet seen an ease in those liquidity cost assignments.
This, to me, is the example of the pricing discipline because those are still present in the lending requirements for bankers on their marginal loans, even though we just talked about the change in deposit availability and the actual costs of deposits falling in lockstep with Fed funds in 2025. So, kind of put a bow on that, the pricing discipline is to challenge bankers to cover all their all-in funding costs in order to assist in maintaining those top-line spread goals. So, it's a supporting element to support bankers in keeping their spreads as high as possible.
Jim Young
Got it. A lot to digest there. And then it also, I’ve got to say, and then we kind of throw in this other part, which is we talked about all those factors, but then there's also the factor sometimes of you're repricing a loan from, say, the pandemic, which was a regular feature we put into the Market Update in 2025. We called it roll-off watch. And it was a periodic check-in to see how repricing was going for a really big number of pandemic-era loans that were rolling off the books in 2025. Which I think we all can safely know were priced at significantly lower rates back then.
So, all those factors you mentioned, and now bankers have this additional challenge of people coming in and saying, OK, let's redo this loan, but they probably got a price point that's from 2020 in their minds when they're doing that. So, the TLDR on this is that bankers did manage to bump up the coupon on those repriced loans by about 100 basis points, but that still landed about 30 basis points short on the NIM of those loans, the original version of those loans. What made this repricing cycle just particularly hard?
Anna-Fay Lohn
To me, it is the fact that the curve has been inverted since the liquidity crisis, which is interesting because the pandemic predated the liquidity crisis. So it's just another event that happened. And because the fixed-rate loans, which is what we're talking about here, are priced on that typically on that midsection of a funding curve, which has been the trough, the low point of the curve, that's been the challenge for the bankers. Because while the numbers support taking a coupon rate, I'll call it in the low sixes in 2025 as being appropriate and profitable, it gives them heartburn because it's at such a huge discount to what a floating rate alternative is. An absolute discount, because that fixed-rate coupon is influenced by this inverted curve.
And that's the reason that this repricing cycle has been, I think, difficult to readjust the margins. In a different environment, borrowers might easily choose to shift from a rolled-off fixed-rate loan to a replacement floating-rate loan. But that's just not really even something they would want to consider because the absolute cost of their debt would increase even more. That to me is the challenge, is the inverted curve has kept bankers from being comfortable with their replacement fixed-rate loan opportunities. I was on the phone with a banker, a leader of a commercial real estate division just this morning, about that very fact.
Jim Young
It's a really, really good point, and if you want to hear more really good points like that from Anna-Fay, as well as from Gita Thollesson and Debbie Smart, I definitely encourage you to join us for the State of Commercial Banking webinar.
I just want to thank you for coming on the show, Anna-Fay. 2025 was—you and I lived it month to month on those updates—it was a very interesting year. I have a … this is my non-banker hunch is that 2026 will also have lots of twists and turns.
Anna-Fay Lohn
I agree, Jim, about 2026. So, thank you so much for having me join you on the podcast. I really enjoyed it.
Jim Young
All right, and again, just a reminder, if you want more of that analysis, and the charts, and the benchmarks and all that deeper walkthrough, join us on February 10 for the State of Commercial Banking webinar. We will, again, add the link in the show notes, and again, you can find it, as well, the registration for it at hub.q2.com/webinars.
Finally, if you want to catch more episodes of The Purposeful Banker, please subscribe to the show wherever you listen to podcasts, including Apple Podcasts, Spotify, Stitcher, and iHeartRadio. We love to hear what you think in the comments, and you can head over to Q2.com to learn more about the company behind the content. Until next time, this is Jim Young, and you've been listening to The Purposeful Banker.