Competition for commercial loans has been incredibly intense as community banks, regional banks, credit unions and fintechs battle to expand their commercial loan portfolios in a low demand, high liquidity environment.

Now, the Federal Reserve has announced its intention to raise rates another six times this year after making its first twenty-five basis point increase in mid-March, aiming for a 2% Fed Funds rate by year-end 2022 and with an intention of removing monetary accommodation by the end of 2023, at or around a Fed Funds rate of 3%. Looking back to only the beginning of 2022, market rates have moved up 124 basis points on the two-year treasury, 88 basis points on the five-year, and 62 basis points on the ten-year.

Despite this recent change in direction, most community bank loan portfolio yields are still trending downward due to recently granted new loans at rates below (and sometimes significantly below) prior portfolio averages. Rate increases of even 25 to 50 basis points over current market quotes do not even come close to allowing a community bank’s loan portfolio to hold its own in terms of average yield.

What options do community banks have for boosting profitability?

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