A Word from Arne
As our community banking industry works through the coronavirus pandemic and its impact on the US economy, I want to update readers on some current SBA conditions. The SBA Debt Relief Program includes the provision that the SBA will pay six months of principal, interest and any related borrowers’ fees on all current 7(a) loans, 504 loans and Microloans disbursed prior to September 27, 2020. Effective as of that date, it is now the responsibility of any new 7(a) recipients to make the required repayments on their approved loans. The act features three major relief programs:
Additionally, we have entered the Forgiveness phase for PPP loans. Roughly 125,000 PPP Loan Forgiveness Applications have been submitted to the SBA, and about 45,000 have been approved. The SBA began slowly issuing payments on Monday, but we do not have official word yet on the actual number paid. We continue to await clear guidance on the proposed level of blanket forgiveness that might be issued on PPP loans by means of a simple borrower certification. The Independent Community Bankers of America (ICBA) and Holtmeyer & Monson (as a Preferred Provider of the ICBA), continue to request that a blanket certification of PPP loans be made to forgive loans of $150,000 or less – which represents approximately 86% of all PPP loans. This proposal is hung up in the legislative process. Treasury Secretary Mnuchin has unilateral authority to issue blanket forgiveness on PPP loans of $50,000 or less – approximately 50% of all loans. We expect that, if the legislative agreement cannot be achieved, Secretary Mnuchin will issue authority for the lower level of blanket forgiveness to be enacted. This could happen in the next few days.
Additional PPP Funding
We firmly believe that another round of PPP funding will become available sometime after the election, giving PPP borrowers the ability to secure another loan. It’s likely that this round would be directed to specific industries and include a lower maximum loan amount than previously permitted. As proposals for additional relief program(s) begin to surface, we will keep all of our readers advised of developments.
The Year Ahead
Now that the government has begun a new fiscal year, it’s a good time to reassess your institution’s government-guaranteed lending practices. Due to the pandemic, a whole new group of borrowers has emerged. In the past, these borrowers have been conventional lending customers, but now have been stressed to the point that lenders who want to fill their capital needs will be looking for new credit enhancements to do so. Borrowers are focused on acquiring working capital and debt restructuring, and SBA and USDA loan programs are excellent tools for meeting these needs.
As you consider the economic landscape and ways to help your community’s small businesses grow stronger, please call on us with any questions. We’ll be happy to provide answers and explanations. Having served as the out-of-house SBA and USDA loan departments for lenders across the country, we’ve built quite a bank of experience, and we’re excited to become an extension of your team.
A football fan’s guide to portfolio management
by Jim Reber, President and CEO, ICBA Securities
As the calendar turns to the fall, millions of Americans gear up for their favorite sport of football. Of course, with this being a year unlike any other, we’re still trying to figure out what it will look like. Nonetheless, what better way to usher in the new football season than to relate common gridiron phraseology to its investment portfolio equivalent? Some of this may sound like a stretch for the sticks, but perhaps you can find a loose ball in the pileup. If so, hopefully you can convert the takeaway into a visit to the sweet land of six.
Many footballers prepare themselves for the season with frequent trips to the gym. There, they can make good use of barbells. Community bankers often utilize “barbells” to hedge their bets against rate movements. This strategy simply entails buying roughly equal amounts of very short-duration bonds and long-duration bonds. The definitions of “short” and “long” will vary from buyer to buyer, but in the end, the investor is going to be pleased with at least half of the holdings, regardless of whether rates rise or fall.
This recent innovation of play calling gives the quarterback the ability to decide on the fly whether to run the ball or throw downfield. In a similar sense, investors can do the same with a do-it-yourself floater. Most municipal bonds in community bank portfolios have longer-than-average durations. Often, that is precisely the intention of the portfolio manager, as it may sync with the bank’s interest rate risk posture. However, sometimes the manager decides the portfolio is longer than desired, in which case the DIY is called. This entails the execution of a pay-fixed interest rate swap to turn the asset into a receive-floating adjustable rate bond.
The best way to explain this is to lift the definition from Wikipedia: “These elite defenders cover an offensive receiver so effectively on either side of the field that the quarterback does not target the receiver being covered.” To the community banker, this means owning assets that cannot be called away or converted to cash when interest rates are not favorable (e.g., now). The way to lockdown your assets is to buy “bullets,” which have no call features, or securities such as multifamily mortgage-backed securities (MBS) that have prepayment penalties or yield-maintenance provisions.
Man in motion
This entails sending one or more offensive players running parallel to the line of scrimmage prior to the snap to better position them for the play. In investment management, its equivalent is the purchasing of newly issued bonds that have extended original settlement dates, which further coincide with upcoming maturities of bonds currently in the portfolio. This play has been especially beneficial in recent months, as the amount of maturities and calls have outpaced new issuances, creating something of a scrum among investors.
Sometimes a team will insert a fifth defensive back into the lineup on obvious passing downs in order to give it a better chance of covering the potential pass receivers. This “nickel package” appears in balance sheet management in the form of match-funding assets and liabilities. If a community bank strategically adds assets through an acquisition or an outright leverage, thought must be given to balancing the altered interest rate risk. Tools such as Vining Sparks’ Performance Architect can quantify the new dynamics of the balance sheet, including the impact on capital, margins and earnings.
The third quarter of the calendar year for broker-dealers is often a period of low volume. Some of it has to do with portfolio managers not taking time to identify beneficial portfolio opportunities until the figurative two-minute warning. This year especially there are plenty of good reasons to be distracted. The bad news is that there are a lot of community bankers who operate in a last-second mode. Late December is rarely a good time to be selling securities; it can, however, be a buyers’ market. Make decisions early—10 minutes to go in the game is still relatively early. Late fourth-quarter comebacks are hard to pull off.
New SBA Standard Operating Procedure
Effective 10-01-20, a new SBA Standard Operating Procedure (SOP):
- Replaces SBA Form 912 (Statement of Personal History) with SBA Form 1919
- Clarifies issues related to using a Lender Service Provider
- Explains actions causing suspension or revocation of 7(a) program lending authority
- Deletes references to the discontinued Certified Lender program
- Raises the number of 7(a) loans completed over past 24 months to attain PLP status.
Please feel free to contact us at (800) 340-7304 if you have a specific question. We’re happy to provide guidance.
Upon expiration of the 7(a) Relief Payment program, lenders are requesting more payment deferment requests for struggling borrowers. This process remains unchanged. Prior to deferring principal and/or interest payments on loans with sold SBA guarantees, investor approval must be granted. We are happy to handle this for our Portfolio Management service clients.