A Word from Arne
As we head into autumn, all SBA lenders need to be aware of several pending changes related to SBA lending. The following items are important for you to note:
Effective 10-01-17, the SBA will begin applying an upfront guaranty fee (equal to 2% of the guaranteed portion of the loan) for SBA loans above $125,000. Currently the fee is applied to any loan above $150,000, so lenders should be aware that a fee at this new threshold will soon be taking effect. Additionally, the ongoing service fee on SBA guaranteed loans will increase from 0.546% of the guaranteed portion to 0.55%. Again, these fee increases are effective on loans authorized on, or after, 10-01-17. On another matter, for SBA Veterans Advantage loans between $125,001 and $350,000, the upfront guarantee fee to veteran-owned small businesses will be 50% less than the fee to non-veteran owned businesses. (Fee amounts will be based on loan size and maturity.) This change will also take effect on 10-01-17. The upfront guarantee fee for veteran-owned small businesses will be zero for 7(a) loans of $125,000 and zero for all SBA Express loans.
Loan Pool Changes
Many of our community bank clients sell SBA 7(a) loan guarantees in the secondary market. This is an excellent way for the lenders to boost liquidity and non-interest fee income. Their individual guarantees are generally compiled (by third-party assemblers) into loan pools, which are then purchased at a premium by qualified investors. On October 1, the SBA is changing certain aspects of its Secondary Market Loan Pooling Program – such as increasing the minimum maturity ratio in certain Pools. The SBA is making this change in order to reduce the costs of the Pooling Program. The new guideline will primarily affect premiums of 10-year loans, which are expected to fall about 2 points. But remember, when 7(a) loan guarantees are sold, the lender and SBA share any premium income above 10 points For example, if the premium on a 10-year loan guaranty were to drop from 12 points to 10 points, the seller would experience a net reduction of just 1 point after the split.
While all banks want to earn the highest premiums possible on loan guaranty sales, this change will help ensure that the SBA continues to operate at a “zero subsidy” level. Many of our trusted investor associates advise that you can still achieve the best premiums by using a calendar quarterly adjustment on the SBA note interest rate, and selling the 7(a) guarantees as soon as the loan is closed and fully disbursed.
If you have any questions about the SBA’s new changes, fees and other related matters, please don’t hesitate to give us a call. Our clients rely on us to help them stay on top of the latest SBA news and developments. Need a knowledgeable SBA lending partner? Whether you do zero SBA loans a year or a steady stream each month, we welcome the opportunity to add our value to your organization.
The Great Liquidity Squeeze of 2017
Cash dries up as loan demand continues to grow
by Jim Reber, President and CEO, ICBA Securities
This article is in the be-careful-what-you-wish-for category: Community banks have returned to their traditional business model, after being in a figurative bunker for nearly a decade, and old issues have begun to arise.
Nationally, community banks’ loans have expanded nearly eight percent since last year. This is over twice the rate of banking in general. Loans as a percentage of assets are at their highest level since 2009. What has been the result of these developments is that, in addition to improved earnings, the means for funding this demand is becoming a challenge.
To be sure, these are issues that a community banker would prefer to tackle compared to a slowdown in loan demand, or worse, a deterioration of credit quality. Still, since this is the first time in a decade that liquidity management has focused on finding adequate sources, instead of employing suitable uses, it’s a worthwhile exercise to review the expectations and make some suggestions.
Rules are the same
The last time the coalition of bank examiners, the FFIEC, saw the need to publish a joint policy statement on the matter was way back in 2010 when it issued guidance on Funding and Liquidity Risk Management. In that Financial Institution Letter, the council identified six components of effective liquidity management:
- Accurate cash flow projections
- Diversification of funding sources
- Stress testing
- A formal contingency funding plan
- A cushion of liquid assets, and
- An early warning system
There is a good chance that your community bank has access to help in measuring your compliance with, or creating policies and procedures for, each of these criteria. For example, a sample liquidity policy is a standard document that any full service broker-dealer or consultant should have ready for your use. Also, interest rate models should assist in quantifying how much cash flow will naturally be available from the current mix of assets and liabilities, given an assumed future interest rate path.
Bonds for cash flow
If your community bank finds itself in a situation in which it is looking for more liquidity in the near future, there are a number of strategies relating to the investment portfolio that can be easily employed. And, we hasten to add, without any incremental risk to credit quality, your asset/liability posture, or your earnings.
First, you could purchase investments that have a high likelihood of being called within a year. These will be investments such as agency securities whose stated interest rates are above current levels, and have call dates in the near future. You will probably have to pay a price above par for them, in which case you will have bought a “cushion bond”. When the call date arrives, if your bond doesn’t get taken away from you, your investment yield will rise. Hence the cushion against rising rates.
A variation of this recipe is to buy a mortgage-backed security (MBS) that has a high enough borrowers’ rate (“Gross WAC”) to improve the chances that there will be some prepayment activity. Currently, a 15-year MBS with a Gross WAC of 4.00 percent or higher could see some near-term refinancing. Your brokers can find some candidates that check these boxes.
Other home-grown sources
You also may be surprised to learn that there is an active secondary market for high quality non-conforming loans. Many sellers of these loans have accumulated some type of concentration risk in their loan portfolios—interest rate, loan sector, and geographic are some examples. If your community bank has a homogenous set of $5 million or more in performing credits, my recommendation is to have an intermediary work up an estimated price for your consideration. These transactions can be structured for the seller to either retain or release the servicing.
And don’t forget the wholesale funding option. Recently there have been opportunities to lock in rates on brokered deposits that are longer in duration and lower in cost than a lot of community banks can accomplish in their traditional footprint. And from the looks of the FHLB’s balance sheet, which now has more outstanding advances than at any time since 2009, a lot of your fellow community bankers have been availing themselves of that option once again.
To conclude, liquidity management has really come full circle in a decade. No longer are community banks awash in idle funds. We have, finally, found ourselves in a part of the business cycle in which a comprehensive liquidity policy should be ready to complement the needs of the core earning assets of the balance sheet.
Jim Reber is president and CEO of ICBA Securities and can be reached at 800-422-6442 or email@example.com. Vining Sparks, ICBA Securities’ exclusive broker, is equipped to assist any community bank in developing a robust liquidity policy. Included is a policy template, customized cash flow reporting, and consultation on a contingency funding plan. For more information, contact your Vining Sparks sales rep or visit www.viningsparks.com.
Capitalizing a business with 401(k) funds: Be careful to comply.
Recently, we’ve encountered several SBA loan requests that include an equity injection from the principals’ 401(k). Both the SBA and IRS allow owners to capitalize a business this way. Just be sure to comply with SBA rules and regulations. To avoid jeopardizing the SBA guaranty, follow these carefully:
- SBA requires any individual owning 20% or more of a borrowing entity to personally guarantee an SBA loan. IRS prohibits a 401(k) Plan from providing a loan guaranty; thus the owners of the Plan must tender unconditional full guarantees, subject to the standard collateral requirements.
- The borrowing entity may not operate under an EPC/OC structure and must be organized as a C corporation.
- The 401(k) Plan cannot own 100% of the borrowing entity’s stock and all shareholders, including the Plan, must have paid the same price for the company stock.
- The 401(k) must be a tax-qualified Plan in order to avoid IRS early withdrawal penalties. The lender should require an opinion letter from tax counsel establishing the Plan’s qualification.
If you run across this type of SBA application, please call us for further guidance.
(1) Lenders must perform a site inspection of the borrowers’ place of business BEFORE the SBA loan is funded, and the visit should be well documented (with pictures of the facilities and collateral) in the lender loan file. (2) Lenders working with a Lender Service Provider (LSP) must have LSP Agreement in place and approved by SBA before any work can be undertaken.