A Word from Arne
Holtmeyer & Monson is finishing up 2018 and starting the new year with a lot of positive momentum. We’re proud to say that we’ve helped more lenders and borrowers with more transactions than ever throughout the last 12 months. To all of our partners, we extend a resounding “Thank You” for the trust you’ve placed in our company. We remain committed to ensuring that you receive the absolute highest level of service provided in our industry.
More Good News
Speaking of outstanding service, congratulations go to one of our clients, Avidia Bank, for being recognized by the SBA as the 2018 Massachusetts Lender of the Year to Manufacturers. Avidia does a wonderful job for their borrowers and we are honored to have had a role in their success.
We’re also proud to announce that the Community Bankers Association of Georgia has recently named Holtmeyer & Monson an Endorsed Member of its group. This is a very important new relationship for us, and we look forward to a broadening our ability to serve community banks throughout the state.
Possible Short-Term Government Shutdown and SBA Applications
At this writing, our country is operating under a U.S. Budget Continuing Resolution (CR) to keep the government funded without a partial shutdown until Friday, December 21, 2018, when the CR expires. Since the SBA is funded through the Federal budget, there is always the possibility that a temporary shutdown would disrupt the approvals of SBA loan applications. Rest assured that H&M will continue to process client SBA applications through any possible short-term government shutdown – and we will urge our clients to keep the applications moving if one does occur. According to the nonpartisan Committee for a Responsible Federal Budget, we have seen only three “true” shutdowns (those affecting government operations for more than three days), one in 2013 and two in the winter of 1995-96.
If you have questions about any aspect of the Small Business Administration or SBA lending, please reach out to us. We’ll be glad to explain, clarify and simplify all matters concerning SBA and USDA guaranteed loans. This is the kind of support that has earned Holtmeyer & Monson recognition as a Preferred Service Provider of the Independent Community Banks of America, helping lenders across the country in any capacity they need.
How ’Bout Them Dogs?
Put unrealized losses to good use
by Jim Reber, President and CEO, ICBA Securities
This just in: community bank investment portfolios have lost value in 2018. The rest of this article contains good news. At least, it does for those community bank portfolio managers who are interested in improving future earnings, creating a more diversified collection of bonds, tweaking their risk profile and, yes, deferring income. I hope that includes you.
Before we get into the numbers, and at the risk of being Master of the Obvious, I want to mention that all of the decline in value this year is for the purest of reasons: rising interest rates. In the recent past (i.e. the last decade), there have been certain securities whose prices plummeted because either credit quality had deteriorated or spreads had widened. Two of the more notable examples of this are the cratering of Fannie Mae/Freddie Mac Preferred Stock in the aftermath of their being placed in receivership in 2008, and a couple of episodes of disruption in the muni market. Does Meredith Whitney on “60 Minutes” ring a bell?
Where we are
Even though we’re now a full three years into this rising rate cycle, bond prices have really been quite stable until just recently. The Fed first hiked overnight rates in December 2015 after warning that it might for several meetings. By the end of that year, the typical community bank had a modest unrealized loss of about 30 basis points (0.30 percent).
Fast forward two years, to December 2017, and those losses, on average, were still only 50 basis points. The cause of the relative price stability was two-fold. First, the Fed was moving quite slowly, as there were only four rate hikes in that two-year period. Second, credit spreads on most of the bonds banks owned tightened during that period. As the economy improves, the required incremental yields over those of benchmark Treasuries normally shrink, and such was the case here too.
Today, those losses on average are approaching 3 percent. That means a $100 million portfolio is $300,000 underwater. Many community banks have not a single bond that’s owned at an unrealized gain. If your portfolio sounds like this, you’re in good company. This also represents an opportunity.
Build for the future
If you ask your tax accountant if income deferral is a sound tax-planning and cash flow strategy, you should first set your stopwatch to see how long it takes to receive a “yes.” Selling some underwater bonds, which some might term “dogs,” and buying other securities that have higher market yields will push income into future periods. It will also delay some payment of income tax to Uncle Sam.
So far this year, the banking industry’s earnings are about 20 percent ahead of last year. That’s due to both a still-improving lending environment and (as you may have heard) tax reform. Chances are that your institution could selectively sell some bonds this year and still meet its earnings goals, with all future years also benefiting.
Look both ways
As you investigate your opportunities, a few bond-swap reminders are in order. First, economically, the best bonds to sell are the ones with the lowest current market yields. Examples of these could be short bullet agencies or “pre-refunded” munis. Your brokers could use the term “take-out yield” as a synonym for market yield.
Also, and this may be academic at this point, it’s very difficult to make the math work by taking a gain on a tax-free bond. However, it can be beneficial to buy tax-free securities to replace bonds sold at a loss. Your broker can demonstrate the economics of this “tax swap” strategy.
Finally, from a timing standpoint, it’s wise to act sooner rather than later as year end approaches. The liquidity in the bond market often starts to evaporate by mid-December, so you’ll want to stay ahead of that likelihood. And, if it’s more advantageous to take some losses in the next calendar year, think about pulling the trigger by mid-January. Having nearly an entire year to start making up the realized losses will help the 2019 results.
There are plenty of reasons to think about taking some losses now, and this column contains just a few of them. Your broker-dealers can help you and your management team identify which “dogs” can be converted into “winners” for future periods.
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, can help identify bond swap candidates and quantify the impact of a swap on the entire financial position of your community bank. To learn more, or for a demonstration of their Performance Architect, contact your Vining Sparks sales rep or visit www.viningsparks.com.
New 2019 Rates for Annual Service and Upfront Guaranty Fees
When the SBA 2019 fiscal year began on October 1, 2018, so did new rates for fees such as the FY 2019 SBA Annual Service Fee and Upfront Guaranty Fees for 7(a) loans. The following are SBA fees for FY 2019:
- Annual ongoing service fee is .55% of the guaranteed portion of the outstanding balance of the loan.
- Upfront guaranty fees for loans with maturities exceeding 12 months are now:
- 2.00% of the guaranteed portion for loans of $150,000 or less.
- 3.00% of the guaranteed portion for loans of $150,001 to $700,000.
- 3.50% of the guaranteed portion up to $1,000,000, plus 3.75% of the guaranteed portion over $1,000,000, for loans of $700,001 to $5,000,000.
Specific Fee Relief programs are available for loans made in certain rural areas, as well as for loans to qualifying veteran-owned small businesses.
Please call your Holtmeyer & Monson Account Executive for any clarifications.
Rate hikes are sparking borrowers' requests to lower or freeze variable rates on their SBA loans. This is a routine matter for loans with unsold guarantees. Not so if guarantees have been sold to investors – they expect to be paid based on the variable rate. While some investors have been flexible about new rates, it's critical that H&M reviews proposed changes to ensure investor requirements are met. Contact us with questions.