A Word from Arne
This year promises to be a good one for small businesses and small business lenders. According to the NFIB Small Business Optimism Index, current small business operations remained quite strong in January. Econoday reported that the Index reflects strong hiring, hiring plans and job openings, as well as solid inventory and capital spending. Writing in Forbes, contributor Rohit Arora noted that banks and credit unions have been making SBA loans at record volumes, adding, “SBA loans help thousands of small businesses get off the ground each year, and I do not see an end to this trend anytime soon.” Our growing client roster reflects the increase in SBA lending, as well. We have the privilege of serving more clients than at any time in our 37-year history, as more lenders recognize the value of using an out-of-house service to add income with no overhead expense – and further profit from the sale of SBA guarantees. The continued support of our clients – both long term and new – is much appreciated.
USDA and SBA Disaster Support
Many of our clients have asked for clarification about government programs available to provide disaster support to customers hard hit by storms, floods, droughts and other devastating natural events. Both the USDA and the SBA offer direct-to-consumer loans that may provide relief to affected members of your community.
The USDA’s Farm Service Agency (FSA) offers an Emergency Loan that provides funding direct from the Agency to farmers and ranchers who have sustained losses due to an event officially designated as a natural disaster or quarantine, and who have been denied disaster-related credit by a commercial lending institution(s). The Emergency Loan, a specialty loan that’s part of the FSA’s Disaster Assistance Program, requires the same application forms as all FSA direct loans – plus two additional forms:
- Lenders Verification of Loan Application, providing written confirmation that credit was denied to the applicant by an organized commercial lending institution
- Certification of Disaster Losses
Application forms, their instructions, plus other valuable Emergency Loan information, are available at https://www.fsa.usda.gov/programs-and-services/farm-loan-programs/emergency-farm-loans/index. Applicants are encouraged to visit their local FSA office or USDA Service Center to learn more about the Agency’s programs and information needed for a full application. As a final step in the process, applicants are required to visit the FSA office to complete forms specific to their requested loan.
The SBA provides long-term, low-interest Disaster Loans to businesses of all sizes, private non-profit organizations, homeowners, and renters. SBA disaster loans can be used to repair or replace the following items damaged or destroyed in a declared disaster: real estate, personal property, machinery and equipment, and inventory and business assets. More details are available at https://disasterloan.sba.gov/ela/Information/Index, where you’ll find links to the different types of SBA Disaster Loans, fact sheets for each type, mail-in paper application forms, current disaster declarations, and a glossary of terms. All types of SBA Disaster Loans may be applied for online at https://disasterloan.sba.gov/ela. The three-step online process is the fastest way to receive an eligibility decision. Applications may be submitted by mail. Holtmeyer & Monson is available to assist with the application process, which involves completing standard forms and providing financial information along with a signed IRS FORM 4506-T permitting release of tax return information to SBA. People may also apply in person at any Disaster Recovery Center and receive one-on-one help from an SBA representative. (For Center locations, go to https://www.fema.gov/disaster-recovery-centers.)
See You at ICBA Live 2019?
The Independent Community Bankers of America (ICBA) will be holding their annual National Convention March 17 through 21 in Nashville. Holtmeyer & Monson will be exhibiting as well as conducting an educational workshop on Thursday March 21 at 8:40 a.m. During the session, a panel of esteemed bankers will be sharing their experiences with SBA Lending, so we fully expect it to be a very informative session. Whether your bank has been generating SBA loans for a while or you’re just getting started, there are definitely best practices and valuable insights to pick up in this session. If you plan on going to ICBA Live 2019, please attend our session and stop by booth 428 in the Music City Convention Center. We look forward to seeing you!
Of course, we’re always glad to connect with our readers, wherever you may be. If you have an SBA-related question or issue, by all means give us a call. The same goes if you simply want to learn a little more about Holtmeyer & Monson. As a qualified Lender Service Provider, we serve as an out-of-house SBA lending department for community banks across the country, and we’ve been designated a Preferred Service Provider of the ICBA.
Tax-free supplies and demand are evolving
by Jim Reber, President and CEO, ICBA Securities
However you slice it, municipal bonds have a big impact on community bank investment performance—even if you don’t own any. That’s because your bank’s collection of bonds is destined to be in the bottom of the rankings amongst its peers, unless you own some.
This, of course, is not news. For decades, a hallmark of high bond portfolio performance is a large weighting of tax-free securities. Among the investments that community banks are permitted to own, munis tend to be the highest yielding. There are several reasons for this.
First, they’re not guaranteed by the federal government or one of its agencies. (That doesn’t necessarily indicate they don’t have really good credit quality.) Second, munis have a limited supply, which could mean they have a scarcity value that makes them expensive but instead means they have somewhat lesser liquidity than other sectors. Third, and most importantly, munis have the longest durations of any category in the portfolio, which is mainly a function of a perpetually steep yield curve.
Remember also that the yield your bank earns on its tax-free securities is driven by its marginal tax bracket. The higher the tax rates, the bigger the tax-equivalent yields. This means S Corporations have higher yields on their munis than do C Corporations, although all tax-advantaged assets have seen their yields drop since the Tax Cuts and Jobs Act went into effect in 2017.
For example, a C Corporation that owned a muni at a tax-free yield of 2.75 percent prior to tax reform would have been earning a tax-equivalent yield of about 4.17 percent. Now, that same bond’s tax-equivalent yield is about 3.45 percent. For S Corporations, the drop is similarly painful: from about 4.55 percent to 3.87 percent.
In response, banks have been right-sizing their muni holdings. For the one-year period ending Sept. 30, 2018, the typical community bank bond portfolio decreased its muni sector weighting from 28 percent of the total to 23 percent. It’s likely more shifting will occur as bonds get called and mature.
The 2017 Act will also affect municipal supply in the coming years. Attendant to tax reform was the elimination of the ability for muni issuers to “pre-refund” their outstanding debt any longer than 90 days before their call dates. Prior practice saw bonds being issued as long as three years in advance of outstanding issues they were to replace. What this meant for muni issuance in 2018 was that only about 31 percent of 2018-dated bonds were for refinancings of older bonds. That number was 74 percent just two years ago.
Also, the largest two years of muni issuance in history were 2009 and 2010, because the American Recovery and Reinvestment Act (ARRA) of 2009 created several new classes of municipal bonds and expanded the size limit for Bank Qualified bonds. These provisions only applied to those issued in the two years, so there was a lot of paper printed in that time frame. Many of the longer-dated maturities had 10-year call provisions embedded in them, which means that 2019 and 2020 will see a lot of bonds get called. Also, the entire muni market has been stuck at about $3.7 trillion for the past five years, and there are actually fewer bonds outstanding now than in 2010.
Ironically, even though banks are shedding some of their munis, there should be decent liquidity and stability in the muni market. A lot of this is owing to robust demand from the retail sector, which owns about two-thirds of all municipal bonds. Individual tax rates didn’t change much in the 2017 Act, so those individuals’ tax-equivalents didn’t change much, either. The aforementioned limited amount of outstanding muni debt will also help keep a relative floor under muni prices, particularly in the early months of 2019.
To be sure, banks have plenty of income these days to shield from the tax man. Industry earnings were up year-over-year by more than 30 percent through Sept. 30. By most indications, 2019 should be a solid year for community bank performance. You can help ensure it by actively managing and updating your municipal bond holdings to fit your institution’s needs.
Jim Reber is president and CEO of ICBA Securities and can be reached at 800-422-6442 or firstname.lastname@example.org.
Vining Sparks, ICBA Securities’ exclusive broker, , offers a host of tools to help community banks manage their municipal bond portfolios. For more information, contact your Vining Sparks sales rep or visit www.viningsparks.com.
Proposed SBA Loan Changes
SBA has proposed changes to various regulations governing selected business loan programs. To follow are some of the most critical proposals:
Personal Resource Test – Certain owners with liquid assets above a stated threshold would be required to inject cash into the applicant small business to reduce the SBA loan amount.
Limiting Fees – The SBA would impose a limit on the maximum fee collected for servicing, limit the maximum fee an agent may collect, modify the extraordinary servicing fee limit, and eliminate the so-called Dual Agency exception.
Affiliation Rule – Designed to simplify eligibility determinations while reducing costs and processing time, proposed revisions would modify regulations for determining affiliation under SBA’s business loan programs and its surety bond guarantee program.
We have been closely following the development of these proposed changes to SBA regulations, so that we can provide our clients with the best interpretation and implementation of SBA requirements. Please call your Account Executive for any clarifications.
Lenders frequently ask about payment relief for creditworthy borrowers. One option is to re-amortize the existing principal balance of an SBA 7(a) term loan with an unsold guaranty. The loan’s maturity date may be extended up to 10 years, and the remaining principal re-amortized over the loan’s new lifetime.