A Word from Arne
Following the Biden administration’s selection of Isabel Guzman to head the U.S. Small Business Administration, the Senate Committee on Small Business and Entrepreneurship has voted in the affirmative, and has sent the nomination to the full Senate for confirmation. Ms. Guzman has previously served as Deputy Chief of Staff to the Administrator of SBA during the Obama administration as well as Director of the California Office of the Small Business Advocate. She succeeds Jovita Caranza, and we looking forward to continuing our work with the SBA under her leadership.
Updates of Debt Relief and Assistance Programs
On February 16, the SBA issued a Procedural Notice adjusting the number of months of Section 1112 payments for several of its programs. The SBA provides P&I payments up to $9,000 per month on 7(a) loans. The number of payments will vary depending on loan type, the approval/disbursement dates of the loan, whether the borrower qualifies for an industry classification code hardest hit by the pandemic, and the availability of fund appropriations. For quick details on these initiatives, please refer to our Reference Guide, which summarizes the latest updates.
As a reminder, the Economic Aid Act that was signed into law on December 27, 2020 temporarily increases the SBA guaranty percentage on Standard 7(a) Loans and 7(a) Small Loans to 90%, while waiving borrower guarantee fees and the ongoing .55% service fees. The temporary fee waivers, guaranty percentage increases and other temporary changes will be in effect through September 30, 2021 — helping to make SBA 7(a) lending an even more attractive tool for small business lenders. If your institution is not yet an active SBA lender, this is a great time to start.
Secondary Sales of Government Guarantees At Historic Heights
The secondary market for selling SBA and USDA guarantees has long been a very lucrative option for community lenders. Selling government guarantees can generate significant non-interest fee income for institutions, and also assist in overcoming leverage issues. Recently, premium levels for SBA and USDA guarantees have reached historically high levels. For example, a new 25-year SBA loan with a rate of prime + 2.75%, and a calendar quarterly adjustment will generate a premium of more than 20 points. This income, coupled with a guarantee equal to 90% of the loan, adds up to a great revenue opportunity for SBA lenders. H&M surveys the secondary market regularly, and we send a monthly Secondary Market Premium Indications email to our newsletter subscribers. Please call Arne Monson at 800.340.7304 if you’d like an indication bid on any specific SBA or USDA transaction you may be considering.
Holtmeyer & Monson can provide you with insights about the ins and outs of all matters related to government-guaranteed lending. Our deep familiarity with the agencies’ requirements and processes give lenders a head start in achieving smooth and rewarding transactions—for them and their customers alike. We are a Preferred Service Provider of the Independent Community Bankers of America and serve as the SBA/USDA loan department for many institutions. If you have questions, we’ll have answers.
Do’s, Don’ts, and Maybes
A set of simple rules to streamline bond management in 2021
by Jim Reber, President and CEO, ICBA Securities
If my recent aggregate conversations with investment security managers are an indication, there is still a lot of seat-of-the-pants decision making going on out there when it comes to bond strategies. And I hasten to add this is not a criticism; it’s merely an observation. Why should we expect anything else?
Banks are still sitting on a lot of cash. The bond market is giving mixed signals with short rates being anchored at near-zero levels while the Treasury yield curve is its steepest in three years. Bond portfolios still have substantial unharvested gains, and net interest margins are at record lows. PPP 2.0 has been launched, as a new wave of fiscal stimulus is about to be unleashed on consumers and governments.
Given this bewildering set of variables, perhaps we can create a (relatively) simple set of ground rules that portfolio managers can refer to while trying to make sense of it all. I would like to emphasize that “maybe” is the unspoken theme to these guidelines, as every community bank has its own risk/size/earnings/ownership profiles. But here goes:
Do: Stay invested. Cash yields zero, and will remain there for the remainder of the year, at least. A simple bond that yields even 80 basis points (.80%) will probably produce a spread to your cost of funds, and will provide collateral for pledging purposes. An example of a bond that yields 0.80% is a callable agency with a five-year maturity, and two years of call protection (“5/2 callable”).
Don’t: Keep buying the same old bonds just because. In just the last three years, community bank portfolios have changed tenor significantly. You know that banks own fewer tax-free securities since tax rates were cut in 2017, but did you know that both general market munis, and taxable munis, have picked up the slack? The other big “new” bond sector is multifamily mortgage-backed securities (MBS), which follows…
Do: Take action to normalize your bond portfolio’s cash flow. As low as returns (and spreads) are, the cost of eliminating optionality is an all-time low. Case in point: a five-year non-callable agency (aka “bullet”) yields about 0.75%, which means an investor surrenders five measly basis points to remove all cash flow uncertainty. In a different sector, MBS, a similar set of dynamics is at play. You’ve read in this column recently that “prepayment friction” pools, which consist of low balance loans, can slow down refinance activity. The same outcomes can be achieved with “yield maintenance” provisions on multifamily MBS.
Don’t: Worry (too much) about rates rising to the point that your collection of bonds is underwater from a market price standpoint. If your community bank is typical, it will benefit from a general rise in rates. For one thing, since banks own a whole lot of bonds at prices above par, interest rate increases will cause the current bonds’ yields to improve. For another, the rest of your bank’s earning assets will pretty quickly show some improvement, whether the loan portfolio consists of floaters or shorter-duration fixed rate credits. Community banks’ asset/liability positions are built for rising rates.
Do: Stay on top of your portfolio’s effective duration, to put your mind at ease about all of the above. We have seen this important barometer of price risk really whipsaw over the last year. At last look, most portfolios had returned to their pre-pandemic durations of around 3.0 years, but that’s taken a lot of buying of a lot of longer-maturity bonds to get there. In mid-2020, they had shrunk, on average, to about 2.5 years. That’s a 20% increase in two quarters.
Maybe: Invest in some bond education for your staff and you. As the economy (and travel) begins to open back up, there will be a whole range of investment school options available, some virtual, some live, some hybrid. There is also plenty of archival information that’s been accumulated over the last year as trade associations, brokers-dealers and consultants have figured out digital delivery channels. So ask around your providers for offerings that may suit your needs.
And do, by all means, continue your due diligence and documentation of your actions. Investment portfolios have grown remarkably in the last year. They are likely to be a substantial driver of bank profits for the foreseeable future.
SBA Debt Relief and NAICS Codes
Lately, current borrowers have asked us whether they’re eligible to receive SBA Debt Relief payments based on the borrower’s North American Industry Classification System (NAICS) code. SBA has published a list of eligible payment recipients. A borrower’s NAICS code is established at the time they apply for the loan, and cannot be changed after the fact to qualify for SBA Debt Relief payments. Refer to our Reference Guide.
As the largest Lender Service Provider in the U.S., we now provide Portfolio Management Services for more than $1.5 billion in SBA and USDA loans. To ensure accuracy, efficiency and the prevention of 1502 reporting and adjustment problems, we respectfully ask for payment dates on new transactions to be set no later than the 28th of each month.