A Word from Arne
March is known as a time of transition, with the weather moving from winter to spring. It marks the season for March Madness and the NCAA men’s and women’s basketball tournaments, and the return of Major League Baseball. Is there a spring season for SBA and USDA lending?
SBA and USDA Lending Picking Up
Historically, we’ve seen a pick-up in SBA and USDA lending in the spring, and this year is no exception. With the recent increases in interest rates, lenders are looking for ways to continue to provide financing to borrowers who may be stressed. It is a great time to consider SBA and USDA lending programs to help meet their capital needs. Through the support offered via the government guaranty, lenders can significantly extend loan maturities and successfully take pressure off of cash flow.
We’ve all heard the common objections from borrowers regarding SBA and USDA lending: “Too many fees,” “Too much work,” and “I don’t want the government in my business.” The reality is that effective use of these guaranteed loan programs allows lenders to continue providing borrowers with access to capital on terms that are not available conventionally. Recent program enhancements make it a great time for borrowers to apply for an SBA loan. For example, SBA is currently offering a guaranty fee waiver on any SBA 7(a) loan of $500,000 or less. One less borrower objection! If government-guaranteed lending has not been part of your lending strategy, now is an excellent time to give it strong consideration.
USDA B&I Lending Highlights
Considering the USDA Business and Industry (B&I) Loan Program? It provides affordable financing to a variety of eligible businesses in rural communities throughout the U.S. and is a viable alternative to the SBA 7(a) program. For FY ’23, the USDA B&I program was funded at $1,842,890,356. Through March 1, 2023, they’ve obligated $971,303,061 and still have $871,587,295 available. The maximum loan limit for B&I loans is $25,000,000 with an 80% guarantee — that’s a much larger loan limit than SBA 7(a). The guarantee fee is 3% of the guaranteed amount.
USDA also has a special program geared towards the food supply chain. The FY ’23 funding for these loans was $1,178,868,657, with $1,034,986,212 still available. This program offers loans with a zero-guarantee fee. Eligible borrowers must be directly engaged in the middle of the food supply chain, specifically the aggregation, processing, manufacturing, storing, transporting, wholesaling, or distribution of food. When available funds are exhausted, the food supply chain program will end.
For more information on these programs, including qualifications, eligibility, and restrictions, please reach out to us for assistance.
We’ll See You in Hawaii
The annual ICBA LIVE is being held from March 12th through 16th in Hawaii. Those of you who are attending, please visit Booth #914 in the exhibit hall for a chance to win cash prizes. We’ll be looking for you!
How can we help your team meet your 2023 SBA and USDA lending goals? Give us a call and “get in the game.” We’re here to serve as your outsourced SBA and USDA lending department so your bank and borrowers can reap the rewards of these outstanding government-guaranteed loan programs.
The Five Percenters
Current bond yields have long-term appeal
by Jim Reber, President and CEO, ICBA Securities
I will be candid with you. Your correspondent is most assuredly not a professional journalist. And, being an accountant by trade, creativity isn’t something that comes naturally. Therefore, when composing these investment columns I often rely on some techniques I’ve learned from listening to the professionals. Among these are joke-writers, specifically those for nighttime talk shows and Saturday Night Live.
A few of these jokesters have said that several of our recent Commanders-in-Chief are “the gift that keeps on giving.” It occurs to me that, on a decidedly different stage, my version of this font of material is the Federal Open Market Committee (FOMC). The FOMC’s execution of monetary policy according to its dual mandate often results in wild swings in interest rates—and the resultant volatility in bond prices. The historic 2022 (and ongoing) hike in interest rates, while painful for bondholders, has at least produced a yield environment that is worthy of an investment column.
Very recent past
In 2020 and 2021, investment brokers were doing their best to help community banks make good decisions about how to invest the mountains of cash that were sitting on their balance sheets, earning next to nothing. In fact, a number of investments that were several years in duration earned well less than fifty basis points (0.5%). This is what happened when short-term rates were anchored at near zero, and the Fed wasn’t “thinking about thinking about” changing anything.
In fact, “The quest for one percent” could have been the title of this very column barely a year ago. For an example, the five-year Treasury note issued in December 2021 has a coupon of 0.375%. Fifteen-year mortgage-backed securities (MBS) with 1% coupons were trading for a while at prices above 100.00; today they’re worth around 86 cents on the dollar.
Opportunity is present
So now, as 2023 is well underway, it’s quite easy to buy a bond with a yield of 5% or higher. Thanks to overnight investments being in the high 4%’s as of this writing and quite possibly headed to the mid-5%’s, even short investments (particularly those with call options attached) can be found with 5.5% returns.
The inverted yield curve needs mentioning. The “2-to-10” part on the curve is reaching historic levels in both the degree and duration of inversion. It has produced a dilemma for portfolio managers. Intuitively, shorter bonds that yield more than longer ones sound sweet. This is a reminder that the bond market is predicting a recession, and it’s sometime soon. Another consequence of the curve’s shape and the rate cycle is that the municipal bond market currently does not offer relative value. Tax-equivalent yields out to 10 years are actually lower than the Treasury curve
Of course, all this 5% yield-opportunity stuff doesn’t help a community bank that has no remaining liquidity to take advantage of it. From the looks of things, that includes a lot of institutions. The FDIC reports that Federal Home Loan Bank advances increased 32% in the fourth quarter of 2022 alone.
One strategy that comes to mind is the advance purchase of investments, financed by borrowed money that will be paid off by future bond portfolio cash flows. The general framework is this:
- Calculate your next two to three years’ cash flows from investments
- Use wholesale funds to finance a matching term and amount
- Use the proceeds to buy bonds with prepayment protection at today’s rates
This makes sense for any financial institution unless it has no borrowing capacity, is leveraged as far as is feasible or has exposure to rising rates. By all indications, most community banks have room on all these fronts.
Each time the bank pays down borrowings with existing cash flow, the bank is removing low-yielding bonds, relatively high-cost borrowings and is de-levering. All the while, it has greatly boosted its overall bond portfolio yield, and hasn’t booked any losses on sales. And at the end of this two- to three-year period, voilà! The bank owns a high-yielding set of bonds, hopefully with unrealized gains, free and clear.
Of course, this isn’t to say that bonds purchased early in 2023 won’t have some dip in their values at least initially, if the FOMC continues to push rates higher. Generally, though, 5% yields have proven to be quite attractive over longer periods. A little creativity can help get those five percenters on board. That’s something even a professional joke writer can’t poke fun at.
Jim Reber (firstname.lastname@example.org) is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks.
Common Technical Exceptions — OCRM Oversight Reviews
SBA lenders are subject to regular oversight reviews by the Office of Credit and Risk Management (OCRM). Three of the most frequently cited technical exceptions discovered during these oversight reviews are: (1) failure to adequately address the credit elsewhere determination, (2) failure to adequately address the collateral fully secured determination, and (3) failure to comply with equity injection requirements. If we can be of assistance in these areas, please let us know.
SBA requires annual re-amortization of loan balances to avoid negative loan amortization. With recent interest rate increases, H&M is analyzing variable rate SBA loans more frequently and advising clients of suggested payment adjustments.