A Word from Arne
As of this writing, the U.S. House has passed a temporary Continuing Resolution (CR) to keep government funding at current levels through December 20. A previous CR was set to expire November 21. The bill now goes to the Senate. The White House has indicated that the President would support the new extension, making it likely that the Senate will pass the measure. Budgetary funding is critical to the ongoing operations of the Small Business Administration. Unfortunately, the budgeting process sometimes becomes political, and any disruptions to small business owners’ access to capital for tend to be very problematic. We are monitoring the process closely, and will keep all of our clients up to date on the situation.
The Small Business Administration is currently operating under an Acting Administrator since the departure of Linda McMahon. President Trump has nominated Jovita Carranza to serve as the new Administrator. We will follow Ms. Carranza’s appointment proceedings, and keep you informed.
Common Deficiencies in Defaulted SBA Loans
The office of Inspector General (OIG) regularly reviews early defaulted SBA 7(a) loans for material deficiencies in loan origination and/or closing procedures. A consistent theme in the OIG findings includes these most common deficiencies:
- Inadequate support for equity injection
- Inappropriate use of delegated authority
- Inadequate review of franchise agreements
- Failure to obtain business valuations
- Unsupported operating projections
- Inadequate support for debt refinancing
- Affiliate not considered for size standard determination
- Inadequate assurance of repayment ability
Working closely with our clients, the Holtmeyer & Monson staff goes to considerable lengths to assure we and our clients meet the requirements of SBA and USDA lending regulations. Our absolute obligation to all of our clients is to protect the integrity of the government guaranty. Occasionally, we run across a request from either a lender or borrower to “cut a corner.” Rest assured that we will not engage in this practice, nor tolerate any noncompliance with well-established SBA and USDA protocols.
We love to share our clients’ SBA lending successes, and we’re glad to extend further congratulations to Avidia Bank, which was recognized as the best Massachusetts Lender to Manufacturers in fiscal year 2018. Avidia is celebrating its 150th year of providing banking services to Massachusetts communities. Happy Anniversary to all of our Avidia Bank associates.
As a long-time qualified Lender Service Provider, it gratifies us here at Holtmeyer & Monson to play a role as our clients across the country enable local businesses to have quicker access to needed funding through government-backed loans. If you’d like to know more about the SBA and USDA programs, or have any related questions, please let us know. We serve lenders as their outsourced SBA/USDA loan department (and have been named a Preferred Service Provider of the Independent Community Bankers of America), and we welcome your inquiries.
Rock (and Roll) into a New Decade
A look into a previous era can help today’s portfolio managers
by Jim Reber, President and CEO, ICBA Securities
It was 20 years ago today
More precisely, it was 20 years ago this year that community banks, and their investment portfolios in particular, were enduring a period of extremes. Many of the readers of this column were in charge of their bond portfolios then, and were, proverbially, “Riders on the Storm”, which involved:
- Inflation, which actually used to be a problem, was gaining traction. The year-over-year Consumer Price Index (CPI) was more than 3% and rising.
- Since the economy was doing quite well, unemployment dropped from 4.7% in 1998 to 4.0% at the end of 1999, which was a 30-year low.
- The Federal Open Market Committee, chaired at the time by Alan Greenspan, was busy stomping on the brakes. Overnight rates rose 250 basis points (2.5%) between 1998 and 2000, finishing at 6.5%. This remains by far the highest level we’ve seen since. The 10-year treasury note reached 6.79% in January 2000.
- Bond portfolios’ market values took a beating: The average community bank’s bonds had more than a 3% loss in 1999, which is enormous on a historical standard.
In short, it appeared we were on “The Eve of Destruction.”
As we’ve learned over the decades, bond portfolio management is a give-and-take proposition. If your collection of securities is underwater, at least you have the comfort of knowing that your overall yields are heading “Higher and Higher.” At least, if you continue to purchase bonds in that environment.
However, 1999–2000 wasn’t a period in which banks were actually buying many bonds, which is also a mixed blessing. The aforementioned Fed rate hikes accompanied a very healthy economy, which of course spawned a favorable lending environment, much like today. Bond portfolios actually shrunk between 1998 and 2000 by a goodly amount of about 25%. This too is a condition that has repeated itself in the very recent past.
What were once vices…
Peeling back the portfolio onion a bit, we can see how investor preferences and investment products have changed in two decades. Non-amortizing taxable bonds, meaning treasuries and agencies, made up a large portion of securities portfolios in 1999; in fact, more than 30%. Community banks actually owned more agencies than direct pass-through mortgage backed securities (MBS). It was in this period that “step-ups” hit the scene and appealed to portfolio managers who were justifiably concerned about a “Bad Moon Rising,” otherwise known as still-higher rates.
Today, the treasury/agency slice of the “American Pie” is only 12% of the total. These have been replaced by all manner of MBS and by tax-free munis. Even though banks own fewer munis than before tax reform went into effect in 2017, the overall industry profitability creates plenty of incentive to avoid tax liability. Also, particularly for the bank-qualified (BQ) muni sector, credit metrics recently have been outstanding.
…Are now habits
Portfolio managers in the 21st century have proven to be quick on their feet, and well informed. The migration out of one-fifth of their tax-free bonds mentioned in the above paragraph is a perfect example. Something else that community bankers have gotten comfortable with in relatively short order is the dramatic growth of multifamily MBS. Bonds with names like DUS, Aces and K’s have become staples in bond portfolios.
Also present is the careful maintenance of average maturities, also known as effective duration. Around 80% of investments owned by community banks have some type of call feature attached. Though interest rates have had some wild swings in the past two decades, and rates have trended lower in that time, bond portfolios’ durations have been amazingly stable. The portfolio managers and the risk management functions in general have been able to “Hold on Tight.”
Another success for community banks is their still-low cost of funds. Industry-wide, the average remains less than 1%, even though the Fed raised rates a total of 10 times between 2015 and 2018. Included in the toolbox are interest rate swaps, which can be used to lock in historically low funding costs. It’s not “Money for Nothing,” but close.
Let’s party like it’s 2020. The Beat Goes On.
Jim Reber (firstname.lastname@example.org) is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks.
Vining Sparks, ICBA Securities’ exclusive broker, will again offer a multi-part webinar series Community Banking Matters next year. A variety of topics that address balance sheet strategies and risk management will be offered. We will again offer CPE to the participants. For more information, visit icbasecurities.com.
Rate Adjustment/Maturity Extension on Sold Guarantees
Lenders sometimes encounter situations that call for extending the maturity dates of SBA term loans and lines of credit. Extensions can be accomplished, but care must be taken to follow the established requirements. The maturities of unsold SBA credit facilities (both term loans and lines of credit) may be extended under the lenders’ unilateral authority BEFORE the facilities mature. After maturity, the extension process becomes more complicated, and requires approval granted by the SBA. It’s always a good practice to be aware of maturing SBA credit facilities.
Mergers of financial institutions are common today. If the merging parties are active SBA lenders, they must follow a well-established protocol that includes the SBA’s receiving and reviewing the PLAN of Merger, then issuing a Letter of Consent, BEFORE the merger is finalized.