A Word from Arne
The calendar has turned to September, and that means several things — kids are back at school, cooler weather, football and a new fiscal year is coming up for the SBA.
The SBA has released the 7(a) fees which will become effective when FY 2023 begins on October 1. The new fee structure brings much good news for SBA lenders and borrowers.
The following is a synopsis of the FY 2023 fees for 7(a) loans:
Lender’s Annual Service Fee – Based on the Gross Loan Amount:
- For loans of $500,000 or less: 0.00%
- For loans of $500,001 to $5,000,000: .55% of the guaranteed portion of the loan
Up-front Guaranty Fees on Loans Exceeding 12 Months in Maturity – Based on the Gross Loan Amount:
- For loans of $500,000 or less: 0.00%
- For loans of $500,001 to $700,000: .55%
- For loans of $700,001 to $1,000,000: 1.05%
- For loans of $1,000,001 to $5,000,000: 3.50% of the guaranteed portion up to $1,000,000 plus 3.75% of the guaranteed portion over $1,000,000
Up-front Guaranty Fees on Loans with Maturities of 12 Months or Less:
- For loans of $500,000 or less: 0.00%
- For loans of $500,001 or greater: .25% of the guaranteed portion
Up-front Fee Waiver Includes Loans of $500,000 or Less
Most notable under the new fee structure is the wider range of loan amounts which qualify for a waiver of the up-front guaranty fee on SBA 7(a) loans. Effective October 1, 2022, loans of up to $500,000 will be exempt from the up-front fee. Previously the fee waiver was applied only to loans of $350,000 or less. This new waiver structure will be very meaningful for SBA lenders working with borrowers whose financing needs fall into this expanded category. We are all aware of the recent increases in the Prime Interest Rate. The recurring rises in interest may create some pushback from borrowers, but can certainly be offset by the SBA up-front guaranty fee waiver.
Sales of Loan Guarantees
Another benefit to SBA lenders who choose to sell 7(a) guarantees in the secondary market is that selling a $500,000 7(a) loan with no fees will return a premium worth approximately 1.25 points more when compared to the amount earned on a loan of the same amount with the Annual Service Fee in place.
SBA requires 7(a) loans be re-amortized annually, so that any P&I payments to be made in the year ahead can be adjusted, and a failure to cover any interest due can be avoided. H&M completes this process each year after the January P&I payment has been made.
The H&M team is excited about the SBA 7(a) loan changes coming about in FY 2023. If you have questions about particular aspects of these popular credit options — or any of the other loan programs offered by the SBA and USDA — by all means reach out to us. Community banks across the nation rely on H&M to be their government-guaranteed lending department. Our experts are great at offering helpful answers and assistance. Just one more reason why Holtmeyer & Monson is a Preferred Service Provider of the Independent Community Bankers of America.
Price Pullback Prospects
Availability of discount bonds causes a rethink of strategies
by Jim Reber, President and CEO, ICBA Securities
I’ve learned a few things about human nature as it relates to bond portfolio management over the years. Some of these notions or biases in the minds of investors are more logical than others. For example, it seems community bankers take some pride in owning a collection of bonds whose price has risen since purchase. An unrealized gain is much preferred over an unrealized loss in the minds of a lot of seasoned portfolio managers, investment committees and boards. This is in spite of the fact that the gain is residue of rates falling since purchase. The natural consequence is that the overall portfolio’s yields are on the way down, and I haven’t met many people who are hoping for lower returns on their bonds.
A great paradox is that many of these same bankers prefer to buy bonds whose prices are less than 100 cents on the dollar, rather than at premiums. In some cases, they’ll opt for discount bonds even if they have lower yields to maturity. I think they get satisfaction out of knowing they’re better off than the poor suckers who originally paid par or more for the same investment.
In that community banking is a cyclical industry, and its earnings have some correlation to market interest rates, there are periods in which certain strategies are in play, and others are not. An environment in which rates are high and rising, such as 2022, will produce bonds whose prices are below par. Like it or not, discounts are the story of the day, so let’s review how discount-priced bonds can be used strategically to improve portfolio performance.
The simplest investment sector to analyze is government agencies. These bonds are issued by some of your favorites, such as Fannie Mae, Freddie Mac and the Federal Home Loan Bank. These do not have periodic principal repayments, so your original investment remains intact until maturity date. That is, unless it has a call feature, which is present in about 88% of outstanding issues. For these bonds, the borrower can decide to “call,” or prepay, the debt early, and on designated dates.
If a given bond is purchased in the secondary market at a price below 100, and the issuer later calls the bond early, the investor’s yield to call is higher than yield to maturity. This yield improvement can be dramatic if the callable is owned at a deep discount. Of course, the investor doesn’t expect the call to ever be exercised, so it’s a pleasant surprise to see the yield jump. These discount callables are typically priced to the worst case (i.e., maturity) to yield slightly more than non-callable bonds (i.e., bullets).
Mortgage-backed securities (MBS) remain popular as community bank investments. The majority of the dollars in all bank portfolios are in some type of MBS. And it is a deep and liquid (and growing) market, so supplies are plentiful for a given investor to shop around.
The cash flows of an MBS are mostly predicated on how much prepayment (not repayment) is received each month. There is a direct link between prepayment activity and the borrowers’ rates (in MBS parlance, “Gross WACs”) of a given pool, so investors can (within limits) create a predictable risk/reward profile. And have I mentioned that MBS are currently available at discounts?
Buying below-market coupons means two things in the near term. First, your monthly cash flows will be limited, and that may be fine for your bank’s needs. Secondly, the market price has room to improve, up to and beyond par, if rates begin to fall. For example, a 15-year MBS with a 2.00% coupon is currently priced around 94 cents on the dollar, and was worth around 102 at the start of 2022. Since the borrowers’ rates on these pools will be well below 3%, there is no financial incentive to prepay the loans early, so average lives will be quite long in the near future.
Offset to falling rates
Maybe the biggest benefit to owning bonds at prices less than 100 is that their returns will be inversely related to general market rates. When interest rates fall, the “optionality” comes “in-the-money” and some bonds get called away. To the extent they’re owned at discounts, their yield-to-call is enhanced. This is true for all bonds: agencies, MBS and even munis at discounts.
Further, since most all community banks have interest rate risk profiles that are built for rising rates, investments that out-perform as rates fall can help offset the margin compression that’s likely to occur. Perhaps best of all, discount bonds’ yields will automatically (magically?) increase as interest rates decline, without the need to sell the investments.
All told, owning bonds at prices less than par can help bring stability to the cash flows while lessening exposure to falling rates. It can also feed the needs, however subliminal, to get a bargain price, while improving future chances for unrealized gains. Paradoxical? I’d call it logical.
Jim Reber (email@example.com) is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks.
Vining Sparks and Stifel Financial have completed their merger, and for the first time since 1989, ICBA Securities has a new endorsed broker. Stifel representatives will be on-site at a number of ICBA affiliate events later this year. For more information, visit stifel.com
IRS Tax Transcript Delays – And A Fast Solution
The system the IRS offers for processing the tax transcripts required for SBA 7(a) loan applications is experiencing chronic delays. It may take up to 30 days for the IRS to fulfill transcript requests sent through its Income Verification Express Service (IVES) system using Form 4506-C. This delay not only frustrates SBA lenders and borrowers, but may also adversely affect the SBA loan guaranty. Holtmeyer & Monson solves this problem by using a different transmission service and IRS form. Both are fully SBA compliant — and they offer the option of same-day transcript deliveries from the IRS.
The current Prime Rate is 5.5%, but is shown incorrectly on the CAFS system maintained by the SBA. Please note this error and use the accurate number for reporting purposes. More changes to the Prime Rate are expected in the coming months.