Pub. 8 2019 Issue 2

The CommunityBanker 8 W hat if?” How many times and how many ways has someone started a conversation like this with a community banker? Borrower: What if you hold the title on my ’83 Camaro as additional collateral? Examiner: What if Fannie Mae and Freddie Mac walk from their debt obligations? Depositor: What if you pay me an extra five basis points on my $5,000 CD? Auditor: What if your Held-to-Maturity bonds go further underwater? Lender: What if we put a 6% cap on this floater? Investor: What if you bought my 25 shares at three times book ? What if you could purchase a full faith and credit instrument that pays monthly principal and interest, adjusts based on prime with no caps, has little or no prepayment risk, and out-yields the 10-year Treasury? Highly Valued All of the above qualities currently exist in a Small Business Administra- tion (SBA) 7(a) loan pool. These have long been the choice of investors look- ing for additional yield on the very shortest end of the maturity spectrum. Most 7(a) pools adjust with the calen- dar quarter, although there are some monthly adjusters available. It is true that there are no rate caps, either peri- odic or lifetime. All these factors make SBA securities the most rate-sensitive of any in the market. There has been a lucrative two-way market for SBA pools for at least 30 years. Community bank lenders like the ability to make loans to qualify- ing borrowers that don’t quite fit the standard parameters. They also like the ability to sell the guaranteed portions of the loans (usually 75%) and retain the servicing and the relationship. And they especially like selling them at big premiums. By the end of 2018, the balance on outstanding 7(a) pools was over $32 billion, which was a high- water mark for the agency. Nine out of 10 loans originated are sold in the secondary market to a consortium of SBA poolers. Response to Demand To a community bank investor, the rub with the pools has historically been the high purchase prices. All of the characteristics, except for the premi- ums attached, are prized by risk-averse portfolio managers. While there are ways to manage those prepayment exposures, there’s no getting around the fact that an instrument that costs Short and Sweet Cash-Management Instruments Have Relative Value Today By Jim Reber F E A T U R E