Independent Banker - February 2023 - 39

PORTFOLIO PORTFOLIO MANAGEMENT
Time to lock in?
SBICs can hit the sweet spot on the yield curve.
By Jim Reber, ICBA Securities
fter several years of trying
(mostly futilely) to normalize
cash flows from a community bank's
collection of investments, portfolio
managers may once again have to
address a shift in the direction of
interest rates in 2023. Volatility
since the pandemic created extremes
in the amounts of liquidity being
thrown off by bond portfolios. The
years of 2020-21 saw wave after
wave of prepayments and calls as
market rates (and mortgage rates)
plummeted to generational lows.
Last year, with its 300+ basis
point rate shock, the opposite was
true: Cash flows completely dried
A
up, and quickly.
So now, as portfolio managers look
at nominal interest rates and wonder
if we're most of the way to the end of
this rate cycle, some are trying to find
value in the belly of the curve, which
for our purposes is roughly three to
seven years. At some point, the curve
will no longer be inverted, and it's
probably going to be due to shorter
rates falling. At the same time, most
community banks are still exposed to
a decline in rates.
The Small Business Administration
(SBA) has a number of products
that may be suitable for community
banks, the most visible of which are
7(a) pools, floating rate securities
that adjust based on Prime. It also
has fixed rate pools known as Small
Business Investment Companies
(SIBCs) that have fixed rates
and reasonably short stated final
maturities. These SBICs seem to offer
relative value for fixed-rate investors,
so let's dig in to see how they work.
Things you'll like
For starters, I'll point out the
obvious: SBA products are full faith
and credit instruments, and therefore
0% risk weighted. Another feature
is that the fixed rate pools come in
10-year stated final maturities, which
fit most community banks' interest
rate risk profiles. Their liquidity is
good, but probably not quite to the
level of residential mortgage-backed
securities (MBS).
SBIC pools are collateralized by
debentures issued by small business
investment company funds, which
are licensed and regulated by the
38 // ICBA Independent Banker // February 2023
Illustration by Christoph Burgstedt/Adobe

Independent Banker - February 2023

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Table of Contents
Independent Banker - February 2023 - Cover1
Independent Banker - February 2023 - Cover2
Independent Banker - February 2023 - Table of Contents
Independent Banker - February 2023 - 2
Independent Banker - February 2023 - 3
Independent Banker - February 2023 - 4
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