PORTFOLIO PORTFOLIO MANAGEMENT Price stability or yield? Here's both Cash-management instruments have relative value today. By Jim Reber, ICBA Securities hat if? " How many times and how many ways has a conversation like this begun with a community banker? Borrower: What if you hold the title on my 1979 Ford Pinto as additional collateral? Auditor: What if your heldto-maturity bonds go further underwater? Loan officer: What if we put a 6% cap on this floater? Stockholder: What if you bought my 25 shares at three times book? Depositor: What if you pay me an extra five basis points on my $5,000 CD? Examiner: What if the Treasury defaults on its debt? " W What if you could purchase a full faith and credit instrument that pays monthly principal and interest, adjusts each quarter based on prime with no caps, has little or no prepayment risk and outyields the 10-year Treasury by 100 basis points (1.0%)? 7(a) loans: highly valued All of the above qualities currently exist in a Small Business Administration (SBA) 7(a) loan pool. These have long been the choice of investors looking for additional yield on the very shortest end of the maturity spectrum. Most 7(a) pools adjust with the calendar quarter, although there are some monthly adjusters available. They also have no rate caps, either periodic or lifetime, so when we endure a year like 2022 when fed funds rose 425 basis points (4.25%), these floaters went up lockstep. 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 qualifying 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. 28 // ICBA Independent Banker // May 2023 Artwork by Evgeniy Shvets/Stocksy