Independent Banker - May 2023 - 29

Next: Lobbying for the new Farm Bill 
At the start of 2023, the balance
on outstanding 7(a) pools was over
$38 billion, which was a high water
mark for the agency. Around four out
of 10 loans originated are sold into
the secondary market, to a variety of
SBA poolers.
Response to demand
To a community bank investor, the
rub with the pools has historically
been the high purchase prices. Riskaverse
portfolio managers covet all
of the characteristics of a 7(a) pool,
except for the premiums. While there
are ways to manage those prepayment
exposures, there's no getting around
the fact that an instrument that costs
110 cents on the dollar or more, that
can prepay at any time, contains risk.
In response, there are SBA
securities being issued and available
at prices very near par. As part of the
pooling process, certain amounts of
the loan rates can be stripped off for
alternative uses, leaving just enough
coupon pass-through on a given bond
to result in a market price between,
say, 99.50 and 100.50.
The positive is that short-term bonds
outyield longer-term bonds so, today you
don't have to extend your maturities for
reasonable returns.
Price stability
You may have heard that the yield
curve is inverted. (It's not exactly
news-it's been that way since last
June.) This is a concrete example of
the good news/bad news environment
in which community banks invest.
The positive is that short-term bonds
outyield longer-term bonds, so
today you don't have to extend your
maturities for reasonable returns.
The negative is that an inverted curve
is usually followed by a secular drop
in rates, especially on the short end.
True floaters, like SBA 7(a)s, will be
the first to see their yields fall.
However, it's totally uncertain that
Education on Tap
Quarterly bank strategies webcast
ICBA Securities' endorsed broker Stifel hosts its next strategies
webcast May 18 at 1 p.m. Eastern. Several members of Stifel's Fixed
Income Strategies staff will discuss current opportunities and relative
value. Up to 1.5 hours of CPE are offered. To register, contact your
Stifel rep.
Bank management fundamentals webcast
Marty Mosby, director of Stifel's Enterprise and Risk Management
Analytics (ERMA), presents his next quarterly webcast June 6 at 1 p.m.
Eastern. Participants can earn up to one hour of CPE. To register, visit
icbasecurities.com
any rate-cutting will happen in the
near future. Macro indicators like
GDP, employment and inflation
aren't pointing to recessions anytime
soon. And though the current level of
fed funds is approaching the normal
stop-out point in a rate-hike cycle,
maybe we're in for a period of stable
rates. " Higher for longer " is the
mantra of some rate hawks in 2023.
If so, then the current yields on
these 7(a) pools are quite handsome.
It's not too difficult to achieve a
return of around prime minus 270
basis points, which as of this writing
equates to a true yield of over 5%.
Where's the value in that?
For starters, the 10-year Treasury
note has averaged about 3.70% this
year. For closers, these par-level
bonds have virtually no prepayment
risk and very little price risk, are
pledgable and produce monthly cash
flow. They also can be great items
to sell, if and when a community
bank decides it needs to extend
its duration.
What if you committed a portion of
your securities portfolio to investing
in SBA 7(a) pools?
Jim Reber, CPA, CFA (jreber@
icbasecurities.com), is president
and CEO of ICBA Securities, ICBA's
institutional, fixed-income brokerdealer
for community banks
independentbanker.org // 29
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Independent Banker - May 2023

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