Recently one of our bank partners asked us whether it should hold SBA-guaranteed loans in portfolio for ongoing net interest income or sell the guarantee for an up-front profit. We replied that the answer depends on a variety of factors, including bank capital and deposit levels, loan portfolio growth (or lack thereof) and perceived difficulty in collecting on the guarantee.
Sell versus Hold: We can only generalize some situations for a thought process to see how it might relate to the bank. In general, SBA can be a balancer between loan portfolio size, growth and core earnings versus immediate earnings impact from sales. At Country Bank, we start with a thought process of selling all SBA loans and placing all non-SBA loans on portfolio. In periods of slow portfolio loan growth or high runoff, we may hold some SBA loans until the loan portfolio returns to desired levels and then sell the held SBA loans, maintaining overall desired portfolio levels.
Reasons to Sell
- An immediate positive earnings impact.
- No worries about collecting on the guarantee. In the event of default, the guarantee purchaser puts back the guarantee to the SBA for full repayment of the purchase price. Then the lender resolves loan and shares in loss pro-rata with the SBA on its unguaranteed piece.
- Efficient use of bank capital. Once sold, only 25% of the unguaranteed portion of the loan is charged to capital.
- Extraordinary servicing income. A bank can eventually cover the cost of the entire servicing department and produce a servicing profit from 1% SBA servicing fees.
- Okay if loan prepays quickly. The profit is earned up-front.
- Allows up-front profit on less-than-desirable loans without concern for collecting on the guarantee. This is not desirable, but a reality.
- Keep the files and servicing up to SBA standards to collect on a guarantee. We do it for good operating principals because we do not have to worry about the quality of the files since we do not have to collect on the guarantees.
- Allows the bank to put out more loans with the same amount of capital, increasing the customer base, awareness in the marketplace, building banking relationships and other cross-selling opportunities.
Reasons to Hold
- Loss of income. This is particularly acute if the bank has (1) low cost of funds, (2) excess deposits, (3) low portfolio growth, (4) excess regulatory capital and (5) low loan velocity
- However, holding exposes the bank to guaranty recovery risk, no servicing income, 0.55% servicing fee and resources to maintain strict program compliance in preparation for a guarantee collection request.