California's SierraWest Bancorp became the first banking company to securitize the nonguaranteed portion of its Small Business Administration loans last week.
"When it takes an act of Congress to get something done, you know it's not easy," said William McGaughey, SierraWest senior vice president and treasurer.
Nonbank lenders have been allowed to sell both the nonguaranteed and guaranteed portions of SBA loans since 1992. In April, the SBA and Congress designed a rule that gave banks the same ability.
The $338 million-asset SierraWest was one of the first bank lenders to securitize the guaranteed portion of its SBA loans, but the agency had previously prohibited banks from securitizing the nonguaranteed portion.
SBA lenders securitized $8.9 billion of the guaranteed portions of their loans between 1992 and 1996, but only $5 million of the unguaranteed portions in the same period.
SierraWest's $51.3 million loan securitization was underwritten by Prudential Securities and resulted in a $2 million gain for the company, which is based in Truckee, Calif.
The senior certificates, which represented 93% of SierraWest's securitization, were rated Aaa by Moody's Investors Service and priced at prime minus 2.15%.
That's better than the prime minus 2.14% price the Money Store, the leading SBA lender in the country, received for its last securitization, which was structured in the same way.
"It was much better than I imagined," Mr. McGaughey said.
Mr. McGaughey said SierraWest will use the money raised from the securitization to fund additional loans and expand its lending nationwide.
The amount of SBA loans securitized has doubled in the last decade as nonbank lenders with no access to deposits securitized their loans to generate funds for additional borrowers.
But as banks began following nonbanks' example by lending in areas where they have no deposits, they grew more interested in securitizing SBA loans.
Mr. McGaughey said SierraWest, located in the foothills of the Sierra Nevada mountains, usually increases its loans 15% to 20% each year, but its deposits only grow at 6% each year.
Other banks will follow SierraWest's example of securitizing loans as an alternative to attracting new deposits, said Arthur C. Johnson, president of United Bank of Michigan.
"Especially in rural and suburban areas, banks are able to sustain loan growth at a quicker pace than deposit growth," he said. "This allows you to import capital from other parts of the country."