Competition in the Small Business Administration loan market has Bill McGaughey of Sierra Tahoe Bancorp contemplating a route that only nonbanks have taken to date.
The senior vice president and treasurer of the Truckee, Calif.-based holding company is trying to structure a $40 million securitization of the unguaranteed portion of its SBA loan portfolio.
"We feel that from an all-in costs basis, securitization will be cheaper than the current costs of funding these loans through the branch system," said Mr. McGaughey, pointing out that securitization could also reduce the bank's impaired assets.
To date, this segment of the $8 billion secondary market in SBA loans has been dominated by nonbanks. Money Store Investment Corp. is by far the largest issuer, having securitized over $380 million of its unguaranteed portfolio. Industry insiders say the success of these offerings is attributable to buyers' comfort with the underwriting standards of the Money Store.
In recent months, however, the market has embraced lesser-known lenders as well. Late last year, PMC Capital Corp. of Dallas completed a $25 million unguaranteed SBA securitization. And late last month, Prudential Securities helped Emergent Business Capital of Greenville, S.C., place a $17.1 million portfolio.
The aggressive pricing of the Emergent deal is what has Mr. McGaughey and management at Sierra Tahoe hopeful they will get similar treatment. After all, the company's lead bank, Truckee River Bank, is typically one of the 10 largest lenders in the SBA market.
The Emergent offering suggests that Truckee River would not have to give up much. Whereas SBA lenders typically charge borrowers prime plus 2.25%, Emergent was able to place its triple-A senior tranche at a rate of prime minus 1.35%.
However, the Emergent deal was patterned after earlier Money Store offerings, which were structured with senior and subordinated tranches. The junior pieces in the Money Store deals were set up to support the senior notes.
But Campbell Chaney, an analyst with Rodman & Renshaw in San Francisco, thinks Sierra Tahoe's plan has merit. By selling the unguaranteed portion of its SBA portfolio, the company will keep 70% of the loans it makes, while selling the unguaranteed portion into the secondary market.
Mr. Chaney points out the company's stock is currently priced at less than 90% of book value, partly because of the gains on sale of SBA loan portfolios it reports every year. Without this line item, he figures the price will rise as the market perceives a higher quality of earnings.
Mr. McGaughey sees other advantages as well. Because the unguaranteed portion of these loans has a higher risk weighting, he said regulators require more capital kept against this portion of the portfolio.
In effect, the company is replacing a troubled asset with one carrying a government guarantee. As a result, the risk-weighted capital is cut to about 20%.
But a big reason nonbanks have dominated this area of the secondary market is the SBA itself. Because nonbank lenders do not have access to insured deposits, they need to securitize their loans to fund new lending.
However, the agency has been reluctant to allow banks to do the same. The fear, say some secondary market players, is that underwriting standards would start to falter if banks were allowed to take a 10% premium on the SBA-backed portion and sell the unguaranteed piece.
For Sierra Tahoe to reach its $40 million target, it is likely the SBA will have to lower the required retention amount for commercial banks in its preferred lender program to 10% from the current 20%.
Marty Sorensen, president and chief executive of Truckee River Bank, said the company will also likely supplement its own inventory of SBA loans with loans purchased from other nonbank and bank lenders to get to the $40 million level.
It seems the company has chosen the right time to make its move, though. Gordon Lindsay, managing director of Bear, Stearns & Co.'s SBA secondary market program, said such securitizations have generated a lot of interest in recent months.
"I think there is plenty of appetite for this kind of deal," he said.
To be sure, there are skeptics who say that the mere sale of the unguaranteed portion carries negative connotations for some market players.
"It wouldn't be the sort of thing a normal bank would do, except to get the asset off their books for liquidity or capital reasons," said Dale Bregenzer, a vice president with Vining-Sparks IBG in Memphis.
These kinds of sales are restricted to banks needing additional liquidity or capital, he suggested.
But Rodman & Renshaw's Mr. Chaney said Sierra Tahoe actually has too much capital after it raised $10 million in subordinated debentures last year for its mortgage banking operation. When interest rates rose, however, the mortgage market sank, leaving the company with high-cost capital and no place to invest it.
By securitizing the unguaranteed portion of the portfolio, while keeping the 70% to 80% guaranteed amount, the company will be able to leverage its balance sheet. And in the process, they think they will also help their earnings.
"It's a profitable transaction to sell the unguaranteed portion," said Mr. Sorensen.