Near-record SBA loans give banks much-needed income jerk

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The managers of Cadence Bancorp. made a tough call in early 2021.

After Congress approved funding for a second round of Paycheck Protection Program loans in late December, Houston-based Cadence chose not to participate even though it had made $ 1.1 billion in funding. PPP loans in 2020. The lenders in the Small Business Administration of the company’s $ 18.7 billion asset have helped clients get PPP loans at other institutions, of course. Beyond that, they largely returned to their pre-pandemic role as traditional SBA lenders, just as interest in the 7 (a) program was heating up again.

“It was an uncomfortable time,” said Alan Thomes, managing director of Cadence for the SBA bank. “We had a handful of customers who probably would have preferred us to do PPP directly, but in the grand scheme of things most of our customers seemed to be happy.”

In the end, “it was a business decision that had to be made,” Thomes said – and it turned out to be timely.

As part of its second quarter results released Thursday, Cadence reported record SBA loan income of $ 5.8 million, up 45% from the first quarter and 346% from the second quarter of 2020, when the coronavirus pandemic shook the economy.

Cadence is by no means alone. The 7 (a) program is in the midst of a resurgence that is benefiting the results of a number of other SBA lenders, including Hope Bancorp in Los Angeles, Live Oak Bancshares in Wilmington, NC, and the mega-bank. Wells Fargo at a time when commercial lending growth across the industry has been uneven.

In a weekly loan report released on Wednesday, the SBA reported that fiscal year 7 (a) volume to date exceeded $ 20.95 billion, up 34% from the same period of the year. fiscal year 2020., its lowest level in six years.)

This year’s performance is also 7% better than in fiscal 2017, when the agency guaranteed a record $ 25.4 billion in loans 7 (a).

“SBA as a whole is on the rise across the industry, and we were able to take advantage of it,” said Thomes of Cadence.

The $ 17.5 billion Hope asset on Wednesday reported a substantial increase in 7 (a) loans in its second quarter results, which helped boost aftermarket sales. Hope said it issued $ 77.7 million in 7 (a) loans in the quarter ending June 30, more than double its first quarter production of $ 36.8 million.

The increase in loans allowed Hope to resume loan sales in the secondary market, which in turn generated gain on sale income totaling $ 2.4 million. Hope sold $ 30 million in 7 (a) loans between April and June and plans to sell a similar amount quarterly in the future, according to CEO Kevin Kim.

“We believe the current SBA premium levels will hold for now,” Kim said Wednesday on a conference call with analysts.

A similar story unfolded at the nation’s largest SBA lender, Live Oak, with $ 8.2 billion in assets. It announced second-quarter SBA creations on Wednesday totaling $ 503 million, up 28% year-over-year.

Strong sales of secondary loans brought Live Oak $ 15 million for the quarter ending June 30.

Live Oak posted a record second quarter profit of $ 63.6 million. Hope’s net income totaled $ 53.8 million, double the $ 26.8 million reported for the second quarter of 2020. Cadence rebounded from a loss of $ 56.1 million a year earlier for post second quarter profit of $ 101.3 million.

Wells Fargo also reports higher SBA activity across the board. “The increased awareness of the benefits of SBA products is driving demand from business owners for SBA financing, which offers favorable terms to clients,” said Don Fracchia, division director of Wells SBA loan group, in a statement to American Banker.

Program 7 (a) is the SBA’s largest loan program, offering partial guarantees on loans of up to $ 5 million to qualifying small businesses. Banks grant loans in advance and collect collateral in the event of borrower default.

While the 68-year program has proven popular with lenders and borrowers, it has been particularly attractive in fiscal 2021 as Congress waived user and borrower fees and provided a funding to cover several months of payments for new borrowers, as part of the government’s pandemic. associated stimulation effort.

The loan repayment program is expected to end on September 30, the last day of fiscal 2021, leading some analysts to question whether its elimination could curtail the current 7 (a) boom a bit.

Kim, however, believes the program will remain very strong even without the government’s temporary improvements.

“Given the excess liquidity on the market and the few investment opportunities, [7(a)] … Will be a very attractive product to invest in, ”said Kim. “We expect premium levels to remain high.”

Live Oak chairman Huntley Garriott said he also expects SBA activity to continue at high levels.

“Our loan pipeline continues to be near our all-time high, even after the quarter we just ended,” Garriott said Thursday on a conference call with analysts.

“As the SBA improvements are due to come to an end, we expect this to impact volume to some extent as well as our aftermarket pricing,” Garriott added. “But we really believe our franchise is in a great place to continue providing capital to small businesses.”

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