Independent Banker - January 2024 - 31

Next: Reasons to off er FedNow 
example, residential mortgages)
where there is little opportunity in the
local footprint.
The matching up of sellers' supply
and buyers' demand is what makes
for the deep secondary market, and
middlemen such as ICBA Securities'
exclusive broker Stifel can act as
agents to connect the parties. These
agents can assist in arriving at fair
values for various loan blocks based
on empirical data such FICO scores,
risk-free rates, average lives and
collateral. They also should have
yield spread information on other,
similarly structured recent whole
loan transactions. Not least, they can
assist with the sharing of information
on the potential purchase/sale of
given loans, including a sampling
of loan fi les for underwriting and
due diligence.
Ballpark estimates
Of course, buyers of others' credits
would not have ever materialized if
there weren't adequate risk-adjusted
returns. It's diffi cult to estimate a
Loan demand has been healthy, and,
even better, credit quality has held up
very well even though rates hit a 15-year
high toward the end of the year.
range of incremental returns over
the treasury curve for a given block
of loans, as clearly a portfolio will,
by defi nition, not be homogenous.
However, it's logical that the shorter
the fi xed-rate period (either to an
adjustable reset date, a balloon date
or maturity), the lower required yield.
Collateral will also factor in the
yields; single-family residences have
lower risk levels than do autos or
commercial properties. Nevertheless,
it's not uncommon for a loan package
to trade at 250 to 500 basis points
(2.5% to 5%) over the curve.
That being the case, there are
several strategies that can be
employed with whole loans as an
investment. One is a leverage, in
which wholesale funding is used to
fi nance the purchase. Blocks of loans
could produce net spreads over the
related borrowings of 2% to 3.5%,
which is a multiple of available
spreads from investment securities.
Also, buying loan packages with
proceeds from a sale of underwater
bonds can greatly shorten the
" earnback " period, perhaps to within
12 months.
Education on Tap
2024 webcast off erings
ICBA Securities' exclusively endorsed broker Stifel will have a
variety of webcasts this year that will cover a range of topics
pertinent to community banks. Included will be economic outlooks,
enterprise risk management and balance sheet strategies. Look for
information in this column, and from your Stifel sales rep, as the
events are scheduled.
Whole loan off erings
Stifel Loan Group actively assists community banks in the secondary
whole loan market. To learn more about the group's capabilities
whether your bank is a potential buyer or seller, please contact your
Stifel rep.
There are more nuances to whole
loan trading than we can adequately
cover in this space. However, given
that bank lending could be in a state
of fl ux as the economy potentially
slows, opportunities could arise for
both buyers and sellers to benefi t from
these economic machinations. Finally,
the start of 2024 gives whole loan
market participants a full calendar
year to realize, and recognize, the
eff ects of the transaction.
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 // 31
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Independent Banker - January 2024

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