Bringing Booty Back. SBA 7(a)/USDA Secondary Market Update

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1 Bringing Booty Back SBA 7(a)/USDA Secondary Market Update Brad Walden Managing Director, Coastal Securities, Inc. Zach Brewer Managing Director, Coastal Securities, Inc.

2 About Coastal Securities Coastal Securities is an institutional fixed income broker/dealer that specializes in buying and selling secondary market government guaranteed SBA & USDA small business loans. Coastal is one of the oldest and most active market makers for government guaranteed loans and SBA pool securities, averaging close to $4 billion in total transaction volume in government guaranteed loan products over the last three years. Brad Zach

3 First Things First, Premiums 10 years P years P+2 10 years full coupon 25 years P years P+2 25 years full coupon Low 109s Upper 111s Low 114s Low 113s Mid 115s Low 118s

4 A Look Back at 2014 We now have our final SBA 7(a) Pool issuance data for 2014 and the highlights are as follows:

5 Pool Growth $5.7 Billion in total issuance eclipsed last year s previous high water mark by almost 24%. This was enormous year over year growth for an asset class that has averaged just less than 5% annual growth over the past decade.

6 Pool Composition The two major WAM buckets of the 8-11 Year (Equipment) and 21+ Year (Real Estate) have traditionally composed 75% to 85% of all production. In 2014, these two accounted for approximately 90% of all production at 30% and 60% respectively.

7 Pool Growth Since the advent of WAC pools in 2009, Regular Pools, those that utilize stripping down to the lowest net margin loan in the pool, have represented 52% of all production with WAC pools making up the balance. This year Regular pools were 53% of all pools with WAC pools at 47%. However, within the 8-11 Year bucket the WAC structure was responsible for almost 88% of all pool formation. Contrast to the long real estate bucket (21+ Year) where the WAC structure was only utilized for 32% of the volume. The reasoning for this is the lack of strip (I.O.) investors in the equipment paper vs. a very strong investor appetite in the real estate sector.

8 Average Loan Size The average loan size among all pools formed in 2014 was approximately $575k marking the fourth year in a row of $500k+ average loan sizes. The long real estate bucket is averaging just under $1MM ALS at $969k whereas the 8-11 Year bucket is approximately $360k ALS.

9 Average Loan Count While this year did see some of the highest loan count pools formed on record, average loan count per pool increased slightly from last year to 38 loans per pool. Equipment pools continue to have considerably more diversification with an average loan count of 53 vs. the long real estate pools at 35 loans per pool.

10 Average Pool Size Since 2009, the increase in average pool size has been quite dramatic more than doubling. This year the average pool size was in excess of $22.1MM compared to $20.7MM last year.

11 Coupon Distribution 99%+ of the underlying loans trade at a substantial premium. One of the metrics we follow is the distribution of pool coupons in order to get an idea of the amount that is being stripped down. For our purposes, we have historically used a P-2.50% Net Margin and lower to differentiate those pools that are Lower Premiums or PAR handle price points vs. the more frequent premium execution. In 2014, the volume of the P-2.50% Net Margin and lower more than doubled vs to more than $1.2 Billion. Almost all of this issuance was in the long real estate bucket. What s remarkable about this volume is that it has occurred in an environment of very low prepayments. Traditionally, the supply of pools at PAR and/or very limited premiums has been during periods of high prepayments when investors were not willing to incur premium exposure.

12 Annual Issuance

13 Pool Speeds

14 Premiums what s in store? Not much upside Don t see a downside in the near future What could change that? Prepays pick up Bear Flattener You ll know before we do!

15 USDA Secondary Market Premiums up to 115 Premiums driven by coupon, adjust frequency, and prepayment penalties. For specific bid indications on a project, please give me a call.

16 USDA Structure 2014: Fixed Rate 41% Odd Adjust 36% Quarterly Adjust 21% 2013: Fixed Rate 34% Odd Adjust 33% Quarterly Adjust 33%

17 NRLA is a recently formed group of industry professionals involved in the USDA guaranteed lending space Solely dedicated to the cause of supporting USDA lending programs

18 Disclaimer Nothing contained herein is an offer to sell or the solicitation of an offer to buy any financial instrument. The opinions and recommendations presented do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. Investors must make their own independent decisions regarding any securities or financial instruments mentioned herein and seek professional advice, including tax and accounting advice. Any indications of market valuation contained herein are based on current information that we consider reliable, but we do not guarantee it is accurate or complete and users should make whatever additional determinations of market value they deem appropriate. All assumptions, opinions and estimates constitute Coastal Securities, Inc. s (CSI) judgment as of this date and, along with prices and yields, are subject to change without notice. Past performance is not indicative of future results. The yield and/or average life shown on loans, SBA pools, CMOs or mortgage backed securities consider prepayment assumptions that may or may not be met. Changes in prepayments may significantly affect yield and/or average life. CSI does not accept orders or instructions transmitted via or left on any phone voice or text mail system. Please be aware that communications received by or sent from our system are not confidential and subject to review by supervisory personnel.