Investing in SBA Pools

SBA Pools are safe investments

• They have the “Full Faith and Credit” guarantee of the U.S. government
• They provide unconditional guarantee of timely payment of principal and interest
• They are a zero percent risk-based capital for insured financial institutions
• They are an allowable investment for money market funds under SEC Rule 2a-7

SBA Pool coupons adjust with movements in interest rates.

• Pool rates are tied to the Wall Street Journal Prime Rate and adjust monthly or quarterly.
• The variable rate feature allows institutions to maintain an attractive spread above their cost of funds.
• Pools may be matched against short term repricing liabilities (deposits) for GAAP management.

SBA Pools are actively traded in the secondary market

• The creation of pool products in 1984 increased investor participation in the SBA market.
• The continuing growth of SBA loan originations provides additional liquidity.
• Maturities range from 5 to 25 years to meet the needs of various investors.
• Pools are DTC eligible.
• Market size is approximately $50 billion.

SBA Pools have unique characteristics that reduce the risk to investors.

• Guaranteed status ensures strict underwriting guidelines, therefore lowering the risk of default.
• Diversification is derived from numerous SBA loans.
• The adjustable rate feature reduces the incentive to refinance, therefore reducing prepayment risk.
• Pools have no periodic caps and usually no lifetime caps.
• Prime Rate historically increases more quickly and decreases more slowly than other benchmark rates.
• Prepayment penalties offer protection from prepayment risk.

Signature Securities Institutional Trading group and the vast experience of its financial professionals makes the SBA pooling process simple for institutions of any size. A brief overview of the process is outlined in the steps below:

• First, a financial institution originates a new SBA loan and sells the guaranteed portion to an SBA pool assembler.
• Then the pool assembler combines several SBA loans of similar characteristics into a pool in a process similar to a mortgage backed security formation.
• By “stripping away” a portion of the coupon from each loan, the assembler may sell the pool for a lower dollar price.
• The resulting security maintains the same “Full Faith and Credit” guarantee of the U.S. government.
• The investor in a SBA pool owns an interest in a diverse group of SBA loans.
• Each month, the lender (originator) remits the pro-rata share of the principal and interest payment from the guaranteed portion of the loan to Colson Services Corporation, the Fiscal and Transfer Agent (FTA) for the Small Business Administration.
• Colson Services Corp. then forwards the applicable payment to the SBA pool investor.

• The pool coupon rate adjusts monthly or quarterly based on Wall Street Journal Prime Rate.
• The maximum difference in gross coupon rate allowed between any loans in the pool is 2%.
• The maximum difference in maturity allowed between loans in the pool is 30%.
• The minimum number of loans allowed in each pool is four. The minimum original dollar size of any pool is $1,000,000.
• No individual loan can represent greater than 25% of the entire original pool size.
• Pool maturity date is the 25th of the month following the longest loan maturity.
• Interests in pools can be purchased in minimum denominations of $25,000 with additional increments of $5,000. Only one tail piece per pool is allowed.