Business Team

NONPROFIT & CDFI LOAN UNDERWRITING SERVICES

One key to a successful mission-based investment program is effective due diligence. CCA has decades of underwriting experience in nonprofit lending and will do the work for you. We do a deep-dive into the finances and operations of a potential borrower, using stringent criteria for our assessment. Upon completion, CCA provides you with a comprehensive loan narrative, detailing the following:  

 

  • Background - how will the loan funds be used? What impact does this potential borrower have in the community, and how will this loan make a difference? 

  • Loan terms and structure

  • Repayment and collateral 

  • Risks and mitigating factors 

  • Social impact measurement reporting 

  • Potential borrower management team description

  • Full programming examination. For example, for a borrowing CDFI, what kind of lending programs and products do they provide? What is their lending portfolio composition? 

  • In the case of a CDFI, a detailed look at their loan portfolio performance and loan loss reserve 

  • A review of funding sources

 

Full detailed financial analysis report based on the review of 3 years of audited statements Every potential borrower is unique, so while we use specific criteria in our review as outlined above, some may require extra due diligence.

Underwriting Example

Loan/Program Related Investment (PRI) REQUEST NARRATIVE

CDFI A

$300,000 Lending Capital Loan

 

Background

CDFI A is requesting a $300,000 loan/PRI which will be used for lending capital for its Loan Fund (“LF”).   

 

CDFI A provides training, technical and financial resources and advocacy so rural communities can achieve their goals and visions. Founded more than 35 years ago, CDFI A provides a wide range of community development services for rural and Native American communities, and community-based organizations in 13 western states and other Pacific islands. CDFI A was certified as a CDFI in 1996 and through its LF, finances affordable housing, community facilities, environmental infrastructure and small businesses in rural communities. As a CDFI, CDFI A fills financing gaps and serves those traditionally neglected by conventional markets.  Headquartered in XX, California, CDFI A’s more than 160 employees serve rural communities from field offices located throughout its service region.

 

To-date, CDFI A has funded over 1,250 loans totaling $700 million and leveraged more than $2.4 billion for projects in rural communities. These loans have supported approximately 15,550 affordable housing units; 11,500,000 feet of community facility space; 120,000 individual water and wastewater connections; and created or retained 22,800 jobs.

 

Loan Terms

  • Amount: $300,000

  • Interest: 2.5%

  • Term/Structure: 5 years, with 5 year auto reset at 2.5%.  10-years interest only. Full repayment of principal upon maturity

  • Collateral: unsecured with full recourse to CDFI A

  • Funds will only be used to finance loans in rural XX Counties

 

Social Impact Measurement

CDFI A will provide the following reporting:

  • On a quarterly basis, CDFI A’s Loan Fund Investor Report that includes the Fund’s activity (loan production, portfolio performance, and loan amounts per type).

  • On an annual basis, all CDFI A loans made in XX Counties.  

Currently, CDFI A has 31 loans in the four counties for a total of $5.9 million.  Of those 31 loans, 26 were small business, 4 were community facilities and one was housing related.

 

Staff

CDFI A has a seasoned management team with extensive expertise in community development lending and technical assistance serving rural communities.

 

Jane Doe, Chief Executive Officer

Joining CDFI A in 2019, Jane brought with her 30+ years of community development and leadership experience in rural communities. Her career began in rural Colorado as founding executive director of a nonprofit, building a single purpose organization into a diverse community development entity that became one of Rural LISC’s partners. Subsequently, as LISC’s vice president, she led Rural LISC’s national community, housing and economic revitalization work, partnering with rural community-based organizations, serving 2,200+ counties across 45 states. Jane is a member of the U.S. Bank Community Advisory Committee and serves as a board member for National Rural Housing Coalition; California Coalition for Rural Housing and Rural Community Assistance Partnership.

 

John Doe, CFO

John joined CDFI A in 1998 and has spent 29 years in various finance roles. He has served on the CDFI A Senior Leadership Team for 20 of those years. As controller, he managed CDFI A’s finance, grants and contracts department, presiding over a $16 million operating budget. In 2015, he was promoted to CFO. He is responsible for the organization’s financial operations including oversight of finance, grants, contracts, and Information Technology. He has more than 34 years of experience in financial and organizational management, nonprofit accounting, financial reporting, and governmental regulations.

 

Mary Doe, Director, Loan Fund

Mary joined CDFI A in 2000 and became Loan Fund director in 2017. She oversees loan originations; manages CDFI A’s lending program, activities and staff; develops new lending and other financing products and programs; and serves as the chief executive officer’s liaison to the board’s Loan Committee.  In her role, she coordinates and communicates with individual clients or networks of clients and funding sources and participates in strategic planning, program development and marketing of CDFI A programs, products and services. Prior to joining CDFI A, Mary was the closing manager for a local bank and the operations manager for a large mortgage company.

 

Lending Programs/Product Type

CDFI A operates its lending programs in four main sectors: A) Affordable Housing; B) Community Facilities: C) Environmental Infrastructure; and D) Small Business.

 

  1. Affordable Housing Loan Program: Provides short-term and long-term financing for the construction and rehabilitation of single- and multifamily housing for low-income families. Borrowers include nonprofit developers, local government agencies and tribal governments.

  2. Community Facility Loan Program: Provides short-term loans for early property acquisition and predevelopment, interim construction costs and long-term permanent financing. Applicable facilities include public and nonprofit office buildings, treatment centers, emergency and transitional housing, assisted living, human services, pub­lic safety, child care, education and cultural facilities. Borrowers include nonprofit developers, local government agencies and tribal governments.

  3. Environmental Infrastructure Loan Program: Provides short-term and long-term financing to construct, improve or expand the supply of safe drinking water and waste disposal systems. Borrowers include nonprofit organizations, public agencies and tribal governments. Eligible projects include water, wastewater, solid waste and storm water facilities that primarily serve lower-income rural communities.

  4. Small Business Loan Program- Provides loans for a variety of business financing needs including working capital, lines of credit and long-term loans for real estate and equipment acquisition. Most small businesses that generate employment can be considered for loans.

 

The following is CDFI A’s portfolio composition by type as of FYE20: 

 

 

*As of FYE20, small business loans also included PPP loans (see PPP Portfolio section below for more details).

 

  • Affordable housing loans represent the largest type of loan in CDFI A’s portfolio (44%) and all of these loans are secured by real estate. 

  • Community facility loans (representing 19% of the loan portfolio) are also secured by real estate.

  • Security for the small business portfolio (representing 22% of the loan portfolio) varies by type of loan.  Working capital loans and lines of credit may be secured by real estate, equipment, inventory or a combination thereof while term loans are secured by either real estate or equipment.

  • Security for environmental infrastructure loans (representing 8% of the loan portfolio) also depends on type of loans.  Short-term loans used for feasibility studies and pre-development are unsecured while long-term loans are secured by a commitment letter for permanent financing by USDA.

 

PPP Portfolio

In 3rd quarter of 2020, CDFI A made its first PPP loans and by August 2020 it had funded 98 applications for a total of $9.3 million in new loans. As of May 2021, CDFI A had funded an additional 81 applications for a total of $6.5 million in additional loans.

 

Administering the PPP Program

  • As typical with SBA loan programs, CDFIs like CDFI A must use their own capital (either equity or borrowed) to finance the loans.  CDFI A has used a combination of its own cash and 0% financing from several of its key community partners such as Charles Schwab, the Packard Foundation, the Isenberg Foundation, the Satterberg Foundation and the Schmidt Family Foundation.

  • Using its own and borrowed cash, CDFI A originates and funds the loans directly to its small business borrowers. 

  • As part of this origination process, CDFI A earns fees ranging from 5% on loans of $350k or less and 3% on loans between $350k and $2 million. 

  • Each loan is booked as a Notes Receivable on CDFI A’s balance sheet.  Typical terms are 12-24 months.  For any portion of the loan that is not forgivable, that part converts into a 5-year term loan. All PPP loans are 100% guaranteed by the SBA.

  • In addition to originating the PPP loan, CDFI A also processes the forgiveness.  CDFI A works directly with the borrower to collect the receipts to prove that the business spent the funds on qualified expenses. Once it has assembled the forgiveness paperwork, CDFI A submits the documentation to the SBA and the SBA has up to 90 days to make a decision. To-date, 98% of all the PPP loans have been 100% forgiven.

  • When the forgiveness is approved, SBA provides funds directly to CDFI A to repay the Notes Receivable and loan is forgiven.

 

Loan Portfolio Performance

The following is an analysis of LF’s portfolio performance from FY18-YTD21:

 

 

Overall, CDFI A’s portfolio performance is strong with a cumulative loan loss rate of 2.5% since inception. 

  • The increase in delinquencies to 4.95% as of 3/31/21 was driven by two loans totaling $5.7 million. 

    • The larger loan ($5.5 million) is a real estate loan to a dried fruit manufacturer.  The borrower was financing a new plant/new equipment to expand her business. The equipment is from China, however, and with COVID, the borrower faced significant delays that impacted her planned growth. While the equipment did arrive this year, the project is still experiencing financial difficulties and the borrower is unable to make debt payments. The loan is secured by real estate, equipment and a personal guarantee.  In addition, the loan has a 70% guarantee from USDA.

    • The other loan ($175k) is to a grain and rice distributor who decided to close his business.  The loan is guaranteed by equipment and has an 80% guarantee by the State of California.

    • Given that both loans are secured and backed by partial government guarantees, CDFI A has adequately reserved 30% in loan loss reserves for these two facilities. 

  • With its seasoned loan portfolio team and high touch technical assistance for all borrowers, CDFI A reports minimal charge-offs (from .63% in FYE18, to .29% in FYE19 and 0% in FYE20/YTD21).

  • With the exception of the one $5.5 million loan described above, CDFI A does not expect any material charge-offs due to COVID. While many of its small business borrowers reported stress during the pandemic, none of them closed their doors.  During this past year, CDFI A worked closely with borrowers and provided interest deferrals and/or restructures when needed (less than 10% of its portfolio).  All of the borrowers who received interest deferrals or restructures are current and paying as agreed.

  • For all periods reviewed, CDFI A maintained an adequate loan loss reserve given its low charge-off rates.

  • CDFI A’s total loan outstandings grew significantly from FYE18-FYE20 ($68.3 million to $116.9 million, respectively).  While CDFI A continued with high levels of loan production during 1Q21-2Q21YTD21, total outstandings remained flat for the following reasons:

    • CDFI A reported $10 million in loan payments during that period.  

    • Much of CDFI A’s loan production in 1Q/2Q 2021 were PPP loans that have since been forgiven.

  • With a strong pipeline, CDFI A expects to reach loan outstandings of $124 million by FYE21.

 

CDFI A’s loan loss reserve is based on its risk rating of each loan. Risk ratings are based on the performance of each loan and are reviewed quarterly and more often if a loan deteriorates and is delinquent, etc. Each loan is rated from (1-Excellent to 6-Loss) and has the following Loan Loss Reserve Requirements.

 

Sources of Funding

CDFI A’s LF portfolio is made up of a diversified mix of CDFI A equity, debt and EQ2/PRIs.  CDFI A’s largest three financial institution funders include First Republic Bank at $3 million, Charles Schwab at $5.0 million, Compass Bank at $6 million.  The top foundation supporters include the Ford Foundation at $2 million, the Packard Foundation at $3 million, and the California Endowment at $11.7 million.  CDFI A also has financing from the USDA at approximately $18 million.  (See Appendix A for list of other major funders.)

 

Asset/Liability Matching

CDFI A reports the following annual maturities of Notes Payables/Notes Receivables for each of the next five years and thereafter as of FYE20.

 

 

 

 

CDFI A’s finance staff is experienced at projecting and managing its liquidity sources (cash and upcoming Notes Receivables maturities) to prepare for its upcoming Notes Payables.  For the three years that the maturing Notes Receivables are less than the Notes Payables (2023-2025), CDFI A has adequate cash to service its debt. 

 

For liquidity and debt repayment purposes, it is important to note that CDFI A’s total Notes Receivables ($116.8m) are greater than its total Notes Payables ($95.9m) by $20.9m.

 

Financial Analysis

The following analysis reviews audited statements for FYE18-FYE20 and company prepared interims through 3/31/21.  CDFI A’s fiscal year end is 9/30.

 

Conclusion

From FYE18-20, CDFI A has consistently grown its balance sheet, liquidity and net worth from its earned revenue from its well-performing portfolio and contributed revenue.  As of 3/31/21, CDFI A reported a significant profit and corresponding increase in net assets when it received a large, unrestricted $20 million grant from MacKenzie Scott (ex-wife of Jeff Bezos) in 1Q21. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance sheet

CDFI A’s balance sheet has grown each year over the last several years as it grew its loan portfolio and unrestricted cash position. This growth was fueled primarily by a combination of CDFI A’s equity (from its strong profitability-including the $20 million Scott grant) and a mix of sub-debt and senior debt.  With this new debt, leverage increased slightly from FYE18-FYE20 (1.4x to 2.1x) but then declined to 1.5x with the receipt of the Scott grant in 1Q21.

  • With the Scott grant, inflow of new debt sources, and $10 million of loan repayments during 1Q21-2Q21, CDFI A’s liquidity is solid with Unrestricted Cash on Hand ranging from 4-8 months in FYE18-20 and reaching 26 months in 2Q21 with the Scott grant.  (Note: CDFI A expects cash levels to return to normal levels over the next several years as it funds its strong loan pipeline and finances several new initiatives supported by the Scott grant). With its liquidity position, CDFI A is well positioned for servicing its debt and other payables with a strong Current Ratio ranging from 3.6 in FYE18 to a high of 8.8 as of 3/31/21.

  • In addition to its Unrestricted Cash, CDFI A also reports Restricted Cash averaging $17.2 million over the past several years.  Like many CDFIs, this cash is restricted for lending and other specific technical assistance programs.

  • The largest item on CDFI A’s Balance Sheet is its well performing loan portfolio representing 58%-70% of Total Assets during the time period reviewed. 

  • In addition to its main portfolio, CDFI A reports a small portfolio of forgivable loans ($1.5 million).  These loans were funded by a California state grant.

  • CDFI A has a modest real estate portfolio of $1.9 million that includes its headquarters building and other office properties.  These properties were financed with state bonds.  CDFI A also has an additional $1.9 million in Land Held for Investment that it acquired as collateral from loan workouts.

  • As typical with CDFIs, the largest liability is long-term debt ($100.7m as of 3/31/21) which is used primarily to fund its loan portfolio.  The overall weighted average interest rate of CDFI A’s long-term debt is 1.6%. See Appendix A for list of funders.

  • As of 3/31/21, leverage remains moderate (below 2.0x) and CDFI A reports a healthy Net Asset ratio of 40%.

 

CDFI A’s balance sheet is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Statement

With consistent earned revenue from its loan portfolio and a diverse source of contributions (including foundations, banks, government, and the $20 million Scott grant in 1Q21), CDFI A reported Total Revenue ranging from $24.5 million in FYE18 to $29.8 million in FYE20, reaching $34.7 million in the 1st six months of FYE21.   As typical with CDFIs, personnel is CDFI A’s largest expense and has grown moderately to support its growing loan portfolio.  With strong revenue and moderate expenses, CDFI A has generated a profit the last three FYEs (ranging from $2.2 million to $6.7 million in FYE18-20) and $23.8 million YTD 3/31/21. 

  • As noted earlier, the significant increase in revenues for YTD 3/31/21 included a large unrestricted $20 million grant from MacKenzie Scott. 

  • In addition to the one-time Scott grant, CDFI A consistently reports contributions from national, regional and community banks as well as private and community foundations.

  • CDFI A also has long standing funding relationships with multiple government agencies such as USDA, HUD, EPA, SBA, the CDFI Fund and multiple state and county water agencies.  For example, in FYE20 CDFI A received $4.7 million from the USDA, $2.0 million from HUD, $3.6 million from EPA, $4.4 million from the CDFI Fund, and $1.1 million from the San Diego County Water Authority.

  • With its well performing loan portfolio, CDFI A generates consistent earned revenue from its LF (including interest and loan fees) ranging from $4.0 million in FYE18 to $6.3 million in FYE20 and $3.4 million as of 2Q21.  With this solid earned revenue, CDFI A reports self-sufficiency rates ranging from 25%-33% in the periods reviewed.

  • CDFI A increased staffing to manage its growing loan portfolio and as a result, personnel expenses increased moderately from $11.4 million to $14.6 million from FYE18-FYE20 and $7.3m as of 2Q21.

  • Other material expenses include Interest Income on its Notes Payables, Allowance for Loan Losses (which increased moderately in FYE210 related to the two loans described earlier), and Grants and Pass-Through Awards. As with many CDFIs, CDFI A administers grants for government agencies like CDBG funds from HHS.

 

The income statement of the organization is as follows:

 

 

 

 

 

 

Projections for 2021

  • CDFI A is projecting Total Revenues of $52.7 million in FYE21 (compared to $29.8 million in FYE20).  This increase is driven by:

    • The $20 million Scott grant received in 1Q21 as described earlier.

    • CDFI A has been recently awarded several large grants from the State of California Water Board for water and drought mitigation over the next several years.

  • While projected revenues will increase for FYE21, overall Total Expenses will also increase from $23.1 million in FYE20 to $31.7 million in FYE21. 

    • This increase is primarily driven by expenses related to the new grant programs for water and drought mitigation noted above. 

    • As noted earlier under Loan Portfolio Performance, CDFI A does not expect any material portfolio deterioration from COVID. As a result, projections for loan loss allowance stayed flat. 

  • With increased revenues driven by the Scott grant and state water grants and the corresponding moderate increase in Total Expenses, CDFI A is projecting a net profit of $21 million for FYE21.

 

Risks and Mitigants

 

  1.    Unsecured Structure

As typical with PRIs, this Loan/PRI is unsecured.Interest will be repaid through contributions and earned revenue from CDFI A’s loan portfolio.Principal will be repaid primarily from pay-offs of CDFI A’s underlying loans.

Mitigants

a.  As noted above under Loan Portfolio Performance, CDFI A has a well-seasoned, strongly performing loan portfolio (cumulative loan       loss rate of   5%) that serves as a solid source of repayment for both interest and principal.

b.  CDFI A has demonstrated a track record of having an adequate source of unrestricted cash on its balance sheet (ranging from a low

     of $7.5 million in FYE19 to a high of $47.0 million as of 3/31/21). CDFI A’s unrestricted cash would be available for both interest and

     principal repayment.

   2.    Notes Payables Versus Note Receivables

As noted under Sources of Funding, there are 3 years (2023-2025) when CDFI A’s Notes Payables are greater than its Notes Receivables over the next five years and thereafter.

Mitigants

a. As described under Sources of Funding, CDFI A’s experienced financial management team effectively projects and manages it

    liquidity which includes utilizing its cash and Notes Receivables maturities to service its upcoming Notes Payables. 

b. As noted earlier, CDFI A’s total Notes Receivables ($116.8m) are greater than its total Notes Payables ($95.9m) by $20.9m. This

    positive difference positions CDFI A strategically for future liquidity events.

Financial

  1. Semi-Annual internally prepared financial statements

  2. Audited financial statements annually, no later than 180 days after fiscal year end.

 

Impact (as noted earlier)

  1. On a quarterly basis, CDFI A’s Loan Fund Investor Report that includes the Fund’s activity (loan production, portfolio performance, and loan amounts per type).

  2. On an annual basis, all CDFI A loans made in XX Counties.  

 

Financial Performance

  1. Liquidity: At the end of each fiscal quarter, [(Unrestricted Cash and Equivalents / (Annual Operating Expenses –Depreciation))/12] must be greater than 6 months

  2. Net Asset Ratio: At the end of each fiscal quarter, the total net assets available for operations must equal or exceed 15% of Total Assets

  3. Portfolio Performance:  At the end of each quarter, Non-Performing Loans shall be less than or equal to ten-percent (10%) of the aggregate outstanding principal balance of all of Borrower’s Loan Receivables.

  4. Profitability: At least two out of three consecutive fiscal year periods have a positive year over year change in net assets.

Appendix A

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