Minutes of the Regular Meeting of NMSBIC, February 18, 2013

A regular meeting of the New Mexico Small Business Investment Corporation was called to order on this date at 8:00 a.m. in the conference room of the WESST Enterprise Center, 609 Broadway Blvd., N.E., Albuquerque, New Mexico.

A quorum was present:

Members Present:
Mr. Joseph H. Badal, Chair
Mr. Sam Cobb [by telephone]
Mr. Alan Fowler, Secretary/Treasurer
Mr. Lupe Garcia
Ms. Roxanna Meyers, Vice Chair
Mr. Clarence L. Smith [designee of Hon. James Lewis, State Treasurer] Joined at 9:30 am

Members Excused: Ms. Launa Waller

Financial Advisor to Board: Mr. Russell Cummins

Legal Counsel to Board: Mr. Randall McDonald

Guests Present:
Mr. Brad Steward, Pulakos CPAs
Mr. Jake Dopson, Pulakos CPAs

REVIEW AND ACCEPTANCE OF AGENDA

Mr. Fowler moved approval of the Agenda, as published. Mr. Garcia seconded the motion, which passed unanimously by voice vote.

REVIEW AND ACCEPTANCE OF STRATEGIC PLANNING/BOARD MINUTES: JANUARY 21, 2013

Mr. Fowler moved approval of the minutes of the Strategic Planning Meeting of January 21, 2013 and of the regular Board Meeting of January 21, 2013, as submitted. Mr. Garcia seconded the motion, which passed unanimously by voice vote.

PULAKOS CPAS, AUDIT/TAX PROPOSAL, FISCAL YEAR ENDING JUNE 30, 2013: BRAD STEWARD AND JAKE DOPSON

Pulakos Audit Partner Brad Steward and Audit Senior Manager Jake Dopson were present.

Mr. Steward commended the Board for looking at the planning aspects of the audit and providing input into the audit process. Only 10 percent of their clients express an interest in participating at this level of oversight.

Mr. Dopson presented an overview of the audit process and anticipated audit timeline. He said Pulakos expects to do the majority of the audit fieldwork in August (with the assistance of Mr. Cummins and Ms. Brescia) and to present the audit results to the NMSBIC Board in mid- September. The final audit issuance deadline is September 30, 2013.

Mr. Cummins noted that the annual report and audited financial statements must be submitted to the Governor and LFC by October 1. Ms. Brescia has reviewed all of the equity partner agreements, and all require unaudited financial statements to the NMSBIC with deadlines varying between 45 and 60 days; based on that, all should be in the hands of the NMSBIC by August 31 at the latest. He said he will be reminding all of the equity partners well in advance that their deadlines must be met.

Mr. Dopson stated that there are four members on the audit team: Brad Steward; Jake Dopson; Ryan Thorpe; and Susan Harness. He said they have rotated in a new staff auditor, Ms, Harness, to keep a fresh focus and fresh eyes on the audit.

Responding to Chairman Badal, Mr. Steward said he did not believe the NMSBIC is subject to state government’s audit rotation rule; however, it is always a good idea to evaluate the auditor and make sure there are timely responses and competent people on the engagement. Furthermore, everybody should be a CPA or working toward that. He said there should always be some type of rotation within the audit team while maintaining a balance between maintaining institutional knowledge and having a fresh look. He commented that studies have found that most audit failures happen within the first two years of an audit rotation.

Chairman Badal observed that this would be the NMSBIC’s fifth year with Pulakos and Messrs. Steward and Dopson. He asked them to schedule a more robust discussion on this topic two years from now in terms of whether or not it would be appropriate to rotate the engagement partner.

With respect to audit fees, Mr. Dopson said Pulakos is proposing an audit fee of $22,900, unchanged from 2011 and 2012. The proposal also includes the fee for preparation of tax returns of $3,750, which is also unchanged.

Chairman Badal commented that anything the NMSBIC can do to make Pulakos’ job easier, and thus reduce fees, would be very helpful. He asked Pulakos to coordinate efforts with Mr. Fowler.

Board members discussed the idea of including some of the NMSBIC’s success stories in the annual report, and including with the audited financial statements a one-page management discussion and analysis listing highlights from the last year and expectations going forward.

Mr. Fowler moved to approve the Pulakos CPAs audit proposal and that he be authorized to sign the engagement letter. Ms. Meyers seconded the motion, which passed unanimously by voice vote.

JANUARY 31, 2013 FINANCIAL REPORTS

Mr. Fowler reviewed the January financial reports. He said there were no unusual or outstanding issues.

Mr. Garcia moved to accept the January financials. Mr. Fowler seconded the motion, which passed unanimously by voice vote.

ACCION: PROPOSED MODIFICATION TO PARTICIPATION AGREEMENT

Mr. Cummins reported he had a follow-up meeting with Greg Henderson, and communicated to him that the Board is not interested at this time in considering an equity investment in Accion. He also told Mr. Henderson the Board would consider either a revolving line of credit or at least modifying the existing participation agreement, where Accion would buy out loans that become 90 days’ delinquent and not pass losses through to NMSBIC.

Mr. Cummins said their preference is to modify the existing participation agreement, and the feedback that he received was that the modification be prospective so it wouldn’t apply to loans Accion has already originated. NMSBIC would therefore continue to have risk of loss on the loans already originated.

Mr. Cummins said Accion also asked about reducing the interest rate to 1%, and he said he would present this request to the Board. He noted that, although the current rate under the existing agreement is 3%, the NMSBIC only earns what actually is paid, which historically is about 2.75%.

Mr. Cummins said he informed Accion that he would present the proposed changes to the Board and, if approved, would have NMSBIC’s legal counsel draft proposed modification language for Accion to review.

Mr. Cummins said he thought it appropriate to have a slightly higher interest rate under these terms because, unlike with The Loan Fund, there is no over-collateralization or cash reserve provision. He said another consideration is that Accion has higher net assets, so one could argue they have a larger cushion to help mitigate risk.

Mr. Cobb noted that most of Accion’s net worth is in real estate as opposed to liquid assets.

Mr. Cummins added that Accion has a fair number of investment securities.

Chairman Badal stated that anything the Board can do to reduce risk to the NMSBIC makes sense. The fact that the NMSBIC is making money available at a very low interest rate, and because of the investment environment the NMSBIC cannot fund its operations through investment income, is something the Board should take into account. He said he would be willing to entertain something less than 3% if the covenants could include a clause that Accion would retroactively indemnify the NMSBIC from any losses on outstanding loans.

Mr. Cummins responded that the participations on Accion’s financial statements are treated as loans on their books, and entering a retroactive change would require a substantial write-off on their books. He said Accion would prefer not to do that.

Mr. Cummins noted that, for the past three years, Accion has had a trend of declining loan losses; and in the first seven months of this year the NMSBIC is in a positive position with them.

Chairman Badal and Board members asked Mr. Cummins to meet with Accion and discuss the following proposal:

NMSBIC might consider committing another $1 million to the Accion program under the following terms, which are identical to those with The Loan Fund:

• A reduced interest rate to 2% for two years, and then increased to 2.5%.
• There should be over-collateralization and cash reserve provisions.
• Ideally, NMSBIC would like the current loan commitment to be retroactive, but any new loans under the current commitment would have no risk of loss.

Board members also asked Mr. Cummins to discuss with Accion ways that they can make improvements to their lending practices.

Board members agreed that Accion would be allowed to continue making draws during the negotiation period, but that the Board would like to make a decision at the next Board meeting on a revised agreement.

EXECUTIVE DIRECTOR/INVESTMENT ADVISOR REPORT

• Loan Reports
• Equity Partner Detail
• Take Away Report

The Loan Fund

Mr. Cummins stated that Leroy Pacheco, President and CEO of The Loan Fund, is requesting that the NMSBIC modify the covenants under their existing agreement so The Loan Fund can make more capital available for lending. Mr. Pacheco states that the over-collateralization and cash reserve requirements limit their ability to make loans.

Mr. Cummins noted that The Loan Fund has had increasing delinquencies, and he would like to do a more detailed analysis of their loan portfolio and reasons behind the increase before the Board takes any action. He stated that their historical loan losses have been less than 1%; and between the over-collateralization, cash reserve, and their loan loss reserve, there is about 16% in reserves. The cash reserve is an asset that does not earn interest, which is inefficient for The Loan Fund and reduces their earnings, but on the other hand it increases security for NMSBIC.

SHORT-TERM INVESTMENTS, CD MATURITIES IN MARCH 2013

Mr. Cummins reviewed a cash flow forecast, including estimated capital calls.

Mr. Cummins said Mesa (NMGF II) has indicated that they will make no more capital calls, other than for expenses. Mr. McDonald said he would prepare a proposed modification to Mesa’s agreement accordingly.

Mr. Cummins noted that two CDs totaling $6.5 million, both at First National Bank of Santa Fe, will mature in March. He investigated competing interest rates at other banks that offer CDARs CDs, but did not look for collateralized interest rates because there would be legal costs involved in setting up a new collateral agreement. He noted that, at First National Bank of Santa Fe, NMSBIC has such an agreement in place. He proposed that the CDs be reinvested as follows:

$3,500,000, plus interest, maturing March 8, 2013

• $1,000,000 in a 6 month CD at 0.50% interest
• $1,000,000 in a 9 month CD at 0.50% interest
• $1,000,000 in a 12 month CD at 0.60% interest
• $50,000 in a Business Checking Account
• Remaining balance and interest in Money Market Account at 0.30% interest

$3,000,000, plus interest, maturing March 29, 2013

• Reinvest the maturing balance and interest in the Money Market Account to be established on March 8, 2013.

Mr. Cummins noted that the new accounts would require two signatures, and asked the Board to authorize Joseph Badal and Alan Fowler to sign on the accounts and any documents necessary to open these new accounts.

Ms. Meyers moved for approval of the CD reinvestment recommendations and to authorize Joseph Badal and Alan Fowler to sign on the accounts and to certify to the adoption of any required banking resloutions necessary to open and maintain the accounts. Mr. Fowler seconded the motion, which passed unanimously by voice vote.

NMSBIC BOARD MEETING SCHEDULE FOR 2013

The Board agreed on the following meeting dates for the remainder of 2013:

• Friday, May 24, 9:00 a.m., WESST Enterprise Center
• Friday, August 23, 9:00 a.m., tentatively scheduled in Española, with community meeting on August 22 in the evening
• Friday, September 20, 9:00 a.m. [one-hour meeting to approve audited financial statements, call-in phone number will be provided]
• Monday, October 14, 9:00 a.m., WESST Enterprise Center
• Monday, December 9, 9:00 a.m., WESST Enterprise Center

[Break.]

STRATEGIC PLANNING DISCUSSION & EQUITY INVESTMENTS

Board members continued their discussion from the last meeting on NMSBIC’s investment focus for the future, and made additional modifications to the outline that had been developed out of that meeting.

Chairman Badal noted that the SIC is exploring the idea of having Sun Mountain Capital work out a sub-management agreement with NMSBIC. He added that, interestingly, the SIC is in the same deals as NMSBIC in many instances on the private equity side and these are managed by Sun Mountain. He said Sun Mountain has the staff to manage these deals for the NMSBIC, which would allow the NMSBIC Board to focus more on the lending side.

Mr. Cobb recalled that the NMSBIC issued an RFP a few years ago and at that time the cost to have Sun Mountain as fund manager would have cost substantially more than would have been the case with existing staff because of the relatively small size of the portfolio.

Ms. Meyers suggested that the NMSBIC look into possible participation in Metropolitan Redevelopment plans through partnerships with seasoned lenders.

Mr. Cobb commented that the communities needing NMSBIC money through such a partnership would need experienced planning staff as well as a governing body willing to facilitate the necessary documentation.

Mr. Cobb said the City of Hobbs, working through NM Junior College, has created a foundation that is doing outreach to the national labs around the country. Right now, they are dealing with a designer/manufacturer of artillery equipment for the U.S. military with forging methods that have applications for the oil & gas industry in Hobbs. He suggested that the NMSBIC consider this tech transfer strategy, since it has the potential to create entrepreneurship in New Mexico.

Mr. Cummins said there seems to be a funding gap in the very early seed stage, which is connected with tech transfer in many cases. Based on meetings he has had with the labs, Technology Ventures Corp., and Sun Mountain, what may be needed in the early seed stage is grant funding as opposed to investment capital because of the risk involved. However, grant funding is not consisent with NMSBIC’s investment strategy.

Mr. Fowler moved to accept the strategic plan, as amended. Ms. Meyers seconded the motion, which passed unanimously by voice vote.

NEW MEXICO COMMUNITY CAPITAL ROYALTY FUND PROPOSED LOAN

Mr. Cummins stated that he spoke with NMCC CEO Leslie Elgood over the weekend, and she stated that NMCC continues to want to pursue a royalty fund loan with NMSBIC, seeing it as a new and innovative approach to equity funding in New Mexico.

Chairman Badal presented the following suggestions, based on emailed comments from Board members:

• Test the royalty fund idea with a lesser amount, such as $500,000.
• Lend money at 3% for a maximum of 4 years. Interest would go to 4% in year 3 and 5% in year 4.
• NMCC would have to prove up their monitoring system to ensure appropriate tracking of borrowers’ financial results.
• NMCC would have to strike a deal for CDFI grant monies to be used as a loan loss reserve.
• Any borrower whose financial performance deteriorates to the point they can’t pay enough on a monthly basis to cover the NMSBIC’s interest and a minimum royalty to the fund would have to be removed from the NMSBIC’s part of the portfolio.

Mr. Cummins agreed to meet with NMCC and present this proposal.

NEW MEXICO LEGISLATURE, PROPOSED LEGISLATIVE CHANGES, MEETING WITH THE STATE INVESTMENT COUNCIL

Chairman Badal noted that Rep. Egolf and Sen. Wirth have a proposed bill to create a New Mexico bank and are requesting $200 million from the Severance Tax Permanent Fund. He said he hopes to speak with Rep. Egolf, the lead sponsor, to discuss the NMSBIC’s loan program.

UNM TECHNOLOGY BUSINESS PLAN COMPETITION, PROPOSED SPONSORSHIP

Mr. Cummins reported that Dr. Sul Kassicieh, who runs the UNM Technology Business Plan Competition, contacted Chairman Badal and asked that NMSBIC sponsor the competition with a $1,000 sponsorship. He said Chairman Badal responded that it requires Board approval.

Mr. Cummins said he has previously been contacted about sponsoring events such as TVC’s Deal Stream Summit, and his previous response has been that the NMSBIC doesn’t do grants or sponsorships. The concern is that if the NMSBIC decides to do one of these, several others may step forward and make a similar request. The NMSBIC does not have anything budgeted for grants or sponsorships.

Mr. Fowler said he didn’t think it was inappropriate for the NMSBIC to do sponsorships; however, the NMSBIC is not self-sufficient at this point and he didn’t think the NMSBIC should use money that would otherwise be going out for loans.

Ms. Meyers commented that the NMSBIC also isn’t in a position to monitor the effectiveness and success rate of any sponsorship it does.

Chairman Badal said he would consider making personal donation, and if anyone else on the Board is interested in doing that, they should contact Mr. Cummins.

Ms. Meyers asked Mr. Cummins to provide the success rate of this competition.

CHAIRMAN’S COMMENTS

Mr. Cummins said Holly Eakes of Finance NM has reported that their article about NMSBIC was picked up by newspapers in Las Cruces, Deming, Silver City, Ruidoso and Carlsbad.

ADJOURNMENT

Its business completed, the NMSBIC Board adjourned the meeting at 11:00 a.m.