Minutes of the Regular Meeting of NMSBIC, August 13, 2012

A regular meeting of the New Mexico Small Business Investment Corporation was called to order on this date at 9:00 a.m. in the City of Hobbs Annex Building, 3rd floor, 200 E. Broadway, Hobbs, New Mexico.

A quorum was present:

Members Present:
Mr. Joseph H. Badal, Chair
Mr. Sam Cobb
Mr. Alan Fowler, Secretary/Treasurer
Mr. Lupe Garcia
Ms. Roxanna Meyers, Vice Chair
Mr. Clarence L. Smith [designee of Hon. James Lewis, State Treasurer]
Ms. Launa Waller

Members Excused: None.

Financial Adviser to Board: Mr. Russell Cummins

Guests Present: None.

REVIEW AND ACCEPTANCE OF AGENDA

Mr. Smith moved for approval of the Agenda, as published. Ms. Waller seconded the motion, which passed unanimously by voice vote.

REVIEW AND ACCEPTANCE OF BOARD MINUTES: June 18, 2012

Mr. Fowler moved approval of the June 18 Minutes, as submitted. Mr. Smith seconded the motion, which passed unanimously by voice vote.

REVIEW AND ACCEPTANCE OF FINANCIAL REPORT

Mr. Fowler reviewed the July financials, noting that only the first quarter results are available at this time from the NMSBIC’s equity partners. [The June financials were in the packet for review.]

Mr. Fowler stated that there is a $9,200 variance in the consulting budget because Mr. Goblet elected not to charge for his services for the month of July.

Responding to Ms. Meyers, Mr. Fowler said he would ask Ms. Brescia why the June financials reflect a negative $65,000 receivable for The New Mexico Community Development Loan Fund.

Ms. Waller moved to accept the financial report. Ms. Meyers seconded the motion, which passed unanimously by voice vote.

EXECUTIVE DIRECTOR/INVESTMENT ADVISER REPORT

Accion

In follow-up to questions from the last meeting, Mr. Cummins stated that his adviser report includes a list of Accion’s 2010 major contributors and their relationships in the past and present with commercial banks. According to Chief Operating Officer Rob Boosman, Accion’s relationship with their banks continues to be very strong – it helps these commercial banks meet their Community Reinvestment Act requirements and also provides the opportunity for them to refer loans to Accion so they can serve their clients and maintain a deposit relationship with those same clients.

Chairman Badal said he had previously asked Mr. Cummins to have Accion provide the actual funding amounts as opposed to just funding ranges. Mr. Cummins will provide that information at the next board meeting.

Ms. Meyers asked Mr. Cummins to find out whether or not the donations Accion receives from commercial banks are restricted.

Chairman Badal stated that Mr. Cummins and Ms. Meyers will be meeting with Accion later this week, and urged Board members to submit any questions or concerns to Mr. Cummins prior to that meeting.

Chairman Badal commented that he has no concerns, generally speaking, about Accion’s mission — his concern goes more to the NMSBIC’s mission and attempts to be all things to all people. He added that he is also very concerned over Accion’s 7% loan loss rate and the importance of preserving the NMSBIC’s capital.

Chairman Badal said he thought the previous Board’s decision, which compelled The New Mexico Community Development Loan Fund to take a more responsible approach to their lending through a change in covenants in the agreement between the NMSBIC and The Loan Fund was very constructive. Ultimately, the NMSBIC caused them to be a more conservative and responsible lender. He said he feels there is an opportunity to do the same with Accion, and Mr. Cummins will come back to the Board in the near future with some suggestions for accomplishing that.

Mr. Cobb asked the Board to keep in mind that the default rate among small business loans in the U.S. and in New Mexico has gone up. He agreed that the Board has to be very sensitive about preservation of capital, but on the other hand, Accion is a main source for potential entrepreneurial lending activity in the state. He also noted that Accion originally had too much loan volume relative to their ability to service loans, and the NMSBIC made some changes as a result of that; and in the earlier years, because of the interest rates Accion was charging, the NMSBIC was not losing any capital even though its loss ratios were higher than those of a traditional lender.

Mr. Cummins said that Accion President/CEO Anne Haines Yatskowitz has indicated that approximately 40% of Accion’s budget is paid for through interest on loans and investments, and their board would like that to increase to 100% in five years. He said the Accion board does not feel they can achieve that goal from interest on micro loans, so they plan to also start making larger loans.

The Loan Fund

Mr. Cummins stated that, in response to comments from Chairman Badal, The Loan Fund is proposing changes to the existing agreement with NMSBIC that they believe would help them grow. He said he has met with Mr. Pacheco about possible changes to the covenants and loan terms and will report back to the Board in October.

WESST Corp

Mr. Cummins reported that Director of Lending Kim Blueher indicated to him that she is seeing increased demand from businesses that need a line of credit not available under existing SBA and USDA programs – the source of most of WESST Corp’s lending activity – and so they may be using more of the $375,000 in funding available from NMSBIC in the future.

NM Mezzanine Partners (NMMP)

Mr. Cummins said he has met several times with Mike Doolittle, who said NMMP has three loans in the pipeline with a September-October closing timeline. Two loans are in the $500,000 to $800,000 range, with a third potentially at $1.25 million. The third would receive $800,000 up front with follow-on funding for the balance of the commitment. He said each of the three loans is contingent on the individual borrower companies signing a vendor contract with a major customer.

Mr. Cummins said there is a conflict of interest issue that has to be resolved because people who serve on the NMMP investment committee are also investors in one of the companies, and member John Chavez is also the brother of the company CEO. He added that Mr. Doolittle has indicated that the combined interest of all of these people in this company is less than 5%.

Ms. Meyers pointed out that, while an individual might be investing a relatively small amount of around $25,000, that investment could grow to a substantial amount.

Board members discussed whether it was advisable to participate in a company where the managers or members of the advisory board or investment committee have a personal interest.

Mr. Cummins said he did not believe our agreement with NMMP specifically prohibits this.

Mr. Cummins said NMMP hopes to resolve the conflict of interest issue by asking two of their advisory committee members – probably LANB and Sandia Pueblo — to temporarily serve on the investment committee for this vote.

Ms. Meyers suggested that the Board write a letter to NMMP expressing its reservations.

Ms. Meyers moved that Mr. Cummins draft a letter stating that the NMSBIC will vote against any loan where a conflict of interest exists either with their investment committee or advisory committee. Mr. Smith seconded the motion.

Board members noted their awareness of conflicts of interest with other equity partners, and agreed that avoiding conflicts of interest should be the NMSBIC Board’s stance with any new equity partners going forward.

The motion passed unanimously by voice vote.

Mr. Cobb said he would be interested in knowing where in the state NMMF has marketed their mezzanine lending program.

New Mexico Community Capital

Mr. Cummins reported that NMCC has issued a check to NMSBIC for $92,626, NMSBIC’s first return of capital from a successful exit of Aero Mechanical Industries (AMI). NMCC’s initial investment in AMI was for $1 million; and under the terms of a stock buyback agreement, AMI will pay NMCC $1.4 million, representing a 40% return on the $1 million investment.

Mr. Cummins said that, at the request of the Chair, he will calculate the estimated return net of fees and report back to the Board in October.

Mr. Cummins also reported that NMCC is interested in exploring new funding models, including royalty funding, where a percentage of sales would be paid to NMCC in exchange for its investment in a company. Chairman Badal has asked them to come up with a specific example or a proposed actual deal for discussion in a follow-up meeting next week.

Flywheel Ventures

Mr. Cummins reported that Flywheel has made a $200,000 investment in Cinnafilm, a leader in file-based image processing technology, from the New Mexico GAP Fund. He said Cinnafilm is well established and needed some funding to expand their sales and distribution channels.

Verge Fund

Mr. Cummins stated that Verge had no major announcements from any of its funds during July, and Managing Partner Tom Stephenson is cautiously optimistic that there may be some exits within the next year.

Mesa Capital Partners

Mr. Cummins stated that New Mexico Growth Fund 2 issued a capital call for approximately $13,000 to cover accounting, audit and legal expenses, and waived further management fees. They plan to close the fund as soon as they can get the assets liquidated or distributed.

Mr. Cummins said the remaining assets include a vacant food processing plant in Deming, an equipment lease, and an ownership interest in a food distribution company. At the time of the last valuation, these three assets were valued at $1 million.

Mr. Cummins commented that an issue that came up with NMGF 2, and which may come up with other funds, is that funds reaching the end of their life may spin out remaining assets in the form of LLC ownerships. According to Board legal counsel Randy McDonald, ownership in an LLC derived from the end of a partnership would not violate NMSBIC policy.

Mr. Cummins said that, if the NMSBIC ends up with an LLC ownership in an operating company, there would be some operational issues. For instance, the NMSBIC would carry the LLC at fair market value, and the question is who would calculate the fair market value?

Chairman Badal pointed out that he has raised this issue repeatedly in the past – what happens to a fund when it reaches the end of its life, and who will ultimately manage the investment after that. He suggested that perhaps an extension agreement could be worked out with the other GPs, but that will mean paying ongoing management fees.

Chairman Badal asked Mr. Cummins to do an analysis of the equity funds to determine what each fund’s originally anticipated life was, what its realistic life is, and what it will cost to continue to manage it– and with that in mind, what amount of money has to be set aside to do that. He also suggested that Mr. Cummins meet with the equity partners and ask them what their plan is once a fund reaches the end of its life.

Mr. Cobb noted that this is also a potential issue with the NMSBIC’s lending relationships; and with some of the equity relationships, the NMSBIC could end up owning an interest in the intellectual capital of a company that has gone bankrupt.

Continuing with his report, Mr. Cummins said New Mexico Growth Fund 1 has made an offer for the NMSBIC to purchase approximately 40% interest in New Mexico Broadband Holdings (NMBBH) at cost, or $16,551. The details of the proposed purchase are outlined in a letter previously provided to the Board.

Mr. Cummins stated that, in reference to earlier discussions, this is not a spinout of ownership from NMGF 1, but would be a new investment in a new company. He noted that there is no cooperative agreement partner, which is a legislative requirement for the NMSBIC, and no one has been identified who would do the fair market value calculation or accounting in connection with this investment.

Mr. Cummins recommended against this investment.

Mr. Cobb moved that the NMSBIC not make this investment. Mr. Fowler seconded the motion, which passed by voice vote, with Chairman Badal and Ms. Waller in abstention because they each are affiliated with a rural telephone company.

Potential new investment opportunities

Mr. Cummins said he has reviewed the presentation made by the Economic Development Corporation of Lea County (EDCLC) to the NMSBIC Board in March 2012, which was for the NMSBIC to set aside $3 million and create a participation agreement with the Lea County Loan Fund. The agreement would be set up as a revolving loan fund to provide gap financing ($100,000 to $500,000) to qualified projects in Lea County. Banks in Lea County would service the loans and provide first lien financing, and the Lea County Loan Fund would provide second lien financing.

Mr. Cummins reviewed potential challenges with junior lien financing and recommended that he gather additional information this afternoon, when meeting with Lea County bankers, about what funding gaps exist that aren’t currently being filled.

Enchantment Land Development Company

Mr. Cummins reported that he and Alan Fowler met with Ron Brown, Executive Director of Enchantment Land Community Development Company, which underwrites and services SBA 504 loans. Under the SBA 504 program, a bank takes a first lien on real estate or equipment up to 50% loan to value, the SBA takes a 40% second lien. and the borrower puts in 10% cash investment. At the meeting, Mr. Brown cited situations where the bank may be interested in participating part of its first lien position to NMSBIC, and said he would provide more information in a written proposal to the NMSBIC in the next 60 days.

NM Mortgage Finance Authority

Mr. Cummins stated that Joseph Montoya, Deputy Director of Programs at MFA, said MFA would be interested in exploring a relationship with NMSBIC where the NMSBIC would provide a secured line of credit to MFA. He said MFA provides permanent financing to homebuyers of residential properties that are built or rehabilitated, but it is difficult for contractors in rural communities outside the Albuquerque and Santa Fe areas to obtain construction financing. MFA has qualified and pre-approved homeowner applicants in these areas. Mr. Montoya said he would provide a more detailed formal proposal to Mr. Cummins in September.

New Mexico Angels

Mr. Cummins reported that he recently met with John Chavez of the New Mexico Angels, who would like the NMSBIC to consider a “sidecar” investment with the NM Angels. Mr. Cummins said he is reviewing the sample documents provided by Mr. Chavez and evaluating this proposed investment opportunity.

HD3

Mr. Cummins said he recently met with Michelle Hoeft of HD3 and discussed HD3’s proposal that the NMSBIC provide them with a $500,000 unsecured line of credit. He advised Ms. Hoeft that the NMSBIC is required to go through a cooperative agreement partner such as Accion, WESST or The Loan Fund. Ms. Hoeft said HD3 approached the Loan Fund, but was told they would require collateral and/or personal guarantees. Mr. Cummins advised Ms. Hoeft that any NMSBIC lending partner HD3 works with will probably have similar underwriting requirements.

Mr. Cummins said HD3 is also requesting that NMSBIC provide $1 million in equity capital in HD3 Fund I, which they are calling a coinvestment fund, which Ms. Hoeft said is similar to a sidecar fund structure. In this deal, the NMSBIC’s investment would comprise 18% ownership in the fund.

Board members discussed the NMSBIC’s ability operationally to conduct ongoing due diligence where it is part of a sidecar or coinvestment fund.

Chairman Badal also noted past Board discussion about the large concentration of capital it has invested on the equity side and whether it is prudent to make further incremental investments, at least until after some of that to roll off.

Board members agreed with comments by Mr. Fowler that the NMSBIC should continue to keep communication lines open for the day when it is less concentrated in equity and can consider such investments.

Short-term investments

Mr. Cummins presented an update on NMSBIC’s forecasted cash needs.

Mr. Cummins reviewed a report listing approximately 50 New Mexico banks with various deposit interest rates, including New Mexico bank money market and CD rates.

Mr. Cummins stated that, of the $6 million in CDs maturing with New Mexico Bank & Trust, about $3 million is in a CDARs CD and about $3 million is collateralized with $3.5 million in GNMA securities. He said New Mexico Bank & Trust has offered to keep the existing collateral agreement in place and roll up to $3.75 million into a collateralized money market account currently paying 25 basis points.

Mr. Cummins recommended that the NMSBIC establish up to $5 million in money market accounts in New Mexico banks in $245,000 amounts in seven or eight separate banks that are paying above 25 basis points (and thus FDIC insured), and up to $3.5 million in a money market account with New Mexico Bank & Trust at 25 basis points.

Ms. Meyers so moved. Mr. Fowler seconded the motion.

The motion and second were withdrawn.

Chairman Badal asked that the motion be restated to make deposits of approximately $245,000 in several banks around the state, in order to get better yield; and to put $3 million or more in one or more banks that would be willing to secure 100% of the deposit with government securities.

Ms. Meyers and Mr. Fowler seconded the motion, which passed unanimously by voice vote.

INVESTMENT POLICY, PROPOSED CHANGES

Mr. Cummins reviewed the draft policy and highlighted recommended changes.

• The following language was deleted: “The NMSBIC shall invest its short-term cash assets to generate an income stream sufficient to fund the operating budget… while protecting the principal market value of these assets.” Mr. Cummins commented that this original language made sense when there was a much larger short-term investment portfolio and interest rates were higher, but if the NMSBIC invests increasing amounts in loans or other types of investments, it is no longer reasonable to expect the dwindling pool of liquid assets to offset operating expenses.
• Added language to reflect current practice, which is that the NMSBIC can invest in deposits that are insured by the FDIC or are 100% collateralized with government securities; and removed any reference to asset backed securities.

Ms. Meyers expressed concern that the list of securities in the section titled “Investment Objectives and Guidelines for Currently Available Funds” not be construed as having some kind of priority based on their order. Chairman Badal asked Mr. Cummins to consult with Mr. McDonald to see if language could be added stating that the order is not indicative of importance.

Mr. Fowler moved to approve the Investment Policy, subject to changes pointed out in the discussion. Mr. Cobb seconded the motion, which passed unanimously by voice vote.

[Break.]

EXPENSE REIMBURSEMENT, USE IRS STANDARD MILEAGE RATE

Mr. Cummins asked the Board to postpone this item until he could consult with Randy McDonald on whether the NMSBIC is subject to the mileage reimbursement rate set by state statute.

Mr. Cummins agreed to email Board members advising them on reimbursement details for this trip to Hobbs.

APPROVAL OF EXECUTIVE DIRECTOR/INVESTMENT ADVISER AS NMSBIC CORPORATE OFFICER

Mr. Cummins stated that Mr. McDonald has advised him that the Executive Director/Investment Adviser can be added to the NMSBIC’s D&O policy at no additional cost.

Mr. Cummins said Mr. McDonald recommended that the Board officially approve this position as a corporate officer so there is no confusion or misunderstanding about what is intended. Mr. McDonald had also pointed out that this would provide additional protection to the NMSBIC.

Upon motion by Mr. Garcia, seconded by Ms. Meyers, and upon unanimous voice vote, the NMSBIC Board approved the following Resolution:

• RESOLVED, pursuant to Article IV, Section 4.1 of the Bylaws of the Small Business Investment Corporation (the “corporation”), there is hereby created the corporate office of Executive Director/Investment Adviser; and it is further
• RESOLVED, that the Executive Director/Investment Adviser shall have such powers, duties, and responsibilities as may be prescribed from time to time by the Board of Directors and as may be set out in any contract defining the powers, duties and responsibilities of the Executive Director/Investment Adviser; and it is further
• RESOLVED, that Russell Cummins be and hereby is elected and appointed as the Executive Director/Investment Adviser for the corporation, to hold office until the next regular election of officers of the Corporation until his successor is elected.

RATIFY PURCHASE OF DIRECTOR & OFFICER INSURANCE COVERAGE AS OF JUNE 23, 2012

Mr. Cummins stated that Mr. McDonald recommended that the Board ratify the purchase of D&O coverage with Carolina Casualty through Manuel Lujan Insurance, as the pricing is very similar to what the NMSBIC has paid in the past. This is a $1 million policy with a $5,000 retention amount.

Ms. Meyers moved to ratify this purchase. Mr. Smith seconded the motion, which passed unanimously by voice vote.

MESA CAPITAL OFFER FOR NMSBIC TO ACQUIRE INTEREST IN NMBBH, RECOMMENDATION NOT TO INVEST

[Discussed and acted on earlier in this meeting.]

SHORT-TERM INVESTMENTS, RECOMMENDATION TO INVEST UP TO $5 MILLION IN NEW MEXICO BANK MONEY FUNDS, WITH CHAIRMAN JOSEPH BADAL AND TREASURER ALAN FOWLER AUTHORIZED TO OPEN AND SIGN ON ACCOUNTS

Mr. Cummins stated that Chairman Joseph Badal and Treasurer Alan Fowler would be authorized to sign jointly on these accounts. Chairman Badal requested the proposed motion be changed to read, “… Joseph Badal and Alan Fowler authorized to “jointly” open and sign on accounts.”

Mr. Smith so moved. Mr. Cobb seconded the motion, which passed unanimously by voice vote.

FEEDBACK REGARDING COMMUNICATION WITH BOARD MEMBERS

Board members discussed the status of communications between the ED/IA and the board.

Chairman Badal commented that Mr. Cummins is representing the NMSBIC Board in a very professional fashion, and the cooperative partners he has met with have developed a lot of confidence in Mr. Cummins in a very short period of time.

CHAIRMAN’S COMMENTS

Chairman Badal stated that he met with banking consultant Scott Edwards, who will submit a proposal to the NMSBIC for loan underwriting services.

Chairman Badal stated that he has organized a lunch meeting with State Investment Officer Steve Moise in order to introduce him and Mr. Cummins to one another and discuss any SIC-related issues. Chairman Badal added that, as he indicated at the June NMSBIC meeting, the NMSBIC does not report to the SIC, but it is important to keep lines of communication open.

ADJOURNMENT

Its business completed, the NMSBIC Board adjourned the meeting at 11:35 a.m.