Wells Fargo Works for Small Business®

Diverse Community CapitalInnovations in UnderwritingAugust 26, 2017

Today’s Webinar

Introduction:▪ Alexandra Jaskula-Ranga, Opportunity Finance Network

Case Study Presenters:▪ Amber Banks, Carolina Small Business Development Fund

▪ Betsy Beauvais, Montana and Idaho CDC

▪ Bob Porter, Pacific Community Ventures

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Agenda

Wells Fargo Works® for Small BusinessDiverse Community Capital Program

Overview: Innovations in Underwriting Publication

Case Study Presentations:▪ Simplified Loan Policies: Montana and Idaho CDC

▪Underwriting Matrix: Pacific Community Ventures

▪New Equity Capture Loan Product: Carolina Small Business Development Fund

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DIVERSE COMMUNITY CAPITAL PROGRAM

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Diverse Community Capital Program

The Diverse Community Capital program is Wells Fargo’s commitment over three years to support Community Development Financial Institutions (CDFIs) serving diverse small businesses.

Wells Fargo is making available $75 million in capital for CDFIs to increase CDFI lending to diverse small businesses, with initial focus on increasing lending to African-American-owned businesses, based on the study findings.

To that end, Wells Fargo will provide:

1) $25 million in grant capital

2) $50 million in debt capital, and

3) the opportunity to participate in activities that build Social Capital in the CDFI industry with the objective of creating greater capital access for diverse small businesses.

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Social Capital Program

The program will offer activities to build effective support networks and social infrastructure (Social Capital) among CDFIs for the purpose of increasing lending to diverse small businesses.

Social Capital activities will include mentorship programs, peer learning, Knowledge Networks, and other collaborative efforts to improve and increase the capacity of CDFIs to lend to diverse business owners.

Wells Fargo will offer the Social Capital activities through Opportunity Finance Network (OFN).

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Working Groups

Goal: Encourage knowledge sharing by CDFIs that have best practices related to Underwriting, Marketing and Outreach, and Tailored Products and Services.

Activity: Working group calls and in-person discussions of best practices documented in publications

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Underwriting

• Streamlining the process

• Tailored underwriting guidelines

Marketing and Outreach

• Well-designed marketing campaigns

• Defined outreach strategies

Tailored Products and Services

• Market-specific products

• Scalable TA programs

Industry Resources

Culminating the work of the 2016 Knowledge Network, industry publications and webinars will be presented in 2017 by the contributors from the Knowledge Network:

▪ Innovations in Underwriting: Case Studies

▪ July 26, 2017

▪ Value Proposition for Small Business Lending: Process and Deliverables

▪ August 2017

▪Marketing and Outreach to Diverse Communities: Best Practices and Resources

▪ September 2017

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OVERVIEW: INNOVATIONS IN UNDERWRITING

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Members of the 2016 Underwriting Working Group

Access to Capital for Entrepreneurs

Bridgeway Capital

Carolina Small Business Development Fund

CommunityWorks

Craft3

Montana & Idaho CDC

Pacific Community Ventures

Self-Help

Wisconsin Women’s Business Initiative Corporation

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Common Goals Related to Underwriting Diverse Small Businesses

Finding alternative risk models to finance borrowers with thin credit files or poor credit.

Adjusting underwriting criteria to accommodate lack of collateral and owner equity.

Updating documented policies and processes to reflect common “exceptions” and CDFI underwriting practice.

Accelerating loan decision-making and improving borrower experience.

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Lessons Learned in Underwriting Diverse Small Businesses

Innovative underwriting strategies by CDFIs do not undermine risk management or portfolio quality.

Efforts to rethink underwriting are not done in isolation. Often, they are part of a larger effort to update the strategic plan, to overhaul other systems, or to increase the CDFI’s capacity to effectively serve its market.

Improving the borrower experience also improves staff experience.

Underwriting innovations are often accompanied by additional targeted outreach, specifically bilingual and culturally sensitive outreach to build trust; and by strategic technical assistance efforts.

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Innovations in Underwriting Case Studies

Montana & Idaho CDC dramatically simplified its underwriting policies.

Pacific Community Ventures adopted a matrix to streamline its underwriting.

Carolina Small Business Development Fund developed an innovative product to support borrowers with limited owner equity.

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CASE STUDY PRESENTATIONS

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Betsy Beauvais

Director of Lending

Montana & Idaho Community Development Corporation

844-728-9234 • betsyb@mtcdc.org

• Small Business Lending

• New Markets Tax Credits

• Community Facilities Lending

• Resident Owned Communities

• Down Payment Assistance

Susan Loyd and Sandy Brown, Tin Roof Tacos – Boise, ID

WHAT WE DO

MAJOR MARKETS WE SERVE

• Combined population of MT and ID:

2.6 million people

• Offices in Boise, Missoula, Bozeman

• 30 Staff

Types of businesses that we finance:

Start-ups, business purchases and

existing businesses

Types of loans:

Term loans, lines of credit, construction

loans

Loan size:

$1,000–$2,000,000

Rates:

9% interest and 3.5% origination

SMALL BUSINESS LOANS

Brad Bernhart, Earlywood Designs – Red Lodge, MT

OUR PATH TO “SMARTER, BETTER, FASTER”

• Needed to find a way to underwrite faster and more

efficiently

• Ran a regression analysis on historic portfolio to determine

which factors most influence repayment

• Resulted in a screening instrument to assess potential risk

and determine if/how to underwrite

SMARTER: THE KEITH SCORE

• Knew we were making good loans that did not meet our

own policies

• The loans looked high risk but in fact were good loans

SMARTER: REDEFINING “POLICY”

MCDC PolicyActual #'s

in

policy

out of

policy

Collateral Coverage Ratio 1.00 or above 0.25

Credit 625+615

Equity 10% or more0%

Business DCR greater than 1.0 1.05

Global DCR greater than 1.01.05

Personal DTI less than 60%47%

Use of Funds No gambling, on-site

alcohol consumption or

adult entertainment

Permitted

BETTER: NEW POLICIES

Willingness

to repay

debt

Skin in

the game

Secondary

source of

repayment

Business

ability to

repay

BETTER: PRIORITIZED BY LOAN TYPE

RE or Equipment Purchase

•Ability to repay

•Willingness

•Skin in the game

•Secondary source

Business Purchase

•Ability to repay

•Secondary source

•Willingness

•Skin in the game

Business Capital Restructure

•Ability to repay

•Willingness

•Secondary Source

•Skin in the game

Business Expansion

•Ability to repay

•Willingness

•Skin in the game

•Secondary source

Start Ups

•Willingness

•Secondary source

•Skin in the game

•Ability to repay

1. Decreased time in underwriting

• Better, more targeted risk analysis—

not one size fits all

• Only collect documents you need to

assess risk; gather the rest before

close

2. Increased efficiency of approvals

• Added faster approval routes for

lower risk loans

3. Tracking time client spends in each

stage of our underwriting process

FASTER: BETTER CLIENT EXPERIENCE

Chad, Brittney, and Ryker Hartley, Idaho

iRepair—Meridian, ID

• Segmenting potential clients has

increased our ability to “bucket”

and then underwrite more

effectively

• Creating policies that reflect risk

has made our underwriting more

robust without using specific

ratios/criteria

• Hire the smartest people you

can find

WHAT WE’VE LEARNED

David Stark, Bitterroot Gymnastics—Missoula, MT

QUESTIONS?

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© 2012, Pacific Community Ventures

Bob Porter

Managing Director, Pacific Community Ventures

Lending and BusinessAdvising.org

Located in San Francisco

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© 2012, Pacific Community Ventures

Pacific Community Ventures

• Founded in 1998 as one of America’s first double-bottom-line investors, and helped create the impact investing movement as part of the U.S. National Advisory Board on Impact Investing, the G8 Social Impact Investment Task Force, and the White House Impact Economy.

• CDFI certified in 2003

• Lending CA-wide since mid-2013

• Targeting underserved SBO’s who aren’t eligible for SBA or traditional capital with loans of $10-200K

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© 2012, Pacific Community Ventures

Why We Looked At Our Underwriting

• 3 year history of lending $50-200K

• Despite clearly defined loan amounts indicated all marketing, 20% of applications were for less than our $50K minimum loan

• So we asked:

– Do we want to continue to refer?

– Or do we want to serve this market and be seen as a continuation of capital provider?

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© 2012, Pacific Community Ventures

A Deeper Discussion To Insure Success

✓ Analyzed:

✓ Salesforce data from 3 years of applications

✓ All metrics used in previously approved loans to determine averages, mean and mode

✓ Involved all internal departments

✓ Reviewed current processes and procedures

✓ Mapped and re-mapped processes looking for efficiencies and new processes

✓ Developed a rollout and marketing strategy

✓ Identified new technology needed to grow

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© 2012, Pacific Community Ventures

Underwriting Case Study

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© 2012, Pacific Community Ventures 32

Loans >$150 will be reviewed by the Loan Committee

Score X Points Y Points Z+ Points

Risk Rating Acceptable Risk Moderate Risk Low Risk

Regular Pricing 9-10% 8-10% 7-9%

Current Loan ($50-150K) Scoring Guide

Score X Points Y Points Z+ Points

Risk Rating Acceptable Risk Moderate Risk Low Risk

Regular Pricing 9-10% 8-10% 7-9%

Approval Loan Committee Internal Committee Auto-Approved

New Smaller Loan (<$50K) Scoring Guide

Score XX Points YY Points Z+ Points

Risk Rating Acceptable Risk Moderate Risk Low Risk

Micro Pricing 13% 12-13% 10-12%

Approval Loan Committee Internal Committee Auto-Approved

Approval Channels

© 2012, Pacific Community Ventures

Results – Staff Perspective

New $10-50k product launched as part of our continuation to capital model

Application-to-close improved by over 4 weeks

185% increase in the # of loans closed

214% increase in the $ of loans closed

New technology identified and being implemented

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© 2012, Pacific Community Ventures

Results – Borrower Perspective

Underwriting allows strengths to offset weakness

Application-to-close improved by over 4 weeks

Applicants funded who were previously excluded

from PCV loan fund purely by $ amount

Able to communicate clear underwriting issues

and work with SBO on improvement/solutions

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© 2012, Pacific Community Ventures

Closing Remarks

➢This process has been transformative

➢ Team feels empowered

➢ Our underwriting is clearly defined

➢ Tracking metrics which allows for better portfolio analysis

➢Questions?

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QUESTIONS?

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Amber Banks Vice President, Business Lending

OUR VISION

To create economic opportunity for all people.

OUR MISSION

To foster economic development in underserved

communities by providing capital, business services, and

policy research to support small businesses.

Carol ina Smal l Bus iness i s…

For small business owners seeking business loans

Who are dissatisfied with the barriers to obtaining business

loans in the traditional marketplace

Our product is a flexible and affordable combination of

lending solutions and business support services.

That provide small businesses the resources to succeed and

grow.

Unlike impersonal small business lenders with rigid

standards.

Our Value Proposition

A small

business

advocate

A trusted

business

guide

A partner for

small

businesses in

the Carolinas

An

accessible

funding

resource

We fulfill a critical lending need for startups and existing businesses in the Carolinas, with special focus on underserved markets.

We provide the opportunity for small businesses to succeed, while achieving sustainability.

What makes us unique?

Small Business Lending

W H AT W E O F F E R :

> Loans and lines of credit up to $250,000

for all types of businesses in a wide range

of industries

> Flexible terms with rates typically between

8% and 12%

> Personalized assistance

S P E C I A L I N I T I AT I V E S :

> Ready. Set. Grow!

> Dream Big

• Working Capital to Support Operations

• Leasehold Improvements

• Purchase Inventory

• Purchase Furniture and Equipment

• Purchase Owner-Occupied Commercial Real Estate

• Restructure Debt

• Business Acquisition

Acceptable Loan Purposes

• Refinancing Personal Debt or Covering Household Expenses

• Financing Down Payments

• Sin Industries (e.g., liquor stores, “hard” bars, sales of prurient nature

products, night clubs, etc.)

• Investment Real Estate – Residential and Commercial

Industry and Loan Purpose

Restrictions

Small Business Lending

We have made 508 loans totaling $36.3 million since 2010,

which have created or maintained 1,092 jobs.

Western

79 Loans

$5.4 Million

139 Jobs

Northwest

7 Loans

$544,000

5 Jobs

Southwest

88 Loans

$6.5 Million

210 Jobs

Piedmont Tr iad

38 Loans

$3.0 Million

50 Jobs

North Centra l

184 Loans

$12 Million

515 Jobs

Northeast

36 Loans

$2.7 Million

49 Jobs

Sandhi l l s

33 Loans

$2.8 Million

55 Jobs

Southeast

35 Loans

$3.0 Million

64 Jobs

I n d u s t r i e s

Service 37.1%

Restaurant 18.4%

Retail 12.2%

Manufacturing 8.5%

Construction 6.1%

Trucking 4.4%

Agribusiness 3.2%

Bakery 3.1%

Child Care Services 2,8%

Other 4.6%

Our Borrowers

Rural 34%

Minority 59%Women 39%

Veteran 18% Start Up 41%Low Income

36%

African-

American

50%Hispanic 6%

NC Small Business Landscape

> Diverse small businesses face particular challenges.

> Women and minority firms lag behind in revenues.

Analysis of Denials

• Capacity – business DSCRs generally below 1.25, global generally

lower

• Collateral – consistently insufficient after discount rates

• Business Acumen – combination of relevant business management

education and experience

• Credit – past or recent challenges that have impacted score (typically

business related)

• Equity Injection – 10% is not available

Case Study Solutions

• Capacity – loan terms extended up to 24-months, including interest only

periods

• Collateral – use credit enhancements such as SBA, NC Capital Access,

etc.

• Business Acumen – develop a required post-closing Business Services

plan

• Credit – subsidize costs of third party credit repair specialist

• Equity Injection – Cash flow recapture feature

Success Story

G R A C E F E D E R A L S O LU T I O N SRaleigh, NC

> SBA-certified small business delivering

professional healthcare services,

administrative/clerical services, research

support, data abstraction, training and

information technology

> Needed working capital to quickly scale

workforce to keep up with new projects

> Obtained a CSBDF loan to expand the

company

> The business is now serving national clients

and expects to continue to grow“Carolina Small Business is helping me achieve my vision. They are always available to answer questions. They are a major part of Grace Federal’s continued success.”

- Iris Phillips

Success Story

E VA N S E L E C T R I C A L S E RV I C E S , L L CNashville, NC

> Veteran-owned business providing residential,

commercial, and industrial electric solutions

> Participated in CSDBF’s Accelerate 60 Program

designed to provide training, counseling and

matching businesses with lenders

> Qualified for a CSBDF loan

> Hired 20 employees and secured to major

clients and multiple contracts

> Receiving ongoing business coaching and

expects growth to 100 empoyees and $10-

$12M revenue

“We envision building a business that will support manufacturing across North Carolina, but will also provide services that will stretch across the U.S. We also plan to use the success and profit we generate to be of service to all the communities in which we operate. This would not have been possible without Carolina Small Business ”

- Dwayne Evans

Success Story

K I N G O F K I N G SAsheville, NC

> Provides cleaning, painting, pressure washing,

and remodeling services

> Wanted to start his own business, but didn’t

know where to start and faced language

barriers in accessing resources

> CSBDF provided coaching and assistance in

Spanish to complete a loan application

> Qualified for a CSBDF loan to purchase

equipment to start up his business

“I had always wanted to open a business. I just was never sure on how to go about it. My friend, who had opened a business, inspired me to get myself out there and do it and so I did. ”

- Alejandro Herrera

CSBDF Business Services

Department

CSBDF has expert staff members in our Business Services Department that can

assist in preparing your loan package for submission.

Services Include:

• Marketing

• Accounting

• Credit Repair

• Assistance with Creating Accurate Projections

• Understanding Financial Documents

• Creating a Business Plan

Follow this link to get connected to Business Services:

http://carolinasmallbusiness.org/contact/request-for-counseling/

QUESTIONS?

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To Learn More…

Wells Fargo Works® for Small BusinessDiverse Community Capital (DCC) Program:

https://www.wellsfargo.com/com/financing/real-estate/community-lending-investment/cdfi/#diversecommunitycapital

DCC Social Capital Resources:http://ofn.org/wells-fargo-dcc

Contact Information:Alexandra Jaskula-RangaVice President, Opportunity Finance Network ajaskula@ofn.org

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