Asset Management / Portfolio Management

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1 Asset Management / Portfolio Management

2 Asset / Portfolio Management Brian Miller, CHFA Director of Asset Management Kristi Budish, CHFA Manager Asset Quality Steve Boice, CHFA Loan Analyst Erik Robinson, CHFA Multifamily Asset Manager

3 Agenda Introduction Brian Loan Grading & Loan Loss Reserve Steve loan grading process loan grading criteria loan loss reserve Risk Ratings & Watch List Kristi risk ratings watch list Portfolio Reporting Erik

4 Loan Grading / Loan Loss Reserve Steve Boice, CHFA Loan Analyst

5 Loan Grading Process Review loans over $500,000 every 24 months Watch List loans every 12 months Equates to approximately 90% coverage of portfolio Review financial statements, property valuations, payment history, loan documents, covenants, etc.

6 Loan Grading What to look for Loan modifications and reasons Payment history / performance of other properties Cash Flow / DSCR (Debt Service Ratio) LTV Liquidity (Reserves, cash, guarantor/owner) Capital Expenditures Vacancies / Concessions PUPA Expense Ratio Changes in management or ownership Income and Expense Trends

7 Loan Grading Loan Grading Criteria Grade Parameters 1 Pass DSCR 1.10x LTV < 90% 2 Pass-Marginal DSCR 1.10x LTV > 90% (declining trends) 3 Pass-Watch DSCR 1.0x to 1.09x 4 Special Mention DSCR 1.0x or less (includes additional support) 5 Substandard DSCR 1.0x or less 6 Doubtful Split note: A substandard, B Doubtful 7 Loss Charge off

8 Loan Grading Loan Grading Criteria Grading can be Objective or Subjective past performance should not be used to justify a passing credit if information supports a well-defined weakness. If sale of collateral is the primary source of repayment, well secured loans may be considered Pass-Watch

9 Loan Loss Reserve Specific LLR on Substandard loans Based on 90% of collateral value Use the lesser of appraisal or list price Include insurance, escrow advances or capital improvements

10 Loan Loss Reserve General Reserve on all remaining loans Total LLR typically ranges from 1.0%-2.0% LLR should be > charge offs of the last 2-4 years

11 Loan Grading and Loan Loss Reserve Discussion

12 Risk Ratings and Watch List Kristi Budish, CHFA Manager Asset Quality

13 Risk Ratings and Watch List Risk Factors Financial Operational Collateral Market

14 Financial Risk DSCR loan grade pass pass-marginal pass-watch special mention substandard doubtful doubtful these loans exhibit borrowers have loans that are similar adequate cash loans with minimal potential inadequately weaknesses as flow and payment delinquencies or weaknesses that protected by the Substandard, but history, but exhibit show signs of are either shortterm or sound worth and full collection is either declining weakness in cash paying capacity of highly financial trends, flow, collateral transitional in the obligor. Loans questionable. A/B potential support, financial nature. Loans may have a well note structure may compliance risk, or documentation, or be less than 90 defined weakness be utilized to collateral compliance risk days delinquent. or weaknesses strengthen the weakness asset. satisfactory performance in the following areas: financial condition, payment history, collateral support, and compliance with regulatory covenants equal or greater than 1.10X equal or greater than 1.10x 1.0x to 1.09x (or adequate liquidity to achieve 1.10x) Less than 1.00x (or inadequate liquidity) less than 1.00x (or inadequate liquidity) less than 1.00x loans are considered uncollectible and of little value that the loan's continuance as an active asset is not warranted Deficiency Note LTV Less than 90% greater than 90% Any Any Any greater than 90% Deficiency Note Loan Loss Reserve No No No No Yes Yes Charge Off Semi-Annual or Semi-Annual or Semi-Annual or Semi-Annual or Quarterly financial Quarterly financial Quarterly financial Quarterly financial Submit annual reporting, market reporting, market reporting, market reporting, market Owner Submit annual audit Based upon audit 90 days after conditions report conditions report conditions report conditions report Requirement 90 days after FYE workout plan FYE and physical and physical and physical and physical improvement plan improvement plan improvement plan improvement plan if applicable if applicable if applicable if applicable CHFA Risk Rating

15 Operational Risk operational grade no added risk moderate risk serious risk Operational Review Regulatory compliance Staff No material compliance issues. Reports remitted on time Seasoned management staff. Owner responsive to requests. Minor compliance Serious regulatory issues corrected within deficiencies. Failing defined timeline. Minor MOR score / regulatory reporting issues default/ 8823 issued with no corrective action plan. Reporting is incomplete or not received Change in management staff or Ownership structure however; new staff is experienced in applicable programs. Owner responsive to requests. Management staff is new to the industry with little or no experience. Change in Ownership structure or forced restructuring of partnership. CHFA Risk Rating 0 1 2

16 Collateral Risk Physical collateral grade no added risk minor physical issues Physical Reserves REAC Score (if applicable) No Physical deterioration of the asset. Capital replacement schedule in place and actively used. Sufficient funds to meet upcoming obligations. Current on required deposits, if applicable Score of 61 or higher. Any EHS findings corrected within defined timeline. Minor physical repairs addressed in capital improvement plan Sufficient funds to meet identified repairs/improvements. Current on required deposits, if applicable Score between 31 and 60 (CHFA to monitor repairs). Any EHS findings corrected within defined timeline. ongoing to severe deterioration of physical condition Ongoing to severe deterioration of the physical asset. No future plans to address improvements. Insufficient resources to meet current repairs. Suspended/failure to pay required reserve deposits. Score between 0 and 30 (coordinate with HUD DEC). Known EHS findings not corrected within defined timeline. History of low REAC scores. CHFA Risk Rating 0 1 2

17 Property Name: Loan Number: Date of Site Visit: Physical Reference Rating 0 - No Added Risk No Physical deterioration of the asset. Preventative Maintenance Program 0 - No Added Risk 1 - Minimal Risk Minor physical repairs needed 2 - Moderate/ Severe Risk Ongoing to severe deterioration of the physical asset. General Physical Condition 0 - No Added Risk 1 - Minimal Risk 2 - Moderate/ Severe Risk Replacement Reserves Appears to have sufficient funds to meet upcoming obligations. Submissions and Financial Monitoring Current on required deposits, if applicable Appear to have adequate reserves to meet identified repairs/ improvements. Current on required deposits, if applicable Appear to have insufficient resources to meet current repairs. Suspended/failure to pay required reserve deposits. Rating 0 - No Added Risk REAC Score Rating 0 - No Added Risk Score of 90 or higher General Physical Condition No Added Risk Score between 89 and 80. Any EHS findings corrected within defined timeline or failed REAC inspections due to issues 1 - Minimal Risk that have subsequently been corrected to CHFA's satisfaction. Score between 60 and 79. Known EHS findings not corrected within defined timeline. History of low 2 - Moderate/ Severe Risk REAC score. Score of 59 and below - coordinate with HUD DEC Overall Risk Rating: Collateral 0 - No Added Risk Regulatory Compliance Reference 0 - No Added Risk No material compliance issues. Reports remitted on time Submissions and Financial Monitoring 0 - No Added Risk 1 - Minimal Risk Minor compliance issues corrected within defined timeline. Minor reporting issues Re-Certification Process Serious regulatory deficiencies. Failing MOR score / Rent Restriction 2 - Moderate/ Severe Risk regulatory default/ 8823 issued with no corrective action plan. Reporting is incomplete or not received Staff Rating 0 - No Added Risk Seasoned management staff. Owner responsive to requests. Monitoring Documents and Training 0 - No Added Risk 1 - Minimal Risk 2 - Moderate/ Severe Risk Overall Risk Rating: Operations Change in management staff or Ownership structure however; new staff is experienced in applicable programs. Owner responsive to requests. Management staff is new to the industry with little or no experience. Change in Ownership structure or forced restructuring of partnership. 0 - No Added Risk

18 Market Risk Market / Industry Collateral value per loan policy, Industry strength, Concentrations Vacancy Rate Sales Activity Sales Price/ Lease Rate Employment Economic Activity Other Factors no added risk moderate risk serious risk Low Vacancy Rate - demand is greater than supply. Increasing Vacancy Rate - vacancy rate is beginning to increase or is generally higher when compared to the historic rate High Vacancy Rate - supply is greater than demand. Active Market Conditions. Properties Slow Market Conditions - Sale and Limited Market Conditions are actively being sold or leased. lease activity is slow or slowing. - there is limited or no Marketing periods are less than 6 Marketing periods are between 6 and demand for a type or class months 12 months. of property. Marketing period exceed 12 months. Increasing Prices/Lease Rates. Static Prices/Lease Rates Declining Prices/Lease Rates - sale prices and lease rate are trending downward. Low Unemployment Increasing Unemployment - High Unemployment - unemployment is beginning to unemployment is high increase or is higher than what has when compared to historic been experienced during the past few levels. years. Good Business Activity- new businesses are being created putting upward pressure on the demand for real-estate No News - there is no known event that could have potential negative impact on real estate prices or lease rates Slow Business Activity - business owners are expressing that business conditions are slow or slowing Poor Business Activity - businesses are failing and/or closing. Lease rates are being renegotiated downward. Known News - an event is known, but Known News- an event is what it's overall impact on real estate known and its occurrence is generally unknown will definitely have a negative impact on real estate prices and/or lease rates. CHFA Risk Rating 0 1 2

Watch List HUD loans as of 3-31-15 Loan # Property Name Loan Status Days Past Due Program Type Loan Type LTV DSCR Loan Grade Financial Risk

19 Watch List HUD loans as of Loan # Property Name Loan Status Days Past Due Program Type Loan Type LTV DSCR Loan Grade Financial Risk Market Risk Operational Risk Collateral Risk Current 0 LIHTC PAB 542 (C) 72% Risk Rating TDR 0 LIHTC PAB 542 (C) 98%

20 Table Watch List Summary

21 Narrative Watch List Summary Cash Flow Concerns: Market Concerns: Payment History: Program Compliance Officer Concerns: Collateral Concerns: Management Concerns: Y15 Risk: AQ Comments/Recommendations:

22 Risk Ratings and Watch List Discussion

23 Portfolio Reporting Erik Robinson, CHFA Multifamily Asset Manager

24 Portfolio Reporting Property type by dollar % of Risk Multifamily challenges Trends Watch list Past due Substandard loans Loan loss reserve Concentrations of credits Geography Market, Demographics, and Lending Opportunities

25 MF Loan Portfolio Property Type by $ $350,000,000 $300,000,000 $250,000,000 $200,000,000 $150,000,000 $100,000,000 $50,000, Total $463.7M 2013 Total $397.2M 2014 Total $376.0M $-

26 MF Risk to CHFA 9/30/14 $11,032,435 3% $200,829,373 53% $164,236,007 44% 100% 50% 1%

27 MF Challenges Substandard Tax Credit Loans Year >11 and >90% LTV Property 1 (year 15): $520K LLR Property 2 (year 13) 20 unit senior property with high vacancies at 98% LTV with <$18K> Net Cash Flow $29K LLR Property 3 (year 12) income is approximately 25% less than projected 114% LTV improved from 199% LTV in 2013 $459K LLR Property 4 (year 11) DSCR 0.89x with <$89K> Net Cash Flow and 25% of units are at market rate 93% LTV $213K LLR.

28 Trends in Credit Quality 2014 Watch List $31,475,028 6% $367,328,839 74% $97,790,401 20% MF Watchlist: 69 loans (52 properties) BF Watchlist: 41 loans Non-criticized portfolio: 432 loans

29 Watch List Loans 30.00% % of Total Loans 25.00% 20.00% 15.00% Watch List Loans 10.00% 5.00% 0.00% 9/30/2013 9/30/2014

30 MF 60 + Days Past Due 1.00% 0.80% 0.60% 0.40% CHFA MF Fannie Mae 0.20% 0.00%

31 Substandard Loans 35.00% Percent of Total Loans by Dollar 30.00% 25.00% 26.70% 28.28% 28.76% 29.05% 20.00% 22.16% 19.89% 21.02% 21.16% 21.07% 15.00% % of Total Loans 10.00% 5.00% 0.00%

32 Specific Reserves / Total Loans 2.50% 2.00% 1.50% 1.00% 0.50% CHFA Colorado National 0.00%

33 MF Concentrations of Credit 75.0% CHFA Dollars Versus State Population 70.0% 65.0% 66.4% 60.0% 55.0% 50.0% 45.0% 44.20% 40.0% 35.0% 30.0% % by Dollar Population 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 14.80% 12.40% 11.4% 5.1% 5.80% 5.80% 6.00% 4.8% 2.5% 3.0% 2.80% 3.1% 3.10% 5.10% 3.6% 0.1% Metro Denver Boulder Douglas El Paso Larimer Mesa Pueblo Weld Other

35 Multifamily Lending Opportunities Douglas County - Castle Rock, Highlands Ranch, and Parker El Paso County Colorado Springs Larimer County Fort Collins and Loveland Weld County - Greeley

36 Multifamily Lending Opportunities Douglas County - Castle Rock, Highlands Ranch, and Parker Unemployment Rate 4.5% Apartment Vacancy 3.6% Tax Credit Vacancy - < 1% Average Apartment Rent $1,302/Month, $1.32/SF Projected Population Growth 2015 to ,003

37 Portfolio Reporting Discussion

Preparing the Financial Statement Credit Quality Disclosure

Preparing the Financial Statement Credit Quality Disclosure Twenty Twenty Analytics is the Exclusive CUNA Strategic Service provider for your Loan Portfolio Analytics and Regulatory Compliance Objective