LAFAYETTE COLLEGE FINANCIAL ASSESSMENT FISCAL YEAR 2020 As Financial Advisor to Lafayette College, Janney Montgomery Scott performs an annual financial assessment of the College to review historical financial position, report on changes within the past year and provide an outlook on its future positioning. This report provides a summary of the key factors driving Lafayette’s finances and recommends certain actions the College could take to ensure financial positioning is maintained or improved. The report includes a summary of the College’s financial position as well as an appendix which serves as a financial factbook and includes much of the information that is the basis for the conclusions herein. The following analysis utilizes information from the College’s annual financial statements prepared in accordance with generally accepted accounting principles. EXECUTIVE SUMMARY Janney views that the College remains in a strong financial position. However, there are negative headwinds within the sector due to the COVID-19 pandemic which will require the College to remain diligent with prudent budget management. This will allow Lafayette to withstand these near-term challenges so that it is well positioned to make strategic investments that ensure the College maintains its market position in the future. Over the past five years, Lafayette has displayed a strong budget function resulting in an annual operating surplus. Lafayette has excellent balance sheet wealth supported by its endowment. Over the past year, the College’s liquidity position was tested due to business disruptions in April 2020 from the COVID-19 pandemic and the College displayed that it has sufficient internal liquidity to manage through this type of crisis. The College was also able to strengthen external liquidity sources through additional lines of credit, which is a positive. The College refinanced existing debt for interest savings this year; however, it remains more leveraged than peers. From an external perspective, the College maintained its credit ratings of Aa3 (stable outlook) by Moody’s and A+ (stable outlook) from Standard & Poor’s. Janney recommends the following items that the College could take actions on over the next year: . Liquidity Management: The College should perform annual reviews and sensitivity analysis on its internal and external liquidity sources to ensure it has ample liquidity to withstand any major liquidity events that could happen. Budget Management: The College displays solid ability to plan and manage its operating budget resulting in strong operating performance. Many higher education institutions are moving to a GAAP- based budget which more aligns with financial statements. The College may want to explore this option in order to align budget with financial statements. Debt Strategy: The College should continually review its debt strategy to ensure that it aligns with strategic objectives. As principal maturities come due in the coming years, the College should consider whether it makes more sense to repay or restructure these maturities based on its strategic direction. In order to increase flexibility to repay debt at maturity, the College should explore ways that it can generate funds that can be used for debt retirement. This could come in numerous forms including annual transfers to its capital reserve or inclusion of depreciation in operating budget which can be considered a proxy for principal repayment. These budgeted funds can subsequently be transferred to the capital reserve for debt retirement. Page 1 LAFAYETTE COLLEGE FINANCIAL ASSESSMENT FISCAL YEAR 2020 INTRODUCTION The following report summarizes Lafayette’s financial position based on five key factors which provide a broad overview of the qualitative and quantitative drivers of Lafayette’s financial position. This report is based on Lafayette’s historical financial position through fiscal year ending June 30, 2020 with some forward looking analysis based on the College’s Fall 2020 student demand, budget outlook for fiscal 2021, and qualitative assessments of the outlook for higher education. Debt and Other Market Position Operations Financial Reserves External Factors Liabilities . Positioning to . Historical operating . Amount of reserve . Existing Debt Profile . Higher Education compete for: performance funds Sector Outlook — Risks — Students . Budgeting . Liquidity sources and . Rating Agency Views procedures and potential uses — Structure — Gifts and Pledges . Performance Against outlook — Strategy . Strategy for reserve Peers growth (investment . Derivative Portfolio returns, operations, philanthropy) . Planned Future Debt Issuance The COVID-19 pandemic caused unprecedented challenges academically and financially throughout the higher education sector. In response to the COVID-19 pandemic, in April 2020, Lafayette closed residential facilities and transitioned all classes to remote learning for the remainder of the Spring 2020 semester. For the Fall 2020 semester, the College continued to hold all courses remotely, with the majority of students studying from home. For the Spring 2021 semester the College will be offering both in-person and remote courses and will welcome back any student to live and learn on campus who desires to be there. The impact of the COVID-19 pandemic resulted in widespread impacts on the College’s financial outlook which will be discussed throughout this assessment. In particular, the COVID-19 pandemic disrupted the College’s progress on the Strategic Direction to grow to 2,900 students. The College has shown the ability to withstand these near-term challenges which should allow Lafayette to re-focus on its future goals in the coming years. MARKET POSITION Market position is indicative of the ability for an institution to generate revenues from key sources. For Lafayette, the largest revenue sources are student revenue (tuition plus auxiliaries) which accounts for 67% of total operating revenue, draws on endowment which accounts for 26% of operating revenue, and gifts which accounts for 4% of operating revenues. Therefore, the College’s market position will be driven by its ability to attract students onto campus and generate gift revenue that can be utilized to grow endowment and fund operations. Student Demand Lafayette College has a unique student market position as a small, highly-ranked liberal arts college with a niche focus on STEM (science, technology, engineering, math) majors. This provides Lafayette with a competitive advantage to certain other liberal arts competitors as STEM majors are increasingly popular in the higher education market due to strong post-graduation career and salary outlooks. The chart below displays certain key rankings for Lafayette College. The College ranks 40th in National Liberal Arts Colleges and 62nd in Best Value Schools by U.S. News and World Report. The College is also ranked as a best value college by Money and Forbes, which is a positive in the current student market. Page 2 LAFAYETTE COLLEGE FINANCIAL ASSESSMENT FISCAL YEAR 2020 Lafayette College Rankings . U.S. News & World Report (2021) – No. 40 out of 223 in National Liberal Arts Colleges . U.S. News & World Report (2021) – No. 62 out of 102 in Best Value National Liberal Arts Colleges . U.S. News & World Report (2021) – No. 13 out of 220 in Undergraduate Engineering Programs . Money – Best Colleges in America Ranked by Value (2019-20) – No. 97 out of 739 colleges and universities . Forbes – America’s Top Colleges (2019) – No. 57 out of 650 colleges and universities . Forbes – America’s Best Value Colleges (2019) – No. 199 out of 300 colleges and universities The College’s demand softened in Fall 2020 as acceptance rate increased from 31.5% in Fall 2019 to 35.6% in Fall 2020 while matriculation rate decreased from 26.0% in Fall 2019 to 20.7% in Fall 2020. However, the College did not see a major difference in student quality as average SAT score of enrolled students was 1343 in Fall 2020 compared to 1341 in Fall 2019. The softened demand is at least in part due to impact of the COVID-19 pandemic, which resulted in a decrease in matriculants and increase in deferrals throughout the higher education sector. At Lafayette, 82 students opted to defer their enrollment in Fall 2020 – 41 for one semester (enrolling in January 2021) and 41 for the academic year (enrolling August 2021). If the 82 deferrals are included in Fall 2020 matriculants, the College’s Fall 2020 freshman class would be comparable to Fall 2019. A key question moving forward is how many of the deferrals will end up enrolling at the College, which can have long lasting impacts on enrollments. Twenty-eight of the one semester deferrals enrolled for the January 2021 semester, while 13 decided to defer again until Fall 2021. The softened demand in Fall 2020 disrupted the College’s enrollment growth as FTE enrollment fell to 2,476 in Fall 2020 compared to 2,643 in Fall 2019. Moving forward, Lafayette’s student demand in the form of increased freshman enrolled students that are retained for four years will be key to rebounding from the Fall 2020 setback. Gifts and Fundraising Lafayette completed the Live Connected, Lead Change campaign on December 31, 2018, successfully exceeding its $400 million goal by raising $425 million through over 27,000 donors. The College’s success in this campaign displays its ability to generate philanthropic funds that can be utilized to fund student scholarships, grow endowment and fund capital investments. The College recognizes gift revenue on its income statement as private gifts and grants classified as operating revenue and endowment, capital, and other restricted gifts classified as non-operating revenue. In fiscal 2020 private gifts and grants totaled $7 million while non-operating endowment, capital and other restricted gifts were $11.1 million, resulting in $18.1 million of total gift revenue. This amount was lower than fiscal 2016, 2017, 2018 and 2019 which totaled $25.9 million, $38.2 million, $32.7 million and $30.1 million, respectively. The reduction in gift revenue was due to a reduction in endowment, capital and other restricted gifts which is logical given that the College completed its campaign in mid-fiscal 2019.