When the first Covid-19-related shutdowns happened in March, many felt that community businesses¹ would take a short-term hit but would bounce back with warming temperatures and lifting restrictions. As time went on, it became clear that the impacts on the economy will be dramatic and long-lasting, and that community businesses may be among the hardest hit. Because community development financial institutions (CDFIs) lend almost exclusively to community business the crisis threatened their loan portfolios—just as their lending was becoming more important than ever.
We can evaluate the health of the broader economy by looking at employment, consumer sentiment, and other indicators. But what about CDFIs, our economic first responders? How are they faring as they double down on helping communities? As the rating and information service for CDFI loan funds, Aeris is watching CDFI performance closely. What follows is an early look at some of the emerging trends and key indicators that we are watching—and will continue to monitor in upcoming fiscal quarters.
Behind the Data
Aeris issues approximately 20 CDFI ratings each quarter. Our work keeps us close to CDFIs and produces information about how individual CDFIs have been responding to the Covid-19 crisis. In general, we have observed that CDFIs have stayed in close contact with borrowers to help them weather the downturn. Similarly, CDFIs have collaborated with their own lenders and funders to tap new resources, build up loan loss reserves, adjust terms, etc.
In addition to ratings, Aeris collects, standardizes, and cleans quarterly performance data on approximately 140 CDFIs representing about 65% of on-balance-sheet assets held by certified loan funds in the U.S. CDFI investors use the Aeris database to monitor existing CDFI credits, and to identify and analyze new investment opportunities that align with their impact objectives. All rated CDFIs participate in the database, and dozens of non-rated CDFIs voluntarily take part to contribute to the data set and/or monitor their own performance relative to peer institutions. These data give Aeris a window into trends as the economy undergoes a period of uncertainty.
“Rather than pulling back, CDFIs are stepping forward by increasing lending volume.”
Three Keys to Performance: Capital, Loan Portfolios, and Liquidity
CDFIs have been successful in attracting new resources to shore up and even expand their loan portfolios. Sizeable and noteworthy commitments of both debt and grant capital have come from foundations (e.g., the Ford Foundation, Mary Reynolds Babcock Foundation), high-net-worth individuals (e.g., Mackenzie Bezos, the single family office Ceniarth), and corporations (e.g., Google, Wells Fargo). There are myriad examples of CDFI funders and investors stepping up that cannot all be listed here.
Grants are a critical resource for CDFIs to expand their lending activity, prepare for possible future losses, and manage liquidity. The data as of June 30 indicate that CDFIs in all sectors experienced significant year-over-year growth in contributed revenue; notably, small business lenders experienced 40% median contributed revenue growth.
In addition to grants, CDFIs are raising new debt. Small business lenders’ median leverage increased from 1.5 at December 31 to 1.8 at June 30. Their ability to lever up speaks to the strength of CDFIs’ balance sheets as they entered the crisis: median unrestricted net assets for all Aeris-rated and reporting CDFIs as of December 31 was 26.8% of total assets; at June 30, it was holding at 26.1% of total assets. This varies considerably from CDFI-to-CDFI and sector-to-sector. We will be watching this ratio for both individual CDFIs in our analyses, and in our broader CDFI population as we look for trends.
Rather than pulling back, CDFIs are stepping forward by increasing lending volume. This mirrors CDFI activity associated with the 2008 financial crisis.² As of June 30 lending growth was most dramatic for small business lenders and community facilities/commercial real estate lenders, with 20.6% and 14.6% growth in average loans outstanding over December 31, respectively. Some of this is due to natural growth; business lenders and community facilities/commercial real estate lenders had compounded median annual growth rates for the most recent three years of 10.6% and 13.2%, respectively. Based on our rating analyses, we attribute some of the additional growth to new “emergency” loans that CDFIs in these sectors are originating, in some cases with local municipal or philanthropic support.
CDFIs that are licensed SBA lenders have originated PPP loans. Aeris tracks PPP lending in a separate line item from its other loans, as PPP loans have minimal credit risk. CDFIs reporting to Aeris booked $206.9 million in PPP loans outstanding as of June 30. Other CDFIs worked to facilitate PPP loans from local banks or qualified CDFIs.
On balance, CDFI loan portfolios continued to perform reasonably well through June 30. Real estate lenders’ delinquencies ticked up slightly yet remained strong. For business and microlenders, 30- and 90-day delinquencies decreased nominally from December 31 to June 30. We will be watching these figures closely, especially if recently enacted government support for small businesses dries up.
Thus far, CDFIs appear to be prudently managing liquidity to ensure seamless operations, meet creditor obligations, and make loans. The current ratio for CDFIs is traditionally somewhat variable, as it can be affected by large awards and balloon loans coming due. Current ratios at June 30 did not display sharp difference from historic norms. As noted, CDFIs are getting money out the door to help their borrowers, but they are nonetheless responsibly managing capital liquidity. Capital liquidity—as measured by the deployment ratio (loans outstanding/total financing funds)—ranges within a much tighter band than current ratio metrics, but also had not changed significantly. Deployment among the bottom and top quartile of real estate lenders at June 30 was 70% and 90%, respectively. Small business lenders typically hold more of their liquidity on balance sheet. These lenders had deployment rates in the bottom and top quartile of 60% and 80%, respectively.
As we enter the fourth quarter of 2020, experts warn that from a public health perspective some of the most challenging days lie ahead. At the time of this writing, Aeris is processing calendar year Q3 2020 performance data, and will continue to monitor performance in the coming quarters as CDFIs continue to respond to the economic fallout from the virus. As always, Aeris Rating Reports will provide detailed information about an individual CDFI’s impact performance and financial condition, including their pandemic response.
¹ This article uses the term “community businesses” as shorthand to describe the range of borrowers that CDFIs serve (with the exception of consumer credit): i.e., small businesses, microenterprises, community facilities and other nonprofits, charter schools, affordable housing developers, etc.