This is the second in a series of CDFI trend reports tracking CDFI performance in the recession

In 2020, Aeris began publishing a CDFI loan funds trend report on the impact of the recession on CDFIs, drawing upon the quarterly data we collect on approximately 140 CDFI loan funds. We created the report partly in response to the unprecedented volume of inquiries we have received from current and prospective investors in CDFIs. Investors face the competing exigencies of quickly deploying emergency capital into communities and prudently adhering to their fiduciary duties and responsibilities. We received very positive feedback on our first trends report, and we intend to continue these updates for the duration of the crisis.

Our analysis through the quarter ended 9/30/20 examined (i) lending activity, (ii) portfolio quality, and (iii) earnings. In general, we found that performance in all three of these areas remained positive. However, we continue to watch the data closely, in view of the shifting macroeconomic conditions and a changing public policy environment.

1. Lending Activity

CDFI loan portfolios continued to grow through 9/30/20. As in our 6/30/20 analysis, the most dramatic growth in lending was among small business lenders. Small business lender portfolios grew on average 27.1% from 12/31/19 to 9/30/20. (This compares to a five-year compound annual growth rate through 12/31/19 of less than 10%.) This growth rate excludes Paycheck Protection Program (PPP) loans originated by CDFIs, which we track separately. For community facilities/commercial real estate lenders and housing development lenders, loan portfolio growth was more modest.

PPP loans originated by CDFIs continued to be a significant source of new loan volume. Business lenders in the Aeris database reported total PPP loans outstanding of $317.7 million as of 9/30/20, an increase from $206.9 million as of 6/30/20.

We did not observe a continuation of the trend observed at 6/30/20 of CDFIs leveraging up. This may be due in part to the sizable contributions made to CDFIs, which have helped grow their net assets. The philanthropist MacKenzie Scott made very large, unrestricted gifts, mostly in the fourth quarter, to 33 CDFIs. Twenty-nine of those were Aeris-rated or report to Aeris. Leverage ratios may decrease further still in 2021 due to the massive, $3 billion emergency allocation to the CDFI Fund in the federal COVID-19 economic relief bill.

CDFI loan portfolios continued to grow, with the most dramatic growth among small business lenders.

2. Portfolio Quality

Through 9/30/20, we have yet to see significant increases in delinquencies or charge-offs. Among small business lenders, government support is likely working to keep borrowers current on loan payments. However, we expect that, as many programs in the original CARES Act end, and as new programs face a combination of delays and more rigorous requirements, some borrowers may be left vulnerable. Deterioration of delinquency and charge-off performance may follow in the quarters ahead.

However, CDFIs appear to be prudently preparing for potential challenges to come. Except for housing lenders, CDFIs have increased their allowance for loan loss reserves. From 12/31/19 to 9/30/20, the average allowance among business lenders and community facilities/commercial real estate lenders increased by 1.2%, from 7.3% to 8.5%, and 1.3%, from 4.0% to 5.3%, respectively. Nearly 30% of small business lenders have set allowances for loan losses of over 10.0%. This trend is likely to continue.

3. Earnings

We analyzed revenue growth using data for the quarter ended 9/30/20. Across the board, CDFIs saw increases in contributed revenue—dramatically so among small business lenders, whose average contributed revenue increased more than 1.5x over 9/30/19. Notably, among community facilities/commercial real estate lenders, several larger CDFIs recorded significant year-over-year growth in contributed revenue. This was not experienced uniformly in the sector.

Small business lenders’ earned revenue also grew, averaging a 29.2% increase year-over-year. This is likely driven by loan fees from higher lending volumes and contracts addressing the crisis. Earned revenue was flat among housing and real estate lenders.

To sum up, CDFI loan funds continue to perform impressively, thanks to their prudent stewardship of capital, as well as the broad and growing support from corporate, philanthropic, government, and other sectors. Importantly, CDFI performance has been aided not only by the direct support they have received, but also by the public programs that support their borrowers. As always, these trends are subject to change, and we will continue to monitor performance in the coming quarters.

We are grateful to investors for their feedback on our first trends report and we invite them to continue to share thoughts and insights with us, such as observations of their own CDFI portfolios. Please let us know what you wish to see in future trend reports. We thank CDFIs for their timely reporting of quarterly data, which makes this analysis and report possible.