When will CDFI portfolio deterioration come? Not yet. Maybe not in this economic cycle.
Portfolios continue to perform the same as or better than in previous periods; CDFIs continue to attract contributions and new investments.
Aeris collects and standardizes quarterly performance data on 145 CDFI loan funds. These data are made available through subscriptions to the Aeris Cloud database, which is used by CDFI investors, policymakers, and other stakeholders for analyzing CDFI loan fund performance. In 2020 Aeris began publishing quarterly analyses using the Aeris Explorer peer analytic tool. This is the fourth quarterly report that we have published in this series to help investors track CDFI performance during COVID.
For more than a year, we have been closely watching CDFI portfolio performance for signs of distress. As of 3/31/2021, most CDFI loan funds in the Aeris analysis have yet to experience significant portfolio deterioration. In many cases, portfolio quality has improved over 12/31/2019, the final quarter before the pandemic. While it is too soon to conclude that CDFI loan portfolios have emerged unscathed from the crisis, to date, portfolios have continued to perform within historic norms. Aeris continues to monitor these data closely for changes.
It will likely come as no surprise to those in the CDFI field that the Aeris dataset reveals rapid and significant growth among CDFI loan funds since 2019. A June 2021 ceremony at the White House announcing the initial release of $1.25 billion in new grants from the U.S. Treasury to CDFIs encapsulates both the unprecedented attention and resources that CDFIs continue to attract. These CDFI Rapid Response Program grants from the CDFI Fund will be reflected in the Q2 or Q3 data set. Even prior to the distribution of this historic large federal program, CDFIs in the Aeris analysis grew total assets by $2.3 billion from 12/31/19 to 3/31/21. Average CDFI growth was $23.6 million but the range was very wide — from largest increases of more than $200 million to decreases of up to $19.3 million. Eighty-seven CDFIs of the 96 included in the dataset for this analysis had positive growth.
Loan deployment, as measured by loans outstanding as a percentage of financing resources, is more mixed. Deployment rates of housing development lenders and community facilities/commercial real estate lenders continued to fluctuate around 80.0%. Small business lenders’ deployment for their standard loans decreased from historical norms of around 70.0% to 63.2% at 3/31/21. The decrease is likely due to multiple factors: the highest proportional increase in assets, resources focused on providing PPP loans and other pandemic relief programs, and lower demand as businesses focused on survival rather than growth. In the quarters ahead, we will monitor with interest the rate at which CDFIs are able to deploy the billions of new dollars they have added to their balance sheets since 2019.
The analysis below is based on data collected through the quarter ended 3/31/21 and focuses on (i) portfolio quality, (ii) growth, and (iii) lending activity. We thank the CDFIs that voluntarily and promptly report quarterly data to Aeris, helping make these reports available to the industry.
For more than a year, CDFI watchers have wondered when CDFI portfolios would begin to show weakness due to recessionary economic conditions. To date, significant weakness is yet to materialize, as public and private pandemic-related support coupled with CDFI borrower programs and borrower resiliency appear to be effective, and as the U.S. economy moves towards a full reopening. It may be that significant portfolio deterioration never materializes, especially if the U.S. can avoid new COVID restrictions due to the so-called “Delta” coronavirus variant.
Overall, CDFI loan portfolios continue to perform better than or consistent with previous periods. The median 90-day delinquency for small business lenders was 1.2% as of 3/31/21, down from 1.7% at 12/31/19. Yet CDFI small business lenders remain prudently cautious, reserving higher-than-normal amounts of capital against potential future losses. At 8.4%, the median allowance for loan losses among small business lenders as of 3/31/21 had increased from 6.3% as of 12/31/19.
Non-business lenders’ allowances for loan losses are consistent with previous years, and between 12/31/19 and 3/31/21 their 90-day delinquency rates have either remained flat (community facilities/commercial real estate lenders) or declined (housing development lenders).
CDFI loan funds continue to attract unprecedented attention, contributions, and access to new investments. While the $2.3 billion increase in total assets since 12/31/19 is historically significant, this growth has been measured to maintain capital strength. Median leverage and unrestricted net asset levels in all sectors remained within historically normal ranges. At 3/31/21, for small business lenders leverage and UNA percentage were 1.5 and 27.1% respectively; for community facilities/commercial real estate lenders these were 1.6 and 26.8%; and for housing development lenders, 1.4 and 22.3%.
The data show CDFIs continuing to grow loan portfolios and putting to work new resources, such as the federal Paycheck Protection Program (PPP). Median deployment for standard loan products among housing development lenders grew from 72.4% at 12/31/19 to 81.8% at 3/31/21. During the same period, median deployment among community facilities/commercial real estate lenders fell slightly, from 83.3% at 12/31/19 to 79.4% at 3/31/21. Deployment among small business lenders decreased slightly more—from 72.4% at 12/31/19 to 63.2% at 3/31/21. While small business lenders experienced the largest decrease in their standard loan deployment, they also have the greatest growth in PPP/forgivable loans, a testament to CDFIs’ role in delivering credit to communities that tend to be underserved by commercial lenders. Small business lender PPP/forgivable loans totaled $431.1 million at 3/31/21, or 92.4% of total PPP/forgivable loans in this Aeris analysis.
This is the fourth in a series of CDFI trend reports tracking CDFI performance during the COVID pandemic. Reports for Q4 2020, Q3 2020, and Q2 2020 are also available.
Are you an investor with questions about the performance of your own CDFI portfolio? We are eager to hear from you. Contact us if you would like to discuss your portfolio, ask questions, or hear more about what we are seeing through our CDFI ratings and data collection work. Are you a CDFI loan fund that would like to participate in our database? Let us know.
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