We are pleased to provide this fifth quarterly update in the Aeris CDFI loan funds trends report series, which we launched in 2020 to help the field track CDFI financial strength and performance during the COVID crisis. The analysis that follows is based on the standardized quarterly performance data in the Aeris Explorer CDFI peer analytic tool, using sector median measurements.

Readers of this series may recall that we observed a declining deployment ratio among small business lenders for the two quarters analyzed most recently (Q4 2020 and Q1 2021). For some, this raised questions about the sector’s ability to deploy the unprecedented amount of COVID recovery resources it had attracted. In a reversal of that trend, small business lenders’ deployment at 6/30/21 had returned to historic levels. This may alleviate some of the concerns raised previously about deployment. The increased deployment is especially noteworthy in the context of continued growth in small business lenders’ total assets.

As did small business lenders, CDFI housing development lenders and community facilities/commercial real estate lenders maintained strong portfolio performance, total asset growth, and loan portfolios. These have been hallmarks of CDFI performance throughout the COVID era, and the trend continued through 6/30/21.

Despite this strong performance, one should not discount the significant challenges that CDFIs and the communities they serve continue to face. Government support for small businesses, the unemployed, and renters are being phased out, despite an uneven economic reopening due to the Delta variant surge. These factors may yet weaken portfolios but if, when, and how much remains difficult to predict.

Lending Activity

Historically, Aeris has observed that CDFIs in capital-raising mode can present “lumpy” deployment trends. The phenomenon was especially evident in 2020-2021, thanks in part to the unprecedented levels of support for the CDFI field in general, and in particular for small business lender CDFIs. In addition, some small business lenders have commented that some small businesses were hesitant to take on additional debt during COVID, and that there were often grant programs from city, state, or philanthropic sources to help meet small business’ capital needs.

As noted above, small business lenders saw deployment ratios decline to 64.4% as of 12/31/20, and further still to 63.2% at 3/31/21. This raised questions for some about the ability of CDFI small business lenders to deploy capital commensurate with the levels at which capital was being attracted. This trend appears to be reversing through Q2 2021, when deployment at 6/30/21 had returned to historic levels of approximately 70%.

In addition, 23 of 49 (47%) of CDFI small business lenders in the dataset reported that they had provided PPP loans. These loans totaled $745.5 million at 6/30/21, representing 95.1% of total PPP loans in the dataset across all three sectors.

Portfolio size for community facilities/commercial real estate lenders and housing development lenders grew 25.3% and 24.5%, respectively, between 12/31/19 and 6/30/21.

Portfolio Quality

In another positive trend, small business loan portfolio delinquencies continued to decrease through 6/30/21. Ninety-day delinquencies decreased from 1.6% at 12/31/19 to 0.7% at 6/30/21. However, despite this strong portfolio performance, small business lenders continue to maintain above-normal allowances for loan loss reserves in anticipation of future challenges. At 8.0%, small business lenders’ allowance for loan losses remains well above the historic level of 6.0%.

Portfolio performance among housing development lenders and community facilities/commercial real estate lenders continued to track historic norms. As of 6/30/21, 90-day delinquencies were below 1.0% for both lending types. Housing development lenders were maintaining an allowance for loan losses of 4.1%. This is consistent with pre-COVID times when allowances for loan losses typically ranged between 4.0% to 5.0%. Community facilities/commercial real estate lenders’ allowance for loan losses remain slightly higher than pre-COVID when loan loss allowances were below 4.0%.

Growth

Small business CDFIs experienced the largest percentage increase in total assets of all lender types, with an increase of 51.9% since 12/31/19. During this period, many small business lenders were able to access new resources to provide PPP loans and other emergency loan and grant programs. Since 12/31/19, community facilities/commercial real estate and housing development lenders grew total assets by 36.7% and 22.5%, respectively. However, as small business lenders are the smallest sector by asset size, housing development lenders and community facilities/commercial real estate lenders grew more when measured in dollars. As of 6/30/21 the unrestricted net asset ratios for small business, community facilities/commercial real estate, and housing development lenders stood at 29.6%, 28.4%, and 23.1%, respectively.

This is the fifth in a series of CDFI trend reports tracking CDFI performance during the COVID pandemic. Reports for Q1 2021, Q4 2020, Q3 2020, and Q2 2020 are also available.