In its last two CDFI loan funds trends reports, Aeris examined (i) the higher growth trends for larger CDFIs and (ii) the successful operating model of CDFIs engaged in primarily small- and micro-business lending. For this trends report, we analyze overall industry performance through June 30, 2022 for the three largest loan fund peer groups: community facility and commercial real estate lenders (CFCRL), housing development lenders (HDL), and small- and micro-business lenders (BML). While growth has flattened relative to the rapid growth that was seen in 2020-2021—which was driven primarily by pandemic-related support—capital structures and liquidity generally are stronger than pre-pandemic. Capital and liquidity strength were essential as CDFIs weathered the unknowns of the pandemic and remain so as CDFIs face an economy with both high inflation and labor shortages. Portfolio performance metrics were strong through the pandemic and remain relatively strong in 2022. Earnings also appear to be holding.

Growth and Capitalization

Figure I – Median Total Assets

Figure II – Median % Growth – Total Assets

*CAGR = compound annual growth rate

Capital growth for most CDFIs slowed or decreased somewhat in comparison with calendar years 2020 and 2021, especially for the BML peer group. The unprecedented public and private support provided to CDFIs related to the pandemic, including PPP lending, has played its course and new programs are yet to be initiated, although some significant federal commitments to CDFIs were recently announced.

Figure III – Median Unrestricted Net Asset and Leverage Ratios

* Leverage = Debt / Net Assets (including Net Assets with Donor Restrictions)

All sectors generally maintained or strengthened their unrestricted net asset ratios and maintained or decreased their leverage through Q2 2022 relative to pre-pandemic metrics. Consistent with historical trends, the BML sector maintained the strongest capital ratios of the three groups, as is prudent given the BML sector’s generally smaller size and higher risk portfolios.

Portfolio Size and Quality

Figure IV – Median Loans Outstanding

Figure V – Median % Loan Growth

Portfolio growth patterns differed for each sector. As usual, this is influenced by the characteristics and dynamics impacting each primary lending type. The following insights draw on individual Aeris analyses, conversations with CDFI management, and general observations.

• CFCRL portfolios grew early in the pandemic but then slowed or flattened, and then shrank. Community facilities developers use a wide variety of government subsidies and private philanthropy for facilities development and to run the social service programs they house. Commercial real estate development depends on a healthy commercial rental market. The pandemic uncertainty affected these groups in different ways, but generally increased risks for community facility- and commercial real estate developers and lowered demand for CFCRL debt. Recent widespread supply chain disruptions and labor shortages may further challenge these developers.
• HDL portfolios grew significantly during the pandemic but more recently contracted slightly. The affordable housing sector has a robust and established infrastructure that supports both development and low-income renters , which helps insulate developers from some economic headwinds. However, as with the CFCRL group, housing development lenders may yet face supply chain disruption and labor shortage challenges.
• BML lenders shifted their focus during the pandemic from normal portfolio growth to borrower support, with many administering a combination of federal government, local government, and philanthropic programs to support small businesses. Roughly half of the BML CDFIs in the Aeris peer group participated in the PPP loan program. (PPP loans are excluded from core portfolios reported in Figures IV, V, and VI.) Participation peaked as of Q2 2021, with more than $770 million PPP loans outstanding. While the median loan portfolio shrank in CY 2021, it has begun to grow again.

Figure VI – Median Portfolio Performance

>90 days = >90 days past due as percentage of portfolio; ALL = Allowance for loan losses as percentage of outstandings; W/O – write offs as percentage of portfolio
*Write-offs for Q2 2022 are not presented since generally write off decisions peak at year end and Q2 amounts would not be comparable.

CDFI loan performance historically has held up well during difficult economic times, as evidenced by CDFI performance during the Great Recession of 2007-2009. While opinions may differ on whether the pandemic is “over,” the U.S. economy has entered a new phase. CYE 2019 performance metrics for all CDFI sectors reflected healthy portfolios, as have subsequent metrics. While the pandemic hit small businesses hard and BML CDFIs increased their ALLs in anticipation of write-offs, portfolio metrics held, thanks in part to the support of myriad public and private emergency programs. That support has mostly ended or is winding down in 2022, yet >90-day delinquency levels are still within historical norms and ALLs appear conservative relative to delinquencies and write-offs. Portfolio performance may still deteriorate in the quarters ahead, but that trend is not yet apparent as of June 30, 2022.

Deployment and Liquidity

Figure VII – Median Deployment* Ratios

*Deployment = Loans Outstanding/Total Financing Funds. The deployment ratio measures a CDFI’s timeliness and effectiveness in deploying capital into loans and investments that drive the creation of impact.

As CDFIs mature, they typically use more sophisticated tools to manage liquidity. CDFIs may structure debt with draws, obtain lines of credit for operations and to bridge debt, and sell whole loans and participations to augment liquidity when advantageous. Because of these growing practices, the simple deployment ratio does not capture the total picture of liquidity. Nor does it perfectly capture a CDFI’s loan demand or ability to deploy loans, which are also too complex for one simple metric. Nonetheless, the deployment ratio does reflect CDFI practices. From Aeris’ broader work in the industry, we can say that decreasing deployment ratios during the pandemic reflected both the deliberately prudent move by CDFIs to maintain higher on-balance-sheet liquidity, as well as the challenges in growing portfolios as the economy struggled.

Earnings

Figure VIII – Median Surpluses in $

*Q2 2022 amounts are shown here despite the lumpy nature of some types of earned revenue (e.g., NMTC transaction fees) and contributed revenue.

CDFIs experienced high levels of government and private support and achieved historic surpluses during the pandemic as they were recognized as effective partners in reaching vulnerable communities. While earnings may not continue at the same record levels, healthy surpluses at Q2 2022 are a promising indicator of continued post-pandemic support.

This is the ninth in a series of CDFI trend reports tracking CDFI performance during the Covid pandemic. Access the archive of Aeris CDFI loan fund trends reports.