Aeris’ most recent industry data analysis found that CDFI loan funds’ Median Operating Surpluses have moderated through calendar year end (CYE) 2022, after reaching record levels during the pandemic, and as CDFIs reinvested surpluses in growing their human capital and capacity in 2022. Portfolio quality remained strong, despite the end of numerous public and private pandemic-related support for small businesses and other borrowers. CDFI loan funds emerged from the pandemic with strong capital and liquidity, positioning them well not only for a period of rising interest rates and economic uncertainty, but also to pursue capital opportunities from a new round of large government funding programs.

Here are financial highlights from the Aeris Explorer peer groups for community facility lenders (CFL), housing development lenders (HDL), and business and micro business lenders (BML).

EARNINGS

Median Surplus

Operating Surpluses for all primary lending sectors grew during the pandemic, reaching record highs in calendar year (CY) 2021. As of CYE 2022, surpluses had decreased, yet remained higher than pre-pandemic levels.

Median Contributed Revenue

Median Earned Revenue

Both Median Contributed Revenue and Median Earned Revenue grew during the pandemic, peaking in CY 2021. Relief programs from public and private sources served as major drivers of CDFI revenue growth during the pandemic years. In CY 2022, growth in Median Contributed Revenue and Median Earned Revenue flattened but did not decrease significantly enough to account for the more significant decrease in Median Surplus in CY 2022.

Median Operating Expenses

Median FTEs

Median Operating Expenses increased post-pandemic, bringing down the extraordinarily high median surplus for all primary lending types in the previous year. Personnel costs generally made up the largest component of CDFI loan funds’ Median Operating Expenses. The correlation between an increase in Median Full-Time Equivalent Employees (FTEs) and Median Operating Expenses suggests that CDFIs used surpluses to build capacity in CY 2022.

PORTFOLIO QUALITY

Portfolio Quality Median Metrics

Previous Aeris CDFI Loan Fund Trends Reports discussed the pandemic-era trend of CDFIs, especially those in the BML sector, increasing their Allowance for Loan Losses (ALL) in anticipation of weakening portfolios. However, portfolio quality did not ultimately decline to the extent anticipated. By CYE 2022, ALL levels had moved closer to historical norms and portfolio performance indicators remained strong, despite the end of many federal, state, and local government support programs that had sustained small businesses and low-income renters during the pandemic. Although CDFI borrowers continue to face myriad economic challenges, these have not yet materially impacted portfolio performance as of CYE 2022.

CAPITAL AND LIQUIDITY

Capital and Liquidity Medians

Median Total Assets for all three peer groups continued to grow through CYE 2022. CDFIs in the CFL peer group include some of the largest CDFIs by Median Total Assets, followed by HDL and then BML. As reported in the Aeris CDFI Loan Funds Trends Report for December 31, 2021, growth in Total Assets of the largest CDFIs has in recent years outpaced that of smaller CDFIs. This trend of larger CDFIs separating themselves from their peers in terms of Total Assets growth continued through CYE 2022.

Public and private support helped CDFIs emerge from the pandemic with stable and strong capital structures, as reflected in CDFIs’ median Unrestricted Net Assets and Leverage ratios. More than ample on-balance-sheet resources available for lending is reflected in CDFIs’ lower-than-historical Deployment levels at CYE 2022. It is typical for there to be a lag in making new loans after major infusions of capital in CDFIs. However, Deployment is also actively managed and CDFIs may choose to maintain higher liquidity as a prudent measure to contend with ongoing uncertainty in the macroeconomic environment, including inflation and rising interest rates.

CDFIs’ strong capital and high liquidity make them well-positioned to manage interest rate pressures. Also, CDFIs are insulated from rising interest rates by the variety of their debt sources with differing interest rate sensitivity, as discussed in the January 2023 Aeris CDFI Loan Funds Trends Report. At CYE 2022, Average Interest Rates for debt appear to be holding relative to historical rates. Aeris will be monitoring CDFIs’ Average Interest Rates closely to see if and how much CDFIs’ cost of debt increases, and how CDFIs respond, given their borrowers’ constraints and CDFIs’ own missions. For example, Aeris has observed through our ratings work several CDFIs raising grants to buy down interest rates for borrowers.

In 2023, the public sector is rolling out significant new capital programs for CDFIs that have the potential to significantly impact CDFI balance sheets and lending activity in the short- and medium term. These include the CDFI Fund’s $1.73 billion Equitable Recovery Program, the U.S. Treasury’s $10.0 billion State Small Business Credit Initiative (SSBCI), and the EPA’s Greenhouse Gas Reduction Fund, which includes an $8.0 billion carve-out for financing clean energy projects in underserved communities. However, these programs do not necessarily lessen the need for CDFIs to continue to raise grants and flexible debt to creatively address future challenges and goals, especially as some of these programs will require the creation of new products and strategies.

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