CDFI Loan Funds Financial Performance: Back to the Future
CDFI Loan Funds Financial Performance: Back to the Future
CDFI Loan Funds Trends Report for Q2 2023
As of June 30, 2023, CDFI loan funds lending activity and portfolio performance returned to pre-pandemic levels. Median loan portfolios, (excluding Paycheck Protection Program [PPP] loans), which had flattened or decreased during the pandemic, once again showed growth, and as CDFIs began investing their debt and net asset resources more fully, deployment ratios rose.
The success of government and private sector aid in supporting CDFI loan funds during the pandemic is visible in a number of ways. Net assets increased with unprecedented grant funding and new earned revenue contracts, and net asset ratios at the end of the pandemic exceeded levels at the onset of the crisis. Portfolio performance strengthened during the pandemic supported by emergency aid; as these tapered off, delinquencies returned to pre-pandemic levels. Recognizing that such aid may mask weaknesses, CDFI loan funds maintained large precautionary allowances for loan losses during the pandemic, and lowered them in FY 2022. Average interest rates, lower than historical norms during the pandemic, increased as pandemic-era debt was repaid. CDFI loan funds have traditionally been able to manage cost of debt within a narrow band due to the diversity in their sources of debt, including those less sensitive to market rates. It is too early to know if average interest rates will increase above historical norms given the currently high market rates.
Financial highlights follow for our three largest loan fund peer groups: community facility and commercial real estate development lenders (CF), housing development lenders (HDL), and small business & micro business lenders (Bus).
Note: For clarity, in the graphs that follow, we have added vertical markers at CYE 2019 and CYE 2021 to highlight the core pandemic period, although the effects of the pandemic had not completely subsided at the end of CY 2021.)
Portfolio growth trajectories flattened or decreased during the pandemic for Bus and CF lenders. As the graph shows, Bus and CF lender portfolios were more sensitive to market changes brought on by the pandemic. Early in the pandemic, some Bus lenders made loans to help stabilize businesses before the Paycheck Protection Program became more widely accessible, but then the median portfolio size flattened. For HDL and CF real estate lenders, projects that were in development continued to progress, delaying the pandemic’s effect on portfolio growth. In addition, the robust infrastructure for affordable housing development, such as the Low Income Housing Tax Credit, seemed to have somewhat sustained HDL portfolio growth, relative to the other peer groups. Finally, real estate lenders are able to grow the size of their portfolios more quickly, as evidenced by pre-pandemic growth rates, given their much larger average loan size and a mix of products that can include permanent mortgages. In contrast, small business lenders typically extend smaller loans with shorter terms and tend not to offer longer-term products.
While CDFI loan fund’s lending may have slowed, support during the pandemic in the form of public and private grants and debt was strong. In addition, many CDFI loan funds prudently increased their liquidity. This combination led to conservative deployment levels persisting into early CY 2022, when CDFIs once again began ramping up loan production. HDL and CF deployment levels were at pre-pandemic levels by June 30, 2023, with Bus lenders close behind.
Net Asset Ratio
During the pandemic, CDFIs gained recognition as an effective channel to assist small businesses and marginalized communities. CDFIs obtained new contracts to execute public programs, including those CDFIs that became PPP lenders, boosting earned revenue and surpluses. Strong grant support increased restricted net assets for targeted programs and operating surpluses, which further grew net assets. As a result, most CDFI loan funds came out of the pandemic with stronger capital structures, most significantly the Bus lending group. CDFI loan funds now have the choice of increasing their leverage or not, depending on loan demand, the attractiveness of debt terms, and their perceptions of the strength of the economy.
>90 Day Delinquency
Prior to the pandemic, portfolio delinquencies (both>90 days and >30 days) of all three CDFI loan fund peer groups fluctuated within relatively narrow and low ranges. During the pandemic, portfolio performance strengthened due to public and private support, provided to CDFIs (who provided loan deferments and restructures), to CDFIs’ borrowers (such as small businesses), to CDFI borrowers’ customers (such as affordable housing renters).
Post pandemic, delinquencies began returning to pre-pandemic levels — still very low — but they may continue to rise if the economy enters a recession. Although small business portfolios are the most sensitive to economic conditions, real estate portfolios are not immune. HDL portfolios are affected by the financial health of low-income renters; CF lending includes both community facilities (which are supported by a complex mix of public and private revenues) as well as commercial real estate, which is sensitive to market pressures.
Allowance for Loan Losses
Despite strong portfolio performance during the pandemic, CDFI loan funds were conservative and increased their Allowances for Loan Losses (ALLs), understanding that the public and private support they received could help mask underlying weakness. At June 30, 2023, ALLs returned to pre-pandemic levels but remained significantly above the levels of delinquencies. Historically, ALLs have been more than adequate to cover losses. However, losses are often recorded at the end of the year, so mid-year numbers are not an accurate indicator.
Aeris will be covering loan losses in our 2023 CYE trends analysis.
Average Cost of Debt
Both low market rates and mission-motivated debt resulted in lower than historical cost of debt for CDFI loan funds during the pandemic. Repayment of pandemic-era borrowings has led to a higher cost of debt, closer to historical norms.
As reported in the Trends Analysis released in January 2023 (see Aeris website, “Resources”), CDFI loan funds have diverse sources of debt with different sensitivities to market rates, and historically have been able to manage overall cost of debt within a stable and narrow band. Real estate lenders have business models that enable them to absorb higher cost debt. Bus lenders typically have higher costs for core lending and technical assistance activities, and less ability to take on higher rate debt. They have consistently attracted and operated with a lower cost of debt relative to real estate lenders. It is too early to know if CDFI loan funds’ average cost of debt will increase above historical norms given currently high market rates.
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.