CDFI Loan Funds continue to be a stable force for community development impacts during economic uncertainty.

CDFI Loan Funds Trends Report for December 31, 2023

As of December 31, 2023, CDFI loan funds (CDFIs) continue to grow and perform despite high market interest rates and an uncertain and turbulent economy, while the effects of the pandemic and the attendant emergency public and private support during that period fade into the past.

Key performance indicators at year end 2023 indicate that CDFIs appear well-positioned to grow and to continue providing capital and services in pursuit of mission, even though they and their borrowers are facing new challenges.

In this Trends Report, Aeris examines the growth, strength, and potential of the three largest CDFI peer groups, based on data as of December 31, 2023. The three groups, determined by primary lending activity, are:

  • Small Business and Micro Lenders (“Bus”, 73 organizations are in this group);
  • Community Facility and Commercial Real Estate Development Lenders (“CF”, 20 organizations are in this group); and
  • Housing Development Lenders (“HDL”, 20 organizations are in this group).

It should be noted that many CDFIs engage in more than one type of lending activity.

The graphs in this report show data at calendar year-ends (CYEs) for statement of position metrics and fiscal year-ends (FYEs) for statement of activity metrics, covering the period 2014 through 2023. The height of the pandemic period from the beginning of CY 2020 to the end of CY 2021 is delineated in the graphs, although the effects of the pandemic did not totally end after that period.

GROWTH

Core Loan Portfolios*

image of core portfolio graph

*Core loan portfolios exclude loans made under the Paycheck Protection Program during the pandemic years.

Core loan portfolios of CDFIs in all three peer groups have grown since the pandemic.

Bus group:

  • The median growth line for Bus group portfolios appears to be less steep because the median size of the Bus group portfolios is smaller than those of the other groups. In fact, in percentage terms, the median grew by 32% in CY 2022 and 22% in CY 2023.Bus portfolios in the data set totaled $2.7 billion at CYE 2023.
  • Although the median portfolio size of the Bus group was only 26% and 21% of the median portfolio sizes of the CF and the HDL groups respectively, the total portfolio dollars of the Bus group ($2.7 billion) was actually 64% and 57% of the CF and HDL portfolio totals respectively. With 73 CDFIs in the Bus group, there is significant capacity for additional investments and portfolio growth.

CF group:

  • The median portfolio for the CF group decreased in size in both CY 2021 and CY 2022 but grew a robust 33% in CY 2023. CF portfolios in the data set totaled $4.2 billion at CYE 2023.

HDL group:

  • The medium portfolio size of the HDL peer group is the largest of the three and grew by 9% in CY 2022 and 26% in CY 2023. HDL portfolios in the data set totaled $4.7 billion in the data set at CYE 2023.

Earned Revenue*

image of earned revenue graph

* To ensure comparability for a full operating year, this graph uses data for the fiscal year (FY). The majority of the CDFIs in each group of the data set have a fiscal year end of December 31st. However, a significant percentage have different FYEs: Bus 38%, CF 35%, and HDL 48%.

The median earned revenue dollars is another clear indicator of CDFI growth post pandemic. Part of the growth in FY 2023 is due to growing loan portfolios. However, as reported in the Aeris Trend Report released in December 2023, CDFIs have diverse earning sources besides loan interest and fees. The earned revenues graph includes revenue generated from lending as well as other activities such as technical assistance and consulting contracts, New Market Tax Credit syndication and management, and real estate development.

During the pandemic, many CDFIs were able grow earned revenue by executing private philanthropic and government programs, the largest being the Payment Protection Program, which addressed the crisis. Earned revenue levels in FY 2022 reflected the loss of these type of contracts, although CDFIs had broadened and strengthened their relationships and reputation as effective partners. In FY 2022, the median earned revenue for Bus and CF groups decreased 3% and 6%, respectively, while that for the HDL group increased modestly by 4%. In FY 2023, median earned revenue again showed meaningful year- over-year growth: 27% for the Bus peer group, 21% for the CF peer group, and 14% for the HDL peer group.

STRENGTH

Growth is not necessarily an indication of financial strength. To understand CDFIs’ current strength, we examined critical measures of profitability, capital structure, and asset quality.

Operating Surplus*

image of operating surplus graph

* To ensure comparability for a full operating year, this graph uses data for the fiscal year (FY).The majority of the CDFIs in each group of the data set have a fiscal year end of December 31st. However, a significant percentage have different FYEs: Bus 38%, CF 35%, and HDL 48%.

Operating surpluses reached historic peaks in FY 2021, due both to increased earned revenue and private philanthropic support related to the pandemic. While operating surpluses have decreased for all three peer groups for FY 2023, they also remained above pre-pandemic levels for all three peer groups.

Capital Structure

capital structure table

CDFIs in the Bus group historically have had higher median unrestricted net asset (UNA) and total net asset (NA) ratios, which is prudent given 1) their smaller asset size, 2) greater dependence on contributed revenue, and 3) higher-risk portfolios relative to the CF and HDL peer groups. This trend continued during and post pandemic. All peer groups were able to further strengthen their UNA and NA positions with the extraordinary surpluses, due to the high levels of both earned and contributed revenues experienced during the pandemic. Post pandemic, CDFIs have maintained or built on this strength, and have room to further leverage their balance sheets with additional debt and maintain net asset ratios above CYE 2019 pre-pandemic levels.

Asset Quality

asset quality table

CDFIs’ borrowers were provided supports during the pandemic through restructuring and/or with resources such as the SBA’s program to pay debt on behalf of borrowers for a set period. These supports have ended and delinquency performance for the CF and HDL portfolios are near pre-pandemic levels. Bus group portfolios delinquency performance has weakened to below, but within 1.0% of, pre-pandemic levels. Although a small degree of deterioration, this may be an indication of challenges in the current environment and is an indicator worth monitoring.

Gross Charge-Offs

image of gross charge offs graph

Gross charge-off ratios (a lagging indicator), for the portfolios of CF and HDL groups in the bottom quartile, were well below 1.0% for the entire review period, reflecting the asset quality strength in these groups. The median charge-off ratios for portfolios of the Bus peer group have also been near or below 1.0% for the review period. However, charge-off ratios for the portfolios of Bus groups in the bottom quartile have been higher and more variable, ranging between 1.6% at CYE 2021 and 3.7% at CYE 2017, and was 2.1% at CYE 2023 — not necessarily indicating a declining trend given the variability. Regardless of whether these measures are at the beginning of a weakening trend for the portfolios of Bus CDFIs, their capital structures have the ability to absorb some portfolio deterioration.

POTENTIAL

Deployment Ratios*

image deployment ratios graph

*Calculated as loans outstanding/financing funds.

Prior to the pandemic, median deployment ratios for all three peer groups were relatively stable — 80% for CF, 70% climbing to 80% for HDL, and 70% for Bus. Lower deployment ratios (inversely related to higher on-balance-sheet liquidity) for the Bus peer group was prudent given 1) their smaller asset size, 2) greater dependence on contributed revenue, and 3) higher-risk portfolios relative to the CF and HDL peer groups; this rationale is similar to that for higher net asset ratios for this peer group.

In the normal course of business, there can be a lag between large capital grants or debt infusions and the deployment of that capital into loans. But as the timing of new grants and debt is spread over time among multiple CDFIs, there is not a pattern that consolidates into a peer group trend.

During the pandemic, an extraordinary amount of capital was infused into the CDFI system in a very short period of time, and a lower deployment ratio manifested itself in the median deployment ratios for the Bus and HDL groups (see graph). This raised a concern that CDFIs may not be able to put their significant newly-garnered financial resources to work in good time. However, as shown previously in this report, loan portfolio growth continues to be steady and the industry is ‘catching up’ with its increased capital. All peer groups are reaching pre-pandemic deployment ratios at CYE 2023 and future growth will require new capital.

Interest Expense

image of interest expense graph

Median cost of debt has been remarkably stable for all peer groups— median cost of debt for CF and HDL peer groups hovered around 2.5%, and that for the Bus peer group hovered around 2.0%. The cost of debt band between top and bottom quartiles for all peer groups is also remarkably narrow— over the review period, the average band between the top and bottom quartiles was 1.2% for the Bus peer group, 1.1% for the CF peer group, and 1.0% for the HDL peer group.

 How have CDFIs been able to achieve this consistent cost of debt? As reported in the Aeris Trend Report released in January 2023, CDFI loan funds have diverse sources of debt with different sensitivities to market rates, which has enabled CDFIs to manage overall cost of debt historically within a stable and narrow band. Real estate lenders have business models that enable them to absorb a higher cost debt. Business lenders, who rely on subsidies to help cover their core lending and technical assistance activities, with less ability to take on higher rate debt, have been able to consistently operate with a lower cost of debt relative to real estate lenders.

While it does appear that the high interest rate market is beginning to push median rates near historic high levels at CYE 2023, the diversity of CDFI debt sources should continue to help control increases in cost of debt.

CONCLUSION

CDFI performance and positions are stable and remain strong through CYE 2023. This should not be taken for granted but is a reflection of skilled leadership and a maturing industry, with strong and growing public and private sectors interest and support. The announcement in April 2024 of Inflation Reduction Act Greenhouse Gas Reduction Fund awardees, which include many CDFIs and coalitions with CDFIs, is an example of public support. While CDFIs will continue to pursue their own missions, the awardees will be stewards of a new and significant resource for community development. Its impact on CDFIs will be important to monitor and understand as funds are further invested in late 2024 and 2025.

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.

Contact Us

Share This Story