As of September 30, 2024, Small Business and Micro Lenders and Housing Development Lenders, the two largest peer groups in Aeris’ analysis, show deployment of their financing funds near the top of their historical ranges, reflecting pressure to build more lending capacity. At the same time, both peer groups have historically high unrestricted net asset ratios, showing the ability to leverage balance sheets with more debt. In the face of coming uncertainty and change, CDFIs have critical decisions to make about how to pursue their missions while continuing to be responsible financial stewards. 

In this Report, Aeris examines the performance of the three largest CDFI peer groups to understand financial trends through September 2024. Since then, two major factors have begun to affect the field, bringing significant uncertainty:

• The new federal Administration is beginning to roll out changes in government to align with its priorities. It is unclear if federal programs and policies that support CDFIs and CDFI borrowers will be affected, and if so in what ways. The CDFI Fund of the US Department of the Treasury, the US Department of Agriculture, the US Department of Education, the US Department of Housing and Urban Development, and the Small Business Administration all have programs and policies that CDFIs and their borrowers utilize to serve their communities. Changes to these, as well as to the Community Reinvestment Act, could affect new capital availability, operating revenues and portfolio quality.

• Greenhouse Gas Reduction Funds (GGRF) awards were announced in August 2024 and received by intermediary awardees for the National Clean Investment Fund ($14 billion) and the Clean Communities Investment Accelerator ($6 billion) before the end of the year. Significant restricted grant and debt capital is expected to begin flowing to CDFIs in 2025. (The third major program under the GGRF, Solar for All [$7 billion], was not disbursed prior to year end and is now frozen. This program had the lowest level of participation by CDFI loan funds.)

It is too soon to know how CDFIs and their partners in the private sector will respond to the challenges and opportunities ahead, but based on the September 2024 data, CDFIs are poised—or even pressed—to build additional lending capacity to further their missions.

For this analysis, we excluded a few CDFIs that had not yet submitted data for Q3 2024, to eliminate distortions in the median and quartile results. The three peer groups, determined by primary lending activity, are:

• Small Business and Micro Lenders, “BML”– 66 CDFIs with total assets of $4.3 billion; portfolio data from 61 CDFIs;
• Housing Development Lenders, “HDL” – 37 CDFIs with total assets of $8.0 billion;
• Community Facility and Commercial Real Estate Development Lenders, “CFL” –19 CDFIs with total assets of $7.2 billion.

Please note that many CDFIs engage in more than one type of lending activity as well as other lines of business.

The graphs in this report show data at calendar year-ends (CYEs) for 2017 through 2023 and then calendar Q3 2024 for most metrics; FY data is shown for activity-related data (e.g. self-sufficiency and gross charge-offs). The height of the pandemic period from CYE 2019 to CYE 2021 is delineated in the graphs, although the effects of the pandemic did not completely end after that period.

LENDING CAPACITY

Deployment: Loans/(Net Assets + Debt for Financing), Median

Deployment is a simple measure of capital liquidity, calculated using on-balance-sheet data. CDFIs use a variety of tools to manage capital liquidity, such as debt with draws, lines of credit, and selling loans and loan participations, none of which is captured in the simple deployment calculation. Nonetheless, deployment is a relevant measure to assess the field’s relative liquidity over time.

Many CDFIs experienced both record high grants and earned revenue during the pandemic period, boosting their on-balance-sheet lending capacity and decreasing deployment. Lending focus also shifted to pandemic support loans (such as the Paycheck Protection Program) while new core loans production slowed and CDFIs focused more on managing their portfolios.

With the end of the pandemic, lending began to grow, and on-balance-sheet deployment increased for the HDL and BML groups. By Q3 2024, deployment had reached near the high of historical ranges for these peer groups, roughly 80% and 70%, respectively. The elevated deployment ratios reflect a potential need for additional capital.

Deployment did not increase for the CFL peer group, the smallest of the three peer groups with 19 CDFIs. Eleven of those (nearly 60%), received very large grants from Yield Giving in 2024, boosting resources and decreasing deployment. Yield Giving grants also benefitted CDFIs in other peer groups, but at a lower percentage of the group and with less impact on the peer groups’ deployment levels.

Core Loan Portfolios*, Median

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

 The core loan portfolios of CDFIs in all three peer groups grew post-pandemic and continued to grow in calendar year 2024 at a robust rate. 2024 median growth appears somewhat flatter as the data covers only three operating quarters while previous periods represent a full year. If growth continues at the same pace, the median annualized portfolio growth in 2024 for the HDL, CFL and BML peer groups would be roughly 28%, 32%, and 25%, respectively.

CAPITAL STRUCTURE: POSITIONED TO LEVERAGE

Unrestricted Net Asset Ratio: UNA/Total Assets, Median

CDFIs in the BML peer group were able to significantly increase their UNA ratios during the pandemic, building on private and government support for small businesses. The BML peer group maintained a higher median UNA than historical norms which had hovered around 30%; the median UNA ratio at Q3 2024 was a robust 36.7%. The HDL peer group also increased its median UNA ratio moving from a pre-pandemic 25% norm to post-pandemic median near 30%. In contrast, the CFL peer group’s UNA ratio was relatively flat, hovering around 25% throughout the review period.

The BML group has the strongest UNA ratios. However, the leverage ratios for the BML and HDL groups are similar because the HDL group has larger donor restricted net assets, which is included in the leverage calculation.

Leverage: Total Debt/Net Assets, Median

Please note the leverage ratio is based on total net assets, which includes donor restricted net assets for both lending and program expenses.

APPETITE FOR DEBT

Average Cost of Debt: Interest Expense/Average Total Debt, Median

While the BML and HDL peer groups, as well as individual CDFIs in the CFL peer group, appear to have both the need and capacity to take on more debt, the higher interest rate environment has potentially curbed demand. Through Q3 2024, despite rising commercial interest rates, median cost of debt for the BML and HDL peer groups has been relatively stable, reflecting CDFIs’ mixed sources of debt, including mission-driven debt that is less sensitive to market pressure.

Average Net Interest Margin*, Median

*Includes interest revenue from PPP loans and interest expense related to facilities for PPP lending.

Self-Sufficiency: Earned Revenue/Total Expenses, Median

To understand CDFIs’ sensitivity to the cost of debt, it is important to recognize the differences in business models between the BML and the real estate peer groups.

The BML peer group has the highest average net interest margin (“NIM”). This group has more flexibility in loan pricing and can better pass interest costs on to the borrower. However, with a higher net interest margin, BML groups have a much lower self-sufficiency ratio because their lending costs relative to loan sizes, with the essential and inherent provision of technical assistance, are much higher. This makes low-cost debt and flexible mission-driven lending partners critical for their business models.

Real estate projects supported by the CFL and HDL peer groups, often have tight budgets with required subsidies and limited competitive sources for those subsidies, leaving little room for CDFIs to increase pricing. These peer groups have historically operated with median NIMs of 3.0% or less. At the same time, real estate peer groups have higher self-sufficiency ratios, and their typically larger asset sizes [1] drive sourcing for larger capital infusions. For many of these CDFIs, this translates to a greater reliance on bank partners, the CDFI Bond Guarantee Program, and, for some, capital market bonds, all sources that are sensitive to commercial interest rates. Both peer groups have historically operated at a higher cost of debt relative to the BML peer group. As expressed by some of the real estate CDFI leaders, “the higher priced debt is worth the trade-off of larger debt facilities that are more efficient to raise and manage.”

[1] Median total assets for peer groups at Q3 2024 were as follows: BML – $40.1 million, HDL – $137.6 million, and CFL – $241.3 million

A DEEPER DIVE INTO PORTFOLIO PERFORMANCE, BOTTOM QUARTILE

Finally, to complete this analysis on CDFI financial strength at Q3 2024, we examined multiple portfolio performance metrics, focusing on the bottom quartiles of each of the three peer groups to gain a more thorough and conservative perspective.

All three peer groups had elevated allowances for loan or credit losses (“ALL/ACL”) during the pandemic, given the period’s economic uncertainty. By Q3 2024, the top quartile data for ALL/ACL normalized to pre-pandemic levels, with some peer groups falling below those levels. The implementation of the “current expected credit losses” (CECL) accounting standard had a minor effect on the top quartile ALL/ACL levels. The CECL methodology is based on an analysis of historical loan losses (which are usually significantly lower than allowances, as shown in the graphs) and takes into account environmental factors. At the individual CDFI level, Aeris has seen both increases and decreases in the allowance based on CECL, but on balance, as reflected in the relatively flat ALL/ACL for the top quartiles at Q3 2024 for all peer groups, changes have not been significant.

Bottom quartile delinquencies and charge-offs are near historical norms for all three peer groups except for > 30-day delinquencies for the BML peer group. This may be an early indicator of portfolio challenges for this lending sector. Some portfolios of individual CDFIs in the peer group have clearly weakened and have increased the bottom quartile metric —of the 61 CDFIs in the peer group at Q3 2024, 11 had > 30-day delinquencies over 10%, compared with five and six CDFIs at FYE 2023 and FYE 2022, respectively.

BML, Portfolio Performance Metrics, Bottom Quartile

HDL, Portfolio Performance Metrics, Bottom Quartile

CFL, Portfolio Performance Metrics, Bottom Quartile