About ImpactPHL Perspectives:

ImpactPHL Perspectives is a multi-part content series that explores the many facets of the impact economy in Greater Philadelphia from the perspectives of its doers, movers, shakers, and agents of change. Each volume is written directly by a leader in this space to discuss best practices and share lessons learned while challenging our assumptions about financial and impact returns. For more thought leadership like this, check out the full catalog of ImpactPHL Perspectives.

Andrew Porter, Senior Consultant, Stepping Stone Partners

In September of 2022, the Department of Treasury provided $8.3 billion of COVID relief to CDFI and MDI banks through a program called the Emergency Capital Investment Program (“ECIP”). This program provided substantial equity-like awards ranging from $60-500 million to encourage these organizations to increase their financial services to low- and moderate-income, urban, rural, and minority communities. Some recipients are publicly traded, and these large cash infusions attracted the attention of some deep value-seeking investors. In this article, I will explain why this program presents a rare potential opportunity to earn high financial returns while investing in entities that are making a significant impact in their communities.

Let’s take a step back and answer a few questions

“The Emergency Capital Investment Program (“ECIP”) program provided substantial equity-like awards ranging from $60-500 million to encourage these organizations to increase their financial services to low- and moderate-income, urban, rural, and minority communities.”

First, what are CDFIs? And what types of CDFIs are there? “CDFI” stands for Community Development Financial Institution. The US Department of Treasury grants the CDFI designation to financial services providers “with a mission to provide fair, responsible financing to rural, urban, Native, and other communities that mainstream finance doesn’t traditionally reach.”(1) The four types of CDFIs are Loan Funds, Credit Unions, Banks, and Venture Capital funds.

What are MDIs?

“MDI” stands for Minority Depository Institution. MDIs “focus on the banking industry matters most relevant to Black Americans, Asian Americans, Hispanic Americans, Native Americans, and women, and work collectively to eliminate the racial wealth gap.” (2)

Why are CDFI Banks and MDIs eligible for ECIP?

“MDI” stands for Minority Depository Institution. MDIs “focus on the banking industry matters most relevant to Black Americans, Asian Americans, Hispanic Americans, Native Americans, and women, and work collectively to eliminate the racial wealth gap.”

CDFI Banks and MDIs share many characteristics with regular banks but have a special purpose: “provide capital to rebuild economically distressed communities through targeted lending and investing. They are for-profit corporations with community representation on their boards of directors.”(3) These are entities whose core missions are aligned with the ECIP program’s stated purpose of providing relief to low-income and underserved communities.

What are ways to invest in CDFIs and MDIs?

There are many ways. One of the simplest is to open a CD in a CDFI bank, MDI, or credit union. In another paper published by Stepping Stone Partners, we provide a list of CDFI loan funds that accept individual investments. And in relatively rare cases, you can buy shares of CDFI banks or MDIs that trade publicly on the stock market.

Why is it a big deal that the CDFI banks and MDIs that are publicly traded received ECIP? There are several ways this extra cash flow can benefit the owners of common stock in these banks. ECIP awards strengthen balance sheets and drive future earnings as the funds are deployed into interest-earning loans. Some ECIP recipient banks have announced share buybacks and special dividends, while others have engaged in M&A activity. For these reasons, the ECIP program has attracted attention outside the impact investing community.

Publicly traded ECIP recipient banks

I learned about the ECIP program in an unlikely place: the 3Q22 newsletter of microcap investor Dave Waters of Alluvial Capital. Waters and a number of other small-cap investors, like Tim Eriksen of Cedar Creek and a Santa Monica-based person who goes by the Twitter handle @oracleof90402, all followed an anonymous Twitter (X) personality @dirtcheapstocks into the community banking space, where I reside. At Stepping Stone Partners, we help wealth management firms and foundations invest in CDFIs. There are over 1350 CDFIs nationwide, yet only 178 are banks and thus eligible to receive ECIP awards. Of those, less than 20 are publicly traded.

Below are 13 ECIP recipients that are publicly traded. The first column indicates which banks are favored by which investors, including Stepping Stone Partners (“SSP”) - our favorites are also in bold. (4) This table illustrates the potentially transformative nature of the program for these banks: note that the ECIP amount awarded often exceeds the market cap!

When I first came across the @dirtcheapstocks writeup at the end of 2022, it seemed that I was late: the share prices of some of the stocks were up 30-50% from the date of the writeup in early October 2022. But after the Silicon Valley Bank collapse, I thought there might be an opportunity to buy the dip. From my work with CDFIs, I felt the stresses affecting SVB, Signature, First Republic, and others would have a limited impact on CDFI banks, making them more likely to weather the crisis affecting other banks. Why?

“CDFI banks have performed better than their mainstream counterparts during banking crises. Most notably, during the 2008-2009 crisis, very few CDFI banks went under, and even at the height of the crisis, most CDFIs reported very strong loan portfolio performance.”

CDFI banks focus on customers in low-income communities, where they are less likely to have many customers with deposits over $250k. Even when customers approach those levels, CDFI Banks report encouraging their customers to open multiple accounts or take advantage of programs that spread deposits among several FDIC-insured banks. (5)
CDFI banks have performed better than their mainstream counterparts during banking crises. Most notably, during the 2008-2009 crisis, very few CDFI banks went under, and even at the height of the crisis, most CDFIs reported very strong loan portfolio performance. This pattern continued during COVID-19, when CDFIs performed well, especially with small businesses, helping their clients not only survive but also repay their loans.
CDFI banks will continue to benefit from programs that provide grants and low-cost capital for economic redevelopment at the federal and state levels. CDFIs have proven over 30 years that their business model is sustainable and effective at reaching historically underserved people and communities. Programs like the New Markets Tax Credit (NMTC), Capital Magnet Fund (CMF), and Bank Enterprise Award (BEA) all provide bottom-line benefits to CDFI Banks for community development activities. The EPA’s Greenhouse Gas Reduction Fund will direct an additional $27 billion to community development in 2024.

What all this says about impact and financial returns

Much has been made of the putative trade-off between financial returns and impact. These banks both have high return potential and significantly impact their communities. (6) They provide responsible financial services in otherwise underserved communities, offering alternatives to predatory players. They are a potentially powerful counterexample to the notion that impact investments are necessarily concessionary.

Andrew Porter is a Senior Consultant at Stepping Stone Partners, a consultancy focused on impact investing. Before joining the firm in 2020, he ran a consultancy helping Chinese companies enter the US market, and he has worked in the financial services industry for over a decade. Andrew is active in ASBN/Investors Circle and the Angel Capital Association. He holds a master's degree from the London School of Economics and a bachelor's degree from the University of Pittsburgh.

https://www.ofn.org/what-is-a-cdfi/
https://www.nationalbankers.org/vision-and-opportunities
https://www.ofn.org/what-is-a-cdfi/
In another version of this paper we include a deeper analysis of how we selected our favorites.
For example, Intrafi offers ICS and CDARS https://www.intrafinetworkdeposits.com/
Of course, no investment is without risk – investing in equities always carries the risk of loss of principal. And in particular, many of these banks trade on the over-the-counter markets and are very illiquid.