Back in 2021, Asian Bank in Philadelphia launched its Small Business Booster Loan. The product’s name was inspired by the pandemic jabs that were grabbing headlines.
The loan can be secured by business assets rather than real estate. That twist could make them attractive for business owners who haven’t had the opportunity to acquire hard assets and may otherwise have trouble getting financing. On the flip side, the untraditional collateral means the loan carries inherently higher risks for Asian Bank, which specializes in commercial financing.
The Small Business Booster Loan didn’t get much initial traction, but something big happened in June 2022 that is motivating Asian Bank to market the product more. The bank’s holding company received a $66 million investment from the Department of the Treasury as part of the Emergency Capital Investment Program (ECIP), which increased Asian Bank’s capital from $36 million to just over $100 million. Now, the bank has $400 million in assets.
While the bank has implemented risk mitigations for the product from the start, president and CEO James Wang says, “Additional capital gives us the cushion to be able to absorb some of these losses if and when they do occur.” In addition, Asian Bank can benefit from the incentives ECIP offers to participants that lend to borrowers in underserved communities.
As Asian Bank and two other community banks illustrate, receiving a massive infusion of government dollars is having a positive effect on their institutions and the communities they serve.
Asian Bank delivers the right recipe for a local restaurateur
Sagrario German Aguero, a native of the Dominican Republic who recently became a U.S. citizen, dreamed of buying the building that houses her Vivaldi Restaurant in Philadelphia. She was able to get a loan from a community development financial institution (CDFI), but she sought refinancing because the interest rate and payments were too high.
After a traditional bank took two months to respond to her refinancing inquiry, her financial advisor suggested she call Asian Bank, which has a particular focus on the Asian and immigrant communities in and around the City of Brotherly Love.
“They were just ready to work and were super accommodating,” the native Spanish speaker says through a translator. She was able to get a loan with better terms in June 2022, but that’s not the only reason she’s grateful to Asian Bank.
German Aguero says as a woman, a Latina and someone with limited English, she’s long felt she wouldn’t have the same opportunities as others. However, the bankers at Asian Bank have been supportive and professional, and they treat her with respect. She says they’ve also accommodated her language barrier: She’s in constant communication with a Spanish-speaking employee.
Congress established the ECIP in the Consolidated Appropriations Act of 2021. The program authorizes the Treasury to provide up to $9 billion in capital directly to banks, holding companies and other financial institutions that are designated as community development financial institutions (CDFIs) or minority depository institutions (MDIs).
The Treasury announced that the funds are intended “to support the efforts of community financial institutions to provide loans, grants, and other assistance to small and minority-owned businesses and consumers, especially in low-income and financially underserved communities that struggled during the COVID-19 crisis.”
As of late November 2022, the Treasury had invested $8.3 billion in 164 institutions.
The low- and moderate-income community financial institutions that were accepted into the program generally issued preferred stock to the Treasury, which qualifies as additional tier 1 capital. If they couldn’t issue stock, they could issue subordinated debt instead.
Participants that reach specific benchmarks for increasing loan originations to the intended categories of borrowers will receive a reduction in the dividend or interest rate that they owe to the Treasury.
Notably, 65 ICBA member banks have received nearly $5 billion in ECIP funds, according to James Sills, who chairs ICBA’s Minority Bank Advisory Council and is president and CEO of $425 million-asset M&F Bank in Durham, N.C.
“The goal of the program is to leverage the funding 10 times,” Sills says. “Over the next 10 years, ICBA member banks will potentially have a $50 billion lending impact on communities served all across the U.S. This is a game changer for community banks.”
As for his own bank, Sills describes the ECIP funding as “a transformational opportunity.” The Treasury’s $80 million investment boosted the capital of the bank’s parent company, M&F Bancorp, to more than $119 million.
Sills says that over the next 10 years, his bank, which is both an MDI and an CDFI, plans to lend a minimum of $31 million annually to small businesses and underbanked and underserved consumers across North Carolina.
About 60% of those loans will go to small and medium-size businesses, Sills says. The remaining 40% will be targeted at consumer lending, mortgages and affordable housing projects. “It’s our goal to partner with nonprofit housing developers to help address a critical affordable housing shortage in the markets that we serve,” he says.
M&F, which currently serves five cities in North Carolina, plans to expand into new markets within the state over the next year or two to provide lending to more communities.
In the meantime, the community bank is already leveraging the new capital to help diversely owned businesses expand and grow. In October 2022, for example, M&F closed on a business loan with Ken Gibbs and Shawana Hudson Spann, the owners of Durham-based Thomas & Gibbs CPAs, PLLC.
Gibbs says the 14-person firm has used the loan in part to buy out a retired partner’s interest in the business. “We needed to do that to move forward,” he says. The firm also has plans to expand its workforce and continues to improve its technology, including the tools that allow employees to work remotely.
Thomas & Gibbs, which opened in 2001 and works with businesses and individuals, has a line of credit with M&F. In addition, the bank processed its Paycheck Protection Program (PPP) loans.
Though the company works with multiple banks, Gibbs says he appreciates having access not only to the people at M&F who are processing the new loan, but also to those “who are in charge.”
He adds, “It’s still nice to be able to know who your bankers are and for them to know who you are, and I definitely have that with M&F.”
The benefits of one loan
Ponce Financial Group, the holding company of $2.2 billion-asset Ponce Bank in Bronx, N.Y., received $225 million in ECIP funding. The investment is enabling the community bank to write more mortgage loans for consumers as well as housing-related loans for small businesses, like those that are building affordable housing.
As to be expected, rising interest rates are spoiling the financing party to some extent. Carlos P. Naudon, Ponce Bank’s president and CEO, says, “We are accelerating [our lending], but not as fast as we could have had the rates not been as high.”
Nonetheless, Naudon expects the long-term economic impact of the ECIP money will be significant and felt in the communities his MDI and CDFI serves. Those include communities that are made up largely of immigrants and people of color in Union City, N.J., as well as the Bronx, Manhattan, Brooklyn and Queens.
Naudon is particularly bullish about the multiplier effect the funds could produce. “ECIP enables us to provide real estate investment, long-term capital to businesses to help them grow and get to levels that make them more sustainable,” he says. “That improves the community and the job resiliency of the community.”
Funding bank growth
Although ECIP largely focuses on lending to underserved communities that were adversely affected by the pandemic, there aren’t specific requirements for how participants must use the funds.
The three community banks we spoke to are directing some of their new capital toward internal improvements and hiring new employees. “The capital is an investment that is being made in institutions to help them grow and provide more and faster services to their communities,” Naudon says.
He says the funds from the Treasury—in addition to the $132 million Ponce Financial Group raised through a public mutual-to-stock conversion in March 2022—will enable Ponce Bank to further invest in automation and digitalization. “A bank like ours can only grow as we adopt new technology and bring in people who can help us with that,” Naudon says. “We’re acquiring a lot of talent and a lot of technology.”
M&F, meanwhile, is investing in a cloud-based loan origination system that Sills says will allow the community bank to generate more loan volume and improve efficiency.
And Asian Bank is rolling out additional capabilities of its new core system and has hired employees from outside of the immediate Asian community to help expand its customer base.
“Historically, one of our employees has been able to make a connection with somebody in the community, and from there it’s word of mouth,” Wang says. “It’s always been the best way for us to reach out and gain the trust of new clients and community members.”
The CDFI ecosystem
The government funds have led to another development: The three banks are strengthening their relationships with other CDFIs.
Asian Bank, for instance, is offering grants that affect the community. The community bank is also refinancing loans of CDFI clients, lending to CDFIs directly and even participating in some deals. “ECIP incentivizes recipients to be creative and encourages providing capital to businesses in need,” Wang says. “One way to do that is to help nonbank CDFIs increase capacity by being a participant in nondepository CDFI loan transactions.”
Ponce Bank has started making loans directly to other CDFIs for specific activities and has created an advisory board of CDFI executives to help guide its efforts.
M&F is partnering with other CDFIs on loan opportunities, Sills says, and is providing additional direct banking services to those firms.
Ultimately, the ECIP funding that these and other community banks have received is supercharging missions they’ve long embraced.
“We’ve always provided loans to small food, retail, grocery, bodega-type businesses in communities in Philadelphia that perhaps other people have felt are a little bit challenging to do business [with],” Wang says. “[ECIP] is really an extension of what we have been doing and allows us to do more of it.”
What are ECIP’s lending incentives?
Institutions participating in the Emergency Capital Investment Program (ECIP) issued either preferred stock or subordinated debt to the Department of the Treasury.
Dividends and interest don’t accrue and aren’t payable to the Treasury for the first two years. While the maximum annual dividend or interest rate is 2%, it could fall to as low as 0.5% for banks that make a certain amount of “qualified loans” and go even further with “deep impact loans.” The latter earn banks double credit toward their rate reduction.
For example, loans that are considered qualified include those to low- and moderate-income (LMI) borrowers, small businesses with annual revenues below $1 million and borrowers involved in affordable housing.
Loans that are considered deep impact include those to low-income borrowers, small businesses with revenues below $100,000 and to borrowers involved in deeply affordable housing.
The Treasury noted in a press release that the additional credit for deep impact lending “recognizes the fact that the kind of lending that will be most impactful in achieving the statutory purpose of the program often requires more time and
resources from the lender.”
It adds, “This approach is designed to help level the playing field for borrowers that face the greatest barriers to accessing capital and will provide greater transparency into the impact of the program.”
What are MDIs and CDFIs?
The Emergency Capital Investment Program (ECIP) supports the efforts of minority depository institutions (MDIs) and community development financial institutions (CDFIs). How do banks gain these designations?
The FDIC says a federal insured depository institution can qualify for MDI status in two ways. First, if 51% or more of its voting stock is owned by minority individuals. Or, if a majority of its board of directors is minority and the community that it serves is predominantly minority.
Meanwhile, “specialized organizations that provide financial services in low-income communities and to people who lack access to financing” can earn the CDFI designation, according to the Department of the Treasury.
It’s no coincidence that ECIP targets MDIs and CDFIs. Treasury press releases have noted that these institutions already “specialize in delivering responsible capital, credit and financial services to underserved communities” and “often make smaller loans and work with borrowers who face barriers in our economy and may require more time-intensive and personalized technical support.”