Summary
- The ECIP is a corrupt $9 billion transfer of taxpayer money.
- Here’s how to exploit it for profit.
- Marketed to help the poor and minorities, it goes straight to investors.
The Emergency Capital Investment Program is a government program funneling capital directly to a small group of banks . The second round of applications was due this week with more capital getting distributed shortly. It was validly signed into law ; any responsibility lies with the politicians that voted for and signed this (and, in turn, the electorate that voted for them). My job is to understand it and exploit it for profit. According to the US Treasury,
Established by the Consolidated Appropriations Act, 2021, the Emergency Capital Investment Program ((ECIP)) was created to encourage low- and moderate-income community financial institutions to augment their efforts to support small businesses and consumers in their communities.
Under the program, Treasury will provide up to $9 billion in capital directly to depository institutions that are certified Community Development Financial Institutions (CDFIs) or minority depository institutions “MDIs” to, among other things, provide loans, grants, and forbearance for small businesses, minority-owned businesses, and consumers, especially in low-income and underserved communities, that may be disproportionately impacted by the economic effects of the COVID-19 pandemic. Treasury will set aside $2 billion for CDFIs and MDIs with less than $500 million in assets and an additional $2 billion for CDFIs and MDIs with less than $2 billion in assets.
On October 6, 2022, a Twitter friend posted one of my favorite things I read all last year on the ECIP. He got my attention with his description,
Imagine this. You buy a house for $500,000. You close, you get the keys and from this day forward everything in that house is yours. You walk into the basement and find an unlocked safe with $1,000,000 inside. This is the closest metaphor I can think of to describe what is happening to certain banks across the United States.
He identified ten public ECIP recipients:
They have since performed extraordinarily well with only one down since early October.
That one, Ponce ( PDLB ), remains the equivalent of an unlocked safe with a million dollars in it. In fact, $225 million from the US Treasury. It is designated both a certified Community Development Financial Institution and a minority depository institution, opening up two spigots of endless taxpayer money in the form of non-cumulative perpetual preferred stock with below market dividend rates. This is free money with only a thin veneer of complexity to obfuscate the reality that it is a gift.
Ponce gets their $225 million with a zero rate for the first two years then it could adjust to 1-2% depending on meeting certain requirements, but it is likely to remain at 0%. The government could buyback the prefs at 10% of face but they also could ultimately end up simply cancelling them. In any M&A transaction, they will have to be fair valued, which would mark them down by 90%.
Despite recent missteps, Ponce management is well aligned with shareholders, trades for less than its tangible book value which was last reported as $10.77 per share, and is over a year past demutualization which allows them to buyback shares. Their past as a mutual holding company offers glimmers of hope that they will maximize value. For example, they harvested hidden real estate value that didn’t make sense to hang onto.
The ECIP program will help significantly grow book value in the coming quarters. As it stands today, the Russell cutoff this year is estimated to be around $185 million so Ponce’s current $230-240 million market cap should be enough to meet that hurdle. That will mean that over two million shares will have to be bought by indexers. In the days ahead, they should announce a big buyback plan. To execute, they need to get a regulatory non-objection which will dictate timing. They aggressively bought back shares before the second step conversion and will again be able to do so this month.
They could benefit from ESG investors as well as taxpayer money. They plan on becoming a big beneficiary of the government focus on incentivizing companies including Microsoft ( MSFT ), Google ( GOOG ) ( GOOGL ), and Netflix ( NFLX ) to put their corporate deposits in minority depository institutions at very low rates. There is some throat clearing and complexity but this will essentially be a gift. Microsoft et al will get a tax credit and ESG/DEI/BLM etc. street cred. The FDIC has posted about some of the companies that they have leaned on to support depository institutions based on race . This kind of positive attention from regulators offers some innuendo that there will be favorable treatment for companies that play ball.
They will be one of the 75% of demutualized banks to sell in their fourth or fifth year (2025-2026). By the time they are allowed to sell, the Chairman and the CEO will be 74 and 73 respectively. The average board member will be 73. It will be time to hit the bid on the best strategic M&A deal they can negotiate.
Caveat
One of the reasons you can buy this under $10 is that they just released a lousy quarter. It is not the best deposit base. Their funding cost is too high, and margins are too low. They wrote off the rest of an ill-advised micro-loan program called Grain. The idea was to offer credit lines of up to $1,000 to people who were obviously uncreditworthy and unlikely to repay the loans. The plan was to give money to people who would 1) take the money and 2) run. They… did. More than half of their microloans were such frauds. Or as described by Ponce’s lawyers, Grain,
has been victimized by cyber fraud using synthetic and other forms of fraudulent identifications, a phenomenon that has become prevalent with FinTechs.
So far, PDLB has been a disappointment – it didn’t get much of a demutualization pop, it failed to get into the R2K index, and it underperformed other ECIP recipients. But that underperformance left the stock massively undervalued today. It is a bargain for anyone who can set it up under $10 and hang onto it for the coming years.
Conclusion
If you like free money, there’s nothing like the federal government for arbitrarily handing it out. Get some. Ponce should grow its $10.77 tangible book value to $12-13 over the next few years then sell for at least 125% of that TBV or $15-17 per share.
TL; DR
After others have raced so far, today my favorite ECIP boondoggle recipient is Ponce ( PDLB ). If you’re a US taxpayer, you’re the one giving away free money… so you might as well get some of it back.
For further details see:
Ponce: A Free Safe With $1 Million