Community Development Capital Initiative: Status of the Program and Financial Health of Remaining Participants
Published: 2014-06-06T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Treasury established CDCI under the Troubled Asset Relief Program (TARP) in February 2010 to help banks and credit unions certified as Community Development Financial Institutions (CDFI) maintain their services to underserved communities in the aftermath of the 2007-2009 financial crisis. Treasury invested a total of $570 million in 84 eligible institutions by September 2010.
TARP's authorizing legislation mandates that GAO report every 60 days on TARP activities, including CDCI. This report examines (1) the financial status of CDCI; (2) factors affecting participants' decisions to remain in or leave the program and Treasury's exit strategy; and (3) the financial condition of institutions remaining in the program.
To assess the program's status, GAO reviewed Treasury reports on CDCI. GAO also used regulatory financial data to compare the financial condition of banks and credit unions remaining in CDCI with those that would have been eligible but did not participate. In addition, GAO interviewed staff from Treasury and NCUA, associations representing CDCI participants, and representatives of a nonprobability sample of CDFI banks and credit unions that participated in CDCI. GAO selected banks and credit unions based on asset size and geography.
GAO is making no recommendations in this report. In comments on a draft of this report, Treasury and NCUA concurred with our findings.
section_title: What GAO Found
paragraphs: As of April 30, 2014, 82 percent of the Department of the Treasury's (Treasury) $570 million total investment in eligible banks and credit unions through the Community Development Capital Initiative (CDCI) was still outstanding. Sixteen institutions have exited the program, leaving 29 banks and 39 credit unions, respectively, in the program. Treasury had received repayments and investment income of $134.3 million, but has also recorded a $6.7 million write-off based on the failure of one participant's subsidiary. As of February 28, 2014 (most recent information available), Treasury estimated a lifetime cost of $80 million for CDCI, down from an estimated cost of $290 million in November 2010.
Representatives of participant banks and credit unions GAO interviewed said that access—or lack thereof—to similar forms of capital was a key factor in institutions' willingness or ability to exit the program. They noted that CDCI continued to be one of the few sources of capital for small banks and credit unions. In addition, they listed program terms, such as the scheduled increase in the dividend or interest rate from 2 percent to 9 percent in 2018, as considerations. Treasury has not yet announced an exit strategy for CDCI but said it will consider the interests of the financial institutions and taxpayers as they consider options for winding down the program. For example, they noted that any strategy would need to take into account how the wind down of the program may impact the community development mission of the remaining participants.
The financial health of the remaining CDCI banks and credit unions is mixed. For example, few CDCI institutions have missed their dividend or interest payments to Treasury since 2010. The Federal Deposit Insurance Corporation and National Credit Union Administration (NCUA) had identified very few of the remaining banks and credit unions as exhibiting serious financial, operational, or managerial weaknesses as of March 2014. GAO's analysis of financial data found that banks remaining in CDCI tended to be more profitable, held stronger assets, and had higher capital and reserve levels when compared to non-CDCI banks that were eligible for the program but did not participate. However, remaining credit unions were less profitable, held slightly more poorly performing assets, and had lower capital levels and less protection against losses than non-CDCI credit unions that were eligible for the program but did not participate.

section_title: Letter
paragraphs: The Community Development Capital Initiative (CDCI) was created in  February 2010 to assist eligible certified Community Development  Financial Institutions (CDFI) and the communities they served cope with  the effects of the 2007-2009 financial crisis. The Department of the  Treasury (Treasury) ended funding through this program in September  2010, with a total investment amount of approximately $570 million for 84  institutions. CDCI is implemented under the Troubled Asset Relief  Program (TARP), which gave Treasury the authority to buy or guarantee  up to $700 billion of the “troubled assets” that were believed to be at the  heart of the financial crisis, including mortgages, mortgage-backed  securities, and any other financial instruments deemed appropriate, such  as equity investments. CDCI provided capital to CDFI banks and credit  unions by purchasing preferred equity and subordinated debt from them.  CDCI offered favorable capital terms, including a relatively low dividend or  interest rate, an important benefit for CDFIs that often did not have the  same access to capital markets as larger banks. For example, approved  CDFIs received investments with an initial dividend or interest rate of 2  percent that would increase to 9 percent after 8 years (2018). Treasury  has continued to oversee its CDCI investments and collect dividend and  interest payments. A few participants have redeemed their investments  and exited the program with the approval of their primary federal  regulators.
This report is based on our continuing analysis and monitoring of  Treasury’s activities in implementing the Emergency Economic  Stabilization Act of 2008 (EESA), which provided us with broad oversight  authorities for actions taken under TARP and required that we report at  least every 60 days on TARP activities and performance. To fulfill our  statutorily mandated responsibilities, we have been monitoring and  providing updates on TARP programs. This report examines (1) the  financial status of CDCI, including repayments and other proceeds,  investments outstanding, and the estimated lifetime cost of the program;  (2) factors affecting participants’ decisions to remain in or leave the  program and Treasury’s exit strategy; and (3) the financial condition of  institutions remaining in CDCI.
To assess the financial status of CDCI, we analyzed Treasury reports on  the number of institutions that made full repayments, the amounts of  dividends and interest paid and CDCI investments outstanding, and the  estimated lifetime cost of the program. To examine factors affecting  participants’ decisions to remain in or leave the program and Treasury’s  exit strategy, we interviewed Treasury officials and associations  representing banks and credit unions that received CDCI capital. We also  selected and attempted to contact a nonprobability sample of 9 banks and  12 credit unions remaining in CDCI, and we obtained responses from 8  banks and 9 credit unions representing a range of asset sizes and  geographic locations. To assess the financial condition of the remaining  CDCI institutions, we used regulatory financial data from SNL Financial to  compare financial indicators for remaining CDCI participants with the  same indicators for banks and credit unions that were eligible for the  program but did not participate. We conducted separate analyses for  banks and credit unions, because the two types of institutions file different  regulatory reports and have different financial indicators. We have  assessed the reliability of Treasury data through previous financial  statement audits. We assessed the reliability of the SNL Financial data by  performing manual testing of required data elements and reviewing  existing information about the data and the system that produced them. In  addition, we have assessed the reliability of SNL Financial data as part of  previous studies and found the data to be reliable for the purposes of our  review. We determined that the financial information we used was  sufficiently reliable for the purposes of this report. Appendix I has more  information on our scope and methodology.
We conducted this performance audit from February 2014 to June 2014  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Created in 2010, CDCI was one of the later TARP programs and was  intended to help mitigate the adverse impact that the financial crisis was  having on communities underserved by traditional banks. CDCI is  structured much like the TARP Capital Purchase Program (CPP), in that  both provide capital to financial institutions by purchasing preferred equity  and subordinated debt from them. However, CDCI differs from CPP in  several important ways. First, CDCI provided financial assistance only to  CDFIs, which provide financial services to low‐ and moderate‐income,  minority, and other underserved communities. Second, CDCI also  provided assistance to credit unions, unlike CPP, which provided capital  only to banks. Finally, CDCI provided more favorable capital terms to its  participants than CPP did. Specifically, CDCI investments have an initial  dividend or interest rate of 2 percent, compared with 5 percent under  CPP. The dividend or interest rate increases to 9 percent after eight years  under CDCI, compared with five years under CPP.
Treasury finalized the last of its $570 million in CDCI investments in  September 2010, just prior to the expiration of its TARP purchasing  authority. The 84 participating institutions included 36 banks and 48 credit  unions. Twenty-eight of the 36 banks were former CPP participants that  were in good standing in that program and thus were allowed to refinance  their CPP shares for a lower rate in CDCI. Of these 28 banks, 10 received  additional disbursements under CDCI.
As shown in table 1, CDCI terms varied depending on the type of  institution receiving the capital. In general, banks received capital by  issuing to Treasury preferred stock representing not more than 5 percent  of their risk-weighted assets. The capital they received in return was  generally treated as tier 1 capital for regulatory purposes, with a perpetual  term. Federal banking regulators classify capital as either tier 1—currently  the highest-quality form of capital—or tier 2, which is weaker in absorbing  losses. Credit unions issued unsecured subordinated debentures totaling  not more than 3.5 percent of their total assets. In exchange, Treasury  provided participating credit unions with secondary capital that boosted  their net worth until 5 years before the maturity date, at which point it  would begin amortizing at 20 percent per year. All institutions  participating in CDCI are required to make quarterly dividend or interest  payments to Treasury. After 8 years, the initial dividend or interest rate of  2 percent increases to 9 percent.
section_title: Treasury’s Estimated Lifetime Cost for CDCI Has Decreased as Participants Have Begun Exiting the Program
paragraphs: As of April 30, 2014, 68 of the original 84 CDCI institutions remained in  the program. Fifteen institutions (six banks and nine credit unions) had  exited through repayment, while one institution had exited as a result of  its subsidiary bank’s failure. Three of the banks and at least one of the  credit unions that had exited the program did so when they merged with  or were acquired by institutions that were not certified CDFIs. CDCI terms  required them to repay their investments, as non-CDFIs were not eligible  for the program. Two of the 68 remaining institutions had begun to repay  the principal on the investments they had received, while the other  remaining institutions had paid only dividends and interest.
Repayments and income from dividends and interest to date have  amounted to less than a quarter of Treasury’s $570.1 million investment  in 2010 (see fig. 1). As of April 30, 2014, the outstanding investment  balance for CDCI was $467.4 million, reflecting repayments and write-offs  totaling $102.7 million. Specifically, as of this date, Treasury had received  approximately $96.0 million in principal repayments from CDCI recipients.  As a result of the failure of Premier Bancorp, Inc.’s subsidiary, in January  2013 Treasury wrote off nearly all of its $6.8 million investment in  Premier, whose assets were liquidated when its banking subsidiary  entered receivership. Treasury also did not collect more than $300,000 in  unpaid dividends and interest for Premier. CDCI participants have also  paid $38.3 million in dividends and interest.
Treasury has lowered its estimates of the program’s lifetime cost over the  last 2 years as market conditions have improved and institutions have  begun to repay their investments. As of November 2010, Treasury  estimated the program’s lifetime cost at about $290 million. As of  February 28, 2014, Treasury estimated the program’s lifetime cost at $80  million.
section_title: Market Conditions and CDCI Program Terms Will Affect Continued Participation as Treasury Explores Possible Exit Strategies
paragraphs: According to representatives from the remaining CDCI institutions we  spoke to, factors such as access to capital, the benefits of CDCI capital,  and CDCI program terms affected participants’ decisions to remain in or  exit the program. Specifically, we interviewed a nonprobability sample of  8 banks and 9 credit unions remaining in the program as well as  organizations representing the banks and credit unions participating in  CDCI.
Representatives of CDCI participant institutions and bank and credit  union organizations told us that a key factor in participants’ decision to  remain in or exit CDCI was their ability to access other sources of capital.  Representatives of a few of the CDCI institutions, as well as  representatives of two organizations representing CDCIs, said that CDCI  had been one of the few sources of external capital for small community  banks and credit unions since the financial crisis and economic downturn.  Representatives of the same organizations and a few other CDCI  institutions explained that for many CDFI banks and credit unions, access  to credit could be difficult and expensive. Some bank representatives said  they were waiting to see whether the credit market improved closer to  2018 before making a decision on the timing of repayments. Some credit  union representatives noted that they would pursue grants or nonmember  deposits to replace the CDCI capital. One bank representative, as well  as a bank organization representative and an investor in CDFIs, noted  that the structure of the CDCI agreement gave Treasury priority status  over other investors, making it difficult for these banks to attract additional  investors and find replacement capital. This structure would be an issue  if a bank was attempting to raise capital in smaller amounts than its CDCI  capital, as the bank would have to balance the interests of both Treasury  and new investors.
Representatives from CDCI institutions we interviewed also mentioned  several benefits of maintaining their CDCI capital. First, they stated that  CDCI had allowed them to meet customer demand and provide access to  services they would otherwise not have been able to provide. For  example, three bank representatives we interviewed said the CDCI  capital allowed them to purchase bank branches that were struggling or  closing in underserved communities. They said that these purchases  allowed them to ensure that residents of these communities had access  to financial services. Several representatives noted that the CDCI capital  allowed them to increase their lending. According to a representative of  one credit union, the capital helped fund a loan so that a grocery store in  a neighborhood that had previously lacked one could be built. Two bank  representatives and a credit union representative also noted that the  capital had allowed them to make residential mortgage loans. As one of  the representatives noted, other financial institutions were decreasing this  type of lending during the financial crisis and economic downturn.  Second, several representatives we interviewed noted that the 2 percent  rate on the CDCI capital was lower than the rates they could obtain in  private capital markets. Therefore, regardless of their current capacity to  fully repay Treasury, they planned to keep the capital as long as it  remained less expensive than alternative capital. Finally, regulations  reflecting Basel III regulatory capital reforms that are scheduled to take  effect in 2015 will increase the percentage of capital that banks must  hold. Three bank representatives noted that the increased capital  requirements would make them more likely to hold their CDCI capital.
Representatives from bank and credit union organizations and  participating institutions also told us that changing program terms would  influence institutions’ decisions about exiting the program. The scheduled  increase in the CDCI dividend rate (from 2 percent to 9 percent) that will  take effect in 2018 is a key factor for institutions in deciding when to exit.  Representatives from several CDCI institutions we interviewed told us  that they would like to repay Treasury before the increase takes effect.  However, a few of the representatives from remaining institutions who we  interviewed were uncertain about their ability to find other sources of  inexpensive capital before the increase in 2018. A representative of one  of the bank organizations stated that a good number of remaining CDCI  banks would likely struggle to pay dividends at the higher rate while  maintaining services to their communities. In addition, we found that for  credit unions, the treatment of CDCI funds as secondary capital may also  affect repayment schedules. Credit unions with 2018 maturity dates on  their CDCI securities (approximately half of the remaining credit unions,  according to Treasury) have had to begin counting a portion of their  capital as debt. Treasury representatives explained that as a result of this  regulatory capital rule, it was likely that many of these institutions would  pursue repayment before 2018. Three credit union representatives we  interviewed whose CDCI securities had a maturity date of 2018 stated  that they hoped to either increase their earnings or find alternative  sources of secondary capital in time to replace the CDCI capital.
Treasury officials stated that they had not yet determined an exit strategy  for CDCI but were studying various alternatives and would need to  consider the interests of participating institutions and taxpayers. The  officials noted that CDCI differed from CPP because of the mission of the  participating institutions, which focused on communities and populations  lacking access to credit, banking, and other financial services. To date,  Treasury has had a number of meetings with participating banks and with  organizations representing the banks in the program and said that it was  aware that these organizations were also looking at alternatives for the  banks’ exit from CDCI. Treasury officials said that they had not yet held  similar meetings with organizations representing credit unions but  planned to do so. In addition, Treasury officials said that they would meet  with the federal financial regulators to discuss options. Treasury officials  added that any decision would need to balance the mission of CDCI with  the need to protect the taxpayers’ investment.
Treasury officials stated that, like CPP, CDCI would wind down as  participants (1) repaid their investments; and (2) in some cases,  restructured them. While they had not yet determined what approach they  would use for CDCI participants that did not follow either of these  courses, Treasury officials said that they were exploring a number of  options. Treasury has used auctions to sell some of its investments in  CPP institutions. According to representatives of one organization we  spoke with, some CDCI participants expressed concern that Treasury  would also use the auction method for CDCI after announcing its auction  strategy for CPP in 2012. These representatives noted that participants’  mission to serve communities that lacked access to financial services  might suffer if investors such as hedge funds bought their securities from  Treasury, because the investors’ interests would not necessarily align  with the institutions’ interests.
Similarly, representatives from the same organization told us that several  CDCI banks and credit unions were classified as minority depository  institutions and that some of these institutions had concerns that auctions  could weaken their status as such. The Federal Deposit Insurance  Corporation (FDIC) defines a minority depository institution as any  federally insured depository institution with 51 percent or more minority  ownership of its voting stock, or a majority of the Board of Directors is  minority and the community that the institution serves is predominantly  minority. NCUA requires a federally insured credit union’s percentage of  both minority members and minority management officials to exceed 50  percent for minority depository institution status. Treasury officials told  us that they were aware of the issues that auctions could present for  CDCI institutions and had not determined whether they would incorporate  auctions into their CDCI exit strategy. Further, when concerns first  surfaced in 2012, after auctions were announced for CPP, Treasury  issued a public statement clarifying that it had not yet determined what  exit strategies would be used for CDCI. Treasury officials also told us that  a few minority depository institutions had been part of the CPP auction  process and that Treasury consulted with FDIC on this matter for the CPP  auctions. According to FDIC officials, FDIC was notified of the details of  these auctions before they were finalized, and the officials stated that  none of the CPP auctions affected the designation of any minority  depository institutions.
section_title: Financial Health of Remaining Institutions Is Mixed
paragraphs: Most CDCI institutions have paid dividends and interest to Treasury on a  timely basis, with only a small percentage missing payments over the life  of the program. In addition, few of the remaining CDCI banks and credit  unions are considered troubled by FDIC or NCUA. Moreover, remaining  CDCI banks generally are financially stronger than certified CDFI banks  that did not participate in the program, but remaining CDCI credit unions  are generally weaker than nonparticipating CDFI credit unions.
subsections: section_title: Few CDCI Institutions Have Missed Payments or Been Considered Troubled by Regulators
paragraphs: The number of CDCI institutions with missed quarterly dividend or interest  payments has been generally low, representing, on average, about 4  percent of all remaining institutions over the life of the program. The  percentage of remaining institutions with missed payments has ranged  from about 1 percent to 7 percent (one to six institutions). Since  November 2010 (the first quarter that dividend and interest payments  were due), nine institutions (seven banks and two credit unions) have  missed at least one quarterly payment. Of those institutions, three banks  have missed at least eight payments, the threshold at which Treasury has  the right to elect directors to their boards. As of April 30, 2014, Treasury  had not appointed directors to the board of any CDCI banks, but it had  sent an observer to one bank and requested to send an observer to a  second bank. Two of the three banks with eight or more missed payments  were up to date on their payments as of April 30, 2014, while the third  was not. Institutions can elect whether to pay dividends and interest and  may choose not to pay for a variety of reasons, including decisions that  they or their federal and state regulators make to conserve cash and  maintain (or increase) capital levels. However, investors may view a  company’s ability to pay dividends as an indicator of its financial strength  and may see failure to pay full dividends as a sign of financial weakness.
Very few of the remaining CDCI institutions were included on FDIC’s or  NCUA’s most recent lists of “problem” or “troubled” banks or credit  unions. The designation of these institutions as “problem” or “troubled”  is, in large part, derived from the Uniform Financial Institutions Rating  System, commonly known as CAMELS. Stated differently, these lists  designate institutions with weaknesses that threaten their continued  financial viability. Federal and state regulators generally do not allow  institutions on these lists to make dividend payments in an effort to  preserve their capital and promote safety and soundness.
section_title: Banks Remaining in CDCI Were Generally Financially Stronger Than Non-CDCI Banks, but Remaining Credit Unions Were Generally Weaker Than Non-CDCI Credit Unions
paragraphs: The financial health of remaining banks and credit unions differed relative  to institutions that did not participate in CDCI. We examined various  measures that described banks’ and credit unions’ capital adequacy,  profitability, asset quality, and ability to cover losses. We analyzed  quarterly regulatory reports from December 31, 2013 (the most recent  reporting period for which data were available for both banks and credit  unions) on the 68 institutions remaining in the program as of April 30,  2014. We then compared the data to information on nonparticipating  CDFI-certified banks and credit unions.
subsections: section_title: Banks
paragraphs: On several measures of financial strength, remaining CDCI banks tended  to be financially stronger than certified CDFI banks that did not participate  in CDCI (non-CDCI banks) (see table 2). We found that the median asset  size of CDCI banks as of December 31, 2013, was nearly three times that  of non-CDCI banks ($387.4 million for CDCI banks compared with $143.3  million for non-CDCI banks). While only 1 of the 29 remaining CDCI  banks (about 3 percent) had assets of less than $100 million, 32 of the 97  non-CDCI banks (33 percent) had assets in this range. Remaining CDCI  banks also had lower median Texas Ratios than non-CDCI banks. The  Texas Ratio helps determine a bank’s likelihood of failure by comparing  its troubled loans to its capital. The higher the ratio, the more likely the  institution is to fail. As of December 31, 2013, remaining CDCI banks had  a median Texas Ratio of 29.01, compared with 35.05 for non-CDCI  banks.
Remaining CDCI banks performed better than non-CDCI banks with  regard to profitability and asset quality. Specifically, remaining CDCI  banks had a better median return on average assets, a measure of  profitability relative to total assets and management’s efficiency at using  its assets to generate earnings. As of December 31, 2013, remaining  CDCI banks had a median return on average assets of 0.73, compared  with 0.40 for non-CDCI banks. While 1 of the 29 remaining CDCI banks  (about 3 percent) had a negative return on average assets, 32 of the 97  non-CDCI banks (33 percent) had negative values for this ratio, indicating  that the non-CDCI banks had more challenges with regard to managing  their assets. In addition, remaining CDCI banks generally held better  performing assets than non-CDCI banks. For example, remaining CDCI  banks had a lower median percentage of noncurrent loans than non- CDCI banks. As of December 31, 2013, a median of 2.35 percent of loans  for remaining CDCI banks were not current, compared with 3.35 percent  for non-CDCI banks. However, remaining CDCI banks had a slightly  higher median ratio of net charge-offs to average loans than non-CDCI  banks (0.35 compared with 0.30).
Remaining CDCI banks also held more regulatory capital as a percentage  of assets than non-CDCI banks. Regulators require minimum amounts of  capital to lessen an institution’s risk of default and improve its ability to  sustain operating losses. Regulatory capital can be measured in several  ways, but we focused on tier 1 capital, which includes both a tier 1 capital  ratio and common equity tier 1 ratio, because it is the most stable form of  regulatory capital. The tier 1 risk-based capital ratio shows tier 1 capital  as a share of risk-weighted assets; the common equity tier 1 risk-based  capital ratio shows tier 1 common equity as a share of total risk-weighted  assets. Tier 1 common equity generally does not include CDCI or other  TARP funds. Both ratios were higher for the remaining CDCI banks than  for non-CDCI banks, suggesting that the CDCI banks were in a somewhat  better position to avoid financial losses. As of December 31, 2013,  remaining CDCI banks had a median tier 1 capital ratio of 15.88,  compared with 13.67 for the non-CDCI banks. The median common  equity tier 1 ratio for the remaining CDCI banks was 14.44, compared  with 13.50 for non-CDCI banks.
Finally, remaining CDCI banks had higher reserves for covering losses  compared with non-CDCI banks. Higher reserves suggest that the banks  are better positioned to withstand losses. As of December 31, 2013, the  median ratio of reserves to nonperforming loans was about one-third  greater for remaining CDCI banks as for non-CDCI banks (61.30  compared with 41.68). However, similar percentages of banks in each  group (about 14 percent of CDCI banks and about 18 percent of non- CDCI banks) had ratios of reserves to nonperforming loans exceeding  100.00. In other words, these banks had at least one dollar of reserves for  every potential dollar of losses on nonperforming loans.
section_title: Credit Unions
paragraphs: CDCI credit unions had lower assets and were generally weaker than  nonparticipating certified CDFI credit unions (non-CDCI credit unions) on  several measures that regulators commonly use to assess the financial  health of these institutions. Specifically, as of December 31, 2013, CDCI  credit unions had a median asset size of $19.3 million, compared with  $29.9 million for non-CDCI credit unions (see table 3). While the largest  CDCI credit union had assets of less than $300 million, 6 of the 126 non- CDCI credit unions had assets exceeding $1.0 billion. Remaining CDCI  credit unions were less profitable than non-CDCI credit unions and held  slightly more poorly performing assets. As of December 31, 2013,  remaining CDCI credit unions also had a median return on average  assets of 0.27, compared to 0.53 for non-CDCI credit unions. A greater  percentage of the remaining CDCI credit unions than non-CDCI credit  unions had a negative return on average assets (about 26 percent, or 10  of 39 CDCI credit unions, compared to about 19 percent, or 24 of 126  non-CDCI credit unions). A negative return on average assets means that  the credit union’s earnings did not cover its operating expenses and cost  of funds. In addition, remaining CDCI credit unions held more poorly  performing assets than non-CDCI credit unions. For example, remaining  CDCI credit unions had a delinquent loan ratio of 1.78, compared to 1.43  for non-CDCI credit unions. However, remaining CDCI credit unions had  a slightly lower median ratio of net charge-offs to average loans than non- CDCI credit unions (0.54 compared with 0.61), indicating slightly more  effective lending and collection practices.
Remaining CDCI credit unions also had less capital as a percentage of  total assets than non-CDCI credit unions. Specifically, remaining CDCI  credit unions had a lower median net worth ratio—net worth as a  percentage of total assets—than non-CDCI credit unions. Net worth  mitigates fluctuations in earnings, supports growth, and provides  protection against insolvency. As of December 31, 2013, CDCI credit  unions had a median net worth ratio of 7.35, compared with 9.98 for non- CDCI credit unions. For purposes of capital adequacy, a net worth of 7  percent or greater of total assets is considered well-capitalized. Forty-one  percent of the remaining credit unions (16 of 39) had net worth ratios less  than 7 percent, while only about 10 percent of non-CDCI credit unions (12  of 126) fell below the 7 percent threshold.
Finally, CDCI credit unions were at slightly greater risk of experiencing a  decline in net worth from delinquent loans than non-CDCI credit unions.  For a credit union, declining net worth is similar to a bank’s having lower  reserves for covering losses. As of December 31, 2013, remaining CDCI  credit unions had a median ratio of total delinquent loans to net worth of  9.18, compared to 8.30 for non-CDCI credit unions.
section_title: Agency Comments
paragraphs: We provided a draft of this report to Treasury, FDIC, and NCUA for their  review and comment. Treasury provided written comments that we have  reprinted in appendix II. In its written comments, Treasury concurred with  our findings, noting that the report provides constructive insights into  Treasury’s efforts to help CDFIs and the communities they serve cope  with the effects of the financial crisis. Treasury stated that it continues to  explore various exit strategies for its CDCI investments and that any  decision would need to balance the mission of CDCI, which focuses on  communities and populations that lack access to certain financial  services, with the need to protect the taxpayers’ investment. NCUA also  provided written comments that we have reprinted in appendix III. NCUA  agreed with our representation of credit union information. Treasury,  FDIC, and NCUA also provided technical comments, which we  incorporated as appropriate.
We are sending copies of this report to the Special Inspector General for  TARP, interested congressional committees and members, Treasury,  FDIC, and NCUA. The report also is available at no charge on the GAO  website at http://www.gao.gov.
If you or your staff members have any questions about this report, please  contact A. Nicole Clowers at (202) 512-8678 or clowersa@gao.gov.
Contact points for our Offices of Congressional Relations and Public  Affairs may be found on the last page of this report. GAO staff who made  major contributions to this report are listed in appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report examines (1) the financial status of the Department of the  Treasury’s (Treasury) Community Development Capital Initiative (CDCI),  including repayments and other proceeds, investments outstanding, and  the estimated lifetime cost of the program; (2) factors affecting  participants’ decisions to remain in or leave the program and Treasury’s  exit strategy; and (3) the financial condition of institutions remaining in  CDCI.
To assess the financial status of CDCI, we analyzed data from Treasury.  In particular, we used Treasury’s April 2014 Monthly Report to Congress  and April 2014 Dividends and Interest Report to determine the dollar  amounts of principal, dividends, and interest; outstanding investments;  the number of remaining and former participants; and the estimated  lifetime cost of the program.
To examine factors affecting participants’ decisions to remain in or leave  the program and Treasury’s exit strategy, we selected and attempted to  contact a nonprobability, judgmental sample of 9 of the 29 banks and 12  of the 40 credit unions remaining in CDCI as of March 31, 2014. To draw  the sample, we split the remaining institutions into banks and credit  unions and divided each list of institutions into four groups according to  their total asset size as of September 30, 2013. We selected the largest  three banks and the largest credit union. We then randomly ordered the  other institutions based on asset size categories and selected the first two  to five institutions in each category, depending on the total number of  institutions in that category. We selected and attempted to contact 9  banks and 12 credit unions. These samples reflected each institution  type’s proportions in the total list of 69 remaining institutions and reflected  a variety of geographic areas. We were able to conduct interviews by  phone with managers at 8 of the 9 banks and 9 of the 12 credit unions.  These interviews consisted of a brief set of questions about each  institution’s negative and positive experiences with CDCI, their plans for  repayment, and factors affecting those plans. The results of our  interviews cannot be generalized to all remaining CDCI banks and credit  unions. We also interviewed officials from the National Credit Union  Administration (NCUA), associations that represent banks and credit  unions that received CDCI capital, and an organization that invests in  some of the CDCI banks, to obtain their observations on the same topics.  Specifically, we met with representatives of the Community Development  Bankers Association, the National Bankers Association, the National  Federation of Community Development Credit Unions, the National  Association of Federal Credit Unions, and the National Community  Investment Fund. Finally, we reviewed Treasury reports and public  statements and interviewed Treasury officials to obtain information on  CDCI and Treasury’s exit strategy.
To assess the financial condition of institutions that received investments  under CDCI, we used data from Treasury’s Dividends and Interest reports  from November 2010 through February 2014 (the most recent month in  which quarterly payments were due) to determine the extent to which  participants had missed payments throughout the life of the program. We  also obtained from the Federal Deposit Insurance Corporation (FDIC) the  number of remaining CDCI banks (as of Feb. 28, 2014) on its problem  bank list. Similarly, we obtained information from NCUA on the number of  remaining CDCI credit unions it considered “troubled” as of March 13,  2014.
In addition, we used SNL Financial (a private service that disseminates  data from quarterly regulatory reports, among other information) to obtain  regulatory financial data on the 68 remaining CDCI banks and credit  unions and on comparison groups of institutions that were eligible for but  did not participate in CDCI. To identify the comparison groups, we used  Treasury’s CDFI Fund’s list of certified CDFIs as of February 28, 2014.  This list included 127 banks, thrifts, and depository institution holding  companies, as well as 176 credit unions. We chose to limit our  comparison groups to certified CDFIs rather than the universe of banks  and credit unions because they shared a community development  mission and generally have smaller asset sizes. SNL Financial had data  on all of the 127 CDFI banks, thrifts, and depository institution holding  companies (“banks”) and 171 of the 176 CDFI credit unions. We divided  the bank and credit union lists into three groups each: (1) those remaining  in CDCI, (2) those that had exited CDCI, and (3) those that had never  participated in CDCI. We defined remaining CDCI institutions as those  with their full or partial investments outstanding; this group included the  29 banks and 39 credit unions. For both the bank and credit union  analyses, we excluded the institutions that had exited CDCI because of  the small size of these groups of institutions. For example, six banks had  exited CDCI as of April 30, 2014, but SNL Financial only had current data  on three of them because the others had been acquired. Similarly, SNL  Financial had current data only on seven of the nine credit unions that  had exited as of April 30, 2014. We determined that the median values for  these small groups would not provide a meaningful illustration of the  financial condition of exited institutions. The final comparison groups  included 97 non-CDCI banks and 126 non-CDCI credit unions.
We conducted separate analyses for banks and credit unions because  the two types of institutions file different regulatory reports and have  different financial indicators. For our bank analysis, we used financial  measures that were similar to those we had identified in our previous  reporting on banks participating in Treasury’s Capital Purchase Program  (CPP). These measures help demonstrate an institution’s financial health  as it relates to a number of categories, including profitability, asset quality,  capital adequacy, and loss coverage. For our credit union analysis, we  obtained information from NCUA on the measures it typically uses to  assess credit unions’ financial health. We selected at least one measure  in each of the four categories (profitability, asset quality, capital  adequacy, and loss coverage) we used for the bank analysis. We chose  to present median values.
We determined that the financial information used in this report, including  the CDCI program data from Treasury and the financial data on banks  and credit unions from SNL Financial, was sufficiently reliable to assess  the status and condition of CDCI and institutions that participated in the  program. For the data from Treasury, we tested Treasury’s internal  controls over financial reporting as they related to our annual audit of the  Troubled Asset Relief Program (TARP) financial statements and found  the information to be sufficiently reliable based on the results of our audits  of fiscal years 2010 through 2013 financial statements. We assessed the  reliability of the SNL Financial data by performing manual testing of  required data elements and reviewing existing information about the data  and the system that produced them. In addition, we have assessed the  reliability of SNL Financial data as part of previous studies and found the  data to be reliable for the purposes of our review. We verified that no  changes had been made that would affect the data’s reliability.
We conducted this performance audit from February 2014 to June 2014  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Comments from the Department of the Treasury’s Office of Financial Stability
section_title: Appendix III: Comments from the National Credit Union Administration
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Kay Kuhlman (Assistant  Director), Lisa Reynolds (Analyst-in-Charge), Emily Chalmers, William  Chatlos, Chris Forys, Marc Molino, and Patricia Moye made significant  contributions to this report.