All institutions  participating in CDCI are required to make quarterly dividend or interest  payments to Treasury. Treasury’s Estimated Lifetime Cost for CDCI Has Decreased as Participants Have Begun Exiting the Program

As of April 30, 2014, 68 of the original 84 CDCI institutions remained in  the program. CDCI participants have also  paid $38.3 million in dividends and interest. 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. 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. 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. 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. In addition, Treasury officials said that they would meet  with the federal financial regulators to discuss options. 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. Banks Remaining in CDCI Were Generally Financially Stronger Than Non-CDCI Banks, but Remaining Credit Unions Were Generally Weaker Than Non-CDCI Credit Unions

The financial health of remaining banks and credit unions differed relative  to institutions that did not participate in CDCI. Finally, remaining CDCI banks had higher reserves for covering losses  compared with non-CDCI banks. Remaining CDCI  credit unions were less profitable than non-CDCI credit unions and held  slightly more poorly performing assets. For purposes of capital adequacy, a net worth of 7  percent or greater of total assets is considered well-capitalized. Agency Comments

We provided a draft of this report to Treasury, FDIC, and NCUA for their  review and comment. Appendix I: Objectives, Scope, and Methodology

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 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. 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. 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.
Why GAO Did This Study

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.

What GAO Found

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.