Capital Purchase Program: Revenues Have Exceeded Investments, but Concerns about Outstanding Investments Remain
Published: 2012-03-08T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Capital Purchase Program (CPP) was established as the primary means of restoring liquidity and stability to the financial system under the Troubled Asset Relief Program (TARP). Under CPP, the Department of the Treasury (Treasury) invested almost $205 billion in 707 eligible financial institutions between 2008 and December 2009. CPP recipients have made dividend and interest payments to Treasury on the investments. TARPs authorizing legislation requires GAO to report every 60 days on TARP activities, including those of CPP. This report examines (1) the status of CPP and (2) the financial condition of institutions receiving CPP investments.
GAO reviewed Treasury reports on the CPP program and participants and interviewed officials from Treasury and the financial regulators. Using financial and regulatory data, GAO compared the financial condition of institutions remaining in CPP with those that had exited the program and those that did not participate in CPP.
section_title: What GAO Found
paragraphs: While repayments, dividends, and interest from institutions participating in the Capital Purchase Program (CPP) have exceeded the programs original investment disbursements, the number of missed payments has increased over the life of the program. As of January 31, 2012, the Department of the Treasury (Treasury) had received $211.5 billion from its CPP investments, exceeding the $204.9 billion it had disbursed. Of that amount, $16.7 billion remains outstanding, and most of these investments were concentrated in a relatively small number of institutions. In particular, as of January 31, 2012, 25 institutions accounted for $11.2 billion, or 67 percent, of outstanding investments. As of November 30, 2011, Treasury estimated that CPP would have a lifetime income of $13.5 billion after all institutions exited the program. As of January 31, 2012, 341 institutions had exited CPP, almost half by repaying CPP with funds from other federal programs. Institutions continue to exit CPP, but the number of institutions missing scheduled dividend or interest payments has increased. For example, as of November 30, 2011, the number of institutions that had missed their quarterly payments rose to 158, a marked increase from 8 in February 2009, even though CPP had fewer participants. The number of CPP institutions designated as problem banksthat is, demonstrating financial, operational, or managerial weaknesses that threatened their continued financial viabilityalso rose from 47 in December 2009 to 130 in December 2011. Institutions that continue to miss payments and problem institutions may have difficulty ever fully repaying their CPP investments.
GAOs analysis showed that the remaining CPP institutions were financially weaker than institutions that had exited the program and institutions that did not receive CPP capital. In particular, the remaining CPP institutions tended to be less profitable and hold riskier assets than other institutions of similar asset size. Among other things, they had significantly lower returns on average assets and higher percentages of noncurrent loans than former CPP and non-CPP institutions. They also held less regulatory capital and reserves for covering losses. Although GAOs analysis found differences in the financial health of remaining and former CPP institutions, Treasurys quarterly financial analysis of CPP institutions did not distinguish between them. In prior work, GAO has noted the importance of providing clear information to Congress and the public about the performance of the assistance provided through the various programs within the Troubled Asset Relief Program. By distinguishing between remaining and former CPP participants, Treasury could provide greater transparency about the financial health of institutions remaining in CPP.
section_title: What GAO Recommends
paragraphs: To provide Congress and the public with more transparent and comprehensive information on institutions remaining in CPP and enhance its reporting, the Secretary of the Treasury should consider analyzing and reporting on remaining and former CPP participants separately. Treasury stated that it would carefully consider our recommendation.

section_title: Letter
paragraphs: From October 2008 through December 2009, the U.S. Department of the  Treasury (Treasury) invested almost $205 billion in 707 financial  institutions as part of the government’s efforts to help stabilize U.S.  financial markets and the economy. These investments were made  through the Capital Purchase Program (CPP), which was the first and  largest initiative under the Troubled Asset Relief Program (TARP).  Specifically, Treasury’s authority under TARP enabled it to buy or  guarantee up to almost $700 billion of the “troubled assets” that it deemed  to be at the heart of the crisis, including mortgages, mortgage-backed  securities, and any other financial instruments, such as equity  investments. Treasury created CPP in October 2008 to provide capital to  viable financial institutions by using its authority to purchase preferred  shares and subordinated debt. In return for its investments, Treasury  received dividend or interest payments and warrants. The program was  closed to new investments on December 31, 2009, and since then  Treasury has continued to oversee its CPP investments and collect  dividend and interest payments and sell warrants. Some participants have  repurchased their preferred shares or subordinated debt and exited the  program with the approval of their primary bank regulators.
Rather than purchasing troubled mortgage-backed securities and whole  loans, as initially envisioned under TARP, Treasury used CPP  investments to strengthen financial institutions’ capital levels. Treasury  determined that strengthening capital levels was the more effective  mechanism to help stabilize financial markets, encourage interbank  lending, and increase confidence in lenders and investors. Treasury  believed that strengthening the capital positions of viable financial  institutions would enhance confidence in the institutions themselves and  the financial system overall and increase the institutions’ capacity to  undertake new lending and support the economy. Financial institutions  interested in receiving CPP investments sent their applications directly to  their primary federal banking regulators, which performed the initial  evaluations. Institutions were evaluated to determine their long-term  strength and viability, and weaker institutions were encouraged by their  regulators to withdraw their applications. Treasury’s Office of Financial  Stability (OFS), established to implement TARP, made the final decisions,  although the regulators provided recommendations for approving or  denying applications. In October 2010, we reported that while Treasury’s  processes included multiple reviews of CPP applicants, certain  operational control weaknesses offered “lessons learned” for similarly  designed programs, such as the Small Business Lending Fund (SBLF).
Section 116 of EESA, 122 Stat. at 3783 (codified at 12 U.S.C. § 5226). expands on that work.including repayments and other proceeds, restructuring of investments,  and timeliness of dividend payments, and (2) the financial condition of  institutions that received investments under CPP compared with  institutions that have exited CPP and those that did not participate in the  program.
This report examines (1) the status of CPP,  To assess the status of CPP, we analyzed Treasury’s reports, which  included the amount of investments outstanding, the number of  institutions that had repaid their investments, and the amount of dividends  paid, among other things. We also interviewed Treasury officials  responsible for the program. To assess the financial condition of  institutions that received investments under CPP, we used financial and  regulatory data to compare the financial condition of institutions that  received CPP investments with those that did not. We determined that the  financial information we used was sufficiently reliable to assess the  condition and status of CPP and institutions that participated in the  program. We also leveraged our past reporting on TARP, as well as that  of the Special Inspector General for TARP, as appropriate. Appendix I  has more information on our scope and methodology.
We conducted this performance audit from August 2011 to March 2012 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 2008, CPP was the primary initiative under TARP to help  stabilize the financial markets and banking system by providing capital to  qualifying regulated financial institutions through the purchase of senior  preferred shares and subordinated debt. On October 14, 2008, Treasury  allocated $250 billion of the original $700 billion in overall TARP funds for  CPP. The allocation was subsequently reduced in March 2009 to reflect  lower estimated funding needs, as evidenced by actual participation  rates. The program was closed to new investments on December 31,  2009.
Under CPP, qualified financial institutions were eligible to receive an  investment of between 1 and 3 percent of their risk-weighted assets, up to  a maximum of $25 billion. generally received senior preferred shares that would pay dividends at a  rate of 5 percent annually for the first 5 years and 9 percent annually  thereafter. EESA required that Treasury also receive warrants to  purchase shares of common or preferred stock or a senior debt  instrument to further protect taxpayers and help ensure returns on the  investments. Institutions are allowed to repay CPP investments with the  approval of their primary federal bank regulator and afterward to  repurchase warrants at fair market value.
Risk-weighted assets are all assets and off-balance-sheet items held by an institution,  weighted for risk according to the federal banking agencies’ regulatory capital standards.  In May 2009, Treasury increased the maximum amount of CPP funding that small  financial institutions (qualifying financial institutions with total assets of less than $500  million) could receive from 3 to 5 percent of risk-weighted assets.
Federal Reserve System, as well as bank and financial holding  companies;
Federal Deposit Insurance Corporation (FDIC), which provided  primary federal oversight of any state-chartered banks that were not  members of the Federal Reserve System;
Office of the Comptroller of the Currency (OCC), which was  responsible for chartering, regulating, and supervising commercial  banks with national charters; and
Office of Thrift Supervision (OTS), which chartered federal savings  associations (thrifts) and regulated and supervised federal and state  thrifts and savings and loan holding companies. OTS has since been  eliminated.
The primary federal regulator is generally the regulator overseeing the lead bank.  Primary federal regulators of bank holding companies also consult with the Federal  Reserve. referred to an interagency CPP Council composed of representatives  from the four banking regulators, with Treasury officials as observers. The  CPP Council evaluated and voted on the applicants, forwarding to  Treasury applications that received “approval” recommendations from a  majority of the council members. Treasury provided guidance to  regulators and the CPP Council to use in assessing applicants that  permitted consideration of factors such as signed merger agreements or  confirmed investments of private capital, among other things, to offset low  examination ratings or other attributes of weaknesses. Finally, institutions  that the banking regulators determined to be the weakest and thus  ineligible for a CPP investment, such as those with the lowest  examination ratings, received a presumptive denial recommendation.
The banking regulators or the CPP Council sent recommendations for  approval to Treasury’s Investment Committee, which was composed of  three to five senior Treasury officials, including OFS’s Chief Investment  Officer (who served as the committee chair) and the assistant secretaries  for financial markets, economic policy, financial institutions, and financial  stability at Treasury. The Investment Committee could also request  additional analysis or information in order to clear up any concerns before  deciding on an applicant’s eligibility. After completing its review, the  Investment Committee made recommendations to the Assistant Secretary  for Financial Stability for final approval. Once the Investment Committee  recommended preliminary approval, Treasury and the approved  institution initiated the closing process to complete the investment and  disburse the CPP funds.
Nine major financial institutions were initially included in CPP.institutions did not follow the application process that was ultimately  developed but were included because Treasury and the federal banking  regulators considered them essential to the operation of the financial  system. At the time, these nine institutions held about 55 percent of U.S.  banking assets and provided a variety of services, including retail,  wholesale, and investment banking and custodial and processing  services. According to Treasury officials, the nine financial institutions  agreed to participate in CPP in part to signal the program’s importance to  the stability of the financial system. Initially, Treasury approved $125  billion in capital purchases for these institutions and completed the   These  transactions with eight of them on October 28, 2008, for a total of $115  billion. The remaining $10 billion was disbursed after the merger of Bank  of America Corporation and Merrill Lynch & Co., Inc. was completed in  January 2009.
section_title: Treasury Estimates a Lifetime Gain for CPP, but Concerns about Some Investments Remain
paragraphs: Repayments and income from dividends, interest, and warrants from CPP  investments have exceeded the amounts originally disbursed, but  concerns remain about the financial strength of the remaining institutions  and their ability to repay and exit the program. As we have reported,  Treasury disbursed $204.9 billion to 707 financial institutions nationwide  from October 2008 through December 2009. As of January 31, 2012,  Treasury had received $211.5 billion in repayments and income from its  CPP investments, exceeding the amount originally disbursed by $6.6  billion (see fig. 2). The repayments and income amount included $185.5  billion in repayments of original CPP investments as well as $11.4 billion  in dividends, interest, and fees; $7.7 billion in warrants sold; and $6.9  billion in gains from the sale of Citigroup common stock. After accounting  for write-offs and realized losses totaling $2.7 billion, CPP had $16.7  billion in outstanding investments as of January 31, 2012. Although this  $16.7 billion is still potentially at risk, Treasury estimated a lifetime gain of  $13.5 billion for CPP as of November 30, 2011.
As of January 31, 2012, 52 percent (366) of the original 707 institutions  remained in CPP. These institutions accounted for $16.7 billion in  outstanding investments, or 8 percent of the original amount disbursed.  About two-thirds of the outstanding investments were concentrated in a  relatively small number of institutions (see fig. 3). Specifically, 25  remaining CPP investments accounted for $11.2 billion, or 67 percent of  outstanding investments. In contrast, the remaining $5.5 billion (33  percent) was spread among 341 institutions.
On a geographical basis, outstanding CPP investments were relatively  widely disbursed throughout the United States as of January 31, 2012. All  but 3 states and the District of Columbia had at least 1 institution with  CPP investments outstanding, and 25 states had at least 5 such  institutions (see fig. 4). California had the highest number of remaining  CPP institutions with 33, followed by Illinois with 24. These states also  had the highest number of original CPP recipients (72 and 45,  respectively). In terms of total CPP investments outstanding, however,  Alabama had the largest amount ($3.6 billion), followed by Utah ($1.4  billion), Georgia ($1.4 billion), and Puerto Rico ($1.3 billion).
Nearly half (341) of the 707 institutions that originally participated in CPP  had exited the program as of January 31, 2012. Of the 341 institutions  that exited CPP, 43 percent, or 146 institutions, exited by fully repaying  their investments. Another 48 percent, or 165 institutions, exited CPP by  exchanging their investments under other federal programs: 28 through  the Community Development Capital Initiative (CDCI) and 137 through  the SBLF program (see fig. 5).CPP recipients that exited the program, 15 went into bankruptcy or  receivership, 12 had investments sold by Treasury, and 3 merged with  another institution.
CPP dividend and interest payments are due on February 15, May 15, August 15, and  November 15 of each year, or the first business day subsequent to those dates. The  reporting period ends on the last day of the calendar month in which the dividend or  interest payment is due. number of institutions missing dividend or interest payments due on their  CPP investments increased steadily from 8 in February 2009 to 158 in  November 2011, or about 42 percent of institutions still in the program  (see fig. 6). This increase has occurred while program participation has  declined, and the proportion of those missing scheduled payments has  risen accordingly. The number of institutions missing payments has  stabilized since February 2011, but most of these institutions continued to  miss them. In particular, 119 of the 158 institutions that missed payments  in November 2011 had also missed payments in each of the previous  three quarters. Moreover, only 7 of the 158 institutions had never missed  a previous payment.
On July 19, 2011, Treasury announced that it had, for the first time,  exercised its right to elect members to the boards of directors of two of  the remaining CPP institutions. In considering whether to nominate  directors, Treasury said that it proceeds in two steps. First, after an  institution misses five dividend or interest payments, Treasury sends OFS  staff members to observe board meetings. Second, once an institution  has missed six dividend payments, Treasury decides whether to  nominate a board member based on a variety of considerations, including  what it learns from the board meetings, the institution’s financial condition,  the function of its board of directors, and the size of its investment.January 31, 2012, Treasury had elected 12 board members to 7 CPP  institutions.
At the same time that the number of institutions missing dividend  payments has risen, the number of CPP institutions on FDIC’s problem  bank list has generally increased. FDIC compiles a list of banks with  demonstrated financial, operational, or managerial weaknesses that  threaten their continued financial viability and publicly reports the number  of such institutions on a quarterly basis. While some CPP funds were  disbursed to bank holding companies, FDIC’s problem bank list does not  include them. FDIC accounted for bank holding companies participating in  CPP when their subsidiary depositories were designated as problem  banks. It is possible that a bank holding company CPP recipient  downstreamed CPP funds to a subsidiary depository that appeared on  the problem bank list. However, it is unclear the extent to which this  downstreaming occurred and thus the extent to which subsidiaries on the   As of December 31, 2009, 47  list may have benefitted from CPP funds. CPP institutions were on the problem bank list (see fig. 7). This number  had grown to 120 institutions by December 31, 2010, and to 130 by  December 31, 2011. The number of these institutions increased every  quarter from March 2009 to June 2011 and rose even as the number of  institutions participating in CPP declined. As figure 7 shows, the number  of problem banks fell slightly for the first time in the third quarter of 2011.  Federal and state bank regulators may not allow such institutions to make  dividend payments in an effort to preserve their capital and promote  safety and soundness.
Multiple subsidiary depositories of the same CPP bank holding company that were  designated as problem banks were counted separately.
subsections: section_title: The Financial Strength of CPP Participants is a Key Consideration in Exiting the Program
paragraphs: The financial strength of the participating institutions will largely determine  the speed at which they repay their investments and exit CPP and thus is  a key factor in the program’s total lifetime income. Institutions will have to  demonstrate that they are financially strong enough to repay their CPP  investments in order to receive regulatory approval to exit the program.  The institutions’ financial strength will also be a primary factor in whether  they make dividend payments, and institutions that continue to miss  payments may have difficulty exiting CPP. Financial institutions that are  on the problem bank list because of their financial weaknesses, as  identified by their regulators, may also face challenges exiting the  program. In late 2013, CPP dividend and interest rates will begin  increasing (as described earlier), and the increase may prompt  institutions to repay their investments more quickly. If broader interest  rates are low, especially approaching the date that the dividend resets,  banks could have a further incentive to redeem their preferred shares.
However, the increased dividend rate could make exiting even more  difficult for problem banks and those that have missed payments.
As we have previously reported, in unwinding TARP programs, Treasury  has stated that it strives to protect taxpayer investment and maximize  overall investment returns with competing constraints, promote the  stability of financial markets and the economy by preventing disruptions,  bolster markets’ confidence to increase private capital investment, and  dispose of the investments as soon as it is practicable. As we and  others have noted, these goals at times conflict—that is, maximizing  returns on investments may require Treasury to hold the assets until their  value increases, creating a conflict with the goal of exiting as soon as  practicable. Treasury officials told us that Treasury’s practice was  generally to hold rather than sell its CPP investments. As a result,  Treasury’s ability to exit the program would depend on the ability of  institutions to repay their investments. However, Treasury officials noted  that, if warranted, Treasury could change its practice in the future and sell  more of its investments to third parties.
section_title: Remaining CPP Institutions Are Financially Weaker than Former CPP and Non-CPP Institutions, but Treasury’s Analysis Does Not Show This Difference
paragraphs: Institutions that remain in CPP tend to be financially weaker than  institutions that have exited the program and institutions that did not  receive CPP capital. Our analysis considered various measures that  describe banking institutions’ profitability, asset quality, capital adequacy,  and ability to cover losses. The analysis focused on institutions with under  $10 billion in assets, a group that constituted nearly all of the remaining  institutions. We analyzed financial data on 352 remaining CPP  institutions and 256 former CPP institutions that exited CPP through full  repayments or conversion to CDCI or SBLF. These two groups  accounted for 608 of the 707 institutions that participated in CPP. We  compared these two groups to a non-CPP group (i.e., institutions that  have not participated in CPP and have less than $10 billion in assets) of  8,040 active financial institutions for which financial information was  available. All financial information generally reflects quarterly regulatory  filings on December 31, 2011.
subsections: section_title: Remaining CPP Institutions Are Generally Less Profitable and Hold Riskier Assets
paragraphs: Profitability measures for remaining CPP institutions were lower than  those for former CPP participants and the non-CPP group. From March  2008 to December 2011, the remaining CPP institutions consistently had  lower quarterly return on average assets values than the other groups  (see fig. 8). This measure shows how profitable a company is relative to  its total assets and how efficient management is at using its assets to  generate earnings. For the quarter ending December 31, 2011, remaining  CPP institutions had a median return on average assets of 0.25,  compared with 0.74 for former CPP institutions and 0.69 for the non-CPP  group. The return on average equity measure, which shows the profit a  company generates with the money shareholders have invested, showed  a similar but more pronounced relationship. The median return on  average equity was 2.71 for remaining CPP institutions, compared with  7.15 for former CPP institutions and 6.22 for the non-CPP group.
Further, the median net interest margin—another important measure of  profitability—was consistently lower for remaining CPP institutions than  for the other groups, but the differences were less pronounced,  particularly in recent quarters (see fig. 9). The net interest margin  measures a company’s investment decisions by comparing its investment  returns to its interest expenses. A higher margin indicates a more  successful business strategy. For the quarter ending December 31, 2011,  the median net interest margin was lowest (3.74) for the remaining CPP  institutions. However the medians were not significantly higher for the  other two groups—3.90 for former CPP institutions and 3.79 for the non- CPP group.
Not only were remaining CPP institutions less profitable than former CPP  institutions and the non-CPP group, but they also held relatively more  poorly performing assets, as measured by several financial indicators.  First, remaining CPP institutions had a consistently higher percentage of  noncurrent loans than former CPP institutions and the non-CPP group  from March 2008 to December 2011 (see fig. 10). While the median  noncurrent loan percentage increased over time for each group before  leveling off, the rate of growth was steeper and the period of growth  lasted longer for the remaining CPP institutions. As of December 31,  2011, a median of 4.18 percent of loans for remaining CPP institutions  were noncurrent, compared with 1.68 percent for former CPP institutions  and 1.70 percent for the non-CPP group. Second, remaining CPP  institutions had a higher median ratio of net charge-offs to average loans  (1.22) than both former CPP institutions (0.47) and the non-CPP group  (0.30), as of December 31, 2011.
Finally, both remaining and former CPP institutions tended to hold loans  that were more concentrated in risky business lines than those held by  the non-CPP group, although the differences, and the overall percentages  of these loans, were relatively small for one loan category. Both  remaining and former CPP institutions had higher proportions of  commercial real estate and construction and land development loans  compared with the non-CPP group (see fig. 11). As we have reported,  delinquencies on commercial real estate loans have more than doubled  since the onset of the financial crisis in 2008, and such loans are prone to  volatility because of high transaction costs, rigid and constrained supply,  and a number of other factors. While remaining CPP institutions had  about the same proportion of commercial real estate loans overall as the  former CPP institutions (about 35 percent), they had a noticeably higher  proportion of construction and land development loans compared to the  non-CPP group. Although these loans made up only about 4 to 8 percent  of the banks’ overall portfolios, construction and land development loans  are generally considered to be particularly risky. For example, they often  have long development times and can include properties that are built  without firm commitments from buyers or lessees.
Compared with former CPP institutions and the non-CPP group,  remaining CPP institutions held less regulatory capital as a percentage of  assets. Regulators require minimum amounts of capital to lessen an  institution’s risk of default and improve its ability to sustain operating  losses. Capital can be measured in several ways, but we focused on Tier  1 capital, which includes both risk-based and common risk-based  measures, because it is the most stable form of regulatory capital. The  Tier 1 risk-based capital ratio measures Tier 1 capital as a share of risk- weighted assets, and the common equity Tier 1 ratio measures common  equity Tier 1 as a share of risk-weighted assets.
Remaining CPP institutions had lower Tier 1 capital levels than former  CPP institutions and the non-CPP group. On a quarterly basis, for  example, the Tier 1 risk-based capital ratio for remaining CPP participants  generally remained well below those for the former CPP institutions and  the non-CPP group from March 2008 to December 2011 (see fig. 12).  While Tier 1 capital levels of the remaining institutions have trended  slightly upward since December 2009, levels for the other two groups  rose at a slightly higher rate, increasing the gap between the groups. As  of December 31, 2011, Tier 1 capital accounted for 12.38 percent of risk- weighted assets for remaining CPP institutions compared with 14.09  percent for former CPP institutions and 14.81 percent for the non-CPP  group.
Because Tier 1 capital for the remaining institutions includes funds  received through TARP, ratios using common equity Tier 1—which  generally does not include TARP funds—may better illustrate these  institutions’ capital adequacy. For the remaining CPP institutions, TARP  funds comprised a median of 25 percent of the institution’s Tier 1 capital.  As was the case with the Tier 1 risk-based capital ratio, the common  equity Tier 1 ratio for remaining CPP institutions generally remained well  below those for the former CPP institutions and the non-CPP group from  March 2008 to December 2011 (see fig. 12). However, the differences  between both CPP groups and the non-CPP group were more  pronounced possibly because common equity Tier 1 generally does not  include TARP funds. While the ratio for remaining CPP institutions  stayed relatively stable from March 2008 to December 2010, it has since  begun increasing slightly. As of December 31, 2011, the common equity  Tier 1 ratio was lower for remaining CPP institutions than the other two  groups. In particular, common equity Tier 1 for remaining CPP institutions  comprised a median of 10.53 percent of risk-weighted assets, compared  with 12.09 percent for former CPP institutions and 14.68 percent for the  non-CPP group.
In addition to holding less regulatory capital than former CPP institutions  and the non-CPP group, remaining CPP institutions also had significantly  lower reserves for covering losses. On a quarterly basis, the median ratio  of reserves to nonperforming loans was consistently lower for remaining  CPP institutions than for the other groups from March 2008 to December  2011 (see fig. 14). The ratio for all three groups declined in 2008 and  2009, and while it began to stabilize for the non-CPP group in 2010, it  continued to decline for remaining CPP institutions. As of December 31,  2011, the ratio of reserves to nonperforming loans was lower for  remaining CPP institutions (40.87) than for former CPP participants  (70.93) and the non-CPP group (59.56). We also compared loan loss  provisions to net charge-offs and found that the remaining CPP  institutions had lower ratios (74.48) than former CPP institutions (92.47)  but higher than the non-CPP group (72.78).
Remaining CPP institutions also had noticeably higher Texas Ratios than  former CPP institutions and the non-CPP group. 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.  On a quarterly basis, median Texas Ratios for remaining CPP institutions  remained consistently above those for former CPP institutions and the  non-CPP group from March 2008 to December 2011 and rose at a faster  rate (see fig. 15). Since December 2010, median Texas Ratios for  remaining CPP institutions have stabilized, while those for former CPP  and the non-CPP group have shown slight decreases. As of December  31, 2011, remaining CPP institutions had a median Texas Ratio of 51.14,  compared with 20.06 for former CPP institutions and 17.20 for the non- CPP group. Moreover, about 19 percent (66) of the 352 remaining CPP  institutions had a Texas Ratio of more than 100 percent, indicating an  elevated likelihood of failure, compared with only about 1 percent (3) of  the 256 former CPP institutions.
To assess CPP’s effect on lending by depository institutions, Treasury  began publishing a quarterly analysis of CPP institutions. The analysis  included financial data in three categories: balance sheet and off-balance  sheet items, performance ratios, and asset quality measures. Treasury  grouped the institutions by asset size and separated institutions that  received CPP funds from those that did not.
However, Treasury did not compare remaining CPP institutions to former  CPP institutions. While Treasury’s analysis is intended to measure CPP’s  effect on the financial institutions that participated, its analysis could also  provide useful information about the relative likelihood of remaining  institutions to repay their investments and exit the program. Our analysis  found differences in the financial condition of remaining and former CPP  institutions, suggesting that the remaining CPP institutions could face  challenges in repaying CPP funds and exiting the program. Treasury said  that it did not perform this analysis because the quarterly CPP report was  designed only to group banks into categories based on asset size and to  analyze the differences between CPP and non-CPP institutions.
In our prior work, we noted that Treasury should ensure transparency in  providing financial assistance to private market participants, especially  given the unprecedented government assistance it provided to the  banking industry during the recent financial crisis. We also  recommended that Treasury ensure that external stakeholders, including  Congress and the public, are informed about the program’s current  strategy.
Treasury’s quarterly CPP analysis is a useful tool in providing  transparency about the public’s investment in financial institutions. In  addition, Treasury makes public a variety of products on its website— including transaction reports, dividend and interest reports, and monthly  105(a) reports—that account for all investments and provide program- level summaries for all TARP programs. However, the usefulness and  transparency of Treasury’s quarterly CPP analysis—which includes  detailed bank financial measures—could be enhanced by distinguishing  between former and remaining CPP institutions because the financial  characteristics of these two groups differ. As a result, Congress and the  public would benefit from a more complete and meaningful picture of the  condition of the remaining institutions.
section_title: Conclusions
paragraphs: CPP repayments and other income surpassed the program’s original  investment disbursements, and as institutions continue to exit CPP, this  surplus continues to grow. Furthermore, Treasury’s latest estimate  (November 30, 2011) projects CPP’s lifetime income to be $13.5 billion.  However, a growing number of the remaining institutions have missed  scheduled dividend or interest payments or appeared on FDIC’s problem  bank list. As a result, there is increased concern regarding the speed at  which institutions will be able to repay remaining funds and how much of  these funds Treasury will ultimately recover. In particular, our analysis  showed that institutions remaining in CPP were generally less profitable,  held riskier assets and less regulatory capital, and had lower reserves for  covering losses compared with institutions that repaid their CPP  investment and those that never participated in the program. Despite the  noticeably different financial profiles for remaining and former CPP  institutions, Treasury’s quarterly analysis of CPP institutions does not  distinguish between these two groups. As we have indicated in past  reports on TARP, transparency remains a critical element in the  government’s unprecedented assistance to the financial sector. Such  transparency helps clarify to policymakers and the public the costs of  TARP assistance and the government’s intervention in various markets.  Enhancing the quarterly CPP analysis by distinguishing between  remaining and former CPP participants will help Treasury provide  Congress and the public with a more transparent and comprehensive  understanding of the status of CPP and the institutions that participate   in it.
section_title: Recommendation for Executive Action
paragraphs: To provide Congress and the public with more transparent and  comprehensive information on remaining CPP institutions and enhance  its reporting, the Secretary of the Treasury should consider analyzing and  reporting on remaining and former CPP participants separately.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to Treasury for its review and comment.  Treasury provided written comments that we have reprinted in   appendix II.
In its written comments, Treasury stated that it would carefully consider  our recommendation to further enhance transparency by analyzing and  reporting on remaining and former CPP participants separately. Treasury  emphasized its ongoing commitment to keep the public informed of its  progress in winding down CPP. We believe that implementation of our  recommendation would further strengthen Treasury’s reporting to the  Congress and the public on the status of CPP.
We are sending copies of this report to the Financial Stability Oversight  Board, Special Inspector General for TARP, interested congressional  committees and members, and Treasury. The report also is available at  no charge on the GAO website at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  A. Nicole Clowers at (202) 512-8678 or clowersa@gao.gov, or Daniel  Garcia-Diaz at (202) 512-8678 or garciadiazd@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 III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The objectives of our report were to examine (1) the status of the Capital  Purchase Program (CPP), including repayments and other proceeds to  date, restructuring of investments, and timeliness of dividend payments,  and (2) the financial condition of institutions that received investments  under CPP compared with institutions that exited CPP and those that did  not participate in the program.
To assess the status of CPP at the program level, we analyzed data from  a number of sources including the Department of the Treasury (Treasury)  and the Federal Deposit Insurance Corporation (FDIC). In particular, we  used Treasury’s January 2012 Monthly 105(a) Report to Congress to  determine the dollar amounts of outstanding investments, the number of  remaining and former participants, and the geographical distribution of  each as of January 31, 2012. We also used data from Treasury’s  Dividends and Interest reports from February 2009 through November  2011 to determine the extent to which participants had missed payments  throughout the life of the program. We interviewed Treasury officials to  compare our missed payment counts with theirs and noted the reasons  for any differences. Finally, we obtained from FDIC summary information  on its quarterly problem bank list to show the trend of CPP institutions  appearing on the list from December 2008 through December 2011.
To assess the financial condition of institutions that received investments  under CPP, we reviewed industry documents—including summaries of  monitoring data used by banking regulators and Treasury—to identify  commonly used financial measures for depository institutions. These  measures help demonstrate an institution’s financial health related to a  number of categories including profitability, asset quality, capital  adequacy, and loss coverage. We obtained such financial data for all  depository institutions using SNL Financial—a private financial database  that contains publicly filed regulatory and financial reports. We merged  the data with SNL Financial’s CPP participant list to create the three  comparison groups—remaining CPP institutions, former CPP institutions,  and a non-CPP group comprised of all institutions that did not participate  in CPP. We analyzed financial data on 352 remaining CPP institutions  and 256 former CPP institutions that exited CPP through full repayments  or conversion to the Community Development Capital Initiative or the  Small Business Lending Fund, accounting for 608 of the 707 CPP  participants (see table 1). Our analysis focused on institutions with less  than $10 billion in assets, which constituted nearly all of the remaining  CPP institutions. Of the 99 CPP institutions excluded from our analysis,  11 were active participants with more than $10 billion in assets; 37 were  former participants with more than $10 billion in assets; and 51 had no  data available in SNL Financial, had been acquired, or were defunct. We  compared the remaining and former CPP institutions to a non-CPP group  of 8,040 active financial institutions for which financial information was  available. We chose to present median values, but we also analyzed  weighted averages and found the results to be similar. Financial data  were available from SNL Financial for 427 of the 608 CPP institutions,  and we accounted for an additional 181 institutions using the financial  information of the holding company’s largest subsidiary from SNL  Financial. All financial information reflects quarterly regulatory filings on  December 31, 2011, unless otherwise noted. We downloaded all financial  data from SNL Financial on February 20, 2012. Finally, we compared our  analysis with Treasury’s quarterly analysis of CPP institutions, and we  also leveraged our past reporting on the Troubled Asset Relief Program  (TARP), as well as that of the Special Inspector General for TARP, as  appropriate.
We determined that the financial information used in this report, including  CPP program data from Treasury and financial data on institutions from  SNL Financial, was sufficiently reliable to assess the condition and status  of CPP and institutions that participated in the program. For example, we  tested the Office of Financial Stability’s internal controls over financial  reporting as it relates to our annual audit of the office’s financial  statements and found the information to be sufficiently reliable based on  the results of our audits of fiscal years 2009, 2010, and 2011 financial  statements for TARP. We have assessed the reliability of SNL Financial  data—which is obtained from financial statements submitted to the  banking regulators—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 its reliability.
We conducted this performance audit from August 2011 to March 2012 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 Office of Financial Stability
section_title: Appendix III: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to the contacts named above, Christopher Forys, Emily  Chalmers, William Chatlos, Rachel DeMarcus, Michael Hoffman, Marc  Molino, Tim Mooney, and Patricia Moye made significant contributions to  this report.