Treasury created CPP to help stabilize the financial markets and banking system by providing capital to qualifying regulated financial institutions through the purchase of preferred shares and subordinated debt. Rather than purchasing troubled mortgage-backed securities and whole loans, as initially envisioned under TARP, Treasury used CPP investments to strengthen the capital levels of financial institutions. Treasury determined that strengthening capital levels was the more effective mechanism to help stabilize financial markets, encourage interbank lending, and increase confidence in the financial system. On October 14, 2008, Treasury allocated $250 billion of the original $700 billion, later reduced to $475 billion, in overall TARP funds for CPP. In March 2009, the CPP allocation was reduced to $218 billion to reflect lower estimated funding needs, as evidenced by actual participation rates. On December 31, 2009, the program was closed to new investments. Institutions participating in CPP entered into securities purchase agreements with Treasury. Under CPP, qualified financial institutions were eligible to receive an investment of 1 percent to 3 percent of their risk-weighted assets, up to $25 billion. In exchange for the investment, Treasury generally received preferred shares that would pay dividends. As of the end of 2014, all the institutions with outstanding preferred share investments were required to pay dividends at a rate of 9 percent, rather than the 5 percent rate that was in place for the first 5 years after the purchase of the preferred shares. EESA requires 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 after repayment, institutions are permitted to repurchase warrants on common stock from Treasury. Treasury continues to make progress winding down CPP. As of December 31, 2016, Treasury had received repayments and sales of original CPP investments for more than 97 percent of its original investment. For the life of the program, repayments and sales totaled almost $200 billion (see fig.1). In 2016, institutions’ repayments totaled about $25 million. Moreover, as of December 31, 2016, Treasury had received about $227 billion in returns, including repayments and income, from its CPP investments, which exceeds the amount originally disbursed by almost $22 billion. Income from CPP totaled about $27 billion, and included about $12 billion in dividend and interest payments, almost $7 billion in proceeds in excess of costs, and about $8 billion from the sale of warrants. After accounting for write-offs and realized losses from sales totaling about $5 billion, CPP had about $0.2 billion in outstanding investments as of December 31, 2016. Investments outstanding represent about 0.1 percent of the amount Treasury disbursed for CPP. Treasury’s most recent estimate of lifetime income for CPP (as of Sept. 30, 2016) was about $16 billion. As of December 31, 2016, 696 of the 707 institutions that originally participated in CPP had exited the program (see fig. 2). A total of 6 institutions exited CPP in 2016. Among the institutions that had exited the program, 262 repurchased their preferred shares or subordinated debentures in full. Another 165 institutions refinanced their shares through other federal programs. In addition, 190 institutions had their investments sold through auction, 43 institutions had their investments restructured through non-auction sales, and 32 institutions went into bankruptcy or receivership. The remaining 4 merged with other CPP institutions. The method by which institutions have exited the program has varied over time. From 2009 through 2011, a total of 336 institutions exited the program. During this 3-year period, most institutions exited by fully repaying the investment or by refinancing the investment through another program. From 2012 through 2016, a total of 360 institutions exited the program. During this 5-year period, most institutions exited by Treasury selling the investment through an auction, repaying the investment to Treasury, or restructuring the investment. Repayments. Repayments allow financial institutions to redeem their preferred shares in full. Institutions have the contractual right to redeem their shares at any time provided that they receive the approval of their primary regulator(s). Institutions must demonstrate that they are financially strong enough to repay the CPP investments to receive regulatory approval to proceed with a repayment exit. As of December 31, 2016, 262 institutions had exited CPP through repayments. Restructurings. Restructurings allow troubled financial institutions to negotiate new terms or discounted redemptions for their CPP investment. Treasury requires institutions to raise new capital from outside investors (or merge with another institution) as a prerequisite for a restructuring. With this option, Treasury receives cash or other securities that generally can be sold more easily than preferred stock, but the restructured investments sometimes result in recoveries at less than par value. According to Treasury officials, Treasury facilitated restructurings as an exit from CPP in cases where new capital investment and the redemption of the CPP investment by the institutions otherwise was not possible. Treasury officials said that they approved the restructurings only if the terms represented a fair and equitable financial outcome for taxpayers. Treasury completed 43 such restructurings through December 31, 2016. Auctions. Auctions allow Treasury to sell its preferred stock investments in CPP participants. Treasury conducted the first auction of CPP investments in March 2012, and has continued to use this strategy to sell its investments. As of December 31, 2016, Treasury had conducted a total of 28 auctions of stock from 190 CPP institutions. Through these transactions, Treasury received over $3 billion in proceeds, which was about 80 percent of the investments’ face amount. As we have previously reported, thus far Treasury has sold investments individually but noted that combining smaller investments into pooled auctions remained an option. Whether Treasury sells CPP investments individually or in pools, the outcome of this option will depend largely on investor demand for these securities and the quality of the underlying financial institutions. As of December 31, 2016, 11 institutions remained in CPP (see fig. 3). The largest outstanding investment, about $125 million, accounted for almost two-thirds of the outstanding CPP investments. The investments at the 10 other institutions ranged from about $1.5 million to $17 million. As figure 4 illustrates, Treasury’s original CPP investments were scattered across the country in 48 states and Puerto Rico and the amount of investments varied. Almost 4 percent (25) of the investments were greater than $1 billion and almost half (314) of the investments were less than $10 million. The largest investment totaled $25 billion and the smallest investment totaled about $300,000. The 11 institutions that remained in CPP as of December 31, 2016 were in Arkansas, California (2), Colorado, Florida, Kentucky, Maryland (2), Massachusetts, Missouri, and Puerto Rico. Treasury officials said that they expect the majority of the remaining institutions will require a restructuring to exit the program in the future because the overall weaker financial condition of the remaining institutions makes full repayment unlikely. However, they added that repayments, restructurings, and auctions all remain possible exit strategies for the remaining CPP institutions. Since we last reported in May 2016, Treasury continues to maintain its position of not fully writing off any investments. Treasury officials anticipate that the current strategy to restructure the remaining investments will result in a better return for taxpayers. According to officials, any savings achieved by writing off the remaining CPP assets and eliminating administrative costs associated with maintaining CPP would be limited, because much of the TARP infrastructure, such as staff resources, will remain intact for several years to manage other TARP programs. Treasury officials also noted that writing off the remaining assets, thereby not requiring repayment from the remaining institutions, would be unfair to the institutions that have already repaid their investment and exited the program. Treasury officials told us that they continue to have discussions with institutions about their plans to exit the program. Overall, the financial condition of institutions remaining in CPP as of December 31, 2016, appears to have improved since the end of 2011. As shown in figure 5, the median of all six indicators of financial condition that we analyzed improved from 2011 to September 30, 2016. However, some institutions show signs of financial weakness. As figure 5 illustrates, the median for the first three financial condition indicators—Texas ratio, noncurrent loan percentage, and net chargeoffs to average loans ratio—have decreased, which indicates stronger financial health. The median for the remaining three financial condition indicators—return on average assets, common equity Tier 1 ratio, and reserves to nonperforming loans—have increased, which also indicates stronger financial health. However, some institutions show signs of financial weakness. For example, 5 of the 11 institutions had negative return on average assets for the third quarter of 2016. Six institutions had a lower return on average assets for the third quarter of 2016, compared to the third quarter of 2011. The remaining institutions also had varying levels of reserves for covering losses, as measured by the ratio of reserves to nonperforming loans. For example, 4 institutions had lower levels of reserves for covering losses for the third quarter of 2016 compared to the third quarter of 2011. For 1 institution, four of the financial indicators had weakened from the third quarter of 2011 to the third quarter of 2016. Treasury officials stated that the remaining CPP institutions generally had weaker capital levels and poorer asset quality relative to institutions that had exited the program. They noted that this situation was a function of the life cycle of the program, because stronger institutions had greater access to new capital and higher earnings and were able to exit, while the weaker institutions had been unable to raise the capital or generate the earnings needed to exit the program. Of the remaining 11 CPP institutions as of December 31, 2016, 1 of the 9 required to pay dividends made the most recent scheduled dividend or interest payment. The 8 institutions that are delinquent have missed an average of 28 quarterly dividend payments, with 19 being the fewest missed payments and 32 being the most. Institutions can choose whether to pay dividends and may choose not to pay for a variety of reasons, including decisions they or their federal or state regulators make to conserve cash and capital. However, investors may view an institution’s ability to pay dividends as an indicator of its financial strength and may see failure to pay as a sign of financial weakness. Treasury officials told us that Treasury regularly monitors all institutions remaining in the program. For example, Treasury’s financial agent has provided quarterly valuations and credit reports for all of the institutions remaining in the CPP portfolio. In addition, Treasury has requested to attend the Board of Directors meetings at nine of the remaining institutions and has observed meetings at eight institutions. One institution has declined Treasury’s request. Treasury officials said that the agency currently does not plan to take any other actions with respect to its request to send a board observer to that institution but will continue to monitor the institution’s financial condition. As discussed previously, Treasury officials told us that they have continued to have discussions with institutions remaining in the program. We provided Treasury with a draft of this report for review and comment. Treasury provided technical comments that we have incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of the Treasury, and other interested parties. In addition, this report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me 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. In addition to the contact named above, Karen Tremba (Assistant Director), Anne Akin (Analyst-in-Charge), William R. Chatlos, Lynda Downing, Risto Laboski, John Mingus, Tovah Rom, Jena Sinkfield, and Tyler Spunaugle have made significant contributions to this report.

Summary: CPP was established as the primary means of restoring stability to the financial system under the Troubled Asset Relief Program (TARP). Under CPP, Treasury invested almost $205 billion in 707 eligible financial institutions between October 2008 and December 2009. CPP recipients have made dividend and interest payments to Treasury on the investments. The Emergency Economic Stabilization Act of 2008, as amended, includes a provision that GAO report at least annually on TARP activities and performance. This report examines (1) the status of CPP, including repayments, investments outstanding, and number of remaining institutions; and (2) the financial condition of institutions remaining in CPP. To assess the program's status, GAO reviewed Treasury reports on the status of CPP. In addition, GAO reviewed information from Treasury officials to identify the agency's current efforts to wind down the program. Finally, GAO used financial and regulatory data to assess the financial condition of institutions remaining in CPP. GAO provided a draft of this report to Treasury for its review and comment. Treasury provided technical comments that GAO incorporated as appropriate. The Department of the Treasury (Treasury) continues to make progress winding down the Capital Purchase Program (CPP). As of December 31, 2016, investments outstanding stood at almost $0.2 billion (see figure), which represents about 0.1 percent of the original amount disbursed. Treasury had received almost $200 billion in repayments, including about $25 million in 2016. Further, Treasury's returns for the program, including repayments and income, totaled about $227 billion, exceeding the amount originally disbursed by almost $22 billion. Of the 707 institutions that originally participated in CPP, 696 had exited the program, including 6 institutions in 2016. Treasury officials expect that the majority of the remaining institutions will require a restructuring to exit the program. Restructurings allow institutions to negotiate terms for their CPP investments. With this option, Treasury requires institutions to raise new capital or merge with another institution and Treasury agrees to receive cash or other securities, typically at less than par value. Treasury officials expect to rely primarily on restructurings because the overall weaker financial condition of the remaining institutions makes full repayment unlikely. The financial condition of the institutions remaining in CPP as of December 31, 2016, appears to have improved since the end of 2011, but some institutions show signs of financial weakness. For example, 5 institutions had negative returns on average assets (a common measure of profitability) for the third quarter of 2016.