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. 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. 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. 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. 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. 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. 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. 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. 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. 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.

Summary: 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. 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. 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.