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. 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. 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, and 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. In exchange for the investment, Treasury 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 CPP investments made in late 2008 began paying the higher thereafter.dividend or interest rate in late 2013 whereas the remaining investments will see the increase begin sometime in 2014. 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. As of January 31, 2014, a total of 624 of the 707 institutions that originally participated in CPP, about 88 percent, had exited the program. Of the 624 institutions that exited CPP, 239 institutions repurchased their preferred shares or subordinated debentures in full (see fig. 1). Another 165 institutions refinanced their shares through other federal programs: 28 through the Community Development Capital Initiative (CDCI) and 137 An additional 162 through the Small Business Lending Fund (SBLF).institutions had their investments sold through auction and 29 institutions went into bankruptcy or receivership. The remaining 29 had their investments sold by Treasury (25), or merged with another institution (4). Repayments and income from dividends, interest, and warrants from CPP investments have exceeded the amounts originally disbursed. Treasury disbursed $204.9 billion to 707 financial institutions nationwide from October 2008 through December 2009. As of January 31, 2014, Treasury had received $225 billion in repayments and income from its CPP investments, exceeding the amount originally disbursed by $20.1 billion (see fig. 2).in repayments and $2.8 billion in auction sales of original CPP investments as well as $18.9 billion in dividends, interest, and other income and $8.0 billion in warrants sold. After accounting for write-offs and realized losses totaling $4.7 billion, CPP had $2.1 billion in The repayments and income amount include $195.3 billion outstanding investments as of January 31, 2014. Treasury estimated a lifetime gain of $16.1 billion for CPP as of November 30, 2013. About half of the institutions (37 of 72) that responded to our questionnaire about the impact of the upcoming or recent increase in the dividend or interest rate on CPP securities stated that it impacted or is impacting their efforts to exit the CPP program and/or retire any outstanding CPP securities.that the institutions are taking a range of actions. Some institutions indicated that the increase led them to raise alternative capital. For example, one institution completed a public offering of common stock and used the proceeds to redeem its CPP shares. Others indicated that they are working with Treasury to participate in a future auction or attempting to negotiate with Treasury to restructure the CPP debt. Still others commented that the increase in the interest or dividend rate will increase the burden on the institution, make it more difficult to raise alternative capital, and further reduce their ability to exit the program. Thirty-three institutions responded that the increase did not or is not impacting their efforts to exit the program or retire CPP securities. As of January 31, 2014, the 83 remaining institutions accounted for the $2.1 billion in outstanding investments or about 1 percent of the original investment. The outstanding investments were concentrated in a relatively small number of institutions. Specifically, the 10 largest remaining CPP investments accounted for $1.5 billion (73 percent) of outstanding investments and 2 institutions accounted for more than half of this amount (see fig. 3). In contrast, the remaining $557 million (24 percent) was spread among the other 73 institutions. As of January 31, 2014, the number of states with at least one institution with CPP investments outstanding was 28, and the number of states with at least 5 such institutions was 7 (see fig. 4). California had the highest number of remaining CPP institutions with 8, followed by Illinois with 7. In terms of total CPP investments outstanding, Puerto Rico had the largest amount ($1.2 billion), followed by North Carolina ($108 million), Virginia ($91 million), and Florida ($74 million). Treasury began selling its investments in banks through auctions beginning in March 2012 as a way to balance the speed of exiting the investments with maximizing returns for taxpayers. As of January 31, 2014, Treasury had conducted a total of 23 auctions and received a total of about 80 percent of the principal amount (see fig. 5). As figure 5 shows, the total proceeds from selling securities do not include any income received from repurchases, dividends, or other sources or any missed dividend or interest payments, the rights to which are sold with the securities. For example, if an institution whose securities were being sold by Treasury at auction had missed $100,000 worth of dividend payments, the purchaser of the securities would own the right to receive those past- due dividends if the institution can pay them. As of January 31, 2014, Treasury has sold all or part of its investments in 162 institutions, through the auction process, including the rights to approximately $207 million in missed dividends and interest payments. In 2013, we reported that according to Treasury officials, the auction results reflected the potential risk associated with the liquidity of the investments, the credit quality of the financial institutions (including their ability to make future dividend or interest payments), and the prospect of receiving previous missed payments that had accrued. For example, later auctions have tended to include smaller institutions with more cumulative missed payments. In a few cases, the prospect of recouping these missed payments made the institutions particularly attractive to investors and helped raise the sale price of those securities above their par value. Although Treasury has not generally recouped its full investment in individual institutions through the auctions, in 2013, Treasury officials told us that accepting a discount and transferring ownership of these institutions to the private sector was in the best interest of the taxpayer. Because of the inherent risk factors of these institutions, Treasury officials did not anticipate that they would be able to make full repayments in the near future. The officials added that had they chosen not to auction these positions, their values could have decreased later. Treasury officials also said that while auctions were generally priced at a discount to the principal amount, the prices were generally equal to or above Treasury’s internal valuations. 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. We analyzed financial data on the 83 institutions remaining in CPP as of January 31, 2014, and 482 former CPP institutions, which we split into three groups: (1) those that repaid their investments, (2) those that exited through an auction, and (3) those that refinanced their investments through SBLF. The current and former CPP institutions in our analysis accounted for 565 of the 707 institutions that participated in CPP. We compared the 565 institutions to a non-CPP group (i.e., institutions that have not participated in CPP) of 7,177 active financial institutions for which financial information was available. All financial information generally reflects quarterly regulatory filings on December 31, 2013. Table 1 provides the results of our analysis of these measures, including the following. Mostly smaller institutions remain in the program and larger institutions tended to exit through repayment. For example, institutions that exited through repayment had a median asset size of $1.7 billion, compared with $548 million for those that refinanced through SBLF and $385 million for those that exited through an auction. In the aggregate, the remaining institutions were noticeably less financially healthy than each of the groups of former CPP participants. As a group, institutions that exited through auctions were significantly less financially healthy than the group of institutions that repaid their investments or refinanced through SBLF. Overall, the institutions that remain in CPP are less financially healthy than both the group of institutions that never participated in CPP and the aggregate group that had exited CPP. In particular, remaining CPP institutions had noticeably higher median Texas Ratios than each group of former CPP institutions as well as 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.