oversight

Capital Purchase Program: Revenues Have Exceeded Investments, but Concerns about Outstanding Investments Remain

Published by the Government Accountability Office on 2012-03-08.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States Government Accountability Office

GAO          Report to Congressional Committees




March 2012
             CAPITAL PURCHASE
             PROGRAM

             Revenues Have
             Exceeded
             Investments, but
             Concerns about
             Outstanding
             Investments Remain




GAO-12-301
                                              March 2012

                                              CAPITAL PURCHASE PROGRAM
                                              Revenues Have Exceeded Investments, but Concerns
                                              about Outstanding Investments Remain
Highlights of GAO-12-301, a report to
congressional committees




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




View GAO-12-301. For more information,
contact A. Nicole Clowers at (202) 512-8678
or clowersa@gao.gov.



                                                                                        United States Government Accountability Office
Contents


Letter                                                                                    1
               Background                                                                 3
               Treasury Estimates a Lifetime Gain for CPP, but Concerns about
                 Some Investments Remain                                                  8
               Remaining CPP Institutions Are Financially Weaker than Former
                 CPP and Non-CPP Institutions, but Treasury’s Analysis Does Not
                 Show This Difference                                                   19
               Conclusions                                                              29
               Recommendation for Executive Action                                      30
               Agency Comments and Our Evaluation                                       30

Appendix I     Objectives, Scope, and Methodology                                       34



Appendix II    Comments from the Office of Financial Stability                          37



Appendix III   GAO Contacts and Staff Acknowledgments                                   39



Table
               Table 1: Median Financial Information on Analysis Population, as
                        of December 31, 2011                                            35


Figures
               Figure 1: Process for Accepting and Approving CPP Applications            7
               Figure 2: Status of CPP, as of January 31, 2012                           9
               Figure 3: Remaining CPP Investments, as of January 31, 2012               10
               Figure 4: Remaining Participation in CPP by State, as of
                        January 31, 2012                                                11
               Figure 5: Institutions That Received CPP Investments, as of
                        January 31, 2012                                                12
               Figure 6: Number of Institutions Missing Scheduled Dividend or
                        Interest Payments and Number of Institutions
                        Participating in CPP, by Quarter, February 2009 through
                        November 2011                                                   15
               Figure 7: Number of CPP Institutions on FDIC’s Problem Bank List,
                        December 2008 through December 2011                             17


               Page i                                    GAO-12-301 Capital Purchase Program
Figure 8: Quarterly Trend of Median Return on Average Assets by
         CPP Status, March 2008 through December 2011                                     20
Figure 9: Quarterly Trend of Median Net Interest Margin by CPP
         Status, March 2008 through December 2011                                         21
Figure 10: Quarterly Trend of Median Noncurrent Loan Percentage
         by CPP Status, March 2008 through December 2011                                  22
Figure 11: Median Loan Composition by CPP Status, as of
         December 31, 2011                                                                23
Figure 12: Quarterly Trend of Median Tier 1 Risk-based Capital
         Ratio by CPP Status, March 2008 through December 2011                            25
Figure 13: Quarterly Trend of Median Common Equity Tier 1 Ratio
         by CPP Status, March 2008 through December 2011                                  26
Figure 14: Quarterly Trend of Median Reserves to Nonperforming
         Loans by CPP Status, March 2008 through December 2011                            27
Figure 15: Quarterly Trend of Median Texas Ratio by CPP Status,
         March 2008 through December 2011                                                 28




Abbreviations

CDCI                       Community Development Capital Initiative
CPP                        Capital Purchase Program
EESA                       Emergency Economic Stabilization Act of 2008
FDIC                       Federal Deposit Insurance Corporation
Federal Reserve            Board of Governors of the Federal Reserve System
OCC                        Office of the Comptroller of the Currency
OFS                        Office of Financial Stability
OTS                        Office of Thrift Supervision
SBLF                       Small Business Lending Fund
TARP                       Troubled Asset Relief Program
Treasury                   U.S. Department of the Treasury



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Page ii                                              GAO-12-301 Capital Purchase Program
United States Government Accountability Office
Washington, DC 20548




                                   March 8, 2012

                                   Congressional Committees

                                   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). 1
                                   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. 2 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. 3 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.



                                   1
                                     As authorized by the Emergency Economic Stabilization Act of 2008 (EESA), Pub. L. No.
                                   110-343, 122 Stat. 3765 (2008), codified at 12 U.S.C. §§ 5201 et seq. EESA was signed
                                   into law on October 3, 2008, to help stem the worst financial crisis since the 1930s. EESA
                                   established the Office of Financial Stability within Treasury and provided it with broad,
                                   flexible authorities to buy or guarantee troubled mortgage-related assets or any other
                                   financial instruments necessary to stabilize the financial markets.
                                   2
                                    Section 3(9) of the Emergency Economic Stabilization Act of 2008 (EESA), 12 U.S.C. §
                                   5202(9). EESA required that the appropriate committees of Congress be notified in writing
                                   that the Secretary of the Treasury, after consultation with the Chairman of the Board of
                                   Governors of the Federal Reserve System, had determined that it was necessary to
                                   purchase other financial instruments to promote financial market stability. EESA originally
                                   authorized Treasury to purchase or guarantee up to $700 billion in troubled assets. The
                                   Helping Families Save Their Homes Act of 2009, Pub. L. No. 111-22, Div. A, 123 Stat.
                                   1632 (2009), amended EESA to reduce the maximum allowable amount of outstanding
                                   troubled assets under EESA by almost $1.3 billion, from $700 billion to $698.7 billion.
                                   3
                                    A warrant is an option to buy shares of common stock or preferred stock at a
                                   predetermined price on or before a specified date.




                                   Page 1                                               GAO-12-301 Capital Purchase Program
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). 4

This report is based upon our continuing analysis and monitoring of
Treasury’s activities in implementing the Emergency Economic
Stabilization Act of 2008 (EESA), which provided us with broad oversight
authorities for actions taken under TARP and required that we report at
least every 60 days on TARP activities and performance. 5 To fulfill our
statutorily mandated responsibilities, we have been monitoring and
providing updates on TARP programs, including CPP, and this report




4
 SBLF was a $30 billion fund separate from TARP that provided capital to qualified
community banks and community development loan funds with assets of less than $10
billion in an effort to encourage small business lending. SBLF provided an option for
eligible institutions to refinance preferred stock issued to Treasury through CPP or the
Community Development Capital Initiative under certain conditions. See GAO, Small
Business Lending Fund: Additional Actions Needed to Improve Transparency and
Accountability, GAO-12-183 (Washington, D.C.: Dec. 14, 2011).
5
Section 116 of EESA, 122 Stat. at 3783 (codified at 12 U.S.C. § 5226).




Page 2                                               GAO-12-301 Capital Purchase Program
             expands on that work. 6 This report examines (1) the status of CPP,
             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.

             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.


             Created in 2008, CPP was the primary initiative under TARP to help
Background   stabilize the financial markets and banking system by providing capital to
             qualifying regulated financial institutions through the purchase of senior




             6
              See, for example, GAO, Troubled Asset Relief Program: Opportunities Exist to Apply
             Lessons Learned from the Capital Purchase Program to Similarly Designed Programs and
             to Improve the Repayment Process, GAO-11-47 (Washington, D.C.: Oct. 4, 2010), and
             Troubled Asset Relief Program: As Treasury Continues to Exit Programs, Opportunities to
             Enhance Communication on Costs Exist, GAO-12-229 (Washington, D.C.: Jan. 9, 2012).




             Page 3                                            GAO-12-301 Capital Purchase Program
preferred shares and subordinated debt. 7 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. 8 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
thereafter. 9 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.

While CPP was Treasury’s program, federal banking regulators played a
key role in the application and approval process, receiving and reviewing
CPP applications, and recommending approval or denial. The banking
regulators that participated in CPP included:

•   Board of Governors of the Federal Reserve System (Federal
    Reserve), which supervised and regulated banks that were authorized
    to do business under state charters and that were members of the



7
 For purposes of CPP, qualifying financial institutions generally include stand-alone U.S.-
controlled banks and savings associations, as well as bank holding companies and most
savings and loan holding companies.
8
  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.
9
 For S corporations, a federal business type that provides certain tax and other benefits,
Treasury received subordinated debt rather than preferred shares in order to preserve
these institutions’ special tax status. The U.S. Internal Revenue Code prohibits S
corporations from having more than one class of stock outstanding. Interest rates for this
debt are 7.7 percent for the first 5 years and 13.8 percent for the remaining years.




Page 4                                                 GAO-12-301 Capital Purchase Program
     Federal Reserve System, as well as bank and financial holding
     companies; 10

•    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. 11
Treasury, in consultation with the federal banking regulators, developed a
standardized framework for processing applications and disbursing CPP
funds (see fig. 1). Treasury encouraged financial institutions that were
considering applying to CPP to consult with their primary federal bank
regulators. 12 Eligibility was based on the regulator’s assessment of
applicants’ strength and viability—as measured by examination ratings,
financial performance ratios, and other mitigating factors—without taking
into account the potential impact of TARP funds. Institutions deemed to
be the strongest, such as those with the highest examination ratings,
received presumptive approval from the banking regulators, and their
applications were forwarded to Treasury. Institutions with lower
examination ratings or other concerns that required further review were


10
  Bank holding companies are entities that own or control one or more U.S. commercial
banks. Financial holding companies are a subset of bank holding companies that may
engage in a wider range of activities.
11
  The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203,
Title III, 124 Stat. 1376, 1520 (2010), eliminated OTS. Rulemaking authority previously
vested in OTS was transferred to OCC for savings associations and to the Federal
Reserve for savings and loan holding companies. Supervisory authority was transferred to
OCC for federal savings associations, to FDIC for state savings associations, and to the
Federal Reserve for savings and loan holding companies and their subsidiaries, other
than depository institutions. The transfer of these powers was completed on July 21, 2011,
and OTS was officially dissolved on October 19, 2011.
12
  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.




Page 5                                               GAO-12-301 Capital Purchase Program
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. 13

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.




13
 For a discussion of our assessment of the CPP approval process, see GAO-11-47.




Page 6                                          GAO-12-301 Capital Purchase Program
Figure 1: Process for Accepting and Approving CPP Applications




                                       Note: If the applicant was a bank holding company, an application was submitted to both the
                                       applicant’s holding company regulator and the regulator of the largest insured depository institution
                                       controlled by the applicant.


                                       Nine major financial institutions were initially included in CPP. 14 These
                                       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


                                       14
                                         The nine major financial institutions were Bank of America Corporation; Citigroup, Inc.;
                                       JPMorgan Chase & Co.; Wells Fargo & Company; Morgan Stanley; The Goldman Sachs
                                       Group, Inc.; The Bank of New York Mellon Corporation; State Street Corporation; and
                                       Merrill Lynch & Co., Inc.




                                       Page 7                                                      GAO-12-301 Capital Purchase Program
                         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
Treasury Estimates a     investments have exceeded the amounts originally disbursed, but
Lifetime Gain for CPP,   concerns remain about the financial strength of the remaining institutions
                         and their ability to repay and exit the program. As we have reported,
but Concerns about       Treasury disbursed $204.9 billion to 707 financial institutions nationwide
Some Investments         from October 2008 through December 2009. 15 As of January 31, 2012,
Remain                   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). 16 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. 17




                         15
                           See GAO-12-229.
                         16
                           Treasury, Troubled Asset Relief Program (TARP) Monthly 105(a) Report – January
                         2012 (Feb. 10, 2012).
                         17
                          Treasury estimates lifetime costs on a quarterly basis in conjunction with the Office of
                         Management and Budget and publishes them in its monthly 105(a) reports.




                         Page 8                                               GAO-12-301 Capital Purchase Program
Figure 2: Status of CPP, as of January 31, 2012




a
 The total amount of repayments includes $336 million from institutions that transferred to the
Community Development Capital Initiative and $2.2 billion from institutions that transferred to the
Small Business Lending Fund.


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.




Page 9                                                      GAO-12-301 Capital Purchase Program
Figure 3: Remaining CPP Investments, as of January 31, 2012




                                        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).




                                        Page 10                                   GAO-12-301 Capital Purchase Program
Figure 4: Remaining Participation in CPP by State, as of January 31, 2012




Institutions Continue to                 Nearly half (341) of the 707 institutions that originally participated in CPP
Exit CPP, with Many Using                had exited the program as of January 31, 2012. Of the 341 institutions
SBLF                                     that exited CPP, 43 percent, or 146 institutions, exited by fully repaying
                                         their investments. 18 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




                                         18
                                           Additionally, 11 institutions have made partial repayments but remain in the program.




                                         Page 11                                             GAO-12-301 Capital Purchase Program
                                         the SBLF program (see fig. 5). 19 Finally, of the remaining 9 percent of
                                         CPP recipients that exited the program, 15 went into bankruptcy or
                                         receivership, 12 had investments sold by Treasury, and 3 merged with
                                         another institution.

Figure 5: Institutions That Received CPP Investments, as of January 31, 2012




                                         19
                                            CDCI is a TARP program that provides capital to Community Development Financial
                                         Institutions that have a federal depository institution supervisor. The program is structured
                                         like CPP but expands to credit unions and provides more favorable capital terms. SBLF
                                         was created by the Small Business Jobs Act of 2010, Pub. L. No. 111-240, 124 Stat. 2504
                                         (2010), enacted on September 27, 2010. SBLF is a $30 billion capital support program,
                                         separate from TARP, that encourages small and midsize banks and community
                                         development loan funds to lend to small businesses. When SBLF closed on September
                                         27, 2011, the program had approved $4 billion in disbursements to 332 institutions. Of the
                                         332 institutions participating in SBLF, 137 institutions were originally TARP participants
                                         with combined investments of $2.2 billion.




                                         Page 12                                               GAO-12-301 Capital Purchase Program
An Increasing Number of         The number of institutions remaining in the program continues to
Remaining CPP                   decrease as CPP investments are repaid. However, a growing number of
Participants Have Missed        the remaining institutions have missed scheduled dividend or interest
                                payments or appeared on FDIC’s problem bank list. As a result, there is
Dividend or Interest            increased concern regarding the speed at which institutions will be able to
Payments and Appeared           repay remaining funds and how much of these funds Treasury will
on FDIC’s Problem Bank          ultimately recover.
List

The Number of Remaining CPP     The cumulative number of financial institutions that had missed at least
Participants That Have Missed   one scheduled dividend or interest payment by the end of the month in
Dividend or Interest Payments   which the payments were due rose from 164 as of November 30, 2010, to
Has Increased                   226 as of November 30, 2011. 20 Dividend or interest payments are due
                                on a quarterly basis, but institutions can elect whether to pay dividends
                                and may choose not to pay for a variety of reasons. For example, the
                                institution or its federal and state regulators may decide not to pay
                                dividends to conserve cash and maintain (or increase) capital levels.
                                Further, institutions are required to pay dividends only if they declare
                                dividends, although unpaid cumulative dividends generally accrue and the
                                institution must pay them before making payments to other types of
                                shareholders, such as holders of common stock. However, investors view
                                a company’s ability to pay dividends as an indicator of its financial
                                strength and may see failure to pay full dividends as a sign of financial
                                weakening.

                                The 226 institutions that had missed at least one payment had missed a
                                cumulative total of 1,170 payments. 21 As of November 30, 2011, 184
                                institutions had missed 3 or more payments, and 97 of these institutions
                                had missed 6 or more. The total amount of missed dividend and interest
                                payments was $429 million, although some of these payments were later
                                made prior to the end of the reporting month. On a quarterly basis, the



                                20
                                  Under CPP terms, institutions pay cumulative dividends on their preferred shares,
                                except for banks that are not subsidiaries of holding companies, which pay noncumulative
                                dividends. Some other types of institutions, such as S corporations, received their CPP
                                investments in the form of subordinated debt and pay Treasury interest rather than
                                dividends.
                                21
                                  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.




                                Page 13                                            GAO-12-301 Capital Purchase Program
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). 22 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.




22
  In its dividend and interest reports, Treasury no longer considers a payment to be
missed or unpaid once the institution (1) repays its investment amount and exits CPP, (2)
repays dividends by way of capitalization at the time of exchange, or (3) enters bankruptcy
or has its bank subsidiary placed into receivership; however, we included such institutions
in our counts.




Page 14                                              GAO-12-301 Capital Purchase Program
Figure 6: Number of Institutions Missing Scheduled Dividend or Interest Payments
and Number of Institutions Participating in CPP, by Quarter, February 2009 through
November 2011




Note: Dividend and interest payments are due on a quarterly basis. The number of participating
institutions in any given quarter did not reach 707 (that is, the total number of institutions that
participated in CPP) because institutions entered and exited the programs at different times. Also,
379 institutions remained in CPP as of November 30, 2011, but as of January 31, 2012, that number
had decreased to 366.


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. 23 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,



23
  According to the standard terms of CPP, after participants have missed six dividend
payments—consecutive or not—Treasury can exercise its right to appoint two members to
the board of directors for that institution.




Page 15                                                   GAO-12-301 Capital Purchase Program
                                 the function of its board of directors, and the size of its investment. 24 As of
                                 January 31, 2012, Treasury had elected 12 board members to 7 CPP
                                 institutions.

The Number of Remaining CPP      At the same time that the number of institutions missing dividend
Institutions on FDIC’s Problem   payments has risen, the number of CPP institutions on FDIC’s problem
Bank List Has Also Increased     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
                                 list may have benefitted from CPP funds. 25 As of December 31, 2009, 47
                                 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.




                                 24
                                   Treasury reported that it might not nominate directors immediately after an institution
                                 missed six payments but would develop a pool of candidates screened by executive
                                 search firms it engaged. Board members whom Treasury nominates cannot be
                                 government employees and must have the same fiduciary duties and obligations to the
                                 institution’s shareholders as any other member of the board and receive the same
                                 compensation from the institution.
                                 25
                                   Multiple subsidiary depositories of the same CPP bank holding company that were
                                 designated as problem banks were counted separately.




                                 Page 16                                               GAO-12-301 Capital Purchase Program
Figure 7: Number of CPP Institutions on FDIC’s Problem Bank List, December 2008 through December 2011




                                       Note: The numbers presented in figure 7 were compiled by FDIC in response to our request and are
                                       not otherwise maintained or published by FDIC. FDIC’s problem bank list does not include bank
                                       holding companies. Bank holding company recipients of CPP funds were accounted for if one or more
                                       of their subsidiary depositories were designated as problem banks. Each subsidiary depository
                                       appearing on the list was counted separately.




The Financial Strength of              The financial strength of the participating institutions will largely determine
CPP Participants is a Key              the speed at which they repay their investments and exit CPP and thus is
Consideration in Exiting               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
the Program                            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.




                                       Page 17                                                 GAO-12-301 Capital Purchase Program
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. 26 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. 27 Treasury officials told us that Treasury’s practice was
generally to hold rather than sell its CPP investments. 28 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.




26
 See GAO-12-229.
27
  See GAO, TARP: Treasury’s Exit from GM and Chrysler Highlights Competing Goals,
and Results of Support to Auto Communities Are Unclear, GAO-11-471 (Washington,
D.C.: May 10, 2011). The Congressional Oversight Panel also noted these competing
goals. See Congressional Oversight Panel, January Oversight Report: Exiting TARP and
Unwinding Its Impact on the Financial Markets (Washington, D.C.: Jan. 14, 2010).
28
  Treasury has already sold some CPP investments. According to its Section 105(a)
reports, Treasury may sell its holdings or exchange CPP securities on a limited basis to
protect taxpayers’ interest and further EESA’s objectives.




Page 18                                              GAO-12-301 Capital Purchase Program
                             Institutions that remain in CPP tend to be financially weaker than
Remaining CPP                institutions that have exited the program and institutions that did not
Institutions Are             receive CPP capital. Our analysis considered various measures that
                             describe banking institutions’ profitability, asset quality, capital adequacy,
Financially Weaker           and ability to cover losses. The analysis focused on institutions with under
than Former CPP and          $10 billion in assets, a group that constituted nearly all of the remaining
                             institutions. 29 We analyzed financial data on 352 remaining CPP
Non-CPP Institutions,        institutions and 256 former CPP institutions that exited CPP through full
but Treasury’s               repayments or conversion to CDCI or SBLF. 30 These two groups
Analysis Does Not            accounted for 608 of the 707 institutions that participated in CPP. 31 We
                             compared these two groups to a non-CPP group (i.e., institutions that
Show This Difference         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. 32


Remaining CPP                Profitability measures for remaining CPP institutions were lower than
Institutions Are Generally   those for former CPP participants and the non-CPP group. From March
Less Profitable and Hold     2008 to December 2011, the remaining CPP institutions consistently had
                             lower quarterly return on average assets values than the other groups
Riskier Assets               (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. 33 The return on average equity measure, which shows the profit a



                             29
                               We also compared institutions with less than $1 billion in assets to those with between
                             $1 billion and $10 billion in assets. The relationships and trends were relatively similar, so
                             we combined them for the purposes of our discussion.
                             30
                               Financial data were available from SNL Financial for 427 of the 608 CPP institutions,
                             and we accounted for the remaining 181 institutions using SNL Financial information for
                             the holding company’s largest subsidiary.
                             31
                               Of the 99 CPP institutions our analysis excluded, 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.
                             32
                               We chose to present median values, but we also analyzed weighted averages and
                             found the results to be similar.
                             33
                               Return on average assets is net income divided by average total assets.




                             Page 19                                                GAO-12-301 Capital Purchase Program
                                       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. 34

Figure 8: Quarterly Trend of Median Return on Average Assets by CPP Status, March 2008 through December 2011




                                       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). 35 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.


                                       34
                                         Return on average equity is net income divided by average total equity.
                                       35
                                         Net interest margin is net interest income divided by average earning assets.




                                       Page 20                                             GAO-12-301 Capital Purchase Program
Figure 9: Quarterly Trend of Median Net Interest Margin by CPP Status, March 2008 through December 2011




                                        Note: Since 2000, the net interest margin for all banks has generally ranged between 3 and 4
                                        percent. We have adjusted the scale in figure 9 accordingly to more clearly show the differences
                                        between the three groups.


                                        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




                                        Page 21                                                    GAO-12-301 Capital Purchase Program
                                       (1.22) than both former CPP institutions (0.47) and the non-CPP group
                                       (0.30), as of December 31, 2011. 36

Figure 10: Quarterly Trend of Median Noncurrent Loan Percentage by CPP Status, March 2008 through December 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. 37 While remaining CPP institutions had



                                       36
                                         A charge-off occurs when a bank recognizes that a particular asset or loan will not be
                                       collectible and must be written off.
                                       37
                                        See GAO, Banking Regulation: Enhanced Guidance on Commercial Real Estate Risks
                                       Needed, GAO-11-489 (Washington, D.C.: May 19, 2011).




                                       Page 22                                              GAO-12-301 Capital Purchase Program
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.

Figure 11: Median Loan Composition by CPP Status, as of December 31, 2011




Page 23                                       GAO-12-301 Capital Purchase Program
Remaining CPP               Compared with former CPP institutions and the non-CPP group,
Institutions Hold Less      remaining CPP institutions held less regulatory capital as a percentage of
Regulatory Capital and      assets. Regulators require minimum amounts of capital to lessen an
                            institution’s risk of default and improve its ability to sustain operating
Reserves for Covering       losses. Capital can be measured in several ways, but we focused on Tier
Losses Compared to          1 capital, which includes both risk-based and common risk-based
Institutions That Exited    measures, because it is the most stable form of regulatory capital. 38 The
CPP or Never Participated   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.




                            38
                              Tier 1 capital includes the core capital elements that are considered the most reliable
                            and stable such as common stock, noncumulative perpetual preferred stock, and minority
                            interests in consolidated subsidiaries. Total capital includes Tier 1 capital and Tier 2
                            capital, or supplementary capital. Risk-weighted assets are on- and off-balance sheet
                            assets adjusted for their risk characteristics.




                            Page 24                                             GAO-12-301 Capital Purchase Program
Figure 12: Quarterly Trend of Median Tier 1 Risk-based Capital Ratio by CPP Status, March 2008 through December 2011




                                        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. 39 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



                                        39
                                          As of January 31, 2012, Treasury had converted its original investment into shares of
                                        common stock for six institutions.




                                        Page 25                                             GAO-12-301 Capital Purchase Program
                                       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.

Figure 13: Quarterly Trend of Median Common Equity Tier 1 Ratio by CPP Status, March 2008 through December 2011




                                       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).




                                       Page 26                                       GAO-12-301 Capital Purchase Program
Figure 14: Quarterly Trend of Median Reserves to Nonperforming Loans by CPP Status, March 2008 through December 2011




                                       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. 40 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.



                                       40
                                         The Texas Ratio is defined as nonperforming assets plus loans 90 or more days past
                                       due divided by tangible equity and reserves.




                                       Page 27                                           GAO-12-301 Capital Purchase Program
Figure 15: Quarterly Trend of Median Texas Ratio by CPP Status, March 2008 through December 2011




Treasury’s Quarterly CPP               To assess CPP’s effect on lending by depository institutions, Treasury
Analysis Could Better                  began publishing a quarterly analysis of CPP institutions. 41 The analysis
Distinguish between the                included financial data in three categories: balance sheet and off-balance
                                       sheet items, performance ratios, and asset quality measures. Treasury
Remaining CPP
                                       grouped the institutions by asset size and separated institutions that
Institutions and Former                received CPP funds from those that did not.
Participants
                                       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



                                       41
                                         Department of the Treasury, Quarterly Analysis of Institutions in the Capital Purchase
                                       Program, Fourth Quarter 2010.




                                       Page 28                                              GAO-12-301 Capital Purchase Program
              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. 42 We also
              recommended that Treasury ensure that external stakeholders, including
              Congress and the public, are informed about the program’s current
              strategy. 43

              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
Conclusions   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


              42
               GAO, Financial Assistance: Ongoing Challenges and Guiding Principles Related to
              Government Assistance for Private Sector Companies, GAO-10-719 (Washington, D.C.:
              Aug. 3, 2010).
              43
                GAO, Troubled Asset Relief Program: Additional Actions Needed to Better Ensure
              Integrity, Accountability, and Transparency, GAO-09-161 (Washington, D.C.: Dec. 2,
              2008).




              Page 29                                            GAO-12-301 Capital Purchase Program
                     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
Recommendation for   comprehensive information on remaining CPP institutions and enhance
Executive Action     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.
Agency Comments      Treasury provided written comments that we have reprinted in
and Our Evaluation   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.




                     Page 30                                     GAO-12-301 Capital Purchase Program
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.




A. Nicole Clowers
Director
Financial Markets and Community Investment




Page 31                                     GAO-12-301 Capital Purchase Program
List of Committees

The Honorable Daniel K. Inouye
Chairman
The Honorable Thad Cochran
Vice Chairman
Committee on Appropriations
United States Senate

The Honorable Tim Johnson
Chairman
The Honorable Richard C. Shelby
Ranking Member
Committee on Banking, Housing, and Urban Affairs
United States Senate

The Honorable Kent Conrad
Chairman
The Honorable Jeff Sessions
Ranking Member
Committee on the Budget
United States Senate

The Honorable Max Baucus
Chairman
The Honorable Orrin G. Hatch
Ranking Member
Committee on Finance
United States Senate

The Honorable Hal Rogers
Chairman
The Honorable Norm Dicks
Ranking Member
Committee on Appropriations
House of Representatives

The Honorable Paul Ryan
Chairman
The Honorable Chris Van Hollen
Ranking Member
Committee on the Budget
House of Representatives


Page 32                                 GAO-12-301 Capital Purchase Program
The Honorable Spencer Bachus
Chairman
The Honorable Barney Frank
Ranking Member
Committee on Financial Services
House of Representatives

The Honorable Dave Camp
Chairman
The Honorable Sandy Levin
Ranking Member
Committee on Ways and Means
House of Representatives




Page 33                           GAO-12-301 Capital Purchase Program
Appendix I: Objectives, Scope, and
              Appendix I: Objectives, Scope, and
              Methodology



Methodology

              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


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                                        Appendix I: Objectives, Scope, and
                                        Methodology




                                        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.

Table 1: Median Financial Information on Analysis Population, as of December 31, 2011

Dollars in millions
                                                   All CPP                  Remaining CPP       Former CPP               Non-CPP
Number of institutions                                   608                            352              256                 8,040
TARP funds received                       Not applicable                               $12.9           $15.0         Not applicable
TARP funds outstanding                    Not applicable                               $12.6   Not applicable        Not applicable
Assets                                              $493.4                            $395.7          $617.7                $176.8
Loans and leases                                    $320.2                            $270.6          $405.9                $108.5
Reserves                                                $6.2                            $6.2            $6.2                  $1.8
Securities                                            $74.2                            $53.3          $120.3                 $33.5
Liabilities                                         $440.9                            $359.6          $547.4                $157.6
Deposits                                            $384.9                            $318.4          $497.4                $148.4
Tier 1 capital                                        $42.1                            $32.5           $61.3                 $17.3
Common equity Tier 1                                  $32.3                            $24.4           $43.6                 $17.1
Net income                                              $0.4                            $0.1            $1.0                  $0.2
                                        Source: GAO analysis of SNL Financial data.



                                        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



                                        Page 35                                                 GAO-12-301 Capital Purchase Program
Appendix I: Objectives, Scope, and
Methodology




the results of our audits of fiscal years 2009, 2010, and 2011 financial
statements for TARP. 1 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.




1
 See GAO, Financial Audit: Office of Financial Stability (Troubled Asset Relief Program)
Fiscal Years 2011 and 2010 Financial Statements, GAO-12-169 (Washington, D.C.:
Nov.10, 2011); Financial Audit: Office of Financial Stability (Troubled Asset Relief
Program) Fiscal Years 2010 and 2009 Financial Statements, GAO-11-174 (Washington,
D.C.: Nov.15, 2010); and Financial Audit: Office of Financial Stability (Troubled Asset
Relief Program) Fiscal Year 2009 Financial Statements, GAO-10-301 (Washington, D.C.:
Dec. 9, 2009).




Page 36                                             GAO-12-301 Capital Purchase Program
Appendix II: Comments from the Office of
              Appendix II: Comments from the Office of
              Financial Stability



Financial Stability




              Page 37                                    GAO-12-301 Capital Purchase Program
Appendix II: Comments from the Office of
Financial Stability




Page 38                                    GAO-12-301 Capital Purchase Program
Appendix III: GAO Contacts and Staff
                  Appendix III: GAO Contacts and Staff
                  Acknowledgments



Acknowledgments

                  A. Nicole Clowers, (202) 512-8678 or clowersa@gao.gov
GAO Contacts
                  Daniel Garcia-Diaz, (202) 512-8678 or garciadiazd@gao.gov


                  In addition to the contacts named above, Christopher Forys, Emily
Staff             Chalmers, William Chatlos, Rachel DeMarcus, Michael Hoffman, Marc
Acknowledgments   Molino, Tim Mooney, and Patricia Moye made significant contributions to
                  this report.




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                  Page 39                                   GAO-12-301 Capital Purchase Program
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