THE BASIS POINT

BofA To Repay $45b TARP Funds, Helping Their CEO Hunt

What a difference one year and unprecedented levels of Fed and Treasury help makes. Bank of America said today they will repay TARP funds in full with $26.2b in cash and $18.8b in proceeds raised by a common stock issue that begins Thursday, December 3. This will obviously dilute the shares, but it could help break the inability of the firm to hire a new CEO to replace Ken Lewis who is leaving because of pressures he’s faced regarding receipt of TARP funds as well as bonus and other disclosure issues pertaining to the Merrill acquisition.

Below are excerpts from the Bank of America press release, including their stats on lending to consumers and businesses in the past 12 months. This is a positive development in the credit crunch that began August 2007, and should create some near-term positive market sentiment—but it’s just the beginning of the bank regulatory debate.

Full BofA Press Release
To date, Bank of America has paid $2.54 billion in dividends to the U.S. Treasury on the TARP investment. Repaying TARP will save the company approximately $3.6 billion in annual dividend costs from the TARP investment.

“Adding TARP to our capital has allowed Bank of America to continue to support the economy. In the 12 months since the government first made its investment in Bank of America, our company originated $760 billion in new credit, or approximately $3 billion per business day,” [CEO Ken] Lewis added. “Importantly, this includes our leadership role in financing home ownership, helping more than 1.54 million customers purchase a new home or refinance their existing mortgages and another 423,000 homeowners modify their loans to avoid foreclosure.”

So far this year, Bank of America has extended more than $12 billion in credit to small-business customers and assisted more than 49,000 small business card clients in improving their cash flows by modifying their payment structures.

The repayment of TARP is the latest in a series of actions taken to reduce Bank of America’s reliance on government assistance. Other actions include:

  • Paying the U.S. government $425 million to terminate a term sheet that would have guaranteed up to $118┬ábillion in assets, if a final agreement had been reached.
  • Opting out of the Temporary Liquidity Guarantee Program (TLGP) in September.
  • Exiting the Term Auction Facility (TAF) in the summer of 2009.
  • Eliminating borrowings from the Federal Reserve’s Term Securities Lending Facility (TSLF) and Primary Dealer Credit Facility (PDCF).
  • Announcing plans to exit the Transaction Account Guarantee Program (TAGP) effective Jan. 1, 2010.
  • Increasing Tier 1 Common capital by approximately $40 billion in the second quarter of 2009.
  • Issuing more than $10 billion in non-government-backed debt in the public markets in 2009.

Under terms of the authorization from the U.S. Treasury and banking regulators to repay the $45 billion investment made under TARP, Bank of America will repurchase all 600,000 shares of the company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series N; all 400,000 shares of the company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series Q; and all 800,000 shares of the company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series R. The shares were issued to the U.S. Treasury as part of TARP. Bank of America is not exercising its right to repurchase the related warrants at this time.

Bank of America plans to repay the $45 billion in TARP funds using $26.2 billion in excess liquidity and $18.8 billion in proceeds from the sale of “common equivalent securities.” The $18.8 billion issuance of “common equivalent securities” would be treated as Tier 1 Common capital. Shareholders would be asked at a special meeting to be held within 105 days of issuance to approve an increase in the authorized shares outstanding in order to allow the “common equivalent securities” to be converted into common stock. The “common equivalent securities” carry warrants to buy a total of 60 million shares of common stock at $0.01 per share and other benefits if shareholders do not approve an increase in authorized common shares.

In addition, Bank of America agreed to increase equity by $4 billion through asset sales to be approved by the Board of Governors of the Federal Reserve and contracted for by June 30, 2010. To the extent those asset sales are not completed by the end of 2010, the company agreed it would raise a commensurate amount of common equity.

Bank of America also agreed to raise up to approximately $1.7 billion through the issuance of restricted stock in lieu of a portion of incentive cash compensation to certain Bank of America associates as part of their normal year-end incentive payments. Year-end incentive payments are dependent on the performance of the company, business units and individuals and have not yet been determined. This initiative also aligns associate interests with the company’s performance.

After the TARP repayment and these initiatives, the company’s Tier 1 Capital ratio would be 11.0 percent, pro forma based on the September 30, 2009 ratio of 12.5 percent. The Tier 1 Common capital ratio would be 8.5 percent, pro forma based on the September 30, 2009 ratio of 7.3 percent. The company will continue to have strong liquidity.

Repurchase of TARP preferred stock is expected to reduce income available to common shareholders in the fourth quarter by $4.1 billion, as the book value of the preferred is less than the amount paid.