BofA to Repay Entire TARP Money

Bank of America Corporation (BAC - Analyst Report) said on Wednesday that in a few days it will repay the entire $45 billion of bailout money it has received from the government for its participation in the Troubled Asset Relief Program (TARP) at the height of the credit crisis last year and after its purchase of Merrill Lynch & Co. earlier this year.

The move will free the bank from government involvement in its affairs and pay restrictions, even though the Treasury will hold BofA warrants. Also, the TARP repayment will make it easier for the bank to recruit a new chief executive to replace outgoing CEO Ken Lewis.

BofA said that it would use $26.2 billion in available cash and sell $18.8 billion in securities to pay the debt. The $18.8 billion issuance of common equivalent securities would be treated as Tier 1 Common capital.

Initially, BofA received $25 billion as part of the bailouts. Then the bank received an additional $20 billion in January 2009 after its acquisition of Merrill Lynch, which had billions of dollars in losses unanticipated by BofA.

Additionally, BofA intends to increase its equity by $4 billion through asset sales by June 30, 2010, and it will raise up to $1.7 billion through the issuance of restricted stock.

The repayment of TARP money is expected to reduce the bank’s earnings in the fourth quarter of 2009 by $4.1 billion.

As of Oct. 31, about 50 financial institutions have repaid a total of $72.3 billion in TARP money. Some large financial firms that have already repaid government funds are JPMorgan Chase & Company (JPM - Analyst Report), Morgan Stanley (MS - Analyst Report), Bank of New York Mellon Corporation (BK - Analyst Report), Goldman Sachs (GS - Analyst Report), U.S. Bancorp (USB - Analyst Report), American Express Company (AXP - Analyst Report), BB&T Corporation (BBT - Analyst Report) and State Street Corporation (STT - Analyst Report).

The repayment of TARP money can be viewed as a sign of recovery of the institutions as well as the economy. Also, the full repayment of government money has enabled these firms to protect their executive compensation packages. Restrictions on pay rules as a result of absorbing government money were a major competitive disadvantage for these firms in retaining talented employees.

BofA’s third quarter 2009 loss came in at 26 cents per share, substantially worse than the Zacks Consensus Estimate loss of 10 cents. This compares unfavorably with earnings of 15 cents in the prior-year quarter.

Results were hurt primarily by continued weakness in the overall economy as well as stress on the consumers, resulting in high credit costs and loan loss. Though earnings benefited from the profit generated by its wealth management business, the company experienced continued net interest yield compression and credit quality deterioration.

Additionally, the company is facing problems over its new CEO appointment and litigation issues due to the Merrill Lynch acquisition. Revenues are also expected to be negatively affected due to the new credit card regulation. However, we anticipate continued synergies from the company’s large scale operation and balance sheet restructuring.

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