Wednesday, Bank of America Corp. (BAC) announced that it repaid the U.S. Treasury a $45 billion of the government investment in the company as part of the Troubled Asset Relief Program or TARP, pursuant to the bank's closing of securities offering.
The company previously commenced an offer to sell 1.286 billion common equivalent securities that generated gross proceeds of around $19.29 billion. The offering was priced at $15.00 per common equivalent security and its proceeds, along with existing corporate funds, were used to repurchase all the preferred stock issued to the U.S. Department of the Treasury. The company also paid the government $190 million in accrued dividends on the repurchased preferred securities.
As per the terms of the TARP program, Bank of America repurchased all of the issued 600 thousand of its fixed rate series N cumulative perpetual preferred stock, 400 thousand of series Q stock and 800 thousand of series R stock from the treasury. However, the Treasury continues to hold warrants to buy Bank of America common stock issued as part of the TARP investments.
Commenting on the repayment, BoA's chief executive officer and president, Kenneth Lewis said, "We owe taxpayers our thanks for making these funds available to the nation's financial system and to our company during a very difficult time. Now that we have cleared this significant hurdle, which demonstrates the strength of our company, we look forward to continuing to play a key role in the economic recovery and helping to meet the changing needs of our customers and clients."
The Charlotte, North Carolina-based bank has decided to increase equity through various means, including $3 billion asset sales and issuing $1.7 billion of restricted stock to certain Bank of America associates as part of their normal year-end incentive payments.
After the TARP repayment and these initiatives, the company's Tier 1 capital ratio would be 11.0%, pro forma based on the September 30, 2009 ratio of 12.5%. The Tier 1 common capital ratio would be 8.4%, pro forma based on the September 30, 2009 ratio of 7.3%.
BofA Merrill Lynch served as the sole bookrunner for the common equivalent securities offering and UBS Investment Bank served as co-manager and qualified independent underwriter.
The TARP was set up last year to prop up the U.S. financial system after big bets on mortgage-related assets pushed many institutions toward collapse. Following the collapse of Lehman Brothers Holdings Inc. (LEHMQ.PK), as well as several other events that rocked the financial sector last year, the federal government stepped in, providing bank holding companies access to the $700 billion rescue plan.
Bank of America received funds from the federal government under TARP, partly to help cover its losses arising from the acquisition of securities firm Merrill Lynch & Co. in January 2008. The company at the time of receiving the bail-out funds said it hoped to repay the money within the next couple of years.
However, there were lot of restrictions for the banks in repaying the TARP fund, with the government insisting on stress test clearance to ensure the banks stand-up to any further deterioration in the economy. The tests found that if the recession were to worsen, losses at the nineteen banks during 2009 and 2010 could total $600 billion. The banks involved in the exercise account for two-thirds of the assets and more than half the loans in the U.S. banking system.
The banks that cleared the stress test raised funds in order to quickly pay back the TARP bail-out funds. One of the biggest reasons for the banks to quickly repay the money was to free themselves from restrictions enforced by the government.
With the repayment of TARP funds, banks would be able to function independently and without government scrutiny, as well as any restrictions on bonus payments and salaries to executives. Financial institutions that received funds under TARP, had also reported client concerns of being under the government's thumb.
Pursuant to the completion of the stress assessment, if permitted by supervisors and if supported by the results of the stress assessment, the banks had said they would like to use the capital raised plus additional resources to repay the tax-payers money they received from the U.S. government under the Capital Purchase Program.
During June 2009, major American banks including Morgan Stanley (MS), JPMorgan Chase & Co. (JPM), Goldman Sachs Group, Inc. (GS), U.S. Bancorp (USB) and BB&T Corp. (BBT), repaid the capital received as bail-out funds under the TARP.
With the TARP fund aid, BA helped 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.
Year-to-date, BA 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.
BAC closed Wednesday's regular trading at $15.39, down $0.02 or 0.13%, on a volume of 198.45 million shares, lower than the three-month average volume of 205.21 million shares. However, the stock gained $0.05 or 0.34%, and traded at $15.4418 in after hours. In the past 52-week period, the stock has been trading in a broad range of $2.53 to $19.10.
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