(Bloomberg) — Bank of America Corp. (BAC), the nation's biggest lender, will repay $45 billion of government bailout funds, helping free the bank from U.S. curbs on executive pay that have hampered its search for a new leader.
The bank will repay the Troubled Asset Relief Program using $26.2 billion of "excess liquidity" and $18.8 billion from the sale of securities, according to a statement today. The firm plans to increase equity by $4 billion through asset sales, and will issue $1.7 billion of restricted stock instead of year-end bonuses to some employees.
Bank of America's two rounds of U.S. funding included $20 billion to help cushion losses tied to the takeover of Merrill Lynch & Co. The planned repayment will ease the bank's effort to replace Chief Executive Officer Kenneth D. Lewis, who announced his departure in September.
Dilution for shareholders will be "substantial," said William Fitzpatrick, an analyst at Racine, Wisconsin-based Optique Capital Management, which oversees $1 billion, including Bank of America shares. "It looks like this was done for the incoming chief executive," he said. "You take out the compensation restrictions and everything else that went along with the government ownership."
Bank of America, based in Charlotte, North Carolina, rose 3.5 percent to $16.19 in late New York trading. The shares have gained 11 percent this year on the New York Stock Exchange after plummeting 66 percent in 2008.
The repayment was negotiated by Chief Risk Officer Greg Curl and Chief Financial Officer Joe L. Price, a person familiar with the matter said. The two executives had approval from the board to close the deal once regulators including the Treasury, the Federal Reserve and the Office of the Comptroller of the Currency agreed to it, the person said, speaking anonymously because the details of the talks aren't public.
Curl, 61, is among candidates vying to replace Lewis as CEO. His role in negotiating the exit from TARP may enhance his prospects, according to a person familiar with the process.
The repayment saves $3.6 billion a year in dividend payments, the bank said. It also means CEO Lewis, 62, can fulfill his vow to arrange the return of all bailout funds before his tenure ends at the end of the year. Lewis said Sept. 30 he would step down on Dec. 31 after enduring criticism from lawmakers, regulators and shareholders about his handling of the Merrill Lynch purchase.
"We appreciate the critical role that the U.S. government played last fall in helping to stabilize financial markets, and we are pleased to be able to fully repay the investment, with interest," Lewis said in today's statement.
Bank of America will also be able to better compete with rivals including JPMorgan Chase & Co. (JPM), which already repaid its bailout funds, spokesman Robert Stickler said in an interview.
Bank of America's plan will reduce income available to common shareholders in the fourth quarter by $4.1 billion, the company said. Terms call for issuing $18.8 billion of "common equivalent securities," and shareholders will be asked to approve an increase in authorized shares so they could be converted into common stock. The new securities have warrants to buy a total of 60 million shares of common stock at a penny a share if stockholders don't vote to approve the increase.
The asset sales, designed to boost the bank's equity, must be in contract and approved by the Federal Reserve's board of governors by June 30, the statement said; if the sales aren't completed by the end of 2010, the bank agreed to sell common equity.
The plan calls for the bank to buy back 1.8 million preferred shares sold to the Treasury Department; for now, the bank isn't buying back warrants also awarded to the U.S., the statement said.
Bank of America is offering the common equivalent securities because it doesn't have stockholder authority to issue enough shares to raise the $18.8 billion of common equity, Stickler said. The sale is commencing immediately and should price by Monday, he said.
"It's a bitter pill, but longer term it outweighs the hit to the stock," said Matthew McCormick, a banking analyst and portfolio manager at Bahl & Gaynor Inc. in Cincinnati, which oversees $2.5 billion. "I thought it would take longer than this for Bank of America to get out of it. It shows that the government couldn't attract anyone of substantial talent unless they paid a fair wage."
To contact the reporter on this story: David Mildenberg in Charlotte at email@example.com