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Management Strategies

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BofA Repays TARP, Shareholders Lose

Lending is up and the bank's purchase of Merrill Lynch appears to be more of an asset than a liability, based on the bank's fourth quarter results.

Bank of America today reported full-year 2009 net income of $6.3 billion, compared with net income of $4.0 billion in 2008. Including preferred stock dividends and the negative impact from the repayment of the U.S. government's $45 billion preferred stock investment in the company under the Troubled Asset Relief Program, income applicable to common shareholders was a net loss of $2.2 billion, or $0.29 per diluted share.

"While it's disappointing to report a loss for the fourth quarter, there were a number of important accomplishments worth noting," said chief executive officer and president Brian T. Moynihan in a statement. "First, we repaid the American taxpayer, with interest, for the TARP investment. Second, we have taken steps to strengthen our balance sheet through successful securities offerings. And third, all of our non-credit businesses recorded positive contributions to our results.

"As we look at 2010, we are encouraged by signs the economy is improving, as we have seen in the stabilization of our credit costs, particularly in the consumer businesses. That said, economic conditions remain fragile and we expect high unemployment levels to continue, creating an ongoing drag on consumer spending and growth."

Bank of America repaid the $45 billion of the U.S. taxpayers' preferred stock investment in the company as part of TARP. To do so, it raised a total of $57 billion in additional Tier 1 common capital.

Lending was up in the fourth quarter. Bank of America funded $86.6 billion in first mortgages to 400,000 people, including $22.9 billion in mortgages to 151,000 low- and moderate-income borrowers. Approximately 42 percent of first mortgages were for home purchases. The bank made 260,000 loan modifications with total unpaid principal balances of approximately $55 billion and was working with approximately 200,000 customers who were in trial-period modifications under the government's Making Home Affordable program at December 31.

The bank expanded its "home retention staff" to more than 15,000 to help customers experiencing difficulty with their home loans. This represents more than double the size of the team since Bank of America acquired Countrywide.

In 2009, small business lending extended more than $14 billion in credit comprised of $12 billion in business banking and $2 billion to more than 146,000 small business banking businesses. Bank of America recently announced an initiative to increase lending to small- and medium-sized businesses in 2010 by at least $5 billion from 2009 levels.

Average retail deposits during the quarter increased $89.9 billion, or 15 percent, from a year earlier. Excluding the initial impact of the Merrill Lynch acquisition and the expected decline in higher-yielding Countrywide deposits, average retail deposits experienced organic growth of $29.1 billion as momentum in the affluent and mass affluent customer base continued.

The bank said its integration with Merrill Lynch remained on track. The Global Wealth and Investment Management financial advisor network of more than 15,000 was up slightly from the third quarter as the company increased hiring, training and development of new advisors.

Global Wealth and Investment Management net income rose to $2.5 billion driven by the addition of Merrill Lynch, partially offset by lower residual net interest income and higher credit costs.

Net revenue more than doubled to $18.1 billion on higher investment and brokerage service income from the addition of Merrill Lynch, a $1.1 billion gain related to the BlackRock equity investment and the lower level of support for certain cash funds.

Merrill Lynch Global Wealth Management net income increased 22 percent to $1.5 billion from a year earlier as the impact of lower residual net interest income, the migration of deposits and loan balances to the Deposits and Home Loans and Insurance businesses and higher credit costs were more than offset by the addition of Merrill Lynch.

U.S. Trust, Bank of America Private Wealth Management net income declined to $174 million as net revenue fell and credit costs increased significantly, including the impact of a single large commercial charge-off in the third quarter. Net revenue declined 11 percent to $2.7 billion driven by a lower residual net interest income allocation and the effect of lower valuations in equity markets on asset management fee income.

Credit quality showed signs of improvement in most portfolios compared with the prior quarter, the bank said, although credit costs remained high as global economic conditions remained challenging. Rising unemployment and underemployment kept consumers under stress and individuals spent longer periods without work. Losses, however, declined in most consumer portfolios from the prior quarter.

Net charge-offs were $1.2 billion lower than the prior quarter, driven by improvements across most consumer portfolios. Net charge-offs declined from the previous quarter for the first time in nearly four years. Nonperforming assets were $35.7 billion, compared with $33.8 billion at September 30, 2009, reflecting a slower rate of increase than in recent quarters.

Global Card Services reported a net loss of $5.6 billion as credit costs continued to rise, reflecting weak economies in the U.S., Europe and Canada. Managed net revenue declined 6 percent to $29.3 billion mainly due to lower fee income and the absence of one-time gains that positively impacted 2008 results. The decline was partially offset by higher net interest income, as lower funding costs outpaced the decline in average managed loans. The revenue decline also was partially driven by enrolling customers who are experiencing financial stress in various card modification programs.

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