Bank of America 2009 Annual Report Download - page 32

In addition, various proposals for broad-based reform of the financial
regulatory system are pending. A majority of these proposals would not
disrupt our core businesses, but a proposal could ultimately be adopted
that adversely affects certain of our businesses. The proposals would
require divestment of certain proprietary trading activities, or limit private
equity investments. Other proposals, which include limiting the scope of
an institution’s derivatives activities, or forcing certain derivatives activ-
ities to be traded on exchanges, would diminish the demand for, and prof-
itability of, certain businesses. Several other proposals would require
issuers to retain unhedged interests in any asset that is securitized,
potentially severely restricting the secondary market as a source of fund-
ing for consumer or commercial lending. There are also numerous pro-
posals pending on how to resolve a failed systemically important
institution. In light of the current regulatory environment, one ratings
agency has placed Bank of America and certain other banks on negative
outlook, and therefore adoption of such provisions may adversely affect
our access to credit markets. It remains unclear whether any of these
proposals will ultimately be enacted, and what form they may take.
For additional information on these items, refer to Item 1A., Risk
Factors of this Annual Report on Form 10-K.
Performance Overview
Net income was $6.3 billion in 2009, compared with $4.0 billion in
2008. Including preferred stock dividends and the impact from the
repayment of the U.S. government’s $45.0 billion preferred stock invest-
ment in the Corporation under the Troubled Asset Relief Program (TARP),
income applicable to common shareholders was a net loss of $2.2 bil-
lion, or $(0.29) per diluted share. Those results compared with 2008 net
income applicable to common shareholders of $2.6 billion, or $0.54 per
diluted share.
Revenue, net of interest expense on a fully taxable-equivalent (FTE)
basis, rose to $120.9 billion representing a 63 percent increase from
$74.0 billion in 2008 reflecting in part the addition of Merrill Lynch and
the full-year impact of Countrywide.
Net interest income on a FTE basis increased to $48.4 billion com-
pared with $46.6 billion in 2008. The increase was the result of a favor-
able rate environment, improved hedge results and the acquisitions of
Countrywide and Merrill Lynch, offset in part by lower asset and liability
management (ALM) portfolio levels, lower consumer loan balances and an
increase in nonperforming loans. The net interest yield narrowed 33 basis
points (bps) to 2.65 percent.
Noninterest income rose to $72.5 billion compared with $27.4 billion
in 2008. Higher trading account profits, equity investment income,
investment and brokerage services fees and investment banking income
reflected the addition of Merrill Lynch while higher mortgage banking and
insurance income reflected the full-year impact of Countrywide. Gains on
sales of debt securities increased driven by sales of agency MBS and
collateralized mortgage obligations (CMOs). Equity investment income
benefited from pre-tax gains of $7.3 billion related to the sale of portions
of our investment in China Construction Bank (CCB) and a pre-tax gain of
$1.1 billion on our investment in BlackRock, Inc. (BlackRock). In addition,
trading account profits benefited from decreased write-downs on legacy
assets of $6.5 billion compared to the prior year. The other income (loss)
category included a $3.8 billion gain from the contribution of our mer-
chant processing business to a joint venture. This was partially offset by
a decline in card income of $5.0 billion mainly due to higher credit losses
on securitized credit card loans and lower fee income. In addition, non-
interest income was negatively impacted by $4.9 billion in net losses
mostly related to credit valuation adjustments on the Merrill Lynch struc-
tured notes.
The provision for credit losses was $48.6 billion, an increase of
$21.7 billion compared to 2008, reflecting deterioration in the economy
and housing markets which drove higher credit costs in both the
consumer and commercial portfolios. Higher reserve additions resulted
from further deterioration in the purchased impaired consumer portfolios
obtained through acquisitions, broad-based deterioration in the core
commercial portfolio and the impact of deterioration in the housing mar-
kets on the residential mortgage portfolio.
Noninterest expense increased to $66.7 billion compared with $41.5
billion in 2008. Personnel costs and other general operating expenses
rose due to the addition of Merrill Lynch and the full-year impact of Coun-
trywide. Pre-tax merger and restructuring charges rose to $2.7 billion from
$935 million a year earlier due to the acquisition of Merrill Lynch.
For the year, we recognized a tax benefit of $1.9 billion compared with
tax expense of $420 million in 2008. The decrease in tax expense was
due to certain tax benefits, as well as a shift in the geographic mix of the
Corporation’s earnings driven by the addition of Merrill Lynch.
TARP Repayment
In efforts to help stabilize financial institutions, in October 2008, the U.S.
Department of the Treasury (U.S. Treasury) created the TARP to invest in
certain eligible financial institutions in the form of non-voting, senior pre-
ferred stock. We participated in the TARP by issuing to the U.S. Treasury
non-voting perpetual preferred stock (TARP Preferred Stock) and warrants
for a total of $45.0 billion. On December 2, 2009, the Corporation
received approval from the U.S. Treasury and the Federal Reserve to
repay the $45.0 billion investment. In accordance with the approval, on
December 9, 2009, we repurchased all shares of the TARP Preferred
Stock by using $25.7 billion from excess liquidity and $19.3 billion in
proceeds from the sale of 1.3 billion units of Common Equivalent Secu-
rities (CES) valued at $15.00 per unit. In addition, the Corporation agreed
to increase equity by $3.0 billion through asset sales in 2010 and
approximately $1.7 billion through the issuance in 2010 of restricted
stock in lieu of a portion of incentive cash compensation to certain of the
Corporation’s associates as part of their 2009 year-end performance
award. As a result of repurchasing the TARP Preferred Stock, the Corpo-
ration accelerated the remaining accretion of the issuance discount on
the TARP Preferred Stock of $4.0 billion and recorded a corresponding
charge to retained earnings and income (loss) applicable to common
shareholders in the calculation of diluted earnings per common share.
While participating in the TARP, we recorded $7.4 billion in dividends and
accretion, including $2.7 billion in cash dividends and $4.7 billion of
accretion on the TARP Preferred Stock (the remaining accretion of $4.0
billion was included as part of the $45.0 billion cash
payment). Repayment will save us approximately $3.6 billion in annual
dividends, including $2.9 billion in cash and $720 million of discount
accretion. At the time we repurchased the TARP Preferred Stock, we did
not repurchase the related warrants. The U.S. Treasury recently
announced its intention to auction, during March 2010, these warrants.
We issued the CES, which qualify as Tier 1 common capital, because
we did not have a sufficient number of authorized common shares available
for issuance at the time we repaid the TARP Preferred Stock. Each CES
consisted of one depositary share representing a 1/1000th interest in a
share of our Common Equivalent Junior Preferred Stock, Series S (Common
Equivalent Stock) and a contingent warrant to purchase 0.0467 of a share
of our common stock for a purchase price of $0.01 per share. The Corpo-
ration held a special meeting of shareholders on February 23, 2010 at
which we obtained stockholder approval of an amendment to our amended
and restated certificate of incorporation to increase the number of
authorized shares of our common stock, and following the effective date of
the amendment, on February 24, 2010, the Common Equivalent Stock
converted in full into our common stock and the contingent warrants
expired without having become exercisable and the CES ceased to exist.
30 Bank of America 2009