BAC-WT - Bank of America Warrants

[jay21]

Buffett's warrants will most likely be amended similar to GS and GE.

 

Also, there's probably some upside optionality through balance sheet optimization alone (i.e. I think 1% ROA is slightly conservative).

[bmichaud]

Agreed. WFC is at 1.5% right now with below historical average NIM. No reason BAC can't get above 1% I'm the medium term.

[bmichaud]

1.5% for WFC is misleading. They under reserved this year, so normalized roa is probably closer to 1% right now.

[vinod1]

Mayo used $2T, I used FYE 2013 total assets, which is $2.1T.

 

I used the basic share count b/c the BRK warrants don't come into play for years. The BRK warrants have a strike of $7.14. 700MM shares x $7.14 = $5B.

 

My 2017 projected basic share count is 8,836MM and my projected terminal value is $262.79B. If you add the $5B warrant proceeds to the terminal value and the 700MM shares to the basic share count, my estimated FYE 2016 terminal value falls from $29.74 to $28.08. My guess is the warrant dilution will be mitigated by higher-than-estimated earnings and/or buybacks, and TIME.

 

I assume preferred dividends to remain at 2013 levels in perpetuity.

 

 

EDIT: Scratch most of the above. You are right about the share count. I assumed I was missing something on the diluted share count when Mayo hinted at $2 EPS. He must be assuming buybacks.

 

I updated the PDF to reflect a 11.4B diluted share count. I assume $5B of BRK warrant proceeds at FYE 2016. Terminal value is now $28.17.

 

I did a similar calculation just yesterday. My numbers differ a little bit here and there but broadly match up. On loan losses, I think you can adjust to $8 billion as there are more than $100 billion in PCI loans which have lifetime losses already incorporated. I had an estimate of 1% of loan losses as well and came up with $8 billion for all non-PCI loans. I estimated normal litigation at $2 billion. Likewise most of the other estimates evened out between us.

 

The most significant difference is share count. I assumed about 100 million in annual share dilution due to employee stock options, etc. I estimated share buybacks to be about 50% of net income. I ended up with shares outstanding of 10.7 billion by year end 2016.

 

Vinod

[ERICOPOLY]

EDIT: Scratch most of the above. You are right about the share count. I assumed I was missing something on the diluted share count when Mayo hinted at $2 EPS. He must be assuming buybacks.

 

The odd thing is Thompson's reply to Mayo.  He acted like Mayo is assuming the share count won't come down enough to support more than $2 per share.  However Mayo is assuming more than 1b shares retired.

 

A $5 billion dividend annually is pretty decent relative to peers.  The bank should generate almost $23 billion in capital this year, and close to $26 billion in 2015.  Combined, that's $49 billion.

 

Take out $10b for dividends over next 24 months and that leaves $39 billion.

 

That's enough to retire 2.4 billion shares if you bought them all for today's stock price.

 

That takes the share count to 9 billion. 

 

I know that sounds like a crazy amount of buybacks, and I feel like it's crazy -- I think only in a pipe dream.  However where is the cash going to go?  They've met the capital levels with the SIFI buffers.

 

The Fed just began to taper -- perhaps now is the time to let the banks flood the equity markets with capital returns.  I am being optimistic here almost to make a joke out of it, but really, at some point they need to let the banks return all of the excess.

[gary17]

First, my apologies if this topic has been covered like many, many times in this thread - there are some 450 pages and i randomly went to different periods but did not see this -

 

I read on the internet that the warrant strike price gets adjusted down when say BAC pays a dividend - but reading the SEC docs it seems to suggest that the shares you can exchange for also get adjusted up  - 

 

http://www.sec.gov/Archives/edgar/data/70858/000119312510044940/d424b7.htm

 

This is how I read it:  basically if Bank of America pays any dividend over the current $0.01 , this will (a) reduces the strike price of the warrant and (b) increase the number of shares the warrant is entitled to.

 

(a) is calculated as follows:

 

  new_strike = old_strike * ( $BAC_share_price - dividend over $0.01) / ($BAC_share_price)

 

where $BAC_share_price is the ex-dividend day share price.

 

(b) is calculated as follows:

 

  new_#_warrant_shares = old_#_warrant_shares * (old_strike / new_strike)

 

###

 

If BAC can go to $25 over the next three years (by end of 2016), these warrants can be worth quite a bit...  and even better if a few dividends are issues  so one gets the benefit of the additional shares that one can exchange. 

 

Gary

 

 

###

Here's the excerpt from SEC:

 

 

If we fix a record date for making a distribution to all holders of our common stock of securities, evidences of indebtedness, assets, cash, rights or warrants (excluding ordinary cash dividends (as defined below), dividends of our common stock and other dividends or distributions referred to in the preceding bullet point), the exercise price in effect prior to such record date will be reduced immediately thereafter to the price determined by multiplying the exercise price in effect immediately prior to the reduction by the quotient of (x) the market price (as defined below) of our common stock on the last trading day preceding the first date on which our common stock trades regular way on the principal national securities exchange on which our common stock is listed or admitted to trading without the right to receive such distribution, minus the amount of cash and/or the fair market value of the securities, evidences of indebtedness, assets, rights or warrants to be so distributed in respect of one share of our common stock (such amount and/or fair market value, the “per share fair market value”) divided by (y) such market price on the date specified in clause (x). Any such adjustment will be made successively whenever such a record date is fixed.

 

The number of warrant shares will be increased to the number obtained by multiplying the number of warrant shares issuable upon exercise of a warrant immediately prior to such adjustment by the quotient of (a) the exercise price in effect immediately prior to the distribution giving rise to this adjustment divided by (b) the new exercise price as determined in accordance with the immediately preceding sentence. In the case of adjustment for a cash dividend that is, or is coincident with, a regular quarterly cash dividend, the per share fair market value would be reduced only by the per share amount of the portion of the cash dividend that would constitute an ordinary cash dividend. If, after the declaration of any such record date, the related distribution is not made, the exercise price and the number of warrant shares then in effect will be readjusted, effective as of the date when our board of directors determines not to make such distribution, to the exercise price and the number of warrant shares that would then be in effect if such record date had not been fixed.

 

“ordinary cash dividends” means a regular quarterly cash dividend on shares of our common stock out of surplus or net profits legally available therefor (determined in accordance with generally accepted accounting principles in effect from time to time). Ordinary cash dividends will not include any cash dividends paid subsequent to January 16, 2009 to the extent the aggregate per share dividends paid on our outstanding common stock in any quarter exceed $0.01, as adjusted for any stock split, stock dividend, reverse stock split, reclassification or similar transaction.

 

 

[bennycx]

EDIT: Scratch most of the above. You are right about the share count. I assumed I was missing something on the diluted share count when Mayo hinted at $2 EPS. He must be assuming buybacks.

at some point they need to let the banks return all of the excess.

 

I'm just wondering in general what if alot of the excess cash go to increased compensation to executives and bankers.. as in future EPS might be lower than expected due to increased expenses..

[ERICOPOLY]

First, my apologies if this topic has been covered like many, many times in this thread - there are some 450 pages and i randomly went to different periods but did not see this -

 

I read on the internet that the warrant strike price gets adjusted down when say BAC pays a dividend - but reading the SEC docs it seems to suggest that the shares you can exchange for also get adjusted up  - 

 

http://www.sec.gov/Archives/edgar/data/70858/000119312510044940/d424b7.htm

 

This is how I read it:  basically if Bank of America pays any dividend over the current $0.01 , this will (a) reduces the strike price of the warrant and (b) increase the number of shares the warrant is entitled to.

 

(a) is calculated as follows:

 

  new_strike = old_strike * ( $BAC_share_price - dividend over $0.01) / ($BAC_share_price)

 

where $BAC_share_price is the ex-dividend day share price.

 

(b) is calculated as follows:

 

  new_#_warrant_shares = old_#_warrant_shares * (old_strike / new_strike)

 

###

 

If BAC can go to $25 over the next three years (by end of 2016), these warrants can be worth quite a bit...  and even better if a few dividends are issues  so one gets the benefit of the additional shares that one can exchange. 

 

Gary

 

 

###

Here's the excerpt from SEC:

 

 

If we fix a record date for making a distribution to all holders of our common stock of securities, evidences of indebtedness, assets, cash, rights or warrants (excluding ordinary cash dividends (as defined below), dividends of our common stock and other dividends or distributions referred to in the preceding bullet point), the exercise price in effect prior to such record date will be reduced immediately thereafter to the price determined by multiplying the exercise price in effect immediately prior to the reduction by the quotient of (x) the market price (as defined below) of our common stock on the last trading day preceding the first date on which our common stock trades regular way on the principal national securities exchange on which our common stock is listed or admitted to trading without the right to receive such distribution, minus the amount of cash and/or the fair market value of the securities, evidences of indebtedness, assets, rights or warrants to be so distributed in respect of one share of our common stock (such amount and/or fair market value, the “per share fair market value”) divided by (y) such market price on the date specified in clause (x). Any such adjustment will be made successively whenever such a record date is fixed.

 

The number of warrant shares will be increased to the number obtained by multiplying the number of warrant shares issuable upon exercise of a warrant immediately prior to such adjustment by the quotient of (a) the exercise price in effect immediately prior to the distribution giving rise to this adjustment divided by (b) the new exercise price as determined in accordance with the immediately preceding sentence. In the case of adjustment for a cash dividend that is, or is coincident with, a regular quarterly cash dividend, the per share fair market value would be reduced only by the per share amount of the portion of the cash dividend that would constitute an ordinary cash dividend. If, after the declaration of any such record date, the related distribution is not made, the exercise price and the number of warrant shares then in effect will be readjusted, effective as of the date when our board of directors determines not to make such distribution, to the exercise price and the number of warrant shares that would then be in effect if such record date had not been fixed.

 

“ordinary cash dividends” means a regular quarterly cash dividend on shares of our common stock out of surplus or net profits legally available therefor (determined in accordance with generally accepted accounting principles in effect from time to time). Ordinary cash dividends will not include any cash dividends paid subsequent to January 16, 2009 to the extent the aggregate per share dividends paid on our outstanding common stock in any quarter exceed $0.01, as adjusted for any stock split, stock dividend, reverse stock split, reclassification or similar transaction.

 

 

These special warrant provisions simulate a dividend-reinvestment program (DRIP).  It simply says "Hey, here is a dividend and we're going to invest it into more shares at the current stock price".

 

That's all it is.  Nothing more. 

 

Much excitement was generated in the past regarding this anti-dilution provision -- but it's pretty boring.  Just reinvestment of the dividend.  That's why the strike price is lowered, to credit you for value of the dividend.  That's why the conversion amount is bumped up, to credit you for reinvestment into more shares. 

[gary17]

Thanks. That makes a lot of sense.

 

But in comparison to options this seems better. I don't believe option premiums and strike etc get adjusted.

 

So the a warrant is like a call option with the benefit of a longer term plus drip...

 

I guess the risk of the warrants is they might be worthless - but that risk is no different than options.

 

I switched part of my commons to warrants in my rrsp last week. 

[Rabbitisrich]

http://www.ifre.com/banks-target-dtas-to-boost-capital/21132984.article

 

The concept of a bank issuing notes linked to its deferred tax assets has been floating around since the ink dried on the first draft of Basel III in 2010, but only recently began to gain traction in the industry.

 

“Regulators are determined not to be arbitraged, so any transaction would have to have real economic substance, meaning the risk of DTAs not being used up would have to be fully borne by the end-investor,” he said.

 

DTAs are divided across a bank’s operating companies and would only be used if the bank earned profits in a particular region. Investors would also be vulnerable to any changes in tax law.

 

 

[fareastwarriors]

Bank of America Says New Probes Launched Into Forex, Mortgage Practices

 

BofA Also Increases Its Estimate of Possible Litigation-Related Losses to $6.1 Billion

 

The bank bumped up by $1 billion its estimate of possible litigation-related losses to $6.1 billion, according to the filing, a figure that gets adjusted every quarter.

 

 

http://online.wsj.com/news/articles/SB10001424052702303880604579405503344864282?mod=WSJ_hp_LEFTWhatsNewsCollection

 

 

 

 

[Grenville]

The 10K is out:

 

http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-sec#fbid=-gM4HwPzCNa/9289229

[OracleofCarolina]

10-K is ONLY about 300 pages...i wonder if I can figure out what half of them mean :)

[Yours Truly]

As of December 31, 2013, under the capital plan, we can purchase up to $1.8 billion of additional common stock through the first quarter of 2014.

 

During 2013, we repurchased certain of our debt and trust preferred securities with an aggregate carrying value of $10.1 billion for $10.2 billion in cash.

 

Hopefully the buyback amount gets increased at the next CCAR review.

[Grenville]

10-K is ONLY about 300 pages...i wonder if I can figure out what half of them mean :)

 

It's shorter than last years!

[maxthetrade]

BofA Reaches Deal With Buffett on Preferred Stake. The amendment would allow the bank to count preferred shares with a $2.9 billion carrying value as Tier 1 capital:

 

http://www.bloomberg.com/news/2014-02-25/bofa-reaches-deal-with-buffett-to-extend-term-of-preferred-stake.html

[Grenville]

BofA Reaches Deal With Buffett on Preferred Stake. The amendment would allow the bank to count preferred shares with a $2.9 billion carrying value as Tier 1 capital:

 

http://www.bloomberg.com/news/2014-02-25/bofa-reaches-deal-with-buffett-to-extend-term-of-preferred-stake.html

 

From the 10K

In 2013, we entered into an agreement with Berkshire Hathaway, Inc. and its affiliates (Berkshire), who hold all the outstanding shares of the Corporation’s 6% Cumulative Perpetual Preferred Stock, Series T (Series T Preferred Stock) to amend the terms of the Series T Preferred Stock. As of December 31, 2013, the Series T Preferred Stock has a carrying value of $2.9 billion, which does not qualify as Tier 1 capital. The material changes to the terms of the Series T Preferred Stock proposed in the amendment are: (1) dividends will no longer be cumulative; (2) the dividend rate will be fixed at 6%; and (3) we may redeem the Series T Preferred Stock only after the fifth anniversary of the effective date of the amendment. Under Delaware law and our certificate of incorporation, the amendment must be approved by the holders of the Series T Preferred Stock, voting as a separate class, and a majority of the outstanding shares of our common stock, Series B Preferred Stock and Series 1 through 5 Preferred Stock, voting together as a class. The amendment will be presented to our stockholders for approval at the annual meeting of stockholders scheduled to be held on May 7, 2014. Berkshire has granted us an irrevocable proxy to vote their shares of Series T Preferred Stock in favor of the amendment at the annual meeting. If our stockholders approve the amendment and it becomes effective, our Tier 1 capital will increase by approximately $2.9 billion, which will benefit our Tier 1 capital and leverage ratios. We do not expect any impact to our financial condition or results of operations as a result of this amendment. For more information on the Series T Preferred Stock, see Note 13 – Shareholders’ Equity to the Consolidated Financial Statements.

 

At first glance doesn't look like they had to give up anything more to get the amendment.

[yitech]

Not true.

 

From Bloomberg:

 

"The amendment would force Bank of America to wait at least five years from its approval to redeem the preferred stock. Under the 2011 deal, the bank was able to redeem the preferred stake at any time as long as it paid a 5 percent premium."

 

"Berkshire gets 6 percent annual interest on the securities. Under the revised deal, Buffett agreed to give up a dividend provision that gave him the right to recover missed payments."

 

BofA gave up the call option to redeem the 6% preferred stock at 5% premium (excluding the warrants) for 5 years in order to get the Tier 1 capital treatment. The call option itself is not free, but the bank seems to think the benefit of Tier 1 capital treatment outweighs the cost of giving up the call option. Though dividends are now non-cumulative, which benefits the bank, I don't think it matters much now since the bank is much healthier.

[wescobrk]

Using 10.6 shares outstanding bac is estimated to earn 14.3 billion this year.

Citigroup is estimated to earn 15 billion this year.

They are both estimated to earn 17.4 billion next year yet bac has a market cap 27 billion higher than citigroup.

I still don't get the reason.

Oh well, Mr market is an odd fellow.

[Grenville]

Not true.

 

From Bloomberg:

 

"The amendment would force Bank of America to wait at least five years from its approval to redeem the preferred stock. Under the 2011 deal, the bank was able to redeem the preferred stake at any time as long as it paid a 5 percent premium."

 

"Berkshire gets 6 percent annual interest on the securities. Under the revised deal, Buffett agreed to give up a dividend provision that gave him the right to recover missed payments."

 

BofA gave up the call option to redeem the 6% preferred stock at 5% premium (excluding the warrants) for 5 years in order to get the Tier 1 capital treatment. The call option itself is not free, but the bank seems to think the benefit of Tier 1 capital treatment outweighs the cost of giving up the call option. Though dividends are now non-cumulative, which benefits the bank, I don't think it matters much now since the bank is much healthier.

 

Nice catch. So they can't redeem the prefs earlier than 2018, so BRK continues to collect the dividends.

[fareastwarriors]

BofA under probe over US housing program, forex

 

http://www.cnbc.com/id/101447322

[wescobrk]

Jpg morgan said trading revenues are down 15 percent this year.

Does anyone think bac will report a softer q1 number because of trading?

[dcollon]

The funny thing about JPM's trading results is some of the analysts think it's because of "weather".

 

http://www.bloomberg.com/news/2014-02-27/dimon-quip-leads-analysts-to-blame-trading-slump-on-polar-vortex.html

[Kraven]

The funny thing about JPM's trading results is some of the analysts think it's because of "weather".

 

http://www.bloomberg.com/news/2014-02-27/dimon-quip-leads-analysts-to-blame-trading-slump-on-polar-vortex.html

 

It gets chilly sometimes on the trading floor!

[racemize]

some potentially troubling excerpts from Bank-Reg Data newsletter:

 

In the past 3 years Bank of America has added $65.2 Billion in net new C&I lending. The $65.2 Billion is more in new loans than the entire C&I loan portfolios of all but 3 banks. Surely, this is a good thing - especially at the pricing on the new loans to get to an aggregate Yield below 3% on their entire C&I portfolio.

 

While JPMorgan Chase, Citigroup and Wells Fargo have been more modest we still see 3 year growth rates in excess of 22%.

 

Of considerable interest is the 47.16% growth from the $10B to 1T banks. Ally Bank (75.88%), HSBC Holdings (74.37%), GE Capital Bank (124.50%) and CIT Bank (384.60%) are some of the fastest growers in that asset size category.

 

It's interesting to see that the sub-$1 billion in asset size community banks appear to be sitting out the C&I ramp. I think this represents an understanding that at current pricing it makes little sense for them to increase their C&I lending levels.

 

 

I am deeply worried about the potential risk of the recent massive growth in C&I loans. Collectively, banks have added $397 Billion in net new C&I loans in the past 3 years. We have witnessed only two other instances where banks have added over $390 Billion in new loans in 3 years. Banks added $901 Billion in 1-4 Family 1st Liens from 2003 Q1 through 2005 Q4 and we're still working through the results.

 

The other time was when banks added $422 Billion in net new C&I loans from 2004 Q4 thru 2007 Q3. The next chart reviews the C&I NPL Rate for the past 10 years with an overlay of the two periods where banks added large amounts of new C&I loans.

 

(graph)

 

In orange, we see the $422 Billion in new C&I loans from 2004 Q4 thru 2007 Q3. As one would expect this had a tremendous impact in driving down the NPL Percentage as the new loans contributed to the denominator yet were too "fresh" to start impacting delinquencies. That said, when the delinquencies did begin to come in you see a major ramp in the NPL rate peaking at 3.57% in 2009 Q3.

 

Today, we sit at historic lows of 0.61% in NPL rate for C&I lending and have seen a similar benefit of the $397 Billion added in the past 3 years. This is not to say that we'll witness the extreme swing to 3.50%+ levels, but to think we'll not see increases in NPLs from C&I in the next few years is to disregard years of Vintage Curve experience. Massive amounts of new lending (regardless of type or lender) inevitably result in subsequent waves of increasing delinquencies.