Bank of America has won approval from the Federal Reserve to raise its quarterly common stock dividend to 5 cents per share after it postponed the same plan earlier this year because it miscalculated its capital ratios.
On Wednesday, the Fed said it did not object to the Charlotte bank’s resubmitted capital plan, allowing the dividend to go forward. The bank is not buying back $4 billion in common stock, which had been part of its original plan approved by the Fed in March.
The dividend postponement in April was the latest misstep for the bank during the Fed’s annual stress testing process, which is designed to make sure banks have enough capital to weather another economic downturn. In 2011, CEO Brian Moynihan told investors he expected the Fed would approve a modest dividend increase, only to have regulators reject the proposal.
After navigating the process a second time this year, the bank can now increase the dividend for the first time since it was slashed to a penny per share in January 2009, in the depths of the financial crisis. The bank’s shares, which fell more than 6 percent on the dividend postponement in April, were up nearly 2 percent to $15.29 in afternoon trading.
Bank of America has previously said the problem with its original capital plan dated to the 2009 Merrill Lynch acquisition and how the bank calculated regulatory capital ratios after accounting for a type of debt known as structured notes. The error involved notes that had matured or were redeemed before the purchase.
In a statement, the Fed said the bank addressed the errors in its resubmission and reviewed its regulatory capital reporting process as required by the Fed.
“This is a milestone day,” said Matt McCormick, a portfolio manager with Bahl & Gaynor Investment Counsel, a Cincinnati investment firm that manages $12 billion. “It allows them to get looked at by investors who want a dividend. I hope this continues, and they increase it more.”
The bank, in a statement, said its first dividend increase in seven years “reflects the significant progress the company has made to strengthen the balance sheet and build capital and liquidity.”
Payout far from peak
The new increased payout, however, is a far cry from the 64 cents per quarter the bank was paying as recently as 2008. Where the bank once doled out more than $10 billion a year in dividends to shareholders, it paid just $428 million last year.
“I don’t think it’s anything to light a roman candle about,” Tom Lockhart, a retired Charlotte attorney and long-time shareholder, said of the dividend hike. “To increase from a penny per share to five cents, what difference does that make?”
Lockhart, 86, said he lost total confidence in the bank and its management after executives provided few details about how the bank miscalculated its capital ratios at the annual shareholder meeting in May. He was also upset that Moynihan received a 17 percent raise in 2013, upping his total compensation to $14 million.
“It ought to be clawed back and put back in the company,” he said.
The dividend is payable Sept. 26 to shareholders of record as of Sept. 5.
Bank of America wasn’t the only major financial institution to stumble during the Fed’s stress test. In March, Citigroup executives were surprised when the Fed rejected their capital plan. The New York bank has until Jan. 5 to resubmit its plan.
While the dividend increase is positive news for investors, Bank of America still faces hurdles in its recovery from the financial crisis. Executives have been negotiating a settlement with federal and state authorities over mortgage bonds that could exceed $12 billion.
And on Tuesday, regulators said Bank of America and 10 other banks need to redo their “living wills,” which are plans for dismantling their companies in a time of distress. If those plans are found deficient, the regulators could require banks to hold more capital, restrict their growth or even require divestitures.