Bank of America is suspending a long-awaited dividend increase after miscalculating its capital ratios, the latest setback for a bank still wrestling with mortgage-related legal woes.
The Charlotte bank had planned to raise its quarterly dividend to 5 cents per share in the second quarter, up from the penny per share it had paid since the financial crisis.
But Bank of America said Monday it had incorrectly accounted for a type of debt inherited in its 2009 Merrill Lynch acquisition for years and will have to resubmit its capital plan to the Federal Reserve.
The bank’s shares fell more than 6 percent to $14.95 Monday, their lowest point since November. The shares, which approached $18 in March, are now down nearly 4 percent percent for the year.
As part of the annual stress testing process, the Fed in March had approved Bank of America’s plan to raise its dividend and to buy back $4 billion in common stock.
On Monday the bank said its revised plan will return less capital to shareholders. The bank said it will hire an outside party to review its calculations before providing the Fed with its new data.
The Fed said the bank will have 30 days to turn in its revised plan, unless the regulator approves an extension. The bank must address its mistakes and review its capital reporting process “to help ensure there are no further errors,” the regulator said.
Monday’s announcement marks the bank’s latest misstep during the annual stress testing process implemented by the Fed after the financial crisis. In 2011, CEO Brian Moynihan told investors he expected the Fed would approve a modest dividend increase, only to have regulators reject the proposal.
The bank also continues to face costly legal challenges. Bank of America lost money in the first quarter after settling for $9.5 billion with the Federal Housing Finance Agency, and it’s reportedly negotiating a massive settlement with federal and state authorities over mortgage bonds.
Moynihan held a conference call Monday morning with senior leaders at the bank to update them on the dividend issue.
Bank analyst Nancy Bush said the miscalculation of capital ratios is a significant setback for the bank and its CEO, who succeeded Ken Lewis in January 2010.
“Brian and the company had been gaining a reputation for competence after having a rocky start when Brian’s tenure began,” Bush said. “I would say they’re back to square one, or maybe square 1 1/2.”
The miscalculation is also an embarrassment for the Fed, which didn’t catch the mistake before the bank reported it, Bush said.
In a report Monday, analysts at Keefe, Bruyette & Woods slightly lowered their estimate of the bank’s 2015 earnings per share. The new estimate eliminated the planned $4 billion common stock buyback, which it called a “conservative approach.”
The dividend news comes less than two weeks before Bank of America executives face shareholders at the bank’s annual meeting May 7 in Charlotte. Stockholders in the past have peppered Moynihan with questions about when they could expect a dividend increase.
“It’s a disappointment, no doubt,” said Alan Goozner, 68, a retired federal contractor in Charlotte who has owned shares in the bank for at least 15 years. “Of course, even at 5 cents it’s not generating a lot of income for me.”
Jonathan Finger, a partner in Houston-based Finger Interests, said the expected dividend increase had been seen as a “step in the right direction” for the bank.
Finger, whose company owns 900,000 shares of the bank, said he’s spoken over the years to Bank of America shareholders in the Charlotte area who have been “severely impacted” by the shrunken dividend. As recently as 2008, the quarterly dividend was 64 cents per share.
Some retirees relied heavily on the dividend, Finger said. When it fell, “it affected their lifestyle,” he said.
Capital ratios reduced
Monday’s announcement comes four days after the bank moved chief risk officer Terry Laughlin to a new strategy position and replaced him with Geoffrey Greener, who was the bank’s enterprise capital management executive.
Bank of America said the executive shift was unrelated to the miscalculated ratios. The error was discovered in the last several days as the bank was preparing its quarterly filing with the U.S. Securities and Exchange Commission.
Greener, who is based in New York, was involved in building the bank’s capital ratios in his previous role and will now be involved in correcting the error. Laughlin, who splits time between Charlotte and New York, will help coordinate the resubmission to the Fed.
Bank of America said the problem 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.
On Monday, Bank of America revised downward its regulatory capital amounts and ratios as of March 31 but said its past earnings were not affected. Under one key measure, the bank’s capital declined by just 0.3 percentage points, but that still amounted to a more than $4 billion decrease in capital.
The bank’s estimated common equity tier 1 capital ratio – a measure of capital to assets weighted by risk – remains above the minimum 8.5 percent required by 2019 under new international capital standards, the bank said.
Bank of America isn’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, and they’re now preparing a resubmission.