Latest BofA setbacks mean tough questions for executives this week

A year ago, Bank of America board Chairman Chad Holliday confidently told shareholders that the “train is on the tracks.”

As investors prepare to gather in Charlotte again this week, they’ll be looking to Holliday and CEO Brian Moynihan for assurance that the bank’s progress hasn’t been derailed.

Wednesday’s annual shareholder meeting follows a series of recent setbacks for Bank of America. That puts a heightened focus on whatever Moynihan and Holliday say when they take the stage at the Charlotte Marriott City Center.

The meeting will be the first public appearance for Bank of America executives since the bank announced it would be forced to scrap its plans for a dividend increase this year. Industry observers say they expect pointed questions about accounting and controls directed at the two men in charge of the bank’s governance.

“It couldn’t be worse timing,” said Tony Plath, finance professor at UNC Charlotte. “It’s going to be a slugfest.”

Moynihan, in his fifth annual meeting as CEO, will be expected to address Bank of America’s dividend and how the bank will respond to errors in how it accounted for its capital. That would be a marked change from the atmosphere in 2013, a largely cordial meeting where most questions Moynihan fielded were on environmental issues.

That meeting came after a year and a half of a rapidly increasing stock price. This year hasn’t been as kind. Shares are down more than 2 percent since the start of 2014.

Bank of America, which declined to comment for this story, announced last month that it lost money in the first quarter after reaching a $9.5 billion settlement with the Federal Housing Finance Agency over securities sold to Fannie Mae and Freddie Mac. The bank also disclosed that it had set aside an additional $2.4 billion for future legal expenses, a surprising move that drew repeated questions from analysts during a conference call outlining the quarter’s results.

The bank has spent more than $24 billion in legal fees and litigation since 2009, according to documents filed with the Federal Reserve, and the new reserve raises questions about how much more is to come. Combined with the $36.2 billion the bank has paid or set aside to cover investors’ claims that Bank of America misrepresented mortgage-backed securities sold to them, the bank has now spent more than $60 billion dealing with the legal ramifications of the financial crisis.

For comparison, that’s more than the $42.7 billion that BP reports it has spent or set aside in connection with the 2010 Deepwater Horizon oil spill.

Reports have also surfaced that Bank of America is negotiating another settlement with the Department of Justice that could reach billions of dollars.

Analysts acknowledge that the bank has made progress in putting legal issues behind it. Last year was also the most profitable at Bank of America in the past half-decade.

“Certainly the company’s come a long way,” Mike Mayo, a bank analyst with CLSA, told the Observer. “The question for any shareholder at this time is, ‘Have they done enough?’ And I think that’s a fair question.”

More troubling, he said, is the announcement last week that Bank of America would have to suspend its planned dividend increase and stock buyback program because it had miscalculated its capital ratios.

The bank had planned to increase its quarterly common stock dividend to 5 cents, up from the penny it had paid since the financial crisis. But Bank of America discovered it had incorrectly accounted for a type of debt inherited in its 2009 acquisition of Merrill Lynch. That sent the bank back to the drawing board to calculate the capital return it would offer shareholders this year.

The question, as Mayo sees it: “Is this a one-off event, or is this indicative of a control environment that needs to improve?”

To get an answer, he said he’ll be traveling to Charlotte for his first appearance at a Bank of America annual meeting this Wednesday. He began attending other banks’ meetings last year, after 25 years in the industry, as a way to hold boards more publicly accountable, he said.

“We’re really looking (for) assurance, insight and perspective on how they protect the interest of shareholders,” Mayo said.

Bank of America’s largest shareholders are giant institutional investors, who do most of their work with companies behind the scenes. That means the crowd at shareholder meetings tends to be skewed toward activist investors. For the past few years, Bank of America’s shareholder meetings have been dominated by questions about the bank’s financing of coal projects and its foreclosure practices.

Mayo’s presence will shake that dynamic up. He said he intends to stay in the microphone line until all of his questions are answered.

The bank also faces several familiar shareholder proposals, including one that would require Bank of America to publicly disclose what it spends on direct and indirect lobbying each year. Influential shareholder advisory firm Glass Lewis & Co. has again recommended investors adopt the proposal, according to its most recent report.

Shareholders have voted down similar proposals in 2011 and 2012, with fewer than a third of votes in favor of them each time, according to Proxy Monitor, which tracks voting results.

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