Bank of America Corp. is suspending a long-awaited dividend increase after miscalculating its capital ratios, another setback for a bank still saddled 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 been since the financial crisis.
But Bank of America said Monday it had incorrectly accounted for notes inherited in its 2009 Merrill Lynch acquisition for years and will have to resubmit capital plans to the Federal Reserve.
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.
Now the bank says the revised plans it will resubmit to the Fed will return less capital to shareholders. The bank said it will hire an outside party to review its calculations before providing the regulator with its new data.
The Fed said the bank will have 30 days to turn in its revised plan, unless it receives 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 latest misstep by the bank 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 Charlotte bank also continues to face 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 Moynihan, 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 one-and-a-half.”
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. Shareholders 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, 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.”
Shareholders would like the dividend to increase, said Goozner, 68.
“Most of my investments in my retirement account are in dividend-paying stocks,” he said.
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 fall the dividend has taken since the financial crisis. As recently as 2008, the dividend was 64 cents.
Some retirees relied heavily on the dividend, Finger said. When it fell, “it affected their lifestyle,” he said.
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 past 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 for structured notes assumed in the purchase. The error involved notes that had matured or were redeemed prior to the purchase.
On Monday, Bank of America revised downward its regulatory capital amounts and ratios as of March 31, but said its past financial statements were not affected. 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.