Bank of America scrambling to regain OK for higher dividend

NEW YORK — Bank of America’s chief executive officer, Brian Moynihan, won permission last month for the company’s first dividend increase since the financial crisis. Now he’s under pressure to salvage the payout after the company mistakenly inflated capital levels by about $4 billion.

One leading option is scrapping a $4 billion share repurchase, said a person briefed on the deliberations. That could allow the North Carolina-based bank to resubmit its request to boost the quarterly dividend to 5 cents, said the person, asking not to be identified because the process is confidential.

Moynihan, 54, has a month to draw up plans that would win Federal Reserve approval after the regulator asked the bank to freeze buybacks and dividend increases. The boost approved in March was heralded as a symbolic victory for Moynihan and the bank, which has had a token penny-a-share payout since 2009.


‘‘This is a step backward for them, it raises credibility issues for management,’’ said Jonathan Finger, whose family- owned investment firm, Finger Interests Ltd., owns 900,000 shares of the bank and stands to lose about $144,000 in annual income if the increase is denied. ‘‘Shareholders have suffered a significant period with no dividends, so some respite from that would be welcomed.’’

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Bank of America, the nation’s second-largest bank, views the dividend as linked to the company’s ability to generate regular earnings, which was unaffected by the capital accounting mistake, said the person. The firm isn’t yet certain what payout it will request, and may refine the proposal until the due date, the person said.

The predicament arose after the bank found an error in how it valued structured notes inherited in its 2009 acquisition of Merrill Lynch. The Fed responded by asking it to resubmit parts of its stress-test capital plan, which is designed to prove that a bank is strong enough to survive an economic shock. Bank of America disclosed the situation Monday and said it was hiring an outside firm to review its processes before the resubmission.

The bank’s revised estimate of Tier 1 capital under coming rules fell to $130.1 billion from $134.2 billion, it said in a regulatory filing Monday.

The resubmission probably will face closer Fed scrutiny and a higher risk of rejection, said Erik Gordon, a Ross School of Business professor at the University of Michigan Ann Arbor.


The bank’s blunder doesn’t necessarily mean the Fed will reject a revised capital plan on qualitative grounds, as the regulator did with Citigroup Inc.’s proposal, said another person with knowledge of the process. Examiners can’t check all the data provided by banks, the person said.

The Fed regards the incident as bolstering the case for the stress tests because the discovery was handled swiftly, said Barbara Hagenbaugh, a spokeswoman for the central bank. Before the stress tests, finding and fixing the error probably would have been a drawn-out process, she said.

The bank said the revised proposal probably will include lower payouts than the earlier plan, which was already modified once to win Fed approval during the stress tests. At stake are $1.68 billion in annual dividend payments for a company that earned more than $10 billion last year. Before the financial crisis, stockholders were getting quarterly payments of 64 cents a share.

Bank of America shares swung to a loss for this year, tumbling 6.3 percent Monday to $14.95,