Bank of America Corp (BAC.N) may give shares worth $1 billion to employees instead of cash as part of bonuses and hold back on dividend increases and buybacks, as the second-largest U.S. bank grasps for ways to boost its capital levels.
Bank of America posted a quarterly profit on Thursday, boosted by loan growth, improving credit quality and one-time gains on asset sales, sending its shares up as much as 7 percent.
But the focus turned to the bank's capital levels, which although higher than before, still lag rivals when it comes to meeting the global regulatory standard known as Basel III.
The bank has already sold most of its noncore assets, and the unusual plan now to swap some of its employees' bonuses with shares shows it is looking for creative ways to reach the target.
A large stock issue to effectively captive investors -- its employees -- could further pad the bank's capital levels, but at the same time dilute shareholders' interest and possibly stir discontent among some bankers.
"I've seen companies give out stock but it's usually to executives. It's not so broad. It doesn't happen very often," said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. "It's usually done as an incentive scheme as opposed to a way to preserve capital."
In another move that will conserve capital, Chief Financial Officer Bruce Thompson told reporters, the bank did not ask the U.S. Federal Reserve for permission to increase its dividend or buy back its own stock as part of this year's ongoing stress tests. Other banks have said they are eager to return more capital to shareholders as part of the process.
Last year, Bank of America asked the Fed for a modest increase to its quarterly dividend of a penny per share but was rebuffed. After the denial, the bank turned its attention to meeting new international standards by building more capital, a measure closely watched by investors, Thompson said.
"If you look at where we are relative to our peers, we made enormous progress this quarter in closing the gap," he said.
Bank of America is still trying to recover fully from the 2008 financial crisis and its disastrous acquisition of mortgage lender Countrywide Financial, which has saddled the company with losses.
For all of 2011, the bank's mortgage unit, mostly because of Countrywide, lost a whopping $19.5 billion, as the company set aside reserves for soured home loans and related lawsuits. Those losses are the primary driver behind the bank's thirst for capital. Its other business units were profitable for the year.
Chief Executive Brian Moynihan is under pressure to build a balance sheet strong enough to absorb these mortgage-related hits and to meet the new capital requirements that begin taking effect at the end of this year.
Last spring, Bank of America launched a wide-ranging efficiency program called Project New BAC, which is expected to eliminate 30,000 jobs in its first phase over the next few years.
On a conference call with analysts on Thursday, Thompson said the bank should start to see the benefits of lower expenses in the first quarter. The bank's total headcount dropped by about 7,000 -- even with the hiring of about 2,500 workers to help with troubled loans -- to about 282,000.
Bank of America said its Tier 1 common equity ratio, a key measure of capital against risk-weighted assets, reached 9.86 percent at the end of December.
That was up from 8.65 percent at the end of September and higher than the 9.25 percent minimum the bank had forecast. Wells Fargo & Co's (WFC.N) ratio, in comparison, was 9.46 percent at the end of the fourth quarter.
Bank of America executives said the bank can still make improvements by shedding riskier loans and other holdings, although Thompson said the bank is nearing the end of its sale of business units.
Moynihan has also taken limited steps to issue new shares, including a stock-for-preferred-shares exchange during the fourth quarter and the latest plan to dole out more shares to employees.
The bank has employed a similar tactic in the past, issuing $1.7 billion in stock to employees as part of its 2009 repayment of its $45 billion government bailout. The difference this time around is that employees can immediately sell the shares.
Bank of America spokesman Jerry Dubrowski said the bank could receive a "modest" benefit to capital from the plan.
The move is unusual but could better align employees with shareholder interests, said Laura Hay, a managing director with compensation consultant Pearl Meyer & Partners. Other companies, she said, will likely watch how the move plays out at Bank of America.
Bank of America said net income applicable to common shareholders was $1.58 billion, or 15 cents per share, in the fourth quarter, compared with a loss of $1.6 billion or 16 cents per share, a year earlier.
For all of 2011, Bank of America posted a slim profit -- $85 million in net income applicable to common shareholders, compared with a loss of $3.6 billion in 2010. Its last profitable year was 2008.
The Charlotte, North Carolina-based bank benefited from pretax gains of $5.3 billion from the sale of China Construction Bank Corp (0939.HK) shares, and gains from the exchange of trust preferred securities and the sale of debt securities.
Various accounting charges and litigation expenses reduced earnings by $3.7 billion.
The legal expenses include charges related to a Countrywide fair lending settlement and the bank's latest expectations for a settlement with state attorneys general and federal officials over alleged foreclosure abuses, Thompson said.
The bank set aside $2.9 billion in the quarter for loan losses, down from $5.1 billion a year ago.
Like rivals Wells Fargo & Co, JPMorgan Chase & Co (JPM.N) and some regional banks, Bank of America reported loan growth in the fourth quarter, potentially boding well for the U.S. economy.
In its corporate bank, average loans and leases increased 29 percent to $107.5 billion, with growth in both U.S. and international commercial loans.
EURO CRISIS, REGULATION HURT
But also like other banks with large investment banking operations, such as Citigroup Inc (C.N), JPMorgan, Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N), Bank of America was hurt by lackluster trading and investment banking revenue in the fourth quarter as clients shunned capital markets and put off deals because of the European debt crisis.
Bank of America bulked up its investment banking business with the 2009 purchase of Merrill Lynch.
Total revenue declined to $24.9 billion from $28.5 billion in the third quarter but was up from $22.4 billion a year ago.
Sales and trading revenue in Bank of America's banking and markets unit fell to $1.9 billion, excluding an accounting charge, from $2.4 billion a year ago. It increased sequentially from $1.1 billion in the third quarter.
Investment banking fees were flat from the third quarter at $1 billion but down from $1.6 billion a year ago.
Low interest rates and regulatory restrictions on fees earned from debit card transactions also hurt revenue.
The bank said the Durbin amendment, the provision in the Dodd-Frank financial reform bill that curbed debit-card swipe fees, decreased card services revenue by $430 million.
"Bank of America had a solid quarter, but not quite enough to make you pop the champagne" said Allerton Smith, senior director at Moody's Analytics.
"Capital ratios are up, liquidity is stronger and there is a noticeable decline in problem loans," Smith said.
Bank of America shares closed up 2.4 percent at $6.96 in late afternoon on the New York Stock Exchange, off an earlier high at $7.28. The shares last closed above $7 in late October.
(Reporting By Rick Rothacker in Charlotte, N.C.; Additional reporting by Ben Berkowitz in Boston and Jed Horowitz and David Henry in New York; editing by Paritosh Bansal, Maureen Bavdek, John Wallace and Matthew Lewis)