BankAmerica Board OKs Cut in Dividend From 38 to 20 Cents

BankAmerica’s board of directors, with their company under intense scrutiny by federal bank regulators, announced late Monday that the bank company’s quarterly dividend would be cut nearly in half in response to huge second-quarter losses.

The common stock dividend, which has been 38 cents a quarter for three years, was reduced to 20 cents. Dividends on preferred shares were not affected.

A company spokesman said he knew of no previous reduction or elimination of the quarterly dividend.

The announcement of the dividend reduction was the most recent bad news for the company, parent of San Francisco-based Bank of America, the nation’s largest bank. It has been beset by poor earnings, large loan losses and a string of other setbacks.

Bank industry analysts predicted that the firm’s stock price would fall in response to the cut and that many small shareholders who depend on their dividends to meet living expenses would lose faith in the bank.

Bank officials said the reduction was necessary in light of a second-quarter loss of $338 million, the bank’s first quarterly deficit since 1932 and the second largest in U.S. banking history.

‘Realistic Dividend’

“We are keenly aware that a reduction in the dividend will be difficult for many of our shareholders, and, consequently, this was a very hard decision for us,” Samuel H. Armacost, president and chief executive, said in a statement. “But when we had finished sorting out the pros and cons, the action clearly was in the best interests of the corporation and, by extension, shareholder values.

“The action allows us to pay a realistic dividend and still maintain BankAmerica’s flexibility to take advantage of opportunities which increase the value of our shareholders’ investment over the longer term,” he said.

Harvey Gillis, the bank’s chief financial officer, said the reduction will save $27.5 million per year.

The painful decision was made at a director’s meeting attended by acting Comptroller of the Currency H. Joe Selby, the nation’s top bank regulator. He and a team of agency auditors who recently completed a rigorous four-month examination of the bank presented the findings to the board.

Details of the presentation were not available Monday night. But sources inside and outside the bank have said that the regulators have taken an unusually hard line with Bank of America and played a key role in the bank’s decision to set aside $892 million in the second quarter to cover bad loans. The mammoth loss provision was the major reason that the bank suffered the big quarterly deficit.

Gillis said the 20-cent pay-out was what management had recommended to the board. Although the board meeting began at 11 a.m. and the announcement was not made until after 7 p.m., the decision on the dividend was taken after an hour’s discussion, he said.

Small Holders Most Affected

Bank analysts interviewed in advance of Monday night’s announcement were split over whether B of A should reduce the dividend. Some said prudence and planning for the future dictated a reduction to reflect the large loss. Others, describing B of A as a “semi-public utility,” said the pay-out should be maintained at any cost in order to reassure the large body of individual shareholders and depositors.

B of A, unlike most of its large competitors, has a huge number of individual shareholders for whom the dividend cut will be punishing.

Don Crowley, an analyst with Keefe, Bruyette & Woods, a brokerage house that specializes in bank stocks, said after the bank’s announcement that it is these small shareholders who will be most affected. He predicted that a number of them will sell their B of A holdings, which for years have yielded steady earnings.

Larger shareholders and institutional holders have already prepared for the bad news. It should not account for a big sell-off of B of A shares, he said.

“It was not out of line with expectations,” Crowley said of the size of the reduction.

Crowley predicted that the price of B of A common stock would bottom out at $15 a share. It closed Monday at $16.625.

Dividends on the common shares will be paid Aug. 30 to shareholders of record Aug. 15.