B of A Cut Dividend Due to Expected Smaller Profits

BankAmerica’s decision to cut its quarterly dividend nearly in half resulted from the bank company’s expectations of smaller future profits and was arrived at following extensive discussions with federal bank examiners, company sources said Wednesday.

Reduction of the quarterly pay-out to 20 cents from 38 cents was decided upon Monday to preserve capital to support future growth and to satisfy regulatory orders to improve the bank’s primary capital position, the sources said. Primary capital is composed of shareholders equity, loan-loss reserves and certain kinds of subordinated debt.

The dividend cut will save BankAmerica, parent of San Francisco-based Bank of America, $27.5 million per quarter (not per year as incorrectly reported in Tuesday’s editions. Annual savings would be $110 million.) The firm recently announced a second-quarter loss of $338 million.

The move was seen by industry analysts as an acknowledgment by company officials that the firm had been hurting itself by paying out too high a percentage of its earnings. Last year, for example, it paid out more than 85% of its earnings in dividends, while its major peers in the banking industry traditionally limit dividends to 30% to 40% of earnings.

Bank officials stressed, however, that regulators who attended Monday’s meeting of the company’s board of directors did not directly pressure directors to cut the dividend.

Rather, management’s recommendation to the board that the dividend be reduced followed lengthy conversations with bank officers regarding ways to return the bank to profitability.

“The regulatory guys had some influence,” one source close to the board said. “The decision to cut was arrived at in conjunction with meetings with the examiners.”

The source added that “the flavor of the meeting was that the regulators are taking a very hard look at all the big banks and putting the blocks to them.”

B of A, while subject to unusual regulatory scrutiny, was not singled out for punitive action, according to a spokesman for the office of the Comptroller of the Currency, which regulates national banks.

Following Monday’s marathon meeting, which lasted well into the evening, B of A President and Chief Executive Samuel H. Armacost appeared to continue to enjoy the support of the board.

Board Sees Progress

One board source indicated that the directors believe that Armacost is making progress and turning around the troubled institution and that he is dealing in large measure with problems that he inherited.

“Sam is still in with both feet,” according to one director. “There is no threat of his removal.”

Examiners reportedly warned the board to expect continued problems in the bank’s loan portfolio, particularly in loans to California farmers. The bank currently has about $1.7 billion in outstanding agriculture loans.

Examiners reportedly also told the board that they believe the bank is making substantial progress in reducing troubled assets and putting in place systems to further trim costs. The report contained few surprises and no new bad news, according to one source close to the board.

Meanwhile, analysts generally endorsed the decision to reduce the dividend as prudent in light of the bank’s limited short-term earnings prospects.

Already it is clear that, because of the huge second-quarter loss, only a sale of assets--perhaps the bank’s San Francisco and Los Angeles headquarters buildings and a consumer finance subsidiary--will bring the bank into the black by year-end.

‘Great Deal of Symbolism’

“It must have been a very difficult decision, but it was the right thing to do from a financial management point of view,” said bank analyst William J. Welsh of the investment firm of Sanford C. Bernstein & Co.

“A great deal of symbolism comes into play when you’re dealing with a bank that depends so heavily on public confidence.”

Investors reacted to the dividend reduction by trading BankAmerica’s shares heavily--3.3 million shares changed hands--and slicing $1 off the price. The stock closed at $15.625 per share.

Bank officials and analysts had anticipated a moderate reaction. “That’s not too bad,” commented one bank official at the news of the closing price.

Harvey Gillis, B of A’s chief financial officer, said the bank tried to strike a balance between the interests of diverse stockholder groups and the need for the bank to build equity. He said he wanted the decision to give a realistic signal to both individual and institutional investors.

“If we were to cut it too far, we would give a miscue to the marketplace that we don’t expect to return to profitability,” Gillis said in an interview. “But neither do you want to keep it too high to give the expectation of a return to high earnings.”