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BofA Halts Buybacks, Dividend Increase After Error; Stock Dives

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Bank of America Corp. (BAC)  fell the most in a year after suspending a dividend increase and $4 billion of planned share repurchases because of an error in its stress-test submission to the Federal Reserve.

Bank of America will resubmit its proposal, the Charlotte, North Carolina-based lender said today in a statement. The company said it incorrectly adjusted for cumulative realized losses on structured notes issued by Merrill Lynch.

Chief Executive Officer Brian T. Moynihan had planned on boosting the bank’s quarterly payout to 5 cents a share from 1 cent, five years after the firm cut the dividend to a token amount during the financial crisis. Bank of America said today its revised proposal will probably feature lower payouts than in its original plan.

“Bank of America is by far not the first big bank to make a mistake in its CCAR submission,” David Hilder, an analyst at Drexel Hamilton LLC in New York, said in a phone interview, referring to the Fed’s Comprehensive Capital Analysis and Review. He said that while Bank of America noticed the error and probably has sufficient capital for the payout, the setback is “embarrassing” for the company.

The stock fell 5.2% to $15.13 at 9:48 a.m. in New York, the biggest intraday slide since April of last year.

Leverage Ratio

The bank’s estimated Tier 1 capital ratio is actually 11.9% as of March 31, which is 21 basis points below what the company previously reported, according to today’s statement. The Tier 1 leverage ratio was 7.4%, or 12 basis points lower. A basis point is 0.01 percentage point.

Bank of America discovered the mistake last week as it prepared its 10-Q quarterly regulatory filing and immediately notified the Fed, said a person with direct knowledge of the process. The error had gone undetected since the firm’s acquisition of Merrill Lynch in 2009, said the person, who requested anonymity because the information hasn’t been made public.

The lender must resubmit a capital plan within 30 days and undertake a review to ensure no other errors, the Fed said today in a separate statement.

Bank of America, led by Moynihan since 2010, has been working for years to resolve headaches inherited with the purchases under his predecessor of Merrill Lynch and mortgage-lender Countrywide Financial Corp. during the financial crisis. The company this month reported a $276 million deficit for the three months ended March 31, its fourth quarterly loss under Moynihan.

Mortgage Costs

Today’s retreat is another setback for the CEO, who has underestimated the costs tied to mortgages as he sought to return capital to shareholders. In March of 2011, the company said the Fed objected to its plan to raise its dividend. Months earlier, Moynihan told investors, “I don’t see anything that would stop us” from raising the payout in 2011.

The more recent reversal erases what had seemed to be a victory last month with its approval even as Citigroup Inc.’s plan was rejected by the Fed. The Citigroup decision was based on concerns about the quality of its process, including defects the Fed had flagged before. Citigroup was also seeking its first dividend since the crisis, as well as a $6.4 billion buyback.