By Rick Rothacker
January 19, 2012 6:39 PM EST
(Reuters) - 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 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 non-core 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.
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"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.
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