Bank of America

Bank of America Corp (NYSE:BAC) is the largest bank in Northeast Florida, with 37 local branches and $20 billion in area deposits for a market share of 45.5%. The stock of the big bank has risen up at a much faster pace than the market as a whole in the last quarter. The company’s stock has gained more than 70% in value since mid-summer and now that the fiscal cliff deal is sealed it works in BAC’s favor.

Several large U.S. banks were exposed to LIBOR (London interbank offered rate) rate rigging including the Bank of America. The other two banks involved were Citigroup Inc. (NYSE:C) and JPMorgan Chase & Co. (NYSE:JPM) Bank of America Corp (NYSE:BAC) will be in line with UBS’ $1.5 billion settlement.

Average Financials

Bank of America reported a sharp decline in the Profit during the third quarter of 2012. The company reported a net income of $340 million before paying preferred dividends. The bank posted a $33 million net loss on results applicable to common shareholders. That’s a steep plunge from the same period a year ago, when BofA reported $6.2 billion in net income, or 56 cents per share. The earnings were affected largely due to litigation expenses and an accounting charge.

 The third quarter was adversely impacted by its $1.9 billion debit valuation adjustments (DVA) and fair value option (FVO) adjustments associated with enhancing the company’s credit spreads, $1.6 billion for total litigation expense, along with a charge for the settlement of the Merrill Lynch class action litigation, and a $0.8 billion charge for reprising of certain deferred tax assets due to a reduction in the U.K. corporate tax rate. In total, these charges produced a negative $0.28 per share.

Settlement with Fannie Mae:

The Bank of America took a huge step when it declared the settlement with Federal National Mortgage Association (OTC:FNMA) regarding ongoing repurchase claims for fraudulent mortgages sold by its Countrywide financial subsidiary through Dec 31, 2008. This move will particularly help the bank to reduce its legal liability, removing a large amount of drag in its stock prices.

The settlement with Federal National Mortgage Association (OTC:FNMA) according to a series of analysts came in good time. It will reduce the uncertainty around the mortgage repurchase losses, and will prove beneficial in reducing expenses and balance sheet risks heading into 2013.

Along with reducing Bank of America’s mortgage risk. The regulators would be more inclined towards approving increased dividends and/or share repurchase. This is favorable news to the investors.

The Bank of America Corp (NYSE:BAC) though seems to be in a good position after the Fannie Mae settlement but not for very long. The Bank has agreed to $43.5billion in settlements which include Fannie Mae, as well as its portion of the $8.5 billion agreement by 10 big banks regarding improper foreclosure practices in 2009 and 2010.

The ongoing litigation with the Department of Justice and MBIA will also knock the current huge amount of the settlement money even higher. It is estimated to reach $ 3 billion or more.

Savings from Mobile Banking

The Mobile Banking segment surged by 30% in 2012 and reached 11.1 million users. CEO Brian Moynihan announced this figure in a Goldman Sachs Group, Inc. (NYSE:GS) conference in December. With 40 million households banking with BAC, the cost savings available by moving the remaining 29 million customers to mobile is incredible.

The savings from directing the average customer to mobile will more than counterbalance the higher cost incurred in personal service for the rich, who are dependable for growth in BofA’s wealth management segment.

Balance sheet risk

Though settling litigation rightfully reduces the uncertainty and risk in the Balance sheet, the sale of $400 billion in mortgage servicing rights constituting approximately a quarter of the bank’s servicing business, is also vital.

Bank of America keeps on reducing its mortgage risk. At present, the Bank is in talks to sell the mortgage servicing rights on more than $300 billion of loans in its continued efforts to offload problem mortgage exposure. This division negatively impacts the company as compared to any other segment in the bank because assisting aberrant homeowners gets very expensive. Even though, costs have increased in 2012 for this division, CEO Brian Moynihan believes the bank is doing well to control expenses and should be able to get them down to about $500 million per quarter-down from $3.4 billion in the third quarter.

In the end of the last quarter, BAC’s MSR (Mortgage Servicing Right) balance was recorded at $5.1 billion. MSR balances are added to capital, but the allowed contribution will reduce to a maximum of 10% of the MSR balance, from 100% presently, as per the Basel 3 guidelines. This does not seem like to be an issue for BAC as its MSR balance is less than 5% of “Tier 1” capital of $135 billion.


According to the Bank of America Corp (NYSE:BAC) its fourth quarter will have some items associated to the settlement and other matters. The bank estimates modest positive earnings for the quarter. The large part of this settlement will be paid within 2013.

Much of the Bank of America’s settlement will be done in the first quarter of 2013 along with the LIBOR settlement. Since the bank has appreciated so much in the fourth quarter of 2012, it may face some hurdles in maintaining its current pace of growth in the coming quarters. So, 2013 may not be a ‘value growth’ year for the bank, but it will be a good year for the company as it amends it past problems.