Did Brian Moynihan Just Signal A New Era For Bank of America Corp?

For Bank of America's (NYSE: BAC  ) shareholders, it may seem there is no end to the bank's legal drama still lingering from the financial crisis. However, there may finally be a light at the end of the tunnel.

According to CEO Brian Moynihan, the only big settlement still hanging over the company may be over and done with pretty soon. Once the mortgage-related settlements are behind B of A, it may take a little while for the crisis to be forgotten, but it could signal a new era for the bank and its shareholders.

A lot has been paid already
Bank of America has already had to pay quite a lot, mainly related to bad mortgages originated by Countrywide Financial, which B of A acquired in 2008.

The company has already paid or agreed to pay more than $60 billion since 2011 to settle lawsuits, pay legal fees, and repurchase bad loans.

Just one more to go
While there are lots of cases that still need to be resolved; there is just one big one left to settle. The bank is working on a settlement with the U.S. Department of Justice that covers mortgage-backed securities sold by Bank of America under false pretense.

Basically, the DOJ alleges the securities were of much lower quality than they led investors to believe.

The Justice Department was originally seeking about $20 billion, but that figure included funds to go to the Federal Housing Finance Authority (FHFA), a case that was subsequently settled on its own. Even when backing out the $6.3 billion in cash Bank of America agreed to give the FHFA, it would still produce the largest settlement related to the financial crisis, which currently is JPMorgan's $13 billion settlement over similar issues.

However, it is important for investors to bear in mind a couple of things.

First, the original settlement offer in virtually any legal proceeding, including this one, is a somewhat inflated starting point for negotiations. The actual settlement amount is likely to be considerably less.

Don't worry too much about the pending legal bills
Also; Bank of America has been setting money aside to pay their legal expenses. This, as well as the previous settlements, came as no surprise to the bank. In fact, Bank of America revealed it had set aside an additional $2.4 billion for mortgage-related matters. The company hasn't said exactly how much it has set aside for this specific case, which makes sense given there are ongoing negotiations, but if the past few years are any indication, they'll more than be able to cover the tab.

What comes next for the bank?
Although this sounds like a ton of money, and it is, it needs to happen before the bank can truly move on from the crisis.

I've said before that every settled lawsuit makes Bank of America a stronger company, and this is the first definitive confirmation we've gotten that the end of all this drama is in sight.

As far as what could happen once the crisis is really in the past, and all of the pending legal payments are history, consider how cheaply Bank of America trades relative to its historic level. The stock currently trades at 1.2 times its tangible book value, and while it traded at a ratio of around four during the pre-crisis years, that was probably inflated due to investor over-optimism.

However, if we look back a few more years, we'll see that during the pre-housing bubble years, the bank traded for a ratio of about 2.5, which is certainly reasonable to expect once the uncertainty surrounding legal settlements is truly gone.

BAC Price to Tangible Book Value Chart

A valuation of 2.5 times tangible book would imply a share price of about $33. While we won't get there overnight, this is definitely a realistic target over the next few years.

Now that the bank can really put the past behind it, it can focus on building up its core business and realizing its potential. If the latest data on Bank of America's growth is any indication, it's already well on its way to doing just that.

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Read/Post Comments (8) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 03, 2014, at 11:24 AM, ChristianRiley wrote:

    "Even when backing out the $6.3 million in cash Bank of America agreed to give the FHFA,"

    MILLION? I believe it was BILLION, FYI.

  • Report this Comment On June 03, 2014, at 11:30 AM, rcwhalen wrote:

    Did I just read 2.5x tangible book? Really? Stock did not trade that high during the mortgage boom...

  • Report this Comment On June 03, 2014, at 1:43 PM, Edi wrote:

    Great Article. Thanks. Bank of America already need enough money to settle the last case. They already knew how much they have to pay but not all in cash payment. So cash payment would be $9 to $12B which they already have and the rest should be different typee of assistance.

  • Report this Comment On June 03, 2014, at 4:23 PM, funfundvierzig wrote:

    Brian Moynihan jumped into the cockpit as CEO of this crash-prone craft on Jan. 1, 2010. BAC opened on Jan. 4, 2010 @ 15.24. Today BAC closed @ 15.20. BAC shareholders have nothing to show for 4 1/2 years from pilot Moynihan and his bumbling co-pilot Chairman of the Board, Chad O. Holliday, Jr., whom veteran bank analyst, Mike Mayo, amusingly and accurately called "a figure-head with no banking experience." ...funfun..

  • Report this Comment On June 03, 2014, at 9:53 PM, Rifleman3006 wrote:

    funfun - same old dribble day after day.

  • Report this Comment On June 04, 2014, at 1:22 AM, AMADUMBE wrote:

    Neve, ever compare the past Bank of America illusory profits which were pumped up by expensive acquisitions, very dodgy accounting, ripping off customers, investors and shareholders with the current heavily Fed-SEC-regulated environment...BAC is now a regulated Utility...i.e honest, lower more predictable profits and a must have dividend yield of 3pct...until that happens the crazy to talk about 2x tangible book value...and please note, we found out that a bank s tangible book value does not mean a damn thing in a financial crisis...not long ago , do you remember !!! I am a shareholder !!!

  • Report this Comment On June 04, 2014, at 11:11 AM, funfundvierzig wrote:

    Rifleman, same vindictive ad hominem attacks against independently-speaking investors from the unethical proponents and PR operatives protecting Bank of America Management! ...funfun..

  • Report this Comment On June 09, 2014, at 7:33 AM, dukesnider wrote:

    Let us not forget that Charlie Munger ,Vice Chairman of Berkshire Hathaway, runs the portfolio of The Daily Journal (DJCO).he is a very good stock picker and 30% of the portfolio is in the common stock of Bank of America.Food for thought.


    Good Luck To All !!!!

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Matthew Frankel

Matt brought his love of teaching and investing to the Fool in order to help people invest better, after several years as a math teacher. Matt specializes in writing about the best opportunities in bank stocks, real estate, and personal finance, but loves any investment at the right price. Follow me on Twitter to keep up with all of the best financial coverage!

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