Bank Of America's Return To Profitability
The problems of Bank of America are legion. It's a large lender that came about and grew by acquisition, (its two more egregious being Countrywide, a troubled subprime mortgage lender and Merrill Lynch, a storied broker/dealer), that saddled it with onerous costs and assets of questionable value. Given the double whammy of duff mortgages and investor skittishness that erased household wealth on an order of magnitude not seen since the Great Depression, the brokerage business became a challenge over the past several years.

SEE: What Caused The Great Depression?

Return to Profitability?
Is this all in the process of going away? The bank's stock price is hovering close to $10, having almost doubled since the beginning of the year, with the bulk of the jump coming in just the past three months. Events during this time would seem to present a mixed record, however. Notwithstanding the bulk of CEO Brian Moynihan's compensation being in the form of performance-based restricted stock, several other key officers' compensations are still quite high.

Along with several others, the bank caved to popular resistance against a $5 monthly debit card fee late in 2011 and is working on implementing monthly charges for accounts with balances below a minimum threshold. Retail banking is looking to recover costs due to asset write-downs from 2008 to 2011. This past autumn, Moynihan himself announced reductions in employees on the order of around 30,000 over the next several years, or about 10% of the company's workforce.

The bank has sold off over $30 billion in assets which, along with wielding the scalpel, has helped its return to profitability. Its participation in the recent mortgage settlement to afford relief to troubled (underwater) homeowners may be viewed by some as a palliative. Additionally, Allstate had its case against Bank of America dismissed due to a lack of evidence sufficient to support the insurer's allegation that the bank sought to defraud creditors of Countrywide Financial, which the bank had acquired in 2008, and from which Allstate purchased about $700 million in mortgage-backed securities.

Finally, along with several of its peers, the bank scored well on a recent stress test, demonstrating sufficient strong capital buffers against a future financial hit and boosting its credit worthiness, all the more advantageous, given the steepening of the yield curve and the resultant lower funding costs for the bank. Warren Buffett's $5 billion infusion last August, made when the bank's share price was at its nadir, came with beneficial terms, including a 6% dividend with shares redeemable at a 5% premium and the ability to acquire 700 million shares at $7.14 any time over the next 10 years. The fecundity of this investment could be staggering if the bank stays on its current trajectory.

A Silver Lining
Optimism on the state of the U.S. economy, though still on shaky legs, drove a strong first quarter rally. Consumer spending has increased. This development, along with the bank setting its house in order, (satisfying capital requirements with many of the other large U.S. banks and agreeing to rectify past misdeeds), has driven a favorable perception of the bank that is reflected its share price, which has increased over 70% during the first quarter. Part of this increase is attributable to short covering as the naysayers (short sellers) received their comeuppance in the latest rally.

While this is all well and good, unemployment still exceeds 8%; housing prices may have moderated, but not completely and by varying degrees, depending upon their location. European economies are in a mess and the long-term viability of this year's rally has yet to be determined. Also, at a forecasted rate of 2.2 %, domestic growth is proceeding, albeit slowly.

The Bottom Line
The ongoing risk of lawsuits from bogus mortgages originated by Countrywide continues to loom, as do continued knock-on effects of toxic loans in the bank's portfolio. In conclusion, the caution accorded to banks in light of their challenges would appear to warrant a make-haste-slowly approach by investors, as the bumpy economic recovery slogs forward.

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