BAC-WT - Bank of America Warrants

[Grenville]

Also, 10-Q is out.

 

Thanks, was wondering when that was coming out.

[Parsad]

They settled 3 more litigation cases in the 3rd quarter that they disclosed today.  The main big one left is AIG, and I think that will be settled before the end of the year if AIG is reasonable, as well as the MBIA case which should be settled too.  But check this out:

 

The lender also said it could have as much as $2.8 billion in legal costs as of Sept. 30 beyond what it has already set aside. That’s a decline from the $4.1 billion estimated three months earlier because of a settlement of a class-action suit tied to the 2009 takeover of Merrill Lynch & Co., said Jerry Dubrowski, a Bank of America spokesman.

 

Meaning they've already saved $1.3B in costs on the litigation they've settled above their provisions.  How much do you want to bet that they settle all of their litigation for maybe $1-1.2B above what they've set aside?  Cheers!

 

http://www.bloomberg.com/news/2012-11-02/bofa-discloses-three-mortgage-lawsuit-accords-in-third-quarter.html?cmpid=yhoo

[xazp]

From the Q:

 

[Comment:  I was unaware of the FHFA motion; it looks like 24 of the 86 trusts were dismissed on statute of limitations/repose grounds.  I view the FHFA as one of the greater outstanding risks]. 

 

For those matters where an estimate is possible, management currently estimates the aggregate range of possible loss is $0 to $2.8 billion in excess of the accrued liability (if any) related to those matters. This estimated range of possible loss is based upon currently available information and is subject to significant judgment and a variety of assumptions, and known and unknown uncertainties.

 

On September 27, 2012, the parties in In re Bank of America Securities, Derivative and Employee Retirement Income Security Act (ERISA) Litigation agreed in principle to settle the securities claims (referred to as the Merrill Lynch Class Action Settlement). The Corporation has agreed to pay $2.4 billion, an amount that was fully accrued as of September 30, 2012, and institute and/or continue certain corporate governance enhancements until January 1, 2015, including those relating to majority voting in director elections, annual disclosure of noncompliance with stock ownership guidelines, policies for a board committee regarding future acquisitions, the independence of the Board's compensation committee and its compensation consultants, and conducting an annual “say-on-pay” vote by shareholders. In exchange, Securities Plaintiffs will release their claims against all defendants. The agreement is subject to execution of a written settlement agreement and court approval.

 

AIG Litigation

On August 31, 2012, in the Countrywide RMBS MDL proceeding, AIG filed an amended complaint, which added claims against the Corporation and certain related entities for constructive fraudulent conveyance and intentional fraudulent conveyance. The amended complaint also revised various factual allegations, added claims concerning certain transactions and deleted claims concerning other transactions.

Bayerische Landesbank, New York Branch (Countrywide) Litigation

On September 27, 2012, the case was settled for an amount not material to the Corporation's results of operations.

 

Dexia Litigation

On September 27, 2012, the case was settled for an amount not material to the Corporation's results of operations.

FHFA Litigation

On August 14, 2012, the U.S. Court of Appeals for the Second Circuit granted the UBS defendants' application for an interlocutory appeal in FHFA v. UBS Americas, Inc., et al.

On October 18, 2012, in FHFA v. Countrywide Financial Corporation, et al., pending in the U.S. District Court for the Central District of California as part of the Countrywide RMBS MDL, the court dismissed as untimely FHFA's Section 11 claims as to 24 of the 86 MBS allegedly purchased by FNMA and FHLMC, but otherwise denied the motion to dismiss on statute of limitations and statute of repose grounds.

 

Luther Litigation and Related Actions

On August 31, 2012, the U.S. District Court for the Central District of California denied the plaintiffs' motions to remand Luther v. Countrywide Financial Corporation, et al. and Western Conference of Teamsters Pension Trust Fund v. Countrywide Financial Corporation, et al. to the California Superior Court.

Sealink Litigation

On September 27, 2012, the case was settled for an amount not material to the Corporation's results of operations.

[xazp]

<< Meaning they've already saved $1.3B in costs on the litigation they've settled above their provisions.  >>

 

This is the Merrill Lynch thing, and in the last quarter they had to take a charge to resolve it.  The total litigation charge was $1.6Bn, (unspecified how much was ML itself).  I don't see them "saving" costs - it looks like they paid something in the vicinity of their worst-case estimate. 

 

They settled 3 more litigation cases in the 3rd quarter that they disclosed today.  The main big one left is AIG, and I think that will be settled before the end of the year if AIG is reasonable, as well as the MBIA case which should be settled too.  But check this out:

 

The lender also said it could have as much as $2.8 billion in legal costs as of Sept. 30 beyond what it has already set aside. That’s a decline from the $4.1 billion estimated three months earlier because of a settlement of a class-action suit tied to the 2009 takeover of Merrill Lynch & Co., said Jerry Dubrowski, a Bank of America spokesman.

 

Meaning they've already saved $1.3B in costs on the litigation they've settled above their provisions.  How much do you want to bet that they settle all of their litigation for maybe $1-1.2B above what they've set aside?  Cheers!

 

http://www.bloomberg.com/news/2012-11-02/bofa-discloses-three-mortgage-lawsuit-accords-in-third-quarter.html?cmpid=yhoo

[obtuse_investor]

 

While the stock is selling below Book, I really hope that they focus heavily on buybacks and not the dividend.

 

Buybacks below book are a great capital allocation decision, while dividends are precisely not.

 

What should they buy back first?  A-warrants or stock?  A mix of both?

 

Both, because it is a good capital allocation decision. I am no accounting expert, but this is how I understand it.

 

When a company pays a dividend, it pays out a portion of the equity to shareholders (reducing cash assets). If the $1 of equity can be purchased in the market for 50¢; then, as a shareholder, wouldn't it be a more profitable decision be to buy 50¢ dollar bills, rather than get $1 cash $1 of equity?

 

If P/BV is 0.5, then buyback would be a 50% ROI... a dividend would be a 0% ROI.

 

[ERICOPOLY]

If P/BV is 0.5, then buyback would be a 50% ROI... a dividend would be a 0% ROI.

 

They are the same if the dividend isn't taxed and if the shareholder in turn uses the dividend to purchase more shares.

 

Theoretically, the buyback can be substantially above intrinsic value and still be a better deal than cash dividends when a high dividend tax rate is involved.  Berkshire Hathaway is taxed very little on dividends so you know what Warren's answer is going to be here before he even moves his lips.

 

[Mephistopheles]

If P/BV is 0.5, then buyback would be a 50% ROI... a dividend would be a 0% ROI.

 

They are the same if the dividend isn't taxed and if the shareholder in turn uses the dividend to purchase more shares.

 

Theoretically, the buyback can be substantially above intrinsic value and still be a better deal than cash dividends when a high dividend tax rate is involved.  Berkshire Hathaway is taxed very little on dividends so you know what Warren's answer is going to be here before he even moves his lips.

 

 

Eric,

 

Correct me if i'm wrong, but wouldn't a buyback be slightly more accretive still, regardless of the tax issue?

 

If you have a company with 100,000 shares outstanding, a stock selling for $10, BVPS of $20, and total equity of $2 million. Here are the effects of issuing $100,000 in dividends and reinvesting vs. $100,000 in buybacks, if you own 100 shares.

 

Scenario A:

 

Total dividends: $100,000

Dividends/share = $100,000/100,000 = $1

New equity base = $2 million - $100,000 = $1.9 million

New BVPS = $1.9 million / 100,000 = $19

 

For 100 shares, that's $100 in dividends.

$100/$10 = 10 more shares you can buy

Total # of shares now owned = 110

% of company owned = 110/100,000 = 0.11000%

@ BV, your total investment would be worth $19 x 110 = $2,090

 

Scenario B:

 

Total buybacks: $100,000

Shares bought back = $100,000/$10 = 10,000 shares

New shares outstanding = 100,000 - 10,000 = 90,000

New equity base = $2 million - $100,000 = $1.9 million

New BVPS = $1.9 million / 90,000 = $21.11

 

% of company owned = 100/90,000 = 0.11111%

@ BV, your total investment would be worth $21.11 x 100 = $2,111.11

 

 

Am I missing something?

[ERICOPOLY]

If P/BV is 0.5, then buyback would be a 50% ROI... a dividend would be a 0% ROI.

 

They are the same if the dividend isn't taxed and if the shareholder in turn uses the dividend to purchase more shares.

 

Theoretically, the buyback can be substantially above intrinsic value and still be a better deal than cash dividends when a high dividend tax rate is involved.  Berkshire Hathaway is taxed very little on dividends so you know what Warren's answer is going to be here before he even moves his lips.

 

 

Eric,

 

Correct me if i'm wrong, but wouldn't a buyback be slightly more accretive still, regardless of the tax issue?

 

If you have a company with 100,000 shares outstanding, a stock selling for $10, BVPS of $20, and total equity of $2 million. Here are the effects of issuing $100,000 in dividends and reinvesting vs. $100,000 in buybacks, if you own 100 shares.

 

Scenario A:

 

Total dividends: $100,000

Dividends/share = $100,000/100,000 = $1

New equity base = $2 million - $100,000 = $1.9 million

New BVPS = $1.9 million / 100,000 = $19

 

For 100 shares, that's $100 in dividends.

$100/$10 = 10 more shares you can buy

Total # of shares now owned = 110

% of company owned = 110/100,000 = 0.11000%

@ BV, your total investment would be worth $19 x 110 = $2,090

 

Scenario B:

 

Total buybacks: $100,000

Shares bought back = $100,000/$10 = 10,000 shares

New shares outstanding = 100,000 - 10,000 = 90,000

New equity base = $2 million - $100,000 = $1.9 million

New BVPS = $1.9 million / 90,000 = $21.11

 

% of company owned = 100/90,000 = 0.11111%

@ BV, your total investment would be worth $21.11 x 100 = $2,111.11

 

 

Am I missing something?

 

Your example works out in favor of buybacks because of the implicit assumption  that the share price won't rise in concert with a dwindling share count.

 

May or may not be a realistic assumption.

 

[Munger_Disciple]

Correct me if i'm wrong, but wouldn't a buyback be slightly more accretive still, regardless of the tax issue?/quote]

 

You are also implicitly assuming that when a company declares and pays a dividend, the stock price does not decrease by the dividend amount. This may or may not be the case even though the stock in your example is trading below book. 

[Munger_Disciple]

Correcting the formatting error in my previous post:

 

Correct me if i'm wrong, but wouldn't a buyback be slightly more accretive still, regardless of the tax issue?

 

 

You are also implicitly assuming that when a company declares and pays a dividend, the stock price does not decrease by the dividend amount. This may or may not be the case even though the stock in your example is trading below book.

[Parsad]

Correcting the formatting error in my previous post:

 

Correct me if i'm wrong, but wouldn't a buyback be slightly more accretive still, regardless of the tax issue?

 

 

You are also implicitly assuming that when a company declares and pays a dividend, the stock price does not decrease by the dividend amount. This may or may not be the case even though the stock in your example is trading below book.

 

Hi Sreenr, the stock price may fluctuate with any dividend paid, but it would still be accretive to the actual underlying book, earnings and even liquidity if the stock is bought under tangible book.  Eventually over time, the stock price will trade closer to the underlying fundamentals.  Cheers!

[Munger_Disciple]

Hi Parsad,

 

I was commenting on Mesiphistopheles analysis on buyback vs. dividends. His calculation seems to imply that one is slightly better than the other when no taxes paid on dividends & he buys stock himself with the dividends paid. Both options are good for the shareholder in the case of BAC which is trading well below book and intrinsic value. The question is which option is better. The answer depends on whether the investor pays dividend taxes and whether the company can manage to buyback w/o the stock price increasing too much.

[actuary]

I think the point was that the example needs to be adjusted for the lower stock price when the stock does ex-dividend. Arbitrage arguments require that the price adjusts when it goes ex-dividend. To fix the example from Mesiphistopheles:

 

Scenario A:

 

Total dividends: $100,000

Dividends/share = $100,000/100,000 = $1

New equity base = $2 million - $100,000 = $1.9 million

New BVPS = $1.9 million / 100,000 = $19

 

For 100 shares, that's $100 in dividends.

*

Stock goes ex-dividend => new stock price is $10 - $1=$9

*

$100/$9 = 11.11 more shares you can buy

Total # of shares now owned = 111.111

% of company owned = 111.11/100,000 = 0.11111%

@ BV, your total investment would be worth $19 x 111.11 = $2,111.11

 

Scenario B:

 

Total buybacks: $100,000

Shares bought back = $100,000/$10 = 10,000 shares

New shares outstanding = 100,000 - 10,000 = 90,000

New equity base = $2 million - $100,000 = $1.9 million

New BVPS = $1.9 million / 90,000 = $21.11

 

% of company owned = 100/90,000 = 0.11111%

@ BV, your total investment would be worth $21.11 x 100 = $2,111.11

 

 

Therefore they are the same in the absence of taxes and transaction costs.

[Uccmal]

My main interest is medium term, not long term.  Long term there will be another banking debacle at some point.  Moynihan stated somewhere that excess cash would be used in about a 1/3 split: expansion, dividend, buybacks. 

 

I for one would rather see 60% come back as dividends as fast as possible.  That will push the stock up much faster, and the warrant strike lower.  A dividend imposes cashflow discipline on the company whereas buybacks dont.  i.e. JP Morgan cut their buyback program after the Whale incident buy didn't touch the dividend. 

 

On this board it is kind of like killing the sacred cow to suggest that you prefer cash to buybacks, but I do, regardless of the tax implication.  Of course, there are always exceptions such as AIG buying back shares from the Treasury.

 

In general buybacks are done badly. 

[benchmark]

My main interest is medium term, not long term.  Long term there will be another banking debacle at some point.  Moynihan stated somewhere that excess cash would be used in about a 1/3 split: expansion, dividend, buybacks. 

What's your time horizon for mid-term?  I think if you trust the management and culture, bank is a decent business to own in the long term (see Buffet's investment with WFC).

[Parsad]

My main interest is medium term, not long term.  Long term there will be another banking debacle at some point.  Moynihan stated somewhere that excess cash would be used in about a 1/3 split: expansion, dividend, buybacks. 

What's your time horizon for mid-term?  I think if you trust the management and culture, bank is a decent business to own in the long term (see Buffet's investment with WFC).

 

I agree.  What is the likelihood of another U.S. banking crisis in the next 15 years?  At best, as likely as it was after the "Savings and Loan" scandals, but this was far worse as far as the large financial institutions were concerned and the long-term effect on the economy.  Unlikely you will see another banking crisis in the next 15-20 years.  Banks when run correctly...simple deposits, lending and investments with conservative leverage (8-9 times asset to equity)...is a terrific business.  Cheers!

[obtuse_investor]

US Banks have the [mis]fortune of having the crisis first. They have recapitalized and cleaned up shop.

 

I wouldn't be surprised if five years from now, wall street pundits start claiming that US Financials are a safe haven!

 

[Uccmal]

I dont disagree with the long term hold say 6+ years.  Its just that there is no way I would ever convert all the options and warrants into stock.  BAC would be 300% of my holdings.  So, the sooner the better, and the fastest way to riase the stock price is raising the dividend.  Anyone who hasn't taken advantage of the cheap price to now has waited too long.  I wont be putting another cent into BAC, and haven't since last summer.  I have just moved durations around. 

 

If the dividend is increased to $1.00 per share over the next couple of years I would keep a certain amount of BAC indefinitely.  You know me Parsad.  I have held FFH, MTL, SSW, RUS, and CFx for years - they are all gifts that keep on giving.  BAC for 2.5 years now. 

[PlanMaestro]

BofA moves closer to payout

http://www.ft.com/intl/cms/s/0/ec4fb098-26a7-11e2-9295-00144feabdc0.html#axzz2BJf3LTP6

 

One rival banker whose institution faces a higher surcharge said he was “scratching his head” at how BofA avoided a higher number.

 

Sorry Jamie. I guess Brian is just doing a much better job in reducing risk.

[fareastwarriors]

BofA moves closer to payout

http://www.ft.com/intl/cms/s/0/ec4fb098-26a7-11e2-9295-00144feabdc0.html#axzz2BJf3LTP6

 

One rival banker whose institution faces a higher surcharge said he was “scratching his head” at how BofA avoided a higher number.

 

Sorry Jamie. I guess Brian is just doing a much better job in reducing risk.

 

“The investment community has had one collective ‘huh?’,” said Mike Mayo, analyst at CLSA. “It’s good news that the uncertainty about the final capital levels has been lifted but the issue is there is no clear road map on how the regulators are operating . . . and there’s no better example of that than with Bank of America.”

 

[Parsad]

BofA moves closer to payout

http://www.ft.com/intl/cms/s/0/ec4fb098-26a7-11e2-9295-00144feabdc0.html#axzz2BJf3LTP6

 

One rival banker whose institution faces a higher surcharge said he was “scratching his head” at how BofA avoided a higher number.

 

Sorry Jamie. I guess Brian is just doing a much better job in reducing risk.

 

“The investment community has had one collective ‘huh?’,” said Mike Mayo, analyst at CLSA. “It’s good news that the uncertainty about the final capital levels has been lifted but the issue is there is no clear road map on how the regulators are operating . . . and there’s no better example of that than with Bank of America.”

 

The investment community always gets it wrong anyway.  Remember two years ago how Jamie Dimon and JPM could do no wrong...then the losses and obvious internal control issues?  How Vikram had saved Citi...but the board kicked his butt from here to eternity!  They don't get it right until it is blatantly obvious.  Cheers!

[goldfinger]

http://www.thestreet.com/story/11756844/1/bank-of-america-sees-40b-normalized-profits.html?puc=yahoo&cm_ven=YAHOO

 

BAC management sees 40$B of normalized earnings power...

[StubbleJumper]

http://www.thestreet.com/story/11756844/1/bank-of-america-sees-40b-normalized-profits.html?puc=yahoo&cm_ven=YAHOO

 

BAC management sees 40$B of normalized earnings power...

 

Meh.  That's only like $4/sh.  Why would that be exciting?  ::) ::) ::)

 

The dang thing must be overvalued, because if those normalized earnings are correct, it's currently selling at an astronomical 2-3X....

[ERICOPOLY]

http://www.thestreet.com/story/11756844/1/bank-of-america-sees-40b-normalized-profits.html?puc=yahoo&cm_ven=YAHOO

 

BAC management sees 40$B of normalized earnings power...

 

What a crock of BS modesty.  Just like 7.5% was the target for FYE 2012 B3 levels.

 

They're easily to 50$B if we're talking about these numbers:

$10b saved in LAS

$7b saved in NewBAC

$10+b increase revenue from normalized curve and lower non-performing loan balance

$3b from retiring 100b LT debt and replacing with deposit funding

??? from legal expense savings

[Parsad]

http://www.thestreet.com/story/11756844/1/bank-of-america-sees-40b-normalized-profits.html?puc=yahoo&cm_ven=YAHOO

 

BAC management sees 40$B of normalized earnings power...

 

I think that's about where most on this board that hold BAC figured they would be.  But keep it even at $25B, which most analysts think they can achieve within two years once the cost-cutting is done and more legacy issues are settled, and what do you get?  About $2.30 per share...ten times multiple...$23 stock! 

 

I personally think they can do better than that...conservatively...much closer to the $40B as Eric states.  But analysts won't get it till they've done it, just like the rest of the industry is wondering how the heck did they get to 9% Tier 1 Common Capital in a year and have to hold less capital than JPM.  The culture is changing under Moynihan, and BAC is going back to it's pure banking roots.  Cheers!