Overall, Bank of America Corp (BAC) stock did well in 2014, increasing by about 11%, which is comparable to the S&P 500’s return of over 12%. But BAC stock had a lot more ups and downs.

BAC stock was up more than 11% in March, but that turned into nearly a 10% loss by May. Over the preceding months BAC stock was able to inch its way back up to close the year near its March high.

So what does 2015 look like for the beleaguered bellweather of American banking? Assuming BAC’s mortgage problems are behind it, investors have the potential to buy into a great national franchise at a reasonable price.

BAC Asset Quality and Portfolio Growth

BAC’s asset quality has shown very strong improvement over the past year. BAC’s net charge-off ratio has steadily declined from 0.7% in the third quarter of 2013 to less than 0.5% in the third quarter of 2014. Allowance for loans and leases has also declined and as of last quarter is now 3.65x net charge-offs.

Nonperforming loans, leases and foreclosed properties as a percentage of total loans, leases and foreclosed properties stands at 1.6%, a decrease from 1.7% the previous quarter and nearly 2% the quarter prior.

In comparing average assets, BAC’s consumer and business banking portfolio has declined about $5 billion from a year ago, which was more than offset by a $7 billion increase in its global banking portfolio with a slight decline in the consumer real estate and global markets portfolios.

The standout performer is BAC’s investment management segment, which has seen an increase in average assets from $112 billion in the third quarter of 2013 to $121 billion in the third quarter of 2014. With markets rebounding, increased assets in this segment is not necessarily surprising, but BAC has a strong record of 21 consecutive quarters of positive AUM cash inflows along with continued strong net income in this area.

In addition, although BAC has not demonstrated strong asset growth in most segments, it has been able to produce steady annual operating income increases in most segments and improving margins since 2011.

BAC Litigation Hangover Continued in 2014

BAC continues to be hammered by litigation and expenses related to legacy asset from the financial crisis. For the nine-month period ending Sept. 30, BAC recorded $12.2 billion in litigation charges. For a company that only produced $16 billion on income before taxes in 2013, that is a huge number.

BAC continues to face death by a thousand cuts as litigation just seems to never stop. Some estimates have the legal liability to BAC since 2008 at close $90 billion, but the good news about all this is the hope that all the financial crisis-related issues are now behind it and BAC can now focus on serving clients and future growth.

Is BAC a Good Value for 2015?

As would be expected, all this litigation and lack of loan growth has weighed heavily on BAC’s efficiency ratio, which is over 90% on a trailing 12-month basis, well over the current industry average of about 62%.This produced a return on assets of 0.2% and an return on equity of under 2%, both well below industry averages.

If I strip out the legacy asset and litigation costs, the efficiency ratio drops to a more normal 60%, which provides me confidence that the core banking franchise is still able to produce solid results once the litigation expenses subside.

BAC stock trades at a current price to tangible book value of 1.24, compared to an industry average of 1.3, and offers a small yield of 1.1%.

BAC’s forward price-to-earnings ratio is 11.5, making it appear fairly priced to forward earnings. The mean price target is $18.30, which offers a small 8% buffer to its current trading range.

Bottom Line

A financial institution of BAC’s size and complexity is difficult to manage and without strong internal controls, it is difficult to ensure that future lapses in judgment will not lead to other litigation. But the overall increased level of industry regulation and the fact that BAC’s size makes it nearly impossible to acquire any additional material acquisitions limits BAC’s risk profile.

Assuming that there are no more mortgage related skeletons in the closet, BAC’s core franchise has good fundamentals and a great deal of cross-selling opportunity between segments. Over the next 10 years, I see BAC stock as a core asset in most portfolios and think it will continue to thrive long after all the litigation is through.

In 2015, I would look to buy in only at a price below $13 a share to allow sufficient cushion in case more bad news is waiting in the wings but has yet to come out.

As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.