3 Critical Numbers From Bank of America's Earnings Release

Think you know what's going on at Bank of America? If so, then you might want to check out these three numbers.

Apr 17, 2014 at 7:11AM

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There's no question that Bank of America (NYSE:BAC) has made considerable progress over the past few years at atoning for its role in the financial crisis. However, if there was any question about whether it's fully recovered, the bank's latest earnings release proves the answer is no.

Nothing demonstrates this more than the performance of Bank of America's legacy assets and servicing unit, or LAS, which administers its toxic and noncore assets dating back to the crisis. For the three months ended March 31, its parent division, consumer and business banking, lost a staggering $5 billion. As you can see in the following chart, this more than offset the combined earnings from the lender's four other operating divisions.

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The source of LAS's problems is twofold. They derive in the first case from massive litigation expenses stemming from faulty mortgages sold by Bank of America and legacy companies like Countrywide Financial to institutional investors in the lead-up to the crisis. In the first quarter alone, the Charlotte, N.C.-based bank recorded $6 billion in litigation expenses -- click here for a comprehensive list of Bank of America's legal settlements since 2008.

Beyond this, Bank of America has found itself weighed down by one of the country's largest and worst performing portfolios of mortgage-servicing rights. For the record, these are intangible assets that stay with a bank after it's originated a mortgage, packaged the loan into a mortgage-backed security, and then sold the security to institutional investors like insurance companies, pension funds, and university endowments.

Although mortgage servicing rights have historically be lucrative assets for banks, the tides turned when default rates picked up and regulators imposed higher duties on the servicing process. This resulted in a dramatically higher headcount in Bank of America's LAS unit. And, suffice it to say, expenses in the unit responded in kind.

It's for this reason that the three most important metrics that investors in Bank of America should watch all have to do with this -- namely, (1) the noninterest expense associated with its LAS unit, (2) the number of LAS employees on staff, and (3) the quantity of third-party mortgages that LAS services.

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The good news, as you can see in the preceding chart, is that Bank of America continues to whittle down all three of these figures. LAS's third-party mortgage-servicing portfolio dropped by 45% in the first quarter compared with the year-ago period; its employee count fell by a third; and its quarterly noninterest expense, something CFO Bruce Thompson pointed out in his prepared comments, was slashed by $1 billion.

These are impressive accomplishments no matter how you slice it. At the same time, there's a lot that needs to be done before all three are down to zero -- which, for the record, is the bank's objective. To tie everything together, in turn, if you're ever curious about whether Bank of America has recovered from the crisis, or about how much progress it still needs to make, then these are the three numbers that will provide the answer.

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John Maxfield has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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