Here's Why Bank of America's Loss Isn't As Bad As It Looks

If you're wondering how Bank of America (NYSE: BAC  ) fared in the latest quarter, then look no further than its stock price. Shares of the nation's second largest bank by assets got knocked down by over 3% an hour into the trading session following its earnings announcement.

The headline figure is probably the worst. For the three months ended March 31, Bank of America posted a net loss before taxes of $681 million compared to income of almost $2 billion in the same quarter last year. It was the first quarterly loss at the Charlotte-based bank in over a year.

"The cost of resolving more of our mortgage issues hurt our earnings this quarter," said CEO Brian Moynihan. "But the earnings power of our business and customer strategy generated solid results and we continued to return excess capital to our shareholders."

To Moynihan's point, the primary explanation for the loss stemmed from elevated legal expenses. At the end of March, Bank of America agreed to a multibillion-dollar settlement with the Federal Housing Finance Agency dating back to the financial crisis. The deal accounted for $3.6 billion of the $6 billion in total litigation expenses recorded last quarter. By comparison, in the year-ago period, this figure was $2.2 billion.

More recently, as disclosed in yesterday's earnings release, the bank reached a settlement with Financial Guaranty Insurance Company, a monoline insurer seized by regulators in 2011. The agreement calls for payments of approximately $950 million -- notably all of which are covered by previously established litigation reserves.

To see a full list of Bank of America's legal settlements since 2008, click here.

While expenses were the primary catalyst for the loss, they weren't the only cause, as revenue dropped by $631 million, or 2.7%, on a year-over-year basis. Virtually all the top-line issues came from a $579 million reduction in net interest income. "The decline was driven by lower yields on debt securities due to an approximate $540 million swing in market-related premium amortization expense," the bank explained. It had less to do with actual yields and funding costs, in other words, than with accounting conventions.

Just to be clear, the quarter contained a number of positive signs as well, perhaps ironically given the elevated legal expenses, the biggest of which concerned Bank of America's notoriously bloated expense base. Excluding litigation and certain retirement-related incentive compensation costs, noninterest expense declined $1.2 billion from the year-ago quarter.

Additionally, the bank reported upticks in its deposits, capital, and book value per share. Deposits increased by $38 billion to a record $1.13 trillion. The bank's pivotal Tier 1 common capital ratio improved by 20 basis points over the quarter. And book value per share went from $20.19 last year to $20.75 today.

Taking all of these things into consideration, in turn, it's fair to say that Bank of America's quarterly loss isn't as bad as it looks. And while this doesn't necessarily mean the bank's stock is a buy at today's price, its latest performance precludes any reason to sell it as well.

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John Maxfield

John is The Motley Fool's senior banking specialist. If you're interested in banking and/or finance, you should follow him on Twitter.

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8/28/2015 4:02 PM
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Bank of America CAPS Rating: ****