3 Reasons Bank of America's Fourth-Quarter Earnings Are Better Than They Seem

By Markets Fool.com

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At first glance, you'd be excused for concluding that Bank of America's fourth-quarter earnings were dreadful. Its net income dropped by 11%, and revenue was hit by a slump in bond trading.

But even if you're not a Bank of America bull -- like me, for instance -- it's still possible to appreciate that the nation's third-largest bank by assets made progress on multiple important fronts last quarter.

First and foremost, its litigation expenses were lower than they've been since the middle of 2011. Coming in at $400 million, they were a fraction of its recent run rate. Through the first three quarters of the year, litigation expenses cost Bank of America $16 billion, or more than $5.3 billion a quarter.

The reason for the drop is that most of Bank of America's major liabilities from the financial crisis seem to be in the rear-view mirror. The latest piece fell into place last August, when the bank agreed to a $16.7 billion settlement with the U.S. Justice Department and a collection of other federal and state agencies to resolve a variety of mortgage-related improprieties.

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This isn't to say that new liabilities won't materialize and push litigation expenses back up. As we've seen, the nation's biggest banks have understandably become magnets for federal regulators and prosecutors, be it for exploiting customers or manipulating any variety of financial markets. But at this point, the ball seems to be in Bank of America's court to better control future exposure.

The second positive trend concerns Bank of America's legacy assets and servicing unit. This division has been one of the most consistent drags on Bank of America's earnings over the last few years because it both holds and services toxic assets dating back to the crisis. Not to mention, it's also where mortgage-related litigation costs are generally allocated.

The progress on this front is evidenced by the dramatic drop in headcount. At its peak in the second quarter of 2012, the unit employed the equivalent of 41,800 full-time employees. Today the number is down to 15,800.

On a percentage basis, the decline has been rapid. Compared with the third quarter of 2014, it's down by 7.6% by the end of last quarter. And on a year-over-year basis, it's dropped by 38%.

The final positive trend concerns Bank of America's branch count. Going into the crisis, the North Carolina-based lender had the largest physical footprint in the industry thanks to a series of transformative mergers going back to the late 1990s. But because it was so focused on growth, its branch portfolio became bloated and redundant with too many branches serving too few customers.

Under CEO Brian Moynihan's lead Bank of America has since taken steps to remedy this. By the end of last year its branch count stood at 4,855. That compares to 4,947 at the end of the previous quarter, and 5,095 at the end of 2013. All told, it's come down by 17.7% since the middle of 2010.

As Bank of America continues to emerge from under the cloud of the 2008-2009 crisis, the impact from optimizing its footprint will become increasingly evident on the bottom line. This follows from the fact that branches typically account for an estimated 75% of a retail bank's overall expense base.

The takeaway is that there was more to Bank of America's seemingly dreadful quarter than initially met the eye. Does this mean the North Carolina-based bank is a buy? In my opinion, no. However, it does mean that current Bank of America shareholders have reason to be optimistic about the company's direction.

The article 3 Reasons Bank of America's Fourth-Quarter Earnings Are Better Than They Seem originally appeared on Fool.com.

John Maxfield has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple and 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.