October 19, 2011 at 10:11 AM EDT
Forget Big, Bad BofA — Invest in BB&T Instead
Bank of America's third-quarter earnings numbers just don't add up -- meanwhile, BB&T is sturdily run and its CEO is dedicated to its dividend.

Bank of America (NYSE:BAC) made money in the third quarter — $6.2 billion, to be exact. The country’s now-second-largest bank by assets saw its stock bounce on the news. While it’s a big turnaround, BAC isn’t out of the woods — not by a country mile. Investors thinking about buying its stock on the good news might want to think twice. A better move is to buy BB&T (NYSE:BBT) instead. Here’s why:

The Real Number

Once you remove one-time items, Bank of America’s third quarter isn’t nearly as rosy. Jason Goldberg of Barclays Capital says BAC earned 25 cents per share in the quarter, excluding items, which is six cents better than the analyst consensus and much higher than its loss from the third quarter in 2010. The bank’s chief financial officer would require a number of hours of your time to explain how the Barclays analyst came to this figure.

Right at the beginning of its press release, the bank states, “There were a number of significant items that affected results in both periods.” In a nutshell, it had $9.8 billion in pretax benefits that were one-time items, as well as a $2.2 billion loss from its private equity segment.

Keeping things simple, basic subtraction suggests that there were $7.6 billion in pretax benefits in the quarter. The summary income statement from its press release shows pretax income in the third quarter of $7.4 billion. One could surmise that the bank didn’t actually generate a pretax profit from operations, but rather a $200 million loss and certainly nothing remotely close to the number the Barclays analyst mentions.

Now I’m sure there’s a perfectly sensible explanation for this, but why would you invest in a company whose financial statements are so impossibly difficult to understand? True, banks do have some of the most difficult financial statements of any industry to comprehend, but when they become an exercise in futility, something isn’t right.

Hits and Misses

As I stated in the previous paragraph, Bank of America’s private equity division lost $2.2 billion in the quarter. It wasn’t the only one. BofA’s mortgage and insurance unit also lost $1.1 billion in Q3, 181% higher than in 2010. Bank of America paid $2.5 billion for Countrywide Financial in 2008. The acquisition has cost the company an estimated $30 billion in write-downs and lawsuits with more likely to come.

Most disappointing, however, is the fact that Bank of America’s mortgage division originated just $33 billion in home loans in the third quarter, less than half the $71.9 billion in the same quarter a year ago. Bill Hassiepen, senior credit analyst at Egan-Jones Rating Co. describes its core earnings as “very suspect.”


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