Bank of America is having a tough day after announcing an earnings miss and a $1.2 billion compliance fine over the past 24 hours, and the company's stock dropped almost 5% Wednesday.

Another problem is the rise in interest rates in recent months and its effect on Bank of America's large bond portfolio. During the Covid era, the bank blundered by buying hundreds of billions worth of long-duration bonds when yields were at historic lows.

Bond prices move inversely to interest rates. As 10-year Treasury yields rose past 5% in September, Bank of America's paper losses on that bond portfolio widened by almost $22 billion to $103.9 billion in the third quarter, by far the largest losses in the banking industry. The disclosure came in a financial supplement to its earning report Wednesday.

Barron's wrote last month that the paper losses could top $90 billion in the quarter.

It isn't just an accounting issue. Because Bank of America tied up so much of its bond portfolio in low-yielding assets, it has depressed its profits and its interest margins.

It was a rough week all around for the nation's second-largest bank. It had a slight miss with its third-quarter results reported early Wednesday and it disclosed late Tuesday a regulatory settlement including a $1.2 billion fine related to its ability to monitor money laundering and other financial crimes.

Bank of America shares fell 4.8% to $51.39, the worst showing among its peers in a weak session for most financial stocks.

Bank of America's paper losses account for about a quarter of the total losses industrywide based on FDIC data and compared with losses of about $26 billion in the third quarter at the larger JP Morgan, which is Bank of America's closest peer.

Bank of America's mark-to-market losses reside in a $496 billion bond portfolio that mostly consists of agency mortgage securities with a below-market average rate of 2%. The mortgage portfolio totaling around $370 billion is carried for less than 80 cents on the dollar.

The bank holds these bonds in a portfolio that is treated as "held-to-maturity" for accounting purposes and benefits from favorable treatment under generally accepted accounting principles (GAAP).

Banks don't have to reflect losses in their held-to-maturity portfolios in their capital ratios. Since the Bank of America portfolio consists of agency mortgage securities and U.S. Treasuries, there is no real credit risk. The bank will get paid back at maturity and the losses will melt away over time.

It will take many years for that to happen since the agency mortgage securities appeared to have 30-year maturities when they were purchased.

If the paper losses were reflected in Bank of America's capital ratios, there would be a significant impact.

Bank of America's tangible common equity ratio -- based on its equity as a percentage of its assets -- stood at 6% in the third quarter.

Adjust for the paper losses on the bond portfolio and make a tax adjustment and the tangible common equity ratio would fall to 3.6%, according to a calculation by Barclays analyst Jason Goldberg in a client note Wednesday.

Like Bank of America, JP Morgan also has a 6% tangible capital ratio, but a downward adjustment to its capital from its bond losses would be considerably less than at Bank of America at less than a half-percentage point, Barron's estimates.

So adjusting for paper bond losses, JP Morgan has a stronger tangible capital base.

Does this matter?

While Bank of America declined to comment to Barron's, its view is that it is amply capitalized and continues to generate significant earnings. Bank of America chief financial officer Alastair Borthwick told analysts on its earnings call this morning that the bank has a "lot of flexibility on capital."

The bank has continued to buy back a sizable amount of stock -- $6 billion in the latest quarter -- and pay a dividend of more than 2%, some $2.2 billion in the latest quarter.

Bank of America has talked about the opportunity stemming from the low-rate bond portfolio, since it can reinvest maturing bonds at higher current rates of 5% to 6%, boosting its profits and margins.

But the low-yielding portfolio has weighed on the bank's profitability as rates have risen in recent years, and contributed to the significant underperformance of Bank of America stock relative to JP Morgan.

Bank of America stock is down 6% this year while JP Morgan is up 3% year to date. Over the past five years, the gap is huge with Bank of America returning 5% annually, against 18% for JP Morgan, according to Bloomberg data.

Bank of America largely accumulated the low-rate bonds during the Covid era of 2020 and 2021, when interest rates were at historic lows.

At that time, the bank viewed the huge portfolio as a potential hedge against an extended period of near-zero short-term rates.

However, it has turned out to be one of the bank's worst financial moves since CEO Brian Moynihan's tenure began in 2010, because the value of the portfolio has dropped sharply as yields have risen.

JP Morgan CEO Jamie Dimon was more cautious toward bonds during that low-rate period and his bank accumulated a smaller portfolio. That decision and others by Dimon and his management team have contributed to the much better performance of JP Morgan stock over the past five years.