5 Takeaways From Bank of America's Earnings

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Bank of America's (NYSE: BAC  ) second quarter earnings ($0.19 per share) beat analyst expectations ($0.14 per share) and last year's tally (-$0.90 per share), but the market reacted negatively. Digging further, there weren't any bombshells this quarter.

Here are my five takeaways from B of A's earnings.

Core business revenues were underwhelming: All but one of Bank of America's business lines had lower net revenue than the year before. Some of this can be expected as B of A, like Citigroup (NYSE: C  ) , has been shrinking the size of its operations. The lone exception to the revenue drain was on the consumer real estate side. Although, like fellow banks Wells Fargo (NYSE: WFC  ) and JPMorgan Chase (NYSE: JPM  ) , it saw some strength in mortgage banking activities because of historically low interest rates, last year's performance wasn't hard to beat. As B of A stated in its earnings release: "The improvement was due primarily to higher mortgage-related charges in the prior year period, including $14.0 billion in representations and warranties provision, a $2.6 billion non-cash goodwill impairment charge and $2.6 billion in other mortgage-related costs."

Cost-cutting measures are going well: For perspective, B of A is down to about $17 billion in non-interest expenses in the second quarter (that would be $68 billion annualized). Here's where they're at on Project New BAC: "Bank of America remains on track to exceed its previously announced goal of achieving 20% of the $5 billion in annualized targeted cost savings from Phase 1 by the end of 2012. With Phase 2 evaluations now complete, the company expects a total of $8 billion in annualized cost savings from New BAC by mid-2015."

Credit is strengthening: As can be seen across the banking industry, Bank of America's credit portfolio showed signs of strength. In other words, fewer loans are turning bad as a result of non-payment. Its allowance for bad loans is down about $7 billion from last year (to $30.3 billion) while maintaining a $5 billion cushion on its non-performing loans.

Balance sheet is strengthening: As international standards are requiring higher capital cushions for banks, there's a multiyear scramble to shore up balance sheets. Bank of America reported some good news, estimating that its tier 1 common capital ratio under Basel III standards is at 8.1%. It's been aiming for just 7.5% by the end of the year, but as we know in banking, things can deteriorate quickly.

Countrywide cleanup is ongoing: Litigation including repurchase claims from Fannie Mae, Freddie Mac, and private lenders is still unresolved. This is a big black-box risk (much of it relating to B of A's nightmarish purchase of Countrywide) to continue monitoring.

Bottom line, we have some good (credit and balance-sheet strengthening, cost-cutting), some bad (revenue), and some ongoing ugly (the Countrywide cleanup) that continues to keep Bank of America's shares trading well below book value.

Anand Chokkavelu owns shares of Bank of America, Citigroup, Wells Fargo, and JPMorgan Chase. He also owns long-dated options on Bank of America and warrants on Citigroup, Wells Fargo, and JPMorgan Chase. The Motley Fool owns shares of JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup and has created a covered strangle position in Wells Fargo. Motley Fool newsletter services have recommended buying shares of Goldman Sachs. 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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