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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.