Bank of America (BAC – Free Bank of America Stock Report), the largest bank in the U.S. and a Dow component, reported a loss of $0.16 a share in the December quarter, slightly less than our revised estimate of a loss of $0.20, and better than the $0.60-a-share loss recorded in the year-earlier period. For 2010 as a whole, the company lost $0.37 a share as compared with our revised estimate of a $0.40 loss and a 2009 loss of $0.29.

Reported results in the latter half of 2010 included a few large negative accounting charges. Recall that the steep September-period deficit was the result of a $1.04-a-share charge to recognize the negative effect of financial reform legislation enacted last July on the company's debit card income. In the December period, Bank of America took a $0.20-a-share goodwill impairment charge to recognize the decline in the value of its Home Loans & Insurance business. Absent these items, the company would have earned $0.04 a share in the December period and $0.86 a share in 2010, but our estimates are of reported results.

Delving a bit deeper, the $0.04-a-share December-period operating profit included a $4.1 billion provision for outstanding and future mortgage repurchase claims, $1.5 billion of litigation expenses, and lower trading revenues, all of which were partially offset by a decline in credit costs, $360 million of gains on sales of non-core assets, and a $1.2 billion tax benefit. These factors probably clipped another net $0.06 from earnings per share, but we do not view them as nonoperating items.

Bank of America used 2010 to address many of the problems resulting from the 2008 financial crisis. It worked down problem credits and strengthened its reserve coverage and capital levels. The company made progress in resolving mortgage foreclosure and repurchase issues. It identified and reduced non-core assets and invested in its wealth management and trading businesses. These initiatives should position the giant bank holding concern for better results in 2011, when we expect BofA's credit costs to decline further.

The company still faces some formidable headwinds in the year ahead, however. It probably will take a few years to resolve mortgage repurchase claims, and related expenses are likely to remain high. Net interest income is expected to decline in the March period due to fewer days in the quarter, the continued runoff of loans from Countrywide Financial (acquired in 2008), and lower hedge results. Noninterest revenue for the year will reflect the full impact of last year's regulations limiting overdraft fees, and new rules will hurt fee income in the latter half of 2011. Taking these factors into account, we are lowering our share-net estimate for the current year by $0.20, to $1.25. We still believe the stock has good total return potential to mid-decade, even based on our projections of only a partial earnings recovery by 2013-2015, but long-term investors probably will need to be very patient. BofA would seem to us to be not as far along in the recovery road as JPMorgan Chase (JPM – Free JPMorgan Chase Stock Report), but further along than the third member of this banking triumvirate Citigroup (C).

About The Company: Bank of America Corp. was formed by the merger of NationsBank with BankAmerica on 9/30/98. It subsequently acquired FleetBoston Financial (4/04), MBNA (1/06), LaSalle Bk. (10/07), Countrywide Financial (7/08), and Merrill Lynch (1/09). It has about 5,850 offices in 29 states & Wash. D.C. The loan breakdown as of 12/31/10 is as follows: commercial, 23%; commercial real estate, 5%; residential, 42%; consumer, 24%; and international, 6%. Net loan losses were 3.60% of average loans in ’10; loan loss reserve, 4.45% of loans (12/31/10); nonperforming assets (incl. 90-day past-due), 5.84%. BofA had 285,822 full-time equivalent employees as of 9/30/10.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.