Bank of America (BAC - Free Bank of America Stock Report), one of the largest commercial banks in the United States and a component of the Dow 30, reported a loss of $0.90 a share for the June quarter, in line with the estimate the company provided in late June when it announced a settlement of a significant portion of its Countrywide private-label residential mortgage-backed securities exposure. The loss matched our revised second-quarter bottom-line estimate.

Prior to the settlement (which requires court approval), we had looked for June-interim earnings of $0.21 a share, below the $0.27 a share the company logged in the year-earlier period. Management indicated that, absent the mortgage settlement, the bank would have earned $0.33 a share. The stock, which has been trading near a two-year low lately, moved modestly lower following the report.

All of BofA's business groups except the consumer real estate division were profitable. The consumer real estate group's results were deeply depressed by the $13.6 billion of mortgage-related charges, net of tax benefits. But even without the mortgage settlement costs, the division would have lost nearly $1 billion, reflecting the sale of an insurance business, a higher provision for credit losses, and increased operating expenses.

On a consolidated basis, net interest revenue fell 13% year to year, the result of reduced consumer loan balances and yields, the negative effect of lower long-term interest rates on hedging results, and a narrower trading-related margin. Noninterest income declined sharply, reflecting the mortgage settlement as well as the negative effect of financial reform measures on credit card and service charge income and lower equity investment income. The mortgage settlement and goodwill expenses boosted operating costs. On a positive note, the loan loss provision moderated to less than half of the year-earlier tally, reflecting progress in reducing both nonperforming consumer and commercial loans. In addition, tax benefits offset nearly a third of the $12.9 billion pretax loss.

The company still faces a number of challenges in the next several years, which will probably contribute some volatility to results. Although the mortgage settlement in the June period puts a big chunk of BofA's mortgage problems behind it, new claims continue to be filed and may take a while to resolve. Sluggish economic activity probably will limit BofA's ability to strengthen noninterest revenues in the year ahead, and new regulations will reduce debit card revenue starting in the December quarter. The company has about $16.7 billion of exposure to five troubled European nations, only partly offset by hedges, and bears watching. Furthermore, BofA will need to make meaningful reductions in risk-weighted assets to meet new international equity capital ratio requirements scheduled to be phased in by 2019.

Although we tentatively look for the bottom line to return to the profit column in the second half, we expect the company to report a loss of about $0.15 a share for 2011 as a whole due to the big June-quarter loss. For now, we continue to look for 2012 share earnings to rebound to the $1.50-$1.70 range.

Despite the depressed stock's wide long-term recovery potential, the company's prospects over the near term remain uncertain. Consequently, all but very aggressive investors may want to defer commitments to Bank of America shares at this juncture.

About The Company: Bank of America was formed by the merger of NationsBank with BankAmerica in September of 1998. As a financial holding company, it provides banking and financial services to individuals, corporations, and governments worldwide. Acquisitions over the years include FleetBoston Financial, MBNA, LaSalle Bank, Countrywide, and most recently, Merrill Lynch. In total, the bank has about 6,000 offices in 29 states & Wash. D.C.


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