Bank of America (BAC - Free Bank of America Stock Report), the nation's largest bank, has posted earnings of $0.17 a share for the first quarter of 2011, slightly short of our estimate of $0.20 and below reported results of $0.28 in the year-earlier period.

Earnings in the March quarter were helped by a lower loan loss provision (down 61%), solid equity investment gains, and higher asset management and investment banking fees. These positive items were partly offset by increased mortgage and litigation expenses (including expected assessments for mortgage foreclosure delays), and lower trading revenues compared to the record level in the year-earlier quarter. In addition, credit card and service charge income declined, reflecting the negative impact of financial reform legislation on service charges and card fees.

There were some encouraging developments in the quarter, including a modest pickup in lending to midsize companies and declining early-stage consumer loan delinquencies. New deposit account growth and account closure rates improved, reflecting changes in the deposit division's strategy.

Still, Bank of America is liable to face persistent headwinds over the balance of 2011. Management expects net interest revenues to decline in the June quarter, reflecting interest rates at near-historic lows. Card revenues probably will moderate further as new rules concerning debit card fees take effect in the second half. In addition, expense levels probably will remain elevated as the big bank works through its mortgage problems and due to the costs of expanding operations. Although B of A's credit costs should continue to edge down over the next several quarters, we are trimming our share-net estimate for 2011 by $0.20, to $0.90.

The outlook for 2012 is better. Resolution of a greater portion of B of A's mortgage foreclosure and repurchase problems should result in a decline in related expenses, including some reduction in mortgage personnel. And by next year, the company's credit costs are likely to be lower. Also, further economic progress in the U.S. may support stronger loan growth. We are introducing a 2012 earnings estimate of $1.30 a share.

Shares of the Dow 30 component hardly budged immediately after March-quarter earnings were announced. Although BAC has considerable price-recovery potential out to 2014-2016, we would advise most investors to defer commitments until the company makes more progress in resolving its mortgage issues. Moreover, until Bank of America strengthens its equity capital position further, we don't expect it to receive permission to raise the dividend on its common stock this year.

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.