Bank of America (BAC - Free Bank of America Stock Report), one of the largest banks in the U.S. and a Dow-30 component, has reported September-quarter earnings of $0.56 a share, compared with our estimate of $0.23 and a loss of $0.77 in the year-earlier period. But results weren't indicative of a significantly better underlying operating performance. However, the stock pushed higher by early afternoon following a weak start.

Management indicated that accounting gains and a profit on the partial sale of BofA's interest in China Construction Bank, net of several negative items, accounted for the bulk of the company's earnings in the quarter. Recall that in the June period, unusual items reduced earnings by a net $1.23 a share.

Bank of America's underlying operating performance was mixed. Faster loan prepayments and the accounting impact of risk management activities squeezed the margin and net interest income. Absent these items, and given recent reductions in both short- and long-term debt, net interest income in the December quarter should bounce back to the June-period level. Problem assets continue to fall, but the company increased the loan loss provision in its credit card business. Mortgage banking revenues were nearly as strong as in the year-earlier quarter, but investment banking and market-related revenues weakened, reflecting a tough operating environment. Operating expenses fell nicely, reflecting workforce reductions and lower mortgage litigation and other expenses.

Looking ahead, we expect the company to make further progress on its Project New BAC initiative, the first phase of which aims to streamline the company and reduce expenses by $5 billion a year by 2014. In addition, charges related to several acquisitions in the past few years are expected to end in 2011. This cautiously optimistic news may have caused investors to take a second look at the report, pushing the stock higher.

Nevertheless, BofA's markets-related businesses may continue to face a difficult operating environment. Indeed, mortgage repurchase and related litigation costs probably will stay high for some time to come. Too, consumer loan demand is still very soft. Including the unusual items in the June and September quarters, we now tentatively look for Bank of America to break even in 2011, compared with our previous estimate of a loss of $0.30 a share. We are, however, scaling back our 2012 share-net estimate, from $1.30 to $0.80.

About The CompanyBank 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.