Bank of America (BAC - Free BofA Stock Report), one of the largest banks in the United States and a component of the Dow 30, moved farther along the recovery path in the final quarter of 2012. The company still has some distance to go, however, and investors bid the stock lower in Thursday morning trading.

The company reported earnings of only $0.03 a share for the December quarter and $0.25 a share for the full-year 2012. These results matched the earnings revisions we made in early January, when the company announced an agreement with Fannie Mae to settle mortgage-related claims and incur other mostly mortgage-related costs, which in total reduced share net by $0.18 a share. We previously had expected BofA to earn $0.18 a share in the December quarter and $0.40 a share in 2012.

As a result of settling $12.2 billion of claims that BofA buy back mortgages sold to Fannie Mae, BofA's mortgage repurchase claims declined, from $28.3 billion at the end of 2012 to $16.1 billion in early January. One concern is that repurchase requests on private-label mortgage securitization transactions continue to rise and may take time to resolve. But the company now estimates the range of possible losses related to its total claims could exceed its reserves by $4 billion, down from $6 billion over reserves at the end of last September. And the settlement should help lower mortgage-related operating expenses.

Absent the unusual items, BofA's revenues in the December quarter would still have fallen short of the year-earlier period level, but expenses would have been lower. Net interest revenue benefited from reductions in long-term debt (down nearly $100 billion during 2012), better trading-related net interest income, and less negative impact from market-related amortization expense. As usual, noninterest revenue was a mixed bag, with the unusual charges resulting in losses in the mortgage area. In addition, service-charge income was reduced by fee waivers for customers hurt by Hurricane Sandy. But income from investment services and investment banking rose.

BofA is making good progress lowering its operating expenses, having achieved about 45% of the savings from its New BAC efficiency initiative at the end of 2012. We expect the company to make further headway on this front in 2013, although litigation expenses are an unknown and seasonal compensation expenses may boost the number in the March quarter.

The company's asset quality trends are also moving in a positive direction. BofA reduced its nonperforming assets by 15% in 2012, and past-due consumer loans fell 27%. Management expects to continue to reduce its loan loss reserves and provisions in 2013, though at a slower pace than in 2012.

Absent possible additional large charges related to resolving mortgage-related matters, we now look for BofA to earn about $0.75 a share in 2013. Note, however, that the company isn't quite out of the woods yet. Regaining market share and rekindling revenue growth probably will remain a struggle for BofA, given continued low interest rates and competitive pressures. Also, BofA's potential mortgage-repurchase-related exposures, though reduced, are still rather sizable.

The stock has been trading near its 12-month high recently, and already discounts much of its recovery potential over the pull to 2015-2017. We also don't expect directors to raise the dividend on the common stock until the company is a bit farther along the recovery track.

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 & Washington, D.C.

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