Early Wednesday morning out of Charlotte, N.C., Bank of America (NYSE: BAC) announced its quarterly earnings report, and the numbers have caused some confusion, and then some pessimism on the markets. Though the bank reported EPS of 19 cents per share (5 cents better than expected), the revenue number of $21.97 billion was off by $900 million (4 percent). Shares initially rose on the EPS news, but after the full report and the subsequent conference call, shares have dropped about 2.5 percent in the early hours of trading to about $7.70 per share.
While the bank admitted it was being questioned about its role in the Libor-fixing scandal, that isn't necessarily at the heart of the problems from the earnings report and the pessimism of the market. BAC announced that net interest income was down nearly 15 percent from the same period in 2011, and net interest margin dropped to 2.21 percent. Non-interest expenses were down nearly 26 percent from Q2 2011 levels, meaning sharp cost-cutting. Also noteworthy was that 11 cents of 19-cent EPS figure originated from a reserve release - one that was only expected to account for 7 cents of EPS by analysts. Also, the bank reported $22.7 billion in outstanding claims against it (up $6.6 billion), but reserves of just $15.9 billion to cover - an underreserve of nearly $7 billion if all the claims are met. Average deposits were up from $467 billion in Q2 2011 to $476 billion a year later.
Also in the news at the same time was the announcement that BAC had reached a $375 million settlement with a bond insurance company who sued Countrywide in 2008 for misrepresenting the quality of its ultimately toxic mortgage-backed securities.
“In a challenging global economy, we still see opportunities to do more with our customers and clients. Lending to commercial businesses increased for the sixth straight quarter -- with small business lending and commitments up 23 percent in a year -- and consumer credit is in the best shape in years,” said CEO Brian Moynihan. “This quarter we surpassed 10 million mobile banking customers, up 34 percent in a year. With about 45,000 new mobile customers a week, we are adapting to meet customer needs and to do more with them.”
While the market is not convinced of the bank's health, that certainly may not be seen as a good sign for hedge funds like Bruce Berkowitz' Fairholme or Kerr Neilson's Platinum Asset Management. Fairholme was invested to a $984 million tune in BAC at the end of March, while Platinum had a $285 million stake. Fairholme did sell off 1 percent of its stake during the quarter, but Platinum jettisoned 15 percent of its stake in the first three months of this year.