Reviewing Bank of America's Mixed Report

Bank of America (BAC) reported earnings this morning. This report always has puts and takes, and this quarter was no different. But after last quarter's relatively "clean" report and beat, this is a definite downshift.

The company took a litigation charge of $6 billion, and the headline was a loss of $0.05 to earnings. This missed the mark. But adjusting for the charge (it is one-time and related to the Federal Housing Finance Agency settlement), earnings would have been $0.25 a share and more in line with consensus, which was at $0.27.

Core revenue was disappointing, however at $21.9 billion, compared with the $22.9 billion consensus, on lower net interest income and a drop in net interest margins.

The stock is down on the news. The charge was higher than expected (consensus was $4 billion to $5 billion), and on the conference call, the company guided for net interest income to be down in the second quarter, although it does see a snapback in the second half. After the outperformance in the shares relative to the group by 6% year to date, the lower guidance and a quarter that didn't positively surprise to the upside, the stock is down 3% today.

Along with the mediocre results, the drop in the 10-year bond yield continues to surprise to the downside, especially in the face of better economic data (we got another round of better industrial production and capacity utilization this morning). Until this reverses, the banks in general will struggle. We like what we own, but we have recently cut back our weighting in the group (we sold out of KeyCorp (KEY) and a bulk of Goldman Sachs (GS) last week).

We'll let the dust settle before adding to our Bank of America position (it's still above our basis), but it is a buy for the long term. The expense story still on track (expenses were better than expected), the market-share gains in global wealth management continue to impress, and the stock trades at just over tangible book value, which remained at $13.81 in the quarter.

There were positives and negatives to the quarter. The highlights were that global wealth investment management (GWIM) posted record fees and strong margins, global banking average loans rose 7% year over year, investment-banking fees rose $1.5 billion, and non-interest expense fell 7% quarter over quarter. The consumer and business banking unit (CBB) posted a 15% year-over-year increase in net income due to lower non-interest expense and lower provisions for credit losses.

Bank of America remains the No. 1 U.S. market-share leader in deposits. Client brokerage assets were up $100 million, and mobile bank usage was up 4% quarter over quarter and 19% year over year. Global wealth management had record revenue at $4.5 billion -- a little light of consensus at $4.7 billion but up sequentially and yearly from the $4.4 billion level on record asset management fees. The company posted strong pre-tax margins in this division of 25.6%.

Client balances rose to $2.4 trillion, a record. Assets under management increased for the 19th consecutive quarter and were at the second-highest level on record. Period end loans rose 9%, and deposits increased 2%. Global markets and trading revenue was better than peers. Fixed income, currencies and commodities (FICC) fell 2% year over year to $3 billion (compared with the $2 billion expectation), equities were flat year over year at $1.2 billion (also better than the $1.1 billion consensus), and investment- banking fees were solid, with 11% quarter-over-quarter growth in advisory and debt underwriting flat, offset by a 3% decline in equity underwriting.

Bank of America had easy comparisons from a year ago on its FICC business, but even making this adjustment, down 15%, its FICC results still beat JPMorgan's (JPM) 21% drop and Citigroup's (C) 18% decline. Liquidity was strong - - it rose 14% quarter over quarter to $427 billion, Basel III Tier 1 common is 9.3% (up 20 basis points quarter over quarter) and statutory liquidity ratios for both the holding company and the bank were above the regulatory threshold of 5%.

The negatives were lower net interest income (and the lowered guidance), lower net interest margin and weak mortgage results (although not a surprise). Reported net interest income was $10.1 billion, compared with the $10.4 billion estimate, and core net interest income was $10.3 billion (down $200 million quarter over quarter), all due to weak mortgage results. Mortgage fees were $600 million below the $1.2 billion estimate, and production fell 57% year over year to $10.8 billion. Core net interest margin fell 3 basis points to 2.36%. The company expects NII/NIM pressure to continue in the second quarter but expects a pickup in the second half of the year as loan growth improves. The company won't get much credit for these comments until it shows results.

Net-net, we come away with no major change to our thesis for owning the shares. There will always be plusses and minuses, given the size of the company and the many different divisions. But the expense story continues to make progress, the legal issues continue to be worked down, and capital levels are stronger. The stock is cheap, and many of the underlying businesses are headed in the right direction for further market-share gains. That said, we believe the stock will pause after the strong results out of the gate this year. We'll look to add on a pullback.

Regards,

Jim Cramer, Stephanie Link, and TheStreet Research Team

DISCLOSURE: At the time of publication, Action Alerts PLUSwas long BAC, JPM and GS.