Bank of America profit tumbles 41%

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NEW YORK (CNNMoney.com) -- Bank of America proved its dexterity yet again on Monday by reporting better-than-expected results even as it juggled credit issues and its high-profile acquisition of the troubled mortgage lender Countrywide Financial.

The Charlotte, N.C.-based bank said it earned $3.41 billion, or 72 cents a share during the second quarter. That was down 41% from $5.76 billion, or $1.28, a year earlier, but better than the 53 cent per share profit Wall Street was expecting.

Sales improved from a year ago, increasing 3.5% to $20.32 billion.

That was also better than analysts had expected, making Bank of America the fourth of the nation's largest banks to deliver a quarterly performance that topped forecasts over the past week.

"We are in the middle of a recession, from that standpoint this was a grand slam," said Anthony Polini, analyst at Raymond James & Associates. "I think the key going forward is can they repeat this quarter?"

The news also provided some encouragement to jittery investors, who have been closely tracking the performance of the financials. Bank of America (BAC, Fortune 500) shares gained nearly 7% in midday trading.

The company's consumer and small business division bore the brunt of the profit decline. Profits in the division fell 66% as further deterioration in the housing market and slower economic growth put pressure on borrowers of home equity, credit card and small business loams, the company said.

Bank of America said its non-performing assets jumped to $9.75 billion, or 1.13% of all loans, during the quarter.

At the same time, the company said it was forced to set aside $5.8 billion during the quarter to account for loans gone bad or that could falter in the future.

Offering a much more tempered outlook on the broader economy than some of his fellow banking executives, Ken Lewis, Bank of America's chairman and CEO, warned that credit losses would remain an issue. But he said they were manageable given today's conditions.

"We are not in denial," Lewis told analysts in a conference call Monday.

Lewis added that he expected consumer-related losses to peak some time over the next two to three quarters.

Bank of America's other key businesses - wealth management and its investment banking division - held up relatively well during the quarter, even as the investment banking unit took a $1.2 billion writedown, part of which was related to its exposure to mortgage-related securities.

Also encouraging was a jump in the company's net interest margins, or the profits made from taking in deposits and lending them back out. Net interest income rose 25% during the quarter, as interest rate cuts by the Federal Reserve drove down short-term borrowing costs.

While Bank of America's results revealed just how sound some of its key businesses remain, Monday's earnings did provide plenty of insight into the recently completed Countrywide merger.

Bank of America said the troubled mortgage lender lost $2.33 billion during the quarter. But the company surprised many on Wall Street by stating it expects the acquisition to add to profits this year.

When the all-stock deal was first announced in January, Bank of America said it expected the deal to have little impact on earnings for the remainder of the year.

Lewis said the Countrywide acquisition would put Bank of America's Tier 1 capital ratio, a measure of a bank's ability to absorb losses, just below 8% in the coming quarters. But he stressed once again that the company's lofty dividend is safe.

"We have not changed our philosophy about the dividend," said Lewis.

At the quarter's end, Bank of America said its Tier 1 capital ratio stood at 8.25%. A ratio above 8% is generally considered a good sign for financial institutions.

Capital levels, along with liquidity, have become a key concern for large financial institutions as the credit crisis drags on. Ongoing deterioration in the housing market, mounting troubles in the economy and pressure from regulators have prompted financial firms to raise capital in the form of stock sales and dividend cuts.

Bank of America's results offer another encouraging sign for the hard-hit financial services sector. The bank is the latest to report results above analysts' expectations.

Citigroup (C, Fortune 500) booked a $2.5 billion quarterly loss on Friday, but managed to beat Wall Street's dreary projections of an even bigger loss. Earlier last week, both JPMorgan Chase (JPM, Fortune 500) and Wells Fargo (WFC, Fortune 500) reported a plunge in profit that was not as bad as analysts were forecasting.

Still left to report, however, are a number of regional institutions and thrifts, most notably Wachovia (WB, Fortune 500) and Washington Mutual (WM, Fortune 500). Both of them will release their results Tuesday.

Earlier this month, Wachovia warned that it expected to lose anywhere between $2.6 billion and $2.8 billion during the second quarter. Analysts are expecting WaMu to report a loss of $1.14 billion.