Few large bank stocks have come close to the market performance of Bank of America (NYSE:BAC) over the past year. While some of that appreciation may have been due to investors accepting that BoA is still a going concern in banking, the reality is that the bank still has a lot of work left to do, and the current banking environment is not exactly hospitable. With legal risks still pretty high and near-term growth opportunities looking more modest, Bank of America seems pretty fairly valued today.

SEE: Equity Valuation In Good Times And Bad

Good And Bad News In Q1
Bank of America did miss expectations for the first quarter, and the company did come in short of its expense reduction targets. Even so, it wasn't a terrible quarter for this still-troubled bank.

Net interest income performance was actually better than expected (down 2% annually and up 3% sequentially), as the bank posted a small increase in average earning assets. Net interest margin did decline 14bp on a market-adjusted basis (while increasingly slightly on a sequential basis), but the adjusted figure of 2.4% is still quite low relative to other large banks like Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), and U.S. Bancorp (NYSE:USB) (though the sizable capital markets business at Bank of America makes the latter two comps a bit unfair).

Fee income was not as strong, though. While non-interest income did increase 24% from the fourth quarter, the bank missed on investment banking/trading revenue. Other line items like cards, service charges, and mortgage banking were down sequentially, but more in line with analyst expectations.

Bank of America also missed on expenses, as core expenses increased about 4% on a sequential basis. Coupled with weak trading revenue, this lead to a roughly five-cent miss at the bank equivalent to an operating income line.

SEE: Analyzing A Bank’s Financial Statements

Mixed Trends In Business And Share
Bank of America did report a pretty gaudy figure for mortgage originations, with growth of 57% relative to last year and 11% compared to the fourth quarter. Keep in mind, though, that Bank of America's share of the mortgage business has cratered since the crisis, with rivals like U.S. Bancorp picking up the slack.

What's more, overall loan growth was all but non-existent on a sequential end-of-quarter basis. Even with the jump in mortgage originations, consumer lending was weak overall, while commercial lending was a bit stronger than we've seen from banks like Comerica (NYSE:CMA) and U.S. Bancorp (and more or less in line with Wells Fargo).

Curiously, Bank of America is one of the few banks so far that has reported a sequential decline in deposits. While banks are not exactly clamoring for new deposits (why bother when loan demand and securities yields are both so poor?), that's unusual so far in this reporting season. I'm inclined to believe this has more to do with letting go of expensive deposits than real share loss, and I believe Bank of America is still the largest bank in the U.S. by deposit share (in the neighborhood of 12%).

SEE: The Industry Handbook: The Banking Industry

I do wonder, though, what the future holds. Bank of America's CEO has been pretty aggressive in projecting significant cost reductions across the business, and I wonder how that will square with the bank's huge branch footprint. While trying to encourage customers to adopt cost-saving moves like paperless statements and technology-assisted deposits will help, there is the risk of losing deposits to smaller banks that can maintain familiar service levels. It's also worth asking how Bank of America will combat increasing competition in the card space and non-mortgage lending spaces, as almost every major peer (Wells Fargo, Citi, U.S. Bancorp, etc. is talking about bulking up these businesses).

The Bottom Line
With this quarter's results in hand, I feel a bit more confident about the bank's core banking operations, but a bit less confident about the always-volatile investment banking/trading businesses. Moreover, I think this quarter highlights that the march towards a more cost-efficient bank is not going to be a steady one.

I still don't see a tremendous amount of value in these shares. I admit that my long-term target return on equity of 8% could prove low if management can hit all of its targets, but I'd also point out that my 8% target is higher than a large percentage of the sell-side targets. In any case, I think U.S. Bancorp and Wells Fargo offer more upside from today's levels than Bank of America. I do agree that there's still a “getting back to business as usual” trade with Bank of America, but I think the process will be longer and more challenging than bulls believe, and I think the easy money is likely in hand with most of the market's problem-child banks.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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