Bank of America Corp. (BAC) kept this quarter's earnings streak going, reporting a sizeable drop in earnings that yet managed to be better than analysts had anticipated -- which has been all it's taken for investors to rally as of late. The nation's second-largest bank by assets said Monday before market open that net income declined 41 percent to $3.41 billion, or 72 cents a share, from $5.76 billion, or $1.28, a year earlier. It also said that its recently-completed acquisition of troubled lender Countrywide Financial Corp. would add to earnings before this year is out, countering speculation from some who had said that bad loans and debt obligations at the Calabasas-based lender would drag the North Carolina-based bank into the muck almost immediately. Take that, housing bust! Analysts had expected earnings equal to 54 cents per share, Bloomberg reported, which meant the drop in earnings and a huge jump in credit-loss provisions didn't slow down investors, who drove a surge in BofA shares in early Monday trading anyway. "Outside of real estate-related products, our operating results were quite good virtually across all business segments," said Bank of America CEO and chairman Kenneth Lewis in a press statement. Provision for credit losses across the bank came in at $5.83 billion for the quarter, down from $6.01 billion in the first quarter but up dramatically from $1.81 billion in the second quarter of 2007. Net charge-offs were $3.62 billion of that total, and equaled roughly 1.67 percent of total average loans and leases; that compared with $2.72 billion, or 1.25 percent, in charge-off activity the first quarter and $1.50 billion, or 0.81 percent, during the second quarter of 2007. Nonperforming assets totaled $9.75 billion or 1.13 percent of total loans, leases and foreclosed properties, compared with $7.83 billion, or 0.90 percent, at the end of March -- signaling that the credit environment yet remains under considerable pressure. Against NPAs, BofA's allowance for loan and lease losses stood at $17.13 billion at the end of Q2, net of charge-off activity. A look at mortgages, Countrywide It's worth noting that BofA's overall credit metrics, however, did not include the impact of Countrywide Financial. Countrywide posted a second-quarter net loss of $2.33 billion, including just under $4 billion in credit-related losses, Bank of America said. Loan production at Countrywide fell precipitously during the quarter as well, with total production of $59 billion representing a drop of 22 percent and refi volume drop of 35 percent from year-ago levels. Countrywide's servicing portfolio held steady at $1.485 trillion, BofA said. Perhaps most significantly -- at least for those in the industry -- is that in a conference call with analysts, Lewis and other execs at BofA "reaffirmed" a commitment to the Calabasas-based lender's substantial wholesale and correspondent mortgage operations. Both channels had been rumored to be on the chopping block in the wake of the Countrywide acquisition since the deal was first announced earlier this year. For now, at least, Bank of America apparently sees the 7,500 in job cuts tied with the acquisition as sufficient to manage operations going forward. Bad loans continue to hamper the former Countrywide mortgage portfolio -- loans now held for investment by Bank of America. Among $2.4 billion subprime loans, 26.7 percent were classified non-performing at the end of the second quarter; 12.7 percent of $26.4 percent in option ARMs were non-performing. Much more surprising, however, was that 6.3 percent of $29.6 billion in prime firsts were NPLs by the end of Q2 -- the difficulties here underscore just how far the mortgage mess has spread. Related links: supplemental financials, investor presentation Side notes: While BofA expects Countrywide to benefit earnings before the end of this year, most missed that the bank is banking $4 billion in goodwill on the merger, according to an investor presentation ... the total purchase price for Countrywide came out to $4.1 billion. Disclosure: The author held no shares in BAC, although indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.