By David Reilly 
 
  Bank of America took yet another step away from death's doorstep with 
second-quarter results that showed credit quality improving, expenses falling 
and improved net profit. But it isn't ready for the Olympics. 
  The bank has yet to convincingly shake worries over the mortgage mess that 
resulted from its acquisition of Countrywide Financial. Those returned to the 
fore Wednesday after BofA said demands it repurchase flawed mortgages jumped 
by more than 40% in the quarter to $22.7 billion. 
  With $15.9 billion set aside for losses from such demands, the bank should 
be adequately reserved. Given the complexity of the claims, and numerous legal 
issues around them, it remains difficult for investors to know for sure, 
though. And despite the spike in claims, the bank's repurchase reserve 
increased by only $200 million in the quarter. 
  Meanwhile, BofA continues to insist that those demanding it repurchase 
mortgages will have to show that any breaches in representations and 
warranties for a loan directly caused a loss and, not, say, the housing 
meltdown. Yet a New York state judge has rejected that argument. 
  Worries about mortgage exposure feed back into what has been the big 
question hanging over BofA for more than a year--whether it has enough 
capital. On this front, the bank has made progress. 
  For example, tangible common equity, a bank's best loss-absorbing buffer, 
has increased by about 11% the past year. Along with reductions in some 
assets, this has pushed BofA's tangible equity ratio to 6.83% in the second 
quarter, up nearly a full percentage point from a year earlier. 
  Yet in its eagerness to banish capital doubts, the bank may have 
overreached. It declared that its Tier 1 common ratio under new, Basel 3 rules 
would be 8.1%. This is well above its previously stated, year-end goal of 7.5% 
and would put it ahead of rivals J.P. Morgan Chase, Citigroup and Wells Fargo. 
  But the way BofA calculated its capital ratio differed from the approach 
used by the other banks. When questioned on the bank's earnings call, finance 
chief Bruce Thomson said the other approach would have put the ratio closer to 
the other banks, which were around 7.9%. 
  BofA also declined to provide an alternative view of the ratio to reflect 
that regulators may require banks to use two approaches. This would likely 
lower its ratio further. J.P. Morgan, for example, said its ratio would drop 
to 7.6% in this scenario. 
  Mr. Thomson said the bank wasn't providing that figure because regulators 
wouldn't ultimately require it. This implied BofA has unique insight into 
regulators' thinking. 
  Not surprisingly, that sowed a seed of doubt in investors' minds. It and 
mortgage worries overshadowed many of the quarter's positive developments, 
including net profit of $2.46 billion versus a loss of $8.82 billion a year 
earlier. A bank in show-me mode can't afford such stumbles.