The banks reported a very solid second quarter during the month, even if this fact was obscured by the price action or press coverage. Core earnings for the sector grew 14% Q/Q, and 50% Y/Y. Credit continued to improve, with charge-offs declining 12% Q/Q and 41% Y/Y.

Other takeaways from the quarter include:

1. Core Earnings Now Higher than Pre-Cycle Earnings: Although market caps for the sector are still about 50% below pre-cycle levels, many investors would be surprised to learn that core earnings this quarter actually exceeded pre-cycle earnings for the first time since the cycle began 4.5 years ago. It is truly an unusual development to have more than a full recovery in earnings, yet have virtually no recovery in stock prices.

2. Charge-offs Continue to Decline … Materially: Charge-offs continued their rapid decline, falling 12% Q/Q to $24 bln and 41% Y/Y (“normal” is ~$8.0 bln). The total decline from the Q3-09 peak is 44%. Provisions declined 8% Q/Q to $15 bln. The trend of reserve releases becoming “permanent earnings” within two quarters or less remains intact (implying this quarter’s $8.0 bln reserve release will flow into charge-offs by Q4-11).

3. Significant Noise Obscures Progress: The banks continue to report very noisy quarters, with many one-time items (mostly from BAC) depressing earnings for the sector and, we believe, obscuring much of the progress. These items include goodwill write-downs, securities gains/losses, litigation reserves (and settlements), gains/losses on loan sales, foreclosure-related expenses, and mortgage repurchase settlements (but not provisions, which we expect to be immaterial by the end of 2011). Of note, we continue to believe a mortgage foreclosure settlement is likely before the end of the summer.