Jan. 22 (Bloomberg) -- Bank of America Corp., the second- largest U.S. bank, said earnings dropped 95 percent after $5.28 billion of mortgage-related writedowns and higher provisions for future loan losses.

Fourth-quarter net income fell to $268 million, or 5 cents a share, from $5.26 billion, or $1.16, a year earlier, Charlotte, North Carolina-based Bank of America said today in a statement. Excluding merger and restructuring costs and a gain from the sale of Marsico Capital Management LLC, the company earned 5 cents a share, missing the 21-cent average estimate of 21 analysts surveyed by Bloomberg.

Chief Executive Officer Kenneth Lewis, who has led the company since April 2001, called the past few quarters ``easily the toughest environment since I have been CEO,'' in a conference call with analysts.

Bank of America increased its bet on the faltering U.S. housing market earlier this month by agreeing to acquire Countrywide Financial Corp., the largest U.S. mortgage lender, for about $4 billion in stock. Lewis has scaled back investment banking, where the company lost $2.76 billion in the fourth quarter, by cutting 1,150 jobs since October and putting the hedge-fund brokerage unit up for sale.

Bank of America rose $1.44, or 4 percent, to $37.41 in New York Stock Exchange composite trading at 4 p.m. It erased an earlier decline of as much as 7.9 percent after Lewis said on the call that he doesn't expect to cut the company's 64-cents a share dividend and that 2008 earnings will rise to ``well above'' $4 a share from $3.30 in 2007.

Investment Banking

The corporate and investment bank's loss compares with a profit of $1.4 billion in the same period a year earlier. Earnings at the consumer and small-business banking unit declined 28 percent to $1.87 billion.

``Investment banking isn't Ken Lewis's core competency and he doesn't need it,'' says Bruce Foerster, a former Lehman Brothers Holdings Inc. managing director who's now president of the South Beach Capital Markets advisory firm in Miami.

Bank of America's total fourth-quarter revenue fell 31 percent to $12.7 billion, while non-interest costs rose 15 percent to $10.1 billion. Return on equity, a gauge of how effectively the company reinvests profit, declined to 11.1 percent for the year from 16.3 percent in 2006.

2007 Profit

Full-year earnings dropped for the first time in Lewis's tenure since the 60-year-old CEO succeeded Hugh McColl Jr. in 2001, with net income sliding 29 percent to $15 billion.

Wachovia Corp., the fourth largest U.S. bank, reported its lowest earnings since 2001 after $1.7 billion of writedowns. The Charlotte, North Carolina-based company's corporate and investment bank lost $596 million.

Countrywide would give Bank of America a 25 percent share of U.S. mortgage originations, Lehman analyst Jason Goldberg wrote in a Jan. 11 report to clients. Almost two-thirds of Countrywide's loan originations in 2007 came from mortgage brokers and other third parties, a practice that Lewis has said Bank of America expects to curtail.

Bank of America has declined 4.8 percent in the week since the Countrywide takeover was announced. Countrywide has dropped 31 percent as investors speculate that Bank of America may seek better terms or abandon the deal.

``Everything is as we discussed last week,'' Chief Financial Officer Joe Price said. Countrywide's decline reflects ``typical market noise,'' he said.

CDO Costs

Bank of America had costs of $5.28 billion to reduce the value of its collateralized debt obligations tied to subprime mortgages. The writedown was 76 percent more than the $3 billion that Price estimated on Nov. 13.

The reserve to cover losses from loans and debt securities doubled to $3.3 billion in the fourth quarter from $1.57 billion in the year-earlier period. Net charge-offs, the cost for loans that the bank doesn't expect to fully recover, rose 40 percent to $2 billion in the final three months of 2007.

Payments more than 60 days due on credit cards climbed to 5.08 percent of outstanding loan balances from 4.86 percent in the third quarter. Late payments on credit cards and home-equity loans may rise more than previous forecasts, Lewis said on the conference call. Bank of America became the largest U.S. card issuer after its 2006 acquisition of MBNA Corp.

Bank of America had $800 million in losses and writedowns after it was forced to rescue money market mutual funds that were in danger of declining to less than $1 per share in net asset value. The funds held some securities linked to subprime mortgages, the bank said.

Marsico Gain

The sale of the Marsico mutual fund business generated a $1.5 billion pretax gain.

The net interest yield -- the difference between what the bank pays on deposits and earns from loan interest -- was 2.61 percent, unchanged from the third quarter. Declining interest rates should boost that margin over the next year, helping Bank of America post an earnings per share gain of more than 20 percent, Lewis said.

Citigroup Inc., the nation's largest bank by assets, posted a fourth-quarter loss of $9.8 billion, the biggest in its 196- year history, as surging defaults on home loans forced it to write down the value of subprime-mortgage investments by $18 billion. JPMorgan Chase & Co. said profit dropped 34 percent after it put aside $2.3 billion for credit reserves. Both are based in New York.

Share Comparison

Citigroup declined 55 percent in NYSE trading during the 12 months through Jan. 18, JPMorgan fell 20 percent and Bank of America dropped 33 percent. The world's biggest banks and brokerages have disclosed more than $120 billion of writedowns and credit losses since June because of collapsing prices in U.S. mortgage markets.

``If consumer portfolios continue to weaken, certainly credit cards will be the next shoe to drop,'' William Fitzpatrick, who helps manage $1.8 billion at Optique Capital Management, said in a Bloomberg TV interview on Jan. 17.

Bank of America gets less than 20 percent of its revenue from outside the U.S., compared with Citigroup's 45 percent and JPMorgan's 25 percent, data compiled by Bloomberg show.

Price, the CFO, said on the conference call that Bank of America will access the capital markets ``in the near future,'' and expects to issue preferred shares to raise more than $2 billion. The bank won't cut its dividend, which is now yielding almost 6.9 percent.

Tier 1 Capital

The bank wants to raise its Tier-1 capital ratio, which measures its ability to cover losses, to 8 percent of assets from 6.87 percent at year-end, Price said. Regulators term banks with ratios of at least 6 percent as ``well-capitalized.''

Lewis said earlier this month that Bank of America's investments in Brazil, China and Mexico reflect a sound international strategy. The bank is just starting to study whether to add to its 8.5 percent stake in China Construction Bank or sell some of its holdings, Lewis said today.

The bank also has a pretax gain of more than $2 billion from its holding in Visa Inc., the credit-card network that's planned an initial public offering for later this quarter, Sanford C. Bernstein & Co. analyst Howard Mason said in a Jan. 10 report.

To contact the reporter on this story: David Mildenberg in Charlotte, North Carolina, at 6587 or dmildenberg@bloomberg.net.

Last Updated: January 22, 2008 16:16 EST