Bank of America barely stays profitable

Bank of America reported a 95 percent drop in earnings Tuesday, hurt by a $5.3 billion writedown on the company's mortgage-related portfolio.

NEW YORK (CNNMoney.com) -- Bank of America, stung by a $5.3 billion mortgage-related writedown, reported a steep drop in quarterly results Tuesday that fell short of expectations.

The Charlotte, N.C.-based company said its net income plunged 95 percent to $268 million, or 5 cents a share, from $5.26 billion, or $1.16 a share, a year earlier.

Revenue fell 31 percent to $12.67 billion from $18.48 billion in the 2006 period.

The results, which included the company's purchase of LaSalle Bank, were much worse than analysts had anticipated. The company was expected to report a profit of 18 cents a share on revenue of $13.24 billion.

"Our performance even under these conditions are not what they should have been," said Bank of America Chairman and CEO Kenneth Lewis.

Wall Street, however, embraced the news as Bank of America (BAC, Fortune 500) shares gained more than 3 percent in midday trade on the New York Stock Exchange.

Bank of America's results cap what has been a particularly busy period for financial services firms.

Last week, Citigroup (C, Fortune 500), Merrill Lynch (MER, Fortune 500) and Washington Mutual (WM, Fortune 500) posted multi-billion-dollar losses as a result of the ongoing credit crisis. Rival Wachovia (WB, Fortune 500) also announced a bigger-than-expected decline in its fourth-quarter earnings Tuesday.

Like its competitors, Bank of America blamed its disappointing results on a $5.28 billion writedown the company took on CDOs, or collateralized debt obligations, to reflect weakened demand for mortgage-related securities and recent credit agency downgrades. That hit resulted in a $2.67 billion loss in the company's corporate and investment banking division.

During a conference call with analysts Tuesday, Lewis said he was "comfortable" with the valuation of these mortgage-related securities, but ultimately left the door open to another writedown, saying their value was "subject to change."

Other areas of the company suffered as well. Net income at the company's consumer and small business division fell 28 percent, while its wealth and investment management arm saw earnings decline 42 percent.

Looking ahead to 2008, Lewis said he expected the company to report full-year earnings "well above" $4 a share, but warned that credit quality would remain a headwind in the coming year.

Facing rising credit costs, particularly in the company's home equity, homebuilders and small business loan portfolios, Bank of America ramped up its loan loss provisions by $1.33 billion during the quarter.

Another area that garnered plenty of attention from analysts was the amount of capital the company had on hand, given Bank of America's recent announcement that it planned to acquire the embattled mortgage lender Countrywide Financial Corp. (CFC, Fortune 500) for $4 billion in an all-stock deal.

If approved by regulators and shareholders, a purchase of Countrywide would make Bank of America the nation's largest mortgage lender.

At the end of the year, Bank of America's so-called tier 1 capital ratio - a key measure of its ability to absorb losses - stood at 6.87 percent, down from 8.22 percent in the previous quarter and below its internal target level of 8 percent.

Lewis blamed the deterioration on the company's recent acquisition of LaSalle Bank and last year's lower profits, but said the company remained committed to maintaining its dividend and would look to raise capital through other means.

"We have not changed our philosophy on our dividend," said Lewis.

A number of Bank of America's rivals including Citigroup and Washington Mutual, have slashed their dividends recently in an effort to raise capital.