A surge in troubled loans overshadowed better-than-expected earnings at Bank of America Corp, and the largest U.S. bank expects the credit situation to worsen, driving its shares down 17 percent.

While first-quarter profit more than doubled, the results are unlikely to end calls by investors for Kenneth Lewis to step down as chief executive or give up the post of chairman. The bank's purchase of Merrill Lynch & Co on January 1 led to an emergency federal bailout two weeks later.

Bank of America has received $45 billion of taxpayer money, and some analysts believe it needs more. But Lewis said on a conference call that we absolutely don't think we need additional capital.

The bank also said economic conditions remain difficult, and that nonperforming assets surged 41 percent in the first quarter to $25.74 billion.

It's too early to call stability in this cycle, Chief Financial Officer Joe Price said on a conference call.

Bank of America joined Citigroup Inc, Goldman Sachs Group Inc and JPMorgan Chase & Co in posting results that improved from the fourth quarter, but some of the improvement has come from trading gains, accounting treatments and one-time items.

I don't see anything that makes me think all of a sudden people are going to take the pressure off Lewis, said Walter Todd, a portfolio manager at Greenwood Capital Associates LLC, which invests $650 million. The biggest question I have is, what is going on with these nonperforming assets?

STRESS TESTS

Net income applicable to common shareholders more than doubled to $2.81 billion, or 44 cents per share, from $1.02 billion, or 23 cents, a year earlier. Net revenue also more than doubled to $35.76 billion.

Results included $4.1 billion of one-time gains.

Excluding one-time items, profit was 17 cents per share, according to Reuters Estimates. Analysts expected 4 cents.

Before the impact of preferred stock dividends paid to the government, net income rose to $4.25 billion from $1.21 billion. About 86 percent of earnings came from Merrill operations, while just $583 million came from Bank of America.

I don't think it changes anything, said Jonathan Finger, whose family sold Houston's Charter Bancshares Inc to a Bank of America predecessor and says it owns 1.1 million shares. The family is campaigning against the reelection of three bank directors, including Lewis and lead director O. Temple Sloan.

Questions persist over whether the bank sector has bottomed. Around May 4, the government plans to release results of stress tests designed to gauge 19 banks' ability to weather a deep recession.

In midday trading, shares of Bank of America fell $1.81, or 17 percent, to $8.79 on the New York Stock Exchange.

The KBW Bank Index slid 10.5 percent, and major U.S. stock indexes also declined. Bank of America shares traded at $33.74 before the Merrill merger was announced last September 15.

CREDIT BOTTOM NOT HERE

Critics have faulted Lewis for failing to disclose what he knew about losses at Merrill before shareholders voted to approve the purchase, valued at about $29.1 billion in common and preferred stock, in December.

Bank of America faces many lawsuits over Merrill and its mid-2008 purchase of Countrywide Financial Corp, once the nation's largest mortgage lender.

It has also infuriated regulators, including New York Attorney General Andrew Cuomo, over its handling of $3.62 billion of bonuses awarded to Merrill workers. Several top Merrill executives have left the combined company.

The bank added $6.44 billion to reserves for bad loans after losses from mortgages, credit cards and commercial real estate increased.

The amount set aside for credit losses soared 57 percent to $13.38 billion. Net charge-offs totaled $6.94 billion. Bank of America's credit card business lost $1.77 billion in the quarter as the rate of managed credit card net losses rose to 8.62 percent from 7.16 percent at year-end.

The bank's ratio of tangible common equity to tangible assets rose to 3.13 percent from about 2.9 percent at year-end, but some analysts prefer a ratio closer to 5 percent.

Oppenheimer & Co's Chris Kotowski said the bank may need to raise $36.6 billion by year-end.

TRADING PROFITS

Mortgage and home equity loan production rose 79 percent from the fourth quarter to $89.26 billion.

But this suggests a loss of market share to Wells Fargo & Co, despite Countrywide. Wells Fargo said it made more than $100 billion of mortgage loans in the quarter.

Profit in the investment bank totaled $2.37 billion, compared with a year-earlier loss of $991 million, fueled primarily by $4.92 billion of trading profits. Wealth management profit more than doubled to $510 million.

Results included a $1.9 billion gain from selling shares of China Construction Bank Corp and $2.2 billion of gains tied to widening credit spreads.

Among U.S. banks, only Citigroup has also taken as much as $45 billion of taxpayer money since the credit crisis began.

Bank of America shareholders will consider whether to remove Lewis from the board or split the chairman and CEO jobs at the bank's annual meeting on April 29.

I think his fate is in the hands of the government, said Nancy Bush, an independent bank analyst. It's not up to him.

(Reporting by Elinor Comlay, Jonathan Stempel and Dan Wilchins; Editing by Derek Caney and John Wallace)

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