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Updated to add information about the performance of individual units





Bank of America

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Friday said it swung to a loss during the third quarter because of high credit costs and preferred dividend payments.

The Charlotte, N.C.-based bank lost $2.2 billion, or 26 cents per share, in the three months ended Sept. 30, down from a $704 million profit in the year-ago period. Excluding preferred dividend payments -- a large portion of which went to the U.S. government -- the bank would have lost a more moderate $1 billion.

The average analyst estimate was for a loss of 21 cents per share, according to Thomson Reuters. The range of estimates was wide, however, with the most bearish predicting a loss of 42 cents per share, and the most bullish predicting a penny profit per share.

BofA's large core business of lending wasn't faring well. Credit costs climbed with net charge-offs reaching $9.6 billion, while nonperforming loans rose to 3.72% of the bank's loan book, from 3.31% the previous quarter and 1.45% a year ago. BofA also added $2.1 billion to loan reserves, bringing the total put aside for future losses to $35.8 billion. The company attributed the higher credit costs to continued weakness in the U.S. and global economies and "stress on the consumer."

Lewis, however, did strike a more positive note at times than executives from

JPMorgan Chase

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Goldman Sachs

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executives earlier in the week, all of whom indicated that the banking industry is not out of the woods yet. He said revenue continued to "hold up well" in the quarter, although the future of delinquencies and defaults is unclear with unemployment still on the rise.

"Obviously, credit costs remain high, and that is our major financial challenge going forward," Lewis said. "However, we are heartened by early positive signs, such as the leveling of delinquencies among our credit card customers."

In the latest quarter, BofA recorded pretax mark-to-market and credit valuation adjustments on certain liabilities, including certain Merrill Lynch structured notes, totaling $2.6 billion, as well as a $402 million pretax charge related to the termination of an asset guarantee term sheet with the federal government.

Merrill Lynch has alternately been viewed as BofA's greatest blessing and its greatest curse this year, driving significant gains in the capital markets business while bringing along a raft of investigations, litigation and public scrutiny, as well as a difficult integration. However, Merrill's key businesses -- global banking, global markets and global wealth and investment management -- provided mixed results in this latest quarter.

Global banking profits dropped to $40 million in the September period from more than $1 billion in the year-ago period because of high credit costs and higher premiums paid to the Federal Deposit Insurance Corp. Global markets fared better, swinging to a profit of $2.2 billion in the quarter vs. a $588 million loss last year that BofA posted as a standalone entity; however, a good portion of the earnings were related to lower compensation costs -- a change essentially mandated by the government.

Profits at the company's smaller wealth and investment management arm more than tripled to $271 million, though the division was also hurt by surging credit costs, and lower net interest income.

In one good sign for the Merrill business, BofA did say that merger-related cost savings are on track to exceed goals for the year.

The bank did not make any statements about repaying at least $45 billion in loans the government has extended to BofA through the crisis, though Lewis has said the company is prepared to begin repayment as soon as regulators allow it.

With Lewis departing at year-end, investors are also anxious to find out whom the board has selected as his replacement. Though the bank provided no clues in its report, executives will almost certainly be grilled on a conference call with analysts that begins at 9:30 a.m. ET.

In response to reporters' inquiries on Thursday afternoon, the bank said Lewis will not receive any compensation for 2009. He will repay the $1 million he has so far received from his $1.5 million salary and forfeit whatever stock and option awards he would have been granted. His decision was forced by what a spokesman called the government's "pay master," Kenneth Feinberg

But after more than 40 years at the bank, Lewis isn't leaving to head to the poor house. He has still accumulated a retirement package worth an estimated $125 million, on top of the millions he received in base salary and stock awards in his more successful years as an executive.

BofA shares closed Thursday at $18.10, down 2.6%, ahead of the report. The stock is up nearly 40% since the company reported its second-quarter results in mid-July.

Written by Lauren Tara LaCapra in New York