BofA records $2.2 billion loss: 3rd quarter earnings slump not a shock, though stock slid. Lewis: 'Several things show better days ahead.'

Bank of America announced Friday that it lost $2.2 billion from July through September -- its second quarterly loss in the past year.

The bad news wasn't a huge surprise, as analysts had predicted the bank would lose money in the third quarter. But it's probably not what departing chief executive Ken Lewis wanted for his last earnings report at the bank. The $2.2 billion figure includes the payments the bank must make on its government loans.

Despite the loss, Lewis offered two main points of comfort. Consumer banking losses were likely to peak by year end, he said, though he expects they will remain high in 2010. He also noted that the quarterly loss was partly caused by "non-core" expenses -- such as a $402 million government fee -- that didn't affect the bank's fundamentals.

"There are several things this quarter that indicate that there are better days ahead," Lewis said.

Executives didn't provide a specific timeframe for repaying the $45 billion the bank holds in federal aid, but they're eager to get out from under the government's thumb. As long as the bank holds the taxpayer money, the government will have broad authority over its operations and will charge hefty interest rates on the loans.

Also overhanging Friday's earnings report was the uncertainty about who will succeed Lewis, who announced Sept. 30 that he would retire at year's end. Lewis, 62, is under fire for his Jan. 1 purchase of Merrill Lynch.

But Merrill has fueled the bank's revenue all year, including this latest quarter. As consumer banking remains weak, Merrill's businesses have provided the bank with alternative paths for making money.

Consumer bank business, which includes deposits, credit cards and home loans, lost about $1.9 billion. But the bank's Wall Street-related businesses, which were bulked up by Merrill, earned $2.5 billion. Those include investment banking, trading, and wealth and investment management.

The bank said that its integration of Merrill is on track, and that cost savings should be higher than first predicted.

Some analysts expressed concern about BofA being overly reliant on investment banking, an area where returns are highly volatile. The bank's shares fell 4.6 percent to $17.26, on a down day for the markets.

In consumer banking, defaults leveled off but remained high. The bank lost more than $1 billion in global card services, which includes credit and debit cards. That's an improvement over the previous two quarters, but still much higher than a year ago.

The bank lost another $1.6 billion on home loans and insurance.

Small-business losses hurt

Charge-offs, or loans the bank doesn't expect to collect, rose over the year and over the previous quarter in almost all consumer units. Credit cards were an especially ugly spot, with the bank charging off more than 14 percent of its domestic credit card loans. It charged off about 2 percent of residential mortgage loans and 5 percent of home-equity loans.

Small-business was another problem area, with charge-offs totaling more than 17 percent.

The bank signaled that it's also keeping a wary eye on commercial real estate, where charge-offs were 4.7 percent, up from 1.65 percent a year ago.

Lewis noted that the "non-core" expenses that hurt earnings, but not fundamental operations, included about $1.3 billion in fees paid to the government. That included $893 million for interest on the $45 billion in federal loans and a $402 million charge for taking an early exit from a loss-sharing agreement the bank entered in January. The bank decided last month to exit the agreement, despite the big fee, because it is eager to get out from under the government's grip.

Chief financial officer Joe Price said the bank is working out how to repay the government loans but didn't give a time frame.

"We're supplying all the information and doing everything we can on our part," he said, though he noted that regulators might create some new, more specific guidelines on repayment.

In addition to Merrill, Bank of America is also digesting mortgage lender Countrywide Financial, which it bought last year. The purchase helped the bank take advantage of a refinancing boom in the first half of the year. Friday, the bank said it has integrated Countrywide's deposit systems and plans to integrate mortgage servicing by the end of the year. It said cost savings with Countrywide remain on track.

This is the second time under Lewis' eight-year tenure that the bank has reported a quarterly loss. It also lost $2.4 billion in the fourth quarter of 2008, which was its first quarterly loss in 17 years.

Wells Fargo reports third-quarter earnings next week.