Bank of America Groans Under Souring Loans

Bank of America CEO Ken Lewis may be exiting with his tail between his legs, but at least for him the pain is nearly at an end. For company shareholders, the torture continues.

B of A reported a third-quarter loss of $1 billion, a sharp reversal from its $1.2 billion in net income in the year-ago period. Like Citigroup, its ailing money-center kin, B of A is taking the hit after years of profligate lending. Nonperforming loans and leases soared to 3.5 percent for the quarter, a huge jump over 1.2 percent a year ago; nonperforming assets have more than doubled during that time.

On the consumer side, there's deterioration across loan types -- residential mortgage, home equity, credit card. Through Sept. 30, chargeoffs on home loans and insurance are up to 5.2 percent, versus 2.8 percent through the first nine months of 2008. B of A's domestic credit card customers are falling behind on payments at an alarming clip, with chargeoffs reaching 12.5 percent, more than twice the year-ago total. Commercial lending is also suffering. Year-to-date, chargeoffs on commercial real estate loans are at 3.5 percent, more than triple last year's figure.

The big question facing B of A, and the industry as a whole, is when these losses will peak. Unemployment, the major reason loans go bad, is still rising. Most estimates project the jobless rate to crest at 10 percent, although no one knows for sure (and that doesn't take into account underemployment, which also can force borrowers to fall behind or default).

In forecasting where B of A is headed, then, you have to ask whether its lending portfolio will bottom out before or after unemployment peaks. That, too, remains unclear.