In Bank of America Corp.'s (BAC) third quarter, bad loans beat out Merrill Lynch.

Losses on loans at the Charlotte bank, the nation's largest bank by assets, more than offset strong revenues from trading and investment banking, businesses bolstered by its controversial acquisition of Merrill Lynch.

The bank reported a $1 billion net loss for the third quarter, its first this year, as it posted $9.6 billion in permanent losses tied to an array of bad debt, including mortgages, home equity loans, credit cards and loans tied to commercial real estate. Its levels of nonperforming loans - or loans that may soon become uncollectible - also mostly rose across the board.

Bank of America executives did deliver some encouragement for the banking industry, as well as for investors who seem to believe the U.S. economy is now on a path to recovery. The bank's embattled chief executive, Ken Lewis, who announced in September he will retire at year-end, said Bank of America's quarterly levels of losses from bad loans may have finally reached their high-water mark.

"We believe we may have peaked in total credit losses this quarter," Lewis said during a conference call, "although the levels going forward will continue to be elevated and certain businesses will still experience higher losses." Banks typically post losses from loans months or years after borrowers stop making payments, which means losses for many banks will remain high even after the U.S. economy recovers.

Bank of America is working to keep pace with strong rival JPMorgan Chase & Co. (JPM) - which on Wednesday posted third-quarter profits of $3.6 billion - and to demonstrate it's in better condition than beleaguered rival Citigroup Inc. (C), which on Thursday posted a very narrow third-quarter profit.

Shares in Bank of America were recently down 3.9% to $17.40.

Even as loan losses hurt the bank, there were signs Merrill Lynch was helping.

Bank of America's trading profits rose 57% during the third quarter to $3.4 billion. Revenue fell at its wealth management unit, which includes Merrill's "thundering herd" of brokers.

An improvement in investor sentiment toward Bank of America paradoxically cost the bank $2.6 billion in the quarter due to an arcane accounting rule that reflects the amount at which a company could hypothetically purchase its own debt. As financial firms crumbled last year and early this year, banks took credits as their debt fell in value, but they have lately posted losses as confidence in their debt has recovered.

"I'd rather see the operating improvements and take the accounting loss," said Lewis.

Bank of America's credit card business took permanent losses of $6.5 billion from bad debt - a hefty amount, but about equal with last quarter. The bank also withdrew cash from its account for future loan losses tied to credit cards, instead of adding to the reserve, which suggests the bank expects troubles with its credit card accounts to begin slowing in the near future.

The bank said Friday it expects unemployment, which climbed to 9.8% last month, will peak at 10%. The bank's loans tied to credit cards and mortgages, as well as businesses large and small, are all vulnerable to a further sharp rise in the nation's jobless rate.

The bank's results provide investors their first detailed look at Bank of America since Lewis abruptly announced his upcoming retirement. After facing months of criticism over the bank's purchase of Merrill Lynch, Lewis said three weeks ago he will leave the bank at year-end, even though the bank has no planned successor.

One analyst asked Lewis when the bank's board of directors would name his replacement.

Lewis said the board, which has formed a committee to look for candidates inside and outside the bank, has "an appropriate sense of urgency."

"But I can't give you a date," he said.

-By Marshall Eckblad, Dow Jones Newswires; 212-416-2156; marshall.eckblad@dowjones.com

(Joan Solsman contributed to this article.)