Bank of America Corp posted a quarterly profit that topped Wall Street forecasts, but the largest U.S. bank warned of a fresh surge in troubled loans from credit card, mortgage and business customers due to the weak economy.

Chief Executive Kenneth Lewis said tough economic conditions will hurt results into 2010. The bank set aside $13.38 billion for bad loans for a second straight quarter, and said net charge-offs totaled $8.7 billion, up 25 percent from the prior three-month period.

Nonperforming assets surged 21 percent to $30.98 billion. The bank added $4.63 billion to reserves for bad loans, ending with $35.78 billion.

Growth in charge-offs and non-performing assets still scares the daylights out of me, said Paul Miller, an analyst at FBR Capital Markets.

Charlotte, North Carolina-based Bank of America said on Friday second-quarter net income applicable to common shareholders fell 25 percent to $2.42 billion, or 33 cents per share, from $3.22 billion, or 72 cents, a year earlier.

Before preferred stock dividends in both periods, profit fell 5 percent to $3.22 billion.

Net revenue rose 61 percent to $32.77 billion, helped by the acquisition of Merrill Lynch & Co.

Analysts on average expected profit of 29 cents per share on revenue of $33.26 billion, according to Reuters Estimates.

Difficult challenges lie ahead from continued weakness in the global economy, rising unemployment and deteriorating credit quality that will affect our performance for the rest of the year and into 2010, Lewis said.

Bank of America shares fell 18 cents to $12.99 in premarket trade. Through Thursday, the shares had fallen 6 percent this year, compared with a 14 percent drop in the KBW Bank Index.


Results included a $5.3 billion pre-tax gain from selling part of its stake in China Construction Bank Corp.

They also included $713 million of dividend payments tied to a federal bailout, and a charge to bolster a federal deposit insurance fund.

Lewis faces strong pressure from investors and regulators to improve performance after the bank's acquisition of Merrill on January 1, which caused its shares to tumble.

Congress is investigating whether Lewis was pushed to go through with the merger and withheld information about Merrill's problems from investors. New York Attorney General Andrew Cuomo is investigating the bank's role in $3.62 billion of bonuses that Merrill awarded.

According to The Wall Street Journal, regulators have placed Bank of America under special secret oversight to address problems with risk and liquidity management.

Shareholders in April stripped Lewis of his chairman role, and Bank of America has since installed several directors with banking or regulatory experience.

Regulators have so far not permitted Bank of America to repay its $45 billion federal bailout.

JPMorgan Chase & Co, which last month repaid its $25 billion of bailout money, on Thursday reported a 36 percent increase in quarterly profit. (Reporting by Jonathan Stempel; Additional reporting by Sweta Singh; editing by John Wallace)