Dear Mr. Berko:

What are your thoughts on Bank of America? It has a yield of 4.4 percent and a good record of dividend growth. Why were earnings lower in 2005 than projected? If you think it’s still a good stock, I’d like to buy $3,000 worth for my Individual Retirement Account and reinvest the dividends each quarter.

I’m 68, still working because I got caught in the tech and dot-com debacle and lost nearly 60 percent of what I had invested. I used to have an account at NationsBank when it was taken over by Bank of America, but the service at the new bank was terrible. Please tell me what you think.

E.K., Boca Raton, Fla.

Dear E.K.:

Bank of America Corp. (BAC-$48.23) was formed by the merger of NationsBank (a customer-friendly bank) with Bank of America (not a customer-friendly bank) in late 1998. In early 2004, Bank of America (still not a customer-friendly bank) purchased FleetBoston (a very customer-friendly bank).

After five years of good earnings growth, BAC’s earnings for 2005 were not as strong as anticipated. Earnings came in at $4.04, which was a dime lower than guidance, the result of poor performance in BAC’s brokerage and trading division and unexpected residual costs from the FleetBoston merger.

I believed that BAC might soon become one of the most profitable banks in the nation with revenues and net income surpassing CitiGroup. With 6,000 branches, BAC is truly a nationwide bank and arguably the dominant player in the high-growth regions of the country. BAC has a huge domestic deposit base that provides an inexpensive source of funds.

However, BAC has three big problems.

1. Chief Executive Officer Kenneth Lewis (according to several BAC high-level “small shots”), lacks the respect of subordinates in the field as well as some of the boys at corporate headquarters.

2. BAC’s investment banking and brokerage division is its weakest-performing unit. Ken and the boys in Charlotte, N.C., are clueless about what it takes to make this unit a bright light or even a dim bulb. Though investment banking and brokerage services are mighty profitable for BAC’s competitors, Ken’s boys lack the credibility, the experience, the contacts and the expertise to run this business.

3. Customer service at Bank of America is an oxymoron. Sadly, BAC is becoming one of those American companies that is toilet-training its customers to accept a lower-quality product at a higher cost with lousy service. This is painfully evident at the branch level. If you have a checking account, savings account, business account, car loan, home equity loan or line of credit, it’s almost impossible to visit with an employee or the branch manager by phone.

Customer service is even worse once you figure out the phone prompts. The folks who answer the phone (a thousand miles away) are dumber than Formica and sound like they’re from the backwoods of Pluto. And don’t try to navigate BAC’s Web site unless you have hours of time to waste.

The Street reckons that BAC’s 2005 earnings should advance to $4.34 per share in 2006, according to Theresa Brophy at Value Line Investors Service. Earnings for 2007 should improve to $4.70.

Contributions from MBNA (credit cards) are expected to enhance earnings. However, credit card losses have accelerated and Charlotte’s new service charge pricing may have a negative effect on fee income earnings. Some believe that the MBNA acquisition might diminish BAC’s 2006 earnings. Meanwhile, some observers believe profits from BAC’s business banking division might be limited by continuing interest rate pressures.

Many on the Street reckon that BAC at $48.23 is not timely. The $2 dividend is safe and the mid-level big shots I know at BAC tell me that the dividend should be raised again this year, probably to the $2.12 level, which is just shy of a 5 percent return. So if you’re a patient investor, you might hold BAC for its total return potential two to four years out.

I am required to tell you that I and accounts we manage own shares of Bank of America.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

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