Bank of America

(BAC) - Get Report

shareholders have their annual meeting Tuesday, more or less two years after

NationsBank

and

BankAmerica

agreed to merge to form the nation's second-largest bank. But they don't have much to celebrate, according to several analysts and investors.

While several of its competitors are flourishing, the Charlotte, N.C.-based institution has been showing weakness in its large consumer and commercial divisions. First-quarter results, released last week, showed these trends clearly. And investors have continued to vote against the merger: Bank of America shares are off 35% over the last two years, compared with a 10% decline in the

KBW Banks Index

, which tracks the nation's 24 largest banks.

If these shortcomings persist, investors naturally will wonder whether management, led by Chairman and CEO Hugh McColl, can make the merger a success.

Adding to the skepticism, Bank of America in the first quarter changed the way it presents its business-segment results and made it hard to chart profitability at its consumer operations.

Bob Stickler, a spokesman for the bank, says the bank's critics are being overly negative about its operations.

Pleasure to Meet You

While Bank of America has recently managed to meet, or exceed, analysts' profits forecasts, the quality of the bank's earnings has drawn

criticism. And, in fact, last year's per-share earnings fell some 18% short of the target the bank set when it announced the merger in April 1998.

Further, first-quarter earnings of $1.33 per share would've been as much as 17 cents lower had highly volatile revenue sources such as trading and venture capital gains come in at average levels, says Mike Mayo, banks analyst at

Credit Suisse First Boston

. Instead, these businesses were strong due to first-quarter strength in the markets.

The current turbulence in the equity markets may make it hard for the bank to make as much on trading and venture capital in the second quarter. Without such revenue, slowness in the institution's more traditional banking operations could show up on the bank's bottom line.

"If the capital markets remain weak, Bank of America's earnings could be under pressure," Mayo says. CSFB rates Bank of America a hold and hasn't done recent underwriting for the bank.

Traditional banking businesses are no picture of health. Cash earnings (which exclude amortization expenses) in the consumer business were $1.01 billion in the first quarter, 8.6% below the fourth-quarter total and 2.2% off the first quarter of 1999. Commercial cash earnings were just as soft in the first quarter. At $220 million, they were 20% below the fourth-quarter total and were 3.8% up on the year-ago period. Consumer accounted for a hefty 55% of cash earnings in 1999, with commercial contributing 12%.

"Consumer and commercial looked lousy," says Andy Collins, a banks analyst at

ING Barings

. Collins rates Bank of America a hold and ING hasn't done underwriting. Tom Brown, a manager at New York-based investment firm

Second Curve Capital

, reckons customer dissatisfaction is rising. "Consumer income sucks, and management would be deluding itself to say otherwise," Brown adds.

In defense of Bank of America's consumer performance, Lawrence Cohn, banks analyst at

Ryan Beck

, says that fourth-quarter profits are always significantly above the following quarter because of the boost from the Christmas season, and because February makes the first quarter shorter. Cohn rates Bank of America a hold and his firm hasn't done underwriting for the bank.

Presentation

To test this thesis, it's necessary to compare the 1999-2000 fourth-quarter-to-first-quarter decline with the 1998-99 drop. However, that's not possible because Bank of America changed the way it reports its consumer and commercial numbers in the first quarter. It stopped reporting net income separately for each segment, and now provides only a combined total for both. Some observers wonder whether that restatement was designed to mask difficulties.

"There is a kind of bank that tries to obfuscate deteriorating trends by restating how data is presented; we most recently saw this occur at

Bank One

(ONE) - Get Report

," says Charles Peabody, banks analyst at New York-based

Mitchell Securities

, which rates the bank a sell and has done no underwriting for it.

Bank of America's Stickler says obfuscation wasn't the aim of the change: "They were combined because they are managed together." Stickler adds that's there's no evidence that Bank of America's consumer and commercial bank is losing clients. He attributes the pressure on the consumer income to higher interest rates pushing up the bank's borrowing costs and to additional marketing expenses.

Overdue

But disappointing income is not the only concern about the consumer division. Past-due loans are growing at quite a pace in the consumer finance business. Nonperforming loans totaled $737 million in the first quarter, or 3.23% of consumer finance loans, a big jump from $598 million, or 2.8% of loans, in the previous quarter.

In the year-ago period, the equivalent numbers were $332 million, or 2.1% of loans. Stickler says this is due to what he calls a "seasoning of the

consumer finance portfolio." (Translation: As loans age, the amount of past-due loans goes up, because people don't get into difficulties immediately.)

"What's going on in the consumer-finance portfolio is more than seasoning," says Brown.

Brown contrasts Bank of America with its apparently more successful West Coast rival,

Wells Fargo

(WFC) - Get Report

, which posted strong first-quarter numbers. Each of Wells' four business segments bested year-earlier net income numbers, and three improved on fourth-quarter profits. Brown's fund is long Wells.

Wells used part of its $885 million in first-quarter venture capital gains to offset $602 million in losses from the sale of underwater bonds. This helps the bank because it reinvests the proceeds from the sale in higher-yielding securities. Bank of America could have benefited from this sort of trade in the first quarter; like Wells, it also has lots of loss-showing bonds. But Bank of America needed to have its $563 million venture capital gain flow to the bottom line, because without it, the bank most likely would have missed analysts' profit forecasts, according to Brown.

Despite the underperformance at the bank since the merger, McColl's pay package for 1999 exceeded $70 million. Comparing that with the bank's fortunes, Brown called the pay package "truly nauseating."