Running Head: PROJECT PAPER
Project Paper
ACCT 370 – Financial Statement Analysis
Professor Dr. Jamie E. Stowe
Caleb Hempstead
Liberty University
March 19, 2018
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Abstract
Bank of America is a for-profit, public company traded on the New York Stock Exchange. Bank
of America is currently the second largest bank in the United States and the ninth largest bank in
the entire world. Ranked in this position, Bank of America has $2.34 trillion dollars of assets
stored within its vaults (Dixon, 2019). Bank of America is a successful bank that has successfully
made it through the credit crises of 2008. Because of this, Bank of America implemented
strategies during the credit crisis to save itself that it is now changing those strategies to continue
to grow further. Examples of these strategies that have been changed are the repurchase of
common stock and the recent expansion of brick and mortar stores. However, regardless of these
changes, Bank of America is a successful bank with a bright future. As long as Bank of America
continues on the path that it has for the past 240 years, Bank of America will continue to produce
positive results and return value to its shareholders.
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Introduction
Bank of America is a worldwide commercial bank with a presence not limited by its
name. It’s ability to grow has become clearer now than ever before. Its growth has taken it too all
6 inhabited continents with branches, offices, and ATM’s located around the world. Bank of
America is a commercial bank where consumers, business, and investors all can go for their
financial needs. With a history longer than 240 years, Bank of America is continuing to grow and
a world leader in the banking industry. As a leading company within the financial services
industry, Bank of America provides a wide variety of services for consumers. A typical financial
services center provides banking, investment advice, and a variety types of loans for consumers
and business. Some of the greatest, historical competitors to Bank of America include Wells
Fargo, JPMorgan Chase, and Citigroup. Regardless of these competitors, Bank of America is an
industry leader and a company with a bright future.
Analysis of the Operating Activities of Bank of America
According to Business Insider, Bank of America ranks as the ninth largest bank in the
world. Banks are ranked by total asset evaluation (Martin, 2018). However, when compared just
to banks within the United States, Bank of America ranks second. Bank of America has a total
asset valuation of $2.34 trillion dollars (Dixon, 2019). Unlike a normal business, banks do not
solely rely on the sale of products or services to receive cash. (Even though, this is a way for
them to make money. It is not the primary source of cash deposits.) Individuals, companies, and
consumers deposit their cash at a bank, knowing that the bank will use their funds to invest in
other activities. Users of banking establishments know that their money will be used for further
financing needs. These consumers of the bank still have access to their funds but, typically, have
some stipulations on how much they can withdraw, use, or move around. Additionally, the bank
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has stipulations by the United States government on how much consumer money it can re-loan
within its business operations. The Federal Reserve Board of Governors controls the federal
reserve requirements (which is the percentage of cash deposits that member banks must keep on
hand). Member banks must follow this policy. Currently, member banks must keep a minimum
of ten percent of deposits on hand (Amadeo, 2019). This is to ensure that banks have some cash
on hand to give to consumers for withdrawals but also to help with the liquidity of cash on hand.
The federal reserve can increase or decrease the federal reserve requirement to help establish
economic policy of the current administration in office Knowing these core difference of the
banking industry, compared to other industries, is important for the reader to understand that
banks do not necessarily operate with the same mindset as a typical business selling a consistent
service or product. Banks have more regulations on the way they operate and are, in a broader
since, a facilitator for business to operate in the manner that they do regarding cash and liquidity.
Core Income Sources for Bank of America
Bank of America divides its business operations into five reporting categories. According
to Bank of America’s 10-k the five categories are the following: Consumer Banking, Global
Wealth & Investment Management, Global Banking, Global Markets, and All Others (Bank of
America 10-K). These five categories are broad and include several subcategories. However,
internally, this is how Bank of America divides in five revenue generating operating segments.
Additionally, Bank of America divides its income on its SEC reporting into two categories:
interest income and non-interest income. Through this, it reports all five internal revenue
generating operating segments under one company, Bank of America. From this reporting, Bank
of America than divides its operations into two segments interest income and non-interest
income within its SEC filling. This allows outside investors to see the entirety of Bank of
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America while allowing internal decision makers to see how affective each operating segment is
operating.
Bank of America’s core income sources are its interest income and non-interest income.
Historically, interest income has represented fifty to fifty-five present of Bank of America’s
income with non-interest income representing the other forty to forty-five present. Ruth King, an
author for Yahoo Finance writes, “Every bank earns income on loans and other earning assets
and pays interest on deposits and other interest-bearing liabilities. Deducting interest paid from
the total interest earned gives net interest income” (King, 2015). The majority of Bank of
America’s income is made from net interest’s income. This interest income is made off loans that
Bank of America approves and distributes. These loans range from mortgages, auto loans,
student loans, business loans, or any other type of loans that Bank of America is able to offer.
Regardless of the type of loan, consumers borrow money from Bank of America then pay back
more money, depending on current interest rates which are also controlled by the Federal
Reserve, which Bank of America keeps as profit. The other type of income that Bank of America
receives is non-interest income. Non-interest income is primarily made of services rendered or
fees. Examples of non-interests’ revenue would include account fees, investment advice,
withdrawal fees, card fees, mortgage building, etc. These two types of income are the sources
that generate billions of dollars for Bank of America.
Comprehensive Income Sources for Bank of America
For the Fiscal year 2017, Bank of America’s comprehensive income shifted. Previously,
comprehensive income, typically, had been negative and had been accounted for over the length
of several years. However, starting in 2017, Bank of America started to have a positive
comprehensive income. One factor that attributes to this change is the growth of the United
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States economy. Banks of America’s comprehensive income consist of five categories. The five
categories that are include are the net changes in the following: Debt and Marketable equity
securities, debt valuation adjustments, derivatives, Employee benefit plan, and foreign currency
translation. These changes provided Bank of America with an additional eighteen million dollars
in revenue during the year 2017.
Quality of Earnings for Bank of America
According to Deloitte, “Quality of earnings is difficult to define and, although there are
no definitive criteria by which to evaluate it, there are many factors that can be considered in
assessing the quality of earnings” (Brady, 2009). However, the author believes that the quality of
earnings by Bank of America has been increasing by actual higher revenue and not by
accounting manipulation. A couple of factors that account for this conclusion are the increase of
interest rates by the Federal Reserve and the growth of the United States economy. When the
Federal Reserve raise the minimum interest rate banks are allowed to charge, banks are then
required to charge higher interest rates for borrowing money. When banks are forced to charge
higher interest rates, they are also able to make more money. According to Trading Economics,
the Federal rate has increased nine times over the past three years (Trading Economics, 2019).
This has enabled banks to charge more for the same amount of money which, in turn, has
allowed banks to become more profitable. Another reason that has made the Federal Reserve
increase the interest rate, but has also increased the demand for borrowing money, is the growth
of the United States economy. This second factor that has increased the quality of earnings for
Bank of America is the growth of the United States economy (Mutikani, 2018). As the economy
is growing more consumers want to borrow more money. This therefore increases the number of
customers wanting to borrow money from banks. Which in turns allows Bank of America to
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receive more customers. Therefore, an increase of customers and an increase of prices have
enabled Bank of America to truly see an increase in net income. The increase in revenue does not
represent accounting manipulation but good strategic operations by management.
Sources of Operating and Non-Operating Income for Bank of America
Bank of America has no material or significant information on other sources of income
such as operating vs. non-operating. As previously explained, Bank of America has two primary
means of revenue that is interest and non-interest. The author could not find any sources of
information online or in the 10-k referring to any other source of revenue such ast non-operating
income or any other sources of operating income that has not already been explained.
Transitory and Permanent Earnings for Bank of America
For most Bank of America’s earnings, one can see that it looks like permanent earnings.
As every business relies on the key factors of the driving economy and the amount of disposable
income of consumers, Bank of America also depends on an expanding economy and consumers
wanting to borrow sums of money to purchase products. However, one key factor that has made
a significant impact in Bank of America financial reporting is the new tax law. The Tax Cuts and
Jobs Act, according to BDO (Binder Dijker Otte), an international accounting firm, lowered the
corporate rate by 40%. “The top corporate tax rate has been permanently reduced by 40 percent
—from 35 to a flat tax rate of 21 percent” (BDO, 2018). This is a significant reduction in
expense as 14% of Bank of America’s expense is has not been returned to them. Additionally,
this is an economic factor that could continue to boost the United States economy and enable
Bank of America to receive more customers. Not only by having more cash on hand, but also by
giving the government less money, companies automatically increase their potential profit of
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future business endeavors. Business that once wanted to implement new products or growth
plans might not have been able to because those plans were not profitable enough, but now these
companies might borrow that money from Bank of America to go start that new product line
because it, potentially, is 14% cheaper now with the new tax law.
Analyze Bank of America’s Sources of Cash Flows
Trends in Bank of America’s Cash Flows
Operating. Over the past several years, Bank of America has had a significant decrease
in cash flows provided by the operating section. This decrease is mostly due to a large loss on
short-term trading instruments or a loss on the sells of short-term assets. In 2015, Bank of
America received, approximately, twenty-eight million dollars in net operating cash flows.
Whereas, in 2017, it only received approximately ten million dollars in net operating cash flows.
This dramatic shift is accounted for the with the loss of assets and trading instruments.
Regardless of these two losses within the operating section, Bank of America has continued to
increase net income and become more profitable. Some of this loss in the operating section can
still be accounted for as recovering from the 2008 credit crises and the recovering economy
afterwards. During this time, the United States government past several acts and law regarding
banks which, potentially, halted the recovery of these institutions by increasing regulations.
Investing. Bank of America has had a consistent negative cash flow for several years
within the investing section. This is primarily because of a loss on investing activities such as
purchases of debt securities, purchases on held to maturity securities, other loans and leases, and
growth. To the investor this means that Bank of America has lost some of its hopeful returns in
its longer-range investing portfolio. This has a more significant impact on Bank of America than
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other business since Bank of America is a bank offering services for investing and not one’s
typical company selling a product or service. However, Bank of America is also expanding with
its increase of growth in the United States. According to an article on Reuters, “Bank of
America…plans to open more than 500 new branches across the United States over the next four
years, as the bank continues to invest in physical and digital enhancements.” This expansion is a
big plan for Bank of America. It should also help with Bank of America’s recovering strategy
from the credit crisis of 2008. According to CNN, Bank of America had closed around 2,000
branch locations from 2008 to 2018 (Egan, 2018). After the credit crisis of 2008, Bank of
America implemented a phase of reduction, reducing some of its expenses and “hedging the
bleeding” as much as possible. However, since making it through the crisis, Bank of America is
changing that position and trying to re-grow its national brick and mortar presence. As it will
now re-open around 500 of the 2,000 stores it had originally closed to reduce expenses. An
additional means of growth and investing that Bank of America has increased in recent years is
its investment into digital services. An exact number for Bank of America’s increase growth
expenditure in digital services is not disclosed, but according to Deloitte, banks are now
spending approximately ten percent of their growth expenses in digital banks while predicting it
will increase to at least fifteen percent by 2022 (Deloitte, 2018). At fifteen percent this is a big
investing section for Bank of America while will, hopefully, one day incorporate a big return for
Bank of America.
Financing. Bank of America has been able to have a consistent upward, positive trend
with financing cash flows. A large portion of this upward trend can be accounted for with the
increased amount deposit that Bank of America is receiving. However, even through the hard
times, Bank of America was able to pay its shareholders its dividends. This consistent payment
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of dividends sends a strong signal as consistent paying of dividends is crucial sign for investors
and people on Wall Street. An additional strategy that Bank of America has been pursing is the
re-purchasing of common stock. Initially, Bank of America issued more shares to help stabilize
itself during the credit crisis of 2008 but is now taking steps to withdraw from this strategy. In
Bank of America’s 2018 10-K, one will read, “We [Bank of America] were able to return nearly
$26 billion in capital to our shareholders, including more than $5 billion in dividends and more
than $20 billion in share repurchases. We continue to make progress to undo the dilution from
the shares we issued due to the economic crisis of 2008-2009 and subsequent regulatory
changes” (Bank of America, 2019). From this, one can see the repurchase initiative that Bank of
America is pursing to increase the value of their diluted stock.
Implications of Unrecorded Assets or Liabilities for Bank of America
Bank of America does not have a significant amount of unrecorded assets or liabilities.
Bank of America’s business model is very straightforward and that of your typical bank.
However, an unrecorded asset that Bank of America does have is their name. This is a common
unrecorded asset that most big brands do not get the opportunity to account for in their financial
statements. Additionally, Bank of America provides some insight of their unrecorded obligations
or liabilities in their yearly 10-K. Bank of America, like most business, has obligations on
payments of future debt, contractual agreements on typical business operations, and Employee
Benefit Plan. These unrecorded assets and liabilities are standard and do not present any red flags
to potential investors.
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Comparative and Ratio Analysis for Bank of America and Competitors
Liquidity
Liquidity Ratio’s for banks or financial service centers are nonexistent. According to the
databases of IBIS World, Reuters, ADVFN, and S&P Capital IQ NetAdvantage, these
websites/databases do not provide ratios for Current, Quick, or Liquidity ratios for Bank of
America or these types of financial centers. This is because of the business model of banks and
financial services would not provide accurate or beneficial information. Unlike other business,
consumers and business freely deposit cash into banks frequently. This re-use of this cash, which
is how banks operate, cause this anomaly for this industry.
Solvency/Financial Leverage
Solvency/Financial Leverage are referring to the organizations ability to pay back debt,
particularly long-term debt. Bank of America has had a consistent long-term debt to equity ratios
around 1.3. This is a good ratio, lower that of JPMorgan’s 2.35 and Wells Fargo’s 2.36.
Inherently, this can inform the investor that Bank of America is a less risky decision and in a
better position than the other competitors to pay back its debt. Additionally, the Debt Equity ratio
of Bank of America is slightly lower than its competitors which also informs investors that Bank
of America has less assets financed by debts and equity then its competitors. Within its industry,
Bank of America is in a good position regarding solvency and its ability to pay back debt.
Asset Efficiency
Regarding Asset Efficiency, Bank of America is in a standard position with its
competitors. The Debt to Total Assets ratio for Bank of America in 2017 was .24 with JPMorgan
at .22 and Wells Fargo having a .21. All three companies are within a few points of each other.
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Additionally, the Return on Total Assets ratio were all within a few points of each other.
Rounded to two decimals places the percentage for each company equaled .01%. Ratio such as
Fixed Asset Turnover and Total Asset Turnover are again not existent for banks due to their
business model and structure of the company.
Profitability
Profitability is one area within the ratio analysis that does not change for the banking
industry. Investors want to know how much money banks are making on their investments. One
of the primary profitability ratios is the Gross Profit Margin. This tells investors what amount of
money is truly being made. Bank of America has had a consistent Gross Profit Margin of .80.
When compared to its competitors Wells Fargo at .84 and JPM at .78, one can see that Bank of
America is also relatively close to its competitors in this category. Operating Profit Margin and
Net Profit Margin are all also very close to each other. Operating Profit Margin for Bank of
America is .69 while Wells Fargo is at .66 and JPMorgan is .59. Net Profit Margin for Bank of
America is .19, Wells Fargo and JPMorgan are both at a .25. From these ratios, potential
investors can see that Bank of America is competing with its competition.
Market Value
The one area that Bank of America is falling behind in is the Market Value ratio analysis.
As mentioned early, Bank of America issued a high level of stock during the credit crisis of
2008. Because of this, the ratio analysis for market value ratios seems dramatically less than that
of its competitors. Earnings per a share for Bank of America in 2017 was $1.52. For Wells Fargo
earnings per a share was $4.52, and JPMorgan it was $6.88. From this, one can conclude that the
Return on Stockholder’s Equity was also significantly lower, which it was lower. The Return on
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Stockholder’s Equity for Bank of America in 2017 was .06. Whereas, Wells Fargo was .11 and
JPMorgan at .10. However, as Bank of America has taken the initiative to buyback stocks this
pattern is being reversed. This is represented in the Price Earnings ratio. The Price Earnings ratio
for Bank of America in 2017 was 19.41. Whereas, Wells Fargo was 13.41 and JPMorgan was
15.54. This shows the increase consumer confidence in the stock. Basically, Bank of America has
a higher growth potential moving forward. This was a crucial area that Bank of America needs to
fix which it is in the process of doing. Within the next couple of years, Bank of America should
have these numbers in a competing position with its competitors, if not leading the industry with
them. Bank of America’s strategy dealt with its challenges of the 2008 credit crises trying to
survive that time period. Now their strategy is to build back up from stopping the “bleeding.”
Bank of America’s Financial Position and Organization Strategy in Relation to the Bible
Bank of America has a strong financial position and is currently in line with a biblical
worldview. Bank of America’s business model can be found in scripture. Luke 19:23 reads,
“Then why did you not put my money in the bank, and having come, I would have collected it
with interest?” The verse is referring to the parable of the rich man giving his servants “talents”
(money in biblical times). The last servant in this parable did not use the talents given to him by
his master to make his master any more money but instead hid the talents given to him by his
master in the earth. Doing this, he earned the rejection of his master. The master could have
stored his money in a bank, just like consumers due with Bank of America. This option would
have provided the master with at least a return of interest on his deposit. From this parable, one
can conclude that the business model of a bank does align with scripture.
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Conclusion of Bank of America’s Future
Bank of America has a lot of potential going forward. The repurchasing of their stock was
the one area that needed some improvement which is currently being worked on. Bank of
America is competing with its competitors, increasing its market share, and expanding in
physical locations and digitally. Their debt is lower than their competitors and their reputation is
strong. Bank of America should continue to provide a banking and financial services to
consumers for many years to come. It has built a legacy over the past 240 and will hopefully last,
at least, another 240 more. If Bank of America continues to strategize the way they are, continues
to push new boundaries, and continues to pursue new opportunities, Bank of America will
continue to be the bank that consumers from the United States can find from coast to coast and
around the world. Bank of America, truly, has the potential to be the bank for all Americans.
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