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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 Farg...