I've followed Bank of America (NYSE:BAC) closely for four years now, but am still often perplexed at its complexity. To simplify the $2.2 trillion bank in my own mind, I think about ways to visualize it with charts. The three below are my favorites.
1. Business lines
A traditional bank is a straightforward business. It borrows money from depositors and other institutional investors and then invests the proceeds into higher-yielding assets, such as loans and government securities.
But while this model accurately explained how banks have made money for most of their history in the United States, a wave of deregulation over the past four decades opened the door for them to engage in a host of other activities as well, including investment banking, trading, and asset management.
Bank of America is one of the firms that heeded this call. As you can see in the chart below, which breaks its various business lines down by the amount of revenue each activity earned in the first six months of 2015, the nation's second-biggest bank by assets offers a highly diversified line of financial products and services:
2. A financial conglomerate
Bank of America has long been unabashed about its strategy to grow through acquisitions. In 1957, it was a $234 million bank known as American Commercial Bank that was based in Charlotte, North Carolina. Its assets have since grown exponentially and, of course, it changed its name.
How did it get from point A to point B? It did so by buying or merging with other banks. The net result is that Bank of America isn't actually Bank of America, the eponymous bank founded by A.P. Giannini in 1904. It's instead a collection of regional lenders that were brought together by NationsBank, the corporate successor to American Commercial Bank.
As we sit here today, then, here are the four main legacy companies that came together to form what we now think of as Bank of America:
Finally, if you want to understand Bank of America, or any bank for that matter, you need to get your head around the massive amount of leverage it uses to make money.
While most people think about Bank of America as a $2.2 trillion behemoth, it's probably more accurate to describe it as a $252 billion bank. As you can see in the chart below, the latter figure relates to Bank of America's equity while the former represents its assets:
This matters because leverage increases a company's frailty. In the lead-up to the financial crisis, Lehman Brothers was leveraged by a factor of 30 to 1. As such, a mere 3% decline in the value of its assets would totally wipe out its shareholders' equity and thereby render it insolvent -- which, of course, is exactly what happened.
Bank of America isn't as leveraged as Lehman was, and it also has a much more stable source of funds (i.e., deposits), both of which increase its resilience in the face of economic downturns. But the fact remains that leverage, regardless of how you look at the situation, makes banks inherently riskier than the vast majority of other types of businesses. This isn't good or bad; it's just something to keep in mind.
John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.