Bank of America's seven-year financial performance and strategic acquisitions

Bank of America Financial Analysis

The intent of this financial analysis of Bank of America is to review the company's performance over the last seven years, including an overview of balance sheets, income statements, financial ratio analysis, discussion of current activities and a review of future expectations.

Current Activities

Today Bank of America has successfully completed the questions of two previous competitors, Fleet in 2004 and MBNA in 2006. In addition, Bank of America's core financial businesses including small business banking and lending, mortgage, premier banking, and expansion overseas in cards and investment banking are now just 20% of total revenues.

For Bank of America to continue organically growing it needs to first make use of its unique franchise, which has been intelligently created through the series of acquisitions defined, in addition to growing its dominance in key markets including California, Florida and Texas, in addition to key cities where through acquisitions the company now has dominant deposit market shares.

Currently the company has yet to make use of its strength in the credit card business which was a major motivation for completing the MBNA acquisition in 2006. Second, Bank of America has completely re-engineered and re-done its many customer management and data systems so that a single view of the customer can now be completed, in essence creating a 360 degree view of each client. This has been a major competitive advantage relative to other regional and national banks. Third, bank of America has also gained significant competitive advantage over Citigroup, JP Morgan and Wachovia, all of which still have multiple, and often disconnected systems that fail to deliver a 360 degree view of their customers, and lack the integration necessary to deliver a complete view of their operations as well. As a result, Bank of America is accomplishing significant growth in key markets where these competitors, due to a lack of integration, are failing to reach critical mass. Fourth, Bank of America is one of the more effective national banks at managing multiple locations on behalf of its commercial accounts. Due to the heavy level of spending on integration across systems and the successful acquisition of Fleet, Bank of America has emerged as one of the strongest banks with a national scope in the U.S.

Taken together, these strengths contribute to the profile of Bank of America's Global Consumer and Small Business Banking Group, which includes retail banking, mortgage and home equity, and cards services comprising 55% of earnings in 2007 according to the latest financial information from SEC Filings (2007). The second largest group in Bank of America is the Global Corporate and Investment Banking Group, which is comprised of Business Lending, Capital Market and Advisory Services, and Treasury Services. This group contributes 33% of total earnings to Bank of America.

The last group, Global Wealth and Investment Management, contributes 12% of earnings and is comprised of a private ban, Columbia Management, and Premier Banking and Investments. Of all these groups, the Retail banking sector of the Global Consumer and Small Business Banking Business Group is the highest performing, as is Card Services, which contributed 28% of total earnings in the first half of 2007. Bank of America has been successful in getting Card Services competitive in the U.K., where the company has a #2 market position today. The full integration of the MBA merger will continue to drive up earnings in this sector throughout the next three to five years.

Table 1: Bank of America Business Line Analysis

Business Group

Segment of earnings (07)

Strategic Positioning

Peer Analysis

Global Consumer and Small Business Banking

Retail Banking in retail branches, deposits, online banking (21 mil. subscribers); attractive footprint (above avg. growth); #1 in outstanding in small business

Centralized bank model and scale have made

BofA one of the most efficient retail banks;

small business franchise is underleveraged relative to distribution and client base;

Incremental loss of deposit share nationally

Mortgage & Home Equity in originations and servicing; distribution platform reliant on retail branches (LoanSolutions)

Mortgage originations -2% in '06 vs. -17% for the industry; Underleveraged relative to distribution capabilities and client base

Cards Services card in U.S., strong positioning in the U.K.; #1 debit card issuer in the U.S.

Above avg. revenue and balance growth in addition to accelerated merger-related cost savings

Global Corporate and Investment banking

Business Lending

2 in loan syndications and leveraged lending and #1 in middle market lending

Leverages balance sheet and distribution capabilities

Capital Markets & Advisory Services

Several years of expansion and contraction; lacks scale in commodities, prime brokerage, overseas, etc.; building out European platform tier debt UW in the U.S. And global player in interest rate derivatives; 2nd-tier in advisory and equity UW

Treasury Services

Leverages middle-market and corporate relationships to provide cash management, trade finance, etc.

Competitive due to distribution, but rarely mentioned as a top competitor by peers

Global Wealth and Investment Management

Private Bank

Largest private bank upon closing of U.S. Trust deal (est. 1H07)

Legacy BofA private bank underperformed expectations; integration and culture issues might push back improvement in near-term

Columbia Management

25 global asset manager; uncertain if BofA can take advantage of wealth trends outside of the U.S.

Good growth in '06 and modest flows but below peer median overall

Premier Banking and Investments

Targeting mass affluent banking customers; using scale and pricing power (i.e., free trades)

Underleveraged relative to distribution capabilities and client base

Source: (SEC 2007)

Ratio and Variance Analysis

The following series of analyses are based on the results of ratio analysis completed from seven years of Bank of America financial performance. Table 2 presents seven years of financial ratio analysis, Table 3, a summary of income statements, and Table 4, a comparison of balance sheets. Key findings from the analysis are provided here:

Income Statement Variance Analysis

Bank of America achieved a 37.4% increase in revenue between 12/31/05 and 12/31/06, driven by acquisitions and organic growth in Retail Banking and Card Services. Cost of Revenue increased 53% in the same fiscal period.

Net Income increased 28% from $16.4B to $21.2B also driven by the acquisitions completed during the period. As a result Earnings per Share on a Net Income Diluted basis rose 13.61% from $4.04 to $4.59.

In the period between 6/30/06 and 3/31/07, Revenues increased 5.4%, or $1.6B based on revenues of $28.8B rising to $30.4B. Cost of Revenues in the same fiscal period rose $1.8B from $11.6B to $13.2B.

Net Income during the period of 6/30/06 to 3/31/07 dropped $220M from $5.4B to $5.2B, a 4% reduction in Net Income during the period.

Balance Sheet Variance Analysis

The most significant variance sin the 12/31/05 to 12/31/06 timeframe reflect the impact of acquisitions on Bank of America's assets. In this fiscal period Fixed Assets increased 18.87% from $7.7B to $9.2B. Total Assets increased 13% from $1.291B to $1.459B.

Total Long-Term Debt increased 44.7% in the same financial period, rising from $100M to $146M, a direct result of the cost of acquisitions.

In the financial period between 6/30/06 and 3/31/07, Cash and Cash equivalents rose 13.6% from $286M to $324M.

Long-term debt increased in the same fiscal period from $129M to $152M, an 18.21% increase overall.

Ratio Variance Analysis

In the period from 12/31/05 to 12/31/06, the largest variance occurred on Return on Assets (ROA), which grew 14.17% in the f8iscal period from 1.27 to 1.45. The Quick Ratio dropped 3% in the same fiscal period, and Net Profit margin % also decreased, by 6.35%. Pre-Tax Margins also decreased 4.69% during this period. For a complete trending of these ratios please see Table 2.

In the period from 6/30/06 to 3/31/07, Long-Term Debt-to-Equity increased 11.88% and Total Debt to Equity increased 14.85%. Pre-Tax Gross Margin dropped by 12.68% in the same fiscal period, the largest decline of any calculated ratio in the calculated set.

Summary

For Bank of America, the challenges are first to keep the strong growth Retail banking and Card Services moving forward, including working to ensure the integration of the Fleet acquisition is completed and contributes to growth in market share in key global locations including the U.K. The effects of the company's growth-by-acquisitions strategy can be seen throughout the financial analyses provided here, including the impact on revenues and debt. The Global Wealth and Investment Management Business Group, by far the most under-performing of all Bank of America groups, is most likely going to see selective and highly targeted acquisitions in nations that bank of America sees potential to grow this Business Groups' performance. Global Corporate and Investment Banking will seek to compete for effectively with its Business Lending Segment, and look to bolster Capital Markets and Advisory Services, which is considered 2nd tier by many investment analysts. Clearly Bank of America will be challenged to grow their earnings beyond Retail Banking and Card Services in the near-term.

Table 2: Bank of America Ratio Analysis (FY 2006-2000)

Bank of America Corp. Financial Ratio Analysis

Profitability Ratios 12/31/2006 12/31/2005 12/31/2004 12/31/2003 12/31/2002 12/31/2001 12/31/2000 Return on Equity (%) 15.62-16.22-14.19-22.53-18.38-14-15.78 Return on Assets (%) 1.45 1.27 1.27 1.47 1.4-1.09 1.17 Return on Investment 13.35-10.48-10.46-13.29-15.94-20.44-21.81 EBITDA of Revenue (%) 29.89-30.86-34.92-34.62-30.4-22.31-23.49 Operating Margin (%) 27.43-28.78-32.42-32.37-28.02-19.05-20.4 Pre-Tax Margin 27.43-28.78-32.42-32.37-28.02-19.05-20.4 Net Profit Margin (%) 18.13-19.36-21.61-22.06-19.95-12.79-13.01 Effective Tax Rate (%) 33.9-32.74-33.35-31.85-28.8-32.87-36.23 Liquidity Indicators Quick Ratio 0.32 0.33 0.27 0.32 0.28 0.24 0.23 Current Ratio 0.34 0.35 0.31 0.39 0.35 0.29 0.26 Working Capital/Total Assets -0.48 -0.5 -0.52 -0.47 -0.49 -0.52 -0.55 Debt Management Current Liabilities/Equity 7.9-9.91 8.38-11.65 9.94 9.45-10.04 Total Debt to Equity 1.1-1-0.99 1.57 1.22 1.29 1.42 Long-Term Debt to Assets 0.1-0.08 0.09 0.1-0.09 0.1-0.11 Asset Management 12/31/2000 Revenues/Total Assets 0.08 0.07 0.06 0.07 0.07 0.09 0.09 Revenues/Working Capital -0.17 -0.13 -0.11 -0.14 -0.14 -0.16 -0.16

Table 3: Income Statement and Balance Sheet Series Comparisons

Bank of America Corp. Income Statements (2000-2006)

12/31/2006 12/31/2005 12/31/2004 12/31/2003 12/31/2002 12/31/2001 12/31/2000 Interest & fees on loans & leases $48,274 $34,843 $28,216 $21,668 $22,030 $27,166 $31,872 Interest & dividends on securities $11,655 $10,937 $7,265 $3,160 $4,035 $3,706 $5,045 Fed funds sold & secs purch und resell agree $7,823 $5,012 $2,043 $1,373 $870 $1,414 $2,354 Trading account assets $7,232 $5,743 $4,016 $3,935 $3,811 $3,623 $2,725 Other interest income $3,601 $2,091 $1,687 $1,507 $1,415 $2,384 $1,262 Total interest income $78,585 $58,626 $43,227 $31,643 $32,161 $38,293 $43,258 Deposits $14,480 $9,492 $6,275 $4,908 $5,434 $8,886 $11,010 Short-term borrowings $19,840 $11,615 $4,434 $1,951 $2,089 $4,167 $7,957 Trading account liabilities $2,640 $2,364 $1,317 $1,286 $1,260 $1,155 $892 Long-term debt $7,034 $4,418 $2,404 $2,034 $2,455 $3,795 $4,957 Total interest expense $43,994 $27,889 $14,430 $10,179 $11,238 $18,003 $24,816 Net interest income $34,591 $30,737 $28,797 $21,464 $20,923 $20,290 $18,442 Provision for credit losses -- - $2,535 Net interest inc after prov for credit loss -- - $15,907 Gain on sales of securities -- - $25 Consumer service charges -- $3,230 $2,986 $2,866 $2,654 Corporate service charges -- $2,388 $2,290 $2,078 $1,946 Total service charges -- $5,618 $5,276 $4,944 $4,600 Service charges - $7,704 $6,989 -- Consumer investment & brokerage service -- $1,559 $1,544 $1,546 $1,466 Corporate investment & brokerage service -- $792 $693 $566 $463 Total investment & brokerage service -- $2,351 $2,237 $2,112 $1,929 Card income $14,293 $5,753 $4,588 $3,052 $2,620 $2,421 $2,229 Service charges $8,224 -- - Investment & brokerage services $4,456 $4,184 $3,627 -- Investment banking income $2,317 $1,856 $1,886 $1,736 $1,545 $1,579 $1,512 Equity investment gains (losses) $3,189 $2,040 $861 $215 ($280) $291 $1,054 Trading accounts profits $3,166 $1,812 $869 $409 $778 $1,842 $1,830 Mortgage banking income $541 $805 $414 $1,922 $751 $593 $560 Other income $2,246 $1,200 $863 $1,119 $644 $566 $775 Total noninterest income $38,432 $25,354 $20,097 $16,422 $13,571 $14,348 $14,489 Total revenues $73,023 $56,091 $48,894 $37,886 $34,494 $34,638 - Provision for credit losses $5,010 $4,014 $2,769 $2,839 $3,697 $4,287 - Gains on sales of securities ($443) $1,084 $2,123 $941 $630 $475 - Personnel expense $18,211 $15,054 $13,473 $10,446 $9,682 $9,829 $9,400 Occupancy expense $2,826 $2,588 $2,379 $2,006 $1,780 $1,774 $1,682 Equipment expense $1,329 $1,199 $1,214 $1,052 $1,124 $1,115 $1,173 Marketing expense $2,336 $1,255 $1,349 $985 $753 $682 $621 Professional fees $1,078 $930 $836 $844 $525 $564 $452 Amortization of intangibles $1,755 $809 $664 $217 $218 $878 $864 Data processing $1,732 $1,487 $1,325 $1,104 $1,017 $776 $667 Telecommunications $945 $827 $730 $571 $481 $484 $527 Other general operating $4,580 $4,120 $4,439 $2,902 $2,856 $2,687 $2,114 General & administrative & other expenses -- $615 $583 Business exit costs -- $1,305 - Merger & restructuring charges $805 $412 $618 -- $550 Total noninterest expense $35,597 $28,681 $27,027 $20,127 $18,436 $20,709 $18,083 Income before income taxes $31,973 $24,480 $21,221 $15,861 $12,991 $10,117 $11,788 Current federal income taxes $7,398 $5,229 $6,392 $4,642 -- $3,093 Current state income taxes $796 $676 $683 $412 -- $202 Current foreign income taxes $796 $415 $405 $260 -- $328 Total current income taxes $8,990 $6,320 $7,480 $5,314 -- $3,623 Deferred federal income taxes $1,807 $1,577 ($407) ($222) -- $552 Deferred state income taxes $45 $85 ($11) ($45) -- $96 Deferred foreign income taxes ($2) $33 $16 $4 -- Total deferred income taxes $1,850 $1,695 ($402) ($263) -- $648 Income tax expense (benefit) $10,840 $8,015 $7,078 $5,051 $3,742 $3,325 $4,271 Net income $21,133 $16,465 $14,143 $10,810 $9,249 $6,792 $7,517

Table 4: Bank of America Corp. Balance Sheet Comparison (2000-2006)

12/31/2006 12/31/2005 12/31/2004 12/31/2003 12/31/2002 12/31/2001 12/31/2000 Cash & cash equivalents $36,429 $36,999 $28,936 $27,084 $24,973 $26,837 $27,513 Time deposits placed & oth short-term invests $13,952 $12,800 $12,361 $8,051 $6,813 $5,932 $5,448 Fed funds sold & sec purch under resale agreement $135,478 $149,785 $91,360 $76,492 $44,878 $28,108 $28,055 Trading account assets $153,052 $131,707 $93,587 $68,547 $63,996 $47,344 $43,041 Derivative assets $23,439 $23,712 $30,235 $36,507 $34,310 $22,147 $15,534 Securities available for sale $192,806 $221,556 $194,743 $67,993 $68,122 $84,450 $64,651 Securities held-to-maturity, at cost $40 $47 $330 $247 $1,026 $1,049 $1,187 Total securities $192,846 $221,603 $195,073 $68,240 $69,148 $85,499 $65,838 Commercial - domestic $161,982 $140,533 $122,095 $96,644 $105,053 $118,205 $146,040 Commercial real estate - domestic -- $19,043 $19,910 $22,271 $26,154 Commercial real estate - foreign -- $324 $295 $383 $282 Commercial real estate $36,258 $35,766 $32,319 -- Commercial lease financing $21,864 $20,705 $21,115 -- Commercial - foreign $20,681 $21,330 $18,401 $15,293 $19,912 $23,039 $31,066 Total commercial $240,785 $218,334 $193,930 $131,304 $145,170 $163,898 $203,542 Residential mortgage $241,181 $182,596 $178,103 $140,513 $108,197 $78,203 $84,394 Credit card - domestic $61,195 $58,548 $51,726 $34,814 $24,729 $19,884 $14,094 Credit card - foreign $10,999 -- - Home equity lines $74,888 $62,098 $50,126 $23,859 $23,236 $22,107 $21,598 Direct/indirect consumer $68,224 $45,490 $40,513 $33,415 $31,068 $37,638 $40,457 Consumer finance -- $5,589 $8,384 $5,331 $25,800 Foreign consumer -- $1,969 $1,971 $2,092 $2,308 Other consumer $9,218 $6,725 $7,439 -- Total consumer $465,705 $355,457 $327,907 $240,159 $197,585 $165,255 $188,651 Loans & leases $706,490 $573,791 $521,837 $371,463 $342,755 $329,153 $392,193 Allowance for credit losses $9,016 $8,045 $8,626 $6,163 $6,851 $6,875 $6,838 Loans & leases, net of allow for credit loss $697,474 $565,746 $513,211 $365,300 $335,904 $322,278 $385,355 Premises & equipment, net $9,255 $7,786 $7,517 $6,036 $6,717 $6,414 $6,433 Interest receivable -- $2,800 $4,432 Mortgage banking assets -- $2,482 $2,762 $2,110 $3,886 $3,762 Mortgage servicing rights $3,045 $2,806 -- Goodwill $65,662 $45,354 $45,262 $11,455 $11,389 $10,854 $11,643 Core deposit intangibles & other intangibles - $3,194 $3,887 $908 $1,095 $1,294 $1,499 Intangible assets $9,422 -- - Other assets $119,683 $90,311 $86,546 $65,063 $59,125 $58,371 $43,638 Total assets $1,459,737 $1,291,803 $1,110,457 $736,445 $660,458 $621,764 $642,191 Noninterest-bearing deposits in domestic off $180,231 $179,571 $163,833 $118,495 $122,686 $112,064 $98,722 Interest-bearing deposits in domestic offices $418,100 $384,155 $396,645 $262,032 $232,320 $220,703 $211,978 Non-interest bearing deposits in foreign off $4,577 $7,165 $6,066 $3,035 $1,673 $1,870 $1,923 Interest bearing deposits in foreign offices $90,589 $63,779 $52,026 $30,551 $29,779 $38,858 $51,621 Total deposits $693,497 $634,670 $618,570 $414,113 $386,458 $373,495 $364,244 Fed funds purch & sec sold und agree to repur $217,527 $240,655 $119,741 $78,046 $65,079 $47,727 $49,411 Trading account liabilities $67,670 $50,890 $36,654 $26,844 $25,574 $19,452 $20,947 Derivative liabilities $16,339 $15,000 $17,928 $24,526 $23,566 $14,868 $22,402 Commercial paper -- $1,558 $6,955 Other short-term borrowings -- $20,659 $35,243 Commercial paper & other ST borrowings $141,300 $116,269 $78,598 $42,478 $25,234 -- Accrued expenses & other liabilities $42,132 $31,938 $41,243 $27,115 $17,052 $27,459 $22,859 Senior debt -- - $49,824 Senior notes $93,951 $61,488 $57,239 $40,985 -- Subordinated notes $29,618 $22,485 $24,743 $19,349 -- $17,690 Notes pay to fin the purch of leased vehicles -- - $2 Obligations under capital leases -- - $31 Junior subord notes related to trust pfd secs $16,641 $13,032 $10,350 $6,244 -- Advances from the Federal Home Loan Bank $5,756 $3,802 - $8,739 -- Other debt $34 $41 $5,746 $26 -- Long-term debt $146,000 $100,848 $98,078 $75,343 $61,145 $62,496 $67,547 Trust preferred securities -- $6,031 $5,530 $4,955 Total liabilities $1,324,465 $1,190,270 $1,010,812 $688,465 $610,139 $573,244 $594,563 Preferred stock $2,851 $271 $271 $54 $58 $65 $72 Common stock -- $14 $496 $5,076 $8,613 Common stock & additional paid-in capital $61,574 $41,693 $44,236 -- Retained earnings $79,024 $67,552 $58,006 $50,213 $48,517 $42,980 $39,815 Accumulated other comprehensive income (loss) ($7,711) ($7,556) ($2,587) ($2,148) $1,232 $437 ($746) Other shareholders' equity ($466) ($427) ($281) ($153) $16 ($38) ($126) Total shareholders' equity $135,272 $101,533 $99,645 $47,980 $50,319 $48,520 $47,628