Credit: Data source: Bank of America. Chart by author.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:
3. Leverage
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.
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The article 3 Simple Ways to Visualize Bank of America originally appeared on Fool.com.
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 .
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
