Before the third quarter of 2009, Bank of America (NYSE:BAC) didn't report its tangible book value per share in its quarterly regulatory filings, which are meant to apprise investors of the bank's financial condition and performance. It disclosed only its book value per share.
Since then, although the $2.2 trillion bank continues to disclose its book value per share in its earnings releases and regulatory filings, its executives have shifted the focus of their conversations and presentations to tangible book value per share.
What caused Bank of America (and other banks, for that matter) to move the goal posts? If growing book value was the mark before the financial crisis, why has its importance been eclipsed by a derivation of the same measure?
It makes B of A look better
The short answer is that it allowed Bank of America's executives to claim that the bank was creating value for shareholders when in fact they were overseeing its destruction -- or, more accurately, the new executive team under current chairman and CEO Brian Moynihan were overseeing the realization of value destruction caused by their predecessors.
You can see this in the chart below. Since the beginning of 2008 through the third quarter of 2016, Bank of America's book value per share has dropped by 33%. But its tangible book value per share has increased by 44% over this same stretch.
I trust this makes it clear why Bank of America now prefers to use tangible book value per share as a benchmark and not book value per share.
Why have these diverged?
You may be wondering what caused two related metrics to diverge so much in the wake of the financial crisis. The answer lies in the evolution of Bank of America's acquisition strategy.
Prior to the crisis, Bank of America was focused on growth for the sake of growth. If its executives wanted to acquire or merge with another bank, they would pay just about anything to get it done.
- In 2003, Bank of America paid a $30 billion premium over book value to merge with FleetBoston Financial.
- A year later, it paid a $20 billion premium to acquire MBNA, one of the nation's leading credit card issuers at the time.
- And despite the fact that Merrill Lynch was teetering on the brink of failure in 2008, Bank of America paid a $15 billion premium to bring on its thundering herd of financial advisors.
Because these premiums are accounted for as goodwill, an intangible asset that boosts book value but doesn't impact tangible book value, it was in Bank of America's best interest to direct investors' attention to the former as opposed to the latter.
Moving the goal posts
But this changed when the financial crisis struck. The downturn led Bank of America to write off billions of dollars' worth of goodwill as it became clear that the premiums paid for some of these acquisitions were unjustifiably high. This reduced the bank's book value, but again didn't impact its tangible book value.
To survive the crisis, moreover, Bank of America had to issue copious amounts of new shares, eventually more than doubling its outstanding share count. And it had to do so when its shares were trading for substantial discounts to book value.
One way to disguise the dilution to the value of its existing shares was thus to focus on tangible book value per share, which was half that of its book value per share because it excluded the roughly 50% worth of shareholders' equity that was then accounted for as goodwill on Bank of America's balance sheet.
When Bank of America issued 1.25 million shares of common stock at an average price of $10.77 a share in the second quarter of 2009, for example, that equated to a 53% discount to its book value but an only 8% discount to its tangible book value.
In fact, despite the share offering, Bank of America's tangible book value per share actually increased by 7% that quarter. Though the same couldn't be said for its book value per share, which dropped by 13%.
The point here is that executives at companies can and will change benchmarks when it suits them to do so. This isn't to say that what they did is good or bad, but rather that this is something that investors in any company should always keep in the back of their minds.