Value Investing

ValueX Vail 2015: The Search For The Next Wells Fargo – 5280 Capital

5280 Capital’s presentation on the search for the next Wells Fargo from the ValueX Vail, June 2015.

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Wells Fargo -- Almost A 50 Bagger

Wells Fargo

Recent Results Are Rather Ordinary And Track S&P 500

Wells Fargo

Wells Fargo is Now a Huge Bank

  • Largest US. bank by market cap - $297 billion
  • Ranks 3rd in US. in total assets - $1.571 trillion
  • Ranks 2nd in US. in total deposits - $1.244 trillion

Much of Wells Fargo’s Stock Gains Came in 1990-2004 Period

Wells Fargo

1990 - 2004 15 Years of Strong Performance

  • Total stockholder return - 21% annually
  • Average ROE of 18%
  • Average earnings growth of 11%
  • Assets grew from $24 billion to $410
    • Significant organic growth
    • Geographic expansion
    • Numerous acquisitions including Norwest acquisition of Wells Fargo
  • Market cap grew from $2.1 billion to $105 billion

The Search for the Next Wells Fargo

  • Identify a bank similar to Norwest in 1990
  • Large enough to have some scale and professional management
  • Small enough to be able to compound value at high rates for many years

The Search

  • Sandler O’Neill Sm-AII Stars List - 35 banks
  • Raymond James Community Bankers Cup -31 banks
  • Search for banks with market capitalizations between $200 million and $5 billion and an ROA> 1%
  • Reviewed over 70 banks
  • Two part process
    • Narrow the field to the best of the best
    • Study what it takes to sustain greatness over time

The Semi-Finalists

  • Access National (ANCX)
  • Bank of the Ozarks (OZRK)
  • Bryn Mawr Bank Corporation (BMTC)
  • CVB Financial (CVBF)
  • Eagle Bancorp (EGBN)
  • First Financial Bankshares (FFIN)
  • Glacier Bancorp (GBCI)
  • Independent Bank Group (IBTX)
  • Lakeland Financial (LKFN)
  • Pinnacle Financial (PNFP)
  • ServisFirst Bancshares (SFBS)
  • Washington Trust Bancorp (WASH)
  • Western Alliance Bancorporation (WAL)
  • West Bancorporation (WTBA)

Characteristics of a Great Small Bank

  • High ROE
  • Ability to grow
  • Great management

Sustainability of a High ROE

  • Lending is mostly a commodity business in a commodity environment, the low cost operator is the long term winner
  • Keys to being a low cost operator
    • Cheap funding cost
    • Operating efficiency
  • Ability to make good loans
    • Empire builders can temporarily inflate profitability as high growth initially looks profitable
    • Skill only becomes obvious in a downturn
    • Great Recession was the banking industry’s crucible

The Growth of a Great Small Bank

  • Location is important - can’t grow loans if there is no demand
  • Both coast, the SE and the SW are growing quicker than Midwest and Rust Belt
  • Need geographic expansion AND market share growth

See full presentation below.