Insights on the Financial Industry

Dave Ellison: I think the industry has been improving for many years coming out of the '08 credit liquidity crunch that we had. Measures of assets and equity, return on equity, return on assets, liquidity, capital, credit metrics are all very good. So the industry is transforming, and each type of company has an opportunity to get better, and I think we have an environment where the regulatory structure is good, the rate structure is good, the command and control in both the regulatory and the federal reserve is very good, and so I think we're poised to do well for years to come.

Lessons from the Financial Crisis

Ryan Kelley: We think that the increased regulation since the financial crisis has been very good both for banks and for investors. Banks are constructing their balance sheets in a less risky manner. They're looking for more fee-based businesses, less interest rate risk, and we think that all of that leads to a more consistent earnings stream, which, therefore, is then easier to understand, and more repeatable, and better for investors to look at.

Benefits of a Rising Rate Environment

Ryan Kelley: Bank profitability increases in a rising rate environment when banks are able to re-price their loans faster than their deposits re-price. And so those are really the companies that we're focusing on in the portfolio, companies that have good strong core deposits, sticky deposits, a lot of non-interest bearing deposits, that are able to hold what they pay for deposits lower for longer. We think that over time this increases the value of really strong, good depository franchises. And also over time, we'll see increased M&A activity, as some of the larger banks look for those depositories and purchase them in years to come.

Global Payment Processors

Dave Ellison: We all know names like Visa and MasterCard. They've been growing and been public for many years. There's a lot of new entrants in the industry now - Square, PayPal are two of the ones that people mention. But basically, these companies have grown enough that they're a critical mass now in the industry. Obviously, the computerization of the industry has allowed it to grow faster, reach more people, people use their cell phones, so it's a growing trend. The goal here is to have names in the portfolio that are less sensitive to regulatory issues, interest rate issues, yield curve issues, credit issues that have obviously impacted the depositories for, as we all know, for the last 10 years.

Opportunities for Improved Earnings

Ryan Kelley: Banks, especially many of the larger ones, have been going through a process of rationalizing their businesses, looking at each business line, rationalizing the amount of branches, the amount of employees, which parts of their business make money and which don't. And we think that that's really the biggest opportunity here for many of these larger companies.  As they get rid of nonprofitable businesses or bring expenses in line, we'll see improved profitability for the industry.