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Ignore the crowd.
Soundinteresting?
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Wecertainlythinkso, andwearenotalone.
Bank of America is a strong, wellled company...I am impressed with the profitgenerating abilities of this franchise, and that they are acting aggressively to put their challenges behind them.
WarrenE.Buffett ChairmanandCEO,BerkshireHathaway August25,2011
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InvestmentThesisforBankofAmerica(BAC)
ReasonableExpectations
1% Returnon
Assets
10% Returnon
OwnersEquity
20% ImpliedAnnual
ReturnonInvestment
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BankofAmerica:A200YearHistory
ExtensiveReach,ExtraordinaryBreadth
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*BankofAmericawascreatedthroughnumerousmergersandacquisitions overthelasttwocenturies,someofwhicharedepictedabove.
BankofAmericasGlobalFranchise
5,702Branches,17,817ATMs,and58millionconsumerandsmallbusinessrelationships 17,300FinancialAdvisorsserveclientsinover100countries
$2,500,000
Dollars(inmillions)
$2,000,000
$1,500,000
$1,000,000
$500,000
$0
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
TotalAssets
*BankofAmericaconductsglobaloperationsintheblueshadedgeographicareasdenotedabove.
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InvestinginourCircleofCompetence
Experiencedwithfinancialcompanies Favorableearningspower
$60
Initiatedpurchaseafter thefinancialcrisis.
Fixableproblems Availableatattractiveprices
$50
DollarsPerShare
$40
$30
$20
$10
2004
2005
2006 Cash
2007
2008
2009
2010
2011
MarketPrice
Revenue
Ignore the crowd.
U.S.HousingMarketisStabilizing
NewSingleFamilyHomeSalesTrendingUpward
Source:NationalAssociationofHomeBuilders
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U.S.JobMarketisStrengthening
InitialJoblessClaimsTrendingLower
700
InitialJoblessClaims(inThousands)
650
600
550
500
450
400
350
300 January February March April May 2009 June 2010 July 2011 August September October November December
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FinancialSectorFundamentalsAreImproving
Youvegottoadmititsgettingbetter...
FDIC3Q2011QUARTERLY BANKING PROFILE:INSURED INSTITUTION PERFORMANCE
Netincomeroseto$35.3billionasprovisionexpensesfellfurther Loanlossprovisionsdeclinedforaneighthconsecutivequarter Reportedrevenuesincludeaccountinggainsatlargebanks Loanlossespostedfifthquarterlydeclineinarow Noncurrentloanlevelsfellforasixthconsecutivequarter Loanlossreservesdeclinedforsixthquarterinarow Internalcapitalgrowthimproved Commerciallendingactivityrose Flowoflargedenominationdepositsintolargebanksincreased
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BACFundamentalsAreImproving
alittlebetterallthetime.
$600,000 $500,000 $400,000 $300,000 $12,000 $10,000 $8,000 $6,000
FAIRXHoldingPeriod
$200,000 $100,000 $0 $4,000
LongTermDebtDecline 27%declinesinceQ12010
$2,000 $0
ChargeOffs 0.18 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0
Capital SufficientTier1Capital
Tier1commonEquityRatio Deposits
*Seelastpageforsupplementaryinformation.
Tier1RiskBasedCapitalRatio
Dollars(inmillions)
TotalRiskBasedCapitalRatiocapitalratio*
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BACConsumerSpending ShowingSignsofImprovement
$41,000
BACConsumer Spending($MM)*
$39,000
$37,000
$35,000
$33,000
$31,000
$29,000
$27,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2009
2010
2011
*Source:BankofAmerica
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BACisPrudentlyAccumulatingCapital WellAboveRegulatoryMinimums
TIER 1COMMON EQUITY ($B)
$200 16% 14% $150 $200
12% 10%
6.64%
12% 10%
$100
8% 6% 4% 2%
$100
8%
2.93%
$50
$136.4
6% 4%
$50
$63.3
$50.7
$0 4Q08
Tangible Common Equity
2% 0% 4Q11
Tangible Common Equity Ratio
$0 4Q08
Tier 1 Common Equity
0% 4Q11
Tier 1 Common Equity Ratio
Ourcapitallevelsareamongthehighest theyveeverbeeninthisinstitutionshistory.
BrianMoynihan,PresidentandChiefExecutiveOfficer,BAC,August10,2011
*
RepresentsanonGAAPfinancialmeasure.
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CounttheCash
BACShortTermLiquidityhasdramaticallyimprovedsincethefinancialcrisis.
4Q2008
$250,000 $200,000 $150,000 BACShortTermLiquidity(inmillions) $100,000 $50,000 $0 $50,000 $100,000 $150,000 $200,000 $250,000 Cash&TimeDeposits NetFederalFunds&Repos NetTradingAssets CommercialPaper&STBorrowings NetDerivativeAssets ExcessCash
1Q2009
4Q2011
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TrustButVerify
OurResearchhasbeenEnhancedbyUnprecedentedRegulatoryDisclosure
Youalsohavetorememberthatinourindustrywerenotalone, sowehaveregulatorsandothersthatlookoverourshoulders.
BrianMoynihan,PresidentandChiefExecutiveOfficer,BAC,August10,2011
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ComparedtoitsPeers, BACisExceptionallyCheap
2.0
Historical15yearPrice/BookAverageforKBWBankIndex=1.83
1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 WellsFargo
(MarketCap:$150+Billion)
BACPrice/Book =.29
J.P.Morgan
(MarketCap:$140+Billion)
Citigroup
(MarketCap:$80+Billion)
BankofAmerica
(MarketCap:$70+Billion)
5YearAveragePrice/Book
CurrentPrice/Book
MarketCapitalizationsasofJanuary30,2012.
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MarginofSafety:$7BuysYou$20+
Investingisallaboutwhatyougiveversuswhatyouget.*
GIVE =$7
FutureCash Flows
MarketCap:$70bn
In return for purchasing stock (above) at historic lows, an investor in BAC receives value (right) that far outweighs the cost. This provides downside protection as well as upside opportunity when the market returns to a weighing machine, BACs market cap will increase.
OwnersCapital:$200bn Reserves:$50bn
GET =$20+
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*BruceR.Berkowitz,MorningstarConference,June9,2011 MarketPricesasofJanuary30,2012.
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MovingForward
Aspartofitsefforttogeneratelongtermshareholdergrowth,BACis continuingtoaggressivelyaddresslegacyCountrywidemortgageissues.
48,500DEDICATED EMPLOYEES
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MortgageBusinessTransformation
BACisfundamentallytransformingitsmortgagebusinesstoreducerisk, improveperformance,andeliminateinefficiencies.
FROM MORTGAGE MARKET SHARE DRIVEN MULTICHANNEL PRODUCTION ADDING MORTGAGE SERVICING RIGHTS (MSRS) REGULAR AND DEFAULT SERVICING
TOGETHER
DIRECT TO CONSUMER
ExitedWholesaleandCorrespondentchannels
REDUCING MSRS
Asof3Q11,completedsaleofservicingon150Kloans Additionalsalesexecutedin4Q11 ExitofCorrespondentchannelwillresultinaddinglessMSRsin thefuture
LEGACY ASSET SERVICING ESTABLISHED EXITING NONCORE ACTIVITIES (E.G.,BALBOA, REVERSE MORTGAGE,ETC.)
Ignore the crowd.
ANCILLARY BUSINESSES
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BuildingaStrongCushion
BACisconservativelymanagingitslegacymortgageexposuresbyincreasing chargeoffallowancesaswellasputbackandliabilityreserves.
ALLOWANCE FOR LOANS AND LEASES ($B) AND COVERAGE OF ANNUALIZED NET CHARGEOFFS
$50 2.4
2.1 X
$40 2.0 $25
$30
1.6
$20
1.0 X $23.1
$33.8
1.2 $15
$15.9
$20
0.8 $10
$10
0.4
$5
$2.3
4Q 2008 4Q 2011
0.0 $0
*Representationsandwarrantiesreservesdonotincludelitigationaccrualsestablished.
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PowerfulFranchises
Withongoingreductionsinriskandexpenses,NewBACwillbepropelledbythe strongperformanceofitsprofitablefranchises.
DEPOSITS
CARD SERVICES
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InSum
Its earnings power has been disguised by the intense provisioning for loan losses. But when the provisioning gets back to a normal level, youll start to see that incredible earnings power come down to the bottom line. And its as simple as that.
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Djvu?
Its earnings power has been disguised by the intense provisioning for loan losses. But when the provisioning gets back to a normal level, youll start to see that incredible earnings power come down to the bottom line. And its as simple as that.
BruceR.Berkowitz OutstandingInvestorDigest November25,1992
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BanksHaveBeenHereBefore
WiseinvestorsdonotpermitMr.Marketsdailyfluctuations toaffecttheirunderstandingoffundamentalvalue.
1,800% 1,600% 1,400%
CumulativeReturn
StartedtoBuy WellsFargo
WellsFargo
S&P500
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StayingtheCourse
CourageofConviction
Our inclination remains to run from the popular and embrace the hated where prices tend to reflect such mistrustwe eventually get it right by seeing beyond temporary conditions and by avoiding diversification that leads to mediocrity.
BruceR.Berkowitz SemiAnnualReport May31,2011
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This presentation uses Bank of America as a case study to illustrate Fairholme Capital Managements investment strategy for the Fairholme Fund. In this presentation, we show Fairholme Fund shareholders why we Ignore the crowd with regard to our portfolio positions that are currently out of favor in the market. However, nothing in this presentation should be taken as a recommendation to anyone to buy, hold, or sell certain securities or any other investment mentioned herein. Our opinion of a companys prospects should not be considered a guarantee of future events. Investors are reminded that there can be no assurance that past performance will continue, and that a mutual funds current and future portfolio holdings always are subject to risk. As with all mutual funds, investing in the Fairholme Fund involves risk including potential loss of principal. Opinions expressed are those of the author and/or Fairholme Capital Management, L.L.C. and should not be considered a forecast of future events, a guarantee of future results, nor investment advice. The Fairholme Funds holdings and sector weightings are subject to change. As of November 30, 2011, Bank of America securities comprised 5.5% of the Fairholme Funds total net assets. The Fairholme Funds portfolio holdings are generally disclosed as required by law or regulation on a quarterly basis through reports to shareholders or filings with the SEC within 60 days after quarter end. A complete list of the Fairholme Funds top ten holdings is available on our website at www.fairholmefunds.com. The Fairholme Fund is nondiversified, which means that it invests in a smaller number of securities when compared to more diversified funds. Therefore, the Fairholme Fund is exposed to greater individual security volatility than diversified funds. The Fairholme Fund can invest in foreign securities which may involve greater volatility and political, economic, and currency risks and differences in accounting methods. The Fairholme Fund may also invest in special situations to achieve its objectives. These strategies may involve greater risks than other fund strategies. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longerterm debt securities. Lowerrated and nonrated securities present greater loss to principal than higherrated securities. Tier 1 Capital: a regulatory measure of a banks financial strength. It is composed of core capital, which is principally common stock and retained earnings. Tier 1 Common Equity Ratio: the measurement of a bank's core equity capital compared with its total riskweighted assets. This is the measure of a bank's financial strength. The Tier 1 common capital ratio excludes any preferred shares or noncontrolling interests when determining the calculation. Tier 1 RiskBased Capital Ratio: the ratio of Tier 1 capital to its Riskweighted assets. Riskweighted asset is a bank's assets or offbalance sheet exposures, weighted according to risk. The historical return shown for Wells Fargo is based on Closing Price of its Common Stock. The chart refers to the purchase and sale of Wells Fargo stock by Fairholme Funds portfolio manager while he was a portfolio manager for Shearson Lehman Brothers. Wells Fargo securities were not among the Fairholme Funds top ten holdings as of November 30, 2011, and were not held by Fund as of its last shareholder report dated May 31, 2011. The Fairholme Funds investment objectives, risks, charges, and expenses should be considered carefully before investing. The prospectus contains this and other important information about the Fairholme Fund, and may be obtained by calling shareholder services at (866) 2022263 or by visiting our website at www.fairholmefunds.com. Read it carefully before investing. Fairholme Distributors, Inc. (01/12)
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