The financial sector has been "undervalued" on a historical basis for some time now. Some of the big banks are trading at or below their tangible book value, a far cry from the 3 to 4 times TBV multiples that were seen in the earlier part of the last decade.

However, certain issues such as the continuing legal risk from the financial crisis, low yields, and the high volatility in the stocks themselves have scared away many investors. One company, Wells Fargo (NYSE:WFC), is in an excellent position to provide great returns for its shareholders without the risk and volatility that comes with companies such as Citigroup (NYSE:C) and Bank of America (NYSE:BAC).

The strength and performance of Wells Fargo
Even before the mortgage bubble burst, Wells Fargo was in much better financial shape than its peers, which is the main reason it was able to weather the storm. As a result, the company was able to scoop up Wachovia for a fraction of its value, and it has expanded its footprint to become the most widespread U.S. banking institution by number of branches, with 6,332 as of the most recent data available.  

Wells Fargo has also grown into the country's largest bank in terms of market cap, which is impressive given that it has fewer customers than some of its rivals.

The fact that Wells Fargo is the No. 1 bank in the country by market cap, but is only the No. 4 bank in the U.S. in terms of total assets is a testament to the overall quality of its assets.

The company is performing tremendously well in several aspects of the lending market and is actually the leading mortgage originator, commercial loan originator, and small business lender in the U.S. Wells Fargo's outstanding loans continue to grow at an impressive pace and currently stand at $812.3 billion (up by about 4% from last year) at an average yield of 4.41%. 

Not only is Wells Fargo's loan portfolio growing nicely, but so is the credit quality of the loans that make up the portfolio. For the most recent quarter, net charge-offs were around $1 billion, down 58% from the $2.4 billion in the same quarter in 2012. Additionally, Wells Fargo is getting more money to lend. As of the most recent data, the institution's total deposits are about $1,026 billion, which is an impressive increase of 8.4% in one year. 

Lack of legal issues
While Wells Fargo is by no means immune to the after-effects of the mortgage meltdown, the company's legal risks pale in comparison to those of most of its rivals. 

For example, Wells Fargo just agreed to pay $335 million to settle a dispute with the FHFA over risky mortgages sold to Fannie Mae and Freddie Mac. While this is indeed a significant amount of money, consider that JPMorgan Chase's settlement in the matter totals $5.1 billion, or about 15 times the liability of Wells Fargo. It's reported the lawsuit seeks about $6 billion from Bank of America.

Wells Fargo has settled many of its lawsuits related to the financial crisis recently, having settled with Federal Home Loan Banks of Indianapolis, Chicago, and Boston. The company has said repeatedly that it has set aside money for all of these settlements, and that they won't affect the financial health or the profitability of the bank.

While Wells Fargo and its peers aren't quite out of the woods yet, I think Wells is in a much better position to deal with whatever additional legal drama it may face. The legal battles involving banking institutions over the past few years have indicated that the amount of wrongdoing by Wells is a fraction of that committed by its peers.

Going forward
With a growing loan portfolio, improving credit quality, more deposits, and smaller legal risk, Wells Fargo is an excellent choice for a safe, long-term investment in the banking sector. While Wells Fargo trades at 2 times its tangible book value, a significant premium to its peers, I feel the strength of the company's operations is well worth the price.