Checking Our Mail: Financials Edition

On this week's Industry Focus: Financials, Gaby Lapera and John Maxfield give in-depth answers to some listener questions.

Why are stocks delisted, and how does a stock make it into the S&P 500? How are banks being affected by the price of oil, and what's the worst that could happen to them if it stays so low? How does peer-to-peer lending work, and is it a good investment for individuals with a little cash to spare? All that and more on this week's episode.

A full transcript follows the video.

This podcast was recorded on Feb. 1, 2016. 

Gaby Lapera: Hello, everyone! Welcome to Industry Focus: Financials. This is Gaby Lapera in the studio, and I have John Maxfield joining me on the phone. This week, we are doing mail questions that we've received from various listeners. We are going to do about four, and we may get to bank earnings, or we may not. I hope we do. So let's just dive right into it.

The first question we got is from Rob Waters: Why are stocks delisted? Originally, that was, "Why are stocks delisted from the Dow?" -- but we decided to do, "Why are stocks delisted from the S&P?" just because it's a better broad index than the Dow. So in the last few years, I don't think that many stocks have been delisted, but the ones you may have heard of that you probably know would be, like a JCPenney, or I think, Avon, was delisted in 2015.

There are five basic qualifications that the S&P has for stocks that they need to fulfill, generally -- we'll get to some of the exceptions in a bit -- in order to stay within the index. The first is that the S&P is a large-cap index, and they generally want companies to be above $5.3 billion in order to stay on there.

John Maxfield: And that's $5.3 billion in market cap. And just to reiterate Gaby's point, you know that saying in the Pirates of the Caribbean movie? I can't remember which pirate it was, he was like, "Oh, this is more guidelines, as opposed to hard and fast rules." So each of these things that we'll go through -- each of these five components that we're going to talk about that she noted -- all of these are just guidelines, as opposed to hard-and-fast rules.

Lapera: Absolutely. Generally, the exceptions come when the market is not doing great, and if they were to strictly adhere to all of the guidelines, there wouldn't be anyone in the S&P; and that would not be great for the S&P, right? So there's a little bit of flexibility here. The second guideline -- the first, I'd like to remind you, is that it need to have a market cap of $5.3 billion or above -- the second is liquidity.

The stocks need to have traded at a minimum of 250,000 shares over a six-month period leading up to the evaluation. I think the example we were talking about earlier, John, was Berkshire Hathaway (BRK.A -0.30%) (BRK.B -0.26%), which is a great company. People know about it, it's really stable; but for the longest time, it was not in the S&P 500 because shares were so expensive that people couldn't afford to trade them easily.

Maxfield: Yeah. It's one of those really ironic things. When you think of our biggest and best large-cap companies in the United States, certainly Berkshire Hathaway is at the top of that, right? But the problem with that is, its shares, for all of these years -- well, not all these years, but for multiple years -- traded above $100,000 per share. And it wasn't until 2010, when Berkshire purchased Burlington Northern Santa Fe, the railroad, that they did a stock split that then created a second category of shares that then trade for much, much less. And that's what has made it possible for individual investors to buy and sell it, which boosted its volume, which then qualified it for inclusion on the S&P 500.

Lapera: Another thing that all the companies on the S&P have in common is that they must be domiciled in the U.S. They define this in various ways. They have to file a 10K, and then, they say you have to have a plurality of revenue and assets that are based in the U.S., or your headquarters must be in the U.S. Do you want to expand a little bit on why they have it that way?

Maxfield: This is a large-cap American index. So what they mean by plurality is -- as a lawyer, this is something I'm relatively familiar with, because it comes into play in Supreme Court decisions -- but what plurality means is, you don't have to have a majority, which would be at least 51%; but if you have, say, assets in five different countries, and say, 40% of your assets are in the United States, and whatever that would be, 15% or so in each of the other ones -- a plurality means the largest of the group. So because it's a large-cap index that's based in the United States, they want, at least, of all the countries that you're exposed to, they want the largest share to be in the United States.

Lapera: Right. And this has something to do with avoiding tax laws and stuff like that, too. So some people will register their companies in, say, Hong Kong or Ireland because taxes are less. And it gets complicated. But in general, that's what they want -- they want the companies to basically be based in the United States. The stocks, to stay in the S&P, have to be listed on the Nasdaq or the Dow. And they must also have a corporate-governance structure consistent with U.S. companies.

Maxfield: You fill in the blanks there.

Lapera: (laughs) Yeah, I have no idea what that means.

Maxfield: Does that mean, like, Enron? (laughs)

Lapera: (laughs) Oh, God.

Maxfield: Or does that mean Berkshire Hathaway? You know what I mean? It seems like the continuum there is probably pretty broad. But I think the point they're trying to make is that they want you to follow the same country guidelines, and they want you to abide by, at least, the same concept of how you should be operating ethically.

Lapera: Right. Just, like, a general, and something that's written down so people can look at it, as opposed to shadowy backdoor dealings. I think that's what they're trying to get at with that last one. So far, we've covered large-cap index, liquidity, domicile. The company must have a public float of at least 50% of their stock. Do you want to expound on that?

Maxfield: Yeah. When a company goes public -- Goldman Sachs (GS -0.71%) is a good example. When it went public in, I think it was 1999, they don't list 100% of the company. They'll list, like ... I can't remember what it was with Goldman Sachs, but it was a pretty small percentage, maybe 5% or 10%, something like that. The rest of that -- that 90%, whatever that remainder is -- is non-floated stock; it's not traded on the active exchange.

Well, the S&P 500 wants companies that have at least 50% of that that's floated. Now, like Goldman Sachs and their situation, that float has increased over time as their partners at the time of the IPO have sold out their positions, and retired and diversified their assets and stuff like that. But, just, the idea is, you want these to be public companies that are highly liquid, and in order for those things to come into play, you need a large float.

Lapera: Right. And that ties a little bit into the last one, which is financial viability. This is probably the most common reason for stocks to get delisted, is that there's something fundamentally wrong with them. I think one of the latest stocks to be delisted was Peabody Energy, and you saw that their credit rating just got bumped and bumped and bumped again, all downward. So, they have to have positive earnings over the last four quarters, and they have to have good credit ratings. They just have to seem like a fundamentally sound business in general. Right?

Maxfield: Right. Exactly. Again, this is a general rule. You don't want the S&P 500 to be full of these companies that don't make any money, right? What would that say about an index that's supposed to track the large-cap sector of the United States, our biggest and best companies? But again, the way the S&P lays its methodologies out, it says, you have to have positive earnings over the last four quarters. If you look back to the financial crisis, and you were a stickler on that, the S&P 500 would be the S&P 5. (laughs) You know? So you don't want to push it so far that it would defeat the whole purpose of the thing. But as a general rule, what they're getting at here is that they want good companies that adequately represent what America's biggest and best companies, for lack of a better term, represent.

Lapera: Right. And I'm going to say that, in general, I haven't ever seen the S&P delist a company and someone say, "Oh, that was vindictive." It's always like, "Yeah, we kind of saw that coming." You know what I mean?

Maxfield: Yeah. That's exactly right. JCPenney's, a few years ago, it's going down, going down, going down, and the S&P 500 were finally just like, "Okay, fine, we have to get rid of these guys, it's getting pretty ugly here."

Lapera: Oh, and fun fact: When someone gets delisted, someone else can come on.

Maxfield: That's exactly right, because it has to stay at 500.

Lapera: Exactly. You can't have 501; that would be absurd (laughs).

Maxfield: I mean, you could, but you'd have to change the name.

Lapera: Yeah. So, tied into this is another question that we got, which is, what determines a company's share price? A lot of the things we actually mentioned as factors in whether or not a company can stay listed in the S&P also contribute to share price. This is how I see it: Share price is ultimately going to be reflective of a company's internal fundamentals, as well as what the market as a whole thinks of the company's chance of success in the context of the global economy. That's kind of a lot. Do you want to break that down a little bit?

Maxfield: No, no, go for it.

Lapera: No, it's all you, John. It's all you.

Maxfield: (laughs) Okay, I'll take that. So think about what we're seeing right now. We're on the back-end of a really, really long bull market, where, at the beginning of this, stocks -- it didn't matter if you were P&G, which is an excellent company, Coca-Cola, which is an excellent company, Walmart, Amazon (AMZN -1.65%), or you're a 3D printer -- it didn't matter what you were; all stocks were hit in 2009. And then, out of that, you saw stock prices of certain companies come back up much more quickly, and those were your solid companies that were improving much more quickly.

Then, as everything gained momentum, then you had those more speculative stocks really start to pick up, because people are feeling more optimistic about things, they're thinking that everything's turning around the corner, we're three, four years into a bull market, and it's at that point where everybody wants to start pouring their money in -- which is kind of ironic. You know what I mean?

But yes, you have both that underlying market stuff that's going on, and now we have the concerns in China, we have the low oil prices, and ISIS,and whatever else -- you know what I mean -- that's going on with the economy. So you have those things that are bringing it down. But then, to Gaby's point, you also have -- and this is one of the things that we really preach at The Motley Fool -- ultimately, it all comes down to the fundamentals of any company. A really good company will survive through a full cycle, whether it's good or bad, or whatever.

Lapera: Right. There are some companies that are down right now just because the market, in general, is down. But it doesn't necessarily mean they're a bad stock. Heck, Berkshire Hathaway is down right now. But they have an outstanding track record, and its fundamentals are strong. Just because it's down right now doesn't mean that there's anything inherently wrong with it. But, for an example of a company that is down, other than Berkshire Hathaway, based on something that's happening in the global economy, is Chevron. They have a lot of exposure to energy, obviously. Right? (laughs)

Maxfield: (laughs) Just a little bit.

Lapera: (laughs) They're an oil company. And I don't know if you've noticed -- gas is super cheap right now. That's not great for oil companies.

Maxfield: It's not, but let me tell you something -- and Gaby and I talked about this beforehand -- there's an oil stock that I can't talk about because I want to buy it and I'm under trading restrictions, but you talk to your really big investors right now -- and I'm not one of them, I'm a medium investor, but I listen to what they say -- oil is a great opportunity right now. At least, that's certainly what it looks like to a lot of investors. It looks like that to me, too.

Lapera: Yeah. And on the opposite side of this spectrum, you have a company that is probably a pretty solid company, but there's some internal stuff that's going on right now that makes it look a lot less valuable than you might think it would be. Chipotle (CMG 6.33%) is a great example of that, with the E. coli scare that's going on right now. There's nothing technically wrong with Chipotle's fundamentals. If they can't get this E. coli thing under control -- we'll see -- but that should be a short-term hindrance to them. I don't think there's anything generally wrong with that company. But the shares are a lot lower than what you'd expect, than they have been historically.

Maxfield: Yeah, they're a lot lower. They peaked well above $700, and they're down into the $450, $460 range right now, way down.

Lapera: So cheap! It's like it's nothing for me at all! (laughs)

Maxfield: Yeah, it makes me shed a few tears. Full disclosure, I've been buying some Chipotle, too. Let me share my thesis on Chipotle -- if you look back at every single major food service company in the United States -- I'm talking McDonald's, Wendy's, Burger King, all of them. Even Walmart, Costco, Kroger -- every single one of them has been through something just like this. McDonald's had the first well-known E. coli scare in the early 1980s. Jack in the Box had one in 1993; and this is horrible, but it's important to keep all this in context -- four people died because of the E. coli situation at Jack in the Box in 1993.

But yet, its stock, after the market pounded it and it went through lawsuits and all that, its stock went on to return multiple thousands of percents since then. So you have to look at these things, and you have to ask yourself, based on history, is this a temporary thing? Or is this something that brings companies down? And in my analysis of it, this is a temporary thing; at least, that's what history tells me.

Lapera: Yeah, I'm with you on that one. So the other kind of aspect to share prices is -- we covered the global economy, we covered internal things. Sometimes, share prices are higher than the book value of the company because people see enormous room for growth. And we're really talking tech stocks here, that's something that happens a lot with them. So for example, Amazon. Right now, we looked it up this morning, it's P/E was 462 this morning. Correct?

Maxfield: Yeah, I think that's what we saw. It was a pretty big P/E.

Lapera: That's huge! That's so much! What's a typical one for a bank? 18 or something?

Maxfield: Yeah. I think the S&P 500, I think the average P/E ratio on the S&P 500 right now is 20 or 21.

Lapera: Right. And of course, things vary by industry. But 462 is high, regardless of what industry you're in. But a lot of people see a lot of potential in Amazon, so they're willing to pay a premium for those stocks, despite there not being the present, perhaps, value for them.

Maxfield: Right. And just to clarify one thing, it's not so much that the stocks -- their market capitalization are higher than their book value. Really, what we're talking about here is, you're on a continuum, in terms of what you're paying for a stock. And what your P/E ratio tells you -- this is the way you can think about it: If your P/E ratio is 20, that means you're paying $20 for every $1 of current earnings in that company. So if your P/E ratio is five, then you're paying $5 for every $1. So, the higher the P/E ratio, the more speculative the stock.

And in Amazon's case, it's not like Amazon is a speculative company. We're talking about the big four. Gaby, you buy on Amazon, I'm sure, all the time. I buy on Amazon all the time. The issue with Amazon is that their success and their growth and their revenue is not reflected in their bottom line, because what Bezos does -- and Bezos has got to be, I mean, on the shortlist of the best CEOs in the country, and this is one of the reasons -- he's taking all of that money they're earning and he's recycling that back into growth. That's why it's not hitting the bottom line, and that's why their P/E ratio is so high.

Lapera: Yeah. But let's -- you're absolutely right. Sorry, I kind of transitioned into the next thing without acknowledging the fact that you're super right on that.

Maxfield: Did I put you to sleep? (laughs)

Lapera: No! (laughs) I was actually thinking of another tech stock which kind of highlights the risk, perhaps, would be the right word -- GoPro (GPRO -3.39%). When it first went public, its P/E was insane. Shares for super expensive, and I have it pulled up on my screen right now -- they're currently trading at $11.13 per share, and their P/E is 9.12. So, that's one of the things that you do sometimes see with these companies with these huge P/E values that seem to be a little bit, in terms of stock price, overvalued: Sometimes, they do go down. That is a danger with these.

Maxfield: Yeah. And the other thing -- I think that's a great example, I'm glad you brought their P/E ratio up, because what that also shows us is that, in a case like GoPro vs Amazon, there is much more going on behind the P/E ratio. So yes, the P/E ratio is a good entry to get a good idea of what's going on, but then you really have to look what's beyond it. In Amazon's case, its cashflow. In GoPro's case, it's -- how I would couch that is, their problem is that they're over-reliant on a single type of product that they're selling.

Lapera: Yeah. I'm actually looking at their five-year chart right now for GoPro, and it looks like, on June 26th, 2015, their P/E was 78.17 -- just to give you an idea of how much that has plummeted between the two points.

Maxfield: Yeah (laughs). I'm glad I did not own that stock.

Lapera: That would be rough.

Maxfield: Although, that would be just my luck, to own that one.

Lapera: (laughs) Yeah. So to sum this up -- at the end of the day, share prices are going to go down because more people are selling than buying, and they're going to go up because more people are buying than selling. That's ultimately the nugget of truth to share prices. But the reasons behind people either buying or selling are going to vary depending on the global economy, what's going on with the company itself, and that's basically it. Yeah?

Maxfield: Yeah, I agree 100%. More people selling than buying, or buying than selling.

Lapera: Okay. Let's move on to our next question, which is from Levi Waddell of South Dakota. He asks a lot of good questions, guys (laughs). I'm really impressed. I don't know if you know this, but I used to teach, so I love it when people ask really good questions, because sometimes, you're standing at the front of the classroom, and you're like, "I don't even know if anyone's paying attention, no one's asking any questions." Like, you ask them questions and ... I don't know. Sometimes, engagement is hard, especially when you teach at 8 a.m. on a Monday morning at a university (laughs).

Maxfield: And you know what the best part about Levi is? He's from South Dakota. You know what's in South Dakota? Mount Rushmore, which is awesome, because it's, like, our Sphinx, our pyramid, the thing that, let's say, humans are not around in whatever it is, 20,000 years, there'll be Mount Rushmore. And then, there'll be aliens, and they'll be like, "What is this thing? What were these people doing? Does this look like what they looked like?" So yeah, South Dakota. Awesome. Love it, Levi. Love it.

Lapera: (laughs) That's hilarious! You know, I actually lived in Nebraska for a couple years, and I never made it to South Dakota, and I regret that immensely now, because I don't know when I'll be back.

Maxfield: Oh, I'll regret that for you (laughs).

Lapera: (laughs) Anyways. Levi asked, "What's your take on peer-to-peer lending?" He says, "I'm returning 11% on the platform of Lending Club (LC -2.08%), but I'm down around 40% on the stock. Would you talk about peer-to-peer lending and what hurdles/regulations are needed to clear before these companies can do well?" Do you want to give a basic description of what peer-to-peer lending -- which we're probably just going to call P2P -- is?

Maxfield: Yeah. So P2P lending is -- basically, you have a company that sets up a platform, and then, if you want to get a loan for ... I don't know, in the example we were talking about earlier, you want to start a company that makes coffee cups with pictures of cats on them. And the cats are doing things like riding bikes or things like that, like, that's your thing, that's your business idea. And you go to a bank, and you're explaining this to the loan officer, and you're like, "Look, it's a great idea. There's going to be coffee cups, and there's going to be pictures of cats riding bikes, and they'll be saying things to other cats that are riding on hoverboards." And then the bank is like, "I don't know, that doesn't seem like a very viable business model to me."

So then, you would still need capital; so where would you go get it? So you could go to one of these marketplaces and put your idea on the marketplace, and people on the other side effect -- like you and me, we have a few extra thousand dollars that we're looking to invest, and we wanted to diversify away from stocks or real estate or whatever your thing is. And these people say, "I'll borrow your money and give you an 8% return on that so that you can fund my business to make these awesome cat mugs." So that's what peer-to-peer lending is. It's me, a guy with a little extra money going on to this platform and loaning it to, say, Joe Schmo, who wants to start this business making cat mugs, which I'm sure is going to be awesome and profitable; but the banks don't realize the potential.

Lapera: Right, and people use this for all sorts of things besides starting small businesses. They use it to fund -- the most recent one I saw was student loans, mortgages, stuff like that -- loans for money for home renovations. And when you go into the loan, when you click on it, it'll give you a description of the person and the thing they're using the loan for. It'll be like, "It's a nurse and she's between 30-35, and she makes ... " I don't know how much nurses make, "$70K a year."

Maxfield: Yeah. And let me be clear, I'm not trying to belittle what peer-to-peer lending is, but you're talking about a very niche market, where people probably aren't going to be able to get mainstream credit. And when you think about, why aren't these people going to be able to get mainstream credit -- then you start thinking about credit risks. Because banks want to give credit, right? What banks do is sell money via loans. But they're not going to sell money to people that their risk models say are not a good credit risk, or at least ... that has been in the past. That's what the financial crisis was all about. But theoretically speaking, the banks don't want to do that.

Lapera: Right, and then the financial crisis beat them up, so they're very interested in not doing that again. And the thing with banks is, they have these super sophisticated models that give them a pretty good idea of whether or not a person is a good risk or not, which, when you compare to some of these peer-to-peer lending sites -- for example, Jordan Wathen wrote an article the other day that showed in it that the Prosper loans marketplace, which is one of these peer-to-peer lending sites -- it's not public yet, but they submitted an S1, which is part of the paperwork you need to submit to get yourself listed.

It says that Prosper verified employment and/or income for 59% of the loans originated on their site. Banks verify that for 100% of people that they give loans to, not 59% (laughs). That's a huge difference. And then, from those loans where they verified the income and/or employment, they delisted 15% of those. That's quite a few. You know what I mean?

Maxfield: Yeah. Let me get this straight -- they check the income and the credit risk of 59%, and then 15% of those 59%? Is that right? Are those the ones they then pick out?

Lapera: Yeah.

Maxfield: So then, what happened to the other 41%? 

Lapera: They didn't get checked at all. They just left them up on their site. 

Maxfield: They just -- (laughs)...

Lapera: So who knows how many more (laughs) would have been delisted?

Maxfield: Yeah, that's right. That's great. And I mean, this is really, really, really risky. That's the point you're making.

Lapera: Yeah. It's super risky. And Prosper is not a loan. Lending Club, it doesn't disclose how many of its loans it checks, it just says it doesn't check all of them. So who knows what that percentage is? (laughs)

Maxfield: (laughs) It's like Russian roulette.

Lapera: (laughs) Yeah, pretty much.

Maxfield: Now, here's the other interesting thing... to talk about another specific company, then you look at Lending Club. Lending Club, if you go to their board of directors, and you see who's sitting on that board. You have Larry Summers, a former Treasury secretary -- and Gaby and I have talked about this in the past -- Larry Summers can be controversial in terms of some of the things that he says, but there aren't a lot of people out there in the financial world who really know what's going on who would question his intelligence, and what he knows about finance and economy and stuff like that.

You also have John Mack, who was a former CEO of Morgan Stanley. You also have Mary Meeker, who's a partner at Kleiner Perkins. Lending Club, in particular, is not some fly by-night company. These are established people who know what they're doing. But they're evolving toward a different business model than the "John Maxfield is lending to Joe Schmo." They're evolving to where they will originate small business loans, and then syndicate those to a whole bunch of community banks who don't otherwise have exposure out of their local markets.

Lapera: Yeah, and I could actually totally see that working. But I think part of the reason that people are down on the actual stocks themselves vs whatever loans they've made within the platform is because there is so much uncertainty there. And it seemed like a great idea when it first came out, and then people started reading more and more about it, and stuff, like I said, that came up with them actually checking who's listing these loans ... if that's not even certain, it's kind of sketchy. So until these things get worked out, I don't know that it's a great idea to invest in these. in particular. Also, this is an area that's ripe for regulation that hasn't been done yet. And until that happens, it's very hit or miss whether or not this will survive, in general. You know what I mean?

Maxfield: Yeah, that's a really good point. That regulatory point is actually a really good point I hadn't thought about. My real specialty is the history of banking, and the history of banking is made up of credit cycles. If you go back to, basically, the start of the United States, we've had something like 20 of these huge, large credit cycles. What I mean by that is, where loan losses are really low when the economy is going great, and then loan losses go really high when things turn bad, which is what we saw in the Great Depression, and the financial crisis, and stuff like that.

So the big question to me, and I'll provide an answer after I state the question, is whether or not these companies or this model will survive a serious downturn in the credit market. It's my opinion that there is no way they're going to make it through one of those. I could be totally wrong on that. But the quality of the borrowers that are on these platforms, as I understand it, are the bottom of the barrel. And in the bottom of the barrel, in terms of your credit statistics, you see huge loan losses on those when the cycle turns down.

Lapera: Yeah. I mean, I guess the other side of that would be, where else would these people get money from? The answer would be payday lenders, and that's probably way worse than this -- for them especially.

Maxfield: Well yeah, for them, it's way worse, but...

Lapera: ... but for the people investing in it, it's way worse for us.

Maxfield: Exactly. And you could also say, maybe they shouldn't be going out. If a bank looks at their business plan, or whatever they want money for, and is not willing to lend it, maybe they should look for other things to do, because if a bank thinks they're going to default, and they do default, it doesn't matter what the platform is, that's going to ruin your credit. Right? So maybe that should be a sign to people who are looking for loans over these platforms.

Lapera: Yeah. It's a hard question, because if people need the money, where did they get it from? But if they're such a bad risk ... anyways, this is a question that is not for you and I to solve, Maxfield. (laughs)

Maxfield: (laughs) This is philosophy.

Lapera: Anyways, the last question -- we have to hustle on this -- is basically a combination of two questions, which essentially is asking, what's going to happen to banks with a lot of oil exposure? So the basic thing to understand here is, certain things are exposed a lot more to oil than others. And the type of bank and the size of that bank is going to matter a lot. For example, JP Morgan, yes, it has energy exposure, but it's huge, and it has a hugely diversified portfolio. It's going to hurt, but it's not going to take the bank out of business.

Now, let's go to Texas to a small community bank that has energy exposure both in its portfolio, and also to the people that it's lending to. For example, say you have a guy who works out on an oil field and he has a mortgage with that bank, and he gets laid off because they're not making enough money, and suddenly he can't pay his mortgage anymore. It's going to hurt a bank like that a lot more than it's going to hurt one of your big banks of the world.

Maxfield: Yeah. If you listen to the conference calls of these big banks, you're talking about 1% of their loan portfolios are energy related. And in those portfolios, a lot of these banks are marking this down -- they're taking reserves on those, assuming that oil stays at $30 a barrel. So they're being pretty aggressive about it. But the big point -- and this is exactly what Gaby is saying -- it's the banks that have a large amount of exposure relative to their overall loan portfolio to either the energy market, or other markets that would be affected, like real estate markets in Texas -- things like that.

And let me just give you a quick example of how bad it can get: In the 1970s, we had a couple oil crises, and that caused oil prices to shoot. And in the 1980s, oil prices fell just as fast. When they fell that fast, basically every single major bank in Texas failed because they where overexposed to energy. Now, I don't think we're going to see that this time. We may, I doubt it, but we may. But the point being, those banks that are in the oil patch, highly exposed to it, are going to, most likely, take larger losses than your big, well-diversified banks.

Lapera: Yeah. Something that I've actually been seeing in a lot of 10Qs this quarter is, banks, where they normally wouldn't have said anything at all, devote at least two or three sentences explaining what their exposure to the energy industry is, and what they've done in terms of reserves for that. Obviously, like I said, some are super-duper exposed. I think the banks that I've seen the most ... I can't remember which one it was, but--

Maxfield: I think it was Cullen/Frost, maybe.

Lapera: Was it around ... I can't remember... something like 80% of its portfolio was energy related in some way, shape, or form?

Maxfield: Oh, I don't know who that is.

Lapera: I can't remember who it was. I read a lot of articles every day, since I'm also an editor. So it's lost somewhere in the haze of editing. But that's a massive exposure. And it was a fairly small bank, as I recall. So they're probably in a lot of trouble. And as I recall, they raised their reserves quite a bit. But, eh, I don't know.

Maxfield: And here's the thing, Gaby -- let's say you look at that bank, and you look back 30 or 40 years, and they've made it through all those other cycles. There's a very good possibility that they know exactly what they're doing going into this thing, and they know exactly what they're doing to get out of it.

Lapera: That's true.

Maxfield: It's a very, very, very fact-specific situation.

Lapera: That's definitely true.

Maxfield: But there are instances ... Cullen/Frost has been around, I can't remember, like 100 years. They're an oil-patch bank, and they've made it through a whole bunch of different crises. So it seems to me that they know how to get through these things, whereas maybe, a bank that's newer, that hasn't been through all this stuff, that's facing the oil patch now, your confidence in them should probably not be very high.

Lapera: Right. So I think, ultimately, what we're saying to our two listeners who both asked about this is, one, it depends on the bank. It depends on the size, it depends where it is; it depends on what its portfolio looks like. Two, it depends on what the bank is doing. And three, it depends on the bank's history. So it's just the same as any other company that we look at The Motley Fool. We're looking at its fundamentals and its history. And although that's never a guarantee that a company is going to pull through and succeed, it's certainly a good indicator of whether or not it's going to be OK (laughs). I think that's it for me. We are running low on time. Do you have anything else you want to say, Mr. Maxfield?

Maxfield: That's it for me. Let me just throw in one sentence on bank earnings -- banks are going in the right direction. Some of them are going there slower than others, but they're all moving in the right direction.

Lapera: And we will definitely cover that in a little bit more depth next week, because we are, ultimately, a financials show, and everything's gotten a little bit messed up here by the blizzard in D.C. I was super excited to leave my house on, like, Thursday of last week. That's how bad it was. I was trapped for five days.

Maxfield: Your igloo?

Lapera: Yeah. Oh my God. Anyways, thank you guys very much for listening! As always, people on this program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against those stocks; so don't buy or sell stocks based solely on what you hear on this program. Thank you guys for joining us! Hope you have a great week. And don't forget, you can contact us at [email protected], or by tweeting us @MFIndustryFocus. Yeah, everyone have a great week!