On Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel, CFP, spend lots of time discussing the big U.S. banks. However, there are some interesting small-cap banks that are worth a look, as well.
A full transcript follows the video.
This video was recorded on Nov. 26, 2018.
Jason Moser: Let's take a look here, new topic for discussion. We got a tweet a few days back from @ChrisM_Jones. Chris said, "Would love for the two of you to cover some small-cap financials. For example, AX, UVE. Full disclosure, UVE was my first stock, and now is my largest position." The bottom line is, Chris was hoping we could take a look into some more small-cap financial stocks. Matt, you and I love talking stocks. When you get to find compelling small-cap financials, we could probably talk about that for the next four hours. Unfortunately, we're not going to be given that much time. We thought we would take an opportunity here to target two companies each in the small-cap space that we like and see if we could give Chris a couple of ideas, companies that we like, some things to keep an eye on with them.
We're going to start the discussion here with a company that Matt, you know, Synovus, ticker SNV. Give us your elevator pitch for Synovus.
Matt Frankel: This is a bank that I drive by a lot because it's a southern regional bank. The reason I like Synovus is, one, they're profitable; two, they're growing very fast. On the side of profitability, return on assets of a little over 1.3X, return on equity of 40%. Both are great numbers. The loan portfolio is growing at a pretty impressive rate, about 4.5% a year. They're making acquisitions on a pretty aggressive basis and they're actually getting really good deals. I reported over the summer that Synovus decided to acquire a bank called FCB Financial, Florida Community Bank. They actually wound up getting a discount to the share price. Generally, when you acquire a company, you're paying a premium. That's why the shares jump up right after the acquisition's announced. This will make them one of the biggest regional banks around. They got a great price. They expect it to be immediately accretive to earnings. I really like Synovus. Very profitable, well-run bank with big ambitions.
Moser: Ameris Bancorp is the first one I'm going to talk about here. Listeners have probably heard me talk about it before. The ticker is ABCB. This is a not-so-little regional bank in the southeast. Home base is Moultrie, Georgia. Full disclosure, my mom and dad actually live in Moultrie, Georgia. I've played golf with a couple of these guys at Ameris Bancorp before. That wasn't through design, it's just small town living there. Everybody knows everybody. And I do own shares of Ameris Bancorp, as well. This is a company I found back in 2011, at the depths of the financial crisis, when a lot of these small-cap banks, these tiny banks, particularly in Georgia, for whatever reason, were going belly up. They had bad loan books and really overextended themselves. Ameris Bancorp has always been a very well-run, fairly conservative operation, not trying to write checks that the bank can't cash.
What that resulted in, over the course of the few years in that recovery from the financial crisis, the FDIC recognized Ameris Bancorp's excellence in operating and started using Ameris as a partner in rolling up some of these failed financial institutions to give them at least a little bit of an exit strategy so that everything didn't go completely to hell in a handbasket. What this ultimately did for Ameris, it gave them a very risk-free way to build up their asset base and their deposit base. The FDIC basically said, "Any losses are going to be on us. We just want you to help us get these things rolled up, and there's going to be nothing ultimately but upside there for you."
Fast-forward to today, that really has worked out for the company. They now have total assets near close to $11.5 billion. Tangible book value per share is close to $18. All in all, what you have here in Ameris is a still small-cap bank, around $2 billion market cap, that has grown its presence beyond that Georgia footprint. They have plenty of opportunities to continue to make some smart acquisitions going forward. And they certainly have done that. They recently purchased Atlantic Coast Financial, as well as Hamilton State Bank. It's all helping them grow this business out. Longtime CEO Edwin Hortman stepped down recently. The new CEO, Dennis Zember, who has been with the company for a number of years, held positions of COO and CFO. That's all to say, I expect that conservative, smart, long-term-focused mentality to continue here with Ameris Bancorp. Certainly had developed a long track record of success. I suspect we will see that going forward, as well. That's one of those little small-cap financials I really like.
Speaking of banks, Matt, you wanted to take a trip out west and talk a little bit about Bank of Hawaii, right?
Frankel: Yeah! Since we're talking about some of your disclosures, disclosure: I've never been to Hawaii, so I've never been to a Bank of Hawaii branch.
Moser: I've been to Hawaii! I was looking to see if we could get a Fool branch in Hawaii. That'd be pretty sweet, actually.
Frankel: If there was an office there, I might sign up for it.
Moser: I was pitching that and or/ the Bahamas. I would gladly take either post.
Frankel: [laughs] So, I've never actually been to a Bank of Hawaii, but I know a lot about them as a bank. They're one of my favorite small-cap banks. I've been watching them for a little while. Not only are they an extremely profitable bank, but along with one other bank, they have a pretty dominant market share in Hawaii. If you're in Hawaii, you generally don't go to a Bank of America or Wells Fargo. You're either at Bank of Hawaii or First Hawaiian Bank, the other major bank out there. They have a very big market share. Great reputation on the island. Don't expect too much growth as in geographic growth. You're not going to have a Bank of Hawaii branch in Kansas or anything like that.
Hawaii's economy is doing great. It's growing at a faster rate than the rest of the U.S. It's one of the fastest-growing economies. Great reputation. The loan portfolio, for example, grew about 7% over the past year, most banks were in the 3-4% range, if you look back at our episode where we covered the big banks. That's a testament to how strong the Hawaiian economy is right now. Consistently profitable throughout any economy. A little fun fact: after Citigroup almost collapsed during the financial crisis, they brought in Bank of Hawaii's former CEO to be the new chairman of the board. The big guys on Wall Street know how profitable Bank of Hawaii is and how well-run it is.
It's not a cheap bank stock. I put it in the valuation category of a US Bancorp. But just like Synovus, about a 1.3% return on assets, and 18% return on equity, which is unheard of for a brick and mortar bank. Highly profitable. Very, very low default rate. It was like a 0.2% non-performing assets rate, which is extremely low. Great economy, great quality bank, great history of being a well-run institution. That's why it's one of my favorites. Hopefully I get to visit one someday.
Moser: I feel like this is the opportunity to bring this thing under official coverage here at The Fool. The annual meeting is out there in Hawaii, right? That has to be where they have the annual meetings. Then you have to go out there, right? It's the biggest no-brainer. We'll look into that later this week, Matt.
Let's wrap it up here. Chris had made specific mention here of a company, Universal Insurance Holdings. This is the company he said has grown into his biggest position. Let me tell you, Chris, I think that's not actually such a bad move here. From what I have seen with Universal Insurance Holdings, this is a pretty compelling company. This is the largest private personal residential homeowner's insurance company in Florida. When I say Florida, let's be very clear, most of their business is in Florida. Only 26% of their total insured business is outside of Florida. This is a Florida play. They are in 16 states, but right now, this is a Florida play. They are seeking to expand that footprint and diversify, geographically speaking.
But generally speaking, we love the insurance business from the investor's perspective because insurance is one of those things that's always going to be needed, particularly if you're a homeowner. Chances are, you've got a mortgage, you have to pay that mortgage, your mortgage company is going to require it. Even if you've got your mortgage paid off, nobody owns a home and isn't going to have some type of insurance on it.
Universal Insurance Holdings has been focusing on its primary market of Florida for a number of years. It's a small company, $1.5 billion market cap. But I tell you, if you bought this thing five years ago, you're feeling really good about it. The stock's up close to 300% since then. A big measure for us when we look at insurance companies is book value. We can see through Universal's book value they are growing. In 2013, that book value was at $5.20 per share, vs. today, which is $15.20 per share. Obviously, that indicates the company is growing, and growing at a healthy rate. Another metric that we look to with insurance companies to understand if they're writing good books of business is the combined ratio. We like to see that combined ratio under 100%, that tells us that they are writing good business, profitable business. The combined ratio for Universal in 2017 chalked up at 84.4%. That actually was a little bit up historically from what we've seen in years past.
This is a well-run business. CEO Sean Downes has been there for a while, has plenty of experience in the industry. The risks with a business like this, particularly in a state like this, is the natural disasters. Florida is known for its storms. But the flip side of that is, every insurance company in Florida is planning for that stuff. It's not a matter of if, it's a matter of when. So, I like to believe that management is certainly keeping that on their radar. And the way that insurance companies tend to hedge that risk is by reinsurance.
So, all in all, it does look like Universal Insurance Holdings is doing a lot of good things with the business. Based on the metrics, the business looks very healthy. Strong balance sheet, appears to be very capable management there. Chris, I think you can feel pretty good about owning that one. Congratulations on your gains, and here's to many, many more dollars in the future!