2 Smaller Banks to Watch and the COVID-19 Impact on Insurance

In this week's installment of Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel, CFP, take a deep dive into the latest earnings results from Live Oak Bancshares (LOB -14.02%) and Ameris Bancorp (ABCB -1.53%). The duo also discuss Travelers Insurance (TRV 0.26%) and how the COVID-19 pandemic could impact the insurance industry. Finally, Moser and Frankel discuss why Markel (MKL -0.78%) and Berkshire Hathaway (BRK.A -0.30%) (BRK.B -0.26%) are on their radar this week.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on April 27, 2020.

Jason Moser: It's Monday, April 27th. I'm your host Jason Moser. On today's Financials show, we're going to dig into a few more earnings reports from small banks, we'll take a look at Travelers Insurance's most recent report to get a better idea of how the insurance industry is handling the current COVID environment. Of course, we've got a couple of stocks for you to watch this coming week. And joining me, as always, Certified Financial Planner Matt Frankel. Matt, how's everything going?

Matt Frankel: Hey, pretty good. Happy Monday to everybody listening. Hope you're having good weather, as we are in South Carolina.

Moser: [laughs] You know, Austin and I were talking about this just before taping. It seems like we're not having that same good weather, it's been kind of rainy here in Virginia in the past few days and it doesn't seem like it's really letting up, but who knows, maybe this is a sign of good things to come, maybe we're getting the bad weather out of the way first.

Frankel: [laughs] Yeah. Well, it's been in the 70s and sunny here. In South Carolina, and you used to live here, right?

Moser: Oh, yeah, grew up there.

Frankel: So, you know generally this time of year, it goes from cold immediately to about 100 degrees. [laughs] So, we're not having that this year, which is a really nice change.

Moser: [laughs] Yeah, there's normally no spring, you just go right from winter into summer. And then it's just like, what happened to spring? But it sounds like you're getting a little bit there, that's good. Hopefully, you're able to get out a little bit during this time. I mean, obviously, activity has ground to a halt.

But, Matt, last week we talked a lot about the big banks' earnings. You know, the big banks, JPMorgan, Bank of America, Wells Fargo, how those banks were dealing with the current environment here. This week we wanted to take a bit of a different direction and talk about how some of the small banks are doing, because we had a couple of earnings reports that came out for banks that we've covered on the show before. We had Live Oak Bancshares report and we also had Ameris Bancorp report as well.

So, let's jump right in, let's talk about Live Oak Bank. And this is a bank that you follow, it's one that I follow, and they announced earnings which -- it seemed like a pretty good quarter, we know they have a big focus on small business loans. And I mean, it's a tech-oriented bank with a pretty low capital structure, so to speak, no physical branches anywhere. But talk to us a little bit about Live Oak's quarter -- what stood out to you?

Frankel: Well, to say that they're a small business lender is, kind of, like a big understatement. They originate, just to kind of put it in context, they originated $1.3 billion in SBA loans -- Small Business Administration loans -- last year, that was almost double the No. 2 competitor. So, they're a pretty big deal when it comes to small business lending, they know the process and all that, which is giving them a really good advantage right now, which I'll get to in a second.

But just looking at the quarter. I mean, assets are up 30% year over year, deposits were up 32% year over year. If you're not too familiar, Live Oak is an online bank, they're very tech-focused. They have great profit margins on their loans, because they're a small business lender, about half of the portfolio is guaranteed by the government, because they're small business loans, that's just the nature of the product.

That's pretty nice. I mean, I bet a lot of other banks wish all their loans were government guaranteed and still profitable.

Moser: [laughs] Well, there are a lot of them, at least right now, that are having their loans somewhat guaranteed, because of the payroll protection program and other efforts the government is making to keep our economy afloat while it's ultimately shut down, right?

Frankel: Right. Well, Live Oak has that benefit even when we're not in a global health emergency, so you know, it's nice to have. And speaking of the SBA loans, we all know the Paycheck Protection Program loans. That was $350 billion of the original CARES Act bill, they just added $310 billion, I believe, to it. Live Oak is playing a pretty big role in that.

They announced that, as of their latest earnings call, they'd closed almost 5,000 Paycheck Protection Plan loans -- it's kind of a tongue-twister.

Moser: [laughs] Yeah. 5,000, though, that's a good number.

Frankel: About 5,000 for almost $1 billion total. For a small lender, [laughs] that's pretty impressive to do in one quarter. When, like I said, their SBA loan volume in 2019, the whole year, was $1.3 billion. So, they want investors to know that they are well capitalized, they have about $1 billion of liquidity. They actually sold some of their existing small business loan portfolio during the quarter just for the purpose of shoring up the balance sheet. Because, I mean, we've mentioned this with the big banks, uncertainty is the name of the game right now.

We saw all the big banks posted pretty terrible profit numbers because they're building up their reserves in anticipation that losses might get pretty bad. We're seeing the same thing with Live Oak. I mean, it's obviously on a smaller scale than a Wells Fargo or something like that, but Live Oak set aside an extra $13 million to cover loan losses. I think they mentioned about a quarter of their clients have already requested and received loan deferrals during this.

And Live Oak, one thing to really keep in mind is they're a very industry-specific lender. Veterinary practices is one that they really focus on; just to kind of name a specific industry.

Moser: And craft brewers too, I saw, which interestingly enough, you know, I have been reading a lot lately about how craft brewers are really running into a buzz saw here, because, I mean, those businesses just rely on traffic. And no traffic, that really puts them between a rock and a hard place. They're literally just trying to buy any amount of time that they can.

Frankel: Right. So, craft brewers is one of their big ones that has potential exposure. Hotels, fitness centers are two other areas of the business. So, it's way too early to predict just how much these businesses will be affected longer. Like I said, they've already deferred most of their loan payments, in the troubled industries anyway. And historically, Live Oak has a really good record of making high-credit-quality loans, their debt charge-off rate was about one-third of what the average big bank was last year. [...]

It's way too early to predict what the actual impact will be. I guess, a lot of these are on six-month deferrals, whether or not that's going to be enough to get back to normal is a big question mark at this point. My hope is that all the banks are, kind of, planning for the worst, but in reality we're not going to get a worst-case scenario here when it comes to loan defaults, which eventually, the procedure in that case would be some of these reserves would be released over time and would show back up in the bank's earnings. But for the time being, they are being cautious. They're a big, big part of the Paycheck Protection Plan. I'm going to say that to myself, like, 10 times after this.

Moser: [laughs] The PPP.

Frankel: [laughs] The PPP loans, they're a big part of that. And while that's probably not going to produce a ton of interest income, it will, A. expand their business relationships, and 2, bring in a nice little stream of fee income, because these aren't fee-free loans, they're just forgivable loans that have low interest rates.

Moser: Yeah. And I mean, you make a good point there. And that while these PPP loans aren't some big profit driver, I mean, it does a couple of things for them. No. 1, it shows that they are able to be a part of the solution, they can be a reliable partner in a time of crisis. But also, there are relationships they can build from those loans. I mean, perhaps borrowers who didn't have a relationship with the bank before. And we've seen that, I mean, a lot of borrowers are having trouble with their primary banks getting exposure to that PPP program and so then they end up having to go to other banks, which ultimately can work out pretty well for those other banks, if they can end up bringing that level of service that customers really remember.

Frankel: Right. I mean, Live Oak is all about customer service, all about streamlined easy loan procedures, too, which is another thing that they can, kind of, showcase to these borrowers. Like I said, they are a small-business-focused lender, so this is what they do. I was reading the latest conference call transcript and they said something like, just one of the small -- in the SBA's loan programs, the manual is over 500 pages long. So, there's a lot of rules and regulations involved in these. And as the biggest SBA lender before the crisis, they had a lot less getting up to speed to do that as opposed to some of these other banks. So, I think this is going to be a net positive in the long run for Live Oak.

Moser: Yeah, it sounds like going into this. I mean, we obviously like this business going in, given the near-term challenges. Live Oak isn't the only bank, right? I mean, we're all kind of in the same boat here. All financial institutions are essentially in the same boat. So, it sounds like coming into this and when we ultimately get out of it, it sounds like Live Oak is a bank that you still like for the long haul, is that safe to assume?

Frankel: Yeah, for sure. And I mean, 30% year-over-year asset growth is a pretty impressive number, not that they're going to get that this year or -- have a great profit-wise year. But I mean, the stock is down 25% in 2020 and that's a lot better than a lot of the rest of the financial sector. So, I mean, the market is kind of reflecting that -- I don't want to say the pandemic is going to be good for them, but it could be -- I mean, the way they are part of the solution could be a positive catalyst for their business.

Moser: Yeah, I think that makes sense. And you know, we'll pivot over to Ameris Bancorp and talk a little bit about their earnings report, because I think there's a very similar theme here with Ameris, as was with Live Oak there. When you look at the actual numbers, the bank is performing very well. Total assets as of the end of March were at $18.2 billion, which was essentially unchanged from the end of the year. Total deposits of around $13.8 billion, that was a little bit lower than a quarter ago when they recorded just a little bit over $14 billion in deposits.

But you know, we were talking about that common theme with the big banks in their reports and the theme being reserves. All these banks are really preparing for the coming storm. And it sounds like Live Oak was the same way, certainly Ameris was, as well. Their current allowance for loan losses ended the quarter at $149 million -- that was up from $38 million at year-end. And so, you can see they were building up that reserve early on. And I think that makes a lot of sense, but the bank is still in a good capital position.

If we talk about that PPP program. And Ameris has lent $685 million under that program to just under 3,200 customers. And they're going to be participating in the second round here, too. They anticipate ultimately the same number of units of loans; so, around 3,200 units. Now, the dollar volume might be a little bit lower, but again, it kind of goes back to the smaller community and regional banks are finding ways to be a part of the solution.

And ultimately -- you know, management referred to this on the call for Ameris, when they were talking about the fact that there are plenty of customers out there where their primary banks were simply not allowing them to participate in that program. If they didn't get there in time, so they weren't able to receive the funding. And so, management has seen this play out, they are getting a lot of non-Ameris customers coming into Ameris' bank looking for help.

And ultimately, Ameris, they're proving to be one part of that solution. So, you can bring in borrowers who may not necessarily have been Ameris customers from the get-go, but they're finding that you really amp up that customer service -- you help these people in need -- it creates a relationship there. And it starts to give some of these customers this idea that, "Hey, maybe the big banks aren't the only solution, maybe there are other opportunities out there." So, I think they're seeing Ameris and Live Oak as two of those types of banks.

And we're seeing, again, in a very difficult time, the numbers are still holding up for Ameris. Tangible book value just a little over $20. And it was just down a tick from the end of the year. So, you can see, I mean, the stock today trading around $23, $24 dollars, it's been pretty volatile but it's trading just a little bit over tangible book value today. But we even saw it take a dip under that tangible book value over the quarter, which again, as a shareholder of Ameris Bancorp, I'm going to be hanging on to my shares. I really was noodling [laughs] buying a few more shares during that dip, but I'm also trying to be a little bit patient here.

Because I feel like maybe next earnings season might be a bit more telling because we get a better idea of how bad bad really is. But you know, at the end of the day, you've got a bank here, they have no exposure to oil and natural gas, I mean, you got to love that. They do have some modest exposure to hotels, never talking about that in the call. But all in all, a very diversified real estate portfolio.

And the acquisition of Fidelity, that merger that closed recently I think is going to be something that gives them a little bit more of that commercial exposure and diversity that will ultimately, I think, lead this bank to many happy days to come down the road here, especially as we work our way through what is obviously just a time of crisis for everyone.

So, yeah, again, I think with Live Oak and with Ameris, I think we're seeing a theme here, that big banks aren't the only solution. We're certainly seeing small, regional banks step up to the plate and show that they've got something to offer here, too. And I think that the Federal government realizes that, which is why they have the access to these PPP loans and whatever financial aid may come down the road, as we work our way through this coronavirus crisis.

Frankel: Yeah. And you make a good point about not putting too much stock in the first-quarter numbers, and that second quarter is going to be the most telling. Like we said with the big banks, January and February were, you know, largely pretty normal in terms of the U.S. economy.

I know when I was up there in February, the coronavirus was a thing, but it wasn't, you know, there weren't shutdowns, there wasn't, you know. We were in HQ that day and it wasn't really a thing yet.

So, you're seeing one month of, kind of, sort of, having an effect in the first quarter. The second quarter is going to be really interesting in that regard. And I mean, I will say, I wish I had bought shares of both of those in mid-March when they were trading for, like -- you know all banks were trading for pennies on the dollar at one point, so.

Moser: Yeah, they were. And I mean, I think we may see those days, again, that's certainly very possible. Now, I think that this quarter really shines a light on how healthy these banks really are, right? So, maybe we don't see the market react quite so negatively based on these reports that we saw this past quarter. I think they've proved their mettle a little bit here over this past quarter. And I think that we'll probably continue to see the same as the year plays out. I think, if the opportunity arises for either one of these two banks, I think that's going to be because of an overarching theme that's playing out on the overall economy, as opposed to just playing out on smaller banks, in particular.

But I do think that we're seeing this play out here, where these smaller banks are certainly stepping up and providing big solutions, for not only their current customers but for customers that they never had before. So, you said earlier, when we were talking about Live Oak, we're not saying that coronavirus is a good thing for these banks; I mean, it's simply not a good thing at all. But you can also see how this is going to be an opportunity for these banks, to not only grow their customer base but really to gain more credibility, to gain more respect in the overall banking environment and showing that big banks aren't the only solution in town.

And I think that with Live Oak and with Ameris -- I mean, these are two banks that you and I like a lot. And I think, when you look over these numbers for the quarter, it makes a lot of sense as to why we like them. You know, I think it's going to be a little bit tough in the near term, but I think these are two banks that will certainly emerge from this time, ultimately in better shape. And I think they're creating a lot of long-term goodwill with a lot of people.

Frankel: Yeah, and I would definitely agree with that. And the second quarter is going to be an interesting one, as you just said.

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OK, Matt, pivoting away from banks for a few minutes, because we saw another big financial company out there report earnings recently, but this is the insurance space, another space that you and I like to follow closely. Travelers Insurance, the big red umbrella, they reported earnings and, you know, going through the release, going through the call, I leave this quarter feeling cautiously optimistic that Travelers is one of those strong companies that will emerge from this in a stronger position.

But you know, I will tell you, Matt, when I read through that call, I left with just this concern, it feels like to me the biggest risk for the foreseeable future for these big insurers is ultimately going to be COVID-related litigation. It sounds like the litigation has already started and it sounds like the litigation may only grow in time and ultimately that litigation is going to be revolving around coverage, right?

Insurance companies may be not necessarily covering virus-related losses based on the language in the contracts. Now, I'm not a lawyer, I won't even pretend to go down that rabbit hole, so to speak, but I do know insurance, I worked at an insurance company and understand how that works. And I could see litigation dragging out for a long period of time for all of these big insurers given the hardship that everybody is feeling today.

And that's not to take anything away from how the company performed, I think the company performed very well. What did you think about the quarter for Travelers?

Frankel: Yeah, I mean, the quarter is solid. Like we just said, that January and February were pretty normal. They had, they said, $86 billion worth of COVID-19-related charges, which is not that big of a number for Travelers in the grand scheme of things. But just kind of, to echo what you were just saying, we mentioned, I think, with one of the other insurers that a lot of insurance policies, we were talking about business interruption the other show about, I think, one of the mall REITs. And a lot of business interruption policies and workers' compensation policies and underemployment policies, things like that, specifically have language that exclude anything related to a virus. That's a big issue with some of these retailers who're having business interruption.

So, on the call, Travelers' CEO pretty much made it clear that they don't foresee anything changing retroactively with that. In other words, they don't think anyone's going to really have success adding virus coverage into a policy that specifically excluded viruses. But that's not to say people won't try, as you said. [laughs]

Moser: [laughs] Well, but, yeah, it's not just the virus, right? It's talking about -- I mean, the virus is the reason why we've ultimately been shut down, but the shutdown was more or less implemented by regulators, by the government. So, the argument could be made that it's not a virus loss, but it's a regulated loss. And I think that's where that litigation gets really murky. And I'm with you, in that, I feel like the burden to make that argument is pretty high, but you said it, I mean, it's not going to stop people from trying.

Frankel: Right. And there's a lot of other, kind of, interesting dynamics in Travelers' business, because as you know, they write insurance in a wide range of the insurance business. Just, for example, their auto insurance business, they're giving 15% rebate in April and May because people aren't driving right now. They're probably still coming out ahead in that. I mean, I'm driving a lot more than 15% less than I, you know, I mean, I think, I haven't put gas in my car since March.

Moser: I'm with you. And that was a neat point they made on the call there and being able to offer those rebates. But by the same token, they're not seeing the same level of losses because people simply aren't driving as much, you're not going to see as many high-speed accidents, so they can afford to give those rebates, because those losses aren't going to be there and as they would be in normal times, too.

Frankel: Right. So, the company said that there will be some COVID-19 losses, we already saw some, like I just mentioned, in the first quarter, but they said that their exposures will also decrease somewhat as well. And auto is probably the most easy to understand example of that. You know, they're going to have some COVID-19 losses, but exposure, like, you know, less driving means fewer auto accidents they have to pay out and things like that.

So, it's a big question, like I said, uncertainty is the name of the game here. So, it's a big question as to whether the COVID-19 losses or the reduced exposure wins in the end and whether or not the net losses or the net gains are going to move one way or the other. You know, the loss ratio, as they put it in the insurance business, whether that's going to be higher or lower as a result of this. Because those are two, kind of, competing dynamics here.

The company said they're going to make expense adjustments accordingly, so they're not worried too much about the impact. I mean, insurance companies deal with assessing risk and handling unknown situations. Obviously, this is an unprecedented crisis, but in terms of the impact to an insurance company and them navigating through this, is it really that much different than a major hurricane or whatever --

Moser: Well, yeah, the hurricane, they talked about tornado season pending or wildfires. I mean, there's a litany of opportunities for loss out there; this is clearly another one, but probably it's something that's not going to occur with the consistency of something like a tornado season or a hurricane season either.

Frankel: Right. So, I mean, it's an unprecedented situation in and of itself, but insurance companies are really good at navigating this. And like I said, there's a lot of things that are going to hurt the insurance companies and a lot of things that are going to help the insurance companies. Like, I can go on from auto insurance, but there's -- like, you know, I mean, workers' comp claims, fewer people are getting hurt at work. So, that's something that's going to be, you know, less an exposure. So, it's going to be interesting to see how it plays out for the rest of the year.

Moser: Yeah, it'll be one that we follow for sure. I mean, Travelers being one of the majors out there. I got to believe that they're going to be pretty well prepared going into this. They have a tremendous fixed-income portfolio that should help them get through this as well and protect them from some of that market volatility.

Real quick, Matt, I know you got to go, what is the stock you are watching this coming week?

Frankel: Yes, sorry, I got to stop early, because Dan Kline voluntold me to be on Fool TV with him this afternoon. [laughs] I'm watching Berkshire. I know I've mentioned that one a couple of times in this, but this week is going to be especially interesting, not just because they're having a fully online meeting for the first time ever. Obviously, I was supposed to go to Omaha, so obviously, that's not going to happen.

Online meeting is being live-streamed on Yahoo! Finance.

That morning, however, they're releasing their first-quarter earnings, and we'll get a first look at how Berkshire's cash hoard was affected by the first quarter. If you see that number go down, you can bet that Buffett had a pretty active quarter buying stocks. I'm hoping it went down. Pretty much my whole investment thesis with Berkshire is that he's really good at putting money to work at the right times. March was one of the right times, so I want to see that he put some money to work.

Moser: I think that's probably a pretty safe bet, but yeah, we'll have to wait and see. In line with the insurance, I'm going to be keeping an eye on Markel, their earnings report comes out on Wednesday. Focusing a lot on the same kinds of things we focused on with Travelers. It's less about the past quarter, more about how they see the rest of the year unfolding, and how, you know, it's going to look toward the lines of coverage that they write.

It'll be exceptionally interesting for them, because they're such a specialized underwriter. But yeah, certainly Markel will be another one on our radar, those earnings on Wednesday.

So, with that, Matt, I know you gotta get going. I appreciate you taking the time out this week and maybe you can kick some of that good weather down there in South Carolina up our way.

Frankel: I hope so, and I hope I can come up there myself with it, too.

Moser: Well. Soon enough, soon enough, right? Glass half full.

Frankel: Exactly.

Moser: Well, that's going to do it for us this week, folks. Remember, you can always reach out to us on Twitter @MFIndustryFocus or you can drop us an email at [email protected].

As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

Thanks, as always, to our man Austin Morgan for keeping it real behind the Zoom. For Matt Frankel, I'm Jason Moser, thanks for listening and we'll see you next week.