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Why JPMorgan Is Eyeing Square

By John Maxfield – Updated Oct 30, 2020 at 8:51AM

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Bill Demchak once noted that JPMorgan can build anything fintech has in a week given its resources, so what's the missing ingredient?

In this episode of Industry Focus: Financials, Jason Moser and Motley Fool contributor John Maxfield are looking at some banking and fintech companies and some earnings releases. They've got an incredibly innovative bank, a bank with a rich history as a community bank and penchant to grow through acquisitions, and a multinational financial services behemoth. They also discuss bank loan loss reserves and share some stocks to put on your radar.

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.

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This video was recorded on October 26, 2020.

Jason Moser: It's Monday, October 26. I'm your host, Jason Moser. On this week's Financial show, we've got more earnings to get to, we've got a big bank looking to give a fintech company a run for its money. And we'll answer the question, or at least entertain the question, should banks be releasing reserves with so many questions still outstanding regarding the pandemic and the economic slowdown that we've been witnessing here in 2020? Of course, as always, we've got one to watch for the coming week. And joining me this week, it's not Matt Frankel, folks, it's Mr. John Maxfield. John, thanks for being here.

John Maxfield: Pleasure, Jason. Thanks for the invitation.

Moser: Yeah, well, it's wonderful to have you along here. I'm really excited to talk with you more about the banks and get your idea, your thinking here on the reserve's questions, particularly, as well as the JPMorgan Chase (JPM 0.24%) fintech move there. But let's talk earnings first and foremost. We had a few companies in our Foolish universe report earnings last week. And first up, it's a bank that I know you're a fan of and it's a bank that Matt and I both like a lot, and we've actually had the president of Live Oak Bank on our show once, Mr. Huntley Garriott. But Live Oak Bank reported earnings recently, John; give us a quick look at the quarter and your thoughts.

Maxfield: All right, Jason, let me give a short preamble on Live Oak before talking about the quarter. So Live Oak, the way I think about Live Oak is that it is run by, I think of them as, kind of, the Batman and Robin of banking innovation, and that's Chip Mahan and Neil Underwood. And so, when you think about banking, the way you typically think about it is like boring, slow-moving kind of, entities that are not innovative, just kind of doing the same thing over and over and making money from other people's money. Live Oak is a totally different entity.

So it is an incredibly innovative bank, and if you go back through Chip and Neil's history, you'll see this popping up again and again and again. Chip founded the bank. He's taken banks public. He's founder at other banks. He's then spun-off technology companies from those banks. He then came over and started Live Oak Bank and then spun off a big, really successful technology company from it. And so, not only do they have your typical, kind of, banking earnings type of stuff on their P&L or on their income statement, but they also have big potential bets in technology companies that, given what's going on in the market, can have a huge impact. And so, what we've seen is that type of global situation played out in Live Oak's latest quarter -- in fact, the last two quarters.

So they make loans, they take deposits and they make loans.But Live Oak specializes in making SBA [Small Business Administration] loans. And you think, OK, SBA loans are for small businesses. Who's hurting right now? Small businesses, right? That's got to be horrible for Live Oak. No, it's not horrible for Live Oak. It's actually the exact opposite, because you have two different things that came through in the past, what is it, seven months.

The SBA came out with the Paycheck Protection Program, so PPP. So these are loans to small businesses, and the SBA is basically, like, "Look, you make these loans to small businesses and you don't fire any employees, at the end of, I think, it was a 90-day period, we'll turn that loan into a grant, we'll just like give you that money." The second element of this, was that the SBA came, and said, "Look, if the loan is made between the end of March and the end of September, we will cover your interest and principal payments on those." So it takes all that pressure off of these small businesses. Well, Live Oak is the No. 1 SBA lender in the country.

Moser: They do that without branches too, right? To your point there, as far as innovation and tech goes, this is a branchless, tech-based bank. They embrace technology in virtually every regard.

Maxfield: If you go back to its origin story, the thought process is that, look, we're going to go deep into one vertical, and that's going to be veterinarians, and make SBA loans to veterinarians. And we're just going to go really deep into that vertical. They're based in Wilmington, North Carolina. To go really deep into that vertical you can't just be serving veterinarians in that area; you've got to serve veterinarians all over the country.

So they had this idea of branches in the sky. Chip Mahan bought a couple of jets and they were just flying people all over the country. And that's why that tech focus is so important, because it's, kind of, the glue that put the whole thing together, because it didn't matter where their people were, they could be originating and moving these loans along.

So if you look at last quarter's earnings, their earnings were, I mean, it is like the right time, the right place, and the right product. So their earnings were up. So what did they earn? They earned $34 million last year on a year-over-year basis. That was up like 7% or 6% to 7%. Now, there's noise in those numbers, because they have these investments that they're constantly writing up and writing down, but what was really, really interesting and really promising is, if you look at their loan origination volume -- so, typically they originated about $500 million of loans a quarter. Last quarter was about $1 billion. It was a record quarter for them. And again, a lot of that is because they're doing these SBA loans. And not only that, but projecting forward, their pipeline is at an all-time high. So it's just really, really, I mean, it's just a perfect environment for them.

And then the one other piece of this is that, if you dig into what Chip and Neil are doing over there, they have a thing called LiveOak Venture, I'm sure you and Matt have talked about LiveOak Venture.

Moser: Sure.

Maxfield: They've maybe [laughs] these incredibly successful investments in a variety of different fintech companies, nCino (NCNO) being one of them. nCino went public in July; it was the second most successful tech IPO since 2005. And they wrote up one big investment in that quarter, and that was in Greenlight, which is a debit card for kids...

Moser: Very familiar with that, by the way. We use that for our kids here at home. And they love it, and we love it as parents. So yeah, that's exciting to me to know that they are actually behind that.

Maxfield: Yeah, that's really cool. And then the other thing that they're doing -- and this is what I think is really, really, really cool, Jason. So they've taken that LiveOak Ventures and they've created this new entity that is taking its place, and it's called, I think, Canapi Ventures, and they're doing this with Gene Ludwig, who is the former Comptroller of the Currency. Gene is like an incredibly entrepreneurial guy in the banking space too. He founded Promontory Interfinancial Network. What they do is they take, it's this huge depositary of products, and it's this amazing thing that all of these community banks, all over the countries use, all the time, to make sure that big deposits are insured, and they're going out and they've got 35 banks -- well, that's what it was when they announced it, are limited partners in this bond -- and they're going to go out and invest in all of these new technologies.

And so, when you think about Live Oak, I would urge listeners to think about it less as exclusively a bank and more as really a bet on innovation in the financial industry.

Moser: Well, I like that thinking there. And given the reputation that banking has throughout time as being, kind of, that boring, stodgy, just making money with other people's money sort of industry. I mean, to see banks like Live Oak getting out there and playing the role of an innovator, particularly today when, as you mentioned, small and medium-sized businesses, that's when they really need it most, it's exciting to see.

And I'll tell you, another bank that announced earnings last week, and a bank that we follow here on the show a good bit, Ameris Bancorp (ABCB -0.70%), very similar in that it's a small bank focused really certainly on the smaller businesses within its region, and it has a rich history as being a community bank. But it's grown, it's made some acquisitions. And if you go all the way back to the financial crisis of 2008, 2009, and 2010, when everything seemed to be going south, Ameris was seen as one of the smaller banks in the region in Georgia that was serving a role as a savior almost, right? They were part of the solution, not part of the problem, so the FDIC [Federal Deposit Insurance Corporation] actually saw Ameris as a suitable parent, so to speak, for rolling in all of these institutions that really needed some help. The FDIC made some pretty attractive offers there to say, "Listen, you bring these, more or less, failed institutions under your umbrella, we're going to make this basically a risk-free transaction for you. It'll be a way for you to get a little bit bigger, and also, in the process, you'll be helping us out too by ridding the system of some of the fat, so to speak."

And what we've seen since then, Ameris had its ups and downs, but the bank itself has continued to do well, and it continues to grow and perform well. But if you look at some of the numbers from the quarter, they reported adjusted net income of $170 million, that was $1.69/share; that compared with $68.5 million or $0.98/share from the same period a year ago. They have continued to see healthy growth in mortgages; no surprise there given where interest rates are today. Nice to see as well the efficiency ratio, which is just a nice way of telling us, you know, how the bank is spending its money, what it's doing with its money. So lower is better, and we saw that efficiency ratio now down under 50% at just over 47%. And net interest margin pressure continues, but again, given the interest rate environment, that's all banks being in the same boat there.

One of the things that I continue to focus on regarding Ameris that I think is really encouraging, and it goes back to this acquisition they made of Fidelity a year or so ago. It gave them great exposure to some commercial real estate markets in the Southeast, which is really nice, but what it also did, it really gave them this big boost to their non-interest-bearing deposits. And you figure that those non-interest-bearing deposits, I mean, that's great for a bank, because that's essentially free money for them, right, they don't have to pay anything to be holding on [laughs] to that money. So now you've seen that non-interest bearing deposits closing in on 37% of total deposits. That's up from just under 30% a year ago. And then that really was part of the rationale behind that fidelity acquisition at the time they made it.

And finally, we've been talking about the potential for ongoing M&A in the space, and management there at Ameris feels like there is a little bit of a coiled spring there. They're going to see some M&A activity as things start to improve here, and they definitely want to be a part of that. So I think it's a safe assumption that Ameris will grow via acquisition, and they seem to be very focused on making sure that those acquisitions are in alignment with their culture. And that, to me, makes all the sense in the world. But it seems like they really have been successful with that Fidelity acquisition to date, and a lot of that, I think, has to do with the fact that it was two very similar cultures coming together.

So for those of you who are interested in Ameris or own Ameris Bancorp, like I do, I think you can feel really good about the quarter and knowing that management just continues to do what they tell us they're going to do, and that's a big priority in my book.

John, let's wrap up earning season here real quick. American Express (AXP 10.54%), another little bank, [laughs] maybe not little, but technically, yes, a bank, as many listeners probably know, but maybe some don't, tell us a little bit about American Express' quarter and what stuck out to you.

Maxfield: So American Express is American Express, right? I mean, this is a big, solid, well-run company that's been well run through many, many, many, many, many cycles, right? And it's a credit card company too in large part. You have a bank and then you have this other element, there's this credit card element. And then they, of course, hold there's portfolio of those loans, which is one of the differences with American Express' business model.

So when you think about what's going on in the economy right now, you see that exactly in American Express' earnings. So their revenues are down about 20% year over year, net income down about 40% year over year.

And so, you say, OK, here's what's interesting about American Express. So when you talk about a bank, you have two elements, two, kind of, big, big P&L elements or income statement elements. You have the money that they're bringing in; you have your revenue. But then you also have this kind of plank that is your credit exposure, and because banks or typical bank is leveraged 10:1, I mean, you have to be so right on your credit decisions all the time, or else you are under the threat of insolvency at all times, particularly at a time like this.

I did the math one time, Jason, and if you want to perform as, literally, like a top-performing bank, an M&T type of situation, PNC type of situation, you can write off no more than a 0.5% of your loans on an annualized basis through an entire cycle. So think about that. That means you got to get 99.5% on your test every single year. But that's like, that's not easy, right? [laughs] That's just not easy.

And so, client selection and customer selection is super-duper important, and that's where American Express shines, because they go after high-end consumers and businesses for their card business. And so when you think about that, that means these folks have bigger balance sheets, when you think about bigger balance sheets, that means they can survive cycles better. So that protects American Express on the downside.

What has hurt American Express in the latest quarter, though, is that if you go through and you look at the consumer spending patterns by income group, OK -- let me pull these numbers up; this is really interesting, all right. Right now, if you go back to January, you look at your low-income group of consumers, their spending compared to January, on an annualized basis, is up nearly 1%; it's up by 1% in this environment. You look at your middle income: down 4% compared to January. You look at your high income: down about 7.5%. And that's where American Express, that's their specialty. It's in that high-end consumer group. Not only that, it's within the corporate group where you have corporate cards, people paying at restaurants, people paying for flights, people paying for hotels, all those things are down. And so that's why American Express' earnings were down and revenue, and earnings were down last quarter.

But the important thing to remember -- and you know, The Motley Fool, we are long-term investors, I mean, this is a solid company, it's going to make it through this just fine. Ten years from now, you'll look back, it'll be a tiny blip in American Express' history.

Moser: Do you feel like with American Express -- and I mean, I say this as a cardholder for, I don't know, 15 years or something it feels like now, I've always enjoyed having that card, because it's always been very reliable, particularly as a travel card. You know, you go somewhere like Costa Rica or wherever you may go, you don't have to worry about that card being shut down. I mean, the customer service level, to my experiences at least, American Express has been heads above all else in regard to customer service, which is one of the reasons why I keep the card. But it does feel like they've had to really figure out a way to grow in the recent years by reaching out to that consumer demographic that they haven't traditionally met the needs of before. Do you feel like they are being successful and it's just slow going? Or do you feel like they're doing enough, do you feel like they need to do more in that regard?

Maxfield: Okay, that's a really good question. I mean, you go back a couple of -- I can't remember right now, now you've asked, I can't remember the exact moment that happened, when that Costco membership fell off in the consumer segment, that really took a bite out of their consumer segment. Now they retained a bunch of those accounts, but that spending pattern shifted over to other cards, so that hurts them in the consumer segment.

Is it a prudent strategy going forward for American Express? Look, I mean, I'm not going to Monday-morning quarterback American Express, because they are really sophisticated, [laughs] you know what I mean? Like, this is a bet. They've got all the data, I trust they're making really smart decisions. They made smart decisions along the way through the years through multiple cycles. So I mean, this is one of those situations where there are now -- when we get to end of the segment and talk about credit losses, I think there are reasons to, I think, you can Monday-morning quarterback in some situations, American Express is not one I would feel comfortable, just because I feel like they know so much more about this, and they've had a history of such prudent decision making.

Moser: Sure, yeah, I mean that's the benefit of that closed-loop system, like we've talked about before, very different from something like a Visa or MasterCard. Visa and MasterCard, they don't subject themselves to that credit risk like American Express does. That has its puts and takes, but certainly, to your point, American Express has a long history of doing a lot of good stuff. So yeah, it's one of those companies where you feel really good about taking that longer view, because you can deal with, sort of, the peaks and troughs given whatever the macroeconomic conditions may be bringing to us as investors. But American Express has a strong brand, rich history of, yeah, I think innovating within the space and also, obviously, using data to make good decisions, and it's worked out well for them to this point.

Okay, let's pivot here and talk a little bit about this story we were looking at over the weekend, because I found this to be fascinating from a number of different perspectives. And I have my take on this, but we're going to get your take first, John. I want to hear what you have to say about this, because, to me, I'm a little bit surprised it took this long, to be honest with you, but JPMorgan Chase has plans to take on fintech companies like Square (SQ 3.25%) and PayPal, and let's throw Stripe in there to some extent, even though it's not a publicly traded company, it still plays in that sandbox. But JPMorgan Chase wants to get out there with smartphone card readers. They want to sell customers on faster deposits for merchants. I mean, they're trying to get into this space. And it certainly seems like, on the surface, you've got a very big bank with what seems like a limitless pool of resources. What do you think here? I mean, is this something Square and PayPal need to be worried about or not?

Maxfield: Well, I think you'd be silly not to be worried about it [laughs] if you're PayPal, right? To your point, I mean, what is JPMorgan...they make their revenue over the trailing 12 months is $119 billion, [laughs] you know what I mean. I mean, any time that it moves into a space, I would be worried ...

Moser: Yeah, Square's top line is a rounding error for JPMorgan at this point, so let's just, [laughs] you know, that ought to put it all into perspective, I think.

Maxfield: Yeah. You know, Bill Demchak, who I think is literally the smartest banker, maybe not the most intelligent on an IQ scale, but like, everything he says is so spot-on. And he made a comment a couple of quarters ago, someone was talking about fintech companies, like, are you worried about fintech companies? He says, "Look, we spend $1 billion on this stuff a quarter, a year" -- well, I don't remember whether it was a quarter or a year -- he says, "We can build anything that they make in a week." You know, like, OK, that's a very good point. [laughs]

But so, should Square be worried? I mean, yes, they should be worried. Does that necessarily mean that JPMorgan is going to succeed? No. Like, when you think back to that, remember that app that they released for millennials, I think they called it Finn? And it fell on its face. So it's no guarantee. And Square has a good brand. I mean, small business owners love Square. And so, the question is, is it too entrenched for JPMorgan to move into that?

Or the other question is that, so JPMorgan is something like 3 million small business customers, are they going to be able to get those 3 million small business customers to get off of Square and come over to its product? And if they can, you know, give those benefits and use those benefits that you mentioned, that's, kind of, the sales pitch? And if they can't, can they use it as a beachhead to erode Square's dominance in that space? Don't know the question, but certainly, it'll be interesting to watch. But is it a big deal to JPMorgan? No. To your point, that's a rounding error for them. I do think it's a big deal for Square, in particular.

Moser: Yeah, it makes me wonder [laughs] if the powers that be at JPMorgan regret maybe not jumping in there and trying to acquire something like a Square a few years back when it was a little bit more affordable. But I mean, clearly, to your point there, I mean, Square's success at this point... I think the one thing, I mean, my general perspective is that the investing landscape, it's a very rich history of large incumbents with endless capital resources trying to jump into a space like JPMorgan Chase is trying to jump into Square's space here. And they don't necessarily witness the same kind of success as you might think given their size and capital resources. And I think a lot of that goes back to something you mentioned, in actually talking to customers to switchover. Is it saying, OK, we have better hardware? I find that hard to believe they're going to make better hardware than Square, because they've been doing it for so long.

So what's the other thing they can try -- the other carrot thing to dangle is faster funding, right? And that I certainly understand. I mean, hey, the sooner you can get money into the hands of the people that need it or want it, that's a value proposition for sure. Now, that's also something that Square has been focused on since day one as well. I mean, as it stands right now, customers have to pay a little bit for that faster funding, but my suspicion is, over time, as with most of the costs in this finance space, as money goes from point A to point B, those costs are all coming down. So I think it's inevitable that at some point or another for Square, they're not going to be able to get away with charging any kind of a convenience fee or additional fee to get to your money faster. I mean, it seems like these costs are all coming down anyway.

But it really does boil down to Square being, kind of, two companies. They've got the hardware, but really, I think what drives the ship, so to speak, is the software. And I think that's going to make the switching -- there's some material switching costs that can come from good software and good customer experiences over time, and I think that's a tougher thing to compete with, you know, all the capital and resources in the world, that's a more difficult thing to compete with.

Maxfield: Yeah. And I'm sure you've talked about this on the show many times, but let me make two points, actually. One is that Square's business model is amazing; like, it's just an amazing business model. So you go out, who do you want to make loans to? If you're a highly scalable business like Square, who do you want to make loans to? You want to make loans to small businesses, because there's tons of small business, [laughs] right? So how do you make loans to small businesses? What's the principle key there? Well, small businesses are super-duper risky, super-duper risky. I don't know what the stats are, but I mean, new restaurants, I don't know, but there's like a 40%, 50%, 60% failure rate. I mean, super-risky business, food carts, things like that, you know, little merchants at Saturday markets and things like that.

And so, you don't want to necessarily, as a general rule, just go out and start making loans to these companies, which can be really profitable, because your yield on them is higher, because their inherent risk is higher. So it's like the Valhalla of making loans if you can do it safely. Well, Square has [laughs] all of that data, they have all of their cash flow data. And so, they can come in, they can look at all that cash flow and come in and be like, OK, we're going to loan to you -- and they can almost take all of the risk out of it, because they know the cash flow so, so well. And that's where Square is really going to, really, really going to do well. That's the first point.

The second point is just a broader point about financial technology companies. There is this narrative in banking, and I can go back to the beginning, like what I was talking about with Live Oak, the banks are these slow-moving, noninnovative companies, right? So you go out and you talk to a fintech exec, you say, Mr. Fintech Exec or Mrs. Fintech Exec, tell me what your thesis is. Their thesis is, OK, banks are horrible at innovating, banks treat their customers horribly, banks are too slow, too old, blah-blah-blah, right. You say, OK, I'm [...] with you, so tell me about your company? Okay, we've been around for 18 months, you know, we're not profitable, [laughs] in fact, we don't even generate any revenue.

You understand that like, the oldest bank in this country was founded by Alexander Hamilton, and you go into Bank of New York Mellon's headquarters in downtown New York, you're not going to think that these are unsophisticated people. Point being, is that like, banks are a force to be reckoned with in the technology space, and they really have been very good, out of all banks through this through the years.

Moser: Yeah, I agree.

Well, speaking of banks, let's get to our final story of the day here, this is one that I actually was really, I was a bit conflicted on how to feel about this, John, because I mean, on the one hand, it feels like, hey, maybe this is a sign that things are getting better, but yet on the other hand, I mean, you know, I understand the desire to be, sort of, a financially conservative guy, and you want to just try to make sure you've got all your bases covered. And with banks, I mean, that's kind of part of their job [laughs] is to make sure they've got all their bases covered. And it certainly sounds like, at least from this story that there are some banks out there that are starting to release these loan loss reserves. The banks which typically are going to set aside loan loss reserves, it's been a big narrative here over the past couple of quarters, where we're seeing just billions and billions of dollars being set aside for potential losses. And I think the potential in most cases is probably pretty high, but it does seem like maybe some banks are feeling a little bit more, let's just say, glass half full about this situation.

So we've got some noteworthy banks out there. Fifth Third is one that is starting to release some of these loan loss reserves. I mean, what's your gut reaction to reading this?

Maxfield: Crazy.

Moser: [laughs] Don't cupcake it, John, tell me what you really think.

Maxfield: It doesn't make any sense, and I'll tell you why. Okay, so this is one of those situations where, as a general rule, I think it's important as an investor on the outside, we don't have the data for you to act with immense amount of humility. It's easy to look on the outside and go, oh, this company, they don't know what they're doing, blah-blah-blah, OK. Like, you have to understand that these people do this all day, every day, all week. You know what I mean? And particularly when we get to these big companies, these are sophisticated people with a lot of data. They hire a lot of smart people to analyze the stuff. So as a general rule Monday-morning quarterbacking, one should exercise humility.

There are exceptions to that, I believe this is an exception. So the way that this works is that, if you think about it, you come into a crisis, loans don't start going bad immediately, OK. The economy deteriorates, unemployment deteriorates, then you start seeing delinquencies, people can't pay their credit cards, people can't pay their mortgages, businesses can't pay their mortgages, businesses can't pay on their lines of credit. There's a lag. But as soon as the bank sees unemployment and things like that, GDP starts to fall, they will immediately start to set aside money, they'll start to take provisions for loan loss reserves. Okay. They set aside money to say, OK, we think we're going to experience this much, this percentage of our loans is going to go bad, or this dollar amount of our loans are going to go bad, let's put this away right now to prepare for that. So they do that early, and then, as you get deeper and deeper and deeper into crisis, like, your debt starts to kind of taper off.

Well, it's really important at the beginning of a crisis to take as much as you absolutely can, because what you can do is you can just charge off all of your earnings; all that money you're making, you just set that aside as a loan loss reserve. Okay, you set that aside. So if you can do that at the beginning and the crisis gets really bad, you have more quarters through which to do that.

On the other side of that, if you are really aggressive, and they call it taking "a big bath," and you take a big bath at the beginning, and it turns out that you overestimated what was happening and it doesn't turn out that bad. Well, then what happens is you start to release these reserves on your income statement. So you charge those back, but you charge them back not as an expense but as income to boost your earnings, it can do it for years. There were banks after the financial crisis, but their [laughs] earnings were boosted for, like, eight years. Because they ...

Moser: [laughs]'s just because they're putting money back in they've already reserved.

Maxfield: Exactly.

Moser: It's a nice gig if you can get it, I suppose. [laughs]

Maxfield: Yeah, it is a great gig, because it's like, it just boosts your earnings for all those years. And so, and you can do it, kind of, strategically, maybe even factoring in taxes and things like that.

Well, the thing is that right now, we're still in the point where we don't know what's going to happen. Like, yeah, credit losses are like zero, they're like nil. Live Oak, if you look at their credit, literally their delinquencies were 0%. But that's because we've had such immense fiscal monetary stimulus come in. We don't know what's going to happen with that, so the smart thing to do when you're running a highly, highly leveraged institution where the margin for error is slim to none is to be uber conservative.

And so, you go on and you say, OK, let's go and look at what the really conservative, really well-run banks have been doing with their loan loss provisions. You look at your M&Ts, you look at your JPMorgans, you look at your PNCs. They're all like on their conference calls are like, [laughs] "Ah, we don't know what's going to happen, you know, like, this could get really ugly or it could be fine." We don't know, but what we're not playing around, so we're going to be aggressive about this, we're going to be prudent about this, we're going to set this thing aside.

Then you have a couple of these banks that have come in and started releasing reserves. And when I say release reserves, there's two levels of releasing. You can release reserves by setting aside less than your provision as you charge off. So that's one way to release reserves. But you can also release reserves and take it to the next level, where you're actually recording a negative provision on your income statement, where it is actually benefiting.

And so, there's two major banks that did this last quarter, and that's Fifth Third and Umpqua. Umpqua is in my hometown of Portland. Now, I don't want to say [laughs] anything too negative about these guys, OK. I've had the chance to get to know the CEOs of both of those companies, and they're nice guys and all that. But I find the decision to start releasing reserves this early in the crisis, it's just confounding to me, it makes no sense. Because it doesn't do you any good, because your valuations are already hit by what's going on, just save that for later. And if it gets greater later, release some later to let your earnings fly with everybody else's; if it gets worse, you're prepared for it. It just doesn't make any sense to me.

Moser: I wonder -- you know, and we pride ourselves on all of our shows on not taking the political angle for myriad reasons, but I do wonder, when I see something like this... I mean, obviously, we're still in a position where the Congress has not able to reach a deal regarding stimulus, yet I feel like at some point they will hopefully, but again, to your point, we really don't know. You don't know until you do know. Do you feel like maybe this is just a bet on management's part? They are thinking that it's going to happen at some point? It's just a matter of time?

Maxfield: Okay. So first slice it that, in no way, shape or form should a bank, because it's so highly leveraged, be making bets like that, directional bets. You just don't do that. You do that, but then banks fail; 17,000-plus banks have failed since the modern American banking industry came into form in the Civil War, that's over a 100/year. The reason is a lot of time is because they're making directional bets like that, whether it's on real estate, whatever it is. You don't do that in banking, that's just not what you do, that's not what the smart banks do. The smart banks they just don't take any risk ever, that's just what -- you know what I mean. You earn a 12% return on equity, you earn every year, bang-bang-bang-bang, 12% return on equity. You do that, you double your invested money every six years, it's just like clockwork, OK. So that's the one thing I would say.

And the other thing I would say is that, to your point, I mean, gaming this out how this is going to go, [laughs] Jason, like, how do you game it out? So let's say Biden takes the White House, but the Republicans keep control of the Senate. I mean, what does that mean? What does that do to the odds of something going through? Now, if Democrats take everything, the odds of something going through are pretty good, probably a pretty big package. But do you have a split situation? And like, nobody can model, I mean, nobody can guess that. I mean, you're just basically, at some point, you're just flipping a coin, and you don't want risk managers flipping coins, when they're using federally insured deposits, certainly.

Moser: Yeah. And to your point, not all investments are the same; you invest in certain companies for certain reasons. I mean, you're not typically investing in your banks trying to recognize like those SaaS-style gains, right? I mean, the bank's financials are going to hold a part of your portfolio for a certain reason, and so, yeah, I can certainly appreciate that. You'd be looking for those banks to behave accordingly. So yeah, that's going to be something certainly worth keeping an eye on, especially as not only this earnings season rolls out but subsequent earnings seasons. See how these management teams are feeling about the reserves and well, you know, we'll keep an eye on that trend to see if it's something that continues to gain steam. Let's hope it doesn't, I think I'd rather see them be a little bit more prudent than not.

But John, before we wrap it up this week, we always like to throw a stock out to our listeners, a stock that we're watching for the coming week for whatever reason. And so, I'm going to let you start here. What's your one to watch for this coming week?

Maxfield: Okay. My one to watch right now is not just for the week, it's like the one I'm watching right now. And so, I mean, I do banking stuff, I write about banking, I watch banks, I see what they're doing, I see what's going on in the industry. And I mentioned this company earlier when I was talking about Live Oak, and it's nCino. This is digitization of the financial services industry; it is a big thing and it's a real thing. There have been changes in the past, like phone banking came out, all these other things came out, people were like, oh, banks are going away forever, blah blah blah. It never came to fruition.

The same things are being said right now, bank branches are going away blah blah blah. Like, now, it is more real than it has ever been. I don't think branches will ever go away, but like if you see the trend in branch counts, I mean, it is having a huge -- this digital banking is having a huge impact. And the COVID situation has accelerated that, it's like the Cambrian explosion in evolution. One.

And then you see step back, now you say, OK, let's step on the other side of that, like, kind of a picks-and-shovels-type analysis. Like, who is selling the picks and the shovels? Who's really going to benefit from this? And there are two companies in the financial technology space, outside of your big oligarchs that are running like your quarters, like your Pfizers, your FIS, those companies, your Jack Henrys. Outside of those companies, there are these financial technology companies, a select few of them that are growing and having enormous success, this enormous success.

One of them is called MX, [Technologies]. It's a company based in Utah, right outside of Salt Lake City. It is not public. I would not be surprised, given what's going on in the IPO market, if it were to go public relatively soon, but the other one is nCino, NCNO is the ticker. It went public in July.

I mean, you go around, you talk to community bankers, the community bankers who can afford nCino get nCino. Community bankers who cannot afford nCino wish they could afford nCino. Everybody knows nCino in the banking industry. And so it is just a big, important company that is just growing so, so, so fast. In fact, to kind of tie one more loose end together, Fifth Third just announced that they are using nCino. So big banks, small banks, every bank wants nCino.

Moser: Love to hear that. I certainly am familiar with the name, so I appreciate you bringing that up.

I am going to be paying attention to Visa, which has earnings coming out later this week, Wednesday, October 28, here after the market closes, I believe, is when Visa earnings will come out. And really, the main reason why I pay attention to Visa and MasterCard is a little bit different than American Express as we noted, but very, very good indicators of just where the consumer's at right now. I mean, these are two, obviously, very powerful brands with lots of cards all over the world.

I mean, people are using these cards more and more, particularly now, as sort of this migration away from cash continues. And we, of course, talk all the time about the war on cash here and we've had a lot of fun with the War on Cash basket of stocks that we've talked about as well. But, yeah, for me, I think it's really just getting a glimpse of where management sees the consumer, how they see consumer spending playing out. And as Visa and MasterCard continue to invest in these cross-border capabilities as well, as we become a more globalized society, so to speak. I mean, it's a big world, but it seems like technology is making it a lot smaller. And so Visa and MasterCard are two companies that are really playing a role in that.

And with Visa earnings coming out, it's the biggest card out there. MasterCard is a close second, but Visa is the leader out there today, and so we'll be keeping an eye on their earnings and their language regarding the consumer.

But, John, I think that's going to do it for us this week. I appreciate you taking the time to jump on the show and share your insight. This was a lot of fun.

Maxfield: That was terrific, Jason, loved it.

Moser: All right. Well, remember, you can always reach out to us, folks, on Twitter @MFIndustryFocus. You can drop us an email at [email protected] and let us know, you know, what are you keeping your eyes on this earnings season? It's always interesting to know, get some new stocks on the radar. And any show ideas, anything you need us to dig into, bring it up, we're happy to give it a look.

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 Tim Sparks for putting this show together for us. For my man, John Maxfield -- again, thanks so much, John, I really enjoyed it -- I'm Jason Moser. Thanks for listening, and we'll see you next week.

John Maxfield has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Costco Wholesale, Mastercard, nCino, Inc., PayPal Holdings, Square, Twitter, and Visa. The Motley Fool recommends Ameris Bancorp and Jack Henry & Associates and recommends the following options: long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.

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