PLBC - Plumas Bancorp

[Guest Schwab711]

Business: Plumas Bancorp is a bank holding company of Plumas Bank, which operates in the Lake Tahoe area. They operate 12 branches in several under-served CA counties, Carson City, NV, and Reno, NV. Roughly 45% of their deposits are non-interest bearing and the remaining deposits cost roughly 0.18%. The new deposits in Carson City, NV and deposits in Reno, NV are more susceptible to deposit beta, but the small CA county branches will likely provide cheap funding for awhile. I think deposits will remain stable and cheap for at least a few more years for a variety of reasons.

 

Plumas primarily offers commercial loans with agriculture and auto loans representing a fair portion of their book. If you think OZK is bad with CRE loans, wait til you see PLBC (350% CRE exposure to capital). The primary difference and why I like PLBC is they have a TON of stable, cheap funding. Their loan to deposit ratio will likely be 65% after their recent branch acquisition closes. The bank is highly liquid. Although a drop in CRE could severely harm the bank, I think they can survive many scenarios. PLBC is not CNND though (the RE market around Lake Tahoe, especially CRE, is much more volatile) and I would not over-allocate to PLBC.

 

Valuation:

2018 earnings will probably come in at $2.50 - $2.80 a share, pending profits from SBA loan sales ($2.50/share assumes $0). PLBC is trading at less than 10x P/E with a ROTCE > 20% (probably will come in at 21% - 25% in 2018).

 

 

That's it. They are a well-run bank in a non-competitive region. The region's economy is finally starting to improve after many years of below-national average growth. PLBC is cheap and liquid. If you think the US economy can continue to do well, PLBC has a chance to do very well.

 

2018E EBT: $18.5m

2018E NI: $13.9m

2018E EPS: $2.71

 

(Assuming a share price of $25.85):

P/E: 9.5x

P/TBV: 2.2x

2018E ROTCE: 23.3%

[bianji108]

Thank you for the interesting idea! I don't know much about SBA loan businesses, but I see many banks offer SBA loans and make tons of profits. To someone without much knowledge, it sounds too good to be true. Generally speaking, what characteristics do you look for a SBA loan team that can weather a downturn? What characteristics do you use for avoiding investing a bank with SBA loan?

[oddballstocks]

SBA lending is a weird beast.  Ultimately you have businesses that could not qualify for lending on their own, but if the government backs them they qualify.  These aren't awesome businesses and I'm not sure the credits are awesome either.

 

BUT... you could look at SBA differently.  In some ways it's more like VC lending, or an equity piece.  Some of these SBA companies go belly-up, but others mature, get off the ground and become significant customers of traditional products.

 

The SBA guarantees 85% of the loan, and a bank usually gets a personal guarantee for 15-20%.  The advantage for a bank is they can lend guaranteed money at attractive rates.

 

SBA is its own beast. 

[Guest Schwab711]

As Oddball says, it's a funny portion of the bank (and I'm not overly familiar with it). Almost every bank worth its salt is in the Preferred Lender Program. This allows you to make SBA loans. How aggressively they pursue this program is another matter. Banks lend to small businesses for a relatively large yield (though much lower than without the guarantee), but most banks (like PLBC) sell the guaranteed portion of the loans for a one-time gain. PLBC originates $40m or so of SBA loans lately, which makes them one of the larger SBA lenders in the country. In PLBC's case, they sell the large majority of the SBA loans they originate with the loan servicing rights (I believe PLBC only services mortgages they originate and hold, but could be mistaken). This gives PLBC a greater premium at sale (large loan sales gain in any given year) but will make yearly results more choppy since SBA loan originations obviously ebb-and-flow with the economy. The sales of the non-guaranteed portion of SBA loans are starting to pick up and I imagine PLBC would do well if that becomes a bigger market.

 

 

I believe the SBA lending arm is heavily connected to PLBC's CRE portfolio/commercial lending. PLBC helps clients get an SBA loan for their business while also purchasing the property.

https://www.linkedin.com/feed/update/urn:li:activity:6440324134290493440/

 

 

SBA Loan Sale info:

https://www.bankdirector.com/committees/lending/how-banks-can-profit-from-sba-lending/ (short version of SBA lending and sale economics - it's a little dated)

 

http://ctaggl.com/wp-content/uploads/2017/02/The-Secondary-Market-for-SBA-USDA-Guaranteed-Loans_Ben-Clark_FTN-Financial.pdf (detailed, long version)

 

https://www.occ.treas.gov/topics/community-affairs/publications/insights/insights-bankers-guide-sba7a-loan-program.pdf (see p.14)

 

 

I imagine most of the recent decline in the stock price is due to the Carr Fire and potential losses associated with uninsured homes. I don't think the impact to PLBC's financials will be anywhere near the 15% decline.

 

https://www.redding.com/story/news/2018/09/19/shasta-county-homeowners-rebuilding-after-carr-fire-may-get-break/1345517002/

 

https://en.wikipedia.org/wiki/Carr_Fire

[bianji108]

Thank you so much Schwab711 and Oddballstocks, for your insights. I was reading the FTN Financial slides that Schwab711 shared. On page 3, the graph shows default rates on SBA loans. The 30% average default rate and 80% default rate in crisis look scary to me(or did I interpret it wrong?)

 

Do you happen to know any reports on how the SBA-focusing banks performed in the Great Recession?

 

Thank you in advance!

[Guest Schwab711]

Ya, that's a weird chart. It's measuring the ratio of defaults:payoffs, not defaults:loans outstanding (common ratio to measure default rate). I don't understand the purpose of the chart.

 

The economics of SBA lending is different then normal banking. Normal banking, you give out money (funded from deposits) with the intent of getting your money back over time plus interest. Interest and fees represent your profit.

 

SBA lending works like the following (see 1st link in 1st reply - I'll update below with new #s):

Bank originates a $1m SBA loan.

SBA (gov't agency) guarantees 85% or $850,000 of the loan.

The guaranteed portion is sold in to the secondary market at 12.5% - 13.5% premium (low if bank keeps servicing rights, high if not, and percents do move some because it's a market).

 

Bank's POV:

$150,000 non-government guaranteed SBA loan on the books.

$135,000 profit in the year the loan was originated (The SBA also charges a guarantee fee [like FDIC insurance or Fannie/Freddie insurance] + the bank may charge loan origination fees - overall, this is still cheaper capital for a small business then any alternative).

When netted over the long-run, the bank essentially owns a $150,000, 6%-7% loan with $15,000 of capital at-risk. If the SBA loan defaults immediately and has a recovery rate of 10%, you break-even (before any operating expenses and such).

 

In practice, efficiency ratios are 60%-65% so the 'true' break-even rate is probably closer to 30%-40% recovery rates. Commissions to the banker probably further increase the recovery rate. At the end of the day, SBA loans are high reward loans for the risk absorbed a bank, if you can originate them.

 

 

Some common issues with SBA loans is the government guarantee makes bankers lazy and bank shareholders (and the government) pay the price. This means the culture of the bank that a banker works at is important. Secondary market premiums take this in to account by varying to some degree by geographic location and originating bank (from my understanding).

 

Here's how things can go wrong:

https://www.openthebooks.com/watchdog_what_happens_when_an_sba-backed_loan_goes_bad/

 

 

Here's a great study on the SBA loan market outlook:

https://www.windsoradvantage.com/wp-content/uploads/2018/03/WindsorAdvantage-2018SBALoanMarketOutlook-WhitePaper.pdf

 

In summary, less lenders are comprising more of the total volume because of rules. The value of a loan accounted for by servicing rights is declining. The premium at sale is steady (9.2% - 14.6% for 10Y, 14.7% - 18.1% for 25Y in 2017). The default rate was once 5% but now it is between 1% - 2%.

 

 

This is not the greatest deal for the government but it's cheap stimulus for entrepreneurs. Either way, the high volume lenders will likely be more and more profitable in future years.

[Junto]

If you really want to understand SBA lending, dig into Live Oak Bancshares, Inc. (TICKER: LOB).

 

This is interesting. I look forward to looking into this one some more. Price to Book is quite high right now as a banking metric goes.  One positive item is that they have no brokered or listing service deposits as of June 30, 2018. Pretty uncommon on bank's with the strategy you are indicating.

 

Definitely adding to the watch list.

 

 

 

[bianji108]

Thank you so much Schwab711 and Junto for the resources and advices :)

[bianji108]

Ya, that's a weird chart. It's measuring the ratio of defaults:payoffs, not defaults:loans outstanding (common ratio to measure default rate). I don't understand the purpose of the chart.

 

The economics of SBA lending is different then normal banking. Normal banking, you give out money (funded from deposits) with the intent of getting your money back over time plus interest. Interest and fees represent your profit.

 

SBA lending works like the following (see 1st link in 1st reply - I'll update below with new #s):

Bank originates a $1m SBA loan.

SBA (gov't agency) guarantees 85% or $850,000 of the loan.

The guaranteed portion is sold in to the secondary market at 12.5% - 13.5% premium (low if bank keeps servicing rights, high if not, and percents do move some because it's a market).

 

Bank's POV:

$150,000 non-government guaranteed SBA loan on the books.

$135,000 profit in the year the loan was originated (The SBA also charges a guarantee fee [like FDIC insurance or Fannie/Freddie insurance] + the bank may charge loan origination fees - overall, this is still cheaper capital for a small business then any alternative).

When netted over the long-run, the bank essentially owns a $150,000, 6%-7% loan with $15,000 of capital at-risk. If the SBA loan defaults immediately and has a recovery rate of 10%, you break-even (before any operating expenses and such).

 

In practice, efficiency ratios are 60%-65% so the 'true' break-even rate is probably closer to 30%-40% recovery rates. Commissions to the banker probably further increase the recovery rate. At the end of the day, SBA loans are high reward loans for the risk absorbed a bank, if you can originate them.

 

 

Some common issues with SBA loans is the government guarantee makes bankers lazy and bank shareholders (and the government) pay the price. This means the culture of the bank that a banker works at is important. Secondary market premiums take this in to account by varying to some degree by geographic location and originating bank (from my understanding).

 

Here's how things can go wrong:

https://www.openthebooks.com/watchdog_what_happens_when_an_sba-backed_loan_goes_bad/

 

 

Here's a great study on the SBA loan market outlook:

https://www.windsoradvantage.com/wp-content/uploads/2018/03/WindsorAdvantage-2018SBALoanMarketOutlook-WhitePaper.pdf

 

In summary, less lenders are comprising more of the total volume because of rules. The value of a loan accounted for by servicing rights is declining. The premium at sale is steady (9.2% - 14.6% for 10Y, 14.7% - 18.1% for 25Y in 2017). The default rate was once 5% but now it is between 1% - 2%.

 

 

This is not the greatest deal for the government but it's cheap stimulus for entrepreneurs. Either way, the high volume lenders will likely be more and more profitable in future years.

 

Thank you for explanation. I can see why the default rate/payoff ratio can be outliers in the crisis.

 

I am wondering for the maths. Would the profits from reselling be 850k*13.5% rather than 1mn*13.5k(the Bank Director calculation seem to suggest this former version)? If it is 850k*13.5%, then it is 150k principal and ~40k at risk. Or did I understand the equation wrong?

 

Would you agree that a lot of banks do not enter into SBA business because the talents are scarce compared with conventional loans(Bank Director seems to imply this)? If that is the case, what makes these talents special? And if outsourcing is possible like the Bank Director article suggests, what would be differentiator among banks?

[Junto]

SBA lending is not always in the best interest of the customer. Heavy fees and if you aren't experienced, the SBA has a history of fighting the guaranty until the very end. Payouts come but not always quickly. One of the primary challenges at least.

 

The premiums paid are on the SBA guaranteed portion of the loan and 13.5% (http://www.boefly.com/images/Back_of_the_envelope_sba_loan_sale_math.jpg Link: http://www.boefly.com/boefly-knows/boefly-case-study-the-economics-of-selling-sba-guaranteed-loans.cfm

 

 

[bianji108]

It seems that many banks that focus on selling SBA loans had a hard time in Q4 as the premium in the market fell?