Plumas Bancorp, Ticker: PLBC
A wonderful microcap bank
Plumas Bancorp (referred to as “the bank” or “the business” in this writeup) is a bank headquartered in Reno, Nevada with branches located in Northeastern California and Northwest Nevada with just over $1 billion in assets. It isn’t’ covered by any analysts, has a roughly $100 million market cap and does not even have a wealth management division to drive non-interest income! However, there is more than meets the eye with this business. It first came on to my radar a little over a year ago when financials and almost every other stock sold off dramatically. Being the microcap that it is, the stock got crushed and it subsequently found itself on a basic screener that I set up. I was fortunate to find this business and have kept tabs on it ever since.
Background
Plumas started out and continues to be a small community bank. It is situated close to the California/Nevada border and offers basic banking products such as checking and savings accounts along with time deposits, retirement accounts, and internet banking. Their product offering is about as exotic as a loaf of white bread. As of 12/31/2020, the bank had 34,368 deposit accounts with balances totaling ~$974 million equaling an average account balance of ~$28,000. Since its inception, the bank has grown from one branch to thirteen today. The bank was plugging away up until the Great Recession until it got fairly deep into land development loans in the early to mid-2000’s. It does not take much to figure out that those loans really caught up with them. I spoke with the bank’s CFO and he told me that the loans back then were underwritten conservatively, but the land values plummeted which caused huge losses. In addition to the plummeting land values, the provision for loan losses exploded, the business lost money for a few years and ultimately had to participate in the TARP program. The banks future was not exactly rosy, but things have really turned around since. To the company’s credit they only had one year of losses (2009), but it was not until 2011 that things started to turn around.
Things turned around for Plumas for a few reasons. One is that the CEO was replaced by Andrew Ryback who continues in that role, another is that the company changed their loan portfolio, and the third reason is that the bank is simply well run and conservatively financed. After discussing these, I will discuss the valuation, risks and outlook for the business.
CEO
I do not have access to Mr. Ryback nor are there a lot of articles online that I could find about him. However, what I have been able to find reflects well on him as a leader. The most obvious thing is that the bank has done very well under his leadership. Since 2011, with him at the helm, the bank has gone from exiting TARP to increasing the stock price from sub $3 a share to ~$27 a share (just under a 25% CAGR). Mr. Ryback was elected to the Federal Reserve’s Board of Community Depository Institutions Advisory Council last year and under his leadership the business has won awards due to how well run the company is (These awards are shown at the end of this write up). He also deserves a lot of credit for how well the bank has been run under his stewardship. I will talk about this more in the two subsequent sections of this writeup.
I cannot tell you whether I think Mr. Ryback is over, under or properly compensated. I do think it is nice to see that he made a bit less in 2020 than he did in 2019 ($438k in 2020 versus $560k in 2019). The two other most highly compensated employees were the CFO and Chief Banking Officer who both took hits to their compensation. This gives me some hope that his compensation structure relies on constant improvement and is not doling out the banks hard earned money too egregiously. In addition to his salary, Mr. Ryback is entitled to a Non-Equity Incentive Plan. To quote directly from the most recent 10-K, “Goals for the CEO included targeted increases in loans and deposits, improvement in asset quality, and development of growth initiatives focused on Northern Nevada. Metrics included targeted levels of ROE and ROA (calculated on a pre-tax basis) compared to a select group of peer institutions.” Mr. Ryback owns approximately 1.5% of the bank. I prefer to see that a significant portion of the CEO’s net worth is tied up in a business, but I was not able to confirm this in Mr. Ryback’s case. My intuition leans towards “yes” because he has been at the bank for so long, but I have no way of confirming this unless I am able to speak to him directly which I am not counting on. His holdings in Plumas are currently worth just over $2.2 million.
Loans
Leading up to and through the Great Recession, a large percentage of Plumas’ loans were in land development. From 2002-2008, land development loans went from approximately 7% to 20% of total loans with a peak of 22% in 2007. These loans were given based on the value of real estate at the time. I asked the Richard (Rick) Belstock, the CFO of the company, if they were doing anything now to prevent something like this from happening again. He told me that he does not know if loans are underwritten more conservatively now versus then (he was not the CFO at the time). He also said, regarding the land development loans, that “…they were underwritten conservatively, but the value of land simply plummeted.” Land development loans (referred to as Real estate – construction) in their public filings now make up only 3.6% of the total loan portfolio. Commercial real estate in their biggest lending channel now with just under 50% of total loans. I asked the CFO about how their lending process works currently, especially with commercial real estate, auto, consumer and agriculture making up such a large percentage of their total loans. He told me that the “…loan to values (LTV) is ~80% max. Anything more than that would be to a great operator or the operator is guaranteeing the loan. The company (Plumas) has a tiered loan decision making. Some loan officers have leeway in making loans, but above certain levels it goes to a committee who approves the loans.”
*A table showing the company’s loan portfolio is shown at the end of this writeup.
Plumas is well run and conservatively financed
It is difficult to find a comprehensive list of what makes a bank well run and conservatively financed. I personally believe that the latter makes the former. I was lucky enough to find a book titled Analyzing and Investing In Community Bank Stocks (referred to as “the book” in the rest of this report) via the r/SecurityAnalysis subreddit. It was released in 2005, but I used it as my guide to analyze Plumas because it is a community bank and is the only comprehensive document that I could find that gives a breakdown of what a “good community bank” looks like. To decide whether Plumas was well run or not I looked at certain ratios across the balance sheet, income statement, asset/liability structure and the reserve coverage. As a side note, all the information posted below is listed from 2011, the year that Andrew Ryback started to run the business.
On the balance sheet side, Plumas meets or exceeds the benchmarks that are set in the book across the board. The ratios and quotes are taken from Chapter 2 - The Balance Sheet of Analyzing and Investing in Community Bank Stocks):
Tangible equity ratio - The book does not go in to too much detail on this metric and I can’t find data for this online. It is simply a risk that you have to take and try to assess qualitatively. Take the 2019 tangible equity ratio of 10%. This means that if the bank’s assets are worth less than 1% of their stated value than the book value is overstated by 10% indicating that Plumas was levered 10-1 that year. There is not much an investor can do with this other than simply be aware of the leverage in the company and trust that management isn’t overdoing it by mismatching assets and liabilities.
Liquidity ratio – As you can see, Plumas falls well within the 15-25% level of liquidity. Per the book, a bank falling into this range can fund their withdrawals without worrying regulators or their customers.
Loan to deposit ratio – Per the book, Plumas falls well within the range of loans to deposits. Having a ratio between 70-85% indicates that a bank is “… “loaned-up, meaning that the bank has achieved and appropriate balance between loans and other interest-earning assets. Once the loan-to-deposit ratio moved about 85% the bank may be taking on more risk that in should, although there are exceptions.”
Borrowings-to-deposits – Plumas really shines in this category. The calculation for this ratio is (FHLB advances + long term debt) as a percentage of deposits so it is a little misleading. With that being said, the company has taken on small amounts of short- and long-term debt in the past. The company currently has no debt. Per the book, the small (often 0%) ratio indicates that Plumas has been able to grow its loan portfolio in a stable manner and has a great deposit gathering strategy.
DDAs to total deposits – DDAs stand for Demand Deposit Accounts. Per the book, “most highly profitable banks can trace their profitability to the presence of large DDA deposit balance on which no interest is paid.” Per the book again, “At a successful community bank, DDA’s will typically comprise at least 15-20% of the total deposit base and there are some community banks in which DDAs comprise as much as 40% of the total deposit base. Clearly, when 40% of a bank’s deposits are interest free, the bank can make a lot of other mistakes (in the area of operating expenses, for example) and still remain quite profitable.” You can see from the table that Plumas knocks this one out of the park.
Plumas does very well with the income ratios. The ratios and quotes are taken from Chapter 3 - The Income Statement of Analyzing and Investing in Community Bank Stocks):
Return on average assets - Per the book, a return on average assets greater than 1% is good. A bank that is getting a 1.5-2.0% return on average assets is an exceptional one. Per the book, “These banks generally have a very low cost of funds and are run very efficiently from an operating perspective.” Plumas has met or exceeded the 1.0% mark since 2015.
Return on average equity – The book does not go into depth about what a “good” return on average equity is. Luckily, God Google (as Mohnish Pabrai calls it) helped me with this problem. Per the St. Louis Fed image below, Plumas’ exceeds the average return on average equity for all US banks.
Net interest margin – Again, the book does not state what is a “good” net interest margin is. I went back to the St. Louis Fed data and found what the average net interest margin is for all US banks. As you can see Plumas exceeds the average amounts by a healthy margin. The book does state that “as a general rule, most banks investors are more comfortable with a bank that has demonstrated the ability to minimize the size of swings in its NIM (Net Interest Margin) than with one that produces a wider, but more volatile margin. Again, you can see from the table again that Plumas has kept their NIM in the range of 4-4.8% since 2011.
Loan loss ratio – The book does not say what a “good” loan loss ratio is. Again, I went to the St. Louis Fed data. As you can see, Plumas’ loan loss ratio is lower than the national average indicating that they’re not loosening credit standards to increase loan yields or volume.
***I know that I compared Plumas to all national banks in these charts and it might not be the best comparison. I pulled the FFEIC Call Reports and looked into doing a comparison of Plumas to all its competitors, but that would’ve required that I find them individually. The problem is that there are almost 500 banks in that dataset, which was seemed like too much of a task, so I went with the St. Louis Fed data instead.
Efficiency ratio – Per the book, “An efficiency ratio of less than 55% is typically considered to be pretty good for a bank.” Plumas has managed to drive down their efficiency ratio every year since Mr. Ryback took over and over the last four years their efficiency ratio has been 55% or less.
Non-interest expense to average assets – I’m really in the dark on this one. The book does not give much information other than that a low ratio of non-interest expense to average assets is good. I am going to guess than having a ratio of <3% for several years running is solid.
Non-interest income to average assets – This is the only metric where Plumas really falls short. I asked the CFO about why the non-interest income is so low at the bank. His answer was short and simple. He said that the bank cannot compete with major banks in terms of asset/wealth management and that they would not get into exotic offerings, so they just do not do it.
***The ratios and quotes in the following paragraph are taken from Chapter 4 – Asset/Liability Structure of Analyzing and Investing in Community Bank Stocks)
The book also talks about a community bank’s asset/liability structure. Plumas is an “asset sensitive” bank because its ratio of interest-sensitive assets to interest-sensitive liabilities is greater than one. What this means is that, on average, if rates increase in the short to medium term, then net income will increase. If rates decrease, then net income will decrease. I tried finding out when Plumas’ assets and liabilities reprice to see what the spread is but could only find information (in the 10-K) on the former. Per the book, an important note (that applies especially well to Plumas) about the asset/liability structure is that “…the greater the proportion of DDAs to total deposits (see above), the more asset sensitive the institution and that … as a general rule it’s better to be asset sensitive than liability sensitive.” The rationale for this is simple. If all of a banks interest rate sensitive assets reprice upwards, but only 50-60% of the liabilities reprice upwards because 40-50% are not interest rate sensitive, then you can see how that will positively affect net income.
The next section of the chapter discusses adjustable rate loans versus fixed rate loans. To quote the book directly, “All else being equal, the great the ratio of a bank’s variable-rate loans to its fixed-rate loans, the more asset sensitive the institution’s balance sheet After all, if a bank’s balance sheet is comprised entirely of fixed-rate loans, and deposits of varying duration, its margin would get crushed as rates increased - deposit rates would climb as asset yields remained the same. Conversely, if the bank’s balance sheet is comprised entirely of variable rate loans and deposits of varying duration, there would have to be some net benefit to rising rates – all asset yields would climb as interest rates increased, but some deposit rates would remain the same.”. Plumas’ variable rate loan portfolio makes about 68% of the total loan portfolio putting it at just over a 2/1 ratio to fixed rate loans. Lastly, this section of the book talks about being aware of borrowings and how they are used by management. The author is skeptical of any bank using borrowings to increase yield via arbitrage strategies. Plumas has no borrowings currently, so you do not have to worry about this.
As a final kicker for this section, Plumas does very well with its capital standards. The ratios listed in this paragraph come straight from the 10-K and not the book. To be considered “Well-Capitalized” a bank’s Common Equity Tier 1 Ratio should be 6.5%, the Tier 1 Leverage Ratio should be 5%, the Tier 1 Risk-Based Capital Ratio should be 8% and the Total Risk-Based Capital should be 10%. At 12/31/2021, Plumas had a Common Equity Tier 1 Ratio of 14.2%, a Tier 1 Leverage Ratio of 9.2%, a Tier 1 Risk-Based Capital Ratio of 14.2% and finally a Total Risk-Based Capital Ratio of 15.4%; all of which exceed the good old Basel III standards.
***The ratios and quotes in the following paragraph are taken from Chapter 5 – Asset Quality and Reserve Coverage of Analyzing and Investing in Community Bank Stocks)
Per the book, “Asset quality (or credit quality) is the single most critical determinant of any bank’s success or failure.” It also the hardest thing to measure because we cannot see the individual loans on the bank’s books. Listed below is a table that I created to show the coverage ratios.
Non-performing assets to loans (NPA ratio) - Per the book, a good NPA ratio is between 0.40-1.25% during good economic times. You can see that Plumas has managed to really drive down this ratio since 2011 and is now comfortably under the 0.40% benchmark which indicates high quality lending and underwriting.
Loan loss reserves to total loans – The author of the book would like this ratio to be ~1.50% of gross loans. Plumas has fallen a bit short of this target since 2016. Less than 1% would be concerning, but its safely above that. I would obviously like to see this ratio tick higher but given how well the business performs on nearly every other metric, I think it’s okay to give them some leeway here.
Loan loss reserves to NPA’s – Per the book, “The most important reserve ratio is the ratio of reserves to NPA’s, also known as the reserve coverage ratio.” A solid ratio here is 200%+ which Plumas achieved over the last three years with 2020 being in excess of 300%. The loan loss reserves to NPA’s ratio has increased in nine out of the last 10 years.
So what and who cares?
Two of my high school English teachers drilled this question in to my head. They said to make your arguments persuasive, you need to answer, “So what and who cares?” The reason I listed and described so many ratios is to show that Plumas is run conservatively, has skill in their underwriting and possesses high levels of asset quality. I believe that this is a virtuous cycle for the business. Their conservative nature, skill in underwriting and high level of non-interest bearing deposits leads to high levels of asset quality which leads to operational performance which in turn leads to financial performance as evidenced by the company’s results since 2011.
Valuation
Per the book, there are a few ways to value a community bank. You can do a peer comparison, a dividend discount model, takeout value and liquidation value. Of the four, none of them really make any sense for long-term investing besides the dividend discount model. However, I think that this model requires too much unknowable information. You must be able to reasonably guess two growth factors (growth and steady state), inflation, Treasury rates and the equity risk premium. This seems like wishful thinking at best for me. What I do know is that Plumas has increased net income by 35%, on average, per year since 2011. However, this average increase has varied widely with not a lot of consistency. I decided to cut this average and only apply a 20% increase in earnings for the next five years which comes out to $6.96/share and put a multiple on it. At 12x 2025 earnings, the stock is worth $83.49 per share giving you a 5-year CAGR of 23.31% from the current share price of $29.29. I went with the multiple of earnings valuation because it seems to be the most practical, pragmatic and easiest to understand along with the least number of inputs. Also, I think the 12x multiple is conservative given how well I think Plumas will do over the medium to long term.
Risks
Outside of the normal risks that a bank faces, I think that two stand out. The first is the bank’s geography. The second are interest rates.
Geography – Plumas is really tied to the economic outlook, more specifically the value of real estate, of Northern California and Nevada. It is also located in the middle of earthquake and wildfire country. I’m not sure how you could quantify these risks, but they do exist, and you should be aware of them.
Interest rates – I have read that both low and high interest rates are good for banks. Lower rates are good for business and encourage borrowing. Higher rates allow the bank to rake in more profits on the spread between the money they take in versus invest. A prolonged environment of low rates may result in margin compression and reinvestment risk.
Online competition and FinTech – I ran this writeup initially through a Discord channel that I am a part of, and someone brought this risk up. I emailed IR and I will paraphrase what they said. The bank is still happy to keep their high touch, local branches open for their clients. Being there for their clients and having the ability to meet face to face is still particularly important to Plumas’ overall strategy. Given that the brick-and-mortar part of the business is still important, they are working on providing as good of an online experience as they can. The online/digital channel is also a “significant focus for the bank’s strategic vision” and the company is working on rolling out new products and features constantly. Plumas is open to partnering with FinTech vendors if the opportunity is there and a mutually beneficial relationship can be established. They also let me know that they have offered online banking for over a decade. I took a look at their online banking app via the App Store and it has a solid 4.4/5.0 ranking. Lastly, they let me know that the company continues to perform very well when measured against stress test requirements.
Outlook
Plumas seems to be in a sweet spot in terms of geography and economics. As you can see from the map below, their branches are located far away from major metro centers. Going back to my conversation with the CFO, he said that Plumas used to compete hard with Bank of America, but they exited the market. He said they just upped and left. They did not even sell their branches. This sweet spot is evidenced by their ratios that were descried in in the previous section in addition to the fact that the bank has averaged a 20% net income margin since 2011 and 28% net income average since 2016. Per the most recent 10-K, they are achieving these stellar results even though they face “… 110 other banking branch offices of competing institutions in towns where Plumas has a branch.” To me this indicates that Plumas has figured something out and knows their markets very well.
Additionally, Plumas has expanded and recently moved its headquarters to Reno. The city came up in my discussion with Mr. Belstock. He said that Northern Nevada and particularly Reno is a hot market for the business. Plumas has seen lots of demand and there has not been much competition for construction loans. Borrowers are primarily experienced operators and management is selective about the loans they are taking. Per Mr. Belstock, “The company could lend more, but our concentration levels won’t allow us to do so.” The general outlook for Reno is solid. Per Wikipedia, its population growth has outpaced that of the United States over the last decade. It has become a center for technology companies and distribution centers which are attracted by the pro-business (no corporate or income tax and it does not have an information sharing agreement with the IRS) characteristics of the state plus the relatively affordable housing. The Reno area is home to the Tahoe Reno Industrial Center. Per Wikipedia, “The center is the largest in the United States, occupying over half of the land mass in Storey County, and is home to more than a hundred companies and their warehouse logistics centers and fulfillment centers such as PetSmart, Home Depot, Walmart. and others. The Gigafactory 1 is being built there to serve Tesla Motors and Panasonic… Facilities include rail-serviced sites with Union Pacific Railroad and BNSF Railway, municipal water and sewer, natural gas service, and five power plants on site producing more than 900 megawatts.” Given the pro business nature Reno and the influx of tech companies that have and continue to flock to the city, I think this bodes well for Plumas’ expansion into the area. For those of you looking for a cherry on top, one of the members of the bank’s board of directors is Heidi Gansert. She happens to be the Executive Director of External Relations at University of Nevada, Reno and a Nevada state senator. If you told me her appointment to the board wasn’t related to the push into the Reno area, then I’d call you a liar. I would be willing to bet that Plumas thinks she’s going to help with business efforts.
Acquisition
Plumas acquired the Bank of Feather River back in March. Information on the acquisition and Bank of Feather River are shown in the slides below.
Edit on 12/18/21 - Apologies for not including this yesterday, but I wanted to disclose that I am long shares of PLBC.