New bank makes big entrance into Sonoma County beer industry

Live Oak Bank, which opened its Santa Rosa office in January, has become the second-largest national lender under the SBA’s main lending program. It specializes in serving craft brewers, wineries and distillers.|

For those in the craft beer community, it wasn’t hard to figure out the guys over at HenHouse Brewing Co. in Petaluma were going places.

They made a mark in the North Bay by specializing in the quality ingredients that go into their beer, much of it outside the ever popular hoppy India pale ale that is the flagship for most local brewers.

They use biodynamic grain from a specialty Healdsburg producer that goes into their popular saison, even though it costs three times that of traditional grain. The brewers use oysters from Hog Island and hand-harvested sea salt to produce their oyster stout, which was once served at French Laundry, arguably America’s best restaurant. And they get their kegs out the door quickly through their own vehicles to ensure their beer is fresh when it is pulled from the tap rather than wait on a wholesaler to distribute it.

But when it came time for the brewery to expand beyond its 2,000 barrels of annual production, it found the local banking community didn’t share the enthusiasm that could be readily seen at beer festivals and taprooms.

“None of the local banks were interested in our plan,” said Scott Goyne, who along with friends Collin McDonnell and Shane Goepel founded the brewery four years ago and are co-owners. The banks wanted a business that had existed for five years, showing profitability for two years. “They want to see assets you can tie up,” he said.

But HenHouse’s path toward growth was aided by a new entrant into the local banking market, Live Oak Bank. The Wilmington, N.C., bank, which opened its Santa Rosa office in January, specializes in serving craft brewers, wineries and distillers.

“HenHouse is a great company. The fact they couldn’t get a loan from anybody else doesn’t mean that they are a bad company,” said Randall Behrens, a senior loan officer for Live Oak. “Most banks don’t like to lend on projections. ... We were able to see through that.”

Live Oak was able to structure a loan of more than $1 million for HenHouse spread out over 15 years at a low interest rate, allowing the brewery to move on to its next phase: a new facility in south Santa Rosa that can handle an initial capacity of 5,000 barrels annually as well as a new taproom that will also have bottles. It is scheduled to open in the spring.

The loan was made possible by a guarantee from the U.S. Small Business Administration, which backs up to 75 percent of the value. The guarantee allows banks to take a little more risk on a company, but not so much so to run afoul of regulators. The SBA rates typically are prime plus 2.75 percent and the loans go up to ?$5 million, though there is some additional flexibility for real estate loans. They are typically for equipment, expansion, working capital and hiring.

Without the SBA backing, there is too much risk for financial institutions to assume, even for a craft-beer industry that experienced an 18 percent increase in volume in the previous year, bankers say. The SBA program is significant because it allows the bank more flexibility in underwriting so that it can look at future revenue projections, said Tracy Sheppard, a senior loan officer for Live Oak who worked on the HenHouse deal.

“Given the rate of growth in these industries, the SBA program is crucial for a lot of these small guys to get bigger,” said Sheppard. “It would be hard to find conventional banking for young businesses that are growing that fast.”

Bank’s specialty

The SBA program is where Live Oak is gaining a reputation both locally and nationally. The bank, which was founded in 2008 and went public this summer, has become the second-largest national lender under the SBA’s main lending program. The status is remarkable given that Live Oak is a small bank with assets of just more than $1 billion, compared to the bank in the No. 1 spot, Wells Fargo, with $1.75 trillion in assets. Its default rate is less than 1 percent.

Live Oak has centered its business plan on certain verticals that are attractive in small business lending, such as poultry processing, veterinarians and funeral directors. It came on the scene at a fortuitous time when banks were pulling back in the midst of the Great Recession.

The bank was preparing to start a wine vertical but then looked at the space and saw the tremendous growth in both craft beer and spirits and decided to include them into the mix, said Keith Merklin, general manager of the wine and craft beverage division.

“Most banks are not set up like us,” Merklin said. He noted that a community bank may have an officer who will do brewery deals, but he or she is likely off the following week chasing an entirely different industry, whether a small clothing boutique or a self-storage place. Big banks have such specialty divisions, but many small business owners may feel that they will not receive sufficient attention from large institutions more apt to chase the largest deals, he added.

Live Oak teams are specialized in their industries, knowing the vernacular, the people, the gossip and the players. The teams work nationally and are not restricted by geography, meaning a lot of time on the road with clients such as Short’s Brewing Co. in Bellaire, Mich.

Keeping informed

The Santa Rosa team will read industry publications like the American Banker, but it also keeps its eye on beer news through sites like Brewbound and attends conferences across the country where brewers congregate including the annual Great American Beer Festival in Denver. Its Santa Rosa office has a cornhole game and both Sheppard and Behrens can dress the part as they wore T-shirts during an interview last week, with Behrens in shorts. No Brooks Brothers suits can be found here.

The team got off to a quick start as Sheppard came over from Wells Fargo and Behrens from First Community Bank in Santa Rosa, where he worked with another local brewery, St. Florian’s Brewery in Windsor. The division is on pace to do about $60 million in loan originations across wine, beer and spirits with about 40 craft brewers as clients, Sheppard said.

“We have made some noise in a very short period of time,” Behrens said.

Historically, the SBA program has been a crucial link for the brewing industry as most of its pioneers came up through the home-brewing movement in the 1980s and early 1990s and had to cobble together funds from friends and families to start small production. It’s somewhat different from the wine industry where the old joke is: How do you make a small fortune in the wine industry? Start with a big one.

About 75 craft breweries in Northern California have used the SBA since the turn of the century, said Mark Quinn, director of the SBA’s San Francisco office. The loans are typically done after the initial startup phase as it gives bankers a chance to determine the viability of a brewery’s business plan.

“It’s one thing to brew beer at home. It’s another thing to make a commercial enterprise out of it,” said Bryan Borders, small business lending manager at First Community Bank.

Many of the names that have made the North Coast synonymous as a major craft beer destination ?have used the program, including Lagunitas Brewing Co. in Petaluma, Russian River Brewing Co. in Santa Rosa and Bear Republic Brewing Co. in Cloverdale.

Earlier this year, Bear Republic was named small business of the year by Quinn’s office. The brewery used a 2006 SBA loan to help build its new plant in Cloverdale, working with First Community Bank and Bay Area Development Co. so that it could eventually double its operations.

Russian River used a $2 million SBA loan by First Community Bank ?to help finance its brewery on Ferdinand Court in Santa Rosa, which will allow it to keep up with consumer demand for its flagship Pliny the Elder, said Natalie Cilurzo, who owns the business with her husband, Vinnie.

Though it was daunting to take out such a large loan, Cilurzo said she became comfortable with First Community Bank even though her brewery didn’t bank there. It helped that the bank’s personnel liked Russian River’s beer and she could see some of them in her pub on Fridays enjoying it.

That wasn’t the case for one unnamed banker who started dropping financial jargon when Cilurzo took a meeting with him. “I flat out told him, ‘We don’t talk like you,’” Cilurzo recounted. To no surprise, the banker didn’t land Russian River as a client.

Industry ‘on fire’

Cilurzo said it was a great time for craft brewers to borrow money as “our industry is on fire.” But resistance lingers. For example, 101 North Brewing Co. in Petaluma received investment from Pat McDonald, whose family founded REACH Medical Holdings, as banks were reluctant to lend to the brewery despite the great buzz surrounding its Heroine IPA and its entrance into Costco and Safeway.

“Honestly, no one is breaking down our door to lend us money,” said John Lilienthal, a co-owner who handles sales for brewery.

Live Oak wants to change the paradigm, by knowing the vernacular so it is more quickly to build trust in the brewing community and to spot businesses that are ripe to grow. Sheppard noted that Live Oak may have been in good position to loan to 101 North if the bank’s local office had been running before January. He keeps his eyes on other brewers that could expand in the future, specifically mentioning Tyler Smith at Cooperage Brewing Co. in Santa Rosa as one to watch.

One advantage that Live Oak has is that it structures an SBA loan to provide more flexibility to its clients, more aggressive than most banks, so owners don’t have to cough up additional equity in their business, Sheppard said. The HenHouse deal is ?100 percent financing. About 25 percent of HenHouse ownership is outside the primary three owners, Goyne said.

“They did not have to raise more equity and dilute the company any more, which is what they were really excited about,” Sheppard said.

While SBA loans can typically last from seven to 10 years, Live Oak deals for breweries can be extended over longer time frames. The bank knows that assets such as tanks and boilers can have a longer shelf life, up to 20 years in some cases, Merklin said. That, in turn, makes the monthly payments more manageable.

The local craft beer industry, with roughly two dozen breweries in Sonoma County, could easily double in the future, Sheppard contends. He also is bullish on the growth of craft distillers, which number about a dozen in the county. Borders of First Community Bank also sees such growth as his craft division should do about $40 million in originations this year.

“Not all of the guys are going to be the next Lagunitas. Maybe none of them. Who knows? They all can carve out a healthy business,” he said.

You can reach Staff Writer Bill Swindell at 521-5223 or On Twitter ?@BillSwindell.

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