Description

Luther Burbank ("LBC" or "Company") is a bank holding company that operates primarily through Luther Burbank Savings ("Savings"), a California commercial bank.  LBC raised ~$140mm in a December 2017 IPO at $10.75 per share.  Its shares currently trade at $9.78, which is 0.97x tangible book value.  Savings has recorded consecutive quarterly profits since its second quarter of operations (in 1983).  The founders and their families continue to own the majority of LBC.  I believe Savings will continue to compound capital at a high single digit rate and, over time, LBC's multiple may expand to generate a total shareholder return in the teens.  

I think Savings' asset book is high-quality but low-yielding.  Of the $5.9 billion loan portfolio, 60% are multifamily residential and 37% are single family residential.  The multifamily portfolio targets 30 year first mortgages on stabilized, older, smaller properties with rents at or below market levels that cater to lower and middle income renters.  The majority of multifamily loans are originated on a retail basis (although prior to 2015 they were originated through a broker network).  The portfolio is very focused on Southern California, with 50% in LA / Orange County, 10% in other SoCal, 23% in NorCal, 15% in Washington and 2% in Oregon.  The average loan in the portfolio has a $1.6 million balance, 57% LTV and 1.55x DSCR.  The single family portfolio is sourced through third party brokers with the intention of retaining the loans.  Similar to multifamily, the single family book is focused on California, with 43% in LA / Orange County, 15% in other SoCal, 34% in Norcal and 8% in Washington.  The average loan in the book has an $896,000 average balance, 65% LTV and 750 FICO.  Collectively, asset performance is very strong with 0.03% NPAs / assets and 0.04% NPLs / loans.  Obviously these loans are very competitive on price.  The average yield on Savings' loans is 3.7%, though 3Q18 originations had a weighted average loan coupon of 4.84%.

I think Savings has a weak funding profile.  Savings has 10 full service branches, with 9 in California and 1 in Washington.  The oldest location, Santa Rosa, opened in 1983 and has $1.2 billion in deposits.  The newest location, Bellevue, opened in 2018 and has $55 million in deposits.  Over time, as recently-opened locations season and Savings opens additional branches, lower-cost deposits should continue to grow.  But currently, 65% of deposits are CDs so the average cost of deposits is 1.4%.  

Combined, Savings generates a 2% NIM.  It is well-operated with a <50% efficiency ratio.  The Company currently generates very little non-interest earnings, so that is another opportunity to grow earnings.  Savings is well-capitalized with a CET1 ratio of 11% and a total RBC ratio of 20%.  All together, LBC has a 8.5% TCE / TA ratio and generates an 8% ROAE.  

Over the next year or two, if Savings continues to grow its loan book, the Company may issue additional equity.  Recently, however, LBC announced a $15 million share repurchase plan to take advantage of its share price trading at a discount to tangible book value.

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This is not investing advice.

Catalyst

time, liquidity, M&A