Santa Rosa's Luther Burbank Savings growth plan includes Oregon office, property management

The Business Journal interviewed John Biggs, CEO and president of Luther Burbank Savings. North Bay's largest financial institution was started in 1983 and is based in Santa Rosa.

In September, Luther Burbank Savings converted from a federally chartered unitary thrift to a state-chartered bank. The company lends only for real estate, with 60 percent of loans in multifamily apartments and the rest single-family homes. Luther Burbank Savings has nine branches. In February 2016, the company moved to new headquarters on Third Street across from Old Courthouse Square.

Biggs has his office on the top floor of the building with a grand view of the square under construction in a reunification project that started in May and is expected to finish in spring 2017.

You have been with Luther Burbank Savings how long?

30 years.

The owners of Luther Burbank Savings are still Vic(tor Trione), Mark (Trione, sons of Henry Trione) and George (Mancini, former president)?

Those are the only owners. George comes (into the office) two days a week.

You're not an owner?

I'm not.

Do they promise (ownership) at some point?

I am well taken care of in a different way (laughs). I'll leave it at that. George started the bank in 1983. He had some shares when he first started. Vic is the primary shareholder. Mark is second. George has a little bit. That has been the shareholder ownership since day one.

Vic is very much involved?

That's his office there. I meet with Vic regularly. We have a very good, close relationship. We talk quite a bit about strategy, what we're doing. He's very involved - chairman of the board.

The Federal Reserve didn't balk at your transition to a state-chartered bank?

I think it was September. We are officially converted. It's a funny cycle we went through. We were originally a state-chartered savings institution.

A savings institution, not a bank?

Not a bank. FIRREA (Financial Institutions Reform, Recovery and Enforcement Act of 1989) came in post-savings-and-loan crisis (more than 1,000 out of 3,200 S&Ls failed from 1986 to 1995 after investors moved money to money-market funds; the Federal Savings and Loan Insurance Corp. needed a $124 billion bailout and some 700 S&Ls were closed by Resolution Trust Corp.). That created the Office of Thrift Supervision in 1989. We decided that was a good regulator for us, and why have two regulators.

Luther Burbank Savings became a federal thrift?

We gave up our state charter, became a federally chartered savings institution, still a thrift. The OTS got the short end of the stick with Dodd-Frank (Wall Street Reform and Consumer Protection Act, 2010, enacted in response to financial crisis of 2008).

They supervised IndyMac. [Independent National Mortgage Corp., closed in July 2008 and turned over to Federal Deposit Insurance Corp., which sold it to OneWest Bank, 2009; CIT Group acquired OneWest in 2015.]

They supervised Countrywide. [In 2006, it financed some 20 percent of all U.S. mortgages. In 2008 it was sold for $4.1 billion in stock to Bank of America, which was ordered in 2013 by a federal jury to pay $1.27 billion penalty for Countrywide's loans to unqualified buyers in so-called “hustle” program. That fraud penalty was overturned on appeal in May of this year.]

Those were two of the most egregious troubles in that cycle.

Bank of America likely regretted buying Countrywide?

A lot of people regretted buying those, no doubt. Banks weren't that much better, really (in taking mortgage risk). It was a bit unfair that the OTS was sunsetted under Dodd-Frank. All the thrifts went to the Office of the Comptroller of the Currency (for supervision, part of Dept. of Treasury). We did it for several years. We have always had good relationships with our regulators. The OCC was different. We are a real-estate company.

That's all you do?

That's all we do. The OCC is not that used to that. We never really jived that well.

You are now supervised by the Department of Business Oversight?

Yes. We are considered a non-member bank. There are two regulators: the DBO and, if you are a member bank, the Federal Reserve (38 percent of 8,039 commercial banks in the United States are members of Federal Reserve System; national banks must be members; state-chartered banks have option to be members, which are required to hold 3 percent of capital as stock in reserve bank in their district, based here in San Francisco). If you are a non-member, then the FDIC. We chose non-member. I think we have a much better match with the FDIC. We are real estate, (mostly) California. We also have concentrations, mostly apartment lending. Concentrations are usually tracked with a multiple of risk-based capital. We have about 450 percent of our risk-based capital in apartment loans. The OCC is not that comfortable with those concentrations. The FDIC does not appear to have that same concern. We haven't had an exam yet.

It's coming right up?

Our first FDIC exam is in December. It better fits us. The OCC is more of a national charter. If you are in multiple states throughout the United States, you need the OCC. We're California.

You also have an office in Seattle?

Yes. We have Seattle. We got a business license for Seattle. It changes your authority as you are not a national charter.

How big is the Seattle office in terms of loan portfolio?

About $300 million.

Luther Burbank Savings has more than $4.5 billion in assets?

We are $4.9 billion. We will be $5 billion by the end of the year. We will have funded about $1.8 billion in loans this year. A lot of people don't realize how big we are from a point of view of how much loan production (we do). We are a major player in the apartment space, and then in the jumbo single-family - non-Freddie (Mac, the Federal Home Loan Mortgage Corp.), non-Fannie (Mae, FNMA, Federal National Mortgage Association, government-sponsored) agencies.

Large homes, typically?

Large homes. We also have a division called Luther Burbank Mortgage, which is where we do mortgage banking. That is where we do smaller-balance stuff. We lend through all sectors of the single-family market.

Out of your whole portfolio, how much is in the Los Angeles area?

If you look at Sonoma County, there's not a lot of apartment lending. Most of that is in southern California or Seattle. I grew up in L.A. for 30 years, had a house in Long Beach. I know it very well. You drive into the Valley, various areas of L.A., it's apartment city, apartments everywhere. In this recent recession, apartment values were the strongest asset class out there by far.

They held their value?

They held and went up. A lot of people lost their houses and needed a place to live. Vacancy rates went down, rents went up and values went up. Our portfolio performed very strongly during this cycle. That's another thing the FDIC and the state get - apartment lending is a very secure, strong asset.

It's not risky?

It's not risky and I don't envision a lot of changes to it. We haven't built much. In the last 10 years, there have been very few apartment buildings built. Their values are rising. The demographics are still growing (number of apartment dwellers). Until we start building more houses or more apartment buildings, the value is going to maintain.

You were 60/40 in apartments/single-family homes. Do you expect that to hold?

We are still about the same, roughly there. Probably.

In Sonoma County, what's your portfolio size?

I wish it were more.

Smaller than Seattle?

Oh yes. Seattle is a strong market. You have Queen Anne Hill (an affluent neighborhood) and all the different areas. Look at employers in Seattle - Microsoft, Boeing and Costco (as well as Amazon), all sorts of major employers. When big employers start building office space, that says they're hiring and that means people need a place to live. Next to San Francisco, it's a very strong market.

L.A. is your strongest market, San Francisco is second and Seattle third?

Yes. That would be about right. Values in San Francisco have gotten ridiculous, mostly from young tech businesses. Values are unbelievable.

And venture capitalists poured in as well?

VCs went where business was, which was in San Francisco. VCs left Silicon Valley (to add offices in San Francisco, particularly near Jackson Square). Not completely, but there was a big migration.

You see Luther Burbank Savings' growth rate continuing into 2017?

We are doing our strategic plan right now. Yes. We will grow in 2017 at least as much as in 2016, maybe a little bit more. A lot depends on the climate. We can't control the economy, the environment. Over the last several years, a lot of banks have been trading loans because there has been a lot of refinance activity. We'll take a bunch of loans from a certain bank and get their borrower, who refinances for less, then we lose a bunch of loans to somebody else. We prefer purchase activity. We perform better with that. Our ability to turn deals around is very timely.

You're quick?

We're quick. Being nimble is very important. We work very hard on that. If you do it a lot, you get pretty consistent. Apartment loans are a unique product. We specialize in how we underwrite. For banks that don't do it that much, it's hard for them to be able to turn that out.

Compared to single-family-home lending, what is trickier about apartment lending?

It depends on what your regulator asks you to do versus what we as a lender want to do. Most of these individuals own several apartment buildings. Apartment-owning is a business for them. We have borrowers that have multiple properties with us. Or borrowers that have multiple properties and didn't know us, and now they're coming to do one new purchase. You have to look at the cash flow of that building and the cash flow of their entire portfolio. OK, you have 17 apartment buildings, I need to see the cash flow of those 17 buildings.

You want to see which ones are underwater?

You look at the global cash flow of the borrower. That's a much more detailed financial analysis. With single-family and a W-2 employee, you're going to look at the W-2, the income, FICO scores (created by Fair Isaac Corp.) and the LTV (loan-to-value ratio).

You are done in a day?

Yes. It's really easy. It is a different animal to process.

The apartment-owner analysis is much more business-oriented and more complex?

It can be. There are thresholds. Some people own one or two apartment buildings, maybe a tech person who thinks that's a good investment. The next layer of people own maybe five to 15 or 20. Then there's the next layer - big apartment buildings, like on Wilshire Boulevard and UCLA. That's insurance funds that fund that, not banks.

REITs (real estate investment trusts)?

Yes. Our primary competitor for property mortgages is Chase (Bank, owned by JPMorgan Chase Bank, >$2.4 trillion assets), which is in the very same space we're in. Throughout every one of our markets, we are always competing with Chase.

You are dealing with a giant?

Right. My new president of commercial and consumer banking is from Chase. We have hired a number of Chase loan officers. That's been good. Originally we were doing these through wholesale brokers. We have converted over to being retail. Most of my apartment lending - we still do wholesale, and it used to be entirely wholesale - now about 60 percent is retail. It's our customer. That's a very important factor to bankers. Not to go to Wells (cross-selling excesses) - cross-sell that customer deposit products. I would like to have their property-management account, more of their business. When you go retail with a borrower, that's your primary focus. You want more business with your customer. Hopefully, it's a reciprocal relationship and the customer likes the way we bank them, feels comfortable with our services.

You do apartment management?

We have not done that in the past. Part of our conversion to a bank is that that's considered more a commercial-type deposit product. By the end of this year, we have been building our systems for that. In 2017, that will be one of our major pushes - to get property-management accounts, and more commercial-type accounts. In our branches, we have been more a consumer depository.

With CDs (certificates of deposit)?

CDs, money markets, checking, too. Mostly the consumer individual personal account. Now that we are a state bank, we're not giving up on what we're doing, we're just augmenting it, adding to our repertoire.

Is the spread between cost-of-funds and interest rates charged to borrowers historically low?

Banks are under great duress. The spread is not good. Loans are mostly priced at the 10-year Treasury (rate, about 1.7 percent). Deposits can be priced by a number of things. Banks are trying to get more efficient, fine-tuning costs, trying to come up with fee income. We are a little bit different, margin-driven for profitability. We don't have a lot of fee-income-generating activities. An Exchange Bank would have fee income from checking accounts. We have not specialized in that. It's not our thing. We will probably get some when we start doing property-management accounts.

Since Trump was elected, bank stocks have risen sharply. Is that encouraging?

I don't like to talk politics, but I think the jury is out. There's going to be some volatility. It could all come back to earth. We don't know what we got yet. We'll see. You gotta believe it's going to be pro-business. After the financial crisis, it has been pro-regulation. Not just banking - everything, so overregulated. California is the worst. Texas is probably the best.

You have roughly 30,000 deposit accounts?

That's about right.

Is that growing, staying the same?

That hasn't grown as much as I'd like. We want to grow that. We're reconfiguring what we're doing. We have a new brand (sailboat theme, slogan: You're worth more here.), a new website. We went through a complete rebranding. We will do more online, mobile, we invested in technology because we don't have a lot of branches.

Nine still?

Nine. But just one in each major location. One in Santa Rosa. One in San Rafael. I built all of these branches.

How many were there when you came aboard 30 years ago?

There were three. We were in Palo Alto. I moved that to Los Altos. Only one branch is the same - San Rafael. That one we purchased in 1996 from New Horizons Savings. In Los Angeles, the first branch was in Encino. The second was in Toluca Lake Burbank. The third was Pasadena. Fourth was Beverly Hills. The fifth one was Long Beach, in Belmont Shore (neighborhood). It's near where I lived. I knew the area and had been watching it. Our branches are very large depositories. This branch (Santa Rosa) is over $1 billion. We have more deposits ($1.1 billion) than Exchange Bank ($931 million in Santa Rosa with nine branches, as of June 30, 2016). In San Rafael we are $543 million with one branch. Bank of America is $480 million with two. Bank of Marin is $404 million; they have three.) In 2017 we will promote mobile deposits, online banking. Depends on who the customer is. Millennials would rather do it electronically. With our debit card, we do the same as First Republic. You can use it anywhere and we rebate the fees. You have the ability to get your money no matter where you go. Then you have remote capture, which I use. With your iPhone, take a picture, off it goes.

Your typical depositor is fairly affluent and baby boom generation?


Your aim is to go for millennials more?

My aim is to diversify. I still want the deposit demographics we have. I want to grow both. That's our goal.

In the city, the millennial demographic is unbelievably affluent?

It is. That's what's driving up all the rents. Some of the income these young tech people are getting is unbelievable. It's astounding. They're driving up the price of everything. That's a great customer to have. They're not as conservative. Our customer is typically pretty conservative. A problem with banking right now is that rates have been so low for so long that we have ceased to be a source for a conservative investor to get a reasonable yield. That demographic has been damaged in this cycle - people who lived off their interest checks. It's not happening. We have lost money from people giving up and buying real estate - something that will yield them more than 1 percent. You have to take more risk. I hope that economic growth jumps and that rates go up, that we get out of this very low-rate environment.

Do you think that's not far off?

The difficulty for banks is not getting there, it's how fast you get there. If it moves really quickly, you can sometimes get squeezed. It's getting to more normalized rates for both loans and deposits.

If rates were raised on a fixed schedule, what would be reasonable, a quarter point every quarter?

I don't know. The Fed has talked about that, whether they should peg where they're going to move rates to some sort of index. As that moves, they would move in lock-step with it.

You'd think the stock market would love that because it's predictable?

It's predictable.

The Fed has been so cautious that it sends a message of uncertainty about our economy?

It's not a good message. Although we are still the safe haven for treasuries all over the world. It's a strange environment.

Are there other major growth areas you see in 2017 or 2018?

I don't think so. We will continue to focus on apartment lending and the single-family that we do. I want to augment our deposit strategy and funding strategy. I think the market is still going to be pretty good. On the jumbo single-family, that was under more stress than multifamily, but the difference is you are lending to a high-net-worth individual who has the capacity to hold it. Very few of ours went underwater.

The assets are there?

The assets are there. I'm a believer in California real estate. The prime properties, there are not that many. If you are looking at Bel Air (Los Angeles Westside) and Brentwood, these places where people want to be, there's only so much inventory. That's going to keep values strong. Holmby Hills is where the Playboy Mansion was, near Beverly Hills. It's an old Hollywood enclave - beautiful old homes, but most of them were built in the 1930s. People are buying lots and scraping them. You're buying a house for $6 million and tearing it down. Then you're building something for $4 million or $5 million.

So you have $10 (million) involved?

Yes. You have $10 (million) involved. That is happening all over the L.A. area.

The value is going to be $20 (million)?

Right. There's no additional space to build. These are great areas. Every builder just scrapes it and starts over. We are doing construction lending for that, a niche that we do. We specialize in niches. We also do parting residence. In L.A., if you want to move and you see a house on the market, you don't have time to sell your house. That new house will go for an all-cash deal or it will go promptly. There's no way an offer contingent on the sale of your house will ever get accepted on the house you want to buy. If you have equity, we'll give you a loan to go ahead and buy the new house. You put some equity in, cross-collateralize it as a parting residence. Then they can rent that property or sell it. We'll pay down the loan when they sell. This allows a buyer to be able to close on a purchase they want quickly without having to worry about selling their house. They can sell it in a year or rent it.

It gives them flexibility?

Yes. That's one of our specialties, cross-collateralization, departing residences. We look for niches in lending. Freddie- and Fannie-conforming has been so homogenized, so many people who do it. It's a very difficult market to make much money in. We do it in (Luther) Burbank Mortgage. That's probably our least successful unit.

Geographically you are in Seattle, but everything else is in California. Considering Oregon, Portland?

We are going to go to Portland next year, 2017. We have been thinking about that, but have been working on technology. Portland fits very much.

That office will be spring (2017)?

Maybe sooner. We're looking at it now. First quarter. These are not big offices. I'm doing Seattle with one guy and one processor. He's Mr. Seattle, worked for World Savings. All that volume is driven by one guy. If you find the right person, they can produce quite a bit.

They know everybody?

They know everybody and they're connected. We're not going to get every loan that's up there. Chase is up there. Washington Federal is another competitor there. Chase is everywhere. Most of it is finding the right person.

Do you have that person for Portland?

We have a couple in mind, yes. There is a great person up there who happens to work for Chase right now (laughs).

Lure them away?

We'll see. These guys are very valuable. They know the markets. All the apartment investors know them. It really is about who you hire.

That's your conduit into the market, one human being?

Absolutely. Portland is not as big as Seattle. It will be a smaller market. It will be L.A., San Francisco, Seattle and Portland in (descending order of) size and activity. It's still a large and growing community. I am impressed with their real estate.

Do you have your eye on some other market past Portland?

No. We are working on more retail, less wholesale. We will hire a retail officer in Portland. There are a couple of more positions in California will be hiring retail loan officers. We still do a fair amount of business with a couple of big brokers. Marcus & Millichap is the broker we work with in L.A. We will continue to work on the Luther Burbank Mortgage piece. That's in L.A. We need to grow the volume in that. That has been a challenge for us.

You mentioned that you might save roughly $800,000 in examination fees after the conversion?

That's accurate. For us, $800,000 is not a small number. I'm not sure why the OCC is so expensive. Every agency is different. They have had a lot of people convert off for that reason.

You have yet to deal with the Dept. of Business Oversight?

We have had initial meetings with the DBO and an entrance meeting with the FDIC. I'm feeling pretty good about it. The way I like to work with regulators is to have conversations like this - open conversations - get them to be comfortable with our business. If they think we're doing something too risky or we ought to change, I prefer to do it in open dialogue. If we can, we say, sure.

You do it informally?

I prefer informally if possible. Out of the crisis, the OCC certainly became more formal. Everything was written, nailed down. It's a relationship. Regulators don't want to be regulating any bank after they have given them a good examination. They want to get it right. We have done well for our entire history, 33 years. We have gone through several down cycles and managed through all of those. I have been through every one of them. It's a good story for a regulator. That's the story we tell to our customers, too. We have good capital. We're strong, competitive on our rates.

Your employee count is still under 300?

We are about 315.

You have grown 10 percent (employee count) in a year?

Yeah. I prefer we didn't (laughs). Employees are expensive. That's a whole other level of management.

You have to find leverage like you have in Seattle, where production is unbelievable?

Exactly. No, you can't do everything with one person - unfortunately.

Your view here (out of his office overlooking Old Courthouse Square) should change in about a month?

My entire board encouraged me not to do this (move to the former AT&T building). No one thought Hugh (Futtrell, developer) could get it done. It got stalled several times. We didn't know if it was going to happen. The museum was going to come. They bailed, never thought he was going to get it done. We kept waiting and waiting and waiting. When he couldn't do the apartments up top, that was a very positive thing. That wouldn't have been very practical. Costs were exorbitant. When he finally scaled it down to being just this, it became a much more doable project. It has turned out far better than I thought. No one knew what the views were going to look like. There were no windows. It was quite a transformation. We are the anchor tenant, so I took over the blade sign (front of building). That's going to get so much branding when the square is done. (He stands up, walks to window and surveys the square.) It could be a pretty nice square.

As a state-chartered bank now, are you looking to acquire anything?

I don't want to comment on that, but we always look at things. Anything's possible.

So that could happen?

It could happen. The perception is that the regulatory apparatus is going to be more pro-lending. Under Dodd-Frank, it limited lending, made lending less available to the public and more expensive, even though rates were really low. It's hard for banks under $1 billion (in assets).

They're vulnerable to a takeover?

They're very vulnerable. The infrastructure you have to put in place to cover all your risk-management practices is very expensive. Technology is very expensive. You're just not going to be able to compete.

Summit State Bank, with about half a billion in assets, is in that range?

Certainly if the regulatory climate stays the same, you already see mergers. If you look at asset sizes, nobody wants to go over $10 (billion), the trigger for even more regulations. Everyone is fearful of $10 (billion). The sweet spot is about $7 (billion).

All you need is two more (billion)?

Yes. It will take two or three years.

James Dunn covers technology, biotech, law, the food industry, and banking and finance. Reach him at or 707-521-4257.

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