Santa Rosa’s Luther Burbank Savings seeks commercial bank status

By early September, Luther Burbank Savings expects to become a state-chartered commercial bank. The Santa Rosa bank, a savings and loan since 1983, will join other locally based banks such as Bank of Marin (public), Exchange Bank (public), Summit State Bank (public) and First Community Bank (private). Luther Burbank Savings will remain private.

Parent Luther Burbank Corporation, also based in Santa Rosa, on July 19 published notice of its application to the Federal Reserve Board in San Francisco to convert from a unitary thrift holding company to a bank holding company. If approved, the newly formed bank holding company will acquire control of Luther Burbank Savings after its conversion from a federally-chartered savings association to a state-chartered commercial bank.

Before approving the change, the Federal Reserve will consider whether Luther Burbank Savings performed well in meeting local credit needs.

Luther Burbank Savings is engaged in real-estate lending, with 60 percent of its loans for multifamily apartments and the rest for single-family homes. The company has nine branches: Santa Rosa, San Rafael, San Jose, Los Altos, Beverly Hills, Long Beach, Burbank, Encino and Pasadena. In 2015, Luther Burbank Savings had net income of nearly $43 million and $4.4 billion in assets.

In February, Luther Burbank Savings, moved to new headquarters on Third Street in the former AT&T building across from Old Courthouse Square in Santa Rosa.

A unitary thrift, the current structure of Luther Burbank Corporation, controls one savings-and-loan association and can open branches anywhere in the United States. A unitary thrift must hold at least 65 percent of its assets in qualified thrift investments, such as mortgage-backed securities or residential mortgages, but can use up to 20 percent of its assets for commercial loans.

A bank holding company, which reports data to the Federal Reserve, is a corporation that controls one or more banks but doesn’t necessarily do business in banking. Most big banks are part of a bank holding company, which can also engage in securities dealing or underwriting, asset management, real estate, leasing, insurance, private equity and trust services.

Bank holding companies in the United States control more than $15 trillion in assets, according to the Federal Reserve Bank of New York - nearly the size of the $18 trillion U.S. gross domestic product in 2015.

Luther Burbank Savings, a private company, plans to remain private, according to CEO John Biggs, who has been with the company for nearly 30 years.

“Nothing changes in the ownership,” Biggs said in an interview with the Business Journal on July 19. “It’s not going public. What we are doing is converting our charter, changing from a federally chartered savings-and-loan institution to a state bank. That means we will not be supervised by the OCC (Office of the Comptroller of the Currency).”

“We will be supervised by the DBO (Department of Business Oversight) and insured by the FDIC (Federal Deposit Insurance Corporation),” Biggs said. The change is driven in part to avoid OCC examination fees.

There are lower fees for the state DBO. “We will save about $800,000 a year,” Biggs said. “It’s a big number for us.” The FDIC does not charge for its examinations.

The savings goes directly to profits, Biggs said.

At the state level in California, the California Department of Business Oversight regulates not just banks, but other businesses including: broker dealers and investment advisers, business and industrial corporations, payday lenders and finance lenders, residential mortgage lenders and originators, capital-access companies, check sellers, bill payers, money transmitters, credit unions, escrow agents, franchises, industrial banks, corporate securities and trust companies.

“Dodd-Frank converted all the savings and loans over to the OCC,” Biggs said, “I don’t believe the OCC is the best regulator for savings institutions. They’re more for national banks, banks working out of state and in multiple states. We are truly a California financial institution. It makes more sense to have a California regulator as opposed to having a federal regulator,” he said.

“We are changing to a state bank at the insured depository level,” Biggs said. “We were a savings-and-loan holding company that owned shares of the bank. Part of this conversion requires us to convert to a bank holding company.” The bank holding company will acquire the shares of Luther Burbank Savings.

“In about 45 days, we will be officially a bank,” he said, like Exchange Bank and Summit State Bank, both also based in Santa Rosa.

The Dodd-Frank Act of 2011 transferred regulatory authority over roughly 430 thrift holding companies from the Office of Thrift Supervision to the Office of the Comptroller of the Currency. The Office of the Comptroller of the Currency issued a final rule effective July 1, 2015 that integrated rules for national banks and federal savings associations regarding policies for corporate activities and transactions. The rule reduced unnecessary requirements and aimed to increase fairness in supervising national banks and federal savings associations.

The Federal Reserve Board has supervised and regulated bank holding companies for about 70 years, including requiring that a bank holding company raise capital for its subsidiary banks, if needed. No such policy was applied to thrift holding companies. Grandfathered unitary holding companies were permitted to engage in various non-depository businesses, such as insurance, where generally accepted accounting practices are not necessarily the norm, and capital levels were established by state insurance regulators. Luther Burbank Savings, according to Biggs, conducted all of its lending in real estate.

The Federal Reserve regulates state-chartered banks, bank holding companies, foreign branches of U.S. national and state member banks, and state-chartered U.S. branches and agencies of foreign banks. National banks are regulated by the Office of the Comptroller of the Currency.

After Dodd-Frank, “the rules are not that different between a bank and a savings and loan,” Biggs said. “There are not that many savings and loans left. It’s a dying breed. That’s the other part of it. We want to be chartered as a bank. There’s no plan to significantly change our strategic initiatives. We will pretty much stay the way we are,” lending for apartments and single-family homes. “All of our lending is real estate. Even though we will change to that bank charter, we won’t be doing auto loans. Our business model will remain the same.”