Quiet Luther Burbank Savings, Sonoma County’s biggest bank, is adding to its successful formula

With new digs in downtown Santa Rosa, a large sign out front and a strong record of profit, Luther Burbank Savings is finally bringing a little attention to its success as the largest consumer bank in Sonoma County.

Whereas banks tend to promote themselves heavily, from the local high school ballfield to the corporate naming rights of nationally known sports arenas, the county's largest consumer financial institution (and second largest in the North Bay in terms of assets) goes largely unheralded.

Luther Burbank Savings has churned out steady profits for more than 32 years by focusing on a niche market and loyal customer base. It has 284 employees and holds 31,000 customer accounts. In February, the bank moved into new headquarters downtown sporting a prominent sign, occupying 30,000 square feet over two floors of the former AT&T building on Third Street overlooking Old Courthouse Square.

Yet bragging is not in the Santa Rosa company's DNA.

“It's kind of our best secret in the business world and they bring a remarkable record,” said Ben Stone, executive director of the Sonoma County Economic Development Board.

The move was primarily for logistical purposes so four different offices could be put under one roof, said John Biggs, president and chief executive officer.

“My primary goal was to get everybody together at one place. If you have four buildings, it's very hard for me as CEO to walk around and talk to people. So there's a lot of positives to having everybody under one roof,” Biggs said.

But even with all the physical changes, the business plan for the bank has remained mostly the same: Attract customers with certificate of deposit rates that are higher than others' and then use that money to make competitive loans in the real estate sector. Luther Burbank has long specialized in the stable market for multi-family housing loans, but has branched out just recently into loans for single-family homes.

“They're a financial institution with a niche,” said Brett Martinez, president and chief executive officer of Redwood Credit Union. “And they do a good job in that niche.”

That formula has produced profits for 128 consecutive quarters. In 2015, it reported net income of $42.7 million. At year's end, it had $4.4 billion in assets, a 10 percent increase over the previous year. Growth was driven by a 12 percent increase in loans, or $403 million.

The profit streak continued as the financial sector underwent tremendous turmoil during the 2008 banking crisis. It led to unprecedented intervention by the federal government, which spent $700 billion to bail out banks, money that was eventually repaid.

It also survived the enactment of the Dodd-Frank financial reform law, passed in 2010 and designed to correct abuses that led to the crisis. The legislation created greater oversight over large banks, a new consumer financial protection agency and language designed to curb unsafe home mortgages that were at the center of the crisis. Overall, it has produced a much greater regulatory burden on all financial institutions.

And Luther Burbank has continued to succeed through a prolonged low-interest-rate environment orchestrated by the Federal Reserve. Bankers contend that higher interest rates would boost their profits because they widen their net interest margin, which is the difference between what they pay out for deposits and what they can charge in interest for loans.

“The best thing for the banking industry is to achieve a normalization of interest rates,” said Vic Trione, chairman of Luther Burbank Savings. Trione, his brother Mark, and George Mancini, the company's first president, are the only shareholders in the bank, which makes the bank less vulnerable to the sway of outside influences.

Biggs was even more succinct, noting that his bank's return on assets is still not what it was before the banking crisis.

“It's not the most profitable environment for banking,” said Biggs, 60, an accountant by training.

Steady growth

The bank was founded in 1983 and named in honor of Luther Burbank, the noted horticulturist whose name is synonymous with the country's agriculture roots. From the start, the bank placed a high emphasis on customer service. It took 17 years to reach $1 billion in assets, but growth has increased rapidly within the last decade.

The bank has made its mark as a traditional savings bank, pulling in customers who want a stable and secure environment for their investment guaranteed by the FDIC. It has traditionally offered high rates for its certificates of deposit and savings accounts, with some customers attracting a level at around 1 percent in this low-rate era.

The average deposit balance for Luther Burbank Savings is $135,000, Biggs said. That is extraordinarily high; a Google survey conducted last year by GOBankingRates found that only 14 percent of respondents had more than $10,000 in savings.

The certificates of deposit have traditionally garnered the lion's share of investment by customers, but Biggs said the CDs are now about 50-50 with savings accounts.

Given that providing a savings vehicle is the main draw for consumers, Luther Burbank differs from other banks in that it has no ATMs, instead rebating the fees charged to its customers when they use other banks' ATMs. It also doesn't have many branches, only nine located in northern and southern California. In contrast, Exchange Bank in Santa Rosa has 19 branches.

Only real estate loans

That narrow focus on its customer side is also reflected in its lending business: It only provides real estate loans, and specializes in apartment buildings. But the loans aren't for the glitzy new projects popping up in urban centers such as San Francisco's Market Street.

The typical loan balance, instead, is $1 million on average and it goes to experienced borrowers that have four to nine buildings, Biggs said. These are apartments that typically were built decades ago in places such as the San Fernando Valley of Los Angeles, where the rents could range from $1,500 to $2,000 a month.

“It's not high-rent districts. It's not tenements. It's sort of that niche in between,” Biggs said.

The borrowers are using new loans to help revamp their buildings so they can charge higher rents, while others are looking for cash-out refinancing to buy more properties, he said.

“It's a difficult time to buy because prices are high,” Biggs said.

What Luther Burbank does well is find strong markets that have provided stability even in downturns. It has concentrated in diversified urban areas in California such as the Bay Area, Los Angeles and San Diego and avoided places where the housing crash took a significant toll, such as the Inland Empire.

When single-family home prices fell as a result of the banking crisis, especially in areas such as Santa Rosa, multifamily buildings remained strong for the bank. The reason: People have to live somewhere, even those who lost their homes.

Seattle branch flourishing

Luther Burbank entered the Seattle market in 2008, a decision that has proved fruitful especially given the growth in that area. Amazon's major expansion in the South Lake Union area of Seattle, for example, has driven even more demand. The bank now does $500 million in loans in Seattle.

“The job market in Seattle is just fantastic,” said Biggs. “There is a building of apartments there and there's building of houses there. What they do is they follow the hiring of those firms.”

As far as any new markets, Biggs said his bank is looking at areas only on the West Coast, but the institution is very cautious about entering any new place unless it is convinced the job growth is there.

The bank has looked at Oregon, but so far has held off. “Portland is not as strong as Seattle. It's getting better, but it's not nearly as strong as Seattle,” he said.

At the suggestion of regulators who want more diversification, the bank has gotten more involved in single-family housing. Its mix now is 60 percent multifamily and 40 percent single-family homes.

“If we had our preference, we'd probably have more in apartments because that's really what we specialize in,” Biggs said. “But that was really what prompted the launching of the mortgage company.”

It launched a new mortgage division in 2013 with a goal to originate $1 billion in loans in its second year of operation, but it did about half that amount, Biggs said.

“That has been more difficult than what I expected,” Biggs said. The bank has had difficulty building up a pool of commission-based loan officers. “It's much better now than it was a couple of years ago,” he said.

Rent control issue looms

In November, the bank rolled out new programs for borrowers with low-to-moderate incomes or those residing in less affluent areas, especially focusing on down payments. Options include providing borrowers with home loans that come with no mortgage insurance, offering loans with down payments as little as 3 percent, and home equity loans at a fixed-rate of 4.15 percent for 15 years.

“You don't need a down payment. You've got to have a job,” Biggs said of the company's push.

Biggs said he doesn't envision a repeat of what occurred leading up to the crisis, where many borrowers had loans with no documentation or outright falsehoods on their applications. He noted Dodd-Frank requires lenders to ensure that borrowers have the income to be able to repay the mortgage.

“In the previous cycle, you had really speculative buying,” he said, with borrowers believing home prices would continue to escalate so they could pay off the original loan.

The next real estate cycle is likely to center on escalating rents, he said, with more jurisdictions focusing on rent control policies.

“I think that's what is going to slow down apartment lending,” Biggs said.

You can reach Staff Writer Bill Swindell at 521-5223 or bill.swindell@pressdemocrat.com. On Twitter @BillSwindell.