Little Bank That Can : Security Pacific’s State-Charted Offspring Provides Parent With New Opportunities

Bankers were a little surprised when Security Pacific Corp. formed a state-chartered bank 4 1/2 years ago to take over most of the $29 million in assets at the failed Bank of Irvine.

After all, the company already owned Security Pacific National Bank, the state’s second largest bank.

But Security Pacific State Bank, as the young institution is known, has given the company access to a wide variety of business opportunities that are closed to its national bank and even to itself as a national bank holding company.

Now the state bank, one of the most profitable and most overcapitalized banks in Orange County, is poised to plumb the riches of Proposition 103 by offering the national bank’s 3 million customers a complete line of insurance products--from automobile policies to casualty coverage.

For under Prop. 103--the November initiative better known for its provision to roll back insurance rates 20%--it is only state-chartered banks, not national banks, that can sell a full line of insurance policies. Security Pacific State and First Interstate Bank, the only state-chartered institution among the major banks, are awaiting license approval from the state Insurance Department.

Security Pacific State expects approval within a week or so and plans to start marketing some insurance policies within the next 2 months, said James N. Koury, a corporate executive and chairman of the state bank.

But insurance is only part of the formula that has made the company’s step into state-chartered waters successful.

“This has turned out to be an exceptional investment, a really great one,” Koury said.

The state charter gives the company the ability not only to take advantage of wider investment powers and business opportunities provided under state law, he said, but also to offer customized products to its targeted market--other financial institutions.

Security Pacific State ended the year with net income of $4.7 million, 52% higher than the previous year’s earnings of $3.1 million. Fueled by huge reserves of capital, its size more than doubled to $225.1 million at the end of December from $106.3 million a year earlier.

Those figures may appear paltry compared to the parent’s consolidated assets of $78.9 billion and earnings of $469.4 million for the first 9 months alone, but the small state bank’s results are well above almost all of Orange County’s community banks.

After it started operations in May, 1984, Security Pacific State began stashing away capital as it engaged in one of the more controversial powers permitted state-chartered banks--direct investments in real estate.

At one point 2 years ago, Security Pacific State’s capital amounted to 46% of its assets, even though regulators required only a 6% ratio. The bank had built up about $15 million in real estate investments and commitments through joint ventures.

The ability to participate in the joint ventures was the reason the parent company kept the state-chartered bank, Koury and Security Pacific State President Duane Rickard acknowledged.

But when the parent sought regulatory approval in September, 1986, for its purchase of Arizona Bancwest Corp. in Phoenix, it cut a deal with regulators. To acquire Arizona’s third-largest banking company, Security Pacific Corp. agreed to end the state bank’s joint venture deals.

“With the joint ventures gone, the company had to rethink why it wanted a state charter,” Rickard said.

After an examination of the other powers offered banks under state law, the parent decided the state charter still had “strategic value” that wasn’t available elsewhere, Koury said.

Besides, with its huge capital base, the bank could grow substantially. While the bank’s assets doubled in the past year, for instance, its capital grew by only $7 million to $56.1 million. Still, its ratio of capital to assets at year end was 24%. And it plans to have $500 million in assets within 3 years, Koury said.

As it wound down its joint venture operations, the state bank increased its efforts to market its products--consumer loans, student loans and automated teller machine services, for example--to other financial institutions. It allowed the institutions to offer those loans or other products under their own names.

The bank now has 15 loans, services and other products it offers to such financial institutions as banks and savings and loans. And it offers those products directly to its small coterie of retail customers.

Security Pacific State also began creating subsidiaries that its giant sister couldn’t have. Those subsidiaries engage in such services as management consulting, auditing, computer consulting and real estate consulting for automobile sales centers.

The state bank now has seven subsidiaries, including the recently purchased Summit Inc., a Corvallis, Ore., company that handles data processing for credit unions. Six of its units, including Summit, are subsidiaries that the national bank is not permitted to own.

One subsidiary, for example, buys assets--usually packages of loans--from banks and S&Ls; that need cash and sells those assets to other financial institutions looking for investments.

“The state bank simply has more flexibility than the national bank. . . ,” Koury said.

Most of the parent company’s and the national bank’s subsidiaries are dedicated to supporting the national bank’s customer base, he said. That left the state bank with room to do different things, he said.

The newest activity is insurance. It will be handled by the state bank itself partly because the Federal Reserve Board is proposing to limit the activities of state bank subsidiaries.

The state bank expects to sell insurance policies to customers of the national bank, which in turn will let customers put the premiums on their credit cards so they can pay monthly, said Richard M. Horn, vice president and general counsel of Security Pacific Insurance Group.

Horn’s group, a company subsidiary that is helping the state bank’s insurance effort get off the ground, is limited by law to selling insurance only on such bank services as credit card balances and mortgages.

That the state bank was ready to file for its insurance license the day after Prop. 103 passed doesn’t surprise analysts familiar with the corporation. It has a reputation for experimenting.

“Security Pacific tries anything,” said Dan Williams, an industry analyst at Sutro & Co. in San Francisco. “They look at everything. There isn’t anything in banking that they don’t know about.”

Sometimes, the parent has had to halt its experiments. It killed its export trading company after it turned out be duplicating efforts elsewhere, and it recently scaled back its business in Europe when competition proved too great, he said.

But Security Pacific State Bank may be a little jewel that the analysts haven’t found yet. Williams and other analysts said they know little about the state bank’s operations, though they figure the insurance effort will be used to help the national bank broaden its services and sell customers other bank products.

But Koury and Rickard believe the industry will be hearing more about Security Pacific State. Starting with its Jan. 24 annual meeting, Koury said, the bank plans to promote itself more actively than it has in the past.