Deal Quiets Nervous SecPac Investors
By rushing into the arms of a strong partner, Security Pacific Corp. has quieted a broad range of investor concerns, for the moment. Among them: How shaky is its real estate loan portfolio?
Long considered one of the most innovative banking companies in the country, Security Pacific has recently seen some of its more speculative loans come back to bite - and hard. Indeed, worries about further losses on questionable loans may have led the Los Angeles-based banking company to its merger plan with BankAmerica Corp.
Years of Problems Loomed
"Security Pacific was dealing from a position of weakness," said Larry Vitale, bank analyst at Kemper Securities Group, Chicago.
Security Pacific was in no danger of failing, Mr. Vitale and other analysts were quick to point out. But it might have taken the company years to work out its problem loans without help. Joining forces with a well-capitalized outfit like BankAmerica, by contrast, should hasten the cleanup.
The first indication of serious soul-searching at Security Pacific came last December. That's when the banking company abandoned its ambitious global strategy, which was anchored by its chronically underperforming merchant bank.
A Shift in Strategy
Foreign operations were cut back, and loans to leveraged buyouts were also called into question.
The new plan called for Security Pacific to make itself into an institution serving consumers and medium-sized businesses, primarily on the West Coast. New people were recruited into top management posts from other banking companies, such as Wells Fargo & Co. and the Union Bank unit of Bank of Tokyo Ltd.
The restructuring charges - combined with provisions for loan losses - knocked the stuffing out of earnings. Profits in 1990 fell 78%, to $161.3 million, or $1.03 per share. As loan losses continued this year, earnings for the first six months fell 63% from year-earlier levels to $143.2 million, or $1.01 per share.
Investors and other bank handicappers began to worry. After all, as of yearend 1990, 19% of Security Pacific's total loans were to commercial real estate borrowers and a further 7% to highly leveraged transactions.
As the recession ground on, Security Pacific's loan problems became more serious. The bank revealed problems in the United Kingdom, Australia, and Arizona. Nonperforming assets, including foreclosed real estate, reached $3.86 billion, or 6.55% of total loans. That is up 38% from the $2.79 billion at yearend 1990.
Its troubled-loan ratio ranked Security Pacific 37th among the nation's 50 largest banks. Analysts were predicting more big increases in soured loans at least through yearend and perhaps into 1992.
All these problems pushed Security Pacific's stock down recently to a price of $23 a share, or 58% below its all-time high of $54.50, reached two years ago. The stock traded late Monday at $32.375 a share, up $9.375.
With California's real estate market still weak and "megabank" competitors emerging on the East Coast, the BankAmerica merger surely was welcome at Security Pacific.