For years Security State Bank in Pearsall, Tex., ranked among the most profitable small banks in the country by sticking to a simple strategy: investing deposits primarily in securities while keeping its overhead low.
But a recent slide in profits, caused largely by the flat yield curve, has forced the $355 million-asset bank to change its approach.
Now Security is looking to do more lending, and it is targeting small and midsize businesses in central Texas. After 81 years as a one-branch bank, it opened a second branch in December in Pearsall, and it is planning to open a third in a San Antonio suburb next year.
Mike Wilson, Security's president and chief executive officer, is leading the bank's transformation. A former executive vice president, he took over at Security in May of last year after the death of its longtime president, A.R. Gallaway.
In an interview last week, Mr. Wilson said the bank's growth will be measured. "We're not trying to open a branch a year, and we aren't trying to make ourselves big enough where someone would want to acquire us."
Still, Security needed to change the way it does business, because margins on securities have been shrinking, he said.
"It's hard to believe we could get all the one-day money we wanted for about 1% and still buy securities in the 5.34% range," he said. "That doesn't exist anymore, so we moved to traditional loans and started looking for more sources of revenue."
Security is making progress. As of June 30 about 70%, or $254 million, of its assets were held in securities, versus 78%, or $269 million, a year earlier, according to Federal Deposit Insurance Corp. data.
Its loan-to-deposit ratio, while still well below that of most banks its size, was 49.73% on June 30, versus 39.46% a year earlier.
For decades Security made whatever loans it could in its 7,157-person hometown, put the rest of its deposits into securities, and kept costs down by operating a single branch with a few employees.
That business model worked well for a while. For several years in a row it ranked as a top performer in Texas by return on equity in the ABA Banking Journal's list of most profitable non-S-corporation banks and thrifts with $100 million to $3 billion of assets. It also consistently ranked among the top 15 nationally in its asset class.
But higher fund costs and expenses related to the new branch caused it to slide to No. 30 nationally and No. 5 in Texas in the journal's most recent list, which was released in July and reflects last year's data. The statistics, obtained from SNL Financial LC, show that Security had a return on average equity of 23.38%, versus 30.05% in 2003.
The second branch also caused Security's efficiency ratio to rise from 26% in June 2005 to 35% a year later.
The branch was built along the Interstate 35 corridor to chase anticipated growth in Pearsall after the announcement that a detention facility for illegal immigrants would be built nearby and employ just over 330 people, Mr. Wilson said.
"To have a second branch in your own small town may not seem very smart, but it seemed like the community was moving toward the interstate, so we wanted to be there," he said.
Security's third branch is slated to open in Pleasanton, about 17 miles south of a newly built Toyota plant near San Antonio.
When the plant is fully operational, it is expected to have about 2,000 employees and an annual payroll of $90 million to $100 million, said Steve Nivin, the chief economist for San Antonio.
To support the plant, about two dozen auto parts suppliers are opening facilities in and around Pleasanton that are expected to create an additional 2,100 jobs. Mario Hernandez, the president of the San Antonio Economic Development Foundation, said the total economic contribution of the plant and its suppliers to the local economy will be about $1.7 billion a year.
"This is going to throw out a lot of opportunity," he said. "It will impact small businesses."
Outlying areas with easy access to the plant also will feel the bump in growth, Mr. Hernandez said.
"I don't think" Pleasanton "will become only a bedroom community," he said. "I think it will have businesses that supply the plant."
Security likely will not lend to a company as large as Toyota Motor Corp., but Mr. Wilson said he anticipates making loans to its suppliers.
"We've decided not to sit here," he said. "We've gone out of Pearsall and looked for opportunities."
