Security Capital Corporation
Security Capital Corporation
Total Assets: $3.44 billion (1996)
Stock Exchanges: NASDAQ
SICs: 6712 Bank Holding Companies; 6036 Savings Institutions, Not Federally Chartered
Security Capital Corporation is a bank holding company formed in 1993 to enable its subsidiary, Security Bank S.S.B., a state-chartered service bank, to convert itself from a mutual savings bank to a public stock corporation. In 1993 Security Bank was the second-largest thrift institution in the state of Wisconsin and the largest in the city of Milwaukee. Nationally, it ranked 13th among all U.S. state-chartered savings institutions in 1995, and its holding company, Security Capital Corporation, ranked 177th among all U.S. bank holding companies. In addition to making home mortgage and home equity loans to the consumer market, in the mid-1990s Security engaged in a wide range of financial activities, including originating commercial loans, investing in mortgage-backed securities, and offering commercial leasing, insurance, and investment services. In 1996, Security Bank maintained 42 branch offices, ten lending offices, and five subsidiaries in six midwestern states.
Community Thrift: 1913-1965
A year before the outbreak of World War I in 1914, a German-descended entrepreneur named Theodore Mueller founded the Security Loan and Building Association in a one-room storefront in Milwaukee, Wisconsin, and began translating customers’ deposits into loans for the growing Milwaukee homebuilding market. To enhance Security’s budding image as a safe and reliable thrift, in 1915 Mueller adopted the lion emblem (the “picture of strength”) that would remain the bank’s corporate symbol of financial invulnerability for the next eight decades. Before Security’s first decade was out, however, the U.S. banking industry had become embroiled in the most disastrous period of its history: 5,700 U.S. banks alone closed between 1921 and 1929, and the stock market crash of 1929 inaugurated another prolonged string of failures. Due in part perhaps to the reputation for hard work and pay-your-debt financial responsibility attributed to Milwaukee residents, Mueller’s savings and loan (S&L) remained solvent until the onset of the Great Depression forced Congress to radically rewrite the rules of American banking.
While the Depression was beginning to force a new epidemic of bank closures—including several hundred S&Ls—Congress passed the Banking Act of 1933, which sought to eliminate banks’ imprudent mixing of their traditional deposit-taking and loan-making functions with more speculative ventures. More importantly for savings and loans like Security, the act also created the Federal Home Loan Bank System (FHLB), which amounted to a kind of Federal Reserve system for S&Ls: federally chartered S&Ls could now receive government-guaranteed insurance for withdrawals, seasonal shifts in business, expansion, and special circumstances. Moreover, for the price of a premium, state-chartered S&Ls like Security could now also conduct business with the full backing of the federal treasury through the new Federal Savings and Loan Insurance Corporation (FSLIC).
Buoyed by the new federal guarantees, Security weathered the 1930s and officially rechristened itself Security Savings and Loan Association in 1940. Reflecting a concern for civic involvement that would characterize the bank through much of its history, in 1944 Security invested $2 million in U.S. government securities. The sizable investment not only helped the federal government finance the war effort but enabled Security to enter the postwar era flush with valuable liquidity. In 1948 the federal government again transformed the topography of the S&L industry by creating the Federal National Mortgage Association (or “Fannie Mae” as it came to be called) to buy Federal Housing Authority (FHA) and Veterans Administration (VA) home mortgage loans from financial institutions. By thus interjecting itself into the lender-borrower market for home loans, Fannie Mae created a so-called secondary market for home mortgages, which—much like stocks and bonds—would now have a tradeable, independent value in the financial marketplace. This, along with other federal incentives to stimulate home loans to returning GIs, led to a housing boom in the late 1940s and 1950s that solidified Security’s already thriving niche in the Milwaukee mortgage lending industry.
In addition to continued steady growth both in customers and assets, the 1950s and early 1960s were watershed years for Security for two other reasons: in 1951 it moved to the office on Milwaukee’s near south side that would remain its trademark headquarters until the early 1970s, and between 1957 and 1961 it elected the two directors—William G. Schuett Sr. and Joseph F. Schoendorf Jr.—who would play the most central roles in Security’s coming boom years. The “go-go” growth that characterized the 1960s in Wall Street’s financial markets was about to engulf Security Savings and Loan and transform a distinctly local S&L into a regional banking leader.
Wisconsin S&L: 1965-90
When William Schuett was elected Security’s president and CEO in 1965 he inherited a Wisconsin S&L climate that was suddenly brand new. A bill signed by Governor Warren Knowles in the fall permitted state-chartered S&Ls to set up or acquire branch offices if they could demonstrate that the new location was needed and not presently serviced by a competitor. Security—now operating with nearly $120 million in assets—promptly requested approval from the state S&L commission to establish a branch office on Milwaukee’s northwest side. Within weeks of the commission’s OK, it got the green light to acquire Aetna Savings and Loan, a small, $100,000-in-assets lender based in Milwaukee’s critical downtown business district. By the end of fiscal year 1966, Security’s assets stood at $131.2 million, and it was perched on an industrywide catapult that would see U.S. S&L assets triple between 1965 and 1975.
In 1967 Security continued its campaign of expansion that by 1996 would number thirteen acquisitions. With the purchase of Sherman Savings and Loan and Atlas Savings and Loan, both of Milwaukee, Security now claimed five branches, and by the end of the fiscal year its assets had grown by a third to $174.4 million, net savings had climbed to almost $39 million, and reserves stood at a comfortable $3.5 million. Virtually overnight Security had become the second-largest S&L in the state. In 1968 Security benefited from two government moves—one federal, the other state—to bolster the home mortgage industry. Fannie Mae became a private organization to enhance its effectiveness in the home mortgage secondary market, and the Government National Mortgage Association (or “Ginnie Mae”) was created to absorb some of the subsidy functions for FHA loans previously handled by Fannie Mae. Meanwhile, the Wisconsin supreme court ruled that state S&Ls could now open branches throughout the state, freeing them from the traditional maximum radius of one hundred miles from their main office. In 1968, Security closed 1,436 mortgages valued at $31.3 million and executed more single-family home mortgages than any other S&L in the state. A new branch was opened, assets grew to almost $183 million, and Security was soon claiming that of its 11,000 mortgages only 27 were delinquent.
Security formed its first subsidiary in 1968 when Schuett unveiled the Security Real Estate and Management Corporation, which was charged with managing and liquidating real estate properties acquired by Security through foreclosure. The move reflected Schuett’s eagerness to exploit another new loophole in the traditionally straitjacketing regulations governing the S&L industry: Security could now begin to vertically integrate itself into the full range of S&L-related activities, pumping additional assets into its bottom line. In an interview with the Milwaukee Sentinel Schuett credited the thrift’s growth in part to new marketing and market research techniques but primarily to a “young, highly trained, intelligent and efficient” management team bent on capitalizing on Wisconsin’s new liberalized banking environment.
Security broke the $200 million threshold in assets in 1969, closed 1,613 loans (89 percent of which were mortgage loans), and in early 1970 acquired Surety Savings and Loan of Wisconsin, thereby raising Security’s net assets to $234 million and giving it seven locations in the Milwaukee area. By the end of 1970, Schuett’s team had closed a record 1,823 home loans, added another outlying branch, and completed a $1 million facelift of its downtown Milwaukee office. American Banker was now rating Security the fourth fastest-growing S&L in the country and the 89th largest of the nation’s top one hundred S&Ls. In 1971 Security definitively broke out of its metropolitan boundaries, exploiting the 1968 state supreme court decision by opening a branch office in Madison, the state capital. Moreover, in Milwaukee’s banking community Schuett was establishing a reputation as an aggressive, forward-thinking executive now known respectfully by some as Security’s “Baron von Schuett.”
Security Capital Corporation has a tradition of strength and performance, achieved by focusing on a vision of profitable growth without sacrificing basic values or sound financial principles. Our Corporate Objectives: maintain the trust and loyalty of our shareholders and customers by continuing to follow our traditional standards of financial integrity; grow profitably through expansion of product lines and through prudent acquisition of quality institutions that share Security’s vision and values; provide a full range of basic, progressive, competitive and superior quality financial services; maintain a dedication to exceptional customer service; recruit, develop, motivate and retain employees of exceptional ability, character, diversity and dedication; fulfill our responsibilities to local communities, the State and the Nation by performing in a manner which contributes to economic and social progress.
Federal efforts to ensure a stable, expanding home-lending market had led to the Emergency Home Finance Act of 1970, which authorized the Home Loan Bank System to use federal subsidies to reduce the interest rates on home mortgages. More importantly, the act created regulations that would extend the secondary market for FHA and VA home mortgages into the conventional home mortgage market. To offset the government’s growing influence, Schuett began promoting private mortgage guarantee insurance, and in 1971 Security announced an agreement with Milwaukee’s Mortgage Guarantee Insurance Corporation (MGIC) to attract more capital to the home mortgage market by offering guaranteed 100 percent payment for any delinquent Security mortgage loan insured by MGIC. Schuett announced that “what we are beginning here is a true private secondary market for conventional mortgages.” Besides attracting more customers for now more secure home loans, private home mortgage insurance offered S&Ls a new way to build assets: defaulted mortgages now had a guaranteed market value and in the form of mortgage-backed securities could be traded like stocks in the financial markets.
S&Ls were finally emerging as major thrift organizations in the Milwaukee area, and by the end of fiscal year 1971, Security alone boasted assets of nearly $300 million with nearly three thousand executed mortgages (almost all for single-family homes) and could further claim it had not lost a dollar on loans since 1965. Throughout the 1970s, Security continued to build up its assets, diversify its loan products, and expand to new markets through acquisition. Meanwhile, some states were beginning to allow S&Ls to offer adjustable rate mortgages to help them weather periods of rising interest that eroded the profitability of fixed rate mortgages, and, in another break with the past, the Housing and Community Development Act of 1974 significantly loosened the regulations on the kinds and amounts of loans S&Ls could make. In 1975 Security created Security Investment Resources Inc., a subsidiary formed to offer annuities, mutual funds, and insurance-related products to an increasingly nontraditional S&L market. By 1976, Security had merged with Community Savings and Loan of Wauwatosa, Wisconsin, and Franklin Savings and Loan of Wausau and surpassed the $500 million mark in assets.
Bad loans, high interest rates, and the weak economy of the late 1970s had left many U.S. S&Ls with long-term, fixed-rate mortgages that yielded little interest and ate away at the industry’s profitability. With two watershed federal banking laws—the Depository Institutions Deregulation and Monetary Control Act of 1980 and the Garn-St. Germain Depository Institutions Act of 1982—Congress hoped to resuscitate the S&L industry by allowing it to diversify into new activities. The upper limits of the rates thrifts could pay for deposits were eliminated, and S&Ls could now offer nonresidential real estate, commercial, and personal property loans as well as adjustable rate mortgages. But the liberalized environment also encouraged unscrupulous operators to freely enter the S&L business, acutely aware that any losses they accumulated on risky loans were fully guaranteed by federal funds. By 1989 one in six U.S. S&Ls was bankrupt, and in August 1989 Congress passed a $50 billion S&L bailout that forced hundreds of failing S&Ls to go under or find buyers while restoring the S&L industry’s traditional emphasis on mortgage lending. In addition, a new Savings Association Insurance Fund (SAIF) was created to replace the bankrupt FSLIC.
On the strength of its management and enormous assets ($1 billion by 1980), Security weathered the industry shakeout and continued its geographical and vertical expansion. It merged with Wisconsin S&Ls in Cudahy, Antigo, Oconomowoc, West Allis, Green Bay, and Rhinelander and formed five subsidiaries: Security Financial and Leasing Services, Inc. (to lease office equipment, trucks, railroad cars, and other property to mid western corporations), Security Financial and Mortgage Corporation (to offer mortgage banking services), Security Insurance and Financial Services, Inc. (a full-service insurance agency), Security Commercial Credit Corporation (a commercial loan originator), and Wisconsin Real Estate Asset Management, Inc. (a corporation to develop an office and distribution plant for Security in Milwaukee). In 1986 and 1987, the Federal Home Loan Bank-Chicago formally requested that Security assume the management of two distressed midwestern thrifts, which it did, and while the national S&L industry as a whole was struggling through years of consolidation and instability, Security posted a decade of consecutive profits (1983 to 1993).
Regional Bank: 1990-1996
In 1990, Security Savings and Loan officially changed its name to Security Bank S.S.B. (state-chartered service bank) and within two years had completed its transformation from a state-chartered mutual S&L to a state-chartered savings bank. The move allowed it to escape the jurisdiction of the Federal Office of Thrift Supervision (saving $300,000 annually in fees in the process). More importantly, however, it anticipated a decision in late 1992 by the Wisconsin commissioner of S&Ls to allow S&Ls and savings banks to create bank holding companies, which would in turn allow the depositors of the old mutual S&Ls to become shareholders in a public stock company formed as a subsidiary of the newly created holding company. While a mutual thrift’s depositors are in fact its owners, once they become shareholders they traditionally show more active interest in the thrift’s management because they now own a share in the company’s growth. Moreover, an initial public offering (IPO) generates huge inflows of cash and because mutual thrifts are allowed to set the initial share price well below the market price both the depositors and management gain a significant windfall when the stock becomes publicly traded. The resulting increase in financial strength and the ability of the new corporation to offer stock rather than tax-liable cash to companies it wishes to acquire would make much more realistic Security’s vision of further expansion through mergers.
In 1993 Security formed the Security Capital Corporation as the holding company to execute its conversion from a mutual thrift to a public company. Depositors approved the conversion in December, and at the IPO depositors and bank employees were offered $270 million worth of shares with special stock reservations and awards to Security’s top executives. In January 1994 Security began trading on the NASDAQ stock exchange. The IPO was quickly greeted by protests from critics who argued that Security’s generous provisions of stock to Security’s management (the top five executives received a total of $7.9 million in free stock) were “indecent” and disproportionate to the remuneration packages of top executives at other Wisconsin banks. Security’s management countered that because Security had been a mutual thrift for so long its management had missed out on the financial rewards of stock ownership and awarding large blocks of stock to executives only redressed a long-standing inequity. In 1996, Security also settled, for $12 million, a class action suit brought by depositors who claimed that Security’s reservation of large blocks of stock to “insiders” prevented them from buying all the stock they wanted.
Security’s predictions of the renewed growth made possible by the stock conversion seemed to be borne out as early as 1995 when it reported that its net income had risen to $20.3 million, $2.1 million higher than the year before. As the bank settled into its new structure, it continued to overhaul and fine-tune its business. A new retail banking division was formed in 1994 to link its 42 branch offices into a network of full-service financial service centers offering everything from traditional home and home equity loans to commercial, real estate, and educational loans as well as investment services and life insurance. With the traditional distinctions between commercial, credit card companies, credit unions, savings banks, and S&Ls fast dissolving, competition grew fiercer, and in 1995 Security added four lending offices; opened an industrial loan and thrift subsidiary in Minnesota; closed its Security Financial and Mortgage Corporation subsidiary; and combined its Security Commercial Credit Corporation and Security Real Estate and Management Corporation subsidiaries into their parent, Security Bank. It also moved swiftly to embrace the new technology transforming the banking industry: a new consumer lending software system allowed statistical modeling and database marketing techniques to build a precise profile of potentially profitable customers, a 24-hour home equity loan banking phone service enabled Security to service customers in regions where it had no offices, and a “data warehouse and management central information system” linked the laptop computers of loan agents in the field with terminals in branch offices.
Halfway through CEO Schuett’s first year as newly named chairman of the board, Security was claiming its most successful year ever, with total assets for fiscal year 1996 of $3.44 billion, a newly announced fourth stock repurchase program, and a new corporate slogan, “Your Lifetime Bank,” that declared Security’s intent to leave its days as a single-market, home loan S&L far behind.
Security Bank, S.S.B., Security Investment Resources, Inc., Security Financial and Leasing Services, Inc., Security Insurance and Financial Services, Inc., Security Mortgage and Financial Services, Inc., Security Financial and Mortgage Corporation.
Bronstein, Barbara, “Security Capital Settles Suit over Conversion for $12 Million,” American Banker, March 19, 1996, p. 14.
Curran, John, “Does Deregulation Make Sense?,” Fortune, June 5, 1989, p. 181.
Doherty, Chuck, “Security Bank Plans Public Stock Sale,” Milwaukee Sentinel, July 3, 1993.
Gallagher, Kathleen, “Bill Targets ’Indecent’ Thrift Stock Profits,” Milwaukee Sentinel, January 7, 1994.
Meigs, J. C., “What’s Wrong with Our Banking System?” Consumers’ Research Magazine, March 1, 1991.
Norman, Jack, “S&L Deals Yield Windfall Profits for Executives,” Milwaukee Journal, December 12, 1993, pp. 1-2.
——“Security Bank’s Depositors Approve Conversion,” Milwaukee Journal, December 19, 1993.
——“Security to Reap $270 Million in IPO,” Milwaukee Journal, September 28, 1993, pp. 6-7.
——“3 Wisconsin Savings and Loans to Convert to Savings-Bank Status,” Milwaukee Journal, October 15, 1992.
Spivak, Cary, “Going Public Pays Off for Execs,” Milwaukee Journal-Sentinel, p. 1.
“2 More S&Ls Apply to Switch to Savings Bank Charters,” Milwaukee Journal, July 22, 1992.
Williamson, Tammy, “Post-Conversion, Thrifts Are Still Seeking Acquisitions,” Business Journal Serving Greater Milwaukee, January 1, 1995, p. 8.
——“Area Bankers Looking to Avoid Becoming ’Dinosaurs’,” Business Journal Serving Greater Milwaukee, January 1, 1996, p. 14,
—Paul S. Bodine