A regional bank has ventured into asset-backed securitization, long the turf of credit card specialists and the very largest banks.
Last week First Commerce Corp., a New Orleans banking company with $9.3 billion of assets, completed its first-ever securitization. The $280.5 million offering, backed by credit card receivables, was led by Merrill Lynch & Co. and rated AAA by Moody's Investors Service.
The deal intrigued Wall Street with its small size and the newness of the issuer.
"It's interesting because small banks have pretty good sources of funding already," said Tom Hourican, asset-backed analyst at Chase Securities. "Considering the expense of setting up a securitization program, I wouldn't think a small bank would do it unless they wanted to build their credit card portfolio."
Although First Commerce has been building up its credit card business, it is not relying on securitization to finance its growth, said First Commerce senior vice president Ted Wiedemann.
Instead the bank is paying about $750,000 in registration and legal fees to tap this market, to ensure access to a ready source of capital if a funding crunch arose.
"Banks like ours really got hit in the 1980s when liquidity dried up," Mr. Wiedemann, who recently arrived from First Maryland Bancorp to oversee First Commerce's securitization and risk management strategies. "We're flush right now, but who knows what will happen in the future."
After weathering the economic difficulties that swamped many neighboring banks, First Commerce has grown rapidly in recent years. Loans have expanded at over 20% annually, said spokeswoman Holly E. Hobson. Meanwhile, the bank's credit card portfolio has grown to about $850 million, due in large part to an agreement to provide Army and Air Force officers with credit cards they can use on their bases.
The bank has filed to sell $750 million in asset-backed securities with the Securities and Exchange Commission. Now that the credit card deal is done, the bank plans to issue securities backed by auto loan receivables next year, Mr. Wiedemann said.
Although a newcomer to a market that has seen its share of hiccups lately, First Commerce seemed to have little trouble selling its securities. Merrill Lynch analyst Dan Castro said the sale went "pretty well" and investors bought at 34 basis points above Treasuries. That's only one point higher than market average for similar securities, according to Lehman Brothers.
Investors may have been attracted to the portfolio's low chargeoff rate. Although First Commerce reported higher chargeoffs in the second quarter than a year earlier, at 4.16%, that is still some 250 basis points below the industry average.
In explaining its AAA rating, Moody's Investors Service cited the bank's military connection as a reason credit card losses should remain low.
"Given the possible negative consequences to the holder's military career of default, it is expected these accounts will continue to perform well," the ratings agency said.
