Selling securities backed by auto loan receivables has nudged earnings into high gear at Westcorp, a California S&L, despite some stiff competition.

"There's GM, Ford, and Chrysler - then there's us, out there playing with the big boy,s" said Milton D. Jensen, senior vice president and chief financial officer of the $2.7 billion-asset institution.

Unlike the Detroit trio, Westcorp will double its earnings this year, mostly through those sales.

In early December, the Irvine, Calif., thrift sold $150 million of auto securities through Donaldson, Lufkin & Jenrette Securities Corp.

That's the fifth time in as many quarters that Westcorp has sold between $150 million and $200 million of securities backed by auto loans.

Westcorp is the only financial institution that has securitized auto loans repeatedly.

Shedding Credit Risk

Selling the securities removes the credit risk of the packaged loans from Westcorp's balance sheet. And the thrift keeps the difference between the loan yield and the yield the security holders receive.

That's the source of the big gains for Westcorp. In 1990, earnings were $11.7 million. Montgomery Securities estimates earnings will hit $22 million this year and $33 million the following year.

"To a large extent, that's been due to the profitability on the sales of the auto receivables," said Joseph A. Jolson, an analyst with Montgomery Securities in San Francisco.

In 1990, when Westcorp did its first securitized sale, loan servicing fees were $1.5 million. This year, after four such deals, the S&L's servicing fees will be almost $11 million. Next year, Montgomery Securities forecasts servicing fees of around $25 million.

Many competitors in the auto-happy California market took a bath on bad loans and have gotten out of the business. They aren't likely to return. Under the new guidelines for risk-adjusted capital, auto loans need 100% capital to compensate for the risk.

Solid Loan Portfolio

Westcorp was a smarter lender than most. Half of its revenues come from auto loans and half from residential real estate - "bedrooms and steering wheels," in the words of Mr. Jensen.

Yet nonperforming assets are less than 1% of total assets. Return on equity was 15% in the third quarter, well above most California banks.

Westcorp's share of the auto loan market has jumped to 5%, from 1.5% five years ago, according to Montgomery Securities.

To keep costs down, Westcorp has computerized the approval process and can approve a loan in 15 minutes, a benefit for car dealers.

Increased Margins

As market share has increased, so have margins. When competitors from as far afield as New York - Citicorp and Manufacturers Hanover Corp., to name just two - flooded the market in the late 1980s, Westcorp had to compete for business by reducinging the interest rate on loans.

The loan margin has been restored, which makes the securitization even more profitable.

A year ago, for example, the spread on a securitization - the difference between the yield Westcorp had to pay investors and the interest on the underlying loans - was around 300 basis points, said Mr. Jolson.

On the last deal, the spread was double. The higher spreads are what drive the big gains in income.

"Every time we've negotiated pricing, the spreads have gotten better," said Mr. Jensen.

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