EDEN PRAIRIE, Minn. - For nearly 17 years, Jeffrey Mack worked in the trenches as a commercial lending officer for several Twin Cities banks, harboring dreams of setting up a shop of his own.

He watched as the business changed and grew frustrated that, as he puts it, bankers were being handcuffed by outdated expectations for downpayments and security on loans.

"The creativity that you need to be a good lender had left," Mr. Mack, 41, recalls.

In 1990, he opened Olympic Financial Ltd. to compete with banks and car makers in the $350 billion market for auto loans.

"We asked, 'Can we manage this process more effectively than banks have?'" says Mr. Mack, Olympic's CEO. "The market is so large that if we could find a way to extract just a fraction, and underwrite it effectively, we could survive on a long-term basis."

Five years later, Olympic is not merely surviving, it has emerged as serious competition for banks as a one-of-a-kind buyer, securitizer, and servicer of top-end auto loans.

Analysts have labeled the company a "category killer" for its sharply focused approach to financing new and used car sales. And they say it is well positioned for continued growth while some believe it may be a prime bank acquisition candidate in the near future.

"They have a defensible and growing niche, and strong management," says John Coffey, an analyst at Robinson-Humphrey Co. Inc.

In the first half, Olympic purchased $910.2 million in auto loans, a 360% jump over the same period in 1994. The company has a servicing portfolio of $1.64 billion of loans, which it purchases directly from dealers, and it is the nation's third-largest securitizer of auto receivables. Its net interest margin stands at 5.65%.

Like other consumer lenders, Olympic is vulnerable to economic cycles. But Robinson-Humphrey's Mr. Coffey says he sees no reason why growth of at least 30% a year can't continue. Sixty-five percent of auto purchases use financing, and there are 22,000 dealerships nationwide.

Olympic's dealers originate an average of 3.6 loans per month, well below Mr. Mack's target of about six per dealer. "If I had 10,000 dealers and they all sent me five deals a month," he says, "I'd probably do $7 or $8 billion a year in business ... and that would only be about 2% of the market."

Investors appear to be buying into Mr. Mack's vision. Since December, the company's stock price has increased more than three-fold, to as high as $21 a share, despite the negative cash flows associated with a start-up financing business.

Mr. Mack, a former executive vice president for Firstar Corp., recently wrapped up a 21-city tour in which Olympic raised an additional $240 million in debt and equity to fuel the company's capital-intensive growth strategy.

And a secondary offering of $100 million this spring seemed to spark no investor fears of dilution.

Of the 403 public offerings on Wall Street during the two years through the day Olympic first floated shares, the company was the only one that saw its price more than 30% higher on a secondary offering.

Mr. Coffey points to the company's board, with new members Fred Zuckerman, former treasurer of Chrysler Corp., and Rick Zona, chief financial officer of First Bank System Inc., as crucial to further success.

"These guys aren't figureheads. They're in there advising the company on a daily basis," he says.

After years of sleepless nights spent agonizing over financing packages and building the fundamentals of the business, Mr. Mack confidently asserts that Olympic has now achieved "critical mass."

Maintaining the fundamentals - from a successful proprietary credit scoring system to near obsessions with reducing loan losses and focusing on customer service - is the key, he says. "Managing risk is crucial to this business."

But, Mr. Mack adds, perhaps the most important factor in Olympic's success is a corporate culture that never lets up. "We tell employees you have to treat this company like you treat your personal life," he says. "There is no margin for error."

As Mr. Mack sees it, banks miss the boat on auto loans. They typically demand 20% downpayments - often required by regulators - when that's not really necessary. They try to lend in places where they lack a presence. And they don't liquidate repossessed vehicles fast enough.

It's a lament echoed by some bankers. James Wert, chief financial officer for Cleveland-based Keycorp, told investors at a recent conference that his bank turned down 62% of the $6.6 billion in auto loan applications it received in 1994.

Now, aided by its recent acquisition of subprime lender Auto Finance Group, Keycorp is breaking out much of its auto lending into a separate business. "We tend to think that bankers are not genetically engineered to make, service, and collect on these types of credits," Mr. Wert says.

Olympic, says Mr. Mack, is already there: "We're like a division of a bank that has been stripped out and ... (is) more effective than it could be in a bank environment."

Olympic's overall annualized losses stand at 0.6%, well below the prime market average of about 1.5%. On a typical repossession, Olympic's hit is about $3,500, compared with an industry average of $4,500.

"It's part of the business to repossess and liquidate cars ... within 30 days," Mr. Mack says. "We make our money by re-employing those dollars back into a new loan."

On the lending side, the emphasis is on cash flows, not downpayments. The company's credit scoring focuses on six criteria, including debt-to- income and payment-to-income.

The key on a $15,000 car loan, according to Mr. Mack, is whether a borrower has cash flow capable of supporting a $3,000 unsecured loan.

If the loan goes bad, "I don't care if you get 10% down or 20% down, you're still going to lose money."

Individuals may be buying the cars, but Olympic, which operates under the name Arcadia Financial Ltd. in several states, views the dealers, who get an average commission of about 4.25% of the principal, as its customers.

"The dealer decides who gets the contract, not the buyer," Mr. Mack says. "And they have lots of different vendors they can buy from."

Steve Schlafge, business manager of Stephens Buick Jeep Eagle in Minneapolis, concurs. He uses Olympic occasionally, adding that "they are pretty aggressive. ... But there are so many lenders out there, including Norwest and First Bank, that you can't use them all."

To be competitive, Olympic has assembled a 3,200-strong network of auto dealers who originate loans and sell them to the company. Olympic has 14 hubs, or regional buying centers, and 31 "spoke" offices covering 31 states. The offices are open nights, weekends, and any time that at least 40% of its dealers in a market are open, and usually give a decision on an application in under an hour.

On Memorial Day, Olympic was the only lender open in the country, Mr. Mack says, and generated $44 million in loans.

Mr. Schlafge's biggest criticism is that Olympic "isn't the cheapest" lender out there. But Mr. Mack says that, ultimately, a 100-basis-point difference in an auto loan amounts to about $5 a month, and that consumers don't care.

"You don't need to be the low-cost provider, so why should you be?" says Mr. Mack. "That's how we make our money."

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