Though First Union Corp.'s home-equity bank and capital markets group are far removed - culturally and geographically - from Wall Street, they are giving it a run for its money.
Tucked into a thicket along the booming I-77 corridor in Charlotte, N.C., the bank's units are turning loans into securities.
Under the direction of J.C. Faulkner, who helped start the program a year and half ago, First Union Home Equity Bank securitized $327 million of home loans in 1995. This year, the group is looking to build its business to $450 million.
"We've created an effective and efficient program, and we're very happy with the productivity," Mr. Faulkner said. "Since we're a bank, we felt we could do this, but we wanted to move in cautiously."
By managing the mortgage process from originations to securitizations, First Union is charting new territory that few others can travel right now.
From a cost standpoint alone, the project can be prohibitive. "It's an investment that only the largest banks can come up with," said David N. Bernstein, a principal with Furash & Co., New York, who focuses on securitization issues.
Industry observers are looking to First Union's program as a model, believing it represents the shape of things to come.
"It's the wave of the future," said Robert M. Couch, president of Collateral Mortgage Ltd., Birmingham, Ala. "That's where a lot of people want to head."
Mr. Faulkner readily concedes that First Union's volume is a drop in the bucket of the billions of dollars of home equity loans that were securitized industrywide last year. But he maintains that First Union is primed for careful growth.
The home equity unit, working with First Union's mortgage and capital markets groups, puts together deals that provide fee income from securitization and ongoing servicing.
"We take the expertise of three separate areas of First Union Corp. and leverage off them," Mr. Faulkner said.
Mr. Faulkner has been with First Union for 11 years, starting as an assistant branch manager and working up to his current position of corporate vice president. An avid golfer, he is known to mull strategies after-hours while practicing his putting in office hallways.
The approach his unit takes is a switch from the way most programs work. Mortgage banks generally originate loans and turn them over to conduits or Wall Street investment banks for securitization. The banks give up fee income in return for the securitization and often turn over servicing as well.
The venture between First Union Home Equity Bank and the capital markets group is structured to keep all the investment banking activities in the First Union system. "First Union Home Equity originates for the purpose of selling to the capital markets group," said K. Wesley M. Jones, managing director of the group's mortgage finance unit.
The group structures the deals for optimum profit, Mr. Jones said. "By managing the securitization, we can achieve the best prices in the market instead of wholesaling it to someone else who gets the income and servicing."
First Union and its rival NationsBank Corp. are among the handful of banking companies that can handle securitizations internally, industry analysts say.
The stand-alone units must have sophisticated systems and personnel to turn loans into securities that are attractive enough for sale yet retain enough margin for profit.
When the deals are structured effectively, the payoff can be high. Banks can receive several hundred thousand dollars for large securitizations, analysts say.
There is also the cachet of being among an elite group that can can advertise its capabilities to others. "It helps to feed their overall capital markets competence," Mr. Bernstein said.
But all the benefits can be lost if the operation isn't top-drawer.
Capital markets units run the risk of incorrectly pricing deals so that they fail to draw maximum profit. "You don't want to leave money on the table simply because you don't know your markets," Mr. Bernstein said.
These operations must also be able to line up and keep skilled traders who are able to sell the products once they've been securitized.
The capital markets group includes 40 institutional salespeople to distribute the securities. The unit, established in the 1960s, has evolved to securitize all sorts of debt, from corporate issues and auto loans to credit card receivables.
First Union Home Equity Bank is securitizing home-equity loans to the credit impaired, known as B and C loans. The home-equity bank originated and sold $105 million of these loans in 1993 and $265 million in 1994.
It takes a different approach with its more stable conventional loans, holding them in its own portfolio.
But the riskier B and C loans are "liquid" - they are securitized and sold on the open market.
The arrangement makes First Union more willing to take on credits it used to shun. "We can work with people we used to turn away," Mr. Faulkner said.
The program, while judged a success by the executives who oversee it, did not get up to speed overnight. The various First Union units spent more than six months hooking up systems, conducting dry runs, and ironing out bugs, Mr. Jones said.
The challenges of meshing technology paled in comparison to more people- oriented issues the groups faced.
"The hardest part of this was bringing three different groups together, since each has its own corporate mission and profitability goals," said Mr. Faulkner.
"The question was, can we do this successfully," he said. "And the answer was yes, we can as well as anybody."