First Security Corp. is nearing a self-imposed limit on its rapidly growing auto finance business and may securitize surplus concentrations as it continues to expand its eight-state business, sources said.
Though executives at the Salt Lake City-based bank declined to be interviewed, analysts said First Security now has 27% of its loans in the auto finance area. That is within the 25% to 30% maximum concentration the bank has set.
Norman Jaffe, analyst at Fox-Pitt Kelton in New York, said the $10.2 billion-asset regional is studying the possibility of securitizing its mostly prime-quality paper.
"This is definitely one of their strongest growth areas, and they want to look for ways to continue that," he said.
One way would be to securitize parts of the auto loan portfolio, which would produce fee income for the bank. However, securitization of such loans, while common among captive finance companies and other nonbanks, is not widely used by commercial banks.
In 1993, for instance, $23.4 billion in auto receivables were securitized last year, making it the single largest category in the burgeoning asset-backed market. (So far this year, such deals total nearly $16 billion.)
Dan Buser, an auto finance expert at the Virginia-based Consumer Bankers Association, said securitization is increasingly of interest to larger banks who see it as an option to curtailing loan originations.
"Securitization is contrary to the development of an asset base," he said. "Bankers are now making adjustments in their thinking about it."
For First Security, the need to securitize loans is an indicator of the robust growth the bank has registered since committing to indirect auto finance in the late 1980s. Since 1989, the company has registered consumer loan growth driven largely by car loans at a compounded annual rate of 19.1%. That is three times the growth rate of the total portfolio during the same period.
"That is a terrific business they have," said Jay Tejera, a Seattle-based banking analyst for Dain Bosworth Inc. "It has been the linchpin to everything they've done in the last three years."
He compares its importance to the credit card business for Citicorp or the consumer finance company for Norwest Corp. "It gives them a stream to sustain earnings while they expand," Mr. Tejera said.
While First Security is better known for buying brick-and-mortar operations in New Mexico and for its acquisition of Crossland Mortgage Corp., the company's indirect auto business has been churning out a 3% return on assets for much of the past five years. That is more than twice the ROA of the holding company.
However, those impressive numbers may be tougher to sustain amid intensifying bank competition and the squeeze that rising short-term rates will place on the mostly fixed-rate portfolio.
While First Security has benefited from a car financing binge in the past year, Mr. Tejera expects the company to be a long-term player with greater market share in the West and possibly nationally.
The analyst cites the company's underwriting and quick collections efforts for an astonishing loss rate of only 0.40% of total loans last year, compared with an industry average of 1.01% in 1989.
"There are efficiencies that will result as they leverage their size even more," said Mr. Tejera. "Most banks usually get their heads handed to them in this business, but not First Security." First Security Corp. At a Glance Headquarters Salt Lake CityAssets $10.2 billionTotal auto loans in 1993 $1.18 billion5-year growth rate 19.1% for auto finance business vs. all First Security loans1993 ROA * 3.3% (auto finance) * 1.24% (First Security as a whole)Source: Dain Bosworth Inc.
