First Bank System, faced with major technology expenditures to stay competitive in mortgage banking, has decided instead to throw in the towel.

On Monday, the Minneapolis-based banking company announced deals to sell its home loan subsidiary, FBS Mortgage, to BankAmerica Corp. and two smaller companies for a total estimated at between $150 million and $200 million.

First Bank System thus joins a parade of banks departing from the mortgage business. Banks have been exiting because profits have been slim and because their volume does not justify bringing their technology up-to- date.

The $38 billion-asset company took pains to point out that it was not leaving the business completely. It will continue to offer mortgages through its branch system and will also retain its low-income lending programs, apparently out of sensitivity to community reinvestment needs.

"We intend to be a convenient home financing resource for our customers," said Philip G. Heasley, vice chairman of First Bank System. He also said telemarketing would play a key role.

San Francisco-based BankAmerica, already among the top 10 servicers in the nation, has agreed to purchase the $14 billion FBS servicing portfolio. The deal would move BankAmerica up a notch or two in the servicing rankings, probably making it No. 6 in the nation - with about $77 billion of loans.

The loan production offices are to be divided between Columbia National Inc., Columbia, Md., and Knutson Mortgage Co., Bloomington, Minn.

Knutson has been expanding aggressively in recent months and is getting originations business adjacent to its home territory. Columbia has also been in an expansion mode, making a number of moderate acquisitions recently.

"We're committed to building a retail network throughout the heartland of the United States," said Ray W. Sims, Knutson's president. "The FBS Mortgage offices are a prefect fit because they do not overlap in areas where we have already established retail home loan centers."

Production offices generally add very little to the proceeds of a sale, which is generally dominated by the servicing rights, according to industry experts. The sale of the production offices is expected to close by the end of April. Other terms of the deal were not released.

Had First Bank stayed in the mortgage business, said Ben Crabtree, a stock analyst at Dain Bosworth, Minneapolis, it would have needed to make a significant investment in more servicing rights to increase the portfolio and in technology.

Had it gone through, the company's deal for First Interstate Bancorp would have provided much of the additional servicing volume. The Los Angeles bank had about $10.9 billion in servicing as of mid-1995. But even that probably would not have been enough to make First Bank reconsider selling its mortgage subsidiary. Mr. Crabtree said.

"They were not convinced the volatility of the mortgage business generates adequate return on the investment," he said. The bank has in the past exited lines of business that weren't providing an adequate return, he added.

First Bank will continue to offer mortgage services to its customers through its personal bankers, and will keep its program for lending to families with low and moderate incomes, Mr. Heasley said in a prepared statement.

It is uncertain whether First Bank will join others that have farmed out some lines of business in order to continue offering mortgage products to their customers.

Norwest Mortgage Inc. originates loans for Wells Fargo customers. First Interstate Bank of California formed a joint venture with PHH Corp., Hunt Valley, Md., to take over the task of telemarketing mortgages to its customers last year.

Knutson Mortgage is acquiring FBS Mortgage production offices in Colorado, Kansas, Montana, South Dakota, Wisconsin, and Wyoming. In a prepared statement, Mike Woodfin, senior vice president and chief information officer at Knutson, said the company has already made the investment in technology necessary to operate a mortgage operation profitably.

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