When First Bank System Inc. agreed to buy cross-town competitor Metropolitan Financial Corp. last year, the $1.4 billion of indirect auto loans that came with the Minneapolis-based thrift must have given management pause.

That's because First Bank had spent the preceding five years rebuilding its consumer loan portfolio in an effort to make it contribute more to the bottom line. And that had meant getting out of businesses like indirect auto lending that could not be sold through alternative delivery channels.

Instead, the $34 billion-asset banking company created new credit card, revolving credit, and home equity loan products that appealed to a large segment of the market.

"I would characterize it as a move away from the old community bank approach of consumer banking, to more of a credit card approach," said Ben Crabtree, an analyst at Minneapolis-based Dain Bosworth Inc.

But things are changing again, thanks to the Metropolitan deal. Despite heightened competition in the indirect auto market, it is a business the bank is looking to keep.

"Sure, we're concerned about the competitive market," said Richard Zona, First Bank's chief financial officer. "But we're confident we can enhance the business that came with the Metropolitan acquisition and generate good risk-adjusted returns."

Others are less sure of First Bank's desire to remain in indirect auto lending. Jeff Naschek, an analyst at Salomon Brothers Inc., said he finds it hard to believe the company would change a successful strategy so quickly.

"If I were a betting person, my inclination is that the indirect auto business is not going to be a focus," he said. "I'm a believer that if the right price came along they would be sellers outright."

And the past five years seem to support Mr. Naschek's point. When First Bank began its retail push, indirect auto lending totaled $1.3 billion, or 27.1% of its $4.8 billion portfolio. Delinquencies and large chargeoffs forced this segment down to $392 million, or 6.3% of the $6.4 billion consumer portfolio at the end of 1994, excluding the effects of the Metropolitan acquisition.

In its place, the company beefed up home equity loans, from $524 million in 1990, to $2.2 billion last year, or 34.4% of the total. Likewise, the credit card segment nearly doubled during the same period, to $2.4 billion, or 37.5% of the total.

Mr. Zona pointed out important differences between the remnants of First Bank's indirect auto portfolio and the one just bought from Metropolitan. "The portfolio we had was not high-quality," he said. "Given the tighter spreads and reduced risk-adjusted returns, we were not going to grow that line of business."

Things have also changed in the secondary market for indirect auto paper. Whereas the market five years ago was as thin as the paper contracts underlying the securities, higher volumes today make the sale of these loans quick and cheap. It is an option that Mr. Zona said First Bank would use for a large portion of the loans it generates.

Besides, the bank has learned how to compete in price-sensitive markets like credit cards and indirect auto. Nowadays, each product has a manager whose responsibilities include design, underwriting standards, and low-cost delivery.

These products are also distributed more efficiently. Last year, for example, in-bound telemarketing received 680,000 customer calls that generated 240,000 accounts, a 35% conversion rate. In 1993, the same effort produced 223,000 calls and 40,000 new accounts, for about 18% conversion.

Despite the smaller margins on these accounts, observers like Mr. Crabtree of Dain Bosworth say the strategy includes many of the same marketing techniques used by a retail brokerage. And the strategy is likely to get a growing share of that part of the market which is price-sensitive.

"In my view, it's a management that has decided almost all parts of banking are commodity businesses," he said. "First Bank will be the low- cost producer and will tend to get the customers who opt for fast and cheap."

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