A decade of strategic acquisitions has turned First of America Bank Corp. into a $23 billion-asset superregional. Within it is a $1.2 billion credit card portfolio and two million accounts, which analysts have found to be a model of efficiency.

Some observers expected First of America's card business to flounder after it acquired Detroit-based Security Bancorp in 1992, a deal that tripled the size of its credit card portfolio.

But the retail credit division actually became more efficient, reducing costs and increasing profits.

The Kalamazoo, Mich.-based banking company did it by combining the best of both programs. Rather than centralizing operations and dismissing Security Bancorp personnel, the company decided to consolidate operations in two places. Customer service is performed in Kalamazoo, and payment processing takes place in Detroit.

Despite the big increase in the portfolio, First of America cut about 80 jobs, mainly through attrition.

Credit card outstandings have grown 22% since last June, up from $952 million. "We expect to continue to grow at that pace and still maintain quality," said William F. Smith, president of the retail credit services division.

Earnings for 1993 reached $36 billion, and they were just under $20 million for the first six months of 1994. The bank expects earnings to increase further in the second half, boosted by the Christmas season, said Janet Buis-Miller, division controller.

Meanwhile, credit card accounts grew by 422,000 in 1993 and 151,000 during the first half of 1994. The latter figure compares with 164,000 for the 1993 first half

Mr. Smith, 46, who started at First of America in 1969 as a management trainee and celebrated his 25th anniversary on July 7, said the bank tries to be on the leading edge of new technology, staying abreast of new developments.

First of America relies on First Data Resources of Omaha, Neb., for credit card data processing.

Among other services, FDR supplies the Falcon Fraud Detection System, for which First of America was an early test bank. It has been using that high-tech program since the first quarter of 1994. Mr. Smith said the bank expects to reduce his fraud losses this year by $2 million, from a level that exceeded industry averages.

FDR also provides credit- and behavior-scoring help First of America target customers it thinks will accept preapproved credit card offers.

"We're very efficient in terms of acquiring new accounts," said Marc Altman, senior vice president of marketing and sales. The costs per acquired accounts runs $22, significantly lower than the national average.

"First of America has grown dramatically over the last 10 years through acquisitions," he said. Acquired accounts "perform differently than customers picked up through direct marketing."

Mr. Altman also said the bank had started trying to encourage existing customers with low balances to use their cards more. First of America offers Visa and MasterCard gold cards at an introductory 9.8% rate for six months, which then goes to 6.9% over the prime rate. The classic card product also carries a teaser rate of 9.8% and then switches to 8.4% over prime. Both gold and classic cards carry no annual fee for life.

Mr. Altman said the jumps from the introductory rate are not as high as at some competitors. He characterized the program as having no gimmicks with a very-easy-to-understand offer. "Customers seem to like what they've got," he said. "They use the card."

Although competition is fierce, Thomas Schneider, senior vice president of risk management, said the bank was not experiencing the exodus of cardholders it anticipated when the higher rates took effect, but he questioned whether that would change in the months to come.

Thomas Facciola, equity analyst and vice president at Salomon Brothers in New York said that bank's card business was very profitable last year. "With the teaser rates, their profit margins will go down," he said, adding, "With enough accounts to balance it, their absolute level of profits will go up."

Said Robert McKinley, president of RAM Research Corp., a credit card researcher in Frederick Md.: "First of America has been fairly aggressive in their pricing." He said other mid-sized banks had been slow to respond to a changing marketplace, and may struggle to keep pace with their competitors as a result.

Being very selective in the target marketing process, rather than "dumping millions of offers in the mail," can vastly improve response rates, Mr. McKinley said.

Because of its methodical marketing, First of America maintains a very clean portfolio, with a high concentration of gold cardholders. That clientele has lower risks, but its average account balance of $1,300 is below the national average.

"Our insistence on high credit quality drives down the average balance, but at the same time, delinquency and losses are lower than the national average," said Mr. Schneider.

One industry expert said that making money in this business depends on having revolving balances. "Convenience users are a losing ball game, unless they do enough transactions per month," this source said.

Mr. Smith doesn't agree. "Volume and total outstandings drive profits, along with control of expenses and asset quality," he said. "If you have more accounts, sales volume, and cash advance volume, it's not the average balance that controls profitability."

Mr. Smith said that is what sets First of America apart from the crowd of issuers. "Our control factors are very strong -- cost control and asset quality control."

Among the top 50 issuers, First of America has the seventh-lowest operating costs in the country, according to a study conducted by Visa U.S.A.

Per account, First of America spends $43 a year on maintenance, which includes marketing expenses. That is well under the $61 average for a peer group studied by KMPG Peat Marwick.

The American Bankers Association's Bank Card Industry Report listed yearly account average expenses at $45.

Fraud detection is a big part of First of America's cost control. The Falcon pattern recognition software alerts customer service representatives when it detects apparent fraudulent spending.

Mr. Schneider said the bank makes 500 to 1,000 calls per day, inquiring whether customers are in possession of their cards. Although only one in 40 calls leads to a stolen card, Mr. Schneider said, "The savings on potential fraud losses far exceed the costs to make phone calls." He also said the response from customers is very positive.

Any account that's 30 days delinquent receives a phone call as well. Mr. Smith said it's more of customer service approach than a delinquent call, but it keeps a tighter rein on accounts than many larger issuers do.

Mr. Smith said there is a role for mid-sized banks in the credit card business. First of America's staff sits on various Visa and MasterCard committees. Mr. Smith is a member of the MasterCard Business Committee and chairs First Data Resources' National Accounts Advisory Group.

"First-tier banks tend to exert more individual influence on the market-place," said Mr. Smith. "Second-tier banks tend to work together to have a positive influence on legislation and issues that impact consumers."

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