Continuing its drive to boost fee income, Magna Group Inc. has begun an alliance with a Chicago-area automobile finance company that specializes in subprime lending.

The agreement with First Merchants Acceptance Corp., Deerfield, Ill., was made after Magna, a $5.4 billion-asset St. Louis bank holding company, failed to find a subprime auto lender it wanted to buy.

"We looked for several months, long and hard, to acquire a company to get us into the subprime business," said G. Thomas Andes, Magna's chairman and chief executive. "We concluded our best situation was with First Merchants. It really allows us to walk before we run."

Under the agreement, Magna will originate loans beginning through a network of 300 auto dealerships, then sell them to First Merchants. Mr. Andes predicted his company would gain $1 million to $1.7 million in fees from the business next year.

Magna, which has about $480 million of indirect car loans, made the deal because it wanted to recoup business involving loans it had to reject for credit-quality reasons. Mr. Andes said Magna was rejecting about half of all loans offered to it through car dealers.

He added that as much as 20% of the car loans his bank had rejected could have been made by a company specializing in subprime credits.

Mr. Andes said his company would incur no risk from the agreement.

Initially, Magna will focus on car loans in its traditional markets: Illinois, Missouri, and Iowa - where it's buying $1.2 billion-asset Homeland Bankshares of Waterloo. Mr. Andes said his company may eventually solicit car loans elsewhere in the Midwest.

Matthew Finn, an analyst at Burns Pauli Mahoney & Co., St. Louis, called Magna's move a cautious step. "I tend to agree that a business like this should be set up and run by the right people," he said. "The most important thing is to have knowledgeable people."

First Merchants acquires loans from car dealers in 36 states. The five- year-old public company has about $500 million of loans and is seeking to grow through agreements with other banks, said Mitchell Kahn, president and chief executive. Magna was the first bank company to affiliate with First Merchants.

While the pact with First Merchants lands Magna in a new business, Mr. Andes said he's still interested in buying a consumer finance company to create more fee income. "We continue to evaluate those options," he said. "We really want to concentrate on achieving our goals of increasing noninterest income."

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