Wrapping up First Tenn
Even if we don't choose it, we like it...
by Dale Wettlaufer (DaleW@fool.com)

Alexandria, VA (July 23, 1998) --Continuing with our recap of the companies that we're considering for a multi-year DRIP commitment, First Tennessee (Nasdaq: FTEN) has to be considered. This is another bank holding company that defies traditional descriptions of such.

While the company is the second-largest bank holding company in Tennessee and has banking subsidiaries in Arkansas and Mississippi, it is also a large producer and servicer of mortgages with its own network of 147 mortgage offices in 30 states. The company is also a provider of credit transaction processing services, check clearing, and cash management services. In addition, First Tennessee in 1997 was the largest underwriter of U.S. government agency securities with maturities longer than one year. This includes Fannie Mae, Freddie Mac, and FHA loans. The company is also a sizable underwriter of municipal securities.

In our original look at the company (Part 1, Part 2, Part 3), we concentrated on First Tennessee's noninterest income businesses. That's because the majority of the company's revenues do not come from lending itself, but from these other non-lending businesses and from fees on customer accounts. Transaction processing generated more than $30 million in revenues last year, which is less than five percent of revenues, but this is the sort of business where the company has to devote far less capital, on average, than other lines of business to generate the same amount of earnings. In other words, this part of the business is very light on capital.

In mortgages, the company sounds as it may be pulling together its various units under one brand name, allowing better efficiency on marketing itself. Mortgage production and lending is very important to the company, as it makes money initiating loans, selling the loan as part of agency securities, and then servicing the loans. Its mortgage stores can also be a very good source of "B" and "C" mortgage credits, or high loan-to-value home equity loans.

This is what companies such as FirstPlus Financial (quarterback Dan Marino is their pitchman) do. This can be a very attractive business, as rates the lender can charge are in the area of 12 to 13% or more. Of course, that's not a fun rate to pay, but it's less than the rate charged on many credit cards and the interest is deductible for consumers. So, in essence, there are credit card qualities to the company, although a credit card lender can re-price its portfolio in a very short time, which is something a mortgage lender can not do unless all of its loans are floating rate.

The financials at First Tennessee are very good, otherwise they wouldn't have made it into the fray here. Looking at the last quarter, growth in noninterest income lines of business was very impressive (AOL readers, please maximize the window):

                  Q2    Q2   change 
                  1998  1997     % 

Mortgage banking...215,057.....139,135...+54.6
Capital markets...... .68,220.....40,455.....+68.6
Deposit transactions and
cash management....42,767.....40,782.....+4.9
Merchant processing..14,949.....14,913......+0.2
Cardholder fees.............9,866.....9,417.....+4.8
Trust and investment
Securities gains/(losses)....(62).....(760).....+91.8
Other income and

Total noninterest income..409,900.....292,253.....+40.3

As long as the company can continue this sort of growth and keep capital growth limited, we like what's going on here. While ROA actually fell last quarter, the company is very much in a growth mode. This was due to assets increasing faster than earnings, however, there were over $2 billion in mortgage loans held for sale at the end of the quarter, which weighed down performance. These loans held for sale will fuel earnings growth down the line in the form of servicing income. As we can see above, the company's mortgage banking income growth was spectacular, as the second-fastest growth segment in the noninterest income group. This is even more impressive as the largest component of the company's noninterest income group of business lines.

We will have to think hard on choosing this one, as we like the fact that it is smaller and thus has room to grow. We hear good things about its service to customers and like the different lines of business and think the company has its head screwed on straight when it comes to acquisitions. Even if we don't choose this for the portfolio, we like the company.

FoolWatch -- It's what's going on at the Fool today.

7/23 Close

Stock Close Change CPB $53 1/8 -1 1/16 INTC $82 9/16 + 3/16 JNJ $75 -2 5/8
Day Month Year History Drip (0.61%) 5.50% 10.03% (6.30%) S&P 500 (2.09%) 0.52% 17.45% 19.80% Nasdaq (1.75%) 2.14% 23.23% 21.42% Last Rec'd Total # Security In At Current 06/30/98 3.017 CPB $54.259 $53.125 07/01/98 9.724 INTC $80.239 $82.563 07/07/98 6.010 JNJ $69.708 $74.750 Last Rec'd Total # Security In At Value Change 06/30/98 3.017 CPB $163.70 $160.28 ($3.42) 07/01/98 9.724 INTC $780.21 $802.80 $22.59 07/07/98 6.010 JNJ $418.95 $449.25 $30.30 Base: $1700.00 Cash: $286.05** Total: $1698.38

The Drip Portfolio has been divided into 72.501 shares with an average purchase price of $23.448 per share.

The portfolio began with $500 on July 28, 1997, adds $100 on the 1st of every month, and the goal is to have $150,000 in stock by August of the year 2017.

**Transactions in progress:
7/21/98: Sent $60 to buy more CPB, and $40 to buy more JNJ.