ALEXANDRIA, VA (August 19, 1998) --First Tennessee National is Tennessee's largest bank holding company, with more than 250 locations. Yet, it's easily the smallest company by market value of our five finalists.
First Tennessee National (Nasdaq: FTEN) is valued at $3.6 billion compared to the $17 billion market value of Mellon Bank (NYSE: MEL) and $14 billion value granted Fifth Third Bancorp (Nasdaq: FITB). To compare businesses, Mellon had $44 billion in assets at the end of 1997, Fifth Third had $22 billion, and First Tennessee possessed $14 billion. In a way, this means that First Tennessee is a relative "small-cap" -- especially compared to other giants that we considered, such as Citicorp -- with plenty of room to grow. Despite its name, First Tennessee's conventional banking branches now serve northern Mississippi and parts of Arkansas as well as all of the major cities in its namesake state.
Aside from providing the standard banking fare (checking and savings accounts for individuals and businesses), the company offers unsecured loans and provides financing for commercial and industrial development, real estate, and construction and land development. Beyond its tri-state branches, First Tennessee provides mortgage banking in over 30 states through satellite mortgage locations. The company also has a thriving business in credit card processing for merchants (much like Fifth Third does), bond brokering, and venture and trust capital. Finally, First Tennessee sells credit life services in over half of the country's states.
Over the past five years, First Tennessee has grown its earnings per share (EPS) 15.5% annualized. This compares to Fifth Third's 5-year annualized EPS growth of 16%, while Mellon has had 21% annualized earnings per share growth since 1993. Returning to First Tennessee, it's earnings per share is expected to grow about 11.9% annually the next five years.
First Tennessee's stock has gained 28% annualized over the past five years, nearly doubling its annual earnings per share growth rate (remember that the stock began from a depressed price in 1992). This compares to the 35% annual return of our other two finalists (Mellon and Fifth Third) that we just reviewed. Over the past ten years, the company's book value has grown from $3.93 to $7.44 per share. The stock yields 2.30%, the same as Mellon and more than 1% point higher than Fifth Third, whose yield is at 1.10%.
Unlike with Fifth Third, we have several columns written by Dale on First Tennessee. He initially loved the company because of its strong asset turnover and high profitability ratios. The company achieves a return on equity of 22%, topping our other contestants, and a return on invested capital of 15.7%. Its ROE2 is above 23%, again winning the race. (Hopefully, by now these terms aren't foreign here!)
Dale's five part overview of the company was comprehensive and makes our decision considerably easier, at least in relation to our two contestants. Let's see why.
To begin, Dale offered First Tennessee's numbers on May 12 (yes, it's been a while!). Then, on June 1 he took a closer look at the business behind the numbers, highlighting the company's growth, diversity, and stellar asset turnover, dubbing it a mini-Norwest (NYSE: NOB), which is another top-five pick from Dale. He focused on the company's extensive mortgage business that day.
On June 2, Dale covered in detail the merchant transaction business of First Tennessee (this is great background info for those looking at Fifth Third, too). The column explained why this high-margin biz is less risky than many lines of business in the financial world, and how the market rewards this revenue with higher valuation multiples.
What makes our initial conclusion on First Tennessee a little easier, though, was Dale's wrap up column on the company that was written June 4. That column states: "Remember, the intelligently run bank or financial services company (or really, any company) doesn't measure its success on absolute levels of net income or assets it can generate. It measures its success according to the risk it takes on to generate its earnings and how much capital it has to tie up to generate a dollar in net income." The point is important.
First Tennessee achieves exceptionally high asset turnover, and, again from the column: "Most often, a high turnover financial services business operates with lower margins, though. So the next thing we want to look at is return on assets (ROA), which is a primary measure of a financial services firm's profitability." Looking at First Tennessee's ROA revealed that its high asset turnover didn't offset the company's lower margins, effectively shedding light on the fact that the company uses higher than average leverage to help generate its returns -- not usually a great thing.
Dale finished his overview with: "For now, we'll leave off by pointing out that First Tennessee has some attractive features but is pouring back into the business a huge amount of money to achieve its growth. The company has been cash flow negative, and last quarter it generated negative cash flow of over $1 billion."
This means that First Tennessee's growth is not without some added risk, especially if any new initiative turned sour. In general, cash flow negative companies aren't our forte, though in First Tennesee's case this is likely a short-term circumstance. Mellon Bank, however, is the more attractive choice for us. As much as Dale liked First Tennessee to begin with, he likes both Mellon and Norwest more. (When the question of favor arises between First Tennessee and Fifth Third, he's not certain, but that's now secondary.) As I agree with Mellon as a "top pick" already, Mellon wins out over First Tennessee, at least initially, just as it did over Fifth Third.
Next to fall or rise? U.S. Bancorp.