First Tennessee finds outsourcing boosts back-office business.

WHILE MANY BANKS VIEW their back offices as a necessary evil, First Tennessee National Corp. sees a profit center.

The Memphis-based regional bank operates national check clearing and merchant processing businesses. First Tennessee, with $9.6 billion of assets, was also one of the first financial institutions to offer consumers check image statements.

But given the its emphasis on businesses that require heavy back-office support, it may surprise some bankers to find out that First Tennessee's data center and major automation tasks are run by International Business Machines Corp. in an outsourcing relationship.

Ralph Horn, who succeeded Ronald Terry as chief executive in April, says the partnership with IBM is a big part of the bank's technology strategy.

Indeed, First Tennessee executives think automation is so important they concluded that to be more efficient, the bank needed a technology partner. The ten-year contract with IBM was signed in 1989.

They made that decision "primarily to remain competitive and be sure we had a source of technology that could be provided on a smooth fine rather than a stair-step fine," said John C. Kelley Jr., the president of the Memphis banking group who also has responsibility for operations. The second major consideration, he said, was the ability "to reduce costs significantly."

Mr. Kelley estimated the bank will save about 20% over the life of the agreement.

That's not the only anomaly at the bank: First Tennessee also has an somewhat unusual mix of businesses. Only half of its revenues now come from its retail bank.

The remaining 50% comes from its six niche businesses, of which four -- bond trading, check clearing, mortgage banking, and merchant processing -- have a national presence.

Excluding money-centers, fewer than 10 banks in the country earn a larger percentage of revenue from noninterest sources, said Kay C. Lister, an assistant vice president with Keefe, Bruyette & Woods Inc. in New York.

The business strategy, according to most analysts, is a winner. Last year, the banking company posted a return on assets ofl .35%, up from 1.07% a year earlier. Return on equity was 18.99% last year compared with 15.44% in 1992.

But Henry J. Coffey Jr., an analyst with J.C. Bradford in Nashville, noted that those other fines of business have lower price-to-earnings ratios than traditional banking, a factor that is reflected in the bank' s multiple.

Mr. Horn said, "We believe that as we are able to show the marketplace the sustainability of the revenues from those specialty business, we hope to be rewarded with a multiple similar to other banking companies that have a similar mix of fee income to net interest income."

Mr. Horn also noted, "We don't have [a] consistent history of that kind of high perfor

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