First Tennessee Bank has agreed to buy the mortgage unit of MNC Financial Inc. for $115.6 million in cash.
The deal will catapult First Tennessee well into the ranks of the top 50 originators.
But the bank had to win a bidding contest for the unit, Maryland National Mortgage Corp., and is paying a steep price.
Judging from other recent deals, the unit's $4 billion servicing portfolio is worth about $40 million. That means First Tennessee may be paying a hefty $75 million for an origination business on track to produce $2.6 billion in loans this year.
Keen on Expanding
MNC, which is based in Baltimore, is being acquired by NationsBank Corp., which has been reducing its involvement in mortgages. It sold a mortgage banking unit with $7.6 billion of servicing to Margaretten Financial Corp. last year.
First Tennessee Bank is a unit of $9 billion-asset First Tennessee National Corp., Memphis.
First Tennessee has long been keen on expanding its mortgage banking outside of Tennessee, Mississippi, and Alabama. It bid aggressively enough on the MNC unit to overcome stiff competition. Ronald Terry, chairman of First Tennessee National, said there were at least 30 other bidders.
What's more, Maryland National Mortgage may not be the last mortgage-industry acquisition First Tennessee makes. "We'd like to expand outside our originations business outside of the Mid-Atlantic and Midsouth," said Mr. Terry.
Boost for Fee Income
The purchase will add considerably to the bank's fee-based income. Noninterest income, generated largely by the company's bond, trust, and check-cashing departments, provided about 40% of total revenue last year.
With Maryland National Mortgage's 1992 results factored in, the proportion of total revenues derived from noninterest income would have been 47%.
"It's a good strategic acquisition with a neutral near-term effect." said Peter Tuz, an analyst with Memphis-based Morgan Keegan & Co. Mr. Tuz said he believes the purchase will have a negligible effect on 1994 earnings as First Tennessee tries to expand the MNC unit's servicing portfolio and originations.
John Leonard, an analyst at Salomon Brothers, also sees the acquisition as a sound strategic decision, though he had a mixed reaction to the company acquired and price paid.
Mr. Leonard said he thinks that the relatively high average coupon, around 8.25%, of Maryland National Mortgage's servicing portfolio may leave it vulnerable to prepayments.
"Also," he said, "there was not as strong profitability as I might have liked to have seen, given the positive environment for mortgage banks."
In buying Maryland National Mortgage, First Tennessee will get a company that originated $3.3 billion of mortgages last year. The figure for first-half 1993 was $1.3 billion.
Maryland National operates offices in Maryland, Pennsylvania, New Jersey, Virginia, Delaware, and Colorado.
First Tennessee's mortgage unit originated $500 million last year. It had a servicing portfolio of $2.3 billion.
The price is subject to adjustment for certain assets and liabilities at closing, according to a First Tennessee statement.