Details of First Tennessee Bank's $115.6 million acquisition of Maryland National Mortgage Corp. may have seemed like good news to potential sellers of mortgage assets when they were announced on Monday. The price seemed to put a fairly hefty value on the originations business.

But First Tennessee may actually have struck a shrewd bargain.

Judging from the details of the balance sheet the bank is acquiring, the price looks to be much more in line with other recently announced deals, such as PNC Bank Corp.'s purchase of Sears Mortgage Group and the GE Capital acquisition of Shearson Mortgage.

A Rare Glimpse

The unit of Baltimore-based MNC Financial Inc. appears to be a good fit with First Tennessee's strategic objectives.

The bank, a unit of First Tennessee National Corp., distributed a presentation on the deal to security analysts after its announcement on Monday.

The unusually detailed document provided a rare view into how the valuation of a mortgage business is determined.

Doyle W. Bradsher, executive vice president of First Tennessee and head of its mortgage business, confirmed in the presentation that the bank had valued MNC's $3.9 billion servicing portfolio at about $40 million.

This would leave about $75 million for the originations business. But the analysts also were told that the MNC unit's balance sheet had some assets that offset the purchase price, including investment securities (see accompanying table).

Valuing Originations

The company's figures put the value of the originations business at $25 million to $30 million and assigned a value of $45 million to $50 million to these other assets, referred to as "adjusted net worth."

Mr. Bradsher conceded in an interview that the additional assets could not necessarily be separated from the originations business.

But the value of the originations business was clearly something less than $75 million.

In fact, the valuation may well have been even lower but for First Tennessee's determination to lock up the deal.

Growing the Core Business

"This is part of a strategy we developed over last few years of acquiring banks and trying to grow our core business," said Mr. Bradsher.

"We are trying to emphasize fee income in business lines we think we can compete in effectively. Some we are already significant in, such as bonds and check clearing."

He also said mortgage banking had been targeted as a business to be in. "We've been in it for 30 years and we understand it," he said. "But you can only grow so much internally."

Employees to Remain

First Tennessee plans to keep MNC's present management in place and to retain all 762 of the unit's employees.

One source familiar with valuations in the mortgage business took this as an indication that First Tennessee believed the originations business would be a profit center rather than merely a way of accumulating servicing rights.

He also said the $40 million price attributed to the servicing portfolio might be high. Given its average interest rate of 8.4%, he said, vulnerability to prepayments remain high and the life-span of the income stream could be short.

Mr. Bradsher said there would be one significant change in business strategy. He said First Tennessee would retain almost all the servicing rights on loans it originates.

The unit had previously sold the bulk of its rights - about 71% last year - to bolster its short-term profits.

Getting What It Wanted

Pro forma figures provided by First Tennessee showed the unit lost $6.6 million pretax on operations last year and had financing costs and amortization of intangibles amounting to $14.2 million, giving it a pretax loss of $20.8 million.

The sale of servicing produced a gain of $33.1 million, resulting in pretax income of $12.3 million and net income of $7.3 million.

The deal, First Tennessee said, would help it to use excess equity in its core banking business more effectively and further diversify its sources of fee income.

So it clearly is getting what it wanted for a price it believes to be favorable.

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