MEMPHIS - Ronald Terry, chief executive of First Tennessee National Corp., glides his finger over a small map of the United States. He is looking for his next mortgage company.

The Midwest, he muses, "wouldn't be a bad place to be." Then his finger moves to the recession-battered Northeast. "I don't much care to get up in there," he says with a laugh.

And so goes the planning for one of the most ambitious acquisition campaigns the mortgage banking industry has ever seen. A virtual unknown in the business just a few months ago, First Tennessee is now well on its way to the major leagues.

Last month, the $9 billion-asset banking concern agreed to buy Dallas' Sunbelt National Mortgage Co., a sizable originator and servicer, for $67 million. That announcement came just weeks after First Tennessee purchased a similar company, Maryland National Mortgage Corp., for $116 million. And the buying, spree isn't over

Ambitious Goal

"We may not be a Country-wide," says Kenneth Glass. First Tennessee's point man for mortgage banking. "But we can certainly be one of the 10 or 20 major players."

When the Sunbelt deal closes - probably in January - First Tennessee will be originating about $7.5 billion in loans a year, and its servicing portfolio will stand at nearly $13 billion. That should make it one of the top 25 originators and one of the top 30 servicers.

The idea behind all this is to expand First Tennessee's already impressive fee-based business. Led by a big bond-selling operation, fee businesses accounted for 41% of revenues last year, versus 26% at all banks. Once Sunbelt is added, the figure should exceed 50%.

Analysts Question Timing

Though analysts generally applaud the goal of building noninterest income, they are not without worries about the mortgage expansion. After all, they say, First Tennessee is buying into the industry at what appears to be the peak of the biggest originations boom in history. What will happen when interest rates rise and loan volume tumbles?

First Tennessee replies that it took that danger into consideration when pricing the acquisitions. But many analysts are still taking a wait-and-see approach.

"I think they're going to have to work hard to make these deals pay off," says Joseph Stieven, a bank-stock analyst with Stifel, Nicolaus & Co., St. Louis.

Fortunately for First Tennessee, it brings some formidable competitive advantages to the mortgage banking arena.

Perhaps foremost is a 40-member team that buys old, often quirky mortgages from other banks and sells them to investors, either as securities or whole loans. Housed within the vaunted bond division, this team now stands ready to help First Tennessee's mortgage bankers sell off new loans. That could well translate into a broad product menu for consumers and highly competitive pricing.

The leader of this secondary-market swat team is Jerry Hubbard, a bearded 42-year-old from McGhee, Ark. He earned his financial stripes by helping a farmers' cooperative sell cotton.

"Cotton trading is remarkably similar to what I do now," he says. "I'd segregate my cotton by quality, and price accordingly."

|Very Progressive Shop'

In mortgages, Mr. Hubbard and his group are considered to be right on the cutting edge.

"They're a very efficient, very progressive shop," says Dennis Godfrey, director of product development for the Federal National Mortgage Association.

Secondary-market savvy is not all that First Tennessee brings to the table. It also has a solid record of building and running nationwide speciality businesses.

For example, First Tennessee is one of the top banks in both check clearing and transaction processing.

And First Tennessee is not a complete newcomer to mortgage banking. A mortgage division that long has operated out of Memphis currently originates about $700 million of loans a year in four states and is the No. 1 lender in Tennessee.

The home-state leadership was a virtual prerequisite for the expansion. As Mr. Terry has frequently told his managers, "Until you can whip your local competition, don't ask me to go national.'"

Retaining Management Teams

Just how will the new mortgage units be managed? First Tennessee plans to retain the management teams at both Maryland National and Sunbelt and give them relatively long leashes.

Eventually, some functions may be centralized; servicing is a top candidate, bank officials say. But for now, the emphasis is simply to promote an exchange of ideas among the new units and the Memphis mortgage division.

Mr. Glass, the executive coordinating the effort, is also president of the company's traditional banking businesses in Tennessee markets outside Memphis.

Though not a mortgage banker himself, Mr. Glass, 47, immersed himself in the minutiae of the industry this year by helping First Tennessee perform due diligence on five mortgage companies around the country.

"You learn a lot very quickly that way," he says.

On-the-Job Training

Mr. Terry, for one, is supremely confident in Mr. Glass' ability to pull off the job. The chairman recalls how Mr. Glass took charge of the bank's back-office operations shortly after joining the company in 1974 as controller.

"He'd never seen a back office before and he did it beautifully," Mr. Terry said.

So what has made First Tennessee so intent on growing in mortgage banking.?

In part, Mr. Terry says, it is a lack of acquisition opportunities in traditional banking. He says he would like to buy some banks but has simply found them too pricey.

"We've gone to the altar a number of times," he recalls. "But when it comes down to that last three bucks a share, we're not willing to pay it."

A Nature Candidate

Thus, First Tennessee turned it attention to expanding its fee-based businesses. And mortgage banking, the smallest of them at the time, came up the as the natural candidate for expansion.

By the late 1990s, Mr. Terry says, mortgage banking should account for about 10% of the bank's net earnings. That will leave it rivaling the bond division as the largest noninterest earner.

In addition to promising steady servicing fees for the long haul, mortgage banking allows First Tennessee to put some profitable loans on its balance sheet, which has ample capacity. Right now, loans make up just 53% of First Tennessee's assets, versus 60% at similar-sized banks.

Rather than booking mortgages for the long haul, First Tennessee plans to "warehouse" new loans that are being sold into the secondary market. That entails holding batches of new loans for about 45 days each. After the Sunbelt deal closes, First Tennessee will be holding about $900 million of loans in this way.

Acquisitions Too Costly?

"What you get is a long-term yield on a 45-day piece of paper, and you're funding it with short-term deposits," says Mr. Terry.

Analysts like the sound of that, but they still have worries about the acquisitions. And, ironically, one of the biggest concerns is the same one that Mr. Terry voices about bank acquisitions: Have the prices been too high?

The questions center on Maryland National, whose well-regarded originations network inspired a spirited auction.

"The fact that they outbid a lot of companies worries me," says Peter Tuz, a stock analyst with Memphis-based Morgan Keegan & Co.

Don't Know as Much'

"First Tennessee could end up overpaying in these situations because they don't know as much about the industry as others," added the chief executive of a big nationwide mortgage concern.

First Tennessee, however, staunchly defends its pricing and is continuing apace with the acquisitions campaign. The immediate goal: one or more buys that would add about $3.5 billion to annual originations and increase the servicing portfolio by about $4.8 billion.

Meanwhile, the bank is already enjoying its heightened status in the mortgage industry. Says Doyle Bradsher, head of the Memphis mortgage operation: "We're getting resumes from people who never would have thought of writing us before."

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