Ralph Horn, chairman of Memphis-based First Tennessee National Corp., says it is misunderstood. And perhaps it is.
Like many chief executive officers, Mr. Horn argues that his $19 billion-asset banking company is undervalued, and that its price/earnings ratio is lower than it should be.
Revenue growth, a crucial predictor of profitability, has been superb: 15.3% a year on average between 1990 and 1998, according to a study by Salomon Smith Barney, a subsidiary of Citigroup Inc. That is more than the 14.5% at Fifth Third Bancorp, 12.2% at Firstar Corp., and 12.8% at Synovus Financial Corp.
But the price of First Tennessee's stock has been hovering at only 15.4 times projected 1999 earnings, compared with 26.3 for Cincinnati-based Fifth Third, 20.3 for Milwaukee-based Firstar, and 23.9 for Columbus, Ga.-based Synovus.
So Mr. Horn is puzzled.
"Our P/E should be up here," the affable and enthusiastic Mr. Horn said in a recent interview, pointing to a list of the company's peers in revenue growth.
Part of the problem is that First Tennessee lacks sex appeal. It has not bought a slew of other banking companies, as many of its competitors have. And it does not plan to.
Mr. Horn, who insists that all employees call him Ralph, pointed to recent sharp earnings hits taken by Memphis' First American Corp. and Charlotte, N.C.'s First Union Corp., as a result of big mergers. Mr. Horn said his goal is to achieve consistent, rather than flashy growth. First Tennessee can increase market share "without taking the risk of making a big acquisition and stubbing our toe," said Mr. Horn. Astounded by the idea of such an acquisition, he asks: "Why should we even think about doing that?"
He has his own perspective on mergers. "Union Planters has a business line of buying banks," Mr. Horn said. "And the way they try to produce is by buying more banks, taking out expenses, jacking up revenues. But a couple years from now, you're back with a 7% growth rate if you don't buy more. It's a treadmill we've not had to get on."
There is a cost to that policy, however. Because it has not been acquiring banks, First Tennessee remains small by today's standards, and that alone is enough to keep its P/E multiple below those of its peers.
Scott Edgar, an analyst for the Sife Trust Fund, of Walnut Creek, Calif., says First Tennessee has fallen out of the universe of companies that people watch. "It's not an unknown story but it's not widely enough looked at." The Sife Trust Fund owned 0.6% of First Tennessee, with 782,000 shares as of April, and plans to hold the stock for the long term.
That's because Mr. Edgar said he views the research for First Tennessee as low maintenance. "We don't concern ourselves too much with the stock because they continue to put up the numbers," Mr. Edgar said. "You don't have to monitor it on a daily basis." Aside from lack of sex appeal, Mr. Horn blames the company's relatively low P/E on what he deems a misperception of its interest rate exposure. "People think we are more interest-rate sensitive than we really are," said Mr. Horn. "Some of the market doesn't believe us yet."
But analysts say First Tennessee's business mix generates fear among investors because they think that its fee income might be hurt if interest rates rose. Regional banking contributes only half of the company's earnings, with most of the rest coming from fee-based businesses such as mortgages, capital markets, and transaction processing.
Those product lines are the key reason why First Tennessee's revenue growth is so strong. The mortgage and bond divisions racked up $706 million in noninterest income in 1998, 65% more than in 1997. Mortgage banking accounted for $228 million of the increase, while capital markets were up $49 million.
But many investors may see mortgages and bonds as First Tennessee's Achilles' heel. Though Wall Street adores fee income because it usually mitigates earnings fluctuations, investors believe that fees from mortgage banking and bonds do not.
"Generally investors look for fee income because fee income is perceived to be less volatile," said David Trone, an analyst for Credit Suisse First Boston. "However, First Tennessee's fee businesses -- mortgages primarily, and to a lesser extent capital markets -- happen to be the two areas that are volatile."
But with rising interest rates becoming a constant threat, big mortgage divisions spook investors.
"People give a lower multiple to the portion of the income stream from mortgage banking," said Joseph Roberto, an analyst for Keefe, Bruyette & Woods Inc.
In 1993, First Tennessee jumped head-first into the mortgage business by acquiring Maryland National Mortgage Corp. and Sunbelt National Mortgage. The company now operates mortgage offices under 20 names nationwide, most of which will adopt a common moniker -- First Horizon -- in the first quarter The acquisitions have provided a base for the bank to crank out $23 billion in originations in 1998, up 120% from 1997.
"When you look out in 2000, mortgage banking revenue is going to slow," said Gerard M. Cronin, an analyst for McDonald Investments in Cleveland. "At the end of the day the fundamental question for the company is: Will investors become concerned that revenue growth will slow? My personal view is investors should be looking at the bottom line" instead of the top line.
Future growth, Mr. Horn says, will come from current business lines and the expansion of its national consumer finance business. Using the First Horizon name, First Tennessee is cross-selling financial products through its network of national offices. But the concept has yet to catch fire on Wall Street.
"Cross-selling is a angle that a lot of banks have been trying to play over the last few years," said Mr. Trone of Credit Suisse First Boston. "We haven't seen any proof that it works. It is really an issue of 'What is in it?' for the customer."
First Tennessee's giant capital markets division, which ranks first in the underwriting of U.S. agency debt, carries a similar stigma. The 57-year-old Mr. Horn -- who joined First Tennessee in 1963 as a management trainee, became chief executive officer in 1994, and chairman in 1996 -- pushed the bond division to national prominence in the 1970s and 1980s.
"People see the word "bank" with the word "bond' and their reaction is "volatility ," he said, raising his voice, eyes bulging. But "we've done everything we can to take out the volatility."
"We will go through growth spurts where we laid the groundwork, which we think will convince the market that those businesses will be consistent," said Marty Mosby, head of investor relations at First Tennessee. "Then you'll get this interest rate surge, the Wall Street Journal articles, and everybody will start worrying again."
The company has its defenders. Mr. Cronin of McDonald Investments said there are automatic corrections in the mortgage business when interest rates rise. As the pace of originations slows, so does staff expense, he said.
Management at First Tennessee argues that its mortgages are hedged by a large servicing portfolio, which increased 40% to $40 billion last year. While one-time gains from originations slow, keeping a sizable mortgage portfolio on the books allows the company to continue to scoop up more fees. Also, if people do not refinance because of rising rates, fewer loans leave the servicing portfolio. All other things equal, a servicing portfolio especially helps the top line when interest rates rise, they say.
"We want to keep our mix in the production and servicing sides," said J. Kenneth Glass, the executive vice president who oversees the mortgage business.
First Tennessee also uses hedging techniques, such as interest rate swaps and futures, to reduce its exposure to rate changes. Its officers argue that if commercial and retail loan production starts to sag, the bank's bond business will thrive, because banks tend to invest more in bonds when loan demand shrinks in a rising interest rate environment.
In its March proxy filing with the Securities and Exchange Commission, the company reported a staggered 300-basis-point rise in interest rates would shave less than 2% off projected 1999 net interest income. A decline would have no impact.
Mr. Horn makes his arguments, but they seem to be of little avail.
But he is not giving up. In July, the company moved its stock listing to the New York Stock Exchange, from the Nasdaq. The main goal was to reduce the stock's volatility, Mr. Horn said. Instead of relying on several market makers to conduct the trades, the stock is now funneled through a specialist at the New York exchange. The specialist will help reduce volatility by stepping in to take a position if the stock is fluctuating as a result of day trading and other market factors unrelated to the company's fundamentals.
Like other banking companies that have moved to the New York Stock Exchange, First Tennessee also hopes to gain a little more exposure in the eyes of institutional investors, said Mr. Edgar, the Sife Trust Fund analyst.
"One of the reasons to go to the New York exchange is to appeal to a broader spectrum," Mr. Edgar said. The hope is "to give a little boost to the stock."
"We kind of come and go from the radar screen depending on where we are trading," Mr. Horn said. "People tend to forget about us and then they say: 'Oh, yeah, First Tennessee. High performer. Good revenue growth. Trading at a discount.' Then you see a run in our stock. And more people come in and start buying."
All in all, despite Mr. Horn's displeasure with where the stock is trading, his shareholders have done well over the past five years. It has risen 184% in that period, more than the 146% gain in Standard & Poor's bank stock index and the 177% rise in the S&P 500.