Tennessee's First American Corp. has recovered splendidly from loan-generated wounds a few years back. CEO Dennis Bottorff casts the institution as a "supercommunity bank," and is looking to nontraditional businesses to build earnings. Can it keep its independence?

In May 1971, workers were digging a foundation for what would become the First American Center in Nashville when they came upon a nine-inch fang, later identified as that of a saber-toothed tiger, and other animal and human bone fragments.

By 1990, it appeared that the then-107-year-old bank might be going the way of those bones. First American had stumbled badly, growing its loan portfolio too quickly just as commercial real estate was starting to tank. The bank lost $62 million that year after having eked out $4.2 million in profits in 1989. The loan-loss provision almost tripled from two years earlier.

In rushed the feds. The Office of the Comptroller of the Currency forced the lead bank to sign a supervisory agreement in September 1990 to maintain minimum capital levels and omit any dividends. Not surprisingly, the stock skidded to $4.88 a share, down precipitously from $35 three years before.

But First American won't be joining that basement bonepile any time soon. The bank has since turned around smartly--arguably as smartly as any institution in the country--by focusing on soundness and superfluous costs. Its return on assets soared to 1.50% last year (boosted by one-time returns), and return on equity hit 19.9%. It was a banner year. First American rose to 28th on this year's U.S. Banker performance ranking of the 100 largest banking companies, from 77th in 1991 and 66th in 1992.

The dividend was reinstated two years ago, and the bank was released from the supervisory agreement in April 1993. The efficiency ratio has been falling; fro 73% in 1991, it's down to about 61%, and the bank's three-year plan is to have it at 59% or under.

Analysts have cheered the turnaround. "By and large, they have done an excellen job of ensuring the survivability of the institution and plating it on a firmer footing," says Norman Jaffe, a bank analyst with Fox-Pitt, Kelton in New York. "Their risk and asset-quality profiles have improved immensely."

First American is carrying a lot of momentum through this year's first half--earnings per share are up 18%--though like most banks, its margins have shrunk as rates have risen. President and CEO Dennis C. Bottorff and his management team, acknowledging that the basic banking business isn't a high-powered engine, are taking an unusual approach, creating a separate entity that they hope will generate rising revenues from investment products and other nontraditional sources.

Bottorff, who arrived as chief executive in November 1991 from the former C&S/Sovran Corp., says First American's "core bank" can continue to grow and produce a decent return (ROA was 1.24% in the first half) by focusing on consumers and small businesses. But not a superior one. And so the company has split itself into two pieces, the core bank and First American Enterprises, a subsidiary that will make strategic investments in fee-income and payment systems-related businesses--areas where First American could build higher returns. In time, it could generate over a third of the company's growth, executives project.

Yet barring a home run in one of those new businesses, it's not clear what the future holds for a $7.2-billion-asset, 140-office institution. The bank has bee largely a spectator as aggressive peers like AmSouth Bancorp and SouthTrust Corp. in neighboring Alabama have expanded rapaciously. First American is barel bigger than it was six years ago, even after making several small acquisitions, including one in Bowling Green, KY, whose three offices are its only presence outside Tennessee.

"Not a Florida"

Vaulting growth isn't always good, of course, but in a less-than-robust market it can be hard to stoke earnings without acquisitions. Bottorff says Tennessee is a good market, "but it's not a great market. It's not a Florida or a Texas. It's not a Chesapeake Crescent." Hence the new strategy. But in a nation whose banks are bifurcating into ever-larger mega-banks and tiny niche institutions, can a regional keep its seat at the table?

Bottorff and company clearly think so, even if some experts are skeptical. Whil First American could end up being acquired, Bottorff believes that nationwide banking will spur Southeastern mega-banks to look outside the region, giving First American a grace period to nurture its "supercommunity bank" strategy of providing superior service in a carefully defined market area. Meanwhile, by re-engineering processes and trimming expenses, unit costs can be lowered.

First American has more going for it than it might seem at first blush. Historically the state's largest bank--Memphis-based First Tennessee National Corp. is now larger--it still ranks as the top middle-market lender. And Tennessee remains far less concentrated than some neighboring states, leaving a host of community banks that still provide First American with a raft of correspondent relationships.

Nashville itself is a regional hub for American Airlines and the focus of an ever-expanding music and entertainment industry that's grown beyond its histori roots, the Grand Ole Opry and the country music scene. "Fifteen years ago, you wouldn't have had the Los Angeles producers or the movie companies that you hav now," Bottorff says. The entertainment industry isn't much of borrower, however its chief benefits to local banks are in deposit-related services.

Nashville also has Vanderbilt, among the nation's most respected universities, and more than a dozen other local colleges. And it is growing: The city tied fo second, with Phoenix, in net in-migration rates among cities of 300,000 or more in a survey by Ryder Systems. Only Las Vegas scored higher.

What's more, the bank's loan portfolio has been scrubbed very clean: Nonperforming assets are under 1% of total loans plus foreclosed properties. Loans also were up 19% in the second quarter over a year earlier.

Against that backdrop, First American has altered its pre-Bottorff strategy of pursuing big corporate loans, some outside Tennessee. While it won't drop its major in-state corporate customers, it will no longer be their lead bank, says Bottorff, adding, "We said that diversification would be the cornerstone of the risk management system."

Before his arrival, Bottorff says, the company's chairman, James C. Smith Jr., came in as interim CEO "to protect his ownership position. He did some heavy writedowns and reserving on the portfolio." With that, the bank didn't have to do a slew of asset sales, but soundness became something of a mantra. To help carry the message forward, Bottorff recruited two C&S/Sovran veterans: Dale W. Polley, president of First American Bank, and John W. Boyle, president of the Corporate Bank.

Winnowing the Field

By the beginning of this year, with the core bank running well, the hunt for other revenue sources had begun in earnest. Robert A. McCabe Jr., holding company vice chairman and chairman of First American Enterprises, says this new venture, announced in January, was "seeded" with trust and securities wholesaling businesses. Beyond that, the unit's managers have been examining scores of businesses for potential investment.

Some have more or less been ruled out: Custody and operational services, McCabe says, are very technology-dependent and "didn't make the cut," while prices for money managers "have been bid up too much." But he insists, "We're looking for related competencies."

The two best bets appear to be in asset management and securities distribution and sales. The Enterprises unit is committed to having something in place by th end of the year that is contributing to earnings in 1996-97, McCabe says.

To that end, Enterprises managers also have been analyzing payments systems businesses such as ATMs, health care payment processing, point of sale, smart cards and merchant processing. Such businesses could be national, and by order of preference First American would build them, buy them, do a joint venture or form a strategic alliance. The bank has flown in some top consulting help to assist in this brainstorming, including Furash & Co. of Washington and New York's First Manhattan Consulting Group.

One new business is underway: The bank is an exclusive regional distributor of an investment asset-allocation modeling program created by ADAM Investment Services in Atlanta. Bottorff sees loads of potential there. "What customers don't need is more product choices," he says. "What they need is more information to help them pick which products."

While First American is experiencing big growth in mutual funds and annuities, it's only been in that game a short time. Its ValueStar line of four proprietar money market and fixed-income funds had just $272 million in assets last month, though it offers a wider line of investment products through PFIC, a third-part marketer in nearby Brentwood, TN.

The bank is staking a lot on consumers and small business, where Bottorff's insistence on high touch--"where banking is still a people business" is one of the bank's tag lines--can be felt. M. Terry Turner, president of the General Bank, says that a huge emphasis has been put on training to boost service, and that employee incentives are heavily keyed to that.

Small-business efforts are divided among branch personnel and "relationship managers," depending on the company's size. "Our approach is getting people to execute better, to clarify roles and establish performance targets," Turner says. But only now are customer service reps getting platform automation to enable them to cross-sell more effectively.

First American executives say consumers have responded well to initiatives promoting innovative products and fair pricing. The bank has toll-free lines fo general inquiries and cash management help, and its ValueFirst Checking package--featuring unlimited check writing, free transactions on any ATMs and overdraft coverage, all for a $10 monthly fee--has become a local leader. Its FAIR money market account, introduced in 1987, also has consistently paid highe rates than other Tennessee banks'. In addition, the bank is the only larger player in its market offering Saturday hours. It began by opening 40% of its Tennessee offices on Saturdays in July.

Add it all up, First American executives say, and you get superior customer service, coupled with a perception of value, that give the bank an edge even if it can't match the geographic reach of bigger rivals. "What's behind the supercommunity bank concept is a partnership with the customer," says Dennis J. Hooks, director of marketing.

Corporate lending is being re-engineered under a long-term initiative the bank calls "Transformation," aimed at getting its 42 calling officers--the relationship managers--to anticipate customer needs and work with product specialists to design tailored credit solutions. Some use lap-top computers on calls, and all can communicate with each other via electronic mail. "Credit approval has become an electronic event," says Boyle, the Corporate Bank president, adding that "the relationship manager is no longer sitting there simply doing his bankerish thing."

While its market may not be overly concentrated, First American doesn't lack fo competition. A man with a good throwing arm could heave stones from its rooftop and probably hit offices of NationsBank, AmSouth and Union Planters. Towers belonging to Third National and First Union Corp. rise a few blocks away, and credit unions are active and growing.

First American has the oldest building of this bank group, an unadorned 28-stor concrete monolith. But lack of flash doesn't mean stodginess, nor unwillingness to promote itself: Hooks says its ValueFirst checking has been heavily advertised on local TV for two years.

Big Guys at Bottom

Big as they are, NationsBank and First Union don't awe Bottorff. In fact, he puts them at the bottom of a rank ordering of significant competitors: 1) Memphis rivals First Tennessee and Union Planters Corp.; 2) small banks; 3) non-bank competitors; 4) superregionals. "We think that in those areas which require high touch, we can compete very, very effectively against much larger institutions," he says confidently.

He believes the next wave of deals in the Southeast will probably be mergers of equals of bigger banks, say $10 billion each. One example was the recent deal involving North Carolina's BB&T Financial Corp. and Southern National Corp. "If the institutions in the state of Tennessee wanted to sell, they could pick up the phone and be bought," Bottorff concedes with a mild shrug. But "in terms of scope or size, there's just a lot better places (for buyers) to spend their tim and effort."

He says that unlike years ago, he no longer frets constantly about stock price, even though First American's stock (around $34 in mid-August, with a price/earnings multiple of 8.7) tends to trade on the low side of the peer grou multiple "because we're deemed to be a plain vanilla bank, and so it's hard for the Street to get excited." When First American was a turnaround story a couple of years ago, it predictably traded higher.

Some of that excitement has evaporated, in part because there's no sense that a takeover is nigh--hence, no takeover premium--and no big new business or other "story." First American "has telegraphed to the market that they'd like to remain independent," says Jaffe at Fox-Pitt, Kelton.

"I'm shocked there hasn't been a major transaction" in Tennessee, says Stephens Inc. analyst Frank Anderson. First Tennessee and First American are appealing, he says, but without any sale signals--and "unless things get less friendly"--banks talking independence and doing well may have bought themselves time. But he doesn't see that situation lasting more than a few years.

First American is ready to buy, however. Bottorff points to a map showing Tennessee and several markets abutting its borders, places like Huntsville, AL; Hopkinsville and Corbin, KY; and Asheville, NC. There are 556 community banks with $80 billion in assets in this core area, Bottorff says, lots of smaller fruit that could be plucked.

If he's right about bigger banks leaving First American alone, and if the institution keeps perking along and scores in the nontraditional arena, the ban need not worry about becoming someone else's archeological lesson.

Down Home in Tennessee

Dennis Bottorff, an Indiana-born adopted son of Nashville, says he's just where he wants to be.

Leaning back in a red leather armchair in his roomy corner office, handsomely furnished with antiques and an oriental rug, Bottorff speaks softly and reflectively--he's lived in Tennessee since his teens, long enough to have acquired a decided drawl--about his bank, its market and the direction the industry seems to be headed. Of medium height, his dark hair now somewhat receding, he's accessible (to his managers, he's "Denny") and unassuming: he pours a visitor's coffee himself, rather than summoning a secretary.

Bottorff, who turns 50 on Sept. 19, graduated from Vanderbilt--the campus is a few miles from his downtown office--and left for an MBA at Northwestern University. He returned to Nashville in 1968 as a management trainee at Commerc Union Bank, which is now, after three mergers, a cog in the NationsBank machine

He rose through the ranks at Commerce Union, becoming executive vice president in 1975, president in 1982 and chairman and CEO in 1984. A couple of years later, Virginia's Sovran beckoned, and the two merged. Bottorff left for its headquarters in Norfolk as vice chairman, becoming chief operating officer in 1988 and adding the president's title in 1990.

But the subsequent merger with C&S and the then-impending one with NationsBank evidently soured Bottorff on big-time banking, and the handwriting was on the wall that NationsBank executives would capture the top jobs at the combined company (that did indeed happen). Though he was the CEO-designate at C&S/Sovran he left for First American late in 1991.

Bottorff says he missed Nashville, and thought back to the days when Commerce Union slugged it out with First American and Third National Bank. "One reason I decided to come back was that there was only one left," since both Commerce Union and Third National (acquired by SunTrust Banks) were no longer independents. "From a competitive standpoint, First American was in a better position than it had been, historically."

Before he decided to take the job, though, "I wanted to get a sense of the long-term viability of this company, and not just come in and do a turnaround deal and flip it." That viability centered on being a customer-oriented institution that didn't have to be huge, though clearly Bottorff could be running a bigger bank. Recruiters have been high on him for years; when he was at Sovran, he was often mentioned as a contender to head a major institution.

But Bottorff isn't showing any signs of restlessness. He's interested in building First American patiently and profitably. "You don't see us talk about wanting to be a $50 billion or $100 billion institution. What you see us talk about is growing within a defined area, with the idea of getting more depth of market share."

"Bottorff had that bad experience at C&S. Now he's running his show, and the bank's doing relatively well," says Frank Anderson, banking analyst at Stephens Inc. in Dallas. "Why would you want to give that up?"

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