With its agreement last month to acquire MNC Financial Inc.'s Maryland National Mortgage Corp., First Tennessee Bank is poised to become a major mortgage lender. First Tennessee and Maryland National originated nearly $4 billion last year, and their servicing portfolios totaled $6.2 billion.
Doyle Bradsher, head of First Tennessee's mortgage division, discussed the acquisition in an interview with Christopher Noble of the American Banker.
Q.: What is the strategic thinking behind the acquisition?
BRADSHER: We view mortgage banking as a good growth industry. If you look at mortgage loan originations over the last 20 something years, originations have been growing about 14% a year, according to Department of Housing and Urban Development statistics. That's pretty rapid growth.
Then we took at the profitability of the industry and it appears that there are good opportunities for making a respectable profit in this business.
Q.: What about the risks of mortgage banking?
BRADSHER: It's a fairly low-risk business. The credit exposure is fairly small, because you're selling off loans generally on a nonrecourse basis.
There is some interest rate risk in the business, and prepayment risk on your servicing portfolio, but those are manageable.
Q.: Were there any other reasons for the acquisition?
BRADSHER: It represents a good use of capital we had available. It also helps us to diversify our sources of fee income.
Q.: Elaborate a bit on how your fee income will be affected.
BRADSHER: I think right around 40% of our revenues are fee income at First Tennessee National. One of the nice things is that this acquisition will improve the percentage of our total revenues that come from fees to 47%.
Q.: Are you at all concerned about buying a big originations network at what might be the top of the market?
BRADSHER: Well, I think it behooves us to be careful. I think anyone who went into this market without realizing that we were probably at a peak could make a mistake.
Originations nationally last year were just under $900 billion, and this year they're predicting $950 billion. If you go back to 1991 it's something like $600 billion. So that's something that has to be weighed and considered in reviewing any mortgage banking operation.
Q.: How about prepayments - did you take a good look at MNC's servicing portfolio?
BRADSHER: We sure did. We looked at it, our consultants looked at it, our consultants' consultants looked at it.
Right at the point of our negotiations I think theirs were running close to 30%, and I think ours are close to that as well.
We've looked at that real closely, and we've tried to project what we think are reasonable expectations.