First Security's Springdale Deal Now Estimated at $45 Million

by Gwen Moritz  on Monday, Oct. 27, 2003 12:00 am  

It may be a while before we know exactly how much First Security Corp. of Searcy is paying First Tennessee National Corp. of Memphis for First National Bank of Springdale, a deal announced Oct. 8.

But one thing is sure: It's nothing like $98 million, the high-end estimate suggested in one published report.

In fact, clues included in public disclosures suggest that the actual sales price may closer to half that.

"Or a third," said Charles Burkett, president of retail financial services for First Tennessee. "We didn't sell it for less than book," he said, referring to the bank's book value of just over $41 million.

The sale of a subsidiary by a publicly traded company like First Tennessee (NYSE: FTN) would typically generate at least an 8-K filing with the U.S. Securities and Exchange Commission — a notice of a "material event" that would affect shareholders. First

Tennessee has given the SEC no notice of the sale at all, and the press release announcing the sale gives a hint as to why: The company expects its net income for 2003 to be improved by only $1 million-$2 million, barely a blip for a company with $25 billion in assets and net income of $355.7 million in the first nine months of this year.

Such an after-tax gain suggests that the sale price is likely in the neighborhood of $45 million. The Arkansas Democrat-Gazette, by contrast, reported that the price could be as much as $98 million — a 2.4 multiple of book value, based on the average price being paid this year for banks of between $250 million and $1 billion in assets.

First Security is acquiring $330 million in assets — "substantially all" of the $349 million in assets First National of Springdale reported as of June 30.

First Tennessee paid shareholders — including the George family of George's Inc., the Shaw family formerly of Willis Shaw Express Inc. and Bernice Jones, widow of Jones Truck Line founder Harvey Jones — $70 million for First National of Springdale in the fourth quarter of 1995. Its assets, deposits and net income have remained essentially flat during the subsequent eight years. Despite being in a rapidly growing market, First National has added no branches to the four that First Tennessee bought, and its share of the deposit market has trended downward (with the exception of a notable uptick in 2001).

But it would be a mistake to think that First Tennessee will lose money on the deal.

Quarterly call reports filed with the Federal Deposit Insurance Corp. show that the Springdale bank has paid cash dividends to its owners of nearly $45 million since 1995 and its equity was reduced from about $50.6 million at the end of 2001 to $41.5 million at the end of 2002.

If the sale price is approximately $45 million, First Tennessee may have made nearly $30 million on its eight-year investment in northwest Arkansas. And Rutledge, a notorious bargain-hunter, may well have enlarged his bank's $1.5 billion in assets by 22 percent, added four branches and more than doubled its share of the northwest Arkansas market — all for barely over book value.

Security's Strategy

Rutledge's Searcy-based bank began its assault on northwest Arkansas in 2000. By mid-2003, there were six First Security branches in the Fayetteville-Springdale-Rogers Metropolitan Statistical Area, and a new branch in the Pinnacle Point development in Rogers has received regulatory approval.

But even the addition of the four First National branches doesn't mean Rutledge has completed his conquest.

"This does not complete the market, as far as we're concerned," he said last week.

He praised the quality of management and staff that he is buying at First National, including Jerry Reinert, president of First National. Reinert will report to Jim Taylor, president of First Security Bank of Northwest Arkansas.

But any more growth, Rutledge said, will have to wait till he takes a breather from the northwest efforts and his first entry into Little Rock.

That branch will open next year, when the First Security Building under construction on President Clinton Avenue in the River Market District is completed. The 14-story building will contain a 120-room Marriott Courtyard Hotel as well as offices for the First Security-owned Crews & Associates securities firm and 24 condominiums.

A year ago, Rutledge told Arkansas Business that he had no plans to move the headquarters of First Security from Searcy. Last week, he still had no plans to uproot the business but sounded less definite about its long-term location.

"For the time being, I live in Searcy. Assuming the headquarters is where I am, for the time being the headquarters is in Searcy," he said. "We've obviously raised three kids in Searcy, and it was a great thing, but they aren't here anymore. So the ties are not as strong as they once were."

And the pull from the northwest is greater all the time. Rutledge mentioned that he has "outside" business projects with his brother-in-law, Fayetteville real estate development guru Jim Lindsey.

Every Other Direction

Burkett, the retail banking president for First Tennessee, said his company was "not doing justice" to First National Bank of Springdale — which he described as a "great market, great people."

"In '95, when we purchased that bank, we were looking to expand our market. And that was the first purchase we made that was outside our footprint of Tennessee and this area."

First Tennessee had "visions of connecting the dots" between Memphis and northwest Arkansas, Burkett said. Instead, it ended up with a single bank five hours from the home office that didn't have the benefit of the strong branding that First Tennessee enjoys throughout most of its home state.

Rather than spend the dollars and management time required to grow the bank in the northwest Arkansas market, First Tennessee decided to accept First Security's overtures.

"We think someone like Reynie Rutledge and the bank in Searcy ... bring a lot of the branding and a lot of awareness that we did not have," Burkett said.

First Tennessee now has no plans to re-enter Arkansas, he said; instead, it is expanding in almost every other direction. A major investment in Nashville — the only Tennessee metropolitan area where First Tennessee is not a market leader — is already under way, with 21 new branches planned.

Elsewhere in the country, in markets from Bellevue, Wash., to Fairfax, Va., First Tennessee is planning to capitalize on the success and branding of its First Horizon Home Loans subsidiary by opening bank branches using the First Horizon name. Arkansas is not, however, one of the 39 states in which the mortgage subsidiary operates.

First Tennessee's hometown rival, $32 billion Union Planters Corp., has also been backing out of Arkansas. Last month, Simmons First National Corp. of Pine Bluff purchased nine UP branches in north-central Arkansas, including branches at Clinton, Marshall and Mountain View. In 2001, First National Bank of Phillips County in Helena bought three UP branches in Phillips County.

Union Planters currently maintains operations in 11 Arkansas Delta cities.n

First Security Bank of Springdale
As of Dec. 31, except where noted. All dollars in millions.

Category — 2003* — 2002 — 2001 — 2000 — 1999 — 1998 — 1997 — 1996 — 1995**

Total Assets — $349.07 — $366.81 — $368.77 — $351.82 — $323.91 — $375.78 — $359.13 — $368.53 — $358.73
Return on Assets — 1.07% — 1.20% — 1.03% — 0.75% — 0.82% — 0.95% — 0.8% — 0.66% — 0.11%
Total Deposits — $294.41 — $302.19 — $308.69 — $293.12 — $265.56 — $310.64 — $295.76 — $302.39 — $296.24
Market Share? — NA — 6.82% — 7.14% — 6.55% — 7.89% — 8.53% — 9.11% — 9.75% — NA
Net Loans & Leases — $177.28 — $179.76 — $173.97 — $157.07 — $134.91 — $123.68 — $139.15 — $136.34 — $150.50
Net Income — $1.94 — $4.29 — $3.66 — $2.52 — $2.82 — $3.43 — $2.86 — $2.36 — $0.37
Risk-Based Capital Ratio — 13.49% — 12.86% — 16.42% — 13.58% — 15.69% — 16.30% — 15.96% — 16.14% — 13.26%
Return on Equity — 9.38% — 9.50% — 7.30% — 5.21% — 5.70% — 6.76% — 5.62% — 4.68% — 0.80%
Cash Dividend — $1.70 — $4.10 — $3.35 — $2.52 — $4.30 — $2.80 — $5.00 — $0.00 — $21.25

*Through June 30.
**Acquired by First Tennessee National Corp. in October 1995.
?Deposits as a share of the total Fayetteville-Springdale-Rogers Metropolitan Statistical Area.
Source: Federal Deposit Insurance Corp.



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