First Tennessee (FTN) may only be the 41st-largest bank in the country, but the problems it disclosed Monday evening are resonating through the banking sector.

The Memphis-based institution, which has $18 billion in assets, said it was revising down 1999 earnings after its primary regulator, the

Office of the Comptroller of the Currency

, disagreed with the way it had booked some mortgage securitizations, the practice of bundling up loans and selling them as bonds. The wider fear now is that regulators may be pressuring other institutions to do the same.

The bank also said that first quarter earnings per share are likely to amount to 28 to 31 cents per diluted share, compared with the 41 cents forecast by analysts surveyed by

First Call/Thomson Financial

, due mostly to an unexpected slowdown in its mortgage and capital markets businesses. Naturally, the hunt is now on for other banks with large mortgage books that could be hit.

And with shares in First Tennessee free-falling 6 1/4, or 27%, to 17 1/4, on abnormally heavy volume Tuesday, some analysts reckon the bank may now be in play. Its new market value -- some $2.25 billion -- could attract predators, they say. First Tennessee's finance chief, Elbert Thomas, says the bank doesn't comment on market rumors like this.

Hitting the Books

However, it is the OCC's action that has really set tongues wagging, because of what it may mean for other banks. The regulator decided that First Tennessee securitizations valued at $332 million shouldn't have been recorded at book value when they were kept on the bank's balance sheet. Instead, the OCC said they should have been discounted slightly to bring them in line with their likely market value, says Thomas. The change in the accounting treatment meant $12.3 million was cut out of 1999 pretax earnings, cutting earnings per share to $1.85 from $1.91.

According to Thomas, this was the first time First Tennessee had held on to a mortgage securitization and he says the accounting rules for this procedure aren't black and white. Further, he said officials and the bank's auditor,

Arthur Andersen

, believed their original treatment was "reasonable." Arthur Andersen declined to comment.

The regulators late last year

said they intended to focus on valuation of so-called securitization residuals, which are the segments of securitizations that are retained by financial institutions. These residuals can be manipulated to make a bank look better than it is.

But Charles Peabody, banks analyst at New York-based

Mitchell Securities

, says the OCC's move could be a sign that the regulators are broadening their scrutiny of securitizations beyond residuals. (Peabody rates First Tennessee a sell and Mitchell has done no underwriting for the bank.) "I fully expect to see

this type of examination elsewhere," says Peabody.

However, Mike Brosnan, deputy comptroller for risk evaluation at the OCC, denied that regulators are widening the scope of their securitization inspections. Brosnan declined to talk about First Tennessee, citing his agency's practice of not commenting on individual institutions.

It's possible that First Tennessee's problems might spring up at banks that do a lot of mortgage lending, like

Wells Fargo

(WFC) - Get Report

. Wells stock was off 3.1% Tuesday even though other bank stocks rose around 1%, going by the

KBW Bank Index

, suggesting investors felt pressures in the mortgage market may be hitting the bank. Wells declined comment.

Vulnerabilities

But Lisa Welch, a co-manager for the

(FRBAX) - Get Report

John Hancock Regional Bank fund, says the revenue mix in First Tennessee's mortgage operation was more vulnerable than other banks'. (Welch's fund owns First Tennessee.) Mortgage businesses can hold up when interest rates rise if they get substantial from so-called mortgage-servicing income, the money received for collecting on, and administering, loans. Thomas confirmed that the relatively low amount of servicing income had worked against the bank in this environment.

While First Tennessee is hardly floundering, some now think it's vulnerable to a takeover. Jennifer Thompson, banks analyst at

Warburg Dillon Read

, names two banks that might find First Tennessee a nice fit:

Wachovia

(WB) - Get Report

and

Firstar

(FSR)

. Wachovia and Firstar declined to comment on acquisition speculation. (Thompson rates First Tennessee a hold and Wachovia and Firstar buys, and her firm has done no recent underwriting for any of the three.)

Thompson says Firstar has expressed interest in expanding into the Southeast, while Wachovia may want First Tennessee's commercial and consumer banking businesses, and would jettison the mortgage business after a possible acquisition.

As originally published, this story contained an error. Please see

Corrections and Clarifications.