Amsouth: Merger Not The Culprit

Was it the merger or wasn't it?

Amsouth Bancorp, stung by its exposure to rising short-term interest rates and credit quality problems, said Friday that it will miss earnings estimates for the rest of this year and plans to undergo a hefty restructuring.

As the Birmingham, Ala., company prepares to take a $280 million pretax charge for the third quarter, analysts who follow it are suggesting that its problems are more a product of its $6.3 billion merger a year ago with First American Corp. than anything else.

But $42.5 billion-asset Amsouth denies that assertion. In an interview Friday, vice chairman and chief financial officer Sloan Gibson said that factors associated with the merger were not the only issues that led to the restructuring.

"We're dealing with what the whole industry is faced with, and what we believe we're doing is dealing with those issues very aggressively," Mr. Gibson said. "The merger has really gone very well and we're on track to reach all of our cost savings."

Amsouth officials had been aware for some time that the market was penalizing the bank for its merger.

Indeed, they have made some efforts in recent months to convince investors that their marriage was a cut above the rest - in terms of fit and, especially, in terms of execution. At the same time, the bank was unequivocal in telling the market that no further acquisitions were on its horizon.

In June, Mr. Gibson told American Banker that his company had "moved farther and faster … than any other large bank merger integration."

Late last week, however, the Street was having none of it.

"Directly or indirectly this had something to do with the merger," said John Moore, an analyst with Wachovia Securities. "The level of margin contraction is greater than what we were expecting from most banks."

Michael Granger, an analyst with J.P. Morgan Securities, said the way Amsouth accomplished the merger heightened its interest rate risk.

"Because they did the merger they leveraged the balance sheet more than they would have otherwise," he said. By adding investment securities to the balance sheet to help make the merger happen, Amsouth became more exposed to rising rates, he explained.

Because of the restructuring, Amsouth's per-share operating earnings will be 33 cents to 34 cents in the third quarter and 35 cents to 36 cents in the fourth. Analysts polled by First Call/Thomson Financial expected 44 cents and 47 cents respectively.

Amsouth said it expects 2001 earnings to be in the $1.44 to $1.55 range, sharply below the $1.96 First Call consensus. But Mr. Gibson said that's because the company will have shed $5 billion of assets by next year and revenue levels won't be the same as they are now.

"We are obviously disappointed by this earnings shortfall, but the franchise is solid and the aggressive steps we are taking to address these problems will make the company stronger," said Amsouth president and chief executive officer C. Dowd Ritter in a statement.

To pay off short-term borrowings, the company will sell $5 billion in low-yield securities and auto loans. The move will result in a $170 million pretax charge.

The remaining $110 million in pretax charges will shore up the damage interest rates did to certain syndicated loans Amsouth made with large corporate borrowers.

"Overall credit quality remains strong, and this plan will address these issues immediately rather than allowing them to linger for the next several quarters," Mr. Ritter said. The restructuring will lessen interest rate risk, improve earnings, and improve earnings over time, he added.

Shares of Amsouth took a beating Friday in trading on the New York Stock Exchange, falling by more than 20% at one point.

Amsouth's Financial Impact
On 1999-2001 Earnings Per Share
Fiscal Period Amsouth's Revised Estimate ($) * First Call Estimate ($) ** Comparable 1999 EPS
Third Quarter 0.33 to 0.34 0.44 0.44
Fourth Quarter 0.35 to 0.36 0.47 0.41
Full Year 1.48 to 1.50 1.71 1.53
Full Year 2001 1.45 to 1.55 1.96 -
Source: Amsouth, Thomson/First Call
* as of Sept. 22, 2000
** as of Sept. 21, 2000

 


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