Shares of First American Corp. fell nearly 14% Tuesday after the Nashville banking company said its 1999 earnings would fall short of expectations.
The $20.7 billion-asset company said Monday that it would earn $2.70 to $2.75 a share this year, versus a consensus estimate of $2.99, because of problems encountered while integrating the operations of Deposit Guaranty Corp., which it acquired in May.
After trading as low as $35.4375 in mid-morning, First American shares closed Tuesday off $4.0625, at $37.
The action came amid a broad stock market selloff, as investors focused on earnings worries in the technology, manufacturing, and industrial sectors. The Dow Jones industrial average fell 218.68 points, or 2.12%, to 9,671.83.
The Standard & Poor's bank index dropped 2.3%, as analysts said First American's earnings markdown could be just the first in a string of adjustments at regional and superregional banks.
"Some of these banks are becoming more revenue-challenged," said Robert Patten, a Lehman Brothers analyst. Earnings estimates this year will reflect 8% to 10% growth at some regional banks, rather than the 12% growth investors have become accustomed to, Mr. Patten predicted.
"This is not an isolated event," Credit Suisse First Boston analyst Michael Mayo said. "The industry is generally going to have more negative earnings surprises than positive surprises."
In First American's case, bank customers defected amid service quality lapses as the bank started to integrate Deposit Guaranty's operation with its own, the bank said.
The bank's efforts to cut costs quickly prompted some customers to close accounts, First American chief executive Dennis Bottorff said. Fewer tellers meant longer lines, and combining the bank's operations centers led to more errors, he said.
Service quality has improved to pre-deal levels, Mr. Bottorff said, and the bank is using its 2,000-member sales force to retain customers, as well as open new accounts. Mr. Bottorff added that the bank has lowered prices on some of its products.
The attrition is "certainly disappointing, particularly because it's from their core business," said James K. Schmidt, portfolio manager of John Hancock Advisors regional bank fund, one of the largest First American shareholders.
The Nashville bank acquired Deposit Guaranty, Jackson, Miss., for $2.7 billion in May. First American was criticized for paying 25 times earnings for Deposit Guaranty.
Mr. Bottorff acknowledged that the slide in First American's share price could now peg First American as a takeover target.
"We've been saying for years that there will be companies that will be high-performing, that will be advantaged in terms of consolidation," he said. "Certainly what has happened has placed a wider gap between our values and the values of these companies."
Also contributing to First American's earnings adjustment is a $7 million to $8 million loss that First American will have to absorb for a loan to United Companies Financial Corp., a subprime consumer lender that filed for bankruptcy protection this month.
Twenty-two other banks were involved in the loan to United Companies. Hibernia National Bank recently said the loss affected its earnings.
Analysts indicated that First American's franchise would certainly be attractive to a bevy of banks hoping to beef up their Tennessee presence.
Salomon Smith Barney analyst Jacqueline Reeves lowered her rating on First American and dropped 1999 earnings per share $0.25 to $2.75, but noted that the bank could fetch $55 to $60 per share if it is bought.
Keefe Bruyette & Woods analyst Joseph Roberts lowered his 1999 earnings estimate to $2.65, but said that the bank's dominance of the mid-Tennessee market makes it a "jewel" for an acquirer hoping to expand there.
Integration blunders are hardly new in banking, said analysts, who pointed to Wells Fargo & Co.'s painful consolidation of First Interstate Bancorp. in 1996 as another example.