Post-Merger First American Eyes Fee Business in Quest for Revenue

Having accomplished most of the expense cuts it was seeking in its merger with Deposit Guaranty Corp. of Mississippi, First American Corp. of Tennessee is turning its attention to revenue growth.

"The merger has gone extremely well," said First American chairman and chief executive officer Dennis C. Bottorff in a recent interview. "We still have on the drawing board plans to get the rest of the expenses out, ... but our principal focus is expanding our fee-for-service business."

That means boosting sales of annuities and investment products.

Since shortly after the merger was consummated May 1, more than 300 bankers in Deposit Guaranty offices have been redeployed for specialized product sales. As a result, the company notched an 18% third-quarter gain in noninterest revenue. A 22% increase in investment-services-related revenue, to $38 million, led the improvement.

The strategy also requires introducing and pricing products in Deposit Guaranty territory. Before yearend, First American expects to introduce its Select Rewards account program in Mississippi. It hopes that the cash and prize giveaways associated with the accounts will help retain key customers and recruit new ones.

Mr. Bottorff said market-share data indicate that Deposit Guaranty lost ground in the first quarter this year amid customer anxiety over the merger. In the deal's aftermath, the operation has "gained momentum and market share," he said.

That momentum helped fuel a 21% jump in operating earnings compared with the third quarter of 1997, despite a modest revenue slowdown. Expense reductions were a key to improving the bottom line.

Cutbacks in jobs, equipment, marketing, and supplies helped the company improve its efficiency ratio to 52.83%, excluding merger and integration costs, from 56.45% in the second quarter.

The third-quarter results, released Oct. 16, also showed that the company is beset by sluggish loan growth of 2% year-over-year and a sharp narrowing of the net interest margin, by 19 basis points since the second quarter.

Hope Willard, an analyst at J.C. Bradford & Co. in Nashville, said the merger integration appears to be going smoothly.

"It's early, but I think the progress was good," she said. "The third quarter was really the final major piece of the transition."

The $18.9 billion-asset company completed the conversion of Deposit Guaranty's systems in September. This move alone is expected to save about $15 million a year. A net reduction of about 900 jobs will mean $31 million of expense savings, Mr. Bottorff said.

First American further trimmed the old Deposit Guaranty with the mid- August sale of McAfee Mortgage Co. in Texas. The sale was expected to yield annual expense savings of $7 million. That transaction and the sale of a Nebraska mortgage subsidiary previously run by Deposit Guaranty have left First American with a focus on in-market mortgage businesses.

Mr. Bottorff said First American has thus far achieved $77 million of a targeted $88 million in revenue-enhancement synergies.

Christopher T. Kelley, an analyst at Morgan Keegan & Co., said First American still faces many hurdles in the Deposit Guaranty merger but appears to be on the right track.

"The sheer size of this deal for First American is going to make it a challenge," he said. "This is a very big job they're in the middle of. Thus far, they've been able to execute."

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