Placer Sierra Bancshares' decision to pull back its commercial real estate lending to focus on higher-yield commercial and industrial loans did not go over well with investors and analysts.
The Sacramento company's shares tumbled Wednesday morning after James Abbott, a Friedman, Billings, Ramsey Group Inc. analyst, downgraded the stock and sharply lowered his price target.
Though the stock recovered somewhat in the afternoon, it still closed at a 52-week low of $21.03 a share.
In an interview, Mr. Abbott said he downgraded the stock to "market perform," from "outperform," and lowered his price target by $7, to $24 a share, because Placer Sierra's management told him it planned to share more of its commercial real estate loans with other banking companies until deposit costs fall and spreads widen.
"The risk is that they are setting themselves up to lose [loan] market share," he said. "Plus, anytime a bank participates out a loan, the other bank gets all the information for the customer."
But in an interview Wednesday, Placer Sierra chairman and chief executive Ronald W. Bachli said that Mr. Abbott completely missed the point.
Placer Sierra is sharing the loans mainly to reduce its concentration in commercial real estate, which makes up 51% of its loan portfolio, while adding more commercial and industrial loans, he said.
"The real issue is that we're focusing more on C&I loans, and we want those to be a greater proportion of the total portfolio," Mr. Bachli said. "That's why we hired 12 new people aimed at increasing C&I loans and gathering more deposits from middle-market customers."
Currently, such loans make up 10%, or $170 million, of the $2.7 billion-asset company's loan book.
Placer Sierra is the parent of Placer Sierra Bank. Though it has just one charter, the bank operates 49 branches under five separate brands in northern and southern California.
After the market closed Tuesday the company reported that second-quarter earnings rose just 1.7% from the same quarter last year, to $6.2 million. In the earnings announcement, Placer Sierra said that it was lowering its full-year earnings guidance to a range from $1.49 to $1.51 a share, from earlier guidance of $1.78, because it expects deposit costs to increase by as much as 180 basis points this year.
Todd Hagerman, an analyst at Fox-Pitt, Kelton Inc. in New York, said that Placer Sierra is not alone in wanting to diversify its portfolio and make more higher-yielding C&I loans.
"But that's easier said than done," he said. Competition in that sector is especially fierce, and "commercial borrowers are doing very well financially and don't necessarily need to borrow money from banks."
Placer's customers are only using a little over 30% of their credit lines, Mr. Hagerman said.
He did not downgrade Placer Sierra's stock, but, like Mr. Abbott, he said that he was sorely disappointed in the company's strategy.
"They seemed overly concerned with managing investors' expectations, but they should be more focused on just going out there and slugging it out to get their fair share of the business," Mr. Hagerman said.
