Frank Mercardante's task of improving Placer Sierra Bancshares' lackluster earnings has gotten a bit harder now that the Sacramento company is about to lose a large chunk of its core deposits.
The $2.7 billion-asset Placer Sierra disclosed Thursday that a major depositor - a mortgage servicer that is consolidating all of its operations at its Midwest headquarters - would be withdrawing all of its deposits by mid-2007. At Sept. 30 the customer accounted for 12.6% of Placer Sierra's $2.2 billion of deposits overall and a whopping 30.2% of its no-interest deposits.
Mr. Mercardante, Placer Sierra's chief executive officer, would not name the customer. In an interview Thursday, he said that replacing the deposits in an already fiercely competitive deposit market would be difficult.
"We've been implementing various initiatives to grow total deposits at least 6% over the next year," said Mr. Mercardante, who took over as CEO three months ago. "Of course, we are anxious to grow as much of that in core deposits, but those are the golden nuggets that are not as easy to come by."
In the meantime, he said, Placer Sierra has identified other ways to mitigate the loss of the deposits, including accessing lines of credit with its Federal Home Loan bank and other sources or cashing out low-yielding securities.
The news clearly spooked investors. In heavy trading, Placer Sierra's stock fell 5.6% Thursday, to close at $24.15.
James Abbott, an analyst with Friedman, Billings, Ramsey & Co. Inc. in Arlington, Va., said it is highly unusual for a banking company to have such a high percentage of core deposits from one customer. He lowered his 2007 earnings guidance on Placer Sierra to $1.40, from $1.61 per share, saying it has little choice but to resort to alternative, costlier funding sources to make up for the loss of deposits.
The anticipated hit to earnings "will also substantially overshadow the progress they would have made with their new initiatives, and will put the company a year or two behind where they would have been had this not taken place," Mr. Abbott said.
Mr. Mercardante said that Placer Sierra has hired close to 20 relationship bankers over the past year in an effort to increase both commercial and industrial loans and bring in core deposits from business customers.
Since replacing Ronald W. Bachli as CEO in August, Mr. Mercardante has also announced a number of other initiatives, including putting Placer Sierra's five separately named banks under a single brand and upgrading its computer systems so that it can better compete by offering things like remote deposit to its customers. The improvements are being rolled out this quarter and will continue through mid-2007.
Mr. Mercardante said that having one brand for all of the branches in northern and southern California could attract larger customers looking for a statewide bank. Moreover, having one brand - and a consolidated product set - could also increase cross-selling opportunities.
"While there's no question that the loss of this deposit relationship will impact earnings negatively, these other initiatives we're rolling out now and over the next year should have a positive impact, as we grow the organization organically," Mr. Mercardante said.
Mr. Mercardante had been the president and CEO of the $657 million-asset Southwest Community Bancorp in Carlsbad, Calif., when Placer Sierra bought it in June. He stayed on after the deal closed but was promoted two months later, shortly after Placer Sierra announced it was lowering its earnings guidance for the third time this year. Through the first nine months of 2006 the company earned $14.7 million, down nearly 18% from the first nine months of 2005.
Investors had generally been supportive of the change in management and strategy; until Thursday, Placer Sierra's stock was up 13% since Mr. Mercardante's promotion Aug. 15.
Mr. Abbott said that, even with the loss in deposits, most investors will not forsake Placer Sierra, because they view it as a takeover target. But he said the company would have to achieve continued earnings momentum before it could fetch an attractive price. He said he does not see that happening until the end of 2008.
"But really, it's like a house that needs a new paint job before selling, and not one with major damage like termites," Mr. Abbott said. "They've got great people to drive revenues who are well managed, but they've just been lacking a common unified mission."
