Tuesday afternoon, Dispatch publisher Birney Imes sat down with Cadence Bank CEO Lewis Mallory to talk about the recent purchase of the bank by Trustmark National Bank of Jackson for $53.8 million.
Of that purchase price, $23.8 million, or $2 a share, goes to Cadence stockholders; $30.05 million of the purchase price goes to the treasury for $44 million in preferred stock purchased by the government in the Troubled Asset Relief Program (TARP).
Mallory, 67, has been president of the bank since 1974.
Editor’s note: In the interest of brevity, some of Mallory’s responses were edited for length.
Can you just give me a little bit of history on Cadence?
Cadence operates on a charter that is a 125 years old. The charter dates back to 1885.
How long have you been with the bank?
Forty-five and a half years, a long time. I came to the bank in June of ’65.
In what capacity was that?
I came as a management trainee. At that time it was People’s Bank, and it was a $6 million bank. It had one branch. The main office was downtown on the corner of Main and Lafayette streets. And then it had one branch on 12 in the Southdale Shopping Center.
People’s Bank made a strategic decision to create a regional bank in east Mississippi. And you have to keep in mind that in those days, the late ’60s early ’70s, you were restricted in branching. You could not go beyond a 100-mile radius of your home office. And you could not branch across state lines. What we wanted to do was create a bank in this part of the state and we wanted it to be a national bank. To do that either required a name change or it would require us to alter the name People’s Bank … We were able to negotiate a merger with the First National Bank of Monroe County. That was done in 1974 and subsequent to that with National Bank of Commerce in Columbus. It was from National Bank of Commerce in Columbus that we took our name.
I think the question on everybody’s lips is what happened; what were the decisions made that got us to this point?
Cadence accumulated a concentration of residential construction and development loans in its new expansion markets which were primarily in Memphis, Birmingham and middle Tennessee — Franklin and Brentwood, south of Nashville. That type of credit just suddenly stopped on a dime. The mortgage market just absolutely quit in its tracks.
We had no sub-prime loans. But our loans and hundreds of other banks loans around the country were caught up in this wave of just a complete stoppage of the mortgage market.
So were you over-leveraged?
No. What happened was you had builders and contractors in these markets that could not sell their product. There was no demand. Demand just stopped. And when they stopped, we had loaned them the money to build those houses and develop those subdivisions and when the demand for that just stopped, these builders were left without a source of income.
Well, how did Cadence get hit so hard and other banks not?
A lot of banks got his hard. Where I think we allowed ourselves to become vulnerable was that we allowed ourselves more of a concentration in this kind of credit than we normally would have. And so when the market just stopped, it quit, we had more exposure than we would have ordinarily had.
And then you went into Georgia and Florida?
Florida (Sarasota and Bradenton) purchases have been OK. They had a minimal exposure to residential construction and development loans. And unlike, so many Florida banks they have been much less adversely affected.
And Georgia?
Georgia was in Blairsville. And it was a smaller bank, the bank was about a $75 million bank. You cannot branch into Georgia. And we felt that was a prudent way to get into it (the Georgia market). That economy up there, when this real estate market dried up; they were murdered by it. If you look, there have been a lot of banks in north Georgia that have suffered from this.
Is there a purchase, policy change or personnel change that you look back on and say, “I wish we hadn’t done that?”
No, I don’t , not from that standpoint. We expanded in those markets because we needed loans. We had a large market share, fortunately, in this Mississippi market. And our ability to continue earning assets was very limited. … I think the basic decision that we made to put ourselves in markets where the banks could access growth again, access loans was the right decision. It was absolutely the right decision. I think we got caught in a historically severe real estate recession.
You’ve got to be affected personally by this.
Yes, obviously the bank has been my life. I love it. I love what I do. I love the people that I do it with. It has been a joy. So naturally, you feel a great disappointment when you experience something like this. I think the decision that the board made to partner with Trustmark, was absolutely the right decision for Cadence. And I think we have selected a good strong partner.
Was that a forced marriage?
No. It was not.
What would have happened if it had not happened, if the merger had not taken place, they hadn’t purchased?
I think we would have had to continue to search for capital and I think that the longer that dragged on, the more difficult it was for our employees. The greater the uncertainty that could exist in the market. And that is just not a healthy situation for anybody.
We were dealing with a regulatory order that put us in a position where we really could not manage our balance sheet. It was extremely difficult for the bank to generate earnings in that environment. As long as we could not generate earnings and as long as we were under a consent order our stock was not going to go anywhere. It was stuck in the mud. And so if you pull all that together, the prudent thing for the board was is there an alternative available to us that would allow us to move out of that environment and to get again into an environment that is more constructive. And it creates something for our shareholders. More positive environments.
How many jobs do you think will be lost?
I don’t know. That is strictly a decision that Trustmark will have to make.
Have there been opportunities along the way to sell Cadence?
Let’s see how I want to answer that. The way I would answer that … The board, this board over the years has always understood what their fiduciary responsibilities was to shareholders. And until this time, had not received any offers that it felt it should seriously consider.
So you received offers, you just didn’t feel like you should consider them?
That would not be entirely accurate. I’d rather just stay away from that part.
Have you experienced personally people’s anger? Has it been directed at you personally?
I think I know that we have some stockholders out there who are angry, who are frustrated and upset. I would rather avoid the word anger, but frustrated and upset.
I have personally felt a minimal amount of that. I have had a minimal amount of that expressed to me personally. I’ve been … I guess people have been very considerate. I know that people are frustrated and I know that they are upset. I am a stockholder too and we’ve all had to experience the reduction in the stock price.
By my calculations, about $300 million in stockholder value is gone and about $12 million a year in dividends. That’s a huge hit for a community. (Editor’s note: The $300 million is the difference between the stock’s historical highs, slightly above $28 in June ’02 and December ’04, and $2. Cadence stock price at the beginning of 2007 was above $21. There are 11.9 million shares of common stock.)
Well let’s see, those numbers would be about right, I think. Yeah, that’s tough.
If you could say anything to shareholders, what would it be?
What I’ve told you, that the bank had too much concentr
Birney Imes III is the immediate past publisher of The Dispatch.
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