“I feel like there’s been a death in the family. I am sad. I’m mad. I’m disgusted. This was so unnecessary.”
These were the words of a Columbus businessman and Cadence Bank stockholder who has seen the value of his stock sink from a high in 2004 of $28 a share to $2, the price Trustmark agreed to pay Cadence shareholders in its bid to buy the ailing bank announced two weeks ago. For this businessman, who did not want to be named, the loss was $1.5 million.
“I’m grieving,” he said. “This (bank) was a big part of the fabric of the community.”
Though the amounts differ, there are hundreds of stories like his — the Cadence teller who socked every penny of her savings into the bank’s stock for her retirement; the widow of a successful auto dealer who lost a quarter of a million dollars; the savvy developer who amassed blocks of the stock in hopes of someday being appointed to the bank’s board of directors.
What these shareholders had in common was their unshakable faith in an institution that has been part of the local landscape for generations. That faith led them to sit, transfixed, as the unthinkable happened. Compare it to watching a train wreck in slow motion. The wreck took years to happen, but when the dust finally settled, gone were $300 million in shareholder equity, $12 million in annual dividend payments and as many as 100 jobs in Columbus and Starkville.
For this report we spoke with past and present board members and former employees. With the exception of Cadence CEO Lewis Mallory, who sat for an interview with this newspaper last week, and James Prude, former NBC stockholder and board member, all of the people interviewed for this story would only speak on the condition of anonymity.
“I rode it down,” said the businessman. “I couldn’t get out. It was like bailing out on an old friend. I’d banked with them for 50 years, since I had a paper route.”
How did it happen? How did a bank fail with over a century of history, a survivor of depressions and recessions, a bank that for years posted an unbroken string of record profits, a bank guided by a board of highly regarded businessmen and led by a well-respected banker who had spent more than 35 years in the president’s office? How did they, to use a phrase Mallory used last week, lose the bank?
Some are quick to use the words arrogance and greed. The bank’s CEO and a board member blamed it on a disastrous economy. Critics of the bank’s leadership all seem to agree on one thing: The demise of Cadence came as a result of a series of spectacularly bad decisions fueled by management’s eagerness to move beyond Mississippi into fast-paced, less predictable and unfamiliar markets.
The board
Cadence operates on a charter that is 125 years old. In the 1960s, when current CEO Mallory went to work for the bank, it was People’s Bank of Starkville with $6 million in assets. The bank acquired First National Bank of Monroe County in 1974 and then National Bank of Commerce in Columbus. With that purchase, People’s Bank became NBC, which became Cadence Banking in 2006.
At one time Amory heavy equipment dealer J.R. Scribner owned 21 percent of the stock of NBC Bank. As one NBC officer from that era put it, “Mr. Scribner was the 800-pound gorilla in the room.”
“When Mr. Scribner called from Amory and said he was coming in, the floors were mopped and the grass cut,” said someone familiar with the bank at that time. Scribner dominated the NBC boardroom, and the bank fared well with a conservative approach rooted in personal relationships.
After Scribner’s death in 1992, his daughter, Sally Prude, and her son, James, took seats on the board, and continued the family tradition of close-to-the-vest, hometown banking. Board members say the Prudes were savvy business people who, like their forebear, weren’t shy about challenging CEO Mallory. Traditionally bank boards are comprised of successful businessmen, who know little about banking and who rely largely on the bank president for information and guidance.
About some of the bank’s bad decisions one board member said, “I voted for a lot of this stuff, but I don’t think we were getting all the info.”
Another said he thought he was getting about 30 percent of what he needed to know.
The acquisition of a West Point bank and First Federal Savings and Loan diluted the Prude’s holdings to 13 percent ownership and in May of 2001 Sally and James Prude sold their stock for $25 million.
“When the Prudes left, Lewis could dominate,” said one board member from that time.
“Lewis could tell all of them to stand on their heads and they would do it,” said a former board member. Another referred to Mallory as the Pied Piper.
A board member vigorously disagrees with that characterization. “This is not a docile board,” he said. “This never was a one-man show. No one had an agenda.”
The board is comprised of Mallory and Mark Abernathy of Cadence and Allen Puckett III, James Galloway Jr., Robert Caldwell Jr., Robert Cunningham, Robert Calvert III, John Dowdle, Harry Smith, Sammy Smith and Clifton Hunt.
The expansion
James Prude now lives in Dallas. For 15 years he was a bank examiner for the Office of the Comptroller of the Currency. Though he and his mother sold their stock in 2001, he has kept a close watch on Cadence since.
“In 2000 NBC was a billion dollar bank making a million dollars a month and paying half its income as dividends,” said Prude. “There was no need to do anything else other than sit there as a cash cow. The bank was out performing its peers and paying a handsome dividend to its shareholders.”
Mallory and his heir apparent, Mark Abernathy, thought differently. Abernathy had been hired from Nations Bank around 1990 in response to a bank examiner’s demand that Cadence put a succession plan in place.
Abernathy, president and chief operating officer, was never fully embraced by bank staff, and, in time, inserted himself between Mallory and bank management. Abernathy, along with CFO Richard Haston, is credited with masterminding the bank’s expansion. In 2005 and 2006 Cadence bought Enterprise Bank in Memphis and opened branches in Franklin and Brentwood, Tenn., and Hoover, Ala. It also bought a bank in Blairsville, Ga., and Sarasota, Fla.
In those new markets, the bank wasted no time jumping into the overheated construction and development boom and, by extension, the toxic sub-prime market.
The move represented a sea change in Cadence’s philosophy.
“We were very conservative,” said someone who was a bank officer at the time. “We weren’t going to take any losses and we weren’t going to hit any homeruns.”
After their shopping spree in the Memphis, middle Tennessee and Georgia markets, Mallory and company began swinging for the fences.
According to James Prude, in 2002 less than one-third of the bank’s capital was exposed to construction and development loans. In other words, said Prude, “you could have written off all those loans and you would have maintained two-thirds of your capital and still have been a well capitalized bank. By ’06 the bank had 2.3 times its capital in C & D loans. The risk profile of the bank had changed dramatically.
“That type of credit just suddenly stopped on a dime,” said Mallory last week. “The mortgage market just absolutely quit in its tracks.”
“When they got to Memphis, they were lost,” a former board member said. “They made some classic mistakes a banker might have made but a businessman would not have.”
“No real due diligence was done,” said an officer who was with the bank at that time. “They bought in at the top of the market, and they didn’t give themselves time to digest what they had bought.
“Arrogance played a role in this,” he continued. “A good banker in one market is not necessarily going to be a good banker in another market.”
“An analyst told me Cadence paid four times book value for the Memphis bank,” said Prude.
Not only did Cadence pay a premium for Enterprise Bank, it faile
Birney Imes III is the immediate past publisher of The Dispatch.
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