Trustmark has reached a deal to take over troubled Cadence Bank, a $1.87 billion regional bank holding company that federal regulators had under a consent order that expired Sunday.
Both banks are publicly held with headquarters in Mississippi, Trustmark in Jackson and Cadence in Starkville. They announced the deal late Monday, a day after a deadline set by the Office of the Comptroller of the Currency for Cadence to significantly increase its capital reserves.
They “definiteive” agreement calls for Cadence (NASDAQ:CADE) to merge into Trustmark Corp. (NASDAQ:TRMKto ), with a scheduled completion of the merger in early 2011.
Cadence has 38 offices across Mississippi, Tennessee, Alabama, Georgia and Florida, with states with $1 billion in loans and $1.5 billion in deposits as of June 30, according to press statement issued by Trusmark.
Under terms of the definitive agreement, Cadence common shareholders will receive 0.096993 shares of Trustmark common stock for each share of Cadence in a tax free exchange. Trustmark will issue approximately 1,155,104 shares of its common stock forall issued and outstanding common shares of Cadence. Based upon a price of $20.62 per share of Trustmark, the transaction is valued at about $23.8 million, or $2 per Cadence common share.
Trustmark offered to buy the $44 million of Cadence preferred stock and the associated warrant issued to the U.S. Department of the Treasury under the Capital Purchase Program, or CPP, for $30.05 million in cash. Treausry lent the money to Cadence under the Troubled Asset Relief Program, or TARP.
Treasury has indicated its willingness to agree to sell its Cadence preferred stock and warrant for the $30.05 million.
Richard G. Hickson, chairman and CEO of Trustmark, said Cadence’s 125-year-old history in the region and long-standing customer relationships in its legacy markets will strenghten Trustmark’s position as an already strong regional bank.
“This transaction provides an excellent opportunity for Trustmark to enhance its franchise within the attractive Golden Triangle area (Columbus, Starkville and West Point, Ms.) as well as Memphis, Tennessee,” Hickson said in a press statement.
Further, the deal gives Trustmark entry into Birmingham, Nashville, Sarasota, and Tuscaloosa markets.
“This is a strategic, in-market opportunity that will be immediately accretive to Trustmark’s earnings per share and tangible book value,” said Hickson. “We have completed extensive on-site diligence, including review of Cadence’s loan portfolio and significant real estate collateral. We understand the inherent credit risk of the portfolio and have a proven record of managing real estate loans in a challenging economic environment.
“Trustmark’s pro forma capital ratios will continue to significantly exceed ‘well-capitalized levels, enabling us to continue to take advantage of opportunities in the marketplace,” he added.
Lewis F. Mallory Jr., chairman and CEO of Cadence, said the arrangement will “enable us to better serve our customers through increased Trustmark Corporation convenience as well as the addition of broader financial services.”
Added Mallory, “Our shareholders will be receiving shares of a strong, successful banking
The transaction is expected to close no later than the first quarter of 2011 and is subject to approval by regulatory authorities and Cadence’s shareholders as well as certain other closing conditions.
Cadence’s second quarter earnings report showed a net loss of $1.6 million and a Tier 1 leverage ratio of 5.25 percent, well short of the OCC’s order for a minimum Tier 1 ratio of 9 percent.
Cadence’s board of directors agreed to the consent order on May 19. In addition to the Tier 1 leverage ratio of 9 percent, the order gave the bank until Sept. 19 to achieve a minimum total risk-based capital ratio of 12 percent. These capital ratios are higher than the typical capital ratios required to meet “well-capitalized” standards, according to Cadence.
The consent order that expired Sunday followed an earlier formal agreement Cadence made with the OCC on April 17, 2009 to significantly increase its capital ratios by May of this year.
Cadence has said the bank’s condition is not as bleak as it appears. It noted in its second quarter filing with the Securities and Exchange Commission that “we could expect to be profitable by the end of 2011” if allowed to put accumulated liquidity in longer-term assets with higher returns instead of the short-term, low-return investments where much of the liquidity is now parked.
As with many banks around the country, Cadence’s troubles stemmed largely from investments in residential and commercial real estate. In its filings with the SEC, Cadence said it made a late entry into real estate lending in Memphis, Middle Tennessee and Birmingham and suffered the consequences of the bust.