Just as any potential borrower looks over a loan offer and decides whether to take it, Renasant Bank closely examined the Treasury Department’s late 2008 offer of a loan to help it through a banking slump of historic proportions.
Thanks, but no thanks, came the answer from the regional bank based in Tupelo.
Renasant executives did not like the hardball terms then-Treasury Secretary Henry Paulson had included in the offer for participation in the Troubled Asset Relief Program, or TARP. Paulson, after all, came to Treasury as a Wall Street banker accustomed to the art of the deal and wasn’t going to refrain from exerting leverage.
He insisted the common shares Treasury would buy would be at the falling share prices of the day and would have to be bought back at higher market rates when stability returned. Throw in the annual dividend requirement of 5 percent, and the deal lost even more of its appeal, said Renasant CFO Kevin Chapman, who served as the bank’s chief accounting and strategy officer when the invitation arrived to join the TARP.
Beyond those terms, came language that gave Treasury the option of adding new conditions later on, Chapman said. “It was too opened-ended for our taste.”
Another disincentive was the speed at which Treasury expected banks to decide on the offer, he said. “It was being forced down on us very quickly. We didn’t have much time to react. The document we got said the ‘terms of this agreement can change at any time.’”
At that point, Renasant began thinking like a potential borrower or lender. “We would never enter into a deal with a customer that said the terms can change at any time.”
The publicly-held Renasant, at the time a multi-state regional institution with assets of around $4 billion, further worried that taking TARP would limit its ability to pay shareholder dividends, according to Chapman.
The capper came with the turn of public sentiment after the 2008 election. TARP had gone from first being seen as a firewall to later being a Wall Street bonanza paid for by taxpayers. This perception led to even more federal handcuffing of decision making in the banking sector, Chapman said.
“Within three months it became corporate welfare so that banks that took this will ‘do this and will not do X, Y and Z.’”
Ultimately, the need for capital was not sufficient to accept the trade-offs involved, the CFO added.
“We felt we had our arms around where our actual capital position was.”
Smoke on the Horizon
Something else happened on the way to the banking crisis that would heavily influence Renasant’s decision to reject TARP.
Renasant executives peeled back the layers of circumstances that led to a default of a Birmingham real estate developer’s loan in fall 2007, when the real estate market still enjoyed a good measure of wheeling-and-dealing.
“The first hint that something was wrong came out of our Birmingham group,” Chapman said. “They had a developer who ran into cash flow problems.”
Those problems, the Birmingham lenders discovered, came from poorly performing residential developments in Florida.
“It opened our eyes,” Chapman said. “We took that opportunity to go look at our exposure throughout. I think that helped us later when we had to decide on TARP. We had our arms around our risks,”
In retrospect, that developer’s default likely saved Renasant from a lot of trouble and strife later on, the CFO added.
Instead of doing a foreclosure and workout in routine fashion, Renasant asked, ‘Why?’”
“If we had not asked that question, we would not have found out about Florida,” which soon became ground zero for the foreclosure crisis, Chapman said.
By 2008, Renasant had battened the hatches and prepared to ride out a foreclosure storm that quickly spread nationwide from its origins in Florida and California. Too many banks had made loans to developers who sold to borrowers who had subprime loans they couldn’t repay, he noted.
“In 2008 we halted. We didn’t divest but we didn’t do anymore” deals.
Meanwhile, some of Renasant’s competitors “went all in” that year, increasing their exposure.
At various points of 2009, the Mississippi banking sector’s problems seemed to worsen. But Renasant was thinking of returning to the offensive, Chapman recalled.
“2009 was where we started looking externally again,” he said. “We were looking at new markets and starting to grow again. 2010 is when we came back and raised capital on our terms” through issuing common stock,
Not being beholden to TARP helped on the capital quest, giving Renasant bargaining leverage some of its brethren that took TARP did not have. “With some TARP banks the investor knew you were going to have to pay this off at some point. It put downward pressure on stock prices and caused capital raises too be too expensive.”
As time went on, some of the smaller TARP banks found it easier to be acquired than to pay off the TARP tab, according to Chapman. “It was actually better to sell than to issue the maximum of new capital to pay off TARP.”
By 2011, Renasant was among the acquirers, though the distressed Georgia banks it took over had been sold through the assistance of the FDIC.
Chapman said Renasant has out-performed the banking indexes the past five years, largely through the heads-up the Birmingham foreclosure provided and the ability to raise capital that refusing TARP provided. “TARP is one factor but it was also decisions we” were able to make by not taking TARP, he noted.
Today, Renasant is a $5.7 billion bank that recently acquired First M&F Corp. of Kosciusko in a $143 million stock purchase. Analyst Stern Agee said it expects Renasant’s earnings per share to gain a “strong lift” in 2014 through annual savings from the acquisition.
Assessing Mississippi banks on the whole, Chapman said he thinks they performed well throughout the crisis cycle, especially publicly owned ones. “The public banks if anything have come out of this cycle stronger.”
Independent community banks have also shown signs of renewed health post-crisis, he noted.
But “the compliance costs for all banks has increased coming out of this cycle,” Chapman added.
As do most bankers, Chapman has mixed feelings about TARP five years later. “The history books probably will not be kind,” he said of the banking sector rescue.
“Whether or not it was the right move, it provided stability in a very unstable time. I’m not going to say it was right or wrong.”
But any judging must be done in the context of the times, he added. “It took steps to calm things down and let rational decisions be made.”