Mississippi's Cadence Financial Corp. and Trustmark Corp. seemed to be a near-perfect match. Both had competed in neighboring markets for more than a century, and their union would have created an $11 billion-asset Southeast powerhouse.
But the marriage fell apart Wednesday when Cadence jilted Trustmark in favor of a higher-priced offer from a cash-loaded blind-pool investor group, Community Bancorp LLC of Houston.
To add insult, Trustmark found out about the breakup in a letter just before the new deal was announced to the public.
Analysts say that, while this case is more dramatic than most, community bank acquirers would do well to view it as cautionary. That's because Community Bancorp, with $900 million in equity capital, is among a growing number of equity-backed groups turning to ailing institutions as a way to enter the banking business — and they have plenty of money to spend.
Investors backing such groups "want them to put it to work sooner rather than later," said Mark Muth, a senior research analyst at Howe Barnes Hoefer & Arnett Inc. "And that definitely adds to competition."
Executives of Trustmark say while they were surprised by Cadence's decision, that these days it's hard to be shocked.
"I've learned that nothing is ever certain and you have to be prepared for the unexpected," Trustmark's president and chief operating officer, Jerry Host, said in an interview after the announcement by Cadence, which is based in Starkville.
Trustmark, based in neighboring Jackson, was notified that the deal was off Wednesday morning after Cadence's board approved the agreement with Community Bancorp the previous evening. Host said Cadence paid $2 million for terminating the agreement, which will help cover Trustmark's costs associated with the deal.
Host said the $9.3 billion-asset Trustmark will look for other potential acquisitions within its markets. Trustmark likely will have plenty of opportunities, analysts said, yet it will face competition for attractive targets.
"We are definitely seeing a metamorphosis in the M&A market from FDIC deals to open bank M&A," said Brett Rabatin, an analyst with Sterne, Agee & Leech. "There's going to be a lot of capital chasing fewer assets."
Several equity-backed groups have succeeded in striking deals within the past month. In late September another Texas group, Carlile Bancshares Inc., sitting on $328 million in capital commitments, announced it was recapitalizing Treaty Oak Bank in Austin as a way to get into the banking business.
Also, TIB Financial Corp. in Naples, Fla., closed on a $175 million recapitalization Sept. 30 from North American Financial Holdings Inc., a group that raised $900 million last year primarily to bid on failed banks. The $1.7 billion-asset TIB previously had deals on two separate private placements.
These pools "want to pay more than a bank because they need a platform," said Dan Bass, a managing director at FBR Capital Markets
Community Bancorp had three years in which to deploy $900 million in capital commitments from a blind-pool comprising pension funds, foundations, endowments and insurance companies.
Paul Murphy, Community Bancorp's director and chief executive, said in an interview that the company pursued Cadence because of its presence in five Southeast states, which Community Bancorp will leverage to bid on failed banks. The goal is to create a $10 billion-asset franchise, much as Murphy did in his previous role as chief executive of Amegy Bank of Texas in Houston. He helped build Amegy into an $11 billion-asset institution before selling to Zions Bancorp. in 2005 for more than four times tangible book value.
In the end, Cadence, which has been operating under an order to raise capital ratios, just couldn't pass up Community Bancorp's offer. "Trustmark has an excellent franchise … but the whole issue for us was capital," Cadence's chairman and chief executive, Lewis Mallory, said in a conference call Wednesday.
Also, without an existing bank, Community Bancorp plans to retain all of Cadence's employees, management and directors. Mallory said that was a key factor.
The only group that will not remain on board is Cadence shareholders. Community Bancorp agreed to pay shareholders $2.50 a share in cash, for a total price tag of about $30 million. This allows Community Bancorp to buy out all 4,500 shareholders and take the $1.9 billion-asset Cadence private. Trustmark had offered a stock-for-stock deal valued at $2 a share.
The deal is expected to close by the first quarter, pending approval by regulators and Cadence's shareholders. Though analysts don't expect many more 11th-hour agreements like this one, they say the community bank M&A market will likely heat up.
"This won't be something you see that often," Rabatin said. "But it tells other banks that there's going to be some competition out there."