Tennessee Commerce Bancorp has come up with a novel solution for settling a past-due loan made to another bank holding company: forgive the loan and take control of the borrower's two subsidiary banks.
The $1.5 billion-asset Tennessee Commerce announced Thursday that it intends to acquire controlling interests in Peoples State Bank of Commerce in Nolensville, Tenn., and Farmers Bank of Lynchburg in a rare debt-for-equity exchange that would give Tennessee Commerce two years to decide whether to keep the banks or sell them.
The banks are owned by Citizens Corp., a holding company whose principal owners have fallen behind on a roughly $30 million loan to Tennessee Commerce. Under terms of the deal, Tennessee Commerce would exchange the debt for more than 90% of each of the banks' common stock.
In a news release, Tennessee Commerce said it is one of the first banks to consider a so-called "debt previously contracted" transaction to acquire other banks. It did not reveal when the deal would close, but said that upon its completion it intends to hire an investment bank to help it decide whether to hang on to the banks or sell them.
At this point the deal does not require regulatory approval, though Tennessee Commerce said it has kept its regulators abreast of its plans. It would need regulatory approval if it intends to acquire the banks outright.
Tennessee Commerce did not say why Citizens Corp.'s owners had fallen behind on the loan, but data from the Federal Deposit Insurance Corp. show that the two banks have struggled of late. Farmers, with $175 million of assets, lost roughly $7.5 million in 2009 and 2010, while the $200 million-asset Peoples lost nearly $5 million in that same span.
Lawrence Kaplan, an attorney at Paul Hastings in Washington who is advising Tennessee Commerce, said that the transaction would allow Tennessee Commerce to convert a bad asset into something that has value.
"Without doing this, they are essentially stuck with a $30 million nonperforming loan," Kaplan said in an interview.
While such debt exchanges are rare, this is not the first case.
Mercantile Bancorp Inc. in Quincy, Ill., completed a similar deal in late 2009, when the multi-bank holding company transferred ownership of its $320 million-asset HNB National Bank unit in Hannibal, Mo., to R.
Dean Phillips, its largest shareholder and the sole owner of Great River Bancshares Inc. in Quincy, Ill. In exchange for ownership of HNB National, Phillips agreed to extinguish $28 million of debt.
Peoples and Farmers combined have 11 branches spread throughout Tennessee.
In a news release, Tennessee Commerce Chairman and Chief Executive Officer Mike Sapp said that the deal "sets the stage for several positive long-term options. These banks can either be enhanced and divested or can provide a potential footprint of branches that will be strategically advantageous to Tennessee Commerce."
Tennessee Commerce has been wrestling with credit-quality problems itself of late. On Thursday, it announced that it lost $12 million in the second quarter as it continued to aggressively write off troubled loans to comply with a consent order from its regulators. It marked the second straight quarter in which the company reported a loss.
Tennessee Commerce's shares plunged 34% Thursday, to close at $1.61.
