TAKING MR. RUSTY’S BANK How a visit from a federal regulator and boardroom intrigue ended Rusty Cloutier’s 33-year tenure at MidSouth Bank

by Mike Stagg - Edited by Walter Pierce

Photo by Robin May

MidSouth Bank chairman Jake Delhomme, accompanied by two fellow board members and one of the bank’s attorneys, walked from the bank’s board room on the 5th floor of the bank’s headquarters on Versailles Boulevard in Downtown Lafayette into bank holding company President and CEO Rusty Cloutier’s office just after noon on Wednesday, April 26.

Delhomme and the board had been meeting for more than three hours. “They didn’t want me in there,” Cloutier, who bank employees and officers affectionately and respectfully call Mr. Rusty, tells ABiz. “I knew it couldn’t be good.”

He was right. Delhomme, Lead Director James Davis Jr. and board Vice Chairman Joseph Tortorice Jr. (founder of Jason’s Deli) had come to take away Mr. Rusty’s bank.

“They came in and told me my services were no longer needed,” Cloutier says. Cloutier says he was then escorted out of the building.

“I was fired without cause,” Rusty Cloutier hastens to add.

Shortly thereafter, Delhomme and his team went to the office of Cloutier’s son, bank President and CEO Troy Cloutier, to deliver the same message. Troy and Delhomme were longtime friends, and Troy says Delhomme consulted with him before making the decision to accept a seat on the bank’s board of directors.

Troy Cloutier tells ABiz that the firing caught him completely by surprise. He doesn’t want to comment on what has transpired since that day but predicts that he and Delhomme “will one day be friends again.” He says that he has retained an attorney and is considering action against the bank he once led. He declined to comment on the issue beyond that.

Bank officials were not available for interviews on this story due to the federally mandated “quiet period” that precedes the release of financial results. MidSouth Bancorp expects to release its second quarter results by July 28. The bank has agreed to make new President and CEO James McLemore and Delhomme available for interviews at that time.

Rusty Cloutier, out of active banking for the first time in decades, relaxes poolside at his Lafayette home.
Photo by Robin May

The Cloutier firings came five days after examiners from the federal Office of the Comptroller of the Currency met with MidSouth management to deliver the results of a five-week review of the bank’s finances. According to the OCC’s Comptroller’s Handbook, examiners meet with bank management when they arrive at the bank (in this case on March 13) and when they have completed their examination.

There may also have been other meetings between the OCC examiners and the MidSouth management team before the exit interview, which took place Friday, April 21.

The Comptroller’s Handbook describes the purpose of the OCC examiner exit meeting as “to discuss findings, any significant issues, the areas of greatest risk to the bank, preliminary ratings, and plans for future supervisory activities.” The MidSouth management team likely knew that day what the rest of the world would learn on June 8 — that the OCC had labeled the bank a “troubled institution.”

The OCC exit meeting — and varying accounts of it — set in motion the events that led to the Cloutiers being fired the following week.

Troy Cloutier

According to Troy Cloutier, those bank officers in the OCC exit meeting with him were Rusty Cloutier, then-CFO McLemore, Chief Lending Officer Jeffery Blum and newly hired Chief Risk Officer Erin DeWitt. DeWitt’s first day at the bank was also the day the OCC examiners arrived at MidSouth — March 13.

Rusty Cloutier says there were no surprises in the meeting. “I had told the board about six months earlier what was going to happen,” he says.

The problem was the bank’s large portfolio of non-performing oil and gas related loans. By the end of 2016, non-performing assets (including commercial real estate loans) totaled $65 million out of a total loan portfolio of $1.2 billion. Although the bank had been steadily setting aside cash to cover potential losses on those assets, the money put aside by the end of 2016 ($24.4 million) represented just under 40 percent of its non-performing assets at the time.

The OCC examiners’ presence at MidSouth bridged the end of the first quarter of 2017 and the start of the second quarter. First quarter results released in May (after the Cloutiers’ dismissals) showed MidSouth had made progress reducing non-performing assets to $56.4 million, a $6.1 million improvement. The percentage of the bank’s ratio of loss reserves to non-performing assets had also improved to 42.9 percent.

While the OCC would later label MidSouth troubled, no one who would speak on the record thinks MidSouth is in danger of failing.

William Wallace IV is a banking analyst who has covered MidSouth for Raymond James, a large financial services company, since 2011. Wallace had rated MidSouth as “outperform” prior to the OCC information being made public on June 8. In a telephone interview with ABiz, Wallace made clear that he does not believe failure is a possibility for MidSouth.

Jim McLemore

“I don’t think that anyone would say that there’s a high probability that these guys could fail,” says Wallace. “There’s not that level of severity in their credit pressures.”

Wallace says the fact that the bank was able to execute a stock sale that generated more than $50 million in early June is proof the investor community does not believe MidSouth is in mortal danger. The analyst changed his rating of the bank to underperform after news of the OCC classification of the bank became public.

In a phone interview with ABiz, Woodrow “Woody” Briggs, vice chairman of New Orleans-based investment banking firm Chaffe & Associates, says the “term troubled institution is sort of like beauty is in the eye of the beholder — regulators know it when they see it — but there’s not a specific definition for it.”

Briggs believes more will become clear when the OCC takes the next step, which could include anything from what he called “a letter of advice” to more formal actions like a memorandum of understanding or a cease and desist order.

“The bank has some problems, but it’s not in danger of failing,” Briggs asserts. “It’s like getting a test result from a doctor that says you have a 15 percent chance of having cancer. It does not mean that you have a 99 percent chance of dying. This is a strong bank with good management.”

Briggs says he is very familiar with MidSouth and calls Rusty Cloutier “an old friend.”

Both Cloutiers also insist MidSouth is not in any danger of failing.

“If they made every decision wrong over the next three years, the bank would still survive,” Troy Cloutier says. “Jim [McLemore] did a great job on our finances. Essentially, he said we could eat through $100 million without affecting capital. The bank could survive on auto pilot.”

But the possibility of the bank’s failure might have led to the Cloutier firings.

MidSouth Bank Chairman Jake Delhomme
Photo by Robin May

The story told by those insiders who support the removal of the Cloutiers from MidSouth raises the possibility that the firings constitute a corporate coup d’état engineered by board members who had sought the father’s removal over his continued interference in the bank’s operation even after he had been kicked upstairs into the position of president and CEO of the holding company.

According to those insiders, the prospect of the failure of the bank was raised in conversations among board members between the end of the April 21 OCC exit meeting and the board meeting that convened the morning of April 26. Those conversations had a powerful impact on Jake Delhomme, MidSouth’s new and inexperienced board chairman.

Delhomme was a surprise pick to become bank chairman in September 2016. The former UL Lafayette and NFL quarterback had only served on the MidSouth board for a total of four years, including a stint on the bank’s advisory board. Delhomme replaced founding board member Will Charbonnet Sr., who had served as board chair since 1990. With the board environment growing ever more heated, Charbonnet announced his intention to retire at the end of 2016. Delhomme took his place on Dec. 31.

There was opposition to Delhomme’s ascendence to chairmanship among some MidSouth board members. They viewed him as something of a figurehead who would only tighten Rusty Cloutier’s grip on the bank. ABiz has learned that at least one board member conveyed to Delhomme his concern that the Breaux Bridge native was being used by the Cloutiers.

At some point after the OCC exit meeting, Delhomme was told that as board chairman he had personal financial exposure if the bank failed.

“Jake felt a deep sense of betrayal,” says one insider. “He was angry.”

“If the bank failed you could have liability,” according to Rusty Cloutier, “but only if the bank failed. There is nobody at the bank that will tell you that the bank is in dire straits or that it’s going to fail.”

The bank’s SEC attorney in North Carolina, Tom Powell, was contacted on Tuesday, April 25. A board meeting was called for the next morning.

Board members Rusty and Troy Cloutier were advised that they were not to attend the meeting. Powell was present when the MidSouth Board convened Wednesday morning.

Troy Cloutier says he made calls to board members to discuss what had transpired in the OCC exit meeting with them and what actions the OCC might take. When he heard on Tuesday, April 25, that the board would meet but that he would not be allowed to attend, he told his wife, “There’s about a 5 percent chance I am going to get let go tomorrow.” By the time the board convened on Wednesday morning, it was a certainty.

At some point after the board gathered Wednesday at 9 a.m., it decided to fire both Cloutiers; both dismissals were carried out within a half hour.

Rusty Cloutier says the attempts to replace him as MidSouth’s leader date back to 2010. Cloutier had been running MidSouth for 25 years by then. It had grown into a billion dollar financial institution from a tiny, poorly capitalized bank in a one-industry town that had been devastated when oil prices fell through the floor in 1984.

A Morgan City native, the elder Cloutier was hired by MidSouth’s founders after a three-hour meeting at Don’s Seafood on July 4, 1984. He took a 20 percent pay cut to leave First National Bank of Morgan City’s Franklin branch to move to Lafayette. Cloutier did not get a raise from

MidSouth until 1993, the year he made MidSouth National Bank a publicly traded company. (The bank changed its name to MidSouth Bank, according to Cloutier, when it moved into the black glass tower on Pinhook Road. “We didn’t have the $60,000 it would have taken to include National in the sign at the top of the building, so we changed the name.”) Cloutier is the consummate community banker. He had no connections in Lafayette when he arrived, so he started circling the names of people whose photographs appeared in the local papers. “I’d try to figure out a way to meet them,” Cloutier says.

At one point in the ’80s, Cloutier says the OCC told him it was going to close the bank within two weeks if it did not increase its capital assets. “Fortunately, the people at the OCC gave us a chance, and we were able to stay open,” Cloutier recalls.

All the while, he and the very tight, committed, professional team of bankers working with him — Karen Hail, John Nichols, Donnie Landry, Glenn Decou — worked relentlessly to build their bank.

Cloutier says he “is still a small town boy.” His critics say he remained a small town banker even as he tried to grow MidSouth bank into something much larger.

“Rusty couldn’t delegate,” one MidSouth stockholder says. “He never adapted his management style to the size of the institution. You can jump into your car and drive down to the branch when you’re a small bank and have just a few branches, but you can’t do that when you’re in two states and have more than 50 branches.”

Cloutier’s rise to national prominence may have worsened the problem. He became the star not only of the bank, but of the community banking industry when in 2008 he became chairman of the Independent Community Bankers of America. His one-year term spanned the depths of the Great Recession that began that year and the regulatory reform efforts that followed in the first years of the Obama administration. It thrust Cloutier into the spotlight. He testified before Congress. His plainspoken style drew media attention. He was a sought-after interview on business programs and networks. He wrote a book criticizing big banks — BIG BAD BANKS - How greed and ego among the big shots in banking and government created the crisis that wrecked our economy.

Cloutier was featured in a 2009 New York Times article highlighting the bank’s willingness and capacity to lend money at a time when other banks were retreating from markets. The money was federal money and the bank trumpeted its desire to do business. Critics both in the bank and outside it note that Cloutier was the only bank official quoted in the article. “Hell, Rusty wouldn’t let the reporter talk to anyone else,” one board member recalls.

According to one former MidSouth employee who asked not to be identified, Cloutier’s ICBA activity put him on the road and out of the bank for much of three years. “First, you’re chairman-elect for a year, then you become chairman, and then you serve as past chairman,” the source says, noting that MidSouth actually thrived while Cloutier was away.

MidSouth Bank Chairman Jake Delhomme, Vice Chairman Joseph Tortorice Jr. and Lead Director James Davis Jr. walked into Rusty Cloutier's and Troy Cloutier's respective offices on April 26 and told them their services were no longer needed.

It was apparent to others on the bank’s management team while Cloutier was away that MidSouth needed to improve its management and technological infrastructure in order to grow. “We needed to get into a more professional mode,” a former MidSouth employee says. A strategic planner, who specifically centered on the need for Cloutier to lessen his grip on the company, was hired. Cloutier rejected the recommendation — a classic case of founder’s dilemma.

In his book The Founder’s Dilemmas, Noam Wasserman identifies a persistent problem that seems to have gripped Rusty Cloutier and ultimately led to his ouster from MidSouth.

“One such dilemma recorded throughout stages of company development: The need to negotiate a trade-off between wealth and control, between building financial value and maintaining a grip on the steering wheel,” Wasserman writes. “Adding further complexity, founders’ early choices can have delayed and unexpected but significant effects, sometimes because natural inclinations such as passion, optimism, and conflict avoidance lead to shortsighted decisions.”

Will Charbonnet

The first clear sign that MidSouth was outgrowing Rusty Cloutier’s management style appeared after the bank entered the Texas market with the 2004 purchase of Lamar Bank in Beaumont.

“Lamar was this little bank with two or three branches,” one former board member recalls. “It would give MidSouth the toehold it needed to expand further into Texas, but it became immediately apparent just how difficult expanding into Texas would be.”

“We had the head of lending running all over creation looking for expansion opportunities while spending an extreme amount of time dealing with the situation in Beaumont,” the former board member continues. “Karen Hail said the bank needed to add top management to help shape the infrastructure that would be needed for MidSouth’s continued expansion. Rusty was not interested in doing that. It developed into a rub between Rusty and Karen.”

For the first 25 years of his MidSouth career, Rusty Cloutier was mostly unchallenged. He had unquestioned influence over the bank’s board of directors. But by 2010 his core team had begun to splinter. Karen Hail was fired. John Nichols left to manage a bank his family owned in DeRidder. Donnie Landry left for Farmers & Merchants Bank (he now heads Tri- Parish Bank). Glenn Decou left and now works for Washington State Bank.

The board was still controlled by some of the founding directors, including Dr. Joe Hargroder, Paul Hilliard and Will Charbonnet. Taking MidSouth public in 1993, which Cloutier and his team pulled off, made those board members “very good money,” Cloutier says. It also earned him their loyalty.

The first indication that the board wanted change in leadership came in 2010, according to Cloutier, when the board hired a headhunter to find a successor. He was 63 then. A board critic at the time says that the headhunter came into the interview carrying a dog-eared copy of Cloutier’s book. The recommendation of the headhunter was for MidSouth to hire noted Lafayette banker and businessman Jerry Reaux and to bring Troy Cloutier back to Lafayette from Houma where he had served for seven years as a regional president. That transition took effect in 2011.

(Disclosure: Jerry Reaux was a founding minority shareholder in The Independent Weekly LLC, ABiz’s corporate parent. Steve May, The Independent’s publisher, was named to MidSouth Bank’s board in 2000 and served on the MidSouth Bancorp’s board from 2002 to 2008.)

The move raised concerns that Rusty Cloutier intended to have his son Troy succeed him at the bank. Rusty Cloutier has repeatedly denied this, including in his interview with ABiz. “I never moved Troy,” Rusty Cloutier declares. “I never was real happy that Troy ended up at the bank because our family relationship is much better today than it was when we worked together.” Numerous bank insiders dispute Cloutier’s assertion.

An outsider familiar with the negotiations says Cloutier agreed to hire Reaux, and give him the operating room that he had been unwilling to grant others, if Reaux promised in return not to seek to succeed Cloutier as either president or CEO. Cloutier denies there was such an agreement. “We had no written agreement or anything,” Cloutier maintains. “We agreed to bring Jerry and Troy in, and we said we’d work out the progression as we went along.”

Jerry Reaux

Reaux’s unexpected death in early 2014 ended that attempt to move Rusty Cloutier out of the bank’s operations, but left Troy Cloutier with a clear path to succeed his father. In June 2015, just as the bank’s non-performing asset numbers were exploding, the MidSouth board promoted Troy Cloutier to the position of bank president.

Rusty Cloutier retained his role as bank CEO until the board announced in August 2016 that it was making Troy Cloutier CEO effective two months later. Rusty Cloutier remained president and CEO of MidSouth Bancorp, MidSouth bank’s holding company, a promotion intended to remove the elder Cloutier from meddling in the bank’s daily operations. They held those respective positions until the day they were fired.

Two months after Troy Cloutier replaced him as bank CEO and just as its financial condition was worsening, the board of directors chose to give Rusty Cloutier a four-year employment contract that included a golden parachute.

It provided him annual pay guarantees beginning in November 2016. The elder Cloutier was, in effect, guaranteed $1.2 million in salary over the life of the contract — $350,000 for each of the first two years; $250,000 for the final two. The contract included a provision to give Cloutier a lump sum payout of the balance of the contract due within six months of his termination. Due to the OCC’s declaration of MidSouth as a troubled institution, the lump sum payment to Cloutier (which would be due in October) will be subject to federal regulatory approval.

MidSouth’s troubled status can be traced to two decisions made years ago — one by the bank and one by a foreign government.

In his letter to shareholders that accompanies MidSouth’s 2013 annual report, Rusty Cloutier waxed rhapsodic about the future of the oil and gas industry.

“The oil and gas industry is expected to experience its best year in more than four decades, say some experts, with current contracts indicating the upswing will last through the next 10 years. And when it comes to energy exploration, what’s good for Texas is good for Louisiana,” he wrote.

The bank had begun acting on that overly optimistic view of the industry’s prospects in 2013. At the end of 2012, oil and gas related loans constituted 14 percent of MidSouth’s total loan portfolio. By the end of 2013, that percentage had jumped to 17.8 percent.

Cloutier’s 2013 letter was released on March 14, 2014. By the end of the 2014 second quarter, oil and gas lending reached 21.4 percent of total lending. By the end of the September 2014 quarter, it had dipped to 20.5 percent.

In Riyadh, Saudi Arabia, in late 2014, the Saudi royal family decided to increase oil production to protect the kingdom’s share of the global market against U.S.- based frackers. It sent oil prices plummeting and MidSouth reeling.

“November of 2014 is when the oil price fell,” Rusty Cloutier says. “This was my sixth oil recession. So, I knew it had a time delay sequence.”

According to MidSouth 10Q quarterly reports filed with the Securities Exchange Commission, the bank ended 2014 with $10.7 million in non-performing assets. By the end of the June 2015 quarter, the NPAs were up to $23.8 million. By the end of September, NPAs had more than doubled to $51.6 million.

In November 2015, the FDIC warned banks about loan concentrations in specific sectors, including energy. MidSouth was already trapped.

Says one bank insider, “There’s nothing wrong with concentration when things are going good. The problems come when the sector starts going bad.”

The oil and gas sector — notorious for its sudden, dramatic swings — was going bad, and it was taking MidSouth with it.

Exactly what OCC examiners told the MidSouth team in that April 21 meeting is known only to those present. News that the bank likely faced OCC action probably had wildly different impacts on each of the members of the MidSouth team who attended it — CFO McLemore, Chief Lending Officer Blum and Chief Risk Officer DeWitt.

Rusty Cloutier had survived what he calls “the miserable ’80s.” Troy Cloutier had worked at the bank for decades and had seen the ups and downs of the oil and gas industry during his seven years in Houma, as well as through watching his father deal with downturns at home and in the bank.

McLemore, on the other hand, had been involved with what ultimately turned into a bank failure in Georgia immediately before joining MidSouth in 2009. Blum had come to MidSouth from Whitney Bank’s Morgan City office, so he was quite familiar with the industry’s cyclical nature. DeWitt was new on the job and may have had little or nothing to prepare her for what she heard in that meeting in terms of OCC enforcement action.

What is known is that different versions of the content and significance of the meeting began circulating among board members in the days that followed. Ultimately those different perceptions led the board to fire the Cloutiers, news that shocked Acadiana when it broke on April 27.

At MidSouth’s May 24 shareholder meeting, Chairman Delhomme and now President and CEO McLemore talked positively of the bank’s future. Shareholders were not told of the OCC examination, nor was the exit meeting that created the opening to fire Rusty and Troy Cloutier discussed. Neither Delhomme nor McLemore mentioned what they likely knew to be the pending OCC classification of MidSouth as a troubled institution; transparency was not quite the order of the day.

McLemore and his team have since executed a successful stock sale that initially raised more than $50 million in early June. MidSouth confirmed on July 11 that it had successfully executed an option to sell still more stock, raising another $6 million for the bank.

MidSouth confirmed in late June that it was selling two branches in Alexandria and had decided to close seven other branches in Louisiana and Texas.

While MidSouth’s failure is not likely, its future is not clear. The bank’s performance has been flat for the past five years. Raymond James analyst Wallace believes OCC restrictions, which had not been announced at press time, would force MidSouth’s management to maintain an internal focus until lifted. Could another bank step in to buy it? Can its management team work its way through the current problems and then demonstrate the skills needed to resume MidSouth’s growth? MidSouth 2.0 has just launched.

It is no longer Mr. Rusty’s bank.