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Golden Triangle key for Trustmark

Memphis, Tuscaloosa markets also drawing cards

Trustmark National Bank executives looked with envy at competitor Cadence Bank’s dominance throughout the economically resurgent Mississippi Golden Triangle and Cadence’s strengths in such markets as Memphis and Tuscaloosa.

They turned envy to action this week with the signing of a “definitive” agreement to acquire the $1.8 billion Starkville-based bank holding company in a $23.8 million transaction. The acquisition will elevate Trustmark to about $11. 1 billion in assets, the bank said.

Cadence reported a net loss of $1.6 million in the second quarter. By contrast, Trustmark reported earnings to shareholders of $26.2 million in the most recent quarter.

Trustmark said it expects to gain a $10 million annual income contribution from the Cadence acquisition. Trustmark also noted it expects the earnings per share of the combined companies to be higher than Trustmark’s stand alone earnings.

Trustmark called the deal a favorable one for Cadence shareholders, saying they’ll be getting Trustmark shares that trade in the $21 range.

News of the acquisition sent Cadence shares (NASDAQ: CADE) up 20.73 percent Thursday. They opened at $1.85 and climbed to $2.10 before closing at $1.98. Trustmark shares (NASDAQ: TRMK) rose 3.276 percent, opening at $20.40, going to $21.91 and closing at $21.12.

Money for the acquisition comes from $100 million saved from Trustmark’s exit from the indirect auto loan market two years ago, where it had extended more than $800 million in loans, the bank said.

Trustmark executives said in a conference with analysts Thursday that Cadence’s credit risks, which include $69 million in non-current loans and leases, gave cause for pause but an extensive due diligence process showed the loan problems could be managed,” said Gerald Host, director and COO.

The loan portfolio and the extent of the credit issues were “where we focused a great deal of time,” said Host, who takes over as president & CEO on Dec. 31, upon the retirement of Richard Hickson, current president & CEO.

Cadence has decreased the size of its loan portfolio by 25 percent since 2007 and ceased making home mortgages. “They have cut back on new lending and worked through many of their problem loans,” Host said.

Further, it “has provisioned or charged off nearly $100 million in this portfolio,” added Host, one of several Trustmark executives who expressed comfort Thursday with the value Cadence has placed on its current loans.

Cadence’s pre-recession history also influenced the acquisition decision, Trustmark said, noting the Starkville bank consistently earned after-tax profits in the $10 million to $12 million range before the nationwide economic slump.

Trustmark said it was also attracted by the $375 million of liquidity that Cadence has parked in short-term low-return investments. This amount “will be reduced throughout 2011” by putting it to uses that bring higher returns, Hickson said in his opening remarks to analysts..

Trustmark and Cadence 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. Trustmark said Tuesday that the acquisition resolves the capital issue with regulators and will not diminish Trustmark’s reserve ratio.

Together, the banks create a Tier 1 leverage ratio of 9 percent and a Tier 1 risk-based capital ratio of 13 percent, Trustmark executives said in the Thursday presentation.

Federal regulators had ordered Cadence to achieve a minimum Tier 1 ratio of 9 percent by Sept. 19.

Tier 1 represent a bank’s core capital and includes only equity capital and disclosed reserves. The Tier 1 ratio is calculated by dividing a bank’s Tier one capital by its total risk-weighted assets, which are a bank’s assets weighted according to credit risk.

The price of the acquisition grows to $53.8 million when combined with a $30.05 million payment Trustmark will pay the U.S. Treasury to cover the $44 million Cadence received under the Troubled Assets Relief Program, or TARP.

The acquisition is expected to be completed by the end of the first quarter of 2011 and will give Trustmark a 43 percent share of the Golden Triangle’s markets, a region made up of Starkville, Columbus and West Point.

With that comes an opportunity to do business with regional economic engines such as Mississippi State University, Columbus Air Force Base, Severstal Columbus, a $1 billion steel mill; American Eurocopter, a division of EADS; PACCAR engine production facility, a division of Peterbilt; and GTR Global Industrial Aerospace Park, which includes Stark and Aurora.

“Cadence is a leader in maintaining relationships with these companies,” Hickson said.

Acquiring Cadence will bring Trustmark’s deposits in the Golden Triangle from $142 million to $849 million and grow Trustmark’s branch numbers to 17, and will take it from a fifth place market share to first place.

Trustmark also noted the upside with acquiring Cadence’s share of the Tuscaloosa market, home to University of Alabama and Mercedes-Benz manufacturing plant, and  Memphis, home of  FedEx, AutoZone, University of Memphis and St. Jude Children’s Research Hospital. Trustmark had zero presence in Tuscaloosa and will get five branches and about $142 million in deposits there. In Memphis, Trustmark will go from 24 to 30 locations and increase its market share from 2.9 percent to 3.8 percent.

Cadence operates 38 locations, including 19 in Mississippi, seven in Tennessee, seven in Alabama, two in Georgia and three in the Sarasota area of Florida.

Host, the soon-to-be Trustmark president and CEO, said he has visited each location and found all to be competitively situated.

The conversion to Trustmark’s technology should go smoothly, according to Senior VP Melanie Morgan, who noted the Argo system recently installed in Trustmark offices and branches will integrate well with current Cadence systems.

Current Cadence customers will gain from enhanced electronic offerings and will once again be able to seek mortgage loans, a practice Cadence had halted some time ago, Morgan said.

Trustmark last expanded in 2006 when it acquired Houston-based Republic Bancshares of Texas.

Chartered in 1889, Trustmark National Bank built a statewide banking system in Mississippi. It expanded into the Tennessee market in 2001 and then entered the Florida and Texas markets in 2003 and 2004, respectively.

It had 2,481 employees at the close of the second quarter.

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