With capital accumulating, Trustmark National Bank has been hunting for acquisitions to expand its footprint, but the regional bank didn’t go far from its Jackson headquarters for the prey it bagged April 15.
The deal with the Federal Deposit Insurance Corp. gives Trustmark the $226 million in assets, including $196.2 million in total deposits, held by Heritage. In return, Trustmark pays a premium of 0.15 percent of total deposits, or approximately $300,000.
“Still, we take the risk on collecting the loans,” said CEO Jerry Host, referring to a lost share transaction with the FDIC on $156.4 million on total assets. The arrangement specifies the FDIC will pay Trustmark a discount of about $23 million and assume responsibility for 80 percent of the loan assets.
The discount helps to protect Trustmark from any losses incurred from its 20 percent share of the loans it assumed.
“The FDIC is effectively taking the risks associated with the loans out of the transaction,” Host said in an interview Monday, the day Heritage Banking Group locations in Carthage, Madison, Brandon, Canton, Flowood, Edinburg and Hattiesburg reopened under the Trustmark name.
Trustmark’s task is to work through and collect on the loans. “Whatever we collect over the book value the FDIC gets 80 percent and we get 20,” Host said.
The Trustmark CEO estimates the closing of Heritage Banking Group cost the FDIC trust fund $50 million.
A call for help
Badly wounded by failed real estate loans and an absence of capital, Heritage had been under an FDIC consent order since May 2010 that required more diligence in the issuing of loans and a significant infusion of reserve capital. An August deadline to raise about $6 million in capital came and went without new capital coming in. Tier One risk capital levels worsened through the rest of the year, going from about $15 million at the start of 2010 to $5.1 million at the end.
In the same period, Heritage’s non-current loans and leases rose from $12.5 million to $17.5 million, according to reports Heritage filed with the FDIC.
Meanwhile, Heritage’s board searched in vain for new capital and held out hope a buyer would come forward. The lure would be the 90-year-old community bank’s Carthage market share, which at the end of the second quarter of 2010 stood at 54 percent with deposits of $141 million, far ahead of closest Carthage competitor First Financial Bank at 17.7 percent and $46 million in deposits
With just days until the anniversary of the consent order, the FDIC foreclosed on Heritage. It was only 24 hours earlier that Trustmark learned FDIC had selected its takeover bid made more than a month ago, Host said.
Filling in the puzzle
Heritage makes for a good strategic fit and fulfills Trustmark’s acquisition criteria, according to Host.
First, Host said, it met the criteria for acquiring a troubled institution: a good price.
But perhaps more important, it fits into Trustmark’s market footprint and fills in market gaps.
“It fills in along Highway 16 from Carthage to Philadelphia.” Heritage’s locations also fill in market gaps in Edinburg and Canton, he said.
The market overlap is in Madison, Brandon, Flowood and Hattiesburg, Host said.
“Over the next 90 days we’ll decide which branches we would want to keep and which ones we might not.”
The FDIC deal gives Trustmark 90 days to return any physical locations it decides not to keep open. “I would anticipate we would take some action in the next 90 days,” Host said.
An essential question to be answered: does Trustmark change the operational scale of the branches and the employee staffing levels? “Most likely we’ll be putting back some of these buildings with the FDIC,” he said, citing a desire to avoid market overlap.
He expects routine turnover among Trustmark’s 2,600 employees over the next 90 days to give affected former Heritage employees an opportunity to stay on with Trustmark.
Trustmark will stay in the hunt for acquisitions, Host said, and noted its 9 percent-plus tangible common equity to asset ratio gives it ample resources to make purchases.
In most instances, the healthy bank has to come to you first, Host noted.
“Banks are sold; they are not bought,” he said. “You can go out and talk to people all day long but they’re not going to show any interest unless they are in trouble or have made a decision they are ready to sell.”
Meanwhile, the takeover of Heritage leaves Mississippi Banking Commissioner John Allison with one fewer bank on his distressed list. “Heritage was very troubled when we closed it,” Allison said of his decision to revoke the bank’s state charter last Friday afternoon.
That leaves The Peoples Bank of the South in Bude and Bank of Franklin in Meade under FDIC and Mississippi Department of Banking consent orders.
“I can say they are improving,” Allison said of the two remaining banks.
“They’re working through their bad loans. One of them has raised some capital. But it’s going to take another exam or two to get them out from under our orders.”
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