Trustmark (TRMK) is sacrificing considerable capital and its future buying power on a deal for an ailing bank in slow-growth Alabama.

Management faced tough questions during a conference call with analysts Tuesday morning, Steven Alexopolous at JPMorgan Chase was blunt, putting executives on the spot about buying BancTrust Financial (BTFG) in Mobile, Ala., for $55 million.

"It's very clear why they'd want to join up with you guys, right?" he said. "That's a no-brainer. It's not necessarily as clear to me the attractiveness from your side."

Alexopolous said BancTrust seemed to have too many high-cost deposits and weak positions in most of its markets. He noted that it would take at least four and a half years for Trustmark to earn back the capital used to take over a bank that has lost money for three straight quarters.

Trustmark's interest in BancTrust is very real and very sound, Gerard Host, Trustmark's president and chief executive, countered on the call. Host said his interests go beyond the $2 billion-asset seller's balance sheet: Host started his banking career in Mobile and for years has been looking for the right way for his $9.9 billion-asset company to enter Alabama.

Host framed Trustmark's second acquisition in seven months as financially and strategically sensible. The deal values BancTrust at 88% of its tangible book value and just over 5 times its projected operating profits in 2013. The internal rate of return should exceed 15%, and Trustmark plans to remove a quarter of BancTrust's annual noninterest expenses.

BancTrust, the third-biggest bank based in Alabama, is the fifth-largest deposit holder in Mobile, one of the most economically vibrant cities in the nation, Host said. BancTrust has top share of four smaller markets in upstate Alabama.

"We think we can bring some scale into the Mobile market, where they might not have had the capital to support their larger relationships," Host said. "The south Alabama-Mobile region is one that is going to experience growth over the upcoming years and we think that we can be a part of that."

BancTrust's 40 branches in Alabama and nine in Florida would fill a big gap in Trustmark's coverage along the Gulf Coast. None of the Jackson, Miss. company's 170 branches are in Alabama.

Trustmark, which opened a mortgage office in Alabama last year, has $1 billion in mortgages outstanding to about 7,000 borrowers in the state, so the company has a customer network there to build on, Host said.

Host said he expects to focus on consolidating BancTrust after the deal is closes in the fourth quarter, though he did not rule out using BancTrust as a platform to expand into Georgia. "Moving into Georgia" is "to be determined," he said.

Host described capital burden of the deal as "manageable." Trustmark will issue 2.2 million new shares, repaying $50 million of the seller's outstanding federal aid and booking a $227 million, or roughly 17%, credit markdown.

Trustmark's post-acquisition capital ratios will remain well over regulatory minimums for institutions deemed to be well-capitalized. Host also said that the transaction is not a desperate market share grab into unfamiliar territory.

BancTrust has a similar operating platform to another bank Trustmark bought, so the conversion should be smooth, Host said. Trustmark began scoping out BancTrust two years ago, when Host drove to all of its key branches and markets on the way home from a Florida banking conference.

The companies have been actively engaged in merger talks for about a year. Trustmark's due diligence team has gone through BancTrust's $1.3 billion loan book three times, reviewing almost all overdue loans and 82% of its commercial loans. "We have remained very disciplined in our process," Host said.

TrustMark closed its $24 million acquisition of Bay Bank & Trust of Panama City, Fla. in March. Its $55 million deal for Cadence Financial of Starkville, Miss. was terminated in late 2010 when Cadence got a better offer from Houston's Community Bancorp.

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