Trustmark Corp (TRMK) 2014 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Trustmark Corporation's third quarter earnings conference call.

At this time, all participants are in a listen-only mode. Following the presentation this morning, there will be a question-and-answer session. (Operator Instructions).

As a reminder, this call is being recorded.

It is now my pleasure to introduce Joey Rein, Director of Investor Relations at Trustmark.

Good morning. I would like to remind everyone that a copy of our third quarter earnings release, as well as the slide presentation that will be discussed on our call this morning, is available on the Investor Relations section of our website at trustmark.com.

During the course of our call this morning, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We'd like to caution you that these forward-looking statements may differ materially from actual results due to a number of risks and uncertainties which are outlined in our earnings release and our other filings with the Securities and Exchange Commission.

At this time, I'll turn the call over to Jerry Host, President and CEO of Trustmark.

Thank you, Joey, and good morning, all, and thank you for joining us. I'd like to point out that also joining me this morning are Louis Greer, our CFO; Barry Harvey, our Chief Credit Officer; and Tom Owens, the Bank Treasurer.

Let's start by looking at our third quarter highlights, which starts on page three of the presentation material.

We're pleased to report another quarter of solid financial performance. For the sixth consecutive quarter, our legacy loan portfolio experienced an increase in balances, a 2.4% increase for the quarter, or an annualized rate of 9.6%.

Our acquired loan portfolio continues to perform well, as cash flow estimates have continued to improve and yields on acquired loans have increased. In fact, despite loan runoff, interest income on acquired loans remains stable at $23.2 million.

Credit quality experienced improvement as other real estates declined quarterly and year-over-year, as well as recoveries exceeded charge-offs, resulting in a net recovery of $428,000 for the quarter.

Our efficiency ratio improved to 62.8% as a result of lower ORE expenses. Continued improvement will be an ongoing area of focus.

Total revenues remained stable at $149 million, even with the $2.6 million reduction in interchange income. As you may recall, we had exceeded the $10 billion threshold in assets as of year-end 2013, and became subject to the Durbin Amendment as of July of this year.

Our capital base continues to grow, providing us with a continued ability to meet customer needs.

Net income for the third quarter was $33.6 million, which represented earnings per share of $0.50. Our financial performance during the quarter produced a return on average tangible equity of 13.7%, and a return on average assets of 1.10%.

For the first nine months of the year, our net income totaled $95.5 million, which represented diluted earnings per share of $1.41, a 6% increase from this time last year.

I would also like to remind you that our Board yesterday declared a quarterly cash dividend of $0.23 per share, payable on December 15th to shareholders of record on December the 1st.

Let's look at the quarter in a little bit more detail.

Looking at page 4, as previously mentioned, we continue to experience solid growth in our legacy loan portfolio. At September 30th, loans held for investment totaled $6.3 billion, an increase of $147 million, or 2.4% from the prior quarter, and year to date an increase of $535 million, or 12.3% annualized. Growth was broad-based by loan type, as well as by market.

Construction land development, and other land loans increased $49 million from the prior quarter. Growth was driven entirely by commercial and residential construction, primarily in our Texas, Mississippi, and Alabama markets. The single-family mortgage portfolio expanded $44 million, and was mainly due to growth in Mississippi and Alabama.

Loans secured by non-farm, non-residential real estate increased $17 million, as growth in owner-occupied real estate in the Mississippi and Alabama markets were offset, in part, by declines in the Texas, Florida, and Tennessee markets.

Other real estate secured loans, which include multi-family projects, decreased $11 million, reflecting reductions primarily in Trustmark's Mississippi and Tennessee markets.

Our consumer lending portfolio grew $3 million, primarily from growth in our Mississippi, Alabama, and Texas markets.

Commercial and industrial loans remained steady, as growth from the Alabama and Tennessee markets was offset by reductions in Texas, Mississippi, and Florida.

Other loans, which include lending to states and municipalities, non-profits, and REITs, grew $48 million during the quarter, as a result of growth in Mississippi, Alabama, and Tennessee.

At quarter end, loans held for investment and acquired loans collectively totaled $6.9 billion, an increase of $92 million or an annualized rate of 5.6% from the prior quarter. Year to date, our loans held for investments have increased $535 million, or 12.3% annualized.

Our loan growth has been diverse, both in terms of geographic markets, as well as loan type, and we'll be glad to provide more information during the Q&A portion of the call.

Turning to page 5, we continue to be pleased with the performance of our acquired loan portfolio. At September 30th, acquired loans totaled $592 million, a decrease of approximately $55 million from the prior quarter.

During the third quarter, the effective yield on acquired loans was 9.34%, while recoveries on acquired loans totaled $8.9 million. As a result, the total yield on acquired loans was nearly 15% for the quarter.

Excluding any settlement of debt, we would anticipate acquired loan balances to decline by about $70 million by year end.

Based upon existing cash flow estimates, we anticipate the yield on acquired loans to be in the 7% to 8% range in the fourth quarter. And, as a reminder, this yield does not include any potential recovery.

Now, turning to slide 6, please note that these credit quality metrics, exclude acquired loans and other real estate covered by our FDIC loss-share agreement.

At September 30th, non-performing assets totaled $185.4 million, a 4.1% increase from the prior quarter. When compared to one year earlier, this was a $4.4 million, or 2.3%, decrease. Driving the quarterly increase were two substandard credit relationships migrating to non-accrual status.

Other real estate totaled $97 million, a decrease of $9.9 million, or 9.3%, from the prior quarter. Compared to this time last year, this portfolio decreased $19.3 million, or 16.6%.

The $3.1 million of provision for loan losses for loans held for investment included specific reserves related to two credit relationships that migrated to a non-accrual status, as I mentioned earlier.

During the third quarter, recoveries exceeded charge-offs, resulting in a net recovery of $428,000. The allowance for loan losses totaled $70.1 million, and represented 1.2% -- 1.26% of commercial loans, 0.69% of consumer and home mortgage loans, and 178.81% of non-performing loans, excluding impaired loans.

Turning now to slide 7, during the third quarter average non-interest-bearing deposits increased $98 million, while average interest-bearing deposits declined $302 million, which was due, mainly, to a seasonal decline in public funds. Non-interest-bearing deposits represent 29% of our average deposits, while interest-bearing deposits comprise the remaining 71%.

Looking now at slide 8, during the third quarter, revenue remained stable at $149.1 million, despite a reduction of $2.6 million in bank card and other fee income. As I mentioned previously, we became subject to the Durbin Amendment on July 1st of this year.

Net interest income for the third quarter totaled $110.1 million, up $906,000 from the previous quarter. As you know, there are two components that make up this number. Net interest income on acquired loans remained stable at $23 million. Excluding acquired loans, net interest income totaled $87 million, a $1 million increase relative to the prior quarter due to increased loan balances.

For the third quarter, the net interest margin totaled 4.14%, down 7 basis points from the prior quarter due to the current interest rate environment and increased competition, both of which are reflected in the decline in yield on loans that are held for investment and held for sale. Excluding acquired loans, the net interest margin for the third quarter totaled 3.47%. Based upon the current interest rate environment, we would expect the net interest margin, excluding acquired loans, to remain relative stable during the fourth quarter.

Non-interest income decreased $1.2 million to total $42.9 million for the third quarter, mainly due to the implementation of the Durbin Amendment, which affected interchange fee income as of July the 1st.

Insurance revenue for the third quarter totaled $9.2 million, an increase of $940,000, or 11.3%, from the prior quarter, and was mainly due to increased property and casualty business.

At quarter end, service charges on deposit accounts totaled $12.7 million, an increase of nearly $900,000, or 7.6%, from the previous quarter, due, in part, to seasonal factors.

Wealth management revenue totaled $8 million for the quarter, up $328,000 from the prior quarter due to increased sales within investment services, and expanded revenue from brokerage sales in trust management.

Mortgage banking revenue for the third quarter totaled $5.8 million, a decrease of $349,000 from the previous quarter, and was due mainly to a decline in the fair value of mortgage loans held for sale.

For the third quarter, mortgage loan production totaled $345 million, an increase of $23 million, or 7.2%, from the previous quarter, and was due to multiple factors -- seasonality, lower mortgage rates, and expanded originations in our Alabama market.

Turning to slide 9, non-interest expense in the third quarter totaled $100.2 million, excluding ORE, and intangible amortization of $3.1 million. Non-interest expense remained relatively flat at $97.1 million.

For the third quarter, salaries and benefits expense remained well controlled, and totaled $56.7 million. Services and fees were unchanged at $14.5 million. Equipment expense declined $461,000, or 7.5%, from the prior quarter.

ORE foreclosure expense declined $2.9 million from the previous quarter to total $930,000.

The efficiency ratio improved to 62.8%, and we are committed to making additional improvements, both on the revenue and expense side of the equation.

Slide 10 -- Trustmark continues to maintain a solid capital position. We use this capital to support both organic and acquisitive growth, and to pay cash dividends to our shareholders. Our solid capital base is well positioned to meet the needs of our customers, and create value for our shareholders.

Even with sizable loan growth, our capital levels have continued to increase. Our tangible common equity ratio was 8.67% in September 30th, 2014, while our total risk-based capital ratio was 14.7%.

Turning to slide 11, we have a number of strategic priorities to enhance shareholder value. Profitable revenue growth generation -- this is our primary focus, finding more ways to create and expand customer relationships. Process improvement and expense management -- we recently appointed an 18-year Trustmark veteran, Jim Outlaw, as Chief Administrative Officer.

As you may recall, Jim has most recently served as our Chief Operation Officer of our Texas operation, and prior to that was our Chief Information Officer. Jim's proven leadership and broad experience, both in the front line and in the back room, will support our efforts to streamline processes to improve efficiency and profitability across the organization.

We will continue to endeavor to utilize technology to become more efficient and manage the costs of doing business, while ensuring we provide a competitive array of products, services, and delivery channels.

Leveraging existing infrastructure investments -- over time, we've made investments in our infrastructure, including technology. As we stand today, Trustmark has the infrastructure to support a significantly larger bank, and we will leverage our investment to drive continued consistent superior profitability, as we continue to grow.

Credit quality -- we must continue our sound underwriting and review processes. We are also focused on resolution of problem assets acquired via acquisition.

Effective risk management -- there have been a tremendous amount of new regulations placed on the banking industry, and we've made a lot of progress to date, and continue to work towards ensuring our enhanced risk management processes help us to more effectively manage our business.

Mergers and acquisitions -- banking is increasingly becoming a business of scale. Going forward, we will continue to use M&A as an opportunity to complement internal growth, and expand into additional attractive markets. We are proven acquirers, having successfully completed 11 transactions since 2000, but rest assured we will be patient and disciplined in the process to ensure that we create long-term value for our shareholders.

I'd like to thank you for being with us today, and at this time, I'd be happy to take any questions.

(Operator Instructions). The first question comes from Catherine Mealor from KBW. Please go ahead.

Good morning, everyone.

Good morning, Catherine.

Can you speak into the acquired yields a little bit? They've come in above the projected 8% to 9% level for the past couple of quarters, and I know you continue to give guidance on what you believe just the underlying yield will be, without those recoveries, but how should we think about your ability to continue to see elevated recoveries coming in from the BTFG portfolio, just from what you're seeing in terms of trends and the health of that portfolio versus their credit mark, right now?

Catherine, thank you for the question. As you would imagine, projecting the return and the revenue on the acquired yield portfolio is a bit challenging. The work that was done to create the mark occurred over 18 months ago, and, as you know, the economy has improved. Barry Harvey and his team, along with lenders in the field, have worked that portfolio aggressively.

I'm going to ask Barry to talk in a little bit more detail about how the portfolio has performed, and maybe give a little thought about what we see here in the near future.

Sure. Be glad to, Jerry.

Catherine, I think what we've seen this year so far as far as the first three quarters that have been extremely strong in terms of the recoveries. As far as looking forward into the fourth quarter and to '15, obviously, we're going to begin to see a slowdown in the dollar amount of the recoveries. We do foresee recoveries in the fourth quarter. We continue to see recoveries into 2015, although they're going to be at a slower pace than what we experienced so far in 2014.

The larger credits, or the credits with the larger marks, a lot of those have been worked through. There's still some to be worked through. We're working through all the credits as quick as we can, and in a prudent manner, trying to maximize the return from the bank, working through those that have opportunities for recoveries, as well as those who don't, just to make sure that we're getting through the portfolio as fast as we can to reduce the amount of criticized and classified and other measures that we look at from a regulatory perspective.

So, we do expect to continue to see recoveries in the fourth quarter, and then, obviously, into '15 it's going to continue to slow down from what we experienced in the first three quarters of 2014.

Okay, that's helpful. Thank you.

And then, maybe as a follow up, on OREO, the lower OREO costs were great to see, but how sustainable is this level, kind of below the $1 million a quarter mark, especially given that you've still got about $93 million in ORE balances sitting on the balance sheet? And within that, do you think there's -- do you have any thoughts in considering a change in strategy in accelerating disposition of your NPLs or OREO to try to get those balances down further, at maybe a more quicker pace? Thank you.

Sure. And we constantly are visiting with the various asset buyers across the country, talking to them about what the values are, and reassessing the values, passing them information, getting it back, and determining what's the appropriate thing to do for the Bank, and, thus far, as you'd indicated, we have continued to work the credits internally. I think it's been beneficial for the Bank. Our cost to carry is very low, and we've got some very good people working the credits, and moving through them pretty quickly.

One of our challenges was, when we had the acquisition of BancTrust, we kind of reloaded into our ORE quite a bit, $44 million at the time, and we've had a number of properties, problem loans that we've foreclosed on since we acquired the bank. So, it's been a battle to continue to work that ORE number down. We'll continue to do so.

At this point, based on the data we get back from the third parties, we still feel like it's prudent to work through these properties ourselves, but at any point in time we can make a determination that the market has gotten attractive enough to where we could sell into it. But at this stage, we plan to continue to work them.

As far as the level of ORE expense that we had in the third quarter, obviously that's a reflection of one large recovery we had, or really two recoveries we had that totaled up to about $2.2 million. So, having said that, we do have several properties in ORE that we have under contract today, some that will close in the fourth quarter, some that will close in 2015, assuming they do close, that would also result in a nice recovery.

So, while we don't -- we can't plan for the recoveries, we -- there's some uncertainty around them, we do anticipate there's some recoveries to continue to occur fourth quarter and into '15. But as far as a run rate, I think you're better looking at what we've historically had in the prior three or four quarters, and then possibly anticipating some form of recoveries to go along with that, in terms of gain on sale.

Thanks for the color. I appreciate it.

The next question comes from Kevin Fitzsimmons from Hovde Group. Please go ahead.

Hey, good morning, guys.

Good morning, Kevin. Just to touch on the spread income question again, so, a number of moving parts. We have the recoveries, which, admittedly, are very tough for you or us to forecast quarter to quarter, but you guys are saying it's probably going to be a slower pace in fourth quarter and as you go through 2015. The scheduled accretion income might -- I think what your guidance is giving is, that's going to step down over time. So, while it's been fairly stable these past two quarters, that's going to inevitably decline. And the core margin, you're saying, is going to remain stable, and you've had good loan growth, okay?

So, putting all those moving parts together, can you -- do you have like a point in time when you're going to get that inflection point of being able to really -- because I would think the initial move on NII, total NII, would be down. But is there an inflection point where the loan growth and the stable margin is enough to stabilize it and start growing core or total NII?

Thanks.

Difficult to project, and I'll ask Tom Owens to also comment on this, but breaking it into those three parts, Kevin, let's look at loan growth. Loan growth has been very positive for the year. There are a number of loans that have been booked, primarily in the construction real estate portfolio, that have begun the buildout process but are you using owner equity at this point, and will begin to fund up later this year, and early next year.

Looking at the pipeline, the pipeline of loans continues to look healthy, as we mentioned, both throughout the footprint, as well by type. So, from that standpoint or feel, we have a very positive feel.

From the standpoint of the recoveries, as Barry mentioned, that is something we anticipate will slow as that acquired yield portfolio comes off, but very difficult to project.

From the standpoint of the earnings on that acquired yield portfolio, also very difficult to project, but has been very steady in terms of the acquired loan yield. And it's something that we feel will, more than likely, hold up for several more quarters.

As far as the margin overall, again, we're -- our guidance is it's been stable. There are some -- there's some components of that that are somewhat seasonal. We -- the margin is not linear. It incorporates fees which were higher during the second quarter versus the third quarter, and I think help represent some of the differences there.

So, having said that, let me ask Tom Owens, our Treasurer to add some addition color relative to the overall margin.

Well, thank you, Jerry. I'm not sure what I would add to that. That's a pretty good explanation.

But, Kevin, as you set it up, I mean, there are a lot of moving parts, and, as Jerry said, we continue to believe that robust loan growth will outpace any compression in our core net interest margin, so we do expect for the foreseeable core net interest income to continue to go up.

Jerry talked a little bit about the volatility of loan fees, for example. When you look at core net interest margin declining from 3.55 in the second quarter to 3.47 in the third quarter, I can tell you there's just some natural volatility to loan fees in any given quarter, and it just so happens that second quarter we were sort of at the high end of that range of volatility, and in the third quarter at the low end of the range.

So, I would say in the same way that I would say it would have been a mistake to extrapolate forward the increase in net interest margin in the second quarter, I would say it would be a mistake to extrapolate forward the decrease in the third quarter and particularly the decrease in the loan yield on the loans held for investment portfolio.

Hopefully, that helps. Do you have any follow-up questions on that?

Yes. No, that's helpful. Thank you.

Just one quick follow up. On the expense run rate, you guys have done a nice job keeping that -- your core expenses, ex-OREO and amortization, pretty steady. But in past quarters, Jerry, you've talked about the need to step up spending and investments for things like systems and compliance and stress testing. You mentioned looking for things to mitigate that.

Are we -- are those investments made at this point, or are they still lying ahead of you, a fair amount of them? Just if you could characterize it, how we should look at that expense run rate, going forward.

Thanks.

I'll comment and then let Louis also provide his thoughts.

Kevin, we have, for the last four years, continually made investments in technology and process improvement. So, a front-end system in the retail side of the Bank, a new asset and liability system, a new general ledger system, a new HR system, a new database management system. And Louis can on with others. With significant increases in technology, if you look at our run rate on technology, it has increased steadily every year.

Offset, we're trying to find ways to become more efficient, and to adjust our delivery channels. Two years ago we put in $7 million worth of new ATMs with deposit capture technology that can take us even further as we simply reprogram those machines.

So, there's been a lot of ongoing expense, both from those technologies that improve the customer experience with us, as well as technologies that allow us to deal with the regulatory environment we're in, and ways that we can make the Company more efficient, all designed for a larger organization than we have been in the past.

So, the expenses have been ongoing. There have also been significant expenses associated with enterprise risk management, with BSA and other compliance areas, and with DFAST. We've already incurred many of those expenses as they relate -- and many of those are non-recurring because they're consultants that we've had in the Company. And we've just worked diligently to control other expenses so that we could pay for these things we know we've needed to do.

Going forward, and in my comments I talked about bringing Jim Outlaw back from Texas. First of all, we've backfilled with Spence Bridges as our President in the Texas market. He's an experienced lender and manager, has been with the Company for 20 years and out in Texas for the last eight years.

We brought Jim Outlaw back, simply because that he's someone that, for now eight years, has experienced being out in the field in one of our more active markets, but prior to that had run the technology and operations side of this Company. We've brought Jim back to look at the Company holistically in terms of how it operates, to look at all of these investments we've made, and to come up with ways to make us more efficient, and from that process, we believe, will -- we can reduce additional costs.

So, a long-winded answer to your question. Louis, if there's anything you can add, please do.

Jerry, I don't think I can add anything to that. I think just factors that you mentioned that we leveraged up the Company to be able to grow to the next level.

I will mention that all those expenses are in our current run rate, and I do expect us to maintain that core run rate at $96 million, $97 million in the fourth quarter.

But I will mention, although we've added resources for DFAST and leveraging up, going over the $10 billion, we have reduced our headcount on an FTE basis year to date by 43 to help offset some of that. So, we're managing expenses very diligently.

We've reduced headcount by 43 overall. We've actually increased headcount by over 30 in compliance-related areas of the Company.

In the compliance.

Okay, great.

Was that more than you wanted, Kevin?

No, that was actually perfect. Thank you very much. Great.

Thank you.

The next question is from Michael Rose of Raymond James.

Hey, good morning, guys. How are you?

Hey, Michael, how are you?

Hey, just a follow up on the expense question. I know previously you talked about tangible efficiency ratio. Do you guys have a target for that over the next year or two, maybe on both a reported basis, and then maybe on a core basis, ex the purchased accounting accretion?

Overall, the target will be to get that efficiency ratio down below 60%. Specifically, that number we don't know ourselves until we've had an opportunity to kind of evaluate what are the processes that we can change, given the technology we've added? How do we change our process to become more efficient, both from an additional capacity standpoint, without adding people, or from the standpoint of looking at reducing headcount where we can?

Okay. That's helpful. And then, as a follow-up question, you guys have had pretty good growth in Texas, more recently. Any impacts or slowdowns from the lower oil prices that you're seeing, or anything else that we should be considering as we think about Texas? Thanks.

Thank you. From the standpoint of lower oil prices, we are not foreseeing a significant impact. Much of the focus that we have in Texas is real-estate-related, healthcare-related, not so -- and normal C&I businesses, not a specific direct concentration in the energy markets. However, we're not naive to the fact that oil drives a lot of overall economic activity.

But from what we can see, the market is far more diverse than it has been in other economic scenarios, and certainly we have looked at potential exposures, feel comfortable with where we are, and continue to see very robust economic activity in that market, and we have not adjusted our forward projections because of the recent drop in oil prices.

Barry, anything you want to add?

The only thing I was going to mention, Jerry, is that, as you had stated, we don't really have many companies that are -- have a lot of commodity exposure that's not hedged off. Most of our energy-related exposure is the transporting as a -- in those situations they've got whatever exposure they may have, they've got it accounted for so it doesn't really impact their ongoing operations, more in line with a traditional C&I company.

But also, a lot of our growth is really not coming out of -- at least this quarter, it's not coming out of the Texas market. So, I think that's something that's very positive in terms of the contribution of Alabama. It's 44% of our growth this quarter, and then we've got growth in Mississippi and some other markets.

So, we do have a very dynamic market that we're working hard in, in the Houston market, but we do have other markets that are growing, as well. So, we really don't see a lot of energy exposure to the drop in oil prices. In the same respect, we do see ourselves as having a pretty diverse portfolio in terms of where our loan growth is coming from.

Okay. Thanks for the color. Appreciate it.

The next question is from Emlen Harmon from Jefferies. Please go ahead.

Good morning.

Good morning, Emlen.

You guys spoke of recoveries on the interest income side. Would just be interested to address that from the credit side of things in the held for investment portfolio. But just kind of, what's the outlook for recoveries, running through charge-offs, and kind of what would you consider a sustainable rate as head out over the next few quarters here?

This is Barry. I guess I'll go ahead and start on that.

At this point, the -- in our loan-loss reserve, in our quantitative part of our reserve, we have a three-year -- we have a 12-quarter rolling average. The quarters rolling off will be the ones from '12 as we move into next year. We really don't have a lot of large quarter's worth of losses that will be rolling off, as we have historically.

So, all things considered, the provisioning required should be fairly flat, depending upon what happens with the existing portfolio in terms of its performance. So, in the past, we've had a pretty big headwind in terms of historical losses rolling out of our reserve, resulting in releasing of reserve, unless it was needed otherwise.

That trend is -- pretty much will finish up with '14 and '15. It will pretty much be the direction of our credit quality is going to drive both the charge-offs, as well as drive the provisioning.

So, at this point, we're expecting very modest charge-offs going forward, and very modest provisioning going forward. Of course, all of that will change over time as the economy changes.

Got you. Okay, thanks.

And then, just a follow up on the non-acquired loan yield, and the compression there this quarter. You had mentioned that fees were one component of that. Could you just quantify for us just how much of an impact that was? And I think you had mentioned one other area impacting the yield there. I'm sorry, if you could give that to us again, that would be helpful.

Thanks.

Yes, this is Tom Owens. So, if you looked at like the trailing five quarters, for example, you would see that loans fees, natural volatility is about 10 basis points or so. So, my point there was that during the second quarter sort of at the high end of that range. So, about 10 basis points of what you see in that decline in loan yields is really attributable to natural volatility in loan fees.

The other thing, just sort of how the math works, is the day counts when we calculate the yields. The third quarter has 92 days in it. Second quarter has 91 days. So, when you do the math, you find that that's worth a few basis points, as well. So, well more than half of the decline in that held for investment loan yield I would describe as noise, sort of natural volatility.

Got it. All right, thanks.

(Operator Instructions). Our next question is from Brad Milsaps from Sandler O'Neill. Please go ahead.

Hey, good morning.

Good morning, Brad.

Most of my questions have been addressed, but just wanted to ask on the acquired book, I appreciate the guidance on about another $70 million or so in payoffs. I guess that book started about $1 billion. Where do you kind of ultimately see that sort of flattening out?

And then secondly, do you have a sense, if any, how much of those payoffs are actually going back into your guys' portfolio in terms of the HFI book, just to kind of get a sense of kind of where some of those loans are going?

This is Barry. I'll go ahead and start on that. I guess to answer your second question first, there's approximately -- of the $146 million that we grew during the third quarter, $10 million of that was going to be loans, either in Alabama or Florida that were on the acquired portfolio, and that we have reworked the credits, we have additional guarantors, additional collateral, complete re-underwriting of the credit, and something that underwrites as any other credit would in a regular course of business. We approved it, and it moved over to the non-acquired portfolio. So, it's just $10 million of the $146 million that we grew actually migrated over.

As far as the other aspect of it, what we anticipate on the acquire portfolio is a continued working of the problem loans, and either through some type of rehabilitation or working them to the door from the standpoint of do a foreclosure process, settlement of debt, or something of that nature, those things are fairly sporadic, and, therefore, they kind of bring about some noise.

Then we've got the other side of the equation, on the past credit. We'll continue to grow those relationships and expand them. There will be some natural pay-downs and payoffs, just through amortization.

So, the portfolio will continue to trend down in a normal manner, with -- because all the new bookings are going to, of course, be on the non-acquired side. And so, it will continue to pay down through just amortization, with the exception of the final resolution of some of these credits which will be a little lumpy, which will cause the acceleration of the downward movement.

Okay, great. Thank you.

The next question is from Steven Alexopoulos with JPMorgan. Please go ahead.

Hi. Good morning, everyone. This is actually Preeti Dixit, on for Steve.

Just to follow up on the questions on the loan yields, could you give us some color on what new-money loan yields in the various loan buckets?

And then, given the mix of new loan growth that you're seeing, what's your outlook for that core loan yield pressure to bottom, outside of the noise and the fees, which you gave us a lot of color on?

Okay, I'll ask Barry to start there, and then Tom can jump in here.

When we look at it from an approval process, we have a very robust pricing model that focuses on ROE, and that's kind of how we judge things, because there's a lot of components to the pricing aspect, and, therefore, we're looking at it from an ROE perspective as our hurdle, and then when we're below that, we make sure that we've got the proper eyes on it in making those exceptions, especially on the larger deals.

One thing that we, during the third quarter, we did take note of the fact that about 43% of our new bookings were fixed rate, about 57% were variable, which, to us, is very encouraging. We're very careful about going out for long-term fixed rate loans, unless -- we much prefer to be on a three or five-year term debt, with a 15- to 20-year am on a real estate deal. So, we try to be very selective and mostly reserve those long-term fixed-rate financings, where we have to, for long-term existing customers.

Tom, you want to add some to that?

Yes, I would just say that if you're looking for guidance, we've talked about the -- sort of the natural volatility and noise in the yields, but in terms of the dynamic of commitments that we approve and then fundings that come on and how that's really impacting the core -- call it the coupon on the portfolio, I think it's reasonable to assume that you might have, say, 3 to 5 basis points of compression in the actual core portfolio coupon, say quarter to quarter, but, at the same time, the yield on the investment portfolio has been increasing by just call it a couple of basis points a quarter.

So, when you hear us -- and, of course, loans are about two-thirds of earning assets, investments are about one-third of earning assets. So, when you hear us talk about relatively stable net interest margin, that's why.

But, again, you add that up, and net of those things is, again, any given quarter you could be looking at a few basis points compression in net interest margin, but, again, I'd reemphasize the point that the strategy is to continue to grow loans, and at the pace we're growing loans, that growth in earning assets is going to trump any decline in net interest margin, so that you should expect net interest income to continue to increase.

Okay. That's actually really helpful. And then, switching gears, sorry if I missed this, but could you just provide some color on the nature of the two loans that moved into non-accrual status this quarter? And then, how much have these been written down or reserved against at this point?

Yes. Barry would be happy to do that?

On the two loans in question, it's a total of about $16 million as of the balances on 9-30, migrated into non-accrual. Both loans were -- are long-term customers with the Bank, have been substandard for a reasonable period of time.

One of the credits was actually a bankruptcy, so they're obviously removed to non-accrual. The other one was a different set of circumstances that it moved to non-accrual, as well.

What we did was, we did an impairment analysis on the loans to determine, based upon what we know today, in terms of the value of the company's assets, and we've done that analysis while we've ordered, obviously, updated values. We've done the analysis based on the values we have today and our interpretation of those, and we've added specific reserves to both of them totaling a little over, basically, $3.1 million for those specific reserves.

For that reason, had we not had those two loans migrate into non-accrual, we would have actually had no provision for the quarter. And we feel like the reserves that we've established, both through our pool accounting, our pool reserve accounting, and then that calculation, plus the specific that we added to it, we feel very comfortable that we're well reserved on both of those credits, probably for -- to a conservative extent, at this point.

But, like I said, we've ordered updated values on all the assets of both companies. We'll be getting those in here in the fourth quarter. If there's a need to kind of true that up a little bit, we can do so then.

Okay. Appreciate all the color, gentlemen. Thank you.

I guess the other thing, let me just add to this, the other thing is we consider this two unique situations, not really anything that relates to an economic change or a change in a particular industries that these two loans are involved, but are two unique situations.

The next question is from Dave Bishop of Drexel Hamilton. Please go ahead.

Hey, good morning, gentlemen.

Good morning, Dave.

Hey, turning to the fee income side of the house here, I think you noted there was some seasonal increase on the deposit service line, but, obviously, you guys are putting a fine-tooth comb on the expense side.

Any initiatives out there to drive fee income growth higher here, specifically to offset the Durbin impact?

I think we face a challenge that just about every other bank in the country does, any bank over $10 billion.

So, yes, we are looking at various options as they relate to our customers' deposit base. We are continuing to put focus on resources and efforts in the wealth management area, as well as the insurance areas, to help offset.

Obviously, the mortgage area, which is another fee income producer, is an area that has slowed over the last couple of years, because of what's going on in the housing market, but that business remains, still, very viable and very profitable, and, as we noted, we saw a 7% increase in volumes this last month, primarily due to a drop in rates. We would anticipate that we should have another good month in the fourth quarter there.

So, to answer your question, there are no quick solutions, but we feel good about the fact that in our first quarter under Durbin we've been able to, effectively, offset those losses in revenues, and we'll continue to look for new ways to do it with our existing customer base.

Great. And then, on the funding side, a little bit of a shift here in the funding this quarter, using some borrowings, rather than deposits with the runoff there.

Anything philosophically going on there, in terms of the outlook of loan fundings? Or is there some sort of timing impact? Just curious about how you're approaching that.

We'll let Tom Owens answer that.

So, what you're seeing for the year, essentially, is loan growth outpacing deposit growth by a few hundred million dollars. As you know, with our loan to deposit ratio about 70% or so, we have ample room to continue that trend, going forward.

So, we're just at a point in the cycle where we have ample liquidity, and we're very comfortable with that trend going forward into 2015. Obviously, there'd come a point at some point in the future where we might pivot a little bit, try and do some things on the deposit side, and/or choose to allow the investment portfolio to run down a little bit. But from a liquidity funding standpoint, we're in great shape and very comfortable, and there is no change in philosophy or plan at this point.

Great. Thank you.

The next question is from Blair Brantley from BB&T Capital Markets. Please go ahead.

Good morning, everyone.

Good morning, Blair.

I just had a couple quick questions. Most of mine have been answered -- or asked and answered.

The Durbin impact, did that come in line with your expectations?

Yes, it was right on target.

Okay. I just wasn't sure, because I thought you guys had mentioned about a $7 million impact, and, obviously --

No, I think we disclosed --

Blair, this is Louis. I think we disclosed in our last quarterly filings with the SEC, we've been at a range of $9 million to $10 million.

Okay.

Of course, you analyze that $2.5 million a quarter, it's right -- a little bit over $10 million. So, I think we hit right on the mark.

Okay, great. And then secondly, could you guys just give us an update in terms of M&A, what you look for, size, parameters, geography, things like that?

Our focus -- the M&A environment overall, there seems to be a few more banks out there that are interested in partnering with companies that they feel comfortable with. As far as our target, we have defined that we're looking for banks in the Southeast that will fill in gaps in our footprint or complement existing footprints to provide a higher market share. We continue to look, size-wise, at banks that are in the $300 million to $3 billion size range.

So, it's -- as we've noted before, we have to be patient. We're going to look to do transactions that benefit our shareholders long run, are cognizant of the dilutive impact of overpaying, and so, you stay at it, and, as the opportunities arise, you take advantage of them.

And that has been our philosophy. That's how we've grown, and we are not changing that philosophy.

Do you have a preference between something that maybe has some more hair on it versus some of the healthier sellers that we're seeing today?

We've -- we have done both over time, and if you mean, having hair on it meaning the bank has some problems that we can correct, I would say that we've proven on some of the previous more recent acquisitions that banks had had problems associated with the downturn in the economy, as we've talked in great length, about the acquired loan portfolio, and the benefits that we've derived, those certainly present opportunity.

The other side of that is that most banks have improved in terms of their health, in terms of their credit portfolio. Those opportunities aren't as great, and we've also shown that we can take well-run organizations and incorporate them into ours.

So, look at the big picture, but we don't have a preference, one way or another.

Great. Thanks, guys.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Jerry Host for any closing remarks.

Thank you, operator, and thank you all for joining us today. We feel like we've had an exceptionally good quarter at $0.50 a share. We will continue to operate this Company, keep it moving, keep it growing, so that it provides a great return for our shareholders over the long run, and that's how we -- that's how we look at this Company.

And so, we appreciate very much your interest, and look forward to the fourth quarter call in early January. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.