Trustmark Corp (TRMK) 2014 Q4 法說會逐字稿

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

(Operator Instructions)

As a reminder, this call is being recorded. It is now my pleasure to introduce Mr. Joey Rein, Director of Investor Relations at Trustmark.

Please go ahead.

Good morning and thank you. I'd like to remind everyone that a copy of our fourth-quarter earnings release, as well as the slide presentation that will be discussed this morning, is available on the Investor Relations section of our website at Trustmark.com.

During the course of our call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We would 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 will turn the call over to Jerry Host, President and CEO of Trustmark.

Thank you, Joey.

And good morning, everyone, and thanks for joining us. Also joining me this morning are Louis Greer, our CFO; Barry Harvey, our Chief Credit Officer; and Tom Owens, our Bank Treasurer.

During 2014, Trustmark celebrated its 125th anniversary. Much has changed since our inception 125 years ago. We've grown to become a trusted financial advisor for businesses across the Southeast.

We recognize and appreciate the sources of our continuing success -- our associates, customers, shareholders, and communities we have the privilege to serve. 2014 was a great year for Trustmark.

Now let's review our financial performance, beginning on page 3 of the presentation material. Our legacy loan portfolio experienced its seventh consecutive quarter of growth during the fourth quarter. Loans held for investments increased at an annual rate of 7.2%, and balances were up 11.2% from the prior year. We're very pleased with this performance, and we look forward to building upon this momentum as we've entered into 2015.

Over the course of the year, the acquired loan portfolio also made significant contributions to our profitability. During the fourth quarter, the acquired loan yield continued to be in line with our expectations. Asset quality metrics also continued to perform well, as criticized and classified loan balances continued to decline in our legacy loan portfolio, both for the quarter and the year.

Our deposit base is well-diversified and provides an excellent low-cost source of funds. In the current interest rate environment the strength of this deposit base is underappreciated, but it is truly a strength of our franchise.

Total revenue for 2014 exceeded $578 million, the highest level in our history. We are pleased with the performance of our Insurance and Wealth Management businesses, as well as the performance of our Mortgage Banking business, particularly in light of the challenging operating environment.

We continued efforts to optimize our branch network by consolidating five branches and opening three new branches in 2014. Our capital position continues to remain solid, reflecting our consistent profitability from our diversified financial service businesses.

Net income for the fourth quarter was $28 million, which represented earnings per share of $0.42. Our financial performance during the quarter produced a return on average tangible equity of 11.4% and a return on average assets of 0.92%.

I would also like to remind you that our Board declared a quarterly cash dividend of $0.23 per share, payable on March 15, 2015, to shareholders of record on March 1. Based upon our current valuation, our stock has an extremely attractive dividend yield of approximately 4%.

For the year ending December 31, 2014, net income totaled $123.6 million, which resulted in diluted earnings per share of $1.83, which is an increase of 4.6% from the prior year.

Turning now to slide 4, let's discuss the results in a little bit more detail. We continued to experience significant growth in our legacy loan portfolio. At December 31 loans held for investment totaled $6.4 billion, an increase of $115 million from the prior quarter, and an increase of $650 million, or 11.2%, from one year ago.

Construction, land development and other land loans increased $39 million from the prior quarter and $23 million from the prior year. Growth was primarily from our Texas, Alabama, and Tennessee markets, and it was driven by commercial and residential construction.

Other loans, which include lending to states and municipalities, non-profits and REITS, grew $39 million during the quarter and $161 million from this time last year. And growth occurred across most of our markets.

Commercial and industrial loans increased $23 million from the previous quarter and was mainly due to growth in the Mississippi and Alabama markets. Compared to one year earlier, loans grew $113 million as a result of growth in Mississippi, Alabama, and Tennessee.

Other real estate-secured loans, which include existing multi-family projects, increased $14 million during the quarter, with growth primarily in Mississippi and Alabama markets. From the prior year, these loans increased $64 million as growth occurred in Mississippi, Alabama, Texas, and Tennessee markets.

The single-family mortgage portfolio grew $9 million from the prior quarter and $149 million from the prior year, due principally to growth in the Alabama and Mississippi markets. Loans secured by nonfarm, nonresidential real estate decreased $8 million during the quarter as growth in owner-occupied real estate was offset by declines in the income-producing loans. When compared to a year earlier, these loans increased $138 million with growth across our five-state franchise.

Given the recent decline in oil prices, I'd like to take this opportunity to provide an update regarding Trustmark's exposure in the energy sector. First, we are not exploration and production- or reserve-based lenders. That said, Trustmark has total energy sector exposure of approximately $432 million. This represents roughly 4.5% of our total loan exposure.

At year end, outstanding energy-related balances were $208 million, representing 3% of our total loan portfolio at year end. At year end, we had no adversely rated credits and all are performing. Should oil prices remain at current levels or below for a prolonged period of time, there is a potential for downgrades to occur. And we will continue to monitor the situation as appropriate.

Now, turning to slide 5, at December 31 acquired loans totaled $549 million, a decrease of approximately $43 million from the prior quarter and $255 million from the prior year. During the fourth quarter, the effective yield on acquired loans was 8%, while recoveries on acquired loans totaled $2 million. As a result, the total yield on acquired loans was 9.38% for the quarter.

We expect the yield on acquired loans, excluding recoveries, to be in the 6.5% to 7.5% range for the first quarter of 2015 as a result of our most recent re-estimation of cash flows. Based upon the previous mentioned re-estimation of cash flows, we anticipate acquired loan balances, excluding any settlement of debt, to decline approximately $50 million during the first quarter of 2015.

Now turning to slide 6, please note that these credit quality metrics I'll discuss exclude acquired loans and other real estate covered by an FDIC loss-share agreement. At December 31, 2014, nonperforming loans totaled $79 million, a $9 million decrease from the prior quarter. Other real estate totaled $93 million, a decrease of $4 million, or 4.7%, from the prior quarter. Nonperforming assets totaled $172 million, a decrease of $14 million from the previous quarter.

During the fourth quarter, recoveries exceeded charge-offs, resulting in a net recovery position of $875,000. For the year 2014, Trustmark had a net recovery position of $2 million.

Classified loans declined 5.4% from the previous quarter, while criticized loans decreased 14.7%. Compared to the prior year, classified loan balances fell 12.3%, while criticized loan balances decreased almost 16%. The allowance for loan losses totaled $69.6 million and represented 180.95% of nonperforming loans, excluding impaired loans.

Looking at slide 7, during the fourth quarter, average non-interest-bearing deposits represented 29% of our average deposits. We are fortunate to have a fantastic deposit base, with approximately 60% of our deposits in checking accounts.

Trustmark has a top three deposit market share in 65% of the markets we serve, and top five position in 75% of our markets. We have been successful in maintaining or increasing market share while simultaneously lowering our cost of deposits, which was 14 basis points in the fourth quarter.

Turning to slide 8, our revenue exceeded $578 million in 2014, the highest level in our 125-year history. For the fourth quarter, net interest income totaled $103.1 million, resulting in net interest margin of 3.86%.

Interest income decreased $7 million from the prior quarter, due in part to a $6.7 million decline in recoveries on acquired loans. Excluding acquired loans, the net interest margin totaled 3.54% in the fourth quarter and included $2.2 million, or 8 basis points, of yield maintenance payments on prepaid securities. Based upon the current interest rate environment, we would expect modest pressure on the net interest margin to be offset in part by additional loan growth, resulting in increased core net interest income.

Non-interest income totaled $42 million in the fourth quarter, down 2% from the prior quarter but up 8.7% from levels one year earlier. Insurance revenues for the fourth quarter totaled $7.8 million, a seasonal decline of 15.2% from the previous quarter and a 6.6% increase from the prior quarter. Insurance revenue for 2014 totaled $33.5 million, an increase of 8.6% from 2013. The improved performance from the prior year was a result of increased business development efforts.

In the fourth quarter, wealth management revenue totaled $8.5 million, an increase of 5.3% from the prior quarter. For 2014, wealth management revenue totaled $32.3 million, an increase of almost 10% from the prior year. This growth was a combination of improved profitability within the Trust Management business as well as increased sales within the Investment Services area.

Mortgage Banking revenue for the fourth quarter totaled $5.9 million, an increase of 1.3% from the previous quarter. For the year 2014, Mortgage Banking revenue totaled $24.8 million, a 26% decline from the prior year, primarily due to lower secondary marketing gains resulting from tightening mortgage spreads and reduced volumes.

During the fourth quarter, service charges on deposit accounts totaled $12.5 million, a decrease of 1.8% from the prior quarter and 4.6% from the comparable period one year earlier. This decline was due in part to a reduction in NSF and overdraft fees, reflecting changes in customer practices.

Banking card and other fees totaled $6.7 million for the fourth quarter, a decrease of 7.8% from the previous quarter and nearly 30% from the comparable period one year earlier, reflecting the impact of decreased interchange income as Trustmark became subject to the Durbin Amendment as of July 1, 2014.

Looking now at slide 9, noninterest expense in the fourth quarter totaled $104 million, excluding ORE and intangible amortization of $5 million. Noninterest expense totaled $99 million, an increase of $2 million from a comparable expense in the prior quarter. This increase was primarily reflected in salaries and benefits and other expenses.

In the fourth quarter, salary and benefit expenses increased $484,000 from the prior quarter, which included a year-end incentive accrual of $1.3 million, offset by reductions in commissions of $742,000. Other expense increased $1.5 million from the prior quarter, reflecting primarily an increase in contingency reserves.

As previously mentioned, we consolidated two banking centers during the fourth quarter. For the year 2014, we consolidated five offices and opened three new banking centers in Birmingham, Montgomery, and Memphis, reflecting our commitments to reallocate and reinvest resources in an effort to increase our revenue base.

Turning to slide 10, Trustmark continues to maintain a solid capital position, reflecting the consistent profitability of our diversified Financial Services business. We have the financial capital and human capital to support growth. We also use capital to compensate our shareholders for their investment in Trustmark in the form of dividends. And as I previously mentioned, we have an extremely attractive dividend yield of nearly 4%.

Turning to slide 11, we have a number of strategic priorities to enhance shareholder value. Profitable revenue generation -- this continues to be our primary focus, finding more ways to create and expand customer relationships. This will include our continued focus on business development and cross-selling efforts across our multiple lines of business and geographic markets.

We anticipate continued growth in loans held for investments. Pipelines remain strong, and we expect to build upon the momentum established in 2014. We will also continue to build on the success of our referral program, which last year had more than 86,000 referrals, resulting in approximately 33,000 accounts being opened.

Process improvement and expense management -- we will effectively utilize technology to become more efficient and manage the cost of doing business, while also ensuring we provide a competitive array of products, services, and delivery channels. In addition, we will continue reviewing our branch network to enhance productivity and efficiency.

Leverage existing infrastructure investments -- we have made many investments in recent years to support revenue growth, improve efficiency, and ensure regulatory compliance. We have the infrastructure in place to support a significantly larger organization, and that goes hand-in-hand with being a $12 billion bank. Our focus is leveraging the investment in our infrastructure.

Credit quality -- we will continue our sound underwriting and review processes and our focus on resolution of problem assets.

Effective risk management -- there have been a tremendous amount of new regulations placed on the banking industry. We will continue to work towards ensuring that our enhanced risk management processes help us to more effectively manage our businesses.

Mergers and acquisitions -- we will continue to use M&A as an opportunity to complement internal growth and expand into additional attractive markets. But rest assured, we'll be patient and disciplined in the process to ensure that we create long-term value for our shareholders.

At this time, I'd like to open it up for any questions that you may have.

(Operator Instructions)

Catherine Mealor, KBW.

Good morning, everyone. Jerry, thanks for the additional disclosure on your energy book. Just a couple questions on that. First, do you know how much of that $400 million is in syndicated credits?

Yes, Catherine, what I'd like to do is let Barry have a chance because I think there's probably several questions relative to the energy exposure. Let Barry go through a recap in a little bit more detail of what we have and what we have looked at, and how we've looked at it relative to the energy sector.

That would be great. Thank you.

And, Catherine, I'm going to answer your question and then talk about the subject matter in general. The great majority of our energy exposure is going to be in the form of syndications that we've purchased into. These are large companies, high quality, diversified, oftentimes publicly-traded companies that we are engaged in.

With that in mind, I do want to just scope a little bit of where we are. As Jerry mentioned, our exposure to energy is 4.5% of our total bank loan exposure, 3.5% of our balances. Our mix is what I think is very important, as well.

Our upstream exposure is about $6.5 million. None of that is actually exposure to the commodity in the ground. The loan wasn't made on that basis, nor is the extraction of it the way in which we are going to get repaid.

So, we basically have no E&P and/or reserve base type of exposure, which I think is what is very directly correlated with the value of the commodity going up and down. What we do have is some midstream exposure of about $193 million, downstream about $54 million, oil services about $178 million. Our total exposure, as Jerry mentioned earlier, is $432 million.

The demographics of it is, while we show it as Mississippi because of where our calling efforts are originating out of, the southern part of Louisiana we have about $217 million worth of exposure there, and Texas is actually $189 million worth of the exposure. Put it in perspective, Texas exposure for us, across all areas, is about $1.62 billion. So, even for Texas, our energy exposure in Texas is less than 12%.

So, it is a part of what we do. We know what we don't understand. And there's parts of it we don't feel like we have the expertise in so we don't dabble in them.

We don't buy a piece of somebody's deal and hope they know what they're doing. That's not the approach we take. We try to stick to the parts of the business that are more operating in nature and more of a traditional C&I type of lender who happens to be transporting a commodity as opposed to some other type of goods.

Along those lines, Catherine, what we've done is we've gone in and looked at about 25 credits, which make up approximately about 80% of our exposure. We've gone through and looked at those in great detail to determine how they are impacted or are they impacted by the change in the oil price.

And throughout that process, I think we've found clearly that the balance sheet strength of these deals, of these credits, is extremely strong. We've looked and see do they have variable costs that can be adjusted as revenues adjust and then we've looked at the CapEx level that's going to be needed going forward.

We've looked at how they've responded to the commodity drop in 2009. Although it be an up and down pretty quick, it did drop meaningfully back in 2009, as you can remember. And then we've looked at our covenant packages we have in place and the early warning signals they're going to send to us, and our ability to get the borrower back to the table while they are still in a profitable condition.

So, with all those things we've gone through and looked at that in great detail and feel very comfortable with the borrowers we have, understanding that if the low commodity prices persist for a long period of time and is protracted, we, like all other institutions with energy exposure, do have the propensity to have some downgrades. But we feel very comfortable with the position we're in today and the types of credits we're in and the quality of the companies.

Okay, Barry, that was really helpful. Thank you so much for going through that. And a follow-up, maybe just thinking about the growth piece of it, implications of that going forward. Now it seems like that is a smaller piece of your Texas portfolio than I had envisioned.

But, still, your Texas portfolio has been growing at about 11% or so pace over the past couple of years, representing, I don't know, around 15% maybe of your historical growth. And, so, how do you think about a slowdown in the Houston market possibly impacting your forward growth as a company moving into this year?

Of course that's going to remain to be seen. But I do think there are several industries that are very active and a very integral part of the Houston market that are going to benefit, obviously, from lower energy prices. So, it's going to be kind of a have and a have nots.

We do anticipate, with low commodity prices over a long period of time, there may be a slowdown in some of our CRE opportunities that we have today. But to offset that, we've got a lot of CRE commercial construction projects on the books that have quite a bit of equity going in on the front end we've yet to fund. So, we've got a lot of book loans that we will be funding up in 2015 and into 2016.

We feel like that, while it's unknown as to the ultimate impact of the lower commodity prices, we do believe there's beneficiaries of that. We do believe those are quite a few of our customers in the Houston market based upon 88% of our customer base being unrelated to energy directly. So, we feel like there's going to be pros and cons to it, but we feel like for us there may be a little bit of a slowdown in projects coming forward on the CRE side. But that remains to be seen.

I think on the whole we think it's probably a neutral. It could be, over a long period of time, maybe a little bit of a negative drag on opportunities.

Let me add a little color, too, Barry. Catherine, of the 11% growth in the held-for-investment portfolio in 2014, which was about $650 million, about 38% of that came from the Alabama market. So yes, Texas is very important and we all know how much has been going on out there, the concerns around the energy sector and the impact. But we are working to remain diversified in our growth.

I guess it goes back to the middle of 2005 and 2006 and the growth we had in the Florida market. We were somewhat concentrated and we're hoping we remember that lesson as we move forward.

And as we look at 2015, and try to anticipate the type growth, the pipelines continue to remain strong. The rate of growth we would anticipate will be less than last year's overall. We think we'll be somewhere in the 7% to 8% of growth in that held-for-investment portfolio.

And, Jerry, to add to your point regarding our growth in 2014, the $651 million from the legacy bank, virtually none of that was energy-related growth. And also none of that was SNC purchased growth. We were basically flat as it relates to Shared National Credits that we acquired positions in for the year as a whole. So, the growth was very much organic and non-energy-related.

Great. Thanks for all the color. I'll hop out now.

Emlen Harmon, Jefferies.

Good morning, guys. I was hoping to talk about the expense outlook a little bit. I've actually -- for you guys, I prefer to look at the expenses-to-asset ratio, just given that there's some noise that can throw the efficiency ratio around.

But if I look at that measure, you guys have been -- expenses have been 3.4% to 3.5% of assets the last few years. I know that you've been making a lot of investments in technology. Is there a point at which we start to see that 3.4% to 3.5% inflect down? If you could give me any color on the 2015/2016 expense outlook that would be helpful.

Louis?

How are you doing this morning? Our expenses on a core basis, as we look at it, which we take out ORE and the amortization of intangibles, have been pretty consistent on a quarterly basis throughout 2014. I think on an average we've been a little bit over $97 million.

And you are exactly correct -- we continue to reinvest in technologies where we've grown over $12 billion to support our much larger company. I think we're going to see some of that continue into 2015. Maybe in the later part of 2015 we'll see some reductions and I would expect that our run rate in 2015 to be somewhere between the $96 million and $97 million when you look at just core expenses. I think, as it equates to the percent of expenses, you'll see that change slightly, but I don't think you'll see a huge, drastic change.

We also see some continued investment in our compliance costs. The support to be in compliance today with DFAST and all the other regulatory matters, we're continuing to have to make investments in people to support that infrastructure, being over $12 billion.

Got it. Thank you. That's very helpful. And, then, you guys do a very good job of just spelling out expectations for the explicit accretion on the acquired loans. Is there any way to gauge expected interest income from recoveries as we look out over the next year here?

We'll let Barry answer that because that's one of the big unknowns that we have, or challenges, is projecting that. But, Barry?

Yes, it's tricky, but I figured I would try it.

Yes. I think what we can say with some level of certainty is that the recoveries we experienced in 2014 are not repeatable in 2015. Having said that, we do have quite a few credits that we have some good opportunities in, some we feel very strongly about the eventual occurrence of that recovery. Some we're probably putting a probability on it and trying to estimate what we think we may end up with. But we do feel like there are a significant amount of recoveries still to be had in 2015, just not to a level that we experienced in 2014.

Okay. Thanks. Appreciate it.

Steven Alexopoulos, JPMorgan.

Hello. Good morning, everyone, this is Preeti Dixit on for Steve. I want to start with spread revenue. If we back out the recovery income and the $2.2 million in yield maintenance payments, it looks like core FTE NII was about $99 million this quarter.

I know in the prepared comments you said you expect enough volume to offset margin pressure. But given the guidance for the acquired yields ex recoveries to decline, do you think we continue to see some pressure on that core NII near term and then hit an inflection point? Or are you saying you expect net growth from current levels?

I'll take that. And, Tom, if you want to add to it -- Tom Owens. Our expectation is that, given I guess over the last two months, the change in the economic environment, and an environment in which there does not appear to be significant pressure to raise interest rates, given that, we will continue to see increased pressure on the core NIM. We could see it be somewhere in the 3.40% to 3.45% range for 2015.

As I mentioned earlier, the pipelines remain very healthy in terms of anticipated loans that will fund and loans that we believe we will close during the year. Our projection, now, is for it to keep the net interest margin where it -- the interest margin, interest income margin, about where it is or slightly higher. But there again, there are a lot of variables in there and as you have seen on the acquired loan portfolio, there's even greater volatility there in terms of working to project that.

Tom, you want to add some thoughts on it?

I would just say, a simple way to think about it is, as Jerry indicated, if you have mid-single-digit loan growth, net interest income, core net interest income, is just simply volume times spread, right? And, so, if you have mid-single-digit loan growth, and if you did have margin compression of -- if you are at 3.45%, 3.46%, and if you have 3, 4, 5 basis points of margin compression, that's only 1%. So, if you have 5% growth in volume, say, as an example, and 1% decline in spread, net interest income will rise, and that's essentially what we're saying.

Okay. That's helpful. And then, Barry, just a follow-up on the energy loans; do you have what the allowance is on that portfolio today?

And then I know you mentioned the potential for downgrades. Is there some type of trigger event, for example, receiving year-end financials, before you actually take any rating actions on the portfolio? I know a lot of other banks have pointed us to the second quarter as being a beginning of maybe seeing provision increasing.

As far as the reserving today, these are all, in the Trustmark world, we don't -- as Jerry indicated earlier, none of these loans are criticized, so they're going to be all pass credits. And, like any other institution, you're going to have a low PD and a low LGD on any pass credits. So, the reserving is going to be fairly limited because of the pass nature.

Having said that, I do think the second quarter of 2015, once we start to get in the audited financials for those calendar year ends, is going to give us some insight as to what the effects are going to be. But long before then, as I mentioned earlier and I think it's very important, the companies we're doing business with are larger companies. We do have a very extensive covenant package and the covenants typically are fairly tight in the sense of where they are today versus what the covenant allows.

So, I think we're going to see some early indications coming out of covenant violations that we monitor very carefully, have conversations with the borrower, get monthly borrowing basis on working capital lines of credit. Things of that nature, I think, are going to send some signals to us, maybe even before we get audited financial statements toward the latter part of the second quarter of next year.

Okay, perfect. And then last one from us, just given the recent step-down in long-term rates, are you seeing a pickup in refi activity? And maybe just some outlook on mortgage banking volumes and margins, assuming this rate environment holds.

I'll answer that. We did about $1.2 billion in volume last year. Given the fact that we've seen rates drop at the long end, we would anticipate that these volumes for 2015, if this continues, will be there or even slightly better than we've seen.

The real question is what happens with the spreads. We're anticipating that we'll meet or exceed, given this interest rate environment, last year's volumes. And we would hope we would be able to achieve revenue streams, but that is all driven by what happens with the spreads.

Got it. Thank you so much, everyone.

Brad Milsaps, Sandler O'Neill.

Good morning. I just wanted to touch on the loan yields held for investment. I know you mentioned last quarter that those were affected by lower loan fees. It looked like you were down maybe 4 bps this quarter.

Just curious how much of that was affected by fees versus just the overall interest rate environment, the possibility of those coming back and maybe you get a little bit of an uptick there. Just curious on the mix and how the loan yields came down.

Tom?

It's about 50/50. We've talked in prior calls about the fact that loan fees run in the channel that I characterize as about a 10 basis point channel on loan yield. In the fourth quarter loan fees were very much towards the lower end of that channel. So, if you were just talking about the dynamics on loan fees, there is reason to expect that that could rebound somewhat.

Okay. And then, just to follow up on the reserve and provision question, I know you had net recovery this quarter which triggered a negative provision. It looked like a lot of that came out of I guess the Mississippi and Texas regions. Just curious what your outlook would be for provisioning. I know you've got a lot of moving parts, but just thoughts there with all that's going on within those two specific footprints going forward.

Sure. And, Brad, this is Barry. What really drove our negative provision this quarter was really at the process we go through each quarter, which is updating our quantitative and our qualitative reserves, as opposed to maybe specific credits.

On the quantitative, we have a 12-quarter rolling average. And as we continue to roll off some of the higher charge-off quarters from the past and roll-on some much better quarters in terms of net recovered quarters, then there is a release of reserve associated with that that is part of the negative provisioning this quarter.

The other part of it is on the qualitative part. And as the trends begin to continue ever so slowly to improve as far as the economy, as far as our own credit quality within our own portfolio, and a number of other factors that reserve level continues to be less necessary as well.

But, back to your point, because we do this at a market level, if we do begin to see some deterioration in creditworthiness or quality or other types of indicators that we use in our qualitative measures within the Texas market, specifically Houston, it will begin to require reserving, at that point, as well as any individual loans that may wane on their own. Those would require reserves, as well.

So, it's a double trigger. We have the reserves on any credits that fall out of a pass category. And then as it impacts the portfolio, that's part of our qualitative as well, which is trying to be a little more forward-looking. And as those weaken there's reserves required there, as well.

Okay. Would you anticipate -- you've had net recoveries, I think, three out of the last four quarters -- would you anticipate that continuing? Or what's your crystal ball saying in terms of where your position is as it relates to recoveries and how that might affect your provisioning in 2015?

I think the way we view it is a continuation toward a flattening and then a gradual provisioning on a quarterly basis. We don't see any big changes or sea changes for 2015 versus 2014. But we do see less negative provisioning, maybe a flattening and then eventually some moderate provisioning going forward.

Okay. Great. Thank you.

(Operator Instructions)

David Bishop, Drexel Hamilton.

Good morning, gentlemen. Most of my questions have been answered. But just a question in terms of real estate-owned costs there. I know they fluctuate a little bit here, ticked back up fourth quarter. Any sense directionally where those could trend heading into 2015 as you move through the credit cycle here?

This is Barry. I would say that when you look at 2014, and you think about 2015, that's a pretty logical run rate there. We always work to do better, but today I think that's a good way to look at it. In the fourth quarter, we did -- we have an ORE reserve and we did increase that ORE reserve by about $2.25 million. That's what drove most of that expense.

Having said that, the positive aspect of that is, as knowledge of potentially a property or two where the value has changed, once we get that appraisal in 2015 the P&L impact of that reevaluation we believe has been felt in the form of the reserve that was associated with that property. So, that will benefit the Bank as we move forward.

So, I think we're trying to stay on top of anything we know. We try to make sure we properly reflect that in the quarter in which we know it, even though it may not manifest itself till later on in 2015 when the appraisals are obtained.

Got it. And then a follow-up in terms of loan growth. I think you cited the strength in Alabama driving some of the growth this year. Just curious in terms of anything specific to that market that's really driving that growth?

I would say probably the driving factor today is going to be on the commercial construction side. We see some good opportunities with some quality borrowers. We continue to work hard on the C&I side. That's a little slower process by which you get a piece of business and then, eventually, you hopefully move that relationship over time.

We have had success in the healthcare area. Our folks have done a good job of moving several pieces of meaningful business, especially down in south Alabama, away from some of our competitors. And there's other opportunities with that business, both from a private banking, wealth management, insurance.

So, I think we're doing a good job of going after some high-quality customers and trying to be very competitive to get our foot in the door on the C&I side. But today the predominant driver is going to be commercial construction and with a little bit of residential construction as well.

Great. Thank you.

Kevin Fitzsimmons, Hovde Group.

Hi, guys. Good morning. Jerry, could you give us a refreshed outlook on how you're thinking about M&A? And, if you could stock rank some of the areas in terms of your priority for you?

And if you could specifically give us your thoughts on Texas, because I think in the past how you've characterized it is, hey, we want to get bigger, we want to grow in Texas, but it will probably be organically, just given the pricing of potential sellers in Texas. We've had really a sea change here where a lot of those the pricing expectations might be much lower, but it's also an environment where there's just a lack of clarity about what you're going into in terms of oil prices.

So, how do you feel about that? Do you feel that amid all this uncertainty there may actually be some opportunities for you guys? Or would you rather just wait for an all clear before you'd ever consider something like that? Thanks.

Kevin, I think you may have been listening in on some of our strategy meetings. You've really classified it fairly well. Yes, the environment has changed. Yes, we want to rethink some opportunities because of how things have changed. But, as you point out, you have to be careful what you are looking to buy and what kind of exposure you might be bringing on.

We have done, over the last several years, a number of acquisitions that we feel have added real value. And especially BancTrust, where you can see what we're picking up on the acquired loan portfolio, at the same time growing organically on their existing franchise, which was a very good franchise.

So, yes, we look to find other opportunities. Texas had not been on the priority list because of valuations, so our focus was acquiring people to help us grow organically. We will continue that process but also now start looking at opportunities there.

The other areas we've talked about have been throughout the Southeast and where we can add some scale to some of the existing footprint that we have. Most of the organization, with the exception of a handful, is focused 100% on how do we grow organically, how do we build off what we have. And then there's a handful of us that are looking at opportunities that are out there.

If we continue in this low interest-rate environment, this increased focus on regulation, I think you'll see a number of opportunities in banks that are of a size that we would be very interested in open up. So that really is where our focus is.

Okay. And I probably should have added this in here to my reference to Texas, but I would be guessing that Louisiana would fall in there, as well, right? That Louisiana, in terms of where you have a branch presence, it's really a bit of a hole in the franchise, and maybe you'd characterize that the same way; that maybe there might be opportunities that come, just due to the stress that you have or that's in the environment, but you'd have to look carefully.

Yes. We would. And I would also add, as you heard Barry mention before, that in the Mississippi growth numbers are loans that are actually to companies that are headquartered in the Louisiana market, specifically in south Louisiana. So, we have established a presence with our commercial corporate calling officers there. And in the event we have the opportunity to find something in Louisiana, certainly we would look at that.

The other area we would look at, continue to look in Tennessee. We'd continue to look to expand in Alabama. We're building out organically in the Birmingham area. And we look for opportunities there in the Huntsville area, northern Alabama.

Okay, great. One quick follow up, and I apologize if you guys addressed this already when talking about expenses. But the last call you guys talked about James Outlaw coming on and taking a fresh look at technology and ways to get more efficient. I know it's probably early in that process, but if you can just give us a sense on any early things that have been discovered or being pursued that could lead to efficiencies down the road.

It is a little bit early, Kevin. We're allowing Jim some opportunity to come back into the Company. He has looked at those things that have changed since he left eight years to go to Houston. And, as a reminder, he was in charge of technology and operations for the Company.

That role as Chief Administrative Officer has been expanded to HR; it's been expanded to regulatory compliance and risk management. We put significant resources and effort into that area over the last three or four years. It's -- part of what we want Jim to do, is to look to see how efficiently it's operating and how we can improve on that while increasing our regulatory focus.

HR -- that area we've installed new technology and a new system. I think Jim will identify some ways for us to become more efficient in that area, resulting in what we believe will be some cost saves. But there, again, a little premature.

We did have our HR Director, after 51 years in the banking industry, retire at year end. She has moved on, so that's part of what Jim's looking at. So it's an awful lot for him to have consumed within a fairly short period of time.

But I would say that he is identifying some areas of focus. Couple that with what Louis is doing in the way of accountability measures, deeper and more detailed in the Company, we feel confident we're going to find some ways to save money. We're not quite ready to talk about that in specifics.

Okay. Great. Thanks, guys.

(Operator Instructions)

Steve Moss, Evercore.

Good morning. I just have one question here regarding the yield on acquired loans. Wondering, as we think about the full year here, how we should think about the yield excess recoveries? I know it's come down from the prior quarters and just wondering if that's perhaps a better run rate for 2015.

Barry, you want to take that one?

Yes, I'll start, and Louis will jump in here. But I do think the disclosed accretable yield for the first quarter probably is a good way to look at the year as a whole. We anticipate a reduction in balances in the neighborhood of $150 million (multiple speakers). Say again, Louis.

I said the balances as of the end of the year were about $549 million, I think, throughout 2015. I think we're expecting about $150 million paydown with cash flows.

And so, for that reason, I think we look at the first quarter indicative of the remaining portion of the year in terms of the accretable yield percentage. Having said that, the majority of what we think may come in the way of recoveries today technically are not accreting, or if they're accreting they are accreting to a terminal value through a foreclosure or a settlement of debt or something of that nature.

So, we really don't anticipate any recoveries that we have adversely affecting the accretable yield. There may be other reasons through payoffs or paydowns that may impact that accretable yield, but at this point, we look at the first quarter as a pretty good run rate in terms of a percentage.

That excludes -- what Barry is giving you is in our presentation on slide 5. That is only accretion. It has no recoveries in it. I think you're asking if the most recent quarter is more indicative, I'd say it would be. It could be slightly higher than the fourth quarter.

But, again, as Barry said, we do expect it to significantly drop from that $23 million for 2014. So, it's hard to give you an exact number.

I appreciate that. Thank you very much.

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

First, I'd like to say thank you for your interest in Trustmark and for joining us today. We feel we've had a great 2014. We've talked about some of the headwinds, given the low interest-rate environment, some slowing projected in the economy, the regulatory environment we're in, and costs associated with that. But a commitment to stay focused there.

We believe, though, that that is going to be offset by the momentum we have in our business development efforts, our cross-sell efforts as it relates to loan growth, growth in our insurance business, growth in our wealth management business. And we are looking forward to 2015 as another great year for Trustmark. Again, thank you for joining us, and we look forward to talking with you again for the first-quarter call in April.

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