Trustmark Corporation (TRMK) Q4 2014 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Trustmark Corporation's Fourth 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 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 Web site 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'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 Gerry Host, President and CEO of Trustmark.

Thank you, Joey, and good morning, everyone. Thank you 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 enter 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 yields 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, and the current interest 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 continue 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 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 on 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, lets' discuss the results in a little bit more detail. We continue to experience significant growth in our legacy loan portfolio. At December 31, loans held for investments 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 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 it was mainly due to growth in the Mississippi and Alabama market. 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 multifamily 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 Alabama and Mississippi markets. Loans secured by non-farm, non-residential 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 the 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 [ph], 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 credit, and all are performing. Should oil prices remain at current levels or below for prolong 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 yields on acquired loans was 8%, while recoveries on acquired loans totaled $2 million. As a result, 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 that I will discuss excludes acquired loans and other real estate covered by an FDIC loss-share agreement. At December 31, 2014, non-performing 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. Non-performing 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 loan decreased 14.7%. Compared to the prior year, classified loans balances fell 12.3% while criticized loans balances decreased almost 16%. The allowance for loans losses totaled $69.6 million and represented 180.95% of non-performing loans, excluding impaired loans. Looking at Slide 7; during the fourth quarter, average non-interest bearing deposit represented 29% of our average deposits. We're fortunate to have a fantastic deposit base with approximately 60% of our deposits in checking accounts. Trustmark has the top three deposit market share in 65% of the market we serve, and top five position in 75% of the markets. We've been successful in maintaining or increasing market share while simultaneously lowering cost to 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 eight basis points of yield maintenance payment on prepaid securities. Based upon the current interest environment, we'd expect modest pressure on the net interest margin to be offsetting impart 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 revenue for the fourth quarter totaled $7.8 million, a seasonal decline of 15.2% from 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 increase 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, 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; non-interest expense in the fourth quarter totaled $104 million, excluding ORE and intangible amortization of $5 million. Non-interest 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 expense increased $484,000 from the prior quarter, which included a one-year incentive accrual, excuse me, 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 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 service 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, cross selling efforts across our multiple lines of business and geographic markets. We anticipate continued growth in our loans held of advancement, 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 managed the cost of doing business while also ensuring we provide a competitive array of product, services and delivery channel. In addition, we will continue reviewing our branch network to enhance productivity and efficiency. Leveraging existing infrastructure investments, we've made investments in recent years to support revenue growth improve efficiency and insure regulatory compliance, we have the infrastructure in place to support significantly large 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 resolution of problem assets. Effective risk management, there's been a tremendous amount of new regulations placed in 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. The rest assured, we will be patient and disciplined in the process to ensure that we create long-term value for our shareholders. At this time, I would like to open it up for any questions that you may have.

[Operator Instructions] And our first question comes from Catherine Mealor of KBW. Please go ahead.

Good morning, everyone.

Good morning, Catherine.

Gerry, 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 would like to do is let Barry have a chance because I think there is 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 have looked at it, relative to the energy sector.

That would be great. Thank you.

Catherine, I'm going to answer your question and then talk about the subject matter in general. But the great majority of our energy exposure is going to be in the form of syndications that we purchased into. These are large companies, high-quality diversified, often times publicly traded companies that we are engaged. And with that in mind, I do want to just scope a little bit of where we are. As Gerry 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, and 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, total services about $178. Our total exposure, as Gerry mentioned earlier, is $432 million. The demographics of it is, while we listed it -- while we show it as Mississippi because of where our calling efforts are originating out of, the southern part of Louisiana we have about $270 million worth of exposure there, and Texas is actually $189 million worth of exposure. To put it in perspective, Texas exposure for us across all areas is about $1.6 billion, about $1.62 billion. And 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 is 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 for somebody to steal and hope they know what they are doing. That's not the approach we take. So we try to stick to the parts of 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 have done is we've gone in and looked at about 25 credits, which make up approximately about 80% of our exposure. We are going through and look at those in great detail to determine how they are impacted, are they impacted by the change in the oil price. And throughout that process, I think we have found clearly that the balance sheet strength of these deals, of these credits is extremely strong. We look and see, do they have variable costs that can be adjusted as revenues adjust, and then we looked at the CapEx level that's going to be needed going forward. We've looked at how they responded to the commodity drop in '09, although it would be an up and down pretty quick, it did drop meaningfully in '09 as you may remember. And then we looked at our covenant packages we have in place, and the early warning signals they are going to send to us and our ability to get the borrower back to the table, while they're are still in a profitable condition. So with all those things, we've gone through and looked at 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 retracted, 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 are in today and types of credits we are in and the quality of companies.

Okay, Barry, that was really helpful. Thank you so much for going through that; and a follow-up, may be 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 ample part of the Houston market that are going to benefit obviously from lower prices. So it's going to be kind of a have and have not. We do anticipate with low commodity prices over a long period of time. There maybe a slowdown in some of our CRE opportunities that we have today, but to offset that we've got a lot of CRE commercial constructions 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. So we feel like that, while it's unknown as to the ultimate impact of the lower commodity prices, we do believe there is 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 is going to closing cons to it, but we feel like for us, there may be a little bit of slowdown in projects coming forward with -- on the CRE side, but that remains to been seen. I think on the whole, we think it's probably a neutral. It could be over lumpier at a time, maybe a little bit of a negative drag on opportunities.

Let me add little color to 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, 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, goes back to middle of 2005 and 2006 and the growth we had in 2004 the market, we were somewhat concentrated and we are hoping, we remember that lesson as we move forward. And as we look at 2015 and try to anticipate the type growth, the pipeline continue to remain strong, the rate is a growth we would anticipate will be less than last year overall, we think will be somewhere in the 7% to 8% growth in that held for investment portfolio.

And Gerry, to add to your point regarding our growth in 2014, $651 million from the legacy bank, firstly none of that was energy-related growth and also none of that was SNC purchase growth. We were basically flat as it relates to shared national credit that we acquired position 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.

Thank you.

Our next question comes from Emlen Harmon of Jefferies. Please go ahead.

Good morning, guys.

Good morning.

I was hoping to talk about the expense outlook a little bit. I actually 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 kind of -- 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 kind of 3.4% to 3.5% inflect down? If you could give me any color on the 2015, 2016 expense outlook that would be helpful?

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, they have been pretty consistent on quarterly basis throughout 2014, I think on an average we have been a little bit over $97 million and you are exactly correct, we continue to reinvest in technology as we have grown over $12 billion this quarter much larger company, I think we want to see some of that continue into 2015, maybe in the later part of 2015, we will see some reduction and I would expect that our run-rate in 2015 to be somewhere between the $96 and $97 million when you look at this core expenses, I think as percentage of expenses you will see that change slightly but I don't think you will see a huge drastic change but we also see some continue investment in our compliance cost, 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 did a very good job 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?

Well, I let Barry answer because that's one of the big unknowns that we have or challenges projecting that, so Barry.

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

Yes, I think what we can say, with some level of certainty 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 where we are probably putting a probability on it trying to kind of estimate what we think, we may end up with, but we do feel there a significant amount of recoveries to be -- still to be had in 2015 just not to the level that we experienced in 2014.

Thanks. I appreciate it.

Thank you.

Our next question comes from Steven Alexopoulos of J.P. Morgan. Please go ahead.

Hi. 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, extra 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 will take that, and then Tom, if you want to add to it, Tom Owens. Our expectation is given, I guess over the last two months, change in the economic environment and an environment in which there doesn't appear to be significant pressure to raise interest rates, given that we will continue to see increase pressure on the core NIM, we could see it somewhere in the 340 to 345 range for 2015. As I mentioned earlier, the pipeline remained 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 is -- the interest margin, interest income margin about where it is or slightly higher, but there again a lot of variables in there and as you have seen in the acquired loan portfolio there is even greater volatility there in terms of what we can project that. Tom, do you want to add?

I would just say, I mean a simple way to think about it is, as Gerry 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 345, 346 and if you have 3, basis points 4, basis points 5 basis points to 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 what we are saying.

Okay. That's helpful. And then, Barry, just a follow-up on the energy loans, do you have what the allowances on that portfolio today? And then I know you mentioned the potential for downgrades, Is there's some type of trigger event for example, receiving your own 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 provisioning increasing.

Sure. And as far as the reserving today these are all the Trustmark world, we don't -- as Gerry indicated earlier, we don't -- none of this loans are criticized. So there going to be all past credits in the other institution, you're going to have a low PD and a low LGD on any past credits. The reserving is going to be fairly limited because of the past nature. Having said that I do think the second quarter of 2015, once we start to get in the already financials for those calendar year ends, it's 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 these companies we're doing business with are larger companies, we do have a very extensive covenant package. The covenants typically are fairly tied 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 Board, get monthly borrowing basis on working capital, lines of credits. Thanks for the nature. I think we're going to sense some signals to it maybe before we get audited financial statements towards the latter part of the second quarter 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 long in, 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? So we're anticipating that will meet or exceed given the interest rate environment, last year's volumes and we'd 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.

Thank you.

Our next question comes from Brad Milsaps of Sandler O'Neill. Please go ahead.

Hey, good morning.

Good morning, Brad.

I just wanted to touch on the loan yields' health for investment. I know you mentioned last quarter that those were affected by lower loan fees. It looked like you were down maybe four 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.

Yes, it's about 50-50. So we've talked in prior calls about the fact that loan fee sort of run in a channel. Then I characterize that about ten basis points channel of loan yield and the fourth quarter loan fees were very much towards the lower end of that channel, so if you are just talking about the dynamics on loan fees, there is reason to expect that could rebound somewhat.

Okay. And then just to follow up on the reserve and the provision question, I know you had net recoveries 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 where 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 too specific footprints going forward.

Sure. And Brad, this is Barry. I guess that what really drove our negative provision this quarter was really at the process we go through each quarter which is update in our quantitative and our qualitative reserves as opposed to maybe specific credits. On the quantitative, we have 12 quarter rolling average. And as we continued to roll off some of the higher charge of quarters from the past and roll on some of much better quarters in terms of net recovered quarters. Then, there is release of reserve associated with that. That is part of the negative provisioning this quarter. The other part of it is from 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 with our own portfolio and number of other factors that reserve level continues to be less necessary as well. but back to your point, if we -- because we do this at a market level, if we do again to see some deterioration in creditworthiness or quality or other types of indicators that we use in our qualitative measures with in the Texas market specifically, Houston. It will begin to require reserving at that point. As well as any individual loan that may wind on their own. Those would require reserves as well. So it's a double trigger. We have the reserves on any credits and fall out of a past category. And then as it impacts the portfolio that's part of our qualitative as well, we're just trying to be a little more forward looking. And as those weaken, the reserves require 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, say, in terms of where your position is as it relates to recoveries and how that might affect your provisioning in 2015?

Sure. 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 '15 versus '14. But we do see less negative provisioning, maybe a flattening and then a eventually some moderate provisioning going forward.

Okay, great. Thank you.

[Operator instructions] Our next question comes from David Bishop of Drexel Hamilton. Please go ahead.

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'd say that when you look at '14 and you think about '15, that's a pretty logical run rate there. We always worked to do better. But I think that's today. I think that's a good way to look at it. In the fourth quarter we did -- for the ORE -- we have an ORE reserve and we did increase that ORE reserve by about $2.25 million. That was drove most of that expense. Having said that, the positive aspect of that is that with 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 revaluation we believe has been failed in the form of the reserve that was associated with that property. So that would benefit the bank as we move forward. And so, I think we're trying to stay on the top of anything we know. We tried to make sure -- we properly reflect that in the quarter in which we know it, even though it may not manifest itself to later on '15 when the appraisals are obtained.

Got it. And then a follow-up in terms of a loan growth; I think you had 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'd say probably the driving factor today is going to be on the commercial construction side. We've seen 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 some sales 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. Then there is other opportunity with that business both from a probably banking wealth management, insurance. So I think we are doing a good job of going after some hard quality customers and trying to be very competitive to get our foot in the door on the C&I side. But today, as the predominant driver is going to be commercial construction and with a little bit of residential construction as well.

Great, thank you.

Thank you.

Our next question comes from Kevin Fitzsimmons of the Hovde Group. Please go ahead.

Hi, guys. Good morning.

Good morning, Kevin.

Gerry, could you give us a refreshed outlook on how you're thinking about M&A? And of 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 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 thank you. You may have been listening on some of our strategy meetings. You really classified 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 be careful what you're looking to buy. And what kind of exposure you might be bringing on. We have done over the last several years number of acquisitions and we feel that have added real value in especially bank trust where you'd see what we're picking up on the acquired loan portfolio at the same time growing organically their existing franchise, which was 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 an opportunity there. The other areas we have talked about have been throughout the south east and where we can add some scale to some of the existing footprints that we have. So most of the organization with the exception of a handful focused 100% on how do we grow organically? How do we build off what we have? And then, there's handful of us that are looking at opportunities that are out there. If we continue in this low interest rate environment, there's increased focus on regulation. I think you'll see a number of opportunities in banks that are of the size that we would be very interested in open up. So that really is where our focus is.

Okay. And I probably should've 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 mentioned before that in the midst of specific 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. I guess the other area we'd look at continue to look in Tennessee. We continued 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 a year's 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 efforts in to that area over the last three or four years, and it's part of what we want James to do is look to see how efficiently is operating and how we can improve on that while increasing our regulatory focus. HR, in 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 little premature we did have our HR director after 51 years in the banking industry retire year end and she is moved on. So that's part of what Jim is looking at. So it's an awful lot for him to have consumed within a fairly short period of time. But I'd say that he is identifying some area 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.

Thanks, Kevin.

[Operator instructions] Our next question comes from Steve Moss of Evercore. Please go ahead.

Hi, good morning.

Good morning, Steve.

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…

I'll start, and then 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've got -- we just paid reduction imbalances in the neighborhood of $150 million…

That's right, Barry…

Say again, Louis.

I said the balances at the end of the year will be about 549 throughout 2015. I think we're expecting about $150 million pay down with cash flows.

And so for that reason I mean I think we look at the first quarter indicative of the remaining portion of the year in terms of the accretable year percentage. Having said that, the majority of what we think may come in the way of the recoveries today or not technically or not accreting loans. They're accreting to a terminal value through a foreclosure or a settlement of debt or something about a nature. So we really don't anticipate any recoveries that we have adversely affecting the accretable yield. There may be other reasons to payouts and pay downs of that may impact that accretable year. But that's just what we look first quarter is a pretty good run rate in terms of the percentage.

That excludes what Barry is giving you as in our presentation of slide five that is only accretion has no recovery in it, and I think you're asking. Yet, the most recent quarter is more indicative. I'd say it would be. It could be slightly higher than the fourth quarter but yes, as Barry said, we do expect significantly drop form that 23 million of 14. So it's hard to give you an exact number.

I appreciate that. Thank you very much.

Thank you.

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

Well, 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 are in and cost associated with that. But our commitment is to stay focused there. We believe though that season is going to be offset by the momentum we have in our business development efforts or cost sell efforts as it relates to loan growth, growth in our insurance business growth and our wealth management business, we're 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 is now concluded. Thank you for attending today's presentation. You may now disconnect.