Trustmark Corporation (TRMK) Q3 2015 Earnings Report, Transcript and Summary

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, today’s call is also being recorded. It is now my pleasure to introduce Mr. Joey Rein, Director of Investor Relations at Trustmark. Sir, please go ahead.

Good morning. I would like to remind everyone that a copy of our third quarter earnings release, as well as a 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, 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 would like to introduce 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, the Bank Treasurer. Now, let’s review some highlights for the third quarter, beginning on Page 3 of the presentation material. We’re pleased with the financial performance this quarter and believe that it reflects the value of our diversified state franchise, but recognize that there is still a lot of work to be done. Looking at profitable revenue generation, legacy loan growth was strong for the third quarter, increasing approximately $345 million or 5.3% from the prior quarter. Loan growth contributed to an increase in average earning assets resulting in stable revenue relative to the prior quarter and helping to partially offset some of the pressures of the continued low interest rate environment. Our portfolio of complementary fee income businesses performed well and counter-balanced some of the seasonal and cyclical activity in the quarter. Moving on to process improvement and expense management, banking continues to evolve as something customers will do, not necessarily some place they will go. Earlier this year, we launched myTrustmark, our new consumer mobile banking service. Rollout this - the rollout of this service has been very well received and we’re excited about the role that technology will play in enhancing the Trustmark banking experience. Under credit quality, credit metrics remains solid with decreases in both criticized and classified loan balances from the prior quarter and year. Non-performing assets also declined on a linked-quarter and year-over-year basis. Overall net income in the third quarter totaled $28.4 million, which represented earnings per share of $0.42. Return on average tangible equity and return on average assets came in at 10.96% and 0.92% respectively. I would also like to remind you that our board declared quarterly cash dividend of $0.23 per share payable December 15 to shareholders of record on December 1. If you will turn now to Slide 4, we’ll discuss the result in a little bit more detail. For the third quarter of 2015 average deposits totaled $9.5 billion, reflecting a seasonal reduction in public fund balances, although cost of deposit base continues to be a source of strength for us, although not fully recognized in the current rate environment, with nearly 60% of deposits in checking accounts and cost in 13 basis points in the third quarter. Turning to Slide 5, we’ll look at credits. Please note that the credit metrics I will discuss exclude acquired loans and other real estate covered by an FDIC loss-share agreement. As mentioned earlier relative to the prior quarter, we saw improvement in many of our credit metrics including criticized and classified loan balances, as well as non-performing assets. During the quarter net charge-offs totaled $8.1 million, primarily reflecting write-downs of two credits that had existing reserves that were established in prior quarters. At September 30, 2015, the allowance for loan losses totaled $66 million and represented 206.72% of non-performing loans excluding impaired loans. Now, turning to Slide 6, we’ll be looking at our legacy loan portfolio. We continue to focus on profitable credit disciplined loan growth. At September 30, loans held for investments totaled $6.8 billion, an increase of approximately $345 million, from the prior quarter and $458 million from the same quarter one year earlier. Total loans, which include acquired and held for investments expanded $295 million or 4.3% from the prior quarter. Growth in the quarter was generally diversified across our five state franchises. And of note, growth in construction, land development and other land loans was driven by growth in construction loans. Looking at our energy portfolio, as you are well aware, Trustmark has no loan exposure where the source of repayment or the underlying security of such exposure is tied to the realization of value from energy reserves. That said, we continue monitor our energy exposure closely. At quarter end, Trustmark had total energy exposure of $425 million and outstanding balances of $207 million. Should oil prices remain at current levels or below for a prolonged period of time there is a potential for downgrades to occur. We’ll continue to monitor the situation as appropriate. Now, looking at Slide 7, let’s discuss the performance of our acquired loan portfolio. At September 30, acquired loans totaled $419 million, a decrease of approximately $47 million from the prior quarter. Performance of our acquired loan portfolio continues to exceed expectations. As a result of our most recent re-estimation of cash flows, we expect the yield on acquired loans excluding recoveries to be in the 5.5% to 6.5% range for the fourth quarter of 2015. We also anticipate during the fourth quarter that acquired loan balances excluding any settlement of debt will decline by approximately $30 million to $40 million. We’ve been very pleased with the performance of this portfolio. But as you’re well aware, the income benefit from the portfolio continues to decline as balances run off as they should. In 2016, we currently anticipate the yield on the acquired loans excluding recoveries to be in the 5.5% to 6% range. We also anticipate the quarterly run-off in this portfolio to be in the $20 million to $25 million range. Let’s look at revenue highlights by turning to Slide 8. Revenue remains stable from the prior quarter at $143.6 million. Net interest income, fully tax equivalent for the third quarter totaled $102 million and resulted in a net interest margin of 3.72%. Excluding acquired loans, the net interest margin in the third quarter totaled 3.43%, down from 3.49% in the prior quarter and reflecting increased price competition in the marketplace. In the third quarter, non-interest income totaled $46 million. Insurance continued to perform well, but also benefited from seasonal factors. Performance of our mortgage banking business remained solid despite mortgage servicing rights valuation adjustments and narrower secondary marketing spreads. Other income increased linked quarter primarily because of FDIC indemnification passive write-downs that occurred during the second quarter of 2015. Turning now to Slide 9, we’ll review non-interest expenses. In the third quarter, non-interest expense totaled $103.6 million, excluding ORE and intangible amortization of $5.3 million, non-interest expense totaled approximately $98 million, a 90 basis point increase from the prior quarter. Salaries and benefits expense increased linked quarter, primarily because of increased commissions from higher insurance activity and mortgage loan production. ORE and foreclosure expense increased $2.5 million from the prior quarter, primarily because of valuation adjustments resulting from annual renewals of appraisals. As mentioned earlier on the call, we believe technology such as myTrustmark will play pivotal role in the overall Trustmark banking experience, and view this delivery channel as a complement to our branch network. With that said, we continually review our branch footprint to ensure that customer relationships are maintained and opportunities are present for further development. During the third quarter, we consolidated two offices in Florida and Texas and reallocated a portion of those resources into a new office in Gulfport, Mississippi. Year-to-date, we consolidated eight offices and opened three new offices. Now, looking at Slide 10, capital management, Trustmark continues to maintain a solid capital position and remains well-positioned to meet the needs of our customers and provide long-term value for our shareholders. At September 30, Trustmark’s tangible equity to tangible asset ratio was 9.01%, while the total risk-based capital ratio was 14.66%. Looking at Slide 11, we’ll conclude with our strategic priorities. Like many other financial institutions we’re not only into the industry’s headwinds, but we will continue to focus on creating long-term value. We believe the strategic priorities in place align our activities with our focus, enabling us to continue adding value to the customers, clients, communities and the shareholders we serve. At this time, we will be happy to take any questions.

Ladies and gentlemen, at this time we’ll begin the question-and-answer session. [Operator Instructions] At this time, we’ll pause momentarily to assemble the roster. And our first question comes from Preeti Dixit from JPMorgan. Please go ahead with your question.

Hi, good morning, everyone.

Good morning.

Good morning.

Louis, the ex-acquired loan yields were down 11 basis points in the quarter. I know loan fees have caused some volatility there. Was that a factor in the linked quarter change? And then maybe, if you could, frame for us the expected core NIM trajectory from here?

Okay. Preeti, we’ll ask Tom Owens and he will comment on the NIM.

Hi, good morning. So the linked quarter decline of 6 basis points, approximately half of that is due to the compression in loan yields, the other half is primarily attributable to normal volatility of loan fees, and day count. So with respect to the core NIM, if you look at it year-over-year and they were pretty clean comparison between third quarter of 2014 and third quarter of 2015. That’s a 4 basis point decline in core NIM. That’s consistent with the guidance that we’ve given for low single-digit annualized percentage compression in our core NIM. And that would continue to be our guidance going forward.

Okay. That’s very helpful. And then, if I should switch the energy outstandings, it looks like they increased about $17 million in the quarter. In the most banks they are seeing pay-downs in this segment. So can you talk about what kind of behavior you’re seeing from your customers? Ad also any color on if there were any downgrades in that book, specifically this quarter?

Preeti, Barry will take that question.

Sure. In our energy book, just to make sure we’re on point, our exposures there is going to be roughly $424 million in the outstandings as of the end of Q3 it was $207 million. So it’s a fairly small sized portfolio for us. We had one new opportunity this quarter that we availed ourselves of. It was company, a certain natural gas compression business, with also assets that has a lot of exposure as it relates to the WTI and the gas part of the have been pretty steady over time. So we went ahead and took that opportunity. That was $20 million hold for us. So that is the explanation for the $17 million increase in the exposure. Then on the outstandings we have had some a little increase in our fundings from 47% to 49%, most of our outstanding increase was the result of increase in fundings. We continue to have good results and working through any of the problem credits as they pop up. Again, we have had two downgrades during the third quarter, one was the downgrade in special mention, and one was the smaller downgrade to substandard. But on the whole, we continue to see the portfolio performing well. We continue to monitor about $44 [ph] relationships, which is virtually 100% of our portfolio. And we’re continuing to have opportunities to talk with customers, get a good quick look on any type of covenant breaks, address the problems as they arise. We’re still very comfortable with the provisioning levels we have and the reserves we have on these credits.

Okay. And, Barry, was any other provision this quarter tied to that book and maybe if you could break-out what the reserve today is on the energy book?

The reserving on the energy book is from the standpoint of the reserves assigned for those credits, does not differ from any other special mention credit or substandard credit. So there is no difference. The only thing we had this quarter was, one special-mention downgrade and one substandard downgrade. And as they’re just kind of part of a routine business, just like we have upgrades and downgrades, and in the rest of the book.

Okay. Okay, got it. And then one more from me, it looks like a lot of the loan growth was backend loaded. Maybe, you could talk about the timing of the growth in the quarter. And then, what we should expect in terms of carry-through in the fourth quarter?

Yes. I’ll comment first, and then, maybe have Barry add color to that, Preeti. We had given guidance early on. We would say, single to - or mid to upper single-digit growth throughout the year. We didn’t see any in the first-half of the year, commented at the end of the last quarter that that was a result of some unexpected pay-downs and failure to fund loans that had already been booked. But in this quarter, we saw a lot of those loans start to fund along with additional new growth in the portfolio. So that’s the third quarter story kind of seeing catch-up. And then, as far as fourth quarter, we continue to see solid opportunities within the pipeline, things have flattened out down in terms of where we are with the overall pipeline, but still very strong levels. And so, we would anticipate somewhere in the mid-single digit growth for the fourth quarter. Barry, you want to add any color as to where we’ve seen the growth in the second quarter come from.

Sure, I’m glad to Jerry. I guess, there are three things to mention before we talk about where we saw the growth is, one, very little of our growth came from increases in purchased share, national credits, it’s only - that was only increases about $90 million. Also, we really didn’t have much in the way of actually migration from our acquired portfolios to our non-acquired. That was only about $14 million. And then there really wasn’t a lot of activity out of footprint or out of market for us. And so the growth is truly good solid core growth. Now, we will in the commercial real estate side, we’ll have two bank deals as opposed to a one bank deal strictly to limit our exposure to any one real estate project. But the commercial real estate construction side grew roughly $115 million. That was pretty widespread; Texas, Mississippi, Alabama, all participated in that. Great proportion of that was multifamily. There was some retail, some hospitality, some office space, all contributed in that category. Public finance was also a good area of growth for us about $103 million. That’s going to be in predominantly Mississippi and Texas. Here again, that’s just traditional public finance type of activities with tax anticipation notes, school improvements in districts, other type of facility improvements, renovations, things of that nature. We also had good growth in the C&I book, about $43 million. That was predominantly in Tennessee, where we saw that growth coming from. And then in other loans, we actually grew $57 million. And that’s going to be predominantly Mississippi and in Texas. That’s going to be a combination of REITS. And then, you got other entities that lend money, whether it’d be small loan companies, leasing companies, investment companies. And then, it’s also going to be universities, colleges, nursing homes. Those are typically going to be your categories that are driving the 57% increase in other loans. We did see some - a little increase in existing non-owner-occupied. That’s a combination of migration from the construction bucket, but also there is an opportunity to refinance some business with other entities as we were able to move over. That particular portfolio grew about $27 million. So, that’s a little bit of insight as to kind of where we grew category-wise, geographically in the type of growth.

Okay. That’s really helpful. Just to clarify, that mid-single digit growth, that’s on a perian [ph] basis and is that an annualized for the fourth quarter?

It is annualized, yes.

It is annualized?

Yes, correct.

Okay. Okay, thank you.

Thank you, Preeti.

Our next question comes from Catherine Mealor from KBW. Please go ahead with your question.

Alright, thanks. Good morning, guys.

Good morning Kathryn.

Can you talk about little about the expenses? The expenses came up a little bit higher in your guidance from last quarter and I get a really great growth. I’m assuming that’s a big piece of it, but can you talk us little bit about what you’re thinking about the expense run rate moving into next year excluding OREO and CDI?

Okay. I’ll ask Louis if he’ll comment on the expenses that were mainly related to people, right.

Yes, Jerry. I will tell you, Catherine. Yes, we’re a little higher, but when we look at the core I think it’s right at $98 million. You can see our salary benefits were up $800,000 or $900,000. A lot of that was related to commission because of seasonal insurance revenues related to some political subsidies and as well as an increase in our pension cost due to settlement. There’s a settlement charge in the quarter about 200. You see some cash based expenses with premises, but when you take that out, we’re back to our core run rate between somewhere around at $97 million margin. I expect going into 2016 on a quarterly basis, I think we may move that to $96 million or $97 million, or to $97 million or $98 million, but somewhere fairly consistent flat going into 2016, as well as the fourth quarter.

Okay. Great.

And [indiscernible] that excludes ROE and the amortization of intangible assets we have.

Of course, okay. I think it’s a small piece I just want to clarify. How much is less on the FDIC indemnification asset amortization, is that mostly come through now and we won’t to see that drag in the Cs anymore?

Let me talk about that real quick. There was about $1.8 million swing in the income statement. There are really two components of this. There is a true-up or settlement event that covered, because of recoveries in that every quarter, because there is 8% indemnification recovery on this. So last quarter we had about $1.3 million that we had to payback of the FDIC. This quarter we have about $500,000 increase in IA asset, because of losses related ORE. That’s about a million-and-a-half swing quarter-to-quarter, but then there is the amortization pieces, where we set up a receivable for expected loses down the curve. And that’s been about $500,000 a quarter in the most recent two quarters. So the IA asset for the first part ends into second quarter of 2016, right there. And then, there is additional component for consumer that goes out seven years. So we only have about $1.7 million net asset on the balance sheet today, so we can see most of that amortization in by the second quarter of 2016. I would expect that to be anywhere from being probably about $500,000 to $750,000 for the next couple of quarters, without settlement of recoveries or true-ups on ORE.

Okay. Great. Very helpful. Thank you.

Thank you, Catherine.

Our next question comes from Kevin Fitzsimmons from Hovde Group. Please go ahead with your question.

Hey, good morning, guys.

Hi, Kevin.

Can you - I’m just trying to reconcile the very strong pace of loan growth this quarter with your - it is clear [ph] with your guidance for fourth quarter is mid-single-digit annualized. So that seems like a dial-back from what we saw in third quarter. So is that because we had this catch-up in funding that you were talking about. And that’s kind of not expected to be continued or you have - or were pay-downs low in third quarter and you expect them to pick up in fourth quarter. Just trying to get a sense for how sustainable that strength in loan growth, you had in third quarter, because based on the guidance for fourth it seems like you’re expecting the growth to fall back. Thanks.

Kevin, this is Barry. I think it’s much a matter of just the uncertainty on our side of it. What we do know is in the second quarter of this year we did, especially in the month of May and definitely in the month of June, we had a lot of activity that resulted in bookings, and the bookings and fundings in the third quarter. And so, from that standpoint it was a little bit of a building process. We also have quite a bit in the way of commercial construction that have a lot of funding that will happen over time. Because of the equity going in on the front-end being extremely large, and the timing of when we will get a chance to fund into those credits and then how long they’ll stay on the books, because of how strong secondary market is now, where things fairly can get stabilized, if they can even have to get stabilized, so move to permanent source. That makes it a much more difficult to see the volume coming in and be able to predict what it’s going to mean in terms of outstandings. And so we see a lot of deal flow, but a lot of times it’s a pretty good delay before there we’re actually seeing funding especially on the commercial real estate side of it. So for those reasons, I think it is a little bit harder of us to have visibility or certainty about what fourth quarter 2016 may mean. It’s easier for us to look at long-time horizons to say, we think over this period of time, we’re going to see this type of average loan growth, but whereas for fourth quarter it may be very brisk again, but it’s hard to tell at this point just because it’s going to come through fundings that are on the books today as opposed to what [indiscernible] this morning.

Okay. All right. That’s helpful. Just one quick follow-up, Jerry, if you can just update us on what you’re seeing in terms of M&A conversations and discussions in potential targets out there, well, how you feel the activity level is going to be, how you feel seller expectations are and what it’s going to mean for Trustmark? Thanks.

Thanks, Kevin. Yes, it remains very fluid. Activity level, I guess, if you compare to a couple of years ago, there is more activity in discussion. At least, that’s what we’re seeing. We continue to remain very selective in terms of looking for the right opportunity, something that will truly add value after the merger. And so, from that standpoint we remain optimistic. Now, we haven’t fully pointed on the board this year, but we continue to remain very active, but also very selective in our approach.

Okay, thank you.

Thanks, Kevin.

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

Hey, good morning, guys.

Good morning Emlen.

So, I wanted to hit on the reserve quickly. Just on the loans held for investment, we did see that reserve decline and a good jump this quarter. Now it’s kind of down below 1% relative to loans. Could you give us a perspective of where you see that headed going forward? And actually while I’m at it, I didn’t hear you guys give the reserve number for the energy book. It would be helpful to have that as well.

Okay.

Yes, and we don’t have that broken out specifically, only because it doesn’t differ from the rest of loan book in terms of special mention, substandard, whatever the past categories are. They are getting a similar reserve based upon prior performance of the portfolio. So, they are not broken out just because there is not necessarily a difference at how we’re reserving for energy credits versus any other type of industry. So, you can, so basically take the balances and go back, just kind of calculate somewhat the average from the reserve total and kind of get a sense of where we are throughout the portfolio. On the 0.97%, it’s really just a matter of we had $8 million worth of charge offs this quarter. Basically $7.7 million of those charge offs were reserved for, as Jerry indicated earlier in previous quarters. And therefore when we charge that out and the reserves went out with the charge offs, then we had a pretty good reduction in the reserve at that point. We also had some adjustments to our loan-loss methodology, which resulted in about $2.2 million worth of reserves, our provisioning going in adding two reserves. So, in the end, the net effect was about $5.6 million reduction. And there wasn’t a lot of other activity during the quarter that moved the reserve one direction or another. I think obviously at 0.97%, we would like to see the reserve stabilize here and possibly move up over time as the credit risk in the portfolio may exit. But we do have a methodology by which we follow consistently. It’s very quantifiable as far as the process goes. And therefore, when we do have these specific reserves on these impaired loans and the actual charge off is taken, then you do have an outflow of those reserves to be used to go with charge-off. That’s what happened this quarter.

Got it. Okay, thanks. And then, Jerry, it’d be good to hear you take on the Houston economy, kind of what you’re hearing from customers there in terms of just the general economic environment?

It still remains very strong. We go out, visit with customers. Obviously, those that are in the energy sector are more cautious than they’ve been in the past. But still they pull back in very aggressively where they can. Other areas in the economy remained very strong. Housing remains very consistent in the market. So, overall, the Houston market still from our perspective remains very strong. And we think there is future opportunity there for us to continue to grow.

Got it. All right. Thanks so, thanks for taking my questions.

Thank you.

Our next question come from Brad Milsaps from Sandler O’Neill. Please go ahead with your question.

Hey, good morning.

Good morning, Brad.

Just a follow-up on the credit discussion with, Barry, the charge-offs during the quarter, I know you mentioned two credits totaling about $7.7 million, looks like they came out of Mississippi. Just curious if you guys could offer any more color, what type of loan is kind of prior to one of the bigger charge-off quarters you had and going back three, four, five years. So, just kind of curious if there was something specific to these two credits or is it a bigger part of another industry? Just any color would be appreciated.

Sure. I’d be glad to, Brad. It I assume was $8 million worth of charge-offs between the two credits. We actually had $7.7 million worth of reserve already established in prior periods, because both of these credits were that repaired by the specific reserve arm. So they didn’t really have a big impact on the provisioning, because the money was already there, obviously they impacted the reserve in a negative way. Having said that, one of the credits is going to be approximately $6.8 million is a legacy - long-time legacy Mississippi customer that over an extended period of time had deteriorated. And then, we ended up with a situation worked into a liquidation of the access on working with management. So that was something that we saw coming that was changes in management put in place with the idea of working - operating the company as long as it was - it could continue to be positive cash-flow-wise, and then eventual liquidation of the assets. And that process has virtually occurred, we went ahead. At this point, we knew enough to go ahead and take the charge-offs and could have another small potential charge-off or recovery coming in the fourth quarter, when everything finally gets trued-up. But since we did have enough information in this quarter to go ahead and make that decision, and go ahead and take the charge-off, we did so. And then, on the other credit it’s actually - it’s not a Mississippi credit. It’s a Texas credit. And it’s a credit we talked about for a couple of quarters, and it’s a multifamily project that we had in the Texas market. Neither one of these credits are energy-related, I might add, but it’s in fact, this is the second credit with $1.2 million charge-off that we actually took out of the Texas market, multifamily-related. The actual collateral and the actual ORE is out in the buying, so that’s behind us. And so I think that hopefully gives you a little bit of color on both of those credits that are out of the both Mississippi and the Texas market.

Yes. Just being curious on the multifamily credit, kind of what drove it out. Do you think it was something just credit-specific or I know Jerry just talked about the Houston economy, but just kind of curious anything specific to multifamily?

Right. And it’s not. It was very project-specific. It was not actually in the Texas - it was not actually in the Houston market, but it was very project-specific, investor-specific, where there were some challenges along the way, some problems with a contractor, a general contractor et cetera. And not too different that you occasionally run into where you have disputes along the way that gets on ways. And then there is - the project doesn’t move forward. And then, you potentially have damage to the project, because it’s not completely buttoned up, due to number of factors. And so we just had - at one point, we had to step in on the project and work through it and that’s what we did over the last couple of quarters.

That’s really helpful. And just one final question, I know this number can bounce around a lot, but the OREO right now seemed a little heavier this quarter, any additional color there? Do you anticipate this being kind of a high watermark or what are you kind of seeing in that regard?

We do, Brad, I think we do see that as a high watermark. We did have higher write-downs in ORE this quarter. Part of that came from the multifamily project in Texas that moved into ORE. We did have in fact a $600,000 to $700,000 write-down on the actual sale. So that did occur. And then, we had really one other property that was a Mississippi property that actually we had to, we had a revaluation going on. It’s a large piece of raw land and values on raw land and commercial nature can fluctuate from time-to-time. And this one did fluctuate downward based upon some recent sales in that area. And therefore, we had to revalue that and write it down as well. So, we had two, really two pieces of property, one that’s no longer with us, one that is that drove the majority of that $2.5 million ORE write-down. Going forward, we will think, we’re going to look much more like we looked for second quarter. And not like, we saw us in the third quarter. So we expect that number to come down in a meaningful way in the fourth quarter. And then on a go forward basis, thereafter we would expect for ORE write-downs to be reasonable.

Great. Thank you, guys.

Thanks, Brad.

Our next question comes from Michael Rose from Raymond James. Please go ahead with your question. Mr. Rose, your line is open. [Operator Instructions] Our next question comes from Michael Young from Sun Trust.

Hey, good morning.

Good morning Michael.

I was just curious on the settlements of debt at $4.8 million this quarter and then a high NOI and the pace of decline going forward seems little more modest, would you expect those to decline and can you give us a sense for how much recoveries you see left in the pipeline?

Michael, this is Barry. I think we have a little more visibility obviously for fourth quarter and we feel like there is some good opportunities for recoveries in the fourth quarter that should occur. Beyond that, I think it’s going to be much more limited. As you can tell over the last several years it began to be a much lower number over the last - especially this year versus in 2014. And we expect that trend to be the same, if not accelerate a little bit as we get into 2016. We expect for the recovery opportunities to be limited in 2016.

Okay. Thanks. That’s helpful. And then, just on the mortgage business, maybe if we just take it from the production side, would you expect production in 2016 to be down year-over-year sort of consistent with the MBA forecast? Are there market share gain opportunities or purchased refi mix something that differentiates you?

Yes. We would - first of all, we comment on this year relative to last year. We’re about 21% versus last year year-to-date. We would expect that to continue. We’re seeing about 70% purchase activity of the portfolio, which has been consistent for about the last four, five quarters. In terms of going forward, we have expanded within our footprint the number of retail originators. So, despite the fact that, Mortgage Bankers Association is predicting lower volumes next year, which will impact us, we think that we will offset some of that simply to the expansion within our footprint, primarily Alabama and Texas. The challenge though is that this quarter we saw margins tight. We saw the benefit from the mortgage servicing hedge, which intended to be neutral, but has been a benefit to us. We saw that reduce somewhat. So, I think we will see volumes that or there are some reasons why we think we can beat the volumes, as the volume decrease with Mortgage Banking Association, but we still face the other challenges of tightening spreads and the volatility of the mortgage servicing rights.

That’s helpful. Thanks.

Great. Thank you.

[Operator Instructions] And ladies and gentlemen, at this time we’re showing no additional questions. This concludes our question-and-answer session. I’d like to turn the conference call back over to Mr. Host for any closing remarks.

Thank you so much. I’d like to thank everyone for joining us today. As you could see, we had a very strong quarter. As we mentioned, we are not immune to the challenges of this prolonged interest rate environment, a very competitive loan environment. We feel like we are getting our opportunities and we’re taking advantage of those opportunities to grow the loan portfolio, yet maintain the credit disciplines that has been an important part of our company. We continue to stay focused on the needs of our customers and servicing those needs. And we look - again, thank you for joining us and we look forward to visiting you after the year end in the January conference call. So, thank you all very much.

Ladies and gentlemen, the conference is now concluded. We thank you for attending today’s presentation. You may now disconnect.