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Trustmark (NASDAQ:TRMK)
Q4 2019 Earnings Call
Jan 29, 2020, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

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.

Joey Rein -- Director of Investor Relations

Good morning. 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 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'll turn the call over to Jerry Host, president and CEO of Trustmark Corporation.

Jerry Host -- President and Chief Executive Officer

Thank you, Joey. Good morning, everyone, and thank you for joining us. Also joining us this morning here in the room are Duane Dewey, our chief operating officer; Louis Greer, our chief financial officer; Barry Harvey, chief credit officer; and Tom Owens, our bank treasurer. We had a solid finish to the year as we remain focused on profitable revenue generation across our financial services business while maintaining disciplined expense management.

We deployed capital through share repurchases and continued optimizing our balance sheet. Let's take a minute and review the results in a little bit more detail. Trustmark reported net income of $33.9 million or $0.53 per diluted share in the fourth quarter. Results in the fourth quarter reflects negative hedge ineffectiveness, which resulted -- excuse me, which reduced net income by $2.2 million or $0.03 a share.

For the full year, Trustmark's net income totaled $150.5 million, which represented diluted earnings per share of $2.32. Results for 2019 reflect negative hedge ineffectiveness, which reduced net income by $8.6 million or $0.13 per share. I'd like to briefly provide you with an update on our financial results, which are on Page 3 of the presentation. Loans held for investments increased $500 million or 5.7% year over year.

Net interest income, excluding acquired loans, totaled $431.1 million at 12/31/19, a 3.9% increase from the prior year. The net interest margin, excluding acquired loans expanded to 3.58% in 2019 from 3.46% in 2018. Revenue, excluding interest and fees on acquired loans and negative hedge ineffectiveness, totaled $616.8 million in 2019, a 5.5% increase from the prior year. Core noninterest expense for 2019, excluding ORE and intangible amortization, totaled $421 million, an increase of 3.1% year over year.

Credit quality continued to remain solid in 2019 as nonperforming assets declined 14.4% year over year and net charge-offs represented 0.06% of average loans. In 2019, Trustmark repurchased $56.6 million or approximately 1.8 million of its common shares. At 12/31/19, Trustmark had $80.3 million in remaining authority under its existing stock repurchase program, which will expire on March 31, 2020. At this time, I would like to ask Barry Harvey if he would provide some color on both loan growth and credit quality.

Barry?

Barry Harvey -- Chief Credit Officer

Glad to, Jerry. Thank you. Loan growth for for Q4 was actually $112 million. We were up $150 million in CRE.

Mortgage were up approximately $35 million. For the year, we grew $500 million or 5.7%, mid-single-digit loan growth, which is what we've been guiding to previously so that we were able to achieve that directive. CRE for the year was up $551 million. Mortgages for the year were up $39 million.

From a credit quality standpoint, we continue to see strong credit quality measures. The provision was $10.8 million for the year, which is 12 basis points. Nonaccruals were 56 basis points as of year-end, which is a very, very positive level for us. NPAs were 86 basis points, which was down 14% for the year, and that's a result of us continuing to move out other real estate.

Portfolio remains well diversified. We're well below our regulatory CRE concentration levels at 81% for construction line development, 229% for total CRE. So, we have plenty of room to continue to grow in those categories. Our energy book is just immaterial at this point at $123 million or 1% of the outstandings.

If we could look over to Page 6 and talk a little bit about CECL. We are fully implemented and operational today with CECL. We've had a third-party validation, gotten that behind us, got some good feedback from that and implemented those changes. The drivers of our CECL models are going to be as follows: credit deterioration is going to be a key function; economic forecast, which is embedded in our model, is going to be critical; levels of unfunded commitments will obviously have an impact to loan growth; and the outstandings, funding on the outstandings is a part of the equation of a change -- any change in portfolio mix will have an impact on our CECL calculation going forward, as well as any changes we may have in the mix of our length of maturities.

Those are going to be the drivers in our CECL models as we move forward or as referred to day 2. Our estimated CECL reserve is going to be in the range, as indicated, $95 million to $120 million versus the $84 million we're currently at from an incurred perspective. That estimated range is dependent upon a number of factors. As you can imagine, any further model refinement that occurs, testing and finalization of our internal controls, any management judgment that is applied, as well as current future economic environments.

As we mentioned, we do have an economic forecast inside of our model, so that's obviously an element. And then any changes in portfolio composition could have an impact on that range that's being provided. From a day 1 perspective, the main driver in our change in our CECL reserve versus our incurred model is going to be the reserving for unfunded commitments. That's going to be the bigger driver there for day 1.

And Jerry, I think that's everything.

Jerry Host -- President and Chief Executive Officer

Good. Thank you, Barry. Now let's turn to the liability side of the balance sheet. And Tom Owens, if you could give us an update on the net interest margin.

Tom Owens -- Bank Treasurer

Will do, Jerry. So, turning to Page 7. Deposits totaled $11.2 billion at year-end, essentially unchanged from the prior quarter and a decrease of $119 million or 1% from the prior year. As we've continued to optimize our deposit base, however, we've driven some public fund balance attrition.

So, excluding public fund balances, deposits at year-end were up $303 million or 3.3% from the prior year. Likewise, our linked-quarter average balance decline of $42 million was driven by a $103 million decline in public fund balances with commercial and personal accounts increasing by $61 million or an annualized rate of 2.6%. And year over year, fourth-quarter average balance growth of $254 million was driven by a $441 million or 4.9% increase in personal and commercial accounts, which more than offset a $187 million decline in public fund balances. Our cost of interest-bearing deposits declined 11 basis points from the prior quarter as we proactively repriced certain deposits in response to the Fed's three rate cuts in 2019.

So, we've been pleased with our continued deposit growth, while at the same time, reducing our deposit cost. And noninterest-bearing deposits represent 27% of average deposits in the fourth quarter with 58% of deposits in checking accounts. Turning our attention to revenue on Page 8, net interest income, FTE totaled $108.7 million in the fourth quarter, which resulted in a net interest margin of 3.56%, a 10 basis point decline from the prior quarter. Excluding acquired loans, the net interest margin was 3.52%, down nine basis points from the prior quarter and up two basis points from the prior year.

For the full year of 2019, excluding acquired loans, net interest income FTE totaled $431.1 million, which is an increase of 3.9% from the prior year. And net interest margin was 3.58%, which is an increase of 12 basis points from the prior year. And now Duane will provide an update on noninterest income.

Duane Dewey -- Chief Operating Officer

Thank you, Tom. Turning to Page 9. Noninterest income before negative hedge ineffectiveness totaled $50.6 million in the fourth quarter, a decrease of $1.5 million or 2.9% from the prior quarter principally due to a seasonal decline in insurance revenues. For 2019, noninterest income before hedge ineffectiveness totaled $198.6 million, an increase of $16.1 million or 8.8% from the prior year.

Mortgage loan production in the fourth quarter totaled $500 million, a seasonal decrease of 11.9% from the prior quarter and an increase of 64.2% year over year. For 2019, mortgage loan production totaled $1.76 billion, an increase of 25.8% from the prior year. Mortgage banking income before negative hedge ineffectiveness totaled $10.9 million in the fourth quarter, a $1 million decrease from the prior quarter. For 2019, mortgage banking income before negative hedge ineffectiveness totaled $41.3 million, an increase of $9.1 million or 28.1% from the prior year.

For 2019, insurance revenue totaled $42.4 million, a 4.7% increase from the prior year. And wealth management revenue totaled $30.7 million, a 1.1% increase year over year. Louis will now cover expenses on Slide 10 and capital management on Slide 11.

Louis Greer -- Chief Financial Officer

Thank you, Duane. As Jerry mentioned, our core noninterest expenses, which exclude ORE and intangible amortization, totaled a little over $107 million in the fourth quarter, an increase of approximately $2 million or 2% from the prior quarter, which is slightly higher than our previous guidance. The primary reason for the increase is related to higher-than-expected mortgage production in the fourth quarter. Commissions on this production increased by $1.1 million, while other cash-based expenses increased approximately $1 million.

For 2019, core noninterest expenses totaled $421 million, an increase of approximately 3% year over year. In the first quarter of 2020, with annual salary increases and resetting of payroll taxes, we would expect our core expenses, which exclude ORE and intangible amortization, to increase by 1% to 2%. Turning to Slide 11. You can see that Trustmark's capital remains well-positioned during 2019.

As Barry mentioned, we repurchased approximately $57 million of outstanding common shares, which, during the fourth quarter, we acquired $2.2 million of those common shares. At December 31, 2019, we had approximately $80 million remaining in that authorization. And again, it expires on March 31, 2020. However, in our most recent board meeting, we authorized a new stock repurchase program effective April 1, 2020, under which $100 million of Trustmark outstanding shares may be acquired through December 31, 2020.

Jerry?

Jerry Host -- President and Chief Executive Officer

Thank you, Louis. I hope that this discussion of our fourth-quarter earnings is proven helpful. And at this time, we'd like to open it up for questions.

Questions & Answers:


Operator

We would now begin the question-and-answer session. [Operator instructions] The first question will come from Jennifer Demba with SunTrust. Thank you.

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

Good morning.

Jerry Host -- President and Chief Executive Officer

Good morning, Jennifer.

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

Two questions. First, have you seen or do you expect to see any merger disruption opportunities in the coming months as we see more large transactions in the industry?

Jerry Host -- President and Chief Executive Officer

Jennifer, I think most everyone in our industry is watching the trends that are taking place right now. That include MOEs. They include larger transactions. They include lower premiums.

And yes, absolutely, we are watching those things very carefully. We have our board meeting yesterday. A lot of the discussion with the board meeting included a lot of industry information about what was going on and various pricing levels. So clearly, our interest in M&A continues to remain very high.

Finding the right opportunities at the right price still remains a challenge, but we remain very focused on looking for opportunities.

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

OK. And question on just opportunities for further deposit repricing in the coming months. Can you just give us some color there?

Jerry Host -- President and Chief Executive Officer

Sure. I think Tom can weigh in on that.

Tom Owens -- Bank Treasurer

Good morning, Jennifer. So, I think we discussed on last quarter's call sort of the relationship there. In round numbers, call it $2.5 billion of high beta and higher interest rate paid, high-yield money market accounts. We have been proactively repricing those down.

As I said in my prepared comments, we've been pleased at our ability to continue to grow deposits despite that repricing down. I would characterize it as when you think about the timing of the three Fed rate cuts in late '19 and when you think about the timing of us really proactively repricing down those deposits, as you can imagine, we're still in the mode of monitoring potential attrition of those deposits. And so, I think it's reasonable too soon that we'll continue to monitor. To-date, we've been pleased we have not driven significant attrition.

And so perhaps, there is the opportunity to reprice those down a bit further. And then in addition, obviously, the CD book, our time deposit book will continue to reprice downward somewhat as well. So, I can tell you I'm sure we'll get the question about our projections on net interest margin. So, I'll just go ahead and address that now to some extent.

Our current projections are for full-year '20 as compared to full-year '19, if you talk about interest-bearing deposit costs, a decline in round numbers of about 20 basis points or so.

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

OK. So interest-bearing deposit costs coming down about 20 basis points?

Tom Owens -- Bank Treasurer

Correct. In round numbers, yes.

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

And what do you think that implies for net interest margin?

Tom Owens -- Bank Treasurer

Sure. So, we're looking at a range of probably 2% to 3% decline in net interest margin from the full-year 2019 number of 3.62%. So, 2% to 3% decline would be approximately 8 to 12 basis points, call it 10 basis points as a midpoint. And that's because if you look at the asset side of the balance sheet, so in round numbers, a decline of 20 basis points or so in interest-bearing deposit cost, you get compression.

We're projecting loan yields year over year for the full year declining more like 30 basis points. So that's the primary driver of the decline in full-year net interest margin.

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

OK. Thank you.

Tom Owens -- Bank Treasurer

Thank you, Jennifer.

Operator

[Operator instructions] The next question will come from Will Curtiss of Hovde Group.

Will Curtiss -- Hovde Group -- Analyst

Hi. Good morning.

Jerry Host -- President and Chief Executive Officer

Good morning, Will.

Will Curtiss -- Hovde Group -- Analyst

On the expenses, I think you mentioned 1% to 2% increase in core expenses in the first quarter. Any sense on how we should think about the expense base or how it'll trend beyond the first quarter?

Louis Greer -- Chief Financial Officer

Yes. So, this is Louis. As we reset taxes and annual increase, certainly, in the first quarter, if you will, a reset, so that's about one.

Jerry Host -- President and Chief Executive Officer

Annual salary increase...

Louis Greer -- Chief Financial Officer

Annual salary increase.

Jerry Host -- President and Chief Executive Officer

That are effective here in the first quarter of each year.

Louis Greer -- Chief Financial Officer

And I would expect that to be consistent throughout 2020 as well, somewhere around that range, maybe on the 2% to 3% for full year. I think if you look at '19 over '18, it was about a 3% increase, so I'd say something similar for the full-year '20.

Will Curtiss -- Hovde Group -- Analyst

OK. Thank you. And then the other question I had, just in terms of buybacks. So, you obviously have additional capacity, and you have the two authorizations out there.

So, I'm just curious if you can kind of give us a sense for kind of how we should think about buybacks here in the near term.

Jerry Host -- President and Chief Executive Officer

Maybe we'll have Tom comment just a little bit on the discipline we have in place to kind of control the amount and levels at which we buy.

Tom Owens -- Bank Treasurer

Sure, Jerry. Will, so as Jerry said, we have a disciplined approach in place where we continually look at the returns available from different forms of capital deployment. First and foremost, obviously, we're looking to grow loans organically to the extent that our retained earnings outpace our ability to continue to leverage our capital base. We use the share repurchase program to manage our capital ratios.

If you look at where we ended the year for 2019 versus 2018 and really 2017 for that matter as well, you'll see relative stability year over year in our capital ratios, which is to say that our pace of lending and leveraging our equity capital base, combined with our pace of repurchase, has basically managed our capital ratios in place, which, as we've said in the past, remain a bit above our operating target ranges.

Will Curtiss -- Hovde Group -- Analyst

OK. Thank you very much.

Tom Owens -- Bank Treasurer

Thank you, Will.

Operator

[Operator instructions] The next question is from Catherine Mealor of KBW.

Catherine Mealor -- KBW -- Analyst

Thanks. Good morning.

Jerry Host -- President and Chief Executive Officer

Good morning, Catherine.

Catherine Mealor -- KBW -- Analyst

I wanted to circle back on fees and just see if you could give us a little bit of color about what drove the increase in other fees and if that level is sustainable going into next year and then also your outlook on mortgage revenue going into next year as well.

Jerry Host -- President and Chief Executive Officer

Louis, you want to talk a little bit about other fees. And Catherine, on the mortgage area, I think Duane Dewey -- that mortgage area is now reporting directly into Duane. He's been working very closely with Breck Tyler, who's run our mortgage company for over 25 years. And obviously, the fourth quarter was a record in the history of our 25- to 30-year-old mortgage company.

So, in terms of volumes, the one negative aspect, of course, has been the negative ineffectiveness of the hedge. But over the 20 years that we've been hedging, it has done its job and done a very favorable job, so we view that as a bit of an anomaly because of the tightening of the spreads in the 30 and the 10, which -- the 10-year treasury, which is what we use as our futures hedging tool. But in terms of looking forward this year, Duane, maybe if you would make a few comments, and then, Louis, we'll come back to you.

Duane Dewey -- Chief Operating Officer

Yes. Heading into 2020, I mean, 2019 was a fantastic year industrywide, but also at Trustmark, we continued our strategic shift into retail production. 72% of our production in 2019 was retail, and we continue that push in 2020 and are very optimistic. The seasonal volumes as we start out this quarter are very strong, and we're optimistic about the future.

Now the industry is forecasting a 12% to 15% decline in overall mortgage volumes across the country. We are still very optimistic about the year, maybe a little below 2019, but still very optimistic, and our numbers to date are solid.

Louis Greer -- Chief Financial Officer

Duane, I would just say, Catherine, when you look at the fourth quarter, we did have a onetime collection of about $1 million in other income. As you can see, consistently from the first, second and third quarter, that number is usually around $2 million. I would expect the run rate for other income to remain at around $2 million on a quarterly basis when we look into 2020.

Catherine Mealor -- KBW -- Analyst

OK. That's helpful. And then how about on the partnership amortization for tax credits. That was a little bit lower in '19 versus '18.

How should we think about that for '20? And then maybe how we should think about the tax rate as well?

Louis Greer -- Chief Financial Officer

Well, Catherine, that's a good observation. We had a runoff of a few credits, but we do expect to take some up to replace those in 2020, and we continue to expect our effective tax rate to stay in that 13% to 14% range in 2020. So, we've been pretty prudent in trying to keep that tax rate down, so we're constantly looking for replacements. I'll tell you that we've applied for a new spread of allocation for 2020.

We yet to hear from that. We hope to get one for 2020 to continue that program throughout 2020 and beyond.

Catherine Mealor -- KBW -- Analyst

Great. Thank you very much.

Louis Greer -- Chief Financial Officer

Thank you.

Operator

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

Jerry Host -- President and Chief Executive Officer

Thank you, operator. And thank you all for joining us this morning and for your interest in Trustmark. We look forward to reporting to you on our first-quarter 2020 results on our April call. Thank you very much, and have a great day.

Operator

[Operator signoff]

Duration: 27 minutes

Call participants:

Joey Rein -- Director of Investor Relations

Jerry Host -- President and Chief Executive Officer

Barry Harvey -- Chief Credit Officer

Tom Owens -- Bank Treasurer

Duane Dewey -- Chief Operating Officer

Louis Greer -- Chief Financial Officer

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

Will Curtiss -- Hovde Group -- Analyst

Catherine Mealor -- KBW -- Analyst

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