Trustmark Corp
NASDAQ:TRMK
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Trustmark Corp
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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.
Good morning. I would 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.
Thank you, Joey. Good morning, everyone and thanks 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 which, 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 effectiveness 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 12/31/2019, 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 non-interest 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. Non-performing 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 12/31/2019, 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 and he would provide some color on both loan growth and Credit Quality. Barry?
Thank you, Jerry. Thank you. Loan growth for Q4 was actually $112 million, $150 million in CRE were up approximately $35 million for the year, we grew $500 million or 5.7% in 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. Non-accruals 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, but down 14% for the year, and that's a result of us continuing to move-outs 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 up 1% of the outstandings.
If we could look over to Page 6 and talk a little bit about CECL, we’re fully implemented and operational today with CECL. We've had a third-party validation gotten that behind discuss 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. Loan growth and the outstandings funding on the outstandings as a part of the equation of the 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 linked to maturities, those are going to be the drivers and our CECL models as we move forward or as referred to day two.
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, you can imagine any further model refinement that occurs, testing finalization of our internal controls, any management judgment that is applied, as well as current future economic environment as we mentioned, we do have an economic forecast inside of our models, so that's obviously an element and then any changes in portfolio composition could have an impact on that a range that's being provided.
From a day one perspective, the main driver in our change, in our CECL reserve versus our incurred model is going to be the reserve for unfunded commitments that's going to be the bigger driver there for day one and Jerry, I think that's everything.
Thank you, Barry. Now let's turn to liability side of the balance sheet and Tom Owens, if you could give us an update on the net interest margin.
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 continue to optimize our deposit base. However, we've driven to 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%. In year-over-year fourth quarter average balance growth of $254 million was driven by $441 million or 4.9% increase in personal and commercial accounts which more than offset $187 million decline in public fund balances. Our cost of interest bearing deposits declined 11 basis points from the prior-quarter as we proactively reprice 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 non-interest bearing deposits represent 27% of average deposits in the fourth quarter with 58% of deposits and checking accounts.
Turning our attention to revenue on Page 8, net interest income FTE totaled $187 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 non-interest income.
Thank you, Tom. Turning to Page 9, non-interest 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, non-interest 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 of $1.76 billion, an increase of 25.8% from the prior-year. Mortgage banking income before negative hedging effectiveness totaled $10.9 million in the fourth quarter, a $1.1 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.
Thank you, Duane. As Jerry mentioned, our core non-interest expenses, which exclude ORE and intangible amortization totaled a little over $107 million in the fourth quarter and an increase of approximately $2 million or 2% in 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 basis expenses increased approximately $1 million.
For 2019, core non-interest expenses totaled $421 million, an increase of approximately $3 million, 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 decreased at 1% to 2%.
Turning to Slide 11, you can see the Trustmark 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 our authorization and which 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?
Thank you, Louis. I hope that this discussion about our fourth quarter earnings is proven helpful. And at this time, we'd like to open it up for questions.
We would now begin the question-and-answer session. [Operator Instructions] The first question will come from Jennifer Demba with SunTrust. Thank you.
Good morning.
Good morning, Jennifer.
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?
Jennifer. I think most everyone and 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’re 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 in 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.
Okay. And question on just opportunities for deposit repricing, further deposit repricing in the coming months. Can you just give us some color there?
Sure. I think Tom can weigh in on that.
Good morning. Jennifer. So I think we discussed on last quarter's call, sort of the relationship there in terms of 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 is when you think about the timing of the three Fed rate cuts in late 2019 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 to assume 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 for full-year 2020 as compared to full year 2019, if you talked about interest bearing deposit costs a decline in round numbers of about 20 basis points or so.
Okay. So interest bearing deposit costs coming down about 20 basis points.
Correct, in round numbers. Yes.
And what do you think that implies for the net interest margin?
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 mid-point and that's because if you look at the asset side of the balance sheet, so we're 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.
Okay, thank you.
Thank you, Jennifer.
[Operator Instructions] Your next question will come from Will Curtiss of Hovde Group.
Hi, good morning.
Good morning, Will.
I think you mentioned on the expenses, I think you mentioned 1% to 2% increase in core expenses in first quarter. Any sense on how we should think about the expense base or how it will trend beyond the first quarter?
Yes, this is Louis. As we reset taxes and annual increase certainly in the first quarter as due year a reset. So that's about one.
Annual salary increase are effective here in the first quarter of each year.
And I would expect that to be consistent throughout 2020 as well, somewhere around that range may be 1%, 2%, 3% for full-year, I think if you look at 2019 over 2018, it was about a 3% increase. So, I'd say, something similar for the full-year 2020.
Okay, thank you. And then the other question I had just in terms of buybacks. So, you obviously have additional capacity any of 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?
Maybe, we have Tom comment just little bit on the discipline, we have in place to going to control the amount and levels at which we buy.
Sure Jerry, hi 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 debt 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.
Okay. Thank you very much.
Thank you, Will.
[Operator Instructions] The next question is from Catherine Mealor of KBW.
Thanks, good morning.
Good morning. Catherine.
I want 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. Thanks.
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 has been working very closely with Breck Tyler, who has run our mortgage company for over 25 years and obviously the fourth quarter was a record in the history of our 25, 30 year old mortgage company. So in terms of volume, the one, the one negative aspect of course has been the hedge, 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 in addition, Duane maybe if you would make a few comments and then Louis will come back to you.
Yes, heading into 2020, I mean 2019 was a fantastic year industry-wide, 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’re still very optimistic about the year maybe a little below 2019 but still very optimistic and our numbers to date are solid.
Duane, I would just say, Catherine when we look at the fourth quarter, we did have a one-time collection of about $1 million in other income as you could see consistently from the first, second and third quarter that number usually around $2 million. I would expect the run rate for other income to remain around $2 million over quarterly basis when we look into 2020.
Okay, that's helpful. And then I got on the partnership amortization for tax credits that was a little bit lower in 2019 versus 2018, how should we think about that for 2020? And then maybe how we should think of the tax rate as well?
Well, Catherine, it's a good observation. We've had a run-off of the few credits, but we do expect to pick some up to replace those in 2020 and we continue to expect our effective tax rate to stay in at 13% to 14% range in 2020. So, we've been pretty prudent in trying to keep that tax right now. And so we're constantly looking for replacements. I'll tell you that we've applied for a new next spread of the allocation for 2020. We yet to hear from that. We hope to get one for 2020 to continue that program throughout 2020 and beyond.
Great, thank you very much.
Thank you.
[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.
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.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines. Have a great day.