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'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.

Thank you, Joey; and good morning, everyone. Thanks for joining us. With me this morning are Louis Greer, our Chief Financial Officer; Barry Harvey, our Chief Credit Officer; and Tom Owens, our Bank Treasurer. Also joining in on the call this morning is Duane Dewey, our new Chief Operating Officer and Duane, we'd like to welcome you.

Thank you. Thanks, Jerry, and good morning. It's good to be with you. Trustmark has a deep history and culture, we have a extremely strong leadership team that I've been a part of now for 15 years. I've managed the CRE, Corporate Banking, non-interest income areas, as well as our Houston market. In the role of COO, I will assume all the remaining revenue-generating areas of the Bank and the supporting operations. My main focus going forward will be growth initiatives and efficiencies across all business lines. This is a tremendous opportunity to build on the legacy and work with this leadership team to meet our objectives. I look forward to meeting all of you in the coming months. Thanks, Jerry.

Duane, we're excited about you in your new role, and we thank you for your contributions for the 15 years that you've been with us. Let me begin by saying that Trustmark finished the year in a very strong position. We reported net income of $36.7 million or $0.55 per diluted share in the fourth quarter. For the full-year, Trustmark's net income totaled $149.6 million, which represented diluted earnings per share of $2.21. I'd like to briefly provide you with an update on our financial results, which are on page three of the presentation. Loans held for investments increased $88.8 million or 1% from the prior quarter, and $265.9 million or 3.1% year-over-year. Revenue excluding interest and fees on acquired loans totaled $587.1 million for 2018, a 3.4% increase from the prior year. Net interest income totaled $415.1 million in 2018, reflecting a $12.2 million increase from the previous year. Expense management continues to be a priority for us as core non-interest expenses, excluding ORE and intangible amortization remained flat in the fourth quarter compared to the third quarter. Credit quality continue to remain solid as non-performing assets declined 7.7% in the fourth quarter, and 13.1% year-over-year. During the fourth quarter, we repurchased $54.5 million of our common stock. For the year as a whole, we repurchased $62.4 million of our common shares. At this time, I'd like to ask Barry Harvey to provide some color to both loan growth and credit quality. Barry?

I'd be glad to, Jerry. Just looking on page four, couple of highlights. The loan growth for the quarter was $89 million, a year-over-year -- year-to-date, we grew $266 million. The growth continues to be coming out of our CRE book, as well as we have some good growth in our mortgage company and then we've had some growth recently in the public finance side of it. So we continue to see good solid growth. I think, we had guided previously to the low-single digits and that's kind of where we ended the year, about 3.1% growth during 2018. As it relates to our energy book, it remains in check there. Our exposure is $375 million, outstanding is $172 million, about 2% of our book. So, we'll continue to work through that portfolio and it's continued to be challenged by lower commodity prices which tends to be fairly fluid from period-over-period. Looking on the Page -- the Slide 5, the credit quality metrics. Trustmark's credit quality metrics continue to improve, whether you're looking at past dues, criticized, classified. Obviously, here we're showing non-accruals are down for the quarter, we're continuing to work those hard, non-performing assets, continues to work those down to acceptable levels to us and that's a continuous function. Of course, non-accruals as well as continuing to move out our ORE which we've been successful quarter-after-quarter of moving that out without sustaining any additional losses. Looking on to the Slide 6, dealing with our acquired loan portfolio. The acquired loan portfolio decreased about $26 million during the quarter, about $155 million during the year-over-year. The yield on that portfolio during the quarter was 9.9%, part of that yield came from the recoveries which represented about 3.5% of that yield. And then, on a go-forward basis, not being able to predict the recoveries from quarter to quarter, just looking strictly at what we expect to see from the cash flows, we expect to see about 6% or 7% return on that portfolio. Jerry?

Thank you, Barry. And now turning to the liability side, Tom, if you would, please talk a little bit about the deposit base and the net interest margin.

Sure, Gerry. Returning to page seven. Total deposits increased $407 million or 3.7% during the quarter, reflecting both personal deposit growth and normal public fun deposit seasonality. Total deposits increased $787 million or 7.4% from the prior year. We continue to maintain a favorable mix of deposits with 26% in non-interest-bearing and 58% of deposits are in checking accounts. Our cost of interest-bearing deposits rose 11 basis points, representing a beta of 44% for the quarter and 33% cycle-to-date relative to the Fed's rate hikes. Turning to revenue on page eight. Net interest income FTE totaled $108.4 million in the fourth quarter, down 1.6% from the prior quarter, which resulted in a net interest margin of 3.56%, a decrease of 3 basis points from the prior quarter. Excluding acquired loans, the net interest margin was 3.50%, unchanged from the prior quarter and up 15 basis points from the prior year, driven primarily by our continued balance sheet optimization initiatives. And now Louis will provide an update on non-interest income.

Thanks Tom. Also reflected on Page 8, non-interesting income totaled about $44 million in the fourth quarter, and totaled about $185 million for the full year of 2018, which represents approximately 31% of total revenues. As you can see for the linked-quarter, non-interest income was slightly down with a seasonally lower insurance commissions and mortgage banking revenues. I'll also mentioned that, for the year, both insurance and mortgage hit high watermark for non-interest revenues, totaling $41 million and about $35 million respectively. Also mortgage production for the year hit a high watermark of about $1.4 billion, which is an increase of about 3.5% over the prior year. Now turning to Page 9, you will see that our core expenses which exclude ORE and intangible amortization for the fourth quarter remained well controlled, totaling about $102.5 million and in line with our previous estimates. For the first quarter of 2019, we would expect the core expenses would increase approximately 1% to 2% due to cost of living adjustment for associates, Federal taxes resetting in January, as well as adjustments for commission for seasonal revenues. We remain well positioned from a capital perspective as noted on Page 10 and briefly stated by Jerry, that during 2018, we repurchased approximately $62.4 million or 2 million shares of our outstanding stock and it included $55 million in the fourth quarter. As of December the 31st, we had approximately $37 million remaining authority under our existing stock purchase plan. Jerry?

Great. Thank you, Louis. We trust that this discussion of our fourth quarter financials has been helpful. And at this time, we would be glad to answer any questions that you have.

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

I wanted to first start on just your outlook for the balance sheet and the remix that we've continued to see. Maybe first on loans, what is your outlook for loan growth this year? And then, as we think about the size of the securities book, how are you thinking about that size as we move through the year; and maybe as a percentage of assets, are you still targeting what you've indicated previously? Thank you.

Right. It's a team effort relative to optimizing the balance sheet, Catherine. If I could, I'd like Barry to maybe address projected loan growth for the year and then Tom to talk a little bit about what he's doing on the other side of the balance sheet relative to securities and borrowings and deposits.

Glad to, Jerry. Catherine, this is Barry. As it relates to the loan growth for 2019, where we believe that mid-single-digits should be -- is a realistic expectation that we have, I think we'll probably have some stretch goals that will be larger than that. But I think from what we think is realistic today, mid-single-digits is where we are, I think we would expect for the majority of that growth to come in CRE, as it has historically, but we do expect all of our areas to grow some more modest than others, and we expect to see growth in our mortgage area in public finance. And then, we'll continue to work hard to grow on the CRE side, as you know, it's extremely competitive and has been for a while. The opportunities are few and far between, mainly because that they rely, some or most companies, on their own balance sheet to fund any CapEx and things of that nature. So, but we'll continue to work hard there to grow where we can. And then the same is true on the consumer side in a rising interest rate environment, most of the products that the consumers are looking at are variable rate, so they're less desirable. But we'll continue to work hard there, and we do have growth expectations.

Thanks, Barry. So Catherine, this is Tom. We do anticipate continuing to run off the securities portfolio through the first half of 2019. We've talked in the past about a target range of about 21% of earning assets. We ended the year at about 23%. Given our loan growth projections, we think that running off the portfolio through the first-half will get us to about 21% at about the end of the second quarter. So, you take those two things into consideration, our loan growth projections and our running off the securities portfolio, our current guidance is that we're probably looking at a range of 1% to 2% of growth in core earning assets year-over-year, when you take the growth and the loan portfolio, net down the run-off of the securities portfolio. Anticipating other questions we're likely to get here, I'll speak just briefly to core net interest margin. There again, our projection is growth of 1% to 2% for the full-year over full-year. And so, given that full-year 2018 was 3.46%, we're probably looking at a margin in the low-3.50s. The range would be, say, 3.49% to 3.53%, something like that. So if you take those things together, sort at the midpoint of all that, you get to basically about 3% growth in core net interest income, which is about the amount of lift we got in core net interest income in 2018.

And what are rate assumptions are you assuming in that guide? And how does it -- and how maybe would that change if the Fed pauses or we get another couple of rate hikes?

Yes, that's a great question. Thank you for asking it. So, our current forecast incorporates market implied forwards. As you know, the market at this point has basically priced out any further Fed tightening. And as a result of that, rates have come down, the yield curve has come down and it is flattened. So, that creates a bit of headwind to margin expansion as well. So you take the -- the majority of the lift that we've got and probably 75% to 80% of the lift we've got in core net interest margin year-over-year has been from balance sheet optimization, run-off of the securities portfolio, where we currently only anticipate doing that through the first half of 2019. You combine that with no further fed rate hikes, lower rates, flattered yield curve, it just creates a headwind to core net interest margin expansion. But we do believe we will have some expansion yet here in 2019.

Again, then maybe one follow-up, just back on the loan growth, Barry. If you think about the growth that we saw this past year, it was more in the 3% range. And so it feels like your guidance for next year in the mid-single digit is a little bit higher. I guess, what are the puts and takes there? Are you feeling better about less pay-downs and that's what's giving you more confidence in growth being better this year or is it more of a better origination outlook that's given you that higher growth goals? Thanks.

Sure, Catherine. And I think it's more the former. I think we are expecting a little less in the way of unexpected or unforecasted payoffs than what we saw in 2018. I think we've got that baked in a little better into our numbers, and including baking in a reasonable amount of unforeseen payoffs, I think we believe our activity has been strong and continues to be strong in terms of production, and the fundings we believe will be there, especially on the CRE side. We do also see a little bit of improvement in our success rate on the public finance side. Fourth quarter was a good quarter for us in terms of bookings, so we are seeing some improvement there. And I do think that we have the opportunity to continue to book a fair number of short-term, 15-year or less mortgage paper that we would - that we traditionally hold that we can continue to grow that book in a reasonable manner. So, I think between those three categories, we see a good bit of opportunity. And then, of course, we’re here again striving to be successful in the consumer and the C&I side as well. But I think we are little more optimistic in public finance going into 2019, and then I think, we're more optimistic that we'll have a little less in early payoffs that we saw in the first half of 2018, I think we expect to see a little less of that in 2019.

Our next question comes from Daniel Mannix of Raymond James. Please go ahead.

I wanted to dig into the NIM a little bit more. So, the gap between reported and core shrunk a bit this quarter. Can you talk about scheduled accretion for 2019?

Could you repeat that please again?

I think the question that Daniel asking is, just sort of the differential. I think he is asking about acquired loan portfolio accretion, and the fact that 2018's accretion was lower than 2017's. What are we projecting in terms of 2019, the differential --

Well, as Barry disclosed, I think we are expecting about a 6% to 7% yield on that as it continues to runoff, and I'd like to schedule runoff by quarter somewhere between $10 million to $20 million. And so, we expect a steady 6% to 7% yield on that portfolio as it pays down throughout 2019.

So, does that answer your question Daniel or no?

Yes, that helps. Thank you.

I think Barry indicated, we really can't predict recoveries at this point in time, because that portfolio was pretty mature and has been well worked down to over the last three years.

Down to $107 million, so it's relatively immaterial.

We would hope by year-end of 2019, we'd merge this acquired portfolio into loans held for investments, just because it will be immaterial at that time as well.

And can you tell me what you're assuming for deposit betas in that core NIM guidance?

Sure. So, this is Tom. Again, just generally speaking, as it relates to deposit betas, I'll say that fourth quarter actual came in below what we were projecting, which is obviously favorable. So you combine that with the current market interest rate environment, where basically expectations for further Fed tightening have been priced out at this point. We are anticipating -- so as I said in the prepared comments, a beta of 44% on interest-bearing deposits in the fourth quarter cycle-to-date 33%, we are anticipating that in 2019, there will be some further upward repricing of deposits. As you can imagine, just because the Fed isn't tightening anymore, it doesn't mean that rates aren't generally higher, particularly as it relates to the CD book. So there will be some further repricing. We're currently projecting that by the time we get to year-end 2019 that that cycle-to-date beta will have increased from 33% at year-end 2018 to 38% at year-end 2019.

And wanted to just finish up with capital, so higher share repurchase activity on fourth quarter. Is it likely that you guys would finish up, that you would max out the current authorization this quarter, and how's the Board looking at going forward after expiration, a potential program after that?

This is Jerry, Daniel. First of all, process-wise, we have a capital management team that meets every month to review our position and review various types of capital deployment, whether it's a buyback program, organic growth or what we might have on the table in the way of opportunities for M&A. Look, we have approximately $30-what million left in the original?

Approximately $37 million, Jerry, and it expires in March.

Yes, $37 million in the original authorization. It expires at the end of March. If we continue on the same path we've been on during the fourth quarter, that we would use the allowable amount by the end of March, market conditions and need capital will dictate that. As far as going forward and looking at a new authorization, it would come only after a thorough analysis of need for capital, as well as the work that Barry Harvey and his team are doing relative to CECL. We are a long ways down the line and working on CECL and have a good sense for capital needs once that's implemented. So all that's being taken into consideration, it's a little early to be specific about the -- about a new authorization. However, we had our Board meeting yesterday, and we'll tell you, there was a lot of discussion relative to capital as a whole, and where we are and where we think we need to be in the future. I think the positive thing now is, we still remain very well capitalized as an organization. But if you look at where we were at the end of last year, it's about 13% -- just above 13%, where we ended 18%, just above 13% on a total risk-based capital basis. And also on a Tier 1 capital, the slide that's up right now, shows 11.77% versus 11.77%. So, all in all, we were able to deploy the earnings this year in both through dividend and through buyback and kept very strong capital ratios.

Just if I could sneak one in there, on the other side of the coin, there you talk about dividend, do you have a targeted payout ratio?

We monitor our payout ratio. And as you might imagine, over the last eight or nine years, that ratio has been relatively high with the tax cuts and the earnings for this last year, it's come within a more normalized range of low-40s. We do watch that, we don't have a specific targeted payout ratio, but it's one of those things, dividends, buyback, acquisitions and organic growth that we all look at on a very regular basis to determine our actions relative to any of those four things.

Our next question comes from Jennifer Demba of SunTrust. Please go ahead.

Your credit quality has been excellent. We've seen an issue from another bank this week for C&I leverage loans. Just curious if you have any significant balances in that area?

Jennifer, this is Barry. And that is an area that we have intentionally avoided over the years. There's some carved-out language within the guidance that allows you to do a little bit without doing a lot of reporting on it, and that's where we kind of live. Our exposure, as it's reported on the call, is around -- outstanding is around $47 million, exposure is $56 million, basically nothing, that's three or four credits. And that's where we consistently are in that range. We try to accommodate existing customers as they have some transitions in the business ownership, but that's very rare that we had that need. So therefore, we have little or no exposure to that particular category. And that was a choice we made and a decision we made to kind of stick a little more with what we understood and what we're comfortable with, and not getting in a situation where we were had a lot of exposure to air balls that may or may not work out over time.

Are those loans performing right now, Barry?

They are.

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

Louis, I wanted to ask maybe about fees. As you think about 2019, you touched a little bit on the mortgage. Obviously I think in 2018, you were helped a little bit about -- with some hedging, mortgage markets little more challenged with rates where they are. Just kind of curious kind of how you guys are thinking about fee revenue as you move through the year?

Brad, I'll take that one. This is Jerry. In terms of outlook in the mortgage company, I think we have been through I think a significant transition in the last three years, where we have moved the company from about a 50-50 wholesale retail to about 75% retail. We've hired mortgage originators throughout our footprint. We have them working with our retail banking people and our private banking people to help generate leads and opportunities. We feel as though the profitability per loan is much better in that retail distribution channel, and continue to grow that and look for new opportunities there. The real unknown is, what happens with interest rates and housing prices and how that might affect our volumes, but I think the good news is that, we can adjust accordingly. At this point, we feel good about having a very strong 2018 and feel like we can carry that momentum forward in 2019. Lot of unknowns. What you do with FAS 133 at the end of every quarter and the impact. The hedging activity is very much a function of the 30 year mortgage -- 30 year mortgage MBS versus the 10 year Treasury. So all those things affect our mortgage operation. I think we've done an excellent job in the past in managing those interest rate risks as well as those volume risks, and we feel good about where -- how we're position for 2019.

And just for a bigger picture, Jerry or Tom. You guys been crystal clear on the earning asset in mix shift. I completely understand, you're trying to protect the NIM. But kind of listening to kind of your guidance a of percent NII growth, a couple of percent expense growth. It sees like you're going to need $10 earnings in addition to protecting that NIM. Just kind of curious, when you get to your 20% or 21% bond book as a percent of earning assets. What's the next move? Are you just sort of setting up-- setting yourself up in hopes of a better yield curve at that point in time. And maybe you can lever backup to generate some earnings. Just kind of curious what the plan is kind of once you get to the end of this plan, because you get paid in dollars not NIM, just kind of curious what were you're thinking about going forward?

This is Tom. You know, I think it goes back to -- as Jerry was alluding to earlier, we're continually in the business of evaluating different forms of capital deployment and the returns available. I would say particularly, I mean, in my view, there's so much uncertainty right now between now and the end of the second quarter in terms of what may happen with interest rates, what may happen with the yield curve. The economic data that we continue to get continues to be reasonably strong. I would not be surprised if the market gradually begins to price back in for the Fed tightening. I wouldn't be surprised if we do get Fed tightening -- further tightening in 2019, that may steepen the curve a bit and it may present us better opportunities to deploy capital through securities reinvestment. But as it currently stands, the curve is very flat, there is not a lot of opportunity there. So that's a decision that we're going to have to -- an evaluation we're going to have to make at that point in time as we move forward, and that's about as much guidance as I could give you at this point.

[Operator Instructions] And our next question comes from Matt Olney of Stephens Inc. Please go ahead.

This is Brandon Steverson on for Matt, this morning. I just wanted to clarify on the charge off that you noted in the release related to the resolution of two problem credits. I just want to clarify is that the same two credits that drove the higher provision last quarter? I think one was a restaurant SNC and the other was an industrial parts distributor.

This is Barry. That is correct. I think we got did last quarter that while we made the provisions during Q3, you were likely to see full resolution of both of those credits during Q4 and the - as it relates to charge offs and that is what you saw. I think a one credit is fully charged off. The other credit has about $275,000 worth of outstanding balance, that is cash collateralized, and so that's what you saw was the flowing through the actual resolution on those two credits that we discussed last quarter during Q4.

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

Great. Thank you, Operator, and let me thank all of you who've been on the call today. We look forward to discussing our first quarter 2019 results in late April. And we appreciate your interest in Trustmark. This ends our fourth quarter call and thank you for joining us.

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