Earnings Call Transcript - TRMK Q4 2025

Operator, Operator

Good morning, ladies and gentlemen, and welcome to Trustmark Corporation's Fourth Quarter Earnings Conference Call. As a reminder, this call is being recorded. It is now my pleasure to introduce Mr. Joey Rein, Director of Corporate Strategy at Trustmark.

F. Joseph Rein, Director of Corporate Strategy

Good morning. I'd like to remind everyone that a copy of our fourth quarter earnings release and the presentation that will be discussed this morning are available on the Investor Relations section of our website at trustmark.com. During our call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and we'd like to caution you that these forward-looking statements may differ materially from actual results due to a number of risks and uncertainties, which are outlined in our earnings release and in our other filings with the Securities and Exchange Commission. At this time, I'd like to introduce Duane Dewey, President and CEO of Trustmark Corporation.

Duane Dewey, President and CEO

Thank you, Joey, and good morning, everyone. Thank you for joining us again this morning. With me are Tom Owens, our Chief Financial Officer; Barry Harvey, our Chief Credit and Operations Officer; and Tom Chambers, our Chief Accounting Officer. Trustmark's momentum continued to build throughout the year, resulting in record earnings in 2025. Our traditional Banking business drove continued loan and deposit growth, a strong net interest margin and solid credit quality. Our Mortgage Banking business achieved increased production and significant improvement in profitability, while revenue in our Wealth Management business reached an all-time high. In our presentation this morning, I will provide a summary of our performance and discuss forward guidance before moving to your questions. Now turning to Slide 3, our financial highlights. Our fourth quarter results reflected continued significant progress across the organization. Net income totaled $57.9 million, representing diluted EPS of $0.97 a share, up 3.2% linked-quarter and 5.4% year-over-year. For the full year, Trustmark achieved a record net income of $224.1 million, representing diluted earnings per share of $3.70. Net income from adjusted continuing operations increased $37.8 million or 20.3% in 2025. This level of earnings resulted in a return on average assets of 1.21% and a return on average tangible equity of 12.97%. From the balance sheet perspective, loans held for investment increased $126 million or 0.9% linked-quarter and $584 million or 4.5% year-over-year. Our loan portfolio remains well diversified by loan type and geography. Our deposit base declined $131 million or 0.8% linked-quarter, driven in part by a decrease in public fund deposits of $219 million. Year-over-year, deposits increased $392 million or 2.6%, driven by growth in commercial and personal balances of $568 million. The cost of total deposits in the fourth quarter was 1.72%, a decrease of 12 basis points linked-quarter. Our strong cost-effective core deposit base is a continuing strength of Trustmark. During the fourth quarter, we repurchased $43 million or 1.1 million shares of our common stock. For the year, we repurchased $80 million or 2.2 million shares, which represented 3.5% of outstanding shares at year-end 2024. As previously announced, we have authorization to repurchase up to $100 million of Trustmark common shares during 2026. This program continues to be subject to market conditions and management discretion. Revenue in the fourth quarter totaled $204 million, while revenue for the full year totaled $800 million, a record year at Trustmark. Net interest income in the fourth quarter totaled $166 million, which produced a net interest margin of 3.81%. For the full year, net interest income totaled $647 million, up 8.4% from the prior year. Noninterest income in the fourth quarter totaled $41 million, up 3.3% linked-quarter. In 2025, noninterest income totaled $164 million, representing 20.5% of total revenue. Noninterest expense increased $1.2 million or 0.9% linked-quarter. For the year, noninterest expense totaled $512 million, an increase of 5.5% from the prior year. Diligent expense management continues to be a focus of our organization. From a credit perspective, net charge-offs in the fourth quarter were $7.6 million and included 1 individually analyzed loan, totaling $5.9 million, which was reserved for in prior periods. Net charge-offs represented 0.22% of average loans in the fourth quarter. For the full year, net charge-offs were 13 basis points of average loans. The provision for credit losses in the fourth quarter totaled $1.2 million. The provision for both loans held for investment and off-balance sheet credit exposure were impacted by positive credit migration, loan and unfunded commitment growth, and the macroeconomic forecast. In 2025, the provision for credit losses was $12.9 million. At year-end, the allowance for credit losses represented 1.15% of loans held for investment. Again, very solid credit performance. We've been active on the capital management front, issuing $170 million of 6% fixed-to-floating subordinated debt in the fourth quarter, the proceeds of which were used to repay $125 million of existing subordinated debt and for general corporate purposes. This action further strengthens our regulatory capital position. At year-end, the CET1 ratio was 11.72% while our total risk-based capital ratio was 14.41%. Additionally, the Board announced a 4.2% increase in Trustmark's regular quarterly dividend to $0.25 per share from $0.24 per share. This dividend is payable March 15, 2026, to shareholders of record on March 1 and takes our full year dividend to $1 per share. As previously mentioned, we repurchased $80 million of Trustmark common stock during the year, including $43 million in the fourth quarter. At year-end, tangible book value per share was $30.28, an increase of 2.3% from the prior quarter and 13.5% from the prior year. I'm very pleased to report that through share repurchase activity and quarterly dividends, Trustmark returned approximately 61.8% of net income to 2025 shareholders. Now let's focus on forward guidance, which is on Page 15 of the deck. We're providing full year guidance for '26 as well as the 2025 benchmarks upon which the guidance is based. We expect loans held for investment to increase mid-single digits for the full year 2026, and deposits, excluding brokered deposits, to increase mid-single digits as well. Securities balances are expected to remain stable as we continue to reinvest cash flows. We anticipate the net interest margin will be in the range of 3.8% to 3.85% for the full year, while we expect net interest income to increase mid-single digits. From a credit perspective, total provision for credit losses, including off-balance sheet credit exposure, is expected to normalize. Noninterest income for full year 2026 is expected to increase mid-single digits, as is noninterest expense. We will continue our disciplined approach to capital deployment with a preference for organic loan growth, potential market expansion, mergers and acquisitions, or other general corporate purposes depending on market conditions. I would point you to pages 17 and 18, showing Trustmark has made significant improvement in its financial performance over the last several years. We're committed to maintaining that momentum into 2026. And with that, I would like to open the floor up for questions.

Operator, Operator

The first question comes from Stephen Scouten with Piper Sandler.

Stephen Scouten, Analyst

I guess, this morning, obviously, we've got another transaction that kind of impacts some of your larger markets, along with a lot of recent activity. And I know we talked about maybe 21 production hires back in the third quarter. Curious how many new hires maybe you had in fourth quarter, if any, and if these deals kind of accelerate any of your thoughts around talent acquisition in '26?

Duane Dewey, President and CEO

In the fourth quarter, we announced 29 total new hires in the third quarter, with 21 focused on production. The fourth quarter saw around 13 new production hires across various markets and disciplines within the company. We are committed to organic growth and enhancing our talent pool. During the Q&A session, we will discuss loan growth and the advancements we are witnessing in areas like C&I and our equipment finance team, which are showing improved performance thanks to these new hires. We are pleased with this progress. Regarding M&A activity, it indeed presents opportunities. Each transaction can create disruptions for clients and staff, particularly in our core markets and places like Houston. We are actively monitoring the situation and maintaining our recruitment efforts. Overall, we view these developments positively and anticipate continued growth through 2026.

Stephen Scouten, Analyst

Okay, great. My other question is about the guidance for 2026, specifically regarding credit and the concept of normalizing credit costs. Can you provide some insight into what that means for your team, especially in light of the net charge-offs for 2025 being around 13 basis points? I'm curious about how you expect charge-offs and reserve levels to normalize.

Barry Harvey, Chief Credit and Operations Officer

Starting with the charge-off aspect, I would expect that we should see average loans around 13 to 15 basis points on an ongoing basis. We don't anticipate anything unusual for 2025. We may have encountered a few larger commercial credits in 2025 that were resolved, leading to some losses. Currently, we don't have those issues or similar-sized credits. Therefore, I believe that 13 to 15 basis points for net charge-offs would be a reasonable expectation. Regarding provisioning, a range of 14 to 18 basis points of average loans seems appropriate. Much of this will depend on the improvement we see in credit quality. We've made significant strides in credit quality during 2025. For instance, criticized loans decreased by $181 million, and classified loans fell by $57 million for the year. As we address some of these credits, we'll notice upgrades and paydowns, which will also reflect positively on our provisioning. This improvement has already contributed significantly to our provisioning this quarter as well as in Q3. If this trend continues—though we can't predict if it will—we can anticipate lower provisioning costs than initially projected. For now, though, a range of 14 to 18 basis points of average loans feels accurate.

Stephen Scouten, Analyst

Fantastic. That's great color. Congrats on all the progress in 2025.

Operator, Operator

The next question comes from Gary Tenner with D.A. Davidson.

Gary Tenner, Analyst

Thank you for the insights on the provision question. Regarding other guidance areas, it seems that the guidance aligns well with expectations as we transition from 2025 into 2026. Could you discuss the key factors that influence the guidance, such as growth, fees, and expenses, and where you see the most sensitivity and potential leverage as we progress through the year?

Tom Owens, Chief Financial Officer

Well, Gary, I'll start. This is Tom Owens. As you said, our guidance is pretty consistent with the range of analyst estimates coming into '26. With respect to levers in terms of how it falls to the bottom line and EPS, obviously, loan growth is going to be a key driver. We've talked a little bit also about capital deployment during the year and I think those things are related. We've been pleased with our ability to continue to drive capital accretion at the same time that we've been supporting solid loan growth and deploying capital via share repurchase. So probably the biggest levers are probably going to be that relationship between loan growth and capital deployment.

Duane Dewey, President and CEO

We are observing favorable conditions in the mortgage market, which began to materialize in 2025. Factors affecting this business, such as MSR hedging, have shown significant improvement, positively impacting our noninterest income. As previously mentioned, we achieved record revenue in our Wealth Management businesses in 2025. We are investing further in these areas and adding talent across our operations. We anticipate some improvement in noninterest income categories, aiming for mid-single-digit growth, if not better. Expense management will remain a key focus moving forward, and at this point, we feel confident about achieving mid-single-digit growth. Overall, we are positioned for continued improvement across both our income statement and balance sheet.

Gary Tenner, Analyst

I appreciate the color there. And then just a follow-up, specific to Wealth Management. In the fourth quarter, the pickup in revenue there sequentially, what the driver was?

Duane Dewey, President and CEO

There's been a general improvement in asset values, which directly influences fee revenue. The improvement in asset values is encouraging for the business, alongside our efforts in acquiring new accounts. We’ve made investments in the business, brought in new talent, and established strong leadership. There's a focused effort throughout the organization on cross-sales and collaboration among our commercial businesses. This overall strategy is beginning to show positive results. Additionally, we have transitioned our brokerage team to a new platform in the third and fourth quarters, which is now generating new revenues and opportunities. We're feeling optimistic about this development as well.

Gary Tenner, Analyst

So to be clear, there's nothing unusual on that line in the fourth quarter, more just kind of increase on equity value. Okay.

Duane Dewey, President and CEO

That's accurate, yes.

Operator, Operator

The next question comes from Feddie Strickland with Hovde Group.

Feddie Strickland, Analyst

I wanted to start on the expense guidance. Curious to see what the cadence of expense growth throughout the year, is it relatively steady as you make these investments in new talent? Or is there any particular quarter that's higher?

F. Joseph Rein, Director of Corporate Strategy

He's asking about the timing of the timing of increases in noninterest expense.

George Chambers, Chief Accounting Officer

Yes, this is Tom Chambers. As you can see, in the last half of the year, we will have our annual merit increases across the company. Therefore, you will see a natural increase starting on July 1 of that quarter. Aside from that, there isn't anything unusual, unless it pertains to mortgage commissions and revenue-generating business.

Duane Dewey, President and CEO

Yes, I would say that in the second half of the year, we typically implement merit increases starting July 1, which affects that part of the year. Assuming performance is satisfactory, we may also finalize year-end bonuses, production commissions, and similar items during this time. Therefore, the second half of the year generally sees a higher level of increases compared to the first half. Throughout our organization, we continue to invest in technology and manage other usual expense increases that occur annually. Looking ahead to 2026, that sums up our expectations.

Feddie Strickland, Analyst

Got it. That makes sense. And just wanted to ask conversations on M&A. I mean, would you say a deal is any more or less likely in '26? And just a quick refresher on preferred geographies, what you're looking for in terms of partners. Just curious in general on M&A.

Duane Dewey, President and CEO

Yes. I would say, first and foremost, I mean, the increase in discussion and consideration, there probably is a fairly significant increase across our markets and the markets we serve and where we have interest. That has not changed really as we've talked for some time between Houston up to Dallas, Arkansas, Louisiana, Tennessee. I mean we cover such a large geographic footprint that are very attractive markets, and we have interest in those markets. We've talked about size ranges of $1 billion up to $10 billion. But it's all opportunistic. We have to see the opportunity. We have to see a good cultural fit. And we continue to create relationships and build rapport, but we are not going to be focused on doing a deal. We're focused on our organic strategy at this point. And if an M&A opportunity presents itself in a good market, that provides talent, that provides market opportunity and so on, then we will take advantage of that. We do feel from an overall operating profitability, capital, et cetera, perspective, we're in the best position we've been in to do that in quite a while. But we're going to be cautious and selective in that process. And we have felt that the buyback has been a good route to utilize capital to this point, and we'll continue to consider that as we move forward as well.

Operator, Operator

The next question comes from Christopher Marinac with Janney.

Christopher Marinac, Analyst

Just to continue on the M&A question from Feddie. Do you think that there's a scenario where you don't do an M&A deal because there's too much happening around you? Stephen mentioned the Texas deal this morning. Obviously, you have a much bigger merger in your backyard that's happening this year with a competitor going away. Is there a scenario where you don't do anything on M&A, you simply focus organically just to take advantage of opportunities in people exclusively?

Duane Dewey, President and CEO

I think that's a great point, and that's, again, there is a good amount of disruption and good companies all moving their organizations forward. But at the end of the day, it creates opportunities sometimes for those of us in the marketplace. And so that is absolutely a very accurate consideration for us. And as we have talked about our organic strategy, if you look at markets, like Synovus, Pinnacle, Cadence, Stellar, I mean, they're all in markets we serve, they all create some opportunity. And we're looking forward to considering what options we have for that organic strategy and we see it as significant. So I think that's a very good point. And I think it is a strong enough consideration that, yes, you may see us not do a deal.

Christopher Marinac, Analyst

Great. And then just to follow up on sort of the deposit success that you talked about in the prepared remarks. So are you doing anything to incent deposits differently than you had in past years?

Thomas Owens, Chief Financial Officer

So Chris, this is Tom Owens. And so I'm guessing with your question, you're talking about internal incentivization. And the answer there is yes. That has been an increasing area of focus for us, obviously, is deposit customer acquisition and balance acquisition. And so when you look at, for example, our CRM bonus templates and the drivers in the templates, we've increased our emphasis on deposit growth there. And I'll just say, I mean, we've been pleased with, when you look at our competitive stance on deposits and where we rank in terms of deposit costs, we've been pleased with our ability to grow balances cost-effectively. You look at personal and commercial balances are up 4.4% year-over-year. And I think on an average balance basis in the fourth quarter, over year-ago quarter, they're up over 4%. So we've been very pleased with our ability to do that to continue to fund solid loan growth.

Operator, Operator

The next question comes from Catherine Mealor with KBW.

Catherine Mealor, Analyst

All right. I have a quick question regarding the margin. Tom, can you provide any insight on where deposits may have ended the quarter or what the situation looks like as we move into 2026, particularly considering the full impact of the recent rate cut?

Thomas Owens, Chief Financial Officer

Yes, it's a bit hard to hear you, Catherine, but I believe I understand your question. This is Tom Owens. Before addressing your question directly, I want to highlight something that I noticed in the pre-call notes from analysts, which may have been overlooked. Our net interest margin experienced a decline of 2 basis points from 3.83% in the third quarter to 3.81% in the fourth quarter. This decline was largely due to the accelerated recognition of costs related to the 2020 subordinated debt issue, which we refinanced during the quarter. That accounted for approximately $1.1 million that was included in net interest income. Adjusting for this, our margin would have remained at 3.83%, marking our second consecutive quarter at that rate. This brings us back to your inquiry, as it also serves as a reference for our net interest margin guidance for 2026. The range we've provided, between 3.80% and 3.85%, is relatively narrow compared to those of other banks, and we are currently positioned in the middle of that range at 3.83%. In response to your question regarding deposit costs in our guidance, we expect a decrease from 1.72% to 1.61% in the first quarter. If you look at January so far, we're averaging around 1.63%. Additionally, our certificate of deposit book continues to reprice this quarter, which should further reduce our rate by 1 or 2 basis points, all else being equal.

Catherine Mealor, Analyst

That's very helpful, and I appreciate you highlighting that additional $1 million cost you mentioned. My final question is regarding the buyback. Given that growth is improving, there's M&A activity, your stock is reasonably priced, and you have substantial capital, is it reasonable to expect you to utilize your entire buyback authorization? Do you believe you have sufficient capital to aggressively pursue the buyback while still having enough for potential future deals? Or are you a bit more cautious with pricing on that? I'm just trying to gauge the buyback opportunity.

Thomas Owens, Chief Financial Officer

There's a lot to unpack, but I'll start by outlining the range and how to approach it. We've previously mentioned the continued increase in our regulatory capital ratios, with 12% as a target for our CET1. We concluded 2025 with a CET1 of 11.72%, and without any share repurchase, even with strong loan growth anticipated in 2026, we project finishing that year slightly above 12%. As Duane mentioned, we have a $100 million authorization. If we didn’t deploy any capital and experienced robust loan growth, we would still be slightly above 12% by the end of 2026. However, if we utilized the entire $100 million authorization, our ratio would decrease to approximately 11.5%. Therefore, a realistic range to consider would be between $60 million and $70 million, which would maintain our capital ratios. With our current CET1 at 11.72%, this is roughly the midpoint between 11.5% and 12%. So, to answer your question about including the full $100 million in your model, I would recommend guiding towards a range of $60 million to $70 million to better manage our capital levels while still anticipating solid loan growth.

Operator, Operator

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

Duane Dewey, President and CEO

Well, thank you for joining us today on the call. Again, 2025 was a record year for Trustmark. We're very pleased and proud and look forward to keeping that momentum into 2026. We look forward to joining back up with you for our first quarter call at the end of April. You all have a great rest of the week.

Operator, Operator

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