Earnings Call Transcript - TRMK Q4 2024

Operator, Operator

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. As a reminder, this call is being recorded. It is now my pleasure to introduce Mr. Joey Rein, Director of Corporate Strategy at Trustmark. Please go ahead, sir.

Joey Rein, Director of Corporate Strategy

Good morning. I'd like to remind everyone that our fourth quarter earnings release and the slide presentation that will be discussed on our call 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 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 Duane Dewey, President and CEO of Trustmark.

Duane Dewey, President and CEO

Thank you, Joey, and good morning, everyone. Thank you for joining us 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. 2024 was a transformational year for Trustmark, reflecting the sale of our insurance agency, the restructuring of our balance sheet and the expanded sales and service initiatives designed to meet the needs of our customers. These actions, along with other initiatives in prior years have significantly enhanced financial performance and Trustmark's earnings profile. Our capital levels rose meaningfully, which led to the Board's decision to increase the quarterly cash dividend, along with renewed activity in the share repurchase program. Our fourth quarter results reflect continued significant progress across the organization. Net income totaled $56.3 million, representing diluted EPS of $0.92 per share. This represents a linked-quarter increase of $5 million, or 9.7%, along with an $0.08 increase in diluted EPS. Our performance in the quarter produced a return on tangible common equity of 13.68% and a return on average assets of 1.23%. For the full year 2024, net income from adjusted continuing operations totaled $186.3 million, or $3.04 per diluted share, representing an increase of $27.1 million, or 17% from the prior year. Now let's turn to Slide 3 for a summary of financial highlights. Let's start with the balance sheet. Loans held for investment totaled $13.1 billion at 12/31, down $10 million linked-quarter and up $139.4 million year-over-year. Deposits totaled $15.1 billion at year-end, down $132.8 million linked-quarter, which includes an intentional reduction in broker deposits of $150 million during the quarter. Excluding this planned runoff, linked-quarter deposits were basically flat, up $17 million. For the full year, deposits declined $461.6 million, which includes the planned reduction of high-cost public and brokered deposits totaling $726.8 million. Said differently, all other deposits increased $265.2 million in '24 while we diligently manage deposit costs. Revenue in the fourth quarter totaled $196.8 million, up 2.4% linked quarter. For the full year '24, total revenue from adjusted continuing operations was $740.5 million, up 5.6% from the prior year. Net interest income totaled $158.4 million in the fourth quarter, producing a net interest margin of 3.76%, up 7 basis points linked quarter. Noninterest income in the fourth quarter totaled $41 million, up 9% linked quarter, reflecting broad-based growth across virtually all fee-based businesses. For the full year, noninterest income from adjusted continuing operations totaled $156.1 million, an increase of 5.2% from the prior year. From an expense perspective, we've shown noticeable improvement. Noninterest expense from continuing operations in the fourth quarter totaled $124.4 million, up $1.2 million or 0.9% linked quarter. For the full year, noninterest expense from adjusted continuing operations totaled $485.7 million, a decline of $2.1 million from the prior year. Diligent expense management continues to be a focus of the organization. From a credit quality perspective, net charge-offs totaled $4.6 million in the fourth quarter, representing 0.14% of average loans. The allowance for credit losses represented 1.22% of loans held for investment and 341% of nonaccrual loans, excluding individually analyzed loans. Trustmark's capital ratios expanded meaningfully during the quarter as tangible equity to tangible assets increased to 9.13%, while the CET1 ratio expanded 24 basis points to 11.54% and the total risk-based capital ratio expanded 26 basis points to 13.97%. As I mentioned earlier, we resumed activity in the share repurchase program. During the fourth quarter, we repurchased $7.1 million or approximately 203,000 shares of common stock. And as previously announced, we are authorized to repurchase up to $100 million of Trustmark shares during 2025. Additionally, the Board announced a 4.3% increase in the regular quarterly dividend to $0.24 per share from $0.23 per share, payable March 15, '25 to shareholders of record on March 1. This action raises the indicated annual dividend rate to $0.96 per share from $0.92 per share. Each action, the renewed activity in the share repurchase program and the quarterly dividend are reflective of Trustmark's improved financial performance and enhanced forward earnings profile. At this time, Barry Harvey is going to review the loan portfolio and credit quality.

Barry Harvey, Chief Credit and Operations Officer

I'll be glad to, Duane, and good morning. Turning to slide 4, loans held for investments totaled $13.1 billion as of 12/31, which is relatively flat for the quarter. Increases in the fourth quarter from multifamily, commercial and C&I loans and one to four family mortgages were offset by declines in state and political loans, other CRE loans and other loans. We expect loan growth of low single digits for 2025. As you can see, our loan portfolio remains well diversified, both from a product standpoint as well as from a geography standpoint. Looking at slide 5, Trustmark's CRE portfolio is 95% vertical with 73% in the existing category and 27% in construction land development. Our construction land development portfolio is 81% construction. Trustmark's office portfolio, as you can see, is very modest at $244 million outstanding, which represents only 2% of our overall loan book. The portfolio is comprised of credits with high-quality tenants, low lease turnover, strong occupancy levels and low leverage. Turning to slide 6, the bank's commercial loan portfolio is well diversified, as you can see, across numerous industries with no single category exceeding 13%. Looking to slide 7, our provision for credit losses for loans held for investment was $7 million during the quarter, which was driven by the macroeconomic forecast as well as by net adjustments in our qualitative factors. The provision for credit losses for off-balance sheet credit exposure was $502,000, driven by net adjustments to the qualitative factors and increases in unfunded commitments. At 12/31, the allowance for credit losses for loans held for investment was $160 million. Turning to slide 8, we continue to post solid credit quality metrics. The allowance for credit losses increased by 122% prior quarter, bringing it to 1.21%, representing 341% of non-accruals, excluding those that are individually analyzed. In the fourth quarter, net charge-offs totaled $4.6 million. While both non-accruals and nonperforming assets increased slightly during the quarter, they have declined meaningfully year-over-year due to our continuing efforts to effectively manage and resolve problem assets in a timely manner. Duane?

Duane Dewey, President and CEO

Great. Thank you, Barry. Now, Tom Owens can cover deposits, net interest margin and non-interest income.

Tom Owens, Chief Financial Officer

Thanks, Duane, and good morning, everyone. Turning to deposits on slide 9. Deposits totaled $15.1 billion at December 31, a linked quarter decrease of $132.8 million and a year-over-year decrease of $461.6 million. The linked quarter decrease was driven by a $150 million decline in brokered CDs, which we allowed to run off at maturity rather than replace. Beyond the intentional runoff of brokered CDs, deposits increased by $17 million during the quarter with solid growth of about $157 million in personal balances and about $74 million in public fund balances. Those increases were offset by a decline of about $215 million in commercial balances. The year-over-year decline of $462 million was driven by declines of $398 million in public fund balances, reflecting our significantly less competitive posture on rate, and $329 million in brokered deposits, which we chose not to renew at maturity. Looking beyond those managed declines in balances, personal and commercial deposits increased year-over-year by $265 million or 2.1%. While our primary focus, as Duane said, has been managing cost while maintaining strong liquidity. Non-interest-bearing DDA balances remained resilient, declining by $69 million linked quarter and remaining in 20% of our deposit base. Time deposits increased by $4 million linked quarter, excluding the decline of $150 million in brokered CDs. As of December 31, our promotional and exception price time deposit book totaled $1.6 billion with a weighted average rate paid of 4.82% and a weighted average remaining term of about three months. Our brokered time deposit book totaled $250 million at an all-in weighted average rate paid of 4.85% and a weighted average remaining term of about two months as of December 31. The relatively short weighted average remaining term of these portfolios represents significant opportunity for continued downward repricing, and time deposit repricing is a primary driver of the guidance that we're providing for further decline in deposit costs during the first quarter. Our cost of interest-bearing deposits decreased by 30 basis points from the prior quarter to 2.51%. Turning to slide 10. Trustmark continues to maintain a stable, granular and low exposure deposit base. During the fourth quarter, we had an average of about 457,000 personal and non-personal deposit accounts, excluding collateralized public fund accounts, with an average balance per account of about $28,000. As of December 31, 64% of our deposits were insured and 12% were collateralized, meaning that our mix of deposits that are uninsured and uncollateralized was relatively unchanged linked quarter at 24%. We maintained substantial secured borrowing capacity, which stood at $6.5 billion at December 31, representing 179% coverage of uninsured and uncollateralized deposits. Our fourth quarter total deposit costs decreased 24 basis points linked quarter to 1.98%. The favorable variance to prior guidance reflects proactive strategic pricing actions that we took during the quarter in anticipation of the Fed's rate cuts in November and December. Based on those actions as well as the ongoing repricing of the time deposit portfolio, we're currently projecting a linked quarter decline in deposit costs for the first quarter of about 14 basis points to 1.84%. As a frame of reference for that guidance, we're on track for deposit cost of approximately 1.87% month-to-date in January. Turning our attention to revenue on slide 11. Net interest income FTE totaled $158.4 million, which resulted in a net interest margin of 3.76%. Net interest margin increased by 7 basis points linked quarter, driven by 27 basis points of accretion from liability rate and volume, offset by 20 basis points of dilution from asset rate and volume, reflecting the proactive pricing deposit actions that we took during the quarter, which position us well for continued decline in deposit costs during the first quarter. Turning to slide 12. Our interest rate risk profile remained essentially unchanged as of December 31st with a loan portfolio mix of 52% variable rate coupon. The cash flow hedge portfolio, which is structured to mitigate asset sensitivity, had an active notional balance of $875 million and weighted average maturity of 3.4 years, including the effect of $500 million notional in forward settle swaps and $125 million notional in forward settle floors. The weighted average received fixed rate on $850 million active notional of interest rate swaps is 3.12% and the weighted average SOFR rate on $25 million active notional floors is 4%. Turning to slide 13. Non-interest income from adjusted continuing operations totaled $41 million in the fourth quarter, a linked-quarter increase of approximately $3.4 million and totaled $156.1 million for the full year, a year-over-year increase of about $7.7 million or 5.2%. I'll point out that the $7.7 million year-over-year increase includes the effect of a $3 million increase in negative net hedge ineffectiveness. So effectively, net of that, non-interest income was up $10.7 million or 7.2%, driven by increases in mortgage banking of $3.4 million or 13%, wealth management of $2.2 million or 6%, corporate treasury services of $1.5 million or 14% and service charges on deposit accounts of $1 million. And now I'll ask Tom Chambers to cover non-interest expense and capital management.

Tom Chambers, Chief Accounting Officer

Thanks, Tom. Turning to slide 14, we'll see a detail of our total non-interest expense. During the fourth quarter, non-interest expense totaled $124.4 million for a linked-quarter increase of $1.2 million or 0.9%. The increase was mainly driven by an increase in salary and benefits of $2.5 million, resulting from an increase in annual performance incentive accruals during the quarter. Total other expense decreased by $2.2 million, driven by a decrease in other real estate expense net as a result of a valuation reserve established during the third quarter related to one assisted living property. For the year ended 2024, non-interest expense from adjusted continuing operations totaled $485.7 million for a year-over-year decrease of $2.1 million or 0.4%, which was a result of focused disciplined expense control during the year. Turning to slide 15, capital management. Trustmark remains well-positioned from a capital perspective. As Duane previously mentioned, our capital ratios remained solid. At the end of the quarter, common equity Tier 1 ratio was 11.54%, a linked-quarter increase of 24 basis points and total risk-based capital ratio was 13.97%, a linked-quarter increase of 26 basis points. During the fourth quarter, we resumed our share repurchase activity and repurchased $7.5 million or approximately 203,000 common shares. Although we currently have a $100 million share repurchase program in place for year-end 2025, our priority for capital deployment continues to be focused on organic lending. As Duane indicated, we will continue to evaluate the share repurchase program as the market and capital levels dictate. Trustmark's Board of Directors announced an increase in its regular quarterly dividend from $0.23 to $0.24 per share, resulting in an increase of 4.3%. This action raises the indicated annual dividend from $0.92 per share to $0.96 per share. Back to you, Duane.

Duane Dewey, President and CEO

Great. Thank you, Tom. Now turning to slide 16. You'll notice a new format for our guidance in 2025. We now include 2024 benchmarks, upon which our 2025 full year guidance is based. We expect loans held for investment to increase low-single-digits for the full year 2025 and deposits, excluding brokered deposits, to increase also low-single-digits during the year. 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 3.75% to 3.85% for the full year, while we expect net interest income to increase in the mid to high-single-digits during 2025. From a credit perspective, the provision for credit losses, including unfunded commitments is expected to remain stable relative to 2024. Non-interest income from adjusted continuing operations for the full year 2025 is expected to increase mid-single-digits, while non-interest expense from adjusted continuing operations is expected to increase mid-single-digits as well. And as already noted, we'll continue our disciplined approach to capital deployment in 2025 with a preference for organic loan growth and potential market expansion. We'll be considering M&A activities and then other general corporate purposes as we've already described, such as repurchase, etc. So with that, that concludes our prepared comments, and we'd like to open the floor for questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. And the first question will come from Catherine Mealor with KBW. Please go ahead.

Catherine Mealor, Analyst

Thanks. Good morning.

Duane Dewey, President and CEO

Good morning, Catherine.

Tom Owens, Chief Financial Officer

Good morning, Catherine.

Catherine Mealor, Analyst

I wanted to start by congratulating everyone on a fantastic quarter and a strong finish to the year. Additionally, I would like to follow up on some of the insights you provided, Tom, regarding the full year margin guidance. It was informative to hear your thoughts on the direction of deposit costs. Could you elaborate on loan pricing and your outlook on loan betas and incremental loan pricing in the upcoming quarters?

Tom Owens, Chief Financial Officer

Well, I'll start, Catherine, and we'll see if Barry wants to weigh in. As you know, roughly half of the book is floating rate. We do have in the forecast based on market implied forwards two Fed cuts of 25 basis points each, one in March, one in June. With respect to the loan pricing dynamics, I'll let Barry address spread. I mean, the other factors are obviously our spread on floating rate loans coming on the books as well as the differential between fixed rate loans maturing and going off the books, and then the lift that we've been getting from new fixed rate loans coming on the books in prior quarters. When I've commented on that dynamic, I think I've said you can sort of rely on a tailwind, so to speak, on the fixed rate loans of 2 to 3 basis points per month. I think with the longer interest rates that remain higher here, some of that effect is diminished. So whereas I previously said 2 to 3 basis points, maybe I'd say now, 1 to 2 basis points. So that continues to represent a tailwind, but not quite as much. Really, Catherine, the primary driver is deposit costs. The reason I go through the statistics in the prepared commentary on the time deposit book is it is very short. And just to give you an idea here on a point-to-point basis, from the end of the third quarter to the end of the fourth quarter, the time deposit book price got about double that amount. So it's really a key driver of the guidance for the linked-quarter NIM and then for the full year NIM because, obviously, that repricing continues in quarters beyond that at a diminishing rate.

Barry Harvey, Chief Credit and Operations Officer

Well, I'll just make a couple of comments, Tom. I think from a Q4 weighted average interest rate book standpoint, we were about 7.11% versus the book average of 6.07%. So we do continue to have, as you said, the tailwind of what's going on. It's obviously at a higher rate than what's currently in the portfolio. From a standpoint of where we're seeing most of our activities, Catherine, on the CRE side, which obviously all of that for us is floating. And we are still seeing the spread for the most part, be at levels that we've previously benefited from. We'll see one-month LIBOR plus 300, maybe 285. That's the world we lived in during 2023 in the first half of 2024. It got a little bit more competitive in the third quarter, where some banks got back involved that had not been active in the CRE space, but it seems to have settled down from there. And that one-month LIBOR plus 285 with a 75, 80 basis point fee is where we're kind of settling in. It looks like that everybody in the market is behaving a little more rationally and understanding what the risk is and needing to get paid for it. So we're very pleased to see that transition occur during the fourth quarter.

Catherine Mealor, Analyst

Okay. Great. And on loan growth, your low single-digit guidance, it feels like everyone in the industry is feeling a little bit better about the outlook for loan growth this year. And just curious within that, does that low single-digit include maybe better origination volume, but still the impact of paydowns? Or are you still seeing kind of origination volume not pick up as a faster pace as we may have expected? Thanks.

Tom Owens, Chief Financial Officer

Sure. Catherine, I will briefly go over this, as it's important to cover. For 2025, we are expecting low single-digit loan growth. In 2023 and the first half of 2024, commercial real estate activity was not as strong as what we saw in 2021 and 2022, which were very robust years. Consequently, there will be some maturities in 2025 and 2026 from the strong activity in those earlier years. We did notice a significant increase in production for commercial real estate in the third and fourth quarters of this year, and it looks like this trend will continue, which we are pleased about. It's important to note that we cannot predict customer behavior. However, with our commercial real estate construction mini firm products, there are two one-year extension options fully underwritten at the time of origination. The terms, pricing, and everything are clear to the customer, and if they meet certain performance criteria, they can take advantage of that extra year and an additional second year if they wish. In the fourth quarter, we observed a substantial rise in the number of extension options exercised for maturities in 2025. While we are not factoring this continued trend into our guidance for 2025, it is a possibility.

Barry Harvey, Chief Credit and Operations Officer

Catherine, I want to quickly add that we are continuing to see very encouraging production opportunities in the equipment finance area. In commercial and industrial, particularly in the middle market and corporate sectors, our teams are reporting an increase in their pipelines. We experienced a strong fourth quarter in the corporate middle market, some of which has not yet funded, and we are optimistic that it will begin to fund in 2025, along with new production across other categories. Overall, we remain cautiously optimistic as we enter 2025. As Barry mentioned regarding the commercial real estate sector, there can be positive aspects, but there might still be some challenges related to payoffs. Ultimately, this is where our guidance is anchored, suggesting a low single-digit range.

Catherine Mealor, Analyst

That makes sense. Okay. Very helpful. Thank you. Great quarter.

Duane Dewey, President and CEO

Thank you.

Barry Harvey, Chief Credit and Operations Officer

Thank you, Catherine.

Christopher Marinac, Analyst

Hey, thanks. Good morning. I wanted to ask about your thoughts about net charge-offs. And is there any tolerance to have a little bit higher loss rate to get more growth? And kind of how do you think through that, not just near-term, but over the intermediate run?

Barry Harvey, Chief Credit and Operations Officer

And Christopher, this is Barry. From the number of deals we're involved in with other banks, we see that our credit risk-taking aligns closely with many of our peers and larger regional banks. Additional risk-taking depends more on the opportunities that arise rather than the deals we choose not to pursue, which could lead to higher charge-offs. We are very cautious and proactive in evaluating our credits, whether they are criticized or classified, and we prioritize maintaining high credit quality at all times. We are in a much stronger position now, and I believe you'll see an improvement in credit quality over time.

Christopher Marinac, Analyst

All right. Great. Thank you for that background. And then just one follow-up just on expenses. Do you have any color or just observations on sort of net new deposit accounts and sort of just the flow of new customers from the deposit side? I mean we realize the balance changes quarter-to-quarter, but just thinking out loud about how new accounts and customers are added to the Trustmark organization?

Tom Owens, Chief Financial Officer

So Chris, this is Tom Owens. I'll start by addressing your question regarding deposit accounts. There is always some natural turnover with existing accounts compared to new account openings, and we have maintained a consistent performance in that area. When discussing the number of accounts, the increases we see in 2023 and 2024 are largely due to promotional activities, especially related to time deposits. So, when evaluating the number of accounts, it's important to consider these factors separately from overall account growth or decline. As mentioned earlier, our focus in 2024 is on managing costs while balancing loan growth with deposit growth. However, I can confidently say that we are committed to steadily growing our accounts.

Duane Dewey, President and CEO

And Chris, did we miss the first part of that question? Was there another part of the question?

Christopher Marinac, Analyst

No, actually. It was really account opening that Tom described. So I'm good on that. Sorry, if I mentioned expense, that was not my point. So thank you very much for the call this morning.

Duane Dewey, President and CEO

Thank you.

Tom Owens, Chief Financial Officer

Thanks, Chris.

Gary Tenner, Analyst

Thanks. Good morning. I appreciate the color on the puts and takes for 2025 loan growth. I was curious about the C&I traction in the fourth quarter. I think you had indicated in the past that maybe post-election, there was increased optimism, the pipelines have strengthened up. Is there any follow-through in terms of the period end balances there? Or is that purely kind of year-end maybe seasonality and drawdown on lines that maybe reverses in the first quarter?

Barry Harvey, Chief Credit and Operations Officer

Hey Gary, this is Barry. I believe there will definitely be some continuation during 2025. In the fourth quarter of 2024, we experienced a mix of factors. We secured some new opportunities and bookings that provided funding, and we also saw an increase in line utilization. Typically, we've been around 37%. In the third quarter, it dipped to 35% due to some shrinkage we encountered. However, in the fourth quarter, we increased to 36%. I believe there are opportunities for us to return to 37% and beyond in terms of line utilization. Additionally, we achieved good production that was approved and funded in the fourth quarter, and we anticipate that trend will persist with our C&I producers, who are actively making calls.

Duane Dewey, President and CEO

I'll add a few points. As you may remember, we've discussed Fit to Grow over the past couple of years and the adjustments we've made within our franchise, especially in the retail commercial banking sector and our institutional businesses. During this period, we experienced some changes and adjustments. In 2024, we are beginning to come together and produce results. Looking ahead to 2025, we are confident in our structure and the team we have assembled. As Barry mentioned, in the last two months, we have added over 10 new production staff across equipment finance, commercial banking, and corporate banking, all geared towards C&I production. These additions complement the restructuring efforts we undertook, and we anticipate ongoing improvements in our C&I performance across many markets.

Gary Tenner, Analyst

Thanks. I appreciate the color there. And then a quick question just on the stock repurchase, I know you talked about it a bit in your prepared remarks. Given the outlook for pretty moderate loan growth and overall balance sheet growth and a good return profile, there don't seem to be any looming restrictions to continuing the buyback dependent on the price, of course. But am I missing anything there?

Duane Dewey, President and CEO

Other than the $100 million authorization from the Board, that's the operating restriction, if you will, as you described that we might have. But as you know, I mean, that's a function of a lot of different considerations there. One, what's happening on the growth side of the equation as well as then what's happening in M&A or any other considerations that we might have as we move into the year. So, there's a lot of different factors that play into that. We meet and analyze regularly and consider the best way to use capital, and that is one of those alternatives.

Tom Owens, Chief Financial Officer

Yes. This is Tom Owens. I want to point out that our risk-based capital ratio saw a nice increase in the fourth quarter, rising by about 25 basis points. Our CET1 is at approximately 11.5%. I believe we could reach around 12% even without the share repurchase program. Despite stronger loan growth, there will likely be opportunities to use capital for repurchases, which we see as an attractive option in terms of returns. We have a thorough framework and process to evaluate share repurchase activity, so I expect to see this activity continue.

Gary Tenner, Analyst

Great. Thank you.

Duane Dewey, President and CEO

Thank you.

Operator, Operator

The next question will come from Eric Spector with Raymond James. Please go ahead.

Eric Spector, Analyst

Hey, good morning everybody. This is Eric dialing in for Michael. Thanks for taking the questions. Maybe just touching on your expense guide. I'm just curious some of the investments that you've got embedded in your expense guide. Obviously, there's some natural expense growth or normal inflation, but just curious what kind of investments you're focused on?

Duane Dewey, President and CEO

Well, it's across the board in terms of technology investment, a number of different initiatives across the organization, one of which includes the core conversion that will be a focus for the company here throughout 2025. We continue to invest in digital technology and so on to serve customers across the board. When you step back and look at the 2025 expense guide, there's significant continued pressure, I think on the personnel front, with salaries and benefits, as well as a very significant increase in healthcare costs that are true to the industry and true to all different categories out there. So there are several different pressures that are just impacting the expenses for 2025. Those would be the ones that come to mind. I don't know, Tom or Tom, if you'll have anything to add to that.

Tom Owens, Chief Financial Officer

I'd probably add risk infrastructure, continuing to invest in our risk infrastructure and ensure that we have the right framework in place to continue to allow us to grow both organically as well as potentially through acquisition.

Duane Dewey, President and CEO

And then I did leave out, as I already commented on in prior comments, the new production staff, of course, across a lot of different markets and all of our different categories of production, we're gently focused on those categories as well, adding to our potential for growth.

Eric Spector, Analyst

That's great information. I'd like to ask about deposits. You've done an excellent job of reducing costs. Have you seen any client pushback or loss due to this? I understand that most of the decline this quarter was from the intentional reduction in brokered deposits. Can you discuss the trends in non-interest-bearing accounts and DDA, and how much of that is due to seasonal factors versus account migrations? What is the outlook for deposit growth as we approach 2025?

Tom Owens, Chief Financial Officer

This is Tom Owens. We've been very pleased with the response to the pricing actions we implemented in the third and fourth quarters. There hasn't been a noticeable increase in attrition in our deposit accounts as a result. As we mentioned earlier, when we consider the managed declines in brokered CDs and public fund balances, we see that part of the public fund deposit base remains highly competitive on pricing. We're focused on maintaining strong liquidity with a loan-to-deposit ratio in the mid-80s, which has led us to pull back from some of the more competitive bidding situations. However, our core deposits, both personal and non-personal, grew by over 2% for the full year in 2024. Given our competitive position and commitment to cost rationalization, we feel optimistic about our ability to fund balance sheet growth in a cost-effective manner. Notably, as illustrated in Slide 10 of the presentation, we've been able to gradually widen the spread between our deposit costs and the KRX median deposit costs. Based on trends observed during the earnings season, we likely widened that spread again in the fourth quarter. This current environment presents an opportunity for us to stand out in terms of the value of our deposit base, and we expect this trend to continue into 2025.

Eric Spector, Analyst

Great. That's great color. And then maybe one last question for me, and then I'll step back. Just kind of a question on credit, MPAs ticked modestly higher, still relatively benign. It looked like particularly in Mississippi. Just curious whether you're seeing any migration and how you think about credit broadly and if there's anywhere you're watching more closely than others?

Barry Harvey, Chief Credit and Operations Officer

And Eric, this is Barry. We're clearly committed to our robust annual review process for all of our credits, regardless of size, and we have various methods to monitor all the triggers on our credits to identify any that might require further investigation due to signs of weakness. We don't prioritize one category over another, although commercial real estate is impacted by the Fed's 550 basis point increase, which has since seen a 100 basis point reduction. This increase affected CRE projects and their progression through the lease-up phase. I believe we have done well in being proactive and timely in adjusting grades, which is reflected in our criticized and classified levels. Looking ahead to 2025, I feel optimistic that we will have more credits to upgrade than to downgrade based on our current knowledge. This is a cycle, and I am confident that those credits currently classified as non-pass will transition back to pass. The 100 basis point reduction is beneficial, but time also plays a crucial role since many of the struggling projects just need an additional six to nine months to reach their expected occupancy levels and rental rates. While we are closely monitoring everything daily, I am hopeful that the cycle will start to improve, leading to more upgrades than downgrades moving forward.

Eric Spector, Analyst

Great. Thank you for taking the question, and congrats on a good quarter.

Barry Harvey, Chief Credit and Operations Officer

Thank you.

Operator, Operator

The next question will come from Andrew Gorczyca with Piper Sandler. Please go ahead.

Andrew Gorczyca, Analyst

Hi. Good morning, everyone.

Duane Dewey, President and CEO

Good morning.

Barry Harvey, Chief Credit and Operations Officer

Good morning.

Andrew Gorczyca, Analyst

A lot of my questions have kind of been answered at this point, but I just wanted to hop back to maybe capital priorities in the prepared remarks. You touched on organic lending being the top priority, and then followed by potential market expansion. And just to follow up to that, just wondering what regions present the most attractive growth opportunities in 2025?

Duane Dewey, President and CEO

So, first and foremost, organic loan growth is certainly the most cost-effective way to use capital. So, that continues to be a focus, and I've already commented on, some of the production staff. And then further, I commented on the fact that we had been through some restructuring and so on. And through that process, we have plenty of opportunity to add production staff in a lot of our existing markets, Houston, South Alabama, the Mobile, Baldwin County area. In Birmingham, specifically, Birmingham is a significant opportunity for us. Atlanta, we had opened a loan production office in Atlanta several years ago. We've now continued to expand all our offerings in that market. Equipment finance is another area where we've had very solid success with a fairly limited production team, of which we're now adding to the production team in the equipment finance area. Then if you step back and look at our footprint, we have very attractive markets in and around the core franchise up into Tennessee, over into Texas and so on. So those are all things that will be on the drawing board, the most likely for 2025, however, would be adding to existing production staff and expanding markets where we already serve.

Andrew Gorczyca, Analyst

Got it, makes sense. That’s all I had. Thanks for taking the question.

Duane Dewey, President and CEO

Thank you.

Operator, Operator

The next question will come from David Bishop with the Hovde Group. Please go ahead.

Unidentified Analyst, Analyst

Hi. Good morning, guys. This is John on for Dave.

Duane Dewey, President and CEO

Hi, John.

Tom Owens, Chief Financial Officer

Good morning.

Unidentified Analyst, Analyst

So just wanted to start quickly on the hedge front. I was wondering if you could just share your thoughts on how the hedging strategy should impact the margin moving forward, particularly in the event that we get, say, another one to two cuts this year, if that's possible to quantify?

Tom Owens, Chief Financial Officer

It's certainly possible to quantify. This is Tom Owens. The cash flow hedge portfolio is intended to reduce some of the volatility in net interest income caused by changes in interest rates. As mentioned in our prepared comments, 52% of the portfolio consists of floating rate loans, which is approximately $6.5 billion. We've effectively swapped a part of this through $875 million notional, comprised of $850 million in active notional interest rate swaps and $25 million of floors. That's the way to consider it. Regarding the portfolio's impact, the simple calculation is that $850 million in fixed rate loans would yield an $8.5 million benefit for a 100 basis point increase, all else being equal. If we experience two cuts, one in March and another in June, we would see a $4.25 million benefit in the second half of 2025 from having the cash flow hedge portfolio in place relative to our current net interest income.

Unidentified Analyst, Analyst

Very helpful. Thank you for that. And I guess just pivoting and not to beat a dead horse here on the deposit front. I appreciate all the color on the forecasted beta and how time deposit costs have trended thus far in January. I guess I'm just curious as to how much lower we could see deposits reprice in 1Q and 2Q in the event that we don't see a cut in March or a cut in June?

Tom Owens, Chief Financial Officer

That's a great question. As mentioned in my earlier comments, our guidance for the year regarding net interest margin and deposit costs for the first quarter largely depends on the ongoing repricing of our time deposit portfolio. Currently, we have minimal pricing adjustments. We anticipate 25 basis point cuts in our forecasts for March and June based on market expectations. However, there is little reduction anticipated for interest-bearing non-maturity deposit costs associated with these cuts. Therefore, we believe our guidance on deposit costs for the year remains conservative. To give you a clearer picture, we reported a deposit cost of 1.98% in the fourth quarter and are projecting 1.84% for the first quarter based on current market indicators. By the fourth quarter of this year, we estimate it could decrease to approximately 1.70%.

Unidentified Analyst, Analyst

Understood. That’s fantastic color and much appreciated. That’s all I had. Congrats on the quarter guys, and thank you for taking my questions.

Tom Owens, Chief Financial Officer

Absolutely. Thank you.

Duane Dewey, President and CEO

Thank you.

Operator, Operator

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

Duane Dewey, President and CEO

We believe that the fourth quarter and 2024 were very positive years for Trustmark, and we are looking forward to 2025. Thank you for joining the call this morning, and we look forward to reconvening at the end of April. Have a great rest of the week.

Operator, Operator

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