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Trustmark Corporation
1/29/2025
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. To ask a question, you may press star then one on your touchtone phone. And to withdraw your question, please press star then two. As a reminder, this call is being recorded. It is now my pleasure to introduce Mr. Joey Rain, Director of Corporate Strategy at Trustmark. Please go ahead, sir.
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. 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.
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 of 24, net income from adjusted continuing operations totaled $186.3 million, or $3.04 per diluted share. This represented an increase of $27.1 million, or 17% from the prior year. Now let's turn to slide three for a summary of financial highlights. Let's start with the balance sheet. Loans held for investment totaled $13.1 billion at 1231, down $10 million link quarter, and up $139.4 million year-over-year. Deposits totaled $15.1 billion at year-end, down $132.8 million link 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 broker deposits totaling $726.8 million. Said differently, All other deposits increased $265.2 million in 24 while we diligently managed 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 percent from the prior year. Net interest income totaled $158.4 million in the fourth quarter, reducing a net interest margin of 3.76 percent, up seven basis points the length quarter. Tom Owens will provide a little color on the margin in NII, et cetera, in a few minutes. Non-interest 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, non-interest 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. Non-interest 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, non-interest 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 non-accrual loans, excluding individually analyzed loans. Trustmark's capital ratios expanded meaningfully during the quarter as tangible equity and tangible assets increased to 9.13%, while the CET-1 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 were purchased 7.1 million or approximately 203,000 shares of common stock. And as previously announced, we authorized to, 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 24 cents per share from 23 cents per share. The dividend is payable March 15, 25 to shareholders of record on March 1. This action raises the indicated annual dividend rate to 96 per share from 92 cents 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.
I'll be glad to, Duane, and good morning. Turning to slide four, loan sales for investments total $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 five, TrustMorph'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 six, the bank's commercial loan portfolio is well diversified as you can see across numerous industries with no single category exceeding 13%. Looking at slide seven, 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 that are qualitative factors. The provision for credit losses for off-balance sheet credit exposure was $502,000, driven by net adjustments to the qualitative factors, increases in unfunded commitments. At 1231, the allowance for credit losses held for for loans held for investment was $160 million. Turning to slide eight, we continue to post credit, excuse me, we continue to post solid credit quality metrics. The allowance for credit losses increased by 122%. Our quarter was 1.21%. representing 341 percent 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 non-performing 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.
Dwayne? Great, thank you, Barry. Now Tom Owens to cover deposits, net interest margin, and non-interest income.
Thanks, Dwayne, and good morning, everyone. Turning to deposits on slide nine, deposits totaled $15.1 billion at December 31st, 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 at first place. 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 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. That reflects our significantly less competitive posture on rates, and $329 million in broker 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 percent, while our primary focus, as Dwayne said, has been managing cost while maintaining strong liquidity. Non-interest-bearing DEA balances remained resilient, declining by $69 million linked quarter and remaining at 20 percent of our deposit base. Time deposits increased by $4 million linked quarter, excluding the decline of $150 million in brokered CDs. As of December 31st, our promotional and exception price time deposit book totaled $1.6 billion, with a weighted average rate paid at 4.82% and a weighted average remaining term of about three months. Our broker time deposit book totaled $250 million, at an all-in weighted average rate paid of 4.85 percent and a weighted average remaining term of about two months as of December 31st. 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 declining 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 maintains, 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 31st, 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 31st, representing 179% coverage of uninsured and uncollateralized deposits. Our fourth quarter total deposit cost decreased 24 basis points linked quarter at 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 costs 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 seven 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. Again, these results reflect the proactive pricing, deposit pricing actions that we took during the quarter, which positioned 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 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 a 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 lures. 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.
Thank you, 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 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. 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 one ratio was 11.54%, a linked quarter increase of 24 basis points. and total risk-based capital ratio was 13.97%, a length 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 Dwayne indicated, we will continue to evaluate the share repurchase program as the market and capital levels dictate. Plusmark's board of directors announced an increase in its regular quarterly dividend from 23 cents to 24 cents per share, resulting in an increase of 4.3%. This action raises the indicated annual dividend from 92 cents per share to 96 cents per share.
Back to you, Dwayne. Great. Thank you, Tom. Now turn 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 out for investment to increase low single digits for the full year 2025 and deposits excluding broker 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 375 to 385 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 full year 25 is expected to increase mid single digits, while non-interest expense from adjusted continuing operations is expected to increase mid single digits as well. As already noted, we'll continue our disciplined approach to capital deployment in 25. 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, et cetera. So with that, that concludes our prepared comments, and we'd like to open the floor for questions.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble a roster. And the first question will come from Catherine Miller with KBW. Please go ahead.
Thanks.
Good morning. Good morning, Catherine. Good morning, Catherine.
I wanted to start, first of all, congrats on a great quarter and a great end to the year. And I wanted to start just to piggyback on some of the commentary you gave Tom on the full year margin guide. It was helpful to hear where you think deposit costs are going. Can you talk a little bit about loan pricing and how you're thinking about loan betas and incremental loan pricing over the next couple of quarters?
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, 25 basis points apiece, one in March, one in June. With respect to the loan pricing dynamics, I'll let Barry address spread. I mean, the other factors obviously are 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. You know, in prior quarters, when I've commented on that dynamic, I think I've said, you know, you can sort of rely on a tailwind, so to speak, on the fixed rate loans of two to three basis points per month. You know, I think with the higher for longer, the longer interest rates have remained higher here. Some of that effect has diminished. So whereas I previously said two to three basis points, maybe I'd say now one to two basis points. So that continues to represent a tailwind, but not quite as much. Really, Catherine, the primary driver is deposit costs. You know, 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, say from the end of the third quarter to the end of the fourth quarter, the time deposit book priced down by about 15, 1.5, about 15 basis points. We're currently modeling for the first quarter that it'll price down by 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, obviously. Barry, weigh in with any thoughts on loan pricing.
I just have a couple comments. 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 the standpoint of what we're seeing, most of our activities, Catherine, on the CRE side, which obviously all 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 kind of lived in during 23 and the first half of 24. It got a little bit more competitive in the In the third quarter, where some banks got back involved that had not been active in the CRA space, But it seems to have settled down from there. And that one month LIBOR plus 285 with the 7580 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 kind of during the fourth quarter.
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 pay downs? Or are you still seeing origination volume not pick up as a faster pace as we may have expected. Thanks.
Sure. And Catherine, I'll be glad to kind of go through this succinctly, hopefully, but I want to make sure we cover it because it's important. As you said, for 2025, we are guiding to low single-digit long growth. During 23 and the first half of 24, the CRE activity was less clearly than we experienced in 21 and 22, which were very, very strong years. Therefore, everybody is seeing some maturities in 25, 26 from that strong production in 21, 22. We did see a nice pickup in production. for CRE in Q3 and Q4 of this year. That looks like that's going to be the trend going forward, and we're very pleased with that. Remember, and we can't project what the customer is or is not going to do, but remember, with all of our CRE construction mini-firm products, there are two one-year extension options that are fully underwritten at the time of origination. So all the terms, pricing, everything is known to the customer. And assuming they're meeting certain performance hurdles, they can avail themselves of that extra year and then that extra second year if they so choose. So we did see in the fourth quarter, Catherine, a significant increase in the number of extension options being exercised in Q4 that were going to be 2025 maturities. Now, we're not making the assumption in our guidance that that's going to continue throughout 2025, but it very well may. And obviously, when you're talking about projects that are $20 or $25 million on the books, if they stay around, it moves the needle very quickly. I will say our corporate, commercial, and CRE production pipelines continue to look very strong. And as I mentioned, like our peers, 2021, 2022, extremely strong CRE production periods. And when you think in terms of an average four-year duration, then you can see where 25 and 26 could have heavier maturities from that strong production in 21, 22. That doesn't mean they're going to leave us in our case because we've already underwritten those two one-year extension options, but we don't know with any certainty that they will or won't. All we know is the maturities we have in front of us. We'd like to be very optimistic about the fact that they're going to take us up on those extensions. We're beginning to see it in the fourth quarter of 2024, but we don't know how much follow-through they'll be there. The interest rate environment is settling down. may allow for more of our customers to decide they do want that additional one year to find whether they're going to move it to the permanent market or decide whether or not they're going to sell it and they're happy with the cap rates. And so we're starting to see that, but we don't know what the follow-through will be.
Catherine, I'd like to just add real quickly, too, we continue to hear very positive production opportunity on the equipment finance side. CNI, which is middle market, corporate, and our basic commercial banking, we're hearing from the respective teams out there their pipelines are increasing. We had a very solid corporate middle market fourth quarter, some of which hadn't funded yet, which we have some optimism there that that will begin to fund. in 2025 as well as new production in 2025 with the other categories. Overall, we want to see it happen a bit, but we come into 2025 optimistic and it is very described on the CRE front. That can play to the positive. It can still be a bit of a headwind in the payoff category. But at the end of the day, that's where the guide comes from in that low single-digit range.
That makes sense. Okay, very helpful. Thank you. Great order.
Thank you. Thank you, Catherine.
The next question will come from Christopher Maranac with Jannie. Please go ahead.
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?
And Christopher, this is Barry. I would say that we know just from the number of deals we're in with other banks, that we're very much in line with from a credit risk-taking standpoint with a lot of our peers and even some of the larger regional banks. And so I think from the standpoint of additional risk-taking, it's more a function of the opportunities coming forward than it is necessarily the deals we're passing on that we might could possibly do, and that might end up resulting in a little more charge-offs from that perspective. You know, I do think we're very careful and very aggressive in terms of rating our credits, whether they be criticized or classified, and we want to make sure we're maintaining high credit quality at all times. I think it's more of a function of the market improving and providing more opportunities to look at deals, and I think the higher rates are somewhat slowing that down on both the CNI and the CRE front, although I will say, you know, with the 100 basis points drop that we've experienced, a lot more CRE deals penciled today than they did previously. So I think it's a function from a CRE perspective of the funds being available in order to put in the equity, and that's beginning to improve. But until you see the availability of the equity for the developers coming into the deal, then they can go and move the one they've got on the books today and move forward on the next project. That's what we're kind of needing to see, is when you talk about risk-free 5% returns, then there's not as many funds that are interested in plowing money into projects as they were when you had no option in terms of a risk-free return. That's all seeming to settle out now, and there's more fund money coming back in to these projects, which allows for the developers to move forward. But I think from the standpoint of decisioning the credits that we have an opportunity to look at, I think we're as aggressive as any of our competitors. They're in these deals, so we're jointly determining the underwriting. So I feel very confident that we're in sync with what others are doing.
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 TrustSpark organization.
So, Chris, this is Tom Owens. I'll start. I'm a little confused by the question connecting the dots between expenses I think you were asking about and then deposit accounts. I'll start with addressing deposit accounts. You know, I would say with respect to operating accounts, there's always a natural churn, right? Attrition versus new account openings. And we've been very steady in that regard. when we talk about the number of accounts and when you look at the increases in accounts, the headline in 23 and 24, very much a function of promotional activity, especially as it relates to time deposits. So you sort of have to put those off to the side when you're talking about number of accounts outstanding and growth or decline in accounts. Because as we talked about in the prepared commentary, in 2024 we've very much been focused on managing cost and balancing the relationship between loan growth and deposit growth. But I would say just in terms of our competitive position and do we continue to push forward in growing accounts at a consistent rate, the answer is yes.
And, Chris, did we miss the first part of that question? Was there another part of the question?
No, actually, it was really account open that Tom described, so I'm good on that. Sorry if I had mentioned expense. That was not my point. So thank you very much for the call this morning.
Thank you. Thanks, Chris.
The next question will come from Gary Tenner with DA Davidson. Please go ahead.
Thanks. Good morning. Good morning, Gary. I appreciate the color on the puts and takes. Good morning. I appreciate the color on the puts and takes for 2025 loan growth. I was curious about the CNI traction in the fourth quarter. I think you indicated in the past that maybe post-election there was increased optimism, the pipelines had strengthened up. Is there any follow-through in terms of the period imbalances there, or is that purely a kind of year-end, maybe seasonality and drawdown on lines that maybe reverses in the first quarter?
Hey, Jerry, this is Barry. I think there definitely is some follow-through that's going to occur during 2025. In the fourth quarter of 2024, what you saw was a combination. We had some new opportunities, new bookings that funded, and then we also had an increase in line utilization. You know, we typically have been in that 37% range. In Q3, we moved down to 35%. That was part of the little bit of shrinkage we had in Q3. And during fourth quarter, we did move up to 36%. So I think there's opportunities to continue to obviously move back to 37 and beyond in terms of line utilization. And we did have some good production that was actually approved and funded during the fourth quarter. We expect that trend to continue with our C&I producers. They're very, very active out making calls. We've got some newer individuals to the bank who have a long experience in that type of lending. We expect to see some additional production coming from them as well as our long-term associates.
And I'll just chime in a bit. As you will recall, over the last couple of years, we've talked about fit to grow and adjustments we've made throughout our franchise, particularly in the retail commercial banking franchise, but also in our institutional businesses. And through that process, there was some churn and some change and adjustment. 24 was more of a, let's We're starting to form now and produce, and I think going into 2025, we feel good about the structure and the team in place. As Barry noted, probably in the last 60 days, we've added 10-plus new production personnel that spans from equipment finance through commercial banking into corporate banking, all focused on CNI production. As noted, they're very complementary to the restructuring stuff that we did. So we're expecting to continue to see improved performance out of all of our CNI categories in many of our markets. So that's kind of mixed in there also.
Thanks. I appreciate the call there. And then a quick question just on the stock repurchase. I know you talked about it a bit in your prepared remarks. for pretty moderate loan growth or 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?
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, you know, as you know, I mean, that's a function of a lot of different considerations there. One are, you know, 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, you know, there's a lot of different factors that play into that. We meet and
analyze regularly and consider you know the best way to use capital and that is one of those uh uh alternatives so yeah and i would just add this is tom owens i would just add you know our risk-based capital ratios are created pretty nicely uh during the fourth quarter up about 25 basis points or so and you look at cet1 at about 11 and a half percent um you know i just i just can't imagine you get up to about 12% or so. Without the share repurchase program, even with more robust loan growth, there's in all likelihood going to continue to be the opportunity to deploy capital via repurchase. And again, we do view it as an opportunity attractive opportunity from a return perspective. We have a pretty diligent framework, diligent process by which we evaluate share repurchase activities. So I would imagine that you will see a continuation of the activity.
Great. Thank you. Thank you.
The next question will come from Eric Spector with Raymond James. Please go ahead.
Hey, good morning, everybody. This is Eric dialing in from 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 from normal inflation, but just curious what kind of investments you're focused on.
Well, it's across the board in terms of technology investment, a number of different initiatives across the organization. one of which includes a 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, you know, there's significant continued pressure, I think, on the personnel front salaries and benefits very significant increase in healthcare costs that are true to the industry and true to all different categories out there. So there are a number of different pressures that are just impacting the expenses for 2025. Those would be ones that come to mind. I don't know, Tom or Tom, if y'all have anything to add to that.
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.
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 vehemently focused on those categories as well, adding to our potential for growth, and those all add to the equation.
That's great, Tyler. And then maybe just touching on deposits, you've done a great job reducing costs. Just curious how client reception has been, whether you've seen any pushback or attrition from that. I know most of the runoff this quarter was from the intentional brokered runoff. But just curious if you could touch on some of the non-interest bearing and DDA trends and how much of that seasonal dynamics versus migration in accounts and just the outlook for composite growth broadly going into 2025.
So, this is Tom Owens. I would say we've been very pleased to date with the pricing actions, the reaction to the pricing actions that we took in the third and fourth quarter. There's really not been a noticeable increase in attrition in deposit accounts as a result of those actions. And again, as we said in the prepared remarks, I mean, if you get past the managed declines of brokered CDs and the public fund balances where, you know, there's just a certain portion of that public fund deposit base that is very competitive on a bid basis. And so again, we're trying to maintain our liquidity, strong liquidity. in the mid-80s in terms of loan-to-deposit ratio. And so we're just really backed off on some of the more competitive bid situations. But so, you know, that leaves you with the core deposits, personal and non-personal, that grew over 2% for the full year in 2024. And so given, you know, what our competitive posture looked like our focus on rationalizing cost, we feel really, really good about that and we feel really good about our ability to continue to fund balance sheet growth cost effectively. You know, it's interesting when you look at slide 10 of the DAC and you look at the way we've managed to slowly but surely widen the spread between our deposit cost and the KRX median deposit cost and I would speculate based on what we've seen here during earnings season that we probably widen that spread again during the fourth quarter. So I think this environment right now has been an opportunity for us to distinguish ourselves in terms of the value of our deposit base, and we expect that to continue here in 2025.
Okay, 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, you know, still relatively benign. It looked like that was 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.
And Eric, this is Barry. I would say, you know, we're obviously very focused on it day in and day out and making sure, you know, very robust annual review process for all of our credits of any size and along with a number of different ways in which we're monitoring all the triggers on our credits to see what might encourage us to go dig into a credit that maybe is showing some signs of weakness. But there's not really a category that we're more focused on than the other. Obviously, CRE is one that, with the 550 basis point increase from the Fed, they've obviously given back 100 of that. But that increase weighed on, like it did with all banks, it weighed on the CRE projects and how they were performed and how they're maturing through the lease up process. Now, I think we've done a good job of going in and being very aggressive and adjusting grades as timely as needed and therefore reflective in our criticizing classified levels, I do feel like that we've got more credits in front of us that we're going to be upgrading than we do downgrading as we move into 2025 based on everything we know at this point. So I feel very comfortable that this is a cycle and these credits are going to cycle back from a non-pass to a pass category. I do think the 100 basis points helps that, but time helps that as well because most of these projects that are struggling just need an additional six to nine months to get to where they should have been or they're six to nine months behind, looked at another way, in terms of getting the occupancy level or getting the rents that they were originally proformed and underwritten at. While we are monitoring everything and watching it very carefully as we should every day, I am encouraged that we will see the cycle begin to turn back up, and we'll see, like I said, more upgrades and downgrades as we move forward.
Great. Thank you for taking the questions, and congrats on a good quarter. Thank you.
The next question will come from Andrew Gorzica with Piper Sandler. Please go ahead.
Hey, good morning, everyone.
Good morning.
Good morning. A lot of my questions have kind of been answered at this point, but 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?
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 of 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 would 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.
Got it. Makes sense. That's all I had. Thanks for taking the question.
All right. Thank you. The next question will come from David Bishop with the Hubby Group. Please go ahead.
Hey, good morning, guys. This is John on for Dave.
Hey, John.
Morning. 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.
Well, it's absolutely possible to quantify. This is Tom Owens. Again, the cash flow hedge portfolio is designed to mitigate some of the volatility to net interest income. It comes with changes in interest rates. As we said in our prepared comments, 52% of the portfolio is floating rates. So we've taken a portion, so that's in round numbers, six and a half billion, something like that, floating rate loans. We've essentially, John, the way to think of it is we've taken of the roughly $6.5 billion of floating rate loans, we have effectively swapped them via $850 million notional of interest rate swaps and $25 million of floors. So that's the correct way to think about it in terms of impact of the portfolio itself i mean the simple math is 850 million of fixed rate loans for 100 basis point shock we would benefit all of the things equal by eight and a half million dollars right and so if you let's say you do get two cuts one in march uh one in june then in the second half of 2025 we would benefit by uh 4.25 million dollars from having had the cash flow hedge portfolio in place relative to our current run rate net interest income.
Very helpful. Thank you for that. And I guess just pivoting and not to beat a dead horse here on the deposit front, Appreciate all of the color on the forecasted data 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.
Well, it's a good question, and I would tell you, as I said earlier in my prepared commentary, our guide for the year in terms of net interest margin, our guide for the first quarter in terms of deposit cost, is very much a function of the ongoing repricing of the time deposit book. At this point, we have very little And as I said, we do have 25 basis point cuts based on the market implied forwards in our forecast for March and for June. And we have very little reduction in interest-bearing non-maturity deposit costs associated with those. And so I think it's a conservative guide at this point in terms of deposit cost for the full year. I'll give you an idea on the beta. I mean, what we're modeling at this point is, so we just printed 198 for deposit cost in the fourth quarter. We're guiding to 184 in the first quarter based on where market implied forwards are today. that would probably drop to say, by fourth quarter of this year, call it 170 or so in round numbers. And that would represent, to my way of thinking, that would represent a beta, so to speak, of about 34%. So if you took in the numerator, if you took the decline from our peak deposit cost for a quarter of 222 And then if you said, okay, let's say about 170 in the fourth quarter of 25, take that in the numerator, and then in the denominator, take 5.5% Fed funds went down to 4% Fed funds target, and you should get a beta of about 34%. So that's currently what we have modeled, and that's what's driving our guidance at this point. in terms of net interest margin for the full year.
Understood. That's fantastic, Culler, and much appreciated. That's all I had. Congrats on the quarter, guys, and thank you for taking my questions.
Absolutely. Thank you. Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Mr. DeWayne Dewey for any closing remarks. Please go ahead.
As we mentioned, we feel like the fourth quarter and 2024 were very positive years for Trustmark and look forward to 2025 here moving forward. And we appreciate you joining the call this morning, and we'll look forward to reconvening back at the end of April. Have a great rest of the week.
The conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.