The First Bancshares - Q3 2023
October 26, 2023
Transcript
Hoppy Cole (Chairman & CEO)
I'll give a few high-level highlights of the quarter, and then turn it over to other members of our teams in their respective areas. This morning, I've got DeeDee Lowery, our CFO, with us, George Noonan, our Chief Credit Officer, and JJ Fletcher, our Chief Lending Officer. Generally, the quarter, we thought was a solid quarter, given, you know, what everyone knows, a very difficult operating environment. We had talked last quarter about some of the seasonality of our deposits from the loan growth we expected, and some of that materialized this quarter. Our GAAP net income for the quarter increased 2.5% to $24.4 million. However, operating income decreased $2.8 million or 10%, due to some one-time items that were associated with the GAAP net income increase.
Core net interest margin compressed about 16 basis points, and we talked about that last quarter, that we felt like there'd be some compression on the back half of the year. As many of you know, we have a seasonal deposit portfolio in terms of our public monies, and so part of that is that, and also we felt like we have to be a bit more aggressive on deposits, given what we thought would be our loan growth profile for the quarter, and that did materialize. So loans grew $78.9 million, or 6.3% on an annualized basis for the quarter, and JJ will give us more color on that during his part of the presentation. Our credit metrics remain really strong with low past dues, low nonperformers, low charge-offs.
George will talk about some of the credit quality indicators and metrics, and dig into some detail in the credit administration portion of our meeting this morning. We also, during the quarter, received a $6.2 million grant from the CDFI Fund, an Economic Recovery Program grant, and that's COVID relief monies to further our CDFI and CRA investments in some of the more impacted markets from COVID around the Southeast.
And then finally, if you look back over the last twelve months or so, we've been able to grow—well, actually, over the last twelve months, we've been able to grow our tangible book value by over 4%, but given the fact that we closed the largest acquisition we've ever done in January of this year, a $1.7 billion of the Heritage Southeast merger. We also have had increased marks on the interest rate marks on the bond portfolio, which we deduct from tangible book value. But then we also increased our dividend of 21% from $0.76-$0.92 last quarter. So given all that, we're pretty pleased with the fact we were able to even continue to grow our tangible book value over the last twelve months.
So, with that, again, we felt like it was a fairly solid quarter. We knew there would be some compression, margin compression, some deposit headwinds due to the seasonality of our deposit book, some of the loan growth we experienced. So, with that, I'll turn it over to DeeDee for a little more color on our financials.
DeeDee Lowery (CFO)
Great. Thanks, Hoppy. Yeah, as Hoppy mentioned, we, you know, we are pleased with the quarter, and I felt it was a solid quarter, and with the expectation of the increased deposit costs we could see coming, we feel good about it. We did have noise again, as he mentioned, a small amount of acquisition expenses, but with the grant, the ERP grant from the Treasury of $6.2 million, and then the associated expenses, $5.2 million, related to that, and that is in the form of advertising, consulting and contributions that will be spent from that money to further our mission with the CDF- as a CDFI. And so those expenses are in the numbers as well.
For the quarter, we did report earnings of $24.4 million, $0.77 per share. That was $600,000 from last quarter or $0.02 per share. On an operating basis, when you exclude those acquisition charges of $400,000 net of tax, and then the grant net of the associated expenses, that's about $800,000 up to that number. So earnings were $24 million on an operating basis or $0.76 per share, and that compared to $26.8 million or $0.85 per share for the second quarter of 2023, and that was a decrease of $2.8 million. That decrease of $2.8 million in operating earnings compared to last quarter can be summed up in a couple of things.
If you remember, last quarter, we had the increase in accretion income related to the acquisition from Heritage and loading that on our system. That was up $2.3 million, and then our increase in our deposit costs, well, in our interest expense, but specifically in our deposit costs, it was $4.8 million. So those two items really are the drivers of our decrease in operating earnings for the quarter. Expenses were $47.7 million for the quarter, but when you back out those one-time expenses, that brings that down to $41.9 million, which is a lot more in line with what we talked about last last quarter.
You know, if you recall from our last quarter's call, we did expect margin to compress the third and fourth quarter this year, partially due to the seasonality of our deposit book, as well as we have runoff in our public funds, which we normally talk about. That happens this part of the year and usually leads to additional borrowings, which is our typical behavior pattern because of the seasonality of those public funds that run out the last part of the year and then start coming back in late first quarter of next year. We also talked about the increase in deposit costs if we were to be more aggressive in our deposit gathering due to funding loan growth.
Loans did increase, as Hoppy mentioned, $78.9 million or 6.3% annualized. About 30% of those loans were booked till late in the quarter, so our average loan growth for the quarter was up $56.6 million. So you can see a big chunk went on right at the end of the quarter, that'll help and obviously go forward to next quarter. We also initiated a deposit gathering campaign. We had talked a little bit about that last quarter, that we were working on getting that together. So we have that, and as well as we're still playing some defense with some little bit more aggressive deposit pricing in our markets. So both of those actions are reflected in that increased deposit cost.
Our core net interest margin decreased 16 basis points to 3.27. We do expect, obviously, this kind of trend to continue into the fourth quarter, just with the increased deposit costs, with the campaign, and still with the competitive pressures that we're seeing. I mean, we wanna play defense and obviously keep our customers, our core customers. Our yield, a couple of notes due to the accretion. Our yield on earning assets reflects in our release a 2 basis points decline. But if you back out that extra accretion that we talked about last quarter, that was from Heritage, we actually had an increase of 16 basis points to 4.95 from 4.79.
And that same scenario, obviously, when you look at the loan yield, it actually increased 18 basis points up to 5.92% from 5.74%. And that's, you know, when you just kind of go back and take that out of the, that last quarter's number. So good increases in both of those sections for the quarter. Our deposit cost, our cost of deposits, though, increased 30 basis points for the quarter. Our interest-bearing deposit cost increased 44 basis points to 1.76%, and then our cumulative beta since the beginning of the cycle is 31%, and that was up from 22% last quarter.
Our deposit cost increased from 91 basis points to 120 basis points, so it was a 30 basis point increase, but we still feel that's a pretty good number you know, given our granular deposit base and happy, you know, happy right now with, with that number. Our loans, as I mentioned, did increase 78.9% or 6.3 annualized. JJ will give you a little more information about that. Our deposit runoff declined this quarter from last, with a decrease of $12.2 million. But when you look at that, we actually acquired some brokerage CDs during the quarter of $110 million.
The actual deposit decline was $122.2 million or 1.9%, which has been in line with our prior quarters when we have discussed each quarter and then taking out some of the broker deposits that we've had. So that's still kind of in line with where we've been. The public funds and some seasonality in some of our accounts accounted for $51.7 million of that decline, so leaving just about $70 million in runoff. Our non-interest-bearing deposit portfolio did decrease slightly from 32%-30% from last quarter end, and part of that is due to some of the seasonality in our deposit base as well. Our liquidity position remains strong. Our ratios are well above our limits. Loan deposit ratio is right at 79%.
Our borrowing capacity is $2.2 billion, and then we still have about 39% of our investment portfolio is unpledged, which is about $700 million. And out of our investment, our securities book, we have about $230 million that will cash flow in over the next four quarters. That'll be generated from our portfolio. And then the following ratios, we kind of highlighted in there for the quarter. On an operating basis, our ROA was 1.22. Our return on average tangible common equity was 17.7, and our efficiency ratio was 56%. Our capital ratios are also in line from last quarter, with a TCE of 7.3.
Our Common Equity Tier 1 was 12, our Leverage Ratio was 9.6, and our Total Risk-Based Capital Ratio was 15.1, all in line with prior quarters. So I think I'll turn it back over to you, Hoppy.
Hoppy Cole (Chairman & CEO)
Thank you, DeeDee. Thanks for that report. JJ, would you like to talk about the loan portfolio a little bit?
JJ Fletcher (Chief Lending Officer)
Yes, sir. Thank you, Hoppy. I think we've heard now three or four times that we were very pleased with the overall net loan growth of almost $79 million for the quarter. Just historically, you recall, that's up from $36 million in the first quarter and about $41 million in the second quarter. Again, finished the high note on the quarter in September with about $115 million in originations. One thing to note, too, we also had an increase in actual funded loans in September of about 70% of overall originations, compared to about 55%-60%, which we've seen in prior months. That really helped us get those outstandings up for the end of the quarter. Unfunded construction backlog remains strong and in line with previous quarters.
Pipelines did contract about 10% at the end of this quarter, but relatively speaking, remain healthy and within historical averages. Regionally, the legacy Mississippi team had a great quarter, as did the Tampa market. We also began to see a positive contribution from the new New Orleans team that was hired in during the second quarter. Private bank division continues to be a strong performer, particularly in the specialty healthcare division. As to yields, and DeeDee mentioned, on the uptick here in September, we finished the month of September at 7.98%. At the end of the first quarter, 7.36%, and the second quarter, 7.62%. We continue to see improvement in our loan yields, month to month.
Outside the numbers, continue to improve workflow and process management with the acquired HSBI team. We've recently integrated our small business platform with that entire group, and proud to say we've got upwards of 90% retention in the lending staff of HSBI, and also just brought on new mortgage and treasury groups to support that team. So overall, very pleased with the quarter, and I'll turn it back over to you, Hoppy.
Hoppy Cole (Chairman & CEO)
Thank you, JJ. Appreciate that. George, credit administration?
George Noonan (Chief Credit Officer)
Thank you, Hoppy. We continue to see, I think, real stability in our credit metrics for the quarter. Throughout most measurements, delinquencies remained very manageable. We ended the quarter with 31 basis point finish at the end of September. And that tracks actually 10 basis points below our year-to-date average of 41 basis points. So a good positive trend in delinquencies. Year-to-date loan recoveries, we moved out of the red into the black on an annual basis or year-to-date basis, with loan recoveries now exceeding charge-offs by about 0.04%. So pleased with that. Total criticized and classified loans were reduced over the prior quarter by $15.6 million.
So a good trend in criticized and classified assets. That improved to 8.94% of capital plus ACL, compared to 9.57% at the end of quarter two. And as we mentioned last quarter, we did continue to see a positive trend in actual payoffs of a number of our C&C loans. We had borrowers pay off some $96 million in criticized and classified loans during the quarter, so very pleased with that trend. Again, evidence of good liquidity still out there, enabling some borrowers to move those loans or pay them off. So, again, positive. All NPAs did tick up slightly from 43.3 basis points at quarter two to 44.1.
That was really mostly attributable to one large, larger credit, and we expect that to start a liquidation process in the coming weeks, and we really do not expect any material loss in that credit if it goes through a liquidation process. So, NPAs outside of that were pretty well flat. In your deck, you have pie charts showing kind of the segments of the C&D and non-owner occupied CRE slides. I'm referring to page 16. But as a percentage of total loans, I think we still continue to maintain a nice balance in our CRE categories. Retail centers are one of the larger segments at 6.61% of total loans, followed by hotels at 5.15%.
Our owner-occupied professional office is 5.40% of total loans, whereas non-owner occupied is 4.10%, and then warehouse industrial, just under 4%. So some nice balance across all those categories that we probably most closely track. For one, that we do most closely track, definitely non-owner occupied professional office. Again, not particularly typified by larger loans. The average loan size in that category is $737,000. We've got a manageable maturity range in terms of, of preparing for pricing resets, with about 15% of that portfolio maturing through 2025. So some good stratification in the maturities there. And acceptable credit quality, in the, non-owner occupied office segment, we currently have about a 4.4% of the loans in that category rated as substandard.
And again, as we've talked about in prior calls, we really have an absence of mid and higher rise office buildings in our portfolio, several business district type office loans. So most of ours are suburban or smaller, rural and mid-market situations. So, we are just not in that category of larger office towers. Concentration management in CRE and C&D remains well maintained, with a range of 208% of risk-based capital across the year. And our credit risk management group continues to manage ongoing stress analysis within the CRE portfolio. There's a heightened focus on not only rate movement, but occupancy levels and OpEx, especially escalating insurance expenses.
That's one thing that is really on our radar, across many of our markets now, to make sure that we're providing some mitigation for rising insurance costs, as we see that in most markets right now. And then additionally, our annual term loan credit update on all income producing properties of $1.5 million or more requires updated cash flow and coverage analysis. So we're continuing to do that on a regular basis to keep a good handle on possible stress assets. So in closing, continuing to monitor all aspects, which could be considered early indicators in our credit weaknesses, responding accordingly. Fortunately, we have seen very little evidence of that. We hope to see the same trends continue throughout the balance of the year and into 2024.
Thank you.
Hoppy Cole (Chairman & CEO)
Thank you, George. Appreciate it. That concludes our prepared remarks and commentary about the quarter, and we'd open it up for questions.
Operator (participant)
Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw a question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Will Jones with KBW. Your line is now open.
Will Jones (Associate VP of Equity Research)
Hey, great, thanks. Good morning.
Hoppy Cole (Chairman & CEO)
Morning.
Will Jones (Associate VP of Equity Research)
Hey, so DeeDee, I just wanted to start on maybe deposit beta expectations here. I know last quarter we talked to you landing in the third quarter around 26%-27%, but that's, you know, obviously now a little closer to 30% as we stand. But understanding that, you know, the deposit environment remains, you know, challenged, and you guys had that promo that was really running all quarter. But just hoping to get a sense of where you feel like we might ultimately land on deposit betas, you know, following this kind of expected catch up we saw this quarter.
DeeDee Lowery (CFO)
Well, I think kind of probably just generally maybe the same kind of increase we had this quarter. Like you said, I was kind of calculating and thinking that we might be around 26%. That was giving, you know, no really no change for the campaign and to be aggressive for the loan growth. So I think that this will continue because, you know, we're really kind of running our special right now throughout this quarter. So I think you'll see kind of a repeat of this the same quarter.
Will Jones (Associate VP of Equity Research)
Okay, great. That, that's helpful. Maybe just on, you know, flip side loan yields, just hoping to get a sense about where you feel like the trajectory of loan yields goes from here. You know, I know loan betas, if you will, still remain relatively low, but, you know, I know you guys have, you know, a larger piece of, fixed rate loans and, and, you know, relatively short term. So just hoping to get an idea of, you know, maybe scheduling of, of what's coming due in this coming year and, and where you see, you know, some opportunity to reprice. You know, I think the hope is, you know, maybe this turns into a tailwind as, as we move into next year.
DeeDee Lowery (CFO)
Right. And I think you will see kind of with kind of that consistent pricing because of the so much more we have in the fixed rate portfolio over the floating. And then when you look kind of at our ALM modeling and what it's showing currently, it's showing about a you know, a margin expansion next year, by the end of next year, of about eight basis points from our most recent run. So I think that's kind of consistent with what you're saying this could turn into, because we're still you know, obviously putting new loans on at higher yields, but still repricing because we have so much of a fixed book. You want to add, Hoppy?
Hoppy Cole (Chairman & CEO)
Well, I was going to say just, Will, keep in mind, I know we talked about it, but if you look back at the seasonality of our margin, you know, we, we kind of see a similar pattern. Dee alluded to it in her comments as we, in her prepared comments, but we'll continue to see public money run off this quarter. So that's gonna, that's gonna... We're gonna have to replace that funding with higher cost funding because our current cost on our public deposit book is 2.42, I believe.
DeeDee Lowery (CFO)
Right. That's right.
Hoppy Cole (Chairman & CEO)
So then that money will turn around and come back in over the first quarter and second quarter. So we would expect margin expansion during that quarter, all things remaining consistent, because there'll be an influx of funds that comes in. So really looking at the margin over a full quarter average is really more indicative than just kind of picking one quarter, I guess.
DeeDee Lowery (CFO)
Mm-hmm.
Will Jones (Associate VP of Equity Research)
Great. So the messaging is really like maybe next quarter, we see a bit of a bottom and then just to grind higher as we, you know, kind of run through 2024. Is that the right way to think about it?
Hoppy Cole (Chairman & CEO)
I think so, yeah. That's the way we're thinking about it.
Will Jones (Associate VP of Equity Research)
Okay, awesome. That's great. Thank you for that. And then just on expenses, DeeDee, I know we talked about, you know, lower expenses last quarter, and we kind of stalled on it, especially if you really kind of normalize for a you know a jump in FDIC premiums. Do you still expect, you know, even next quarter, we'll see, you know, an even further reduction in the expense base, as we kind of see the last tranche of cost saves come through? So maybe we exit the year at our lowest expense run rate?
DeeDee Lowery (CFO)
I don't think so. I've kind of, you know, I'm looking ahead at where we are and looking at that 41.9, pretty consistent with the increased FDIC premiums in there. Quarter, I think we'll see that same amount for next quarter. So, you know, I'm thinking that 41.9 could be increased just a little bit because of kind of year-end sometimes. I mean, it's, you know, just, different things you'll have expenses in the fourth quarter, related personnel, related issues. You know, I think that could be just a little bit, you know, it could be $400,000-$500,000 over this quarter.
Will Jones (Associate VP of Equity Research)
Okay. That's very helpful. Thanks for the questions.
DeeDee Lowery (CFO)
Sure. Thank you.
Operator (participant)
Thank you so much. One moment for our next question. All right. Our next question comes from the line of Kevin Fitzsimmons with D.A. Davidson. Your line is now open.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Hey, good morning, everyone.
Hoppy Cole (Chairman & CEO)
Hey, good morning, Kevin.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Just wondering, we've had some banks announce bond restructuring transactions, which, you know, I think, I think it's all about what that earn back is and can you reprice or reallocate those proceeds quicker than waiting for them to come? And it's not, you know, I acknowledge it's not always the right thing to do. There's a lot of different variables, but to that. But just wondering, is that something you guys are looking at, contemplating on the radar? Like, how would you describe that? Thanks.
Hoppy Cole (Chairman & CEO)
It absolutely is. We're in the process of analyzing that, running our numbers right now, Kevin. It's something that we're taking a look at, although we've got, you know, pretty good-- we've got, like, good liquidity. But to your point, the earn back, look back and what is the impact on him. So that's something we definitely are considering.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
And I guess when you look at it, is it something where it's better to pay down borrowings or better to reinvest at higher rates or it's either/or?
Hoppy Cole (Chairman & CEO)
I think it's either/or, Kevin. You, you know, depending on what the level of borrowings are, to pay those down and then, reinvest at higher rates, and, and really potentially use it to fund some of the loan growth we feel like is coming.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Okay, great. And can you remind us with the CDFI grant? Do you know, so are there gonna be more of those coming? What kind of frequency and what's the ability for what you can do with that? Is it pretty much pretty open in terms of funding loans, buying back stock, what, or a number of different options?
Hoppy Cole (Chairman & CEO)
There's several different grant programs that go along with that, really kind of three. There's one called the Financial Assistance Grant. There's one called the Bank Enterprise Award. And then this was the grant that we just got, was a special one. It wasn't a recurring grant. It was a one-time grant out of the COVID relief money. So I wouldn't expect a grant of that level to come back. There's nothing on the drawing board for that right now. The other grants are on an annual basis, and they're generally about $2.5 million or so, depending on how much money is allocated through the CDFI Fund. So those are more recurring. And so it's not near to the $6.2 billion level.
The usage for this grant, it was to increase our lending and increase our investments in those most affected COVID markets. And so, you know, so many of our markets are underserved markets, that we don't have any—there's the compliance piece of that, we don't have an issue with, given our normal business function of growing our loans in those markets. It meets the requirements. In fact, we've probably already met the compliance requirements for that.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Okay, great. And one last one from me, Hoppy. I think last quarter, you were pretty upbeat about the potential for M&A opportunities and just given the environment and what small banks must be facing. But what we're hearing from a lot of banks is just given you know what it would trigger in terms of having to mark the market securities and extend or inflate tangible book dilution. It kind of seems like it has quieted down a lot of potential activity. So just wondering if that's what you're seeing or are you seeing something a little different? Thanks.
Hoppy Cole (Chairman & CEO)
No, I would concur with that view, Kevin. It. I'm not as optimistic on it now as I was, say, last quarter, but I think you're right. I think there's still pretty significant headwinds out there in the M&A space. I think there's a lot of deals I'd probably like to get done, but it's just difficult to get them to the table.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Yeah. And without M&A, Hoppy, is there potential to, you know, do lift outs in strategic markets? Is that something you're looking at?
Hoppy Cole (Chairman & CEO)
I think there absolutely is that, and that's a very good point. We've seen an increase in that opportunity as of late. Particularly some of the larger banks are looking at cost-cutting features or cost-cutting programs. In some of our markets that we've expanded in Atlanta, Tampa, Jacksonville, we're hopeful we'll be able to do add to some of our bench strength there through some of the what may be larger banks, cost cutting, cost reductions.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Okay, great. Thanks very much.
Hoppy Cole (Chairman & CEO)
Thank you, Kevin.
Operator (participant)
All right. Thank you so much. One moment for our next question. All right. Our next question comes from the line of Brett Rabatin from Hovde Group. Sorry if I said that incorrect. Your line is now open.
Brett Rabatin (Director of Research)
Thanks. Good morning, everyone.
Hoppy Cole (Chairman & CEO)
Hey, good morning, Brett.
Brett Rabatin (Director of Research)
Wanted to go back to the margin for a second and just make sure I understand. You know, so it sounds like in the fourth quarter, you know, the narrative is you've got some public funds that you have to replace and so, or that come in, and so your margins down a little bit in the fourth quarter, but it should rise through 2024 with loan portfolio repricings. Can you guys give us a little more color on the quarterly progression of loan portfolio repricings in 2024?
DeeDee Lowery (CFO)
... I don't. And let me, JJ, do you happen to have that one here with you? I didn't bring my ALM report in here, I believe.
JJ Fletcher (Chief Lending Officer)
Yeah, I've got this one maturity scheduled for 2024.
DeeDee Lowery (CFO)
I got you. Okay. Yeah.
JJ Fletcher (Chief Lending Officer)
About [crosstalk]
DeeDee Lowery (CFO)
Yeah. So, mm-hmm.
JJ Fletcher (Chief Lending Officer)
About 6%.
DeeDee Lowery (CFO)
Yeah, this looks like a little over $100 million a quarter, that's maturing, so to put, you know, potentially be repricing.
Hoppy Cole (Chairman & CEO)
That's maturing. That doesn't count cash flows coming in.
DeeDee Lowery (CFO)
That counts cash flows, just maturing. Yeah.
Hoppy Cole (Chairman & CEO)
If you look back, the whole quote is about 20% reprices during the whole year-
DeeDee Lowery (CFO)
Mm-hmm.
Hoppy Cole (Chairman & CEO)
in terms of cash flow coming off that plus maturity distribution.
Brett Rabatin (Director of Research)
Okay. And then wanted to go back to loan demand and just get, maybe a little more color around what you're seeing in the different markets, you know, borrowers, are they pulling back some? Are you seeing deals because others have pulled back? Maybe just a little more color around loan demand and how that might shape out for 2024 in terms of loan growth potential.
JJ Fletcher (Chief Lending Officer)
So this is JJ. I think, you know, pipelines, I've said, were down a little bit, but from a historical perspective, they're still pretty much in line. So I have not seen. George and I were talking about that this morning. I have not really felt a lot of deals being shelved or put on the sideline. I do think it's becoming a little more challenging with the more equity, equity requirements. We're wondering when that does become a hindrance, because, you know, if, if developers are putting in another 10% or 20%, we've seen them doing that, but how many times are they gonna do that on the next deal and the next deal? So I'm, I'm not sure, George, if you have any commentary on that.
I think the jury is still out, but as of today, our client base is still, you know, doing deals and, demand seems to be pretty good. We're picking up some in Atlanta. Tampa had a good quarter. We mentioned New Orleans. That team, they've got a really strong pipeline, for this quarter. So, you know, overall, things appear to be still fairly strong.
George Noonan (Chief Credit Officer)
Yeah. I concur, JJ, and we've seen some instances in recent months where maybe a traditional group of investors that have done projects with us in the past may have brought some additional equity partners into their groups, to fund some of that equity requirement. So that has surfaced several times.
JJ Fletcher (Chief Lending Officer)
That's a good point. There's still cash out there. I think some of our guys might be diluting themselves a little bit of ownership, but they're finding the equity to do it.
George Noonan (Chief Credit Officer)
Yes. Yeah.
Brett Rabatin (Director of Research)
Okay. That's helpful. Maybe one last one for me. The expense—I think it sounded like the expense run rate will be slightly higher in Q4, if I heard that right. But you've done a pretty good job holding the expenses flattish since beginning of the year. Was just curious if there was anything out there that you were thinking about investing in, given the environment for the longer term in 2024, that might raise the expense run rate, or if you think you'll kind of run the same kind of strategy in 2024 of, of keeping expenses as flat as you can?
DeeDee Lowery (CFO)
Yeah, I think the same strategy for, in regards to that, just because of, just because of the compressed, you know, margin. And, you know, hopefully we'll see, as we talked about, a little bit of expansion in that next year. But overall, I think our focus is gonna be on the expenses, something that we can hopefully, we can try to control on our side. We are, and we have talked about the last couple of quarters, kind of our $10B initiative. And so we have hired some new folks, actually, this last quarter and third quarter, a Chief Compliance Officer, a Fair Lending Officer. We mentioned before the last quarter, I believe, our Chief Legal Counsel.
So we have, you know, we are and we hired Crowe to come in and do our $10B gap analysis. So, you know, we, we do have expenses kind of associated with that as we build up a little bit and to, you know, get processes and procedures in place for $10B. But that's probably the only real initiative. We're kind of in the middle of that right now, but otherwise, you know, I'm gonna keep trying to get the hammer down on them.
Brett Rabatin (Director of Research)
All right. Thanks. Thanks for all the color.
George Noonan (Chief Credit Officer)
Thanks for that.
Operator (participant)
All right. Thank you so much for your question. One moment for our next question. All right. Our next question comes from the line of Matt Olney with Stephens. Your line is now open.
Matt Olney (Managing Director)
Hey, thanks. Good morning, everybody.
DeeDee Lowery (CFO)
Good morning.
Matt Olney (Managing Director)
I want to go back to the deposit gathering campaign that was mentioned earlier. Any more color you can provide on that campaign? What products you're leading with, and what are some of the cost on some of the promotional products?
DeeDee Lowery (CFO)
Yeah, sure. What, what we came out with and what we're doing is, is two things. One is just a, a CD special. We have a lot of CD specials in our market. We are doing a six month at 5.25%. And then we also, on the deposit gathering side, kind of for a, a money market as well, it's a 5% money market guaranteed for six months, but, you know, with that is a non-interest bearing deposit. So we've opened up a separate product for that. So hopefully we can gather some non-interest bearing while we're, you know, doing this money market special.
Matt Olney (Managing Director)
... Okay, that's helpful. And any more color on when those specials were introduced to the market, and have there been any changes to those rates more recently?
DeeDee Lowery (CFO)
No, we started that right at the beginning of September, kind of just internally. We just recently started with a little bit of advertising on social media. So, we kind of had it in place to raise, you know, some funds through the end of the year. So kind of right now, we're looking at keeping it through the end of the year, but-
Hoppy Cole (Chairman & CEO)
Yeah. And it's really just to help to replace some of those seasonal, seasonality in the public fund monies, and to support some of the loan growth back.
Matt Olney (Managing Director)
Yep, and it's thoroughly, I guess, my campaign, but how would you characterize the volume you're receiving in that versus your initial expectations?
DeeDee Lowery (CFO)
We're a little under half through so far for these two months.
Hoppy Cole (Chairman & CEO)
Right.
DeeDee Lowery (CFO)
So I think that's good.
Hoppy Cole (Chairman & CEO)
Yeah. I think it's been good.
DeeDee Lowery (CFO)
Yeah.
Matt Olney (Managing Director)
Okay. Appreciate the color there. And then, I guess, changing gears on the credit front, I think there was a report in the deck you put out there that criticized classifieds had a nice decline in the quarter, if I read that right. Any more color on that decline?
George Noonan (Chief Credit Officer)
You know, about 60% of it, I guess, was a result of actual payoffs. The rest of it was, you know, attributable to some upward migration, maybe in reclassifying some grades. Frankly, I don't expect to see the level of payoffs continue at the pace that we've seen in the last couple of quarters. But, in going through our quarterly rounds of criticized and classified reporting with our loan officers and regional credit officers, we do see some potential opportunities to maybe now that- and particularly now that we're receiving financials with the tax filing deadline passing us now, we're getting updated financials that may give us some opportunities to do some additional upgraded risk rates.
So, I think more of it will come from that direction, maybe as a proportion of what we see.
Matt Olney (Managing Director)
Okay. Appreciate that, George. And then maybe just one more. DeeDee, I think that the fees were strong this quarter. Any color on the fees or, and the outlook from here?
DeeDee Lowery (CFO)
I think, are you talking about loan fees, or you're talking about the non-interest income fees? Non-interest income.
Matt Olney (Managing Director)
Right. The non-interest income.
DeeDee Lowery (CFO)
Okay, non-interest income. Yeah, I think this was we had a little bit of increase there in our interchange fee income that I think will be not recurring in the next quarter. So that could be down just a little bit in the, you know, next quarter. It's like our one-time, you know, annual kind of payment we received, so it's probably a little higher this quarter, but I don't think it'll be that going forward.
Matt Olney (Managing Director)
Okay. Okay, guys. Thank you.
Hoppy Cole (Chairman & CEO)
Thanks, Matt.
Operator (participant)
All right. Thank you so much for your question. One moment for our next question. All right. Our final question comes from the line of Christopher Marinac, sorry, with Janney Montgomery Scott, LLC. Your line is now open.
Christopher Marinac (Director of Research)
Thank you very much. Hoppy, I wanted to ask a question about the CDFI, and from a strategic standpoint, what does it mean to you to be a CDFI these next couple of years, and how do you see it kind of continuing to build franchise value for The First?
George Noonan (Chief Credit Officer)
Well, there's a lot of unknowns around the CDFI right now, Chris. They're talking about changing what the qualifications are. So, you know, we've always qualified, I don't know what those new qualifications are gonna be in order to be a CDFI. But it means to us, you know, it goes in lockstep with our CRA requirements in serving underserved markets. And so there's grant programs that go along with it, we talked about, which is $2 billion a year. But it's also, you know, growing the franchise across the southeast. There's a lot of underserved markets, so it gives us an opportunity to invest in those markets and lend in those markets as we move forward. I don't know, on the grant side, it's hard to predict.
You know, those are typically appropriated by Congress, so it's hard to tell how much grant money comes and when, with the exception of those sort of recurring grants that we talked. And even the BEA award, which is the Bank Enterprise Award, and the FA, Financial Assistance award, are subject to congressional appropriation. So, you know, we think those will continue on, but again, it's an important part of our mission.
Christopher Marinac (Director of Research)
Got it. Thanks for that. And back to the office real estate discussion from the earlier in the call. You have a predominant amount of sort of low-story buildings. I'm presuming two-story buildings dominate the portfolio, which means under an adverse scenario where you had to take one back, you really could repurpose that and probably have a lot different loss experience better than your peers. Is that a fair kind of way of thinking about it?
George Noonan (Chief Credit Officer)
I think that's a fair statement. It, you know, it would be much more difficult to repurpose, you know, a mid-rise or high-rise tower for residential or any other use otherwise, but so a two-story or maybe even a three, I think you'd have a lot more optionality to be able to do that. I would say even in our non-owner-occupied segment, a fair amount of square footage in many of those properties is from an owner occupying at least part of the building. So there's that also in consideration as well. But yeah, I think your statement is right on to that point.
Christopher Marinac (Director of Research)
Great. Thanks for that. And then, DeeDee, just a quick one for you on the accretion income. Does that level out as we get deeper into 2024? Just kind of trying to think, you know, beyond the next few quarters, kind of how that will proceed.
DeeDee Lowery (CFO)
Yeah, I think that's a fair, fair statement. You know, we had that big increase last quarter because we basically, you know, got all the loans from Heritage on the system, and it, it's just a function of getting them loaded on an individual basis. So now, you know, this quarter we had, you know, from all of our acquisitions are all on the system and accreting as they pay down or pay off. So I think that's a fair statement to hopefully level out right here where we are, you know, going through next year, so.
Christopher Marinac (Director of Research)
Great. Thank you all for the background and information this morning. It's very helpful.
Hoppy Cole (Chairman & CEO)
Thanks, Chris.
DeeDee Lowery (CFO)
Thanks, Chris.
Operator (participant)
All right. Thank you so much for your question. As a reminder, everyone, if you would like to ask a question, please press star one one on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A roster. All right. I'm showing no further questions at this time. I would now like to turn it back to Hoppy Cole for closing remarks.
Hoppy Cole (Chairman & CEO)
Well, thanks, everyone, for your participation this morning. Thanks for your reports. We'll look forward to visiting again after next quarter's results. Thank you.
Operator (participant)
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.