The First Bancshares - Q3 2023

Transcript

Speaker 0

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 Dede Lowery, our CFO, with us George Knutin, our Chief Credit Officer and J. J. Fletcher, our Chief Lending Officer. Generally, the quarter, We thought it was a solid quarter given what everyone knows is 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 dollars 400,000 However, operating income decreased $2,800,000 or 10% due to some onetime items that were associated with the GAAP net income increased. Core net interest margin compressed about 16 basis points, and we talked about that last quarter And we felt like there'd be some compression in 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 $78,900,000 or 6.3 percent on an annualized basis for the quarter.

And J. J. Will give us more color on that during this 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 credit administration portion of our meeting this morning.

We also during the quarter received a $6,200,000 grant from CDFI Fund, Economic Recovery Program brand and that's COVID released 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 12 months or so, we've been able to grow well, actually over the last 12 months, we've been able to grow our tangible book value by over 4%. But given the We closed the largest acquisition we've ever done in January of this year, a $1,700,000,000 of the Heritage Southeast merger. We also have increased have had increased marks on the interest rate marks on the bond portfolio, which would deduct from tangible book value. But then we also increased our dividend of 21% from $0.76 to $0.92 last quarter.

So Given all that, we're pretty pleased with the fact we're able to even continue to grow our tangible book value over the last 12 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 Didi for a little more color on our financials.

Speaker 1

Great. Thanks, Hoppy. Yes. As Hapi mentioned, 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 $6,200,000 and then the associated expenses $5,200,000 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. But for the quarter, we did report earnings of $24,400,000, $0.77 per share. That was at 600 1,000 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 to that number.

So earnings were $24,000,000 on operating basis or $0.76 per share. And that compared to $26,800,000 or $0.85 per share for the Q2 of 'twenty three and that was a decrease of $2,800,000 And that decrease of $2,800,000 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 $2,300,000 and then our increase in our deposit cost, specific well, in our interest expense, but Specifically in our deposit cost, it was $4,800,000 So those two items really are the big the drivers of our decrease in operating earnings for Quarter expenses were $47,700,000 for the quarter, but when you back out those one time expenses, that brings that Down to $41,900,000 which is a lot more in line with what we talked about last quarter. And if you recall from our last Quarter's call, we did expect margin to compress the 3rd Q4 this year, partially due to the seasonality of our deposit book As well as the as we have run off in our public funds, which we normally talk about that happens as 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 Q1 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 and loans did increase, as Hapi mentioned, dollars 78,900,000 or 6.3 percent annualized. About 30% of those loans were booked late in the quarter. So our average loan growth for the quarter was up 56 $600,000 So you can see a big chunk went on right at the end of the quarter. That will help and obviously go forward to next quarter. We also initiated deposit gathering campaign.

We had talked a little bit about that last quarter that we were working on getting that together. And 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, and so both of those actions are reflected in that increased deposit cost. Our core net interest margin decreased 16 basis points to 3.27%. And we do expect, obviously, this kind of trend to continue into the 4th quarter, Just with the increased deposit cost with the campaign and then still with the competitive pressures that we're seeing. I I mean, we want to 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%. In that same scenario, obviously, when you look at the loan yield, it actually increased 18 basis points up to 5.92 From $574,000,000 and that's when you just kind of go back and take that out of that last quarter's number. So Good increases at both of those sections for the quarter.

Our deposit cost our cost of deposits though increased 30 basis Our interest bearing deposit cost increased 44 basis points to 176 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 Given our granular deposit base and happy right now with that number. Our loans, as I mentioned, did increase 78.9%, our 6.43% annualized. JJ will give you a little more information about that.

Our deposit runoff declined this quarter from last with a decrease of $12,200,000 But when you look at that we actually acquired some brokered CDs during the quarter of $110,000,000 the actual deposit The decline was $122,200,000 or 1.9%, which that 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 $51,700,000 of that decline, so leaving just about 70,000,000 in runoff. Our non interest bearing deposit portfolio did decrease slightly from 32% To 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 It's $2,200,000,000 and then we still have that 39% of our investment portfolio is unpledged, which is about $700,000,000 And out of our investment or securities book, we have about $230,000,000 that will Cash flow in over the next 4 quarters. So we that will 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 122.

Our return on average tangible common equity was 17.7 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 was 9.6 and our total risk base was 15.1, all in line with the prior quarter. So I think I'll turn it back to you, Hopi.

Speaker 0

Thank you, Dede. Thanks for that report. JJ, would you like to talk about the loan portfolio a little bit?

Speaker 2

Yes, sir. Thank you, Hopi. I think We've heard now 3 or 4 times that we were very pleased with the overall net loan growth of almost $79,000,000 for the quarter. And just historically, You recall, that's up $36,000,000 in the Q1 and about $41,000,000 in the Q2. Again, finished

Speaker 3

the high note On the quarter

Speaker 2

in September with about $115,000,000 in originations. And 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% to 60%, which we've seen in prior months. So 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, remained healthy and within historical averages.

Regionally, the legacy Mississippi team had a great quarter as did the Tampa market. We also began to see positive contribution from the new New Orleans team that was hired in during the Q2. Private Bank division continues to be a strong performer, particularly in the Specialty Healthcare division. As to yields and Dede mentioned on the uptick here in September, we finished the month of September at 798. At the end of the Q1, $7.36 in the Q2, dollars 7.62.

So 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 HSBCI 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 HSBCI and also just Brought on new mortgage and treasury groups to support that team. So overall, very pleased with the quarter and I'll

Speaker 4

turn it back over to you, Jaffi.

Speaker 0

Thank you, JJ. I appreciate that.

Speaker 5

George, it's our credit administration. Thank you, Hopi. 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 a 31 basis point finish at the end of September and that tracks 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 15,600,000 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 2. And as we mentioned last quarter, We did continue to see a positive trend in actual payoffs of a number of our CNC loans. That borrowers pay off some $96,000,000 in criticized and classified loans during the quarter. So very pleased with that trend.

Again, the evidence of good liquidity still out there, enabling some borrowers Move those loans or pay them off. So again positive. All NPAs It ticked up slightly from 43.3 bps at quarter 2 to $44,100,000 That was really mostly attributable to 1 large larger credit And we expect that to start a liquidation process in the coming weeks. And we really do not Any material loss in that credit if it goes through a liquidation process. So, NPAs outside of that We're pretty well flat.

In your deck, you have pie charts showing kind of the segments So of the C and 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 Our one of the larger segments at 6.61% of total loans, followed by hotels at 515. Our owner occupied professional office is $5.40 of total loans, whereas non owner occupied is $410,000,000 And then warehouse industrial just under 4%. So it's a 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 preparing for pricing resets with about 15% Of that portfolio maturing through 2025. So some good stratification in the maturities there. Unacceptable credit quality in the non owner occupied office segment, we currently have about a 4.4 Percent of the loans in that category rated 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, Different business district type office line. So most of ours are suburban or smaller rural and Mid market situation, so we are just not in that category of larger office towers. Concentration management in CRE and C and D remains well maintained with a range of 2 0 8% A risk based capital across the year. And our credit risk management group continues to manage Ongoing stress analysis within the CRE portfolio, we're focused on not only rate movement, but Let's see levels and topics, 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 And then additionally our annual term loan credit update on all income producing properties of $1,500,000 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. So in closing, continuing to monitor all aspects, So which could be considered early indicators in our credit weaknesses responding accordingly. Fortunately, we have seen very little evidence of that. We hope some of the same trends continue throughout the balance of

Speaker 0

the year and into 2024. Thank you, George. Appreciate it. That concludes our prepared remarks and commentary hearing about the quarter, and we'd open it up for questions.

Speaker 3

Thank you. At this time, we will conduct a question and answer session. Us. Our first question comes from the line of Will Jones with KBW. Your line is now open.

Speaker 6

Hey, great. Thanks. Good morning. Good morning. Hey, so, Dede, I just wanted to start on maybe deposit bid expectation Here, I know last quarter we talked to be landing in the Q3 around the 26% to 27%, but that's obviously now a little closer to 30% As we stand, but understanding that the deposit environment remains 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 following this kind of expected catch up we saw this quarter?

Speaker 1

Well, I think kind of probably this generally maybe the same The increase we had this quarter, like you said, I was kind of calculating and thinking that we might be around 26%. That was giving no Really no change for the campaign and to be aggressive for the loan growth. So I think that this will Can you? Because 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.

Speaker 3

Okay, great. That's helpful.

Speaker 6

Maybe just on flip side, loan yields, just hoping to get

Speaker 3

a sense about more you feel like

Speaker 6

the trajectory of loan yields goes from here. Loan betas, if you will, still remain relatively low, but I know you guys have a larger piece of Fixed rate loans and relatively short term. So just hoping to get an idea of maybe scheduling of what's coming due in this coming year and where you see some opportunity to reprice. I think the hope is maybe this turns into a tailwind as we move into next year.

Speaker 1

Right. And I think you will see kind of consistent pricing because of so much more we have in the fixed rate portfolio over the floating. And then when you look kind of at our ALO modeling and what it's showing, currently it's showing about Margin expansion next year by the end of next year of about 8 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 obviously putting new loans on at higher yields, but still repricing because we have so much of a fixed book. You want to add, Hopi?

Speaker 0

Well, I'll just say just Will, keep in mind, I know we talk about it, but if you look back at the seasonality of our margin, We kind of see a similar pattern. Dede alluded to it in her comments as we in her prepared comments. But we'll continue to see public money runoff this quarter. So that's going to we have to replace that funding with higher cost funding because our current cost on our Public deposit book is $242,000,000 I believe. Right.

That's right. So then that money will turn around and come back in over the first quarter and Q2. So we would expect margin expansion during that quarter, all things remaining consistent because there will be an influx of funds that comes in. So really looking at the margin over a 4 quarter average is really more indicative than just kind of picking 1 quarter, I guess.

Speaker 6

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 can kind of run through 2024. Is that the right way to think about it?

Speaker 0

I think so, yes. That's why we're thinking about it.

Speaker 6

Okay. Awesome. That's great. Thank you for that. And then just on expenses, Dede, I know we talked about lower expenses last quarter and we kind of saw that Especially if you really kind of normalize for a jump in FDIC premiums.

Do you still expect Even next quarter, we'll see 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 $0.06 run rate?

Speaker 1

I don't think so. I've kind of I'm looking ahead at where we are and looking at that 41.9 Pretty consistent with the increased FDIC premiums in their quarter. I think we'll see that same amount for next Quarter, so I think in that 41.9% to be increased just a little bit because of kind of year end sometimes. I mean, it's Just different things you'll have expenses in the Q4 related personnel related issues. I think that could be just a little bit it could be $400,000 $500,000 over this quarter.

Speaker 6

Okay. That's very helpful. Thanks for the questions.

Speaker 3

Sure. Thank you. Thank you so much. One moment for our next

Speaker 0

question.

Speaker 3

All right. Our next question comes from the line of Kevin Fitzsimmons with D. A. Davidson. Your line is now open.

Speaker 7

Hey, good morning, everyone.

Speaker 0

Hey, good morning, Kevin.

Speaker 7

Just wondering, we've had some banks announce bond restructuring transactions, which 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 I acknowledge it's not always the right thing to do. There's a lot of different variables to that. But just wondering, is that something you guys are looking at contemplating on the radar, like how would you describe that?

Speaker 0

It absolutely is. We're in the process of analyzing that, So analyzing that, running our numbers right now, Kevin, something that we're taking a look at. Although we've got pretty good we've got good liquidity, but to your point, The earn back looked like what is the impact on them. So that's something we definitely are considering.

Speaker 7

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?

Speaker 0

I think it's either or. What the level of borrowings are, pay those down and then reinvest in higher rates to and really potentially use it to fund some of the loan growth we feel like is coming.

Speaker 7

Okay. Great.

Speaker 0

And

Speaker 7

Can you remind us with the CDFI grant, so are there going to 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 or a number of different options.

Speaker 0

There's several different grant programs that go on. There's really kind of 3. 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 Special, it wasn't a reoccurring grant.

It was a onetime 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 $2,500,000 or so depending on how much money is allocated through the CDFI fund. So those are more reoccurring.

And so it's not near to the $6,200,000 level. The usage for this grant, it was to increase our lending and increase our investments in those most affected COVID markets. And so many of our markets are underserved markets that we don't have any The compliance piece of that, we don't have an issue with given our normal business function. Look, growing our loans in those markets, it meets the requirements.

Speaker 7

In fact, we've probably already met the compliance requirements for that. Okay, great. And one last one for me, Hoppy. I I think last quarter you were pretty upbeat about the potential for M and 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 What are the trigger in terms of having to mark to 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?

Speaker 0

Thanks. I would concur with that view, Kevin. 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 and A space. I think there's a lot of deals that I'd like to get done, but it's just difficult to get them to the table.

Speaker 7

Yes. And without M and A, Hoppy, is there potential to lift outs In strategic markets, is that something you're looking at? I think there absolutely is that and that's a

Speaker 0

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. And in some of our 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 maybe larger banks on cost reductions.

Speaker 7

Okay, great. Thanks very much.

Speaker 0

Thank you, Kevin.

Speaker 3

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.

Speaker 8

Thanks. Good morning, everyone.

Speaker 0

Hey, good morning, Brent.

Speaker 8

Wanted to go back to the margin for a second and just make sure I understand. So it sounds like in the Q4, the narrative is you've got some public funds that you have to replace and so or that Come in and say margins down a little bit in the Q4, but it should rise through 24 with loan portfolio repricings.

Speaker 0

Can you guys give us

Speaker 8

a little more color on the quarterly progression of loan portfolio or pricings in 24.

Speaker 1

I don't let me J. J, do you happen to have that win here with you? I didn't bring my AOE report in here, I believe.

Speaker 4

Yes, I've

Speaker 2

got this loan maturity scheduled to 24.

Speaker 1

I got you. Okay. Yes.

Speaker 0

About Yes. So 6%.

Speaker 1

Yes. This looks like a little over $100,000,000 a quarter that's maturing. So To put potentially repricing.

Speaker 0

That's maturing, but that can't cash flow is

Speaker 1

coming on. None cash flow is just maturing, yes.

Speaker 0

If you look back, Humport Hotel is about 20% repriced during the whole year in terms of cash flow coming off across maturity distribution.

Speaker 8

Okay. And then wanted to get back to loan demand and just get maybe a little more color around What you're seeing in the different markets, 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 'twenty four in terms of loan growth potential?

Speaker 2

So this is J. J. I think 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 requirements. We're wondering when that does become a hindrance because If developers are putting in another 10% or 20%, we've seen them doing that, but how many times are they going to do that on the next deal and the next deal. So 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 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 overall things appear to be still fairly strong.

Speaker 5

Yes. I concur, J. J. 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 served us several times.

Speaker 2

That's a good point. There's still cash out there. I think some of our guys might We're diluting themselves a little bit of ownership, but they're finding the equity to do it. Yes.

Speaker 8

Okay. That's helpful. And maybe one last one for me. The expense I think it sounded like the expense run rate will be slightly higher in 4Q, if I heard that right. But you've done a pretty good job holding 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 'twenty four that might raise the expense run rate or if you think you'll Kind of run the same kind of strategy in 2024 of keeping expenses as flat as you can.

Speaker 1

Yes. I think the same strategy in regards to that Just because of the compressed margin and hopefully we'll see as we talked about a little bit of expansion in that next year. But overall, I think our focus is going to be on expenses, something that we can hopefully we can try to control on our side. We are and we have talked about Last couple of quarters, kind of our 10B initiative. And so we have hired some new folks actually this last quarter and Q3, a Chief Compliance Officer, a Fair Lending Officer, which mentioned before the last quarter, I believe, our Chief Legal Counsel.

So we have we are and we hired Crowe to come in and do our 10b GAAP analysis. So we do have expenses kind of Associated with that as we build up a little bit and to 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, I'm going to keep trying to get the hammer down on them.

Speaker 8

All right. Thanks for all the color.

Speaker 0

Thanks, Brad.

Speaker 3

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 Only with Stephens.

Your line is now open.

Speaker 4

Hey, thanks. Good morning, everybody. 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 where are some

Speaker 0

of the cost on some of the promotional products?

Speaker 1

Yes, sure. What we came out with and what we're doing is 2 things. 1 is just a CD special. We have a lot of CD specials in our market. We are doing a 6 month at 5.25.

And then we also on the deposit gathering side kind of for a money market As well, it's a 5% money market guaranteed for 6 months, but 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 doing this money market special.

Speaker 4

Okay. That's helpful. And any more color on when those specials were introduced to the market?

Speaker 8

And have there been any changes to those rates more recently?

Speaker 1

No, we started that right at the beginning of September, kind of just internally. We just Currently, we just recently started with a little bit of advertising on social media. So we kind of had it in place to raise 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 Yes.

Speaker 0

And it's really just to replace some of those seasonality of the public fund monies and to support some of the loan growth, Matt.

Speaker 4

Yes. And it's certainly, I guess, Nick and Payne, but how would you characterize the volume you're receiving in that versus your initial expectations?

Speaker 1

We are we're a little under half so far for the 2 months. So I think That's good.

Speaker 0

Yes, I think it's been good. Yes.

Speaker 4

Okay. Appreciate the color there. And then I guess, changing gears on the credit front. I think there was a report in

Speaker 3

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.

Speaker 5

About 60% of it I guess was a result of actual payoffs. The rest of it was attributable to some upward migration maybe and 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 Criticize 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 take some additional Upgraded risk rates.

So I think more of it will come from that direction maybe as proportion of what we see.

Speaker 4

Okay. Appreciate that, George. And then maybe just one more. Dede, I think that the fees were strong this quarter. Any color on the fees or and the outlook from here?

Speaker 1

I think the are you talking about Non fees, are you talking about the non interest income fees, non interest income?

Speaker 3

Right. Non interest income.

Speaker 1

Okay. Non interest income. Yes, 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 next quarter. It's like our one time annual kind of Payment we received.

So it's probably a little higher this quarter, but I don't think it will be that going forward. Okay.

Speaker 4

Okay, guys. Thank you.

Speaker 0

Thanks, Matt. All right.

Speaker 3

Thank you so much for your question.

Speaker 1

One moment for

Speaker 3

our next question. All right. Our final question comes from the line of Christopher Marney with Janney Montgomery Scott LLC. Your line is now open.

Speaker 9

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?

Speaker 0

Well, there's a lot of unknowns around the CDFI right now, Chris. They're talking about changing what the qualifications. And where we've always qualified. I don't know what those new qualifications are going to be in order to be a CDFI. But it means to us, It goes in lockstep with our CRA requirements in serving underserved markets.

And so there's grant programs to go on with it we talked about, which a couple of $1,000,000 a year. But it's also growing the franchise across the Southeast. There's a lot of underserved markets. So it gives us an opportunity to invest in those markets, in those markets as we move forward. I don't know on the grant side, it's hard to predict.

Those are typically appropriated by Congress. So it's hard to tell how much grant money comes and when with exception of sort of reoccurring grants that we talked about. And even the BA award, which is the Bank Enterprise Award and the FA Financial Assistance Award are subject to congressional appropriation. We think those will continue on, but again, it's an important part of our mission.

Speaker 9

Got it. And back to the office real estate discussion from the earlier in the call. You have a predominant amount of sort of low Storey buildings, I'm presuming 2 storey 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

Speaker 4

of thinking about it?

Speaker 5

I think that's a fair statement. It would be much more difficult to repurpose a mid rise or high rise Tower for residential or any other use otherwise, but a 2 story or maybe even a 3, 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 It's from an owner occupying at least part of the building. So There's that also in consideration as well. But yes, I think your statement is right on to that point.

Speaker 0

Great. Thanks for that. And Dede, just a

Speaker 9

quick one for you on the accretion income. Does that level out as we get deeper into 2024? Just kind of trying to think beyond the next few quarters kind of how that will proceed?

Speaker 1

Yes, I think that's a fair statement. We had that big increase last quarter because we basically got all the loans Heritage on the system and it's just a function of getting them loaded on an individual basis. So now this quarter we had From all of our acquisitions, they're all on the system and accreting as they pay down or pay off. So I think that's a first statement To hopefully level out right here where we are going through next year. Thanks, Chris.

Speaker 3

All right. Thank you so much for your question. And as a reminder, everyone, if us. All right. I'm showing no further questions at this time.

I would now like to turn it back to Hafi Kohl for closing remarks.

Speaker 0

Well, thanks, everyone, for your participation this morning. Thanks for your reports. We look forward to visiting again after next quarter's results. Thank you.

Speaker 3

Thank you for your participation in today's conference.