Q3 2023 First Bancshares Inc (Mississippi) Earnings Call
Participants
Donna T. Lowery; Executive VP & CFO; The First Bancshares, Inc.
George Noonan
J.J. Fletcher
Milton Ray Cole; Chairman, President & CEO; The First Bancshares, Inc.
Brett D. Rabatin; Head of Research; Hovde Group, LLC, Research Division
Christopher William Marinac; Director of Research and Banks & Thrifts Analyst; Janney Montgomery Scott LLC, Research Division
Kevin Patrick Fitzsimmons; MD & Senior Research Analyst; D.A. Davidson & Co., Research Division
Matthew Covington Olney; MD & Analyst; Stephens Inc., Research Division
Unidentified Analyst
Presentation
Milton Ray Cole
(technical difficulty) 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 J.J. Fletcher, our Chief Lending Officer.
Generally, the quarter, we thought was a solid quarter given, what everyone knows is a very difficult operating environment. We talked the last quarter about some of the seasonality of our deposits, some of 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 would be some compression for 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% annualized basis for the quarter, and J.J. will give us more color on that during his part of the presentation.
Our credit metrics remained really strong with low past dues, low loan performers, 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, 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 12 months or so we've been able to grow -- but actually over the last 12 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, $1.7 billion 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 dividends 21% from $0.76 to $0.92 last quarter. So given all that, we're pretty pleased with the fact that 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 and deposit headwinds due to seasonality of our deposit books, some of the loan growth we experienced.
So with that, I'll turn over to DeeDee for a little more color on our financials.
Donna T. Lowery
Thanks Hoppy. Yes, as Hoppy 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 $6.2 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.
But for the quarter, we did report earnings of $24.4 million, $0.77 per share. That was up $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 grants. And net of -- the grant net of associated expenses, that's about $800,000, up to that number.
So earnings were $24 million on operating basis or $0.76 per share. And that compared to $26.8 million or $0.85 per share for the second quarter of '23. And that was a decrease of $2.8 million. And 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 increase in our deposit costs -- well, in our interest expense, but specifically in our deposit costs that was $4.8 million. So those 2 items really are the big 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 quarter.
And 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, the -- as we have run-off in our public funds, which we normally talk about.
It 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. And loans did increase, as Hoppy mentioned, $78.9 million or 6.3% annualized.
About 30% of those loans were brought to light in the quarter. So our average loan growth for the quarter was $56.6 million, so you can see a big chunk went out right at the end of the quarter. That'll help and obviously go forward to the next quarter.
We also initiated a public gathering campaign. We 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 costs.
Our core net interest margin decreased 16 basis points to 327. And we do expect, obviously, this kind of trend to continue into the fourth quarter, just with the increased deposit costs with the campaign and then still with the competitive pressures that we're seeing. And we want to play defense, and obviously keep our customers or core customers.
Our yields -- a couple of notes due to the accretion. Our yield on earning assets reflects in our release a 2 basis points decline. But if we 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 295 -- to 495 from 479.
And that same scenario, obviously, when you look at the loan yield, it actually increased 18 basis points up to 592 from 574. And that's, you know, when you just kind of go back and take that out of the last quarter's number.
So good increases of both of those sections for the quarter. Our deposit cost or cost of deposits though increased 30 basis points for the quarter.
Our interest-bearing deposit costs increased 44 basis points to 176. And then our cumulative beta since the beginning of this cycle is 31%. And that was up from 22% last quarter.
Our deposit costs increase 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% or 6.3% annualized. J.J. 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 brokered CDs during the quarter of $110 million. The actual deposit decline was $122.2 million 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 and 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% 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 is $2.2 billion. You'll have that 39% of our investment portfolio is unpledged which is about $700 million. And out of our investment or securities book, we have about $230 million that will cash flow in over the next 4 quarters. So, that will be generated from our portfolio.
And then the following ratios. We kind of highlighted in there for the quarter, on 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 was 9.6%. And our total risk base was 15.1%, all in line with prior quarters.
So, I think I'll turn it back to you -- over to you Hoppy.
Milton Ray Cole
Thank you DeeDee. Thanks for that report. J.J. you'd like to talk about the loan portfolio little bit?
J.J. Fletcher
Yes, sir. Thank you, Hoppy. I think we've heard now 3 or 4 times that we were very pleased with the overall net loan growth of almost $79 million for the quarter. And just historically, you recall that's up $36 million in the first quarter and about $41 million in the second quarter.
Again, finished the high note on the quarter September with about $115 million 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. Our 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 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 798 at the end of the first quarter 736 and the second quarter 762. 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 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.
I'll turn it back over to you, Hoppy.
Milton Ray Cole
Thank you, J.J. I appreciate that. George with our credit administration.
George Noonan
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 good positive trend in delinquencies.
Year-to-date, loan recoveries, we've 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 0.004%. So pleased with that. Total criticized and classified loans, were reduced over the prior quarter about $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 2.
And as we've submitted last quarter, we did continue to see a positive trend in actual payoff on a number of our C&C loans. We had borrowers pay off some 9 -- with $6 million in criticized and classified loans during the quarter. So very pleased with that trend, again, the evidence.
So 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 be -- quarter 2 to 44.1 That was really mostly attributable to one large -- larger credit. And we expect that started liquidation process in the coming weeks. And we really do not expect any material loss on that credit if it goes through a liquidation process. NPAs, outside of that were pretty well flat.
In your deck, you have pie chart 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 that 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 14%. And then warehouse/industrial just under 4%. So, some nice balance across all those categories that we probably most closely track.
But one that we do most closely tracked, 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 reset with about 15% of that portfolio maturing through 2025. So some good stratification in the maturities later.
Unacceptable credit quality. In the non-owner-occupied office segment, we currently have about a 4.4% of the loans in that category rated substandard. And again, as we've talked about in prior calls, we really have an absence of the mid and higher rise office buildings in our portfolio, several business district type office ones.
And most of ours are suburban or smaller rural in mid-market situation. So we're just not in that category of larger office [titles].
Concentration management in CRE and C&D remains well maintained with a range of 280% of risk based capital across the year. And our credit risk management group continues to manage the ongoing stress analysis within the CRE portfolio. It's highly focused on not only right movement, but occupancy levels and OpEx, especially escalating insurance expenses. That's one thing that is really on our radar across these markets now to make sure that we're providing some mitigation for rising insurance costs, as we see there in most markets, right.
And then additionally, our annual term loan credit update. Term loan income producing properties of a 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 stressors.
So, in closing, continuing to monitor all aspects, so which could be considered early indicators in our credit weaknesses, responding accordingly. Fortunately, well, we have seen very little evidence of that. We have same trends continued throughout the balance of the year and into 2024. Thank you.
Milton Ray Cole
Thank you, George. Appreciate it. That concludes our prepared remarks and commentary about the quarter. We'd open up for questions.
Question and Answer Session
Operator
(Operator Instructions) Our first question comes from a line of (inaudible) with KBW.
Unidentified Analyst
So DeeDee, I just wanted to start on maybe deposit beta expectations here. I know last quarter, we talked to your lending in the third quarter around the 26%-27%, but that's obviously now a little closer 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 help me get a sense of where you feel like we might ultimately land on the positive betas, following this kind of expected catch up we saw this quarter?
Donna T. Lowery
Well, I think kind of, probably this -- 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 no -- really no change for the campaign and to be aggressive for the loan growth. So I think that this will continue, because we're really kind of running our special right now throughout this quarter. So I think we'll see kind of a repeat of this, the same quarter.
Unidentified Analyst
Okay. Great. That's helpful. Maybe just on flip side, loan yields. Just hoping to get a sense where you feel like the trajectory of loan yields goes from here. I know loan betas, if you will, still remain relatively low. But, you know -- 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.
Donna T. Lowery
Right. And I think you will see 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 [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 -- you know, obviously, putting these loans on a higher yields, but still recycling because we have so much of a fixed book. You want to add, Hoppy?
Milton Ray Cole
Well, I was going to say, this we'll keep in mind. I know we talked about it. But if you look back at the seasonality of our margin, we kind of see a similar pattern. And DeeDee eluded to it in her comments as we -- in our 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 costs on our public deposit book is 2.42 probably --
Donna T. Lowery
Right. That's right.
Milton Ray Cole
So then that money will turn around and come back in over the first quarter, second quarter. So we would expect market 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 4-quarter average is really more indicative than just kind of picking one quarter, I guess.
Donna T. Lowery
Yes.
Unidentified Analyst
So the messaging is really like, maybe next quarter we see a bit of a bottom and then just to grind higher as we kind of run through 2024? Is that the right way to think about that?
Milton Ray Cole
I think so, yes. That's what we're thinking about.
Unidentified Analyst
Okay, awesome. That's great. And then just on expenses, DeeDee, 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 expense run rate?
Donna T. Lowery
I don't think so. I've kind of -- I'm looking ahead at where we are and looking at that $41.9 million, pretty consistent with the increase to FDIC premiums in there. I think we'll see that same amount for the for next quarter.
So, I think in that $4.19 million could be increased just a little bit because of, kind of year -- sometimes, I mean, it's, you know, just different things you'll have expensed in the fourth quarter related, personnel related issues. I think, that could be just a little bit. It could be $400,000, $500,000 over this quarter.
Operator
Our next question comes from the line of Kevin Fitzsimmons with D.A. Davidson.
Kevin Patrick Fitzsimmons
Just wondering, we've had some banks announced 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?
Milton Ray Cole
It absolutely is. We're in the process of analyzing that to run our right now, Kevin. It's something that we're taking a look at. Although, we've got pretty good -- we've got, like, good liquidity. But to your point, the earn back look like what is the impact on. So that's something we definitely are concerned.
Kevin Patrick Fitzsimmons
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?
Milton Ray Cole
I think it's either or, Kevin. Depending on what the level of borrowings are, we'll pay those down and then, reinvest in higher rates. It really potentially uses to fund some of the loan growth we feel like now.
Kevin Patrick Fitzsimmons
Okay. Great. Can you remind us, with CDFI grant, do -- so are there going to be more of those coming? What kind of frequency and what's the 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 with -- or a number of different options?
Milton Ray Cole
There are several different grant programs that go on. There are 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 a special, when it wasn't a reoccurring 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 money is allocated through the CDFI Fund. So those are more reoccurring. So it's not near to the $6.2 million level.
The usage for this grant -- it was to increase our lending and increase our investment 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 -- growing our loans in those markets. It meets the requirements. In fact, we probably already have met the [compliance] requirements for that.
Kevin Patrick Fitzsimmons
Okay, great. And one last one for me. Hoppy, in the, 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 -- the -- whatever 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 you seeing something a little a different?.
Milton Ray Cole
I would concur with that view, Kevin. And, I'm not as optimistic on it now, I thought was, say last quarter. But I think you're right. I think there's pretty still -- still pretty significant headwinds out there in the M&A space. I think there's a lot of deals that probably like to get done, but it's just difficult to get them to the table.
Kevin Patrick Fitzsimmons
Yes. And without M&A, Hoppy, is there potential to do lift outs in strategic markets? Is that something you're looking at?
Milton Ray Cole
I think there absolutely is. 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. And then 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 maybe, larger banks' cost cutting, cost reductions.
Operator
Our next question comes from the line of Brett Rabatin from Hovde Group.
Brett D. Rabatin
Wanted to go back to the margin for a second and just make sure I understand -- so it sounds like in the fourth quarter, the narrative is you've got some public funds that you have to replace and so. Or is that come in and so you -- margin is little bit in the fourth quarter, but it should rise through '24 with loan portfolio repricings? Can you guys give us a little more color on the quarterly progression of loan portfolio repricings in '24?
Milton Ray Cole
Donna?
Donna T. Lowery
I don't -- and let me -- J.J., do you happen to have that, when do you -- I didn't bring my ALM report in here, I believe.
Milton Ray Cole
Yes. I've got this one maturity scheduled of '24.
Donna T. Lowery
I got you. Okay. Yes.
Milton Ray Cole
About -- at about 6%.
Donna T. Lowery
Yes. This looks like 100 -- this looks like a little over $100 million a quarter that's maturing. So to put -- you know, potentially repricing.
Milton Ray Cole
That's maturing, don't count cash flows coming.
Donna T. Lowery
None cash flow -- just maturing. Yes.
Milton Ray Cole
If you look back -- hopefully that was about 20% repriced during the whole year in terms of cash flow coming off and plus maturity distribution.
Brett D. Rabatin
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 there's a full back, maybe just a little more color around loan demand and how that might shape out for '24 in terms of loan growth potential?
J.J. Fletcher
So, this is J.J. I think pipelines, I've said, were down a little bit. But from an 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, you know, 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's 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.
George Noonan
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.
J.J. Fletcher
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
Yes.
Brett D. Rabatin
Okay. Helpful. And maybe one last one for me. Maybe 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 the 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 '24 that might raise the expense run rate? Or if you think you'll kind of run the same kind of strategy in '24 of keeping expenses as flat as you can?
Donna T. Lowery
Yes, I think the same strategy in regards to that just because of -- 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 the last couple of quarters, kind of our 10B initiative. And so we have hired some new folks, actually, this this last quarter and third quarter, 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, [Crow] to come in and do our 10B gap analysis. So, we do have expenses kind of associated with 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, and we're kind of in the middle of that right now, But otherwise, you know, we don't know. I'm going to keep trying to get the hammer down on them.
Operator
Our next question comes from the line of Matt Olney with Stephens.
Matthew Covington Olney
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 of the cost on some of those promotional products?
Donna T. Lowery
Yes. Sure. What we came out with and what we're doing is 2 things. One is just a city special. We have a lot of city specials in our market. We are doing a 6 month at 5.25%. Then we also, on the deposit gathering side, kind of, or a money market as well, it's a 5% money market, guaranteed 6 months. But, with that is a non-interest bearing deposit. So we've opened up a separate product that. So, hopefully, we can gather some non-interest bearing while we're doing this money market special.
Matthew Covington Olney
Okay. That's helpful. And any more color on when those specials are introduced to the market? And have there been any change those rates more recently?
Donna T. Lowery
No. We started that right at the beginning of September, kind of just internally. We just recently started 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 --
Milton Ray Cole
Yes. And it's really just set to replace some of those seasonal -- seasonality in the public fund monies, and to support some of the loan growth, Matt.
Matthew Covington Olney
Yes. And, it's fairly, I guess, in campaign, but how would you characterize the volume you're receiving net versus your initial expectations?
Donna T. Lowery
We are little under half through the through -- so far for these 2 months. So I think that's -- I think that's good.
Milton Ray Cole
Yes. I think it's been good.
Donna T. Lowery
Yes.
Matthew Covington Olney
Okay. Appreciate the color there. And then I guess changing gears on the credit front. I think, there was a report in the -- that the deck you put out there, that criticized, classifieds, had a nice decline the quarter, if I read that right. Any more color on that decline?
George Noonan
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 of quarters.
But, in going through our quarterly rounds of criticized, classified reporting with our loan officers and regional credit officers, we do see some potential opportunities to be 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 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.
Matthew Covington Olney
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 in the outlook from here?
Donna T. Lowery
I think it's on that loan fees? Are you talking about the non-interest income fees? Non-interest income?
Matthew Covington Olney
Right, the non-interest income.
Donna T. Lowery
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 it's probably a little higher this quarter, but, think it'll be that going forward.
Operator
Our final question comes from the line Christopher Marinac -- sorry - with Janney Montgomery Scott LLC.
Christopher William Marinac
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?
Milton Ray Cole
Well, there's, there's a lot of unknowns around the CDFI, right now, Chris. They're talking about changing what the qualifications. And so, 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 talk about, which was a couple of million dollars a year. But it's also growing the franchise across 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. Those are typically appropriated by Congress. So it's hard to tell how much grant money comes and when with exception of those sort of reoccurring grant we're talking.
And even the BEA award, which is the Bank Enterprise Award, and the, FA, Financial Assistance award is subject to Congressional appropriation. So, we think those will continue on, but again, it's an important part of our mission.
Christopher William Marinac
Got it. Thanks for that. And then 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 2 story buildings dominate the portfolio, which means under 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 the fair kind of way of thinking about it?
George Noonan
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, is 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.
Christopher William Marinac
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 beyond the next few quarters, kind of how that will proceed?
Donna T. Lowery
Yes, I think that's a fair statement. We had that big increase last quarter because we basically 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, this quarter, we had from all of our acquisitions all on the system and accreting as they pay down or pay off. So, I think that's the first statement, to hopefully level out right here where we are going through next year.
Operator
(Operator Instructions) I'm showing no further questions at this time. I would now like to turn it back to Hoppy Cole for closing remarks.
Milton Ray Cole
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
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
