First Bancshares Inc (Mississippi)

NYSE:FBMS

Earnings Call Transcript 2023-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the review of Second Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your speaker today, Mr. Hoppy Cole, CEO; and Sir, please go ahead.

[Milton Cole, executive]

Thank you, and good morning. I've got several of our team members with me this morning, Donna Lowery, our CFO; J.J. Fletcher, our Chief Lending Officer; and George Noonan, our Chief Credit Officer. The agenda for today, I'll give a few highlights of the quarter, and then I'll let each of the respective team members give us some more detail in their areas of management. First, we were very pleased with the quarter, particularly with the performance of our balance sheet and the resiliency and consistency of our earnings stream given the very difficult operating environment.

And I think everybody knows that we're fighting for every basis point of margin out there as deposits can certainly pretty difficult to keep. When you talk about operating earnings, when you talk about pretax fee provision however you want to measure our core earnings, again, I thought they were consistent quarter-over-quarter. We produced operating earnings per share of $0.85 for the second quarter.

Return on assets operating at 1.36% and return on tangible common operator in 19.35%, all return metrics that we're very pleased with. We also talked about the performance of our balance sheet, particularly our deposit base. As you know, we have a highly granular retail oriented of the base across the Southeast.

That really shined again this quarter and the ability to manage our margin. We had a really good -- we did really good job of managing our margin. Our GAAP margin actually increased 13 basis points given some fair value adjustments relative to the HSBI acquisition. But maybe more importantly, our core margin only compressed 4 basis points quarter-over-quarter, again, given all the headwinds out there in terms of margin management, we were very pleased with that.

And Dee Dee's analysis, she'll dig into the margin in a lot more detail. In terms of loan portfolio, we were pleased to see modest loan growth of $41 million at 3.3% on an annualized basis. As we noted in last quarter's call, pipelines were down a bit from year end for the first quarter. But in our travels and J.J. will dig in a little more granular detail. It feels like pipelines are building back and really business to picking up a bit in terms of loan portfolio.

We also believe, given the position of our balance sheet that we're very good, we're well capitalized, that this is going to be a real opportunity for us, particularly on the repairing side of the business, as some other people pull back in terms of types of loans they make, the ability for us to manage our concentration levels and to get fully priced, particularly in the construction area, we think there's going to be an opportunity for us.

We've been able to add several banking teams around the footprint, particularly Tampa, St. P as well as [indiscernible] and J.J. will talk a little more about that in this presentation. Just to note, J.J. spent couple of days down in Tampa with our team recently in Tampa, St. P making calls, we got some, we're so excited about that. As you remember, the Beach grew both in the Penhall, Florida and in Tampa St. Pete area, they are really getting their feet under beginning to focus on growth and really lever the advantages that our balance sheet brings to them.

This system integration was last December. So they are a good 7 months, 8 months post system integration. So they're past the points figuring out sort of new process within procedures and now they're really beginning to get their stride in terms of focusing on growth again. And then Georgia Group was -- has come on extremely well -- come on extremely good as well. They're about 90 days post system integration.

So they very much are beginning to think now more about getting over that sort of uncertainty with new process, procedures are beginning to focus and build their pipelines back, particularly in the Atlanta area and the coastal region. Credit quality was good. Actives were as good as they've been in quite some time.

We saw improved nonperformers and reduction in nonaccrual loans and also charge-offs were somewhat muted. So those were some high-level comments about the quarter here, we're pleased with the performance. We think our balance sheet continues to perform well in this environment. And with that, Dee Dee, would you like to give us some detail around the financials for the quarter.

[Donna Lowery, executive]

Yes, sir, thank you. Well, again, it feels like our normal trend of noise in the quarter, acquisition expenses. And so we have to kind of go through the GAAP and the operating earnings. But if that's okay, we don't mind.

So we -- as Hoppy said, we are very pleased with the quarter and feel like we -- but kind of the same really on top of where we were last quarter with the pretax pre-provision being the same or the core being down about $300,000. We're very pleased with that.

Our GAAP earnings were $23.8 million or 76 -- $0.75 per share, but we exclude those acquisition charges of $3.1 million after tax, that's $26.8 million or $0.85 diluted and that compares to $27.1 million, so $300,000 difference there compared to the first quarter.

A couple of those, if you kind of stay flat, same as last quarter, but just a couple of things to bring out. We did have additional accretion income related to heritage of about $2.5 million or so. And it really getting that -- those marks loaded on the core systems to start accreting with each loan.

And so there were some pay downs from Heritage during the first 5 months of the year that kind of all got caught up in this quarter with the accretion. And then provision expense this quarter, we took $1.250 million versus last quarter was $273,000.

And when you back out what was needed for the CECL day 1. So the extra $1 million, thy are provision expense this quarter compared to last quarter. And then we had about $1 million of extra expenses this quarter. I know we talked about seeing maybe a decrease of a few hundred thousand in expenses for this quarter.

So we had a couple of things that weren't onetime to be noted as not core or they are operating expenses that happens with banks, just was kind of a bigger number this quarter, about $1 million worth of several items, write-down on [indiscernible] and then as well as some also check broad.

So it was just kind of up there a little bit bigger number this quarter and were commenting and hopefully not expecting that to move forward. So I feel like if we take those out, we're really on top of our expenses for last quarter and then still hoping to decrease as we go forward.

We are budgeting to decrease as we go forward in the next quarter, as we talked about last quarter. Also, if you recall from last quarter, we did -- we talked about from the fourth quarter to the first, that we would have margin expansion in the first quarter and would contract going forward.

And that was really due to adding the heritage portfolio in the first quarter and receive that margin expansion for that. But our core -- and they did expand this quarter because of the additional accretion we talked about 13 basis points. But our core margin, when you back out those marks decreased 4 basis points, which we're very pleased with.

And still -- we still are expecting margin compression this year as we talked about last quarter. We're still matching -- we're still fighting for deposits as we kind of talked about the first -- last quarter, matching and keeping our -- being defense on our customers, fighting some of the specials out there. But we are kicking off.

And as we said last quarter, we would kind of move on the office if we felt like our pipelines were there and the loan volume was picking up and that we needed to kind of go on the offhand. So we're going to kind of be playing both sides of that ball going forward this year.

I think with a program of kind of a campaign coming out, and it's more relationship driven, not so much being the highest rate in the market for CD, but it's going to be a relationship product campaign. So we're excited about trying to get that kick off next month. But -- so we still feel like we can see some contractions on that, just still fighting the deposit costs. We did provide a page in the deck that talks about and shows our net interest margin impact in kind of each category that breaks that margin down and the changes.

And you can see you're looking at the margin with how much was for the loan yield minus that accretion. And so our loan yield minus accretion still increased 22 basis points and then our deposit cost about 14 basis points of that. So we're still seeing that improvement.

The big -- I guess the biggest change this quarter was probably in the borrowing cost. We talked about last quarter being in the bank term funding program, we did at $250 million, we take an additional $30 million of that during the quarter. So we had a full quarter of that compared to last quarter. So you can see that breakdown and from last quarter to this quarter detailed in our debt.

So -- with -- just looking at the yield on our earning assets up 42 basis points and then our cost of funds, 19 basis points for the quarter, and that was a 19 basis-point increase. We're at 91 basis points from 72. So still very pleased with that as we go forward. Our interest-bearing cost did increase 28 basis points up to 132 and that brings our cumulative deposit beta since the beginning of the cycle to 22% from 18% last quarter.

So I think that's still minimal increase and still looks good. And where we've kind of been talking about thinking this may be trying to hang around kind of where we were in the last cycle in the mid-20. So we're just at 22% this quarter. Allowance did increase $41 million, that's annualized a little over 3%.

J.J. will give a lot more color on the loan book in just a minute. Deposit runoff for this quarter did decline from what we had seen last quarter. It was a little over 3% when you look at the decline from the brokered CDs in last quarter. But when you look at this quarter, it's 2.6%, $175 million, which is down from last quarter.

We did have one remaining piece of the broker CD matured. And then we also had our public funds decreasing. And both of those items was approximately half of that decline. So that really just left the remaining half of about $88 million, a decrease in our retail base, our money market book. So if you recall in our public funds, this is kind of starting to cycle when spending their public front, the uptick in the first part of the year and spend out as we go.

So we'll start seeing that portion decline as we go forward. Our noninterest-bearing deposits increased another 1% increase. Even though the deposit portfolio balances were down, we had increased as far as percentage and dollars. We did see an increase in our interest-bearing dollars and then up 1% to 32%.

So we feel very good about our deposit book, as Hoppy mentioned. Our liquidity position, we remain strong. Our ratios are well above limits. Non-deposit ratio did increase a little bit this quarter to 77%. Our deposit -- excuse me, our borrowing capacity is at $2.2 billion. And then we still have -- we have about 41% of the securities portfolio when pledged, which is about $750 million. So available.

And then we have about $230 million coming due off our bond portfolio over the next quarter -- next 4 quarters. So we feel like we're in very good shape with our liquidity position as we go forward. Our brokerage -- I did mention our broker CDs did mature $27.4 million, and we did increase our bank term funding program by $30 million.

Our original $250 million was at $469 million per year, and then this last $30 million is at 4.82%. So both still good rates in this environment we're in as well. And obviously, as a reminder, before that year is up, we can -- if rates decline, we can pay that off and/or refinance at a lower rate for a year as well.

So Hoppy did mention a few of our operating results ratios that for the quarter, ROA 1.36%. Our return on average tangible capital -- or common equity was 19.35% and our efficiency ratio remained about the same as last quarter at 53.87%. All great numbers and we're [indiscernible]. Capital ratios, TCE 7.4% into the quarter and then our leverage ratio of 9.1% and our total risk base at 14.5%. So all in line with last quarter and I think that's all my prepared comments. Hoppy, I'll turn it back over to you.

[Milton Cole, executive]

Thank you, Dee Dee. So J.J., give us some color on the portfolio.

[J.J. Fletcher, executive]

Sure, Hoppy. Thank you. I think we've already covered the $41-plus million net number by everybody. So I'll cover that one. But overall, paydowns lined a bit this quarter, which was good. We did finish the month of June on a high note with about $160 million in new originations. That's against an up $362 million for the entire quarter. Construction lending continues to be a strong component accounts for about half of the total loans originated.

So that's given us more reserve for future funding. Hoppy mentioned pipelines. We had a contraction there at the end of '22, saw a good increase in the first quarter and continued uptick here in the second quarter. So we really feel good about pipelines for the rest of the year, hopefully. Average yield, as Hoppy said, we fight for every point. $762 million for June. That was up from $736 million at the end of the first quarter. Regionally product bank division continues to be our strongest performer. We've got the health care specialty division, which is surely traction in the metro markets. Hoppy also mentioned legacy HSBI and Beach enhanced capacity in those markets, into the metro markets, starting to see some new relationship opportunities and really some enhanced opportunities with existing client relationships that we're able to leverage that. We're really starting to see some traction in those areas.

And Dee Dee mentioned this in the release and Hoppy as well, probably for me, the most exciting thing about the quarter was really from talent acquisition and a new market opportunity. So St. P, we opened that just about 30 days ago with 2 new lenders.

New Orleans is an area we've worked on for years, and we finally were able to recruit a 3-person team already seeing traction there from that group. And then also, we were able to attract a 30-year plus corporate banker in Tampa and Hoppy mentioned calls, he and I were down there a few weeks ago making several calls within, and we're really excited about opportunities from that vendor.

So -- and also, I would say that most of those new lenders except for one in St. P really came on at the very end of the quarter. So those pipeline numbers are not really impacted materially to any positive rate. So we really look forward to the third quarter here and see what happens there as well. So overall, a positive quarter from both numbers and a talent acquisition standpoint, and we just hope to keep the momentum going in the back half of the year.

[Milton Cole, executive]

Thanks, J.J. George, you want to on credit quality?

[George Noonan, executive]

Thank you, Hoppy. Just touch on a few key performance metrics for the quarter and then talk a little bit about professional office space. For the quarter, we were generally pleased with asset quality and performance metrics, moderately improving return.

Delinquency showed a very good improvement. We finished the quarter at 25 basis points. That's well below our year-to-date average as well as our annual average for '22. So good work there on part of all of our lending and credit points. Loans on nonaccrual were reduced about $1.40 million compared to quarter 1. NPAs were down a little bit, $800,000.

And so really unchanged on NPAs to total assets at about 28 basis points compared to quarter 1. Net charge-offs did tick up a little bit. We've moved from 1 basis point to 7 basis points. And some of that, we think was not necessarily credit-related directly, but we did see a little tick up there.

ACL remained relatively unchanged. We ended the quarter at $105 million allowance compared to $106 million last quarter. And I think particularly noteworthy, we did see total criticized and classified loans. Those balances declined by $9.2 million quarter-over-quarter. And frankly, a big portion of that, some $8.5 million came through payoffs.

So our lenders and our credit people are working well on exit strategies for some of these substandard and special mention loans, and that's an intent focus as we go through this credit cycle and great teamwork there from the production and the credit side. Talk a little bit about professional office as we know that's been a heightened interest in a lot of quarters and give you a little bit of a kind of a flavor for our profile of our total office portfolio, only 44% is nonowner occupied.

The average loan size in that subgroup is about $758,000. So not big large exposures on a loan-by-loan basis. And almost all of our office buildings are one of the 2 floor type facilities. We've got a few 3-story buildings. But our portfolio does not consist of any large, in fact we have no central business district mid-rise or suburban actually mid-rise buildings in that 4, 5, 8 range.

So what you'd expect, I think, from a community bank of our sales. Our largest nonowner-occupied office loan is $18 million. That was recently -- it's anchored by Fortune 500 [indiscernible] just recently renewed the lease. So we feel very good. But then you see a big drop down, the second largest owner-occupied office line in $7.5 million. So we're in a $5 million to $7.5 million on a number of those credits. I would say of that, if you look at the maturities, which is ended back, I think on Page 17, only 8.27% of our nonowner-occupied office line to mature between now in 20 -- the end of 2025. So we've got a good 2.5-year run rate to work through a little over 8% in our matured loans.

So we feel good about our exposure there. In general, we are obviously monitoring very closely both our renewals as well as our new opportunities for credits, sticking to the underwriting guidelines that has historically served us very well. And we're going to do that for the rest of the year. We feel like we'll get any early signs of any potential credit contribution and be able to address it the adequately. So that's pretty much it for credit at this point.

[Milton Cole, executive]

Thank you, George. Appreciate it. Well, that concludes our prepared comments. We will open it up for questions now.

[Operator]

[Operator Instructions] Our first question will come from Brett Rabatin of Hovde.

[Brett Rabatin, analyst]

Wanting to first ask, Dee Dee, you talked about the 22% deposit beta. And obviously, your cost of deposits is a lot lower than peers. Can you go back over what you were expecting the deposit beta to do from here? And then I guess the risk is that you have some sort of catch-up quarter where maybe the beta moves up just given your relative level of funding cost versus the market?

[Donna Lowery, executive]

So I'm not sure that we would have a hiccup quarter. We are still kind of doing the same thing we've been doing really this year, and that's kind of matching and playing defense with the other competitors in the market. So I won't say that, that would be any different going forward. As I mentioned, we do have this campaign that we're coming out with that will be more a relationship campaign.

So the kind of work we're looking at internally is if we kind of continue on the same pace, what does that look like for a beta going forward and maybe your cost of deposits going forward? And if we kind of continue on the same trend, it looks like that 22% could be 26% or 27% maybe next quarter around that. So I mean that's still kind of just increasing that cost of deposits on our interest-bearing side, about 30 -- almost 30 basis points.

And so we're not really -- unless something majorly changes in the market, I don't see that we're going to be doing anything different or any kind of a catch-up besides kind of what we've been doing, and we have that 25 basis point hike last quarter. So I hope that answers your question. It's just -- okay.

[Brett Rabatin, analyst]

Yes, that's very helpful. And it's good to hear. It's -- you guys obviously have a much better cost of funds advantage than most. The other question I wanted to ask...

[Donna Lowery, executive]

I'm sorry, Brett, you just asked the follow-up, I didn't answer the rest of that. But if you kind of carry that same calculation forward with the $160 million on the interest-bearing that puts that cost of deposits to about $110 million. So kind of using the same average balances if that kind of stays the same, that 26, 27 beta would be about a $110 million cost deposits next quarter.

[Brett Rabatin, analyst]

Okay. That's really helpful. And then the other thing I just wanted to ask was around the accretion. Obviously, you mentioned the catch-up on that, just given in that system online. Can you give us any idea of what obviously, payoffs will impact it to some extent, but any idea of the scheduled accretion from here in the back half of the year and maybe '24?

[Donna Lowery, executive]

Well, obviously, like you said, it depends on payoffs on the loans. But I think that number, I would think for next quarter and going forward, if we back off, as I mentioned, I think, about $2.5 million was kind of a catch-up for loan payoffs. I think it's probably at least for the heritage piece -- I'm going to pull my number right in front of me. The quarter, it was -- yes, I feel like we will probably be in, I would say, for the quarter in that 4 -- $3.5 million, $4 million kind of like we were last quarter, unless there's just more payoffs or continued payoffs. The first quarter for the Heritage book was just kind of a straight-line calculation until it got loaded after conversion on each loan.

So it's just hard to tell. I know it's not very good information. But I would say I'd back off a couple of $23 million of this quarter and kind of carry that forward.

[Milton Cole, executive]

That's kind of interest offset by the expenses, you can tell.

[Donna Lowery, executive]

Yes,yes, yes.

[Brett Rabatin, analyst]

Okay. And just last one, if I could sneak it in. Just if I understood correctly, there are some things on the expense bucket that are not core, but they are ongoing. With the expense base in the back half of the year, I didn't quite understand the guidance on that. Is that the back half of the year a little bit higher than 2Q or flattish? I didn't quite understand the...

[Donna Lowery, executive]

Well -- I'm sorry if I was confusing. But last -- first quarter, we were like $41.8 miilion in core expenses. This quarter, it was $42.8 million. And I was saying there's about $1 million of kind of extra expenses within those the write-downs, those things that are still core, but we feel like it was kind of onetime for this quarter. That puts us in line with last quarter. But going forward, we are budgeting a decrease for third and fourth quarter coming from our cost saves of our acquisitions. And so we feel like we would see prices down $500,000 or so next quarter -- $2,500,000 million next quarter and the next for those cost saves.

[Brett Rabatin, analyst]

Relative to 2Q?

[Donna Lowery, executive]

Yes.

[Brett Rabatin, analyst]

Okay. Congrats on the quarter.

[Operator]

Our next question will come from Catherine Mealor of KBW.

[Catherine Mealor, analyst]

Dee Dee, I just want to just make sure I'm doing the expense trajectory right. So you said you're lower next quarter, is that relative to just the stated operating expenses this quarter or backing out that kind of $1 million or so of kind of extra stuff you had?

[Donna Lowery, executive]

Well, I was saying backing out the extra and then being down is what we're hopeful because of our cost saves now. But yes, that's what we have budgeted to be down due to our cost saves.

[Catherine Mealor, analyst]

Got it. Okay. So that's an expense run rate kind of around $41 million or $40 million?

[Donna Lowery, executive]

That's $41 million, yes.

[Catherine Mealor, analyst]

$41 million. Okay. All right. Did that right. Okay, great. And then how about loan yields? Can you talk about just the trajectory of how you're thinking about loan yields repricing in the back half of the year? And even really how you're thinking about into next year, I feel like that's been a lag for you, but should provide a tailwind to kind of support the margin to move potentially higher next year once rate -- deposit cost stabilize?

[Milton Cole, executive]

Yes. You're right, Catherine. And the way our balance sheet is constructed, particularly on the earning asset side, on the loan side is we don't have as many pure floating rate loans, but we do have a relatively short fixed rate we are continuing to reprice approved material amount every month -- everyday, every month, every quarter. And so where a lot of folks who have pure floating rates got a lot of their yield already for the -- during some time.

We're getting ours a little -- it's a little bit elongated. So I think you're right. We think that the continued improvement in loan yields will continue to get it this quarter, next quarter, in the next year as we reprice the fixed rate growth.

[Catherine Mealor, analyst]

And any -- do you know what the duration on your fixed rate book is or maybe just the amount that is repricing or coming due this year or in the next year?

[Milton Cole, executive]

It's about $300 million or $400 million -- $350 million or so a quarter, just straight repricing, just loans.

[Catherine Mealor, analyst]

Yes. Got it. On the fixed rate piece, not your floating piece. Got it. Okay. Perfect. Okay. And then any -- what have you seen on the credit value ? Your credit metrics look really good this quarter. You made some comments on that. But are you seeing anything within your borrowing base that gives you concern that you're any downgrades within your watch or classified that we don't think you going on behind the scenes or we're not seeing in the nonperformers yet?

[George Noonan, executive]

Catherine, I wouldn't say anything has been extraordinary at this point. I'm not kind of just what you would see in a normal year. Now we think that just from a common sense perspective, we might expect some of that. But even as we saw some of the payoffs on some of our substandard and special mention loans, we were able to exit a number of those relationships and there was somebody else to staffing and those folks gone to home.

So I think we're obviously watching it. We're doing a stress analysis. We're doing loan review, and we have gone now to a quarterly loan review as opposed to a couple of times a year, just so we can keep a more fresh look at a lot of our loan portfolio. So that has been one thing that we've implemented to help us churn a certain segment of our portfolio on a more frequent basis. So we're taking a look at it. But thus far, we have not identified any material weakness on any kind of sustained basis.

[Catherine Mealor, analyst]

And then maybe just last one on just loan growth outlook. The growth was a little bit slower this quarter is because of the paydowns you mentioned, but it feels like the origination volume has a good pipeline. So any commentary on what your growth expectations are for the back half of the year?

[J.J. Fletcher, executive]

Actually, we're up a few million over quarter 1. I would think we should be consistent and maybe a slight uptick. And we talked about all the new folks coming on board, we've got...

[Milton Cole, executive]

Kind of mid-single digit. 5% or 6%.

[J.J. Fletcher, executive]

Very cautious on the credit side. That's always...

[Catherine Mealor, analyst]

Yes. I would expect nothing less from you.

[Operator]

Our next question will come from Christopher Barnett of Janney Montgomery Scott LLC.

[Christopher Marinac, analyst]

Anyone I wanted to ask just a clarification that's on Slide 26, just about the cash flow that comes back from the securities. Would that roughly 15% by year-end '24, would that be kind of a straight line in terms of how the AOCI impact would benefit you? Or would it be more or less just given those precise securities?

[Milton Cole, executive]

I kind of think about that, that increase is the maturity schedule is pretty level. Yes, it is. The portfolio has struggled and it's fairly level. So if you kind of straight line it, I think it'd be real close.

[Christopher Marinac, analyst]

Okay. That's what I thought. I just want to clarify. Okay. Great. And then can you just comment further on kind of new business in terms of loan yields, what's coming on, whether it's the portfolio in general or even the sort of anecdotal example that you were making about the Tampa lenders and the opportunities there?

[J.J. Fletcher, executive]

Well, I think really a mix of the markets. We're trying to be as competitive as we can be, but we're foregoing some really low-rate opportunities we've seen in some other markets where we're trying to hold yield really it's market-specific and deal specific, but we're going to raise our hurdle rate which is really a prime for all smaller stuff that's under like $1.5 million that we call business banking. But I think we're just taking a case by case and trying to hope breaches every day increase yields in more debt. So that's what we're trying to do.

[Milton Cole, executive]

So seeing that pick up 30 bps quarter-over-quarter, it feels pretty good that we can sustain that. It's kind of what Catherine asked earlier about we're repricing up the curve in our fixed rate portfolio and the new stuff coming on 80 -- or approximately at 80%. So combined cores, we feel pretty good about loan deals continue to grow.

[Christopher Marinac, analyst]

Got it. That's helpful. And I guess just the last one for me is Hoppy. Can you kind of refresh our ourselves, everything included with the recent acquisitions that kind of where kind of average deposit life is of your relationships. I feel like a cost of funds maybe stabilizes in future quarters that kind of going back to that kind of deposit tenure that you have for so long is kind of worth bringing back up?

[Milton Cole, executive]

So again, those are -- Chris, our balance sheet in that deposit base is a lot of smaller community banks kind of across the Southeast and many of them are 80, 100 years old. So it's obviously a long-term sticky deposit base.

And it's really shown that in this market. And earlier in the year, deposit runoff was much faster than its sort of decelerated over the last quarter. So we think that a return that will continue -- again, accepting out the seasonality of the public money, which -- it's got a long life. In terms of average loss, I'm not sure exactly what the year is, but it's a long-term deposit portfolio there.

[Donna Lowery, executive]

We're actually not steady. So we'll have that in...

[Milton Cole, executive]

Sure. We should have some exact numbers in terms of the credit rates.

[Christopher Marinac, analyst]

Right. But safe to say it's multiple years, which I think all of us know, I just want to kind of put the work around that.

[Milton Cole, executive]

Yes, we don't have much wholesale hot money as you may get.

[Operator]

Our next question will come from the line of Matt Olney of Stephens.

[Matt Olney, analyst]

Just want to follow up on the expense discussion. And Dee Dee, you gave us some good data points around the puts and takes. Just at a higher level, thinking about cost savings. Just remind us of the overall level of cost savings is still remaining that's not in the 2Q run rate that we could see in the next few quarters?

[Donna Lowery, executive]

And that's really -- Matt, what I was giving between that $500,000 and $1 million. I think down next quarter and the mix would really come from that. Really, that's what I'm projecting, and budgeting is the cost savings from that. So I think those numbers I gave you to hold around that $41 million would come from those deals.

Heritage, as we talked about closed -- I mean, converted into March. And so we would still had a lot of folks that stayed on through probably the end of May. So really, we'll have a full quarter coming up of that. So that's kind of where we're pulling it from.

[Matt Olney, analyst]

Okay. And to clarify, the first fully loaded quarter of cost savings, is that 3Q? Or is that more in 4Q?

[Donna Lowery, executive]

I think it should be more -- probably the full quarter 4, but majority of the third quarter. To kind of get to July, I would say, yes, 2 months this quarter and maybe the full quarter next -- the fourth quarter.

[Matt Olney, analyst]

Okay. Okay. That's helpful, Dee Dee. And then I guess, George, going back to the commentary you made a few times on the payoff of some loans that were maybe a little lower quality. Can you just clarify, are those loans being moved off? Are they being refinanced by other banks still in the banking system? Or are these just borrowers paying down the debt with their liquidity?

[George Noonan, executive]

Most of those were actually taken out by other lenders. So -- and not through borrowing liquidity. But I would say the majority of them were.

[Matt Olney, analyst]

And any color on the profile of banks that are restarting some of these loans.

[George Noonan, executive]

Exit strategies differ loan by loan, but a combination of maybe pricing on a renewal or -- and some of them came up at the renewal point. And so maybe some of our underwriting terms were a little more stringent than others, but I would say probably in most cases, they were.

[Milton Cole, executive]

So I think it's the [indiscernible] I don't know about all of them because those are smaller community banks that took those out. I think they weren't the larger banks, Matt, they were smaller banks.

[Matt Olney, analyst]

Okay. That's helpful. And then I guess just lastly for Hoppy. Hoppy, it's been a while we've talked about M&A. So we've had a few assets this week. So would love to get your view of M&A in the Southeast. Just help us appreciate how much chatter you're hearing in the southeastern markets. And then in the past, the bank has been heavily involved in M&A. Would love to just appreciate the appetite of M&A from the bank at this point?

[Milton Cole, executive]

Well, we hear a lot of talk about it kind of slowed down after the first part of the year after the bank failures. But now there's an awful lot of, I think, of conversations going on right now. So we'll -- it's part of our business model. We think we going to prefer to acquire in the Southeast. We continue to look for opportunities to grow our company. We're just below $8 billion now.

So thinking about $10 billion and how you cross that is certainly part of our strategic plan. I think we talked a lot about the preparations that we're making for that $10 billion mark. So we think there'll be a lot of opportunity for us coming out of the cycle or in this cycle, I should say, because of the stresses that are felt particularly down for downstream by smaller banks, the world is not getting any easier.

I mean it's just getting more and more complicated with potentially higher degrees of regulation, but then deposit pressures, the margin pressures. And we're fortunate to be -- had a pretty solid balance sheet. We're -- our earnings are ramping up materially. So we're recruiting capital pretty rapidly.

So the ability to be selective on sort of treating people what we want is out there. So I think we have an appetite for M&A. We've done that. We continue to think about doing it as a way to grow it further. We've done a tailwind over the last few quarters or the last 2 acquisitions we've done.

And so we -- I think, Matt, we always stay nimble. It's more of the same as strategic plan really hasn't changed. Over the last 15 years, continue to look for opportunities to grow our company and provide improved return to our shareholders.

[Operator]

[Operator Instructions] I am seeing no further questions in the queue. I would now like to turn the conference back to Hoppy Cole for closing remarks.

[Milton Cole, executive]

Well, thanks, everyone. We're very pleased with the quarter. We appreciate your participation this morning in support of the company. So have a great day, and we'll visit again next quarter.

[Operator]

This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.