FB Financial Corporation (FBK) Q1 2021 Earnings Report, Transcript and Summary

Good morning, and welcome to FB Financial Corporation's First Quarter 2021 Earnings Conference Call. On this call today from FB Financial is Chris Holmes, President and Chief Executive Officer. He is joined by Michael Mettee, Chief Financial Officer; Greg Bowers, Chief Credit Officer; and Wib Evans, President of FB Ventures, who will be available during the question-and-answer session. Please note, FB Financial's earnings release, supplemental financial information and this morning's presentation are available on the Investor Relations page of the company's website at www.firstbankonline.com and on the Securities and Exchange Commission's website at www.sec.gov. Today's call is being recorded and will be available for replay on FB Financial's website approximately an hour after the conclusion of the call. [Operator Instructions] And with that, I would like to turn the call over to Robert Hoehn, Director of Corporate Finance. Please go ahead.

Thank you, Ian. During this presentation, FB Financial may make comments, which constitute forward-looking statements under the Federal Securities laws. All forward-looking statements are subject to risks and uncertainties and other facts that may cause actual results and performance or achievements of FB Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond FB Financial's ability to control over date, and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks is contained in FB Financial's periodic and current reports filed with the SEC, including FB Financial's most recent Form 10-K. Except as required by law, FB Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures is available in FB Financial's earnings release, supplemental financial information and this morning's presentation, which are available on the Investor Relations page of the company's website at www.firstbankonline.com and on the SEC's website at www.sec.gov. I would now like to turn the presentation over to Chris Holmes, FB Financial's President and CEO.

Thank you, Robert. Good morning, everybody. Thank you for joining us this morning. We appreciate your interest in FB Financial. We had another successful quarter as we delivered adjusted EPS of $1.12 per share, adjusted ROAA of $1 -- I'm sorry, 1.89% and adjusted return on tangible common equity of 20.9%, and we grew our tangible book value per share to $22.51 or 14.6% annualized. With each day that passes, our markets get a little closer to normal, and that's reflected in a few of our numbers this quarter. We had $31 million in loan growth, excluding PPP, or 1.8% annualized. Through February, balances were actually down $89 million, but then we had a very strong margin with $120 million in growth. As our markets bounce back, customer demand for loans continues to build, and we still feel good about our mid- to high single-digit annual loan growth target that we set for ourselves. We released $13.9 million from our allowance for credit losses this quarter as continually improving economic forecast dictate that we bring down our reserves. Following this reserve release, our allowance to loans excluding PPP is 2.29%, down from 2.48% last quarter. Assuming no further COVID waves or hiccups in the recovery, we would expect those releases to continue in the near term as economic outlooks continue to improve. Our full deferrals of principal and interest are down to $21 million, and we have $131 million of loans on interest-only payment schedules. Of the $131 million on interest-only schedule, $76 million are hotel loans. We continue to feel optimistic about the ultimate resolution of our loan deferrals. Our net charge-offs were 5 basis points this quarter. We're still cautious, and we still have significant reserves in case we do experience any credit events, but we don't have any knowledge of anything specific that causes us any concern. With each passing quarter, we grew more optimistic as we'll get through the pain of COVID without any serious credit losses. Beyond numbers, our associates have returned to the office. This is crucial for the internal projects that we are -- that are our current focus. While remote world has been effective for most tasks and for a limited time period, face-to-face interaction is crucial for the goals that we have for ourselves this year. Each time we speak to investors individually, we harp on being better operators than our competitors. Most of the goals and initiatives from our strategic plan are geared towards ensuring that we run a better bank for our customers than our competitors do. Most services and banking are commoditizing. So our value proposition for our customers is to be faster with less friction while providing better advice than our competitors, whether that's a bank, a credit union or a fintech company. From an infrastructure standpoint, that means ensuring that a customer can attain any product with us they could with any of our competitor -- with any other competitor. And second, that means enabling the customer to do business as conveniently as they can with any competitor, be it online, on their telephones or through a branch location. From a personnel standpoint, we do that by setting up regions investing our regional presence with the power to operate their regions as independent community banks. Each of our regions is divided into markets. Each market has a president, and individual relationship managers report up to those market presidents. Very few banks our size and larger have chosen to stick with the community banking model. From a risk and uniformity standpoint, it's simpler to go with a centralized line of business model. The unintended operational consequences of a centralized model are the reasons that smaller community banks have historically been able to pick off talent and customers from larger banks. Relationship managers tend to get dissatisfied with their work environments, and customers grow frustrated by the lack of responsiveness that's burned out of broken centralized processes. Since I've been with First Bank, our goal is that our -- has been to keep our community banking strategy and model regardless of size. We've been able to maintain that well enough now that we have $12 billion in assets and have a very strong and have very slow organic growth prospects across our footprint. We're taking in the time and working hard to review and challenge the customer experience, support functions, risk management functions and other processes that allow us to maintain our community bank model and will be scalable up to $20 million, $30 million, $40 million and even more. With that explanation about our regional model, we're excited to announce a newly formed Central Alabama region with the hiring of our first 4 banking division associates in Birmingham, two of which are very experienced senior bankers. We have long had more strong mortgage presence in Birmingham with our retail channel leadership being based in Mabi Hills. Our foothold in mortgage in Birmingham made it a logical market expansion for us, and we couldn't be happier to welcome these associates to the First Bank team. We have a loan production office in place currently, and we're working through the branch application process with the goal of having a full-service branch later in the year. I have 2 other financial points to make before turning the call over to Greg and Michael. The first is on mortgage. Our mortgage team delivered $16.3 million in direct contribution this quarter, which was 71% of our fourth quarter 2020 contribution. So within our previous guidance of 70% to 100% of the fourth quarter's adjusted contribution. We generally don't give much guidance, especially with mortgage, but we did last quarter because we were confident that we had good insight into the quarter in that the first quarter would be solid for our mortgage group, both in the retail channel and the consumer direct channel. And it turns out we were right. As we look into the second quarter and the remainder of the year, our retail mortgage channel continues to look strong. But with the increase in interest rates, we've seen a decline in refinance volumes, which has an outsized impact on our consumer direct delivery channel. As a result, the retail channel should have a solid second quarter, but that will be largely or entirely offset by the impact of declining volumes and margins in consumer direct. The smaller pipeline will cause a negative mark-to-market adjustment on the pipeline that we will absorb in the second quarter. With these headwinds, we are inspecting a significant, if any, contribution from our mortgage operations in the second quarter. Once we digest the consumer direct volume decrease, we expect more normal operations in the second half of the year, where we would expect mortgage to be in the 10% range of total contribution for any given quarter, depending on the seasonality, of course. The second point is on our noncore commercial held-for-sale portfolio. We had offers that were close to acceptable for us, but we ultimately decided we were comfortable with the discount that we were being asked to take on the portfolio that we think remains reasonably strong. As long as we continue to hold the portfolio, we're likely see some small movements in the valuation as we mark that to market each quarter. The third quarter was a $1.9 million gain. The fourth quarter was a $1.4 million gain. The first quarter was an $853,000 loss. We continue to feel appropriately mark on the overall portfolio and believe that we will ultimately dispose of the portfolio in line to ahead of the discount that we have on the long term. So to summarize. We had a strong financial performance this quarter. Our regional leadership feels good about their growth prospects for the remainder of the year, and we added a new Central Alabama region and key relationship managers in the quarter. We faced a mortgage headwind in Q2 but feel good about the second half of the year, and we're focused on customer experience and the operational enhancements that allow us to deliver our community banking style no matter our size. Now Greg is going to give you some additional color on credit.

Thanks, Chris. More overall, the portfolio continues to perform satisfactorily, and I'm reminded that it was almost exactly a year ago that we gave our first update in the pandemic world. It would be an understatement to say that we've seen a number of changes within our portfolio. And fortunately, due to good general underwriting by our teams, strong relationships and the strength of our own balance sheet, we've successfully managed through what appears to be the worst of this part of the storm. Those of you that have followed us for the past year will recall that in reaction to the pandemic, we assisted our customers by allowing for some form of payment deferral on approximately 20% of our portfolio. And today, that has been reduced to around 2%, as previously noted and as shown on Slide 11. Of that 2% number, the minority or only $21 million are remaining on a full deferral of P&I, while the other $131 million in deferral are on an interest payment schedule. Those remaining interest-only deferrals are largely in the hospitality sector, as we pointed out previously. All that to say, we're glad to see how that has progressed. While we're on deferrals, it's a good time to highlight some of the major portfolio categories that we've been tracking or our industry is of concern, as it's pointed out in the deck. A year ago, we outlined 6 primary industry sectors that based upon what we knew at the time could potentially be more heavily impacted by the pandemic: retail, hotel, health care, restaurants, other leisure and transportation. As we look back, we are pleased with the overall results in these sectors, especially in the light of the unknown at the beginning of all this. Slide 12 highlights the overall picture of those industry segments, and you can see that credit quality has held up. Of these, we will call out 2 segments to highlight this quarter. In the hotel portfolio, with detail broken out on Slide 13, our larger operators are reporting improved occupancies and, I believe, are optimistic about the future as markets continue to open. The number of vaccinations increase in travel picks back up. They account for the majority of our exposure. On the smaller, less well-capitalized end of the market, we have seen a few operators not fair as well, and those account for some of the movement in the classified totals. I'm talking only about a few smaller loans. We're hopeful their results improve, but if not, we could see further migration with a couple of these. But again, overall, I'm very pleased with how the hotel portfolio has come through this so far. Second one I'd point out is in the health care portfolio, which is detailed on Slide 14. We saw a decline initially last year from the closures of the doctor's offices. But again, that picks back up with the reopening of the markets. The exception of this has been in a few of our assisted living homes, which were hit with outbreaks at the beginning of this year, and their occupancies or census counts have been impacted. At just -- excuse me, this has not been indicative of our portfolio overall, but is project specific. At just over $20 million, a couple of these credits account for the rest of the increase in our classified numbers. Our teams are confident that with the increase in vaccinations, these properties will be able to build the occupancy numbers back up, but this could be an extended time frame that we will be monitoring closely. Slide 15 breaks out the restaurant group, as we have done in the past, but results here are good overall and in line with our last report. I'll close with Slide 16, which displays our overall credit metrics. On the whole, we feel comfortable with the health of our loan portfolio. Charge-offs were minimal this quarter at 5 basis points. Nonperforming ratios held relatively steady this quarter. Our classified loans saw a bit of a jump, but that increase is primarily related to the credits I just discussed, primarily the assisted living. Lastly, we remain comforted by having an allowance towards the upper end of our peers at 2.29%, excluding PPP. With that, I'll turn it over to Michael.

Thank you, Greg. Speaking first to mortgage and expanding on some of what Chris spoke to you earlier, the team produced another strong quarter in Q1, producing $16.3 million, a seasonal decline from Q4 of 2020 but was within the expected range. As mentioned last quarter, we saw a seasonal dip in margins, which have continued to compress, as illustrated on Slide 6, with the rise in interest rates. As we have seen in the past, when interest rates rise quickly, the effects on margins and volume impact to consumer direct lenders harder than the traditional retail channels. This is due to the consumer direct channel being more heavily refinance-focused than our traditional retail channel. And historically, the consumer direct line of business has been between 55% to 65% of our overall volume. We do believe one of the positive outcomes from the pandemic as it relates to mortgage has been the shift in consumer behavior and preference to utilize and leverage technology for their mortgage needs. This shift will provide our consumer direct business with continued growth prospects, especially as the team works to gain additional market share in the purchase space. We have seen successful strides in April to move in that direction. But as in any business model, it just takes time to fully implement, and we will continue to take advantage of the refinance business as long as it exists. We do expect a solid purchase season, but the mortgage industry as a whole is facing its share of headwinds, including excess industry capacity and national and local housing shortages. Moving on to net interest margin. We saw a decline in the headline number as our liquidity has continued to build. Adjusted for normalized liquidity levels, the margin held relatively flat around 3.41% compared to 3.44% last quarter, and that details on Slide 5 in the impact of excess liquidity line. We are still focused on bringing deposit costs down, and we're able to do that this quarter as cost of total deposits came down 5 basis points; while contractual yield on loans, excluding PPP loans, also came down 5 basis points. This trend is poised to continue as we have over $300 million of CDs repricing again this quarter in the 1.25% range. We also continue to see progress on reducing our money market and interest-bearing checking rates as we've been picking up a basis point or so per week on the cost of those deposits recently. Liquidity is likely to continue to weigh on the margin, and we would obviously like to redeploy that cash into core lending relationships. But with the competitive environment and with liquidity continuing to flood into the system, we have ramped up our securities purchases. We have previously held off on investing too much in the securities portfolio given low raised and duration risks that were evident in our investment opportunities. However, with the recent uptick in rates, we've added $112 million to our portfolio in April at about 150 basis point yield, which is a nice short-term pickup compared to the 12 basis points that we're earning on our cash. We will look to move our portfolio to approximately 12% to 13% of total assets. Moving on to CECL in our allowance. We saw a release of $13.9 million this quarter as economic forecast continued to improve. As we had mentioned previously, we have been fairly model-driven with limited qualitative factors to this point. However, the initial release based on our [indiscernible] forecast this quarter was larger than we thought was prudent given that the economic recovery is in its early stages and we're still facing headwinds. With that, we increased our qualitative factors this quarter in order to account for some of the uncertainty. Going forward, we will continue to weigh the improving forecast for skew factors that we believe are prudent to manage the allowance. However, we would currently expect further releases over the next few quarters, assuming outlets continue to improve. I'll close my section by speaking to our expenses. The banking segment noninterest expense was a bit higher this quarter at $55.7 million, which, excluding $4.5 million in FHLB prepayment penalties, compares to $52.9 million in the fourth quarter. This was related to some seasonal and onetime expenses and not a run rate to base future estimates on. Between the seasonal expenses related to the annual incentive compensation payout and a few other onetime items, we're about $1.7 million higher this quarter than what we feel like our run rate is. We continue to expect low to mid single-digit percentage growth rate for 2021; and our annualized run rate from the fourth quarter, which would have been about $212 million. I'll now turn things back over to Chris to close.

Okay. Thank you, Greg; and thank you, Michael, for that color. Thank you, everyone, for -- again, for your interest in our company. And operator, we would like to open the line for questions at this point.

[Operator Instructions] And our first question comes from Catherine Mealor of KBW.

I just wanted to first follow up on your expense guide that you just gave. So you're saying we should take about $1.7 million out of this run rate from this quarter and then grow at a kind of a low single-digit pace from there? Is that right?

Yes. Yes, low to mid, right?

Low to mid.

Yes, low to mid-single digit pace.

Low to mid. Okay. Great. And are you basically through all of your cost savings from the merger? Or how would I think about further cost savings kind of offset by just growth in investments in the franchise and hiring and technology investments and all that?

Yes. So a couple of things. We hit the goals in terms of cost savings, but we still have a few things that will come out later in the year, primarily in the form of some comp-related expenses and some leases. Michael, is there anything else that could come out?

No, I think that's fair. I think we're seeing some improvement in real estate. It's improved the lease outlook.

Yes, that's a good point. We have some dormant branches, and our markets are -- the real estate market is such that the prospects for those were better than when we initially took them in, and so we're probably going to be able to get rid of some of those.

Okay. Great. And then my follow-up is just on the loan growth. It's great that you are forecasting to return to the mid to high single digit in the back half of the year. Can you just kind of talk about what your pipeline looks like and just kind of the health of of your market and then kind of the risk of accelerated paydowns that you may see that may kind of eat into that growth?

Yes. I think your question, actually, I could probably formulate into a pretty good answer. In my comments, I mean to note that we were a little concerned in February because we were down significantly in loan balances, and then we had a really strong March. So if you look at our averages, they would reflect that. And so as we continue to look forward, we've got good demand, and so we are seeing the pipeline actually look quite good. But we're also seeing paydowns because, obviously, it's been a pretty good time to refinance. Your -- it's been a good time to refinance. And actually, it's a good time, especially for some not for profits and others to pay off. And so we're seeing, where there are just some -- both individuals, companies and not for profits just eliminating their debt altogether. So good for them, by the way, not so good if you're the lender on a really solid credit. But -- so -- and we try to project that. I would tell you it's not easy. But we -- when we look at the pipeline today, it still feels pretty good as we try to roll the year forward for mid to high single digits when we take all those things into account. We are seeing -- but we are seeing it bounce around a lot. And I would say, actually, we saw really strong March. We've seen a weaker April. But if we look at the pipeline, again, it gets a little stronger in the latter part of the quarter. So if you -- and by the way, if you sit in Masi, that means you're a little nervous always when it comes in at later versus earlier in the year. But so far, our folks have been right on target with what they've been projecting.

Our next question comes from Stephen Scouten of Piper Sandler.

I wanted to just see if you could give some additional color on that Birmingham team, maybe what size of the bank kind of they're coming from, if there's any sort of specialty focus for that team or if they just kind of standard kind of core commercial bankers. And then what your maybe longer-term vision is for that market, and if it you think that would entail M&A or just other team looked out or kind of how you think about the growth there longer term.

Yes. Thanks, Stephen. I would -- a couple of things. I'd say folks are coming not from a single institution down there. We've had actually probably 2 or 3 different contributors, and that continues to be the case. They do have some experience, but it's a variety of types of banks of folks that we are able to -- have been able to acquire. Remember that we do have some folks in the market that are very experienced in the market. We have -- we're already in Huntsville in Florence, and so again, we've got contacts there. And so I'd say it's fairly normal in terms of just word spreading and us getting some opportunity on how we're taking folks up. So I'd say no -- we're not -- we're certainly not targeting any institution or anything like that. It just fortune shining on us there. And what was the second part of the question?

Great plan, what's the vision for.

Yes, I'm sorry. In terms of just total down there, yes. I mean, we would -- any market that we enter like that, we take a very long-term vision and approach to it. And so we enter that thinking about how can we be the leading bank in that market over a decade or so, and so we're thinking of all of the above. We would think about acquisitions, flat straight-up acquisitions of a bank. We think about a branch deal if the right kind of branch deal popped up. We think about -- we're trying to acquire leading bankers in the market. And so all of those would be a part of our strategy. And if you go back and look at how we've approached Chattanooga and how we approached Knoxville, that's the way we go into each market, is with a long-term intent to be one of the dominant banks in the market, and we'll utilize all those things to be able to achieve that over a longer period of time.

Great. That makes sense, Chris. And then maybe if you guys could talk to the NIM a little bit. I know liquidity makes it almost impossible to kind of forecast, but maybe if we thought about it ex the incremental liquidity and kind of thought about what you think you're seeing on new loan yields and incremental pressure on loan yields. They were, I think, relatively stable ex PPP this quarter. And then kind of, I guess, if you think you'll see incremental investments in the securities. I know you said kind of 12% to 13% of assets, but kind of how you think about that balance of keeping the liquidity versus investing it and taking duration risk?

Yes. Steve, that's a great point. I don't think if you talked to us at the beginning of the quarter, we'd expected that 35% annualized deposit growth. So that liquidity is win on us and others certainly. Yes, we are seeing loans pay off, right, at kind of higher yields. It's about 4.46% in the month of March. Coming in the high 3s, low 4% range, new production. So you do see a basis point or so every month, the lower loan yields, and that's what we were trying to get at on lowering our deposit costs, right? We look to offset that decrease in loan yields to stabilize NIM. We certainly have started to pick up our securities purchases. If opportunity arose as rates moved up late March, early April, you saw the continued 70 to 80 basis points and has settled back in a little bit. And so we got a lot more comfortable. Obviously, we'd like to deploy that excess liquidity and the loan growth Chris was just talking about. But as we said, 150 basis points on the investment portfolio feels a lot better than 12 basis points low cash. So we'll continue to make investments as prudent, but realizing we prefer to invest in that longer-term loan growth and relationships.

Yes. Steve, I'll just add this. When -- it really isn't unusual time when -- margin is one of our most key metrics, and it's hard to use that as a judgment of success right now because liquidity is so abundant. And anything that we tell our folks, basically, any dollar of funding we take in, if we're paying more than 12 basis points on it, that's a loss for us. And so -- and we -- by the way, we took in $800 million in the first quarter. And so the margin, if you just look -- and so I look at about 3 things. One, just about the yield on the loan portfolio, which is holding in reasonably well. We look at deposit costs, which will continue to decrease. And so there, I think we've got some optimism as we move forward. And then the other thing I look at is just the wrong net interest income number. It was down quarter-over-quarter, which is disappointing for me and disappointing for us. And so that's one that we'll be focused on just to try to get as much out of that liquidity as we can.

Got it. Got it. And then maybe just one last thing for me. I'm curious, we've seen some slight uptick back in the refi application numbers as the 10 years moved back down this mid-150 range. If you think there could be some improvement throughout the quarter. And just to confirm, you said those fair value marks might make the contribution for 2Q relatively neutral or close to 0. Did I hear that correctly?

Yes. You did hear that correctly. And yes, we -- I also threw a citizen there before, said, man, we're always giving guidance on mortgage is really a tough thing. And so -- but when you have the pipeline that we have, remember, our business would look a little -- our mortgage business is obviously robust, and we've had 5 quarters of 100 -- if we roll the last 5 quarters, we had about $120 million of contribution, which is fantastic from a capital account standpoint. But that also means our pipeline is large, and so we have a movement in that pipeline like we will have in the second quarter as we do less in our consumer direct business. Just that mark-to-market can be substantial. It was really -- if you remember, our margins related to mark-to-market were really large on the way up as we grew the pipeline as you end up shrinking the pipeline when volumes decrease. You've got the other side of that. So it's a short-term phenomenon. But yes, you're right. It could lead to just a second quarter. I guess, Michael, I'll call it an anomaly. I might get -- we've got a second quarter phenomenon when we shrink the pipeline that mark-to-market will be a negative for us.

Yes. And Stephen, I think your refinance question was a move down right. I think there could be some opportunity there, but keep in mind, the industry has spent the last year building capacity. And so now Chris has touched on margins decreasing. So even if that increase in refinance, you've got people fighting for less business, and we're still down substantially from a rate stance perspective over the last year -- as an industry over the last 6 weeks. So less than that.

We hope you're right. We hope you're right, but the realism in it says let's don't count it.

Yes. No, that's fair. But it helped you grow what tangible booked 23% year-over-year. So I think you'll take it. Congrats.

Yes. You're right. You're exactly right. We'll take it.

And our next question comes from Jennifer Demba of Truist Securities.

Can you just talk about interest in other hires and other markets in the southeast that you may be targeting in? And we're seeing, obviously, a lot of acquisitions being announced in the last several weeks. Can you talk about the interest as it stands right now?

Sure. Other hires, very interested in seasoned relationship managers in other markets. And so that's something that will be our recruiting efforts. I would say 2020 was a tough year in a lot of ways. But remember, we were also -- we grew from 6.1 million to today, 12 million. And so we were focused on a lot of conversion, a lot of things with our business model, a lot of risk management as we have grown the company. And so we probably haven't done as much of that, and so that is a focus for us this year to continue to be able to add folks. And so you'll see us -- you'll see that throughout the year as we add some relationship managers in every -- in each of our markets and in different -- all shapes and sizes, I guess, is the way I'd put it, including mortgage bankers as well as commercial bankers. And then on the M&A front, we're always interested is the way I would put it. But we also -- going back to just -- what I just mentioned, we have been really focused internally on the business model, on the customer experience, on making sure that we have -- that we're beating our competitors every day on the street. And when we talk about being a good operator, that's what we really mean. And so again, with as much as we've grown, that's really our focus. And so we get some calls. But frankly, on most of them, we're saying we've got other things on our mind, and we think that's where we're going to get the biggest dividend in the immediate future. And so we never say never, but that's really not what we -- that's really not where our pursuit from a strategic standpoint is today.

[Operator Instructions] Our next question is going to come from Matt Olney at Stephens Inc.

I wanted to ask about the impact of higher interest rates potentially next few years on the company. Saw the disclosures in the 10-K from December, I don't know if there's a new disclosure I missed last night, but I guess the shock analysis suggests that the bank is one of the more asset-sensitive banks in the peer group. Would love to hear kind of what the drivers are and your expectations of higher rates, impact of loan floors and excess liquidity.

Matt, so yes, we feel pretty good about a rising rate scenario, especially on the short end of the curve. We're about 50% variable in our loan portfolio, and so we will see a nice pickup in NIM interest income as rates rise, and so that disclosure that you're referencing is indicative of some of our optimism. And Chris mentioned NIM being a key metric for us. We obviously -- because we're asset-sensitive, we obviously performed pretty well in that environment. So if we can get some inflation, we can get short-term rates to rise, we think we're well positioned with the way the balance sheet is structured. And obviously, it puts a little bit of pressure on some other bits and pieces by mortgage, but it's more than offset in the balance sheet.

And just as a follow-up, what about loan floors behind that? Would it take a few short-term rate increases before you actually see a benefit because of those loan floors?

Yes. We would see it would take -- it's with increasing -- we get some increasing benefit with each increment, but we get a small benefit from the earlier stages of the increases. I have to look exactly at the chart, but we get some benefit from the incremental rate increases. Okay. And I would just -- I would say this, thanks on the question and good to talk to you. So I would say this, and so we are seeing a benefit from that mortgage. And then I talked about how it's been $120 million over the last 5 quarters. And so as rates go down, the way we try to build it is we get that benefit, because our margin is getting squeezed. But as rates, we think we're positioned well on the NIM and on our core banking business as March forward rates go up. You will see, just like we talked about for the for Q2, you'll see some challenge in -- especially in that consumer direct piece of the mortgage market because it's so rate sensitive. But that's part of the plan, and we think when we grow them both together, it makes for a really good shareholder value kind of proposition.

[Operator Instructions] Next question is coming to come from Alex Lau of JPMorgan.

Can you talk about the growth in public fund deposits in terms of size? And also what you expect in terms of seasonal impact as these runoffs?

Yes. And so on the growth in fund deposits, we have -- we think just about the vast majority of our public funds would be sort of centralized operating type of accounts, and those accounts fund up in the first quarter every year. And so we're accustomed to seeing money come in, in the first quarter and a bigger increase in those balances. And so if we looked at the increase in the first quarter, a majority of that would be driven by public funds accounts that are -- existing accounts that are simply funding up in the quarter. So it'd actually be a fairly significant majority. That will come down in the second quarter and probably throughout the quarter and maybe even a little bit into the third, and that -- so that's a routine occurrence for us.

Well, I'll just layer on. I mean there's a lot of money in the system that's flown these governments that says we're supporting our communities in municipalities, and so that creates a little bit of volatility in that number increase because how much money is flown to governments across our major municipalities there.

Does that answer your question, Alex?

That does. And on your allowance for credit loss ratio, with the combination with Franklin, do you have an ACL ratio for day 1 CECL? So I'm just trying to get a sense of what a normal ratio would be as you release more reserves.

Yes, Alex, the day 1 CECL is not a partner because of what you just mentioned, right? We look a bit different from a balance sheet perspective after the merger. So we don't necessarily have a target that we're looking to return to. We're going through the process on a monthly, quarterly basis. Looking at, obviously, loan growth, new loan balance sheet changes and adjusting accordingly with the model and then based on what the outlook looks like for the economy. So I know that's not a direct number, but that's kind of how we think about it.

Yes. I would just add that, as you can see, obviously, we're maybe at the top of our peer group, probably. If we're not at the very top, we're certainly in the top decile. And we understand that, and that's why we make -- but we also have been -- approached it in both a prudent way. It's a new seasonal so this first year of adoption. So we feel like we've approached it prudently. We try to approach most things conservatively because we're a bank, and so we think we approach that conservatively well. And you've heard us say pretty openly, if things continue to improve, we would likely see releases at least in the near term on some of that. And so that's -- how much that is or what that would look like, we take it quarter-by-quarter as opposed to having any -- we don't have any certain target that we're aiming for because in our understanding of CECL, that's -- I don't think that's what CECL calls for.

Appreciate that. And lastly, with your focus inward on customer experience to compete with other banks and fintechs, does this require any additional investments in terms of technology that would be noticeable?

Yes. Technology in our world, in our way of thinking is -- I mean it's a constant investment. I mean you -- we're making some investment in technology every quarter. And so it's -- for us, it's trying to plan it, it's trying to be routine about it. We have done a couple of things on the technology front that we feel gives us -- keeps us on the front line in terms of what's emerging and what's happening and it keeps us sharp in thinking about that customer experience. We were an early investor back -- a few years back in a local fintech fund called Fintac that's managed by a friend of ours. And when I said we are a local investor, we were an investor, that is actually misstated. And I guess I'd say a very large shareholder of ours was a personal investor. But because of that, we were able to get a lot of insight into their investments, what they're looking at. And so that's -- and so we have since made an investment in a fund -- small investment in a fund that is a fintech focus. And so again, we'll sit on an Advisory Board there. And with Jack Henry, our core processor, we're on their highest level Advisory Board, again, where we're constantly evaluating and monitoring on the technology front. So that -- so wrapping all that into, what we're doing is wrapping that into the customer experience, focus and project that we have going on so that we're in a position to continue to make sure that we are leading our competitors when it comes to that customer experience.

This concludes the question-and-answer session. At this time. I would like to turn it back to Chris Holmes for any closing remarks.

Okay. Thanks, everybody. That wraps up Q1. We're almost further way through Q2 at this point, so we will look forward to being back on with you at the end of next quarter and this quarter now, if not before. Thanks. Everybody, have a great day.

This concludes the conference. You are now free to disconnect at this time. Thank you. Have a great day.