FB Financial Corp (FBK) 2018 Q1 法說會逐字稿

Good morning, and welcome to the FB Financial Corporation's First Quarter 2018 Earnings Conference Call. Hosting the call today from FB Financial is Chris Holmes, President and Chief Executive Officer. He is joined by James Gordon, Chief Financial 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. Today's call is being recorded and will be available for replay on FB Financial's website for the next 90 days. (Operator Instructions)

During this presentation, FB Financial will make comments which will constitute forward-looking statements. 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 material from any results expressed or implied by such forward-looking statements. Many of such factors are beyond FB Financial's ability to control or predict 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 10-K filed with the SEC. 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 the SEC Regulation G. A presentation of the most direct-comparable GAAP financial measures and reconciliation of the non-GAAP measures to comparable GAAP measures is available on FB Financial's website at www.firstbankonline.com.

I would now like to turn the presentation over to Chris Holmes, FB Financial's President and CEO. Please go ahead, sir.

Thank you, Tiffany. Good morning, and thank you for joining us on the call to review our results for the first quarter of 2018. We appreciate your interest in FB Financial. On today's call, I'm going to review the highlights of the first quarter, and then I'll turn the call over to James Gordon, our Chief Financial Officer, who's going to provide us detailed comments on our financial results followed by your questions.

We're pleased with our results this quarter, and I want to thank each of our FirstBank associates for their continued diligent, dedicated delivery of exceptional customer service, which results in our outstanding financial performance.

We're satisfied with our adjusted diluted EPS of $0.66 for the quarter. Our first quarter performance reflects the continued execution of our strategic plan. We grew loans 10%, grew customer deposits by 12%. Our reported NIM was 4.64%. Our adjusted return on average assets was 1.79% and our adjusted return on tangible common equity was 18.7%.

When we stack those numbers up against our goals and our peers, we are exceptionally proud of our team. They continued to deliver on 2 important components of our strategy that sounds simple but are difficult to execute: One, balance between growth and profitability; and two, growing through direct customer business on our balance sheet versus wholesale in non-relationship type business.

We're particularly proud of our 12% customer deposit growth, given the competitive deposit environment across our markets. Importantly though, we didn't sacrifice margin to achieve our growth. Our NIM, adjusted for accretion and non-accrual recoveries, was 4.45%, slightly above our 4.20% to 4.40% target range, and a 10- basis point improvement over the 4.35% for the fourth quarter.

I also can't reiterate enough how critical our still-improving operating leverage is to our overall profitability. Our strong performance was enabled by a Banking segment core efficiency ratio of 55.2%, which has decreased by 921- basis points since the first quarter of 2017. We remain committed to improving our overall efficiencies as we grow.

Our Mortgage Banking team had a good quarter in the face of challenging market conditions, producing $2.1 billion in interest rate locked commitments, which was up 33.2% over the first quarter of 2017. The increased volume led to mortgage revenues of 26.5% (sic) [$26.5 million], a 5.5% increase over the first quarter of 2017.

While we showed growth across most of our channels, our correspondent line, which is our channel with the lowest margin, was the primary driver behind the increased volume. This volume expansion of correspondent drove the delta between our growth rates in volume of interest rate locked commitments of 33.2% and growth in mortgage revenues of 5.5%. While difficult to forecast the balance of the year, we continue to believe that our mortgage pretax contribution will be similar to 2018, relative to our full year results in 2017.

Our underlying asset quality continued to demonstrate strength with net recoveries of 1- basis point for the quarter. Cutting through the noise of those rebooked Ginnie Mae loans, nonperforming assets were 59- basis points of total assets, and our nonperforming loan to HFI ratio slightly improved from fourth quarter to the first quarter, from 32- basis points to 30- basis points.

Our capital generation, driven by our core profitability, enhanced by the recent federal tax reform, continues to support our balance sheet growth as we reported tangible common equity to tangible assets of 10.1% and total risk-based capital of 12.3% for the quarter.

We're also excited to announce that our Board of Directors has approved the payment of an initial quarterly dividend of $0.06 per share to common shareholders as record -- of record as of April 30, 2018. This return of shareholder capital is further evidence of the company's momentum, which continues to be driven by the balance of growth, profitability and strong capital generation.

Overall, this was a solid quarter for us as we continue to produce peer-leading net interest margins, solid earnings, targeted deposit and loan growth as well as demonstrating positive operating leverage. We remain focused on the execution of our strategy and believe the foundation remains in place for continued solid growth in profitability in the coming periods.

With that overview, I'm going to turn the call over to James to review our financial results in some more detail.

Thanks, Chris, and good morning, everyone. First, I want to recap our operating results for the quarter as highlighted on Slide 3. Our adjusted diluted earnings per share were $0.66 on adjusted net income of $20.6 million, delivering an outstanding adjusted return on assets of 1.79% and an adjusted return on tangible common equity of 18.7%. Our year-over-year performance was driven by solid organic growth, the Clayton Bank's acquisition and the benefits from the recently enacted tax reform, allowing net income to more than double year-over-year.

Slide 4 illustrates the underlying fundamental trends of the company's profitability and demonstrates the consistent performance that we are targeting. Our adjusted return on assets has risen to 1.79% for the first quarter as we continue to achieve strong and consistent growth and profitability. This profitability improvement has been driven by balanced loan growth, a strong margins supported by our low-cost customer deposit base, stable net interest income, expense control and fundamentally sound credit quality.

Slide 5 presents the fundamental elements of our stable net interest margin, in particular, our healthy loan yield, fees and low-cost core deposit portfolio. Our NIM is the reflection of the collective efforts of our team to build relationships and deliver exceptional service and value to our customers, for whom we strive to serve as trusted advisers.

Going forward, we anticipate our deposit cost to continue to tick up due to the current competitive environment and cumulative rising short-term interest rate environment. And we expect some continued improvement in loan yields. But we remain confident that our balance sheet is well positioned for rising rates overall and that our base net interest margin will remain in our 4.2% to 4.4% guidance range.

We will continue to maintain a balance between our net interest margin and balance sheet growth. Although, our current performance affords us the opportunity to adjust these targets to meet our growth targets in overall profitability.

Moving on to the next slide on Slide 6. And as Chris previously mentioned, we had solid loan growth this quarter, in line with our long-term 10% to 12% target range. As we've consistently highlighted, we tend to apply longer-term perspective to our growth, thus, we don't get too excited about a 15% loan growth quarter and aren't typically concerned by a 6% or so loan growth quarter. While this quarter is within the range, we can envision future quarters being outside the range, driven by market forces, such as competition, pricing and relative credit risk. Our objective is consistent, profitable and relationship-driven growth, not merely focusing on hitting a quarterly target.

Noting our concentration level, from the top right corner we continued to be tight relative to regulatory guidance on our construction and development ratio this quarter. We remain committed to staying in line with the regulatory guidance of 100% on construction and development loans and 300% on commercial real estate loans over the longer return.

Now moving to Slide 7. Our customer deposits were $3.7 billion, up 36.5% from the first quarter of last year and up 12% on an annualized basis from the fourth quarter of 2017. We benefited this period from some larger customer deposit inflows. These larger accounts, along with the previously disclosed temporary deposits related to our merger, may cause some variability in deposit balances and growth rates going forward.

All in, we saw a 5- basis point increase in cost of total deposits this quarter, equating to a beta of roughly 20% relative to 25- basis point increase in the federal funds target rate during the quarter. Although our costs year-over-year are up 23- basis points, about half is due to the rates and half due to the Clayton Bank's acquisition. As we continue to focus on growing customer deposits in this competitive environment, we see potential for our beta to tick up slightly, but remain confident that our steady low-cost funding base will remain a key strength. We have introduced new products to grow core deposits as well as offer time deposit specials to lengthen overall fixed funding going forward.

And as Chris noted in his opening comments, we had a good quarter, as shown on Slide 8, from our Mortgage Banking operations in spite of heightened market competition. Our mortgage banking income was $26.5 million in the first quarter of 2018, which is up 5.5% on year-over-year basis. As the build out of the correspondent channel has matured, we have experienced an anticipated shift in production with mix as well as an overall margin compression. Although it is important to note the total mortgage pretax contribution, including the retail mortgage footprint, represents approximately 8% of our first quarter pretax results.

As a reminder, we had expected revenue to decline during first quarter 2018 relative to the fourth quarter of 2017. Going forward, we expect volumes and revenue to build in the second and third quarter of 2018 due to seasonality.

As previously disclosed, this is the first quarter which we are not excluding the change in fair value of our mortgage servicing asset from adjusted earnings as we have the asset fully paid. We believe that this will create less volatility in the asset and income statement going forward. However, we did record a negative impact of $1.7 million from the net fair value adjustment of the mortgage servicing rights due to projected and actual prepayments during the quarter.

On Slide 9, our operating leverage this quarter remained in line with the prior quarter, leaning slightly closer to our near-term goal of 55% for the Banking segment. The slight quarter-over-quarter improvement from 55.6% to 55.2% in our Banking segment efficiency ratio comes in spite of higher incentives and related benefit, a typical seasonal impact during the first quarter each year.

Our Mortgage segment's efficiency ratio was flat quarter-over-quarter, primarily due to higher volume in the corresponding channel and continued margin pressure. We expect efficiency ratio to improve as we move into the second and third quarters of 2018 and see volume at other channels pick back up.

Our effective tax rate of 21.7% for the first quarter was lower based on additional deductions related to our equity benefit plan distribution totaling $3.5 million or roughly $900,000 in tax benefit. As previously disclosed, we believe our full year 2018 effective tax rate will be in the lower end of our previous guidance of 24.5% to 25.5%.

Next, as shown on Slide 10, our asset quality remains sound and provides a strong foundation for our company. Nonperforming assets to total assets decreased for the quarter, and nearly the entirety of this decrease is related to the optics of no longer recording the rebooked Ginnie Mae loans, as previously discussed. Our true underlying asset quality in terms of classified loans remains unchanged and in great shape as evidenced by our nonperforming loans ratio of 30- basis points, which is down 2- basis points from last quarter.

Next, on Slide 11, our capital level remained strong, enabling future growth both organically and through strategic acquisition. Our capital structure remains relatively simple, giving us the flexibility, if needed, to potentially add non-common equity sources as needed.

Since the first quarter following our IPO, our tangible book value per share has increased by $3.43 or almost 30% to $14.99 to end the quarter, driven by our strong financial results.

We will also continue to closely follow the ongoing discussions regarding revisions to Basel III's capital treatment of mortgage servicing rights and how that might affect our management of our mortgage servicing assets and total risk-based capital.

As Chris detailed earlier, we are pleased to be able to return a portion of our shareholder's equity in the form of an initial quarterly dividend of $0.06 per share, which represents a payout ratio of approximately 10% for this quarter.

With that overview, I want to turn the call back over to Chris for his closing comments. And then we'll open the call to your questions.

Thank you, James. We had an outstanding first quarter, continuing to deliver balanced growth and profitability. Our strong performance was diversified across our business and our markets, highlighting the strength of our franchise in Tennessee, Georgia and Alabama. We appreciate your interest and investment in FB Financial and look forward to updating you next quarter on our expectations of continued growth.

Operator, that completes my remarks for this morning's call, and we'd now like to open up the call for questions.

(Operator Instructions) We'll take our first question from Catherine Mealor with KBW.

James, you mentioned that your NIM outlook remains in the 4.20% to 4.40% range, but you've been above 4.60% for the past 3 quarters. Can you just talk a little bit about that path downward. Is it from mostly lower accretable yield or kind of deposit betas? Or what really brings your margin back down to that targeted range?

Yes, so the targeted range excludes the accretion, so it's not due to that. It's really due to the cautious outlook on deposit betas and really more -- I wouldn't say the -- if Fed funds goes up to 25, the exact beta for that quarter, it's really more of a cumulative as we're beginning to see -- like, the 5- basis points this quarter, while if you just take it straight as a 20 beta, you really got to look over time. And I think we've held that fairly well in check, roughly 11- or 12- basis points up as rates have come up, and then another 11 or 12 from blending in the Clayton Bank. So our cautiousness on that is really due to where deposit pricing due to competition and at least the initial thoughts from the Federal Reserve of raising rates 2, 3, 4 times over the nearer-term that really causes that outlook. And then with the longer-term rates not really coming through and we may not get that full benefit on the asset side of the balance sheet. So it's really a cautious outlook on interest rates and betas associated with both, really, loans and deposits.

Catherine, Chris. And just to tell you that don't think we're way out of line here. So that -- as James said, the 4.20% to 4.40% is ex non-core interest ex accretion. And so last quarter, we were at 4.35%, so we were in the range. And this quarter, we're at 4.45%, so we're just above the range. And so we're pretty close to the high end of the range when you look at just the core NIM.

Got it. Thanks for that clarification, I forgot that, that was ex accretion. And then on the loan yields, too, I mean, to your point, loan yields increased 8 bps this quarter, but are you -- can you just give some commentary on how you're thinking about your asset beta and what you're seeing in terms of competition in terms of loan yields right now? We keep hearing that although rates are moving higher, it's getting more and more competitive on the loan side. Any color there?

Yes. A little color just on the competitiveness on the loan side. I think we see the same thing. We have -- or similar thing to what you mentioned. We're not seeing a lot of movement up on the loan side. Maybe, I guess, we're hopeful. And so maybe we're optimistic when you put it that way. We don't have any tangible -- much tangible evidence to say it's moving up. It stayed quite competitive, both on the rate and the duration. That said, we're still -- we're -- frankly, we're not -- we kept our terms at how far out we're willing to go on term, but we still see some longer-term fixed-rate deals in the marketplace that are somewhat surprising to us on the competitive front. And so I don't think we've got any real differentiation from what you said you've been hearing.

And I would also add, Catherine, we're still at roughly 50-50 fixed/variable. And we are seeing some tightening or lowering of credit spread, even on the variable side. So our existing portfolio, I mean, it was probably where the majority of that 8- basis points came through on the contractual yields quarter-over-quarter. And so we have -- that will continue to be difficult as well until those pressures abate, hopefully. So...

And then my last question, kind of on the same topic. Your -- James, you mentioned that your construction portfolio is nearing 100% of capital. Does managing to that level impact your growth outlook? Or do feel like you've got enough momentum in other categories to still maintain this growth rate?

Yes, Catherine, we haven't let it affect our growth outlook. We do have to manage it. It made a little more than we have, but we've asked our teams to be aware of it, to try and make sure we're focusing on growing nonconstruction-related. But our capital generation rate, since we're adding capital relatively fast, and so -- and it -- but it also, if we look at anything in an M&A market, that's a consideration, because there's a lot of things that are out there in the M&A market that have a lot of construction in them. And so I'd say those are really the 2 alterations we've had to -- or consideration to things that we've had to make.

And also this quarter, and I mentioned in my comments, are focused around what happens to the disallowance from a total risk-based capital on the MSRs in particular, which also impacts that ratio. We lost roughly $15 million or $16 million in risk-based capital, or it was reduced in volume, total dollar volume, by keeping the mortgage servicing rights because we're hopeful that, that relief will come. But until that happens, that will put a little tighter pressure. And that's reason, I think longer-term, we'll -- we could have a quarter where we tick above the 100%, but our long term would be to stay around or below that 100%. And that could be helped by the -- any MSR relief in the capital calculations going forward.

Thank you, Catherine. Just one other. On that 100%, we don't want to, just for our own risk management, internal risk management parameters, but also for regulatory relations, we may tick over it. We've talked with the regulators about that. But on a long term, we won't stay up in that range just because we don't think that's prudent from either of those perspectives.

We'll go next to Tyler Stafford with Stephens Inc.

Maybe to start on the comment you just closed with around the MSR. What's the size of the servicing portfolio at the end of the quarter?

A little over $9 billion.

So that was up $300 million -- by $3 billion from year end? I've got it was at $6.5 billion at the end of the year.

Yes. I'm sorry, it's a little over $8 billion, and the asset is $93 million. So I misspoke in that, I'm sorry. Yes, it up, primarily due to production as well as the asset was written up during the quarter because the fair value increased, offset by the hedges. So...

Can you just, James, talk about the -- your comfort level there over the long term with the size of that servicing portfolio? How large you'd like that to become? And are there any plans to sell some of that this year?

Yes, we are looking at -- on the sales, and that also plays into my previous comments on why, if any, regulatory relief we ultimately get, there's certain segments of that portfolio in our retail and end-market production levels that we do want to keep from a customer relationship focus, both direct and kind of indirect, if you will, be some of our third-party providers as well. So we are looking to probably hold or shrink that, and also playing into that will be the -- any capital relief we get with that. So we are looking to potentially opportunistically sell portions of that portfolio as we move forward.

Got it, okay. Maybe -- yes.

Hey, Tyler. It's not an infrequent topic of conversation, where we debate internally the merits of the asset. We even have conversation at the board. But generally, our approach is it's not something that we're looking to grow -- as a -- because we love that profitable asset, it's something that goes along with a part of our business. We do like having it in the footprint. But it's not something where we're looking to really blow up that asset. Even if we'd gotten regulatory relief, that wouldn't be the case.

Okay. Maybe going back to Catherine's question about the margin. Is it fair to think that at least in the near term, you would operate maybe a little bit above that long-term range until, really, the deposit betas accelerate to maybe near 100% or much higher from here? I mean, I read your deposit pricing commentary to be not as harsh as I would have thought it would be from the Nashville market. So I'm just curious, given where you're positioned now, slightly above that, that will, of course, increase, but it is fair to think that you could operate maybe a little bit above that long-term range in the near term? Or is there something there that I'm missing?

No, I think we can operate, certainly, on that higher end in the near term. If you look at our deposit betas and you look the way we've constructed both the [local and the] deposit portfolio, it's meant to try to take as much of that out as possible and as much of the volatility out with the rate changes. So if you look at our deposit betas, we're staying pretty competitive. We're having to stay pretty competitive, I'd say it's particularly with larger, wealth-management-type balances. And I'd say those, and maybe a little bit on some of the larger commercial, where we're having to stay fairly competitive. We've got pretty nice retail flow, which is -- which the betas are probably actually a little bit on the lower side of the -- our beta was about 20% for the quarter. And so on that retail, it was actually a little lower. And so -- and we've got a pretty good retail book. So we're -- so to answer your question, we are optimistic that we can stay on that higher end, but as rates move up, we're also -- we've got a balance sheet -- we're also committed to maintaining our balance sheet, which has customer balances on it. And growing both sides of the balance sheet, both the funding side and the loan side. And while we're growing that funding side, there's 2 or 3 dynamics in there that are important. One, we do have a few larger deposited depositors that creates some bulky deposits for us, and so we can have some relatively large movements in that. And the other dynamic is we will continue to move out of wholesale funding. And so we'll continue to have broker deposits leave our balance sheet as they mature. And so -- but in general, we're seeing growth with reasonable deposit pricing. So when you throw all that in the mix, we're seeing pretty good growth at reasonable deposit pricing.

Yes, I think we can operate, I think, the -- we do have some nearer-term opportunities as well on the brokerage side that, and I think the rate on that was about [1 60] or so for last quarter. Still got about $80-odd million there that, hopefully, we can reprice down as well. So there are some near-term opportunities that could keep it there. Some of that will also play into where the assets yields ultimately go relative to the competition. So there's a lot of moving parts to it. We could stay in the higher end of that in the near term, but we'd expect that to come down over time, depending upon the competition and market forces.

Maybe just one on the loan growth side of things. So the consumer loan portfolio has been somewhat of a headwind the last few quarters since Clayton closed. What's running off in that consumer portfolio? And how much more is there to go from the kind of the remixing of that? Where it will then be less of a headwind to growth?

Yes, our consumer portfolio's probably typical of a community bank. It's got -- in that, it's got -- home equity is in that, and then -- and we probably have a little higher concentration, I'd say, of true installment-type consumer loans that you -- most banks aren't built -- that are like us -- aren't doing a lot of that business any more. I've referenced our retail deposit business. We get retail loan business out of those same markets. Those generally aren't high-growth markets for us, and so our growth is coming from other places. And we're -- and you do less and less of that business, and so it's not something that we've built in growth into our projections as we move forward. We hadn't built in a lot of growth. We try to, at least in the near term, hold it flat. That doesn't mean that we'll always be happy with that, but at least in the near term, it's going to be relatively flat.

The other thing that impacts that is the mix on the manufactured housing retail portfolio. Those lines can either fall into mortgage or consumer, depending on whether there's land in a mortgage associated with it. So that mix, it is growing and has grown since we closed the acquisition, but the mix has been changing a little bit more to the mortgage side of that versus the true consumer side of that component. So not really a headwind, just a change in mix. And we do expect that to continue. And where we like the mortgage side of the manufactured housing, on the retail, slightly better than the consumer both on -- that's kind of depending on the customer flow on that.

Okay, very good. And just last one for me just housekeeping. The other expense line item was up $800,000 or so quarter-over-quarter. Is there anything more onetime in that?

I would say there would be. We would expect, all things being equal, only also talking about the incentives that we mentioned being up in the first quarter, that's seasonal, that we would be down on the bank side on noninterest -- total noninterest expenses, between $1 million and $1.5 million for kind of those -- I wouldn't call them onetime, but I would just call them kind of seasonal, and other things that happened in the quarter. So we believe the run rate will continue to improve on expenses from the first quarter. It just some, I'll call them more anomalies, and there's nothing systemic that would make our costs go -- cost base to be adjusted upward.

We'll go next to Peter Ruiz with Sandler O'Neill.

Most of my questions have been answered, but I guess just maybe if you could give a little bit of color around the mortgage, and just in terms of the pricing. Obviously, pricing was down and you held in volume pretty well. But do you think this is kind of a floor for the pricing? Or what are the kind of the dynamics going forward?

Peter, I'm going to let -- Wib is here, who manages our Mortgage segment. And so Wib, I'm going to let you comment on that pricing.

Yes, Peter. What we're seeing is, across the industry and in our footprints as well, is just continued competitive pressure on both margins and volumes. And so I would expect that you will continue to see that pressure. Obviously, we have some -- we have minimal floors for ourselves. And so we'll -- as we even get closer to those, we'll have to be very cautious about how we price. But I think you're going to continue to see some pressure across as the overall industry is down, and we're seeing everybody compete for that volume.

And we did have one -- listen, I'll just comment as well. We did one of our lines, that was at a little bit thicker margins in the fourth quarter. That was kind of an unusual event that added $1 million or so that we previously mentioned in the fourth quarter, that suddenly -- it didn't just totally drop. It was probably a little bit elevated in the fourth quarter from kind of the reality on the overall business lines.

And Peter, one further comment on that, too. One of the things that you'll see changing in our -- across our group or across our channels is the changing mix that we have, being a little bit more heavily weighted towards the correspondent area, which has a lower margin attached to it.

Sure, okay, that's great. And maybe just in terms of accretion. Any kind of outlook there? Do you think it kind of holds near the current range at least for the next couple of quarters? Any color there would be great.

It should be in that relative level. It will begin to tail off -- you get a lot kind of it out of the gate. So that will begin to tail off. And the other reason that it would also tail off is, remember, we still have a fair amount left from the Northwest Georgia acquisition from 2 years ago, which is kind of beginning to tail off. Unless there's a prepayment of one of those with a large mark or something like, abnormal. But just the, I'll call it, routine calculated accretion will slowly begin to trend down, but not significantly.

And maybe just one last one. Sorry to kind of rehash the NIM here. But I just feel like maybe your commentary on the asset side was that you kind of see a little bit less of upside on the asset repricing side. Do you think you see -- so I mean, the contractual yield was up 9- basis points quarter-over-quarter. Does that -- is that less of a magnitude going forward? Or what does it look like with additional rate hikes?

We'll continue to see on the variable side, as rates move up -- about 50% of our portfolio, roughly, is variable, so we'll see that move up as rates move up. On the fixed side, we haven't seen that move significantly at this point. We're -- again, we're hopeful, but we haven't seen -- we hadn't seen it more, and we thought we'd see it move more than we have. And so right now, we're just hopeful.

We would say the loan pressures maybe as equal to or greater in some cases than the deposit competition in pricing.

We'll go next to the Daniel Cardenas with Raymond James.

Just a quick question on looking at your markets, the sequential quarter decline in the community banking loan balances. Is that pretty much planned? Or were there some kind of surprise pay downs or payoffs this quarter?

Yes, so we never planned to go down. So we always want the numbers to go up. But some of those places are in markets that aren't growing. And occasionally, we will get a paydown in the small -- in those particular markets, what would be perhaps on an overall basis, a larger -- a smaller, not a larger. Wouldn't be as significant of a paydown, maybe a little more in some of those markets. And so it's a trend that we have built in, but we do continue to make loans in those markets. They're generally good-margin loans, and it's one that -- we could see that trend continue, but it's one that we also one that we're working on.

And then maybe just a quick update on the M&A side. I mean, it's nice to see that you're putting some of that excess capital to use through -- via dividend. I would imagine, given valuation levels, buybacks are probably a low priority. Maybe some color on M&A, what that looks like right now, and we'll go from there.

Sure, Daniel. On the M&A front -- so we're interested and active on the M&A front. We continue to take a look at some things. And when we look, we kind of go through a series of priorities. For us first, geographies; and second, culture; and then we look at profitability and liquidity are kind of the way that we go down the scale. And geography and culture are, I think, self-explanatory and are obvious necessities for us. But we've expanded our geography some, and so it goes down into parts of Alabama. Matter of fact, at least half of Alabama, half of Georgia and over into the Carolinas, even over into the Western Virginia and a few other markets. When you get down to profitability, that used to be a little higher hurdle because, given where our performance, given where we trade, we're typically competing against less-profitable competitors that will get higher EPS accretion, and they're also willing to take significant capital dilution. And then frankly, less discriminating investors will allow them to take that, sometimes, even reward them to take that. And so it's a tough market out there when you're competing against those types of institutions. And then we look closely at liquidity, and we don't pay a premium for wholesale assets and liabilities. And a lot of these banks put wholesale assets and liabilities on their balance sheet. And frankly, we can generally get them at better terms than they can. So not only do we not pay a premium for those, they're frankly not that valuable. So we're looking for banks like us that have a balance sheet that is made up of customer loans and deposits. So the discipline can be a little frustrating when you're competing against mediocrity and when you're competing against institutions that can only show growth by making acquisitions. But all that being said, we're going to keep looking. We hope to find high quality -- those high quality partners out there. We try not to take material capital dilution as we're looking at these things. And if we did come -- we do have some institutions that would be really strategic to us because we don't think that we could replace them if they were gone, and so we keep an eye on those. And in that cases, we would take some capital to do -- some capital dilution at something that's really strategic to us. But -- so we are very active. Bankers are bringing us opportunities. We just -- we're discriminating, and we hope investors are equally as discriminating as they're trying to figure out where to put their capital. And folks, it can be a little bit difficult with folks with a lot of optionality like us because we can continue to grow our balance sheet at a pretty good rate, and some are desperate and can only grow through acquisitions, so they will do some desperate things.

(Operator Instructions) We'll take a follow-up question from Tyler Stafford with Stephens Inc.

Just one more for me, guys. Just around the dividend. If there was a payout ratio that you guys would like to grow into over time that you're targeting.

We haven't -- we haven't set a payout ratio. We looked at the 10%, and as we kind of thought about -- and [balance sheet] was also thought about, they looked at what others are doing, and that's really a distant second. We think 10% makes sense for us to start. If you look at our trends and you look at our history, we typically have started slower or lower and tried to build ourselves room to always continue to improve, and that's the way we view the dividend as well. And so it's something that, if we got to map out a future, which never goes according to plan, we plan on, of course, moving it up over time. But we haven't set any specific targeted payout ratio.

The other thing, Tyler, on that. We want to use our capital wisely, whether it's organic growth, acquisitions or returning it to shareholders, because we still want to keep our return on tangible common at 15% and greater. And so it's a bit of a balance, like most things, of that, depending on the mixture of the growth and acquisitions as well as our profitability and targeted returns.

With no further questions, I would like to turn the call back over to Mr. Chris Holmes for any additional or closing remarks.

Okay. Thanks, Tiffany. Thank you all for joining us on the call. And as always, we appreciate your interest in the company, we appreciate your support as investors. And we -- again, we think we had a good quarter. And we look forward to the next one. Thank you very much.

This will conclude today's call. Thank you for your participation. You may now disconnect.