FB Financial Corp
NYSE:FBK
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FB Financial Corp
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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 Financials’ earnings release, supplement and 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 Financials’ website for the next 90 days. At this time, all participants have been placed in a listen-only mode. The call will be open for questions after the presentation.
During this presentation FB Financial will make comments which constitute forward-looking statements. All forward-looking statements are subject to risk and uncertainties and other facts that may cause actual results and performance or achievement of the FB Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond FB Financials’ ability to control or predict and listeners are cautioned not to put undue reliance on such forward-looking statements.
A more detailed discussion of these and other risks is contained in the FB Financials’ 10-K filed by the SEC. FB Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation whether as a result of the new information, future events or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by the SEC regulations G. A presentation of the most directly comparable GAAP financial measures and reconciliation of the non-GAAP measures to comparable GAAP measures is available on FB Financials’ website at www.firstbankonline.com.
I would now like to turn the presentation over to Chris Holmes FBs Financials’ President and CEO. Please go ahead, sir.
Thank you, Stephanie. 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 James Gordon, our Chief Financial Officer, who is going to provide additional 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%. We expect those numbers up against our goals and our peers, we are exceptionally proud of our team.
They continue to deliver on two 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 and 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 more than to achieve our growth. Our NIM adjusted for accretion and non-accrual recoveries was 4.45%, slightly above our 420 to 440 target range and a 10-basis point improvement over the 4.35% for the fourth quarter.
I also reiterate enough how critical and are still improving operating leverage is to our overall profitability. Our strong performance was enabled by banking segment core efficiency ratio at 55.2%, which is decreased by 921 basis points since the first quarter of 2017. We remain committed to improving our overall efficiency 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 lock commitments, which was up 33.2% over the first quarter of 2017. The increased volume led to mortgage revenues of 26.5% or 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 lock commitments of 33.2% and growth in mortgage revenues of 5.5%.
While difficult to forecast 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 continues to demonstrate with net recoveries of 1 basis points for the quarter, cutting through the noise of the rebooked Ginnie Mae loans, non-performing assets were 59 basis points of total assets and our non-performing loan HFI ratio slightly improved from the 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 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 our Board of Directors has approved the payment of the initial quarterly dividend of $0.06 per share to common shareholders as of record - record as of April 30, 2018. This return of shareholder capital further evidence to the company's momentum which continues to be driven by the balance of growth, profitability and shareholder capital generation.
Overall, this was a solid quarter for us as we continue to produce peer leading net interest margins, solid earnings, targeted deposit to loan growth as well as demonstrating positive operating leverage. We remain focused on execution of our strategy and believe the foundation remains in place for continued solid growth and 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 three.
Our adjusted diluted earnings per share were $0.66 and 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 four 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 strong growth, a strong margin supported by our low-cost customer deposit base, stable non-interest income, expense control and fundamentally sound credit quality.
Slide five presents the fundamental elements of our stable net interest margin. In particular, our healthy loan yields, fees and low-cost core deposit portfolio. Our NIM is a reflection of the collective efforts of our team to build relationships and deliver exceptional services and value to our customers, for whom we strive the trusted advisers.
Going forward, we anticipate our deposit cost to continue tick up due to the current competitive environment, a cumulative rise in short-term interest rate environment. And we expect some continued improvement and loan yields, but we remain confident that our balance sheet is well-positioned for rise in rate to overall and that our base net interest margin will remain in 4.2 to 4.4 guidance range. We will continue to maintain the balance between our net interest margin and balance sheet growth. Although our current performance supports us the opportunity to adjust these targets to meet our growth targets and overall profitability.
Moving on to the next slide, on slide six, and as previously mentioned, we have solid loan growth this quarter in line with our long term 10% to 12% target range. And we consistently highlight, we continue to apply longer-term perspective to our growth. But we don’t get too excited about a 15% loan growth quarter and are typically concerned by a 6% loan growth quarter.
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 risks. Our objective is consistent, profitable relationship driven growth not nearly focusing on quarterly targets.
Moving to our concentration level on the top right corner, we continue to be tied relative to regulatory guidance on our construction and development we share this quarter. We remain committed to staying in line with the regulatory guided of 100% construction and development loans of 300%. And commercial real estate loans over the longer-term.
Now moving to slide seven. 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, they caused some variability in deposit balances and growth rates going forward.
All in, we saw 5 basis point increase and cost of total deposits this quarter equating to beta of roughly 20% relative to the 25 basis points increased in the federal funds target during the quarter.
Although our cost year-over-year are up 23 basis points about half is due to the rates and half due to the Clayton's Bank acquisition.
As we continue to focus on growing customer deposits in a competitive environment, we see potential for our beta to pick up slightly but remain confident that our steady funding [ph] base will remain a key strength.
We have introduced new products to core deposits as well as of the term deposits specials to maintain overall funding going forward.
As Chris noted in this opening comment, we had a good quarter as shown on slide eight from our mortgage banking operations despite of tightened market competition. Our mortgage banking income was $26.5 million in the first quarter of 2018, which is up 5.5% of a year-over-year basis.
As the build out of the correspondent channel, make sure they're expanding anticipated shift in production mix as well in overall margin compression. Although it is important to know that total mortgage pre-tax contribution including the retail mortgage footprint represents approximately 8% of our first quarter of pre-tax results.
As a reminder, we had expected revenue to decline in the first quarter of 2018, relative to 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, we have from adjusting earnings as we have the asset fully. We believe that this will create less volatility in the assets, and income state going forward. However, we did record a negative impact of $1.7 million from the net per value adjustment of mortgage servicing rates due to projected and actual pre-payments during the quarter.
On slide nine, our operating leverage this quarter remain in line with the prior quarter moving slightly closer to our near-term goal of 55% for the banking segment. This slight quarter-over-quarter improvement from 55.6% to 55.2% in our banking segment efficiency ratio comes in spite higher risks [ph] 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 marketing pressure. We expect efficiency ratio to improve as we move into the second and third quarters of 2018 and see volume of other channels pick back up.
Our effective tax rate of 21.7% for the first quarter is 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 the strong foundation for our company. Non-performing assets to total assets decreased for the quarter and nearly the entirely this decrease is related to optics of no longer recording the rebook -- loans as previously discussed. Our true underlying asset quality in term of classified loans remains unchanged and in great shape as evidenced by our non-performing loans ratios of 30 basis points which is down 2 basis points from last quarter.
Next on slide 11, our capital level remains strong enabling the future growth both organically and through strategic acquisition. Our capital structure remains relatively simple giving us the flexibility as needed to potentially add non-common equity sources that needed. Since the first quarter following our IPO, our tangible book value per share is increased by $3.43 or almost 30% to $14.99 during the quarter driven by our strong financial results.
We will also continue to closely follow the ongoing discussions regarding revisions to the Basel III capital treatment of mortgage servicing rights are now that might affect 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 shareholders' equity in the form of our initial quarterly dividend of $0.06 per share, which represents a payout ratio of approximately 10% for this quarter.
With that overview, I'm going to turn the call back over to Chris for 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 solid 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.
Thank you. [Operator Instructions] We'll take our first quarter from Catherine Mealor with KBW.
Thanks. Good morning.
Good morning, Catherine.
James, you mentioned that your NIM outlook remains in the 420 to 440 range, but you've been above 460 for the past 3 quarters. Can you just talk a little bit about that pass downward? Is it from mostly lower accretable yield or is it kind of deposit betas, or what really brings your margin back down to that targeted range? Thanks.
Yeah, so the targeted range exclude the accretion, so it's not due to that. It's really due to the cautious outlook on that deposit beta. It's really more I'm going to say state funds goes up at 25 exact betas for that quarter. It's really more to cumulative as we're beginning to see like the 5 basis points this quarter while could just take it straight at 20 betas.
You've really got to look overtime, and I think we help that fairly well and check us roughly 11 to 12 basis points up as rates have come up in 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 the lease - the initial thoughts from the Federal reserve of raising rates two, three, four times over the near-term really causes that outlook, I mean with the longer-term rates not really coming through and it 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 beta is associated with the really loans and deposits.
Catherine, Chris. And just don't think that we're way out of line here. So, that - as James said the 420 to 440 is ex non-core and that's accretion. And so last quarter we were at 435, so we were in the range, and this quarter we're at 445. So that's 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 yield, I mean to your points, loan yields increased 8 bps this quarter, but can you just give some commentary on how you're thinking about your asset data, 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 and getting more and more competitive on the loan side. Any color there? Thanks.
Yeah, a little color just on the competitiveness on the loan side. I think we see the same thing, we have - we are both 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 we put it that way, but we don't have any tangible -- much tangible evidence to say, it's moving up. It's stay quite competitive both on the rate and the duration.
And so, we're still -- and we're frankly, we can't - our term that how far 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 this on the competitive front. And so, I don't think we get any real differentiation from what we said we've been hearing.
And I'd also add Catherine, we're still at roughly 50-50 fixed variable. And we are seeing some tightening or lowering of credit spreads even on the variable side. So, our existing portfolio was probably where the majority of that 8 basis points came through on the contractual yields quarter-over-quarter. And so that will continue to be difficult as well until those pressure paid hopefully.
And then my last question kind of on the same topic. James you mentioned that your construction portfolio is nearing a 100% of capital. So, managing to that level impact your growth outlook or do you feel like you've got enough momentum in other categories to still maintain this growth rate?
Yeah, Catherine we haven't let it affect our growth outlook. We do have to manage it little or more than we have, but we've asked our teams to be aware of it to try and make sure they're focusing on building non-construction related.
But your capital generation rate, since we're adding capital relatively fast and so it is, but it also if we look at anything into the M&A market that's a consideration. Because a lot of banks that are out there in the M&A market have a lot of construction in them. And so, I'd say those are really the two alterations we've had to consideration that we had to make.
And also, this quarter, and I mentioned in my comments our focus around what happened into this 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 rates, because we're hopeful that really full time that until that happens that put a little tighter pressure. And that's reason I think longer term we will - we could have a quarter where we pick about the 100 that are long-term would be to stay and around or below that 100% and that could be helped by - in the MSR relief and the capital calculations going forward.
Make sense. Thank you, so much and great quarter.
Thank you, Catherine. And just one just another. On that 100%, we don't want to - just for our own risk management, internal risk management parameters but also for regulatory relations. We make take over it, we've talked with the regulators about that. But on the long term, we won't stay up in that range just because we don't think that's prudent from either of those perspectives.
Understood. Thank you.
Yes.
We'll go next to Tyler Stafford with Stephens Inc.
Hey, good morning guys.
Good morning, Tyler.
Nice quarter. Maybe to start on comments you just closed with around MSR. What's the size of the servicing portfolio at the end of the quarter?
Little over $9 billion.
So that was up $300 million, $3 billion from year-end? I've got was that 6.5 at the end of the year.
Yeah, I'm sorry it's little over $8 billion and the asset is $93 million. So maybe I misspoken that. I'm sorry. It is up primarily due to production as well as the assets was written up during the quarter because of the fair value increased offset that --.
Can you just, James talk about 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?
Yeah, so we are looking on the sale that also plays into not previous comments on why if any regulatory relief we ultimately get. There are certain segments of that portfolio in our retail and in market production levels that we do want to keep from a customer relationship focus. But direct and kind of indirect it will be from some of our third-party providers as well to. 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 up opportunistically sale portions of that portfolio as we move forward.
Got it. Okay. Yes.
It's not in three, four topics of conversation. Where we debate internally the merits of the asset. We even have conversations at the board. But generally, our approach, it's not something that we're looking to grow as - because we love that profitable asset, it's something that it goes along with the part of our business. We do like having it in footprint, but it's not something where we look to really grow up that asset, even if we gotten regulatory relief and that will be the case.
Okay, thanks for that Chris. 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 doing where are you positioned now slightly above that. Yeah, they will of course increase, but is it fair to think that you could operate maybe a little bit above that long-term range in the near term? Or is there something that I'm missing?
No, I think we can operate certainly a little bit higher in the near term. If you look at our deposit betas and then you look at the way we've constructed, both will be following the deposit portfolio. It's meant to try to take as much of that out as possible. And much of the volatility out with the rate changes. And 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 as -- those and maybe a little bit on some of the larger commercial where we're having to say fairly competitive.
We've got pretty nice retail book, which is - which the betas are probably actually a little bit on the lower side of the – our betas were about 20% for the quarter. And so, retail was actually little lower.
And we've got 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 customers balances on it and they are on both sides of the balance sheet both the funding side and in the loan side.
And while we're growing that funding side, there is two or three dynamics in there that are important where and we do have a few larger depositors that creates some multi-deposits for us. And so, we can have some relatively large movements in that.
And the other dynamics is, we'll continue to move out of wholesale funding, and so we'll continue to have broker deposits to leave our balance sheet as they mature. And so, but in general we're seeing growth with reasonable deposit pricing. So, we're really thrilled in all the mix. We're seeing pretty good growth with reasonable deposit price.
Okay, thanks Chris.
Yeah, I think we can operate I think the, we do have some near-term opportunities as well in the broker side and I think where rate on that was about 160 or so for the last quarter. And still got about $80 million bigger that hopefully we can reprice down as well. There are some near term opportunities that could keep that. Some of that will also play into where the asset deals are ultimately go relative to the competition.
So, it's a lot of moving parts to where we could stay and really higher into that in the near-term that we would expect that to come down overtime depending upon the competition and market forces.
Okay, thanks for that James. Maybe just one on the loan growth side of things. So, the consumer loan portfolio has been somewhat of a headwind in 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 we'll then be less of a headwind to growth.
Yes. Our consumer portfolios probably typical of a community banks, it's got -- in that it's got home equity within that and we probably have a little higher concentration I'd say through installment type consumer loans. But most banks are -- that are like us are doing a lot of that business are reference to our retail deposit business.
We get retail loan business out of the same markets that's generally brought high growth markets for us and so, our growth is coming from other places and we're doing less and less of that business. And so, it's not something that we built in growth into our projections as we move forward.
We had built in a lot of growth, we're trying to at least in the near-term hold it flat. That doesn't mean that we will always be happy with that, but at least in the near-term it's going to be relatively flat.
The other thing it impacts that is the mix on the manufactured housing retail portfolio. Those loans can either fall into mortgage or consumer depending on whether there is land and 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 components and 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 and retail slightly better than the consumer, but that's kind of depending on the customer flow on that.
Okay, very good. And just last one from me just housekeeping. The other expense line item was up $800,000 or so quarter-over-quarter. Is there anything more one-time in that?
I would say there would be. We would expect all things being equal. And also talking about the incentives that we mentioned being up in the first quarter that seasonal that we would be down on the bank side, on total non-interest expenses, we paid a million and $1.5 million kind of I wouldn’t call it more in time but I would just call it kind of seasonal and other things that happened in the quarter so we believe that run rate will continue to improve on expenses from the first quarter instead from I’ll call it more normally in the - extended that will make our cost base to be adjusted upward.
Okay, very good. Thanks for clearing that up. Congrats on nice quarter, guys.
All right. Thanks Tyler.
We’ll go next to Peter Reese with Sandler O’Neil.
Morning guys.
Good morning, Peter.
Most of my questions have been answered, but I guess just maybe if you can give a little bit of color around the mortgage and just in terms of what pricing obviously, pricing was down and you held in volume pretty well, but do you think this kind of a floor for the pricing or what are the kind of the dynamics going forward?
Thanks, Peter. I'm going to let Wib, Wib is here who manages our mortgage segment. So, Wib why don’t you comment on that pricing?
Yeah, Peter, what we’re seeing across the industry and in our footprints is well is just continued competitive pressure on both margins and volumes and so I would expect that you continue to see that pressure, obviously we have some minimal floors for ourselves and so as we even get closer to those we'll have to be very cautious about how we price, but I think we’re going to continue to see some pressure across as the overall industry is down and we’re seeing everybody compete with that volume.
And we did have one analysis comment as well, we got one of our plans that had a little bit thicker margins in the fourth quarter that was kind of unusual event that added a million or so dollars that we previously mentioned in the fourth quarter of that. So, it didn’t just totally drop, it was probably elevated in the fourth quarter from kind of the reality on the overall business.
And Peter one further comment on that too, one of the things that you’ll see changing in across our group or across our channel is the changing mix that we have being a little bit more heavily weighted towards the correspondent area which has a lower margin in texture.
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 of it kind of out of the gate so that will begin to tail off and in the other reason we’re also tail off remember to us a fair amount wealth from the Northwest Georgia acquisition from two years ago which is kind of beginning the tail off unless there is a prepayment of one of those with the large mark or something like have normal logistics. I call it routine calculated accretion will slowly begin to trend down, but not significantly.
Okay. 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 be 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 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 rates move up about 15% of our portfolio roughly variables, so we’ll see that move up as rates move up. On the fixed side, we haven’t seen that moved significantly at this point. Again, we’re hopeful but we haven’t seen it moving, we thought we’d see it move more than we have and so right now we’re just hopeful.
We would say the long pressures maybe are equal to or greater in some cases than the deposit competition of growth.
Great, thanks so much guys.
Thanks, Pete.
We’ll go next to the Daniel Cardenas with Raymond James.
Good morning, guys.
Good morning.
Quick question on looking at your markets, the sequential quarter decline in the community banking loan balances, is that pretty much planned or where there is some kind of surprise paydowns or pay-offs this quarter?
Yeah, it’s certainly never plan to go down, so we always work with numbers to go up, but some of those places and markets they are growing and then occasionally we will get a paydown in the small and in most particular markets what we have been perhaps on an overall basis, 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 are 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.
Thank you. 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 it be a dividend, I would imagine given valuation levels buybacks are probably a little priority, maybe some color on M&A, what that looks like right now and go from there?
Sure, Daniel. On the M&A front, we are interested in active on the M&A front. We continue to take a look at some things and when we look – it kind of go through a series or priorities for our first geographies, the agriculture then we look at profitability and liquidity 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.
As we have expanded our geography some and so it goes down into two parts of Alabama and APAC, at least half of Alabama, half of Georgia and over into the Carolinas even into the Western Virginia and a few other markets.
When you get down to profitability, now that gets to be a little higher hurdle, because where our performance given where we trade, we are typically competing against less profitable competitors that will get higher EPS accretion and they are also willing to take significant capital dilution. And then frankly less discriminating investors will allow them to take that, sometimes even we want them to take that, so it’s a tough market out there when you are 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 the banks the wholesale assets and liabilities on the balance sheet and frankly we can generally do that better terms that they can, so not only that we not pay a premium for those, they are frankly not that valuable/. So, we’re looking for banks like us that have a balance sheet that made up a customer loans and deposits.
So, the discipline can be a little frustrating when you are competing against mediocrity and when you are competing against institutions that can only show room by making acquisitions.
But all that being said, you'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 we could replace it and they were gone and so, we keep an eye on those and in that cases we would take some capital some capital to do some capital dilution, it something that's really strategic to us.
But, so we are very active, bankers are bringing those opportunities. We just -- we're discriminating, we help investors, or it will be discriminating as they are current figure out where capital and focus it can be a little bit difficult with the lot of option now and right us, but we can continue to grow our balance sheet in a pretty good way. And summer that's I can only drill the acquisition how that [indiscernible] investment for us.
Okay, great. All my other questions have been answered. Congrats on a good quarter.
All right.
[Operator Instructions] We'll take a follow-up question from Tyler Stafford with Stephens Inc.
Hi, just one more for me guys, just around the dividend. If there was a payout ratio that you guys would like to grow into overtime that you targeting?
We haven't set a payout ratio, we looked at the 10%, as we kind of thought about, LC was also thought about and looked at what others are doing and that's really just a 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 the slower or lower and trust out board ourselves to always continue to improve and that's the way we view the dividend as well. And so, if something that we got to map out of future which never goes according to plan, we plan on of course moving it up overtime. 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 intangible in that 15% and greater. So that it's a bit of a balance like those things of that depending on the mixture of the growth and acquisitions as well as our profitability and targeted returns.
Understand. Very clear. Thanks, guys.
There are no further questions, I would like to turn the call back over to Mr. Chris Holmes for any additional or closing remarks.
Okay. Thanks Stephanie. Thank you all for joining us on the call. As always, we appreciate your interest in the company. We appreciate your support as investors. And we think we had a good quarter and we move forward to the next one. Thank you very much.
This will conclude today's call. Thank you for your participation. You may now disconnect.