Enterprise Financial Services Corp (EFSC) 2017 Q4 法說會逐字稿

Good day, and welcome to the Enterprise Financial Services Corp. Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the call over to the company's CEO, Jim Lally. Please go ahead.

Well, thank you, Justin, and thank you all very much for joining us, and welcome to our Fourth Quarter Earnings Call. Joining me this afternoon is Scott Goodman, President of our bank; and Keene Turner, our company's Chief Financial Officer.

Before we begin, I would like to remind everybody on the call that a copy of the release and accompanying presentation can be found on our website. The presentation and earnings release were furnished on SEC Form 8-K yesterday.

Please refer to Slide 2 of the presentation titled Forward-Looking Statements and our most recent 10-K and 10-Q for reasons why actual results may vary from any forward-looking statements that we make today.

2017 was a transformational year for our company. In addition to closing and integrating the largest acquisition in our company's history and completing our CEO succession, we were able to post record core results for our company and have positioned Enterprise well for 2018.

Slide 3 is a reminder of where we were focused in 2017. We were intentionally focused on a very few but very important items that allowed us to achieve the record performance that will be highlighted throughout this call.

On Slide 4, we share our financial highlights of the fourth quarter when compared to the fourth quarter in 2016. Growth and earnings per share for the quarter -- of fourth quarter 2017 when compared to 2016 was 31%. Our relationship-oriented sales culture and the efficiencies realized from the JCB acquisition fueled our ability to improve net interest income dollars by 40%.

This strategy, coupled with the benefits of several interest rate increases, aided in the improvement of our net interest margin year-over-year of 29 basis points. In addition to this, we maintained a high-quality credit profile and were able to improve our operating leverage by 2.5% over the same 12-month period. This continued operational improvement reflects our ability to connect our front-end sales process with the investments that we have made in technology and talent in the back end of our business.

As I've stated in previous calls, we remain intentional in growing our core deposit franchise. During 2017, we grew our deposit base by 29%, 5% net of the JCB acquisition. More importantly, DDA, net of JCB, grew just over 10%, improving the ratio of DDA to total deposits to 27%, which is a slight improvement over the previous 4 quarters.

Slide 5 shares our focus for 2018. I'm very excited about the opportunity that this year brings us. Over the next 12 months, we will continue to focus on sustaining core growth trends and maintain our focus on long-term strategic development. These 2 goals define the strength of our strategy and will ultimately drive long-term value of our company. Growth of net new relationships and maximizing return on dollars invested in new products and processes will ultimately drive continued earnings growth for our company.

Our third major initiative is to focus on areas where we can get better. Our sales process and culture have been the hallmarks of our company since we were founded 30 years ago. Despite our success, we can get better here. Over the next year, we will examine and improve our sales process and refresh our message in order to further differentiate us from our competition and allow us the opportunity to continue to grow our share of our respective markets.

To provide more color on our deposit and loan growth as well as to provide perspective as to how we are performing in our markets and our niches, I will now hand the call off to Scott Goodman, President of our bank.

Thank you, Jim. Relative to loan growth, which is outlined on Slide #6, 2017 was a solid year characterized by strong organic and acquired execution and ending in a 30% increase in our overall portfolio. I am particularly proud of our organization's ability to manage the successful integration of the acquired JCB associate and client base while also cultivating and converting a robust sales process that provided for 9% growth in organic loans.

As Slide #7 shows, our focus on C&I business remained strong, with 18% year-over-year loan growth and double-digit annualized growth continuing in Q4.

Turning to Slide #8. Growth for the year was spread throughout the portfolio, with heavy influence from the JCB acquisition most notable in the real estate book and continuing increases in the general C&I and specialty categories most heavily impacted by our legacy markets and business lines.

For the quarter, results were mixed, with performance in the life insurance premium finance and tax credit books helping to offset some softness in the enterprise value lending, or EVL, portfolio and the acquired JCB commercial base.

Our EVL business declined by $48 million in the quarter. This reduction reflects an opportunistic shift by many of our fund clients to sell portfolio companies during the quarter in a market with escalating purchase multiples. It's also characteristic of the disciplined nature of our chosen private equity sponsor base.

Given the average deal size of $4 million to $4.5 million and up to $12 million to $14 million on the larger side of the portfolio, the paydowns represent just a handful of deals. Thus, we are optimistic for resuming our growth trends as we continue to see a steady deal flow opportunity from our established sponsor relationships. Countering the deal flow has been expanding valuation multiples. So generally, fewer deals make it through pricing hurdles in their due diligence process.

The other issue, which I have mentioned in prior calls, relates to timing issues associated with the slowed political process in approving new funds under the federal SBIC structure. Many of our sponsors are rolling out their next rounds and are soft pedaling on acquisition process as they experience these delays. Near term, the deal pipeline looks to be building from recent activity developing late in Q4. We continue to add new sponsors to our base through referrals and coinvestment introductions, and the new fund rollouts by many of our client sponsors will ultimately lead to additional senior debt opportunities. In general, we remain optimistic about the EVL business and its ongoing prospects for growth.

The life insurance premium finance business had a seasonally strong quarter, growing by roughly 10% in Q4 and posting 19% overall growth for the year. Performance here reflects timing issues relating to an uptick in policy renewals and premium payments as well as several new policies financed. Despite tightening margins and heightened competition from a few larger players, our emphasis on experience, longevity and consistency in this business with key adviser partners continues to result in a steady flow of opportunities referred to our team.

The tax credit lending business also posted a strong quarter, up $46 million in the period and $91 million or 63% for the year. The growth in this segment is attributable to the financing of several New Market Tax Credits funds with established partners in this business. The resulting capital from these funds are ultimately redeployed into various privately held businesses. And history would show that this leads to future opportunities for lending, depository, Treasury or other fee-based services as we are introduced into these companies.

We continue to generate a steady flow and mix of new general C&I opportunities across our markets. Larger Q4 deals include a management buyout in the financial services sector, refinancing and new equipment in a large medical practice and expanded working capital in a growing transportation-related business.

In the CRE sector, our teams are active and originations reflect a few large projects with strong and experienced investors as well as increased development activity, particularly in the Arizona and Kansas City markets. While we have been vigorous in defending all relationships, growth of the CRE book has been slower than planned as we have maintained certain structural and pricing-related disciplines on more transactional lending opportunities here. However, we continue to pursue and grow where full relationships exist, with the right investors, the right developers and the right deal structures in all 3 of our markets.

As represented on Slide #9, all business units posted solid double-digit loan growth for the year. In the quarter, specialized lending was basically level, with strong performance in life insurance premium and some growth in aircraft finance offsetting the aforementioned reduction in the EVL book.

St. Louis grew by $37 million in the quarter, 7% annualized and 45% year-over-year, inclusive of the JCB acquired portfolio. Q4 origination activity was steady and balanced between C&I and CRE growth with new and existing clients. This was muted somewhat by several larger payoffs related to relationships involving classified loans or competitive situations where we opted to back away from unacceptable structure or pricing terms.

Kansas City grew by 11% year-over-year and $23 million or 14% annualized in Q4. Activity in the quarter included a large new C&I client as well as several new CRE loans in the expanding urban core of the region. The KC team continues to gain momentum, and pipelines are benefiting from new talent, steady economic growth and traction in our brand in this market.

In Arizona, we also experienced double-digit loan growth in 2017 as well as a strong Q4. While CRE is an important component of our strategy here, we have also intentionally prioritized the C&I balance in the portfolio. Q4 shows new C&I loans within industries such as storage, medical services and veterinary along with CRE and development lending to established investors in our portfolio.

Deposit balances, summarized on Slide #10, are up 29% for the year, inclusive of JCB, and 5% excluding the acquired deposits. Furthermore, noninterest-bearing DDA has also grown and is up as a percent of total deposits to 27%. Organic growth is attributable to our performance in the C&I commercial and business banking lines of business, which incorporate a relationship approach and emphasizes the sales process and value of core deposits.

Our branch and commercial teams have done a terrific job of servicing existing and integrating new JCB clients. And this is evidenced in our ability to grow both the number and dollar amount of noninterest-bearing accounts since the acquisitions.

This point, like to hand it off to our CFO, Keene Turner, for his comments.

Thanks, Scott. I'll begin with a full year recap, beginning on Slide #11. We reported $2.07 of earnings per share for 2017, which included $0.20 per share of earnings from noncore acquired assets, $0.18 per share of merger charges from the acquisition of Jefferson County Bancshares and $0.52 per share of remeasurement of our net deferred tax asset.

For more comparable measures, we'll turn to Slide #12, where we roll forward the drivers of growth in core earnings per share. Record core EPS of $2.58 for 2017 resulted in a full year return on average assets of 1.20% and a corresponding 14.5% return on tangible common equity. As the chart depicts, core earnings per share grew 27% or $0.55 per share as we invested $0.38 per share in our expense base, which included the pre- and post-cost savings run rate for JCB. From it, we added $0.88 per share of revenue, which is a 43% incremental efficiency ratio; $0.10 per share was growth in noninterest income; and $0.78 per share of net interest income.

Income taxes were also favorable by $0.17 per share to the prior year. This was driven significantly by our execution of a number of income tax initiatives as well as changes in the reporting rules for share-based compensation. Thus, the effective tax rate declined 4 percentage points to 30% for 2017.

Finally, provision for loan losses on portfolio loans increased $0.12 per share, which includes providing for growth and the abatement of recoveries as compared to prior period.

We couldn't be more pleased with 2017. Continued organic growth, strong balance sheet performance, expense discipline and successful M&A efforts led to superior results and grown momentum as we enter 2018.

To that end, Slide 13 depicts a seasonally strong fourth quarter. Core EPS was incredibly strong at $0.77 per share, resulting in a 1.37% return on average assets and nearly 17% return on tangible common equity. Compared to the linked quarter, there were a couple of items that were a bit of a gross up and included noninterest expense, which increased $0.04 per share and is principally offset in the income tax line item, which improved by $0.05 per share from a tax credit investment that I'll discuss more in a few slides.

Provision for loan losses was $0.02 per share more than the third quarter, and revenue expanded $0.12 per share, split between $0.08 of noninterest income and another $0.04 of net interest income from the linked quarter, on which I'll elaborate further, Slide 14.

Core net interest income increased by $0.8 million to $44.9 million for the quarter. Net interest margin declined modestly in the quarter but remained at 3.73%.

Absent an isolated item, the quarter's results were essentially flat. That item is that during the quarter, we served as a banking partner for a significant customer's sale, which put some large deposit balances on our books for several days. We earned net interest income on those dollars but not at a 3-plus percent margin, and so it was dilutive in the quarter.

Generally, we'd expected to maintain core net interest margin at around 3.75%, with continued growth in net interest income dollars. We knew we would experience an increase in deposit and funding costs, which increased 4 and 6 basis points, respectively.

On the asset side of the balance sheet, portfolio loan yield was limited to 2 basis points of improvement before the impact of the December interest rate increase, while the yield and size of the investment portfolio increased 3 basis points and approximately $30 million.

In the spirit of reflecting on the full year and because it impacts our views going forward, the balance sheet, and specifically deposit cost, performed far better than we had projected. We had indicated that a parallel shift of 100 basis points would increase net interest income around 2.5% or approximately 10 basis points. In fact, fourth quarter core net interest margin expanded nearly 30 basis points while the full 2017 was -- impact was 20 basis points. Additionally, it should be noted that the curve flattened and was not a parallel shift.

Going forward, we're forecasting core net interest margin to be stable, adjusted a couple of basis points downward for the impact of income tax reform. That said, we generally expect interest rate increases to be able to offset the increase in deposit and liability costs. Given our growth expectations, we expect to translate that to meaningful growth in core net interest income dollars. To that end, for 2018, we expect portfolio loan growth will be 7% to 9%.

We're encouraged that some of the initiatives that Jim and Scott discuss will garner a steadier growth during 2018 as compared to 2017. Provided we're successful, this will bode well for our financial performance as it will provide balances on which to earn earlier in the year in the form of net interest income dollars.

On Slide 15, we'll move to our credit metrics for 2017. High level, trends are favorable compared to a year ago with some variability throughout 2017 due to small balances, particularly levels of nonperformers and classified loans. We compare favorably to peers and coverages for those levels. Provision for the quarter reflected our continued posture of prudence, which we think results in high quality of earnings and returns.

As it relates to charge-offs for the fourth quarter, we carefully examined anything that had a specific reserve in addition to our normal process. We believe that we tend to be conservative as it relates to the credit and charge-offs in particular. Nonetheless, we took a slightly harder look, given the implications as it related to deferred tax asset remeasurement that occurred this quarter. Thus, charge-off trends compared unfavorably to the third quarter, which had 8 basis points of net charge-offs compared to 33 basis points in the fourth quarter. The provision in the quarter was $3.2 million to cover growth along with some replenishment of net charge-off as it impacts general reserves.

As a result, we believe we're well positioned to move into 2018, with relatively few problems that are significantly reserved or charged down. Additionally, we expect credit events, when they do occur, to remain isolated. We believe our credit performance is consistent with the commercial loan portfolio, and in particular, one with $2 billion of C&I loans. Nonetheless, we strive for earnings of the highest quality, providing for both growth and any increases in impaired reserves or charge-offs that do occur.

On Slide 16, fourth quarter noninterest income was seasonally strong, driven by state tax credit sales of $2.2 million in the quarter. Combined with strong fee income from customer interest rate swap activity, continued progress in service charges and wealth, core fee income topped $11 million to end the year. I'll note that tax reform did drive slightly more tax credit sales into the fourth quarter, but we do expect first quarter 2018 to contain some level of state tax credit sales at around $0.01 per share.

Operating expenses on Slide 17 totaled $28.1 million for the fourth quarter. Generally, sequential expenses were in line with expectations, with the exception of other expenses as we had the opportunity to invest in a historic tax credit project that delivered us 2017 credits. Therefore, we amortized $0.9 million of this investment in other in the quarter while we recorded an offsetting benefit of $1 million in the income tax expense line item. All things considered, core efficiency dipped to 50% due to continued strong revenue performance.

In each of the last 2 quarters, we've become even more prescriptive with our income tax management, particularly with respect to investments in tax credits. We expect to continue this activity, and thus, we've included additional amortization in our expectations for 2018 expenses as well as our effective income tax rate. I'd be remiss if -- I'm sorry -- thus, our expense guidance for 2018 will start from the current quarter, to which we expect employer payroll taxes will seasonally increase by approximately $1 million.

I'd be remiss if I didn't point out that we expect to continue to enhance our value proposition to our associates and communities throughout 2018. This will likely result in additional expenses for training, compensation, retention and/or charitable items. Timing of those items will likely begin to impact the second quarter and the remainder of 2018. We haven't yet identified all the specifics, but we continue to actively engage associates and ensure we're competitive with other companies' announced initiatives resulting from tax reform.

All that said, we still expect that marginal efficiency will range from 35% to 45% on revenue growth. To be even clearer, the starting point of all that is estimated at a high $28 million range of noninterest expense for the first quarter. Again, this level of expense compared to our recent run rate is reflective of additional benefits in the income tax line item from credit, not just tax reform. We'll move on to that on Slide 18.

This slide is new for the quarter, given we had a number of moving pieces for taxes, including DTA remeasurement. I mentioned earlier that we drove the effective tax rate down with some additional investments late in the year, for which we had not planned on doing so. Thus, the fourth quarter rate benefited from an additional $1 million of credits, improving the rate 4% to 28%. That's in comparison to the incremental statutory rate of 38%, which includes Missouri state income state tax net of federal benefit.

Thus, tax reform for 2018 will be extremely beneficial to our earnings going forward. The incremental statutory rate declines to just under 25% for us. We continue to benefit from permanent items in addition to the tax planning initiatives we've undertaken, so we expect the effective tax rate to be 17% to 19% in 2018, with the first quarter coming in slightly lighter, around 15%, due to the expected seasonal benefits of share-based payments. Thereafter, the effective tax rate will increase 2% to 3% on a quarterly basis, which is 19% to 21% each quarter. I hope this commentary and the additional information on this slide is helpful in understanding the impact on our financials in upcoming periods.

With that, I'll conclude my remarks on Slide 19, where we illustrate our quarterly EPS progression. Our results for the fourth quarter of 2017 were the strongest in our history at $0.77 per share by a significant margin. We believe this slide speaks for itself, but is a direct result of holding ourselves accountable for establishing a successful plan and managing to that plan in the years leading up to and including 2017. We believe that the fourth quarter and all of our 2017 results reflect our ability to effectively manage the business, including seeking opportunities as they arise to manage income taxes, capital, credit and the balance sheet profile in order to maximize the contribution of our business development and successful M&A efforts.

These results are modest in the short term, but the leveraging effect they drive in subsequent periods enhances our ability to grow profits and value for our shareholders. Our focus remains on continued core EPS growth as well as improving returns from already high levels as we move into 2018.

That concludes our prepared remarks. We sincerely appreciate your interest in our company and for joining us today. At this time, we'll open the line for questions.

(Operator Instructions) Our first question today comes from Michael Perito with KBW.

A few questions for me. I wanted to -- just a couple of quick clarification questions, I guess, for Keene. So if I heard you correct, I just want to make sure I am receiving this correctly. The expense growth is 35% to 45% of your anticipated revenue growth in '18, starting off a upper $28 million kind of quarterly run rate?

Yes, that's correct.

Okay. And then the step up from the fourth quarter to the first quarter is the $1 million, give or take, of additional payroll expenses that you mentioned in the prepared remarks?

That's correct.

And then beyond that, there will be increases based on what you see competitively going on in the market?

Yes, and also continued investments in the business. I think we'd expect, trend-wise, for our continued investment in the business to be similar to prior years. And that's, I think last call, I said it was about 4% to 6%. From there, if we're able to manage it effectively that, hopefully, we'll get a little bit of a flattish effect from the $1 million step up from Q1 to Q2. But that's all predicated on how competitive things get with salaries and other programs.

Yes. And then I also wanted to ask on the margin. So I mean, it sounds like the low 3.70s is where you hope to hold the core margin. I thought that the comment on kind of competitive dynamics was interesting. I don't know if I misrepresented that comment. But are you starting to already see kind of more -- are your competitors being a bit more aggressive on pricing with the tax reform being passed in late December? Or is that just something you kind of anticipate seeing over the course of 2018?

Michael, this is Scott Goodman. I'll take that one. I think I don't know that I've seen any change in behavior specifically around competition and tax reform. I think what we see is continued aggressive pricing, particularly on CRE deals. I think that's where we see it the most because generally, that's small and large competitors. C&I certainly remains competitive. I think that what I'll call the crazy stuff is generally on CRE.

Okay. And then just one last one for me, maybe for Jim. Just I mean, you look for the year on a operating basis if you adjust for some of the DTA and stuff, it looked like you did about, again, for the second year in a row, about 1.25%, 1.30% ROA. If you just do some simple math and factor in that tax rate that Keene said, even there's obviously a couple of other moving parts, but that puts you in kind of like a 1.40%-plus number and a lot of capital that you guys would be generating. Curious what your thoughts are as you guys start to accumulate capital here. I mean, can you maybe just give us some thoughts on what the board is thinking in terms of how you're going to best manage that kind of higher capital generation and building capital ratios as we move to the next couple of years?

Sure. A couple of things we're going to do is certainly wait and see and make sure that all comes to realization relative to the economic growth that might occur in our markets relative to tax reform and things of that nature. But as it grows, M&A becomes interesting for us. We'll see disciplined and prudent relative to that as we have in the past. And then as we do our normal capital planning, we'll look at other opportunities to manage it appropriately.

Okay. Actually just one more for Scott. Just in terms of the loan growth outlook, the 7% to 9%, does that kind of take into consideration a base case economic growth assumption that's basically similar to what you guys have been seeing? And I guess, if -- do you -- have you started to hear from any clients that activity could pick up post tax reform here? Is that something you're starting to hear? And could that potentially kind of drive up that 7% to 9%? Or is that already kind of factored into that 7% to 9%?

Yes, I think the 7% to 9% is the base case scenario. I think we're not looking at tax reform as something that's going to substantially accelerate what we see out there. We're listening to conversations. I think generally, what I see companies doing is not making large investment decisions based solely on tax reform. I think we're hopeful that it could help us later in the year. But at this point, it's a base case scenario.

Our next question comes from Andrew Liesch with Sandler O'Neill.

Just wanted to look at the fee income for a second here. The state tax credit brokerage and the sales, they're obviously accelerated here in the fourth quarter. Seems like you'll have some here in the first. But do -- what's your outlook for that business going forward now? Will there be fewer gains on a full year basis now?

On tax reform, we don't expect will have at least the near-term impact on state tax credit. Really, just the cash deductibility, we think, drove a little bit of that timing for people buying credit and being able to deduct them in 2017 versus the ones that lingered into '18. But I think that some of the parts is generally equal going forward, and I think we might expect maybe a little bit more of a reversion to the historical norm, where you get maybe $400,000 to $600,000 in the first quarter and then the remainder in the fourth. But again, just kind of given the change to the rule, it was prudent for those buyers to get them in '17 versus '18.

Right. Okay, understood. And interesting -- in fee income in general, to get that 5% to 7% growth, are there any initiatives or businesses you're looking to enter or expand? Was curious, like, what's the overarching driver of that growth guidance?

Yes, this is Jim. What this is, is about taking a look at the businesses that allow us to leverage better. If you look at our wealth business and our mortgage business, it's about experiential for our clients. But then at cards and Treasury management and the swap fees, things of that nature, allow us to grow that business as we garner more market share and onboard more clients onto our platform.

Okay. And then just one question around credit, just the rise in nonperformers. Is -- any detail you can provide around these? What industries they're in? Are they in related industries? Just kind of curious what your outlook for credit is as well.

Sure. Yes. Well, I will just start by saying I think we believe credit quality remains in excellent shape overall. Classifieds are down 20% in the quarter. NPLs are at 37 basis points, remain muted, and I think these levels compare very well relative to peers. The NPL additions in the quarter, those were in our watch process. Majority of that is 3 credits. There's a St. Louis CRE deal, there's a C&I client in Kansas City and then one residential real estate loan. So there's nothing systemic that I see. And I think overall, we remain favorable on credit.

And next will be Nathan Race with Piper Jaffray.

Just following up on the credit discussion. Any additional color you guys can provide on the charge-offs that were incurred this quarter? And kind of the outlook for charge-offs as we go through 2018.

I'll take that one, Nathan. It's Scott. I think we've approached charge-offs the way we've always had. It reflects the continuation of our process, I think maybe taking on certainly a little bit more aggressive posture towards the end of the year for cleanup. The charge-offs in the quarter, I think $3.3 million, basically $2 million of that was one C&I services company, 13-year client that kind of just hit the wall. So again, I don't see anything systemic there. We've always dealt with issues proactively and taken our lumps up front and posted recoveries as we've earned them, so.

Got it. That's helpful, Scott, and just staying on you for a second. Any color just around the pipeline for hires as we go through 2018? Obviously, you had a pretty active 2Q and 3Q. Just curious kind of highlight activities went in fourth quarter and how that kind of pipeline shakes out as we head into 2018.

Yes, good question. It was an active year in '17. I think I've highlighted the additions, specifically in Kansas City, and I don't think we've seen the traction yet from them. I think it was 7 or 8 hires from -- all from larger banks in that market. I think we still feel very good about what that's going to do for us longer term. We've been opportunistic in all markets. We'll consider -- we'll continue to do that in all markets. And in particular, we're having conversations with bankers that, as we've seen as M&A continues to accelerate, I think that will provide opportunities for us to continue to pick up experienced talent in all markets.

Got it. And then switch over to the core margin, and Keene, just kind of thinking about deposit betas and deposit costs as we go through 2018 as well. So I think I heard you correctly, you mentioned that you still expect some margin expansion with each Fed rate hike. But just curious if you see that impact diminishing at all, given the potential for some increased deposit costs relative to the last few rate hikes.

Nate, I'm glad you asked that question because I think what I said as we -- and if I misspoke, I apologize. I think what we said is we expect that rate hikes would create pressure to move funding costs, and that generally, they would be offsetting. So with the impact of tax reform, as Mike indicated, that puts margin from 3.73% on a normalized basis to 3.70%, and our outlook would be to keep it effectively flat from there and use the capital in the balance sheet to continue to grow and expand net interest income dollars.

And next will be Jeff Rulis with D.A. Davidson.

Keene, I wanted to follow up a little bit to engage with the expense guidance. I guess, if you got -- hit the midpoint of growth on loans and fee income as you've guided to, and then a pretty stable core margin, then that gets you to about 8.5% revenue growth. Could we take just 40% of that and be in the 3% to 3.5% operating expense growth? Is that in the ballpark of budget?

Yes. I guess I would say if that's where you get into on a revenue basis, that's how we would manage to it, right? I think we've been thoughtful about how we've deployed and continue to invest in the business. So if we didn't necessarily get the results from the revenue growth, we'd be slower to deploy expenses. So I think those would be self-managed and self-mitigating. So if you're driving to an 8.5% or a 9% revenue growth rate, I think you could expect us to manage it accordingly and optimally to the lower end of that range or the higher end of the range, depending on how aggressively we're able to achieve those revenue growth target.

Okay. And then Jim, I was hoping to get some specifics a follow-up on that capital question. Maybe take an option away and say M&A, those opportunities don't develop. I guess internally then, with the pretty low dividend payout ratio versus potentially buybacks, how would you prioritize those 2 options if that were -- you were limited to that?

Yes, good question. So you've taken a big chip off the table, haven't you? But anyhow, so the difference -- so that if we had a choice between buybacks and dividends, we'd have to take a look and see, relative to our overall capital plan, the overall impact of that. I'll turn it to Keene at this point in time because we haven't had a chance really to debate that internally here, and get his thoughts.

So I would say that, Jeff, our recent activity in planning would suggest that the better use of that capital is share buybacks, but that's given a price and given a performance target. I think we're sensitive to the fact that over the long course of history, we're 20 days into tax reform, and that's a relatively short-term item. So we're always sensitive to pushing up something that seems to me to be somewhat permanent in terms of the dividend payout ratio, not knowing what's coming down the pike. And that from a relatively simple process, we could be back where we started and -- then be saddled with a heavier payout ratio. So I think our priorities would be growth, leverage the capital; M&A, leverage the capital; share repurchases if they make sense; and then there may be some level of dividend that plays into that. But we're certainly cautious about the permanence of those increases.

(Operator Instructions) Next will be Brian Martin with FIG Partners.

Could you guys -- I don't know who best to talk about it. But just the -- putting that chip back on the table as far as M&A goes, can you just talk a little bit about opportunities you're seeing out there today? And maybe, I guess, would you look to get bigger in all markets? Are there -- I just -- where are discussions at today? Just a little bit more color around the M&A outlook.

Brian, let me just handle that for a second as it relates to our philosophy, again, on that. So what we're looking to do relative to our M&A strategy. All markets are on the table for sure, but like, more likely closer to home, as I said in previous calls. And we're looking to really improve our deposit franchise through M&A to do that. So certainly can't comment on specific discussions at this time. But we're looking at franchises that complement what we do well. So obviously, size is important relative to where we stand today versus where we were a few years ago, and it makes the list somewhat finite in our markets.

And Brian, I would just -- this is Keene. I'd just clarify, when Jim says all markets, he means St. Louis, Kansas City and Arizona. And when he means those close to home, he means more likely in St. Louis, where our growth rates may be a little bit slower.

Yes, okay. Got you, okay. And then I think one of you guys talked about the Kansas City operation and the people you've hired. I mean, I guess, what the production they've put on or maybe lack of it in the near term, I don't know if was payoffs or what was kind of driving that. But I guess, what is -- can you just talk a little bit about the Kansas City market and kind of your expectations for these folks? Or just -- is that market grow a little bit more than maybe the other ones in 2018 if the production follows these folks that you've brought onboard? Is that kind of the plan? I don't know if the CRE payoffs were a little bit heavier there, or just getting up to speed for these guys?

Yes, Brian, I would say, first of all, I think Kansas City did post double-digit growth for the year and in the quarter, so I think they're doing well. What I meant is I still think when you bring talent on, it's a good 6 months to a year, in many cases, especially with C&I, before you really start seeing traction. So I think there's only upside there from what this talent can bring to us. If you remember, several of those were replacements for senior bankers that we moved out to the Arizona market. So I think having 7 or 8 bankers all coming from different banks with different portfolios,, I think there's tremendous opportunity there. And I would tell you, I think the organic growth in the Kansas City market, particularly for a Midwestern city, is encouraging. And some of the developments that we're doing is in the urban core there. I think there's job growth. So I'm very optimistic about what we can accomplish in Kansas City.

Okay. And just in general, payoffs versus originations, how have those been trending? I guess, have the payoffs been pretty consistent? Have they been a little bit higher in a given quarter? Just what -- can you give any color on that?

Yes. I would say probably the only anomaly that stands out is what we saw on EVL in Q4. I think originations continue at a steady pace. And the payoffs, I think, we're generally seeing more transactional payoffs. We're not losing relationships. That's -- I think I mentioned, that's really where the CRE impact has been. And where CRE growth has not been as robust as we might expect, some of the competition rationalizes a little bit.

Yes. Okay. And then I think one of you guys talked about the core, I guess, maybe just the loan initiatives you have going into '18. I mean, maybe I missed what those were, but I guess, did you highlight certain initiatives that you've got on -- I guess you're targeting for '18 on the loan side?

Brian, this is Jim. We're not going to change the core that we call on. It's still going to be the same privately held business that was been -- we've been so successful with. What we're going to work on is improving our message, know what a successful opportunity looks like for us and replicate it in our sales channels as opposed to allowing each relationship manager to figure out what success looks like. So it's become more prescriptive in our coaching, more prescriptive in our targeting, so that we can utilize our resources more effectively.

Okay. All right, I think that's most of it. Maybe just one last one, Jim, just on the M&A side, which I respect the not getting too deep on the ones you're looking at. But as far as the number of the discussions, have -- are the discussions greater today or less today? Or just no change relative to what you've done over the last 6 to 12 months?

It's no change.

No change. Okay.

And that does conclude the question-and-answer session. And I'll now turn the conference back over to you for any additional remarks.

Well, again, thank you all for joining us today. We're very proud of our results. Look forward to a great '18. And we'll speak to you soon. Thank you.

Well thank you, and that does conclude today's conference call. We do thank you for your participation today.