Enterprise Financial Services Corp (EFSC) 2018 Q1 法說會逐字稿

Good day, everyone, and welcome to the Enterprise Financial Services Corp First Quarter Earnings Call. Today's conference is being recorded. For opening remarks, I'll now turn the call over to Mr. Jim Lally, President, CEO of Enterprise Financial Services Corp. Please go ahead, sir.

Well, thank you, Debbie, and thank you all very much for joining us today. I would like to welcome you to our 2018 first quarter earnings call. Joining me this afternoon is Keene Turner, our company's Chief Financial Officer and Chief Operating Officer; and Scott Goodman, President of Enterprise Bank & Trust.

Before we begin, I would like to remind everyone 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 entitled Forward-Looking Statements and our most recent 10-K for reasons why actual results may vary from any forward-looking statements that we make today.

Our corporate scorecard is found on Slide 3. Reported EPS for the quarter was $0.90 per diluted share. On a core basis, we earned $0.84, a 42% increase over the first quarter of 2017.

From all aspects of the business, we are very pleased with our results. Loans and deposits both grew as expected during the quarter. Year-over-year, we're able to drive net income growth in dollars by 21%. (inaudible) core net interest margin, we saw an increase of 11 basis points. It should be noted that our loan balances continue to grow in a very prudent way as evidenced by our credit statistics.

In the past, we highlighted the continued improvement in our operations and how we have successfully linked the back side of our business to the front. This ability to drive operational efficiency continues to move forward as we saw a 2% decrease in the efficiency ratio compared to a year ago.

Our 2018 goals are presented on Slide 4. They have been set in adherence to our plan and to these goals that have driven our results. The first 2, achieving organic loan and deposit growth and focus on long-term strategic development, are woven into the fabric of our company. The third, the improvement of our current sales culture through a refreshed sales process and external message, is a personal challenge and remains a work in process. However, we are convinced that success here will further distinguish our sales teams from our competition and will allow us to continue to achieve the great results that we all have become accustomed. As I stated previously, we are very pleased with these results, but we remain focused on our plan and are committed to further improve in every aspect of our business throughout the remainder of 2018 and beyond.

I would now like to turn the call over to Scott Goodman, who'll provide much more detail on our growth during the quarter.

Thank you, Jim. Our loan growth continues on a healthy pace as outlined on Slide #5. It's up 8% year-over-year and 10% annualized for the quarter. The growth in Q1 is a continuation of the strong momentum built during the latter part of 2017 in our organic loan origination process and is well-balanced across C&I, owner-occupied CRE and investor-based CRE.

Focusing on C&I lending. Slide #6 illustrates our ongoing double-digit pace. TTM growth of 12% results from the continued emphasis on operating businesses within our regional footprint while growth within the specialty business lines also remains steady.

Breaking this down, Slide #7 examines the portfolio by segment. Investor CRE grew by $36 million in the quarter, representing several new projects, acquisitions of properties in a senior living, industrial and multifamily space by investor clients as well as a ramp-up of fundings on existing construction loans.

Following a soft quarter in Q4, enterprise value lending posted solid growth of $31 million in Q1 of 2018. After taking opportunities to realize some returns in the latter part of 2017, private equity sponsors became more active in originating new opportunities. The increased loan demand represents closing on new portfolio companies and elevated usage of lines of credit generally used to make acquisitions.

Growth in the general C&I, owner-occupied CRE and tax credit combined at $21 million for the quarter. These categories all represent financing used to enhance operating company relationships through new capital expansion, equipment purchases and increased lines of credit for working capital needs. Business owners in our markets are generally optimistic about the current environment, and this disposition is beginning to result in greater willingness to make longer-term investments in their business.

You'll notice on this table that we've broken out agricultural lending, which grew by $28 million in the quarter and now stands at a portfolio of $119 million. This group, which is managed within our St. Louis market, came onto our platform in 2017 as part of the JCB acquisition. The team is comprised of several deeply experienced bankers and credit specialists who have been recruited out of the farm credit system in the Midwest. They traditionally managed a sizable book at farm credit focused on midsized, family-owned and privately held operators within the row crop, pork, beef and dairy segments of this industry.

Given the stress in the agricultural markets over the past few years, our strategy has been to opportunistically add new relationships with the best and most well-capitalized operators that successfully managed through this environment. There is strong demand at this time from the sector for banks with our model, that can provide the agricultural expertise and capacity needed but do so with a responsive process and an advisory high-touch approach.

Following seasonally strong double-digit Q4 growth, life insurance premium was characteristically slower in Q1. The residential and consumer portfolios declined slightly as we continue to integrate the JCB portfolio mortgage and consumer product set to be more consistent with our investor-based approach.

Moving now on to Slide #8. Growth is broken out by business unit. Specialized lending posted solid growth for the quarter, mainly attributable to the aforementioned strength of EVL. In St. Louis, in addition to the success from our agricultural group, the St. Louis team also had a good quarter converting new opportunities to expand the relationships with larger clients in the financial services, real estate investment and senior living industries.

Kansas City activity was down slightly in Q1 following a robust fourth quarter. Originations relating to existing C&I clients were good with new lending to clients in the metal processing, telecommunications and machinery industries. We did back away from several investor CRE deals though as terms and pricing were outside of our comfort zones. Overall, we remain optimistic about near-term growth in this market. The new talent added to our KC team in 2017 is active, and the pipeline of new opportunities looks encouraging.

Arizona grew by $14 million or an annualized rate of 19% in the quarter. While Arizona presents a strong CRE market, we've consistently remained focused on balancing this with a steady emphasis on C&I. Q1 is a good example of this, with C&I representing 100% of the 10 largest new loans in Arizona for the quarter. Loans to both new and existing clients here include businesses in the medical imaging, education, food service and self-storage sectors.

Deposit growth is profiled on Slide #9. Overall, deposits were up $125 million in the quarter, 12% annualized and 6% on a year-over-year basis. Both Q1 of 2017 and Q1 of 2018 include the acquired deposits from the JCB acquisition, providing a good look at organic growth results. Early efforts post-acquisition were to introduce branch personnel and JCB clients to the enterprise legacy solutions, which could expand these relationships while migrating away from some higher-cost deposit products. Short term, this resulted in some reduction in the interest-bearing balances. However, since Q2 of 2017, total deposits have grown at an annualized rate of 12.2%. Overall, we've successfully retained JCB relationships.

In addition, our ongoing focus on new C&I opportunities and the integration of a deposit emphasis within our sales process continue to provide an inflow of new accounts, new relationships and additional balances.

The new deposit specialties that I've touched on in prior calls have also been carefully developed and are now beginning to show some early signs of progress. These strategies include focus on particular sectors of the financial services industry, nonprofit and professional business services, where we can develop key relationships and use targeted processes or technology to address particular needs of these professionals.

Now I'd like to turn it over to Keene Turner for a review of our financial results. Keene?

Thanks, Scott. Obviously, we're pleased with the first quarter results. We've continued the strong momentum for both growth of the balance sheet as well as continued financial performance for the first quarter.

On Slide 10, we reported $0.90 per share of earnings, with core contributing $0.84 per share.

On the next slide, we demonstrate the linked quarter changes within core EPS, which reflect seasonal result with overall fundamental improvement. As the chart depicts, core earnings per share grew 9% or $0.07 per share to $0.84 per share for the quarter as seasonality reduced noninterest income by $0.08 per share while expenses grew $0.03 per share.

Provision for loan losses was $0.04 better due to net -- better net charge-offs despite stronger loan growth combined with a relatively stable core net interest margin to expand net interest income by $0.02 per share despite 2 fewer days and further improving seasonally strong pretax income of $23 million with a 15% effective tax rate, which benefited not only from changes to federal tax law for 2018 but also vesting of share-based compensation awards.

Actual core returns on average assets and tangible common equity were 1.49% and 19%, respectively. The new federal income tax code increased these metrics by approximately 18 basis points and 2% from already admirable profitability levels. Irrespective of the changes, we're off to a great start for 2018.

On that note, let's move on to some more details on net interest income trends on Slide 12. Core net interest income increased by $0.5 million to $45.4 million for the first quarter. Net interest income dollars increased despite 2 fewer days, reflecting strong fourth and first quarter growth as well as stable net interest margin.

Tax equivalent adjustments should have been a headwind, but net interest margin improved 1 basis point to 3.74%. I've said this several quarters in a row, but we always seem to have some isolated item that moves us up or down a couple basis points. This quarter was positive due to a pickup on some early payoffs.

Fundamentally, portfolio loan yields, including originations, have moved in the right direction, up 16 basis points to 4.87%. Loans remain the consistent percentage of earning assets. Underlying that, the loan mix has been moving steadily toward floating rate for the last year, and the average rate on variable loans now exceeds the average fixed rate. This is a credit to our C&I-focused business model and should bode well for us in the current interest rate environment. Our experience at the last several rate increases has varied, but on average, loan yields experienced an increase of around 10 basis points following a 25 basis point (inaudible).

Meanwhile, deposit funding -- deposit and funding costs behaved as we expected them to, and we were able to deploy improving asset yields to defend and grow deposits. Thus, increases in funding costs have been driven mostly by the volume and cost of wholesale and broker funds. We have become more aggressive in targeting new core deposits as you heard from Scott while we continue to be cautious not to reprice existing balances unnecessarily.

Competition for deposits is growing, and we see evidence in the rates offered for public unit funds and the number of clients stating that other banks are calling with higher offers. Cost of deposits have increased by 11 basis points to 0.61% for the first quarter.

Interest-bearing liabilities represented 75% of interest-earning assets in Q1, flat with first quarter 2017 but higher than both the third and fourth quarter of 2017. This is more pronounced when looking at brokered and wholesale funding and is not unusual for us early in the year. Recent growth in core deposits though should bode well for us in upcoming quarters.

These points highlight the particular importance of balance sheet mix as it relates to net interest margin, specifically, the mix of funding for us. Without an increase in the flow for the yield curve, it's unlikely we will see material improvement in net interest margin. Longer-term yields remain flat while short-term funding costs continue to rise. Defending core margin is a priority for us, and we're careful to balance margin defense with continued growth in order to drive growth in net interest income dollars. Our opportunity is that we continue to shift more loans to variable rate, and to the extent we can fund growth with deposits rather than wholesale funding, we should be able to mitigate the magnitude of expected increases in our funding costs. To that end for 2018, we continue to expect portfolio loan growth to be 7% to 9%, and we are encouraged to continue to be so that growth will be more steady during the year as compared to prior years. Thus far, we've been encouraged by growth in net interest income dollars.

I know that discussion was fairly extensive, but it's on everyone's mind, and I hope we provide some additional color that you find helpful.

With that, we'll hit the final highlight for the quarter rather quickly beginning on Slide 13, where we display our credit metrics and trends. Credit trends contributed to the strong quarter. Net recoveries of 2 basis points, along with $95 million of portfolio loan growth, resulted in a $1.9 million provision for loan losses.

Meanwhile, levels of nonperforming loans and assets remain favorable, and we believe our posture for allowance and provisioning remain prudent. We believe this quarter's trends are more reflective of the quality of our expansive credit efforts, and it's certainly a great start for 2018.

Turning to Slide 14. Noninterest income started strong but is always a difficult comparison to what is our seasonally best fourth quarter. This trend is driven by state tax credit sales, which were $0.2 million in the quarter compared to $2.2 million in the fourth quarter.

With that comparison aside, first quarter noninterest income compares favorably to all 2017 quarterly levels at $8.6 million. All of our recurring businesses performed well, and there is upside with swap fees and expectations for continued growth of 5% to 7% over 2017 levels as we move throughout the year.

Operating expenses on Slide 15 totaled $29.1 million for the first quarter and reflect seasonal payroll taxes, which increased employee compensation and benefits by about $1 million sequentially. Going forward, the $1 million will be offset by annual merit increases and continued investments in the business, but it provides some opportunity to gain continued improvement in the core efficiency ratio as we move into the second quarter.

We still expect marginal efficiency will range from 35% to 45% on revenue growth, and again, we do expect the trend in the sequential quarter to be more muted with employer payroll taxes largely behind us.

I'll conclude my remarks on Slide 16, where we illustrate our quarterly EPS progression. Our trend is exaggerated by a lower income tax rate, but it will, nonetheless, mirror the strength and the transition from seasonally strong results. We continue to focus on incremental progress guided by our long-term strategy. Our goal remains continued core EPS growth in addition to improving returns from already high levels. We're thrilled to be out of the gate strong in 2018 and look forward to the coming quarters.

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

(Operator Instructions) We'll take our first question today from Jeff Rulis with D.A. Davidson.

Maybe just a question for Scott on -- looking at the money market balance increases on the deposits, is that tied to the -- kind of the -- some of the new specialties that you referenced? Is that part of that success?

Jeff, there is some of that in there. I think there's also parts of that, that are new balances from existing clients as well. I think we particularly saw an uptick towards the end of the first quarter. But yes, there are some balances in there that are part of the new strategies that I touched on.

And is that by -- is that a specific product or you're just -- that customer you're offering the whole gamut of deposit products?

Yes, it's more of targeting specific kinds of companies than it is product design and then similar to, I think, what we've done on the specialty lending side. And so it's more a function of targeting...

Sorry. From your offering though, you offered -- from your product, it's not a set within the money market per se. It's -- you're going to these companies with the broad product mix.

Yes. Yes. Sorry. Yes. That's correct.

Okay. And then maybe just to hit on the loan growth guidance again. A pretty good start to the year and maintaining a conservative guidance number. I guess, was there heavy production in Q1 that may have pulled some out of 2Q? Or is it just a product of kind of staying somewhat conservative as we're only 3 months into the year?

Yes, I would say -- Jeff, this is Keene. Look, I think we feel really good about the way we started, and we feel really good about that high single-digit loan growth. I think we also probably were a little shorter than we wanted to be last year on the loan growth, and we started strong. And if you look at loan averages, they were strong early in the quarter. So maybe not pulling so much back from second to first as it was a little bit of a carryover from fourth to first. And we're standing by our guidance, but we're optimistic that we'll have a really strong year and continue to grow both net interest income dollars and loans at consistent levels throughout.

Okay. And maybe one last kind of housekeeping item. The noncore acquired assets that led to $1 million in the other income, what was that? And can you, I guess, say that, that certainly is not recurring next quarter?

Yes. That was a deal that had recovery of something that we had completely written off, and it was an interest recovery. And by policy, if it's a prior year period, it goes through other versus going through the net interest income line. But again, I think we -- our guidance for the year, that would be outside of what we had guided, and if you back that out, we're still at $3 million to $5 million of pretax from that noncore acquired book.

We'll take our next question from Michael Perito with KBW.

Keene, I want to start on the expense guidance. I just wanted to make sure I had my head wrapped around it correctly. So I mean, obviously, 35% to 45% of revenue growth will be attributed to expense growth, but, I guess, what type of -- what's the revenue growth kind of number that we should be thinking about? Are we thinking about like a core revenue growth number or just an overall reported revenue growth number? Can you help us out a little just on what you guys are thinking when you give that guidance?

Yes, that really relates to core. It's a good question. So it really relates to core, and then that -- we give you that pretax contribution of the noncore acquired, so we're not factoring that in on the expense level. I already have those expenses accounted for. So when we're talking about that, that's growth on that $29.1 million number in the quarter.

Okay. So if you're talking 5% to 7% noninterest income growth, 7% to 9% loan growth flat and then we figure revenue growth will probably be in that upper single-digit range, I mean, that will kind of point to expense growth in the 3% to 4% range. It seems like looking at the core run rate in Q1, you guys might be a little ahead of that and would suggest that there might be some moderation going forward. Is that a fair way to think about it? Or am I missing a piece of it somewhere?

No, I don't think you're missing anything. I think overall for the year, that's more what we would expect. First quarter was $1 million heavy with what was going on with incentive payment and employer payroll taxes and some of the related contributions to that. We expect that, that'll give us some of the room going forward. So you probably see similar levels of expenses in both first and second quarter, and then you'll see that overall growth will kind of come in from there. So I think, overall, those things fit together, and -- but first quarter was definitely higher due to that seasonality.

Okay. That's helpful. And then on the margin side, so the stable core NIM, I mean, you mentioned that loan yields are up about 10 bps for a 25 basis point hike at this point on average given what you've seen thus far, and it looked like in the most recent quarter, a similar kind of increase in deposit costs. So I mean, is that kind of the dynamic, I guess, that you expect to continue going forward? The reason I ask, I guess, is because the deposit cost increase has been accelerating quarter-to-quarter. I mean, are you at a point now where you're hopeful that it won't be much more like 10, 11 bps on a 25 basis point hike? Or is there still room for that to increase and potentially drag down on that core NIM?

Yes. I think we think of core NIM within a relatively consistent band, so don't take my comments as 1 or 2 basis points either way. I think we feel pretty comfortable within 5 basis points on either side of it. And the good news is that the asset side of the balance sheet is moving and giving us that room to defend. The other good news is that we have strong growth. And so we're using rate maybe a little bit more, one, to make sure we defend and don't have to go out and get as much new; and two, there's still an opportunity for us even if the overall cost of deposits grows to use that to keep overall funding costs in check. And so deposits -- even somewhat interest rate-sensitive deposits are still a better trade for us than using wholesale funding incrementally, to the extent we can keep that from bleeding into our existing deposit costs that aren't sensitive to rates, to the extent they are. So those are the dynamics at play. And so I'm not surprised that in a quarter where DDA was down pretty much early and we have a lot of heavy usage in payments in our customer base, that the costs of deposits went up significantly. But it is also -- I'm also not saying that, certainly, the shape of the line and the steepness of the line in terms of deposit costs is steeper the last 6 months than it was the 6 months prior.

Okay. Helpful. And then just one last one for Scott or Jim on the credit outlook. Specifically, within the enterprise value lending business, just curious if you've seen any changes in that marketplace that have made you maybe a bit more cautious or if your partners there are still pretty healthy and the businesses overall are still pretty healthy at this point.

Yes. I'll handle that one. It's Jim. We look at that portfolio closely. We feel very good about it. I guess, you would say it's lumpy, though. If a company has an issue, it can be severe, but we feel very good about where the portfolio stands today and how our partners are working with us. So it's being closely watched. We feel good about it.

We'll go next to Nathan Race with Piper Jaffray.

Just going back to the margin discussion earlier. Just kind of curious where loan pricing is in the current quarter relative to the portfolio yield around 4.03% or if you guys are starting to see -- I'm sorry, closer to 4.88%. And if you guys are starting to see any acceleration commercial loan pricing over the last quarter or so.

Yes. I think in my comments, I hit on this. We're actually fairly pleased with the way the new loan production is pricing. It's certainly competitive, and I don't want to -- Scott and Jim are glaring at me here. But it's certainly competitive, and our teams fight hard every day for all those few extra basis points. But generally, across the board, we're seeing that new loan pricing is actually helping to move the overall portfolio yield up, in addition to the interest rate increases that are moving the existing variable rate loans up. So that's a good trend for us. I'm not sure how long that continues. We see that get competed away at times, and we saw that late last year. So it's hard to say that, that's a trend. But that is what we saw in the current quarter.

Got it. That's great to hear. And then just on the securities portfolio, Keene, it sounds like that's one area where you could help defend your NIM going forward just as perhaps the earning asset mix becomes more weighted into loans. So just kind of curious on your thoughts in terms of the absolute size of the securities book going forward at least through the end of 2018, I suppose.

Yes, I wouldn't expect -- and we said this before, I wouldn't expect the securities book to proportionately get smaller in terms of the balance sheet. We run our loan to deposit between 95% and 100%, and we like to make sure that we have ample liquidity in other measures. So we're more interested in the net interest income dollars, and so we'll continue to keep the size of the investment portfolio growing with the rest of the balance sheet. That'll potentially create a headwind for NIM, but again, we're -- it still generates very low risk net interest income dollars. So we're happy to take that trade, and we'll bring clarity to that. But the reality is that a lot of the trade, in addition to the yield on the portfolio, are fairly modest and don't move the yield much either way despite the fact that investment -- reinvestment rates have actually improved.

That's helpful. Appreciate that. And then just lastly on capital. You kept TCE kind of flat in the quarter with the share repurchases. So just curious if there's any change or updated thoughts on just how you guys are prioritizing capital returns going forward in light of kind of the increased earning power that you have with tax reform. And obviously, within that context, curious, Jim, to hear any updated thoughts on the acquisition environment out there, what you're seeing in terms of loan books and so forth at this stage.

Yes, sure. Our first priority obviously is to support organic growth capital. On the M&A front, we're looking at -- we're looking for companies that complement our business model. And obviously, if we can't be successful there, then we got to look at dividends and share repurchase. And I look to Keene to kind of expand a little bit on that front, but we're actively watching capital management closely.

Yes, Nate, this is obviously a biased answer, but we've done a really nice job leveraging capital through organic growth. We were opportunistic and made a really great acquisition with JCB, and that leveraged capital. And you saw us structure the deal, so there was cash in it and did a 100 basis point leverage in TCE. We've been active in repurchases, and we've also, prior to that, had an increased the dividend. So we'll use it all as we see fit. And number one, we've got strong capital to give ourselves optionality; number two, we've got a really nice earnings growth rate with 150-ish ROA, so we're happy about that; and we continue to be proactive and thoughtful about the way we manage capital, but we want to make sure that we don't impair our ability for our first 2 priorities. And you saw on the quarter us take out $3 million of capital with share repurchases just to mitigate some of the dilution from share-based awards. So I think you'll see more the same going forward, and to the extent that capital builds at a more robust rate, we'll get more intentional, and we'll announce our intentions there.

(Operator Instructions) We'll go next to Andrew Liesch with Sandler O'Neill.

Scott, you talked about some early successes with the new deposit specialties. I'm just kind of curious, the funds that you've been adding, like what rates are those at? And would they bring down the average cost of deposits or overall funding?

It's mixed. We're obviously going after new relationships, so there's a portion of those funds which are going to be noninterest-bearing. I would say then the rest of them become -- are generally going to be money market balances, which are going to probably be at, at average, on par with the blended rate of the portfolio, maybe slightly higher as we go into a pretty aggressive environment. But I don't think you're going to see those strategies significantly move our cost of funds.

Okay. And then just pulling together your comments on loan growth this year. It sounds like they'll be smoother from quarter-to-quarter than in years past. The last couple of years, the second quarter has been a little bit weaker, but safe to assume that it'd be more smoothed out throughout this year?

The word we use was optimistic, but easy to say that when you have a really strong quarter. So I think we're feeling good about how growth is shaping up for the year, but time will tell, and it's too early to call a victory. You know that we're going to fight every quarter and for the rest of the year to get much growth that makes sense with our credit window.

Got you. But it sounds like a little less variable than in prior years.

Yes, I would say the strategies that we've had that are seasonal will remain characteristic with what we've seen in the past, and I think the general C&I, CRE will be less lumpy.

And we'll go next to Brian Martin with FIG Partners.

Maybe one for Keene just on net income, the $1 million pickup. I guess, in your guidance, the $3 million to $5 million, so that does not include, I guess, even though it was moved to the fee income side, that's part of the acquired portfolio. It's not included in your number of $3 million to $5 million. Is that right?

That's correct. We consider that an acceleration. So really, that number's $4 million to $6 million.

Okay. So the accretion was a little bit on the lower end this side relative to kind of getting to your annual target. Fair to say?

I think it was right on what we expected. I mean, we're -- I think we're running right around $0.03 a quarter.

Okay. Okay. And then how about just the -- you guys -- Scott, you talked about the deposit strategy and kind of how it's playing out. I mean, the broker deposits were up a little bit this quarter at least on a spot basis. Just -- and I thought in someone's remarks with Keene's, with someone who talked about this being obviously a bit more -- I mean, I guess, is there kind of a range on how you want to manage those brokered funds versus kind of the strategies you're putting in place to gather kind of the other funds? And just kind of how to think about is there a band on how to think about where those broker deposits stand as you go over the balance of the year.

Yes. I would say, Brian, historically, the use of wholesale and brokered funds has been most significant for us in the first half of the year. I think our clients use a lot more money and deploy it, and we see them accumulate balances in the second half. I think Scott alluded to a lot of good account and deposit gathering that actually helped to minimize and mitigate a lot of that. And I think if you're looking for goals, it would be to essentially not have use of broker deposits, but they're an important tool for us and we'll continue to use it and manage it if necessary. But I do think that the broker deposits, along with other Federal Home Loan Bank borrowings, does present an opportunity as we start to try to accelerate deposit growth in some of the strategies Scott talked about.

Okay. I think it was just seasonality. I just want to make certain of that. And then the tax rate, just, obviously, with the options adjustment, I guess, it's more on the 18% to 20% range is kind of how you're suggesting it over the next couple of quarters.

Yes, that would be the Q2 through Q4, and then that gets you the 17% to 19% for the year, with all 4 quarters blended in.

Okay. And then just the last 2 things. Just on the -- Jim talked about the M&A activity. Just, I mean, there's been -- there's not been a pickup. Or just how would you characterize discussions? And then lastly, if you could just give a little bit more color on, you guys talked about the ag portfolio, just kind how big you'd expect that to get. It sounds like you're comfortable with it getting bigger given the quality of it. And just in particular, what type of loan sizes are we looking at here? And just still a little bit more color would be helpful.

Brian, this is Jim. Let me handle the M&A front, and I'll it over to Scott for the details in ag. I think we approach the M&As like any one of our [calling] efforts. It's just consistent. It's ongoing. It's targeted. And you know as well as we do that there is a process in place. It's got to be a willing seller along with a willing buyer. So we're spending more time there and having a lot of conversations, but we're really focused on our business day to day, and that's the goal. I'll turn to Scott to talk about the ag performance.

Yes, Brian, I guess, maybe some more color on the ag would be, as I said, this is team that had been together at farm credit at JCB. We've added some depth on the credit side since they've joined us, and we're being opportunistic coming out of a down cycle. They are calling on businesses and business owners that they've known and banked for many years, and we're able to somewhat cherry-pick the ones that have managed well through the downturn that are well-capitalized. And I think our model right now, also because of the stress and maybe how other banks have looked at that portfolio, we're getting good opportunities. So it's generally within 150-mile radius of our Midwest markets. They're pretty traditional: row crop, swine, cattle. These are large family-owned and midsized farms. They have operating history, generally pretty good risk management tools that they're using, good contractual or long-term history with their clients. So our goal is to have a balanced portfolio. I think a great portfolio would be kind of 30% row, 30% swine, 30% cattle, with some dairy in there. That's what it looks like now. That's it. I think we're looking at it, watching it, managing it, just like we do our other specialties. Right now, we're watching for indicators that would -- if there's a turn in that market, we'll react, but the results we're seeing now from the year-end from those clients are meeting or exceeding our expectations. So we like what we see so far.

Okay, that's helpful, Scott. And just maybe one last thing, if I can sneak it in. Just -- Keene, just last year with the state tax income that was accelerated or a piece of it was accelerated in the fourth quarter, we kind of think about annual '18, I mean, I guess, should the fourth quarter still be kind of elevated? Or was that just -- was that an outsized level last year that you're kind of looking over year-over-year comparisons that -- what's the best way to think about that now that you've gotten fourth and first quarter kind of under your belt?

Yes, that's a very difficult question. I'm going to give you an answer, and I know it's going to be wrong at some point, but I hope it to be close. So that's about a $2.5 million revenue business, and historically, we would expect it to be about $2 million in the fourth and about $0.5 million in the first. But I'm always very cautious of giving actual number answers.

Yes. Okay. All right. And just capital, you guys -- the buyback you did this quarter, I guess, is there additional shares on that authorization? I guess, how are you thinking about that at this point?

Yes, we have -- I think it's about 1.6 million or so of shares left. So there's plenty of shares more so than we intend to execute on in the short term.

(Operator Instructions) And we'll go next to [Eric Grubelich], a private investor.

I tuned in a couple minutes late, and you were, I think, talking about Arizona. And I've also -- for some reason, your website, I -- the presentation is not downloading right now. So what I wanted to find out was, you talked about the loan yield trends that I think you said newer loans are actually additive to your loan yield. And I just wanted to find out, is that from a particular geography, specialty lending? What's causing that maybe above and beyond just the course of interest rates?

Yes. I think in my comments -- Eric, this is Keene. I think what I said is it's really coming from variable rate loans, which are driving that up. So I think as you heard from Scott, it's fairly widespread across the board in terms of where we grew, and we're seeing that sort of loan-by-loan. So I think it's a positive trend, but it's not like it's concentrated in one area where it's just EVL or just Arizona yields that are driving those rates up, and in other markets, they're below. So we're seeing it pretty much across the board, and that's, I think, in particular because we use similar pricing and return thresholds and discipline across all of our business units and organization.

Okay. So it's not from a new area of lending or some kind of change in the risk profile and it's just more of the (inaudible).

Not at all.

Okay, great. That's all I had.

Thank you. Thank you for the question.

Thanks for the question, Eric. Sorry about the website.

And with no other questions at this time, I'll turn it back to management for closing remarks.

Yes. Well, thank you, Debbie, and thank you all for joining us this afternoon and for your interest in our company. We look forward to speaking to all of you at the end of the second quarter. Have a great day.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now disconnect.