Midwestone Financial Group Inc (IOWA) (MOFG) 2016 Q1 法說會逐字稿

Good morning, everyone, and welcome to the MidWestOne Financial Group 2016 first-quarter earnings release conference.

(Operator Instructions)

Please note that today's event is being recorded. At this time, I would like to turn the conference call over to Mr. Charlie Funk, President and CEO. Sir, you may begin. You may begin.

Thank you very much, Jamie and thank you for joining us this morning. As we get started, as I always do, I will read the forward-looking statements message which just says, this presentation contains forward-looking statements relating to the financial conditions, results of operation and business at MidWestOne Financial Group Inc.

Forward-looking statements generally include words such as believes, expects, anticipates and other similar expressions. Actual results could differ materially from those indicated. Among the important factors that could cause actual results to differ materially are interest rates, changes in the mix of the Company's business, competitive pressures, general economic conditions and the risk factors detailed in the Company's reports and registration statements filed with the SEC.

MOFG undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances after the date of the presentation. And with that, let me begin and say that I have on the call in Iowa City our Chief Operating Officer, Sue Evans, Chief Credit Officer, Kent Jehle and Chief Financial Officer, Gary Ortale. And we also have Katie Lorenson, our Chief Financial Officer in Waiting, so to speak, in the Twin Cities.

Just to review of the prior quarter, I would say that we would describe the quarter as okay. We certainly think that we will have better metrics going forward than we had this quarter. With that said, there are a whole bunch of nuances in the numbers, and I will talk about some of them. If you would like to elaborate on them, we certainly can do that as well during the Q&A, but what we really want to do is provide clarity for everyone on that Let's start with the balance sheet and net interest income. Our loans were up about $20 million from year end. That's a little misleading, loan demand was actually pretty good. We, as you know, sold the Rice Lake in Barron, Wisconsin offices, which had $30 million in deposits and $20 million in loans. We also had our largest classified FDIC loss share credit payoff, which was fully accounted for, paid off without a loss, and that was $6 million, during the quarter.

So really, when you take that into consideration, we had a pretty strong quarter when it comes to loan demand. Loan demand, I think it's fair to say, came from the Iowa City market and from the Twin Cities market, both of those economies remain pretty strong right now. Deposits, pretty much flat, when you take the Rice Lake Barron sale out of the equation. When you look at net interest income compared to the fourth quarter, we also have to remember that we sold our Ottumwa, Iowa office during the fourth quarter. We sold that, I think it was December 2, that it closed, and that had $35 million in deposits and $15 million in loans. And we sold Rice Lake in Barron, so we expected a little bit of a contraction in net interest income.

Also of note, we talked a little bit about the one-off commercial credit that we are dealing with in Iowa and during the quarter, we charged off $230,000 of interest, previously collected interest which obviously had an effect -- negative effect on the net interest income. In terms of non-interest income, of course we had the gain on sale from Rice Lake and Barron. I would highlight our trust department in Iowa, which had a very, very strong first quarter, and I think they are on track to meet or exceed their budget this year, doing a tremendous job.

We've had a little weakness in our investment services area, in Iowa. We need that area to pick up the pace a little bit to meet their budget. If they do that, I think we can meet or exceed our goals and wealth management for the year.

Mortgage, had an okay quarter. And we think as the second quarter goes on we have a good pipeline, and we're expecting a pretty good second quarter from our mortgage unit. As far as deposit fees or service charges, we got a nice lift from the rollout of the new service charge schedule in the former Central Bank footprint which came prior to the bank merger on, April 2. And I think as the year goes on we have a chance to continue to augment that as we rollout a few more things in that particular part of our footprint. Our expenses, the regular number on expenses were high. As we said, there were some merger-related expenses in there.

In terms of the recurring expenses, we didn't see anything out of line or grossly out of line this quarter. In mid quarter, we should start to see a reduction in headcount that comes as the final finishing touches are being put on the banks' merger, so there will be a reduction in headcount that will come in the, probably in the next 30 days or so, most of that will occur.

I do want to take just a moment and remind everyone that we did, I would say successfully, merge the two banks together on April 2. I would just have one word and say, bravo. We did a lot more right, than we did wrong. An event like that does take its toll on the staff, and our front-line people in the Twin Cities especially have had a lot coming at them. I think everyone is anxious to move on and build our franchise. With that said, it's a process and we just need to move forward from that particular point -- from this particular point in time.

The last thing I will say about the merger the banks, and I think this is perhaps the most important thing, is I think it's fair to say that customer disruption was kept to a minimum. Which reflects the fine job that was done, not only by the front-line staff, but also by our operations and IT people. Really, a number of us a have been through a number of these types of events, and the customer disruption was kept I think to a minimum, which reflects very, very well on our entire staff. So that's the quarter.

If we look ahead a little bit, I think it's fair to say that loan growth continues. The pipeline perhaps is not as robust as it's been in prior quarters, but there still is a pipeline of loans. We are choosing not to compete at the low end of the market on rate or on policy exceptions, and there are a lot of those. In both markets, both in the Twin Cities and in Iowa.

It would be also a fair statement to say if we were willing to do [350], 3 5/8 on commercial real estate credits and do it in big volume, we could add a lot more loans. We have chosen not to do that at this particular point in time. And while I don't want to mislead anybody, there will still be occasional policy exceptions. Those are only being made on the strongest borrowers and the ones that we feel are our best customers.

We've talked in the past, in past quarters about competition, and I would say the competition now is probably a little bit keener. And I think the reason is that a lot of banks see, especially commercial real estate lending is about the only thing they have in this low rate environment. So we will soldier on, but we still do have a pipeline and expect loan growth to continue to be good going forward.

I have talked a lot about deposit growth, and I am encouraged by what I see as a renewed emphasis with some results on deposit generation. We've had some notable successes in the last 30 days in our Iowa footprint, with some fairly large the deposits that have come in have been a result of calling efforts. And we have a pretty nice pipeline that is starting to come in the Twin Cities area, and I have a couple of offices, especially in the Twin Cities area, that have made some very good calls. And I would hope in the second and third quarters we would start to see some results from those efforts, but I just heard yesterday about the pipeline we have in the Twin Cities, and I am very encouraged about that, about our ability to grow deposits going forward. Asset quality, of course we have the one-off commercial credit which we have talked about for several quarters, and finally that all came to fruition in this past quarter.

I want to speak for a minute about the agricultural sector. This was a tough renewal season. January, February, a little bit in December are the months when our a borrowers renew their line the credit for the coming year.

We did see more carryover debt this year than we've seen in prior years, and it was a -- I think it's fair to say it was a tough renewal season not only on our borrowers, but also on our bankers who did a really good job of getting through this season. I would speak for the Company when I say that we don't see losses on a big scale in this portfolio this year. There may be some small losses here or there, but I do think it's noted that we do have a higher percentage of our loan loss reserve allocated to ag.

Again, a reminder that operating lines for agriculture comprise about 6% of our loan portfolio and ag real estate 3%,so 9% is our direct exposure to agriculture. I think we can manage through this. We also recognize that every year that this continues, and this will be the third year now for tough conditions in agriculture, every year this continues it just adds stress to the borrowing base. But again, we do not see this as being a major event in 2016. It's just something we have to really keep our eyes on.

One of the things we are going to do, and we hope to provide clarity on the second quarter earnings call, within the next couple of weeks our loan review is going to stress test our agricultural portfolio, and then we would hope to report on that at the end of next quarter because we really believe that we need to go through the exercise and say, what happens for example in the price of corn goes to $3 a bushel and the price of soybeans has a like decline? Where does that put us in relationship to our ag portfolio? So there's more to come on that, but we are being as proactive as we can.

We did, for those of you that saw the earnings release, we did provide a loan-loss reserve on a non-acquired loans for the first time, and that was 1.36%. I think that's important to continue to track that. We will continue to report on that, and we would endeavor to keep that range in the [132 to 140] range, which we think is necessary going forward.

Efficiency, expenses, non-interest expense. We have signed a contract with a firm that we have worked with before, we worked with this particular firm about 10 years ago. We're very pleased with the work they did at the old Iowa State Bank and Trust in Iowa City. They're going to come into our Company and do an efficiency study that will encompass every area of the Company, and they will do this beginning in the third quarter. And I would expect by the end of the third quarter, the beginning of the fourth quarter, we would have their recommendations.

As we've talked about, we are committed and continue to believe that we will get to the $8 million in cost projection, our cost cuts that we talked about, when we announced the merger. We've identified roughly three-fourths of those. Some of them are still in the process of being implemented and will be implemented during the course of this year. And the goal, of course, is to have all of those identified and implemented during the 2017 year. I continue to say, and I've said this a lot in the last 90 days as I've met with various people, I see no reason that we can't accomplish those goals.

Let me end by talking a little bit about capital. You see that when we announced the merger and had our first quarter and our tangible common equity had gone to 7.2% plus or minus, and that was a little bit lower than we had originally modeled when he announced the merger. We are now at 7 3/4%, we're well on the way, I think, getting back to the 8% to 8.5% number that we think is a good number going forward. And perhaps we have made a little more progress than many of us thought we would make on that front.

Also, I think it's good to look back to the tangible book value when the deal was announced. We first -- the first quarter that we reported combined results was June 30 last year and our tangible book value was $18.06 at that time. Tangible book value per share, and ended this quarter at $19.57 a share. Again, we think we have had pretty good accretion back at tangible book value and perhaps we don't talk enough about that. But I think that's worthy of mention.

So Kev's here, Gary is here, Katie is here, I am here. I think, Jamie, we can now open it up to the questions.

(Operator Instructions)

Jeff Rulis, D.A. Davidson.

Thanks; good morning.

Good morning.

Question on the expense -- operating expense run rate. Charlie, you mentioned that you think you're solidifying into that normalized run rate. If we were to back out the merger costs, puts you in the low $21 million range. And then, you mentioned the headcount or some of the cost savings going forward. Could you range-bound your expectations as it plays out? And timeline through the rest of the year?

Yes. I'll let Gary and Katie, if Katie wants to jump in, can add to this.

But yes, we actually -- I think our run rate might be little lower than what you indicated in your question. And I will tell you that both Gary and Katie have spent a lot of time on this, and we've also spent a lot of time at the Board level continuing to talk about the necessity to lower this run rate.

Jeff, this is Gary.

What I would say is that, in talking to you and other analysts in the past, what I would say about the expenses is, we did come in, as you can see, at the $23.3 million range. We typically now have been backing out merger-related expenses and the purchase accounting expenses. And when you do that, we have a combined $3 million in expense this year that is in that $23.3 million. So we would say that the run rate is more close to the $20.2 million or $20.3 million range. I think our goal is to eventually get that run rate down under $20 million and closer to $19 million. But that's going to take probably the rest of this year and into next year before we can get there.

What I would also say is, we have worked hard to try and identify as many of the merger-related expenses and get them in and get them behind us. What I would also tell you, though, is that we do have some severance; and as Charlie just mentioned, we are going to engage this consultant. We're going to try to -- I think most of the severance will be done by the end of the second quarter and may continue into the third quarter, but definitely not past that. The consultant we're trying to get into this second quarter as well. So with all those things, we are doing our best to try and get these expenses behind us.

As far as cost saves, what I would say is, I think Katie and I would say that at the end of 2015 we were probably a little bit ahead of schedule on the cost saves. We have a lot to do here in 2016 to keep pace. And as Charlie indicated, we hope that by the end of this current year that we will have $6 million to $6.5 million of those $8 million originally identified cost saves certainly identified and executed upon. Obviously, we're bringing the consultant in to help find that last $1.5 million to $2 million, but I don't see that being executed on until either late this year or into 2017.

Okay, thanks.

Those would be my comments, Jeff.

Very helpful.

And then, just wanted to confirm that the gain on the sale of branches -- that was not included in your adjusted EPS of $0.60? Basically you just excluded the merger cost, not the gain there?

That is correct.

Okay. And the $700,000 -- was that in the other service charges? Where was that geographically?

It was in that other service charges, commissions, and fees line. And since you brought that up, I would share with you that, that line, since the merger and even before the merger -- but particularly since the merger has taken place -- beginning from last May, that line has become a catch-all for a lot of nonrecurring items. Like the sale of the branch, like OREO gains or losses, like central has an SBA component where they sometimes recognize gain on the sale of SBA loans. All of those things are going into that component -- or into that line item -- and can be somewhat volatile from quarter to quarter.

So I think what we're going to do next quarter, hopefully, is try and break that -- some of those other components, like the gains on the sale of branches or the gains on OREOs or SBA, into another line item so that the other service charges line becomes representative of the typical kinds of bank fees that go in there -- that being the debit and credit card fees, the telephone transfer fees, whatever fees that typically you would associate with the business of banking, to reduce that volatility there and better separate some of those items out for you.

That's great. That would be helpful, thanks.

Maybe just one last one, then, if I could -- just to quantify the accretive benefit from the data processing contract. You mentioned that, expect that to come, amount and timing of that? And that would be it for me, thanks.

Included in the data processing expense number, obviously it's significantly up from last quarter. That's reflective of about $1.750 million and the conversion costs that we paid to our processor. We did receive a benefit of roughly $1.5 million back, but accounting rules dictate that we recognize that over the term of the contract, which is now seven years. And so beginning in, I believe, in February, the second month of the quarter, that $1.5 million over seven years computes to about $18,000 a month. And we will bring that into -- it will be a negative expense, obviously, against the DP costs for the next seven years.

Okay. Thank you very much.

Andrew Liesch, Sandler O'Neill.

Good morning.

Good morning, Drew.

Just want to drill down more on the margin here. It seemed like there was the $1.2 million benefit from the accretion, but also offset by $600,000 of reversal. But then on -- also looked like deposit costs increased as well. So putting that all together, I'm just curious of where you are looking for the reported margin to come in here over the next few quarters?

Andrew, this is Gary again, I will try and tackle that one.

If you will recall, in the fourth quarter last year we had that error reported which significantly understated the interest expense and so overstated the net interest income. So that needs to be factored in as well. In addition to the purchase accounting or the discount accretion on the loans, we have other benefits from other purchase accounting items on the deposit side that is also yielding a benefit. The net benefit this quarter, though, was down from last quarter. And so there's been a lot of noise here, as you have indicated.

What I would tell you is, is that the [397] that we reported in the report -- if you back out these purchase accounting entries, both on the interest income and interest expense side, and you will find that our core margin rate is somewhere in that [379] range for the quarter. I think we see that continuing and maybe slightly narrowing as we move forward over the course of the rest of the year, though.

Great, thanks. And then, just on the expense side again, it sounds like the quarter number that you guys are using is closer to $20.2 million to $20.3 million?

That's correct because -- sorry, go ahead.

I was thinking the cost of the consultant coming on -- just curious how that might affect -- how that would affect that over the next few quarters?

Certainly. As I think I indicated a little earlier, we're going to try and accrue for that expense in this second quarter. I think we view that as a -- we will view that as a merger-related expenses as well, since we most likely wouldn't be doing this without the merger having taken place. So again, I'm talking purely backing out all merger-related, all purchase accounting. I think that's maybe the one item of difference between what Jeff commented on.

We have roughly included in -- I can find it here, it's right there, the amortization of intangible assets, $1.61 million this quarter; almost $1 million of that is purchase accounting or related to the amortization of the premium on the deposits. And we are taking that out. Even though that will be around for a few years yet, it is getting less and less each year. But we included that in addition to the other merger-related items, and that's how we got $2.1 million in merger-related, $0.9 million in this amortization of the intangible. That's the $3 million drop that we are making the allowance for, in coming up with that $20.2 million or $20.3 million run rate versus the $23.3 million that shows in the report.

Okay; and then more on that depreciation line -- are there expenses related to the depreciating your new buildings? So basically my question is, is this $1.061 expected to increase here this quarter before turning lower?

You mentioned -- are you talking about occupancy and equipment, Andrew, is that what you asked?

The depreciation of the new buildings that (multiple speakers) new office, or is that in the occupancy line?

That's in the occupancy line and equipment line. And that, we did begin depreciation on both facilities. I think we started the one place down the road maybe in the fourth quarter of last year and the Tower portion downtown here we started in this first quarter. So I was pleased to see that our occupancy and equipment was lower, given the fact that we did begin this process of adding that depreciation into the component.

Very helpful. I will step back, thank you.

Thank you.

Brian Martin, FIG Partners.

Hello, guys.

Hello, Brian.

Gary, since you are hot on the topic with expenses -- not to beat a dead horse -- but the amortization of intangibles the $1 million that was out there this quarter -- when you talk about backing that out, just making sure I understand what you guys are talking about on the $22 million? If the amortization will be in there next quarter, it's on a reported basis, your guidance would be more on the $21.2 million type of range versus the $20.2 million range, is that fair?

That is correct. Yes.

Okay, and then just --

That $1 million, or $900,000 of amortization will be there each quarter for the rest of this year; and going into 2017 though, it will drop to maybe the $700,000 to $800,000 range. And then every year thereafter it will get -- $700,000 to 800,000 per quarter -- and then it will get less and less in successive years. But you are correct that the, if we back out merger-related next quarter, the run rate would be closer to $21 million because of the intangible amortization.

Okay, and then just making sure I understand the other part -- getting down to the $6 million to $6.5 million or the 75% of the expenses, where does that put that $21 million? If you get to the target you are looking for to get to that $6 million in savings out by the fourth quarter of this year, how much below that $21 million are we talking about to achieve that level?

I think that will get us into the low -- again, if you're going to include the purchase accounting in that, hopefully it will get us under the $21 million and closer to the $20 million.

Okay. That is that's helpful. A couple other questions.

Can you just go through -- I know you talked about breaking out the fee income a little bit next quarter, taking out some of the noise -- but when you look at the first quarter being on a core basis, it seems like it's around $5.6 million. If that number is wrong you can let me know. But I guess, just how to think about the run rate on fee income going forward? It sounds like you've got a few things that are going, more of a tailwind on some of the things Charlie talked about. But is this a reasonable type of run rate? I know mortgage is better, service charges you expect a little bit more, but the $5.6 million that looked to be core this quarter -- can you just give a little bit color on how you think about that over the balance of the year?

Yes, I would also add to Charlie's comments on the mortgage line item, it looks somewhat depressed from what it was in the fourth quarter. And you might think so, given that from a mortgage perspective, that's usually a pretty slow quarter. What I would also tell you that affects this number significantly for us from quarter to quarter is the value of the mortgage servicing rights. And when interest rates or mortgage rates come down, that valuation comes down. And so we had a negative $160,000 mark on those mortgage servicing rights in this quarter.

Last quarter, in the fourth quarter of last year we had a write-up of $70,000, so you've got a $230,000 swing there. So I think your $5.6 million, if you take the $6.4 million, add back a loss on the building, take out the gain on the sale of the branch, and then maybe adjust for this mortgage servicing rights [side], you probably have that $5.6 million, $5.7 million run rate.

Okay; and your thought is, that's a good level maybe in trending upward as you make some progress on some of the things Charlie alluded to?

Yes, I think I was pretty encouraged by the trust investment insurance, given the equity markets in the first quarter. And I would hope that if that recovers, we might see a little bit better performance, but can't say that for sure. But that obviously affects the trust numbers to some degree as well, but if I want to be optimistic and say that the market will continue to -- equity market, at least, continue to perform, hopefully that number will be a good indication of what we would see going forward.

Okay perfect. And then just your reconciliation of the margin to get to the 379 -- was there something in addition that you adjusted for other than the $1.2 million? I just want to make sure I know what you were -- there was something else you were adjusting for?

Arriving at the 379, I just made the allowance for the -- adjustment for the discount accretion only. So I did not adjust it with some of those other expense benefits that we had there or the fact that the interest expense number was understated last. I think if you take all that out, we might be closer to a 373 run rate. But again, we're going to have some level of discount accretion, it's just a matter of how much. And I would say that the amount of discount accretion we recognize has been tracking fairly close to our estimates, although I would also say from the fourth quarter last year to this first quarter, it was probably down about $250,000 to $300,000, if I am not getting my numbers all mixed up.

Okay. All right, that was helpful. And then maybe just two other things, then I will hop out.

The loan outlook -- maybe this is more for Charlie. It sounded, the numbers were a little bit better. They are masked by a few things this quarter, but it also sounds as though you're a little bit more tempered on loan growth. In the past it seemed like the second and third quarters were a bit more productive, especially up in the Twin Cities. Is that a fair assessment based on your commentary? Or are you as optimistic as you were last quarter, heading into the middle part of the year here?

I will give you the overview, Brian, that's a good question, and I think my answer would be that the last couple of quarters, when we've talked about the pipeline, it was an outstanding outlook because of what they had going in the Twin Cities. Adding to what we have in Iowa City, it was outstanding. And now, partially because I think we are reining things in just a little bit and not willing to compete too much on price and terms, it's good. It's not outstanding anymore, but it's still good. If I compare what I see the outlook being compared to the last five years, when we've have these calls, I would say, it's okay, it's pretty good. Kent, you can chime in if you like.

Brian, this is Kent.

The only thing I would add to Charlie's comments would be, we are entering into the construction season, so we will receive some lift from that. So even with an okay or good pipeline, we'll get a little more lift through the construction season. Then also, the ag lines will continue to fund as we are into the fields and everything is moving forward. So there will be a little more lift with that as we get towards the end of the second quarter and enter into the third quarter. So I would agree with Charlie, though -- compared to where our pipeline was, it is more in the good range, which I would define as about half of what the pipeline was previously from a dollar amount.

I got you, okay, that's helpful. And just the last two and I will hop off.

Kent, maybe just more for you since -- the part about the provision for the quarter, the breakout of what was the acquired portfolio versus legacy -- can you give some insight on that? And then just how you are thinking about it going forward? It sounds like maybe you're a bit more conservative on the ag side. I guess that suggests maybe a little bit more allocation to that piece of it?

Yes. Maybe starting with the end of your question: as Charlie alluded to, as we went through the renewal season, we did see more stress in our customers as far as carryover debt from the previous crop year. So we did have migrations of ratings. It wasn't significant, and again, as we work through this year, we will keep our eye on that. Having said that, then we did adjust our factors in our reserve calculation related to ag to account for that from our standpoint. Therefore, we did lift those dollar amounts that are allocated in that specific bucket in that regard.

So as far as the new information that we included, I give a lot of credit to Katie Lorenson, and she can certainly add to this, but it was important for us to look at the loans that remain under the discount, have those be separate, and then look at the rest of our portfolio that actually is being allocated through our reserve that's on the books. And that's where we ended up in that mid [130] range when we looked at that. That gives us the barometer of what we actually have reserved for those specific loans. Then, as we have loans migrate away from the discount across, we will continue to monitor that as we bring the discount into the bank as either renewed, or as we have new growth as well, from that aspect.

So that was our attempt, and I think really good attempt to provide clarity in that area so you can see exactly, when you look at our allowance for loan loss, what we have for loans that are against that and be able to measure that going forward. And I would offer Katie, if she's got any additional comments.

Just real quick, I just add that we just hope to provide some clarity again as to the discount that does remain out there on those acquired loans, because it is quite sizable. And as you know on the call, some of that relates to future income and then some is there to absorb credit losses.

Okay. Understood.

And I think that is -- I think that was it for me, other than if -- Gary, if you have any comment on the tax rate, any changes there? Or just maybe give any update on that? That's all I had.

No, as you know, in the fourth quarter and third quarter last year we did take significant historical tax credits which brought the rate down, effective rate down. But I think we are back closer to that 25% rate that we normally have indicated. There was no historical credits this quarter. We're still working with the state now versus the Fed. So there's still the possibility that we may get a little bit more in credit, but I don't foresee that for the second quarter; it may even be out to the third quarter, if it happens at all.

Okay, so the current run rate -- use that for the time being?

Yes.

Okay. Perfect; thanks, guys.

Thank you.

Daniel Cardenas, Raymond James.

Good morning, guys.

Good morning.

Just a couple quick questions.

Charlie, I think you mentioned in your prepared comments that you are beginning to see some deposit growth in the Iowa market, which -- is that growth coming at an expense to the margin? Or are we seeing perhaps the credit unions, the larger credit unions, maybe back down a little bit from where they price? What's driving that growth in the Iowa market right now?

First of all, I don't think the words back down are in their DNA, so we're not seeing that. But I think, Dan, that this is coming from calling on larger customers that have large sums of money to invest. And you can say it's coming at a little bit of a cost, but we -- if it gets too much, we can pass on it and we will pass on it. If you can bring in $3 million, $4 million, $5 million and you have to pay 10 basis points above your stated rate that you would pay for somebody with $100,000, you are probably going to do that. So it's been that sort of thing. But it's really been identifying large depositors and getting a commitment from those depositors.

Okay. And then in the Minneapolis marketplace -- is competition a little bit more rational there?

Much more rational if you're looking at a rate. It's a good competition; it's just that in the Twin Cities, when you've got 75% of the deposits, bank deposits, held at US Bank and Wells Fargo, that has a real effect on the rate structure. Whereas in our market, the credit unions, everybody has to keep up with the credit unions. In the Twin Cities it's keep up with Wells Fargo and US Bank. So even if you are above those rates, you're still probably below the rate we have to pay in Iowa. So yes, it's much more rational. Very competitive on loans up there, however.

I would imagine. Okay.

And then just a quick question on the capital management side. If you are being more selective when it comes to loan growth, can we expect to see perhaps a pickup in share repurchase activity? Or is that not necessarily the case?

Well, we certainly could, and I think that depends on the circumstances. It's a fair question. My answer would be it is not something that we talked a lot about at this point in time. If we get another couple of quarters down the road and we are still where we are right now in terms of our Company, then I am sure that's something that would be on the table for discussion.

Okay, great. All my other questions have been answered. Thanks, guys.

Thank you, Dan.

(Operator Instructions)

Andrew Liesch, Sandler O'Neill.

Hello, guys.

Do you have a preliminary estimate on how much the consultant is going to cost this quarter?

Yes, I'm not sure how much we will accrue this quarter, but I can say this: one of the things we're happy about is we negotiated a one-time fee, not a contingency fee. So I don't know -- Gary, if you want to give some advice on that.

It's a one-time fee and we plan to accrue for all of it in the second quarter.

Okay. Thank you.

Ladies and gentlemen, at this time I am showing no additional questions. I would like to turn the conference call back over to Management for any closing remarks.

Thanks for being on the call this morning, and we appreciate all the good questions. And, as always, I would say to all of our listeners and shareholders, anytime you have further questions, don't hesitate to call any of us who have spoken on the call this morning. So thanks for joining our call this quarter, and we will talk to you next quarter, if not before.

Ladies and gentlemen that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.