Charles Funk - President and CEO Kent Jehle - EVP and CCO Gary Ortale - EVP, CFO and Treasurer Katie Lorenson - CFO, Central Bank.

Jeff Rulis - D.A. Davidson Andrew Liesch - Sandler O’Neill Daniel Cardenas - Raymond James Brian Martin - FIG Partners.

Good day everyone and welcome to the MidWestOne Financial Group, Inc. 2015 Q3 Earnings Release Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note, today’s event is being recorded.

This time I would like to turn the conference over to Mr. Charles Funk, President and CEO. Please go ahead, sir..

Thank you very much Jamie. Good morning everyone and I would begin to make sure that our captains and attorneys are pleased by reminding you that this presentation contains forward-looking statements relating to the financial condition, results of operations, and business of 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 our 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 periodic reports, and registration statements that are filed with the SEC.

MOFG undertakes no obligation to publicly revise or update these forward-looking statements to reflect the events or circumstances after the date of the presentation.

And with that out of the way, I would thank everyone for joining us this morning and make a few preliminary comments, I think the headline numbers were pretty good and we’re pleased with the progress we are making especially on merger integration.

Of course, there were again, this quarter a number of noteworthy items of interest that I will discuss a little bit more fully in my comments. First of all the historic tax credits, we recognized on the renovation of our 1900s building that we're renovating in downtown Iowa City.

We did have a larger than expected provision and I think it’s really important to understand that has far more to do with loan growth and renewals of the acquired loan portfolios and deterioration of credit.

Balance sheet growth we thought was good, loan growth was solid and I think as you look at our company now and as Central Bank continues to work down the FDIC assisted portfolio they have that portfolio continues to pay down at a pretty good clip.

So the growth that we’ve had at Central Bank is net in those pay-downs very, very pleased with that, we also had growth in the Iowa portfolio.

Deposit growth, very good generally came late in the quarter, the last two or three weeks of the quarter, there were several very large deposits, stumble stick for a while 12 to 18 months, others could be here for three to six months perhaps longer, but they did come in good chunks and we're running well above our year-to-date average and deposits right now in MidWestOne Bank in Iowa.

It is fair to say that competition has become even more fierce for loans, Kent been talk about that a little more fully if you like. And it’s both in Minnesota and in Iowa. I think the underlying result there is with the current fed policy with there just fewer and fewer levers for banks to pull.

And we are seeing an easing of terms, we’re seeing more 25 year amortizations on commercial real estate deals. We’re seeing at times higher loan to values and the price competition continues, that really hasn’t change.

But we’re starting to see 7 and 10 year fixed rates below 4% and it’s not just confined to small banks or large banks it seems to be a mix of the two. And I would just say that we have to only navigate through this, it is a minefield and as I said Kent been talk more about it in the Q&A if you like.

We continue to be on track with the merger of Central Bank and MidWestOne Bank and we’ve identified April 2nd is the day.

Excuse me, there is a lot of preparation that goes into that, I am extremely pleased with the preparation thus far for the merging of the banks and that is, I think by far the biggest item of the merger thus far as to get a correct, is to do it right whenever we merge these two banks together.

We continue to identify cost reductions and to refresh your memory the cost reduction target is based on the 12/31/13 non-interest expense run rate for Central Bank and that is $8 million. I would estimate that we’re roughly 75% of the way there in terms of identifying what the reductions are going to be. We continue to be focused on the last 25%.

It maybe that the cost reductions could come just a little bit slower perhaps than anticipated and the reason for that is we want to do it right, we don’t want to do in a hasty matter, we want to do it right.

But I have every confidence that we will get to the target and good time and we will do correctly and we’ll get the numbers we said we were going to get. We did of course announce the sale of three of our offices during the quarter. I think over the long-term that allows our company to be much more efficient.

And we do believe, we can replace the lost income in our growth markets of Iowa City and the Twin Cities and perhaps a few other markets. But for the long-term, we think this is the right thing to do for our company.

Capital balance sheet growth did not allow us to make perhaps too much progress on our equity to tangible assets targets, but the office sales will help to improve this ratio, I think the key thing here is we believe we have ample room to grow on our balance sheet and get to the desired 8.5% range in the foreseeable future and we did make a comment about that in the earnings release.

Asset quality at this time seems fine with excellent reserve coverage. And again I will reiterate that the reserve build this quarter, a little above our expectations, but it have more to do with providing for growth and allocating for the market loans that have come up the renewal.

We do believe, we’re taking a conservative approach, but I think you’re all used to bankers saying that they take a conservative approach and conservative as always in the eye of the beholder and again net charge-offs continue to remain minimal in our company, but we also note for many banks in our industry.

So in summary, the number seem to be pretty good, 103 ROA for the quarter return on tangible equity in the mid to high-15s and efficiency ratio of 58%. The efficiency ratio can seems a little low to medium.

I think when things settle out it just seems that our efficiency will be in the low-60s, 63, 64 will be a guess, but we also understand that we are in enjoying a tailwind right now from the discount accretion and that the regular run rates are somewhat below this.

But nevertheless, we are very pleased with where we are at this particular point in time and have every confidence that the merger will continue to progress in good fashion. So [Jamie] with that that would conclude my comments.

I will say that we have Gary Ortale, our Chief Financial Officer of MidWestOne Financial Group, Kent Jehle, our Chief Credit Officer in Iowa City.

We also have Katie Lorenson, on the phone who is the Chief Financial Officer for Central Bank and Katie has been invaluable in many regards but especially in the accounting for purchased accounting and all that goes into that and so all three of us, all four of us would be available to answer any questions you might have. So it's back to you Jamie..

Ladies and gentlemen at this time we’ll begin the question-and-answer session. [Operator Instructions] And our first question today comes from Jeff Rulis from D.A. Davidson. Please go ahead with your question..

I was hoping, you could provide a little more loan segment color in the release you talked about commercial real estate one to four family and C&I is the strongest, but could you quantify that bid and provide maybe some color about what you saw in the quarter and perhaps also kind of the pipeline going forward?.

Hey Jeff this is Kent. I will answer that question and maybe start with the pipeline. We looked at the pipeline today from both banks perspective and aggregate that it be in the mid $20 million range. As I look at that the majority of that would be in commercial real estate with the balance be in C&I activity that we’re experiencing right now.

The other thing that you did eluded to as we continue to see a lift in our ag lines of credit, but there in the third quarter that helps in our growth and that is something we are looking at and will be a variable going forward as the harvest is completed and we determine how much of that will be paid in conjunction with harvest how much then we will anticipate being carried over in the next year before they sell the crops.

So that's a variable that's out there that could affect our overall net growth as we move forward, but primarily we would see a majority of our loan growth in the commercial real estate area, combination [none are occupied] and are occupied but also the C&I activity continues to be what I would say pretty good if not well above average.

And I would just add that during the quarter I probably should have said this in the opening comments, so we did walk away from several deals either because of rate or because of term and they were fairly sizable deals but we just chose not to participate at the rate and or the terms that were being shown to us correct..

How does that pipeline compare to last quarter?.

It would be slightly stronger, again because we started the merger occurred on May 2nd, so we didn’t have a full quarter, so as I look at it would be stronger from that standpoint than we were in the second quarter, but overall on a net basis and we talked in terms of annualized growth rate in the 6% range, we were slightly under that in the second quarter, but we still hold that as a net growth rate that we would forecast going forward..

Okay.

Thank you and then maybe one other one on the just on the margin and maybe for Charlie, you talked about the loan competition, you got a late search deposit this quarter, so maybe some extra funding and I guess the outlook you’ve been guarded on margins and I guess excluding the accretion income just kind of a core basis, how does that outlook look for margins?.

Gary did and home work on that, Gary might want to share the homework he has done on that..

Yes, Jeff I would say it this way, our margin as you saw came in at [indiscernible] without the discount accretion that was reflected this quarter, it probably just down to the 382 range and if you recall from last quarter I think when we made that same adjustment the margin came in, in the low 370 range, what I would tell you though is that we were still working through some of the provisional adjustments during this past quarter.

And one of the -- I won’t get into the details of that but we -- the numbers were moving around a little bit, if I was to hazard a guess, after seeing a 371 last quarter and 382 this quarter, my guess is the margin, the core margin would be somewhere in between those two numbers at this point, more or less in the high 370s range would be where I would put that..

Our next question comes from Andrew Liesch from Sandler O’Neill. Please go ahead with your question..

Just following up more on the margin here. It seemed like purchase accounting affected it more than I had anticipated. Just kind of curious and maybe Katie you can help here.

What are some of the payoffs on the FDIC loan? What’s your experience been, are these paying faster than they have been like over the last year?.

Thank you, Andrew. There are not paying down faster, it’s more of a sustained payoff, which I think we do anticipate these loans tailing off in the pay downs. But it has been sustained from what we have experienced in prior periods..

And then just one quick question on the tax.

Was there anything other than the historic tax credit that affected that or [let me just try and get at] what tax rate we should be using going forward?.

Now there was nothing really Andrew that affected the tax number other than the tax credits. I would say however, we didn’t really make it entirely clear in the announcement, the total credits between federal and state where in the 1.3 million range.

But what we didn’t share was that the -- believe it or not there is an after tax effect so with and without. In other words we did the calculation with and without the credit and that difference was roughly 1 million not a [1.3] million.

So I wasn’t sure who said, I think someone indicated in the preliminary comments that the impact was in the $0.11 per share range, I would probably put it more in the $0.09 per share range. But that’s probably a little more detail than you'd like. But believe it or not there is a tax effect on the tax credit.

So we probably should mention that in the release as well. But other than that, no there was nothing out of the ordinary that I can recall..

Okay, that’s very helpful. And I think was at least one of the people that mentioned that there was $0.11. Anyway, thank you. I’ll step back..

Our next question comes from Daniel Cardenas from Raymond James. Please go ahead with your question..

Charlie I apologize, I missed your comments on the cost saves.

Could you go through those again for me?.

On the cost saves. Yes, basically Dan just a reminder that our cost save projections and targets were based on the [12, 31] run rate for non-interest expense as Central Bank and they total roughly $8 million. And we think that right now, we’ve identified about 6 of the $8 million and it has not been implemented yet of course.

And the implementation might be a little bit short or a little bit longer. Simply because we want to do it right and not rush it. With that said, we still feel very confident that we will get to where we need to be in terms of the stated goals that we all agreed upon for expense reduction..

So when you say, it may take you a little bit longer, what are you talking a couple of quarters here is that kind of?.

Yes, yes. There have been some that specific things that we have targeted for 2016 that perhaps at mid-year that may not happen until January 2017. So you’re talking exactly a couple of quarters nothing longer than that..

[Operator Instructions] Our next question comes from Brian Martin from FIG Partners. Please go ahead with your question..

Can one of you guys just talk a little bit about the central operation and the loan generation you’re putting on up in their market. It sounds like you are still putting through some payoffs. I mean, I guess what are the originations versus payoffs look like maybe in the last two quarters.

I mean is it pretty typical, have there been more or less payoffs versus origination, it sounds like activity up there is definitely stronger than maybe originally expected or?.

Yes Brian, this is Kent. I will answer that, certainly if Katie wants to add anything she can. Katie alluded to the run rate on the FDIC loss share portfolio which the dollar amount is staying pretty constant, so when you look at the topline originations, they would be on average in that 8% to 10% range pretty consistently.

The summer months, early in the summer months are little slower, but as we look at the pipeline as we look at the overall activity that 8% to 10% origination rate can hold true. So that is where we had originally model things when we referred to getting together with Central Bank.

So we're pretty positive a lot of that isn’t the commercial real estate area activity that we see at this point in time and certainly as Charlie alluded to in his opening comments the competition for that is as fierce in the Twin Cities as we’re seeing in our markets as well..

Okay.

Helpful and the deposit side, Kent I guess, what is -- I guess what’s happening, it sounds like there is just lumpier credits you saw or just kind of what’s the deposit strategy up in the Minnesota market?.

The deposit strategy in the Minnesota market is still being worked on.

We are going to take a couple of our retail products up to that market that we think will generate some deposit growth, that's in the process of being ruled out right now, my guess is it will be a quarter or two before you are going to see much of a lift from that but we think specifically it's an interest checking account that we’ve had since 2008 in Iowa that they don't offer and so we think that has good potential.

We also continue to work on treasury management products in Iowa, we haven't seen the lift in Iowa that quite frankly that we had hoped, but we still think, we still like our strategy, we still like our products and we really do want to roll that out in the Twin Cities market.

I mean just to be candid about it, Brian, Central Bank has never focused on deposits and if you look at the last three or four years, as they acquired all these banks they were letting the high cost deposits to runoff, at the same time they were building their loan to deposit ratio and so I just think that particular bank will benefit from a more balanced approach where they continue to emphasize loans of course, but also put just as much of an emphasis on deposit generation..

Okay. That's helpful thanks and how about just [couple other things].

Gary, the tax rate it sounds like nothing unusual of this rate that we saw in this quarter is pretty good to think about going forward?.

Well, I don't know that I would say this rig going forward, I could tell you that the effective rate that you see for the nine months might be a better indicator especially as we bring on more of Central into this year and given that they really have very minimal tax exempt items.

I would also tell you however that this was just a partial tax credit that we took for the historical tax credit and we have more credits to come.

How much we’ll take again next quarter remains to be seen, but so the tax, I hate to say that I can’t be any more specific in that, but we will have some more tax credits coming -- certainly in the next quarter..

Okay.

And just to one of the clarification, the accretion income in the quarter, I mean last quarter you had a piece that was related to [CD mark] and I guess -- was that somewhat what it was last quarter, was that included in that accretion income number that you guys put in the release or…?.

No that was not included Brian, the CD mark is the one I alluded to earlier where we -- that was a provisional item last quarter and we did not have any impact this quarter on the margin, so that's why I qualified my earlier discussion with Jeff about the core margin being between the 372 and 384.

I put it in the high 370s, because if we've had that CD mark this quarter that we had last quarter that would have brought that down a little bit more, so hopefully we’ve got most of our provisional items resolved.

I think the only one outstanding at this time is the deferred tax, but we hope that in the fourth quarter here then we’ll have a what we would consider a good run rate and so that would be the color I would add to that..

Okay. And lastly you had -- I guess Charlie talked about the branches you closed. I guess are there more on the [indiscernible] and you’ve got some operations in Florida.

I guess, how are you thinking about the branch footprint at this point and further opportunities for consolidation?.

I think when you look at Florida, we have roughly, I think we’re approaching $100 million in loans there and maybe 80, 85 in deposits. And right now we have no plans other than to continue operate in Florida. And quite frankly have not even talked about that at the Board level.

So I think what we've told our employees, because anytime you announce something like this internally of course, it does create a lot of chattering in the halls and elsewhere. And what we’ve told our employees is of course we're always going to be analyzing all of our offices for efficiency and that sort of thing.

But the two that we’ve announced during the past quarter, those have been on the horizon for quite a while. And so now sort of back to just running our bank but always evaluating any opportunities we might have..

Okay. And then maybe just a last thing. On the fee income, it sounds like it is the expenses maybe and similar type of level for a bit if these cost saves take a little bit longer.

What’s the run rate on fee income this quarter, if on a core basis is that a pretty good number and where is there, I guess is there room for upside I guess as you take your products into the essential markets and just kind of how are you thinking about fee income perceptively?.

I can start that and perhaps Gary can add. I think in terms of the central market when we standardize our fees, I think there will be a little bit of a lift there in terms of fee income from the central portion of the footprint. We didn’t just take the MidWestOne Bank fees and overlaid them to Central Bank, we took a more thoughtful approach.

So in some cases, there were some reductions and fees perhaps in Iowa. But I think overall there be a little bit of a lift, which I can't quantify in terms of fee income, but I do think there will be some opportunity therefore, fee income growth in the aggregate..

Yes Brian. The only thing I would add to that is, I think as you look at this quarter’s fee income, it’s a pretty uneventful quarter in that there were no security gains and there was no unusual losses, I think we the loss in the sale approvals last quarter, there was nothing like that this quarter.

So the only other thing I would maybe add to that is just the normal ebb and flow of the wealth management area given the stock market. The stock market decline that we saw in the third, particularly in the third quarter, hopefully that has come back and so we may see some of that reflected in the fourth quarter.

And the same with the loan fees as we see the ebb and flows in that market during this peak periods and not so good the winter season. So I think this is a pretty good run rate and again Charlie's comment about, I think we do have some service charge opportunities particularly [indiscernible], this will be a good starting point for future numbers..

Even though Brian, it’s a small part of the overall, I think the wealth management fees as Gary said, they are all on target to hit budget insurance investment services and trust, they are all on target to hit budget this year.

So I think the run rate you’ve been seeing for wealth managements probably pretty indicative of what you’ll see in the fourth quarter and first quarter of next year..

Okay. And maybe just for Kent. Just how to think about when you guys are looking at provisioning reserve levels going forward. I guess can you give any thoughts I mean what you said this quarter's provision was a bit on the higher side that you provided for the growth and the portfolio of yields.

I guess will this type of level be reasonable assumption I guess just kind of big picture, how are you guys thinking about that?.

Yes, Brian that’s a certainly good question. And the simple answer is we could see this being comparable going forward, but you also got to remember there is various component into that number now that we didn’t have prior to the merger.

And I will start with MidWestOne, we looked at our provisions very typical to what we’ve done in the past, it was in the $450,000 range, we’re still north of our indicated reserve and we looked at that just like we have as I mentioned in previous quarters.

Then you get into the rest of it and you have other components like loan origination at Central Bank needed to be provided for and then loans that are being renewed out of the legacy Central Bank portfolio that are moving over now also need to be reserve for that brought another $900,000 almost a $1 million into the mix, just on those two areas and those are areas certainly we can forecast, but again loan originations and renewals versus payoffs certainly can be something that creates a verbal aspect to it.

The balance of that was made up just for any new identified impairments in the Central Bank portfolio and then an additional build-up of the reserve that we added given as Charlie alluded to the nature of how we look at providing in our overall company was also included in the balance of what would have been in that number.

So the variable pieces I look at really are the loans originated in Central Bank [indiscernible] renewed our legacy portfolio. Hope for that it helps..

[Operator Instructions] And ladies and gentlemen at this time it showing no additional questions. I’d like to turn the conference call back over for any closing remarks..

I just say thank you to all who joined us this morning, continue to ask us questions, as questions come up and I think the four of us who are on the call this morning are always going to be accessible to answer any questions or concerns you might have. So back to you Jamie. Thank you, so everyone have a great weekend..

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