Charles Funk - President and Chief Executive Officer Gary Ortale - Chief Financial Officer Kent Jehle - Chief Credit Officer Katie Lorenson - Chief Financial Officer in Waiting.

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

Welcome to the MidWestOne Financial Group 2016 Third Quarter Earnings 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 note, this event is being recorded.

I would now like to turn the conference over to Charlie Funk, President and CEO. Please go ahead..

Thank you very much, Carrie. Good morning everybody and thank you for joining us on the call. As I always do I want to read the forward-looking statement, which simply says this presentation contains forward-looking statements relating to the financial condition, results of operations, and business of MidWestOne Financial Group.

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, change 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 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 this presentation.

With that I will get started and talk quite a bit about the third quarter and then at the end of my prepared remarks maybe give a little bit of guidance for the fourth quarter and for 2017 even though it may be limited. There will be some guidance.

There is no doubt that I indicated this in my opening commentary in the earnings release that we were just appointed with the third quarter earnings per share, that said I think there are a lot of reasons for optimism in our company which I will cover in these remarks.

We had one time items that actually offset each other even though they may not have been recorded that way. During the quarter we of course had the sale of our office which was offset by two items that or somewhat extraordinary.

We had roughly $200,000 wire loss at the beginning of the quarter that we recognized during the quarter which simply came as a result of the employees not following proper policies and procedures.

So, we endured that and we also had a $400,000 impairment or excuse me write down on Oreo and that was as a result of the development loan that was made I believe in 2010 so the appraisal came in we took the write down. And when you put those things together they essentially offset each other.

As we indicated, we lost a little over $30 million in loans when we sold the Davenport office. We replaced about $10 million of the $30 million as of the end of the third quarter and today as we near the end of October, we probably replace $7 million to $10 million depending on the day so we are in the process of replacing those loans.

I think the exciting thing and we talked in length in the last earnings call about how the pipeline has gotten sparse, we have a very, what I would call, robust pipeline of loans well in excess of expected pay downs. The trick is to get the loans closed.

They have been for the most part approved and in November and December I would think we should see very good months in terms of getting these loans closed. The question always comes where are these loans coming from? The answer is not much different than it’s been in prior quarters.

The twin city’s markets essentially the closer you get to Minneapolis and suburbs, continues to be very strong. The Iowa City market has seen good activity as well with one large construction loan that has been approved and we will come on overtime.

If you look toward year-end it’s always a guessing game because you don’t always anticipate pay downs but I will give you a range of $2.170 billion to $2.190 billion in terms of where we think we should be at December 31 but again that’s effected by how quickly these loans close and also the related pay downs that we can’t always predict.

One other thing that I commented on, Katie can comment on more detail if you like but the appreciative income that we have been receiving especially in the third quarter continue on into the fourth quarter has been a little bit less than it would have otherwise have been because of the impact of writing down the FDIC receivable more perhaps than we had anticipated.

The good news is that the accretion should become more of a tailwind as we get into 2017 and the FDIC receivable is essentially written off. In terms of the [indiscernible] have been okay.

We have talked at length about our treasury management focus and we have talked about that for roughly 18 months of anticipated deposits that we think are going to continue to come on.

We have a couple of large deposit pay offs and we get this with large deposits customers in once case the customer changed its investment strategy and moved a large sum out of the bank.

And then we had another large customer this week that moved money but again these things are just in the flow of business and I think the most important thing is that there are lots of calls being made and we think that deposit generation will be easier and better than it has been in the past. We talk about non-interest income.

Our wealth management unit is down year-to-year, most of it is in the brokerage area and I think many of you know we cleared through LPL so we get good market data and industry data from LPL and it’s interesting to me that even though its stock market is having a reasonably good year this year but bank brokerage commissions are down throughout the industry and it would appear to me based on the data I have seen that ours are down about the same amount that other banks brokerage commissions are down.

We have hired one broker for the twin cities footprint and we are hopeful in the next six months we will be able to hire more in that footprint but at this point in time we don’t have signed agreements in place.

That leaves our trust in insurance units in wealth management and there is with a year ago and we have been crystal clear with all three of these units that we need growth in top line revenues and that will be a focus as we move into 2017. Mortgage had a good quarter and the fourth quarter starting well.

We typically get a slow down as we approach the holidays.

The MSR write downs continue to be an issue that drag onto that business that is just part of the business you are in if you are going to service loan portfolio, mortgage loan portfolios but we are hopeful at this level of interest rates that it will be a positive adjustment for the fourth quarter but we can’t really estimate that because we don’t know what the interest rates will be as the quarter progresses.

On expenses, I think it’s a good story on expenses. We have talked at -- about the need to reduce expenses and I would tell you that we are probably a little bit ahead of our schedule and the salary number should continue to come down as time goes by. Katie can talk more in detail about that if you like in the Q&A.

we are also beginning to see the data processing savings come into the income statement as the contracts get signed and the savings become realized.

We have talked about the consultants that we have hired and yesterday we actually had the final meeting and it was a very good meeting and is really too soon to talk about the opportunities that we think we have in 2017 but I am more that confident, I am certain that there will be more progress when it comes to the bottom line as a result of these recommendations.

And I thought that they did a very good job after our employees and working with them.

I think when all is said and done the biggest positive will be hard to measure but there are a lot of processes that we have both [ph] back which would have merged with MidWestOne which was a $1.2 billion and at MidWestOne which was a $1.7 billion when we merged and when you have a $3 billion bag you need different processes.

You also have to have the ability to scale going forward and I think there is going to be a lot of refinement there that will only make us better and more efficient company. A few words about asset quality. Very stable, you see that the net charge offs 8 basis points, that’s very good.

We have talked at length for the last 4 to 5 quarters about a large loan that is online accrual. It’s an Iowa City loan.

I think it’s fair to say, it’s a little closer to resolution but I wouldn’t want to predict resolution in the fourth quarter but we are moving own a path there but as with all these things it’s hard to predict like when you can actually get that wrapped up.

The crop report which plays into our agriculture loan portfolio is, the crop report is incredible and for those of you who are familiar with the words bin buster, this is probably a bin buster crop if there ever was one and we are hearing through our footprint probably the worst we hear is average yields but in any case they are facing all-time highs in terms of yields and even throwing out in portions of bushels an acre which 10 years ago, 200 bush was a very good harvest so that doesn’t totally make up for the low crop prices but helps because there is more crop to sell and so I think our bars to get a little bit of break in terms of most of them are seeing very god yields.

I think and we always say this on the third quarter call and the questions will come, how many downgrades you see on that. Well, the next 90 days we will begin the renewal season and we are going to try to expedite the season with our borrowers so that we can good idea of just where they stand.

I don’t think there is some questionable season credits downgrades. But I think we will have a much better idea of what this means for our income statement. By January when we host the earnings call. Be assured we are proactive and that I don’t think there is much of an income statement impact for the foreseeable future but as I have said many times.

The longer this goes on, the more stress it causes and inevitably you may seek some charge offs. We have reserved quite aggressively for our Ag portfolio within our loan loss reserve. And at this point it barely stakes what the credit quality is.

But it will be interesting to see as we go through the renewable statements and just how many credits are downgraded. A word about capital. I think capital is fine. We are on target in terms of our projections. We should be over 80% tangible common which has been our goal.

By the end of the year I would remind everybody that we do analyze the dividend in our January board meeting and I think there is good prospect is for an increase what it is. I don’t know, we really haven’t given too much thought to that just yet.

In terms of M&A there is certainly nothing M&A but there have been discussions and I would characterize most of them as preliminary discussion at this point but more and more you are seeing banks that are in the hundreds of billions of dollars range of hat their long term future is with the incredible amount of regulation we have and I think the longer this low interest rate environment goes on, that has an effect on us as well.

The growth as I said in quarter four and in 2017 I think really have to come mainly from the Iowa city and from the twin cities. I feel good about our prospects there.

I also think we have to understand that roughly a quarter, 20% to 25% of our footprint is in rural markets and the rural markets, if they are not in recession, they are very slow economies because if they are driven by agriculture. The people in agriculture are not spending the money.

They don’t have the discretionary income that they have to spend in the prior years so to expect much growth out of that part of our footprint is probably not realistic. But again I think we are very fortunate to be in Iowa City and to be in the twin cities because those economies are very strong.

I think one other thing that’s not financial but very clear to me and I think it’s very clear to everyone on our senior management that with each month that passes we are working more and more as one team.

The morale is better and I think as much as anything that adds to my confidence level because the company can’t succeed with poor morale and I don’t sense that there is much evidence of poor morale at this point in our footprint and that makes me feel very good. In terms of 2017 a couple of words when talking about 2017.

In retrospect as I look back we did not do a very good job of budgeting in 2016 and in some ways that is understandable. And I think as we look back to a year ago when everything was coming together with the merger and the banks we just missed a few things in our budget. And we are certain that we have learned from our mistakes.

We have focused a little more effort on 2017 earlier than we have in past years because people have been asking and I appreciate that and the only thing I would say about 2017 is that as I look at the estimated that are out there, I am confident that the estimates that are out there are accurate.

I think this is the first quarter and 3 or 4 quarters on this call I could speak with a real sense of optimism but I feel like there will be progress made in the fourth quarter 2016 and I think 2017 becomes pretty good year and I feel good about our abilities to lay out what has been projected for us.

The only thing I would say in concluding is that at this point as we were our return on tangible equity was over 12% and I think we have the ability to do better than that and I also am encouraged with the efficiency is coming down.

I think the efficiency has come own primarily because the past expense reductions and the current expense reductions we have been able to enact. I think to get our efficiency below 60% and to sustain that revenue grow past to come here a little more than it did this year and again I think that we should be able to do that.

In terms of our margin, our margin is, for those of you who follow our income statement know it bounces around a little bit because of the amount of intangibles and amortization and the discount accretion that comes in.

So we looked at our core margin and pay a lot of attention to that and I think the best we can come up with right now is probably 1 to 2 basis points of narrowing in the core margin because our loan portfolio tends to just come down a basis point or 2 a quarter and it looks like that our cost of funds maybe bottomed out a little bit.

There maybe a little bit of opportunity there. We will get rid of some high costs federal loan bank borrowings as we go on but by and large our cost of funds is pretty much hit bottom and if we can keep it along these levels that will more than likely to be a good achievement.

So, with that I think that’s all I have to offer this morning and Carrie I would turn it back over to you for the Q&A. And we do have in the room Katie Lorenson, our Chief Financial officer and Kent Jehle, our Chief Credit officer available to answer the question so Carrie I will turn it back to you. .

Sure we will begin with the question and answer session. [Operator Instructions] Our first question comes from Jeff Rulis of D.A. Davidson. Please go ahead. .

Thank you good morning. Question on the, I guess honing in on the costs. First of the $200,000 in merger cost, is that, was that centered in any one line items, just trying to map where that would come out of. .

I believe that is data processing. This is Katie Jeff, that was data processing line item for the most part. .

Okay. great so if you would back that out then you would get to kind of low-20.2 million run rate and then expectations of further improvement.

Could you talk about, one is that run-rate, do you anticipate some modest improvement as we roll into 2017 and ultimately where that, cutting it a bone or where that kind of stops from that basis?.

Sure, yes I will take that one. So we do anticipate further reductions in non-operating, non-interest expense lines. As you recall our cost saving goal is that to get that to about $19 million quarter and we do look for again further decreases in Q4 and continue drop in 2017 to get to that goal..

And the goal is to hit that $19 million at Q4 of next year?.

No, I would say that $19 million is $19 million excluding the amortization expense and we anticipate hitting that goal in Q4 of this year and are coming close to it and getting there for sure 2017. .

Okay. Got you. And then maybe just coming back on that margin.

What was the core margin if you reported was $372,000?.

The core margin for the quarter was $361,000. The purchase accounting for the quarter was about $800,000. .

And what was the purchase accounting so you had 11 basis points this quarter, what was that in Q2?.

In Q2 the core margin was $369,000 with purchase accounting of about a $1 million. .

Okay that is helpful. And one last one on the tax rate.

Any commentary about how you close the year end, maybe into 2017, any estimated there?.

Yes we are seeing the tax rate increase from where it was with the historical MidWestOne financial group and of course we had the historical packed credits in the prior year so that does appear that’s going to be closer to the 30% range which is a couple of bps higher than it had been in the past. .

Okay, thank you. .

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

Hey guys, everyone. Question on efficiency ratio targets.

Seems like some of that is going to be from lower expenses but also higher revenues, is that correct?.

Yes..

And I guess on the revenue side is tell us what you think is going to be driving that, is that going to better fee income, loan gross, a better margin next year because of less write down over the receivable, just give some direction there. .

Well, Andrew I think it’s all of the above.

We have been writing down the and most of the amortization does relate to improved credit quality so that means more accretion would be used for future income than will be used for absorbing credit losses so that’s certainly impacts the efficiency ratio going forward and then we do look as Charlie eluded to his opening comments, additional top line revenue growth from our wealth management, mortgage, trust and again the non-interest expense continuing to come down in 2017 will attribute a drop in that ration to our goal.

.

Yes, we have to see, I must add, we have to make sure that we returned a little bit more balance sheet growth and I think the growth of the balance sheet will contribute to that as well. Again, we do have a little bit of head win as I said because of our location as we are located primarily in rural Iowa that, it’s not realistic to expect growth.

But we are just trying to maintain, we do think that Iowa City, the twin cities and to a little lesser extent Cedar Falls loop can help us in terms of the revenue growth..

Okay great thanks, that’s my only question. .

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

Good morning guys.

Maybe just a quick question on what line utilization looks like this quarter versus last quarter?.

Yes Dan this is Kent. I can answer that. The line utilization was up in the third quarter primarily driven on the construction side as we continue through the construction season.

I will add though as we look into the fourth quarter we are starting to see that turn the other direction on ag as we get into the harder season we are seen obviously, current year operating loans, a portion of those have been paid back as our clients are selling grains out of the fields and pay down their debts.

So we look at that, the game we probably picked up in the third quarter, we are starting to see that erode in the fourth quarter and won’t lean on that loan growth as look at the fourth quarter. .

Fair enough. And then maybe just a quick question on the Ag portfolio. A while back you guys stress tested that portfolio and I think you indicated that there were losses that were kind of coming at the lower end of your range.

Do you still feel that way given where the commodity prices and yields are shaking out right now? Or is there a change in your overall concern about the portfolio?.

Dan I will still again answer that as well. I would say that we still are in the same position when we look at how it was stressed up prior as Charlie eluded to the yields coming in very strong and actually when you look at the yields in Iowa, they are above the national average and the average is around the surrounding state.

So, again that gives us the commodities to move forward with, the key is going to be the marketing as we go through the rest of the season as we only saw about 15% of the current year’s crop price prior going in to the current market the prices that we see today but again we will be working closely with our clients to get their take on how they are going to market the grain over the upcoming months and in the next year.

So the good news is we were ahead of the game when it comes to the yields and we have the sell, we just need to work through the marketing piece. .

Got you.

That makes sense and then as you look at loan growth in the twin cities and I am sure they are both very competitive, I am sure that the yields coming out of the twin cities substantially lower than what we have seen in Iowa City?.

I would say they are very comfortable. I would say the nature of the competition is a little bit different but I think where it all falls out I don’t see a whole lot of difference. Where it all falls out, I don’t see a whole lot of difference. .

Yes, what I would add to that Dan is that we talked in the past and we dipped under 4% on our commercial real estate rate three and three quarters that did get us back in the game on quite a few conversations and it is part of what’s driving the pipeline that we are experiencing right now and that is for both markets as Charlie is eluded to. .

Yes, we just approved a nice loan yesterday. It was a variable rate loan and it was priced at 350 variable and that more or less, and we thought that was pretty good terms to get it to variability. It gets out there and you have to make sure you don’t compromise too much on the terms because there is still whole bunch of comprising on terms going on.

At least we see that as a loan presentations as we hear from commercial bankers. .

And then, couple of more questions here.

As we think about the margin and thank you for the guidance that you gave, have you priced in any rate hike for 2017 and that margin assumption?.

No, we typically don’t but our Chief, our treasurer Jim Cantrell will tell you that rate hike is a good thing for our company. So we are getting a little bit of a goose there. I think as many banks would if they were to raise rates. .

Okay and then last question.

How should we be thinking about your provision expense going forward?.

That’s a great question and I am going to look at our Chief Credit Officer. Well there is two components to that and I have Katie after this as well.

For our existing portfolio how we traditionally look at it, we would look at that comparable to what we would have in the past so purchase accounting aspect does come into play so with that I will defer to Katie to what the all in number would be as we look forward. .

Thank you. And I think what we are seeing as far as projecting what we can with renewals as such, the provision stay about the same pace that it has been for the last few quarters. .

Dan I don’t think we would qualify if we have a hiccup on the credit side that we would need to identify and realize the impairment, that would come into play and the only thing I would share that we do have one credit that is in the -- that we are watching very closely to see where we sort out with that one that will occur in this quarter if there is anything that’s going to be needed above and beyond I think what we are going to look at but again obviously we always have to mention if there’s anything that would come up as surprise that we would need to deal with.

.

Okay. Great thank you guys. .

Thank you Dan. .

Our next question comes from Brian Martin of FIG Partners. Please go ahead. .

Good morning. Maybe just a couple of things here.

Charlie it seems like last quarter you were fairly bullish if you will on loan growth, and the Davenport sale this quarter but we have also heard from some of your competitors that there has been a little bit of slowdown in the demand in some of the markets so just trying to get a sense for have you guys changed or maybe on the growth outlook on the net basis going forward as you look at 2017 I mean the pipelines are strong, good fourth quarter based on the range you gave but how you thinking about 2017 at this point and is there anything with ag being a little bit slower now, [indiscernible] you guys seeing that and does that temper your outlook on loan growth for next year?.

Well there’s still lot that’s out there and there is a lot of falling efforts and I think that we typically don’t project 6%, 7% or 8% loan growth as a company and I think we have been pretty consistent in the past that we just expect 4% to 5% and I think given the markets we are in, some markets will be over that and some will be under that but I am still in the 4% to 5% range for loans and maybe 3% to 4% for deposits.

I think that’s a realistic expectation, again I think there is one surprise, good surprise for us, I think that our treasury management area could come in ahead of what we think and produce higher deposits growth.

We price the same things every fall when we talk about the next year but we have never been one to forecast double digit loan growth but I think we should be able to deliver 4% to 5%. .

Okay, perfect.

And then maybe just I know you mentioned some of the non-recurring items that were in that other line incumbent, when you guys look at the current quarter what kind of a core run rate with the income and you kind of net out some of those items as they are kind of what the reported number was 5% or 7%, 6% or 7% is that kind of a clean number you guys look at or is there something I am missing in there?.

Hi Brian this is Katie. No I think you are right. I think the 5% - 6%, 5% - 7% because we did have the Davenport gain offset by the other real estate loss but then also in there is the MSR write down and that was about $200,000 for the quarter and in that, in 5%, 5.5%, 6% range should be a run rate going forward. .

Okay perfect. And then maybe one more for you Katie. It’s just the in the press release when you guys spell out kind of the increase in income, you talk about it being I think $800,000 or so this quarter. And in the release some of the tax you talk about is a different number.

The differential is, did I miss that in the tax or is there also something in the other piece of the $800,000?.

Yes sorry. There’s $600,000 in the loan interest income and then there is 200,000 which is coming to the end in the deposit mark-to-market, that's a positive impact on the interest expense. So those two combined are the purchase accounting entries that are entering into the net interest income and net interest margin..

Okay, perfect. And that 200 that you're getting on the deposit side, that -- do you also talk about that release and maybe I just missed it..

I'm not -- I think we did not talk about that in the release, and that's -- next quarter I think that's going to be less than 100,000 and that's the end of the deposit mark-to-markets for purchase accounting..

I got you.

Okay, that's perfect and then maybe just the last thing is -- your -- can you guys remind me where you're -- kind of relative to the 300 and 100 guidance; I mean are you -- where do you stand on that?.

Brian, this is Kent. We are under 250%, closer to 225% of the capital number when you look at that category..

Okay.

And then I guess -- just the way I think about this is I mean -- you're comfortable worth that -- I mean I guess your intent is in that goal over those limits -- I guess what's kind of the bigger picture thought as you look forward?.

I would put a range that we'd be in the 225% to 275% range. Again, the regulatory threshold is 300% and I would see us stay certainly under that 300% as we look at things today..

Okay, perfect.

And I think that you guys said that the tax rate -- I guess you're thinking 30% is good run rate to use going forward?.

It is unless we find more municipal bonds..

Okay. In the cost savings Charlie, just to be clear -- I mean the numbers that you guys are talking about on the expense side -- I think it was a $20 million number -- I guess depending on a lot -- they handle the amortization expense but the. -- is the consultancy you've brought into make some changes or at least give me some suggestions.

I guess the $20 million number; the target that you've got out there, does that include or exclude the recommendations? I guess, I assume it's got nothing of the recommendations but it makes sense as it could potentially be better if you implement some of their market relations or….

Yes. Brian, thank you for asking that question because I was in my remarks and I skipped right over it. That does not include anything from these recommendations. So anything that we would get there would be over about it because we didn't know what to expect.

And so -- as I said, I'm still trying to get my arms around the whole thing, so I can't really offer any guidance on that number, just know that we didn't put that in our forecast for '17 yet..

Okay, yes, that's all I was wondering.

And then just maybe to the amortization out of intangibles; Katie, did you know ballpark -- I mean I guess, it's just run rate of 970 -- I guess does that tail-off a bit in '17 or is it kind of stay at this level for a bit? Just so we're thinking about kind of managing the numbers you're talking about on the expense side?.

Yes, it does tail-off in '17. I think the number for '17 is about $3.2 million and in '16 it will end up closer to $4 million..

Okay.

So $3.2 million for full year '17?.

Right. And it declines every quarter..

Okay, I got you. I appreciate you guys taking the question. Thanks..

Thanks..

This concludes the question-and-answer session. I would now like to turn the conference back over to Charlie Funk for any closing remarks..

I'd just say thank you to everyone who joined us on the call. If anyone has any follow-up questions, please call either Katie or myself and we'll be happy to try to assist. I hope everybody has a great day and a good weekend..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day..