MidWestOne Financial : Reports Second Quarter 2016 Financial Results

Iowa City, Iowa, July 28, 2016 - MidWestOne Financial Group, Inc. (NASDAQ - MOFG) today reported its financial results for the three and six months ended June 30, 2016. Net income for the second quarter of 2016 totaled $4.8 million, compared with $4.5 million for the same period last year. Both basic and diluted earnings per share were $0.42 for the second quarter of 2016, compared with $0.43 basic earnings per share and $0.42 diluted earnings per share for the second quarter of 2015. After excluding the effects of $1.8 million ($1.1 million after tax) of expenses related to the merger with Central Bank, adjusted diluted earnings per share for the second quarter of 2016 were $0.51, compared to $0.66, after excluding $2.7 million ($2.3 million after tax) of expenses related to the merger with Central Bancshares, Inc., for the same period last year. Central Bancshares, Inc. merged into the Company on May 1, 2015, and Central Bank, a wholly owned subsidiary of the Company after the holding company merger, merged into MidWestOne Bank on April 2, 2016.

Earnings comparisons between the second quarter of 2016 and the same period in 2015 were affected primarily by second quarter 2016 results reflecting three months of post-merger operations after the merger with Central Bancshares, while second quarter 2015 included only two months of post-merger operations. Second quarter 2016 earnings are highlighted by the following:

• a 9.8% increase in net interest income, due primarily to an 11.3% increase in interest income which included merger-related discount accretion of $0.7 million;

• a 10.0% increase in noninterest income, driven by increases in other gains of $0.5 million and service charges and fees on deposit accounts of $0.2 million; offset by

• an increase of $0.3 million in the provision for loan losses, due primarily to loan growth; and

• a 15.0% increase in noninterest expense, primarily due to a 33.3% increase in salaries and employee benefits which resulted mainly from $1.3 million of merger-related compensation expense realized during the quarter.

"The second quarter of 2016 was one in which we were able to conclude our merger-related expenses, and these expenses weighed on the overall earnings results," stated President and Chief Executive Officer, Charles N. Funk. "While loan growth slowed during the quarter, we are busy building a good loan pipeline for the second half of 2016."

Net income for the six months ended June 30, 2016 was $10.3 million, an increase of $1.0 million, or 11.2%, compared to $9.3 million of net income for the same period in 2015, with diluted earnings per share of $0.90 and $0.99 for the comparative six month periods, respectively. The increase in net income was due primarily to first half 2016 results reflecting a full six months of operations after the merger with Central Bancshares, while the first half of 2015 included only two months of post-merger operations. The year-to-date 2016 income shows higher net interest income and increased noninterest income, partially offset by increased noninterest expense. After excluding the effects of $4.0 million ($2.5 million after tax) of expenses related to the merger with Central Bank, adjusted diluted earnings per share for the six months ended June 30, 2016 were $1.12, compared to $1.28, after excluding $3.2 million ($2.7 million after tax) of expenses related to the merger with Central Bancshares, Inc., for the same period last year.

Net interest income of $24.9 million for the second quarter of 2016 increased $2.2 million, or 9.8%, from $22.7 million for the second quarter of 2015, primarily due to an increase of $2.9 million, or 11.3%, in interest income. An increase in average loan balances, partially offset by a decrease in the merger-related discount accretion to $0.7 million for the second quarter of 2016

compared to $1.4 million for the second quarter of 2015, resulted in loan interest income growth of $3.0 million, or 13.6%, to

$24.6 million for the second quarter of 2016 compared to the second quarter of 2015. Income from investment securities was $3.3 million for the second quarter of 2016, equal to $3.3 million for the second quarter of 2015, which resulted from a decrease of

$12.8 million in the average balance, offset by an increase of 12 basis points in the yield of investment securities between the two comparable periods. There was no income from loan pool participations for the second quarter of 2016, as the Company sold its remaining loan pool participations in June 2015, and has completely exited this line of business. Income from loan pool participations was $0.2 million in the second quarter of 2015. Interest expense increased $0.6 million, or 25.8%, to $3.1 million for the second quarter of 2016, compared to $2.5 million for the same period in 2015, primarily due to an increase in both the average balance and rate of interest-bearing deposits, and a decrease in the merger-related amortization of the purchase accounting premium on certificates of deposit in the amount of $0.3 million for the second quarter of 2016, compared to $0.6 million for the same period of 2015. The additional cost of the higher average balance of FHLB borrowings, partially offset by the absence of interest expense on a subordinated note assumed in the Central Bancshares merger and subsequently paid-off, also resulted in increased interest expense.

Net interest income for the six months ended June 30, 2016 was $50.5 million, up $13.5 million, or 36.6%, from $37.0 million for the six months ended June 30, 2015, primarily due to an increase of $14.9 million, or 35.7%, in interest income. Loan interest income increased $15.5 million, or 45.2%, to $49.8 million for the first six months of 2016 compared to the first six months of 2015, primarily due to the merger-related increase in average loan balances of $695.4 million, or 47.1%, between the two periods, and the effect of the merger-related discount accretion of $1.9 million for the six months ended June 30, 2016 compare to $1.4 million for the six months ended June 30, 2015. Interest income on investment securities increased $0.1 million, or 1.5%, to $6.7 million for the first six months of 2016 compared to the first six months of 2015 primarily due to an increase of $15.3 million in the average balance, somewhat offset by a decrease of 5 basis points on the portfolio's yield between the comparative periods. There was no income from loan pool participations in the first half of 2016 compared to $0.8 million of income in the first half of 2015. Interest expense was $6.0 million for the six months ended June 30, 2016, an increase of $1.3 million, or 28.2%, compared to the first six months of 2015. Interest expense on deposits increased $1.0 million, or 28.4%, to $4.3 million for the six months ended June 30, 2016 (including $0.7 million in merger-related amortization of the purchase accounting premium on certificates of deposit) compared to $3.4 million (including $0.6 million in merger-related amortization) for the six months ended June 30, 2015.

The net interest margin for the second quarter of 2016, calculated on a fully tax-equivalent basis, was 3.83%, or 22 basis points lower than 4.05% for the second quarter of 2015. A lower yield received on loans, affected by a decrease in purchase accounting adjustments, combined with higher rates paid on interest-bearing deposits, resulted in the lower margin. The Company posted a net interest margin of 3.89% for the first six months of 2016, down 3 basis points from 3.92% for the same period in 2015.

"There is no question that the low interest rate environment is pressuring our net interest margin. Due to strong deposit growth early in the quarter, we carried higher than normal balances in low yielding fed funds," continued Mr. Funk. "We expect these funds to be deployed in the third quarter, which should improve net interest income."

The provision for loan losses for the second quarter of 2016 was $1.2 million, an increase of $0.3 million from $0.9 million in the second quarter of 2015. The increased provision primarily reflects the increase in outstanding loan balances due to organic loan growth, and an increase in nonperforming loans. The provision for loan losses for the first six months of 2016 was

$2.2 million, up $0.7 million from $1.5 million for the same period in 2015, also due to organic loan growth.

Noninterest income for the second quarter of 2016 increased to $5.6 million, up $0.5 million, or 10.0%, from $5.1 million in the second quarter of 2015. The greatest increase was in other gain (loss), which increased $0.5 million to a $0.1 million gain for the second quarter of 2016, compared to a loss of $0.4 million for the second quarter of 2015. Other gain (loss) represents gains and losses on the sale of other real estate owned, repossessed assets, and branch banking offices. The second quarter of 2016 reflects a net gain on sale of other real estate owned of $0.1 million, while the second quarter of 2015 included a net loss on the sale of other real estate owned of $0.4 million, due primarily to the sale of the loan pool participations in June 2015. These items were previously classified as other service charges and fees, and have now been broken out to provide more transparency. Service charges and fees on deposit accounts in the second quarter of 2016 increased $0.2 million, or 20.1%, compared to the second quarter of 2015, while other service charges and fees increased $0.2 million, or 12.2%, from $1.2 million in the second quarter of 2015 to $1.4 million for the second quarter of 2016. The noted increases were partially offset by decreased gains on the sale of available for sale securities of $0.2 million, a $0.2 million decrease in trust, investment and insurance fees, as well as a $0.1 million, or 9.4% decline in mortgage origination and loan servicing fees from $0.8 million for the second quarter of 2015 to $0.7 million for the second quarter of 2016.

For the six months ended June 30, 2016, noninterest income rose to $12.0 million, an increase of $2.9 million, or 31.9%, from $9.1 million during the same period of 2015. The greatest increase for the six months ended June 30, 2016, was in other gain (loss), which increased $1.6 million to a gain of $1.2 million for the six months ended June 30, 2016, compared to a loss of $0.4

million for the six months ended June 30, 2015. The first six months of 2016 reflects a net gain on sale of other real estate owned of $0.8 million, and a net gain on the sale of the Rice Lake and Barron, Wisconsin branches of $0.5 million. The first six months of 2015 included a net loss on the sale of other real estate owned of $0.4 million, due primarily the sale of the loan pool participations in June 2015. Other service charges and fees rose from $1.8 million for the six months ended June 30, 2015, to $2.8 million for the six months ended June 30, 2016, an increase of $1.0 million, or 54.9%. Another significant contributor to the overall increase in noninterest income was service charges and fees on deposit accounts, which increased $0.7 million to $2.5 million for the first six months of 2016, compared with $1.8 million for the same period of 2015. Mortgage origination and loan servicing fees in the first six months of 2016 increased $0.2 million, or 21.8%, from $1.1 million for the same period in 2015. These increases were partially offset by decreased gains on the sale of available for sale securities of $0.5 million between the two periods. In addition, trust, investment, and insurance fees also decreased to $2.9 million for the first six months of 2016, a decline of $0.3 million, or 8.6%, from $3.2 million for the same period in 2015.

Second quarter 2016 noninterest expense was $22.8 million, up $3.0 million, or 15.0%, from the second quarter of 2015. Salaries and employee benefits increased $3.3 million, or 33.3%, between the second quarter of 2015 and the second quarter of 2016 mainly as a result of $1.3 million in expenses related to the bank merger in the second quarter of 2016, and three months of expenses in the second quarter of 2016 compared to two months of expenses in the second quarter of 2015 relating to the increased number of employees of the Company after the holding company merger. Net occupancy and equipment expense increased $1.0 million, or 42.0%, from $2.3 million for the second quarter of 2015 to $3.3 million for the second quarter of 2016, and data processing fees increased $0.1 million, or 21.1%, for the second quarter of 2016 compared with the second quarter of 2015. These increases were partially offset by a decrease in professional fees expense of $1.0 million, or 45.2%, for the second quarter of 2016, compared with the second quarter of 2015 mainly due to lower merger-related expenses. Other operating expense for the second quarter of 2016 decreased $0.3 million, or 9.1%, compared with the second quarter of 2015, and amortization expense declined from $1.2 million for the second quarter of 2015 to $1.0 million for the second quarter of 2016. Merger-related expenses in the second quarter of 2016 were $1.8 million ($1.1 million after tax), relating to the merger of the banks, compared to $2.7 million ($2.3 million after tax), in the second quarter of 2015, relating to the holding company merger. The majority of the second quarter 2016 merger expenses were comprised of salaries and employee benefits, which increased $1.2 million for the second quarter of 2016 compared with the second quarter of 2015. The increase was primarily due to the bank merger-related accrual for employees identified for termination. Merger-related professional fees expense decreased $1.2 million, or 79.95%, for the second quarter of 2016, compared with the second quarter of 2015, and merger-related other operating expense for the second quarter of 2016 decreased $0.9 million, or 87.6%, compared with the second quarter of 2015.

"We expect our noninterest expense to decrease in the second half of 2016, as we are ahead of schedule in our goal to reduce expenses," stated Mr. Funk. "In addition, five officers left the Company in the second quarter, which will reduce salary expense and result in cost savings."

Noninterest expense increased to $46.3 million for the six months ended June 30, 2016 compared with $31.0 million for the six months ended June 30, 2015, an increase of $15.2 million, or 49.1%. With the exception of professional fees, which decreased

$0.7 million, or 25.5%, due to lower merger-related expenses, all categories of noninterest expense increased. Total merger-related expenses paid were $4.0 million ($2.5 million after tax), for the first six months of 2016. These expenses are reflected mainly in data processing expense, which increased $2.3 million, from $1.1 million for the first six months of 2015, to $3.4 million for the first six months of 2016. Contract termination expense of $1.8 million realized during the first quarter of 2016, in connection with the merger of the banks, was the primary cause of the increase. Salaries and employee benefits increased $9.1 million, or 54.0%, from $16.9 million for the six months ended June 30, 2015 to $26.0 million for the six months ended June 30, 2016, reflecting a

$1.2 million increase in merger-related expenses, and the increased number of employees of the Company after the holding company merger. Net occupancy and equipment expense rose from $3.9 million for the first six months of 2015 to $6.6 million for the same period of 2016, an increase of $2.7 million, or 70.1%.

Income tax expense was $1.8 million for the second quarter of 2016 compared to $2.6 million for the same period in 2015, and was $3.7 million for the six months ended June 30, 2016 compared to $4.3 million for the same period in 2015. This expense variation was primarily due to a change in the level of taxable income between the comparable periods because of the merger.

Total assets increased to $3.00 billion at June 30, 2016 from $2.98 billion at December 31, 2015, mainly attributable to higher cash and cash equivalents, which increased $63.9 million, or 135.6%, and loans which increased $16.2 million, or 0.8%. These increases were partially offset by decreases in investment securities available for sale of $56.4 million, or 13.2%. Total deposits at June 30, 2016, were $2.46 billion, unchanged from December 31, 2015. While total deposits remained static, the mix of deposits saw a decrease in non-interest bearing demand of $23.5 million, or 4.2%. This decrease was offset by increases between December 31, 2015 and June 30, 2016 of $8.7 million, or 0.8% in interest-bearing checking deposits, of $8.5 million, or 1.31%, in certificates of deposit, and $6.4 million, or 3.4%, in savings deposits. The Company initiated new long-term borrowings from

an unaffiliated bank of $25.0 million during the second quarter of 2015 in connection with the closing of the holding company merger. At June 30, 2016, this note had an outstanding balance of $20.0 million, a decrease of $2.5 million, or 11.1%, from December 31, 2015, due to normal scheduled repayments. Securities sold under agreement to repurchase declined $7.0 million between December 31, 2015 and June 30, 2016, while FHLB borrowings increased $20.0 million, or 23.0%, between December 31,

2015 and June 30, 2016, to $107.0 million at June 30, 2016.

Total loans (excluding loans held for sale) increased $16.2 million, or 0.8%, from $2.15 billion at December 31, 2015, to $2.17 billion at June 30, 2016. Increases were primarily concentrated in commercial real estate-other, commercial and industrial loans, construction and development, and farmland loans. These increases were partially offset by decreases in residential real estate loans. As of June 30, 2016, the largest category of bank loans was commercial real estate loans, comprising approximately 47% of the portfolio, of which 6% of total loans were multifamily residential mortgages, 6% of total loans were construction and development, and 4% of total loans were farmland. Residential real estate loans was the next largest category at 23% of total loans, followed by commercial and industrial loans at 22%, agricultural loans at 6%, and consumer loans at 2%. The Company also held

$23.3 million net of a discount of $6.0 million, or 1.1% of the total loan portfolio, in purchased credit impaired loans as a result of the merger.

In the second quarter of 2016, the Company ran three different stress test scenarios on its agricultural loan portfolio. The loans that had downward migration to Watch or Classified status under the stress test scenarios were then incorporated into our loan loss allowance model to determine any additional reserve requirements that would be advisable. "As planned, we conducted a stress test of our agricultural loan portfolio in the second quarter of 2016, and we believe the identified risk is manageable and will not adversely affect the Company in the near future," said Mr. Funk.

Nonperforming loans increased from $11.5 million, or 0.54% of total loans, at December 31, 2015, to $23.4 million, or 1.08% of total loans, at June 30, 2016. At June 30, 2016, nonperforming loans consisted of $15.0 million in nonaccrual loans, $7.2 million in troubled debt restructures ("TDRs") and $1.3 million in loans past due 90 days or more and still accruing. This compares to nonaccrual loans of $4.0 million, TDRs of $7.2 million, and loans past due 90 days or more and still accruing of $0.3 million at December 31, 2015. Nonaccrual loans increased $10.9 million between June 30, 2016 and December 31, 2015 due primarily to the addition of one commercial loan customer with four loans totaling $10.4 million. The Company is actively working with this customer to resolve the issues with these four loans. The balance of TDRs was unchanged, as the addition of three loans totaling $0.2 million were offset by payments collected from TDR-status borrowers and the charge-off of two TDRs totaling $0.2 million. Loans 90 days past due and still accruing interest increased $1.0 million between December 31, 2015 and June 30, 2016. Loans past due 30 to 89 days and still accruing interest (not included in the nonperforming loan totals) increased to $16.8 million at June 30, 2016, compared with $8.5 million at December 31, 2015. At June 30, 2016, other real estate owned (not included in nonperforming loans) was $4.1 million, down from $8.8 million of other real estate owned at December 31, 2015. During the first six months of 2016, the Company had a net decrease of 22 properties in other real estate owned. As of June 30, 2016, the allowance for loan losses was $21.2 million, or 0.98% of total loans, compared with $19.4 million, or 0.90% of total loans at December 31, 2015. The allowance for loan losses represented 90.46% of nonperforming loans at June 30, 2016, compared with 168.52% of nonperforming loans at December 31, 2015. The Company had net loan charge-offs of $0.5 million in the six months ended June 30, 2016, or an annualized 0.04% of average loans outstanding, compared to net charge-offs of $0.7 million, or an annualized 0.10% of average loans outstanding, for the same period of 2015.

Non-acquired loans with a balance of $1.59 billion had $20.8 million of the allowance for loan losses allocated to them, providing an allocated allowance for loan loss to non-acquired loan ratio of 1.31%. Non-acquired loans are total loans minus those loans acquired in the Central Bancshares merger. New loans and renewed loans made after the merger are considered non-acquired loans.

Investment securities totaled $496.7 million at June 30, 2016, or 16.5% of total assets, a decrease of $48.9 million, or 9.0%, from $545.7 million, or 18.3% of total assets, as of December 31, 2015. A total of $370.9 million of the investment securities were classified as available for sale at June 30, 2016, compared to $427.2 million at December 31, 2015. As of June 30, 2016, the portfolio consisted mainly of obligations of states and political subdivisions (48.8%), mortgage-backed securities and collateralized mortgage obligations (36.5%), and obligations of U.S. government agencies (1.2%). Investment securities held to maturity were

$125.9 million at June 30, 2016, compared to $118.4 million at December 31, 2015.