Midwestone Financial Group
Annual Report 2015

Plain-text annual report

2 0 15 an n ua l r e p ort Learn constantly so we can continually improve Take good care of our cusTomersHire and reTain excellenT employeesalways conducT yourself wiTH THe uTmosT inTegriTywork as one TeamOur Operating principles:To our shareholders Charles N. FuNk, President & CEO JohN M. MorrisoN, Chairman a year ago in this space, we called 2014 a year of “achievement, success, and, yes, excitement.” In this context, 2015 could be best described in one word: “ditto.” Mid- WestOne Financial Group, Inc., ended 2015 with all-time record earnings. That’s the headline that many will see but there is much more to our story than the headline. It’s been quite a ride in 2015 as we build this company to sur- vive and, yes, thrive in the new world of post-recession banking. We thank you for taking the time to read this report of progress as we recap “the year that was,” 2015. Our merger with Central Banc- shares, Inc., of Golden Valley, Min- nesota, was completed on May 1, 2015. Since that time, our energies have been focused on bringing together two very similar, yet different, cultures as well as preparing for the merger of the two subsidiary banks, MidWestOne Bank of Iowa City and Central Bank of Golden Valley. We have been very cognizant of the need to do so without disrupting our customers’ banking business. As this is being written, we are on track to consummate this merger on April 2, 2016. When merged, the bank will have $2.9 billion in assets and will be one of the largest community banks in the Upper Midwest. Considering that the company operated for the last eight months of 2015 with Central Bank as a contribu- tor to earnings, it is no surprise that net income for 2015 was a record $25.118 million, far in excess of the $18.522 mil- lion that was recorded in 2014 with the smaller MidWestOne. More important, shareholder earnings per share set an all-time record with $2.42 earnings per diluted share in 2015 compared to $2.19 in 2014. It is significant that when excluding one-time merger-related charges, earnings of $2.70 per share far surpassed the $2.32 per share reported in 2014. Regular readers of this letter will find this year’s discussion of the com- pany a bit different than in prior years. This is due to all of the “noise” that has been created in our financial state- ments as a result of the merger. It is said “mergers are messy” and that’s never truer than when trying to decipher the financial statements. We will attempt to assist readers with that task in the following paragraphs. MidWestOne Bank in Iowa City had a solid year in 2015. The bank ended the year with a return on average assets of 1.31% and a return on average tangible equity of 14.40%. More significant, the efficiency ratio, which is a metric we monitor closely, remained relatively stable at an impressive 55.06%. We con- centrate on the efficiency ratio because effective management of expenses allows a company to succeed in times of robust growth as well as in times of stress. The Iowa bank saw its assets decline during the year, from $1.790 billion at year-end 2014 to $1.720 billion at year-end 2015. To some extent, this was a planned event. To pay for the Central Bank acquisition, the bank liquidated some $83.5 million of securities during 2015 at a profit of $1.01 million. Additionally, the bank sold its Ottumwa office to Peoples State Bank of Albia, Iowa, in December. With this sale, approximately $33.0 million in deposits and $17.1 million in loans left the company and a gain on the sale of $0.7 million was recognized. One of the highlights of the Iowa bank in 2015 was sustained bank loan growth of 5.1% from year-end 2014 when the effect of the Ottumwa loan portfolio’s sale is excluded. Our com- mercial bankers did an excellent job of expanding existing relationships and forging new ones. Unfortunately, we continue to be challenged with sus- tained deposit growth in Iowa, although a late surge in December deposits resulted in deposits ending the year just 0.60% lower than in 2014. Every employee in our company has heard our call to grow our deposits and, especially, our core deposits. The MidWestOne Trust Depart- ment again grew gross revenues from the prior year. Our Investment Services Department fought challenging fourth- quarter conditions to post an increase in gross revenues over 2014. Both of these units have continued their multi-year record of increasing gross revenues and net income. We also commend MidWe- stOne Insurance Services, Inc., which posted its best year of net income since our 2008 merger. With that said, current market conditions will challenge all three of these wealth management groups in terms of posting higher revenues and earnings in 2016. Turning to Central Bank, the multi-year run of success for this bank continued in 2015. To fully appreciate what Central has accomplished, one must understand its unique history. In 2008, this bank was a $430 million bank with six offices in Minnesota. Sensing an oncoming recession in the Twin Cities, Central management con- tacted the FDIC to express its interest in acquiring failed banks. And acquire they did! Between 2009 and 2011, Central acquired six failed banks and expanded its footprint into Western Wisconsin and Southwestern Florida. At December 31, 2015, this bank had grown to more than $1.2 billion in as- sets. One does not execute this type of a strategy without an ample pool of talent which we recognize as we have become more acquainted with our new partners. Central Bank enjoyed a banner year in 2015. As the portfolio acquired from the FDIC winds down, the team at Central Bank has taken full advantage of John M. Morrison (left), Chairman and Charles n. Funk, President & CEO. the robust Twin Cities economy and the loan portfolio exceeded $1 billion for the first time in its history. The growth of the bank’s loan portfolio was an impressive 9% in 2015. The loan growth propelled the bank’s earnings, which, excluding purchase accounting adjust- ments, were up 24% compared to a year ago. Decreases in overhead continued in 2015 at Central Bank. Expense reduc- tions related to distressed assets acquired from failed banks had a significant posi- tive impact on the bottom line. Central Bank relies almost exclu- sively on “spread income” (between loans and deposits) for its revenue and during the past five years, its focus has been exclusively on soaking up the excess liquidity it had acquired through its transactions involving failed banks. Con- sequently, deposits have not increased at a rate commensurate with the growth in the Twin Cities economy. As with its sister bank in Iowa, Central Bankers have been challenged to focus on deposit growth in 2016. It is also important to note that Central Bank has done a very good job of shifting its deposit composi- tion to lower-cost non-interest bearing deposits. We are very optimistic that the Central Bank footprint will produce good deposit growth at an attractive cost over time. It is anticipated that the standardization of products and fees when our banks are merged will yield an increase in service charge income in the Minnesota-based bank. Turning to asset quality, it is no secret that we lend to the agriculture industry and it has been a tough few years for farmers in the Midwest. Our agricultural portfolio amounts to ap- proximately 9.7% of our total loans. At this point in time, we see the stress that two tough pricing years have created but we believe our monitoring of the situation has been appropriate. We 2 MidWEstOnE FinanCial GrOuP, inC. 2015 annual rEPOrt MidWEstOnE FinanCial GrOuP, inC. 2015 annual rEPOrt 3 region: Midwest - il, in, ia, Ks, KY, Mi, Mn, MO, nE, nd, OH, sd, Wi peers: WtBa, QCrH, iOFB, snlC, HBia, atlO, HtlF, trVr asset size: $1-5 Billion all Banks: all nasdaQ Banks REtuRn on avERagE Equity (%) REtuRn on avERagE common Equity (%) nEt intEREst maRgin (%) nonintEREst ExpEnsE / avERagE assEts (%) n MoFG n Peer n all Banks n regional n asset Size n MoFG n Peer n all Banks n regional n asset Size n MoFG n Peer n all Banks n regional n asset Size n MoFG n Peer n all Banks n regional n asset Size 12.00 11.00 10.00 9.00 8.00 7.00 6.00 5.00 4.00 12.00 11.00 10.00 9.00 8.00 7.00 6.00 5.00 4.00 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 3.90 3.80 3.70 3.60 3.50 3.40 3.30 3.20 3.10 3.30 3.10 2.90 2.70 2.50 2.30 2.10 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 believe our bankers fully understand the current situation. Our concern remains that this tough pricing will continue into 2017 and 2018. We will continue to report on this situation in our quarterly updates. Those who have followed our company’s history know that superior asset quality has been evident since the beginning of the recession. At year-end 2015, our nonperforming loans plus other real estate owned declined from 0.83% of total assets at year-end 2014 to 0.68% at year-end 2015. Net charged-off loans for 2015 were a very low 0.11% of total average loans. This continues the long record of lower than industry aver- age charge-offs. Our loan loss reserve, which is our cushion against a poor economy and any erosion in our asset quality, stood at 168.5% of nonperforming assets at year- end 2015. This is substantially higher than 125.7% a year earlier. However, the loan loss reserve as a percentage of total loans declined significantly from 1.44% at December 31, 2014, to 0.90% at December 31, 2015. At first glance, this can be unsettling, but under the rules of merger accounting, all acquired loans from Central Bank were marked to market at merger close and the loan loss reserve was eliminated. This means we are rebuilding this reserve as we move forward. Our management of the loan loss reserve adequacy has always been and will continue to be conserva- tive, as we believe a strong balance sheet serves everyone’s best interest. One noticeable change from year to year is in our capital structure. For sev- eral years, MidWestOne Financial Group, Inc., accumulated what we considered to be “excess” capital in our company. We openly talked about the need to more prudently deploy this excess over time. The Central Bancshares, Inc., acquisition did just that and while our returns on tangible equity have increased signifi- cantly, our tangible equity as a percentage of tangible assets has declined. This was a planned strategy. At year-end, our tan- gible equity as a percentage of tangible assets was 7.51%, down from 10.29% a year earlier. Our oft-stated goal is to build this ratio back to what we consider to be our “garden spot” of 8.00 to 8.50% and we believe this can be accomplished dur- ing 2016 or by early 2017. We believe this strategy is critical to serving our share- holders’ best interests in the years ahead. We went to the market to raise a small amount of capital via a Private Investment offering of Public Equity (PIPE) in mid-2015. We were gratified to receive strong interest as we raised an additional $7.9 million of new equity investment. This was our effort to raise a relatively small amount of “comfort capital,” which we believe benefits our shareholders. As we look to 2016 and beyond, we see a few challenges worthy of mention in this space. The first one concerns resi- dential real estate lending. A year ago in this letter, we wrote “mortgage lending has become much more complex due to EfficiEncy Ratio (%) n MoFG n Peer n all Banks n regional n asset Size 75.00 70.00 65.00 60.00 55.00 50.00 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 4 MidWEstOnE FinanCial GrOuP, inC. 2015 annual rEPOrt the continual onslaught of regulation from the Dodd-Frank Act.” We contin- ue to deal with these complexities and the increase in expense that is required to deliver real estate loans to our cus- tomers. While real estate loan origina- tions in both banks were up significantly in 2015, we must now deliver the profit- ability from this line of business that our shareholders expect. Home mortgage loans are a core part of our business and we are not the only bank in America struggling to find adequate profitability under the new rules. We are pleased that our Stillwater, Minnesota-based Stig Sandell has assumed responsibility for mortgage lending in both banks. Stig is a 14-year veteran of the company and we look forward to progress on this front. Since 2010, we have had a laser focus on our efficiency ratio and we have spoken of it frequently in this space, in management meetings, and in the boardroom. With the merger, our core efficiency ratio is now well above the 60% threshold. This is not unex- pected. Our focus and commitment is to thoughtfully make decisions that will move us back into “the fifties” over the next two to three years. Note the word “thoughtfully.” Being thoughtful in this journey is critical to the eventual success of our company. In any merger, there is a blending of cultures. It can be a messy process and when problems arise, it should be no surprise as it “goes with the territory.” In that regard, we have encountered success on many fronts as our staff from both banks has come forward to work through issues with an open mind. It is fair to say that we have taken good ideas from each bank as we strive to build a culture that endures for many years. With that said, we acknowledge that we still have work to do and will continue to forge ahead, always, with our five oft- stated MidWestOne operating principles at the forefront of our thinking. As is customary in this space, we briefly review the progress of our four key constituencies in 2015: Our customers saw better products and technological advances in 2015, all with the idea of delivering service to them in the manner they prefer. EMV (Europay, MasterCard, Visa) debit and credits cards represent one such product. These smart cards safeguard against fraud by using a computer chip to authenticate your identity. Another extension in using technology to better serve our customers is the installation of our company’s first ITM (Interactive Teller Machine) at One Place in Iowa City. This ITM looks like a typical drive-up ATM and functions as one. Through a video monitor and cam- eras, the customer also is able to interact with a Service Banker who can perform 90% of the functions a customer can complete at a traditional teller window. The versatility that a machine like this provides brings countless opportunities to better serve our customers in many locations in the future. MidWestOne customers continue to give us high marks for our customer service and product availability. Each year we survey our customers in each market to assure we are living up to our high expectations. Our overall satisfaction level remained steady at 4.5 on a 5-point scale, and 85% of respondents indicated they were either likely or very likely to recommend MidWestOne Bank to a family member or friend. This is up from 82% the previous year. We plan to survey Central Bank customers in early 2016 to ascertain their satisfaction with our bank. There were many highlights related to our employees in 2015, but none more satisfying than the third consecutive year of MidWestOne Bank appearing on the Des Moines Register’s list of 100 best places to work in Iowa. We moved up this year to seventh in the mid-sized company category. This is reflective of many years of making sound hiring decisions as well as having a well-designed strategy to communicate effectively with our employees. The merger of our companies has provided many career advancement opportunities for dozens of employees. We are most likely to retain good employees when we offer them growth opportunities and the merger did just that. Our annual Rally Day was held on Columbus Day and, for the first time, we had both banks involved, albeit remotely. At MidWestOne Bank, we honored three employees with our highest honor, the President’s Award for excellence. This year’s winners were Mike Sullivan, Net- work Engineer; Brian Ties, LPL Regis- tered Sales Associate in our Investment Services Department; and Kim Ross, Vice President of Deposit Operations. These three employees provide exemplary service, both internally and externally, and always get the job done right the first time. The MidWestOne Leadership Insti- tute will move north of the Iowa border in 2016 with the majority of participants from the Central Bank footprint. We look forward to introducing many leadership concepts to twelve deserving participants in 2016. Our company now has approxi- mately 650 full-time equivalent employ- ees. While this presents new challenges, it also presents opportunity and we continue to communicate those oppor- tunities to each employee. Our communities have continued to benefit from our presence and sup- port. You received our pledge many years ago that this would not change, and it hasn’t. The MidWestOne Founda- tion now has nearly $2.4 million in assets and representation on the board from the Central Bank area. In 2015, the Foundation contributed $107,338 to 27 different projects in our footprint, including five worthy grant applications in Central Bank markets. As in prior years, our bankers have been prominent in every community we serve. We serve on countless not-for-profit boards, on school boards, and we even had one em- ployee elected mayor of his community this year! We believe to our core that support of our communities is among our most important obligations. We believe our shareholders have been well served in the past year. We have long maintained that we cannot control the price of our stock. Rather, we focus on making good decisions every day and we try to take a long-term approach to our decision making. Some years, the market rewards that approach and some years it doesn’t, but we’ve found that the long term takes care of itself if we make good decisions on a daily basis. MOFG common stock has handily outperformed the average Midwestern bank stock in the five years ending December 31, 2015. It has also outperformed the NASDAQ composite index for the same period. As recently as 2010, our annual dividend was $0.20 per share. In January, 2016, MOFG total REtuRn pERfoRmancE n MoFG n naSDaQ Composite n Snl-Midwestern Banks Index e u l a v x e D n I 250 225 200 175 150 125 100 75 12/31/10 12/31/11 12/31/12 12/31/13 12/31/14 12/31/15 MidWEstOnE FinanCial GrOuP, inC. 2015 annual rEPOrt 5 raised its dividend to an annualized rate of $0.64 per share. We have long main- tained a stated strategy of rewarding our shareholders by paying out 20%-40% of our earnings in dividends. As we look now to the future, we recognize a few employees who have agreed to take on a bigger role in our company. Katie A. Lorenson will assume the duties of Chief Financial Officer from Gary J. Ortale, upon his retirement on August 31, 2016. While we will be sorry to see Gary leave us after 28 strong years of service, we are excited about the ability and passion Katie brings as she continues her career with our company. She has been Senior Vice President and CFO of Central Bank since 2011. Prior to joining Central, Katie was a manager with McGladrey in the financial institutions practice for more than 10 years. Douglas L. Benjamin was promot- ed to Chief Banking Officer at Central Bank. Doug was formerly the North Re- gion Regional President at MidWestOne Bank. In his new position, Doug will be charged with rolling out an integrated retail banking platform in the Central Bank footprint that is similar to the one that has been employed successfully at MidWestOne. Wealth Management Senior Vice President Gregory W. Turner added Regional Manager to his duties as well by assuming responsibility for MidWe- stOne’s Northern Region. Mark G.Erickson was promoted to Wisconsin Regional President for Central Bank. Mark’s territory com- prises the Wisconsin offices of Central Bank and he is a leader in our Osceola, Wisconsin, market. Senior Vice President Barbara A. Finney was promoted to Chief Opera- tions Officer of the soon-to-be combined banks. Barb did a fine job as Oskaloosa Market President and South Region Manager at MidWestOne and the new position is very well suited to her con- siderable talents. Barb is celebrating her 20th year with our company in 2016. We also have announced a few Board-level retirements. At our annual meeting in May, Barbara J. Kniff-McCulla retired after ten years of Bank Board service and five years of service on the Company board. She was and is a positive and consistent advocate for our company. John P. Pothoven also retired in May after a splendid banking career spanning 40 years. John is the former President of the former MidWestOne Bank and has been a stalwart in the Oskaloosa com- munity. We will miss him for his service and counsel over the years. Larry D. Albert retired as the Chief Executive Officer of Central Bank in August. Under Larry’s leader- ship, Central completed its failed bank acquisitions and began to prepare for future growth. Larry’s keen eye for asset quality allowed Central to largely escape the woes other Twin Cities area banks faced during the recession and he has continued to serve on the company’s board of directors since his retirement. Though Larry will retire from the MOFG Board of Directors at this year’s annual meeting, he will continue to serve on the bank board and we look forward to his continued contribution. Robert J. Latham will retire from the board at this year’s annual meeting after five years of service. Bob’s level of engagement is second to none and we will greatly miss his counsel as he always has made himself available to help when needed. To say we are optimistic about our future is an understatement. We know that 2016 will be another year of hard work with challenges to be confronted. We face those challenges knowing that we have acquired better scale to face the future. No, bigger does not mean better, but scale, if used properly, will reward our shareholders handsomely in the long run. We remain committed to the ongoing stewardship of this fine company, now in its 81st year of community banking. Serving our shareholders is a privi- lege. We are available to speak with you and answer your questions at any time. After all, you are the Ones for whom we diligently build as we strive to exceed your expectations. Thank you for your faithful support, Charles N. Funk President & CEO John M. Morrison Chairman MidWEstOnE FinanCial GrOuP, inC. and MidWEstOnE BanK Boards oF direCtors From left: Michael a. hatch: attorney, Blackwell Burke P.a r. scott Zaiser: owner, Zaiser’s landscaping, Inc., MidWestone Bank Board Member stephen l. West: Chairman, West Music Company, Inc. kurt r. Weise: Chairman of the Board, Central Bank tracy s. McCormick: Past vice President, Investment Banking, JP Morgan and Co. robert J. latham: Chairman and President, latham and associates, Inc. richard J. schwab: Investor, entrepreneur, and Builder Charles N. Funk: President & Ceo, MidWestone Financial Group, Inc. and President & Ceo, MidWestone Bank patricia a. heiden: executive Director, oaknoll retirement residence, MidWestone Bank Board Member larry d. albert: retired Bank executive, Central Bank W. richard summerwill: retired Bank executive, MidWestone Bank, Director emeritus kevin W. Monson: Managing Partner, neumann Monson architects, PC, vice Chairman, MidWestone Financial Group, Inc. John M. Morrison: Chairman, MidWestone Financial Group, Inc. richard r. donohue: Managing Principal, TD&T Financial Group, P.C. William N. ruud: President, university of northern Iowa Mitchell W. Cook: President & Chief operating officer, Central Bank, Former Central Bank and MidWestone Bank Board Member ruth e. stanoch: Corporate affairs Consultant Not pictured: John s. koza: retired Bank executive, MidWestone Bank, Director emeritus MidWEstOnE FinanCial GrOuP, inC. exeCutive oFFiCers From left: kurt r. Weise: executive vice President Gary J. ortale: executive vice President, Chief Financial officer & Treasurer susan r. evans: Chief operating officer kent l. Jehle: executive vice President and Chief Credit officer MidWEstOnE FinanCial GrOuP, inC. oFFiCers John M. Morrison: Chairman of the Board kevin W. Monson: vice Chairman of the Board Charles N. Funk: President and Chief executive officer susan r. evans: Chief operating officer Gary J. ortale: executive vice President, Chief Financial officer & Treasurer kent l. Jehle: executive vice President and Chief Credit officer kurt r. Weise: executive vice President James M. Cantrell: vice President and Chief risk officer karin M. taylor: vice President katie a. lorenson: vice President Gregory W. turner: vice President and Head of Wealth Management douglas l. Benjamin: Chief Banking officer kenneth r. urmie: Corporate Secretary 6 MidWEstOnE FinanCial GrOuP, inC. 2015 annual rEPOrt MidWEstOnE FinanCial GrOuP, inC. 2015 annual rEPOrt 7 learn ConSTanTly So We Can CoNtiNuallY iMprove Risk and rewards In her new position with enterprise risk, and more, “We spend a lot of time reviewing trade publications, reading the latest bulletins, attending webinars and conferences, and seeking regulatory guidance, all in an attempt to anticipate how the changes will affect us,” she says. “Karin has impressed everyone at MidWestOne with her professionalism and broad knowledge of our industry. She brings a common sense approach to compliance, audit and risk management. More importantly, she has openly embraced our culture and operating principles and has quickly become a leader in the new company,” says Charlie Funk, MidWestOne President and CEO. MidWestOne, Karin will continue to be based in the Twin Cities area, where she was born. Her father was a life- long banker and she pursued the same path after college. Starting as a teller, she served at a number of financial institutions and also worked for the McGladrey consulting group, handling internal audits, regulatory compliance, and other aspects of risk assessment. When Karin was approached by Central Bank in 2009 to build its risk management department, she jumped at the chance. She’s been running fast ever since — and MidWestOne and its customers will soon reap the rewards of her commitment to constant learning. “We’re community banks with a strong customer focus, and we’re fortunate to have very positive and proactive relationships with our regulators.” Karin taylor, Chief risk Officer, Central Bank Golden Valley, Mn KARIN TAYLOR IS A RUNNER – “just for fun, with some neighbors,” she says. It’s a hobby that serves Karin well in her current job as Chief Risk Officer for Central Bank in Golden Valley, MN, where she has to move fast to keep pace with today’s rapidly-evolving regulatory environment. “The 2008 recession triggered so many regulatory changes,” she explains, citing creation of the Consumer Financial Protection Bureau as just one example. “People can debate about whether the rules are reasonable for community banks, but the fact is, we have to be up to speed on all of them.” In other words, staying current is a moving target, making MidWestOne’s operating principle — “learn constantly so we can continually improve” — essential to Karin’s job. That’s just one reason she’s looking forward to completion of the MidWestOne-Central Bank merger in 2016. Karin will then transition to even broader responsibilities as MidWestOne’s Vice President of Audit and Compliance. “During my visits to Iowa City, I’ve seen that we’re more alike than different,” she says of the merger plans. “We’re community banks with a strong customer focus, and we’re fortunate to have very positive and proactive relationships with our regulators.” Regulatory compliance is among the responsibilities covered by Karin and her team, in addition to internal audit, external loan review, assessing 8 MidWEstOnE FinanCial GrOuP, inC. 2015 annual rEPOrt MidWEstOnE FinanCial GrOuP, inC. 2015 annual rEPOrt 9 learn ConSTanTly So We Can CoNtiNuallY iMprove Leading from within “The Institute has always had two MIDWESTONE’S COMMIT- MENT to constant learning and improvement begins at the top. In fact, it was an idea proposed by President and CEO Charles N. Funk that led to the bank’s most prestigious staff de- velopment program: the MidWestOne Leadership Institute. “Charlie and I first began talking about this concept not long after our 2008 merger, in the context of envi- sioning what the organization would look like in the years ahead,” says Soni Harney, MidWestOne Senior Vice Presi- dent and Director of Human Resources. Susan Weinschenk, Vice President, Human Resource Development, soon joined the conversation. “I’m passionate about leadership and management, so it was exciting to jump in and figure out our goals, what the curriculum would look like, and how we would want staff to participate,” Susan says. “We began the program in 2010 and have continued to refine it along the way.” The Leadership Institute is a year- long program involving approximately 12 students in each class. Participants meet for one full day each month for 9 months, with homework assignments in between and an individual cap- stone project at the end of the course. Institute faculty include three external facilitators “who know us well,” says Susan; she and other senior Officers provide instruction as well. Since the Institute began, about 75 bank Officers have participated. main areas of focus,” Susan explains. “First, we help people figure out who they are as leaders. What are their strengths and values, how do they com- municate, what motivates them, what is their leadership style, and how are they perceived by others? We use a behavior- al assessment tool that allows Officers to better understand their predictable tendencies, and how those behaviors might be adapted or leveraged for more effective leadership. “Our second main focus is change management and how to use one’s communication skills to help others navigate through change,” she con- tinues. “We added a decision-making course in this part of the curriculum in 2012, and it proved so popular that we made it available to Institute alumni and our Executive Management Team.” In the program’s fifth year, Su- san and Soni saw a call for entries in HR.com’s annual Leadership 500 Excel- lence Awards program. “We decided to nominate the Leadership Institute, even though we figured it was a long shot,” Soni recalls. “But HR.com contacted us and urged us to come to the 2014 Global Leader- ship Excellence Forum in Colorado that fall. They told us we placed in the top 10, but wouldn’t tell us where. Then, at the awards ceremony, we found out we landed the number two spot among all midsized companies in the nation! It was so cool. To me, it was a real affirma- tion of everything Susan has done to grow this program.” Susan adds that the “We are trying to breed internal champions of change. and a huge part of that is the ongoing process of self-awareness and reflection. Good leadership is a life-long journey.” soni Harney (right), senior Vice President and director of Human resources, pictured with susan Weinschenk, Vice President, Human resource development award also confirmed what MidWestOne has known all along — that programs like the Leadership Institute are rare in the banking industry. “It’s a testament to MidWestOne’s senior leadership for its ongoing support of this Officer develop- ment initiative,” she says. The Institute’s national recognition only added to its visibility within the bank. But Soni explains that while Offi- cers consider it a privilege to be selected for Institute participation, it’s not their only means of acquiring leadership skills. “MidWestOne invests in a broad spectrum of leadership development opportunities, including local Community Leadership Programs, the Iowa School of Banking, the Graduate School of Banking in Colorado, and more,” she says. When choosing Leadership Insti- tute participants, Soni says she and her colleagues look at officers and middle managers “on what I would call our list of rising stars with high potential. We then identify individuals who we be- lieve would benefit from more focused leadership learning.” Among the earliest and most important lessons Institute participants learn is the distinction between leader- ship and management. “We spend a fair amount of time talking about this,” says Susan. “Institute participants understand right away that manage- ment is when I help my people get their tasks done so we can reach our goals. But leadership is more visionary. For example, say we are rolling out some sort of process change, and you find an issue with what’s proposed. Leadership is being able to raise that issue in a way that doesn’t register as a complaint, but helps people understand and gets them all on the same page.” Soni puts it another way. “We are trying to breed internal champions of change. And a huge part of that is the ongoing process of self-awareness and reflection. Good leadership is a life- long journey.” For Institute participants, per- haps the most meaningful journey of self-discovery comes at the end of the course, when they are required to com- plete a final project requiring extensive research, a written report, and an oral presentation. “In the beginning, these presenta- tions were more like book reports,” Susan says. “So we adjusted our expecta- tions and directions, added a class on presentation skills — something many participants were lacking — and now these projects have much more depth and impact. They’re not just a reflec- tion of what students have learned, but what they are pledging to do better.” She shares a list of topics chosen for final Institute presentations, which makes clear that program participants are taking Leadership Institute lessons to heart. From embracing better team- work and more effective communica- tion, to examining the value of intro- spection and humor in the workplace, these future leaders are committed to constant learning — about themselves, their roles at MidWestOne, and their contributions to a vibrant atmosphere of constant change and improvement. 10 MidWEstOnE FinanCial GrOuP, inC. 2015 annual rEPOrt MidWEstOnE FinanCial GrOuP, inC. 2015 annual rEPOrt 11 learn ConSTanTly So We Can CoNtiNuallY iMprove The ripple effect COMMUNITY BANKS ARE ATTUNED to local needs, and after 23 years at MidWestOne in Oskaloosa, Iowa, Jane Krutzfeldt knows her commu- nity well. She also knows first-hand that when community members gain financial literacy, the effects can be far-reaching. Jane serves as an Investment Ser- vices Assistant at MidWestOne. In 2006, she and her husband were approached about teaching a financial literacy class by Love INC, a nationwide nonprofit organization that brings churches together to help disadvantaged indi- viduals and families. Love INC had been working in Oskaloosa since 1998, collaborating with local nonprofits and service agencies to help transform lives. “After reviewing the curriculum, we loved the way the class took financial education way beyond how to balance a checkbook,” Jane recalls. “Sometimes a short-term financial need must be met, but education makes a more lasting im- pact on class participants, which in turn ripples out into the community. We agreed to get involved and we’ve been teaching the course together ever since.” Each class involves between 8 and 15 participants and is offered in the spring and fall. Course topics include opening a bank account, using and maintaining a checking account, orga- nizing financial documents, recording expenses, developing financial goals, cre- ating a budget, paying bills, determining net worth, credit cards and debt, loans, savings, investments, taxes, insurance, and credit reports. That’s a lot to absorb, but the lessons seem to be sinking in. “I have a growing stack of thank- you notes that I treasure,” Jane says. “But the greatest reward is to see partici- pants out in the community, working or raising their children, and having them tell us that they still use the principles taught in the classes, and that they made a difference.” The classes are making a difference for Jane, too, reminding her of the value of constant learning. “We must al- ways be ready to serve our clients, even when their reality suddenly changes,” she explains. “A client who was a wife and mother yesterday, for example, might suddenly find herself as a widow and employee. “Teaching this course keeps me aware of the changing needs of our community, and how MidWestOne can continue to address those needs today and in the future.” 10 MidWEstOnE FinanCial GrOuP, inC. 2015 annual rEPOrt MidWEstOnE FinanCial GrOuP, inC. 2015 annual rEPOrt 11 “the greatest reward is to see participants out in the community, working or raising their children.” Jane Krutzfeldt, investment services assistant learn ConSTanTly So We Can CoNtiNuallY iMprove The knowledge network Assistant Retail Manager John Schicke- danz completed their first year of the Iowa School of Banking this past June. Both came away with new insights – and new connections. session, two MidWestOne employees headed to Boulder, Colorado, for the 2015 Graduate School of Banking – one to begin her schooling there, the other to complete her final year. “BACK TO SCHOOL” is the phrase most people associate with summer’s end. In the banking industry, summertime is school time, when bank- ing schools across the nation welcome students eager to advance their knowl- edge and professional skills. MidWestOne offers its employees opportunities to participate in two such programs: • • The Iowa School of Banking, spon- sored by the Iowa Bankers Associa- tion, a two-year program for first- and mid-level managers, consisting of a one-week session each summer and an intersession project The Graduate School of Banking at Colorado (GSBC), a three-year program for bank officers, regula- tors, and other bank affiliates; classes meet in Boulder for two weeks each summer, with three intersession projects each year Customer Relationship Manage- ment Officer McKenzie Paulsen and “I hoped to gain a better un- derstanding of banking as a whole, especially interest rate risk and portfolio pricing, and I wasn’t disappointed,” says John. “But I was surprised by how much I benefitted from the networking aspects of the program. By talking to other bankers, I was able to think about ways we can better serve our customers.” For McKenzie, the experience helped reveal the bigger picture. “Before the Iowa School of Banking, I mostly envisioned the separate pieces that make up the bank, like sales, account- ing, and so on. Banking school opened my eyes to how the bank functions as one cohesive unit, and the important part each department plays in the suc- cess of the bank as a whole.” Shortly after John and McKenzie completed their Iowa banking school “Banking school opened my eyes to how the bank functions as one cohesive unit, and the important part each department plays in the success of the bank as a whole.” McKenzie Paulsen, Customer relationship Management Officer Thais Winkleblack, Vice President, Private Banking & Trust Business Development Officer, is the new GSBC graduate. Like John, she cites her large network of classmates as one of GSBC’s most valuable aspects. But she was also impressed by the third-year banking simulation exercise, and how much she learned in a course she hadn’t chosen for herself. “I got assigned to a class on agricul- tural lending, where the instructor talked about global economics to help lenders understand the importance of connectiv- ity on a world scale,” she recalls. “It was seriously the best class I had.” Kim Ross, Vice President, Deposit Operations, entered GSBC as a second- year student this summer due to her previous attendance at the Iowa School of Banking, which Thais had done as well. Kim, too, says she increased her knowledge of the banking environment, and she appreciates making so many new contacts across the country. But there’s another takeaway, which McKen- zie, John, and Thais echo as well. “Listening to other GSCB class- mates discuss issues at their banks, I feel very fortunate to work for a company with such a strong culture and proven practices,” Kim says. “More than any- thing else, my banking school experi- ence reinforced the pride and gratitude I have for MidWestOne.” From left: Kim ross, McKenzie Paulsen, John schickendanz, thais Winkleblack. 14 MidWEstOnE FinanCial GrOuP, inC. 2015 annual rEPOrt MidWEstOnE FinanCial GrOuP, inC. 2015 annual rEPOrt 15 FinanCial hiGhliGhts (dollars in thousands, except per share amounts) COndE nsEd COnsOlidatEd BalaNCe sheets (dollars in thousands) 2015 2014 2013 deCeMBer 31, Year-eNd BalaNCes assets investment securities loans loan Pool Participations deposits stockholders’ Equity averaGe BalaNCes assets investment securities loans loan Pool Participations total deposits shareholders’ Equity results oF operatioNs net interest income Provision for loan losses noninterest income noninterest Expense income Before income taxes net income per CoMMoN share net income - Basic net income - diluted dividends Book Value Closing Price asset QualitY Bank loans Past due 30-89 days non-Performing Bank loans net Charge Offs ratios return on average Equity return on average tangible Equity return on average assets net interest Margin Efficiency ratio average Equity as a % of average assets allowance for Bank loan losses as a % of Bank loans net Bank loan Charge-offs as a % of average Bank loans non-performing Bank loans as a % of Bank loans $2,979,975 545,664 2,151,942 - 2,463,521 296,178 $2,773,095 542,515 1,962,846 10,032 2,276,003 255,307 $90,052 5,132 21,193 73,176 32,937 25,118 $2.42 2.42 0.60 25.96 30.41 8,491 11,528 2,068 9.84% 14.70% 0.91% 3.71% 61.08% 9.21% 0.90% 0.11% 0.54% $1,800,302 526,466 1,132,519 21,466 1,408,542 192,731 $1,760,776 534,371 1,092,280 24,321 1,384,084 186,375 $54,853 1,200 15,313 43,413 25,553 18,522 $2.20 2.19 0.58 23.07 28.81 3,862 13,021 1,016 9.94% 10.61% 1.05% 3.53% 58.74% 10.58% 1.44% 0.09% 1.15% $1,755,218 531,186 1,088,412 27,667 1,374,942 178,016 $1,756,344 568,518 1,059,356 32,648 1,359,479 175,666 $53,962 1,350 14,728 42,087 25,253 18,607 $2.19 2.18 0.50 20.99 27.20 4,901 13,776 1,128 10.59% 11.43% 1.06% 3.46% 57.23% 10.00% 1.49% 0.11% 1.27% sHarE priCe 2014 First Quarter second Quarter third Quarter Fourth Quarter 2015 First Quarter second Quarter third Quarter Fourth Quarter hiGh $27.67 $26.18 $24.95 $29.10 hiGh $29.82 $33.88 $34.04 $32.52 loW $23.53 $22.50 $23.00 $22.73 loW $27.74 $28.33 $28.43 $28.06 Cash divideNd deClared $0.145 $0.145 $0.145 $0.145 Cash divideNd de Clared $0.150 $0.150 $0.150 $0.150 assets Cash and due from banks Federal funds sold and other short-term investments cash and cash equivalents securities available for sale securities held to maturity loans held for sale loans allowance for loan losses loans, net loan pool participations, net Premises and equipment, net accrued interest receivable Goodwill Other intangible assets, net Bank owned life insurance Other real estate owned Other assets total assets liaBilities aNd shareholders’ eQuitY liabilities deposits: non-interest-bearing demand interest-bearing checking savings Certificates of deposit under $100,000 Certificates of deposit $100,000 and over total deposits Federal funds purchased and securities sold under agreements to repurchase Federal Home loan Bank borrowings Junior subordinated notes issued to capital trusts long-term debt accrued expenses and other liabilities total liabilities shareholders’ equity Preferred stock, no par value, with a liquidation preference of $1,000 per share; authorized 500,000 shares; no shares issued and outstanding as of december 31, 2015 and 2014 - Capital stock, common, $1 par value; authorized 15,000,000 shares; 11,713,481 shares issued at december 31, 2015 and 8,690,398 shares issued at december 31, 2014 additional paid-in capital treasury stock, at cost; 304,708 shares and 334,732 shares at december 31, 2015 and 2014, respectively retained earnings accumulated other comprehensive income total shareholders’ equity total liabilities and shareholders’ equity 11,713 163,487 (6,331) 123,901 3,408 296,178 $2,979,975 2015 $44,199 2,898 47,097 427,241 118,423 3,187 2,151,942 (19,427) 2,132,515 - 76,202 13,736 64,548 19,141 46,295 8,834 22,756 $2,979,975 $559,586 1,064,350 189,489 348,268 301,828 2,463,521 68,963 87,000 23,587 22,500 18,226 2,683,797 2014 $23,028 381 23,409 474,942 51,524 801 1,132,519 (16,363) 1,116,156 19,332 37,770 10,898 - 8,259 38,142 1,916 17,153 $1,800,302 $214,461 618,540 102,527 235,395 237,619 1,408,542 78,229 93,000 15,464 - 12,336 1,607,571 - 8,690 80,537 (6,945) 105,127 5,322 192,731 $1,800,302 16 MidWEstOnE FinanCial GrOuP, inC. 2015 annual rEPOrt MidWEstOnE FinanCial GrOuP, inC. 2015 annual rEPOrt 17 COndE nsEd COnsOlidatEd stateMeNts oF operatioNs COnsOlidatE d statEMEnts OF shareholders’ eQuitY (dollars in thousands, except per share amounts) (dollars in thousands, except per share amounts) Year eNded deCeMBer 31, aCCuMulated other iNterest iNCoMe loans loan pool participations securities: taxable securities tax-exempt securities Federal funds sold and other short-term investments total interest income iNterest expeNse: 2015 $86,544 798 7,734 5,553 71 100,700 interest-bearing checking savings Certificates of deposit Federal funds purchased and securities sold under agreements to repurchase Federal Home loan Bank advances Other borrowings Junior subordinated notes issued to capital trusts subordinated notes long-term debt total interest expense Net interest income provisioN For loaN losses Net interest income after provision for loan losses NoNiNterest iNCoMe: trust, investment, and insurance fees service charges on deposit accounts Mortgage origination and servicing fees Other service charges, commissions and fees Bank-owned life insurance income securities gains, net loss on sale of premises and equipment total noninterest income NoNiNterest expeNse: salaries and employee benefits net occupancy and equipment data processing FdiC insurance amortization of intangible assets Other expenses total noninterest expense income before income taxes Years eNded deCeMBer 31, 2015, 2014, aNd 2013 stoCk preFerred CoMMoN additioNal stoCk paid-iN Capital stoCk treasurY retaiNed CoMpreheNsive earNiNGs iNCoMe (loss) total Balance, december 31, 2012 $ - $8,690 $80,383 $(3,316) $77,125 $11,050 $173,932 net income dividends paid on common stock ($0.50 per share) stock options exercised (56,314 shares) release/lapse of restriction on rsus (19,585 shares) repurchase of common stock (40,713 shares) stock compensation Other comprehensive income, net of tax - - - - - - - - - - - - - - - - 9 (270) - 384 - - - 296 285 (967) - - 18,607 (4,259) - - - - - - - - - - - (10,001) 18,607 (4,259) 305 15 (967) 384 (10,001) Balance, december 31, 2013 $ - $8,690 $80,506 $(3,702) $91,473 $1,049 $178,016 net income dividends paid on common stock ($0.58 per share) stock options exercised (15,419 shares) release/lapse of restriction on rsus (27,491 shares) repurchase of common stock (165,766 shares) stock compensation Other comprehensive income, net of tax - - - - - - - - - - - - - - - - (26) (436) - 493 - - - 285 459 (3,987) - - 18,522 (4,868) - - - - - - - - - - - 4,273 18,522 (4,868) 259 23 (3,987) 493 4,273 Balance, december 31, 2014 $ - $8,690 $80,537 $(6,945) $105,127 $5,322 $192,731 net income issuance of common stock due to business combination (2,723,083 shares) issuance of common stock - private placement (300,000 shares) dividends paid on common stock ($0.60 per share) stock options exercised (8,414 shares) release/lapse of restriction on rsus (23,123 shares) stock compensation Other comprehensive income, net of tax - - - - - - - - - - - 25,118 - 25,118 2,723 300 - - - - - 75,172 7,600 - (40) (416) 634 - - - - 169 445 - - - - (6,344) - - - - - - - - - - (1,914) 77,895 7,900 (6,344) 129 29 634 (1,914) Balance, december 31, 2015 $ - $11,713 $163,487 $(6,331) $123,901 $3,408 $296,178 2014 2013 $48,466 1,516 $48,828 2,046 8,921 5,455 46 64,404 2,168 145 4,714 127 2,092 24 281 - - 9,551 54,853 1,200 53,653 5,771 3,279 1,554 2,381 1,102 1,227 (1) 15,313 24,918 6,293 1,565 964 547 9,126 43,413 25,553 9,905 5,298 17 66,094 2,362 140 6,453 166 2,686 29 296 - - 12,132 53,962 1,350 52,612 5,345 2,980 3,209 2,210 922 65 (3) 14,728 24,596 6,356 1,452 1,066 663 7,954 42,087 25,253 2,627 360 4,851 210 1,451 22 592 162 373 10,648 90,052 5,132 84,920 6,005 4,401 2,756 5,742 1,307 1,011 (29) 21,193 41,865 9,975 2,659 1,397 3,271 14,009 73,176 32,937 income taxes 7,819 7,031 6,646 Net iNCoMe $25,118 $18,522 $18,607 earNiNGs per CoMMoN share Basic diluted $ 2.42 $ 2.20 $ 2.19 $ 2.42 $ 2.19 $ 2.18 traNsFer aGeNt/ divideNd paYiNG aGeNt American Stock Transfer & Trust Company, LLC 6201 15th Avenue Brooklyn, New York 11219 GeNeral CouNsel Barack Ferrazzano Kirschbaum & Nagelberg LLP 200 West Madison Street, Suite 3900 Chicago, Illinois 60606-3465 iNdepeNdeN t re Gistered puBliC aCCouNtiNG FirM RSM US, LLP 221 Third Avenue SE Suite 300 Cedar Rapids, Iowa 52401 18 MidWEstOnE FinanCial GrOuP, inC. 2015 annual rEPOrt MidWEstOnE FinanCial GrOuP, inC. 2015 annual rEPOrt 19 Conrad Coralville davenport Fairfield Fairfield iowa City iowa City iowa City iowa City miDWEstonE Bank ioWa Belle plaine 802 13th Street Burlington 3225 Division Street Cedar Falls 4510 Prairie Parkway 319-444-2842 319-754-6526 319-277-2500 641-366-2165 319-356-5800 120 West Center Street 110 First avenue 101 W. Second Street, Suite 100 563-322-9900 58 east Burlington avenue 641-472-6511 2408 West Burlington avenue 641-472-2424 Fort Madison 926 avenue G 319-372-3991 102 South Clinton Street 319-356-5800 cEntRal Bank MiNNesota Centerville 7111 21st avenue north 651-762-9440 Centerville sBa loan office 7031 20th avenue South Chisago City 11151 lake Boulevard Coon rapids 3585 124th avenue eden prairie 6640 Shady oak road 651-257-7525 651-257-6561 763-780-0484 952-944-6640 elk river 18233 Carson Court nW 763-274-3200 Forest lake 1650 South lake Street 651-464-2880 Golden valley 945 Winnetka avenue north 763-545-9005 Minneapolis (lowry hill) 2120 Hennepin avenue South 612-767-5600 500 South Clinton Street 319-356-5960 Newport 2104 Hastings avenue 651-256-7250 1906 Keokuk Street 319-356-5800 south st. paul 835 Southview Boulevard 651-451-2133 2233 rochester avenue 319-356-5800 stillwater 2270 Frontage road West 651-439-3050 Melbourne 202 Main Street North english 10030 Highway 149 641-482-3105 319-664-3311 st. Michael 750 Central avenue e, Suite 100 763-497-3114 White Bear lake 3670 east County line north 651-426-2554 North liberty 465 Hwy 965 ne, Suite a 319-356-5800 oskaloosa oskaloosa 124 South First Street 222 First avenue east parkersburg 1001 Highway 57 pella pella sigourney Waterloo 700 Main Street 500 oskaloosa Street 112 north Main Street 3110 Kimball avenue 641-673-8303 641-673-8303 319-346-1645 641-628-4356 641-628-4356 641-622-2381 319-232-5513 West liberty 305 West rainbow Drive 319-627-2100 toll Free en español 319-688-3938 1-800-247-4418 miDWEstonE insuRancE sERvicEs, inc. Cedar Falls 4510 Prairie Parkway 319-277-2500 Conrad 120 West Center Street 641-366-2165 Melbourne 202 Main Street oskaloosa 124 South First Street parkersburg 1001 Highway 57 pella 700 Main Street 641-482-3105 641-673-8603 319-346-1645 641-628-4904 toll Free 1-800-934-7763 MidWestoNe FiNaNCial Group, iNC. Corporate headquarters 102 South Clinton Street Iowa City, Iowa 52240-4065 1-800-247-4418 MidWestone.com NasdaQ symbol: MoFG WisCoNsiN hudson 404 County road uu North hudson 880 Sixth Street north osceola 304 Cascade Street 715-377-7180 715-386-8700 715-294-2183 st. Croix Falls 2183 uS Highway 8 east 715-483-9800 Florida Fort Myers 1520 royal Palm Square Boulevard Suite 100 239-274-1900 Naples 4099 Tamiami Trail north Suite 100 239-430-2500 nick Pfeiffer, MidWestone ©2016 MidWEstOnE FinanCial GrOuP, inC. Direction: Writing: photography: Design: printing: Tru art, Iowa City, Iowa fisheye, Hiawatha, Iowa Shullaw and associates, Iowa City, Iowa Benson & Hepker Design, Iowa City, Iowa 

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