Midwestone Financial Group
Annual Report 2016

Plain-text annual report

2016 an n ual r e p o rt to our shareholders Charles N. FuNk, President & CEO keviN w. MoNsoN, Chairman Charles n. Funk, (left) President & CEO, and Kevin W. Monson, Chairman “When people shake their heads because we are living in a restless age, ask them how they would like to live life in a stationary one, and do without change.” GEOrGE BErnard shaW Financial results for 2016 were not up to the standards of the past five years, each of which was a company all-time high in terms of earnings per share. We will use this space to articulate where we fell short in 2016 and convey our plans for getting back on track in 2017. Net income in 2016 fell 18.8% from the prior year, to $20.391 million. On a per share basis, the results are similar with earnings per share of $1.78 in 2016 compared to $2.42 in 2015. We incurred one-time costs in both years that were associated with our 2015 merger between MidWestOne and Central Bancshares, Inc. These costs were $3.5 million in 2015 and a higher than expected $4.6 million in 2016. Excluding these one- time charges, 2016 earnings per share were $2.03 compared to $2.70 in 2015. Return on assets (ROA) and return on average tangible equity (ROTE) tell a similar story. ROA fell to 0.68% in 2016 and ROTE was 10.13%. These numbers are below our results of the past five years as well as our long term goals. Our 12- to 18-month goal is to return ROA much closer to the 1% level and ROTE to the 12-14% range. Our balance sheet expanded and at December 31, 2016 total assets were $3.08 billion, up 3.3% from $2.98 billion a year earlier. Total deposits increased from $2.46 billion at year-end 2015 to $2.48 billion a year later. Total loans increased from $2.13 billion at year-end 2015 to $2.14 billion at year- end 2016. Taken at face value, these numbers are not impressive in a year that our peers showed more balance sheet growth than MOFG. With that caveat, one should note that during the year we made a strategic decision to sell our offices in Barron and Rice Lake, Wisconsin and in Davenport, Iowa. Combined, these offices accounted for $39.6 million in deposits and $47.2 million in loans at the time of the sales. That we were able to grow through these asset and deposit sales is not a small accomplishment. On a geographic basis, loans increased in Minnesota, Wisconsin, and Florida and decreased in Iowa while the Iowa market contributed the largest increase in deposits in the company. We ended the year with a loan to deposit ratio of 87.3%, consistent with our long held strategy of this ratio being “in the 80’s.” Turning to the income statement, the net interest margin was higher during the year, increasing to 3.80% from 3.71% in 2015. A large contributor to our decline in net income from 2015 was the large increase in our provision for loan losses, which will be discussed later in this letter. While our large one-time merger-related expenses clearly impacted 2016 results, we note that we achieved significant success in reducing the ongoing non-interest expense burden in the company. When we announced our merger with Central Bancshares in 2014, we set a goal to reduce our non-interest expenses by $8 million from the pro- forma company’s non-interest expense as of 12-31-13. At this time, we believe we are on track to exceed this goal and success will be evident in 2017 results. Business units that produce non- interest income in the company reported mixed results in 2016. Our Iowa-based Trust Department reported results that were about 4% lower than 2015. Our Investment Services unit, which employs 11 licensed investment professionals, saw revenues fall by approximately 12.1% in 2015. MidWestOne Insurance Services also saw its revenues and net income fall in 2015, primarily due to a reduction in contingency income. Service charges and fees continued to increase during the year although in the years ahead, we believe increases in this line item will be modest. Our Home Mortgage Division enjoyed a year of increased revenues of 37.8% during the year. While impressive on the surface, we continue to believe we are underperforming our peers in home mortgage and one of 2017’s top goals is to improve the bottom line performance of this entity. Perhaps that is why we are excited that RJ Lang has agreed to join MidWestOne as the leader of MidWestOne Home Mortgage. RJ is an Eastern Iowa native, University of Iowa graduate, and will direct the department from our Stillwater, Minnesota, office and, most importantly, knows the significant role that mortgage activity plays in a community bank. At this juncture, readers no doubt ascertain that many things did not go as planned in 2016. We will spend the remainder of this report outlining our plan to return to the performance 2 MidWEstOnE FinanCial GrOuP, inC. 2016 annual rEPOrt MidWEstOnE FinanCial GrOuP, inC. 2016 annual rEPOrt 3 region: Midwest - il, in, ia, Ks, KY, Mi, Mn, MO, nE, nd, Oh, sd, Wi Peers: WtBa, QCrh, GsBC, snlC, hBia, atlO, htlF, trVr asset size: $1-5 Billion all Banks: all nasdaQ Banks return on average equity (%) net interest margin (%) noninterest expense / average assets (%) efficiency ratio (%) 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 13.00 12.00 11.00 10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.80 3.60 3.40 2.30 3.00 2.80 2.60 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 3.30 3.10 2.90 2.70 2.50 2.30 2.10 1.90 74.00 69.00 64.00 59.00 54.00 49.00 44.00 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 levels to which our shareholders have become accustomed. We begin with a discussion on asset quality and credit administration. Our net charged-off loans rose in 2016 to 0.26% of loans, a level we had not experienced since 2010, and our level of non-performing loans to total loans rose to 1.31%. In the fourth quarter of 2016, we dealt with five loans that required some sort of impairment and/ or charge-off. Three of these loans had been on our radar for many months and continued to deteriorate during the year. The remaining two loans were not identified in prior months, and thus their deterioration came as a surprise. We dealt with all of these loans in a straightforward manner during the fourth quarter. In every strategic planning session we have held for more than a decade, we recognized that asset quality is “job one” in our company. The quickest way to see our standing slip is to make poor credit decisions. We believe our track record over the past decade is very good and we acknowledge that 2016 was not up to our standards in this category. We’ve asked each person involved in the administration of credit to become more proactive. With that said, one cannot divorce the economy from loan portfolio performance. In our company, the Twin Cities and Southwest Florida economies are robust. As such, these markets have experienced lower than normal delinquencies. The Iowa economy is very much impacted by continued stress in the agricultural sector. Agricultural loans represent about 10% of our loan portfolio (one of the above-referenced loans was an agricultural loan). While our focus is always on the entire loan portfolio, the most near-term risk is in the Iowa portion of this portfolio. price/ltm eps (x) n MoFG n peer n all Banks n regional n asset Size 23.00 21.00 19.00 17.00 15.00 13.00 11.00 9.00 7.00 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 dividend payout ratio (%) n MoFG n peer n all Banks n regional n asset Size 41.00 36.00 31.00 26.00 21.00 16.00 11.00 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 4 MidWEstOnE FinanCial GrOuP, inC. 2016 annual rEPOrt Our confidence level is strong that we’ve put the worst of this behind us and that we should return to more normalcy in credit performance in 2017. Turning to capital, our closely monitored tangible equity to tangible assets increased modestly to 7.62% at year-end 2016. Since merger, we have targeted a TE/TA ratio in the 8-8.50% range and we were at 7.94% as of September 30, 2016. The rise in interest rates in the fourth quarter caused an erosion in our “other comprehensive income,” which we are allowed to count as capital. This accounts for the slippage in the TE/TA ratio in the fourth quarter, and our forecast is that the 8% level should be broached in the next 12 to 18 months. Our regulatory capital is well above the minimums established by our prudential regulators. Prior to merger, this company routinely ran with an efficiency ratio in the mid-50% range. Since merger, we’ve seen that ratio move above 60%. Our plan and our goal is to move this back into the 50’s in the next 12 to 24 months. Remember, increasing revenues enhance this ratio, as does judicious administration of expenses. Banks that succeed in moving their efficiency ratios below 60% are best equipped to weather storms when they come (as they inevitably do). We believe our geographic diversi- fication is an extremely positive element of this company and will allow us to pro- duce above average growth in earnings in future years. As previously mentioned, it is the Twin Cities and Southwest Florida markets that are producing the growth in this company at this point in time. This is a role reversal from 2008-2011, when the Iowa economy was routinely outper- forming the national economy. In February, 2017, we announced our intent to open an office in Denver, Colorado. Late in 2016, we were introduced to a team of commercial bankers who expressed an interest in our company and, especially, in the culture we’ve worked so very hard to establish. After a few months of talking and planning, we announced the hiring of this talented team of bankers. They will be led by Regional President Joe Van Haselen and Senior Vice President/ Commercial Banker, Kevin Conroy. Joe and Kevin have been in the Denver market for more than 20 years and they are persons of talent and integrity. As we look at our company, we believe that we are in outstanding markets in the Twin Cities, Southwest Florida, Denver, and with headquarters in Iowa City, a long-time leader in the Iowa economy. While our rural markets are currently not enjoying robust economies, they give the company great geographic balance. To summarize, we believe we are in markets that can consistently deliver top-line revenue growth. Our outlook for 2017 is that we should be able to grow deposits in most markets in our company and the Twin Cities, Florida and Iowa City markets are most likely to generate above trend loan growth. To summarize, our success in 2017 will depend on deposit and loan growth, better performance from our fee- producing areas, and a return to the asset quality we have seen in the past. Moving our efficiency ratio back toward 60% and below is the final component to this plan. Looking back at 2016, we have achieved noteworthy successes that did not manifest themselves in the financial results of the company. If there was one “home run” during the year, it was the early April combination of Central Bank into MidWestOne Bank. We have all seen and heard of the horror stories that can arise when banks merge. We are pleased to report that the April merger of banks had minimal impact on our customers, our customer retention rate was extremely high, and the resulting bank is one that has better product offerings for its customers than either of the two banks prior to the merger. We doff our hats to the dozens of associates who made this happen. Because of their hard and good work, our customers were served as well as at any time in our 82-year history. We continued to enhance our product offerings during the year as our customers continue to demand more from us, their financial provider. Usage of electronic services, particularly mobile, have increased dramatically. In 2016, adoption of our mobile banking app increased 75%, and mobile deposits increased 91%. We’ve also designated a “Fintech” (Financial Technology) task force to assess the technological landscape. We believe that the next five years will see much disruption in this space and our customers will continue to evolve in terms of the way that they choose to do business with us. Community banks who choose to ignore this trend do so at their peril. With great confidence, we can say that the morale in the new company’s employees is good and is improving each month. As with many mergers, there were rough patches. We endured them, we listened intently to our associates, and the team in place now is working well together. The Iowa bank was once again recognized by the Des Moines Register as one of the top workplaces in the state of Iowa – the fourth consecutive year for this designation. Our Leadership Institute completed its seventh year with another 12 graduates, 10 of them from our Minnesota and Wisconsin offices. In November, we announced a program designed to help our employees to help repay their student loan debt. We recognize that this sort of debt has created a crisis of sorts for many millennials and Generation Xers. Our company will contribute a monthly stipend that goes to retire debt of employees who have student loan debt. We believe we are on the cutting edge with this benefit and while only 4% of employers in the U.S. currently offer it, the number is growing and we believe this benefit will become much more prevalent in the coming years. Even in a down year for earnings, MidWestOne Bank contributed more than $682,000 to the communities we serve. The South St. Paul, Minnesota market received the 2016 Community Impact Grant award of $50,000. These funds will go to the Cesar Chavez Charter School in St. Paul to purchase tables, book cases, furniture, and other needs for a brand-new media center, plus provide for improvements to the playground and ball fields to improve the safety for the children using them. Bank employees will teach financial literacy lessons within the school. In addition, the MidWestOne Bank Foundation total return performance n MoFG n naSDaQ Composite n Snl-Midwestern Banks Index e u l a v x e D n I 300 280 260 240 220 200 180 160 140 120 100 12/31/11 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16 MidWEstOnE FinanCial GrOuP, inC. 2016 annual rEPOrt 5 contributed more than $120,000 to various worthy causes throughout our footprint. Contributions ranged from contributing to improvements for the school athletic fields in St. Croix, Wisconsin to assisting with the renovation of the high school library in Fort Madison, Iowa to helping a youth ice hockey association develop “dryland” training facilities in Eden Prairie, Minnesota. We do more than give money, however. We give our time and our talents as well throughout our footprint. For example, 2016 Veterans Day saw bank employees make Quilts of Valor for veterans who are employees or for their relatives. This project was well received and plans are afoot to do this in a bigger way in 2017. Our stock price performed well during the year as shareholders saw their shares appreciate by 24%. To repeat what has been said in prior years’ letters to our shareholders, we do not control the markets in the short term. We do believe that share prices follow earnings over time, thus our emphasis on improving this performance. In January of 2017, the Board of Directors increased the quarterly dividend to $0.165 per quarter, or $0.66 annually. This increase is a vote of confidence in the company’s prospects in 2017 and beyond. We cannot succeed over the long term without satisfying the core four constituencies: our customers, our employees, our communities, and our shareholders. There were many comings and go- ings with key personnel as our company continues to evolve. Chief Operating Officer Susan R. Evans announced her plan to retire in October, 2017 and is currently in a phased retirement plan. Sue joined the company in 2001 as the head of retail banking in the Iowa State Bank & Trust Company and became the company’s COO in 2009. Her contributions have been many but none more important than her role as the company’s unofficial “Culture Warrior.” Sue’s creative ideas and implementa- tion of them have played a primary role in establishing the strong culture that exists in our company today. She has led many banking initiatives in her 16 years here and she has won universal respect from her fellow associates. She has been a friend to numerous employees in times of need. To say we will miss Sue is an understatement. Kurt R. Weise retired on December 31, 2016 as Executive Vice President. Kurt served with Central Bank before the merger and was instrumental in the founding of the bank in 1988. As Central grew over the years, Kurt was involved in an integral way in every key decision. Kurt is an accountant by trade and is very perceptive in his understanding of the business of banking. Kurt will remain as a director of the bank and holding company. October, 2016 marked the retirement of Chief Financial Officer, Gary J. Ortale, who served this company for 29 years. Gary’s career was capped by steering the company through the Central Bank merger, and the accounting and finance areas of the bank performed at a high level during this time. Gary will be remembered for his high level of integrity, his dry sense of humor, and a work ethic that was admired by all. As with Kurt and Sue, we thank Gary for his service to the company and though time marches on, he will not soon be forgotten. We will have one change on our Board of Directors with the departure of William N. Ruud. Bill joined the board in 2013 and we have come to know and appreciate his many talents. Bill was an advocate for us in the Cedar Falls, Iowa community during his tenure as President of the University of Northern Iowa. We will miss Bill’s sense of humor and counsel and note his good service on the company’s Compensation Committee. We welcomed Kevin E. Kramer to our company in October as Chief Operating Officer. Kevin brings many years of commercial banking and management experience to the table and he is off to a fast start. Kevin is a difference maker and will be a key to us achieving our goals in 2017. As we announced in this space last year, Katie A. Lorenson is our new Senior Vice President and Chief Financial Officer. Katie worked closely with Gary Ortale as the merger took place and they facilitated a smooth transition in the office of the CFO. Katie is featured elsewhere in this report and is already a valued member of the senior management team. In August, we promoted Golden Valley, Minnesota-based Mitchell W. Cook to Senior Regional President responsible for commercial banking in the Twin Cities. At the same time, Joel L. Larson (Hudson, Wisconsin), Chad W. Lindgren (Forest Lake, Minnesota), and Todd E. Peterson (St. Michael, Minnesota) were named Regional Presidents. The Twin Cities markets ended the year with good loan momentum thanks to their strong leadership. At our all-employee Rally Day, held on Columbus Day, four employees were awarded the President’s Award. They were: • Terry Engfer, Vice President, Retail Operations, Newport, Minnesota • Amy Hospodarsky, Community Relations Manager, Iowa City • Nikki Ribble, Second Vice President Deposit Operations, Iowa City • Maggie Slaker, Personal Banker in the Golden Valley, Minnesota office We congratulate these four deserving employees and many others who were honored this day. Reward and recognition remains alive and well at MidWestOne! We know that there is work to be done in 2017. We also remain unfailingly optimistic about the future of MidWestOne. We are in good markets with very good geographic diversity. We have an excellent management team and ever-improving employee engagement. We believe we have the necessary scale to succeed in the years ahead as banking continues to evolve and change. It remains our great privilege to serve our shareholders. As always, we are available to answer your questions or receive your comments 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 Kevin W. Monson Chairman MidWEstOnE FinanCial GrOuP, inC. and MidWEstOnE BanK Boards oF direCTors From left: richard r. donohue: CFo, acumen advisors ruth e. stanoch: Corporate affairs Consultant william N. ruud: president, Marietta College Tracy s. McCormick: CFo & Director, Mill Creek Development Company kurt r. weise: retired Bank executive, MidWestone Bank kevin w. Monson: Managing partner, neumann Monson architects, pC, Chairman, MidWestone Financial Group, Inc. larry d. albert: retired Bank executive, MidWestone Bank Charles N. Funk: president & Ceo, MidWestone Financial Group, Inc. and president & Ceo, MidWestone Bank Patricia a. heiden: retired executive Director, oaknoll retirement residence, MidWestone Bank Board Member stephen l. west: Chairman, West Music Company, Inc. richard J. schwab: Investor, entrepreneur, and Builder r. scott Zaiser: owner, Zaiser’s landscaping, Inc. Michael a. hatch: attorney, Blackwell Burke p.a Not Pictured: MidWEstOnE FinanCial GrOuP, inC. exeCuTive oFFiCers John s. koza: retired Bank executive, MidWestone Bank, Director emeritus From left: John M. Morrison: Former Chairman, MidWestone Financial Group, Inc. w. richard summerwill: retired Bank executive, MidWestone Bank, Director emeritus kent l. Jehle: executive vice president and Chief Credit officer katie a. lorenson: Senior vice president, Chief Financial officer kevin e. kramer: Chief operating officer MidWEstOnE FinanCial GrOuP, inC. oFFiCers kevin w. Monson: Chairman of the Board Charles N. Funk: president and Chief executive officer kevin e. kramer: Chief operating officer katie a. lorenson: Senior vice president and Chief Financial officer kent l. Jehle: executive vice president and Chief Credit officer James M. Cantrell: vice president, Chief Investment officer and treasurer karin M. Taylor: vice president Gregory w. Turner: vice president and Head of Wealth Management kenneth r. urmie: Corporate Secretary 6 MidWEstOnE FinanCial GrOuP, inC. 2016 annual rEPOrt MidWEstOnE FinanCial GrOuP, inC. 2016 annual rEPOrt 7 We are oNe Teamwork is job Talk to Katie Lorenson about her role as MidWestOne’s new Chief Financial Officer, and you’ll hear her use two terms repeatedly: team and talent. She could be talking about herself, of course; she leads a team of 10 and her professional talents are considerable. But like many of her MidWestOne colleagues, Katie tends to credit others for the organization’s success. “I am continually amazed at the depth and efficiency of the accounting/ finance team,” she says. “The talent in this organization is incredible, and the communication and true teamwork are evident on a daily basis and across all facets of the company.” Katie first envisioned a career in banking at age 16, when she began working part-time at a community bank near her hometown in northwestern Minnesota. “I worked at financial institutions throughout college,” she says. “After graduation, I was hired by McGladrey and asked to join their financial institutions team. It turned out my years of experience as a teller, proof operator and financial aid assistant were very valuable in consulting and auditing banks. One of my first McGladrey clients was Central Bank, and in 2011, Central asked me to be their CFO. I didn’t think twice about accepting.” Serving as Central’s CFO was challenging, Katie says, but bigger challenges were ahead. Merger talks with MidWestOne began in 2014, and the process was completed in 2016. “There were a few bumps,” she says, “but it has been great seeing my peers rise to the occasion and really excel in the new opportunities that have presented themselves.” One of those new opportunities came to Katie. When long-time MidWestOne CFO Gary Ortale announced his retirement, MidWestOne President and CEO Charles N. Funk offered Katie the position. “Gary was a seasoned veteran with nearly 30 years of experience, and I wasn’t exactly cut from the same cloth,” says Katie. “But Charlie believed in me and has never tried to make me fit a different mold. I’ve learned a great deal from him. And before Gary retired I also was blessed to work with him, and he taught me so many things in a relatively short time.” Katie began her new role in September 2016 and describes her position as multifaceted, encompassing financial and tax reporting to management, the board of directors, regulators, investors and analysts, as well as analysis, budgeting and forecasting. With bank locations in several states, Katie has found some novel ways to encourage teamwork. “In order to put names to faces and spend quality time together, last year we joined forces with the internal audit team and planned an evening at a customer’s wine and painting studio in Iowa City,” she recalls. “It was a great bonding experience, and it turns out there are some talented painters on the finance team — though I am not one of them!” Katie feels fortunate to have a seat at MidWestOne’s strategy planning table, where she can help influence the bank’s future direction. “This company has some incredible talent,” she says, “and I look forward to what the future holds.” “the talent in this organization is incredible, and the communication and true teamwork are evident on a daily basis and across all facets of the company.” KatiE lOr EnsOn MidWestOne Chief Financial Officer 8 MidWEstOnE FinanCial GrOuP, inC. 2016 annual rEPOrt MidWEstOnE FinanCial GrOuP, inC. 2016 annual rEPOrt 9 We are oNe Miles apart, working as When the MidWestOne- Central Bancshares merger was announced in 2014, Nikki Ribble, Second Vice President for Deposit Operations at MidWestOne in Iowa City, admits to some nervousness. “I was excited for the adventure, challenges, and opportunities it would bring,” she says, “but the unknown is always scary. I wondered how we were going to accomplish everything to align the companies and create a smooth transition for our customers and employees.” Many miles to the north, at Central Bank in Newport, Minnesota, Terry Engfer, now Vice President for Retail Operations at MidWestOne, felt more secure about the road ahead. “After 40 years in banking, I’ve become acclimated to constant change,” he says. “I also understand that people adjust to change differently. It just takes patience and time.” How did these two leaders in two different functional areas, in two states, guide their teams through the transi- tion’s many uncertainties, resulting in newly cohesive operations? Their ap- proaches were remarkably similar – and similarly successful. For Nikki, who oversees a staff of 16 charged with all deposit-related func- tions, the biggest challenge was working through change itself. “For some staff members, everything they knew and were familiar with was turned upside down,” she says. “Many processes and procedures changed completely. On top of learning new ways of doing things, employees also needed to address our customers’ questions and concerns.” Committees were formed to com- pare and discuss both banks’ deposit op- eration procedures and systems, which were then voted on for approval. Once approved, new procedures were created and staff training began. “It’s still a work in progress,” Nikki says, “but every day is a little better.” DEpoSiT opERATioNS: FocuSiNg oN MiSSioN Key to the transition process, says Nikki, was a constant focus on MidWestOne’s operating principles. “I’m proud of how my team embraced our mission by taking care of our customers and those who should be, and by working as one team. Keeping those operating principles at the forefront as we went about our day-to- day responsibilities really helped make the merger a success.” Terry also relied on the operating principles, which became essential guideposts for his staff. Like Nikki, he found the “work as one team” principle to be most impactful. “When it comes to mergers and acquisitions, if you don’t have people who can work together and focus on best practices,” he says, “you’re just not going to make progress.” MidWestOne’s Retail Operations serves as an operational, procedural, and training resource for front-line staff who work directly with customers. Terry also manages the bank’s 17 retail branches in Minnesota and Wisconsin. His biggest task, he says, is “making sure people all are on the same page and doing the same thing, and that everyone is focused on taking good care of our customers.” With so many policies and procedures to review during the merger process, says Terry, the emphasis was “to get the best of the best” by retaining what worked well for both companies and, in some cases, coming up with new and better ideas. RETAil opERATioNS: BuilDiNg BEST pRAcTicES As was the case in Iowa City, Terry’s group convened several task forces to examine product integration, procedures, and other issues. “My manager really was clear about the vision,” Terry says. “The whole purpose was to end up better together than we were on our own. We took time to go through every procedure to see who had the best practice and try to combine those as well as we could. We continually asked ourselves, do we need to revise these procedures, or maybe ask again why we do them the way we do? “That was a big deal in this whole process, just asking why,” he recalls. “Lots of times you find you are doing things a certain way because of something that happened 10 years ago, but no one can remember what that was and it’s no longer relevant. It was a good exercise for us, and it made a difference.” Both Terry and Nikki agree that communication and training were essential to the transition process. And although the merger has been completed, communication and training need to continue. “It’s a fine balance,” Terry says. “Train too early and people forget things; train too late and it’s too much to absorb. We’ve kept an eye on areas where employees seem to stumble, and with follow-up training, things start getting better. “People need to see successes before they accept cultural change,” he says, “and now they see things are going in a positive direction.” Or, in Nikki’s words: “Today we’re all working as one team.” 10 MidWEstOnE FinanCial GrOuP, inC. 2016 annual rEPOrt MidWEstOnE FinanCial GrOuP, inC. 2016 annual rEPOrt 11 “Our three grandchildren love to visit the bank. i’m pretty sure it’s not just for the free suckers!” MaGGiE slaKEr MidWestOne Personal Banker We are oNe for all Maggie Slaker grew up on a dairy farm in southern Minnesota and attended a small-town high school. She understood early in life that she preferred putting others’ needs ahead of her own. “With just 44 kids in my graduating class, I was able to try lots of activities, from theatre to basketball,” Maggie says. “But I wasn’t much for learning lines or pretending to be someone I’m not. I’d rather cheer on others than be in the limelight myself.” It’s little wonder, then, that Maggie was drawn to customer service positions. Her first job was working for a community hardware/sporting goods store, where she loved helping customers and getting to know the regulars. After graduating from college, Maggie’s first banking-related position was as a commercial mortgage loan servicer. She later joined Central Bank and has been a Personal Banker — the position she holds today at MidWestOne in Golden Valley, Minnesota — for 10 years. Her duties range from opening new accounts to ongoing account maintenance, assisting customers in person, over the telephone and via email. “I’ve been blessed with the ability to put a name with a face,” she says. “Customers feel more comfortable in discussing their financial concerns when they know and trust their banker.” Maggie’s definition of exceptional customer service is a perfect match for MidWestOne. She’s committed to treating all customers with dignity and kindness, greeting everyone with a smile, listening, and anticipating customers’ needs. “And if you don’t know the answer,” she says, “promise to follow up and then follow through on that promise.” If she had any concerns when the bank merger/acquisition plans were announced last year, those doubts were quickly dispelled. “I was very happy to learn about MidWestOne’s core operating principle of ‘Taking good care of our customers, and those who should be,’” Maggie says. “I’m confident we’re moving in the right direction and that a stronger, cohesive organization will be the outcome.” 12 MidWEstOnE FinanCial GrOuP, inC. 2016 annual rEPOrt MidWEstOnE FinanCial GrOuP, inC. 2016 annual rEPOrt 13 We are oNe Rocking big party In the summer of 2016, when Amy Hospodarsky, Community Relations Manager for MidWestOne in Iowa City, was tasked with creating a community event to celebrate several MidWestOne milestones, she knew she had to think big. “One of our staff members joked, ‘let’s just shut down Clinton street.’” aMY hOsPOdarsKY MidWestOne Community relations Manager The bank had just completed an extensive restoration of its historic 1912 headquarters building in the heart of downtown Iowa City. Just four blocks away, the bank’s brand-new One Place at Riverfront Crossings, which houses the bank’s Home Mortgage, Investment, and Operations Center, had just opened as well. Together, these major facilities projects represented a $22 million investment in the local community. The bank’s ongoing commitment to its hometown was underscored in what became the theme of the August 12 celebration, “Home Sweet Home Iowa City.” But Amy also needed an event concept that would engage participants and link the two facilities projects. Fortunately, both buildings are located along Clinton Street, and that provided the answer. “One of our staff members joked, ‘let’s just shut down Clinton Street,’ and I said it couldn’t be done,” Amy recalls. “But when we approached the City of Iowa City, they were wonderful to work with. We ended up closing a major portion of Clinton from Washington Street to Burlington Street, and further south as well.” Amy and her team decided to turn part of the street into a canvas, and invited artists and community members to “Rock the Chalk.” “It was a Friday afternoon and we had everyone from semiprofessional artists to families, all chalking 8- by 8-foot squares of pavement in front of the historic building,” Amy says. “I was amazed by what people drew, and the art was just wonderful. “At the new building, we closed off a big section of the street and had tons of family-friendly activities, along with tours and other programming in both buildings. And in keeping with our ‘Rock the Chalk’ theme, we had stages with local bands on each end of Clinton Street.” About 75 MidWestOne employees volunteered for the event, which Amy says drew an estimated 2,000-2,500 people. “Everyone had a blast,” Amy says. “We’re already talking about repeating the event and how to top ourselves in 2017.” one school, many needs alexander Elementary, iowa City’s newest elementary school, enrolls approximately 350 children from preschool through 6th grade. More than 74 percent of its students qualify for the free or reduced-price lunch program. in cooperation with the iowa City Community school district Foundation, alexander Elementary and MidWestOne are now piloting the district’s very first “support a school” project. “We’re here to fill the gaps for children who may be without family support because their parents are working or lack transportation or face other challenges,” says MidWestOne Community relations Manager amy hospodarsky. “so far, about 20 MidWestOne volunteers are mentoring some 40 children, spending 20-25 minutes with them once a week,” amy says. “We’ve also been involved in everything from a winter clothing drive to delivering pizza on parent-teacher conference days – whatever the staff tell us they need. “Besides being good for the children, this project gives our employees a much fuller picture of our community and how they can help. supporting students and staff at alexander Elementary is really about who we are, and our responsibility for the community as a whole. it’s in our dna. and working with these kids has been really cool.” 14 MidWEstOnE FinanCial GrOuP, inC. 2016 annual rEPOrt MidWEstOnE FinanCial GrOuP, inC. 2016 annual rEPOrt 15 FinanCial hiGhliGhTs (dollars in thousands, except per share amounts) COndE nsEd COnsOlidatEd BalaNCe sheeTs (dollars in thousands) 2016 2015 2014 deCeMBer 31, Year-eNd BalaNCes assets investment securities loans loan Pool Participations deposits shareholders’ Equity averaGe BalaNCes assets investment securities loans loan Pool Participations 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 $3,079,575 645,910 2,165,143 - 2,480,448 305,456 $2,993,875 551,383 2,161,376 - 2,445,363 304,670 $99,606 7,983 23,434 87,806 27,251 20,391 $1.78 1.78 0.64 26.71 37.60 10,740 28,465 5,560 6.69% 10.13% 0.68% 3.80% 66.43% 10.18% 1.01% 0.26% 1.31% $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 $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 $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% 14.29% 0.91% 3.71% 61.36% 9.21% 0.90% 0.11% 0.54% $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% 58.71% 10.58% 1.44% 0.09% 1.15% sharE PriCe 2015 First Quarter second Quarter third Quarter Fourth Quarter 2016 First Quarter second Quarter third Quarter Fourth Quarter hiGh $29.82 $33.88 $34.04 $32.52 hiGh $30.04 $30.50 $30.74 $39.20 low $27.74 $28.33 $28.43 $28.06 low $24.71 $25.49 $26.50 $ 27.93 Cash divideNd deClared $0.15 $0.15 $0.15 $0.15 Cash divideNd de Clared $0.16 $0.16 $0.16 $0.16 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 Premises and equipment, net accrued interest receivable Goodwill Other intangible assets, net Bank owned life insurance Other real estate owned Other assets Total assets 2016 $41,464 1,764 43,228 477,518) 168,392) 4,241) 2,165,143) (21,850) 2,143,293 75,043 13,871 64,654 15,171 47,231 2,097 24,836 $3,079,575 liaBiliTies aNd shareholders’ eQuiTY liabilities deposits: non-interest-bearing demand interest-bearing checking savings Certificates of deposit under $100,000 Certificates of deposit over $100,000 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 $494,586 1,136,282 197,698 326,832 325,050 2,480,448 117,871 115,000 23,692 17,500 19,608 2,774,119 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, 2016 and 2015 Capital stock, common, $1 par value; authorized 15,000,000 shares; 11,713,481 shares issued at december 31, 2016 and 2015 additional paid-in capital treasury stock, at cost; 277,121 shares and 304,708 shares at december 31, 2016 and 2015, respectively retained earnings accumulated other comprehensive income Total shareholders’ equity Total liabilities and shareholders’ equity - 11,713 163,667 (5,766) 136,975 (1,133) 305,456 $3,079,575 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 - 11,713 163,487 (6,331) 123,901 3,408) 296,178 $2,979,975 16 MidWEstOnE FinanCial GrOuP, inC. 2016 annual rEPOrt MidWEstOnE FinanCial GrOuP, inC. 2016 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, 2016 $98,162 - 2015 2014 $86,544 798 $48,466 1,516 Years eNded deCeMBer 31, 2016, 2015, aNd 2014 sToCk sToCk Paid-iN CaPiTal sToCk earNiNGs iNCoMe (loss) ToTal PreFerred CoMMoN addiTioNal TreasurY reTaiNed CoMPreheNsive aCCuMulaTed oTher Balance, december 31, 2013 $ - $8,690 $80,506 $(3,702) $91,473 $1,049 $178,016 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: 8,297 5,703 166 112,328 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 3,151 267 5,961 205 1,827 19 825 - 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 loan origination and servicing fees Other service charges and fees Bank-owned life insurance income securities gains, net Other gains 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 467 12,722 99,606 7,983 91,623 5,574 5,219 3,771 5,951 1,366 464 1,089 23,434 49,621 13,066 4,940 1,563 3,970 14,646 87,806 27,251 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 5,215 1,307 1,011 498 21,193 41,865 9,975 2,659 1,397 3,271 14,009 73,176 32,937 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 - - - 18,522 (4,868) 285 459 (3,987) - - - - - - - - - - - - - 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 (8,414shares) 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 - - - - - - (6,344) 169 445 - - - - - - - - - - - - (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 net income dividends paid on common stock ($0.64 per share) stock options exercised (2,900 shares) release/lapse of restriction on rsus (26,133 shares) stock compensation Other comprehensive income, net of tax - - - - - - - - - - - - - - (22) (529) 731 - - - 20,391 (7,317) 60 505 - - - - - - - - - - - (4,541) 20,391 (7,317) 38 (24) 731 (4,541) Balance, december 31, 2016 $ - $11,713 $163,667 $(5,766) $136,975 $(1,133) $305,456 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 2,307 1,102 1,227 73 15,313 24,918 6,293 1,565 964 547 9,126 43,413 25,553 income Taxes 6,860 7,819 7,031 NeT iNCoMe $20,391 $25,118 $18,522 earNiNGs Per CoMMoN share Basic diluted $ 1.78 $ 2.42 $ 2.20 $ 1.78 $ 2.42 $ 2.19 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 iNdeP eNdeNT re GisTered PuBliC aCCouNTiNG FirM RSM US, LLP 201 1st Street SE Suite 800 Cedar Rapids, Iowa 52401 18 MidWEstOnE FinanCial GrOuP, inC. 2016 annual rEPOrt MidWEstOnE FinanCial GrOuP, inC. 2016 annual rEPOrt 19 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 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 500 South Clinton Street 319-356-5960 Conrad Coralville Fairfield Fairfield iowa City iowa City iowa City iowa City MiNNeso Ta 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 1906 Keokuk Street 319-356-5800 Newport 2104 Hastings avenue 651-256-7250 2233 rochester avenue 319-356-5800 south st. Paul 835 Southview Boulevard 651-451-2133 Melbourne 202 Main Street 641-482-3105 stillwater 2270 Frontage road West 651-439-3050 North english 10030 Highway 149 319-664-3311 st. Michael 750 Central avenue e, Suite 100 763-497-3114 North liberty 465 Hwy 965 ne, Suite a 319-356-5800 white Bear lake 3670 east County line north 651-426-2554 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 iowa 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 ©2017 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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