Midwestone Financial Group
Annual Report 2017

Plain-text annual report

People. Passion. Progress. 2017 Annual Report “Times of stress and difficulty are seasons of opportunity when the seeds of progress are sown.” — Thomas F. Woodlock To our shareholders Charles N. FuNk, President and CEO keviN w. MoNsoN, Chairman A year ago in this space, we reported sub-par earnings results and a plan to improve our performance in 2017. MidWestOne Financial Group did indeed show many improvements in operating performance in 2017. unfortunately, the third and fourth quarters brought unexpected credit surprises causing company performance to fall short of our expectations. The following paragraphs will inform our shareholders of many areas of progress during 2017 as well as where we fell short of our goals. Net income for the company declined to $18.7 million from $20.4 million in 2016. In Year 2017 we incurred a $3.2 million increase in income tax expense from the Tax Cuts and Jobs Act of 2017. This charge will be recovered over the next two years by a reduction in the company’s federal tax rate. Thus, we believe the more appropriate comparison of net income is $21.9 million in 2017 compared to $20.4 million in 2016. on an earnings per 2 MidWestOne Financial Group, Inc. 2017 Annual Report share basis, 2017 EPS was $1.55 versus $1.78 the prior year. When adjusted for the deferred tax expense, 2017 EPS was $1.82. With $18.7 million of net income, return on average assets of 0.60% and return on average tangible equity of 8.00% are well short of our long-term goals. one bright spot in the financial metrics is that our closely watched efficiency ratio declined to 58.64% in 2017 from 66.43% in 2016. It is our view that this is a harbinger of good things to come in our future. The “elephant in the room” in regard to our financial results is the provision for loan losses. This line item single-handedly kept us from our 2017 goals. Last year, in this space, we wrote “we recognize that asset quality is ‘job one’ in our company. The quickest way to see our standing slip is to make poor credit decisions.” We went on to say that 2016 was not up to our historical standards in asset quality. The same can be said of 2017 as the third and fourth quarters each saw outsized loan loss provisions to account primarily for deteriorating conditions in two large commercial loans. The result was a provision for loan losses of $17.334 million in 2017, well above an already outsized $7.983 million in 2016. To give readers some perspective on these numbers, we had expected the provision to total $5 million in 2017, so one can see how this derailed financial performance. We ended the year with non-performing loans to total loans a respectable 1.04% and net loan charge- offs of 0.51%, the largest number for our company since becoming a public company ten years ago. We ended 2017 with a loan loss reserve to total loans of 1.23% and note that this reserve more than covered our nonperforming loans by 1.17 times. This compares to like ratios of 1.01% and 0.77 times at year-end 2016. The 2017 numbers represent progress and are more in line with our historical metrics. Most important, events in the last six months of 2017 caused us to take a deep dive into our credit administra- tion process. What we found was a process that had served us very well for more than two decades, but needed an upgrade due to the growth and increasing complexity of the company. We are confident that the process now in place will serve stakeholders very well in the years to come. readers will be interested to know that senior leaders and board members were involved in this process. It is not a surprise that most, but not all, of our credit issues have been in our Iowa footprint. However, surprising to many is that it is not the agricultural portion of our portfolio that has created the large problems. rather, these have come from our commercial portfolio. While rural Iowa continues to show below average growth, we believe our agricultural portfolios are going to stand up well over the long term. We will need to reserve more for some of these loans due to increased risk, but we believe charge-offs will be minimal. our collateral margins, while narrowing, are still good. Elsewhere in our footprint, credit conditions in the Twin Cities and western Wisconsin, southwest Florida and Denver remain strong. The diversity of our credit exposure will continue to be a strength of MidWestOne. To summarize: We believe the worst is behind us and our highest 2018 priority is to return our company to the superior asset quality it enjoyed from 2008 to mid-2016. As you will see in succeeding paragraphs, much progress was made at MoFG during 2017. By any measure, the company enjoyed solid growth in 2017. Total assets increased 4.3% to $3.212 billion at year-end 2017. Total loans increased 5.6% in 2017 to $2.287 billion and deposits followed closely, rising 5% year over year to $2.605 billion at year-end. Net interest income, which provides the bulk of our revenues, increased 4.6% in 2017. The numbers cited above are the best we’ve seen in many years at MoFG. To provide context, deposit growth occurred company-wide with the strongest performance coming from our Iowa offices. The loan growth, not surprisingly, came from the robust economies of the Twin Cities, Denver and southwest Florida. It is our expectation that these trends will continue in 2018 and we do expect a greater contribution to loan growth from our larger markets in Iowa. There is also a good story to tell from the non- interest income-producing entities in the company. Wealth Management, which consists of Trust, Investment Services and MidWestOne Insurance, saw its revenues increase 11%. Investment Services rebounded strongly from a down performance in 2016. Each of these units MidWestOne Financial Group, Inc. 2017 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 (%) 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 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 net inteRest mARgin (%) n MoFG n Peer n All Banks n regional n Asset Size 3.90 3.70 3.50 3.30 3.10 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 noninteRest expense / AveRAge Assets (%) n MoFG n Peer n All Banks n regional n Asset Size 3.15 3.05 2.95 2.85 2.75 2.65 2.55 2.45 2.35 2.25 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 efficiency RAtio (%) n MoFG n Peer n All Banks n regional n Asset Size 74.00 69.00 64.00 59.00 54.00 49.00 44.00 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 4 MidWestOne Financial Group, Inc. 2017 Annual Report is well set for a strong 2018 and there is a significant emphasis on acquiring more revenue producers in this area of the bank. our Home Mortgage center saw its revenues decrease by some 9.3% during the year. This is a cyclical business and this decrease is in line with industry averages. More impressive, this unit worked hard to decrease the average “days to close” a mortgage loan by about 25% during the year with more progress anticipated in 2018. our servicing portfolio of mortgage loans, which will sustain us in years when loan originations are down, has grown to $288 million. As was the case a year ago, we remain very positive on the contribution this unit will make to our bank in the years ahead. As we disclosed a year ago in this letter, our downtown Denver office opened for business in May, 2017. By year-end, regional President Joe VanHaselen and his team were well ahead of schedule, with more than $48 million in loans outstanding and $20 million in deposits. This office attained profitability in its first six months of existence and we anticipate more growth in 2018. Their focus on commercial and industrial loans brings much balance to our overall loan portfolio. In late March, our company had the opportunity to raise 750,000 shares of common stock at an average price of $34.25 per share. Demand for our shares was strong and bolstered an already strong capital position. MoFG ended the year with tangible equity of 8.44% of tangible assets, up from 7.62% at year-end 2016. We are well above all regulatory capital guidelines. During 2017, we developed and implemented a five-year strategic plan that charts our path to the future. While this self-examination of the company was in some ways overdue, one thing did not change: our determination to put our operating principles at the center of everything we do. • Take care of our customers • Hire and retain good employees • Always conduct yourself with the utmost integrity • Work as one team • Learn constantly so we continually improve We have seen that a company committed to these operating principles will be able to attract and retain the very best talent that allows us to produce the results our shareholders expect. There was again evidence in 2017 that our company’s morale is good and improving. For the fifth consecutive year we were named as a Top Workplace in the state of Iowa. The award is given based on an anonymous survey of our employees. We incorporate employee feedback via the survey into continual improvements in our workplace. As we look to the future, our strategic plan is mindful that the lion’s share of our operating revenues will come from our deposit generation and lending activities. We will continue to provide innovative ways for our customers to use MidWestOne to meet their financial needs. And, we will continue to seek out bankers who fit our operating principles to work at MidWestOne. pRice/ltm eps (x) our Wealth Management team has done a very good job over the past eight years of growing its revenues. That said, the banks we’ve acquired have not had large wealth management components, so our fees as a percentage of revenues have fallen. We will be more actively looking for ways to expand our wealth management presence in 2018 and beyond. Senior Vice President Greg Turner will be leading this effort. 23.00 21.00 19.00 17.00 15.00 13.00 11.00 9.00 7.00 n MoFG n Peer n All Banks n regional n Asset Size FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 Financial technology, better known as Fintech, is swiftly emerging in our industry. As the world changes— faster and faster, it seems—so must our industry evolve to keep up with our customers’ changing preferences. We have found that our company can compete in this space, but we must be smart about how we compete. The expense associated with meeting the ever-increasing demands of the digital customer requires significant investment. For 2018, our goal is to progressively improve our digital customer experience while remaining competitive. Senior Vice President John Henk leads our Fintech charge. Here is a preview of 2018 Fintech initiatives: dividend pAyout RAtio (%) n MoFG n Peer n All Banks n regional n Asset Size 44.00 39.00 34.00 29.00 24.00 19.00 14.00 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 Next generation digital channel upgrades real-time consumer P2P payment capability real-time alerting and fraud management support totAl RetuRn peRfoRmAnce Digital channel loan and deposit application support, including mobile application functionality Enhanced deposit and loan processing automation As customer expectations change, we recognize that our digital delivery must keep pace. This includes a flexible and secure platform that offers a seamless customer experience regardless of the channel. It also includes support for real-time person-to-person payments that are easy to use, ubiquitous and safe. Actionable alerts and fraud controls are intended to build customer engagement by helping customers stay aware and in control. We also understand that turning prospects into customers means offering options to make this easy in the channel of the customer’s choice. Although it isn’t as visible, technology that automates manual processes has the added benefit of improving the customer experience, as well as staff efficiency. Fintech, combined with exceptional customer service delivered by our MidWestOne team, allows us to stand apart from the competition. remember, technology without exceptional people will not deliver the returns our shareholders expect. E u L A V x E D N I 300 280 260 240 220 200 180 160 140 120 100 n MoFG n NASDAQ Composite n SNL-Midwestern Banks Index 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17 MidWestOne Financial Group, Inc. 2017 Annual Report 5 • • • • • we are very pleased with tangible progress in many areas throughout the company in 2017. Priority one in 2018 is to deliver good financial results to our shareholders. As we continually improve in areas of customer experience and employee engagement, we are also focused on continual improvement in supporting the communities where we serve. In 44 locations, across five states, we partnered with our fellow employees and customers to support organizations that create opportunities. A year of giving and volunteering included our continued partnerships with united Way, Boys & Girls Club of America, American Heart Association, Family Pathways and Habitat for Humanity. our annual Community Impact Grant program is a contest across all branches for a $50,000 grant. This year, the grant went to the construction of the Environmental Learning Center of Mahaska County, IA. We conclude the report on the operations of our company with the acknowledgement that our equity price has not kept up with the average bank stock over the past two years. We’ve long said we cannot control our stock price, only our financial results. In this vein, we know 2018 is a year to return to our accustomed performance levels that were produced in the 2011–2015 timeframe. In that context, the Board of Directors authorized an 14.7% increase in the quarterly dividend of the company to an annualized amount of $0.78 per share. This reflects the board’s confidence in the company’s future. The 2017 annual meeting will mark the end of Steve West’s tenure as a bank and holding company director. Steve joined our company as a director in 1991 and has been a stalwart member of this body. Steve served as the Chairman of the Compensation Committee from 2008- 2017 and was the company’s lead director during this period as well. Steve is thoughtful and has always been a positive contributor in the board room. We will miss him and thank him for his loyal service to the company. Steve has been with us through thick and thin. Joining our board will be Nathaniel J. Kaeding. Nate is best known as an All-American kicker for the Iowa Hawkeyes and for nine seasons in the NFL as a Pro-Bowl kicker. But there is much more to Nate as he returned to Iowa City, attained his M.B.A. and is now an active and well-respected member of the Iowa City community. He is Director of Business Development and Client relations with Build to Suit, a local development company. We welcome Nate to the Board. 6 MidWestOne Financial Group, Inc. 2017 Annual Report New to our company is David Lindstrom, who was hired in January as Senior Vice President of retail Banking. David comes to our company with 28 years of experience with larger banking organizations. It was David’s personality and values that attracted us to him and our culture that attracted him to us. We believe he is a great culture fit and will help us drive top line revenues in the years ahead. At our 2017 rally Day, held on Columbus Day, four employees were honored with the President’s Award. They were: • Sara Benscoter, Commercial/Consumer Loan Processor – Belle Plaine, Iowa • Wayne Bethke, Staff Accountant – Iowa City, Iowa • Debra Koehler, Vice President, BSA officer – Golden Valley, Minnesota • Susan Weinschenk, Vice President, Human resources Development – Iowa City, Iowa We congratulate these four worthy recipients along with many others who were honored for their positive contributions at rally Day. As we conclude, we go back to where we began this missive. We are not satisfied with the 2017 financial results. That said, we are very much pleased with tangible progress in many areas throughout the company in 2017. And priority one in 2018 is to deliver good financial results to our shareholders. It is our great privilege to serve you, our shareholders. Thank you for your faithful support. Charles N. Funk President and CEo Kevin W. Monson Chairman Midwestone Financial Group, inc. executive officers Charles N. Funk: President and Chief Executive officer kevin e. kramer: Chief operating officer kent l. Jehle: Executive Vice President and Chief Credit officer James M. Cantrell: Vice President, Chief Investment officer, Treasurer and interim Chief Financial 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 kent l. Jehle: Executive Vice President and Chief Credit officer James M. Cantrell: Vice President, Chief Investment officer, Treasurer and interim Chief Financial officer karin M. Taylor: Vice President and Chief risk officer Gregory w. Turner: Vice President and Head of Wealth Management kenneth r. urmie: Corporate Secretary Midwestone Financial Group, inc. and Midwestone Bank Boards of directors Back row (left to right): Patricia a. heiden: retired Executive Director, oaknoll retirement residence, MidWestOne Bank Board Member kurt r. weise: retired Bank Executive, MidWestOne Bank Charles N. Funk: President and CEo, MidWestOne Financial Group, Inc. and President and CEo, MidWestOne Bank larry d. albert: retired Bank Executive, MidWestOne Bank, MidWestOne Bank Board Member douglas k. True: retired Senior Vice President and Treasurer, university of Iowa John M. Morrison: Former Chairman, MidWestOne Financial Group, Inc. Front row (left to right): richard J. schwab: Investor, Entrepreneur, and Builder r. scott Zaiser: owner, Zaiser’s Landscaping, Inc. kevin w. Monson: Managing Partner, Neumann Monson Architects, PC, Chairman, MidWestone Financial Group, Inc. ruth e. stanoch: Corporate Affairs Consultant richard r. donohue: CFo, Acumen Advisors Michael a. hatch: Attorney, Blackwell Burke P.A. Tracy s. McCormick: CFo and Director, Mill Creek Development Company Missing from photo: stephen l. west: Chairman, West Music Company, Inc. John s. koza: retired Bank Executive, MidWestOne Bank, Director Emeritus w. richard summerwill: retired Bank Executive, MidWestOne Bank, Director Emeritus MidWestOne Financial Group, Inc. 2017 Annual Report 7 The right leadership at the right time “we have seen that a company committed to these operating principles will be able to attract and retain the very best talent that allows us to produce the results that our shareholders expect.” — Charlie Funk “our strategic plan highlights four guiding factors: our culture, our operating principles, our commitment to creating shareholder value and the need to stay ahead of evolving technology. of those, culture is our bedrock. It’s the reason we’ve had such success in recruiting so many new leaders. Many of those individuals have come from larger and more complex institutions and were drawn to MidWestOne because they wanted a culture they can believe in. “While our focus may be on culture, we’re not resting there. Moving forward, we will continue to build the company and expand our product set. We will reach our customers in ways we haven’t done before, whether in person or online. We will be a proactive partner in identifying needs and providing solutions. As a result, our customers should expect a better experience and thus our shareholders expect a greater return.” Kevin KRAmeR Chief operating officer 8 MidWestOne Financial Group, Inc. 2017 Annual Report The right leadership at the right time “our operations team is focused on supporting our customers and maintaining high standards so everyone involved can accomplish great things. our teams know it all starts and ends with serving people, and our operating principles serve as the guide to carry this out. I believe a key differentiator is our team of experienced operations managers who are not only experts in their fields, but also understand it goes beyond this. They are leaders who understand the importance of teamwork, and they completely support our culture and operating principles. Through this leadership we’ve seen a commitment to operational efficiencies and continuous improvement, without losing sight of the customer experience. It is rewarding to frequently see employees go the extra mile to help a customer or a co-worker.” “When I joined MidWestOne in January 2018, I was drawn by the people, the professionalism and the culture, which puts customers at the center of everything we do. This organization perfectly balances being a people-focused community bank while at the same time offering all the services, conveniences and technology solutions that the big banks do. We’re about building relationships and actually getting to know our customers as individuals. That’s a key driver of success. “We need to take more opportunities to have broader and more holistic conversations with our customers about their goals and dreams. In every interaction with MidWestOne, I’d like to see the customer come away with something new, a pleasant surprise, a nugget of useful information that the customer wasn’t expecting. That’s a win, and that’s the value-add I want us to focus on.” BARB finney Senior Vice President, operations dAvid lindstRom Senior Vice President, retail Banking “We’ve built great teams in each of the Wealth Management divisions of Insurance, Investments, Private Banking and Trust. We have a talented staff with a deep bench of knowledge and competencies, and a strong commitment to our customers’ best interests. our next challenge is to extend our Wealth Management expertise into Minnesota, Wisconsin, Denver and Florida. “I believe if you provide a great service and are a trusted advisor to someone, they’re going to seek you out, wherever they may be. Not to exaggerate, but technology now makes the entire u.S. a potential MidWestOne customer. It completely changes the dynamic of how we take care of and retain our existing customers, as well as those who should be. It’s a fun and exciting time to be here.” gReg tuRneR Senior Vice President, Wealth Management MidWestOne Financial Group, Inc. 2017 Annual Report 9 New markets bring new opportunities “The company enjoyed solid growth in 2017, with strong performances from our iowa offices as well as the robust economies of the Twin Cities, denver and southwest Florida. we expect these trends to continue in 2018.” — Charlie Funk “Here in Denver, our team includes bankers that have worked together for many years and share a passion for building long-term client relationships. MidWestOne embraces this philosophy and provides us with the latitude to be able to remove road blocks and do what’s needed to provide excellent customer service. That’s why MidWestOne is such a great fit for us. “our mission is to continue to build our portfolio of commercial companies that are looking for a more meaningful relationship with their banker — someone who can be a resource and advocate as they grow. They want a banker who understands their business and will support them through the inevitable ups and downs in a business life cycle. We try to surround each client with a team of bankers who put the customer first. This combination of big-bank services in a community bank setting is very appealing to our commercial clients.” Joe vAnHAselen regional President, Colorado 10 MidWestOne Financial Group, Inc. 2017 Annual Report New markets bring new opportunities “My job is a little different from the regional officers in other parts of the country. We have two branches here, in Fort Myers and Naples, and I oversee those branches’ daily operations. We’re getting ready to relocate to a brand-new facility in Fort Myers, which is exciting. It will be our signature location in Florida and will allow us to expand our staff and services. “Many of our staff have been with us for more than 10 years, which is unusual in retail banking. They live here in the community, they know the local market and they know our customers on a more personal level. That’s important, because our customers still want that home-town feel, whether they come into the bank or work with us via phone or email. The more we know about our customers, the better we can be at providing solutions to meet their needs.” “Among our regional priorities is targeting growth in deposits and capitalizing on what I call our gateway products. For example, let’s say someone is new to a community and comes to us for a loan. often we can help them with a checking account or other product or service as well. These are all gateways into a customer’s life, ways that we can capture more wallet share. But it has to be intentional and part of a trusting relationship. “I see my job as building those trusting relationships with our clients and communities. MidWestOne is a community bank led by community bankers, which is a real differentiator in this industry. our customers know we are investing in their success. They know they can count on us for security, access and convenience and that we’ll be here when they need us. If we do these things well, the bank will be successful.” AnA mARiA senicA Vice President and regional retail Manager, Florida mARK eRicKson regional President, Minnesota and Wisconsin MidWestOne Financial Group, Inc. 2017 Annual Report 11 An individualized customer experience “we will continue to provide innovative ways for our customers to use MidwestOne to meet their financial needs.” — Charlie Funk “on the investment side of Wealth Management we try to give people options, and I see myself as an educator as much as a financial advisor. I learn about products and income-planning strategies so that you, as a customer, don’t have to spend your Saturday afternoons trying to figure out which college savings plan is best or what mutual fund to buy. “By offering quality solutions, we have a better chance to answer more of our customers’ needs beyond traditional banking, and we can better anticipate their future needs as well. I want clients to understand their financial plan, but it can be at a very high level, whereas my job is to build the details. The goals are theirs; we provide the options to help them get there. And that gives customers peace of mind. They want to know someone is watching out for them.” “our goal in the Mortgage Division is the same as the rest of the company: to ensure our customers’ overall financial success. We play a big role in that because for most customers, a mortgage is both their largest debt and their largest asset. We go deep with our customers to fully understand their needs and long-term goals. Although we are growing the breadth of our mortgage products pretty significantly, we are not product- pushers; we are client developers. “I’m more excited about being here now than I was when I joined MidWestOne a few months ago. It’s such a professional organization. And to me, the really cool thing is a strong appreciation for the past and for tradition, coupled with a very progressive eye to the future. We’re making decisions not just based on where we came from or where we are today, but where we want to go.” JoHn evAns Vice President, Investment Services Manager R. J. lAng Senior Vice President, residential Mortgage Division Manager 12 MidWestOne Financial Group, Inc. 2017 Annual Report An individualized customer experience “At the core of the Trust Department is our fiduciary responsibility to act in our clients’ best interests and on their behalf when they may not be able to do so. This means we need to listen to and know our customers really well, so we can create an authentic customer experience. Caring isn’t something you can fake. unless you bring your heart into this work, you’re not going to fully understand the needs of others. “The challenge now is to expand our services throughout the bank’s footprint while preserving what makes us so good at what we do. We need to make better use of technology and provide our team with effective tools and support. When we solve how to deliver our services and tailor them to our clients’ needs in any community we’re doing business in, we have huge potential for growth.” tHAis WinKleBlAcK Vice President, Senior Private Banker and Trust Department Manager MidWestOne Financial Group, Inc. 2017 Annual Report 13 Mission, message and media “Turning prospects into customers means offering options in the channel of the customer’s choice. we have found that we can compete in this space, but we must be smart about how we compete.” — Charlie Funk “The wonderful thing about this organization, and it is extremely rare in marketing, is that what we believe about ourselves — this amazing culture we have — is also why our customers do business with us. It’s a great story to tell, but we need to do so more consistently. We need to focus on the value the customer sees in us, what they believe they can do better by working with us. And we need to meet customers where they are. “our customers’ businesses are changing rapidly. We no longer see a business that buys a product and resells it and that’s their business plan for 20 years. Today businesses are transforming and they’re completely different from 10 years ago. How they go about their business, things that would have been either a challenge for them or an opportunity for them to add value — all of that has changed because of technology. “At the end of this strategic planning period I believe MidWestOne will be a financial services company in the eyes of our customers. A bank does a lot of things, but customers don’t inherently understand what a bank is capable of doing, whereas a financial services company contributes to every aspect of a person’s financial life. In fact, we’re there now. We just need to let people know it.” lyndA WHittle Senior Vice President, Marketing “The days of the business owner stopping in and making a deposit every day at lunch are over. Commercial customers are embracing technology, from remote deposits to online banking. our role is to help them embrace that change. And that includes fraud protection, which has become a big deal. We believe we can do a better job for small- to medium-sized businesses, and provide them with a lot more advice and guidance.” mitcH cooK Senior regional President, Minnesota and Wisconsin 14 MidWestOne Financial Group, Inc. 2017 Annual Report Mission, message and media “In Information Services, we view our role as more than just providing technology. What can’t be lost is maintaining the trust our customers have placed in us. Meeting or exceeding security standards and customer confidentiality is absolutely critical. We must also ensure our delivery channels and systems continue to evolve to meet changing customer expectations. Throughout my banking career this has always been the case. “However, the pace of change associated with technology and its impact on the financial services industry cannot be underestimated. We consider it a strategic imperative to adapt and act on opportunities and customer expectations as they are identified. The end goal is the same as it has always been, ‘To take care of our customers, and those who should be.’ The difference is incorporating these new methods and technologies in a thoughtful way that allows us to meet our mission.” JoHn HenK Senior Vice President, Chief Information officer MidWestOne Financial Group, Inc. 2017 Annual Report 15 finAnciAl HigHligHts (dollars in thousands, except per share amounts) 2017 2016 2015 Year-eNd BalaNCes Assets Investment Securities Loans Total Deposits Shareholders’ 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 $3,212,271 643,279 2,286,695 2,605,319 340,304 $3,097,496 641,328 2,201,364 - 2,503,481 334,966 $ 104,175 17,334 22,370 80,136 29,075 18,699 $ $ 1.55 1.55 0.67 27.85 33.53 9,252 23,861 11,125 5.58% 8.00 0.60 3.83 58.64 10.81 1.23 0.51 1.04 $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 $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 $ 10,740 28,465 5,560 $ 8,491 11,528 2,068 6.69% 10.13 0.68 3.80 66.43 10.18 1.01 0.26 1.31 9.84% 14.29 0.91 3.71 61.36 9.21 0.90 0.11 0.54 sHARe pRice 2016 First Quarter Second Quarter Third Quarter Fourth Quarter 2017 First Quarter Second Quarter Third Quarter Fourth Quarter hiGh $30.04 30.50 30.74 39.20 hiGh $38.56 36.72 35.63 37.94 16 MidWestOne Financial Group, Inc. 2017 Annual Report low $24.71 25.49 26.50 27.93 low $33.25 32.92 31.93 30.56 Cash divideNd deClared $0.160 0.160 0.160 0.160 Cash divideNd deClared $0.165 0.165 0.170 0.170 condensed consolidAted BAlAnce sHeets (dollars in thousands) 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 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 2017 $44,818 6,154 50,972 447,660 195,619 856 2,286,695 (28,059) 2,258,636 75,969 14,732 64,654 12,046 59,831 2,010 29,286 $3,212,271 $461,969 1,228,112 213,430 324,681 377,127 2,605,319 97,229 115,000 23,793 12,500 18,126 2,871,967 deCeMBer 31, 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 $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, 2017 and 2016 Capital stock, common, $1 par value; authorized 30,000,000 shares at December 31, 2017 and 15,000,000 shares at December 31, 2016; 12,463,481 shares issued at December 31, 2017 and 11,713,481 shares issued at December 31, 2016 Additional paid-in capital Treasury stock, at cost; 243,870 shares and 277,121 shares at December 31, 2017 and 2016, respectively retained earnings Accumulated other comprehensive income (loss) Total shareholders’ equity Total liabilities and shareholders’ equity - - 12,463 187,486 (5,121) 148,078 (2,602) 340,304 $3,212,271 11,713 163,667 (5,766) 136,975 (1,133) 305,456 $3,079,575 MidWestOne Financial Group, Inc. 2017 Annual Report 17 condensed consolidAted stAtements of opeRAtions (dollars in thousands, except per share amounts) 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: Year eNded deCeMBer 31, 2017 $102,366 - 10,573 6,239 142 119,320 2016 $ 98,162 - 8,297 5,703 166 112,328 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 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 3,648 215 7,626 412 1,838 12 949 - 445 15,145 104,175 17,334 86,841 6,189 5,126 3,421 5,992 1,388 241 13 22,370 47,864 12,305 2,674 1,265 3,125 12,903 80,136 29,075 3,151 267 5,961 205 1,827 19 825 - 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 income Taxes 10,376 6,860 7,819 NeT iNCoMe $ 18,699 $20,391 $25,118 earNiNGs Per CoMMoN share Basic Diluted 18 MidWestOne Financial Group, Inc. 2017 Annual Report $ $ 1.55 1.55 $ $ 1.78 1.78 $ $ 2.42 2.42 consolidAted stAtements of sHAReHoldeRs’ equity (dollars in thousands, except per share amounts) Years eNded deCeMBer 31, 2017, 2016, aNd 2015 PreFerred sToCk CoMMoN sToCk addiTioNal Paid-iN CaPiTal TreasurY sToCk reTaiNed earNiNGs aCCuMulaTed oTher CoMPreheNsive iNCoMe (loss) ToTal Balance, december 31, 2014 $ - $ 8,690 $ 80,537 $(6,945) $105,127 $ 5,322 $192,731 Net income Issuance of common stock due to - - - - 25,118 - 25,118 business combination (2,723,083 shares) - 2,723 75,172 - - - 77,895 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-based compensation other comprehensive income (loss), net of tax - - - - - - 300 - - - - - 7,600 - (40) (416) 634 - - - 169 445 - - - (6,344) - - - - - - - - - (1,914) 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-based compensation other comprehensive income (loss), net of tax - - - - - - - - - - - - - - (22) (529) 731 - - - 60 505 - - 20,391 (7,317) - - - - - - - - - (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 Net income Issuance of common stock (750,000 shares) Dividends paid on common stock ($0.67 per share) Stock options exercised (8,750 shares) release/lapse of restriction on rSus (27,625 shares) Stock-based compensation Tax Cuts and Jobs Act of 2017, reclassification from AoCI to retained Earnings, tax effect other comprehensive income (loss), net of tax - - - - - - - - - 750 - - - - - - - 23,610 - (83) (576) 868 - - - 183 462 - 18,699 - (8,061) - - - - - - - - - 18,699 24,360 (8,061) 100 (114) 868 - - - - 465 - (465) (1,004) - (1,004) Balance, december 31, 2017 $ - $12,463 $187,486 $(5,121) $148,078 $(2,602) $340,304 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 iNdePeNdeNT reGisTered PuBliC aCCouNTiNG FirM rSM uS, LLP 201 1st Street SE Suite 800 Cedar rapids, Iowa 52401 MidWestOne Financial Group, Inc. 2017 Annual Report 19 midWestone Bank iowa Belle Plaine 802 13th Street Burlington Cedar Falls Conrad Coralville Fairfield Fairfield 3225 Division Street 4510 Prairie Parkway 120 W Center Street 110 First Avenue 58 E Burlington Avenue 2408 W Burlington Avenue Fort Madison 926 Avenue G Iowa City Iowa City Iowa City Iowa City 102 S Clinton Street 500 S Clinton Street 1906 Keokuk Street 2233 rochester Avenue Melbourne 202 Main Street North English 10030 Highway 149 North Liberty 465 Highway 965 NE oskaloosa oskaloosa 124 South First Street 222 First Avenue E Parkersburg 1001 Highway 57 Pella Pella Sigourney Waterloo 700 Main Street 500 oskaloosa Street 112 N Main Street 3110 Kimball Avenue 319-444-2842 319-754-6526 319-277-2500 641-366-2165 319-356-5800 641-472-6511 641-472-2424 319-372-3991 319-356-5800 319-356-5800 319-356-5800 319-356-5800 641-482-3105 319-664-3311 319-356-5800 641-673-8303 641-673-8303 319-346-1645 641-628-4356 641-628-4356 641-622-2381 319-232-5513 MiNNesoTa Centerville Chisago City Coon rapids Eden Prairie Elk river Forest Lake 7111 21st Avenue N 11151 Lake Boulevard 3585 124th Avenue NW 6640 Shady oak road 18233 Carson Court NW 1650 South Lake Street S Golden Valley 945 Winnetka Avenue N Minneapolis 2120 Hennepin Avenue S Newport 2104 Hastings Avenue Saint Michael 750 Central Avenue E South Saint Paul 930 Southview Boulevard Stillwater 2270 Frontage road W White Bear Lake 3670 Each County Line N wisCoNsiN Hudson 404 County road uu North Hudson 880 6th Street N osceola 304 Cascade Street Saint Croix Falls 2183 Highway 8 E 651-762-9440 651-257-6561 763-780-0484 952-944-6640 763-274-3200 651-464-2880 763-545-9005 612-767-5600 651-256-7250 763-497-3114 651-451-2133 651-439-3050 651-426-2554 715-377-7180 715-386-8700 715-294-2183 715-483-9800 Florida Fort Myers 1520 royal Palm Square Boulevard 239-274-1900 West Liberty 305 W rainbow Drive 319-627-2100 Naples 4099 Tamiami Trail N 239-430-2500 Toll Free en espanol 800-247-4418 319-688-3938 Colorado Denver 1899 Wynkoop Street 720-739-2300 midWestone insurance services, inc. midWestone financial group, inc. iowa Cedar Falls 4510 Prairie Parkway Conrad Melbourne oskaloosa 120 W Center Street 202 Main Street 124 S First Street Parkersburg 1001 Highway 57 Pella 700 Main Street Toll Free 800-934-7763 Corporate headquarters 102 S Clinton Street Iowa City, Iowa 52240 800-247-4418 Midwestone.com NasdaQ symbol: MoFG 319-277-2500 641-366-2165 641-482-3105 641-673-8603 319-346-1645 641-628-4904 ©2018 MIDWESTONE FINANCIAL GROuP, INC. Direction: Writing: Lynda Whittle, MidWestone Bank Shullaw and Associates, Iowa City, IA Photography: fisheye, Hiawatha, IA Julie renner Photography, Fort Myers, FL Brian Bradshaw, Bradshaw Design, Minneapolis, MN Denver Image Photography, Denver, Co Dan rolling Photography, Iowa City, IA Benson & Hepker Design, Iowa City, IA Tru Art, Iowa City, IA Design: Printing: 

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