MidWestOne Financial : Annual Report - 2023

MidWestOne Financial Group, Inc. 2023 Annual Report

To Our Shareholders

"We will honor our legacy and principles, while embarking on our journey to build a high performing enduring institution."

To say 2023 was a turbulent year in banking would be an understatement. The Federal Reserve raised interest rates a total of five hundred twenty-five basis points in 2022 and early 2023, the largest and fastest increase in our banking lives. Warren Buffet's famous quote of "when the tide goes out" quickly came to fruition and we saw the bank failures of Silicon Valley, Signature and First Republic Bank in quick succession. All were highly concentrated institutions, with extreme levels of uninsured deposits, who exhibited poor asset/liability management.

Your company, MidWestOne Financial, has an exemplary core, granular deposit franchise built over ninety years and a diversified business model that stood the turbulence well. However, we were not immune to the interest rate cycle and our primarily fixed rate loan portfolio and a too large, low yielding bond portfolio caused our net interest margin to decrease to

2.46 percent by year end 2023, the lowest in company history. As eighty percent of our revenue is derived from the spread between our deposit costs and our earning asset yields, our net income was greatly reduced in 2023. We'll discuss our financial results in more detail later in this letter.

Amidst that backdrop, MidWestOne Financial was undergoing its own transformation. One where we honored the legacy and culture built by Dick Summerwill and Charlie Funk, yet one where we accelerated the pace of innovation and increased the level of performance accountability as we strive to become a high performing company for all our stakeholders.

In late April, after months long ideation and data review, Executive Management and Board of Director engagement, our company unveiled its Strategic Plan, based on five Strategic Pillars, along with our 2023 Strategic Initiatives.

We developed the company's first Vision Statement, for we needed to know who we are and who we aspire to be, which will stand alongside our long-held Operating Principles. Our Vision is "To be the pre-eminentrelationship-driven community bank where our expertise and proactive approach generate meaningful impact for our stakeholders."

To achieve our vision, we developed the following Strategic Pillars:

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MidWestOne Financial Group, Inc. 2023 Annual Report

Exceptional Customer and Employee Engagement

In 2023, we commenced programs eliciting the voice of our customer across many of our business lines and we performed well. We were rated over the industry average on the Primary Financial Institution (PFI) score at 75 percent. Additionally, we measured over the industry average at 84 percent in the Service Quality Index (SQI), and our Net Promoter Score (NPS) also came in over the industry average at 54 percent.

Our teams are also inextricably intertwined with the communities we serve, and our philanthropic donations totaled $1,365,470 across our footprint.

We are all about our employees and were incredibly proud to earn Top Workplace recognition in Iowa, Minnesota and the USA for 2023!

In 2023, we also unveiled our MidWestOne Fundamentals, the behaviors that bring to life, each and every day, our Operating Principles. These have served as additional connection to all our regions, team members and communities.

Strong Core Local Banking Model

Our deposits per branch of $90 million and our average account size of $30 thousand compare well to our peers and we have many markets where we have 30-40 percent market share. The importance of this dynamic was seen as the coastal banking crisis erupted in March and our local model fared quite well.

We will be increasing our community advisory boards in 2024, and we continued to decentralize decision making in 2023, getting the decision as close to the customer and the community as possible. A concrete example of such is the hiring of a Senior Credit Officer based in our critical Dubuque, IA, market and now lending decisions up to $10 million are made in the local market by individuals with deep local knowledge.

Sophisticated Commercial Banking and Wealth Management

We are uniquely positioned to become the bank of choice for small-tomid-sized businesses (those with revenue up to $150 million) and individuals with between $3-$25 million in investable assets.

Commercial Banking was led by Executive Vice President Chase Stafford. In 2023, we added considerable commercial banking talent in our major metro markets of Iowa, the Twin Cities and Denver, leading to 7.50 percent loan growth. Late in 2023, we completely revamped our Treasury Management team and are now well-situated to compete for middle market business. We have now developed the talent, products and processes to consistently achieve upper single-digit loan growth on an annual basis.

The talent and product additions we made to our Wealth Management group in 2022 led to significant results in 2023, with new Assets under Management of $195 million, a 60 percent yearly increase and revenue growth in that business segment of 9 percent. In January 2024, we were pleased to welcome Steve Heimermann, Executive Vice President of Wealth Management, as we look to his leadership to grow this business line at a double-digit pace in the years to come.

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MidWestOne Financial Group, Inc. 2023 Annual Report

Investment Services and Trust Activity Revenue ($MM)

13.0

12.0

11.0

10.0

9.0

8.0

7.0

6.0

Specialty Business Lines

Many high performing community banks have utilized a business model where specific expertise is developed in targeted industries or products to drive customer acquisition, risk prudence and ultimately profitability. When this expertise is combined with deep, personal, community-driven relationships, you win. This is the path your company began to develop in 2023 with the formation of specialty groups in Commercial Real Estate, Agribusiness and Government Guaranteed Lending. We look forward to the impact these teams will make to our company and our customers in 2024 and beyond.

Improving our Efficiency and Operations

Our company grew quickly, from $1.8 billion in assets in 2014 to $6.4 billion by the end of 2023. We needed to "mature" our company to keep pace with our asset growth. A team led by President and Chief Operating Officer Len Devaisher and Chief Financial Officer Barry Ray identified numerous opportunities for improvement, the first of which was a geographical realignment of our too-extensive footprint. In late September, we announced the divestiture of our Florida operations for an attractive premium and, almost simultaneously, the execution of a definitive agreement to scale our critical Denver market. The Denver transaction closed in the first quarter of 2024, and we expect the Florida divestiture will occur in the second quarter of 2024.

In addition, as part of our strategic plan, we announced we would reduce expenses by 5.00 percent, while reinvesting 2.50 percent of those savings back into the business. In this difficult operating environment where revenue growth is challenged, we were pleased to exceed our objective. While maintaining expense discipline, we also reinvested in people and significant technology platforms, including Digital Account Opening, a Commercial end-to-end loan origination system and an industry-leading fraud and anti-money laundering platform.

2023 Financial Results

As discussed, the rapid interest rate increases in the 2022-2023 cycle had a dramatic impact on our net interest margin, and thus our net income. To counteract these trends, we undertook two separate balance sheet bond restructurings totaling approximately $347 million in order to reduce our liability sensitivity and to improve future years earnings. We also continued to be disciplined in our loan and deposit pricing, with new loans averaging greater than 7.50 percent, while our deposit costs increased less than peer banks.

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MidWestOne Financial Group, Inc. 2023 Annual Report

Despite these actions, our net interest margin declined 46 basis points year-over-year, primarily due to our fixed rate loan and bond portfolios. Every basis point is equivalent to approximately $600 thousand of annual revenue, and as a result our net interest income decreased $22 million. We expect our net interest margin to trough in the first half of 2024 and to slowly increase thereafter, dependent on future Federal Reserve rate reductions.

Our year-to-date return on average assets was 0.32 percent, and our return on average tangible equity was 6.14 percent.

Return on Average Assets (%)

1.50

1.00

0.50

0.00

Despite the uncertain economic environment, asset quality metrics remained at peer group levels with net charge-offs at only 0.09 percent of loans and non-performing asset ratio at 0.47 percent at year end 2023. These results were accomplished through the diligent credit risk administration efforts of our frontline bankers, as well as our seasoned credit executives. While we do expect more "normalized" asset quality metrics in 2024, we are confident in our underwriting and our credit risk appetite.

Our annual employee "Rally Day" has evolved to "Rally Week" comprising three large-scalein-person recognition events across our footprint. I had the privilege to recognize the following individuals with the CEO award for their performance and alignment with our Fundamentals: RJ Lang, Senior Vice President, Mortgage Banking; Lisa Waldo, Vice President, Branch Banking; Lynne Hager, Vice President, Marketing; Derek Marley, Vice President, Data Analytics; Sandy Bailey, Oskaloosa Market President; Angie Brown, Vice President, Branch Banking; Keith Graff, Vice President, Loan Operations; and Jeannette Hall, Vice President, Finance.

We thank our Board of Directors for their guidance and support in 2023 and for their critical role in leading the transformation of this company to a high performing organization.

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MidWestOne Financial Group, Inc. 2023 Annual Report

While our bottom-line financial results were challenged in 2023, I could not be more proud of the MidWestOne team for their execution of so many of our strategic initiatives and for always taking care of our customer and one another. We will continue to honor the legacy of those before us, strive for excellence in all that we do and Build an Enduring Institution for the next ninety years.

It is a great privilege to write this letter and to serve you, our loyal shareholders. Thank you for your faithful support.

Very sincerely yours,

Charles N. Reeves

Kevin W. Monson

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MidWestOne Financial Group, Inc. 2023 Annual Report

EXCEPTIONAL EMPLOYEE Cedar Rapids, IA Wealth

Management team

receives their Rally Day

Sales Performance Award.

ENGAGEMENT Rally Week

Once a year our teams "Rally" regionally throughout our

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MidWestOne Financial Group, Inc. 2023 Annual Report

Our Stakeholder Commitment

Being Present in our Communities

MidWestOne Financial Group, Inc. 2023 Annual Report