Executive Summary / Key Takeaways

• Strategic Transformation Underway: MidWestOne Financial has undergone a significant strategic overhaul, highlighted by a substantial balance sheet repositioning and targeted investments in talent and technology, aimed at transforming into a high-performing regional bank.
• Profitability Inflection Point: The company's decisive actions, including a $1 billion securities sale and debt payoff, have dramatically improved its net interest margin, with management projecting continued expansion and a return on average assets (ROA) of 1.10% to 1.15% by year-end 2025.
• Disciplined Growth & Diversified Revenue: MOFG is achieving mid-single-digit loan growth, particularly in C&I, and is seeing strong momentum in fee-based businesses like Wealth Management and SBA lending, diversifying its revenue streams.
• Proactive Credit Management: Despite an isolated, large commercial real estate (CRE) office loan issue in Q2 2025, management has proactively reserved for the exposure and maintains a conservative allowance for credit losses, signaling confidence in its asset quality.
• Capital Strength & Strategic Optionality: With a robust capital position, MOFG prioritizes organic growth and dividends, while actively evaluating share repurchases and strategic, digestible M&A opportunities to deepen its presence in key growth markets.

A Foundation Forged in the Heartland: Setting the Scene

MidWestOne Financial Group, Inc. (MOFG) traces its origins to 1934 with the chartering of MidWest One Bank in Iowa City, Iowa, evolving into a bank holding company in 1983. Over decades, it has cultivated a strong presence across central and eastern Iowa, expanding strategically into the Minneapolis-St. Paul metropolitan area, southwestern Wisconsin, and Denver, Colorado. This expansion, notably including the January 2024 acquisition of Denver Bankshares, Inc., underscores a deliberate strategy to deepen its footprint in attractive growth markets. The company's core business revolves around comprehensive commercial and retail banking, complemented by robust trust and investment management services.

In a competitive banking landscape, MOFG operates as a regional player, contending with larger institutions like U.S. Bancorp (USB) and other regional peers such as Wintrust Financial Corporation (WTFC), Associated Banc-Corp (ASB), and Old National Bancorp (ONB). While larger competitors like USB benefit from extensive networks and advanced digital capabilities, MOFG distinguishes itself through a community-focused, relationship-based banking model. This localized approach fosters strong customer loyalty, particularly in niche areas like agricultural lending, where MOFG has a resilient customer base. Compared to peers, MOFG's profitability metrics, such as its TTM Net Profit Margin of -26.48% and ROA of -0.97% (impacted by a significant Q3 2024 impairment), currently lag behind WTFC's 0.18% Net Profit Margin and 0.01% ROA, ASB's 0.06% Net Profit Margin and 0.0029% ROA, and ONB's 0.18% Net Profit Margin and 0.01% ROA. However, MOFG's strategic initiatives are designed to close this gap by enhancing efficiency and revenue generation.

Technological Edge and Operational Excellence

MidWestOne Financial's strategic transformation is not merely about financial restructuring; it is deeply rooted in enhancing its operational capabilities through targeted technological investments. While not developing proprietary core banking technologies in the vein of a fintech startup, MOFG is strategically adopting and integrating advanced platforms to drive efficiency and elevate customer experience.

A key initiative is the implementation of ServiceNow (NOW), a back-office workflow management platform. This investment aims to significantly enhance operational effectiveness and efficiency across the organization. By streamlining internal processes, ServiceNow is expected to reduce manual tasks, improve data flow, and accelerate decision-making, leading to a more agile and responsive banking operation. This translates into tangible benefits such as reduced operational costs and improved service delivery times, which are critical for maintaining competitiveness against larger, more technologically advanced rivals like USB.

Furthermore, MOFG is rolling out a new Aperture commercial banking online platform to its customer base in the fourth quarter of 2025. This digital platform is designed to upgrade the commercial banking experience, offering enhanced functionalities and a more seamless interface for business clients. The goal is to provide a superior digital banking experience that can attract and retain commercial customers, a segment where MOFG is actively growing. This investment directly supports the company's "commercial banking up-tiering strategy," enabling it to compete more effectively with peers who also emphasize digital solutions for business clients.

These technological adoptions are foundational to MOFG's strategy, contributing directly to its competitive moat by improving efficiency and customer satisfaction. By optimizing its internal operations and enhancing its customer-facing digital tools, MOFG aims to achieve better margins through cost savings and increased customer stickiness. This strategic focus on operational technology is a critical component of the company's long-term growth strategy, allowing it to scale its services more effectively and support its ambitious organic growth targets.

Strategic Transformation and Financial Performance

MidWestOne Financial has embarked on a profound strategic transformation, with the latter half of 2024 marking a pivotal shift. A common equity offering on September 30, 2024, raised nearly $125 million in gross capital, which was immediately injected into the bank subsidiary. This capital infusion paved the way for a significant balance sheet repositioning in early October 2024. The company divested $1 billion in lower-yielding debt securities (with a book yield of 1.58%) to pay off $418.7 million in higher-cost Federal Reserve Bank term funding program borrowings (costing 4.77%) and reinvested $590 million into higher-yielding agency securities (yielding 4.65%). While this resulted in a $140.4 million impairment charge in Q3 2024 due to accounting rules, management projected an immediate 70 basis point boost to the net interest margin (NIM) and a $35 million increase in annualized net interest income, with an estimated earnings breakeven period of 4.5 years.

The impact of these actions is clearly visible in recent financial results. For Q2 2025, tax equivalent net interest income surged to $51.20 million, a $13.50 million increase from Q2 2024. This was primarily driven by a $2.50 million increase in investment securities interest income, a $0.70 million increase in loan interest income, and notable decreases in interest expense on borrowed funds ($5.70 million) and interest-bearing deposits ($3.30 million). The tax equivalent NIM expanded significantly to 3.57% in Q2 2025 from 2.41% in Q2 2024, reflecting higher earning asset yields (up 75 bps) and lower interest-bearing liability costs (down 46 bps). The core interest margin, excluding loan purchase discount accretion, expanded to 3.26% in Q4 2024, exceeding expectations.

Loan growth has been a key focus, with gross loans held for investment increasing by $63 million to $4.39 billion at June 30, 2025. This 7.4% annualized growth in Q2 2025 was fueled by organic expansion and higher line of credit usage, despite an $11 million reclassification of credit card receivables to loans held for sale. Commercial loan production reached $215 million in Q2 2025, marking the highest in six quarters, with new loan originations yielding an average of 6.76%. Management expects mid-single-digit loan growth to continue in the second half of 2025.

Deposit trends also reflect strategic optimization. Total deposits decreased slightly to $5.39 billion at June 30, 2025, but the company has prioritized core deposits and non-interest bearing balances, which were up linked quarter in Q2 2025. This focus has helped manage funding costs, with interest-bearing deposit costs decreasing to 2.29% in Q2 2025. The loan-to-deposit ratio increased to 81.31% at June 30, 2025, indicating efficient deployment of funds.

Fee income businesses are gaining momentum. Wealth Management revenues increased 5% linked quarter in Q2 2025, driven by higher assets under administration and new client relationships bringing substantial assets. The SBA lending vertical, a strategic initiative, has seen significant success, with year-to-date SBA fee income doubling in Q2 2025 compared to the prior year, positioning MOFG in the top 10% nationally for fiscal year-to-date SBA 7(a) production. Treasury management fees were up 12% in 2024, further diversifying noninterest income. While total noninterest income decreased in Q2 2025 due to the absence of a large gain from the Q2 2024 Florida branch sale, the underlying fee businesses show strong organic growth.

Expense management remains disciplined, with noninterest expense stable at $35.80 million in Q2 2025 compared to Q2 2024. Strategic talent investments, including new commercial bankers and wealth management hires in growth markets, are driving a slight upward revision to the 2025 annual expense guide to $146 million to $148 million. These investments are largely offset by operational efficiencies and reallocation of resources, demonstrating a commitment to long-term growth without sacrificing cost control.

Credit Quality and Risk Management

MidWestOne Financial maintains a proactive stance on credit risk, although Q2 2025 saw an increase in nonperforming assets (NPAs) to $40.60 million, up $15.40 million from December 31, 2024. This increase was primarily attributed to a single $24 million Twin Cities suburban CRE office loan, originated in June 2022, which moved to nonaccrual status. Management has characterized this as an "isolated issue," noting that a receiver has been appointed and resolution actions are underway. A specific reserve was established for this credit, contributing to the allowance for credit losses (ACL) increasing to $65.80 million, or 1.50% of total loans, at June 30, 2025, up from 1.28% at year-end 2024. Management anticipates provision expense to normalize in the second half of 2025 as resolution progresses.

Beyond this specific loan, asset quality metrics generally improved in Q2 2025, with the criticized asset ratio decreasing and net charge-offs at a low 2 basis points. The company's credit loss estimation model incorporates economic forecasts for national unemployment, retail sales, CRE index, and U.S. GDP, with qualitative factors applied to adjust the ACL for uncertainties. The agricultural portfolio, representing approximately 7% of total loans, is deemed resilient due to an "up-tiered" customer base capable of weathering market fluctuations, despite concerns for 2026 regarding tariffs and input costs. While the office and senior living portfolios have shown deterioration, management observes operational improvements in struggling borrowers.

The company's balance sheet models as asset-sensitive, implying that significant rate cuts could reduce net interest income. However, management believes the current yield curve dynamics and ongoing asset repricing opportunities will continue to support NIM expansion. Liquidity remains robust, supported by a strong deposit base, unsecured federal funds lines ($135 million capacity), and secured lines with the Federal Reserve Bank of Chicago ($302.90 million additional borrowing capacity) and the FHLB ($541.50 million additional borrowing capacity). The recent redemption of $65 million in subordinated notes, funded by cash and a new $50 million senior term note, further optimizes the funding structure.

Outlook and Capital Allocation

MidWestOne Financial's outlook for the remainder of 2025 is characterized by continued execution of its strategic initiatives and a focus on enhancing shareholder value. Management anticipates mid-single-digit loan growth for the second half of 2025, driven by strong pipelines and recent talent acquisitions in key markets. The net interest margin is expected to continue its "grind higher," with an anticipated increase of 4 to 5 basis points per quarter in the second half of the year, even with an assumption of two 25 basis point Fed rate cuts in Q4 2025. This will be supported by new loan originations at higher coupons (low 7s), ongoing repricing of the fixed-rate loan book, and continued reduction in time deposit costs.

The 2025 annual expense guide has been revised slightly upward to a range of $146 million to $148 million, reflecting strategic investments in talent and technology platforms. These investments, including new commercial bankers and wealth management hires, are expected to drive long-term profitable growth and operational efficiency. Fee income is projected to grow in the mid-to-high single digits, with the Wealth Management business targeted for double-digit growth and the SBA lending vertical continuing its strong contribution.

From a capital perspective, MOFG's consolidated CET1 ratio of 11.02% at June 30, 2025, is within its target range of 11% to 11.5%. The company adheres to a clear capital deployment "waterfall": prioritizing organic loan growth, followed by the cash dividend, then share repurchases, and finally M&A. Management is actively reviewing share repurchases, particularly when the stock trades below its intrinsic value, as an efficient means of returning capital to shareholders.

For M&A, MOFG's philosophy is "bigger is not better, better is better." The company is becoming "M&A ready" as its underlying performance and infrastructure improve. Any potential acquisitions would focus on deepening geographic density within its existing markets (e.g., the I-35 corridor from Twin Cities to Kansas City, and the I-80 corridor through Iowa to Denver), targeting digestible sizes ($500 million to $1.5-$2 billion), and seeking accretive business lines with strong management alignment. The company aims to demonstrate continued strong underlying earnings momentum through Q3 2025 before potentially increasing its focus on M&A opportunities. This strategic patience underscores a commitment to foundational strength before pursuing external growth. Overall, management expects to exit 2025 with a return on average assets (ROA) in the 1.10% to 1.15% range, reflecting the positive impact of its strategic initiatives and balance sheet repositioning.

Conclusion

MidWestOne Financial Group is in the midst of a compelling transformation, moving beyond a period of strategic repositioning to focus on disciplined growth and enhanced profitability. The decisive balance sheet actions of late 2024 have fundamentally reshaped its financial profile, driving significant net interest margin expansion and setting the stage for robust earnings momentum. Coupled with targeted investments in operational technology and talent, MOFG is building a more efficient and customer-centric banking franchise.

While the company faces ongoing industry challenges, including an isolated credit event in Q2 2025, its proactive risk management and conservative reserve philosophy provide a solid foundation. The strategic emphasis on organic loan growth, diversified fee income streams, and a disciplined approach to capital allocation positions MOFG for sustained performance. As the company continues to execute its strategic roadmap, its improving financial metrics and readiness for opportunistic, value-accretive M&A suggest a positive trajectory for investors seeking exposure to a regional bank poised for a stronger, more profitable future.