KBRA Affirms Ratings for MidWestOne Financial Group, Inc.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Iowa City, Iowa-based MidWestOne Financial Group, Inc. (NASDAQ: MOFG) ("the company"). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for its main subsidiary, MidWestOne Bank ("the bank"). The Outlook for all long-term ratings is revised to Stable from Negative.

Key Credit Considerations

The Outlook revision to Stable from Negative reflects our expectation that, following various investment portfolio restructurings and a $125 million capital raise in the latter half of 2024, MOFG’s financial performance and balance sheet strength will be consistent with rated peers going forward. While earnings may not revert to peer-leading over the near-term, we expect the firm’s ROA to be consistently in the 1% range while it also continues to build capital.

The company has undergone a few balance sheet restructurings over the last two years that should facilitate more consistent earnings performance in 2025 and beyond. These have involved selling low-yielding securities and using proceeds to de-lever noncore funding or re-invest cash into higher yielding assets (securities or loans). Along with the sales, MOFG has also taken the opportunity to simplify its operating footprint (Florida branch sale) and improve operating efficiencies which we view favorably. Combined with continued back-book repricing, we expect MOFG's net interest margin (NIM) to churn higher over the next number of quarters, producing stronger ROA.

MOFG’s ratings are supported by its conservative liquidity position and solid funding mix. MOFG has consistently reported a high level of core deposits over a long period of time – averaging 80%-90% of total of total funding since YE16. Given the strong core deposit base the company has been able to maintain deposit costs that track in line with peers despite the competitive banking environment within the state of Iowa which remains the bank’s primary deposit gathering market.

The ratings are also supported by MOFG’s diverse loan portfolio and revenue mix. The company continues to have below average exposures to both investor CRE and C&D lending, and the loan book is more spread out from a geographic standpoint compared to similarly rated peers. Moreover, noninterest income has averaged above 20% of total revenues the past five years and consists of more stable/recurring revenue sources, including a solid wealth management division.

From a credit quality perspective, nonperforming assets have modestly improved over the last year as credits have been resolved and problem credit formation has been modest. Further, MOFG’s capital build has been notable, with its CET1 ratio growing 140 bps to 11.0% at 1Q25 on the back of the aforementioned capital raise and reduced RWA density. We also note that the company's updated CET1 targeted range is between 11.0% and 11.5%, which we view as reasonable relative to similarly rated peers and supportive of the Outlook revision.

Rating Sensitivities

While rating upside may be limited in the near term, stronger, more consistent earnings performance in conjunction with good credit quality and a relatively higher reported capital ratios could yield positive rating momentum over the longer term. Deterioration in credit quality, unexpected liquidity or earnings challenges, or a more aggressive approach to capital management could potentially pressure the ratings.

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Methodologies