UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





**FORM
      10-Q**





x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934




For
      the
      quarterly period ended **September
      30, 2007**





OR





o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934





For
      the
      transition period from _______ to _______





Commission
      file number 0-24630





MIDWEST *ONE* FINANCIAL GROUP, INC.


222
      First
      Avenue East


Oskaloosa,
      IA 52577





Registrant’s
      telephone number: **641-673-8448**




(State
                of Incorporation)
            (I.R.S.
                Employer Identification No.)**Iowa**
            **42-1003699**




Indicate
      by check mark whether the registrant (1) has filed all reports required by
      Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
      12 months (or for such shorter period that the registrant was required to file
      such reports), and (2) has been subject to such filing requirements for the
      past
      90 days.





Yes
x
      No o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
      Exchange Act).





Large
      Accelerated Filer o    Accelerated
      Filer o    Non-accelerated
      Filer x





Indicate
      by check mark whether the registrant is a shell company ( as defined in Rule
      12b-2 of the Exchange Act).





Yes
o  No x




As
      of
      November 13, 2007, there were 3,703,875 shares of common stock $5 par value
      outstanding.









PART
      I — Item
      1. Financial Statements


**MIDWEST*****ONE*****FINANCIAL GROUP, INC.**  **AND
          SUBSIDIARIES**  **CONSOLIDATED
          STATEMENTS OF CONDITION**
  **September 30,**
                
                **December
                    31,****2007**
                
                **2006**(dollars
                    in thousands)
                
                (unaudited)**ASSETS**Cash
                    and due from banks
                
                $
                12,426
                
                $
                20,279Interest-bearing
                    deposits in banks
                
                
                629
                
                
                447Cash
                    and cash equivalents
                
                
                13,055
                
                
                20,726Investment
                    securities:Available
                    for sale at fair value
                
                
                76,613
                
                
                70,743Held
                    to maturity (fair value of $10,818 as of September 30, 2007 and
                    $12,168 as
                    of December 31, 2006)
                
                
                10,865
                
                
                12,220Loans
                
                
                533,361
                
                
                503,832Allowance
                    for loan losses
                
                
                (5,299
                )
                
                (5,693
                )Net
                    loans
                
                
                528,062
                
                
                498,139Loan
                    pool participations
                
                
                90,757
                
                
                98,885Premises
                    and equipment, net
                
                
                13,544
                
                
                12,327Accrued
                    interest receivable
                
                
                8,596
                
                
                6,587Goodwill
                
                
                13,405
                
                
                13,405Other
                    intangible assets, net
                
                
                938
                
                
                1,128Bank-owned
                    life insurance
                
                
                8,014
                
                
                7,798Other
                    real estate owned
                
                
                1,579
                
                
                188Other
                    assets
                
                
                3,459
                
                
                2,765Total
                    assets
                
                $
                768,887
                
                $
                744,911**LIABILITIES
                    AND SHAREHOLDERS' EQUITY**Deposits:Demand
                
                $
                49,451
                
                $
                64,291Interest-bearing
                    checking
                
                
                64,375
                
                
                65,482Savings
                
                
                103,886
                
                
                101,443Certificates
                    of deposit
                
                
                340,550
                
                
                329,399Total
                    deposits
                
                
                558,262
                
                
                560,615Federal
                    funds purchased
                
                
                18,545
                
                
                465Federal
                    Home Loan Bank advances
                
                
                90,600
                
                
                99,100Notes
                    payable
                
                
                2,500
                
                
                4,050Long-term
                    debt
                
                
                25,774
                
                
                10,310Accrued
                    interest payable
                
                
                3,828
                
                
                2,804Other
                    liabilities
                
                
                4,799
                
                
                5,034Total
                    liabilities
                
                
                704,308
                
                
                682,378Shareholders'
                    equity:Common
                    stock, $5 par value; authorized 20,000,000 shares; issued 4,912,849
                    shares
                    as of September 30, 2007 and December 31, 2006
                
                
                24,564
                
                
                24,564Capital
                    surplus
                
                
                13,206
                
                
                13,076Treasury
                    stock at cost, 1,213,574 shares as of September 30, 2007, and
                    1,197,418
                    shares as of December 31, 2006
                
                
                (17,514
                )
                
                (17,099
                )Retained
                    earnings
                
                
                44,459
                
                
                42,447Accumulated
                    other comprehensive loss
                
                
                (136
                )
                
                (455
                )Total
                    shareholders' equity
                
                
                64,579
                
                
                62,533Total
                    liabilities and shareholders' equity
                
                $
                768,887
                
                $
                744,911
  See
          accompanying notes to consolidated financial statements.
  
 
 PART
          I — Item
          1. Financial Statements, Continued
 
 **MIDWEST** ***ONE*** **FINANCIAL GROUP, INC.**  **AND
          SUBSIDIARIES**  **CONSOLIDATED
          STATEMENTS OF INCOME**
  (unaudited)
                
                **Quarter
                    Ended**
                
                **Nine
                    Months Ended**(dollars
                    in thousands, except per share amounts)
                
                **September
                    30,**
                
                **September
                    30,****2007**
                
                **2006**
                
                **2007**
                
                **2006****Interest
                    income:**Interest
                    and fees on loans
                
                $
                9,912
                
                $
                8,716
                
                $
                28,849
                
                $
                24,828Interest
                    and discount on loan pool participations
                
                
                1,818
                
                
                2,342
                
                
                6,134
                
                
                7,134Interest
                    on bank deposits
                
                
                14
                
                
                7
                
                
                29
                
                
                22Interest
                    on federal funds sold
                
                
                -
                
                
                -
                
                
                61
                
                
                3Interest
                    on investment securities:Available
                    for sale
                
                
                853
                
                
                740
                
                
                2,412
                
                
                2,063Held
                    to maturity
                
                
                113
                
                
                121
                
                
                350
                
                
                368Total
                    interest income
                
                
                12,710
                
                
                11,926
                
                
                37,835
                
                
                34,418**Interest
                    expense:**Interest
                    on deposits:Interest-bearing
                    checking
                
                
                82
                
                
                85
                
                
                249
                
                
                263Savings
                
                
                740
                
                
                808
                
                
                2,136
                
                
                2,005Certificates
                    of deposit
                
                
                4,193
                
                
                3,061
                
                
                12,271
                
                
                8,315Interest
                    on federal funds purchased
                
                
                243
                
                
                148
                
                
                340
                
                
                393Interest
                    on Federal Home Loan Bank advances
                
                
                1,066
                
                
                1,192
                
                
                3,444
                
                
                3,183Interest
                    on notes payable
                
                
                97
                
                
                92
                
                
                266
                
                
                286Interest
                    on long-term debt
                
                
                272
                
                
                244
                
                
                747
                
                
                689Total
                    interest expense
                
                
                6,693
                
                
                5,630
                
                
                19,453
                
                
                15,134Net
                    interest income
                
                
                6,017
                
                
                6,296
                
                
                18,382
                
                
                19,284Provision
                    for loan losses
                
                
                163
                
                
                90
                
                
                739
                
                
                90Net
                    interest income after provision for loan losses
                
                
                5,854
                
                
                6,206
                
                
                17,643
                
                
                19,194**Noninterest
                    income:**Deposit
                    service charges
                
                
                575
                
                
                516
                
                
                1,562
                
                
                1,576Other
                    customer service charges and fees
                
                
                208
                
                
                133
                
                
                604
                
                
                446Brokerage
                    commissions
                
                
                187
                
                
                224
                
                
                614
                
                
                763Insurance
                    commissions
                
                
                179
                
                
                170
                
                
                566
                
                
                555Data
                    processing income
                
                
                61
                
                
                55
                
                
                180
                
                
                164Mortgage
                    origination fees
                
                
                127
                
                
                148
                
                
                440
                
                
                394Bank-owned
                    life insurance income
                
                
                89
                
                
                84
                
                
                258
                
                
                244Other
                    operating income
                
                
                53
                
                
                82
                
                
                269
                
                
                437(Loss)
                    gain on sale of available for sale securities
                
                
                -
                
                
                (86
                )
                
                49
                
                
                (212
                )Total
                    noninterest income
                
                
                1,479
                
                
                1,326
                
                
                4,542
                
                
                4,367**Noninterest
                    expense:**Salaries
                    and employee benefits
                
                
                3,310
                
                
                3,259
                
                
                9,774
                
                
                9,387Net
                    occupancy expense
                
                
                874
                
                
                887
                
                
                2,626
                
                
                2,626Professional
                    fees
                
                
                183
                
                
                143
                
                
                749
                
                
                483Data
                    processing expense
                
                
                103
                
                
                108
                
                
                296
                
                
                338Other
                    intangible asset amortization
                
                
                63
                
                
                67
                
                
                190
                
                
                222Other
                    operating expense
                
                
                899
                
                
                926
                
                
                2,754
                
                
                2,983Total
                    noninterest expense
                
                
                5,432
                
                
                5,390
                
                
                16,389
                
                
                16,039Income
                    before income tax expense
                
                
                1,901
                
                
                2,142
                
                
                5,796
                
                
                7,522Income
                    tax expense
                
                
                653
                
                
                696
                
                
                1,786
                
                
                2,502**Net
                    income**
                
                $
                1,248
                
                $
                1,446
                
                $
                4,010
                
                $
                5,020Earnings
                    per common share - basic
                
                $
                0.34
                
                $
                0.40
                
                $
                1.08
                
                $
                1.36Earnings
                    per common share - diluted
                
                $
                0.34
                
                $
                0.38
                
                $
                1.07
                
                $
                1.33Dividends
                    per common share
                
                $
                0.18
                
                $
                0.18
                
                $
                0.54
                
                $
                0.53
  See
          accompanying notes to consolidated financial statements.
  
 
 PART
          I — Item
          1. Financial Statements, Continued
 
 **MIDWEST** ***ONE*** **FINANCIAL GROUP, INC.**
 **AND
          SUBSIDIARIES**
 **CONSOLIDATED
          STATEMENTS OF COMPREHENSIVE INCOME**
 
 (unaudited)
                  
                  **Quarter
                      Ended**
                  
                  **Nine
                      Months Ended**(in
                      thousands)
                  
                  **September
                      30,**
                  
                  **September
                      30,****2007**
                  
                  **2006**
                  
                  **2007**
                  
                  **2006****Net
                      income**
                  
                  $
                  1,248
                  
                  $
                  1,446
                  
                  $
                  4,010
                  
                  $
                  5,020Other
                      comprehensive income:Unrealized
                      gains on securities available for sale:Unrealized
                      holding gains arising during the period, net of tax
                  
                  
                  581
                  
                  
                  641
                  
                  
                  351
                  
                  
                  115Reclassification
                      adjustment for net losses (gains) included in net income, net
                      of
                      tax
                  
                  
                  -
                  
                  
                  54
                  
                  
                  (32
                  )
                  
                  133**Other
                      comprehensive income, net of tax**
                  
                  
                  581
                  
                  
                  695
                  
                  
                  319
                  
                  
                  248**Comprehensive
                      income**
                  
                  $
                  1,829
                  
                  $
                  2,141
                  
                  $
                  4,329
                  
                  $
                  5,268
  See
          accompanying notes to consolidated financial statements.
  
 
 PART
          I — Item
          1. Financial Statements, Continued
 
 **MIDWEST** ***ONE*** **FINANCIAL GROUP, INC.**  **AND
          SUBSIDIARIES**  **CONSOLIDATED
          STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY**
  **Accumulated****Other**(unaudited)
                  
                  **Common**
                  
                  **Capital**
                  
                  **Treasury**
                  
                  **Retained**
                  
                  **Comprehensive**(in thousands, except per share amounts)
                  
                  **Stock**
                  
                  **Surplus**
                  
                  **Stock**
                  
                  **Earnings**
                  
                  **Loss**
                  
                  **Total**Balance
                      at December 31, 2005
                  
                  $
                  24,564
                  
                  
                  12,886
                  
                  
                  (16,951
                  )
                  
                  38,630
                  
                  
                  (743
                  )
                  
                  58,386Comprehensive
                    income:Net
                      income
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  5,020
                  
                  
                  -
                  
                  
                  5,020Unrealized
                      gains arising during the period on securities available for
                      sale
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  115
                  
                  
                  115Reclassification
                      for realized losses on securities available for sale, net of
                      tax
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  133
                  
                  
                  133Total
                      comprehensive income
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  5,020
                  
                  
                  248
                  
                  
                  5,268Dividends
                      paid ($.53 per share)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (1,960
                  )
                  
                  -
                  
                  
                  (1,960
                  )Stock-based
                      compensation
                  
                  
                  -
                  
                  
                  79
                  
                  
                  112
                  
                  
                  -
                  
                  
                  -
                  
                  
                  191Stock
                      options exercised (31,179 shares)
                  
                  
                  -
                  
                  
                  (13
                  )
                  
                  440
                  
                  
                  -
                  
                  
                  -
                  
                  
                  427Treasury
                      stock purchased (65,500 shares)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (1,268
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  (1,268
                  )Balance
                      at September 30, 2006
                  
                  $
                  24,564
                  
                  
                  12,952
                  
                  
                  (17,667
                  )
                  
                  41,690
                  
                  
                  (495
                  )
                  
                  61,044Balance
                      at December 31, 2006
                  
                  $
                  24,564
                  
                  
                  13,076
                  
                  
                  (17,099
                  )
                  
                  42,447
                  
                  
                  (455
                  )
                  
                  62,533Comprehensive
                      income:Net
                      income
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  4,010
                  
                  
                  -
                  
                  
                  4,010Unrealized
                      gains arising during the period on securities available for
                      sale
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  351
                  
                  
                  351Reclassification
                      adjustment for realized gains on securities available for sale,
                      net of tax
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (32
                  )
                  
                  (32
                  )Total
                      comprehensive income
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  4,010
                  
                  
                  319
                  
                  
                  4,329Dividends
                      paid ($.54 per share)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (1,998
                  )
                  
                  -
                  
                  
                  (1,998
                  )Stock-based
                      compensation
                  
                  
                  -
                  
                  
                  152
                  
                  
                  (1
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  151Stock
                      options exercised (28,944 shares)
                  
                  
                  -
                  
                  
                  (22
                  )
                  
                  415
                  
                  
                  -
                  
                  
                  -
                  
                  
                  393Treasury
                      stock purchased (45,000 shares)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (829
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  (829
                  )Balance
                      at September 30, 2007
                  
                  $
                  24,564
                  
                  
                  13,206
                  
                  
                  (17,514
                  )
                  
                  44,459
                  
                  
                  (136
                  )
                  
                  64,579
  See
          accompanying notes to consolidated financial statements.
  
 PART
          I — Item
          1. Financial Statements, Continued
 
 **MIDWEST** ***ONE*** **FINANCIAL GROUP, INC.**  **AND
          SUBSIDIARIES**  **CONSOLIDATED
          STATEMENTS OF CASH FLOWS**
  (unaudited)
                
                **Nine
                    Months Ended**(dollars
                    in thousands)
                
                **September
                    30,****2007**
                
                **2006****Cash
                    flows from operating activities:**Net
                    income
                
                $
                4,010
                
                $
                5,020Adjustments
                      to reconcile net income to net cashprovided by operating
                      activities:Depreciation
                    and amortization
                
                
                1,368
                
                
                1,433Provision
                    for loan losses
                
                
                739
                
                
                90(Gain)
                    loss on sale of available for sale investment securities
                
                
                (49
                )
                
                212Stock-based
                    compensation
                
                
                151
                
                
                191Excess
                    tax benefits related to stock options
                
                
                (31
                )
                
                (24
                )Amortization
                    of investment securities and loan premiums
                
                
                155
                
                
                278Accretion
                    of investment securities and loan discounts
                
                
                (76
                )
                
                (63
                )Increase
                    in other assets
                
                
                (4,507
                )
                
                (899
                )Increase
                    in other liabilities
                
                
                789
                
                
                937Net
                    cash provided by operating activities
                
                
                2,549
                
                
                7,175**Cash
                    flows from investing activities:**Investment
                    securities available for sale:Proceeds
                    from sales
                
                
                238
                
                
                10,414Proceeds
                    from maturities
                
                
                13,677
                
                
                11,873Purchases
                
                
                (19,337
                )
                
                (19,636
                )Investment
                    securities held to maturity:Proceeds
                    from maturities
                
                
                1,343
                
                
                726Net
                    increase in loans
                
                
                (30,612
                )
                
                (55,026
                )Purchases
                    of loan pool participations
                
                
                (23,310
                )
                
                (21,150
                )Principal
                    recovery on loan pool participations
                
                
                31,438
                
                
                32,270Purchases
                    of premises and equipment
                
                
                (2,395
                )
                
                (1,898
                )Net
                    cash used in investing activities
                
                
                (28,958
                )
                
                (42,427
                )**Cash
                    flows from financing activities:**Net
                    (decrease) increase in deposits
                
                
                (2,353
                )
                
                19,287Net
                    increase in federal funds purchased
                
                
                18,080
                
                
                1,430Federal
                    Home Loan Bank advances
                
                
                16,000
                
                
                101,000Repayment
                    of Federal Home Loan Bank advances
                
                
                (24,500
                )
                
                (81,000
                )Advances
                    on notes payable
                
                
                1,500
                
                
                450Principal
                    payments on notes payable
                
                
                (3,050
                )
                
                (2,000
                )Advances
                    on long-term debt
                
                
                15,464
                
                
                -Excess
                    tax benefits related to stock options
                
                
                31
                
                
                24Dividends
                    paid
                
                
                (1,998
                )
                
                (1,960
                )Proceeds
                    from exercise of stock options
                
                
                393
                
                
                427Purchases
                    of treasury stock
                
                
                (829
                )
                
                (1,268
                )Net
                    cash provided by financing activities
                
                
                18,738
                
                
                36,390**Net
                    (decrease) increase in cash and cash equivalents**
                
                
                (7,671
                )
                
                1,138Cash
                    and cash equivalents at beginning of period
                
                
                20,726
                
                
                13,520Cash
                    and cash equivalents at end of period
                
                $
                13,055
                
                $
                14,658Supplemental
                    disclosures of cash flow information:Cash
                    paid during the period for:Interest
                
                $
                18,429
                
                $
                14,049Income
                    taxes
                
                $
                2,110
                
                $
                3,287
  See
          accompanying notes to consolidated financial statements.
  
 Part
          I -
          Item 1. Financial Statements, Continued





Notes
      to
      Financial Statements





1.
            Basis
                of Presentation





The
      accompanying consolidated statements of income and the consolidated statements
      of comprehensive income for the three months and the nine months ended September
      30, 2007 and 2006, the consolidated statements of cash flows for the nine months
      ended September 30, 2007 and 2006 and the consolidated statements of condition
      as of September 30, 2007 and December 31, 2006 include the accounts and
      transactions of MidWest *One* Financial Group, Inc. (the “Company”) and its wholly-owned subsidiaries,
      MidWest *One* Bank,
      MidWest *One* Investment Services, Inc. and MidWest*One* Insurance Services, Inc. All
      material intercompany balances and transactions have been eliminated in
      consolidation.





The
      accompanying consolidated financial statements have been prepared by the Company
      pursuant to the rules and regulations of the Securities and Exchange Commission.
      Certain information and footnote disclosures normally included in financial
      statements prepared in accordance with U. S. generally accepted accounting
      principles have been condensed or omitted pursuant to such rules and
      regulations. Although management believes that the disclosures are adequate
      to
      make the information presented not misleading, it is suggested that these
      interim consolidated financial statements be read in conjunction with the
      Company’s most recent audited financial statements and notes thereto. In the
      opinion of management, the accompanying consolidated financial statements
      contain all adjustments (consisting of only normal recurring accruals) necessary
      to present fairly the financial position as of September 30, 2007, and the
      results of operations for the three months and the nine months ended September
      30, 2007 and 2006 and cash flows for the nine months ended September 30, 2007
      and 2006.





The
      results for the three months and the nine months September 30, 2007 may not
      be
      indicative of results for the year ending December 31, 2007, or for any other
      period.





2.
            Consolidated
                Statements of Cash Flows





In
      the
      consolidated statements of cash flows, cash and cash equivalents include cash
      and due from banks and interest-bearing deposits in banks.





3.
            Income
                Taxes





Federal
      income tax expense for the three months and the nine months ended September
      30, 2007 and 2006 was computed using the consolidated effective federal tax
      rate
      of 34 percent. The Company also recognized income tax expense pertaining to
      state franchise taxes payable individually by the subsidiary bank. On January
      1,
      2007, the Company adopted FIN 48, “Accounting for Uncertainty in Income Taxes.”
The evaluation was performed for those tax years which remain open to audit.
      The
      Company files a consolidated tax return for federal purposes. A consolidated
      tax
      return for the state of Iowa is filed for the parent company and non-bank
      subsidiaries. A separate Iowa franchise tax return is filed for the bank
      subsidiary. The tax years ended December 31, 2006, 2005, and 2004, remain
      subject to examination by the Internal Revenue Service. For state tax purposes,
      the tax years ended December 31, 2006, 2005, and 2004, remain open for
      examination. As a result of the implementation of FIN 48, the Company did not
      recognize any increase or decrease for unrecognized tax benefits. There were
      no
      material unrecognized tax benefits on January 1, 2007 and September 30, 2007.
      No
      interest or penalties on these unrecognized tax benefits has been recorded.
      As
      of September 30, 2007, the Company does not anticipate any significant increase
      or decrease in unrecognized tax benefits during the next twelve months.





4.
            Earnings
                Per Common Share





Basic
      earnings per common share computations are based on the weighted average number
      of shares of common stock actually outstanding during the period. Diluted
      earnings per share amounts are computed by dividing net income by the weighted
      average number of shares outstanding and all dilutive potential shares
      outstanding during the period. The following table presents the computation
      of
      earnings per common share for the respective periods:





**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006****Earnings
                per Share Information:**Weighted
                  average number of sharesoutstanding
                  during the period
            
            
            3,695,517
            
            
            3,687,039
            
            
            3,701,675
            
            
            3,698,547Weighted
                  average number of sharesoutstanding
                  during the period including all dilutive potential
                  shares
            
            
            3,725,766
            
            
            3,757,822
            
            
            3,736,747
            
            
            3,767,844Net
                earnings
            
            $
            1,248,000
            
            $
            1,446,000
            
            $
            4,010,000
            
            $
            5,020,000Earnings
                per share - basic
            
            $
            .34
            
            $
            .40
            
            $
            1.08
            
            $
            1.36Earnings
                per share - diluted
            
            $
            .34
            
            $
            .38
            
            $
            1.07
            
            $
            1.33











5.
            Effect
                of New Financial Accounting
                Standards





In
      September 2006, the FASB issued Statement No. 157, “Fair Value Measurements”
(“SFAS No. 157”). SFAS No. 157 establishes a framework for measuring fair value
      in U.S. generally accepted accounting principles and expands disclosures about
      fair value measurements. It applies whenever other standards require or permit
      assets or liabilities to be measured at fair value. It does not expand the
      use
      of fair value in any new circumstances. SFAS No. 157 is effective for the
      Company beginning January 1, 2008. The Company does not expect the adoption
      of
      this statement to have a material effect on its financial condition or results
      of operations.





In
      September 2006, the Emerging Issues Task Force (“EITF”) Issue No. 06-4,
“Accounting for Deferred Compensation and Postretirement Benefit Aspects of
      Endorsement Split-Dollar Life Insurance Arrangements,” was ratified. This EITF
      Issue addresses accounting for separate agreements that split life insurance
      policy benefits between an employer and employee. The Issue requires the
      employer to recognize a liability for future benefits payable to the employee
      under these agreements. The effects of applying this Issue must be recognized
      through either a change in accounting principle through an adjustment to equity
      or through the retrospective application to all prior periods. The Issue is
      effective for the Company beginning January 1, 2008. The Company does not expect
      the adoption of the Issue to have a material effect on its financial condition
      or results of operations.





In
      February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159
      allows companies to elect fair-value measurement of specified financial
      instruments and warranty and insurance contracts when an eligible asset or
      liability is initially recognized or when an event, such as a business
      combination, triggers a new basis of accounting for that asset or liability.
      The
      election, called the “fair value option,” will enable some companies to reduce
      the volatility in reported earnings caused by measuring related assets and
      liabilities differently. The election is available for eligible assets or
      liabilities on a contract-by-contract basis without electing it for identical
      assets or liabilities under certain restrictions. SFAS No. 159 is effective
      for
      the Company beginning January 1, 2008. The Company does not anticipate that
      the
      adoption of SFAS No. 159 will have a material effect on its financial condition
      or results of operations.





6.
            Use
                of Estimates in the Preparation of Financial
                Statements





The
      preparation of financial statements in conformity with U.S. generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities and disclosure of
      contingent assets and liabilities at the date of the financial statements and
      the reported amounts of revenues and expenses during the reported period. Actual
      results could differ from those estimates. A significant estimate that is
      particularly sensitive to change is the allowance for loan losses.





7.
            Reclassifications





Certain
      reclassifications have been made to prior year consolidated financial statements
      in order to conform to current year presentation. These reclassifications
      consist of expanding the noninterest income categories on the income statement
      to present separately bank-owned life insurance income.





8.
            Announced
                Merger





On
      September 12, 2007, the Company announced that it had entered into a definitive
      agreement to merge with and into ISB Financial Corp. of Iowa City, Iowa in
      a
“merger of equals” transaction. The resulting company will operate under the
      name “MidWest *One* Financial Group, Inc.,” with its corporate headquarters to be located in Iowa
      City. Under the terms of the agreement, shareholders of the Company will be
      entitled to receive .95 share of ISB Financial common stock for each share
      of
      common stock of the Company they own at the effective time of the merger. The
      common stock of the combined company is expected to be listed on the NASDAQ
      Global Market. The transaction is subject to regulatory approval, approval
      by
      the shareholders of both the Company and ISB Financial, and other customary
      closing conditions. It is anticipated that the transaction will be consummated
      in the first quarter of 2008.







PART
      I
— Item 2.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations.





OVERVIEW





The
      following discussion is provided for the consolidated operations of
      MidWest *One* Financial Group, Inc. (“Company”), which includes its wholly-owned banking
      subsidiary, MidWest *One* Bank
      (“Bank”), its wholly-owned insurance agency, MidWest *One* Insurance Services, Inc. (“MWO”) and its wholly-owned investment brokerage
      subsidiary, MidWest *One* Investment Services, Inc. (“MWI”). The discussion focuses on the consolidated
      results of operations for the three months and the nine months ended September
      30, 2007, compared to the same periods in 2006, and on the consolidated
      financial condition of the Company and its subsidiaries as of September 30,
      2007
      and December 31, 2006.





On
      September 12, 2007, the Company announced that it had entered into a definitive
      agreement to merge with and into ISB Financial Corp. of Iowa City, Iowa in
      a
“merger of equals” transaction. See Note 8 to the Company’s consolidated
      financials statements contained in this report.




RESULTS
      OF OPERATIONS





QUARTER
      ENDED September 30, 2007





The
      Company earned net income of $1,248,000 for the quarter ended September 30,
      2007, compared with $1,446,000 for the quarter ended September 30, 2006, a
      decrease of $198,000 or 14 percent. The decrease in net income was primarily
      due
      to reduced net interest income and increased provision for loan losses. Basic
      and diluted earnings per share for the quarter ended September 30, 2007 were
      $.34 versus $.40 basic and $.38 diluted for the quarter ended September 30,
      2006. The Company’s return on average assets was .66 percent for the quarter
      ended September 30, 2007 and .82 percent for the quarter ended September 30,
      2006. The Company’s return on average equity declined to 7.76 percent for the
      three months ended September 30, 2007, compared with 9.49 percent for the three
      months ended September 30, 2006.





The
      following table presents selected financial results and measures for the three
      months ended September 30, 2007 compared with the three months ended September
      30, 2006.





Three Months Ended September 30,2007
            
            2006Net
                Income
            
            $
            1,248,000
            
            $
            1,446,000Average
                Assets
            
            
            752,382,000
            
            
            703,619,000Average
                Shareholders’ Equity
            
            
            63,857,000
            
            
            60,464,000Return
                on Average Assets
            
            
            .66
            %
            
            .82
            %Return
                on Average Equity
            
            
            7.76
            %
            
            9.49
            %Equity
                to Assets (end of period)
            
            
            8.40
            %
            
            8.49
            %









Net
      Interest Income





Net
      interest income is computed by subtracting total interest expense from total
      interest income. Fluctuations in net interest income can result from the changes
      in the volumes of assets and liabilities as well as changes in interest rates.
      The Company’s net interest income for the quarter ended September 30, 2007
      decreased $279,000 or 4 percent to $6,017,000 from $6,296,000 for the quarter
      ended September 30, 2006. Total interest income was $784,000 greater in the
      third quarter of 2007 compared with the same period in 2006. Interest income
      excluding loan pool participations was $1,308,000, or 14 percent greater in
      the
      third quarter of 2007 in comparison with the quarter ended September 30,
      2006 due to an increase in the volume of loans and higher yields on loans and
      investment securities. Interest income and discount recovery on loan pool
      participations was $524,000 lower in the third quarter of 2007 compared to
      the
      third quarter of 2006 as a result of reduced volumes and lower collections.
      The
      increase in interest income for the third quarter of 2007 was partially offset
      by increased interest expense on deposits. Total interest expense for the third
      quarter of 2007 increased $1,063,000 or 19 percent compared with the same period
      in 2006 due to increased volumes and a higher cost of funds, reflecting the
      interest rate environment. The Company’s net interest margin on a federal
      tax-equivalent basis for the third quarter of 2007 decreased to 3.55 percent
      from 3.92 percent in the third quarter of 2006. Net interest margin is a measure
      of the net return on interest-earning assets and is computed by dividing
      annualized net interest income by the average of total interest-earning assets
      for the period. The Company’s overall yield on earning assets improved to 7.36
      percent for the third quarter of 2007 compared with 7.33 percent for the third
      quarter of 2006. The rate on interest-bearing liabilities increased in the
      third
      quarter of 2007 to 4.23 percent compared to 3.78 percent for the third quarter
      of 2006.





The
      following table presents a comparison of the average balance of earning assets,
      interest-bearing liabilities, interest income and expense, and average yields
      and costs on a federal tax-equivalent basis for the three months ended September
      30, 2007 and 2006.




**Quarter
                  ended September 30,***(in
                  thousands)*
              
              **2007**
              
              **2006****Average**
              
              
              
              **Average**
              
              **Average**
              
              
              
              **Average****Balance**
              
              **Interest**
              
              **Rate**
              
              **Balance**
              
              **Interest**
              
              **Rate****Average
                  earning assets:**Loans
              
              
              529,348
              
              
              9,951
              
              
              7.46
              %
              
              482,838
              
              
              8,757
              
              
              7.20
              %Loan
                  pool participations
              
              
              81,022
              
              
              1,818
              
              
              8.90
              %
              
              89,153
              
              
              2,342
              
              
              10.42
              %Interest-bearing
                  deposits
              
              
              725
              
              
              14
              
              
              7.50
              %
              
              684
              
              
              7
              
              
              3.65
              %Investment
                  securities:Available
                  for sale
              
              
              74,957
              
              
              972
              
              
              5.15
              %
              
              69,038
              
              
              801
              
              
              4.61
              %Held
                  to maurity
              
              
              11,056
              
              
              169
              
              
              6.05
              %
              
              12,245
              
              
              181
              
              
              5.86
              %Total
                  earning assets
              
              
              697,108
              
              
              12,924
              
              
              7.36
              %
              
              653,958
              
              
              12,088
              
              
              7.33
              %**Average
                  interest-bearing liabilities:**Interest-bearing
                  demand deposits
              
              
              60,121
              
              
              82
              
              
              0.54
              %
              
              62,623
              
              
              85
              
              
              0.54
              %Savings
                  deposits
              
              
              106,407
              
              
              740
              
              
              2.76
              %
              
              115,981
              
              
              808
              
              
              2.76
              %Certificates
                  of deposit
              
              
              340,693
              
              
              4,193
              
              
              4.88
              %
              
              290,376
              
              
              3,061
              
              
              4.18
              %Federal
                  funds purchased
              
              
              18,461
              
              
              243
              
              
              5.25
              %
              
              11,061
              
              
              148
              
              
              5.33
              %Federal
                  Home Loan Bank advances
              
              
              85,089
              
              
              1,066
              
              
              4.97
              %
              
              96,314
              
              
              1,192
              
              
              4.91
              %Notes
                  payable
              
              
              4,939
              
              
              97
              
              
              7.76
              %
              
              4,550
              
              
              92
              
              
              7.98
              %Long-term
                  debt
              
              
              12,159
              
              
              272
              
              
              8.89
              %
              
              10,310
              
              
              244
              
              
              9.38
              %Total
                  interest-bearing liabilities
              
              
              627,869
              
              
              6,693
              
              
              4.23
              %
              
              591,215
              
              
              5,630
              
              
              3.78
              %**Net
                  interest income / interest spread**
              
              
              
              
              
              6,231
              
              
              3.13
              %
              
              
              
              
              6,458
              
              
              3.55
              %**Net
                  interest margin**
              
              
              
              
              
              
              
              
              3.55
              %
              
              
              
              
              
              
              
              3.92
              %




Interest
      income and fees on loans computed
      on a federal tax-equivalent basis increased $1,194,000 or 14 percent in the
      third quarter of 2007 compared to the same period in 2006. Average loans were
      $46,510,000 or 10 percent higher in the third quarter of 2007 compared with
      2006, which contributed to the growth in interest income. The increase in loan
      volume reflects new loan originations primarily in the Waterloo, Oskaloosa,
      Davenport and Belle Plaine, Iowa markets. Higher interest rates in the third
      quarter of 2007 compared with 2006 also contributed to the additional interest
      income generated in 2007. The average yield on loans increased to 7.46 percent
      for the third quarter of 2007, compared to 7.20 percent in the third quarter
      of
      2006. The yield on the Company’s loan portfolio is affected by the amount of
      nonaccrual loans (which do not earn interest income), the mix of the portfolio
      (real estate loans generally have a lower overall yield than commercial and
      agricultural loans), the effects of competition and the interest rate
      environment on the amounts and volumes of new loan originations, and the mix
      of
      variable rate versus fixed rate loans in the Company’s portfolio. Additionally,
      many of the borrowers have refinanced their real estate mortgages outside the
      Company to take advantage of long-term fixed-rate loans. The Company has
      typically not retained long-term fixed rate loans in its portfolio in order
      to
      reduce interest rate risk. Competition in the local markets served by the
      Company has caused the pricing of new and many existing loans to be at or near
      the national prime rate. Historically, the Company had been able to price many
      of these loans higher than prime.










Interest
      and discount income on loan pool participations decreased $524,000 or 22 percent in the third quarter of 2007 compared with
      the
      same period in 2006. Interest income and discount collected on the loan pool
      participations for the three months ended September 30, 2007 was $1,818,000
      compared with $2,342,000 collected in the three months ended September 30,
      2006.
      The yield on loan pool participations was 8.90 percent for the third quarter
      of
      2007 compared with 10.42 percent for the third quarter of 2006. The average
      loan
      pool participation investment balance was $8,131,000 lower in the third quarter
      of 2007 than in the same period of 2006. The loan pool participations are pools
      of performing, distressed and nonperforming loans that the Company has purchased
      at a discount from the aggregate outstanding principal amount of the underlying
      loans. Income is derived from this investment in the form of interest collected
      and the repayment of the principal in excess of the purchase cost which is
      herein referred to as “discount recovery.” The loan pool participations have
      traditionally been a high-yield activity for the Company, but this yield has
      fluctuated from period to period based on the amount of cash collections,
      discount recovery, and net collection expenses in any given period. The income
      and yield on loan pool participations may vary in future periods due to the
      volume and discount rate on loan pools purchased. The Company adopted SOP 03-3
      on January 1, 2005. All loans that the Company had purchased prior to January
      1,
      2005 continue to utilize the cash basis for recognition of interest income
      and
      discount recovery. The loan pool participations purchased subsequent to January
      1, 2005 that are subject to the “accretable yield” income recognition
      requirements of SOP 03-3 have not generated amounts of income significantly
      greater than what would have been recognized under the cash basis. Loan pool
      participations that are not subject to the “accretable yield” requirements also
      utilize the cash basis for recognition of interest income and discount
      recovery.





Interest
      income on investment securities computed
      on a federal tax-equivalent basis increased $159,000 or 16 percent in the
      quarter ended September 30, 2007, compared with the quarter ended September
      30,
      2006 mainly due to higher yields on securities in the portfolio. Interest income
      on investment securities totaled $1,141,000 in the third quarter of 2007
      compared with $982,000 for the third quarter of 2006. An increase in the average
      balance of the investment portfolio also contributed additional interest income.
      The average balance of investments in the third quarter of 2007 was $86,013,000
      compared with $81,283,000 in the third quarter of 2006. The tax-equivalent
      yield
      on the Company’s investment portfolio in the third quarter of 2007 increased to
      5.26 percent from 4.80 percent in the comparable period of 2006 reflecting
      reinvestment of maturing securities at higher market interest
      rates.





Interest
      expense on deposits was
      $1,061,000 or 27 percent greater in the third quarter of 2007 compared with
      the
      same period in 2006 mainly due to higher market interest rates and increased
      deposit volumes. The weighted average rate paid on interest-bearing deposits
      was
      3.92 percent in the third quarter of 2007 compared with 3.34 percent in the
      third quarter of 2006. Average interest-bearing deposits for the third quarter
      of 2007 were $38,241,000 greater compared with the same period in 2006. Most
      of
      the increase in the volume of interest-bearing deposits occurred in certificates
      of deposit.





Interest
      expense on borrowed funds was
      $2,000 greater in the third quarter of 2007 compared with the same period in
      2006. Interest on borrowed funds totaled $1,678,000 for the third quarter of
      2007. The Company’s average borrowed funds balances were lower in the third
      quarter of 2007 resulting in reduced interest expense. Higher market interest
      rates in 2007 compared with 2006 mostly offset the interest reduction from
      the
      lower balances. Average borrowed funds for the third quarter of 2007 were
      $1,587,000 lower compared to the same period in 2006. The weighted average
      rate
      paid on borrowed funds increased to 5.52 percent in the third quarter of 2007
      compared with 5.44 percent in the third quarter of 2006.










Provision
      for Loan Losses





The
      Company recorded a provision for loan losses of $163,000 in the third quarter
      of
      2007 compared with $90,000 in the third quarter of 2006. Net loans charged
      off
      in the third quarter of 2007 totaled $733,000 compared with zero net charge-offs
      in the third quarter of 2006. The provision for loan losses in the third quarter
      of 2007 reflected the continued growth in the loan portfolio and the increase
      in
      net charge-offs. Management determines an appropriate provision based on its
      evaluation of the adequacy of the allowance for loan losses in relationship
      to a
      continuing review of problem loans, the current economic conditions, actual
      loss
      experience and industry trends. Management believes that the allowance for
      loan
      losses is adequate based on the inherent risk in the portfolio as of September
      30, 2007; however, growth in the loan portfolio and the uncertainty of the
      general economy require that management continue to evaluate the adequacy of
      the
      allowance for loan losses and make additional provisions in future periods
      as
      deemed necessary.





Noninterest
      Income





Noninterest
      income results from the charges and fees collected by the Company from its
      customers for various services performed, data processing income received from
      nonaffiliated banks, miscellaneous other income, and gains (or losses) from
      the
      sale of investment securities held in the available for sale category. Total
      noninterest income was $153,000 or 12 percent higher in the third quarter of
      2007 compared with the same period in 2006. Service charges on deposit accounts
      increased $59,000 or 12 percent for the quarter ended September 30, 2007
      compared with the quarter ended September 30, 2006 primarily due to additional
      non-sufficient funds charges collected on deposit account overdrafts. Other
      customer service charges and fees increased $75,000 in the third quarter of
      2007
      compared with the same period of 2006 primarily due to higher ATM fees as a
      result of increased customer transaction volume. Brokerage commissions decreased
      $37,000 from the third quarter of 2006 to $187,000 for the third quarter of
      2007
      due to reduced sales of securities to clients. Loan origination fees on
      single-family real estate loans that were originated by the Company and sold
      servicing-released to the secondary market decreased to $127,000 in the third
      quarter of 2007 compared to $148,000 for the third quarter of 2006 due to lower
      origination activity. Recognized available for sale investment security losses
      totaled $86,000 in the third quarter of 2006. There were no security gains
      or
      losses recognized in the third quarter of 2007.





Noninterest
      Expense





Total
      noninterest expense for the quarter ended September 30, 2007 was $42,000 higher
      compared to noninterest expense for the quarter ended September 30, 2006.
      Noninterest expense for the third quarter of 2007 was $5,432,000 and includes
      all the costs incurred to operate the Company except for interest expense,
      the
      loan loss provision and income taxes. The increase in salaries and benefits
      expense for the third quarter of 2007 was $51,000 or 2 percent compared with
      the
      same period in 2006. The increase was attributable to annual compensation
      adjustments and increased benefit costs. The Company had 222 full-time
      equivalent employees on September 30, 2007 compared with 223 on September 30,
      2006. Professional fees increased $40,000 in the third quarter of 2007 due
      to
      increased legal fees, regulatory fees and costs associated with the pending
      merger. Other operating expenses decreased $27,000 or 3 percent in the third
      quarter of 2007 compared to the third quarter of 2006 with much of the reduction
      related to reduced advertising and marketing expenses.









Income
      Tax Expense





The
      Company incurred income tax expense of $653,000 for the three months ended
      September 30, 2007 compared with $696,000 for the three months ended
      September 30, 2006. The effective income tax rate as a percent of income before
      taxes for the three months ended September 30, 2007 and 2006 was 34.3 percent
      and 32.5 percent, respectively. The effective tax rate varies from the statutory
      rate due to state taxes and the amount of tax-exempt income on municipal bonds
      earned during the period.




NINE
      MONTHS ENDED September 30, 2007





The
      Company earned net income of $4,010,000 for the nine months ended September
      30,
      2007, compared with $5,020,000 for the nine months ended September 30, 2006,
      a
      decrease of $1,010,000 or 20 percent. The decrease in net income was primarily
      due to reduced net interest income, higher provision for loan losses and
      increased noninterest expense. On January 6, 2006, the Company received the
      proceeds from the recovery of an agricultural loan that had been charged off
      in
      2001. These proceeds included a loan principal recovery of $901,000 that was
      credited to the allowance for loan losses, $364,000 in interest that was
      recorded to interest income on loans and $50,000 credited to other loan income
      for the reimbursement of attorney fees incurred by the Company in 2001. The
      interest income and fees recovered contributed $.08 per share basic and diluted
      to the Company’s earnings in the nine months ended September 30, 2006. Basic and
      diluted earnings per share for the nine months ended September 30, 2007 were
      $1.08 and $1.07, respectively. This compares with basic and diluted earnings
      per
      share of $1.36 and $1.33, respectively, for the nine months ended September
      30,
      2006. The Company’s return on average assets was .72 percent for the nine months
      ended September 30, 2007 and .97 percent for the nine months ended September
      30,
      2006. The Company’s return on average equity was 8.48 percent for the nine
      months ended September 30, 2007, compared with 11.19 percent for the nine months
      ended September 30, 2006.





The
      following table presents selected financial results and measures for the nine
      months ended September 30, 2007 compared with the nine months ended September
      30, 2006.





Nine Months Ended September 30,2007
            
            2006Net
                Income
            
            $
            4,010,000
            
            $
            5,020,000Average
                Assets
            
            
            747,881,000
            
            
            689,438,000Average
                Shareholders’ Equity
            
            
            63,203,000
            
            
            60,004,000Return
                on Average Assets
            
            
            .72
            %
            
            .97
            %Return
                on Average Equity
            
            
            8.48
            %
            
            11.19
            %Equity
                to Assets (end of period)
            
            
            8.40
            %
            
            8.49
            %









Net
      Interest Income





The
      Company’s net interest income for the nine months ended September 30, 2007
      decreased $902,000 or 5 percent to $18,382,000 from $19,284,000 for the nine
      months ended September 30, 2006. Total interest income was $3,417,000 greater
      in
      the first nine months of 2007 compared with the same period in 2006. Interest
      income excluding loan pool participations was $4,417,000, or 16 percent greater
      in the first nine months of 2007 in comparison with the nine months ended
      September 30, 2006 due primarily to an increase in the volume of loans and
      higher yields on loans and investment securities. Interest income and discount
      recovery on loan pool participations was $1,000,000 lower in the first nine
      months of 2007 compared to the same period of 2006 as a result of lower
      collections. The increase in interest income was offset by increased interest
      expense. Total interest expense for the nine months ended September 30,2007
      increased $4,319,000 or 29 percent compared with the same period in 2006 due
      to
      increased volumes and a higher cost of funds, reflecting the interest rate
      environment. The Company’s net interest margin on a federal tax-equivalent basis
      for the first nine months of 2007 decreased to 3.66 percent from 4.13 percent
      in
      the first nine months of 2006. The Company’s overall yield on earning assets
      increased to 7.41 percent for the first nine months of 2007 compared with 7.30
      percent for the first nine months of 2006. The rate on interest-bearing
      liabilities increased in the nine months ended September 30, 2007 to 4.16
      percent compared to 3.52 percent for the nine months ended September 30,
      2006.





The
      following table presents a comparison of the average balance of earning assets,
      interest-bearing liabilities, interest income and expense, and average yields
      and costs on a federal tax-equivalent basis for the nine months ended September
      30, 2007 and 2006.





**Nine
                  months ended September 30,***(in
                  thousands)*
              
              **2007**
              
              **2006****Average**
              
              
              
              **Average**
              
              **Average**
              
              
              
              **Average****Balance**
              
              **Interest**
              
              **Rate**
              
              **Balance**
              
              **Interest**
              
              **Rate****Average
                  earning assets:**Loans
              
              
              519,382
              
              
              28,968
              
              
              7.46
              %
              
              463,877
              
              
              24,943
              
              
              7.19
              %Loan
                  pool participations
              
              
              87,273
              
              
              6,134
              
              
              9.40
              %
              
              91,816
              
              
              7,134
              
              
              10.39
              %Interest-bearing
                  deposits
              
              
              603
              
              
              29
              
              
              6.40
              %
              
              570
              
              
              22
              
              
              5.06
              %Investment
                  securities:Available
                  for sale
              
              
              73,373
              
              
              2,728
              
              
              4.97
              %
              
              69,089
              
              
              2,206
              
              
              4.27
              %Held
                  to maurity
              
              
              11,605
              
              
              521
              
              
              6.00
              %
              
              12,607
              
              
              548
              
              
              5.81
              %Federal
                  funds sold
              
              
              1,582
              
              
              61
              
              
              5.13
              %
              
              115
              
              
              3
              
              
              3.69
              %Total
                  earning assets
              
              
              693,818
              
              
              38,441
              
              
              7.41
              %
              
              638,074
              
              
              34,856
              
              
              7.30
              %**Average
                  interest-bearing liabilities:**Interest-bearing
                  demand deposits
              
              
              64,399
              
              
              249
              
              
              0.52
              %
              
              63,351
              
              
              263
              
              
              0.55
              %Savings
                  deposits
              
              
              105,627
              
              
              2,136
              
              
              2.70
              %
              
              113,770
              
              
              2,005
              
              
              2.36
              %Certificates
                  of deposit
              
              
              339,112
              
              
              12,271
              
              
              4.84
              %
              
              282,371
              
              
              8,315
              
              
              3.94
              %Federal
                  funds purchased
              
              
              8,493
              
              
              340
              
              
              5.37
              %
              
              9,935
              
              
              393
              
              
              5.29
              %Federal
                  Home Loan Bank advances
              
              
              92,155
              
              
              3,444
              
              
              5.00
              %
              
              89,348
              
              
              3,183
              
              
              4.76
              %Notes
                  payable
              
              
              4,502
              
              
              266
              
              
              7.90
              %
              
              5,068
              
              
              286
              
              
              7.53
              %Long-term
                  debt
              
              
              10,933
              
              
              747
              
              
              9.14
              %
              
              10,310
              
              
              689
              
              
              8.94
              %Total
                  interest-bearing liabilities
              
              
              625,221
              
              
              19,453
              
              
              4.16
              %
              
              574,153
              
              
              15,134
              
              
              3.52
              %**Net
                  interest income / interest spread**
              
              
              
              
              
              18,988
              
              
              3.25
              %
              
              
              
              
              19,722
              
              
              3.78
              %**Net
                  interest margin**
              
              
              
              
              
              
              
              
              3.66
              %
              
              
              
              
              
              
              
              4.13
              %





Interest
      income and fees on loans computed
      on a federal tax-equivalent basis increased $4,025,000 or 16 percent in the
      first nine months of 2007 compared to the same period in 2006. Total interest
      income and fees on loans for the first nine months of 2007 totaled $28,968,000
      compared with $24,943,000 for the first nine months of 2006. Included in the
      total for the first nine months of 2006 was $324,000 of additional interest
      collected from the recovery of a previously charged-off loan that was received
      in January 2006. Average loans were $55,505,000 or 12 percent higher in the
      first nine months of 2007 compared with 2006, which contributed to the growth
      in
      interest income. The increase in loan volume reflects new loan originations
      primarily in the Waterloo, Oskaloosa and Belle Plaine, Iowa markets. Higher
      interest rates in the first nine months of 2007 compared with 2006 also
      contributed to the additional interest income generated in 2007. The average
      yield on loans increased to 7.46 percent for the first nine months of 2007,
      compared to 7.19 percent in the first nine months of 2006.





Interest
      and discount income on loan pool participations decreased $1,000,000 or 14 percent in the first nine months of 2007 compared
      with the same period in 2006. Interest income and discount collected on the
      loan
      pool participations for the nine months ended September 30, 2007 was
      $6,134,000 compared with $7,134,000 collected in the nine months ended September
      30, 2006. The yield on loan pool participations was 9.40 percent for the first
      nine months of 2007 compared with 10.39 percent for the first nine months of
      2006. The average loan pool participation investment balance was $4,543,000
      lower in the first nine months of 2007 than in the same period of
      2006.





Interest
      income on investment securities computed
      on a federal tax-equivalent basis increased $495,000 or 18 percent in the nine
      months ended September 30, 2007, compared with the nine months ended September
      30, 2006 mainly due to higher yields on securities in the portfolio. Interest
      income on investment securities totaled $3,249,000 in the first nine months
      of
      2007 compared with $2,754,000 for the first nine months of 2006. An increase
      in
      the average balance of the investment portfolio also contributed additional
      interest income. The average balance of investments for the first nine months
      of
      2007 was $84,978,000 compared with $81,696,000 for the first nine months of
      2006. The tax-equivalent yield on the Company’s investment portfolio for the
      nine months ended September 30, 2007 increased to 5.11 percent from 4.51 percent
      in the comparable period of 2006 reflecting reinvestment of maturing securities
      at higher market interest rates.










Interest
      expense on deposits totaled
      $14,656,000 for the first nine months of 2007 compared to $10,583,000 for the
      first nine months of 2006. Interest expense was $4,073,000 or 38 percent greater
      in the nine months ended September 30, 2007 compared with the same period in
      2006 mainly due to higher market interest rates and increased deposit volumes.
      The weighted average rate paid on interest-bearing deposits was 3.85 percent
      in
      the first nine months of 2007 compared with 3.08 percent for the first nine
      months of 2006. Average interest-bearing deposits for the first nine months
      of
      2007 were $49,646,000 greater compared with the same period in
      2006.





Interest
      expense on borrowed funds was
      $246,000 higher in the first nine months of 2007 compared with the same period
      in 2006. Interest on borrowed funds totaled $4,797,000 for the first nine months
      of 2007 compared with $4,551,000 in the same period of 2006. The Company’s
      average borrowed funds balances were $1,422,000 higher in the nine months ended
      September 30,2007 compared with the nine months ended September 30, 2006
      resulting in additional interest expense. Higher market interest rates in 2007
      compared with 2006 also contributed to additional interest expense in the first
      nine months of 2007. Average borrowed funds for the first nine months of 2007
      were $116,083,000 compared with $114,661,000 for the same period in 2006. The
      weighted average rate paid on borrowed funds increased to 5.53 percent in the
      first nine months of 2007 compared with 5.31 percent in the first nine months
      of
      2006.





Provision
      for Loan Losses





The
      Company recorded a provision for loan losses of $739,000 in the nine months
      ended September 30, 2007. A provision for loan losses of $90,000 was taken
      in
      the nine months ended September 30, 2006. The recovery of $901,000 of a
      previously charged off agricultural loan was credited to the reserve in January
      2006. Net loans charged off in the first nine months of 2007 totaled $1,133,000
      compared with net recoveries of $668,000 in the first nine months of
      2006.





Noninterest
      Income





Total
      noninterest income for the nine months ended September 30, 2007 was $4,542,000
      compared with $4,367,000 for the nine months ended September 2006. Excluding
      investment security gains and losses, noninterest income for the first nine
      months of 2007 was $4,493,000 compared with $4,579,000 for the first nine months
      of 2006. This is a decrease of $86,000 or 2 percent in the first nine months
      of
      2007 compared with the same period in 2006. Other customer service charges
      and
      fees increased $158,000 in the first nine months of 2007 compared with the
      same
      period of 2006 primarily due to higher ATM fees as a result of increased
      customer transaction volume. Brokerage commissions decreased $149,000 to
      $614,000 for the first nine months of 2007 due to reduced sales of securities
      to
      clients. Insurance commissions were $566,000 for the first nine months of 2007
      compared with $555,000 in the first nine months of 2006. Mortgage loan
      origination fees on single-family real estate loans that were originated by
      the
      Company and sold servicing-released to the secondary market increased $46,000
      in
      the first nine months of 2007 compared to the first nine months of 2006 due
      to
      increased origination activity. Other operating income declined $168,000 for
      the
      nine months ended September 30, 2007 compared to the same period in 2006
      primarily due to the reimbursement of attorney fees related to the charge-off
      recovery in the first quarter of 2006 and the receipt of other nonrecurring
      income in 2006. Recognized available for sale investment security gains totaled
      $49,000 in the first nine months of 2007 compared with a loss on the sale of
      investment securities of $212,000 in the first nine months of 2006.










Noninterest
      Expense





Total
      noninterest expense for the nine months ended September 30, 2007 was $16,389,000
      compared with $16,039,000 for the nine months ended September 30, 2006, an
      increase of $350,000 or 2 percent. Salaries and benefits expense for the first
      nine months of 2007 was $387,000 or 4 percent higher compared with the same
      period in 2006. The increase was attributable to annual compensation adjustments
      and increased benefit costs. The Company had an average of 220 full-time
      equivalent employees for the nine months ended September 30, 2007 compared
      with
      an average of 216 full-time equivalent employees for the nine months ended
      September 30, 2006. Professional fees increased $266,000 in the first nine
      months of 2007 due to increased legal fees, regulatory fees, costs associated
      with development and implementation of the Company’s Sarbanes-Oxley initiative
      and merger-related costs. Other operating expenses decreased $229,000 or 8
      percent in the first nine months of 2007 compared to the nine months of 2006
      with much of the reduction related to lower marketing expenses and office
      supplies expense.





Income
      Tax Expense





The
      Company incurred income tax expense of $1,786,000 for the nine months ended
      September 30, 2007 compared with $2,502,000 for the nine months ended September
      30, 2006. The effective income tax rate as a percent of income before taxes
      for
      the nine months ended September 30, 2007 and 2006 was 30.8 percent and 33.3
      percent, respectively. The effective tax rate varies from the statutory rate
      due
      to state taxes and the amount of tax-exempt income on municipal bonds earned
      during the period. Tax-exempt income on municipal bonds is greater in comparison
      to previous periods as the market yields on newly-purchased bonds has increased
      and the Company has a higher volume of municipal bonds.





FINANCIAL
      CONDITION





Total
      assets as of September 30, 2007 were $768,887,000 compared with $744,911,000
      as
      of December 31, 2006, an increase of $23,976,000 or 3 percent. As of September
      30, 2007, the Company had $18,545,000 of federal funds purchased compared with
      $465,000 purchased as of December 31, 2006. Federal funds are purchased on
      a
      short-term basis to meet liquidity needs.




Investment
      Securities





Investment
      securities available for sale totaled $76,613,000 as of September 30, 2007.
      This
      is an increase of $5,870,000 from $70,743,000 as of December 31, 2006. The
      proceeds from paydown in the loan pool participations and the proceeds from
      maturing held to maturity securities were utilized to purchase additional
      investment securities. Investment securities classified as held to maturity
      declined to $10,865,000 as of September 30, 2007, compared with $12,220,000
      on
      December 31, 2006.









Loans





Total
      loans were $533,361,000 as of September 30, 2007, compared with $503,832,000
      as
      of December 31, 2006, an increase of $29,529,000 or 6 percent. Much of the
      growth in the first nine months of 2007 came from commercial, agricultural
      operating, agricultural real estate and commercial real estate loans. As of
      September 30, 2007, the Company’s loan to deposit ratio was 95.5 percent
      compared with a year-end 2006 loan to deposit ratio of 89.9 percent. As of
      September 30, 2007, loans secured by residential real estate comprised the
      largest category in the portfolio at approximately 24 percent of total loans.
      Commercial loans were the next largest category at 18 percent. Commercial real
      estate loans made up approximately 15 percent of the total loan portfolio.
      Agricultural loans were approximately 14 percent of the total loan portfolio.
      Construction and land development loans comprised approximately 12 percent
      of
      the portfolio and agricultural land loans were 11 percent. Multifamily
      residential real estate comprised 3 percent of the portfolio and loans to
      individuals also constituted 3 percent of the portfolio. The loan percentages
      did not change significantly from December 31, 2006.





The
      Company has very minimal exposure to subprime mortgages in its loan portfolio.
      The Company’s loan policy provides a guideline that real estate mortgage
      borrowers have a credit score of 640 or greater. Exceptions to the guideline
      have been noted but the overall exposure is deemed minimal by management.
      Mortgages originated by the Company and sold on the secondary market are
      typically underwritten according to the guidelines of the secondary market
      investors. These mortgages are on a non-recourse basis, thereby minimizing
      any
      subprime exposure.




Loan
      Pool
      Participations





As
      of
      September 30, 2007, the Company had loan pool participations of $90,757,000,
      a
      decrease of $8,128,000 or 8 percent from the December 31, 2006 balance of
      $98,885,000. The decrease in the loan pool participations is the result of
      collections of loan pool participations during the period. The loan pool
      investment balance shown as an asset on the Company’s Statement of Condition
      represents the discounted purchase cost of the loan pool participations. The
      average loan pool participation balance of $87,273,000 for the first nine months
      of 2007 was $4,543,000 lower than the average balance of $91,816,000 for the
      first nine months of 2006. The Company placed numerous bids on loan pools during
      the first nine months of 2007 and was successful in purchasing $23,310,000.
      Most
      of the purchases occurred in the third quarter of 2007. In comparison, during
      the first nine months of 2006, the Company purchased $21,150,000 in loan pool
      participations. As of September 30, 2007, the categories of loans by collateral
      type in the loan pools were commercial real estate - 50 percent, commercial
      loans - 18 percent, agricultural real estate - 11 percent, single-family
      residential real estate - 12 percent and other loans - 9 percent. The Company
      has very minimal exposure in loan pools to consumer real estate subprime credit.
      Most of the basis in loans identified with borrowers or guarantors having credit
      scores categorized as subprime relates to additional collateral taken to reduce
      exposure on commercial or commercial real estate loans. The Company does not
      actively seek to purchase consumer or consumer real estate loans characterized
      as subprime credit.




Goodwill
      and Other Intangible Assets





Goodwill
      totaled $13,405,000 as of September 30, 2007 and December 31, 2006. Goodwill
      is
      subject to testing at least annually for impairment in accordance with the
      provisions of Financial Accounting Standards Board Statement No. 142. No
      impairment write-down of goodwill has been recorded.









Other
      intangible assets decreased to $938,000 as of September 30, 2007 from the
      December 31, 2006 total of $1,128,000 reflecting the amortization of
      intangible assets. The gross carrying amount of other intangible assets and
      the
      associated accumulated amortization at September 30, 2007 and December 31,
      2006
      is presented in the table below. Amortization expense for other intangible
      assets for the nine months ended September 30, 2007 and 2006 was $190,000 and
      $222,000, respectively.




**Gross**
              
              
              
              **Unamortized****Carrying**
              
              **Accumulated**
              
              **Intangible****Amount**
              
              **Amortization**
              
              **Assets****(in
                  thousands)****September
                  30, 2007**Other
                  intangible assets:Core
                  deposit premium
              
              $
              3,281
              
              
              2,832
              
              
              449Customer
                  list intangible
              
              $
              786
              
              
              297
              
              
              489Total
              
              $
              4,067
              
              $
              3,129
              
              $
              938**December
                  31, 2006**Other
                  intangible assets:Core
                  deposit premium
              
              $
              3,281
              
              
              2,716
              
              
              565Customer
                  list intangible
              
              $
              786
              
              
              223
              
              
              563Total
              
              $
              4,067
              
              $
              2,939
              
              $
              1,128





Amortization
      of intangible assets is recorded using an accelerated method based on the
      estimated life of the core deposit intangible. Projections of amortization
      expense are based on existing asset balances and the remaining useful lives.
      The
      following table shows the estimated future amortization expense.




**Core**
              
              **Customer****Deposit**
              
              **List****Premium**
              
              **Intangible**
              
              **Totals****(in
                  thousands)**Three
                  months ending December 31, 2007
              
              $
              39
              
              
              23
              
              
              62Year
                  ended December 31,2008
              
              
              156
              
              
              87
              
              
              2432009
              
              
              127
              
              
              79
              
              
              2062010
              
              
              41
              
              
              71
              
              
              1122011
              
              
              41
              
              
              62
              
              
              1032012
              
              
              41
              
              
              54
              
              
              95Thereafter
              
              
              4
              
              
              113
              
              
              117




Deposits





Total
      deposits as of September 30, 2007 were $558,262,000 compared with $560,615,000
      as of December 31, 2006, a decrease of $2,353,000. Certificates of deposit
      remain the largest category of deposits at September 30, 2007 representing
      approximately 61 percent of total deposits. Of the $340,550,000 in certificates
      of deposit, certificates greater than $100,000 totaled $80,520,000. Based on
      historical experience, management anticipates that many of the maturing
      certificates of deposit will be renewed upon maturity. Maintaining competitive
      market interest rates will facilitate the Company’s retention of certificates of
      deposit. Savings and money market accounts constituted approximately 19 percent
      of total deposits with interest-bearing demand deposits at 11 percent of total
      deposits and demand deposits approximating 9 percent of deposits.




Borrowed
      Funds/Notes Payable





The
      Company had $18,545,000 federal funds purchased on September 30, 2007. There
      was
      $465,000 in federal funds purchased on December 31, 2006. During the first
      nine
      months of 2007, the Company had an average balance of federal funds purchased
      of
      $8,493,000. Advances from the Federal Home Loan Bank totaled $90,600,000 as
      of
      September 30, 2007 compared with $99,100,000 as of December 31, 2006. The
      Company utilizes Federal funds purchased and Federal Home Loan Bank advances
      as
      a supplement to customer deposits to fund earning assets. Notes payable
      decreased to $2,500,000 as of September 30, 2007 compared with $4,050,000 on
      December 31, 2006. Long-term debt in the form of pooled trust preferred
      securities was $25,774,000 as of September 30, 2007 compared with $10,310,000
      as
      of December 31, 2006.





On
      September 20, 2007, the Company issued $15,464,000 in additional pooled trust
      preferred securities with a maturity of December 15, 2037. Interest on these
      trust preferred securities is payable quarterly with the interest rate on 50
      percent of the amount fixed at 6.478 percent for five years and the remaining
      50
      percent variable at the three month LIBOR rate plus 1.59 percent. The trust
      preferred securities are callable at the Company’s option at par after 5
      years.





The
      Company anticipates redeeming the original $10,310,000 in trust preferred
      securities on December 31, 2007 at par. The interest rate on the existing trust
      preferred securities is variable quarterly at the three month LIBOR rate plus
      3.65 percent. As of September 30, 2007, the Company had $254,000 of unamortized
      issuance costs associated with the $10,310,000 trust preferred securities.
      In
      the event the trust preferred is redeemed, the Company would incur a charge
      to
      earnings for the amount of the unamortized issuance costs.










Nonperforming
      Assets





The
      Company’s nonperforming assets totaled $6,207,000 (1.16 percent of total loans)
      as of September 30, 2007, compared to $5,989,000 (1.19 percent of total loans)
      as of December 31, 2006. All nonperforming asset totals and related ratios
      exclude the loan pool participations. The following table presents the
      categories of nonperforming assets as of September 30, 2007 compared with
      December 31, 2006:




**September 30,**
              
              **December 31,****2007**
              
              **2006****(in
                  thousands)**Impaired
                  loans and leases:Nonaccrual
              
              $
              2,300
              
              
              727Restructured
              
              
              -
              
              
              2,014Total
                  impaired loans and leases
              
              
              2,300
              
              
              2,741Loans
                  and leases past due 90 days and more
              
              
              2,328
              
              
              3,060Total
                  nonperforming loans
              
              
              4,628
              
              
              5,801Other
                  real estate owned
              
              
              1,579
              
              
              188Total
                  nonperforming assets
              
              $
              6,207
              
              
              5,989





As
      of
      September 30, 2007, the Company’s nonaccrual loans totaled $2,300,000 compared
      with $727,000 as of December 31, 2006. The $1,573,000 increase from December
      31,
      2006 to September 30, 2007 is mainly attributable to an investor rental property
      project, an assisted-living facility, a parcel of agricultural land and rental
      real estate loans that were classified nonaccrual. Loans ninety days past due
      and still accruing decreased $732,000 to a September 30, 2007 balance of
      $2,328,000. There were no troubled debt restructurings as of September 30,
      2007
      compared with $2,014,000 as of December 31, 2006. Other real estate owned
      increased $1,391,000 in the first nine months of 2007 primarily due to the
      foreclosure on a commercial real estate truck stop/convenience store that was
      carried as a troubled debt restructuring as of December 31, 2006. The Company
      recognized a charge-off of $559,000 in connection with the foreclosure of the
      truck stop/convenience store during the third quarter of 2007. The Company’s
      allowance for loan losses as of September 30, 2007 was $5,299,000, which was
      .99
      percent of total loans as of that date. This compares with an allowance for
      loan
      losses of $5,693,000 as of December 31, 2006, which was 1.13 percent of total
      loans. As of September 30, 2007, the allowance for loan losses was 85.4 percent
      of nonperforming assets compared with 95.1 percent as of December 31, 2006.
      Based on the inherent risk in the loan portfolio, management believes that
      as of
      September 30, 2007, the allowance for loan losses is adequate. For the
      three months ended September 30, 2007, the Company experienced net loan
      charge-offs of $733,000 compared with no net loan charge-offs during the three
      months ended September 30, 2006. Net loan charge-offs for the nine months ended
      September 30, 2007 were $1,133,000 compared with net recoveries of $668,000
      for
      the nine months ended September 30, 2006.





Changes
      in the allowance for loan losses for the nine months ended September 30, 2007
      and 2006 were as follows:




**2007**
              
              **2006****(in
                  thousands)**Balance
                  at beginning of year
              
              $
              5,693
              
              
              5,011Provision
                  for loan losses
              
              
              739
              
              
              90Recoveries
                  on loans previously charged off
              
              
              28
              
              
              1,057Loans
                  charged off
              
              
              (1,161
              )
              
              (389
              )Balance
                  at end of period
              
              $
              5,299
              
              
              5,769





Capital
      Resources





Total
      shareholders’ equity was 8.4 percent of total assets as of September 30, 2007
      and was 8.4 percent as of December 31, 2006. Tangible equity to tangible assets
      was 6.7 percent as of September 30, 2007 and 6.6 percent as of December 31,
      2006. The Company’s Tier 1 Capital Ratio was 10.2 percent of risk-weighted
      assets as of September 30, 2007 and was 10.0 percent as of December 31,
      2006, compared to a 4.0 percent regulatory requirement. Risk-based capital
      guidelines require the classification of assets and some off-balance-sheet
      items
      in terms of credit-risk exposure and the measuring of capital as a percentage
      of
      the risk-adjusted asset totals. Tier 1 Capital is the Company’s total common
      shareholders’ equity plus the trust preferred security reduced by goodwill.
      Management believes that, as of September 30, 2007, the Company and its
      subsidiary bank meet all capital adequacy requirements to which they are
      subject. As of that date, the bank subsidiary was “well capitalized” under
      regulatory prompt corrective action provisions.





On
      January 18, 2007, the Company’s Board of Directors authorized a stock repurchase
      of up to $2,000,000 until December 31, 2007. In accordance with this
      authorization, the Company did not repurchase any shares on the open market
      during the third quarter of 2007. A total of 5,760 shares were issued during
      the
      third quarter of 2007 for options exercised under previously awarded grants.
      Cash dividends of $.18 per share were paid to shareholders on September 15,
      2007.





Liquidity





Liquidity
      management involves meeting the cash flow requirements of depositors and
      borrowers. The Company conducts liquidity management on both a daily and
      long-term basis; and it adjusts its investments in liquid assets based on
      expected loan demand, projected loan maturities and payments, estimated cash
      flows from the loan pool participations, expected deposit flows, yields
      available on interest-bearing deposits, and the objectives of its
      asset/liability management program. The Company had liquid assets (cash and
      cash
      equivalents) of $13,055,000 as of September 30, 2007, compared with $20,726,000
      as of December 31, 2006. Investment securities classified as available for
      sale
      could be sold to meet liquidity needs if necessary. Additionally, the bank
      subsidiary maintains lines of credit with correspondent banks and the Federal
      Home Loan Bank that would allow it to borrow federal funds on a short-term
      basis
      if necessary. The Company also maintains a line of credit with a major
      commercial bank that provides liquidity for the purchase of loan pool
      participations and other corporate needs. Management believes that the Company
      has sufficient liquidity as of September 30, 2007 to meet the needs of borrowers
      and depositors.





The
      Company currently maintains a $5,000,000 revolving line of credit that matures
      on June 30, 2008. As of September 30, 2007, the Company had no borrowings on
      the
      line. Management believes that the $5,000,000 line should be adequate to meet
      anticipated borrowing needs.





Commitments
      and Contingencies





In
      the
      ordinary course of business, the Company is engaged in various issues involving
      litigation. Management believes that none of this litigation is material to
      the
      Company’s results of operations.





Critical
      Accounting Policies





The
      Company has identified two critical accounting policies and practices relative
      to the financial condition and results of operations. These two accounting
      policies relate to the allowance for loan losses and to loan pool
      accounting.





The
      allowance for loan losses is based on management’s estimate. Management believes
      the allowance for loan losses is adequate to absorb probable losses in the
      existing portfolio. In evaluating the portfolio, management takes into
      consideration numerous factors, including current economic conditions, prior
      loan loss experience, the composition of the loan portfolio, and management’s
      estimate of probable credit losses. The allowance for loan losses is established
      through a provision for loss based on management’s evaluation of the risk
      inherent in the loan portfolio, the composition of the portfolio, specific
      impaired loans, and current economic conditions. Such evaluation, which includes
      a review of all loans on which full collectibility may not be reasonably
      assured, considers among other matters, the estimated net realizable value
      or
      the fair value of the underlying collateral, economic conditions, historical
      loss experience, and other factors that warrant recognition in providing for
      an
      adequate allowance for loan losses.





The
      loan
      pool accounting practice relates to management’s estimate that the investment
      amount reflected on the Company’s financial statements does not exceed the
      estimated net realizable value or the fair value of the underlying collateral
      securing the purchased loans. In evaluating the purchased loan portfolio,
      management takes into consideration many factors, including the borrowers’
current financial situation, the underlying collateral, current economic
      conditions, historical collection experience, and other factors relative to
      the
      collection process.








In
      the
      event that management’s evaluation of the level of the allowance for loan losses
      is inadequate, the Company would need to increase its provision for loan losses.
      If the estimated realizable value of the loan pool participations is overstated,
      the Company’s yield on the loan pools would be reduced.





Off-Balance-Sheet
      Arrangements





The
      Company is a party to financial instruments with off-balance-sheet risk in
      the
      normal course of business to meet the financing needs of its customers, which
      include commitments to extend credit. The Company’s exposure to credit loss in
      the event of nonperformance by the other party to the commitments to extend
      credit is represented by the contractual amount of those instruments. The
      Company uses the same credit policies in making commitments as it does for
      on-balance-sheet instruments.





Commitments
      to extend credit are agreements to lend to a customer as long as there is no
      violation of any conditions established in the contract. Commitments generally
      have fixed expiration dates or other termination clauses and may require payment
      of a fee. Since many of the commitments are expected to expire without being
      drawn upon, the total commitment amounts do not necessarily represent future
      cash requirements. The Company evaluates each customer’s creditworthiness on a
      case-by-case basis. As of September 30, 2007 and December 31, 2006, outstanding
      commitments to extend credit totaled approximately $81,131,000 and $90,290,000,
      respectively.





Commitments
      under standby letters of credit outstanding aggregated $2,036,000 and $2,495,000
      as of September 30, 2007 and December 31, 2006, respectively. The Company does
      not anticipate any losses as a result of these transactions.





Contractual
      obligations and other commitments were presented in the Company’s Form 10-K
      Annual Report for the year ended December 31, 2006. Please refer to this
      discussion. There have been no material changes since that report was filed.
      The
      Company adopted FIN 48 on January 1, 2007. The adoption of FIN 48 did not have
      a
      material effect on the contractual obligations table presented in the Company’s
      Form 10-K Annual Report for the year ended December 31, 2006.





Additional
      Information about the Merger and Where to Find It





In
      connection with the proposed merger referenced herein, ISB Financial Corp.
      will
      file with the Securities and Exchange Commission (the “SEC”) a registration
      statement on Form S-4 to register the shares of ISB Financial common stock
      to be
      issued to the shareholders of the Company. The registration statement will
      include a joint proxy statement/prospectus which will be sent to the
      shareholders of ISB Financial and the Company seeking their approval of the
      merger. In addition, each of ISB Financial and the Company may file other
      relevant documents concerning the proposed merger with the SEC.





WE
      URGE
      INVESTORS AND SECURITY HOLDERS TO READ THE REGISTRATION STATEMENT ON FORM S-4
      AND THE JOINT PROXY STATEMENT/PROSPECTUS INCLUDED WITHIN THE REGISTRATION
      STATEMENT AND ANY OTHER RELEVANT DOCUMENTS TO BE FILED WITH THE SEC IN
      CONNECTION WITH THE PROPOSED MERGER, BECAUSE THEY WILL CONTAIN IMPORTANT
      INFORMATION ABOUT ISB FINANCIAL, THE COMPANY AND THE PROPOSED TRANSACTION.
      Investors and security holders may obtain free copies of these documents, when
      available, through the website maintained by the SEC at http://www.sec.gov.
      Free
      copies of the joint proxy statement/prospectus also may be obtained, when
      available, by directing a request by telephone or mail to MidWestOne Financial
      Group, Inc., 222 First Avenue East, Oskaloosa, Iowa 52577, Attention: David
      Meinert (telephone: (641) 673-8448) or by accessing the Company’s website at
      http://www.midwestonebank.com under “Company Info.” The information on the
      Company’s website is not, and shall not be deemed to be, a part of this document
      or incorporated into other filings the company makes with the
      SEC.








ISB
      Financial and the Company and their respective directors, executive officers
      and
      members of management may be deemed to be participants in the solicitation
      of
      proxies from the shareholders of ISB Financial and/or the Company in connection
      with the merger. Information about the directors and executive officers of
      the
      Company is set forth in the proxy statement for the Company’s 2007 annual
      meeting of shareholders filed with the SEC on March 23, 2007. Additional
      information regarding the interests of these participants and other persons
      who
      may be deemed participants in the merger may be obtained by reading the joint
      proxy statement/prospectus regarding the merger when it becomes
      available. ** This
      document shall not constitute an offer to sell or the solicitation of an offer
      to buy securities in any jurisdiction in which such solicitation would be
      unlawful.





Part
      I – Item 3. Quantitative and Qualitative Disclosures about Market
      Risk.





Market
      risk is the risk of earnings volatility that results from adverse changes in
      interest rates and market prices. The Company’s market risk is primarily
      comprised of interest rate risk arising from its core banking activities of
      lending and deposit taking. Interest rate risk is the risk that changes in
      market interest rates may adversely affect the Company’s net interest income.
      Management continually develops and applies strategies to mitigate this risk.
      The Company has not experienced any material changes to its market risk position
      since December 31, 2006, from that disclosed in the Company’s 2006 Form 10-K
      Annual Report. Management does not believe that the Company’s primary market
      risk exposures and how those exposures were managed in the first nine months
      of
      2007 changed when compared to 2006.





The
      Company uses a third-party computer software simulation modeling program to
      measure its exposure to potential interest rate changes. For various assumed
      hypothetical changes in market interest rates, numerous other assumptions are
      made such as prepayment speeds on loans and securities backed by mortgages,
      the
      slope of the Treasury yield curve, the rates and volumes of the Company’s
      deposits and the rates and volumes of the Company’s loans. This analysis
      measures the estimated change in net interest income in the event of
      hypothetical changes in interest rates. This analysis of the Company’s interest
      rate risk was presented in the Form 10-K filed by the Company for the year
      ended
      December 31, 2006.





Part
      I – Item 4. Controls and Procedures.





As
      of the
      end of the period covered by this report, an evaluation was performed under
      the
      supervision and with the participation of the Company’s Chief Executive Officer
      and Chief Financial Officer of the effectiveness of the Company’s disclosure
      controls and procedures (as defined in Exchange Act Rule 240.13a-15(e)). Based
      on that evaluation, the Chief Executive Officer and the Chief Financial Officer
      have concluded that the Company’s current disclosure controls and procedures are
      effective to ensure that information required to be disclosed by the Company
      in
      the reports that it files or submits under the Securities Exchange Act of 1934
      is recorded, processed, summarized and reported, within the time periods
      specified in the Securities and Exchange Commission’s rules and
      forms.





There
      were no changes in the Company’s internal control over financial reporting that
      occurred during the period covered by this report that have materially affected,
      or are reasonably likely to materially affect, the Company’s internal control
      over financial reporting.







*Caution
      Regarding Forward-Looking Statements*




*Statements
      made in this report, other than those concerning historical financial
      information, may be considered forward-looking statements, which speak only
      as
      of the date of this document and are based on current expectations and involve
      a
      number of assumptions. These include statements as to expectations regarding
      the
      merger and any other statements regarding future results or expectations. The
      Company intends such forward-looking statements to be covered by the safe harbor
      provisions for forward-looking statements contained in the Private Securities
      Litigation Reform Act of 1995 and is including this statement for purposes
      of
      these safe harbor provisions. The company’s ability to predict results, or the
      actual effect of future plans or strategies, is inherently uncertain. Factors
      that could cause actual results to differ from those set forth in the
      forward-looking statements or that could have a material effect on the
      operations and future prospects of the Company and the resulting company,
      include but are not limited to: (1) changes in interest rates, general
      economic conditions, legislative/regulatory changes, monetary and fiscal
      policies of the U.S. government, including policies of the U.S. Treasury and
      the
      Federal Reserve Board; (2) changes in the quality and composition of the
      company’s loan and securities portfolios, demand for loan products, deposit
      flows, competition, demand for financial services in the Company’s respective
      market areas, implementation of new technologies, ability to develop and
      maintain secure and reliable electronic systems, and accounting principles,
      policies, and guidelines; (3) the businesses of ISB Financial and/or the
      Company may not be integrated successfully or such integration may be more
      difficult, time-consuming or costly than expected; (4) expected revenue
      synergies and cost savings from the merger may not be fully realized or realized
      within the expected time frame; (5) revenues following the merger may be lower
      than expected; (6) customer and employee relationships and business operations
      may be disrupted by the merger; (7) the required regulatory and shareholder
      approvals may not be obtained within expected timeframes, or at all, and the
      ability to complete the merger may be more difficult, time-consuming or costly
      than expected; and (8) other risk factors detailed from time to time in filings
      made by ISB Financial or the Company with the SEC.*





Part
      II – Item 1A Risk Factors.





In
      addition to the other information set forth in this report, you should carefully
      consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual
      Report on Form 10-K for the year ended December 31, 2006, which could materially
      affect our business, financial condition or future results. The risks described
      in our Annual Report on Form 10-K are not the only risks facing our Company.
      Additional risks and uncertainties not currently known to us or that we
      currently deem to be immaterial also may materially adversely affect our
      business, financial condition and/or operating results. In addition, we face
      additional risks and uncertainties as a result of the Company’s agreement to
      merge with ISB Financial Corp., as disclosed in our Current Report on Form
      8-K
      filed with the SEC on September 12, 2007. These risks include, among other
      things, uncertainty about our ability to obtain the governmental approvals
      necessary to close the merger on the proposed terms and schedule or at all;
      whether our shareholders will approve the merger; and disruption from the merger
      that might make it more difficult to maintain relationships with our customers,
      employees or suppliers.





Part
      II – Item 2.  Unregistered
      Sales of Equity Securities and Use of Proceeds.





(a)
–
(b)
      Not Applicable





(c)
      Issuer Purchases of Equity Securities




(a)
                  Total
              
              
              
              (c) Total Number of
              
              (d) Maximum Number (orNumber of
              
              
              
              Shares (or Units)
              
              Approximate Dollar Value) ofShares (or
              
              (b)
                  Average
              
              Purchased as Part of
              
              Shares (or Units) that May YetUnits)
              
              Price Paid per
              
              Publicly Announced
              
              Be Purchased Under the PlansPeriod
              
              Purchased
              
              Share (or Unit)
              
              Plans or Programs
              
              or ProgramsJuly
                  2007
              
              
              -
              
              $
              -
              
              
              -
              
              $
              1,170,200August
                  2007
              
              
              -
              
              
              -
              
              
              -
              
              
              1,170,200September
                  2007
              
              
              -
              
              
              -
              
              
              -
              
              $
              1,170,200Total
              
              
              -
              
              $
              -
              
              
              -




On
        January 18, 2007, the Board of Directors authorized the repurchase of up
        to
        $2,000,000 of the Company's common stock
        on
        the open market. This repurchase authorization expires on December 31,
        2007.







Part
      II – Item 6. Exhibits.





(a)
                The
                    following exhibits and financial statement schedules are filed
                    as part of
                    this report:





Exhibits2
            
            Agreement
                and Plan of Merger between MidWestOne Financial Group, Inc. and ISB
                Financial Corp. dated September 11, 2007. This Agreement and Plan
                of
                Merger is hereby incorporated by reference to the Form 8-K filed
                by the
                Company on September 12, 2007.3.1
            
            Articles
                of Incorporation, as amended through April 30, 1998, of Mahaska Investment
                Company. The Articles of Incorporation, as amended, of Mahaska Investment
                Company are incorporated by reference to the Company’s quarterly report on
                Form 10-Q for the quarter ended September 30, 1998.3.1.1
            
            Amendment
                to the Articles of Incorporation of Mahaska Investment Company changing
                the name of the corporation to MidWestOne Financial Group, Inc. The
                Amendment to the Articles of Incorporation of Mahaska Investment
                Company
                are incorporated by reference to the Company’s quarterly report on Form
                10-Q for the quarter ended June 30, 2003.3.2
            
            Bylaws
                of MidWestOne Financial Group, Inc. (f/k/a Mahaska Investment Company).
                The Amended and Restated Bylaws of Mahaska Investment Company dated
                July
                23, 1998, are incorporated by reference to the Company’s quarterly report
                on Form 10-Q for the Quarter ended September 30, 1998.11
            
            Computation
                of Per Share Earnings.31.1
            
            Certification
                of Chief Executive Officer pursuant to Rule 13a - 14(a) of the Securities
                Exchange Act of 1934.31.2
            
            Certification
                of Chief Financial Officer pursuant to Rule 13a - 14(a) of the Securities
                Exchange Act of 1934.32.1
            
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                Rule
                13a - 14(a) of the Securities Exchange Act of 1934 and 18 U.S.C.,
                Section
                1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
                of
                2002.




SIGNATURES





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned, thereunto
      duly authorized.





MidWestOne
                Financial Group, Inc.(Registrant)By:
            /s/
                Charles S. HowardCharles
                S. HowardChairman, President, Chief Executive OfficerNovember
                13, 2007DatedBy:
            /s/
                David A. MeinertDavid
                A. MeinertExecutive Vice Presidentand Chief Financial Officer(Principal Accounting Officer)November
                13, 2007Dated