Mutualfirst Financial (MFSF) 10-Q 2007 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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 EXHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM  -  TO

Commission File Number:  000-27905

MutualFirst Financial, Inc.

(Exact Name of registrant specified in its charter)

Maryland	35-2085640
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)

110 East Charles Street

Muncie, Indiana 47305

(765) 747-2800

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed 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 report), 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. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o   Accelerated filer x   Non-accelerated filer o

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

The number of shares of the Registrant’s common stock, with $.01 par value, outstanding as of November 9, 2007 was 4,274,138.

FORM 10 – Q

MutualFirst Financial, Inc.

INDEX

		Page
PART I – FINANCIAL INFORMATION		Number
Item 1.	Financial Statements
	Consolidated Condensed Balance Sheets	1
	Consolidated Condensed Statements of Income	2
	Consolidated Condensed Statement of Stockholders’ Equity	3
	Consolidated Condensed Statements of Cash Flows	4
	Notes to Unaudited Consolidated Condensed Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	7
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	15
Item 4.	Controls and Procedures	15
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	16
Item 1A.	Risk Factors	16
Item 2.	Unregistered Sales of Equity Changes in Securities and Use of Proceeds	16
Item 3.	Defaults Upon Senior Securities	17
Item 4.	Submission of Matters to a Vote of Security Holders	17
Item 5.	Other Information	17
Item 6.	Exhibits	17
Signature Page		17
Exhibits		18

PART 1 FINANCIAL INFORMATION

ITEM 1. Financial Statements

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY

Consolidated Condensed Balance Sheets

	September 30,			December 31,
	2007			2006
	(Unaudited)
Assets
Cash	$	21,148,122		$	23,235,328
Interest-bearing demand deposits		2,402,247			1,679,544
Cash and cash equivalents		23,550,369			24,914,872
Interest-bearing deposits		193,000			293,000
Investment securities available for sale		40,514,967			41,070,091
Loans held for sale		2,399,822			1,329,700
Loans		818,735,857			813,781,179
Allowance for loan losses		(8,181,460	)		(8,155,693	)
Net loans		810,554,397			805,625,486
Premises and equipment		15,275,457			15,431,475
Federal Home Loan Bank of Indianapolis stock, at cost		9,938,400			9,938,400
Investment in limited partnerships		3,298,786			3,460,818
Cash surrender value of life insurance		30,073,260			29,120,760
Foreclosed real estate		1,598,594			1,273,449
Interest receivable		3,723,755			3,622,133
Goodwill		14,187,725			13,786,468
Deferred income tax benefit		4,717,220			4,376,318
Other assets		6,763,423			6,599,462
Total assets	$	966,789,175		$	960,842,432
Liabilities
Deposits
Non-interest-bearing	$	46,969,403		$	47,142,407
Interest bearing		659,427,416			656,216,247
Total deposits		706,396,819			703,358,654
Federal Home Loan Bank advances		158,602,673			157,425,176
Other borrowings		1,640,227			1,426,769
Advances by borrowers for taxes and insurance		2,357,653			1,833,661
Interest payable		2,333,319			1,829,168
Other liabilities		7,687,854			7,704,686
Total liabilities		879,018,545			873,578,114
Commitments and Contingent Liabilities
Stockholders' Equity
Preferred stock, $.01 par value
Authorized and unissued — 5,000,000 shares
Common stock, $.01 par value
Authorized — 20,000,000 shares
Issued and outstanding —4,299,138 and 4,366,636 shares		42,991			43,666
Additional paid-in capital		32,960,714			33,101,586
Retained earnings		57,100,377			56,698,546
Accumulated other comprehensive loss		(347,086	)		(354,734	)
Unearned employee stock ownership plan (ESOP) shares		(1,986,366	)		(2,224,746	)
Total stockholders' equity		87,770,630			87,264,318
Total liabilities and stockholders' equity	$	966,789,175		$	960,842,432

See notes to consolidated condensed financial statements.

1

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY

Consolidated Condensed Statements of Income

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2007			2006			2007			2006
Interest Income
Loans receivable, including fees	$	13,453,447		$	13,698,923		$	40,009,004		$	40,026,872
Investment seurities:
Mortgage-backed securities		127,575			134,280			355,874			356,142
Federal Home Loan Bank stock		111,766			106,591			349,223			351,416
Other investments		415,605			375,010			1,201,816			1,053,738
Deposits with financial institutions		20,091			20,253			77,763			47,114
Total interest income		14,128,484			14,335,057			41,993,680			41,835,282
Interest Expense
Passbook savings		71,099			74,143			213,637			228,722
Certificates of deposit		5,269,499			5,046,114			15,564,305			13,985,929
Daily Money Market accounts		166,426			167,315			483,229			527,678
Demand and NOW acounts		751,833			547,120			2,152,493			1,038,075
Federal Home Loan Bank advances		2,000,031			2,140,986			5,568,881			5,879,249
Other interest expense		18,034			15,606			49,746			46,818
Total interest expense		8,276,922			7,991,284			24,032,291			21,706,471
Net Interest Income		5,851,562			6,343,773			17,961,389			20,128,811
Provision for losses on loans		532,500			525,000			1,397,500			1,443,000
Net Interest Income After Provision for Loan Losses		5,319,062			5,818,773			16,563,889			18,685,811
Other Income
Service fee income		1,266,022			1,146,769			3,575,433			3,266,636
Equity in losses of limited partnerships		(22,828	)		(13,437	)		(76,011	)		(15,312	)
Commissions		317,081			135,009			758,292			487,460
Net gains on sales of loans		76,337			110,257			223,659			303,517
Net servicing fees		14,217			10,730			53,247			52,678
Increase in cash surrender value of life insurance		297,500			267,000			952,500			771,000
Other income		55,953			91,582			204,020			222,863
Total other income		2,004,282			1,747,910			5,691,140			5,088,842
Other Expenses
Salaries and employee benefits		3,632,935			3,591,131			10,926,176			10,966,527
Net occupancy expenses		382,087			386,923			1,160,357			1,103,121
Equipment expenses		326,683			300,778			973,143			921,866
Data processing fees		259,385			228,111			813,425			659,883
Automated teller machine		187,261			172,796			534,296			545,787
Professional fees		176,125			235,889			532,190			727,316
Advertising and promotion		172,931			272,729			610,401			715,204
Other expenses		1,061,185			1,019,406			3,071,884			3,010,039
Total other expenses		6,198,592			6,207,763			18,621,872			18,649,743
Income Before Income Tax		1,124,752			1,358,920			3,633,157			5,124,910
Income tax expense (benefit)		(36,000	)		214,550			299,700			1,071,000
Net Income	$	1,160,752		$	1,144,370		$	3,333,457		$	4,053,910
Basic earnings per share	$	0.28		$	0.27		$	0.81		$	0.96
Diluted earnings per share	$	0.28		$	0.27		$	0.80		$	0.94
Dividends per share	$	0.15		$	0.15		$	0.45		$	0.43

See notes to consolidated condensed financial statements.

2

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY

Consolidated Condensed Statement of Stockholders' Equity

For the Nine Months Ended September 30, 2007

(Unaudited)

															Accumulated
	Common Stock						Additional								Other			Unearned
	Shares						paid-in			Comprehensive		Retained			Comprehensive			ESOP
	Outstanding			Amount			capital			Income		Earnings			Income (Loss)			shares			Total
Balances, December 31, 2006, as reported		4,366,636		$	43,666		$	33,101,586				$	56,698,546		$	(354,734	)	$	(2,224,746	)	$	87,264,318
Comprehensive income
Net income for the period										$	3,333,457		3,333,457									3,333,457
Other comprehensive income, net of tax
Net unrealized gains on securities											7,648					7,648						7,648
Comprehensive income										$	3,341,105
ESOP shares earned								214,489											238,380			452,869
Cash dividends ($.45 per share)													(1,944,720	)								(1,944,720	)
RRP shares earned								15,792														15,792
Stock repurchased and retired		(82,910	)		(829	)		(579,612	)				(986,906	)								(1,567,347	)
Stock options exercised		15,412			154			208,459														208,613
Balances, September 30, 2007		4,299,138			42,991		$	32,960,714				$	57,100,377		$	(347,086	)	$	(1,986,366	)	$	87,770,630

See notes to consolidated condensed financial statements.

3

MutualFirst Financial, Inc.

Consolidated Condensed Statements of Cash Flows

(Unaudited)

	Nine Months Ended
	September 30,
	2007			2006
Operating Activities
Net income	$	3,333,457		$	4,053,910
Items not requiring (providing) cash
Provision for loan losses		1,397,500			1,443,000
ESOP shares earned		452,869			496,094
RRP shares earned		15,792			112,923
Depreciation and amortization		1,958,879			1,952,188
Deferred income tax		(346,000	)		(124,882	)
Loans originated for sale		(18,274,646	)		(19,251,486	)
Proceeds from sales of loans held for sale		17,256,137			18,957,768
Gains on sales of loans held for sale		(223,659	)		(303,517	)
Change in
Interest receivable		(101,622	)		609,054
Other assets		122,085			(755,634	)
Interest payable		504,151			233,656
Other liabilities		(16,832	)		655,215
Cash value of life insurance		(952,500	)		(771,000	)
Other adjustments		378,469			935,196
Net cash provided by operating activities		5,504,080			8,242,485
Investing Activities
Net change in interest earning deposits		100,000			-
Purchases of securities available for sale		(5,168,191	)		(3,893,735	)
Proceeds from matuities and paydowns of securities available for sale		5,711,565			2,833,483
Proceeds from sales of securities available for sale		-			219,361
Net change in loans		(8,996,589	)		(13,707,063	)
Purchases of premises and equipment		(916,992	)		(1,384,430	)
Proceeds from real estate owned sales		1,013,042			960,840
Cash received (paid) in acquisition, net		(515,257	)		3,894,267
Other investing activities		75,503			48,303
Net cash used in investing activities		(8,696,919	)		(11,028,974	)
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits		7,963,963			13,379,401
Certificates of deposits		(4,925,798	)		17,008,619
Repayment of note payable		(433,760	)		(419,506	)
Proceeds from FHLB advances		309,350,000			379,100,000
Repayment of FHLB advances		(307,947,007	)		(403,392,213	)
Net change in advances by borrowers for taxes and insurance		523,992			1,029,205
Stock repurchased		(1,567,347	)		(4,334,059	)
Proceeds from stock options exercised		208,613			635,622
Cash dividends		(1,944,720	)		(1,887,301	)
Other financing activities		600,400			-
Net cash provided by financing activities		1,828,336			1,119,768
Net Change in Cash and Cash Equivalents		(1,364,503	)		(1,666,721	)
Cash and Cash Equivalents, Beginning of Year		24,914,872			22,364,583
Cash and Cash Equivalents, End of Year	$	23,550,369		$	20,697,862
Additional Cash Flows Information
Interest paid	$	23,528,140		$	21,472,815
Income tax paid		445,000			1,225,000
Transfers from loans to foreclosed real estate		1,740,194			1,421,870
Mortgage servicing rights capitalized		172,046			186,543

See Notes to Consolidated Condensed Financial Statements

4

MutualFirst Financial, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL

STATEMENTS

Note 1: Basis of Presentation

The consolidated condensed financial statements include the accounts of MutualFirst Financial, Inc. (the “Company”), its wholly owned subsidiary, Mutual Federal Savings Bank, a federally chartered savings bank (“Mutual Federal”), Mutual Federal’s wholly owned subsidiaries, First MFSB Corporation and Mutual Federal Investment Company (“MFIC”), and MFIC wholly owned subsidiary, Mutual Federal REIT, Inc. All significant inter-company accounts and transactions have been eliminated in consolidation.

Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report for 2006 filed with the Securities and Exchange Commission.

The interim consolidated condensed financial statements at September 30, 2007 have not been audited by independent accountants, but in the opinion of management, reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for such periods. The results of operations for the period are not necessarily indicative of the results to be expected for the full year.

The Consolidated Condensed Balance Sheet of the Company as of December 31, 2006 has been derived from the Audited Consolidated Balance Sheet of the Company as of that date.

5

Note 2: Earnings per share

Earnings per share were computed as follows: (Dollars in thousands except per share data)

	Three Months Ended September 30,
	2007						2006
	Income		Weighted- Average Shares		Per-Share Amount		Income		Weighted- Average Shares		Per-Share Amount
	(000’s)						(000’s)
Basic Earnings Per Share
Income available to common shareholders	$	1,161		4,102,302	$	0.28	$	1,144		4,166,531	$	0.27
Effect of Dilutive securities
Stock options and RRP grants				42,677						73,642
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions	$	1,161		4,144,979	$	0.28	$	1,144		4,240,173	$	0.27

	Nine Months Ended September 30,
	2007						2006
	Income		Weighted- Average Shares		Per-Share Amount		Income		Weighted- Average Shares		Per-Share Amount
	(000’s)						(000’s)
Basic Earnings Per Share
Income available to common shareholders	$	3,333		4,117,685	$	0.81	$	4,054		4,222,178	$	0.96
Effect of Dilutive securities
Stock options and RRP grants				54,332						79,413
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions	$	3,333		4,172,017	$	0.80	$	4,054		4,301,591	$	0.94

Options of 91,000 shares were not included in the calculation above due to being anti-dilutive to earnings per share as of September 30, 2007 and September 30, 2006, respectively.

Note 3: Accounting Changes

On September 6, 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements.  SFAS 157 clarifies the fair value measurement objective, its application in GAAP and establishes a framework that builds on current practice and requirements.  The framework simplifies and, where appropriate, codifies the similar guidance in existing pronouncements and applies broadly to financial and non-financial assets and liabilities.  The Statement clarifies the definition of fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, known as an exit-price definition of fair value.  It also provides further guidance on the valuation techniques to be used in estimating fair value.  Current disclosures about the use of fair value to measure assets and liabilities are expanded in this Statement.  The disclosures focus on the methods used for fair value measurements and apply whether the assets and liabilities are measured at fair value in all periods, such as trading securities, or in only some periods, such as impaired assets.   The Statement is effective for all financial statements issued for fiscal years beginning after November 15, 2007 as well as for interim periods within such fiscal years.  The Company is currently evaluating the impact of this Statement on its financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.  SFAS 159 allows companies to report selected financial assets and liabilities at fair value. The changes in fair value are recognized in earnings and the assets and liabilities measured under this methodology are required to be displayed separately in the balance sheet.  The main intent of the Statement is to mitigate the difficulty in determining reported earnings caused by a “mixed-attribute model” (or reporting some assets at fair value and others using a different valuation attribute such as amortized cost). The project is separated into two phases.  This first phase addresses the creation of a fair value option for financial assets and liabilities.  A second phase will address creating a fair value option for selected non-financial items. SFAS 159 is effective for all financial statements issued for fiscal years beginning after November 15, 2007.  The Company is currently evaluating the impact of this Statement on its financial statements.

6

Note 4: Change in Accounting Principle

The Company or one of its subsidiaries files income tax returns in U.S. federal and Indiana jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local examinations by tax authorities for years before 2004.

The Company adopted the provisions of the Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109, on January 1, 2007. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the implementation of FIN 48, the Company did not identify any material uncertain tax positions that it believes should be recognized in the financial statements.

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations.

General

MutualFirst Financial, Inc., a Maryland corporation (the “Company”), was organized in September 1999. On December 29, 1999, it acquired the common stock of Mutual Federal Savings Bank (“Mutual Federal”) upon the conversion of Mutual Federal from a federal mutual savings bank to a federal stock savings bank.

Mutual Federal was originally organized in 1889 and currently conducts its business from twenty-one full service offices located in Delaware, Grant, Kosciusko, Randolph, and Wabash counties, Indiana, with its main office located in Muncie. Mutual Federal’s principal business consists of attracting deposits from the general public and originating fixed and variable rate loans secured primarily by first mortgage liens on residential and commercial real estate, consumer goods, and business assets. Mutual Federal’s deposit accounts are insured by the Federal Deposit Insurance Corporation up to applicable limits.

Mutual Federal currently owns two subsidiaries, First MFSB Corporation and Mutual Federal Investment Company. The assets of First MFSB Corporation consist of an investment in Family Financial Holdings Incorporated. Family Financial is an ordinary Indiana corporation that provides debt cancellation products to financial institutions. MFIC is a Nevada corporation holding approximately $24 million in investments. MFIC currently owns one subsidiary, Mutual Federal REIT. The assets of Mutual Federal REIT consist of approximately $143 million in one-to four-family mortgage loans.

The following should be read in conjunction with the Management’s Discussion and Analysis in the Company’s December 31, 2006 Annual Report on Form 10-K.

7

Critical Accounting Policies

The notes to the consolidated financial statements contain a summary of the Company’s significant accounting policies presented on pages 64 to 67 of the Form 10-K for the year ended December 31, 2006. Certain of these policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management believes that its critical accounting policies include determining the allowance for loan losses, the valuation of foreclosed assets, mortgage servicing rights and intangible assets.

Allowance for Loan Losses

The allowance for loan losses is a significant estimate that can and does change based on management’s assumptions about specific borrowers and current general economic and business conditions, among other factors. Management reviews the adequacy of the allowance for loan losses on at least a quarterly basis. The evaluation by management includes consideration of past loss experience, changes in the composition of the loan portfolio, the current condition and amount of loans outstanding, identified problem loans and the probability of collecting all amounts due.

The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. A worsening or protracted economic decline would increase the likelihood of additional losses due to credit and market risk and could create the need for additional loss reserves.

Foreclosed Assets

Foreclosed assets are carried at the lower of cost or fair value less estimated selling costs. Management estimates the fair value of the properties based on current appraisal information. Fair value estimates are particularly susceptible to significant changes in the economic environment, market conditions, and real estate market. A worsening or protracted economic decline would increase the likelihood of a decline in property values and could create the need to write down the properties through current operations.

Mortgage Servicing Rights

Mortgage servicing rights (“MSRs”) associated with loans originated and sold, where servicing is retained, are capitalized and included in other intangible assets in the consolidated balance sheet. The value of the capitalized servicing rights represents the present value of the future servicing fees arising from the right to service loans in the portfolio. Critical accounting policies for MSRs relate to the initial valuation and subsequent impairment tests. The methodology used to determine the valuation of MSRs requires the development and use of a number of estimates, including anticipated principal amortization and prepayments of that principal balance. Events that may significantly affect the estimates used are changes in interest rates, mortgage loan prepayment speeds and the payment performance of the underlying loans. The carrying value of the MSRs is periodically reviewed for impairment based on a determination of fair value. For purposes of measuring impairment, the servicing rights are compared to a valuation prepared based on a discounted cash flow methodology, utilizing current prepayment speeds and discount rates. Impairment, if any, is recognized through a valuation allowance and is recorded as amortization of intangible assets.

8

Intangible Assets

The Company periodically assesses the impairment of its goodwill and the recoverability of its core deposit intangible. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. If actual external conditions and future operating results differ from the Company’s judgments, impairment and/or increased amortization charges may be necessary to reduce the carrying value of these assets to the appropriate value. 

Forward Looking Statements

This quarterly report on Form 10-Q contains statements which constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may appear in a number of places in this Form 10-Q and include statements regarding the intent, belief, outlook, estimate or expectations of the company, its directors or its officers primarily with respect to future events and the future financial performance of the company. Readers of this Form 10-Q are cautioned that any such forward looking statements are not guarantees of future events or performance and involve risk and uncertainties, and that actual results may differ materially from those in the forward looking statements as a result of various factors. The accompanying information contained in this Form 10-Q identifies important factors that could cause such differences. These factors include changes in interest rates; the loss of deposits and loan demand to competitors; substantial changes in financial markets; changes in real estate values and the real estate market; or regulatory changes.

The Company does not undertake – and specifically disclaims any obligation – to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

9

Overview

The Company’s results of operations depend primarily on the level of net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and investments, and costs incurred with respect to interest-bearing liabilities, primarily deposits and borrowings. The structure of our interest-earning assets versus the structure of interest-bearing liabilities along with the shape of the yield curve has a direct impact on our net interest income.

Historically, our interest-earning assets have been longer term in nature (i.e., fixed-rate mortgage loans) and interest-bearing liabilities have been shorter term (i.e., certificates of deposit, regular savings accounts, etc). This structure would impact net interest income favorably in a decreasing rate environment, assuming a normally shaped yield curve, as the rates on interest-bearing liabilities would decrease more rapidly than rates on the interest-earning assets. Conversely, in an increasing rate environment, assuming a normally shaped yield curve, net interest income would be impacted unfavorably as rates on interest-earning assets would increase at a slower rate than rates on interest-bearing liabilities.

Since 2000 it has been the Company’s strategic objective to change the repricing structure of its interest-earning assets from longer term to shorter term to better match the structure of our interest-bearing liabilities and therefore reduce the impact interest rate changes have on our net interest income. Strategies employed to accomplish this objective have been to increase the originations of variable rate commercial loans and shorter term consumer loans and to sell longer term fixed rate mortgage loans. As a result of implementing these strategies, the percentage of consumer and commercial loans to total loans has increased from 35% at the end of 2000 to 45% currently. On the liability side of the balance sheet, the Company is employing strategies to increase the balance of core deposit accounts such as low cost checking and money market accounts. The percentage of core deposits to total deposits has increased from 33% to 35% over this time period. These are ongoing strategies that are dependent on current market conditions and competition.

During the first nine months of 2007, in keeping with its strategic objective to reduce interest rate risk exposure, the Company also sold $17.2 million of long term fixed rate loans that had been held for sale, which reduced potential earning assets and therefore had a negative impact on net interest income. This was offset, in the short term, by recognizing a gain on the sale of these loans of $224,000.

The Federal Funds rate set by the Board of Governors of the Federal Reserve System decreased 50 basis points on September 18, 2007. The Federal Funds rate decrease, and any future decreases, should allow for deposits and borrowings to begin to reprice lower in future months, reducing pressure on net interest income. Deposits and borrowings have been repricing upwards, increasing interest expense and decreasing net interest income. Any increase in the Federal Funds rate will increase interest expense and reduce net interest income if there is not a corresponding increase in long term rates. As we continue to increase our investment in business-related loans, which are considered to entail greater risks than one-to four- family residential loans, in order to help offset the pressure on our net interest margin, our provision for loan losses may increase to reflect this increased risk.

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The Company converted to a public company at the end of 1999, and at the end of 2000 bought a $200 million thrift for stock. Since then the Company has from time to time bought back the Company’s stock to manage capital levels and enhance earnings per share. During the first nine months of 2007, the Company used $1.6 million for this purpose, thereby reducing earning assets from where they otherwise would have been and correspondingly reducing net interest income.

On August 18, 2006 the Bank purchased assets totaling $7.6 million and assumed liabilities totaling $12.3 million representing the Winchester, Wabash and Warsaw offices previously owned by First Financial Bank, NA, which were operated as branches of Community First Bank and Trust (“First Financial”). The assets purchased included residential real estate mortgage loans of $5.4 million and consumer loans of $1.2 million. The liabilities assumed included total deposits of $12.3 million.

On March 22, 2007 the Bank completed the acquisition of Wagley Investment Advisors, Inc. Wagley Investment Advisors, Inc. is now known as Mutual Financial Advisors, providing new and expanded investment management services not previously offered by the Bank.  Mutual Financial Advisors offers a full range of non-bank investment options and money management. 

Results of operations also depend upon the level of the Company’s non-interest income, including fee income and service charges, and the level of its non-interest expense, including general and administrative expenses. In addition to the First Financial and Wagley Investment Advisors acquisitions, the Company anticipates that a new branch in Elkhart County will open in the first quarter 2008. The Wagley Investment Advisors acquisition assists the Company in continuing to work toward the development of an Investment Management and Private Banking Division in order to better service clients with more specialized financial needs. The intent of all these initiatives is to increase income over the long term. However, on a short term basis, expenses relating to the new branches and a new division will have the affect of increasing non-interest expense with limited immediate offsetting income.

Financial Condition

Assets totaled $966.8 million at September 30, 2007, an increase from December 31, 2006 of $5.9 million, or 0.6%. Loans, excluding loans held for sale, increased $4.9 million or 0.6%. Consumer loans increased $5.2 million, or 2.3%, and residential mortgage loans held in the portfolio increased $1.0 million, or 0.2%, while commercial loans decreased $1.3 million, or 0.9%. Mortgage loans held for sale increased $1.1 million and mortgage loans sold during the first nine months of 2007 totaled $17.2 million. The increased loan balances are due primarily to increased production and loan purchases in the third quarter of 2007. Investment securities available for sale decreased $555,000, or 1.4%, compared to December 31, 2006.

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Allowance for loan losses increased $26,000 to $8.2 million at September 30, 2007 when compared to December 31, 2006. Net charge offs for the first nine months of 2007 were $1.4 million, or .23% of average loans on an annualized basis, compared to $1.5 million, or .24% of average loans for the comparable period in 2006. The decrease was primarily due to larger recoveries during the 2007 period. As of September 30, 2007 the allowance for loan losses as a percentage of loans receivable and non-performing loans was 1.00% and 78.62%, respectively, compared to 1.00% and 143.59%, respectively, at December 31, 2006.

Total deposits were $706.4 million at September 30, 2007, an increase from $703.4 at December 31, 2006. This increase was due primarily to increases in core demand, money market and savings deposits of $8.0 million and wholesale deposit increases of $2.7 million. These increases were partially offset by decreases in retail certificates of deposit of $7.7 million. Total borrowings increased $1.4 million to $160.2 million at September 30, 2007 from $158.9 million at December 31, 2006.

Stockholders’ equity increased $507,000, or 0.6%, from $87.3 million at December 31, 2006, to $87.8 million at September 30, 2007. The increase was due primarily to net income of $3.3 million, Employee Stock Ownership Plan (ESOP) and RRP shares earned of $469,000 and exercised stock options of $209,000. This increase was partially offset by the repurchase of 83,000 shares of common stock for $1.6 million and dividend payments of $1.9 million. Also, the market value of securities available for sale compared to their book value increased $8,000 from a loss of $355,000 at December 31, 2006 to a loss of $347,000 at September 30, 2007.

Comparison of the Operating Results for the Three Months Ended September 30, 2007 and 2006

Net income for the third quarter ended September 30, 2007 was $1.2 million, or $.28 for basic and diluted earnings per share. This compared to net income for the comparable period in 2006 of $1.1 million, or $.27 for basic and diluted earnings per share. Annualized return on assets was .49% and return on average tangible equity was 6.45% for the third quarter of 2007 compared to .47% and 6.23%, respectively, for the same period last year. On a linked quarter basis, third quarter 2007 basic and diluted earnings per share also increased $.01, or 3.7% when compared to the second quarter of 2007.

Net interest income before the provision for loan losses decreased $493,000 from $6.3 million for the three months ended September 30, 2006 to $5.9 million for the three months ended September 30, 2007. The reasons for the decrease were a $28.5 million, or 3.2%, decrease in average interest earning assets and a 14 basis point decrease in the net interest margin reflecting the Bank’s liability sensitive nature. The reduction in average interest earning assets was due primarily to a restructuring of the balance sheet in the fourth quarter of 2006 and decreased loan balances during the first half of 2007.

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The provision for loan losses for the third quarter of 2007 was $532,000, compared to $525,000 for last year’s comparable period. Non-performing loans to total loans at September 30, 2007 were 1.27% compared to .60% at September 30, 2006. Non-performing assets to total assets were 1.37% at September 30, 2007 compared to .76% at September 30, 2006. The increase in non-performing loans is primarily related to five different commercial loan relationships. The Bank’s evaluation indicates that adequate collateral exists to mitigate possible losses on the five commercial loan relationships. The Bank is continually evaluating the collateral for all non-performing commercial loan relationships to determine if additional reserves need to be established.

Non-interest income increased $256,000 to $2.0 million, or 14.6%, for the three months ended September 30, 2007 compared to the same period in 2006. The increase was due primarily to increases in commission income of $182,000, or 134.8% due to the acquisition of Mutual Financial Advisors, increases in service fees on transaction accounts of $119,000, or 10.4% due to enhanced overdraft programs, and improved earnings on cash surrender value of life insurance of $31,000, or 11.6%. These increases were partially offset by decreases in gain on sale of loans of $30,000 due to less mortgage loan sales, and decreases in other income of $36,000 due to non-recurring tax refund in the third quarter 2006. On a linked quarter basis, non-interest income increased $50,000, or 2.6%, primarily due to increases in commission income and service fees on transaction accounts.

Non-interest expense remained flat at $6.2 million for the three months ended September 30, 2007 compared to the same period in 2006. Increases in current quarter non-interest expense compared to the same period in 2006 include increases in data processing expense of $31,000 due primarily to technological upgrades, increases in occupancy expense of $36,000 due primarily to acquisition of branches in August 2006 and increased real estate taxes, increases in salaries and employee benefits of $42,000 due primarily to normal payroll increases, and increases in other expenses of $42,000. These increases were offset by decreases in marketing expense of $100,000 and professional fees of $60,000. On a linked quarter basis non-interest expense was flat at $6.2 million.

Income tax expense decreased $251,000 for the three months ended September 30, 2007 compared to the same period in 2006 due primarily to less taxable income and a tax benefit from the creation of a Nevada investment subsidiary. The effective tax rate also decreased from 15.8% to (3.2)% due to a higher percentage of non-taxable income to total income before income tax and an increased percentage of low income housing tax credits to taxable income when comparing the third quarter of 2007 to the third quarter of 2006, respectively.

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Comparison of the Operating Results for the Nine-Months Ended September 30, 2007 and 2006.

Net income for the nine months ended September 30, 2007 was $3.3 million, or $.81 for basic and $.80 for diluted earnings per share. This compared to net income for the comparable period in 2006 of $4.1 million, or $.96 for basic and $.94 for diluted earnings per share. Annualized return on average assets was .47% and return on average tangible equity was 6.16% for the first nine months of 2007 compared to .56% and 7.25% respectively, for the same period last year.

Net interest income before the provision for loan losses decreased $2.2 million for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006. The reasons for the decrease were similar to those stated above. Average interest earning assets decreased $24.1 million, or 2.7% and the net interest margin decreased by 26 basis points from 3.03% for the nine months ended September 30, 2006 to 2.77% for the same period in 2007.

The provision for loan losses for the first nine months of 2007 was $1.4 million, the same as last year’s comparable period. Non-performing loans to total loans at September 30, 2007 were 1.27% compared to .60% at September 30, 2006. Non-performing assets to total assets were 1.37% at September 30, 2007 compared to .76% at September 30, 2006. As previously noted, the increase in the non-performing loans and assets was primarily related to five different commercial loan relationships. The Bank’s evaluation indicates that adequate collateral exists to mitigate possible losses on the five commercial loan relationships. The Bank is continually evaluating the collateral for all non-performing commercial loan relationships to determine if additional reserves need to be established.

For the nine month period ended September 30, 2007 non-interest income increased $602,000 to $5.7 million compared to the same period in 2006. The increase resulted primarily from increases in service fees on transaction accounts of $309,000, or 9.5% due primarily to enhanced overdraft programs and increases in commission income of $271,000 due primarily to the acquisition of Mutual Financial Advisors.

Non-interest expense was flat at $18.6 million for the nine months ended September 30, 2007 when compared to the same period in 2006. This was due to increased occupancy, equipment, and data processing expenses being offset with reductions in professional fees, marketing expense, and salaries and benefits.

For the nine-month period ended September 30, 2007, income tax expense decreased $771,000 compared to the same period in 2006. The decrease was due primarily to decreased taxable income and a tax benefit from the creation of a Nevada investment subsidiary. The effective tax rate also decreased from 20.9% to 8.3% due to a higher percentage of non-taxable income to total income before income tax and an increased percentage of low income housing tax credits to taxable income when comparing the first nine months of 2007 to the first nine months of 2006, respectively.

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Liquidity and Capital Resources

The standard measure of liquidity for savings associations is the ratio of cash and eligible investments to a certain percentage of the net-withdrawable savings accounts and borrowings due within one year. As of September 30, 2007, Mutual Federal had liquid assets of $59.3 million and a liquidity ratio of 6.77%. It is anticipated that this level of liquidity will be adequate for the remainder of 2007.

ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk

Presented below as of September 30, 2007 and 2006 is an analysis of Mutual Federal’s interest rate risk as measured by changes in Mutual Federal’s net portfolio value (“NPV”) assuming an instantaneous and sustained parallel shift in the yield curve, in 100 basis point increments.

September 30, 2007

Net Portfolio Value

Changes								NPV as % of PV of Assets
In Rates	$ Amount		$ Change		% Change			NPV Ratio			Change
+300 bp		54,642		-45,914		-46	%		6.22	%		-440 bp
+200 bp		71,264		-29,292		-29	%		7.91	%		-272 bp
+100 bp		86,093		-14,463		-14	%		9.32	%		-130 bp
0 bp		100,556							10.62	%
-100 bp		110,773		10,217		10	%		11.46	%		84 bp
-200 bp		117,215		16,659		17	%		11.91	%		129 bp
-300 bp		125,380		24,824		25	%		12.48	%		186 bp

September 30, 2006

Net Portfolio Value

Changes								NPV as % of PV of Assets
In Rates	$ Amount		$ Change		% Change			NPV Ratio			Change
+300 bp		49,648		-48,047		-49	%		5.54	%		-456 bp
+200 bp		66,290		-31,405		-32	%		7.21	%		-289 bp
+100 bp		82,361		-15,334		-16	%		8.73	%		-137 bp
0 bp		97,695							10.10	%
-100 bp		109,798		12,103		12	%		11.10	%		100 bp
-200 bp		114,736		17,041		17	%		11.42	%		131 bp
-300 bp		117,814		20,119		21	%		11.54	%		144 bp

The analysis at September 30, 2007, indicates that there have been no material changes in market interest rates for Mutual Federal’s interest rate sensitivity instruments which would cause a material change in the market risk exposures that effect the quantitative and qualitative risk disclosures as presented in item 7A of the Company’s Form 10-K for the period ended December 31, 2006.

ITEM - 4 Controls and Procedures.

An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a -15(c) under the Securities Exchange Act of 1934 (the “Act”) was carried out, as of September 30, 2007, under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2007, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and the Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. There were no changes in our internal control over financial reporting (as defined in Rule 13a - 15(f) under the Act) that occurred during the quarter ended September 30, 2007, that has materially affected, or is likely to materially affect our internal control over financial reporting.

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The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all errors and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls or procedures can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings
	None.
Item 1A.	Risk Factors
	There are no material changes to the risk factors disclosed in the Company’s Form 10-K for the year ended December 31, 2006.
Item 2.	Unregistered sales of Equity Securities and Use of Proceeds
	On December 22, 2004 the Company’s Board of Directors authorized management to repurchase an additional 10% of the Company’s outstanding stock, or approximately 470,000 shares. Information on the shares purchased during the third quarter of 2007 is as follows:

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					Total Number of		Maximum Number of
					Shares Purchased		Shares that May Yet
	Total Number of		Average Price		As Part of Publicly		Be Purchased
	Shares Purchased		Per Share		Announced Plan		Under the Plan
								40,555	(1)
July 1, 2007 - July 31, 2007		11,403	$	17.76		11,403		29,152
August 1, 2007 - August 31, 2007		16,554		18.22		16,554		12,598
September 1, 2007 - September 30, 2007		11,500		18.22		11,500		1,098
		39,457	$	18.09		39,457

(1) Amount represents the number of shares available to be repurchased under the plan as of June 30, 2007
	On September 12, 2007 the Company’s Board of Directors authorized management to repurchase an additional 5% of the Company’s outstanding stock, or approximately 215,000 shares. As of September 30, 2007, no shares have been repurchased under this plan.
Item 3.	Defaults Upon Senior Securities.
	None.
Item 4.	Submission of Matters to Vote of Security Holders.
	None.
Item 5.	Other Information.
	None.
Item 6.	Exhibits.
	(a)	Exhibits
		Exhibit 31.1 - Rule 13a - 14(a) Certification - Chief Executive Officer
		Exhibit 31.2 - Rule 13a - 14(a) Certification - Chief Financial Officer
		Exhibit 32 - Section 1350 - Certificate of the Chief Executive Officer and Chief Financial Officer

SIGNATURES

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

	MutualFirstFinancial, Inc.
Date: November 9, 2007	By:	/s/ David W. Heeter
	David W. Heeter
	President and Chief Executive Officer
Date: November 9, 2007	By:	/s/ Timothy J. McArdle
	Timothy J. McArdle
	Senior Vice President and Treasurer

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