Mutualfirst Financial (MFSF) 10-Q 2008 Q2 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 June 30, 2008 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, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer x Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting Company 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 August 8, 2008 was 6,994,754.

FORM 10 - Q

MutualFirst Financial, Inc.

INDEX

		Page
		Number
PART I – FINANCIAL INFORMATION
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	17
Item 1A.	Risk Factors	17
Item 2.	Unregistered Sales of Equity Changes in Securities and Use of Proceeds	17
Item 3.	Defaults Upon Senior Securities	17
Item 4.	Submission of Matters to a Vote of Security Holders	17
Item 5.	Other Information	18
Item 6.	Exhibits	18
Signature Page		19
Exhibits

PART 1 FINANCIAL INFORMATION

ITEM 1. Financial Statements

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY

Consolidated Condensed Balance Sheets

	June 30,			December 31,
	2008			2007
	(Unaudited)
Assets
Cash	$	20,378,445		$	21,003,114
Interest-bearing demand deposits		9,663,238			2,645,057
Cash and cash equivalents		30,041,683			23,648,171
Interest-bearing deposits		0			100,000
Investment securities available for sale		54,516,378			43,592,485
Loans held for sale		1,060,781			1,644,615
Loans		801,346,831			810,788,842
Allowance for loan losses		(8,603,588	)		(8,352,345	)
Net loans		792,743,243			802,436,497
Premises and equipment		17,241,051			16,168,434
Federal Home Loan Bank of Indianapolis stock, at cost		10,914,300			10,036,900
Investment in limited partnerships		3,141,833			3,246,468
Cash surrender value of life insurance		30,903,260			30,350,760
Foreclosed real estate		2,301,588			1,364,505
Interest receivable		3,584,194			3,692,879
Goodwill		14,187,725			14,187,725
Deferred income tax benefit		7,675,991			5,174,082
Other assets		7,139,894			6,873,491
Total assets	$	975,451,921		$	962,517,012
Liabilities
Deposits
Non-interest-bearing	$	49,680,185		$	47,172,012
Interest bearing		627,996,889			619,235,341
Total deposits		677,677,074			666,407,353
Federal Home Loan Bank advances		198,778,290			191,675,155
Notes payable		676,268			1,055,433
Other borrowings		250,175			3,907,394
Advances by borrowers for taxes and insurance		3,880,454			1,463,809
Interest payable		2,005,545			2,467,199
Other liabilities		8,753,611			8,526,819
Total liabilities		892,021,417			875,503,162
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 —4,118,079 and 4,226,638 shares		41,181			42,266
Additional paid-in capital		32,122,140			32,567,085
Retained earnings		56,921,411			56,725,785
Accumulated other comprehensive income (loss)		(3,906,242	)		(414,380	)
Unearned employee stock ownership plan (ESOP) shares		(1,747,986	)		(1,906,906	)
Total stockholders' equity		83,430,504			87,013,850
Total liabilities and stockholders' equity	$	975,451,921		$	962,517,012

See notes to consolidated condensed financial statements.

1

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY

Consolidated Condensed Statements of Income

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30						June 30
	2008			2007			2008			2007
Interest Income
Loans receivable, including fees	$	12,747,150		$	13,405,006		$	25,796,104		$	26,555,556
Investment seurities:
Mortgage-backed securities		219,471			111,722			377,895			228,299
Federal Home Loan Bank stock		134,264			110,275			253,290			237,457
Other investments		361,511			398,024			766,950			786,212
Deposits with financial institutions		26,529			30,800			51,786			57,672
Total interest income		13,488,925			14,055,827			27,246,025			27,865,196
Interest Expense
Passbook savings		72,553			72,365			141,365			142,538
Certificates of deposit		4,142,148			5,196,614			8,757,016			10,294,805
Daily Money Market accounts		75,432			161,524			185,917			316,802
Demand and NOW acounts		289,712			726,664			803,197			1,400,661
Federal Home Loan Bank advances		2,092,243			1,768,094			4,155,285			3,568,851
Other interest expense		17,009			16,106			43,098			31,712
Total interest expense		6,689,097			7,941,367			14,085,878			15,755,369
Net Interest Income		6,799,828			6,114,460			13,160,147			12,109,827
Provision for losses on loans		732,500			532,500			1,345,000			865,000
Net Interest Income After Provision for Loan Losses		6,067,328			5,581,960			11,815,147			11,244,827
Other Income
Service fee income		1,365,385			1,245,876			2,524,717			2,309,411
Net realized gain on redemption of VISA stock		0			0			137,434			0
Equity in losses of limited partnerships		(23,644	)		(26,591	)		(47,288	)		(53,183	)
Commissions		307,578			243,883			599,673			441,211
Net gains on sales of loans		128,220			79,104			311,579			147,322
Net servicing fees		28,641			16,644			55,480			39,030
Increase in cash surrender value of life insurance		276,000			317,500			552,500			655,000
Other income		27,075			77,932			95,255			148,067
Total other income		2,109,255			1,954,348			4,229,350			3,686,858
Other Expenses
Salaries and employee benefits		3,892,190			3,654,317			7,710,531			7,293,241
Net occupancy expenses		448,525			362,645			899,836			778,270
Equipment expenses		355,388			328,823			698,750			646,460
Data processing fees		243,388			298,484			510,201			554,040
Automated teller machine		195,382			172,421			397,954			347,035
Professional fees		230,968			177,410			440,119			356,065
Advertising and promotion		316,990			228,743			547,411			437,470
Other expenses		1,188,435			981,941			2,168,117			2,010,699
Total other expenses		6,871,266			6,204,784			13,372,919			12,423,280
Income Before Income Tax		1,305,317			1,331,524			2,671,578			2,508,405
Income tax expense		131,000			203,000			282,000			335,700
Net Income	$	1,174,317		$	1,128,524		$	2,389,578		$	2,172,705
Basic earnings per share	$	0.30		$	0.27		$	0.60		$	0.53
Diluted earnings per share	$	0.30		$	0.27		$	0.60		$	0.52
Dividends per share	$	0.16		$	0.15		$	0.32		$	0.30

See notes to consolidated condensed financial statements.

2

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY

Consolidated Condensed Statement of Stockholders' Equity

For the Six Months Ended June 30, 2008

(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, 2007, as reported		4,226,638		$	42,266		$	32,567,085					$	56,725,785		$	(414,380	)	$	(1,906,906	)	$	87,013,850
Comprehensive income
Net income for the period										$	2,389,578			2,389,578									2,389,578
Other comprehensive income, net of tax
Net unrealized losses on securities											(3,491,862	)					(3,491,862	)					(3,491,862	)
Comprehensive income										$	(1,102,284	)
ESOP shares earned								41,197												158,920			200,117
Cash dividends ($.32 per share)														(1,329,882	)								(1,329,882	)
RRP shares earned								10,528															10,528
Stock repurchased and retired		(108,559	)		(1,085	)		(496,670	)					(864,070	)								(1,361,825	)
Balances, June 30, 2008		4,118,079			41,181		$	32,122,140					$	56,921,411		$	(3,906,242	)	$	(1,747,986	)	$	83,430,504

See notes to consolidated condensed financial statements.

3

MutualFirst Financial, Inc.

Consolidated Condensed Statements of Cash Flows

(Unaudited)

	Six Months Ended
	June 30,
	2008			2007
Operating Activities
Net income	$	2,389,578		$	2,172,705
Items not requiring (providing) cash
Provision for loan losses		1,345,000			865,000
ESOP shares earned		200,117			310,461
RRP shares earned		10,528			10,528
Depreciation and amortization		1,337,054			1,311,864
Deferred income tax		(174,000	)		(350,000	)
Loans originated for sale		(27,657,883	)		(11,748,865	)
Proceeds from sales of loans held for sale		28,270,879			12,103,665
Gains on sales of loans held for sale		(311,579	)		(147,322	)
Change in
Interest receivable		108,685			342,790
Other assets		16,014			28,743
Interest payable		(461,654	)		151,756
Other liabilities		226,792			897,984
Cash value of life insurance		(552,500	)		(655,000	)
Other adjustments		(239,639	)		35,813
Net cash provided by operating activities		4,507,392			5,330,122
Investing Activities
Net change in interest earning deposits		100,000			100,000
Purchases of securities available for sale		(20,761,567	)		(568,879	)
Proceeds from matuities and paydowns of securities available for sale		3,628,076			1,869,443
Net change in loans		6,230,513			8,003,005
Purchases of premises and equipment		(1,787,614	)		(444,584	)
Proceeds from real estate owned sales		291,651			635,776
Cash paid in acquisition, net		-			(515,475	)
Other investing activities		50,335			50,335
Net cash (used in) provided by investing activities		(12,248,606	)		9,129,621
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits		4,199,589			7,614,160
Certificates of deposits		7,070,132			(20,042,804	)
Repayment of note payable		(410,376	)		(240,678	)
Proceeds from FHLB advances		265,725,000			204,150,000
Repayment of FHLB advances		(258,517,338	)		(207,088,800	)
Repayment of other short term borrowing		(3,657,219	)		-
Net change in advances by borrowers for taxes and insurance		2,416,645			1,844,972
Stock repurchased		(1,361,825	)		(853,692	)
Proceeds from stock options exercised		-			87,000
Cash dividends		(1,329,882	)		(1,300,353	)
Other financing activities					250,500
Net cash (used in) provided by financing activities		14,134,726			(15,579,695	)
Net Change in Cash and Cash Equivalents		6,393,512			(1,119,952	)
Cash and Cash Equivalents, Beginning of Year		23,648,171			24,914,872
Cash and Cash Equivalents, End of Period	$	30,041,683		$	23,794,920
Additional Cash Flows Information
Interest paid	$	14,547,532		$	15,603,613
Income tax paid		900,000			230,000
Transfers from loans to foreclosed real estate		1,491,696			932,584
Mortgage servicing rights capitalized		282,417			120,772

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 Bank, a federally chartered savings bank (“Mutual”), Mutual’s wholly owned subsidiaries, First MFSB Corporation and Mutual Federal Investment Company (“MFIC”), and MFIC majority 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 2007 filed with the Securities and Exchange Commission.

The interim consolidated financial statements at June 30, 2008 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, 2007 has been derived from the Audited Consolidated Balance Sheet of the Company as of that date.

Note 2: Earnings per share

Note 2 — Earnings per share

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

	Three Months Ended Ended June 30,
	2008						2007
			Weighted-						Weighted-
			Average		Per-Share				Average		Per-Share
	Income		Shares		Amount		Income		Shares		Amount
	(000's)						(000's)
Basic Earnings Per Share
Income available to common shareholders	$	1,174		3,970,982	$	0.30	$	1,129		4,120,844	$	0.27
Effect of Dilutive securities
Stock options and RRP grants				0						53,142
Diluted Earnings Per Share
Income available to common stockholders and assumed
conversions	$	1,174		3,970,982	$	0.30	$	1,129		4,173,986	$	0.27

	Six Months Ended Ended June 30,
	2008						2007
			Weighted-						Weighted-
			Average		Per-Share				Average		Per-Share
	Income		Shares		Amount		Income		Shares		Amount
	(000's)						(000's)
Basic Earnings Per Share
Income available to common shareholders	$	2,390		3,987,123	$	0.60	$	2,173		4,125,935	$	0.53
Effect of Dilutive securities
Stock options and RRP grants				0						60,168
Diluted Earnings Per Share
Income available to common stockholders and assumed
conversions	$	2,390		3,987,123	$	0.60	$	2,173		4,186,103	$	0.52

Options of 380,613 and 91,000 shares were not included in the calculation above due to being anti-dilutive to earnings per share as of June 30, 2008 and June 30, 2007.

5

Note 3: Future Accounting Pronouncements

In December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations (SFAS141R). SFAS 141R established principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for business combinations where the acquisition date is on or after fiscal years beginning after December 15, 2008. SFAS 141R is expected to have an impact on the Company’s accounting for any business combinations closing on or after January 1, 2009.

In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51 (SFAS 160). SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS 160 shall be applied prospectively. SFAS 160 is effective for fiscal years beginning after December 15, 2008.

Note 4: Disclosures About Fair Value of Assets and Liabilities

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (FAS 157). FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 has been applied prospectively as of the beginning of the year.

FAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1	Quoted prices in active markets for identical assets or liabilities
Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

6

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Available-for-sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. The Company uses a third-party provider to provide market prices on its securities and no securities are priced as Level 1 securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include mortgage-backed, collateralized mortgage, federal agency and certain corporate obligation securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include certain corporate obligation securities.

			Fair Value Measurements Using
	Fair Value		Quoted Prices in  Active Markets  for Identical  Assets (Level 1)		Significant  Other  Observable  Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities	$	54,516,378	$	—	$	48,743,878	$	5,772,500

The following is a reconciliation of the beginning and ending balances for the three months ended June 30, 2008 of recurring fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs:

	Available-for- sale securities
Beginning balance	$	9,711,340
Total realized and unrealized gains and losses
Included in net income
Included in other comprehensive income		(3,938,840	)
Purchases, issuances and settlements
Transfers in and/or out of Level 3
Ending balance	$	5,772,500
Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date	$	—

The following is a reconciliation of the beginning and ending balances for the six months ended June 30, 2008 of recurring fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs:

	Available-for- sale securities
Beginning balance	$	9,923,242
Total realized and unrealized gains and losses
Included in net income
Included in other comprehensive income		(4,150,742	)
Purchases, issuances and settlements
Transfers in and/or out of Level 3
Ending balance	$	5,772,500
Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date	$	—

Note 5: Stock Option Plan

MutualFirst Financial, Inc. shareholders approved a new Stock Option Plan at the last shareholder’s meeting. There have been no stock options granted on the new plan.

Note 6: Subsequent Event

On July 18, 2008, the Company completed its acquisition of MFB Corp. MFB Financial, the wholly owned subsidiary of MFB Corp., was merged into Mutual as part of this acquisition. This merger added ten branch offices in St. Joseph and Elkhart counties, Indiana, two trust offices in Hamilton and Montgomery counties, Indiana, and a loan production office in Berrien County, Michigan to the existing Bank footprint as discussed below.

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 Bank (“Mutual”) upon the conversion of Mutual from a federal mutual savings bank to a federal stock savings bank.

7

Mutual was originally organized in 1889 and currently conducts its business from twenty-two full service offices located in Delaware, Elkhart, Grant, Kosciusko, Randolph, and Wabash counties, Indiana, with its main office located in Muncie. Mutual’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’s deposit accounts are insured by the Federal Deposit Insurance Corporation up to applicable limits.

Mutual currently owns two subsidiaries, First MFSB Corporation and Mutual Federal Investment Company (“MFIC”). 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 $45 million in investments. MFIC currently owns one subsidiary, Mutual Federal REIT. The assets of Mutual Federal REIT consist of approximately $124 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, 2007 Annual Report on Form 10-K.

Critical Accounting Policies

The notes to the consolidated financial statements contain a summary of the Company’s significant accounting policies presented on pages 65 to 69 of the Annual Report on Form 10-K for the year ended December 31, 2007. 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.

8

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.

Intangible Assets

The Company periodically assesses the potential 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.

9

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.

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.

The Federal Funds rate set by the Board of Governors of the Federal Reserve System has decreased 225 basis points from December 31, 2007 and 325 basis points from June 30, 2007 to June 30, 2008. These decreases in the Federal Funds rate have allowed for deposits and borrowings to reprice lower. Any future decreases in the Federal Funds rate in the upcoming months should allow for continued downward repricing of our deposits and borrowings, reducing pressure on 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.

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 mortgage loans. The percentage of consumer and commercial loans to total loans has increased from 35% at the end of 2000 to 46% currently. 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. 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 36% over this time period. These are ongoing strategies that are dependent on current market conditions and competition.

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During the first six months of 2008, in keeping with its strategic objective to reduce interest rate risk exposure, the Company also sold $28.2 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 $312,000.

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 that time the Company has been buying back the Company’s stock to manage capital levels and enhance earnings per share. During the first six months of 2008, the Company used $1.4 million for this purpose, thereby reducing earning assets from where they otherwise would have been and correspondingly reducing net interest income.

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 recent acquisition of Wagley Investment Advisors, the Company opened a new branch in Elkhart County in February 2008 and plans to open another in September 2008 in Elkhart County. The intent of 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.

On July 18, 2008, the Company completed the acquisition of MFB Corp and its thrift subsidiary. This transaction allows the Bank to enter into new markets, expand commercial lending and enhance trust services to existing customers through trust powers received from MFB Financial.

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Financial Condition

Assets totaled $975.5 million at June 30, 2008, an increase from December 31, 2007 of $12.9 million, or 1.3%. Loans, excluding loans held for sale, decreased $9.0 million or 1.1%. Consumer loans decreased $3.6 million, or 1.6%, while commercial loans increased $5.0 million, or 3.5%, and residential mortgage loans held in the portfolio decreased $10.4 million, furthering our strategy to reduce the percentage of fixed rate real estate mortgage loans to total loans. Mortgage loans held for sale decreased $584,000 and mortgage loans sold during the first half of 2008 totaled $28.2 million compared to $12.1 million during the same period in 2007. The decreased loan balances were due primarily to an increase in sales of fixed rate real estate mortgage loans. Investment securities available for sale increased $10.9 million, or 25.0%, offsetting the reduction in the loan portfolio. Cash and cash equivalents increased $6.4 million, or 27.0% as the bank’s interest earning cash accounts increased.

Allowance for loan losses increased $252,000 to $8.6 million when comparing June 30, 2008 to December 31, 2007. Net charge offs for the first half of 2008 were $1.1 million, or .27% of average loans on an annualized basis compared to $744,000, or .18% of average loans for the comparable period in 2007. On a linked quarter basis, net charge offs compared to average loans were .28% in the second quarter 2008 compared to .26% in the first quarter 2008. As of June 30, 2008 the allowance for loan losses as a percentage of loans receivable and non-performing loans was 1.07% and 78.35%, respectively, compared to 1.03% and 79.72%, respectively, at December 31, 2007.

Total deposits were $677.7 million at June 30, 2008, an increase from $666.4 million at December 31, 2007. This increase was due primarily to increases in core demand, money market and savings deposits of $4.2 million and wholesale deposits of $15.8 million. The increase was partially offset by decreases in certificates of deposit of $8.7 million. Total borrowings increased $3.1 million to $199.7 million at June 30, 2008 from $196.6 million at December 31, 2007.

Stockholders’ equity decreased $3.6 million, or 4.1%, from $87.0 million at December 31, 2007, to $83.4 million at June 30, 2008. The decrease was due primarily to a decrease in the market value of securities available for sale compared to their book value of $3.5 million from a loss of $414,000 at December 31, 2007 to a loss of $3.9 million at June 30, 2008. This decrease was due primarily to price decreases, caused chiefly by illiquid credit markets, in certain investment grade trust preferred securities owned by the bank. The decrease in the investment grade trust preferred securities are not seen as other than temporary price changes. Other decreases in stockholders’ equity resulted from the use of $1.4 million to repurchase 109,000 shares of common stock and dividend payments of $1.3 million. These decreases were partially offset by net income of $2.4 million, and Employee Stock Ownership Plan (ESOP) and RRP shares earned of $211,000.

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Comparison of the Operating Results for the Three Months Ended June 30, 2008 and 2007

Net income for the second quarter ended June 30, 2008 was $1.2 million, or $.30 for basic and diluted earnings per share. This compared to net income for the comparable period in 2007 of $1.1 million, or $.27 for basic and diluted earnings per share. Annualized return on assets was .49% and return on tangible equity was 6.58% for the second quarter of 2008 compared to .48% and 6.24% respectively, for the same period last year.

Net interest income before the provision for loan losses increased $685,000 from $6.1 million for the three months ended June 30, 2007 to $6.8 million for the three months ended June 30, 2008. The reasons for the increase were an $8.1 million, or .9%, increase in average interest earning assets and a 28 basis point increase in the net interest margin. On a linked quarter basis, net interest margin increased to 3.13% for the three months ended June 30, 2008 compared to 2.94% for the three months ended March 31, 2008.

The provision for loan losses for the second quarter of 2008 was $733,000, compared to $533,000 for last year’s comparable period. Non-performing loans to total loans at June 30, 2008 were 1.37% compared to .61% at June 30, 2007. Non-performing assets to total assets were 1.51% at June 30, 2008 compared to .80% at June 30, 2007. On a linked quarter basis, non-performing loans to total loans decreased from 1.44% for the quarter ended March 31, 2008 to 1.37% for the quarter ended June 30, 2008.

Non-interest income increased $155,000 to $2.1 million, or 7.9%, for the three months ended June 30, 2008 compared to the same period in 2007. The increase was due primarily to increases in service fees on transaction accounts of $119,000, or 9.6%, due primarily to increased overdraft fees, increases in commission income of $64,000, or 26.2%, due primarily to increased annuity sales, and increases in net gain on loan sales and servicing of $61,000, or 63.8%, due primarily to increased loan sales.

Non-interest expense increased $667,000 to $6.9 million, or 10.8%, for the three months ended June 30, 2008 compared to the same period in 2007. Increases in current quarter non-interest expense compared to the same period in 2007 included increases in occupancy and equipment expense of $135,000, primarily due to a new branch office in Elkhart County, increases in salaries and employee benefits of $238,000, primarily due to salary adjustments and new employees for the Elkhart County branch, increases in marketing expense of $88,000, primarily due to re-branding of the Bank’s name, and increases in other expenses of $207,000, primarily due to FDIC premium increases and expenses related to the Bank’s name change.

Income tax expense decreased $72,000 for the three months ended June 30, 2008 compared to the same period in 2007 due primarily to less income subject to income taxes. The effective tax rate also decreased from 15.2% to 10.0% due to an increased percentage of low income housing tax credits to taxable income when comparing the second quarter of 2008 to the second quarter of 2007, respectively.

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Comparison of the Operating Results for the Six Months Ended June 30, 2008 and 2007

Net income for the six months ended June 30, 2008 was $2.4 million or $.60 for basic and diluted earnings per share. This compared to net income for the comparable period in 2007 of $2.2 million or $.53 for basic and $.52 for diluted earnings per share. Annualized return on average assets was .50% and return on average tangible equity was 6.69% for the first half of 2008 compared to .46% and 6.01% respectively, for the same period last year.

Net interest income before the provision for loan losses increased $1.1 million for the six months ended June 30, 2008 compared to the six months ended June 30, 2007. The reasons for the increase were similar to those stated above. Average interest earning assets increased $6.9 million, or 8.0% and the net interest margin increased by 22 basis points from 2.82% for the six months ended June 30, 2007 to 3.04% for the same period in 2008.

The provision for loan losses for the six months ended June 30, 2008 was $1.3 million compared to $865,000 for last year’s comparable period. The increased provision for the six months ended 2008 compared to the same time period in 2007 was a result of increased non-performing assets, mostly in one-to four-family and commercial real estate loans. Non-performing assets were 1.51% at June 30, 2008 compared to .80% at June 30, 2007.

For the six month period ended June 30, 2008 non-interest income increased $543,000, or 14.7%, to $4.2 million compared to $3.7 million for the same period in 2007. The increase was due primarily to increases in service fee income on transaction accounts of $215,000, or 9.3%, increases in commission income of $158,000, or 35.9%, increases in gains and serving of loans sold of $181,000, and the gain on redemption of VISA stock of $137,000. These increases were partially offset by a decrease in income from cash surrender value of life insurance of $103,000 and a decrease in other income of $53,000.

For the six month period ended June 30, 2008 non-interest expense increased $1.0 million, or 7.6%, to $13.4 million compared to $12.4 million for the same period in 2007. The increase was due primarily to increases in salaries and employee benefits of $417,000, primarily due to annual salary adjustments and staffing of a new branch, increases in occupancy and equipment expenses of $174,000, primarily due to the new Elkhart branch, increases in advertising of $110,000, primarily due to the re-branding of the bank’s name, increases in professional fees of $84,000, primarily due to legal expenses related to delinquent loans, and increases in other expenses of $157,000, due primarily to FDIC premium increases, merger related expenses and expenses related to the bank’s name change.

For the six-month period ended June 30, 2008, income tax expense decreased $54,000 compared to the same period in 2007. The decrease was due primarily to less income subject to income taxes. The effective tax rate also decreased from 13.3% to 10.6% due to an increased percentage of low income housing tax credits to taxable income when comparing the first half of 2008 to the first half of 2007, 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 June 30, 2008, Mutual Federal had liquid assets of $70.1 million and a liquidity ratio of 8.16%. It is anticipated that this level of liquidity will be adequate for the remainder of 2008.

ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk

Presented below as of June 30, 2008 and 2007 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.

				June 30, 2008
				Net Portfolio Value
Changes										NPV as % of PV of Assets
In Rates	$ Amount			$ Change			% Change			NPV Ratio			Change
+300 bp		55,648			-36,680			-40	%		6.23	%		-336 bp
+200 bp		68,115			-24,213			-26	%		7.44	%		-215 bp
+100 bp		81,281			-11,047			-12	%		8.66	%		-94 bp
0 bp		92,328									9.59	%
-100 bp		96,594			4,266			5	%		9.84	%		25 bp
-200 bp		95,683			3,355			4	%		9.59	%		0 bp
-300 bp		n/m	(1)		n/m	(1)		n/m	(1)		n/m	(1)		n/m	(1)

			June 30, 2007
			Net Portfolio Value
Changes								NPV as % of PV of Assets
In Rates	$ Amount		$ Change		% Change			NPV Ratio			Change
+300 bp		58,286		-45,416		-44	%		6.79	%		-443 bp
+200 bp		74,945		-28,757		-28	%		8.51	%		-272 bp
+100 bp		89,486		-14,216		-14	%		9.92	%		-130 bp
0 bp		103,702							11.22	%
-100 bp		114,324		10,622		10	%		12.12	%		90 bp
-200 bp		120,058		16,356		16	%		12.52	%		129 bp
-300 bp		126,889		23,187		22	%		12.98	%		176 bp

n/m(1) - not meaningful because certain market interest rates would be below zero at that level of rate shock.

The analysis at June 30, 2008 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 annual report on Form 10-K for the period ended December 31, 2007.

ITEM - 4 Controls and Procedures.

(a) 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 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 the Company’s disclosure controls and procedures as currently in effect are 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 have been 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 June 30, 2008 that has materially affected, or is likely to materially affect our internal control over financial reporting.

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The Company intends to continually review and evaluate the design and effectiveness of its disclosure controls and procedures and to improve its controls and procedures over time and to correct any deficiencies that it may discover in the future. The goal is to ensure that senior management has timely access to all material financial and non-financial information concerning the Company’s business. While the Company believes the present design of its disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures.

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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, 2007.
Item 2.	Registered sales of Equity Securities and use of Proceeds
	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. Information on the shares purchased during the second quarter of 2008 is as follows.

					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
								96,839	(1)
April 1, 2008 - April 30, 2008		15,000	$	12.82		15,000		81,839
May 1, 2008 - May 31, 2008		20,000		12.55		20,000		61,839
June 1, 2008 - June 30, 2008		26,800		10.81		26,800		35,039
		61,800	$	11.86		61,800

(1) Amount represents the number of shares available to be repurchased under the plan as of March 31, 2008

Item 3.	Defaults Upon Senior Securities.
	None.
Item 4.	Submission of Matters to Vote of Security Holders.
	The following is a record of the votes cast at the Company’s Annual Meeting of Stockholders in the election of directors of the Company:

	FOR	VOTE WITHHELD
Linn A. Crull	3,683,036	166,638
Wilbur R. Davis	3,680,793	168,881
Jon R. Marler	3,679,821	169,853

Accordingly, the individuals named above, were declared to be duly elected directors of the Company for terms to expire in 2011.

17

The following is a record of the votes cast for the proposal to ratify the appointment of BKD,LLP as the Company’s independent auditors for the fiscal year ending December 31, 2007.

FOR	3,822,069
AGAINST	9,836
ABSTAIN	9,953

Accordingly, the proposal described above was declared to be duly adopted by the stockholders of the Corporation.

The following is a record of the votes cast for the proposal to approve the issuance of MutualFirst Financial, Inc. shares in the merger.

FOR	2,652,852
AGAINST	475,949
ABSTAIN	15,742

Accordingly, the proposal described above was declared to be duly adopted by the stockholders of the Corporation.

The following is a record of the votes cast for the proposal to approve the MutualFirst Financial, Inc. 2008 Stock Option and Incentive Plan.

FOR	2,508,332
AGAINST	619,754
ABSTAIN	16,458

Accordingly, the proposal described above was declared to be duly adopted by the stockholders of the Corporation.

Item 5. Other Information.

None.

Item 6. Exhibits.

Index to Exhibits

Number	Description
3.1	Charter of the Company, as amended
3.2	Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K filed on October 15, 2007 (File No. 000-27905))
31.1	Rule 13a - 14(a) Certification - Chief Executive Officer
31.2	Rule 13a - 14(a) Certification - Chief Financial Officer
32	Certificate of the Chief Executive Officer and Chief Financial Officer pursuant to U. S. C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2003.

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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: August 8, 2008	By:	/s/ David W. Heeter
	David W. Heeter
	President and Chief Executive Officer
Date: August 8, 2008	By:	/s/ Timothy J. McArdle
	Timothy J. McArdle
	Senior Vice President and Treasurer

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