Mutualfirst Financial (MFSF) 8-K MutualFirst Announces Increased Third Quarter 2010 Earnings

PRESS RELEASE

Date:	October 20, 2010
From:	MutualFirst Financial, Inc.
For Publication:	Immediately
Contact:	Chris Cook, Senior Vice President, Treasurer and CFO of
	MutualFirst Financial, Inc. (765) 747-2945

MutualFirst Announces Increased Third Quarter 2010 Earnings

 Muncie, Indiana - MutualFirst Financial, Inc. (NASDAQ: MFSF), the holding company of MutualBank (the “Bank”), announced today that net income available for common shareholders for the third quarter ended September 30, 2010 was $1.2 million, or $.17 for basic and diluted earnings per common share.  This compared to net income available for common shareholders for the same period in 2009 of $800,000, or $.12 for basic and diluted earnings per common share. Annualized return on assets was .45% and return on average tangible common equity was 4.77% for the third quarter of 2010 compared to .35% and 3.48% respectively, for the same period of last year.

Net income available for common shareholders for the nine months ended September 30, 2010 was $3.4 million, or $.49 for basic and diluted earnings per common share compared to $3.0 million, or $.44 for basic and diluted earnings per share from the same period in 2009.  Annualized return on assets was .43% and return on average tangible common equity was 4.73% for the first nine months of 2010 compared to .41% and 4.39% respectively, for the same period of last year.

Other financial highlights for the third quarter ended September 30, 2010 include:

·    The investment portfolio was restructured to remove all private label mortgage- backed securities and CMOs to reduce future other-than-temporary impairment exposure on those securities.

·    Non-performing assets increased $5.2 million during the third quarter of 2010 primarily due to three loans totaling $7.7 million becoming non-performing in the quarter.

·    Net charge offs annualized to average loans for the quarter were .78%, compared to .74% for quarter ended June 30, 2010 and .50% for quarter ended September 30, 2009.

·    Allowance for loan losses to non-performing loans as of September 30, 2010 increased to 52.18% from 50.68% as of September 30, 2009.

·    Net interest income increased $372,000 for the quarter ended September 30, 2010 compared to the same quarter in 2009.

·    Net interest margin increased to 3.23% for the quarter compared to 3.21% in the same period in 2009.

·    Non-interest income was flat in the third quarter of 2010 when compared to the third quarter of 2009 and increased $250,000 compared to the second quarter of 2010.

·    Non-interest expenses in the third quarter of 2010 decreased $814,000 from the third quarter of 2009 and $351,000 from the second quarter of 2010.

“The current economic and regulatory environment continues to challenge the financial industry,” said David W. Heeter, President and CEO.  “While we are pleased with the earnings for the quarter, we continue to experience the uncertainty of the economy.  Our staff continues to work very hard with customers having financial difficulties to do what is possible to create a win-win for the customer and the institution.  We are acting diligently to reduce our problem assets.”

Assets totaled $1.4 billion at September 30, 2010, an increase from December 31, 2009 of $41.4 million, or 3.0%. Gross loans, excluding loans held for sale, decreased $61.0 million, or 5.7%.  Consumer loans decreased $23.8 million, or 9.2%, commercial loans decreased $18.3 million, or 5.4%, and residential mortgage loans held in the portfolio decreased $18.9 million, or 4.0%. Residential mortgage loans held for sale increased $7.4 million and mortgage loans sold during the first nine months of 2010 totaled $42.7 million compared to $142.9 million sold during the first nine months of last year. The decrease in consumer lending was a result of the Bank suspending origination of indirect boat and recreational vehicle lending at the beginning of 2010, which accounted for approximately 49% of the consumer outstanding balances at the beginning of 2010.  The decrease in commercial loans was a result of several commercial loans paying down, some of which were loans of concern for the Bank.  Mortgage loan balances continue to decline as the Bank has sold a majority of its fixed rate production.  Cash and cash equivalents increased $37.2 million primarily due to the current liquidity made available to the Bank with increased deposits.  Investment securities available for sale increased $68.1 million, or 52.1%, primarily due to the cash generated from the paydown of the loan portfolio.  These investments are primarily agency related mortgage-backed securities and CMOs.

Allowance for loan losses was $16.5 million at September 30, 2010, an increase of $66,000 from December 31, 2009. Net charge offs for the quarter ended September 30, 2010 were $2.0 million, or .78% of average loans on an annualized basis compared to $1.4 million, or .50% of average loans for the comparable period in 2009.  Net charge offs for the nine months ended September 30, 2010 was $5.2 million, or .67% of average loans on an annualized basis compared to $3.3 million, or .40% of average loans for the comparable period in 2009.  Net charge offs increased as a larger amount of previously identified problem loans were settled in the quarter than in the same period in 2009.   On a linked quarter basis net charge offs increased from an annualized .74% of average loans for the quarter ended June 30, 2010 to .78% for the current quarter.  The allowance for loan losses as a percentage of non-performing loans and total loans was 52.18% and 1.62%, respectively at September 30, 2010 compared to 50.38% and 1.53%, respectively at December 31, 2009.  These increases were primarily a result of increased allowance for loan loss, decreased loan balances, and decreased non-performing loans.

Total deposits were $1.1 billion at September 30, 2010 an increase of $81.7 million, or 7.8% from December 31, 2009. This increase was due to increases in certificates of deposit and savings deposits of $33.4 million and increases in demand and money market deposits of $48.3 million.  Total borrowings decreased $46.1 million to $166.0 million at September 30, 2010 from $212.1 million at December 31, 2009 as the Bank utilized excess liquidity to pay down maturing FHLB advances.

Stockholders’ equity was $133.6 million at September 30, 2010, an increase of $3.9 million, or 3.0% from December 31, 2009. The increase was due primarily to net income of $4.7 million and unrealized gains on securities of $1.8 million.  This increase was partially offset by dividend payments of $1.3 million to common shareholders and $1.2 million to preferred shareholders and net unrealized losses on derivatives of $354,000.  The Bank’s capital ratios were all well in excess of “well-capitalized” levels as defined by all regulatory standards as of September 30, 2010.

Net interest income before the provision for loan losses increased $372,000 from $10.2 million for the three months ended September 30, 2009 to $10.6 million for the three months ended September 30, 2010. The primary reason for the increase was an increase in average earning assets of $35.8 million as a result of increased investments and an increase in net interest margin of 2 basis points to 3.23% in the third quarter 2010 compared to 3.21% for the third quarter 2009.  On a linked quarter basis, net interest income before the provision for loan losses decreased $263,000 primarily due to a decrease in average earning assets of $35.0 million and the net interest margin remaining at 3.23%.

Net interest income before the provision for loan losses increased $1.0 million from $30.9 million for the nine months ended September 30, 2009 to $32.0 million for the nine months ended September 30, 2010. The primary reason for the increase was an increase in average earning assets of $39.1 million as a result of increased investments and an increase of one basis point in net interest margin to 3.22% the first nine months of 2010 compared to 3.21% for the first nine months of 2009.

The provision for loan losses for the third quarter of 2010 was $2.2 million compared to $1.7 million in the third quarter of 2009.  The provision for loan loss for the first nine months of 2010 was $5.3 million compared to $4.9 million in the first nine months of 2009.  Non-performing loans to total loans at September 30, 2010 were 3.11% compared to 3.02% at September 30, 2009.  Non-performing loans increased from 2.49% at June 30, 2010 to 3.11% at September 30, 2010, or $5.9, million primarily due to three loans totaling $7.7 million becoming non-performing during the third quarter of 2010.  These loans include two commercial real estate loans and a large one-to four-family residential loan and are not related loans.  Non-performing assets to total assets were 2.67% at September 30, 2010 compared to 2.31% at June 30, 2010, 2.86% at December 31, 2009 and 2.74% as of September 30, 2009.  Heeter continued, “While asset quality deteriorated slightly this quarter, we are optimistic that we are making progress.  We continue to monitor our loan portfolio closely to ensure we are taking prompt action when necessary to minimize possible losses.”

Non-interest income was unchanged at $3.6 million for the three months ended September 30, 2010 compared to the same period in 2009. Increases in non-interest were $186,000 from commission income due to increased wealth management and brokerage income, $319,000 from net gain on loan sales due to increased mortgage production and sales in the third quarter, and $245,000 on income from life insurance, primarily due to a death benefit.  Decreases in non-interest income were $127,000 in service fee income as overdraft fees on checking accounts decreased due to new opt-in regulations. Loss on sale of securities and other-than-temporary impairment increased $539,000 in the quarter reducing non-interest income.  The Company strategically sold approximately $71 million in investments during the quarter to dispose of all of the private labeled mortgage-backed securities and CMOs.  These transactions were completed and most of the losses were offset by gains in agency securities.  The proceeds were reinvested in agency securities. On a linked quarter basis, non-interest income increased by $250,000.

Non-interest income decreased $1.2 million to $10.2 million for the nine months ended September 30, 2010 compared to the same period in 2009.  The decrease was primarily due to a reduction in gain on sale of loans of $761,000, a reduction in net gains on sale of investments of $381,000 and increased other-than-temporary impairment of securities of approximately $725,000.  These decreases were partially offset with increases in commission income of $722,000.

Non-interest expense decreased $814,000 to $10.1 million for the three months ended September 30, 2010 compared to $10.9 million for the same period in 2009.  Decreases in current quarter non-interest expense compared to the same period in 2009 include decreases in salaries and employee benefits of $508,000, decreases in marketing expense of $112,000, decreases in intangible amortization of $45,000, and decreases in other repossessed asset expense of $138,000.  These decreases were partially offset by increases in deposit insurance premiums of $49,000.  On a linked quarter basis, non-interest expense decreased by $351,000 compared to the three months ended June 30, 2010, primarily due to an decrease in repossessed asset expense.

Non-interest expense decreased $1.7 million to $31.0 million, for the nine months ended September 30, 2010 compared to $32.6 million for the same period in 2009.   The decrease in expenses was partially due to a decrease in salaries and benefits of $1.0 million and the $630,000 FDIC special assessment in the second quarter of 2009, with no corresponding expense in the same period of 2010.

Heeter concluded, “Even with all of the economic headwinds, we have been able to remain profitable and provide for our problem assets.  Our staff remains committed to keep costs low and to find new cost saves at the same time finding new ways to grow revenue.”

MutualFirst Financial, Inc. and MutualBank, an Indiana-based financial institution, has thirty-three full-service retail financial centers in Delaware, Elkhart, Grant, Kosciusko, Randolph, St. Joseph and Wabash Counties in Indiana.  MutualBank also has two Wealth Management and Trust offices located in Carmel and Crawfordsville, Indiana and a loan origination office in New Buffalo, Michigan.  MutualBank is a leading residential lender in each of the market areas it serves, and provides a full range of financial services including wealth management and trust services and Internet banking services.  The Company’s stock is traded on the NASDAQ National Market under the symbol “MFSF” and can be found on the internet at www.bankwithmutual.com.

Statements contained in this release, which are not historical facts, are forward-looking statements, as that term is defined in the Private Securities Reform Act of 1995.  Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by the Company with the Securities and Exchange Commission from time to time.

MUTUALFIRST FINANCIAL INC.

	September 30,			December 31,
Balance Sheet (Unaudited):	2010			2009
		(000	)		(000	)
Assets
Cash and cash equivalents	$	83,588		$	46,341
Interest-bearing deposits		3,006			0
Investment securities - AFS		199,060			130,914
Investment securities - HTM		0			8,147
Loans held for sale		9,903			2,521
Loans, gross		1,015,100			1,076,108
Allowance for loan loss		(16,480	)		(16,414	)
Net loans		998,620			1,059,694
Premise and equipment		33,490			34,556
FHLB of Indianapolis stock		18,632			18,632
Investment in limited partnerships		3,778			4,161
Cash surrender value of life insurance		45,160			44,247
Prepaid FDIC premium		4,642			5,907
Core deposit and other intangibles		4,848			5,881
Deferred income tax benefit		17,468			19,514
Other assets		18,223			18,519
Total assets	$	1,440,418		$	1,399,034
Liabilities and Stockholders' Equity
Deposits	$	1,126,854		$	1,045,196
FHLB advances		152,649			197,960
Other borrowings		13,350			14,114
Other liabilities		13,946			12,037
Stockholders' equity		133,619			129,727
Total liabilities and stockholders' equity	$	1,440,418		$	1,399,034

	Three Months			Three Months			Three Months			Nine Months			Nine Months
	Ended			Ended			Ended			Ended			Ended
	September 30,			June 30,			September 30,			September 30,			September 30,
Income Statement (Unaudited):	2010			2010			2009			2010			2009
		(000)			(000)			(000)			(000)			(000)
Total interest income	$	16,725		$	17,403		$	17,682		$	51,373		$	54,474
Total interest expense		6,110			6,525			7,439			19,392			23,527
Net interest income		10,615			10,878			10,243			31,981			30,947
Provision for loan losses		2,225			1,525			1,650			5,275			4,850
Net interest income after provision
for loan losses		8,390			9,353			8,593			26,706			26,097
Non-interest income
Fees and service charges		1,829			1,887			1,956			5,456			5,522
Net gain (loss) on sale of investments		(282	)		35			60			38			419
Other than temporary impairment of securities		(197	)		(151	)		0			(925	)		(200	)
Equity in losses of limited partnerships		(128	)		(128	)		(78	)		(382	)		(233	)
Commissions		896			1,082			710			2,920			2,198
Net gain (loss) on loan sales		846			209			527			1,410			2,171
Net servicing fees		34			31			55			102			193
Increase in cash surrender value of life insurance		630			372			385			1,385			1,183
Other income		15			56			33			174			121
Total non-interest income		3,643			3,393			3,648			10,178			11,374
Non-interest expense
Salaries and benefits		5,315			5,332			5,823			15,982			16,970
Occupancy and equipment		1,403			1,372			1,424			4,202			4,195
Data processing fees		363			387			388			1,162			1,103
Professional fees		306			243			310			891			972
Marketing		296			306			408			900			1,133
Deposit insurance		465			453			416			1,365			1,849
Software subscriptions and maintenance		377			403			367			1,177			1,045
Intangible amortization		327			353			372			1,033			1,166
Repossessed assets expense		308			614			446			1,388			1,127
Other  expenses		973			1,021			993			2,853			3,069
Total non-interest expense		10,133			10,484			10,947			30,953			32,629
Income  before taxes		1,900			2,262			1,294			5,931			4,842
Income tax provision		279			487			52			1,192			489
Net income		1,621			1,775			1,242			4,739			4,353
Preferred stock dividends and amortization		451			451			451			1,352			1,353
Net income available to common shareholders	$	1,170		$	1,324		$	791		$	3,387		$	3,000
Average Balances,  Net Interest Income, Yield Earned and Rates Paid

			Three							Three
			mos ended							mos ended
			9/30/2010							9/30/2009
	Average		Interest		Average			Average		Interest		Average
	Outstanding		Earned/		Yield/			Outstanding		Earned/		Yield/
	Balance		Paid		Rate			Balance		Paid		Rate
		(000)		(000)					(000)		(000)
Interest-Earning Assets:
Interest -bearing deposits	$	52,893	$	48		0.36	%	$	31,855	$	8		0.10	%
Mortgage-backed securities:
Available-for-sale		175,119		1,420		3.24			85,677		872		4.07
Held-to-maturity		6,535		62		3.79			9,255		141		6.09
Investment securities:
Available-for-sale		31,023		217		2.80			26,975		385		5.71
Loans receivable		1,028,340		14,908		5.80			1,104,330		16,184		5.86
Stock in FHLB of Indianapolis		18,632		70		1.50			18,632		92		1.98
Total interest-earning assets (3)		1,312,542		16,725		5.10			1,276,724		17,682		5.54
Non-interest earning assets, net of allowance
for loan losses and unrealized gain/loss		131,533							126,134
Total assets	$	1,444,075						$	1,402,858
Interest-Bearing Liabilities:
Demand and NOW accounts	$	178,153		243		0.55		$	168,341		210		0.50
Savings deposits		89,539		34		0.15			85,941		64		0.30
Money market accounts		72,410		158		0.87			46,852		140		1.20
Certificate accounts		674,358		4,123		2.45			636,664		4,674		2.94
Total deposits		1,014,460		4,558		1.80			937,798		5,088		2.17
Borrowings		171,728		1,552		3.62			220,433		2,351		4.27
Total interest-bearing accounts		1,186,188		6,110		2.06			1,158,231		7,439		2.57
Non-interest bearing deposit accounts		108,519							95,128
Other liabilities		13,956							19,754
Total liabilities		1,308,663							1,273,113
Stockholders' equity		135,412							129,745
Total liabilities and stockholders' equity	$	1,444,075						$	1,402,858
Net earning assets	$	126,354						$	118,493
Net interest income			$	10,615						$	10,243
Net interest rate spread						3.04	%						2.97	%
Net yield on average interest-earning assets						3.23	%						3.21	%
Average interest-earning assets to
average interest-bearing liabilities						110.65	%						110.23	%

	Three Months			Three Months			Three Months			Nine Months			Nine Months
	Ended			Ended			Ended			Ended			Ended
	September 30,			June 30,			September 30,			September 30,			September 30,
Selected Financial Ratios and Other Financial Data (Unaudited):	2010			2010			2009			2010			2009
Share and per share data:
Average common shares outstanding
Basic		6,877,481			6,869,535			6,845,697			6,869,547			6,836,345
Diluted		6,887,204			6,881,672			6,846,025			6,877,682			6,836,455
Per common share:
Basic earnings	$	0.17		$	0.19		$	0.12		$	0.49		$	0.44
Diluted earnings	$	0.17		$	0.19		$	0.12		$	0.49		$	0.44
Dividends	$	0.06		$	0.06		$	0.12		$	0.18		$	0.36
Dividend payout ratio		35.29	%		31.58	%		100.00	%		36.73	%		81.82	%
Performance Ratios:
Return on average assets (ratio of net
income to average total assets)(1)		0.45	%		0.48	%		0.35	%		0.43	%		0.41	%
Return on average tangible common equity (ratio of net
income to average tangible common equity)(1)		4.77	%		5.66	%		3.48	%		4.73	%		4.39	%
Interest rate spread information:
Average during the period(1)		3.04	%		3.04	%		2.97	%		3.03	%		2.97	%
Net interest margin(1)(2)		3.23	%		3.23	%		3.21	%		3.22	%		3.22	%
Efficiency Ratio		71.07	%		73.46	%		78.81	%		73.42	%		77.10	%
Ratio of average interest-earning
assets to average interest-bearing
liabilities		110.65	%		110.00	%		110.23	%		109.98	%		110.09	%
Allowance for loan losses:
Balance beginning of period	$	16,248		$	16,635		$	16,348		$	16,414		$	15,107
Charge offs:
One- to four- family		1,109			258			218			1,833			749
Multi-family		15			232			0			247			0
Commercial real estate		702			692			585			1,738			1,122
Construction or development		0			0			0			0			0
Consumer loans		477			917			779			2,288			2,160
Commercial business loans		8			0			0			8			83
Sub-total		2,311			2,099			1,582			6,114			4,114
Recoveries:
One- to four- family		37			61			0			183			94
Multi-family		0			0			0			0			0
Commercial real estate		25			0			35			93			178
Construction or development		0			0			0			0			0
Consumer loans		256			126			169			629			503
Commercial business loans		0			0			0			0			2
Sub-total		318			187			204			905			777
Net charge offs		1,993			1,912			1,378			5,209			3,337
Additions charged to operations		2,225			1,525			1,650			5,275			4,850
Balance end of period	$	16,480		$	16,248		$	16,620		$	16,480		$	16,620
Net loan charge-offs to average loans (1)		0.78	%		0.74	%		0.50	%		0.67	%		0.40	%

	September 30,			June 30,			September 30,
	2010			2010			2009
Total shares outstanding		6,984,754			6,984,754			6,984,754
Tangible book value per share	$	13.80		$	13.86		$	13.22
Tangible common equity to tangible assets		6.91	%		6.94	%		6.85	%
Nonperforming assets (000's)
Non-accrual loans
One- to four- family	$	14,308		$	13,501		$	16,100
Commercial real estate		11,635			7,464			9,269
Consumer loans		2,932			2,013			3,501
Commercial business loans		1,317			592			2,192
Total non-accrual loans		30,192			23,570			31,062
Accruing loans past due 90 days or more		366			876			1,266
Restructured loans		1,027			1,224			463
Total nonperforming loans		31,585			25,670			32,791
Real estate owned		5,686			6,171			4,095
Other repossessed assets		1,142			1,318			1,440
Nonperforming securities		0			100			0
Total nonperforming assets	$	38,413		$	33,259		$	38,326
Asset Quality Ratios:
Non-performing assets to total assets		2.67	%		2.31	%		2.74	%
Non-performing loans to total loans		3.11	%		2.49	%		3.02	%
Allowance for loan losses to non-performing loans		52.18	%		63.30	%		50.68	%
Allowance for loan losses to loans receivable		1.62	%		1.58	%		1.53	%

(1)	Ratios for the three and nine month periods have been annualized.
(2)	Net interest income divided by average interest earning assets.
(3)	Calculated net of deferred loan fees, loan discounts, loans in process and loss reserves.