10-Q

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 March 31, 2010      

or

¨ 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 No.)

110 East Charles Street
Muncie, Indiana	47305
(Address of principal executive offices)	(Zip Code)

(765) 747-2800

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

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 reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes ¨  No ¨

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.

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨  No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

The number of shares of the Registrant’s common stock, with $.01 par value, outstanding as of May 14, 2010 was 6,984,754.

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	20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29
Item 4.	Controls and Procedures	29
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Changes in Securities and Use of Proceeds	30
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Submission of Matters to a Vote of Security Holders	30
Item 5.	Other Information	30
Item 6.	Exhibits	30
Signature Page		31
Exhibits

PART 1     FINANCIAL INFORMATION

ITEM 1.     Financial Statements

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY

Consolidated Condensed Balance Sheets

	March 31,			December 31,
	2010			2009
	(Unaudited)
Assets
Cash	$	17,145,091		$	27,245,633
Interest-bearing demand deposits		104,859,355			19,095,264
Cash and cash equivalents		122,004,446			46,340,897
Investment securities available for sale		172,843,811			130,913,670
Investment securities held to maturity		7,663,851			8,147,407
Total investment securities		180,507,662			139,061,077
Loans held for sale		3,718,711			2,520,546
Loans		1,045,603,134			1,076,108,466
Allowance for loan losses		(16,635,320	)		(16,414,331	)
Net loans		1,028,967,814			1,059,694,135
Premises and equipment, net of accumulated depreciation of $16,635,000 and $16,414,000		34,098,633			34,556,318
Federal Home Loan Bank of Indianapolis stock, at cost		18,631,500			18,631,500
Investment in limited partnerships		4,033,012			4,160,629
Cash surrender value of life insurance		44,630,216			44,247,277
Prepaid FDIC premium		5,490,996			5,907,149
Core deposit and other intangibles		5,528,095			5,881,075
Deferred income tax benefit		19,534,511			19,514,151
Other assets		19,985,885			18,519,603
Total assets	$	1,487,131,481		$	1,399,034,357
Liabilities
Deposits
Non-interest-bearing	$	104,474,123		$	98,024,890
Interest bearing		1,017,913,252			947,171,169
Total deposits		1,122,387,375			1,045,196,059
Federal Home Loan Bank advances		207,050,638			197,960,396
Other borrowings		13,702,690			14,113,526
Other liabilities		13,665,240			12,037,299
Total liabilities		1,356,805,943			1,269,307,280
Commitments and Contingent Liabilities
Stockholders' Equity
Preferred stock, $.01 par value Authorized and unissued — 5,000,000 shares Issued and outstanding — 32,382 shares;   liquidation preference $1,000 per share		324			324
Common stock, $.01 par value Authorized — 20,000,000 shares   Issued and outstanding —6,984,754 shares		69,847			69,847
Additional paid-in capital - preferred stock		31,691,805			31,645,814
Additional paid-in capital - common stock		72,461,857			72,485,756
Retained earnings		29,127,755			28,654,285
Accumulated other comprehensive loss		(1,834,284	)		(1,857,723	)
Unearned employee stock ownership plan (ESOP) shares		(1,191,766	)		(1,271,226	)
Total stockholders' equity		130,325,538			129,727,077
Total liabilities and stockholders' equity	$	1,487,131,481		$	1,399,034,357

See notes to consolidated condensed financial statements.

1

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY

Consolidated Condensed Statements of Income

(Unaudited)

	Three Months Ended
	March 31,
	2010			2009
Interest Income
Loans receivable, including fees	$	15,500,545		$	17,128,494
Investment securities:
Mortgage-backed securities		1,348,189			942,357
Federal Home Loan Bank stock		93,923			119,000
Other investments		258,818			455,777
Deposits with financial institutions		43,009			10,304
Total interest income		17,244,484			18,655,932
Interest Expense
Passbook savings		34,459			65,474
Certificates of deposit		4,326,167			5,204,620
Daily Money Market accounts		147,156			129,203
Demand and NOW acounts		198,008			200,447
Federal Home Loan Bank advances		1,814,769			2,430,999
Other interest expense		236,012			233,651
Total interest expense		6,756,571			8,264,394
Net Interest Income		10,487,914			10,391,538
Provision for losses on loans		1,525,000			1,450,000
Net Interest Income After Provision for Loan Losses		8,962,914			8,941,538
Other Income
Service fee income		1,739,889			1,689,590
Net realized gain (loss) on sale of securities		284,828			652
Equity in losses of limited partnerships		(127,215	)		(77,744	)
Commissions		941,516			628,221
Net gains on sales of loans		354,309			1,025,995
Net servicing fees		36,848			77,037
Increase in cash surrender value of life insurance		382,939			386,479
Other-than-temporary losses on securities
Total other-than-temporary losses		(1,831,057	)		(200,000	)
Portion of loss recognized in other comprehensive income (before taxes)		1,254,239			0
Net impairment losses recognized in earnings		(576,818	)		(200,000	)
Other income		104,210			50,355
Total other income		3,140,506			3,580,585
Other Expenses
Salaries and employee benefits		5,335,825			5,460,003
Net occupancy expenses		660,877			809,974
Equipment expenses		485,095			337,203
Data processing fees		410,641			353,815
Automated teller machine		279,079			280,137
Deposit insurance		445,954			387,984
Professional fees		342,319			334,608
Advertising and promotion		297,889			362,500
Software subscriptions and maintenance		397,123			332,751
Intangible amortization		352,980			397,357
Repossessed assets expense		466,885			297,696
Other expenses		859,432			1,018,024
Total other expenses		10,334,099			10,372,052
Income Before Income Tax		1,769,321			2,150,071
Income tax expense		426,000			354,000
Net Income		1,343,321			1,796,071
Preferred stock dividends and amortization		450,766			450,766
Net Income Available to Common Shareholders	$	892,555		$	1,345,305
Basic earnings per common share	$	0.13		$	0.20
Diluted earnings per common share	$	0.13		$	0.20
Dividends per common share	$	0.06		$	0.12

See notes to consolidated condensed financial statements.

2

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY

Consolidated Condensed Statement of Stockholders' Equity

For the Quarter Ended March 31, 2010

(Unaudited)

	Common Stock							Preferred Stock												Accumulated
					Additional							Additional								Other			Unearned
	Shares				paid-in			Shares				paid-in		Comprehensive			Retained			Comprehensive			ESOP
	Outstanding		Amount		capital			Outstanding		Amount		capital		Income			Earnings			Income (Loss)			shares			Total
Balances, December 31, 2009		6,984,754	$	69,847	$	72,485,756			32,382	$	324	$	31,645,814				$	28,654,285		$	(1,857,723	)	$	(1,271,226	)	$	129,727,077
Comprehensive income
Net income for the period														$	1,343,321			1,343,321									1,343,321
Other comprehensive income, net of tax
Net unrealized gain on securities															111,562					$	111,561						111,561
Net unrealized loss on derivatives															(88,122	)					(88,122	)					(88,122	)
Comprehensive income														$	1,366,761
ESOP shares earned						(29,817	)																	79,460			49,643
Accretion of discount on preferred stock													45,991					(45,991	)								0
Share-based compensation						5,918																					5,918
Cash dividends ($.06 per common share)																		(419,085	)								(419,085	)
Cash dividends - preferred stock																		(404,775	)								(404,775	)
Balances, March 31, 2010		6,984,754	$	69,847	$	72,461,857			32,382	$	324	$	31,691,805				$	29,127,755		$	(1,834,284	)	$	(1,191,766	)	$	130,325,538

See notes to consolidated condensed financial statements.

3

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY

Consolidated Condensed Statements of Cash Flows

(Unaudited)

	Three Months Ended March 31,
	2010			2009
Operating Activities
Net income	$	1,343,321		$	1,796,071
Items not requiring (providing) cash
Provision for loan losses		1,525,000			1,450,000
Depreciation and amortization		1,278,720			1,070,119
Deferred income tax		(42,441	)		858,655
Loans originated for sale		(15,466,632	)		(56,081,338	)
Proceeds from sales of loans held for sale		14,480,091			42,442,457
Gains on sales of loans held for sale		(354,309	)		(1,025,995	)
Gain on available for sale securities		(284,828	)		(652	)
Gain on sale of premises and equipment		-			(187,651	)
Loss on other-than-temporary impairement, AFS securities		576,818			200,000
ESOP compensation expense		49,643			46,246
Change in
Interest receivable and other assets		(119,065	)		809,227
Prepaid FDIC premiums		416,153			2,887
Interest payable and other liabilities		479,389			(538,691	)
Cash value of life insurance		(382,939	)		(386,479	)
Other adjustments		(32,147	)		(380,630	)
Net cash provided by (used in) operating activities		3,466,774			(9,925,774	)
Investing Activities
Net change in interest earning deposits		-			(14,000,000	)
Purchases of securities available for sale		(56,426,287	)		(24,701,997	)
Proceeds from maturities and paydowns of securities:
Available for sale		6,019,368			4,155,426
Held to maturity		322,120			380,040
Proceeds from sale of available-for-sale securities		8,408,554			500,000
Net change in loans		25,525,197			19,815,913
Purchases of premises and equipment		(85,045	)		(186,590	)
Proceeds from sale of premises and equipment		-			1,033,151
Proceeds from real estate owned sales		1,312,736			560,081
Other investing activities		759,037			268,381
Net cash used in investing activities		(14,164,320	)		(12,175,595	)
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits		42,662,481			(7,661,417	)
Certificates of deposits		34,528,835			59,521,288
Proceeds from FHLB advances		20,000,000			7,000,000
Repayment of FHLB advances		(10,733,315	)		(27,549,026	)
Repayment of other borrowings		(421,598	)		(415,655	)
Cash dividends paid		(823,860	)		(1,071,450	)
Other financing activities		1,148,552			1,303,554
Net cash provided by financing activities		86,361,095			31,127,294
Net Change in Cash and Cash Equivalents		75,663,549			9,025,925
Cash and Cash Equivalents, Beginning of Year		46,340,897			39,703,452
Cash and Cash Equivalents, End of Year	$	122,004,446		$	48,729,377
Additional Cash Flows Information
Interest paid	$	6,617,556		$	7,973,004
Income tax paid		-			-
Transfers from loans to foreclosed real estate		3,409,821			482,737
Mortgage servicing rights capitalized		142,685			885,732

See Notes to Consolidated Condensed Financial Statements

4

MutualFirst Financial, Inc. and Subsidiaries

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Table dollars in thousands)

(Unaudited)

Note 1:  Basis of Presentation

The consolidated condensed financial statements include the accounts of MutualFirst Financial, Inc. (the “Company”), its wholly owned subsidiary MutualBank, a federally chartered savings bank (“Mutual”), Mutual’s wholly owned subsidiaries, First MFSB Corporation, Mishawaka Financial Services, 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 2009 filed with the Securities and Exchange Commission.

The interim consolidated financial statements at March 31, 2010, 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, 2009 has been derived from the Audited Consolidated Balance Sheet of the Company as of that date.

Note 2: Earnings per share

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

	Three Months Ended Ended March 31,
	2010							2009
				Weighted-							Weighted-
				Average		Per-Share					Average		Per-Share
	Income			Shares		Amount		Income			Shares		Amount
	(000's)							(000's)
Basic Earnings Per Share
Net income	$	1,344			6,861,589			$	1,796			6,825,544
Dividends and accretion on preferred stock		(451	)						(451	)
Income available to common shareholders	$	893			6,861,589	$	0.13	$	1,345			6,825,544	$	0.20
Effect of Dilutive securities
Stock options and RRP grants					2,549							0
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions	$	893			6,864,138	$	0.13	$	1,345			6,825,544	$	0.20

Options of 570,718 and 596,603 shares and warrants of 625,135 shares, in each period, were not included in the calculation above due to being anti-dilutive to earnings per share as of March 31, 2010 and 2009, respectively.

5

Note 3:  Impact of Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (FASB) issued new a new standard regarding accounting for transfers and servicing of financial assets and extinguishments of liabilities, and will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures.

At the same time, FASB also issued another new standard regarding consolidation of variable interest entities, and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance.

The new standards will require a number of new disclosures. The first enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and an entity’s continuing involvement in transferred financial assets.  The second will require a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements.

The Federal Reserve is reviewing regulatory capital requirements associated with the adoption of the new accounting standards by financial institutions. In conducting this review, the Federal Reserve is considering a broad range of factors including the maintenance of prudent capital levels, the record of recent bank experiences with off-balance sheet vehicles, and the results of the recent Supervisory Capital Assessment Program (SCAP). As part of the SCAP, participating banking organizations' capital adequacy was assessed using assumptions consistent with standards ultimately included in these two new standards. 

The Company adopted this new accounting pronouncement for the quarterly period ended March 31, 2010, as required, and adoption did not have a material impact on the statements taken as a whole.

6

In January 2010, the FASB issued an accounting standard providing additional guidance relating to fair value measurement disclosures.  Specifically, companies will be required to separately disclose significant transfers into and out of Level 1 and Level 2 measurements in the fair value hierarchy including when such transfers were recognized and the reasons for those transfers.  For Level 3 fair value measurements, the new guidance requires presentation of separate information about purchases, sales, issuances and settlements.  Additionally, the FASB also clarified existing fair value measurement disclosure requirements relating to the level of disaggregation, inputs, and valuation techniques.  This accounting standard is effective at the beginning of 2010, except for the detailed Level 3 disclosures, which will be effective at the beginning of 2011.  The Company adopted this new accounting pronouncement for the quarterly period ended March 31, 2010, as required, and the adoption did not have a material impact on the statements taken as a whole.

In 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-11, Derivatives and Hedging (Topic 815): Scope Exception Related to Embedded Credit Derivative providing clarification on the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements. Specifically, only one form of embedded credit derivative qualifies for the exemption - one that is related only to the subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature.  The amendments in the ASU are effective for each reporting entity at the beginning of its first fiscal quarter beginning after June 15, 2010. Early adoption is permitted at the beginning of each entity’s first fiscal quarter beginning after March 5, 2010.  The Company is currently evaluating the potential impact, if any, of the adoption of this statement.

Note 4: Investments

The amortized cost and approximate fair values of securities as of March 31, 2010 and December 31, 2009 are as follows:

7

	March 31, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Loss			Value
Available for Sale Securities
Mortgage-backed securities	$	48,517	$	955	$	(80	)	$	49,392
Collateralized mortgage obligations		111,716		2,220		(314	)		113,622
Municipals		1,186		53		(5	)		1,234
Federal Agencies		5,000		16		(41	)		4,975
Small Business Administration		69		-		(1	)		68
Corporate obligations		6,945		-		(5,054	)		1,891
Marketable equity securities		1,696		-		(34	)		1,662
Total investment securities	$	175,129	$	3,244	$	(5,529	)	$	172,844
Held to Maturity Securities
Mortgage-backed securities	$	4,378	$	38	$	(1,270	)	$	3,146
Collateralized mortgage obligations		2,786		158		(523	)		2,421
Federal Agency		500		3		-			503
Total investment securities	$	7,664	$	199	$	(1,793	)	$	6,070

	December 31, 2009
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Loss			Value
Available for Sale Securities
Mortgage-backed securities	$	29,175	$	824	$	(109	)	$	29,890
Collateralized mortgage obligations		85,726		1,874		(571	)		87,029
Municipals		9,313		360		(17	)		9,656
Small Business Administration		158		-		(1	)		157
Corporate obligations		7,321		-		(4,782	)		2,539
Marketable equity securities		1,685		-		(42	)		1,643
Total investment securities	$	133,378	$	3,058	$	(5,522	)	$	130,914
Held to Maturity Securities
Mortgage-backed securities	$	4,619	$	29	$	(1,373	)	$	3,275
Collateralized mortgage obligations		3,028		158		(632	)		2,554
Federal Agency		500		4		-			504
Total investment securities	$	8,147	$	191	$	(2,005	)	$	6,333

8

The amortized cost and fair value of available-for-sale securities and held-to-maturity securities at March 31, 2010, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
Description Securities	Cost		Value		Cost		Value
Security obligations due
Within one year	$	100	$	100	$	-	$	-
One to five years		1,000		1,002		500		503
Five to ten years		-		-		-		-
After ten years		12,031		6,998		-		-
		13,131		8,100		500		503
Mortgage-backed securities		48,517		49,392		4,378		3,146
Collateralized mortgage obligations		111,716		113,622		2,786		2,421
Small Business Administration		69		68		-		-
Marketable equity securities		1,696		1,662		-		-
Totals	$	175,129	$	172,844	$	7,664	$	6,070

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $2.0 million at March 31, 2010.

Gross gains of $285,000 resulting from sales of available-for-sale securities were realized for the first three months of 2010.  There were no losses recognized on these sales.

Certain investments in debt and marketable equity securities are reported in the financial statements at an amount less than their historical cost.  Total fair value of these investments at March 31, 2010, was $29.7 million, a decrease from $35.3 million at December 31, 2009, which was approximately 17 percent and 18 percent of the Company’s investment portfolio at those dates, respectively.

Based on evaluation of available evidence, including recent changes in market interest rates, management believes the declines in fair value for these securities, other than those discussed below, are temporary.

Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

During the first quarter 2010, the Bank determined that two trust preferred securities and seven private labeled mortgage backed securities were other than temporarily impaired.  The amount of the impairment totaled $577,000 and is reflected in the statement of operations.

The following tables show our investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2010 and December 31, 2009:

9

	March 31, 2010
	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Available for Sale
Mortgage-backed securities	$	17,227	$	(80	)	$	-	$	-		$	17,227	$	(80	)
Collateralized mortgage obligations		1,960		(35	)		4,341		(279	)		6,301		(314	)
Federal agencies		1,959		(41	)		-		-			1,959		(41	)
Municipals		-		-			668		(5	)		668		(5	)
Small Business Administration		-		-			68		(1	)		68		(1	)
Corporate obligations		-		-			1,791		(5,054	)		1,791		(5,054	)
Marketable equity securities		-		-			1,662		(34	)		1,662		(34	)
Total temporarily impaired securities	$	21,146	$	(156	)	$	8,530	$	(5,373	)	$	29,676	$	(5,529	)
Held to Maturity
Mortgage-backed securities	$	190	$	(551	)	$	1,417	$	(719	)		1,607		(1,270	)
Collateralized mortgage obligations		183		(118	)		411		(405	)		594		(523	)
Total temporarily impaired securities	$	373	$	(669	)	$	1,828	$	(1,124	)	$	2,201	$	(1,793	)

	March 31, 2009
	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Available for Sale
Mortgage-backed securities	$	8,511	$	(109	)	$	-	$	-		$	8,511	$	(109	)
Collateralized mortgage obligations		16,829		(251	)		4,609		(320	)		21,438		(571	)
Municipals		1,025		(17	)		-		-			1,025		(17	)
Small Business Administration		-		-			157		(1	)		157		(1	)
Corporate obligations		-		-			2,539		(4,782	)		2,539		(4,782	)
Marketable equity securities		-		-			1,647		(42	)		1,647		(42	)
Total temporarily impaired securities	$	26,365	$	(377	)	$	8,952	$	(5,145	)	$	35,317	$	(5,522	)
Held to Maturity
Mortgage-backed securities	$	239	$	(559	)	$	1,521	$	(814	)		1,760		(1,373	)
Collateralized mortgage obligations		199		(157	)		420		(475	)		619		(632	)
Total temporarily impaired securities	$	438	$	(716	)	$	1,941	$	(1,289	)	$	2,379	$	(2,005	)

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Collateralized Mortgage Obligations (CMO)

The unrealized losses on the Company’s investment in CMOs were caused by interest rate changes.  The Company expects to recover the amortized cost basis over the term of the securities.  Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is more likely than not the Company will not be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2010.

Corporate Obligations

The Company’s unrealized loss on investments in corporate obligations primarily relates to investments in pooled trust securities.  The unrealized losses were primarily caused by (a) a recent decrease in performance and regulatory capital resulting from exposure to subprime mortgages and (b) a recent sector downgrade by several industry analysts.  The Company currently expects some of the securities to settle at a price less than the amortized cost basis of the investment (that is, the Company expects to recover less than the entire amortized cost basis of the security).  The Company has recognized a loss equal to the credit loss for these securities, establishing a new, lower amortized cost basis.  The credit loss was calculated by comparing expected discounted cash flows based on performance indicators of the underlying assets in the security to the carrying value of the investment.  Because the Company does not intend to sell the investments and it is likely the Company will not be required to sell the investments before recovery of its new, lower amortized cost basis, which may be maturity, it does not consider the remainder of the investments to be other-than-temporarily impaired at March 31, 2010.

MutualBank evaluates securities for other-than-temporary impairment (“OTTI”) on a quarterly basis.  During the quarter ending March 31, 2010, the Bank determined that two corporate securities met the definition of OTTI.  These pooled trust preferred securities had a total write-down of $393,000.  Impairment on these securities was determined after analyzing the cash flow to be received, underlying collateral and determining the amount of additional losses needed in the individual pools to create a shortfall in interest or principal payments.  All trust preferred securities were priced using a discounted cash flow analysis as of March 31, 2010.

Other-than-temporary Impairment

Upon acquisition of a security, the Company decides whether it is within the scope of the accounting guidance for beneficial interests in securitized financial assets or will be evaluated for impairment under the accounting guidance for investments in debt and equity securities.

The accounting guidance for beneficial interests in securitized financial assets provides incremental impairment guidance for a subset of the debt securities within the scope of the guidance for investments in debt and equity securities.  For securities where the security is a beneficial interest in securitized financial assets, the Company uses the beneficial interests in securitized financial asset impairment model.  For securities where the security is not a beneficial interest in securitized financial assets, the Company uses debt and equity securities impairment model.

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The Company routinely conducts periodic reviews to identify and evaluate each investment security to determine whether an other-than-temporary impairment has occurred.  Economic models are used to determine whether an other-than-temporary impairment has occurred on these securities.  While all securities are considered, the securities primarily impacted by other-than-temporary impairment testing are pooled trust preferred and private-label mortgage-backed securities.  For each pooled trust preferred and private-label mortgage-backed security in the investment portfolio (including but not limited to those whose fair value is less than their amortized cost basis), an extensive, regular review is conducted to determine if an other-than-temporary impairment has occurred.  Various inputs to the economic models are used to determine if an unrealized loss is other-than-temporary.

The Bank’s trust preferred securities valuation was internally prepared.  The approach to determining fair value involved several steps including:

· Detailed credit and structural evaluation of each piece of collateral in the trust preferred securities;

· Collateral performance projections for each piece of collateral in the trust preferred security;

· Terms of the trust preferred structure, as laid out in the indenture; and

· Discounted cash flow modeling.

Pooled Trust Preferred Securities. MutualFirst Financial, Inc., has a current amortized cost in pooled trust preferred securities of $6.8 million, which had an original par value of $10.3 million.  These securities have a current fair value of $1.8 million.  The following table provides additional information related to the Bank’s investment in trust preferred securities as of March 31, 2010:

											Realized
		Original		Book		Fair		Unrealized			Losses						Lowest
Deal	Class	Par		Value		Value		Loss			2010			2009			Rating
	(Dollars in thousands)
Alesco Preferred Funding IX	A2A	$	1,000	$	894	$	251	$	(643	)	$	-		$	-		BB
Alesco Preferred Funding XVII	C1		1,000		105		2		(103	)		-			(900	)	Ca
Preferred Term Securities XIII	B1		1,000		823		415		(408	)		-			(177	)	Ca
Preferred Term Securities XVIII	C		1,000		891		139		(752	)		(117	)		-		Ca
Preferred Term Securities XXVII	C1		1,000		691		182		(509	)		(276	)		-		Ca
U.S. Capital Funding I	B1		3,000		2,891		617		(2,274	)		-			(109	)	Caa1
U.S. Capital Funding III	B1		1,000		500		185		(315	)		-			-		Ca
U.S. Capital Funding V	B1		1,300		51		1		(50	)		-			(605	)	Caa3
Total		$	10,300	$	6,846	$	1,792	$	(5,054	)	$	(393	)	$	(1,791	)

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Private Label Mortgage Backed Securities.  In 2008, the Company redeemed two mutual funds and received cash and underlying securities in the mutual fund as payment.  As of March 31, 2010, these held to maturity securities had a par value of $9.6 million and a book value of $7.2 million.  The securities received were agency and private label mortgage backed securities (MBS).  The agency MBS have a par value of $2.7 million and a book value of $2.6 million.  The private label MBS have a par value of $6.9 million and a book value of $4.6 million.  In the first quarter 2010, the private label MBS had an other-than-temporary impairment of $184,000.  An independent analysis was performed on several MBS that met certain criteria to determine if OTTI was present.  The average book value of the private label securities was $45,000 as of March 31, 2010.    All of these securities are monitored on a quarterly basis by management.

Other information about the private label mortgage backed securities received in the redemption in-kind transaction include:

· The securities have vintage years between 1993 and 2007, with the majority being between 2002 and 2007.

· The securities include sub-prime, Alt-A, and home equity loans.

· Investment grade securities total $1.4 million in book value and $3.2 million in book value are below investment grade.

Credit Losses Recognized on Investments

Certain debt securities have experienced fair value deterioration due to credit losses, as well as due to other market factors, but are not otherwise other-than-temporarily impaired.

The following table provides information about debt securities for which only a credit loss was recognized in income and other losses are recorded in other comprehensive income.

	Accumulated Credit Losses
	2010			2009
Credit losses on debt securities held
Beginning of year	$	(3,905	)	$	(1,350	)
Additions related to increases in previously recognized other-than- temporary losses		(577	)		(200	)
As of March 31,	$	(4,482	)	$	(1,550	)

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Note 5:  Accumulated Other Comprehensive Loss

Other comprehensive loss components and related taxes for the three months ended March 31, were as follows:

	2010			2009
Net unrealized gain on securities available-for-sale	$	1,332		$	(2,122	)
Net unrealized loss on securities available-for-sale for which a portion of an other-than-temporary impairment has been recognized in income		(1,261	)		(483	)
Net unrealized loss on derivative used for cash flow hedges		(134	)		-
Net unrealized loss relating to defined benefit plan liability		-			-
Less reclassification adjustment for realized losses included in income		108			199
Other comprehensive income, before tax effect		45			(2,406	)
Tax expense (benefit)		22			(632	)
Other comprehensive income (loss)	$	23		$	(1,774	)

The components of accumulated other comprehensive loss, included in stockholders’ equity, are as follows:

	March 31,			December 31,
	2010			2009
Net unrealized loss on securities available-for-sale	$	(1,025	)	$	331
Net unrealized loss on securities available-for-sale for which a portion of an other-than-temporary impairment has been recognized in income		(1,261	)		(2,796	)
Net unrealized loss on derivative used for cash flow hedges		(89	)		44
Net unrealized loss relating to defined benefit plan liability		(438	)		(438	)
		(2,813	)		(2,859	)
Tax effect		(979	)		(1,001	)
Net-of-tax amount	$	(1,834	)	$	(1,858	)

Note 6: Disclosures About Fair Value of Assets and Liabilities

FASB Codification Topic 820 (ASC 820), Fair Value Measurements and Disclosures, 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.  ASC 820 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

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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

Items Measured at Fair Value on a Recurring Basis

Following is a description of the valuation methodologies and inputs 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 obligations, small business administration, marketable equity, municipal, 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.

Third party vendors compile prices from various sources and may apply such techniques as matrix pricing to determine the value of identical or similar investment securities (Level 2). Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted for specific investment securities but rather relying on investment securities relationship to other benchmark quoted investment securities. Any investment security not valued based upon the methods above are considered Level 3.

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			Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
March 31, 2010
Mortgage-backed securities	$	49,392	$	-	$	49,392	$	-
Collateralized mortgage obligations		113,622		-		113,622		-
Federal agencies		4,975		-		4,975		-
Municipals		1,234		-		1,234		-
Small Business Administration		68		-		68		-
Corporate obligations		1,891		-		-		1,891
Marketable equity securities		1,662		1,662		-		-
Available-for-sale securities	$	172,844	$	1,662	$	169,291	$	1,891
December 31, 2009
Mortgage-backed securities	$	29,890	$	-	$	29,890	$	-
Collateralized mortgage obligations		87,029		-		87,029		-
Municipals		9,656		-		9,656		-
Small Business Administration		157		-		157		-
Corporate obligations		2,539		-		-		2,539
Marketable equity securities		1,643		1,643		-		-
Available-for-sale securities	$	130,914	$	1,643	$	126,732	$	2,539

The following is a reconciliation of the beginning and ending balances for the three months ended March 31, 2010 and 2009 of recurring fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs:

	2010			2009
Beginning balance	$	2,539		$	6,317
Total realized and unrealized gains and losses
Included in net income		(393	)		(200	)
Included in other comprehensive loss		(272	)		(2,903	)
Purchases, issuances and settlements		17			(7	)
Transfers in/out of Level 3		-			-
Ending balance	$	1,891		$	3,207
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	$	393		$	200

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Items Measured at Fair Value on a Non-Recurring Basis

From time to time, certain assets may be recorded at fair value on a non-recurring basis.  These non-recurring fair value adjustments typically are a result of the application of lower of cost or fair value accounting or a write-down occurring during the period.  The following is a description of the valuation methodologies used for certain assets that are recorded at fair value.

Impaired Loans (Collateral Dependent)

Loans for which it is probable that Mutual will not collect all principal and interest due according to contractual terms are measured for impairment.  Allowable methods for determining the amount of impairment include estimating fair value include using the fair value of the collateral for collateral dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized.  This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.

Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

Other Real Estate Owned

The fair value of real estate is generally determined based on appraisals by qualified licensed appraisers. The appraisers typically determine the value of the real estate by utilizing an income or market valuation approach. If an appraisal is not available, the fair value may be determined by using a cash flow analysis.

Other real estate owned is classified within Level 3 of the fair value hierarchy.

Mortgage Servicing Rights

We initially measure our mortgage servicing rights at fair value, and amortize them over the period of estimated net servicing income. They are periodically assessed for impairment based on fair value at the reporting date. Mortgage servicing rights do not trade in an active market with readily observable prices. Accordingly, the fair value is estimated based on a valuation model which calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost to service, float earnings rates and other ancillary income, including late fees. The fair value measurements are classified as Level 3.

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The following table presents the fair value measurement of assets and liabilities measured at fair value on a nonrecurring basis and the level within the ASC 820 fair value hierarchy in which the fair value measurements:

			Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
March 31, 2010
Impaired Loans	$	3,733	$	-	$	-	$	3,733
Other real estate owned		1,580		-		-		1,580
December 31, 2009
Impaired Loans	$	4,614	$	-	$	-	$	4,614
Other real estate owned		977		-		-		977

The estimated fair values of the Company’s financial instruments not carried at fair value in the consolidated condensed balance sheet as of March 31, 2010 and December 31, 2009, are as follows:

	March 31, 2010				December 31, 2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Assets
Cash and cash equivalents	$	122,004	$	122,004	$	46,341	$	46,341
Investment securities held-to-maturity		7,664		6,070		8,147		6,333
Loans held for sale		3,719		3,761		2,521		2,527
Loans		1,028,968		1,051,243		1,059,694		1,086,805
Stock in FHLB		18,632		18,632		18,632		18,632
Interest receivable		4,429		4,429		4,376		4,376
Liabilities
Deposits	$	1,122,387	$	1,083,559	$	1,045,196	$	1,007,530
FHLB advances		207,051		203,019		197,960		194,717
Other borrowings		13,703		14,747		14,114		15,083
Interest payable		1,331		1,331		1,192		1,192
Advances by borrowers for taxes and insurance		2,882		2,882		1,734		1,734

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The following methods and assumptions were used to estimate the fair value of each class of financial instruments listed above:

Cash and Cash Equivalents - The fair value of cash and cash equivalents approximates carrying value.

Interest-Bearing Deposits - The fair value of interest-bearing deposits approximates carrying value.

Investment and Mortgage-Backed Securities - Fair values are based on quoted market prices and third party analysis.

 Loans Held For Sale - Fair values are based on current investor purchase commitments.

Loans - The fair value for loans are estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

FHLB Stock - Fair value of FHLB stock is based on the price at which it may be resold to the FHLB.

Interest Receivable/Payable - The fair values of interest receivable/payable approximate carrying values.

Deposits - The fair values of noninterest-bearing, interest-bearing demand and savings accounts are equal to the amount payable on demand at the balance sheet date.  Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on such time deposits.

Federal Home Loan Bank Advances - The fair value of these borrowings are estimated using a discounted cash flow calculation, based on current rates for similar debt for periods comparable to the remaining terms to maturity of these advances.

Other Borrowings- The fair value of other borrowings are estimated using a discount calculation based on current rates.

Advances by Borrowers for Taxes and Insurance - The fair value approximates carrying value.

Off-Balance Sheet Commitments - - Commitments include commitments to purchase and originate mortgage loans, commitments to sell mortgage loans, and standby letters of credit and are generally of a short-term nature.  The fair values of such commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.  The carrying amounts of these investments are reasonable estimates of the fair value of these financial statements.

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

Mutual was originally organized in 1889 and currently conducts its business from thirty-three full service financial centers located in Delaware, Elkhart, Grant, Kosciusko, Randolph, St. Joseph and Wabash counties, Indiana, with its main office located in Muncie.   Mutual also has trust offices in Carmel and Crawfordsville, Indiana and a loan origination office in New Buffalo, Michigan.  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 subsidiaries include, Mutual Federal Investment Company (“MFIC”) and Mishawaka Financial Services.  MFIC is a Nevada corporation holding approximately $161 million in investments.  MFIC currently owns one subsidiary, Mutual Federal REIT.  The assets of Mutual Federal REIT consist of approximately $89 million in one-to four-family mortgage loans.  Mishawaka Financial Services was acquired with MFB Corp. and is engaged in the sale of life and health insurance to customers of the bank.

The following should be read in conjunction with the Management’s Discussion and Analysis in the Company’s December 31, 2009 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 63 to 67 of the Annual Report on Form 10-K for the year ended December 31, 2009.  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.

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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 fair value of 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 a reduction in loan servicing fee income.

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Intangible Assets

The Company periodically assesses the potential impairment of its core deposit intangible.  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.

Securities

Under FASB Codification Topic 320 (ASC 320), Investments-Debt and Equity Securities, investment securities must be classified as held-to-maturity, available-for-sale or trading.  Management determines the appropriate classification at the time of purchase. The classification of securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Debt securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and the Company has the ability to hold the securities to maturity. Securities not classified as held-to-maturity are classified as available-for-sale and are carried at fair value, with the unrealized holding gains and losses, net of tax, reported in other comprehensive income and do not effect earnings until realized.

The fair values of the Company’s securities are generally determined by reference to quoted prices from reliable independent sources utilizing observable inputs. Certain of the Company’s fair values of securities are determined using models whose significant value drivers or assumptions are unobservable and are significant to the fair value of the securities. These models are utilized when quoted prices are not available for certain securities or in markets where trading activity has slowed or ceased. When quoted prices are not available and are not provided by third party pricing services, management judgment is necessary to determine fair value. As such, fair value is determined using discounted cash flow analysis models, incorporating default rates, estimation of prepayment characteristics and implied volatilities.

The Company evaluates securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations, for determining if an other-than-temporary impairment (OTTI) exists pursuant to guidelines established in ASC 320.  In evaluating the possible impairment of securities, consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial conditions and near-term prospects of the issuer, and the ability and intent of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.  In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies or government sponsored agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.

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If management determines that an investment experienced an OTTI, management must then determine the amount of the OTTI to be recognized in earnings.  If management does not intend to sell the security and it is more likely than not that the Company will not be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI will be separated into the amount representing the credit loss and the amount related to all other factors.  The amount of OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings.  The amount of the OTTI related to other factors will be recognized in other comprehensive income, net of applicable taxes.  The previous amortized cost basis less the OTTI recognized in earnings will become the new amortized cost basis of the investment.  If management intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the OTTI will be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date.  Any recoveries related to the value of these securities are recorded as an unrealized gain (as other comprehensive income (loss) in shareholders’ equity) and not recognized in income until the security is ultimately sold.

The Company from time to time may dispose of an impaired security in response to asset/liability management decisions, future market movements, business plan changes, or if the net proceeds can be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time.

Income Tax Accounting

We file a consolidated federal income tax return.  The provision for income taxes is based upon income in our consolidated financial statements, rather than amounts reported on our income tax return.  Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect of a change in tax rates on our deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.

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.

23

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 generally 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 generally impacted unfavorably as rates on interest-earning assets would increase at a slower rate than rates on interest-bearing liabilities.  The interest rate risk exposure has been reduced due to changes in the loan composition, by increasing the percentage of loans with adjustable rates and reducing the average duration of the loan portfolio.  This decline in Mutual’s liability sensitive exposure should provide for less net portfolio value volatility with future rate movements.

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 thereby reduce the impact interest rate changes have on our net interest income. Strategies employed to accomplish this objective have been to increase the origination 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 44% at the end of 2004 to 55% as of March 31, 2010.  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 has increased to reflect this increased risk.  To help offset some of the additional risk, the Company suspended origination of indirect boat and recreational vehicle lending at the beginning of 2010.  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 was 39% at March 31, 2010, compared to 36% at the end of the first quarter of 2009.  The remaining total deposits are mostly retail certificates of deposit, which continue to provide stable funding for the Company.  These are ongoing strategies that are dependent on current market conditions and competition.

24

During the first three months of 2010, in keeping with its strategic objective to reduce interest rate risk exposure, the Company also sold $14.3 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 $354,000.

Another important source of revenue for the Company is non-interest income.  Non-interest income is primarily made up of recurring income from service fee income on checking accounts and commissions from the Company’s trust and brokerage business.  Non-interest income also includes gains on sale of loans and investments and increases in cash surrender value of life insurance.  The Federal Reserve’s Regulation E has required consumers to opt-in to certain overdraft services to have access to them.  The Company is actively communicating with customers to determine their preference of opting-in or opting-out.  Depending on the number of customers that do not opt-in, service fee income on checking accounts may decline.  The Company’s trust business is a source of recurring revenue that may increase or decrease partially dependent on movement in the stock market.  The Company’s objective is to increase non-interest income, but in the short run non-interest expense may increase as proper infrastructure is put in place to support a higher level of non-interest income.

Financial Condition

Assets totaled $1.5 billion at March 31, 2010, an increase from December 31, 2009 of $88.1 million, or 6.3%. Gross loans, excluding loans held for sale, decreased $30.5 million, or 2.9%.  Consumer loans decreased $11.1 million, or 4.3%, commercial loans decreased $11.2 million, or 3.3%, and residential mortgage loans held in the portfolio decreased $8.2 million, or 1.7%. Residential mortgage loans held for sale increased $1.2 million and mortgage loans sold during the quarter totaled $14.3 million compared to $42.3 million sold in the first quarter 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.  These types of loans 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.  Investment securities available for sale increased $41.9 million, or 32.0%, primarily due to the current liquidity available to the Bank due to loan pay-downs and increases in deposits.  The investments purchased were all agency issues primarily in mortgage-backed securities and collateralized mortgage obligations.

25

Allowance for loan losses was $16.6 million at March 31, 2010, an increase of $221,000 from December 31, 2009. Net charge offs for the quarter ended March 31, 2010 were $1.3 million, or .49% of average loans on an annualized basis compared to $967,000, or .34% of average loans for the comparable period in 2009.  On a linked quarter basis net charge offs decreased from an annualized .69% of average loans for the quarter ended December 31, 2009 to .49% for the current quarter.  The allowance for loan losses as a percentage of non-performing loans and total loans was 60.77% and 1.59%, respectively, at March 31, 2010 compared to 50.38% and 1.53%, respectively, at December 31, 2009 due to an increase in allowance and decrease in non-performing loans and total loans.

Total deposits were $1.1 billion at March 31, 2010 an increase of $77.2 million, or 7.4% from December 31, 2009. This increase was due to increases in certificates of deposit and savings deposits of $40.3 million and increases in demand and money market deposits of $36.9 million.  Total borrowings increased $8.7 million to $220.8 million at March 31, 2010 from $212.1 million at December 31, 2009 as the Bank has utilized longer term FHLB advances to help mitigate interest rate risk.

Stockholders’ equity was $130.3 million at March 31, 2010, an increase of $598,000, or 0.5% from December 31, 2009. The increase was due primarily to net income of $1.3 million and unrealized gains on securities of $112,000.  This increase was partially offset by dividend payments of $419,000 to common shareholders and $405,000 to preferred shareholders and net unrealized losses on derivatives of $88,000.  The Bank’s risk-based capital ratio was well in excess of “well-capitalized” levels as defined by all regulatory standards as of March 31, 2010.

Comparison of the Operating Results for the Three Months Ended March 31, 2010 and 2009

Net income available for common shareholders for the quarter ended March 31, 2010 was $893,000, or $.13 for basic and diluted earnings per common share.  This compared to net income available for common shareholder for the same period in 2009 of $1.3 million, or $.20 for basic and diluted earnings per common share. Annualized return on assets was .37% and return on average tangible common equity was 3.87% for the first quarter of 2010 compared to .51% and 5.86%, respectively, for the same period of last year.

Net interest income before the provision for loan losses increased $96,000 from $10.4 million for the three months ended March 31, 2009 to $10.5 million for the three months ended March 31, 2010. The primary reason for the increase was an increase in average earning assets of $30.6 million as a result of increased liquidity due to deposit growth.   The increase in earning assets was partially offset by a decrease in net interest margin of 5 basis points to 3.18% in the first quarter 2010 compared to 3.23% for the first quarter 2009.  The decrease in net interest margin was primarily due to the low rate of return on the increased liquidity the Bank held in the first quarter of 2010.  On a linked quarter basis, net interest income before the provision for loan losses increased $207,000 primarily due to an increase in average earning assets of $50.8 million, partially offset by a 6 basis point reduction in net interest margin.

26

The provision for loan losses for the first quarter of 2010 was $1.5 million, approximately the same as last year’s comparable period.  Non-performing loans to total loans at March 31, 2010 were 2.62% compared to 3.03% at December 31, 2009.  This decrease in non-performing loans was primarily due to a decrease in all segments of the loan portfolio.  Non-performing assets to total assets were 2.44% at March 31, 2010 compared to 2.86% at December 31, 2009.

The following is a summary of changes in non-interest income:

	Three Months Ended						Amount			Percent
	3/31/2010			3/31/2009			Change			Change
Non-Interest Income
Service fee income	$	1,740		$	1,690		$	50			3.0	%
Net realized gain on sale of securities		285			1			284			28400.0	%
Equity in losses of limited partnerships		(127	)		(78	)		(49	)		62.8	%
Commissions		942			628			314			50.0	%
Net gains on sales of loans		354			1,026			(672	)		-65.5	%
Net servicing fees		37			77			(40	)		-51.9	%
Increase in cash surrend value of life insurance		383			386			(3	)		-0.8	%
Net other-than-temporary losses on securities		(577	)		(200	)		(377	)		188.5	%
Other income		104			51			53			103.9	%
Total Non-Interest Income	$	3,141		$	3,581		$	(440	)		-12.3	%

Non-interest income decreased $440,000 to $3.1 million for the three months ended March 31, 2010, compared to the same period in 2009. This was primarily due to a decrease in gain on sale and servicing of loans as total fixed rate loans sold during the first quarter of 2010 were $14.3 million compared to $42.3 million in the same period of 2009.  Impairment of securities also increased due to a $184,000, pretax, loss on seven private labeled mortgage backed securities and a $393,000 loss, with no tax benefit recorded, on two trust preferred securities. This was offset by an increase in commission income due to an increase in trust and fiduciary accounts of $69 million, up from $309 million at March 31, 2009.  Gain on sale of securities increased as the Bank liquidated several municipal securities in the first quarter 2010.

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The following is a summary of changes in non-interest expense:

	Three Months Ended				Amount			Percent
	3/31/2010		3/31/2009		Change			Change
Non-Interest Expense
Salaries and employee benefits	$	5,336	$	5,460	$	(124	)		-2.3	%
Net occupancy expenses		661		810		(149	)		-18.4	%
Equipment expenses		485		337		148			43.9	%
Data processing fees		411		354		57			16.1	%
Automated teller machine		279		280		(1	)		-0.4	%
Deposit insurance		446		388		58			14.9	%
Professional fees		342		335		7			2.1	%
Advertising and promotion		298		363		(65	)		-17.9	%
Software subscriptions and publications		397		333		64			19.2	%
Intangible amortization		353		397		(44	)		-11.1	%
Repossessed assets expense		467		298		169			56.7	%
Other expenses		859		1,018		(159	)		-15.6	%
Total Non-Interest Expense	$	10,334	$	10,373	$	(39	)		-0.4	%

Non-interest expense decreased $39,000 to $10.3 million for the three months ended March 31, 2010, compared to $10.4 million for the same period in 2009.  Salaries and employee benefits have continued to maintain constant through attrition and changes in employee benefits.  Net occupancy expenses have declined compared to March 2009 due to lower seasonal maintenance expenses.  Other expenses have declined compared to the same period in the prior year as the Company has looked for efficiencies and decreased miscellaneous costs.  These decreases were partially offset by an increase in repossessed asset expense due to an increase in repossessed assets of 96.4% over March 2009.

Income tax expense increased $72,000 for the three months ended March 31, 2010, compared to the same period in 2009.  The effective tax rate increased to 24.0% from 16.5% due to a decreased percentage of low income housing tax credits to taxable income when comparing the first quarter of 2010 to the first quarter of 2009 and certain other-than-temporary impairment loss recorded without a corresponding tax benefit.

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 March 31, 2010, Mutual had liquid assets of $259.1 million and a liquidity ratio of 19.83%. This elevated level of liquidity is primarily due to increased cash due to the growth in deposits in the first quarter of 2010.  The liquidity ratio will fluctuate throughout the year as excess liquidity is used to originate loans and pay down FHLB advances as they mature.  The Company believes the current available liquidity will be sufficient to meet the needs of the Company throughout 2010.

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Mutual continues to maintain capital ratios which exceed “well-capitalized” levels as defined pursuant to all regulatory standards as of March 31, 2010.  Mutual’s current total risk-based capital ratio is 13.28% and tier 1 risk-based capital ratio is 12.03%.

ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk

Presented below as of March 31, 2010 and 2009, is an analysis of Mutual’s interest rate risk as measured by changes in Mutual’s net portfolio value (“NPV”) assuming an instantaneous and sustained parallel shift in the yield curve, in 100 basis point increments.

March 31, 2010

Net Portfolio Value

Changes										NPV as % of PV of Assets
In Rates	$ Amount			$ Change			% Change			NPV Ratio			Change
+300 bp		179,826			-22,454			-11	%		12.60	%		-75	bp
+200 bp		191,918			-10,362			-5	%		13.17	%		-19	bp
+100 bp		198,078			-4,202			-1	%		13.34	%		-2	bp
0 bp		202,280									13.36	%
-100 bp		n/m	(1)		n/m	(1)		n/m	(1)		n/m	(1)		n/m	(1)
-200 bp		n/m	(1)		n/m	(1)		n/m	(1)		n/m	(1)		n/m	(1)
-300 bp		n/m	(1)		n/m	(1)		n/m	(1)		n/m	(1)		n/m	(1)

March 31, 2009

Net Portfolio Value

Changes										NPV as % of PV of Assets
In Rates	$ Amount			$ Change			% Change			NPV Ratio			Change
+300 bp		177,931			-24,349			-9	%		12.99	%		-51	bp
+200 bp		188,198			-14,082			-4	%		13.46	%		-4	bp
+100 bp		195,727			-6,553			0	%		13.73	%		22	bp
0 bp		195,726									13.50	%
-100 bp		n/m	(1)		n/m	(1)		n/m	(1)		n/m	(1)		n/m	(1)
-200 bp		n/m	(1)		n/m	(1)		n/m	(1)		n/m	(1)		n/m	(1)
-300 bp		n/m	(1)		n/m	(1)		n/m	(1)		n/m	(1)		n/m	(1)

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

The analysis at March 31, 2010, indicates that there have been no material changes in market interest rates for Mutual’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, 2009.  The low level of interest rate risk exposure of Mutual is primarily due to the current structure of the balance sheet and the continuous sale of originated long term fixed-rate loans.

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 March 31, 2010 that have materially affected, or are likely to materially affect our internal control over financial reporting.

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, 2009.
Item 2.	Registered sales of Equity Securities and use of Proceeds
	On August 13, 2008 the Company’s Board of Directors authorized management to repurchase an additional 5% of the Company’s outstanding stock, or approximately 350,000 shares.  Information on the shares purchased during the first quarter of 2010 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
								330,000	(1)
January 1, 2010 - January 31, 2010		-		-		-		330,000
February 1, 2010 - February 28, 2010		-		-		-		330,000
March 1, 2010 - March 31, 2010		-		-		-		330,000
		-		-		-

(1)  Amount represents the number of shares available to be repurchased under the plan as of June 30, 2009

Note:  Repurchases of stock must be approved by the Treasury while the Company participates in TARP.  No such approval was sought during the period.

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.

Index to Exhibits

Number	Description
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.

		MutualFirst Financial, Inc.
Date: May 17, 2010	By:	/s/  David W. Heeter
		David W. Heeter
		President and Chief Executive Officer
Date: May 17, 2010	By:	/s/  Timothy J. McArdle
		Timothy J. McArdle
		Senior Vice President and Treasurer

31

EX-31.1

CERTIFICATIONS                                                                           Exhibit 31.1

I, David W. Heeter certify that:

1. I have reviewed this report on Form 10-Q of MutualFirst Financial, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the consolidated financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) ) for the registrant and we have:

a)  designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and

c)  evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

e)  disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies and material weaknesses in the design or operation of internal control which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 17, 2010

/s/ David W. Heeter

David W. Heeter,

President and Chief Executive Officer

EX-31.2

CERTIFICATIONS                                                                           Exhibit 31.2

I, Timothy J. McArdle, certify that:

1. I have reviewed this report on Form 10-Q of MutualFirst Financial, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the consolidated financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a)  designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and

c)  evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

e)  disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies and material weaknesses in the design or operation of internal control which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 17, 2010

/s/ Timothy J. McArdle

Timothy J. McArdle,

Senior Vice President, Treasurer, and Chief Financial Officer

EX-32

EXHIBIT 32

SECTION 1350 CERTIFICATION

Each of the undersigned hereby certifies in his capacity as an officer of MutualFirst Financial, Inc. (the “Registrant”) that the quarterly report of the Registrant on Form 10-Q for the period ended March 31, 2010, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the consolidated financial condition of the Registrant at the end of such period and the results of operations of the Registrant for such period.

Date:  May 17, 2010	By:	/s/ David W. Heeter
		David W. Heeter
		President and Chief Executive Officer
Date:  May 17, 2010	By:	/s/ Timothy J. McArdle
		Timothy J. McArdle
		Treasurer and Chief Financial Officer
		(Principal Financial and Accounting Officer)