UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2010

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXHANGE ACT OF 1934
	For the transition period from ________ to _______

Commission File Number:  000-27905

MutualFirst Financial, Inc.

(Exact name of registrant specified in its charter)

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

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 o  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o (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 o  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 August 12, 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	23
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34
Item 4.	Controls and Procedures	35
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Changes in Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	Submission of Matters to a Vote of Security Holders	37
Item 5.	Other Information	37
Item 6.	Exhibits	37
Signature Page		38
Exhibits		39

PART 1     FINANCIAL INFORMATION

ITEM 1.     Financial Statements

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY

Consolidated Condensed Balance Sheets

	June 30,			December 31,
	2010			2009
	(Unaudited)
Assets
Cash	$	19,836,407		$	27,245,633
Interest-bearing demand deposits		40,776,430			19,095,264
Cash and cash equivalents		60,612,837			46,340,897
Interest-bearing deposits		3,001,208			0
Investment securities available for sale		208,451,929			130,913,670
Investment securities held to maturity		7,097,104			8,147,407
Total investment securities		215,549,033			139,061,077
Loans held for sale		2,312,947			2,520,546
Loans		1,030,452,668			1,076,108,466
Allowance for loan losses		(16,248,263	)		(16,414,331	)
Net loans		1,014,204,405			1,059,694,135
Premises and equipment, net of accumulated
depreciation of $18,287,977 and $17,471,468		33,927,329			34,556,318
Federal Home Loan Bank of Indianapolis stock, at cost		18,631,500			18,631,500
Investment in limited partnerships		3,905,395			4,160,629
Cash surrender value of life insurance		45,039,404			44,247,277
Prepaid FDIC premium		5,074,341			5,907,149
Core deposit and other intangibles		5,175,115			5,881,075
Deferred income tax benefit		16,589,833			19,514,151
Other assets		17,870,874			18,519,603
Total assets	$	1,441,894,221		$	1,399,034,357
Liabilities
Deposits
Non-interest-bearing	$	102,342,831		$	98,024,890
Interest bearing		1,006,866,021			947,171,169
Total deposits		1,109,208,852			1,045,196,059
Federal Home Loan Bank advances		173,313,888			197,960,396
Other borrowings		13,527,564			14,113,526
Other liabilities		11,481,934			12,037,299
Total liabilities		1,307,532,238			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;		324			324
liquidation preference $1,000 per share
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		31,737,796			31,645,814
Additional paid-in capital - common stock		72,447,908			72,485,756
Retained earnings		30,032,779			28,654,285
Accumulated other comprehensive income (loss)		1,185,635			(1,857,723	)
Unearned employee stock ownership plan (ESOP) shares		(1,112,306	)		(1,271,226	)
Total stockholders' equity		134,361,983			129,727,077
Total liabilities and stockholders' equity	$	1,441,894,221		$	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						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Interest Income
Loans receivable, including fees	$	15,242,467		$	16,669,730		$	30,743,012		$	33,798,224
Investment securities:
Mortgage-backed securities		1,721,101			953,532			3,069,290			1,895,889
Federal Home Loan Bank stock		91,881			49,700			185,805			168,700
Other investments		291,757			446,245			550,575			902,022
Deposits with financial institutions		55,856			17,057			98,865			27,361
Total interest income		17,403,062			18,136,264			34,647,547			36,792,196
Interest Expense
Passbook savings		35,469			66,572			69,928			132,046
Certificates of deposit		4,173,942			4,905,056			8,500,109			10,109,676
Daily Money Market accounts		155,765			120,611			302,920			249,814
Demand and NOW acounts		256,923			193,906			454,932			394,353
Federal Home Loan Bank advances		1,668,348			2,271,023			3,483,117			4,702,022
Other interest expense		234,239			266,853			470,251			500,504
Total interest expense		6,524,686			7,824,021			13,281,257			16,088,415
Net Interest Income		10,878,376			10,312,243			21,366,290			20,703,781
Provision for losses on loans		1,525,000			1,750,000			3,050,000			3,200,000
Net Interest Income After Provision for Loan Losses		9,353,376			8,562,243			18,316,290			17,503,781
Other Income
Service fee income		1,887,237			1,876,831			3,627,127			3,566,421
Net realized gain (loss) on sale of securities		35,448			358,192			320,276			358,844
Equity in losses of limited partnerships		(127,617	)		(77,744	)		(254,832	)		(155,487	)
Commissions		1,082,154			859,501			2,023,669			1,487,721
Net gains on sales of loans		209,378			618,365			563,687			1,644,360
Net servicing fees		31,357			59,986			68,205			137,023
Increase in cash surrender value of life insurance		372,247			412,465			755,186			798,944
Other-than-temporary losses on securities
Total other-than-temporary losses		(292,728	)		0			(1,626,025	)		(200,000	)
Portion of loss recognized in other comperehensive income (before taxes)		141,851			0			898,330			0
Net impairment losses recognized in earnings		(150,877	)		0			(727,695	)		(200,000	)
Other income		54,585			37,944			158,796			88,299
Total other income		3,393,912			4,145,540			6,534,419			7,726,125
Other Expenses
Salaries and employee benefits		5,331,907			5,687,690			10,667,731			11,147,692
Net occupancy expenses		581,954			584,340			1,242,831			1,394,315
Equipment expenses		494,110			479,060			979,205			816,263
Data processing fees		387,828			360,853			798,469			714,668
Automated teller machine		296,391			280,344			575,470			560,481
Deposit insurance		453,338			1,045,096			899,291			1,433,080
Professional fees		243,131			327,382			585,450			661,990
Advertising and promotion		306,096			362,500			603,985			725,000
Software subscriptions and maintenance		402,698			344,517			799,821			677,269
Intangible amortization		352,980			397,357			705,960			794,714
Repossessed assets expense		613,728			382,670			1,080,613			680,366
Other expenses		1,021,251			1,058,344			1,880,686			2,076,369
Total other expenses		10,485,412			11,310,153			20,819,512			21,682,207
Income Before Income Tax		2,261,876			1,397,630			4,031,197			3,547,699
Income tax expense		487,000			83,000			913,000			437,000
Net Income		1,774,876			1,314,630			3,118,197			3,110,699
Preferred stock dividends and amortization		450,766			450,766			901,532			901,532
Net Income Available to Common Shareholders	$	1,324,110		$	863,864		$	2,216,665		$	2,209,167
Basic earnings per common share	$	0.19		$	0.13		$	0.32		$	0.32
Diluted earnings per common share	$	0.19		$	0.13		$	0.32		$	0.32
Dividends per common share	$	0.06		$	0.12		$	0.12		$	0.24

See notes to consolidated condensed financial statements.

2

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY

Consolidated Condensed Statement of Stockholders' Equity

For the Six Months Ended June 30, 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														$	3,118,197			3,118,197									3,118,197
Other comprehensive income, net of tax
Net unrealized gain on securities															3,284,711					$	3,284,711						3,284,711
Net unrealized loss on derivatives															(241,353	)					(241,353	)					(241,353	)
Comprehensive income														$	6,161,555
ESOP shares earned						(49,684	)																	158,920			109,236
Accretion of discount on preferred stock													91,982					(91,982	)								0
Share-based compensation						11,836																					11,836
Cash dividends ($.12 per common share)																		(838,171	)								(838,171	)
Cash dividends - preferred stock																		(809,550	)								(809,550	)
Balances,  June 30, 2010		6,984,754	$	69,847	$	72,447,908			32,382	$	324	$	31,737,796				$	30,032,779		$	1,185,635		$	(1,112,306	)	$	134,361,983

See notes to consolidated condensed financial statements.

3

MutualFirst Financial, Inc.

Consolidated Condensed Statements of Cash Flows

(Unaudited)

	Six Months Ended
	June 30,
	2010			2009
Operating Activities
Net income	$	3,118,197		$	3,110,699
Items not requiring (providing) cash
Provision for loan losses		3,050,000			3,200,000
Depreciation and amortization		2,634,328			2,180,259
Prepaid FDIC premium amortization		832,808			-
Deferred income tax		1,324,741			716,417
Loans originated for sale		(22,774,710	)		(110,249,099	)
Proceeds from sales of loans held for sale		23,316,173			95,437,882
Gains on sales of loans held for sale		(563,687	)		(1,644,360	)
Gain on available for sale securities		(320,276	)		(145,194	)
(Gain) loss on sale of premises and equipment		918			(187,651	)
Loss on other-than-temporary impairement, AFS securities		727,695			200,000
Increase in cash surrender value of life insurance		(792,127	)		(835,885	)
Other equity adjustments		109,236			102,065
Change in
Interest receivable and other assets		1,260,814			1,626,543
Interest payable and other liabilities		(689,624	)		86,565
Other adjustments		(64,293	)		(572,845	)
Net cash provided by (used in) operating activities		11,170,193			(6,974,604	)
Investing Activities
Net change in interest earning deposits		(3,001,208	)		-
Purchases of securities available for sale
Available for sale		(96,484,125	)		(45,189,265	)
Held to maturity		-			(500,000	)
Proceeds from maturities and paydowns of securities:
Available for sale		14,404,461			9,398,154
Held to maturity		782,176			826,193
Proceeds from sale of available-for-sale securities		9,093,021			3,442,813
Net change in loans		37,491,096			23,538,186
Purchases of premises and equipment		(456,571	)		(511,850	)
Proceeds from sale of premises and equipment		500			1,033,151
Proceeds from real estate owned sales		1,806,920			882,740
Other investing activities		1,867,256			742,900
Net cash used in investing activities		(34,496,474	)		(6,336,978	)
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits		32,782,700			(2,240,090	)
Certificates of deposits		31,230,094			39,923,133
Proceeds from FHLB advances		20,000,000			17,500,000
Repayment of FHLB advances		(44,293,622	)		(59,443,500	)
Repayment of other borrowings		(607,486	)		(616,655	)
Cash dividends paid		(1,647,721	)		(2,314,397	)
Other financing activities		134,256			1,811,596
Net cash provided by (used in) financing activities		37,598,221			(5,379,913	)
Net Change in Cash and Cash Equivalents		14,271,940			(18,691,495	)
Cash and Cash Equivalents, Beginning of Year		46,340,897			39,703,452
Cash and Cash Equivalents, End of Year	$	60,612,837		$	21,011,957
Additional Cash Flows Information
Interest paid	$	13,582,436		$	16,651,836
Income tax paid		-			550,000
Transfers from loans to foreclosed real estate		4,422,122			1,771,955
Mortgage servicing rights capitalized		229,823			949,305

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” or the “Bank”), 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 June 30, 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.

5

Note 2: Earnings per share

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

	Three Months Ended June 30,
	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	$	1,775			6,861,589			$	1,315			6,837,751
Dividends and accretion on preferred stock		(451	)						(451	)
Income available to common shareholders	$	1,324			6,861,589	$	0.19	$	864			6,837,751	$	0.13
Effect of Dilutive securities
Stock options and RRP grants					12,137							0
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions	$	1,324			6,873,726	$	0.19	$	864			6,837,751	$	0.13

	Six Months Ended June 30,
	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	$	3,118			6,865,562			$	3,111			6,831,647
Dividends and accretion on preferred stock		(902	)						(902	)
Income available to common shareholders	$	2,216			6,865,562	$	0.32	$	2,209			6,831,647	$	0.32
Effect of Dilutive securities
Stock options and RRP grants					7,343							0
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions	$	2,216			6,872,905	$	0.32	$	2,209			6,831,647	$	0.32

Options of 565,538 and 586,518 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 June 30, 2010 and 2009, respectively.

6

Note 3:  Impact of Accounting Pronouncements

In June 2009, the FASB issued new guidance impacting FASB ASC 860, Transfers and Servicing.  This new standard is 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.

In June 2009, the FASB issued new guidance impacting FASB ASC 810-10, Consolidation.  This guidance is 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.

These two standards 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 new standard became effective for the Company on January 1, 2010 and did not have a material impact on the Company’s consolidated financial position or results of operations.

7

In January 2010, the FASB issued an Accounting Standards Update (ASU) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.  This update provides 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 June 30, 2010, as required, and the adoption did not have a material impact on the statements taken as a whole.

In April 2010, the FASB issued an update (ASU) No. 2010-18, Receivables (Topic 310): Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset.  Thisupdate provides guidance on accounting for acquired loans that have evidence of credit deterioration upon acquisition, that do not result in the removal of those loans from the pool even if the modification would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change.  This update becomes effective for the Company for the interim reporting period ending after July 15, 2010 and is not expected to have a material impact on the statements taken as a whole.

In July 2010, the FASB issued an updated (ASU) No. 2010-20, Receivables (Topic 310): Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.  This update provides guidance to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses.  This update becomes effective for the Company for first interim or annual reporting period ending on or after December 15, 2010 and is not expected to have a material impact on the statements taken as a whole.

8

Note 4: Investments

The amortized cost and approximate fair values of securities as of June 30, 2010 and December 31, 2009 are as follows:

	June 30, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Loss			Value
Available for Sale Securities
Mortgage-backed securities	$	58,517	$	1,944	$	-		$	60,461
Collateralized mortgage obligations		122,602		4,915		(226	)		127,291
Municipals		1,186		48		(8	)		1,226
Federal Agencies		14,927		87		-			15,014
Small Business Administration		18		-		(1	)		17
Corporate obligations		6,955		-		(4,193	)		2,762
Marketable equity securities		1,705		-		(24	)		1,681
Total	$	205,910	$	6,994	$	(4,452	)	$	208,452
Held to Maturity Securities
Mortgage-backed securities	$	4,133	$	66	$	(1,120	)	$	3,079
Collateralized mortgage obligations		2,464		155		(456	)		2,163
Federal Agency		500		1		-			501
Total	$	7,097	$	222	$	(1,576	)	$	5,743

	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	$	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	$	8,147	$	191	$	(2,005	)	$	6,333

9

The amortized cost and fair value of available-for-sale securities and held-to-maturity securities at June 30, 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		-		-		500		501
Five to ten years		2,999		3,010		-		-
After ten years		19,969		15,892		-		-
		23,068		19,002		500		501
Mortgage-backed securities		58,517		60,461		4,133		3,079
Collateralized mortgage obligations		122,602		127,291		2,464		2,163
Small Business Administration		18		17		-		-
Marketable equity securities		1,705		1,681		-		-
Totals	$	205,910	$	208,452	$	7,097	$	5,743

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $2.0 million at June 30, 2010.

Gross gains of $320,000 and $146,000 resulting from sales of available-for-sale securities were realized for the first six months of 2010 and 2009, respectively.  The realized gain on sale of securities reported in the first six months of 2009 also reflected a gain on sale of subsidiary of $137,000 and the sale of Mastercard stock of $75,000.  There were no losses recognized on these sales in the first six months of 2010 or 2009.

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 June 30, 2010, was $10.2 million, a decrease from $37.7 million at December 31, 2009, which is approximately 4.2% and 25.9%, respectively, of the Company's available-for-sale and held-to-maturity investment portfolio.

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 second quarter of 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 $151,000 and is reflected in the statement of operations.

10

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 June 30, 2010 and December 31, 2009:

	June 30, 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	$	-	$	-		$	-	$	-		$	-	$	-
Collateralized mortgage obligations		-		-			3,630		(226	)		3,630		(226	)
Federal agencies		-		-			-		-			-		-
Municipals		-		-			664		(8	)		664		(8	)
Small Business Administration		-		-			18		(1	)		18		(1	)
Corporate obligations		-		-			2,662		(4,193	)		2,662		(4,193	)
Marketable equity securities		-		-			1,705		(24	)		1,705		(24	)
Total temporarily impaired securities	$	-	$	-		$	8,679	$	(4,452	)	$	8,679	$	(4,452	)
Held to Maturity
Mortgage-backed securities	$	121	$	(9	)	$	1,074	$	(1,111	)		1,195		(1,120	)
Collateralized mortgage obligations		-		-			411		(456	)		411		(456	)
Total temporarily impaired securities	$	121	$	(9	)	$	1,485	$	(1,567	)	$	1,606	$	(1,576	)

	December 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	)

11

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 June 30, 2010.

Corporate Obligations

The Company’s unrealized loss on investments in corporate obligations primarily relates to investments in pooled trust preferred 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 June 30, 2010.

MutualBank evaluates securities for other-than-temporary impairment (“OTTI”) on a quarterly basis.  During the quarter ending June 30, 2010, the Bank determined that two corporate securities met the definition of OTTI.  These pooled trust preferred securities had a total write-down of $8,000.  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 valued using a discounted cash flow analysis as of June 30, 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.

12

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 prepared by an independent third party.  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.

MutualFirst Financial uses market-based yield indicators as a baseline for determining appropriate discount rates, and then adjusts the resulting discount rates on the basis of its credit and structural analysis of specific trust preferred securities.  The primary focus is on the returns a fixed income investor would require in order to allocate capital on a risk adjusted basis.  There is currently no active market for pooled trust preferred securities; however, the Company looks principally to market yields for stand-alone trust preferred securities issued by banks, thrifts and insurance companies for which there is an active and liquid market.  The next step is to make a series of adjustments to reflect the differences that exist between these products (both credit and structural) and, most importantly, to reflect idiosyncratic credit performance differences (both actual and projected) between these products and the underlying collateral in the specific trust preferred security.  Importantly, as part of the analysis described above, MutualFirst considers the fact that structured instruments frequently exhibit leverage not present in stand-alone instruments, and make adjustments as necessary to reflect this additional risk.

13

The default and recovery probabilities for each piece of collateral were formed based on the evaluation of the collateral credit and a review of historical industry default data and current/near-term operating conditions.  For collateral that has already defaulted, the Company assumed no recovery.  For collateral that was in deferral, the Company assumed a recovery of 10% of par for banks, thrifts or other depository institutions, and 15% of par for insurance companies.  Although the Company conservatively assumed that the majority of the deferring collateral continues to defer and eventually defaults, we also recognize there is a possibility that some deferring collateral may become current at some point in the future.

To determine if the unrealized loss for private-label mortgage-backed securities is other-than-temporary, the Company projects total estimated defaults of the underlying assets (mortgages) and multiplies that calculated amount by an estimate of realizable value upon sale in the marketplace (severity) in order to determine the projected collateral loss.  The Company also evaluates the current credit enhancement underlying the bond to determine the impact on cash flows.  If the Company determines that a given mortgage-backed security position will be subject to a write-down or loss, the Company records the expected credit loss as a charge to earnings.

Pooled Trust Preferred Securities. MutualFirst Financial, Inc. has a current amortized cost in pooled trust preferred securities of $6.9 million, which had an original par value of $10.3 million.  These securities have a current fair value of $2.7 million.  The following table provides additional information related to the Bank’s investment in trust preferred securities as of June 30, 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	$	895	$	426	$	(469	)	$	-		$	-		BB
Alesco Preferred Funding XVII		C1		1,000		105		4		(101	)		(5	)		(900	)	Ca
Preferred Term Securities XIII		B1		1,000		823		308		(515	)		-			(177	)	Ca
Preferred Term Securities XVIII		C		1,000		895		233		(662	)		(117	)		-		Ca
Preferred Term Securities XXVII		C1		1,000		694		146		(548	)		(276	)		-		Ca
U.S. Capital Funding I		B1		3,000		2,891		1,279		(1,612	)		-			(109	)	Caa1
U.S. Capital Funding III		B1		1,000		500		265		(235	)		-			-		Ca
U.S. Capital Funding V		B1		1,300		52		1		(51	)		(3	)		(605	)	Caa3
Total			$	10,300	$	6,855	$	2,662	$	(4,193	)	$	(401	)	$	(1,791	)

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 June 30, 2010, these held to maturity securities had a par value of $9.0 million and a book value of $6.6 million.  The securities received were agency and private label mortgage backed securities (MBS).  The agency MBS have a par value of $2.5 million and a book value of $2.3 million.  The private label MBS have a par value of $6.5 million and a book value of $4.3 million.  In the second quarter of 2010, the private label MBS had an other-than-temporary impairment of $143,000.  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 $42,000 as of June 30, 2010.    All of these securities are monitored on a quarterly basis by management.

14

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

· 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 $1.1 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		(728	)		(200	)
As of June 30,	$	(4,633	)	$	(1,550	)

	Accumulated Credit Losses
	2010			2009
Credit losses on debt securities held
Beginning of period	$	(4,482	)	$	(1,550	)
Additions related to increases in previously recognized other-than- temporary losses for the three months ended		(151	)		-
As of June 30,	$	(4,633	)	$	(1,550	)

15

Note 5:  Accumulated Other Comprehensive Income (Loss)

Other comprehensive income (loss) components and related taxes for the six months ended June 30 were as follows:

	2010			2009
Net unrealized gain (loss) on securities available-for-sale	$	5,432		$	(2,037	)
Net unrealized loss on securities available-for-sale for which a portion of an other-than-temporary impairment has been recognized in income		(831	)		(567	)
Net unrealized loss on derivative used for cash flow hedges		(365	)		-
Less reclassification adjustment for realized losses included in income		407			55
Other comprehensive income (loss), before tax effect		4,643			(2,549	)
Tax expense (benefit)		1,600			(683	)
Other comprehensive income (loss)	$	3,043		$	(1,866	)

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

	June 30,			December 31,
	2010			2009
Net unrealized gain on securities available-for-sale	$	3,375		$	331
Net unrealized loss on securities available-for-sale for which a portion of an other-than-temporary impairment has been recognized in income		(831	)		(2,796	)
Net unrealized gain (loss) on derivative used for cash flow hedges		(321	)		44
Net unrealized loss relating to defined benefit plan liability		(439	)		(438	)
		1,784			(2,859	)
Tax expense (benefit)		598			(1,001	)
Net-of-tax amount	$	1,186		$	(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
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.

16

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.  Level 1 securities include the marketable equity 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.

	Fair		Fair Value Measurements Using
	Value		Level 1		Level 2		Level 3
June 30, 2010
Mortgage-backed securities
Freddie Mac	$	30,015	$	-	$	30,015	$	-
Fannie Mae		27,950		-		27,950		-
Ginnie Mae		2,496		-		2,496		-
Collateralized mortgage obligations
Freddie Mac		36,013		-		36,013		-
Fannie Mae		26,897		-		26,897		-
Ginnie Mae		54,972		-		54,972		-
Private labeled		9,409		-		9,409		-
Federal agencies		15,014		-		15,014		-
Municipals		1,226		-		1,226		-
Small Business Administration		17		-		17		-
Corporate obligations		2,762		-		-		2,762
Marketable equity securities		1,681		1,681		-		-
Available-for-sale securities	$	208,452	$	1,681	$	204,009	$	2,762
December 31, 2009
Mortgage-backed securities
Freddie Mac	$	15,312	$	-	$	15,312	$	-
Fannie Mae		12,521		-		12,521		-
Ginnie Mae		2,057		-		2,057		-
Collateralized mortgage obligations
Freddie Mac		34,834		-		34,834		-
Fannie Mae		8,848		-		8,848		-
Ginnie Mae		31,882		-		31,882		-
Private labeled		11,465		-		11,465		-
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

17

The following is a reconciliation of the beginning and ending balances for the three months ended June 30, 2010 and 2009 of recurring fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs:

	2010			2009
Beginning balance	$	1,892		$	3,207
Total realized and unrealized gains and losses
Included in net income		(8	)		-
Included in other comprehensive loss		861			(331	)
Purchases, issuances and settlements		17			13
Transfers in/out of Level 3		-			-
Ending balance	$	2,762		$	2,889
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	$	8		$	-

The following is a reconciliation of the beginning and ending balances for the six months ended June 30, 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		(401	)		(200	)
Included in other comprehensive loss		589			(3,234	)
Purchases, issuances and settlements		35			6
Transfers in/out of Level 3		-			-
Ending balance	$	2,762		$	2,889
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	$	401		$	200

18

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.

19

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
June 30, 2010
Impaired Loans	$	4,190	$	-	$	-	$	4,190
Other real estate owned		3,288		-		-		3,288
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 June 30, 2010 and December 31, 2009, are as follows:

	June 30, 2010				December 31, 2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Assets
Cash and cash equivalents	$	60,613	$	60,613	$	46,341	$	46,341
Interest-bearing deposits		3,001		3,001		-		-
Investment securities held-to-maturity		7,097		5,743		8,147		6,333
Loans held for sale		2,313		2,384		2,521		2,527
Loans		1,014,204		1,038,641		1,059,694		1,086,805
Stock in FHLB		18,632		18,632		18,632		18,632
Interest receivable		4,483		4,483		4,376		4,376
Liabilities
Deposits	$	1,109,209	$	1,075,054	$	1,045,196	$	1,007,530
FHLB advances		173,314		178,501		197,960		194,717
Other borrowings		13,528		14,477		14,114		15,083
Interest payable		1,493		1,493		1,192		1,192
Advances by borrowers for taxes and insurance		1,868		1,868		1,734		1,734

20

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.

21

Note 7: Allowance for Loan Losses

Activity in the allowance for loan losses for the six months ended June 30 is as follows:

	June 30,
	2010		2009
Balance beginning of period	$	16,414	$	15,107
Additions:
Provision charged to operations		3,050		3,200
Deductions:
Loans charged-off		3,803		2,532
Recoveries		587		573
Net charge-offs		3,216		1,959
Balance end of period	$	16,248	$	16,348

Information on non-performing assets, including restructured loans, is provided below:

	June 30,
	2010		2009
Non-performing assets
Non-accrual loans	$	23,570	$	27,518
Accuring loans 90 days + past due		876		1,039
Restructured loans		1,224		100
Total non-performing loans		25,670		28,657
Real estate owned		6,171		3,176
Other repossessed assets		1,318		1,499
Non-performing securities		100		-
Total non-performing assets	$	33,259	$	33,332

Refer to Management’s Discussion and Analysis for further discussion regarding the allowance for loan loss and non-performing assets as of the three and six months ended June 30, 2010.

22

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” or the “Bank”) 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 $196 million in investments.  MFIC currently owns one subsidiary, Mutual Federal REIT.  The assets of Mutual Federal REIT consist of approximately $84 million in one-to four-family mortgage loans.  Mishawaka Financial Services 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.

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.

23

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 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.

24

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.

25

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.

26

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 54% as of June 30, 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 June 30, 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.

27

During the first six months of 2010, in keeping with its strategic objective to reduce interest rate risk exposure, the Company also sold $23.0 million of long term fixed rate loans that were originated as held for sale, which reduced potential earning assets and therefore had a negative impact on net interest income.  The negative impact was offset by recognizing a gain on the sale of these loans of $564,000 and by using a portion of the proceeds to make purchases in the investment portfolio.

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 $1.4 billion at June 30, 2010, an increase from December 31, 2009 of $42.9 million, or 3.1%. Gross loans, excluding loans held for sale, decreased $45.7 million, or 4.2%.  Consumer loans decreased $18.0 million, or 6.9%, commercial loans decreased $18.4 million, or 5.5%, and residential mortgage loans held in the portfolio decreased $9.3 million, or 1.9%. Residential mortgage loans held for sale decreased $208,000 and mortgage loans sold during the first half of 2010 totaled $23.0 million compared to $94.9 million sold in the first half 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.  Investment securities available for sale increased $77.5 million, or 59.2%, primarily due to the current liquidity available to the Bank.

Allowance for loan losses was $16.2 million at June 30, 2010, a decrease of $166,000 from December 31, 2009. Net charge offs for the quarter ended June 30, 2010 were $1.9 million, or .74% of average loans on an annualized basis compared to $992,000, or .36% of average loans for the comparable period in 2009.  Net charge offs for the six months ended June 30, 2010, $3.2 million, or .61% of average loans on an annualized basis compared to $2.0 million, or .35% 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 .49% of average loans for the quarter ended March 31, 2010 to .74% for the current quarter.  The allowance for loan losses as a percentage of non-performing loans and total loans was 63.30% and 1.58%, respectively at June 30, 2010 compared to 50.38% and 1.53%, respectively at December 31, 2009.

28

Total deposits were $1.1 billion at June 30, 2010 an increase of $64.0 million, or 6.1% from December 31, 2009. This increase was due to increases in certificates of deposit and savings deposits of $35.4 million and increases in demand and money market deposits of $28.6 million.  Total borrowings decreased $25.2 million to $186.8 million at June 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 $134.4 million at June 30, 2010, an increase of $4.6 million, or 3.6% from December 31, 2009. The increase was due primarily to net income of $3.1 million and unrealized gains on securities of $3.3 million.  This increase was partially offset by dividend payments of $838,000 to common shareholders and $810,000 to preferred shareholders and net unrealized losses on derivatives of $241,000.  The Bank’s risk-based capital ratio was well in excess of “well-capitalized” levels as defined by all regulatory standards as of June 30, 2010.

Comparison of the Operating Results for the Three Months Ended June 30, 2010 and 2009

Net interest income before the provision for loan losses increased $566,000 from $10.3 million for the three months ended June 30, 2009 to $10.9 million for the three months ended June 30, 2010. The primary reason for the increase was an increase in average earning assets of $61.2 million as a result of increased liquidity and an increase in net interest margin of 2 basis points to 3.23% in the second quarter of 2010 compared to 3.21% for the second quarter 2009.  On a linked quarter basis, net interest income before the provision for loan losses increased $390,000 primarily due to an increase in average earning assets of $28.5 million and an increase of 5 basis points in net interest margin.

The provision for loan losses for the second quarter of 2010 was $1.5 million compared to $1.8 million in the second quarter of 2009.  Non-performing loans to total loans at June 30, 2010 were 2.49% compared to 2.60% at June 30, 2009.  Non-performing loans to total loans have also declined from 3.03% as of December 31, 2009 and 2.62% as of March 2010.  Non-performing loans in all loan segments have decreased.  Non-performing assets to total assets were 2.31% at June 30, 2010 comparing favorably to ratios of 2.44% at March 31, 2010, 2.86% at December 31, 2009 and 2.41% as of June 30, 2009.  Although the current economic conditions have lead to an increase in repossessed assets from June 30, 2009 to June 30, 2010, the balances have decreased $1.3 million since March 31, 2010.

29

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

	Three Months Ended						Amount			Percent
Non-Interest Income	6/30/2010			6/30/2009			Change			Change
Service fee income	$	1,888		$	1,878		$	10			0.5	%
Net realized gain on sale of securities		35			358			(323	)		-90.2	%
Equity in losses of limited partnerships		(128	)		(78	)		(50	)		64.1	%
Commissions		1,082			860			222			25.8	%
Net gains on sales of loans		209			618			(409	)		-66.2	%
Net servicing fees		32			60			(28	)		-46.7	%
Increase in cash surrend value of life insurance		372			412			(40	)		-9.7	%
Net other-than-temporary losses on securities		(151	)		-			(151	)
Other income		55			38			17			44.7	%
Total Non-Interest Income	$	3,394		$	4,146		$	(752	)		-18.1	%

Non-interest income decreased $752,000 to $3.4 million for the three months ended June 30, 2010 compared to the same period in 2009. The decrease was primarily due to a reduction in gain on sale of loans as mortgage loan sales slowed as did production in comparison to the second quarter of 2009.  Another reason for the decline was a decrease in gains on sale of securities and an increase in other-than-temporary impairment in the second quarter of 2010 compared to the second quarter of 2009.  Other-than-temporary impairment in the second quarter of 2010 primarily included several private labeled mortgage backed securities that have seen charge offs in the last quarter in the individual mortgage back pools.  These decreases were partially offset by increases in service fees on transaction accounts and increases in commission income.  The increase in commission income was due primarily to commissions received from the trust and brokerage businesses for the quarter.  On a linked quarter basis, non-interest income increased by $252,000.

30

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

	Three Months Ended				Amount			Percent
Non-Interest Expense	6/30/2010		6/30/2009		Change			Change
Salaries and employee benefits	$	5,332	$	5,688	$	(356	)		-6.3	%
Net occupancy expenses		582		584		(2	)		-0.3	%
Equipment expenses		494		479		15			3.1	%
Data processing fees		388		361		27			7.5	%
Automated teller machine		296		280		16			5.7	%
Deposit insurance		453		1,045		(592	)		-56.7	%
Professional fees		243		327		(84	)		-25.7	%
Advertising and promotion		306		363		(57	)		-15.7	%
Software subscriptions and publications		403		345		58			16.8	%
Intangible amortization		353		397		(44	)		-11.1	%
Repossessed assets expense		614		383		231			60.3	%
Other expenses		1,021		1,058		(37	)		-3.5	%
Total Non-Interest Expense	$	10,485	$	11,310	$	(825	)		-7.3	%

Non-interest expense decreased $825,000 to $10.5 million for the three months ended June 30, 2010 compared to $11.3 million for the same period in 2009, or a decrease of $195,000 when excluding the one-time FDIC special assessment of $630,000 for the second quarter of 2009.  Salaries and employee benefits have continued to decrease due to attrition and changes in employee benefits.  Professional fees declined largely due to a recovery of legal expenses.  These decreases were partially offset by an increase in repossessed asset expense due to an increase in foreclosed real estate of 94.3% over June 2009.  On a linked quarter basis, non-interest expense increased by $150,000 compared to the three months ended March 31, 2010, primarily due to an increase in repossessed asset expense.

Income tax expense increased $404,000 for the three months ended June 30, 2010, compared to the same period in 2009.  The effective tax rate increased to 21.5% from 5.9% due to an increase in taxable income and a decreased percentage of low income housing tax credits to taxable income when comparing the quarter ended June 2010 to June 2009.

31

Comparison of the Operating Results for the Six Months Ended June 30, 2010 and 2009

Net interest income before the provision for loan losses increased $662,000 from $20.7 million for the six months ended June 30, 2009 to $21.4 million for the six months ended June 30, 2010. The primary reason for the increase was an increase in average earning assets of $45.9 million as a result of increased liquidity, partially offset by a decrease in net interest margin of 2 basis points to 3.20% in the first half of 2010 compared to 3.22% for the first half of 2009.

The provision for loan loss for the first half of 2010 was $3.1 million compared to $3.2 million in the first half of 2009.  Non-performing loans to total loans at June 30, 2010 were 2.49% compared to 2.60% at June 30, 2009.  Non-performing loans to total loans have also declined from 3.03% as of December 31, 2009 and 2.62% as of March 2010.  Non-performing loans in all loan segments have decreased.  Non-performing assets to total assets were 2.31% at June 30, 2010 comparing favorably to ratios of 2.44% at March 31, 2010, 2.86% at December 31, 2009 and 2.41% as of June 30, 2009.

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

	Six Months Ended						Amount			Percent
Non-Interest Income	6/30/2010			6/30/2009			Change			Change
Service fee income	$	3,627		$	3,566		$	61			1.7	%
Net realized gain on sale of securities		320			359			(39	)		-10.9	%
Equity in losses of limited partnerships		(255	)		(155	)		(100	)		64.5	%
Commissions		2,024			1,488			536			36.0	%
Net gains on sales of loans		564			1,644			(1,080	)		-65.7	%
Net servicing fees		68			137			(69	)		-50.4	%
Increase in cash surrend value of life insurance		755			799			(44	)		-5.5	%
Net other-than-temporary losses on securities		(728	)		(200	)		(528	)		264.0	%
Other income		159			88			71			80.7	%
Total Non-Interest Income	$	6,534		$	7,726		$	(1,192	)		-15.4	%

Non-interest income decreased $1.2 million to $6.5 million for the six months ended June 30, 2010 compared to the same period in 2009.  The decrease was primarily due to a reduction in gain on sale of loans due to decreased loan demand from 2009 and an increased other-than-temporary impairment for eleven private labeled and four trust preferred securities written-down during the first half of 2010.  These decreases are partially offset by increases in commission income primarily due to the trust and brokerage business.

32

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

	Six Months Ended				Amount			Percent
Non-Interest Expense	6/30/2010		6/30/2009		Change			Change
Salaries and employee benefits	$	10,668	$	11,148	$	(480	)		-4.3	%
Net occupancy expenses		1,243		1,394		(151	)		-10.8	%
Equipment expenses		979		816		163			20.0	%
Data processing fees		798		715		83			11.6	%
Automated teller machine		576		561		15			2.7	%
Deposit insurance		899		1,433		(534	)		-37.3	%
Professional fees		585		662		(77	)		-11.6	%
Advertising and promotion		604		725		(121	)		-16.7	%
Software subscriptions and publications		800		677		123			18.2	%
Intangible amortization		706		795		(89	)		-11.2	%
Repossessed assets expense		1,081		680		401			59.0	%
Other expenses		1,881		2,076		(195	)		-9.4	%
Total Non-Interest Expense	$	20,820	$	21,682	$	(862	)		-4.0	%

Non-interest expense decreased $862,000 to $20.8 million, for the six months ended June 30, 2010 compared to $21.7 million for the same period in 2009.   The decrease in expenses was partially due to the FDIC special assessment in the second quarter of 2009 as discussed above.   Another reason for the decrease was a decline in salaries and benefits due to attrition and changes in employee benefits.  Net occupancy expenses have declined compared to June 2009 due to lower seasonal maintenance expenses in late winter and early spring.  These decreases were partially offset by an increase of in repossessed asset expense as our repossessed assets have increased more than 60% over June 2009.

For the six-month period ended June 30, 2010, income tax expense increased $476,000 compared to the same period in 2009. The increase was due primarily to an increase in taxable income. The effective tax rate also increased from 12.3% to 22.7% due to a decreased percentage of low income housing tax credits to taxable income when comparing the first half of 2010 to the first half of 2009, respectively.

Liquidity and Capital Resources

The standard measure of liquidity for savings associations is the ratio of cash and eligible investments to a certain percentage of the net-withdrawable savings accounts and borrowings due within one year.  As of June 30, 2010, Mutual had liquid assets of $276.0 million and a liquidity ratio of 21.25% compared to 14.37% at December 31, 2009. This elevated level of liquidity is primarily due to increased cash due to the growth in deposits in the first half 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.

Mutual continues to maintain capital ratios which exceed “well-capitalized” levels as defined pursuant to all regulatory standards as of June 30, 2010.  Mutual’s current total regulatory capital ratios are as follows: core capital, 8.84%; Tier I risk-based capital, 11.62%; and total risk-based capital, 12.87%.

33

ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk

Presented below as of June 30, 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.

June 30, 2010

Net Portfolio Value

Changes												NPV as % of PV of Assets
In Rates			$ Amount			$ Change			% Change			NPV Ratio			Change
	+300	bp		185,560			-17,901			-9	%		13.39	%		-45	bp
	+200	bp		196,644			-6,817			-3	%		13.89	%		5	bp
	+100	bp		204,032			571			0	%		14.12	%		28	bp
	0	bp		203,461									13.84	%
	-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)

June 30, 2009

Net Portfolio Value

 

Changes												NPV as % of PV of Assets
In Rates			$ Amount			$ Change			% Change			NPV Ratio			Change
	+300	bp		166,243			-28,440			-15	%		12.59	%		-122	bp
	+200	bp		178,160			-16,523			-8	%		13.20	%		-61	bp
	+100	bp		188,576			-6,107			-3	%		13.66	%		-15	bp
	0	bp		194,683									13.81	%
	-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.

34

The analysis at June 30, 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”), as of June 30, 2010 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 as of the end of the period preceding the filing of this quarterly report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and the Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. There have been no changes in our internal control over financial reporting (as defined in Rule 13a – 15(f) under the Act) that occurred during the quarter ended June 30, 2010 that have materially affected, or are likely to materially affect our internal control over financial reporting.

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

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.

35

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

The following risk factor represents changes and additions to, and should be read in conjunction with “Item 1A. Risk Factors” contained in the Annual Report on Form 10-K for the year ended December 31, 2009.

The Dodd-Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act that was enacted on July 21, 2010, provides, among other things, for new restrictions and an expanded framework of regulatory oversight for financial institutions and their holding companies, including the Company and the Bank.  Under the new law, the Bank’s primary regulator, the Office of Thrift Supervision, will be eliminated and existing federal thrifts will be subject to regulation and supervision by the Office of Comptroller of the Currency, which currently supervises and regulates all national banks.  In addition, beginning in 2010, all financial institution holding companies, including MutualFirst, will be regulated by the Board of Governors of the Federal Reserve System, including those imposing federal capital requirements and may result in additional restrictions on investments and holding company activities.  The law also creates a new consumer financial protection bureau that will have the authority to promulgate rules intended to protect consumers in the financial products and services market.  The creation of this independent bureau could result in new regulatory requirements and raise the cost of regulatory compliance.  In addition, new regulations mandated by the law could require changes in regulatory capital requirements, loan loss provisioning practices, and compensation practices and require holding companies to serve as a source of strength for their financial institution subsidiaries.  Effective July 21, 2011, financial institutions may pay interest on demand deposits, which could increase our interest expense.  We cannot determine the full impact of the new law on our business and operations at this time.  Any legislative or regulatory changes in the future could adversely affect our operations and financial condition.

36

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 second quarter of 2010 is as follows.

	Total Number of Shares Purchased		Average Price Per Share		Total Number of Shares Purchased As Part of Publicly Announced Plan		Maximum Number of Shares that May Yet Be Purchased Under the Plan
								330,000	(1)
April 1, 2010 - April 30, 2010		-		-		-		330,000
May 1, 2010 - May 31, 2010		-		-		-		330,000
June 1, 2010 - June 30, 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. Reserved.

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.

37

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: August 12, 2010	By:	/s/  David W. Heeter
		David W. Heeter
		President and Chief Executive Officer
Date: August 12, 2010	By:	/s/  Christopher D. Cook
		Christopher D. Cook
		Senior Vice President, Treasurer and Chief Financial Officer

38