10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

 x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended  June 30, 2011         

or

 ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXHANGE ACT OF 1934

For the transition period from ___________ to ________________

Commission File Number:   000-27905

MutualFirst Financial, Inc.

(Exact name of registrant specified in its charter)

Maryland	35-2085640
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

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

(765) 747-2800

(Registrant’s telephone number, including area code)

None

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No ¨

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

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

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

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

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

The number of shares of the Registrant’s common stock, with $.01 par value, outstanding as of August 5, 2011 was 6,986,586.

FORM 10 – Q

MutualFirst Financial, Inc.

INDEX
		Page
		Number
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Condensed Balance Sheets	3
	Consolidated Condensed Statements of Income	4
	Consolidated Condensed Statement of Stockholders’ Equity	5
	Consolidated Condensed Statements of Cash Flows	6
	Notes to Unaudited Consolidated Condensed Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	47
Item 4.	Controls and Procedures	48
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Changes in Securities and Use of Proceeds	49
Item 3.	Defaults Upon Senior Securities	49
Item 4.	Submission of Matters to a Vote of Security Holders	49
Item 5.	Other Information	49
Item 6.	Exhibits	49
Signature Page		50
Exhibits

2

PART 1     FINANCIAL INFORMATION

ITEM 1.     Financial Statements

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY

Consolidated Condensed Balance Sheets

	June 30,			December 31,
	2011			2010
	(Unaudited)
Assets
Cash	$	10,665,156		$	9,288,748
Interest-bearing demand deposits		23,621,594			17,531,932
Cash and cash equivalents		34,286,750			26,820,680
Investment securities available for sale		304,463,302			245,165,189
Loans held for sale		654,039			10,482,734
Loans		965,439,676			995,273,005
Allowance for loan losses		(15,956,545	)		(16,372,093	)
Net loans		949,483,131			978,900,912
Premises and equipment		32,305,113			32,966,112
Federal Home Loan Bank of Indianapolis stock, at cost		14,390,700			16,682,200
Investment in limited partnerships		3,368,330			3,623,564
Cash surrender value of life insurance		46,327,514			45,565,611
Prepaid FDIC premium		3,427,182			4,207,592
Core deposit and other intangibles		3,919,168			4,533,085
Deferred income tax benefit		16,616,181			20,030,022
Income tax receivable		2,419,680			1,412,938
Other assets		18,271,097			16,510,902
Total assets	$	1,429,932,187		$	1,406,901,541
Liabilities
Deposits
Non-interest-bearing	$	121,859,547		$	113,454,542
Interest bearing		1,039,710,676			1,008,114,181
Total deposits		1,161,570,223			1,121,568,723
Federal Home Loan Bank advances		106,655,982			128,537,407
Other borrowings		12,793,941			13,167,316
Other liabilities		12,889,632			12,488,073
Total liabilities		1,293,909,778			1,275,761,519
Commitments and Contingent Liabilities
Stockholders' Equity
Preferred stock, $.01 par value
Authorized and unissued — 5,000,000 shares
Issued and outstanding — 32,382 shares;
liquidation preference $1,000 per share		324			324
Common stock, $.01 par value
Authorized — 20,000,000 shares
Issued and outstanding —6,986,586 and 6,984,754 shares in 2011 and 2010, respectively		69,866			69,847
Additional paid-in capital - preferred stock		31,921,762			31,829,779
Additional paid-in capital - common stock		72,449,155			72,424,460
Retained earnings		31,004,572			31,757,156
Accumulated other comprehensive income (loss)		1,371,196			(3,988,158	)
Unearned employee stock ownership plan (ESOP) shares		(794,466	)		(953,386	)
Total stockholders' equity		136,022,409			131,140,022
Total liabilities and stockholders' equity	$	1,429,932,187		$	1,406,901,541

See notes to consolidated condensed financial statements.

3

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY

Consolidated Condensed Statements of Income

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
Interest Income
Loans receivable, including fees	$	13,415,158		$	15,242,467		$	27,099,272		$	30,743,012
Investment securities:
Mortgage-backed securities		2,108,319			1,721,101			3,841,403			3,069,290
Federal Home Loan Bank stock		102,499			91,881			207,941			185,805
Other investments		151,276			291,757			289,412			550,575
Deposits with financial institutions		29,795			55,856			51,615			98,865
Total interest income		15,807,047			17,403,062			31,489,643			34,647,547
Interest Expense
Passbook savings		36,658			35,469			71,648			69,928
Certificates of deposit		3,718,088			4,173,942			7,547,751			8,500,109
Daily Money Market accounts		121,032			155,765			242,672			302,920
Demand and NOW acounts		323,326			256,923			594,197			454,932
Federal Home Loan Bank advances		844,066			1,668,348			1,744,345			3,483,117
Other interest expense		209,422			234,239			420,245			470,251
Total interest expense		5,252,592			6,524,686			10,620,858			13,281,257
Net Interest Income		10,554,455			10,878,376			20,868,785			21,366,290
Provision for losses on loans		1,700,000			1,525,000			5,900,000			3,050,000
Net Interest Income After Provision for Loan Losses		8,854,455			9,353,376			14,968,785			18,316,290
Other Income
Service fee income		1,726,352			1,887,237			3,330,662			3,627,127
Net realized gain on sale of securities		1,309			35,448			75,356			320,276
Equity in losses of limited partnerships		(115,762	)		(127,617	)		(149,279	)		(254,832	)
Commissions		1,005,014			1,082,154			1,955,715			2,023,669
Net gains on sales of loans		348,903			209,378			440,703			563,687
Net servicing fees		17,586			31,357			44,246			68,205
Increase in cash surrender value of life insurance		374,182			372,247			724,961			755,186
Loss on sale of other real estate and repossessed assets		(62,380	)		(326,018	)		(336,137	)		(539,131	)
Other-than-temporary losses on securities
Total other-than-temporary losses		0			(292,728	)		(723,338	)		(1,626,025	)
Portion of loss recognized in other comperehensive income (before taxes)		0			141,851			529,896			898,330
Net impairment losses recognized in earnings		0			(150,877	)		(193,442	)		(727,695	)
Other income		17,307			54,585			66,522			158,796
Total other income		3,312,511			3,067,894			5,959,307			5,995,288
Other Expenses
Salaries and employee benefits		5,340,201			5,331,907			10,863,326			10,667,731
Net occupancy expenses		659,546			581,954			1,334,505			1,242,831
Equipment expenses		501,826			494,110			982,371			979,205
Data processing fees		378,784			387,828			780,000			798,469
Automated teller machine		227,862			296,391			535,324			575,470
Deposit insurance		332,105			453,338			839,701			899,291
Professional fees		375,906			243,131			735,877			585,450
Advertising and promotion		299,751			306,096			599,782			603,985
Software subscriptions and maintenance		312,979			402,698			630,637			799,821
Intangible amortization		305,314			352,980			613,917			705,960
Other real estate and repossessed assets		306,274			287,710			467,103			541,482
Other expenses		960,761			1,021,251			1,819,300			1,880,686
Total other expenses		10,001,309			10,159,394			20,201,843			20,280,381
Income Before Income Tax		2,165,657			2,261,876			726,249			4,031,197
Income tax expense (benefit)		485,000			487,000			(261,000	)		913,000
Net Income		1,680,657			1,774,876			987,249			3,118,197
Preferred stock dividends and amortization		450,766			450,766			901,532			901,532
Net Income Available to Common Shareholders	$	1,229,891		$	1,324,110		$	85,717		$	2,216,665
Basic earnings per common share	$	0.18		$	0.19		$	0.01		$	0.32
Diluted earnings per common share	$	0.18		$	0.19		$	0.01		$	0.32
Dividends per common share	$	0.06		$	0.06		$	0.12		$	0.12

See notes to consolidated condensed financial statements.

4

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY

Consolidated Condensed Statement of Stockholders' Equity

For the Period Ended June 30, 2011

(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, January 1, 2011		6,984,754	$	69,847	$	72,424,460			32,382	$	324	$	31,829,779				$	31,757,156		$	(3,988,158	)	$	(953,386	)	$	131,140,022
Comprehensive income
Net income for the period														$	987,249			987,249									987,249
Other comprehensive income, net of tax
Net unrealized gain on securities															5,387,965					$	5,387,965						5,387,965
Net unrealized loss on derivatives															(28,611	)					(28,611	)					(28,611	)
Comprehensive income														$	6,346,603
ESOP shares earned						(12,299	)																	158,920			146,621
Accretion of discount on preferred stock													91,983					(91,983	)								0
Share-based compensation						26,058																					26,058
Stock options exercised		1,832		19		10,936																					10,955
Cash dividends ($.12 per common share)																		(838,300	)								(838,300	)
Cash dividends - preferred stock																		(809,550	)								(809,550	)
Balances, June 30, 2011		6,986,586	$	69,866	$	72,449,155			32,382	$	324	$	31,921,762				$	31,004,572		$	1,371,196		$	(794,466	)	$	136,022,409

See notes to consolidated condensed financial statements.

5

MutualFirst Financial, Inc.

Consolidated Condensed Statements of Cash Flows

(Unaudited)

	Six Months Ended
	June 30,
	2011			2010
Operating Activities
Net income	$	987,249		$	3,118,197
Items not requiring (providing) cash
Provision for loan losses		5,900,000			3,050,000
Depreciation and amortization		3,077,487			2,634,328
Deferred income tax		(511,001	)		1,324,741
Loans originated for sale		(10,829,804	)		(22,774,710	)
Proceeds from sales of loans held for sale		20,742,631			23,316,173
(Gain) loss on sale:
Loans held for sale		(440,703	)		(563,687	)
Securities-available for sale		(75,356	)		(320,276	)
Other real estate and repossessed assets		336,137			539,130
Premises and equipment		-			918
Loss on other-than-temporary impairement, securities		193,442			727,695
Other equity adjustments		169,856			109,236
Change in
Prepaid FDIC premium		780,410			832,808
Interest receivable and other assets		673,516			1,260,814
Interest payable and other liabilities		207,497			(689,624	)
Cash value of life insurance		(724,961	)		(792,127	)
Other adjustments		1,667,605			(603,423	)
Net cash provided by operating activities		22,154,005			11,170,193
Investing Activities
Net change in interest earning assets		-			(3,001,208	)
Purchases of securities
Available for sale		(74,015,984	)		(96,484,125	)
Proceeds from maturities and paydowns of securities:
Available for sale		19,005,980			14,404,461
Held to maturity		-			782,176
Proceeds from sale of securities-available for sale		3,010,702			9,093,021
Redemption of Federal Home Loan Bank Stock		2,291,500			-
Net change in loans		16,728,172			37,491,096
Purchases of premises and equipment		(404,953	)		(456,571	)
Proceeds from sale of premises and equipment		-			500
Proceeds from real estate owned sales		2,365,949			1,806,920
Other investing activities		(36,942	)		1,867,256
Net cash used in investing activities		(31,055,576	)		(34,496,474	)
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits		46,653,978			32,782,700
Certificates of deposits		(6,652,479	)		31,230,094
Proceeds from FHLB advances		11,000,000			20,000,000
Repayment of FHLB advances		(32,785,176	)		(44,293,622	)
Repayment of other borrowings		(394,898	)		(607,486	)
Cash dividends paid		(1,647,850	)		(1,647,721	)
Other financing activities		194,066			134,256
Net cash provided by financing activities		16,367,641			37,598,221
Net Change in Cash and Cash Equivalents		7,466,070			14,271,940
Cash and Cash Equivalents, Beginning of Year		26,820,680			46,340,897
Cash and Cash Equivalents, End of Year	$	34,286,750		$	60,612,837
Additional Cash Flows Information
Interest paid	$	10,358,278		$	13,582,436
Income tax paid		-			-
Transfers from loans to foreclosed real estate		6,295,894			4,422,122
Mortgage servicing rights capitalized		356,571			229,823

See Notes to Consolidated Condensed Financial Statements

6

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 2010 filed with the Securities and Exchange Commission.

The interim consolidated financial statements at June 30, 2011, 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, 2010 has been derived from the Audited Consolidated Balance Sheet of the Company as of that date.

Note 2: Earnings (loss) per share

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

	Three Months Ended Ended June 30,
	2011							2010
				Weighted-							Weighted-
				Average		Per-Share					Average		Per-Share
	Income			Shares		Amount		Income			Shares		Amount
	(000's)							(000's)
Basic Earnings Per Share
Net income	$	1,681			6,903,151			$	1,775			6,861,589
Dividends and accretion on preferred stock		(451	)						(451	)
Income available to common shareholders	$	1,230			6,903,151	$	0.18	$	1,324			6,861,589	$	0.19
Effect of Dilutive securities
Stock options and RRP grants					102,731							12,137
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions	$	1,230			7,005,882	$	0.18	$	1,324			6,873,726	$	0.19

	Six Months Ended June 30,
	2011							2010
				Weighted-							Weighted-
				Average		Per-Share					Average		Per-Share
	Income			Shares		Amount		Income			Shares		Amount
	(000's)							(000's)
Basic Earnings Per Share
Net income	$	987			6,898,195			$	3,118			6,865,562
Dividends and accretion on preferred stock		(901	)						(902	)
Income available to common shareholders	$	86			6,898,195	$	0.01	$	2,216			6,865,562	$	0.32
Effect of Dilutive securities
Stock options and RRP grants					126,725							7,343
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions	$	86			7,024,920	$	0.01	$	2,216			6,872,905	$	0.32

Options for 434,887 and 565,538 shares and warrants for 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, 2011 and 2010, respectively.

7

Note 3:  Impact of Accounting Pronouncements

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 are 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 was effective at the beginning of 2010, except for the detailed Level 3 disclosures, which became effective at the beginning of 2011.  The Company adopted this accounting pronouncement, as required, and the adoption did not 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 became effective for the Company for first interim or annual reporting period ending on or after December 15, 2010 and did not have a material impact on the statements taken as a whole.

In April 2011, FASB issued ASU No. 2011-02: A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.  The standard is intended to provide additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring.  The amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and are to be applied retrospectively to the beginning of the annual period of adoption.  As a result of applying these amendments, an entity may identify receivables that are newly considered impaired.  Early adoption is permitted.  The Company is evaluating the impact of this ASU.

In April 2011, FASB issued ASU No. 2011-03:  Reconsideration of Effective Control for Repurchase Agreements.  The amendments in this ASU remove from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee.  The amendments in this ASU also eliminates the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets.

The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011.  The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date.  Early adoption is not permitted.  The Company does not anticipate that this ASU will have a material effect on its financial statements.

In May 2011, FASB issued ASU No. 2011-04:  Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.  The amendments in this ASU generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed.  This ASU results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRS.

8

The amendments in this ASU are to be applied prospectively.  For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011.  Early application by public entities is not permitted.  The Company does not anticipate that this ASU will have a material effect on its financial statements.

In June 2011, FASB issued ASU No. 2011-05:  Amendments to Topic 220, Comprehensive Income.  Under the amendments in this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income.  This ASU eliminates the option to present the components of other comprehensive income as a part of the statement of changes in stockholders’ equity.  The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.

The amendments in this ASU should be applied retrospectively.  For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  Early adoption is permitted, because compliance with the amendments is already permitted.  The amendments do not require any transition disclosures.

9

Note 4: Investments

The amortized cost and approximate fair values of securities as of June 30, 2011 and December 31, 2010 are as follows.
 

	June 30, 2011
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Loss			Value
Available for Sale Securities
Mortgage-backed securities
Government sponsored agencies	$	178,036	$	3,821	$	(223	)	$	181,634
Collateralized mortgage obligations
Government sponsored agencies		107,662		2,923		(26	)		110,559
Federal Agencies		3,998		8		-			4,006
Municipals		3,445		120		-			3,565
Small Business Administration		13		-		-			13
Corporate obligations		6,726		-		(3,768	)		2,958
Marketable equity securities		1,740		-		(12	)		1,728
Total	$	301,620	$	6,872	$	(4,029	)	$	304,463

	December 31, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Loss			Value
Available for Sale Securities
Mortgage-backed securities
Government sponsored agencies	$	119,017	$	1,076	$	(1,818	)	$	118,275
Collateralized mortgage obligations
Government sponsored agencies		112,615		1,251		(1,642	)		112,224
Federal agencies		7,925		-		(104	)		7,821
Municipals		2,460		33		(11	)		2,482
Small Business Administration		16		-		-			16
Corporate obligations		6,888		-		(4,243	)		2,645
Marketable equity securities		1,723		-		(21	)		1,702
Total	$	250,644	$	2,360	$	(7,839	)	$	245,165

The amortized cost and fair value of available-for-sale securities at June 30, 2011, 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.

10

	Available for Sale
	Amortized		Fair
Description Securities	Cost		Value
Security obligations due
Five to ten years	$	985	$	1,017
After ten years		13,184		9,512
		14,169		10,529
Mortgage-backed securities		178,036		181,634
Collateralized mortgage obligations		107,662		110,559
Small Business Administration		13		13
Marketable equity securities		1,740		1,728
Totals	$	301,620	$	304,463

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $1.5 million at June 30, 2011.

Gross gains of $75,000 and $320,000 resulting from sales of securities were realized for the six months ended June 30, 2011 and 2010, respectively.  There were no losses recognized on the sale of securities during this period in either 2011 or 2010.  Other-than-temporary impairment losses were recognized on securities for the six months ended June 30, 2011 and 2010 of $193,000 and $728,000, respectively.

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, 2011, was $38.9 million, a decrease from $141.3 million at December 31, 2010, which is approximately 13% and 58%, respectively, of the Bank's portfolio.  The Bank has continued to see an improvement since year-end due to increased values driven by lower market rates.

Based on evaluation of available evidence, management believes those securities stated at an amount less than their historical cost, 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.

11

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, 2011 and December 31, 2010:

	June 30, 2011
	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
Government sponsored agencies	$	29,228	$	(223	)	$	-	$	-		$	29,228	$	(223	)
Collateralized mortgage obligations
Government sponsored agencies		4,938		(26	)		-		-			4,938		(26	)
Corporate obligations		-		-			2,958		(3,768	)		2,958		(3,768	)
Marketable equity securities		-		-			1,728		(12	)		1,728		(12	)
Total temporarily impaired securities	$	34,166	$	(249	)	$	4,686	$	(3,780	)	$	38,852	$	(4,029	)

	December 31, 2010
	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Available for Sale
Mortgage-backed securities
Government sponsored agencies	$	69,971	$	(1,818	)	$	-	$	-		$	69,971	$	(1,818	)
Collateralized mortgage obligations
Government sponsored agencies		58,466		(1,642	)		-		-			58,466		(1,642	)
Federal agencies		7,821		(104	)		-		-			7,821		(104	)
Municipals		661		(11	)		-		-			661		(11	)
Corporate obligations		-		-			2,645		(4,243	)		2,645		(4,243	)
Marketable equity securities		-		-			1,702		(21	)		1,702		(21	)
Total temporarily impaired securities	$	136,919	$	(3,575	)	$	4,347	$	(4,264	)	$	141,266	$	(7,839	)

Mortgage-Backed Securities (MBS) and Collateralized Mortgage Obligations (CMO)

The unrealized losses on the Company’s investment in MBSs and 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, 2011.

12

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 decrease in performance and regulatory capital at the underlying banks resulting from exposure to subprime mortgages and (b) a 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, 2011.

MutualBank evaluates securities for other-than-temporary impairment (“OTTI”) on a quarterly basis.  During the quarter ended June 30, 2011, the Bank’s evaluation indicated no other-than-temporary impairment.  Impairment on securities is determined after analyzing the estimated cash flows 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, 2011.

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.  Where the security is not a beneficial interest in securitized financial assets, the Company uses the debt and equity securities impairment model.

The Company routinely conducts 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 currently impacted by other-than-temporary impairment testing are pooled trust preferred securities.  For each pooled trust preferred 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 done with assistance of an independent third party.  The approach to determining fair value involved several steps including:

13

· 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.

 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.

14

Pooled Trust Preferred Securities.MutualFirst Financial, Inc. has a current amortized cost in pooled trust preferred securities of $6.7 million, which had an original par value of $10.3 million.  These securities have a current fair value of $3.0 million.  The following table provides additional information related to the Bank’s investment in trust preferred securities as of June 30, 2011:

Deal	Class	Original Par		Book Value		Fair Value		Unrealized Loss		Realized Losses 2011		Lowest Rating		Number of Banks/Insurance Companies Currently Performing		Actual Deferrals/Defaults (as % of original collateral)			Total Projected Defaults (as a % of performing collateral)a			Excess Subordination (after taking into account best estimate of future deferrals/defaults)b
(Dollars in thousands)
Alesco Preferred Funding IX	A2A	$	1,000	$	898	$	503	$	395	$	-		CCC-		41		19.72	%		22.18	%		39.87	%
Alesco Preferred Funding XVII	C1		1,000		-		-		-		100		C
Preferred Term Securities XIII	B1		1,000		817		278		539		25		Ca		45		30.74	%		22.43	%		0.00	%
Preferred Term Securities XVIII	C		1,000		913		338		575		-		Ca		52		24.26	%		13.66	%		4.67	%
Preferred Term Securities XXVII	C1		1,000		707		163		544		-		C		33		28.14	%		23.73	%		0.00	%
U.S. Capital Funding I	B1		3,000		2,891		1,392		1,499		-		Caa1		33		15.90	%		15.57	%		1.25	%
U.S. Capital Funding III	B1		1,000		500		284		216		-		Ca		31		24.94	%		15.48	%		0.00	%
U.S. Capital Funding V	B1		1,300		-		-		-		68		C
Total		$	10,300	$	6,726	$	2,958	$	3,768	$	193

(a) A 10% recovery is applied to all projected defaults.  A 15% recovery is applied to all projected insurance defaults.  No recovery is applied to current defaults.

(b) Excess subordination represents the additional defaults in excess of both current and projected defaults that the CDO can absorb before the bond experiences any credit impairment. Excess subordinated percentage is calculated by (a) determining what percentage of defaults a deal can experience before the bond has credit impairment,  and (b) subtracting from this default breakage percentage both total current and expected future default percentages.

15

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 tables provide 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
	Three Months Ended
	2011			2010
Credit losses on debt securities held
Beginning of period	$	(3,567	)	$	(4,482	)
Net additions related to increases in previously recognized other-than-temporary losses		-			(151	)
As of June 30,	$	(3,567	)	$	(4,633	)

	Accumulated Credit Losses
	Six Months Ended
	2011			2010
Credit losses on debt securities held
Beginning of year	$	(3,374	)	$	(3,905	)
Net additions related to increases in previously recognized other-than-temporary losses		(193	)		(728	)
As of June 30,	$	(3,567	)	$	(4,633	)

16

Note 5:  Accumulated Other Comprehensive Income

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

	2011			2010
Net unrealized gain on securities available-for-sale	$	7,922		$	4,737
Net unrealized gain on securities available-for-sale for which a portion of an other-than-temporary impairment has been recognized in income		282			(138	)
Net unrealized loss on derivative used for cash flow hedges		(43	)		(365	)
Less: reclassification adjustment for realized losses included in income		118			407
Other comprehensive income, before tax effect		8,279			4,641
Tax expense		2,920			1,598
Other comprehensive income	$	5,359		$	3,043

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

	June 30,			December 31,
	2011			2010
Net unrealized gain (loss) on securities available-for-sale	$	6,611		$	(1,236	)
Net unrealized loss on securities available-for-sale for which a portion of an other-than-temporary impairment has been recognized in income		(3,768	)		(4,243	)
Net unrealized loss on derivative used for cash flow hedges		(382	)		(339	)
Net unrealized loss relating to defined benefit plan liability		(251	)		(251	)
		2,210			(6,069	)
Tax expense (benefit)		839			(2,081	)
Net-of-tax amount	$	1,371		$	(3,988	)

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

17

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 sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Available-for-Sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy.  The Company uses a third-party provider to provide market prices on its securities.  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, municipal, federal agency 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 prices 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.

The following table presents the fair value measurement of assets and liabilities measured at fair value on a recurring basis and the level within the ASC 820 fair value hierarchy used for such fair value measurements:

18

			Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
June 30, 2011
Mortgage-backed securities
Government sponsored agencies	$	181,634	$	-	$	181,634	$	-
Collateralized mortgage obligations
Government sponsored agencies		110,559		-		110,559		-
Federal agencies		4,006		-		4,006		-
Municipals		3,565		-		3,565		-
Small Business Administration		13		-		13		-
Corporate obligations		2,958		-		-		2,958
Marketable equity securities		1,728		1,728		-		-
Available-for-sale securities	$	304,463	$	1,728	$	299,777	$	2,958
December 31, 2010
Mortgage-backed securities
Government sponsored agencies	$	118,275	$	-	$	118,275	$	-
Collateralized mortgage obligations
Government sponsored agencies		112,224		-		112,224		-
Federal agencies		7,821		-		7,821		-
Municipals		2,482		-		2,482		-
Small Business Administration		16		-		16		-
Corporate obligations		2,645		-		-		2,645
Marketable equity securities		1,702		1,702		-		-
Available-for-sale securities	$	245,165	$	1,702	$	240,818	$	2,645

19

The following is a reconciliation of the beginning and ending balances for the three months ended June 30, 2011 and 2010 of recurring fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs:

	2011		2010
Beginning balance, April 1	$	2,924	$	1,892
Total realized and unrealized gains and losses
Included in net income		-		(8	)
Included in other comprehensive loss		21		861
Purchases, issuances and settlements		13		17
Transfers in/out of Level 3		-		-
Ending balance	$	2,958	$	2,762
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, 2011 and 2010 of recurring fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs:

	2011			2010
Beginning balance, January 1	$	2,645		$	2,539
Total realized and unrealized gains (losses)
Included in net income		(193	)		(401	)
Included in other comprehensive income		475			589
Purchases, issuances and settlements		31			35
Transfers in/out of Level 3		-			-
Ending balance	$	2,958		$	2,762
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	$	(193	)	$	(401	)

20

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.  An allowable method for determining the amount of impairment includes estimating fair value 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.

21

The following table presents the fair value measurement of assets measured at fair value on a non-recurring basis and the level within the ASC 820 fair value hierarchy used for such fair value measurements:

			Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
June 30, 2011
Impaired loans	$	8,084	$	-	$	-	$	8,084
Other real estate owned		203		-		-		203
Mortgage servicing rights		3,198		-		-		3,198
December 31, 2010
Impaired loans	$	15,204	$	-	$	-	$	15,204
Other real estate owned		1,030		-		-		1,030
Mortgage servicing rights		3,349		-		-		3,349
Loans held for sale		5,057		5,057		-		-

The estimated fair values of the Company’s financial instruments not carried at fair value in the consolidated condensed balance sheets as of June 30, 2011 and December 31, 2010, are as follows:

	June 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Assets
Cash and cash equivalents	$	34,287	$	34,287	$	26,821	$	26,821
Loans held for sale		654		658		10,483		10,483
Loans		949,483		965,108		978,901		997,018
Stock in FHLB		14,391		14,391		16,682		16,682
Interest receivable		4,564		4,564		4,627		4,627
Liabilities
Deposits	$	1,161,570	$	1,124,960	$	1,121,569	$	1,080,131
FHLB advances		106,656		110,249		128,537		133,258
Other borrowings		12,794		13,432		13,167		14,067
Interest payable		732		732		995		995
Advances by borrowers for taxes and insurance		1,855		1,855		1,661		1,661

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.

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

22

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

Loans - The fair value for loans is 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 fair value of commitments is immaterial.

23

Note 7: Loans

Categories of loans at June 30, 2011 and December 31, 2010 include:

	June 30,			December 31,
	2011			2010
Commercial
Real estate	$	208,650		$	199,517
Construction and development		24,972			49,803
Other		65,342			64,611
		298,964			313,931
Residential Mortgage
One- to four- family		455,192			458,019
Consumer loans
Auto		14,412			16,047
Residential		99,142			103,566
Boat/RVs		92,601			102,015
Other		7,159			6,157
		213,314			227,785
Total loans		967,470			999,735
Undisbursed loans in process		(4,598	)		(7,212	)
Unamortized deferred loan costs, net		2,568			2,750
Allowance for loan losses		(15,957	)		(16,372	)
Net loans	$	949,483		$	978,901

The risk characteristics of each loan portfolio segment are as follows:

Commercial real estate

These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

24

Construction and Development

Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates and financial analyses of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

Commercial other

Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Residential and Consumer

With respect to residential loans that are secured by 1-4 family residences and are primarily owner occupied, the Company generally establishes a maximum loan-to-value ratio and requires PMI if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Nonaccrual Loan and Past Due Loans.  Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due.  The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection.  Past due status is based on contractual terms of the loan.  In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

25

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income.  The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Non-accrual loans, segregated by class of loans, as of June 30, 2011 and December 31, 2010 are as follows:

	June 30,		December 31,
	2011		2010
Commercial
Real Estate	$	5,571	$	6,040
Construction and development		4,864		7,399
Other		1,144		1,019
Residential Mortgage		9,520		12,012
Consumer
Real estate		1,823		2,716
Auto		13		16
Boat/RV		614		870
Other		103		111
	$	23,652	$	30,183

An age analysis of Company’s past due loans, segregated by class of loans, as of June 30, 2011 and December 31, 2010 is as follows:

	June 30, 2011
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days and Accruing
Commercial
Real Estate	$	7,145	$	258	$	5,571	$	12,974	$	195,676	$	208,650	$	-
Construction and development		4,010		-		4,864		8,874		16,098		24,972		-
Other		1,715		39		1,144		2,898		62,444		65,342		-
Residential Mortgage		8,437		4,263		10,506		23,206		431,986		455,192		986
Consumer
Real estate		1,309		449		1,869		3,627		95,515		99,142		46
Auto		85		18		13		116		14,296		14,412		-
Boat/RV		2,008		979		620		3,607		88,994		92,601		6
Other		71		10		103		184		6,975		7,159		-
	$	24,780	$	6,016	$	24,690	$	55,486	$	911,984	$	967,470	$	1,038

26

December 31, 2010
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days and Accruing
Commercial
Real Estate	$	1,883	$	139	$	6,040	$	8,062	$	191,455	$	199,517	$	-
Construction and development		398		205		7,399		8,002		41,801		49,803		-
Other		4,067		173		1,019		5,259		59,352		64,611		-
Residential Mortgage		10,386		4,367		13,461		28,214		429,805		458,019		1,449
Consumer
Real estate		1,920		1,754		2,755		6,429		97,137		103,566		39
Auto		157		74		21		252		15,795		16,047		4
Boat/RV		3,215		957		924		5,096		96,919		102,015		54
Other		281		60		110		451		5,706		6,157		-
	$	22,307	$	7,729	$	31,729	$	61,765	$	937,970	$	999,735	$	1,546

Impaired Loans.  Loans are considered impaired in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan.  Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties.  These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

27

The following tables present impaired loans for the quarter and year-to-date ended June 30, 2011 and year ended December 31, 2010.

	June 30, 2011
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans Quarter		Average Investment in Impaired Loans YTD		Interest Income Recognized Quarter		Interest Income Recognized YTD
Loans without a specific valuation allowance
Commercial
Real Estate	$	2,261	$	2,348	$	-	$	2,277	$	3,611	$	14	$	30
Construction and development		4,940		7,851		-		4,992		5,983		-		9
Other		752		752		-		754		757				-
Residential Mortgage		4,384		6,285		-		5,182		5,490		27		68
Loans with a specific valuation allowance
Commercial
Real Estate		2,132		2,647		640		2,141		2,054		21		43
Construction and development		7,618		7,818		943		7,655		7,755		64		155
Other		-		-		-		-		-				-
Residential Mortgage		507		507		102		508		508		2		7
Total
Commercial	$	17,703	$	21,416	$	1,583	$	17,819	$	20,160	$	99	$	237
Residential	$	4,891	$	6,792	$	102	$	5,690	$	5,998	$	29	$	75

28

	December 31, 2010
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
Loans without a specific valuation allowance
Commercial
Real Estate	$	5,222	$	5,699	$	-	$	3,826	$	137
Construction and development		2,241		2,441		-		2,390		27
Other		762		762		-		388		12
Residential Mortgage		6,419		6,419		-		4,580		183
Loans with a specific valuation allowance
Commercial
Real Estate		5,324		5,724		515		5,395		329
Construction and development		6,760		6,760		825		4,238		226
Other		-		-		-
Residential Mortgage		509		509		69		128		-
Total
Commercial	$	20,309	$	21,386	$	1,340	$	16,237	$	731
Residential	$	6,928	$	6,928	$	69	$	4,708	$	183

The following information presents the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of June 30, 2011 and December 31, 2010.

Commercial Loan Grades

Definition of Loan Grades.  Loan grades are numbered 1 through 8.  Grades 1-4 are "pass" credits, grade 5 [Special Mention] loans are "criticized" assets, and grades 6 [Substandard], 7 [Doubtful] and 8 [Loss] are "classified" assets.  The use and application of these grades by the Bank will be uniform and shall conform to the Bank's policy and OTS regulatory definitions.

Pass.  Pass credits are loans in grades prime through fair.  These are at least considered to be credits with acceptable risks and would be granted in the normal course of lending operations.

Special Mention.  Special mention credits have potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the credits or in the institution’s credit position at some future date.  If weaknesses cannot be identified, classifying as special mention is not appropriate.  Special mention credits are NOT adversely classified and do NOT expose the institution to sufficient risk to warrant an adverse classification.  No apparent loss of principal or interest is expected.

29

Substandard.  Credits which are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged.  Financial statements normally reveal some or all of the following:  poor trends, lack of earnings and cash flow, excessive debt, lack of liquidity, and the absence of creditor protection.  Credits so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the institution will sustain some loss of the deficiencies are not corrected.

Doubtful.  An  extension of credit “doubtful” has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.  The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.  Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans.  A Doubtful classification for an entire credit should be avoided when collection of a specific portion appears highly probable with the adequately secured portion graded Substandard.  

Retail Loan Grades

Pass.  Pass credits are loans that are currently performing as agreed and are not troubled debt restructurings.

Substandard.  Substandard credits are loans that have reason to be considered to have a well defined weakness and placed on non-accrual.  This would include all retail loans over 90 days and troubled debt restructurings which were delinquent at the time of modification.

30

June 30, 2011

Commercial Credit Exposure Credit Risk Profile
Internal Rating	Real estate		Construction and Development		Other
Pass	$	178,279	$	8,176	$	53,835
Special Mention		10,966		5,410		8,113
Substandard		17,150		10,410		2,538
Doubtful		2,255		976		856
Total	$	208,650	$	24,972	$	65,342

Retail Credit Exposure Credit Risk Profile
	Mortgage		Consumer
	Residential		Real Estate		Auto		Boat/RV		Other
Pass	$	440,386	$	96,592	$	14,335	$	91,666	$	6,885
Substandard		14,806		2,550		77		935		274
Total	$	455,192	$	99,142	$	14,412	$	92,601	$	7,159

December 31, 2010

Commercial Credit Exposure Credit Risk Profile
Internal Rating	Real estate		Construction and Development		Other
Pass	$	168,855	$	22,046	$	56,587
Special Mention		9,934		10,313		5,471
Substandard		18,190		17,411		1,665
Doubtful		2,538		33		888
Total	$	199,517	$	49,803	$	64,611

Retail Credit Exposure Credit Risk Profile
	Mortgage		Consumer
	Residential		Real Estate		Auto		Boat/RV		Other
Pass	$	440,296	$	99,041	$	16,031	$	101,097	$	5,977
Substandard		17,723		4,525		16		918		180
Total	$	458,019	$	103,566	$	16,047	$	102,015	$	6,157

31

Allowance for Loan Losses.  We maintain an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on ongoing, quarterly assessments of the estimated losses inherent in the loan portfolio.  Our methodology for assessing the appropriateness of the allowance consists of several key elements, including the general allowance and specific allowances for identified problem loans and portfolio segments.  In addition, the allowance incorporates the results of measuring impaired loans as provided in FASB ASC 310, Receivables.  These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans.

The general allowance is calculated by applying loss factors to outstanding loans based on the internal risk evaluation of such loans or pools of loans. Changes in risk evaluations of both performing and nonperforming loans affect the amount of the general allowance. Loss factors are based on our historical loss experience as well as on significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date.  The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the prior three years.  Management believes the three year historical loss experience methodology is appropriate in the current economic environment, as it captures loss rates that are comparable to the current period being analyzed.

The appropriateness of the allowance is reviewed by management based upon its evaluation of then-existing economic and business conditions affecting our key lending areas and other conditions, such as credit quality trends (including trends in non-performing loans expected to result from existing conditions), collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments and recent loss experience in particular segments of the portfolio that existed as of the balance sheet date and the impact that such conditions were believed to have had on the collectability of the loan.  Senior management reviews these conditions quarterly in discussions with our senior credit officers.  To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s estimate of the effect of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment.  Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s evaluation of the loss related to this condition is reflected in the general allowance for loan losses.  The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments.

The allowance for loan losses is based on estimates of losses inherent in the loan portfolio.  Actual losses can vary significantly from the estimated amounts.  Our methodology as described permits adjustments to any loss factor used in the computation of the general allowance in the event that, in management’s judgment, significant factors which affect the collectability of the portfolio as of the evaluation date are not reflected in the loss factors.  By assessing the probable incurred losses inherent in the loan portfolio on a quarterly basis, we are able to adjust specific and inherent loss estimates based upon any more recent information that has become available.  Due to the loss of numerous manufacturing jobs in the communities we serve during recent years, including 2010, and the increase in higher risk loans, like consumer and commercial loans, as a percentage of total loans, management has concluded that our allowance for loan losses should be greater than historical loss experience and specifically identified losses would otherwise indicate.

 

32

The following tables detail activity in the allowance for loan losses by portfolio segment for the three and six-month periods ended June 30, 2011 and year ended December 31, 2010.  Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses on other segments.

	Three Months Ended June 30, 2011
	Commercial						Mortgage		Consumer
	Real Estate		Other		Construction and Development		Residential		Real Estate		Auto		Boat/RV		Other		Total
Allowance for loan losses:
Balance, beginning of year	$	6,898	$	1,638	$	965	$	2,195	$	1,616	$	254	$	2,088	$	143	$	15,797
Provision charged to expense		350		-		230		700		209		-		100		111		1,700
Losses charged off		292		-		-		819		170		17		345		121		1,764
Recoveries		1		-		-		59		1		24		132		7		224
Balance, end of period	$	6,957	$	1,638	$	1,195	$	2,135	$	1,656	$	261	$	1,975	$	140	$	15,957
Ending balance:
Individually evaluated for impairment	$	640	$	-	$	943	$	102	$	-	$	-	$	-	$	-	$	1,685
Collectively evaluated for impairment	$	6,317	$	1,638	$	252	$	2,033	$	1,656	$	261	$	1,975	$	140	$	14,272
Loans:
Ending balance
Individually evaluated for impairment	$	4,393	$	752	$	12,558	$	4,892	$	-	$	-	$	-	$	-	$	22,595
Collectively evaluated for impairment	$	204,257	$	64,590	$	12,414	$	450,300	$	99,142	$	14,412	$	92,601	$	7,159	$	944,875

33

	Six Months Ended June 30, 2011
	Commercial						Mortgage		Consumer
	Real Estate		Other		Construction and Development		Residential		Real Estate		Auto		Boat/RV		Other		Total
Allowance for loan losses:
Balance, beginning of year	$	7,097	$	1,717	$	1,310	$	2,212	$	1,616	$	250	$	2,008	$	162	$	16,372
Provision charged to expense		400		-		2,830		2,000		209		10		310		141		5,900
Losses charged off		541		79		2,945		2,180		171		25		719		176		6,836
Recoveries		1		-		-		103		2		26		376		13		521
Balance, end of period	$	6,957	$	1,638	$	1,195	$	2,135	$	1,656	$	261	$	1,975	$	140	$	15,957
Ending balance:
Individually evaluated for impairment	$	640	$	-	$	943	$	102	$	-	$	-	$	-	$	-	$	1,685
Collectively evaluated for impairment	$	6,317	$	1,638	$	252	$	2,033	$	1,656	$	261	$	1,975	$	140	$	14,272
Loans:
Ending balance
Individually evaluated for impairment	$	4,393	$	752	$	12,558	$	4,892	$	-	$	-	$	-	$	-	$	22,595
Collectively evaluated for impairment	$	204,257	$	64,590	$	12,414	$	450,300	$	99,142	$	14,412	$	92,601	$	7,159	$	944,875

34

	December 31, 2010
	Commercial						Mortgage		Consumer
	Real Estate		Other		Construction and Development		Residential		Real Estate		Auto		Boat/RV		Other		Total
Allowance for loan losses:
Balance, beginning of year	$	7,072	$	1,721	$	1,210	$	2,359	$	1,588	$	207	$	2,144	$	113	$	16,414
Provision charged to expense		1,300		180		300		2,900		940		86		1,100		244		7,050
Losses charged off		1,343		209		200		3,345		914		62		1,339		880		8,292
Recoveries		68		25		-		298		2		19		103		685		1,200
Balance, end of period	$	7,097	$	1,717	$	1,310	$	2,212	$	1,616	$	250	$	2,008	$	162	$	16,372
Ending balance:
Individually evaluated for impairment	$	515	$	-	$	825	$	69	$	-	$	-	$	-	$	-	$	1,409
Collectively evaluated for impairment	$	6,582	$	1,717	$	485	$	2,143	$	1,616	$	250	$	2,008	$	162	$	14,963
Loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Loans:
Ending balance
Individually evaluated for impairment	$	10,546	$	762	$	9,001	$	6,928	$	-	$	-	$	-	$	-	$	27,237
Collectively evaluated for impairment	$	188,971	$	63,849	$	40,802	$	451,091	$	103,566	$	16,047	$	102,015	$	6,157	$	972,498

35

Management’s general practice is to proactively charge down loans individually evaluated for impairment to the fair value of the underlying collateral.

Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.

For all loan portfolio segments except 1-4 family residential properties and consumer, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

The Company charges-off 1-4 family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down of 1-4 family first and junior lien mortgages to the net realizable value less costs to sell when the loan is 180 days past due, charge-off of unsecured open-end loans when the loan is 180 days past due, and charge down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off.

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

	June 30,
	2011		2010
Non-performing assets
Non-accrual loans	$	23,652	$	23,570
Accruing loans 90 days + past due		1,038		876
Restructured loans		5,431		1,224
Total non-performing loans		30,121		25,670
Real estate owned		7,151		6,171
Other repossessed assets		937		1,318
Non-performing securities		-		100
Total non-performing assets	$	38,209	$	33,259

36

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-two 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 $233 million in investments.  MFIC currently owns one subsidiary, Mutual Federal REIT.  The assets of Mutual Federal REIT consist of approximately $71 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, 2010 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 67 to 72 of the Annual Report on Form 10-K for the year ended December 31, 2010.  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.

37

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.

Management recently reviewed the Bank’s processes for foreclosed properties and deemed they are in compliance with regulations and state laws.

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.

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.  

38

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.

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.

If management determines that an investment experienced an OTTI, management must then determine the amount of the OTTI to be recognized in earnings.  For investments in debt securities, 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.

39

For our investment in marketable equity securities, management evaluates the severity and duration of the impairment and the near term prospects of the issuer in our consideration of whether the securities are other than temporarily impaired.  Based upon that evaluation the Company does not consider our equity securities to be other than temporarily impaired.  If other than temporary impairment is identified that impairment is recognized in earnings.

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.

40

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.  Historically, 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 53% as of June 30, 2011.  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.  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 43% at June 30, 2011, compared to 36% at the end of 2004.  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.

41

During the first half of 2011, in keeping with its strategic objective to reduce interest rate risk exposure, the Company also sold $20.7 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 $441,000 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.  Overall, the Company continues to anticipate less service fee income off of checking accounts than in previous periods due to continued regulations.  The Company’s trust business is a source of recurring revenue that may fluctuate dependent on movement in the stock market.  The Company’s objective is to increase non-interest income by growing its trust and wealth management area, 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 increased $23.0 million as of June 30, 2011 compared to December 31, 2010, primarily due to the $59.3 million increase in investment securities which were partially offset by decreases in gross loans held for investment and sale of $39.7 million.  The increase in investment securities was in shorter term government agency mortgage backed securities and was primarily funded by proceeds from loan payments and increased deposits.  The decrease in loans from year-end includes the following changes in the portfolio.  Consumer loans decreased $14.5 million, or 6.4%, commercial loans decreased $15.0 million, or 4.8%, and residential mortgage loans held in the portfolio decreased $395,000 or 0.1%. Residential mortgage loans held for sale decreased $9.8 million and mortgage loans sold during the first half of 2011 totaled $20.7 million compared to $23.0 million sold during the first half of last year. The decrease in consumer lending was a result of pay-downs and decreased loan demand.  The decrease in commercial loans was a result of several commercial loans paying down, some of which were loans of concern for the Bank, and net charge-offs of $3.6 million in the first half of 2011.  Mortgage loan balances continue to decline as the Bank has sold a majority of its fixed rate production.  In the second quarter of 2011, gross loans held for investment and sale stabilized, decreasing $474,000 compared to a decrease of $39.2 million in the first quarter of 2011.

42

Allowance for loan losses decreased by $415,000, to $16.0 million as of June 30, 2011 compared to December 31, 2010, but increased $160,000 from March 31, 2011.  Net charge offs in the second quarter were $1.5 million, or .64% of total loans on an annualized basis, compared to $4.8 million, or 1.94% of total loans on an annualized basis in the first quarter of 2011. The allowance for loan losses to non-performing loans as of June 30, 2011 was 52.98% compared to 52.97% as of March 31, 2011 and 42.16% as of December 31, 2010.  The allowance for loan losses to total loans as of June 30, 2011 was 1.65%, an increase from 1.64% as of March 31, 2011 and December 31, 2010.

Deposits increased by $40.0 million as the Bank has seen increased activity in all of its markets for core deposit relationships in the first half of 2011.  The increase in deposits has been primarily in core transactional accounts, which increased $46.7 million, while certificates of deposit decreased $6.7 million in the first half of 2011. Core transactional deposits increased to 43% of the Bank’s total deposits as of June 30, 2011 compared to 40% as of December 31, 2010. The increase in deposits allowed the Bank to retire higher rate maturing debt, mainly FHLB advances, of $21.9 million in the first half of 2011.Stockholders’ equity was $136.0 million at June 30, 2011, an increase of $4.9 from December 31, 2010. The increase was due primarily to unrealized gains on securities of $5.4 million and net income of $987,000. This increase was partially offset by dividend payments of $838,000 to common shareholders and $810,000 to preferred shareholders.  The Company’s tangible book value per share as of June 30, 2011 increased to $14.27 compared to $13.49 as of December 31, 2010 and tangible common equity ratio was 7.19% as of June 30, 2011 compared to 6.93% as of December 31, 2010.  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, 2011.

Comparison of the Operating Results

Net interest income before the provision for loan losses decreased $324,000 for the quarter ended June 30, 2011 compared to the same period in 2010.  The decrease was a result of the decline in the net interest margin from 3.23% in the second quarter of 2010 to 3.19% in the second quarter of 2011 and a decline in average earning assets of $22.9 million.  The decline was in part due to the transfer and sale of the held-to-maturity portfolio in the second half of 2010 and reduced loan balances.  On a linked quarter basis, net interest income before the provision for loan losses increased $239,000 as net interest margin increased by 5 basis points and average earning assets increased by $9.6 million.

The provision for loan losses for the second quarter of 2011 increased to $1.7 million compared to $1.5 million during last year’s comparable period.  The increase was attributable to increased non-performing loans and non-performing assets when compared to June 30, 2010.  Non-performing loans to total loans at June 30, 2011 was 3.12% compared to 2.49% at June 30, 2010.  Although there was an increase in non-performing loans to total loans at June 30, 2011 compared to the same period the prior year, non-performing loans to total loans improved from 3.90% at December 31, 2010.  Non-performing assets to total assets were 2.67% at June 30, 2011 compared to 2.31% at June 30, 2010.  Net charge offs for the second quarter of 2011 were $1.5 million, or .64% of loans on an annualized basis compared to $1.9 million, or .74% of loans on an annualized basis in the second quarter of 2010.

43

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

	Three Months Ended						Amount			Percent
Non-Interest Income	6/30/2011			6/30/2010			Change			Change
Service fee income	$	1,726		$	1,888		$	(162	)		-8.6	%
Net realized gain (loss) on sale of securities		1			35			(34	)		-97.1	%
Equity in losses of limited partnerships		(116	)		(128	)		12			-9.4	%
Commissions		1,005			1,082			(77	)		-7.1	%
Net gains on sales of loans		349			209			140			67.0	%
Net servicing fees		18			32			(14	)		-43.8	%
Increase in cash surrender value of life insurance		374			372			2			0.5	%
Loss on sale of other real estate and repossessed assets		(62	)		(326	)		264			-81.0	%
Net other-than-temporary losses on securities		-			(151	)		151			-100.0	%
Other income		17			55			(38	)		-69.1	%
Total Non-Interest Income	$	3,312		$	3,068		$	244			8.0	%

Non-interest income for the second quarter of 2011 was $3.3 million, an increase of $244,000 compared to the second quarter of 2010.  Regulatory changes on overdrafts in July of 2010 resulted in the Company’s reduced service charges on deposit accounts in the second quarter of 2011 compared to the second quarter of 2010.  Gain on loan sales increased primarily due to a recovery of $205,000 on previously written down mortgage servicing rights.  Other-than-temporary impairment losses decreased in the second quarter 2011 compared to the second quarter 2010, as the trust preferred securities stabilized.  On a linked quarter basis, non-interest income increased, primarily in service charges on deposit accounts, due to the seasonality of some services, and the above mentioned increase in gain on loan sales and reduction of other-than-temporary losses.

44

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

	Three Months Ended				Amount			Percent
Non-Interest Expense	6/30/2011		6/30/2010		Change			Change
Salaries and employee benefits	$	5,340	$	5,332	$	8			0.2	%
Net occupancy expenses		659		582		77			13.2	%
Equipment expenses		502		494		8			1.6	%
Data processing fees		379		388		(9	)		-2.3	%
Automated teller machine		228		296		(68	)		-23.0	%
Deposit insurance		332		453		(121	)		-26.7	%
Professional fees		376		243		133			54.7	%
Advertising and promotion		300		306		(6	)		-2.0	%
Software subscriptions and publications		313		403		(90	)		-22.3	%
Intangible amortization		305		353		(48	)		-13.6	%
Repossessed assets expense		306		288		18			6.3	%
Other expenses		961		1,021		(60	)		-5.9	%
Total Non-Interest Expense	$	10,001	$	10,159	$	(158	)		-1.6	%

Non-interest expense decreased $158,000 when comparing the second quarter of 2011 with that of 2010.  FDIC expense related to deposit insurance decreased due to the new FDIC fee structure.  Software subscriptions and maintenance and ATM expenses also decreased in the second quarter of 2011 compared to the same period in 2010.  These decreases were partially offset by an increase in professional fees primarily due to increased legal costs relating to foreclosures.

Income tax expense remained fairly constant for the three months ended June 30, 2011, compared to the same period in 2010, by only decreasing by $2,000.  The effective tax rate increased to 22.4% from 21.5% due to a decrease in low income housing credits when comparing the quarter ended June 2011 to June 2010.

Comparison of the Operating Results for the Six Months

Net interest income before the provision for loan losses decreased $497,000 for the first half of 2011 compared to the same period in 2010.  The decrease was a result of the decline in the net interest margin from 3.20% in the first half of 2010 to 3.16% in the first half of 2011 and the decline in average earning assets of $13.5 million.  The decline was primarily due to the lower yield on investments and decrease in the loan portfolio.

The provision for loan losses for the first half of 2011 increased to $5.9 million compared to $3.1 million during last year’s comparable period.  The increase was primarily due to net charge offs of $4.8 million in the first quarter of 2011.  The charge offs were for previously identified problem loans that were mostly collateralized by real estate.  The charge-offs were taken after updated appraisals were obtained in the late first quarter and early second quarter which  indicated continued decline of market values for commercial and mortgage real estate loans.  Non-performing loans to total loans at June 30, 2011 were 3.12% compared to 3.90% at December 31, 2010.  This decrease in non-performing loans was in all segments of our portfolio.  Non-performing assets to total assets were 2.67% at June 30, 2011 compared to 3.20% at December 31, 2010.

45

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

	Six Months Ended						Amount			Percent
Non-Interest Income	6/30/2011			6/30/2010			Change			Change
Service fee income	$	3,330		$	3,627		$	(297	)		-8.2	%
Net realized gain (loss) on sale of securities		75			320			(245	)		-76.6	%
Equity in losses of limited partnerships		(149	)		(255	)		106			-41.6	%
Commissions		1,956			2,024			(68	)		-3.4	%
Net gains on sales of loans		441			564			(123	)		-21.8	%
Net servicing fees		44			68			(24	)		-35.3	%
Increase in cash surrender value of life insurance		725			755			(30	)		-4.0	%
Loss on sale of other real estate and repossessed assets		(336	)		(539	)		203			-37.7	%
Net other-than-temporary losses on securities		(193	)		(728	)		535			-73.5	%
Other income		66			159			(93	)		-58.5	%
Total Non-Interest Income	$	5,959		$	5,995		$	(36	)		-0.6	%

Non-interest income for the first half of 2011 was $6.0 million, a decrease of $36,000 compared to the first half of 2010.  Service charges on deposit accounts decreased primarily due to regulatory changes, gain on sale of investments decreased primarily due to fewer sales of investment securities and gain on loan sales decreased due to decreased loan production.  These decreases were offset by the stabilization of values for trust preferred securities, which resulted in a decrease in other-than-temporary impairment.

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

	Six Months Ended				Amount			Percent
Non-Interest Expense	6/30/2011		6/30/2010		Change			Change
Salaries and employee benefits	$	10,863	$	10,668	$	195			1.8	%
Net occupancy expenses		1,335		1,243		92			7.4	%
Equipment expenses		982		979		3			0.3	%
Data processing fees		780		798		(18	)		-2.3	%
Automated teller machine		535		576		(41	)		-7.1	%
Deposit insurance		840		899		(59	)		-6.6	%
Professional fees		736		585		151			25.8	%
Advertising and promotion		600		604		(4	)		-0.7	%
Software subscriptions and publications		631		800		(169	)		-21.1	%
Intangible amortization		614		706		(92	)		-13.0	%
Repossessed assets expense		467		541		(74	)		-13.7	%
Other expenses		1,819		1,881		(62	)		-3.3	%
Total Non-Interest Expense	$	20,202	$	20,280	$	(78	)		-0.4	%

Non-interest expense decreased $78,000 when comparing the first half of 2011 with that of 2010.  Salaries and benefits increased during the first half of 2011 compared to the same period in 2010.  This increase was primarily due to less compensation deferrals because of decreased loan production and significant increases in unemployment taxes paid to local and federal governments during the first part of the year.  Software subscriptions and publications expense decreased but was offset by an increase in professional fees.

46

For the six-month period ended June 30, 2011, income tax expense decreased $1.2 million compared to the same period in 2010. The decrease was due primarily to a decrease in taxable income in the first quarter of 2011. The effective tax rate also decreased from 22.7% to (35.9%) due to a decrease in taxable income when comparing the first half of 2011 to the first half of 2010, 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, 2011, Mutual had liquid assets of $317.1 million and a liquidity ratio of 26.53% compared to 22.44% at December 31, 2010. This elevated level of liquidity is primarily a result of increased cash and investment portfolio due to the growth in deposits in the first six months of 2011.  Higher levels of liquidity do not generate as much income as loans, in general; however, management believes it is prudent to have additional liquidity at this time.  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 2011.

Mutual continues to maintain capital ratios which exceed “well-capitalized” levels as defined pursuant to all regulatory standards as of June 30, 2011.  Mutual’s current total regulatory capital ratios as of June 30, 2011 are core capital, 9.10%; Tier I risk-based capital, 13.09%; and total risk-based capital, 14.34%.  This is compared to the December 31, 2010 ratios of: core capital, 9.18%; Tier I risk-based capital, 12.54%; and total risked-based capital, 13.79%.  Risk-based capital improved from December 31, 2010 due to changes in the balance sheet that reduced risk-weighted assets.

ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk

Presented below as of June 30, 2011 and 2010, 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, 2011

Net Portfolio Value

Changes												NPV as % of PV of Assets
In Rates			$ Amount			$ Change			% Change			NPV Ratio			Change
	+300	bp		168,048			-26,884			-14	%		12.52	%		-100	bp
	+200	bp		181,040			-13,893			-7	%		13.16	%		-36	bp
	+100	bp		191,741			-3,191			-2	%		13.59	%		-8	bp
	0	bp		194,932									13.52	%
	-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, 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)

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

The analysis at June 30, 2011, 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 affect 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, 2010.  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.

47

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, 2011 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, 2011 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.

48

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, 2010.

Item 2.  Registered sales of Equity Securities and use of Proceeds

On August 13, 2008 the Company’s Board of Directors authorized management to repurchase an additional 5% of the Company’s outstanding stock, or approximately 350,000 shares.  Information on the shares purchased during the first quarter of 2011 is as follows.

					Total Number of		Maximum Number of
					Shares Purchased		Shares that May Yet
	Total Number of		Average Price		As Part of Publicly		Be Purchased
	Shares Purchased		Per Share		Announced Plan		Under the Plan
								330,000	(1)
April 1, 2011 - April 30, 2011		-	$	0.00		-		330,000
May 1, 2011 - May 31, 2011		-		0.00		-		330,000
June 1, 2011 - June 30, 2011		-		0.00		-		330,000
		-	$	0.00		-

(1)  Amount represents the number of shares available to be repurchased under the plan as of March 31, 2011

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.

49

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 11, 2011	By:	/s/  David W. Heeter
	David W. Heeter
	President and Chief Executive Officer
Date: August 11, 2011	By:	/s/  Christopher D. Cook
	Christopher D. Cook
	Senior Vice President, Treasurer and Chief Financial Officer

50

EX-31.1

CERTIFICATIONS Exhibit 31.1

I, David W. Heeter certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: August 11, 2011

/s/ David W. Heeter

David W. Heeter,

President and Chief Executive Officer

2

EX-31.2

CERTIFICATIONSExhibit 31.2

I, Christopher D. Cook, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date:  August 11, 2011

/s/ Christopher D. Cook

Christopher D. Cook,

Senior Vice President, Treasurer and Chief Financial Officer

2

EX-32

EXHIBIT 32

SECTION 1350 CERTIFICATION

Each of the undersigned hereby certifies in his capacity as an officer of MutualFirst Financial, Inc. (the “Registrant”) that the quarterly report of the Registrant on Form 10-Q for the period ended June 30, 2011, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the consolidated financial condition of the Registrant at the end of such period and the results of operations of the Registrant for such period.

Date:  August 11, 2011	By:	/s/ David W. Heeter
	David W. Heeter
	President and Chief Executive Officer
Date:  August 11, 2011	By:	/s/ Christopher D. Cook
	Christopher D. Cook
	Senior Vice President, Treasurer and Chief Financial Officer
	(Principal Financial and Accounting Officer)

XML



Consolidated Condensed Balance Sheets (Parenthetical) (USD $)	Jun. 30, 2011	Dec. 31, 2010
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, Authorized and unissued	5,000,000	5,000,000
Preferred stock, Issued	32,382	32,382
Preferred stock, outstanding	32,382	32,382
Preferred stock, Liquidation preference	$ 1,000	$ 1,000
Common stock, par value	$ 0.01	$ 0.01
Common stock, Authorized	20,000,000	20,000,000
Common stock, Issued	6,986,586	6,984,754
Common stock, outstanding	6,986,586	6,984,754

XML



Consolidated Condensed Statements of Income (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
Interest Income
Loans receivable, including fees	$ 13,415,158	$ 15,242,467	$ 27,099,272	$ 30,743,012
Investment securities:
Mortgage-backed securities	2,108,319	1,721,101	3,841,403	3,069,290
Federal Home Loan Bank stock	102,499	91,881	207,941	185,805
Other investments	151,276	291,757	289,412	550,575
Deposits with financial institutions	29,795	55,856	51,615	98,865
Total interest income	15,807,047	17,403,062	31,489,643	34,647,547
Interest Expense
Passbook savings	36,658	35,469	71,648	69,928
Certificates of deposit	3,718,088	4,173,942	7,547,751	8,500,109
Daily Money Market accounts	121,032	155,765	242,672	302,920
Demand and NOW acounts	323,326	256,923	594,197	454,932
Federal Home Loan Bank advances	844,066	1,668,348	1,744,345	3,483,117
Other interest expense	209,422	234,239	420,245	470,251
Total interest expense	5,252,592	6,524,686	10,620,858	13,281,257
Net Interest Income	10,554,455	10,878,376	20,868,785	21,366,290
Provision for losses on loans	1,700,000	1,525,000	5,900,000	3,050,000
Net Interest Income After Provision for Loan Losses	8,854,455	9,353,376	14,968,785	18,316,290
Other Income
Service fee income	1,726,352	1,887,237	3,330,662	3,627,127
Net realized gain on sale of securities	1,309	35,448	75,356	320,276
Equity in losses of limited partnerships	(115,762)	(127,617)	(149,279)	(254,832)
Commissions	1,005,014	1,082,154	1,955,715	2,023,669
Net gains on sales of loans	348,903	209,378	440,703	563,687
Net servicing fees	17,586	31,357	44,246	68,205
Increase in cash surrender value of life insurance	374,182	372,247	724,961	755,186
Loss on sale of other real estate and repossessed assets	(62,380)	(326,018)	(336,137)	(539,131)
Other-than-temporary losses on securities
Total other-than-temporary losses	0	(292,728)	(723,338)	(1,626,025)
Portion of loss recognized in other comperehensive income (before taxes)	0	141,851	529,896	898,330
Net impairment losses recognized in earnings	0	(150,877)	(193,442)	(727,695)
Other income	17,307	54,585	66,522	158,796
Total other income	3,312,511	3,067,894	5,959,307	5,995,288
Other Expenses
Salaries and employee benefits	5,340,201	5,331,907	10,863,326	10,667,731
Net occupancy expenses	659,546	581,954	1,334,505	1,242,831
Equipment expenses	501,826	494,110	982,371	979,205
Data processing fees	378,784	387,828	780,000	798,469
Automated teller machine	227,862	296,391	535,324	575,470
Deposit insurance	332,105	453,338	839,701	899,291
Professional fees	375,906	243,131	735,877	585,450
Advertising and promotion	299,751	306,096	599,782	603,985
Software subscriptions and maintenance	312,979	402,698	630,637	799,821
Intangible amortization	305,314	352,980	613,917	705,960
Other real estate and repossessed assets	306,274	287,710	467,103	541,482
Other expenses	960,761	1,021,251	1,819,300	1,880,686
Total other expenses	10,001,309	10,159,394	20,201,843	20,280,381
Income Before Income Tax	2,165,657	2,261,876	726,249	4,031,197
Income tax expense (benefit)	485,000	487,000	(261,000)	913,000
Net Income	1,680,657	1,774,876	987,249	3,118,197
Preferred stock dividends and amortization	450,766	450,766	901,532	901,532
Net Income Available to Common Shareholders	$ 1,229,891	$ 1,324,110	$ 85,717	$ 2,216,665
Basic earnings per common share	$ 0.18	$ 0.19	$ 0.01	$ 0.32
Diluted earnings per common share	$ 0.18	$ 0.19	$ 0.01	$ 0.32
Dividends per common share	$ 0.06	$ 0.06	$ 0.12	$ 0.12

XML



Document and Entity Information	6 Months Ended
	Jun. 30, 2011	Aug. 05, 2011
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q2
Trading Symbol	MFSF
Entity Registrant Name	MUTUALFIRST FINANCIAL INC
Entity Central Index Key	0001094810
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		6,986,586

XML



Accumulated Other Comprehensive Income

6 Months Ended

Jun. 30, 2011

Accumulated Other Comprehensive Income

Note 5:  Accumulated Other Comprehensive Income

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

	2011			2010
Net unrealized gain on securities available-for-sale	$	7,922		$	4,737
Net unrealized gain on securities available-for-sale for which a portion of an other-than-temporary impairment has been recognized in income		282			(138	)
Net unrealized loss on derivative used for cash flow hedges		(43	)		(365	)
Less: reclassification adjustment for realized losses included in income		118			407
Other comprehensive income, before tax effect		8,279			4,641
Tax expense		2,920			1,598
Other comprehensive income	$	5,359		$	3,043

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

	June 30,			December 31,
	2011			2010
Net unrealized gain (loss) on securities available-for-sale	$	6,611		$	(1,236	)
Net unrealized loss on securities available-for-sale for which a portion of an other-than-temporary impairment has been recognized in income		(3,768	)		(4,243	)
Net unrealized loss on derivative used for cash flow hedges		(382	)		(339	)
Net unrealized loss relating to defined benefit plan liability		(251	)		(251	)
		2,210			(6,069	)
Tax expense (benefit)		839			(2,081	)
Net-of-tax amount	$	1,371		$	(3,988	)

XML



Basis of Presentation

6 Months Ended

Jun. 30, 2011

Basis of Presentation

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 2010 filed with the Securities and Exchange Commission.

The interim consolidated financial statements at June 30, 2011, 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, 2010 has been derived from the Audited Consolidated Balance Sheet of the Company as of that date.

XML



Loans

6 Months Ended

Jun. 30, 2011

Loans

Note 7: Loans

Categories of loans at June 30, 2011 and December 31, 2010 include:

	June 30,			December 31,
	2011			2010
Commercial
Real estate	$	208,650		$	199,517
Construction and development		24,972			49,803
Other		65,342			64,611
		298,964			313,931
Residential Mortgage
One- to four- family		455,192			458,019
Consumer loans
Auto		14,412			16,047
Residential		99,142			103,566
Boat/RVs		92,601			102,015
Other		7,159			6,157
		213,314			227,785
Total loans		967,470			999,735
Undisbursed loans in process		(4,598	)		(7,212	)
Unamortized deferred loan costs, net		2,568			2,750
Allowance for loan losses		(15,957	)		(16,372	)
Net loans	$	949,483		$	978,901

The risk characteristics of each loan portfolio segment are as follows:

Commercial real estate

These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

Construction and Development

Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates and financial analyses of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

Commercial other

Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Residential and Consumer

With respect to residential loans that are secured by 1-4 family residences and are primarily owner occupied, the Company generally establishes a maximum loan-to-value ratio and requires PMI if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Nonaccrual Loan and Past Due Loans.  Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due.  The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection.  Past due status is based on contractual terms of the loan.  In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

 

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income.  The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Non-accrual loans, segregated by class of loans, as of June 30, 2011 and December 31, 2010 are as follows:

	June 30,		December 31,
	2011		2010
Commercial
Real Estate	$	5,571	$	6,040
Construction and development		4,864		7,399
Other		1,144		1,019
Residential Mortgage		9,520		12,012
Consumer
Real estate		1,823		2,716
Auto		13		16
Boat/RV		614		870
Other		103		111
	$	23,652	$	30,183

An age analysis of Company’s past due loans, segregated by class of loans, as of June 30, 2011 and December 31, 2010 is as follows:

	June 30, 2011
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days and Accruing
Commercial
Real Estate	$	7,145	$	258	$	5,571	$	12,974	$	195,676	$	208,650	$	-
Construction and development		4,010		-		4,864		8,874		16,098		24,972		-
Other		1,715		39		1,144		2,898		62,444		65,342		-
Residential Mortgage		8,437		4,263		10,506		23,206		431,986		455,192		986
Consumer
Real estate		1,309		449		1,869		3,627		95,515		99,142		46
Auto		85		18		13		116		14,296		14,412		-
Boat/RV		2,008		979		620		3,607		88,994		92,601		6
Other		71		10		103		184		6,975		7,159		-
	$	24,780	$	6,016	$	24,690	$	55,486	$	911,984	$	967,470	$	1,038

December 31, 2010
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days and Accruing
Commercial
Real Estate	$	1,883	$	139	$	6,040	$	8,062	$	191,455	$	199,517	$	-
Construction and development		398		205		7,399		8,002		41,801		49,803		-
Other		4,067		173		1,019		5,259		59,352		64,611		-
Residential Mortgage		10,386		4,367		13,461		28,214		429,805		458,019		1,449
Consumer
Real estate		1,920		1,754		2,755		6,429		97,137		103,566		39
Auto		157		74		21		252		15,795		16,047		4
Boat/RV		3,215		957		924		5,096		96,919		102,015		54
Other		281		60		110		451		5,706		6,157		-
	$	22,307	$	7,729	$	31,729	$	61,765	$	937,970	$	999,735	$	1,546

Impaired Loans.  Loans are considered impaired in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan.  Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties.  These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

 

The following tables present impaired loans for the quarter and year-to-date ended June 30, 2011 and year ended December 31, 2010.

	June 30, 2011
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans Quarter		Average Investment in Impaired Loans YTD		Interest Income Recognized Quarter		Interest Income Recognized YTD
Loans without a specific valuation allowance
Commercial
Real Estate	$	2,261	$	2,348	$	-	$	2,277	$	3,611	$	14	$	30
Construction and development		4,940		7,851		-		4,992		5,983		-		9
Other		752		752		-		754		757				-
Residential Mortgage		4,384		6,285		-		5,182		5,490		27		68
Loans with a specific valuation allowance
Commercial
Real Estate		2,132		2,647		640		2,141		2,054		21		43
Construction and development		7,618		7,818		943		7,655		7,755		64		155
Other		-		-		-		-		-				-
Residential Mortgage		507		507		102		508		508		2		7
Total
Commercial	$	17,703	$	21,416	$	1,583	$	17,819	$	20,160	$	99	$	237
Residential	$	4,891	$	6,792	$	102	$	5,690	$	5,998	$	29	$	75

	December 31, 2010
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
Loans without a specific valuation allowance
Commercial
Real Estate	$	5,222	$	5,699	$	-	$	3,826	$	137
Construction and development		2,241		2,441		-		2,390		27
Other		762		762		-		388		12
Residential Mortgage		6,419		6,419		-		4,580		183
Loans with a specific valuation allowance
Commercial
Real Estate		5,324		5,724		515		5,395		329
Construction and development		6,760		6,760		825		4,238		226
Other		-		-		-
Residential Mortgage		509		509		69		128		-
Total
Commercial	$	20,309	$	21,386	$	1,340	$	16,237	$	731
Residential	$	6,928	$	6,928	$	69	$	4,708	$	183

The following information presents the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of June 30, 2011 and December 31, 2010.

Commercial Loan Grades

Definition of Loan Grades.  Loan grades are numbered 1 through 8.  Grades 1-4 are "pass" credits, grade 5 [Special Mention] loans are "criticized" assets, and grades 6 [Substandard], 7 [Doubtful] and 8 [Loss] are "classified" assets.  The use and application of these grades by the Bank will be uniform and shall conform to the Bank's policy and OTS regulatory definitions.

Pass.  Pass credits are loans in grades prime through fair.  These are at least considered to be credits with acceptable risks and would be granted in the normal course of lending operations.

Special Mention.  Special mention credits have potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the credits or in the institution’s credit position at some future date.  If weaknesses cannot be identified, classifying as special mention is not appropriate.  Special mention credits are NOT adversely classified and do NOT expose the institution to sufficient risk to warrant an adverse classification.  No apparent loss of principal or interest is expected.

 

Substandard.  Credits which are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged.  Financial statements normally reveal some or all of the following:  poor trends, lack of earnings and cash flow, excessive debt, lack of liquidity, and the absence of creditor protection.  Credits so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the institution will sustain some loss of the deficiencies are not corrected.

Doubtful.  An  extension of credit “doubtful” has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.  The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.  Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans.  A Doubtful classification for an entire credit should be avoided when collection of a specific portion appears highly probable with the adequately secured portion graded Substandard.  

Retail Loan Grades

Pass.  Pass credits are loans that are currently performing as agreed and are not troubled debt restructurings.

Substandard.  Substandard credits are loans that have reason to be considered to have a well defined weakness and placed on non-accrual.  This would include all retail loans over 90 days and troubled debt restructurings which were delinquent at the time of modification.

June 30, 2011

Commercial Credit Exposure Credit Risk Profile
Internal Rating	Real estate		Construction and Development		Other
Pass	$	178,279	$	8,176	$	53,835
Special Mention		10,966		5,410		8,113
Substandard		17,150		10,410		2,538
Doubtful		2,255		976		856
Total	$	208,650	$	24,972	$	65,342

Retail Credit Exposure Credit Risk Profile
	Mortgage		Consumer
	Residential		Real Estate		Auto		Boat/RV		Other
Pass	$	440,386	$	96,592	$	14,335	$	91,666	$	6,885
Substandard		14,806		2,550		77		935		274
Total	$	455,192	$	99,142	$	14,412	$	92,601	$	7,159

December 31, 2010

Commercial Credit Exposure Credit Risk Profile
Internal Rating	Real estate		Construction and Development		Other
Pass	$	168,855	$	22,046	$	56,587
Special Mention		9,934		10,313		5,471
Substandard		18,190		17,411		1,665
Doubtful		2,538		33		888
Total	$	199,517	$	49,803	$	64,611

Retail Credit Exposure Credit Risk Profile
	Mortgage		Consumer
	Residential		Real Estate		Auto		Boat/RV		Other
Pass	$	440,296	$	99,041	$	16,031	$	101,097	$	5,977
Substandard		17,723		4,525		16		918		180
Total	$	458,019	$	103,566	$	16,047	$	102,015	$	6,157

Allowance for Loan Losses.  We maintain an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on ongoing, quarterly assessments of the estimated losses inherent in the loan portfolio.  Our methodology for assessing the appropriateness of the allowance consists of several key elements, including the general allowance and specific allowances for identified problem loans and portfolio segments.  In addition, the allowance incorporates the results of measuring impaired loans as provided in FASB ASC 310, Receivables.  These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans.

The general allowance is calculated by applying loss factors to outstanding loans based on the internal risk evaluation of such loans or pools of loans. Changes in risk evaluations of both performing and nonperforming loans affect the amount of the general allowance. Loss factors are based on our historical loss experience as well as on significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date.  The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the prior three years.  Management believes the three year historical loss experience methodology is appropriate in the current economic environment, as it captures loss rates that are comparable to the current period being analyzed.

The appropriateness of the allowance is reviewed by management based upon its evaluation of then-existing economic and business conditions affecting our key lending areas and other conditions, such as credit quality trends (including trends in non-performing loans expected to result from existing conditions), collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments and recent loss experience in particular segments of the portfolio that existed as of the balance sheet date and the impact that such conditions were believed to have had on the collectability of the loan.  Senior management reviews these conditions quarterly in discussions with our senior credit officers.  To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s estimate of the effect of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment.  Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s evaluation of the loss related to this condition is reflected in the general allowance for loan losses.  The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments.

The allowance for loan losses is based on estimates of losses inherent in the loan portfolio.  Actual losses can vary significantly from the estimated amounts.  Our methodology as described permits adjustments to any loss factor used in the computation of the general allowance in the event that, in management’s judgment, significant factors which affect the collectability of the portfolio as of the evaluation date are not reflected in the loss factors.  By assessing the probable incurred losses inherent in the loan portfolio on a quarterly basis, we are able to adjust specific and inherent loss estimates based upon any more recent information that has become available.  Due to the loss of numerous manufacturing jobs in the communities we serve during recent years, including 2010, and the increase in higher risk loans, like consumer and commercial loans, as a percentage of total loans, management has concluded that our allowance for loan losses should be greater than historical loss experience and specifically identified losses would otherwise indicate.

 

The following tables detail activity in the allowance for loan losses by portfolio segment for the three and six-month periods ended June 30, 2011 and year ended December 31, 2010.  Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses on other segments.

	Three Months Ended June 30, 2011
	Commercial						Mortgage		Consumer
	Real Estate		Other		Construction and Development		Residential		Real Estate		Auto		Boat/RV		Other		Total
Allowance for loan losses:
Balance, beginning of year	$	6,898	$	1,638	$	965	$	2,195	$	1,616	$	254	$	2,088	$	143	$	15,797
Provision charged to expense		350		-		230		700		209		-		100		111		1,700
Losses charged off		292		-		-		819		170		17		345		121		1,764
Recoveries		1		-		-		59		1		24		132		7		224
Balance, end of period	$	6,957	$	1,638	$	1,195	$	2,135	$	1,656	$	261	$	1,975	$	140	$	15,957
Ending balance:
Individually evaluated for impairment	$	640	$	-	$	943	$	102	$	-	$	-	$	-	$	-	$	1,685
Collectively evaluated for impairment	$	6,317	$	1,638	$	252	$	2,033	$	1,656	$	261	$	1,975	$	140	$	14,272
Loans:
Ending balance
Individually evaluated for impairment	$	4,393	$	752	$	12,558	$	4,892	$	-	$	-	$	-	$	-	$	22,595
Collectively evaluated for impairment	$	204,257	$	64,590	$	12,414	$	450,300	$	99,142	$	14,412	$	92,601	$	7,159	$	944,875

	Six Months Ended June 30, 2011
	Commercial						Mortgage		Consumer
	Real Estate		Other		Construction and Development		Residential		Real Estate		Auto		Boat/RV		Other		Total
Allowance for loan losses:
Balance, beginning of year	$	7,097	$	1,717	$	1,310	$	2,212	$	1,616	$	250	$	2,008	$	162	$	16,372
Provision charged to expense		400		-		2,830		2,000		209		10		310		141		5,900
Losses charged off		541		79		2,945		2,180		171		25		719		176		6,836
Recoveries		1		-		-		103		2		26		376		13		521
Balance, end of period	$	6,957	$	1,638	$	1,195	$	2,135	$	1,656	$	261	$	1,975	$	140	$	15,957
Ending balance:
Individually evaluated for impairment	$	640	$	-	$	943	$	102	$	-	$	-	$	-	$	-	$	1,685
Collectively evaluated for impairment	$	6,317	$	1,638	$	252	$	2,033	$	1,656	$	261	$	1,975	$	140	$	14,272
Loans:
Ending balance
Individually evaluated for impairment	$	4,393	$	752	$	12,558	$	4,892	$	-	$	-	$	-	$	-	$	22,595
Collectively evaluated for impairment	$	204,257	$	64,590	$	12,414	$	450,300	$	99,142	$	14,412	$	92,601	$	7,159	$	944,875

	December 31, 2010
	Commercial						Mortgage		Consumer
	Real Estate		Other		Construction and Development		Residential		Real Estate		Auto		Boat/RV		Other		Total
Allowance for loan losses:
Balance, beginning of year	$	7,072	$	1,721	$	1,210	$	2,359	$	1,588	$	207	$	2,144	$	113	$	16,414
Provision charged to expense		1,300		180		300		2,900		940		86		1,100		244		7,050
Losses charged off		1,343		209		200		3,345		914		62		1,339		880		8,292
Recoveries		68		25		-		298		2		19		103		685		1,200
Balance, end of period	$	7,097	$	1,717	$	1,310	$	2,212	$	1,616	$	250	$	2,008	$	162	$	16,372
Ending balance:
Individually evaluated for impairment	$	515	$	-	$	825	$	69	$	-	$	-	$	-	$	-	$	1,409
Collectively evaluated for impairment	$	6,582	$	1,717	$	485	$	2,143	$	1,616	$	250	$	2,008	$	162	$	14,963
Loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Loans:
Ending balance
Individually evaluated for impairment	$	10,546	$	762	$	9,001	$	6,928	$	-	$	-	$	-	$	-	$	27,237
Collectively evaluated for impairment	$	188,971	$	63,849	$	40,802	$	451,091	$	103,566	$	16,047	$	102,015	$	6,157	$	972,498

Management’s general practice is to proactively charge down loans individually evaluated for impairment to the fair value of the underlying collateral.

Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.

For all loan portfolio segments except 1-4 family residential properties and consumer, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

The Company charges-off 1-4 family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down of 1-4 family first and junior lien mortgages to the net realizable value less costs to sell when the loan is 180 days past due, charge-off of unsecured open-end loans when the loan is 180 days past due, and charge down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off.

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

	June 30,
	2011		2010
Non-performing assets
Non-accrual loans	$	23,652	$	23,570
Accruing loans 90 days + past due		1,038		876
Restructured loans		5,431		1,224
Total non-performing loans		30,121		25,670
Real estate owned		7,151		6,171
Other repossessed assets		937		1,318
Non-performing securities		-		100
Total non-performing assets	$	38,209	$	33,259

XML



Disclosures About Fair Value of Assets and Liabilities

6 Months Ended

Jun. 30, 2011

Disclosures About Fair Value of Assets and Liabilities

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 sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Available-for-Sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy.  The Company uses a third-party provider to provide market prices on its securities.  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, municipal, federal agency 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 prices 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.

The following table presents the fair value measurement of assets and liabilities measured at fair value on a recurring basis and the level within the ASC 820 fair value hierarchy used for such fair value measurements:

			Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
June 30, 2011
Mortgage-backed securities
Government sponsored agencies	$	181,634	$	-	$	181,634	$	-
Collateralized mortgage obligations
Government sponsored agencies		110,559		-		110,559		-
Federal agencies		4,006		-		4,006		-
Municipals		3,565		-		3,565		-
Small Business Administration		13		-		13		-
Corporate obligations		2,958		-		-		2,958
Marketable equity securities		1,728		1,728		-		-
Available-for-sale securities	$	304,463	$	1,728	$	299,777	$	2,958
December 31, 2010
Mortgage-backed securities
Government sponsored agencies	$	118,275	$	-	$	118,275	$	-
Collateralized mortgage obligations
Government sponsored agencies		112,224		-		112,224		-
Federal agencies		7,821		-		7,821		-
Municipals		2,482		-		2,482		-
Small Business Administration		16		-		16		-
Corporate obligations		2,645		-		-		2,645
Marketable equity securities		1,702		1,702		-		-
Available-for-sale securities	$	245,165	$	1,702	$	240,818	$	2,645

The following is a reconciliation of the beginning and ending balances for the three months ended June 30, 2011 and 2010 of recurring fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs:

	2011		2010
Beginning balance, April 1	$	2,924	$	1,892
Total realized and unrealized gains and losses
Included in net income		-		(8	)
Included in other comprehensive loss		21		861
Purchases, issuances and settlements		13		17
Transfers in/out of Level 3		-		-
Ending balance	$	2,958	$	2,762
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, 2011 and 2010 of recurring fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs:

	2011			2010
Beginning balance, January 1	$	2,645		$	2,539
Total realized and unrealized gains (losses)
Included in net income		(193	)		(401	)
Included in other comprehensive income		475			589
Purchases, issuances and settlements		31			35
Transfers in/out of Level 3		-			-
Ending balance	$	2,958		$	2,762
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	$	(193	)	$	(401	)

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.  An allowable method for determining the amount of impairment includes estimating fair value 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.

The following table presents the fair value measurement of assets measured at fair value on a non-recurring basis and the level within the ASC 820 fair value hierarchy used for such fair value measurements:

			Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
June 30, 2011
Impaired loans	$	8,084	$	-	$	-	$	8,084
Other real estate owned		203		-		-		203
Mortgage servicing rights		3,198		-		-		3,198
December 31, 2010
Impaired loans	$	15,204	$	-	$	-	$	15,204
Other real estate owned		1,030		-		-		1,030
Mortgage servicing rights		3,349		-		-		3,349
Loans held for sale		5,057		5,057		-		-

The estimated fair values of the Company’s financial instruments not carried at fair value in the consolidated condensed balance sheets as of June 30, 2011 and December 31, 2010, are as follows:

	June 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Assets
Cash and cash equivalents	$	34,287	$	34,287	$	26,821	$	26,821
Loans held for sale		654		658		10,483		10,483
Loans		949,483		965,108		978,901		997,018
Stock in FHLB		14,391		14,391		16,682		16,682
Interest receivable		4,564		4,564		4,627		4,627
Liabilities
Deposits	$	1,161,570	$	1,124,960	$	1,121,569	$	1,080,131
FHLB advances		106,656		110,249		128,537		133,258
Other borrowings		12,794		13,432		13,167		14,067
Interest payable		732		732		995		995
Advances by borrowers for taxes and insurance		1,855		1,855		1,661		1,661

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.

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 is 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 fair value of commitments is immaterial.

XML



Consolidated Condensed Statement of Stockholders' Equity (Parenthetical) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
Cash dividends, per common share	$ 0.06	$ 0.06	$ 0.12	$ 0.12

XML



Earnings (loss) per share

6 Months Ended

Jun. 30, 2011

Earnings (loss) per share

Note 2: Earnings (loss) per share

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

	Three Months Ended Ended June 30,
	2011							2010
				Weighted-							Weighted-
				Average		Per-Share					Average		Per-Share
	Income			Shares		Amount		Income			Shares		Amount
	(000's)							(000's)
Basic Earnings Per Share
Net income	$	1,681			6,903,151			$	1,775			6,861,589
Dividends and accretion on preferred stock		(451	)						(451	)
Income available to common shareholders	$	1,230			6,903,151	$	0.18	$	1,324			6,861,589	$	0.19
Effect of Dilutive securities
Stock options and RRP grants					102,731							12,137
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions	$	1,230			7,005,882	$	0.18	$	1,324			6,873,726	$	0.19

	Six Months Ended June 30,
	2011							2010
				Weighted-							Weighted-
				Average		Per-Share					Average		Per-Share
	Income			Shares		Amount		Income			Shares		Amount
	(000's)							(000's)
Basic Earnings Per Share
Net income	$	987			6,898,195			$	3,118			6,865,562
Dividends and accretion on preferred stock		(901	)						(902	)
Income available to common shareholders	$	86			6,898,195	$	0.01	$	2,216			6,865,562	$	0.32
Effect of Dilutive securities
Stock options and RRP grants					126,725							7,343
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions	$	86			7,024,920	$	0.01	$	2,216			6,872,905	$	0.32

Options for 434,887 and 565,538 shares and warrants for 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, 2011 and 2010, respectively.

XML



Impact of Accounting Pronouncements

6 Months Ended

Jun. 30, 2011

Impact of Accounting Pronouncements

Note 3:  Impact of Accounting Pronouncements

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 are 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 was effective at the beginning of 2010, except for the detailed Level 3 disclosures, which became effective at the beginning of 2011.  The Company adopted this accounting pronouncement, as required, and the adoption did not 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 became effective for the Company for first interim or annual reporting period ending on or after December 15, 2010 and did not have a material impact on the statements taken as a whole.

In April 2011, FASB issued ASU No. 2011-02: A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.  The standard is intended to provide additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring.  The amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and are to be applied retrospectively to the beginning of the annual period of adoption.  As a result of applying these amendments, an entity may identify receivables that are newly considered impaired.  Early adoption is permitted.  The Company is evaluating the impact of this ASU.

In April 2011, FASB issued ASU No. 2011-03:  Reconsideration of Effective Control for Repurchase Agreements.  The amendments in this ASU remove from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee.  The amendments in this ASU also eliminates the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets.

The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011.  The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date.  Early adoption is not permitted.  The Company does not anticipate that this ASU will have a material effect on its financial statements.

In May 2011, FASB issued ASU No. 2011-04:  Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.  The amendments in this ASU generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed.  This ASU results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRS.

The amendments in this ASU are to be applied prospectively.  For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011.  Early application by public entities is not permitted.  The Company does not anticipate that this ASU will have a material effect on its financial statements.

In June 2011, FASB issued ASU No. 2011-05:  Amendments to Topic 220, Comprehensive Income.  Under the amendments in this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income.  This ASU eliminates the option to present the components of other comprehensive income as a part of the statement of changes in stockholders’ equity.  The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.

The amendments in this ASU should be applied retrospectively.  For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  Early adoption is permitted, because compliance with the amendments is already permitted.  The amendments do not require any transition disclosures.

XML



Investments

6 Months Ended

Jun. 30, 2011

Investments

Note 4: Investments

The amortized cost and approximate fair values of securities as of June 30, 2011 and December 31, 2010 are as follows.
 

	June 30, 2011
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Loss			Value
Available for Sale Securities
Mortgage-backed securities
Government sponsored agencies	$	178,036	$	3,821	$	(223	)	$	181,634
Collateralized mortgage obligations
Government sponsored agencies		107,662		2,923		(26	)		110,559
Federal Agencies		3,998		8		-			4,006
Municipals		3,445		120		-			3,565
Small Business Administration		13		-		-			13
Corporate obligations		6,726		-		(3,768	)		2,958
Marketable equity securities		1,740		-		(12	)		1,728
Total	$	301,620	$	6,872	$	(4,029	)	$	304,463

	December 31, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Loss			Value
Available for Sale Securities
Mortgage-backed securities
Government sponsored agencies	$	119,017	$	1,076	$	(1,818	)	$	118,275
Collateralized mortgage obligations
Government sponsored agencies		112,615		1,251		(1,642	)		112,224
Federal agencies		7,925		-		(104	)		7,821
Municipals		2,460		33		(11	)		2,482
Small Business Administration		16		-		-			16
Corporate obligations		6,888		-		(4,243	)		2,645
Marketable equity securities		1,723		-		(21	)		1,702
Total	$	250,644	$	2,360	$	(7,839	)	$	245,165

The amortized cost and fair value of available-for-sale securities at June 30, 2011, 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
	Amortized		Fair
Description Securities	Cost		Value
Security obligations due
Five to ten years	$	985	$	1,017
After ten years		13,184		9,512
		14,169		10,529
Mortgage-backed securities		178,036		181,634
Collateralized mortgage obligations		107,662		110,559
Small Business Administration		13		13
Marketable equity securities		1,740		1,728
Totals	$	301,620	$	304,463

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $1.5 million at June 30, 2011.

Gross gains of $75,000 and $320,000 resulting from sales of securities were realized for the six months ended June 30, 2011 and 2010, respectively.  There were no losses recognized on the sale of securities during this period in either 2011 or 2010.  Other-than-temporary impairment losses were recognized on securities for the six months ended June 30, 2011 and 2010 of $193,000 and $728,000, respectively.

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, 2011, was $38.9 million, a decrease from $141.3 million at December 31, 2010, which is approximately 13% and 58%, respectively, of the Bank's portfolio.  The Bank has continued to see an improvement since year-end due to increased values driven by lower market rates.

Based on evaluation of available evidence, management believes those securities stated at an amount less than their historical cost, 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.

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, 2011 and December 31, 2010:

	June 30, 2011
	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
Government sponsored agencies	$	29,228	$	(223	)	$	-	$	-		$	29,228	$	(223	)
Collateralized mortgage obligations
Government sponsored agencies		4,938		(26	)		-		-			4,938		(26	)
Corporate obligations		-		-			2,958		(3,768	)		2,958		(3,768	)
Marketable equity securities		-		-			1,728		(12	)		1,728		(12	)
Total temporarily impaired securities	$	34,166	$	(249	)	$	4,686	$	(3,780	)	$	38,852	$	(4,029	)

	December 31, 2010
	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Available for Sale
Mortgage-backed securities
Government sponsored agencies	$	69,971	$	(1,818	)	$	-	$	-		$	69,971	$	(1,818	)
Collateralized mortgage obligations
Government sponsored agencies		58,466		(1,642	)		-		-			58,466		(1,642	)
Federal agencies		7,821		(104	)		-		-			7,821		(104	)
Municipals		661		(11	)		-		-			661		(11	)
Corporate obligations		-		-			2,645		(4,243	)		2,645		(4,243	)
Marketable equity securities		-		-			1,702		(21	)		1,702		(21	)
Total temporarily impaired securities	$	136,919	$	(3,575	)	$	4,347	$	(4,264	)	$	141,266	$	(7,839	)

Mortgage-Backed Securities (MBS) and Collateralized Mortgage Obligations (CMO)

The unrealized losses on the Company’s investment in MBSs and 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, 2011.

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 decrease in performance and regulatory capital at the underlying banks resulting from exposure to subprime mortgages and (b) a 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, 2011.

MutualBank evaluates securities for other-than-temporary impairment (“OTTI”) on a quarterly basis.  During the quarter ended June 30, 2011, the Bank’s evaluation indicated no other-than-temporary impairment.  Impairment on securities is determined after analyzing the estimated cash flows 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, 2011.

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.  Where the security is not a beneficial interest in securitized financial assets, the Company uses the debt and equity securities impairment model.

The Company routinely conducts 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 currently impacted by other-than-temporary impairment testing are pooled trust preferred securities.  For each pooled trust preferred 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 done with assistance of 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.

 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.

 

Pooled Trust Preferred Securities. MutualFirst Financial, Inc. has a current amortized cost in pooled trust preferred securities of $6.7 million, which had an original par value of $10.3 million.  These securities have a current fair value of $3.0 million.  The following table provides additional information related to the Bank’s investment in trust preferred securities as of June 30, 2011:

Deal	Class	Original Par		Book Value		Fair Value		Unrealized Loss		Realized Losses 2011		Lowest Rating		Number of Banks/Insurance Companies Currently Performing		Actual Deferrals/Defaults (as % of original collateral)			Total Projected Defaults (as a % of performing collateral)a			Excess Subordination (after taking into account best estimate of future deferrals/defaults)b
(Dollars in thousands)
Alesco Preferred Funding IX	A2A	$	1,000	$	898	$	503	$	395	$	-		CCC-		41		19.72	%		22.18	%		39.87	%
Alesco Preferred Funding XVII	C1		1,000		-		-		-		100		C
Preferred Term Securities XIII	B1		1,000		817		278		539		25		Ca		45		30.74	%		22.43	%		0.00	%
Preferred Term Securities XVIII	C		1,000		913		338		575		-		Ca		52		24.26	%		13.66	%		4.67	%
Preferred Term Securities XXVII	C1		1,000		707		163		544		-		C		33		28.14	%		23.73	%		0.00	%
U.S. Capital Funding I	B1		3,000		2,891		1,392		1,499		-		Caa1		33		15.90	%		15.57	%		1.25	%
U.S. Capital Funding III	B1		1,000		500		284		216		-		Ca		31		24.94	%		15.48	%		0.00	%
U.S. Capital Funding V	B1		1,300		-		-		-		68		C
Total		$	10,300	$	6,726	$	2,958	$	3,768	$	193

(a) A 10% recovery is applied to all projected defaults.  A 15% recovery is applied to all projected insurance defaults.  No recovery is applied to current defaults.

(b) Excess subordination represents the additional defaults in excess of both current and projected defaults that the CDO can absorb before the bond experiences any credit impairment. Excess subordinated percentage is calculated by (a) determining what percentage of defaults a deal can experience before the bond has credit impairment,  and (b) subtracting from this default breakage percentage both total current and expected future default percentages.

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 tables provide 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
	Three Months Ended
	2011			2010
Credit losses on debt securities held
Beginning of period	$	(3,567	)	$	(4,482	)
Net additions related to increases in previously recognized other-than-temporary losses		-			(151	)
As of June 30,	$	(3,567	)	$	(4,633	)

	Accumulated Credit Losses
	Six Months Ended
	2011			2010
Credit losses on debt securities held
Beginning of year	$	(3,374	)	$	(3,905	)
Net additions related to increases in previously recognized other-than-temporary losses		(193	)		(728	)
As of June 30,	$	(3,567	)	$	(4,633	)

XML



Consolidated Condensed Statement of Stockholders' Equity (USD $)	Total	Common Stock	Additional paid-in capital	Preferred Stock	Additional paid-in capital	Comprehensive Income	Retained Earnings	Accumulated Other Comprehensive Income (Loss)	Unearned ESOP shares
Beginning Balance at Dec. 31, 2010	$ 131,140,022	$ 69,847	$ 72,424,460	$ 324	$ 31,829,779		$ 31,757,156	$ (3,988,158)	$ (953,386)
Beginning Balance (in shares) at Dec. 31, 2010		6,984,754		32,382
Comprehensive income
Net income for the period	987,249					987,249	987,249
Other comprehensive income, net of tax
Net unrealized gain on securities	5,387,965					5,387,965		5,387,965
Net unrealized loss on derivatives	(28,611)					(28,611)		(28,611)
Comprehensive income						6,346,603
ESOP shares earned	146,621		(12,299)						158,920
Accretion of discount on preferred stock	0				91,983		(91,983)
Share-based compensation	26,058		26,058
Stock options exercised (in shares)		1,832
Stock options exercised	10,955	19	10,936
Cash dividends ($.12 per common share)	(838,300)						(838,300)
Cash dividends - preferred stock	(809,550)						(809,550)
Ending Balance at Jun. 30, 2011	$ 136,022,409	$ 69,866	$ 72,449,155	$ 324	$ 31,921,762		$ 31,004,572	$ 1,371,196	$ (794,466)
Ending Balance (in shares) at Jun. 30, 2011		6,986,586		32,382

XML



Consolidated Condensed Statements of Cash Flows (USD $)	6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010
Operating Activities
Net income	$ 987,249	$ 3,118,197
Items not requiring (providing) cash
Provision for loan losses	5,900,000	3,050,000
Depreciation and amortization	3,077,487	2,634,328
Deferred income tax	(511,001)	1,324,741
Loans originated for sale	(10,829,804)	(22,774,710)
Proceeds from sales of loans held for sale	20,742,631	23,316,173
(Gain) loss on sale:
Loans held for sale	(440,703)	(563,687)
Securities-available for sale	(75,356)	(320,276)
Other real estate and repossessed assets	336,137	539,130
Premises and equipment		918
Loss on other-than-temporary impairement, securities	193,442	727,695
Other equity adjustments	169,856	109,236
Change in
Prepaid FDIC premium	780,410	832,808
Interest receivable and other assets	673,516	1,260,814
Interest payable and other liabilities	207,497	(689,624)
Cash value of life insurance	(724,961)	(792,127)
Other adjustments	1,667,605	(603,423)
Net cash provided by operating activities	22,154,005	11,170,193
Investing Activities
Net change in interest earning assets		(3,001,208)
Purchases of securities
Available for sale	(74,015,984)	(96,484,125)
Proceeds from maturities and paydowns of securities:
Available for sale	19,005,980	14,404,461
Held to maturity		782,176
Proceeds from sale of securities-available for sale	3,010,702	9,093,021
Redemption of Federal Home Loan Bank Stock	2,291,500
Net change in loans	16,728,172	37,491,096
Purchases of premises and equipment	(404,953)	(456,571)
Proceeds from sale of premises and equipment		500
Proceeds from real estate owned sales	2,365,949	1,806,920
Other investing activities	(36,942)	1,867,256
Net cash used in investing activities	(31,055,576)	(34,496,474)
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits	46,653,978	32,782,700
Certificates of deposits	(6,652,479)	31,230,094
Proceeds from FHLB advances	11,000,000	20,000,000
Repayment of FHLB advances	(32,785,176)	(44,293,622)
Repayment of other borrowings	(394,898)	(607,486)
Cash dividends paid	(1,647,850)	(1,647,721)
Other financing activities	194,066	134,256
Net cash provided by financing activities	16,367,641	37,598,221
Net Change in Cash and Cash Equivalents	7,466,070	14,271,940
Cash and Cash Equivalents, Beginning of Year	26,820,680	46,340,897
Cash and Cash Equivalents, End of Year	34,286,750	60,612,837
Additional Cash Flows Information
Interest paid	10,358,278	13,582,436
Income tax paid
Transfers from loans to foreclosed real estate	6,295,894	4,422,122
Mortgage servicing rights capitalized	$ 356,571	$ 229,823

XML



Consolidated Condensed Balance Sheets (USD $)	Jun. 30, 2011	Dec. 31, 2010
Assets
Cash	$ 10,665,156	$ 9,288,748
Interest-bearing demand deposits	23,621,594	17,531,932
Cash and cash equivalents	34,286,750	26,820,680
Investment securities available for sale	304,463,302	245,165,189
Loans held for sale	654,039	10,482,734
Loans	965,439,676	995,273,005
Allowance for loan losses	(15,956,545)	(16,372,093)
Net loans	949,483,131	978,900,912
Premises and equipment	32,305,113	32,966,112
Federal Home Loan Bank of Indianapolis stock, at cost	14,390,700	16,682,200
Investment in limited partnerships	3,368,330	3,623,564
Cash surrender value of life insurance	46,327,514	45,565,611
Prepaid FDIC premium	3,427,182	4,207,592
Core deposit and other intangibles	3,919,168	4,533,085
Deferred income tax benefit	16,616,181	20,030,022
Income tax receivable	2,419,680	1,412,938
Other assets	18,271,097	16,510,902
Total assets	1,429,932,187	1,406,901,541
Deposits
Non-interest-bearing	121,859,547	113,454,542
Interest bearing	1,039,710,676	1,008,114,181
Total deposits	1,161,570,223	1,121,568,723
Federal Home Loan Bank advances	106,655,982	128,537,407
Other borrowings	12,793,941	13,167,316
Other liabilities	12,889,632	12,488,073
Total liabilities	1,293,909,778	1,275,761,519
Commitments and Contingent Liabilities
Stockholders' Equity
Preferred stock, $.01 par value Authorized and unissued - 5,000,000 shares Issued and outstanding - 32,382 shares; liquidation preference $1,000 per share	324	324
Common stock, $.01 par value Authorized - 20,000,000 shares Issued and outstanding -6,986,586 and 6,984,754 shares in 2011 and 2010, respectively	69,866	69,847
Additional paid-in capital - preferred stock	31,921,762	31,829,779
Additional paid-in capital - common stock	72,449,155	72,424,460
Retained earnings	31,004,572	31,757,156
Accumulated other comprehensive income (loss)	1,371,196	(3,988,158)
Unearned employee stock ownership plan (ESOP) shares	(794,466)	(953,386)
Total stockholders' equity	136,022,409	131,140,022
Total liabilities and stockholders' equity	$ 1,429,932,187	$ 1,406,901,541