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 September 30, 2006   OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM  -  TO

Commission File Number:   000-27905

MutualFirst Financial, Inc.
(Exact Name of registrant specified in its charter)
Maryland	35-2085640
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
110 East Charles Street
Muncie, Indiana  47305
(765) 747-2800
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days. 

Yes   x No   o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer x Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 

Yes   o No   x

The number of shares of the Registrant’s common stock, with $.01 par value, outstanding as of November 9, 2006 was 4,365,340

FORM 10 – Q
MutualFirst Financial, Inc.

	INDEX
		Page Number
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Condensed Balance Sheets	1
	Consolidated Condensed Statements of Income	2
	Consolidated Condensed Statement of Stockholders’ Equity	3
	Consolidated Condensed Statements of Cash Flows	4
	Notes to Unaudited Consolidated Condensed Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	16
Item 4.	Controls and Procedures	17
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	18
Item 1A.	Risk Factors	18
Item 2.	Unregistered Sales of Equity Changes in Securities and Use of Proceeds	18
Item 3.	Defaults Upon Senior Securities	18
Item 4.	Submission of Matters to a Vote of Security Holders	18
Item 5.	Other Information	18
Item 6.	Exhibits	18
Signature Page		19
Exhibits

PART 1     FINANCIAL INFORMATION
ITEM 1.      Financial Statements

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY
Consolidated Condensed Balance Sheets

	September 30, 2006			December 31, 2005
	(Unaudited)
Assets
Cash	$	19,766,891		$	20,481,168
Interest-bearing demand deposits		930,971			1,883,415
Cash and cash equivalents		20,697,862			22,364,583
Interest-bearing deposits		293,000			293,000
Investment securities available for sale		40,605,579			39,787,608
Loans held for sale		2,619,626			2,022,390
Loans		846,876,761			830,647,714
Allowance for loan losses		(8,050,920	)		(8,100,349	)
Net loans		838,825,841			822,547,365
Premises and equipment		15,267,495			14,169,464
Federal Home Loan Bank of Indianapolis stock, at cost		10,151,900			10,124,700
Investment in limited partnerships		4,504,564			4,605,898
Cash surrender value of life insurance		28,816,357			28,045,357
Foreclosed real estate		1,449,143			1,507,224
Interest receivable		3,288,849			3,897,903
Core deposit intangibles and goodwill		14,993,584			13,964,377
Deferred income tax benefit		3,929,783			3,817,287
Other assets		5,251,233			4,682,142
Total assets	$	990,694,816		$	971,829,298
Liabilities
Deposits
Non-interest-bearing	$	45,080,645		$	43,466,048
Interest bearing		682,188,293			641,087,825
Total deposits		727,268,938			684,553,873
Federal Home Loan Bank advances		161,489,960			186,007,669
Other borrowings		1,411,163			1,783,851
Advances by borrowers for taxes and insurance		2,866,791			1,837,586
Interest payable		1,856,943			1,623,287
Other liabilities		7,911,632			7,229,412
Total liabilities		902,805,427			883,035,678
Commitments and Contingent Liabilities
Stockholders’ Equity
Preferred stock, $.01 par value Authorized and unissued --- 5,000,000 shares
Common stock, $.01 par value Authorized --- 20,000,000 shares Issued and outstanding ---4,391,637 and 4,552,218 shares		43,916			45,522
Additional paid-in capital		33,099,877			33,889,584
Retained earnings		57,405,924			57,968,477
Accumulated other comprehensive income (loss)		(356,122	)		(374,701	)
Unearned employee stock ownership plan (ESOP) shares		(2,304,206	)		(2,542,586	)
Unearned recognition and retention plan (RRP) shares		—			(192,676	)
Total stockholders’ equity		87,889,389			88,793,620
Total liabilities and stockholders’ equity	$	990,694,816		$	971,829,298

See notes to consolidated condensed financial statements.

1

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY
Consolidated Condensed Statements of Income
(Unaudited)

	Three Months Ended September 30					Nine Months Ended September 30
	2006			2005		2006			2005
Interest Income
Loans receivable, including fees	$	13,698,923		$	11,548,152	$	40,026,872		$	33,349,425
Investment seurities:
Mortgage-backed securities		134,280			132,666		356,142			391,064
Federal Home Loan Bank stock		106,591			93,954		351,416			259,796
Other investments		375,010			298,509		1,053,738			802,541
Deposits with financial institutions		20,253			13,591		47,114			27,355
Total interest income		14,335,057			12,086,872		41,835,282			34,830,181
Interest Expense
Passbook savings		74,143			74,512		228,722			182,200
Certificates of deposit		5,046,114			3,578,759		13,985,929			9,787,596
Daily Money Market accounts		167,315			204,749		527,678			562,907
Demand and NOW acounts		547,120			37,851		1,038,075			111,288
Federal Home Loan Bank advances		2,140,986			1,477,190		5,879,249			4,075,211
Other interest expense		15,606			15,606		46,818			46,818
Total interest expense		7,991,284			5,388,667		21,706,471			14,766,020
Net Interest Income		6,343,773			6,698,205		20,128,811			20,064,161
Provision for losses on loans		525,000			443,750		1,443,000			1,331,250
Net Interest Income After Provision for Loan Losses		5,818,773			6,254,455		18,685,811			18,732,911
Other Income
Service fee income		1,146,769			1,012,816		3,266,636			2,888,658
Net realized loss on sale of available-for-sale securities		0			0		0			(762	)
Equity in gains (losses) of limited partnerships		(13,437	)		44,426		(15,312	)		18,187
Commissions		135,009			206,403		487,460			761,181
Net gains on sales of loans		110,257			0		303,517			203,278
Net servicing fees		10,730			92,872		52,678			155,495
Increase in cash surrender value of life insurance		267,000			250,000		771,000			765,000
Other income		91,582			39,412		222,863			109,092
Total other income		1,747,910			1,645,929		5,088,842			4,900,129
Other Expenses
Salaries and employee benefits		3,591,131			3,435,009		10,966,527			10,220,912
Net occupancy expenses		386,923			345,248		1,103,121			1,015,838
Equipment expenses		300,778			307,758		921,866			928,445
Data processing fees		228,111			209,945		659,883			605,673
Automated teller machine		172,796			153,780		545,787			474,695
Professional fees		235,889			228,512		727,316			669,676
Advertising and promotion		272,729			203,762		715,204			536,045
Other expenses		1,019,406			908,557		3,010,039			2,524,547
Total other expenses		6,207,763			5,792,571		18,649,743			16,975,831
Income Before Income Tax		1,358,920			2,107,813		5,124,910			6,657,209
Income tax expense		214,550			554,725		1,071,000			1,806,975
Net Income	$	1,144,370		$	1,553,088	$	4,053,910		$	4,850,234
Basic earnings per share	$	0.27		$	0.36	$	0.96		$	1.12
Diluted earnings per share	$	0.27		$	0.35	$	0.94		$	1.09
Dividends per share	$	0.15		$	0.13	$	0.43		$	0.39

See notes to consolidated condensed financial statements.

2

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY
Consolidated Condensed Statement of Stockholders’ Equity
For the Nine Months Ended September 30, 2006
(Unaudited)

	Common Stock															Accumulated
							Additional								Other			Unearned			Unearned
	Shares Outstanding			Amount			paid-in capital			Comprehensive Income		Retained Earnings			Comprehensive Income (Loss)			ESOP shares			RRP  shares			Total
Balances, December 31, 2005		4,552,218		$	45,522		$	33,889,584				$	57,968,477		$	(374,701	)	$	(2,542,586	)	$	(192,676	)	$	88,793,620
Comprehensive income
Net income for the period										$	4,053,910	$	4,053,910												4,053,910
Other comprehensive income, net of tax
Net unrealized gains on securities											18,579					18,579									18,579
Comprehensive income										$	4,072,489
ESOP shares earned								257,714											238,380						496,094
Cash dividends ($.43 per share)													(1,887,300	)											(1,887,300	)
Reclassification of Unearned RRP shares to Additional paid-in capital								(192,676	)													192,676			0
RRP shares earned								112,923																	112,923
Stock repurchased and retired		(204,417	)		(2,044	)		(1,602,852	)				(2,729,163	)											(4,334,059	)
Stock options exercised		43,836			438			635,184																	635,622
Balances,  September 30, 2006		4,391,637		$	43,916		$	33,099,877				$	57,405,924		$	(356,122	)	$	(2,304,206	)	$	0		$	87,889,389

See notes to consolidated condensed financial statements.

3

MutualFirst Financial, Inc.
Consolidated Condensed Statements of Cash Flows
(Unaudited)

	Nine Months Ended September 30,
	2006			2005
Operating Activities
Net income	$	4,053,910		$	4,850,234
Items not requiring (providing) cash
Provision for loan losses		1,443,000			1,331,250
ESOP shares earned		496,094			549,411
RRP shares earned		112,923			192,375
Depreciation and amortization		1,952,188			2,988,975
Deferred income tax		(124,882	)		(744	)
Loans originated for sale		(19,251,486	)		(9,131,315	)
Proceeds from sales of loans held for sale		18,957,768			12,247,743
Gains on sales of loans held for sale		(303,518	)		(203,278	)
Change in
Interest receivable		609,054			(343,597	)
Other assets		(755,634	)		(2,047,005	)
Interest payable		233,656			308,096
Other liabilities		655,215			1,180,214
Cash value of life insurance		(771,000	)		(765,000	)
Other adjustments		935,197			120,377
Net cash provided by operating activities		8,242,485			11,277,736
Investing Activities
Purchases of securities available for sale		(3,893,735	)		(8,699,199	)
Proceeds from matuities and paydowns of securities available for sale		2,833,483			5,535,907
Proceeds from sales of securities available fro sale		219,361			12,637,466
Net change in loans		(13,707,063	)		(36,382,745	)
Purchases of premises and equipment		(1,384,430	)		(3,091,785	)
Proceeds from real estate owned sales		960,840			354,989
Cash received (paid) in acquisition, net		3,894,267			(9,313,731	)
Other investing activities		48,303			(596,397	)
Net cash used in investing activities		(11,028,974	)		(39,555,495	)
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits		13,379,401			(16,421,689	)
Certificates of deposits		17,008,619			38,948,298
Repayment of note payable		(419,506	)		(424,005	)
Proceeds from FHLB advances		379,100,000			300,300,000
Repayment of FHLB advances		(403,392,213	)		(290,603,761	)
Net change in advances by borrowers for taxes and insurance		1,029,205			1,449,022
Stock repurchased		(4,334,059	)		(4,165,740	)
Proceeds from stock options exercised		635,622			728,800
Cash dividends		(1,887,301	)		(1,824,924	)
Net cash provided by financing activities		1,119,768			27,986,001
Net Change in Cash and Cash Equivalents		(1,666,721	)		(291,758	)
Cash and Cash Equivalents, Beginning of Year		22,364,583			19,743,376
Cash and Cash Equivalents, End of Year	$	20,697,862		$	19,451,618
Additional Cash Flows Information
Interest paid	$	21,472,815		$	14,256,222
Income tax paid		1,225,000			2,150,366
Transfers from loans to foreclosed real estate		1,421,870			716,398
Mortgage servicing rights capitalized		186,543			121,622

See Notes to Consolidated Financial Statements

4

MutualFirst Financial, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 1:  Basis of Presentation

The consolidated condensed financial statements include the accounts of MutualFirst Financial, Inc. (the “Company”), its wholly owned subsidiary, Mutual Federal Savings Bank, a federally chartered savings bank (“Mutual Federal”), and Mutual Federal’s wholly owned subsidiary, First MFSB Corporation. 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 2005 filed with the Securities and Exchange Commission.

The interim consolidated condensed financial statements at September 30, 2006 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, 2005 has been derived from the Audited Consolidated Balance Sheet of the Company as of that date.

5

Note 2 --  Earnings per share

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

	Three Months Ended Ended September 30,
	2006						2005
	Income		Weighted- Average Shares		Per-Share Amount		Income		Weighted- Average Shares		Per-Share Amount
	(000’s)						(000’s)
Basic Earnings Per Share
Income available to common shareholders	$	1,144		4,166,531	$	0.27	$	1,553		4,310,148	$	0.36
Effect of Dilutive securities
Stock options and RRP grants				73,642						106,903
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions	$	1,144		4,240,173	$	0.27	$	1,553		4,417,051	$	0.35

	Nine Months Ended Ended September 30,
	2006						2005
	Income		Weighted- Average Shares		Per-Share Amount		Income		Weighted- Average Shares		Per-Share Amount
	(000’s)						(000’s)
Basic Earnings Per Share
Income available to common shareholders	$	4,054		4,222,178	$	0.96	$	4,850		4,342,519	$	1.12
Effect of Dilutive securities
Stock options and RRP grants				79,413						118,215
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions	$	4,054		4,301,591	$	0.94	$	4,850		4,460,734	$	1.09

Options of 91,000 shares & 60,000 shares were not included in the calculation above due to being anti-dilutive to earnings per share as of September 30, 2006 and September 30, 2005, respectively.

Note 3:  Accounting Changes

In March 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 156.  This Statement amends SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities.

SFAS No. 156 requires an entity to initially recognize a servicing asset or servicing liability at fair value each time it undertakes an obligation to service a financial asset by entering into a servicing contract in other specific situations.

In addition, SFAS No. 156 permits an entity to choose either of the following subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities:

• Amortization method - Amortize servicing assets or servicing liabilities in proportion to and over the period of estimated net servicing income or net servicing loss and assess servicing assets or servicing liabilities for impairment or increased obligation based on fair value at each reporting date.

• Fair value measurement method - Measure servicing assets or servicing liabilities at fair value at each reporting date and report changes in fair value in earnings in the period in which the changes occur.

SFAS No. 156 is effective at the beginning of an entity’s first fiscal year that begins after September 15, 2006, and should be applied prospectively for recognition and initial measurement of servicing assets and servicing liabilities.  Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year.

The Company did not early adopt SFAS No. 156 on January 1, 2006.  The Company is currently evaluating the effect of adoption of this Statement on the Company’s financial condition or results of operations.

6

In September 2006, the Emerging Issues Task Force (EITF) reached a consensus regarding the accounting for entities with split-dollar life insurance arrangements that provide an employee with a specified benefit that is not limited to an employee’s active service period.  In reaching its consensus, the EITF determined that an employer should recognize as a liability the future benefits to be provided to employees beyond the employees active service period.  In the case of split-dollar plan that provides a death benefit to the employees designated beneficiary and the benefit is provided to the employee beyond their active service period, an entity should accrue a liability during the employee’s active service period for the cost of maintaining the life insurance policy during the employee’s retirement period.   EITF 06-4 is effective for fiscal years beginning after December 15, 2007 with earlier application permitted.  Entities should recognize the effects of applying EITF 06-4 either as a change in accounting principle through a cumulative-effect adjustment to retained earnings or other components of equity as of the beginning of the year of adoption or as a change in accounting principle through retrospective application to all prior periods.

In September, 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158.  This statement requires an entity that sponsors one or more single-employer defined benefit plans to recognize the funded status of a benefit plan (measured as the difference between the fair value of plan assets and the benefit obligation) in its statement of financial position.  For a pension plan, the benefit obligation is the projected benefit obligation and for any other plan the benefit obligation is the accumulated postretirement benefit obligation.  Additionally, all items previously deferred when applying SFAS No. 87 or SFAS No. 106 will now be recognized as a component of accumulated other comprehensive income, net of applicable taxes.  SFAS No. 158 will not change the components of net periodic benefit cost.  SFAS No. 158 will require plan asset and benefit obligations to be measured primarily as of the balance sheet date.  The effective date for the recognition of the funded status on the balance sheet is for fiscal years ending after December 15, 2006 while the effective date for the requirement that the measurement date of plan assets and the benefit obligation be the same as the balance sheet date is for fiscal years ending after December 15, 2008.

In September 2006, the Securities Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (SAB 108), which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 is effective for fiscal years ending after November 15, 2006 The Company is currently evaluating the impact, if any, that SAB 108 will have on its financial condition and results of operations.

Note 4:  Change in Accounting Principle

The Company has a stock-based employee compensation plan, which is described in Notes of Financial Statements included in the December 31, 2005 Form 10-K Annual Report.

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (“SFAS 123(R)”).  SFAS 123(R) addresses all forms of share-based payment awards, including shares under employee stock purchase plans, stock options, restricted stock and stock appreciation rights.  SFAS 123(R) requires all share-based payments to be recognized as expense, based upon their fair values, in the financial statements over the vesting period of the awards.  The Company has elected the modified prospective application and, as a result, has recorded no compensation expense related to vested stock options less estimated forfeitures for the three or nine month period ended September 30, 2006, due to all options being fully vested as of December 31, 2005.

7

Prior to the adoptions of SFAS 123(R), the Company accounted for this plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations.  No stock-based employee compensation cost was reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the grant date.  The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

	Three Months Ended September 30, 2005			Nine Months Ended September 30, 2005
Net income, as reported	$	1,553		$	4,850
Less: Total stock-based employee compensation cost determined under the fair value based method, net of income taxes	$	(26	)	$	(78	)
Pro forma net income	$	1,527		$	4,772
Earnings per share:
Basic - as reported	$	0.36		$	1.12
Basic - proforma	$	0.35		$	1.10
Diluted - as reported	$	0.35		$	1.09
Diluted - proforma	$	0.35		$	1.07

Prior to the adoption of SFAS 123(R), unearned compensation related to restricted stock awards was classified as a separate component of stockholder’s equity. In accordance with the provisions of SFAS 123(R), on January 1, 2006, the balance in unearned compensation was reclassified to additional paid-in capital on the balance sheet and the statement of stockholders equity.

Item 2:  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

General

MutualFirst Financial, Inc., a Maryland corporation (the “Company”), was organized in September 1999.  On December 29, 1999, it acquired the common stock of Mutual Federal Savings Bank (“Mutual Federal”) upon the conversion of Mutual Federal from a federal mutual savings bank to a federal stock savings bank.

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

Mutual Federal currently owns one subsidiary, First MFSB Corporation.  The assets of First MFSB Corporation consist of an investment in Family Financial Holdings Incorporated.  Family Financial is an ordinary Indiana corporation that provides debt cancellation products to financial institutions.

The following should be read in conjunction with the Management’s Discussion and Analysis in the Company’s December 31, 2005 Annual Report on Form 10-K.

8

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 70 of the Form 10-K  for the year ended December 31, 2005.  Certain of these policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain.  Management believes that its critical accounting policies include determining the allowance for loan losses, the valuation of foreclosed assets, mortgage servicing rights and intangible assets.

Allowance for Loan Losses

The allowance for loan losses is a significant estimate that can and does change based on management’s assumptions about specific borrowers and current general economic and business conditions, among other factors.  Management reviews the adequacy of the allowance for loan losses on at least a quarterly basis.  The evaluation by management includes consideration of past loss experience, changes in the composition of the loan portfolio, the current condition and amount of loans outstanding, identified problem loans and the probability of collecting all amounts due.

The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions.  A worsening or protracted economic decline would increase the likelihood of additional losses due to credit and market risk and could create the need for additional loss reserves.

Foreclosed Assets

Foreclosed assets are carried at the lower of cost or fair value less estimated selling costs.  Management estimates the fair value of the properties based on current appraisal information.  Fair value estimates are particularly susceptible to significant changes in the economic environment, market conditions, and real estate market.  A worsening or protracted economic decline would increase the likelihood of a decline in property values and could create the need to write down the properties through current operations.

Mortgage Servicing Rights

Mortgage servicing rights (“MSRs”) associated with loans originated and sold, where servicing is retained, are capitalized and included in other intangible assets in the consolidated balance sheet.  The value of the capitalized servicing rights represents the present value of the future servicing fees arising from the right to service loans in the portfolio.  Critical accounting policies for MSRs relate to the initial valuation and subsequent impairment tests.  The methodology used to determine the valuation of MSRs requires the development and use of a number of estimates, including anticipated principal amortization and prepayments of that principal balance.  Events that may significantly affect the estimates used are changes in interest rates, mortgage loan prepayment speeds and the payment performance of the underlying loans.  The carrying value of the MSRs is periodically reviewed for impairment based on a determination of fair value.  For purposes of measuring impairment, the servicing rights are compared to a valuation prepared based on a discounted cash flow methodology, utilizing current prepayment speeds and discount rates.  Impairment, if any, is recognized through a valuation allowance and is recorded as amortization of intangible assets.

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Intangible Assets

The Company periodically assesses the impairment of its goodwill and the recoverability of its core deposit intangible.  Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value.  If actual external conditions and future operating results differ from the Company’s judgments, impairment and/or increased amortization charges may be necessary to reduce the carrying value of these assets to the appropriate value.    

Forward Looking Statements

This quarterly report on Form 10-Q contains statements which constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements may appear in a number of places in this Form 10-Q and include statements regarding the intent, belief, outlook, estimate or expectations of the company, its directors or its officers primarily with respect to future events and the future financial performance of the company.  Readers of this Form 10-Q are cautioned that any such forward looking statements are not guarantees of future events or performance and involve risk and uncertainties, and that actual results may differ materially from those in the forward looking statements as a result of various factors.  The accompanying information contained in this Form 10-Q identifies important factors that could cause such differences.  These factors include changes in interest rates; the loss of deposits and loan demand to competitors; substantial changes in financial markets; changes in real estate values and the real estate market; or regulatory changes.

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.

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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, NOW accounts etc). This structure would impact net interest income favorably in a decreasing rate environment, assuming a normally shaped yield curve, as the rates on interest bearing liabilities would decrease more rapidly than rates on the interest earning assets.  Conversely, in an increasing rate environment, assuming a normally shaped yield curve, net interest income would be impacted unfavorably as rates on interest earning assets would increase at a slower rate than rates on interest bearing liabilities.

Since 2000 it has been the Company’s strategic objective to change the repricing structure of its interest-earning assets from longer term to shorter term to better match the structure of our interest bearing liabilities and, thereby, reduce the impact interest rate changes have on our net interest income. Strategies employed to accomplish this objective have been to increase the originations of variable rate commercial loans and shorter term consumer loans and to sell longer term mortgage loans. The percentage of consumer and commercial business loans to total loans has increased from 35% at the end of 2000 to 44% at September 30, 2006. On the liability side of the balance sheet, the Company is employing strategies to increase the balance of core deposit accounts such as low cost checking and money market accounts. The percentage of core deposits to total deposits has remained at 33% over this time period primarily due to the recent acquisition of Fidelity Federal which had a lower percentage of core deposits. These are ongoing strategies that are dependent on current market conditions and competition.

During the first nine months of 2006, in keeping with its strategic objective to reduce interest rate risk exposure, the Company also sold $18.7 million of long term fixed rate loans that had been held for sale, which reduced potential earning assets and therefore had a negative impact on net interest income. This was offset, in the short term, by recognizing a gain on the sale of these loans of $304,000 in the first nine months of this year.

Recent increases in short-term interest rates, as a result of increases in the Federal Funds rate by the Board of Governors of the Federal Reserve System, without a corresponding increase in long-term interest rates will result in an increase in interest expense and a reduction in net interest income in 2006. The effect of the flattening yield curve is to increase our cost of funds at a faster rate than our yield on loans and investments, due to the longer-term nature of our interest earning assets. In 2006, as we increase our investment in business-related loans, which are considered to entail greater risks than one-to four-family residential loans, in order to help offset the pressure on our net interest margin, our provision for loan losses may increase to reflect this increased risk.

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The Company converted to a public company at the end of 1999, and at the end of 2000 bought a $200 million thrift for stock. Since that time the Company has been buying back the Company’s stock to manage capital levels and enhance earnings per share. During the first nine months of 2006, the Company used $4.3 million for this purpose, thereby reducing earning assets from where they otherwise would have been and correspondingly reduced net interest income.

On September 16, 2005 the Bank purchased certain assets totaling $106 million and   assumed certain liabilities totaling $96.6 million representing the operations of Fidelity Federal Savings Bank (“Fidelity”) located in Marion, Indiana for $20 million in cash. The assets purchased included residential real estate mortgage loans of $55.0 million, consumer loans of $14.0 million, commercial real estate loans of $9.2 million and commercial business loans of $3.6 million. The liabilities assumed included total deposits of $75.9 million (including $23.5 million core savings and transaction accounts) and Federal Home Loan Bank advances of $20.5 million.

On August 18, 2006 the Bank purchased assets totaling $7.6 million and assumed liabilities totaling $12.3 million representing the Winchester, Wabash and Warsaw offices owned by First Financial Bank, NA, which were operated as branches of Community First Bank and Trust (“First Financial”).  The assets purchased included residential real estate mortgage loans of $5.4 million and consumer loans of $1.2 million.  The liabilities assumed included total deposits of $12.3 million.

Results of operations also depend upon the level of the Company’s non-interest income, including fee income and service charges, and the level of its non-interest expense, including general and administrative expenses. In addition to the Fidelity and First Financial acquisitions, the Company expanded through the addition of a new branch office that opened in June 2005 located in Syracuse, Indiana in Kosciusko County and the recent purchase of land in Madison County in preparation for possible expansion towards the greater Indianapolis area. In addition, it is anticipated that construction will begin on a new branch in Elkhart County later in the year. The Company also continues to work toward the development of an Investment Management and Private Banking Division in order to better service clients with more specialized financial needs. The intent of all these expansion transactions is to increase income over the long term. However, on a short term basis, expenses relating to the new branches and a new division will have the effect of increasing non-interest expense with no immediate offsetting income.

Financial Condition

Assets totaled $990.7 million at September 30, 2006, an increase from December 31, 2005 of $18.9 million, or 1.9%. Gross loans, excluding loans held for sale, increased $16.3 million or 2.0%.  Consumer loans increased $12.9 million, or 6.0%, and commercial business loans increased $5.8 million, or 9.0%, while residential and commercial real estate loans held in the portfolio decreased $2.4 million, furthering our strategy to reduce the percentage of longer term, fixed rate real estate mortgage loans to total loans.  Mortgage loans held for sale increased $597,000 and mortgage loans sold during the first nine months of 2006 totaled $18.7 million. Investment securities available for sale increased $818,000 or 2.1% in order to maintain liquidity targets set by the Board of Directors.

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Premises and equipment increased $1.1 million or 7.7% due to the purchase of assets from First Financial in August and the purchase of land for the purpose of building a branch office in Madison County in the yet to be determined future. These purchases were partially offset by normal depreciation.

Allowance for loan losses decreased $49,000 to $8.1 million when comparing December 31, 2005 to September 30, 2006.  Net charge offs for the first nine months of 2006 were $1.5 million or .24% of average loans on an annualized basis compared to $1.6 million, or .30% of average loans for the comparable period in 2005. A large portion of the net charge offs in the third quarter of 2006 was related to 1-4 family residential and consumer loans. As of September 30, 2006 the allowance for loan losses as a percentage of loans receivable and non-performing loans was .95% and 158.67%, respectively.

Total deposits were $727.3 million at September 30, 2006 an increase of $42.7 million, or 6.2%, from December 31, 2005. Increases in core demand and savings accounts of $42.5 million, brokered deposits of $10.1 million and public deposits of $4.0 million were offset by reductions in daily money market accounts of $13.9 million. A new market rate checking account was introduced during the second quarter. The account pays an interest rate (indexed to the fed funds rate) that is tiered based on the balance of the checking account. The higher the balance the higher the interest rate paid. As of September 30, 2006 the balance in this account was $33.2 million. Total borrowings decreased $24.9 million to $162.9 million at September 30, 2006 from $187.8 million at December 31, 2005 primarily due to the increase in the new checking account.  The increase of this checking account and decrease in borrowings increases the overall franchise value of the Company.

Stockholders’ equity decreased $904,000, or 1.0%, from $88.8 million at December 31, 2005, to $87.9 million at September 30, 2006.  The decrease was due primarily to the repurchase of 204,000 shares of common stock for $4.3 million and dividend payments of $1.9 million.  This decrease was partially offset by net income of $4.1 million, Employee Stock Ownership Plan (ESOP) shares earned of $496,000, and RRP shares earned of $113,000.  Also, the market value of securities available for sale compared to their book value increased $19,000 from a loss of $375,000 at December 31, 2005 to a loss of $356,000 at September 30, 2006.

Comparison of the Operating Results for the Three Months Ended September 30, 2006 and 2005

Net income for the third quarter ended September 30, 2006 was $1.1 million, or $.27 for basic and diluted earnings per share.  This compared to net income for the comparable period in 2005 of $1.6 million, or $.36 for basic and $.35 for diluted earnings per share.  Annualized return on assets was .47% and return on tangible equity was 6.23% for the third quarter of 2006 compared to .70% and 7.29% respectively, for the same period last year.

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Net interest income before the provision for loan losses decreased $354,000 from $6.7 million for the three months ended September 30, 2005 to $6.3 million for the three months ended September 30, 2006. The primary reason for the decline was a 48 basis point decrease in the net interest margin reflecting the Bank’s liability sensitive nature, partially offset by an increase of $88.7 million, or 11.0% increase in average interest earning assets (mainly due to the Fidelity Federal purchase in September of 2005).  

The provision for loan losses for the third quarter of 2006 was $525,000, compared to $444,000 for last year’s comparable period. The increase was due primarily to higher balances and changing composition of the loan portfolio. Non-performing loans to total loans at September 30, 2006 were .60% compared to .85% at September 30, 2005.   Non-performing assets to total assets were .76% at September 30, 2006 compared to .90% at September 30, 2005. The decrease in the non-performing loans and assets was due in part to a non-performing loan in the amount of approximately $1.9 million being paid in full.

Non-interest income increased $102,000 to $1.7 million for the three months ended September 30, 2006 compared to $1.6 million for the same period in 2005. The increase resulted primarily from increases in service fees on transaction accounts of $134,000, or 13.2%, increased gain on loan sales of $28,000, or 30.1% and other operating income increased $52,000, or 132.4%, mostly related to a prior year state tax refund.  The increases were offset by a reduction in commission income on annuity and mutual fund sales of $71,000 as short term interest rates have risen making these products less competitive.  On a linked quarter basis non-interest income increased $71,000, or 4.2%.

Non-interest expense increased $415,000 or 7.2% to $6.2 million for the three months ended September 30, 2006 compared to $5.8 million for the same period in 2005. The increase was due primarily to increased salaries and benefits, which were up $156,000 due to annual salary adjustments, increased health insurance costs and increased staffing for three new branches opened: one in May of 2005, another with the purchase of Fidelity Federal in September of 2005 and the other with the First Financial acquisition in August 2006.  Marketing expenses were up $69,000 primarily due to a new branding campaign designed to more clearly communicate our strategic position. Other expenses increased $111,000 due to increased professional fees primarily related to regulatory compliance requirements and legal costs related to REO, increased REO expenses (other than legal costs) resulting from more repossessed properties, and other general and administrative expense increases related to the opening of the previously mentioned new branches. On a linked quarter basis non-interest expense was flat at $6.2 million.

Income tax expense decreased $304,000 for the three months ended September 30, 2006 compared to the same period in 2005 due to less taxable income. The effective tax rate decreased from 26.3% to 15.8% due to an increased percentage of low income housing tax credits to taxable income when comparing the third quarter of 2006 to the third quarter of 2005.

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Comparison of the Operating Results for the Nine-Months Ended September 30, 2006 and 2005.

Net income for the nine months ended September 30, 2006 was $4.1 million or $.96 for basic and $.94 for diluted earnings per share. This compared to net income for the comparable period in 2005 of $4.9 million or $1.12 for basic and $1.09 for diluted earnings per share. The primary reason for the decrease was a shrinking net interest margin brought on by increased short term interest rates.  Annualized return on average assets was .56% and return on average tangible equity was 7.25% for the first nine months of 2006 compared to .76% and 7.51% respectively, for the same period last year.

Net interest income before the provision for loan losses increased $65,000 for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005. The primary reason for the slight increase was due to a $102.3 million, or 13.0% increase in average interest earning assets (mainly due to the Fidelity Federal purchase in September of 2005), which was mostly offset by a 38 basis point decrease in the net interest margin reflecting the Bank’s liability sensitive nature, as short term interest rates continued to rise.

The provision for loan losses for the first nine months of 2006 was $1.4 million, compared to $1.3 million for last year’s comparable period. The increase was primarily due to higher loan balances at the end of the period compared to a year ago.  The increase was also attributable to the changing composition of the loan portfolio into higher risk products.  Non-performing loans to total loans at September 30, 2006 were .60% compared to .85% at September 30, 2005.   Non-performing assets to total assets were .76% at September 30, 2006 compared to .90% at September 30, 2005. As previously noted, the decrease in the non-performing loans and assets was due in part to a non-performing loan in the amount of approximately $1.9 million being paid in full.

For the nine month period ended September 30, 2006 non-interest income increased $189,000 to $5.1 million compared to the same period in 2005. The increase resulted primarily from increases in service fees on transaction accounts of $378,000, or 13.1% and other income increases of $114,000 (primarily increased gains on sale of REO and a prior year state tax refund) were offset by a reduction in commission income on annuity and mutual fund sales of $274,000 as short term interest rates have risen making these products less competitive.

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Non-interest expense increased $1.7 million, or 9.9% to $18.6 million for the nine months ended September 30, 2006 compared to $17.0 million for the same period in 2005. The increase was due primarily to increased salaries and benefits which were up $746,000 due to annual salary adjustments, increased health insurance costs and increased staffing for three new branches opened; one in May of 2005, another with the purchase of Fidelity Federal in September of 2005, and the other a result of the First Financial branch acquisition. Marketing expenses were up $179,000 primarily due to a new branding campaign designed to more clearly communicate our strategic position. Other expenses increased $485,000 due to increased professional fees primarily related to regulatory compliance requirements and legal costs related to REO, increased REO expenses (other than legal costs) due to more repossessed properties, and other general and administrative expense increases primarily related to the opening of the new branches.

For the nine-month period ended September 30, 2006, income tax expense decreased $736,000 compared to the same period in 2005. The decrease was due primarily to decreased taxable income. The effective tax rate decreased from 27.1% to 20.9% due to an increased percentage of low income housing tax credits to taxable income when comparing the first nine months of 2006 to the first nine months of 2005.

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 September 30, 2006, Mutual Federal had liquid assets of $59.4 million and a liquidity ratio of 6.74%. It is anticipated that this level of liquidity will be adequate for the remainder of 2006.

ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk

Presented below as of September 30, 2006 and 2005 is an analysis of Mutual Federal’s interest rate risk as measured by changes in Mutual Federal’s net portfolio value (“NPV”) assuming an instantaneous and sustained parallel shift in the yield curve, in 100 basis point increments.

September 30, 2006

Net Portfolio Value

		%				NPV as % of PV of Assets
Changes In Rates	$ Amount		$ Change	% Change			NPV Ratio		Change
+300 bp	49,648		-48,047	-49	%		5.54	%	-456 bp
+200 bp	66,290		-31,405	-32	%		7.21	%	-289 bp
+100 bp	82,361		-15,334	-16	%		8.73	%	-137 bp
0 bp	97,695						10.10	%
-100 bp	109,798		12,103	12	%		11.10	%	100 bp
-200 bp	114,736		17,041	17	%		11.42	%	131 bp
-300 bp	117,814		20,119	21	%		11.54	%	144 bp

September 30, 2005

Net Portfolio Value

					NPV as of PV of Assets
Changes In Rates	$ Amount	$ Change	% Change			NPV Ratio		Change
+300 bp	64,885	-44,913	-38	%		7.25	%	-359 bp
+200 bp	79,741	-30,057	-24	%		8.68	%	-216 bp
+100 bp	93,336	-16,462	-11	%		9.91	%	-94 bp
0 bp	104,669					10.84	%
-100 bp	108,563	-1,235	4	%		11.05	%	20 bp
-200 bp	106,957	-2,841	2	%		10.72	%	-12 bp
-300 bp	107,133	-2,665	2	%		10.59	%	-26 bp

The analysis at September 30, 2006, indicates that there have been no material changes in market interest rates for Mutual Federal’s interest rate sensitivity instruments which would cause a material change in the market risk exposures that effect the quantitative and qualitative risk disclosures as presented in item 7A of the Company’s Form 10-K for the period ended December 31, 2005.

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ITEM - 4 Controls and Procedures.

An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a -15(c) under the Securities Exchange Act of 1934 (the “Act”) was carried out, as of September 30, 2006, under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2006, the Company’s disclosure controls and procedures were 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 were 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 September 30, 2006, that has materially affected, or is 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 all 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 are 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 in controls or procedures can occur because of a 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 future 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.

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PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings
	None.
Item 1A.	Risk Factors
	There are no material changes to the risk factors disclosed in the Company’s Form 10-K for the year ended December 31, 2005.
Item 2.	Unregistered sales of Equity Securities and Use of Proceeds
	On December 22, 2004 the Company’s Board of Directors authorized management to repurchase an additional 10% of the Company’s outstanding stock, or approximately 470,000 shares.  Information on the shares purchased during the third quarter of 2006 is as follows:

	Total Number of Shares Purchased		Average Price Per Share	Total Number of Shares Purchased As Part of Publicly Announced Plan	Maximum Number of Shares that May Yet Be Purchased Under the Plan
					169,460	(1)
July 1, 2006 - July 31, 2006	835	$	20.45	835	168,625
August 1, 2006 - August 31, 2006	61,000		21.08	61,000	107,625
September 1, 2006 - September 30, 2006	—		0	—	107,625
	61,835	$	21.07	61,835

(1) Amount represents the number of shares available to be repurchased under the plan as of June 30, 2006

Item 3.	Defaults Upon Senior Securities.
	None.
Item 4.	Submission of Matters to Vote of Security Holders.
	None.
Item 5.	Other Information.
	None.
Item 6.	Exhibits.

(a)	Exhibits
	Exhibit 31.1 – Rule 13a – 14(a) Certification – Chief Executive Officer
	Exhibit 31.2 – Rule 13a – 14(a) Certification – Chief Financial Officer
	Exhibit 32 – Section 1350 - Certificate of the Chief Executive Officer and Chief Financial Officer

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	MutualFirstFinancial, Inc.
Date: November 9, 2006	By:	/s/ David W. Heeter
		David W. Heeter
		President and Chief Executive Officer
Date: November 9, 2006	By:	/s/ Timothy J. McArdle
		Timothy J. McArdle
		Senior Vice President and Treasurer

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