UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2008 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
(I.R.S. Employer
incorporation or organization)
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 Noo

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. (Check one):
Large accelerated filer o   Accelerated filer x   Non-accelerated filer o   (Do not check if a smaller reporting company)   Smaller reporting Company 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 May 8, 2008 was 4,144,879
 
 
FORM 10 – Q
MutualFirst Financial, Inc.
 
   
Page
INDEX
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
14
     
Item 4.
Controls and Procedures
15
     
PART II – OTHER INFORMATION
  
     
Item 1.
Legal Proceedings
16
     
Item 1A.
Risk Factors
16
     
Item 2.
Unregistered Sales of Equity Changes in Securities and Use of Proceeds
16
     
Item 3.
Defaults Upon Senior Securities
16
     
Item 4.
Submission of Matters to a Vote of Security Holders
16
     
Item 5.
Other Information
16
     
Item 6.
Exhibits
16
     
Signature Page
17
     
Exhibits
  
 

 
PART 1 FINANCIAL INFORMATION
ITEM 1. Financial Statements

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY
Consolidated Condensed Balance Sheets

   
March 31,
  
December 31,
  
   
2008
  
  2007
  
   
(Unaudited)
  
 
  
           
Assets
              
Cash
  
$
21,900,480
  
$
21,003,114
  
Interest-bearing demand deposits
    
7,174,162
   
2,645,057
 
Cash and cash equivalents
    
29,074,642
   
23,648,171
 
Interest-bearing deposits
    
100,000
   
100,000
 
Investment securities available for sale
    
44,481,044
   
43,592,485
 
Loans held for sale
    
2,219,425
   
1,644,615
 
Loans
    
800,411,674
   
810,788,842
 
Allowance for loan losses
    
(8,439,875
)
  
(8,352,345
)
Net loans
    
791,971,799
   
802,436,497
 
Premises and equipment
    
16,769,557
   
16,168,434
 
Federal Home Loan Bank of Indianapolis stock, at cost
    
10,291,400
   
10,036,900
 
Investment in limited partnerships
    
3,194,150
   
3,246,468
 
Cash surrender value of life insurance
    
30,627,260
   
30,350,760
 
Foreclosed real estate
    
1,478,099
   
1,364,505
 
Interest receivable
    
3,354,096
   
3,692,879
 
Goodwill
    
14,187,725
   
14,187,725
 
Deferred income tax benefit
    
5,385,302
   
5,174,082
 
Other assets
    
6,991,616
   
6,873,491
 
               
Total assets
  
$
960,126,115
  
$
962,517,012
  
               
Liabilities
              
Deposits
              
Non-interest-bearing
  
$
48,867,622
  
$
47,172,012
  
Interest bearing
    
629,229,645
   
619,235,341
 
Total deposits
    
678,097,267
   
666,407,353
 
Federal Home Loan Bank advances
    
181,505,272
   
191,675,155
 
Notes payable
    
660,662
   
1,055,433
 
Other borrowings
    
-
   
3,907,394
 
Advances by borrowers for taxes and insurance
    
2,811,581
   
1,463,809
 
Interest payable
    
1,965,901
   
2,467,199
 
Other liabilities
    
8,330,791
   
8,526,819
 
Total liabilities
    
873,371,474
   
875,503,162
 
               
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 —4,179,879 and 4,226,638 shares
    
41,799
   
42,266
 
Additional paid-in capital
    
32,371,420
   
32,567,085
 
Retained earnings
    
56,874,576
   
56,725,785
 
Accumulated other comprehensive income (loss)
    
(705,708
)
  
(414,380
)
Unearned employee stock ownership plan (ESOP) shares
    
(1,827,446
)
  
(1,906,906
)
Total stockholders' equity
    
86,754,641
   
87,013,850
 
               
Total liabilities and stockholders' equity
  
$
960,126,115
  
$
962,517,012
  

See notes to consolidated condensed financial statements.

1

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

   
Three Months Ended
  
   
March 31
  
   
2008
  
2007
  
Interest Income
              
Loans receivable, including fees
  
$
13,048,954
  
$
13,150,551
  
Investment seurities:
            
Mortgage-backed securities
    
158,424
   
116,577
 
Federal Home Loan Bank stock
    
119,027
   
127,181
 
Other investments
    
405,439
   
388,188
 
Deposits with financial institutions
    
25,256
   
26,873
 
Total interest income
    
13,757,100
   
13,809,370
 
               
Interest Expense
              
Passbook savings
    
68,812
   
70,173
 
Certificates of deposit
    
4,614,867
   
5,098,191
 
Daily Money Market accounts
    
110,485
   
155,278
 
Demand and NOW acounts
    
513,486
   
673,997
 
Federal Home Loan Bank advances
    
2,063,042
   
1,800,757
 
Other interest expense
    
26,088
   
15,606
 
Total interest expense
    
7,396,780
   
7,814,002
 
               
Net Interest Income
    
6,360,320
   
5,995,368
 
Provision for losses on loans
    
612,500
   
332,500
 
Net Interest Income After Provision for Loan Losses
    
5,747,820
   
5,662,868
 
               
Other Income
              
Service fee income
    
1,159,332
   
1,063,534
 
Net realized gain on redemption of VISA stock
    
137,434
       
Equity in losses of limited partnerships
    
(23,644
)
  
(26,591
)
Commissions
    
292,096
   
197,328
 
Net gains on sales of loans
    
183,359
   
68,218
 
Net servicing fees
    
26,839
   
22,385
 
Increase in cash surrender value of life insurance
    
276,500
   
337,500
 
Other income
    
68,180
   
70,135
 
Total other income
    
2,120,096
   
1,732,509
 
               
Other Expenses
              
Salaries and employee benefits
    
3,818,341
   
3,638,925
 
Net occupancy expenses
    
451,311
   
415,625
 
Equipment expenses
    
343,362
   
317,637
 
Data processing fees
    
266,813
   
255,556
 
Automated teller machine
    
202,572
   
174,614
 
Professional fees
    
209,152
   
178,655
 
Advertising and promotion
    
230,421
   
208,727
 
Other expenses
    
979,683
   
1,028,757
 
Total other expenses
    
6,501,655
   
6,218,496
 
               
Income Before Income Tax
    
1,366,261
   
1,176,881
 
Income tax expense
    
151,000
   
132,700
 
               
Net Income
  
$
1,215,261
  
$
1,044,181
  
               
Basic earnings per share
  
$
0.30
  
$
0.25
  
               
Diluted earnings per share
  
$
0.30
  
$
0.25
  
               
Dividends per share
  
$
0.16
  
$
0.15
  

See notes to consolidated condensed financial statements.
 
2

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY
Consolidated Condensed Statement of Stockholders' Equity
For the Three Months Ended March 31, 2008
(Unaudited)

                   
 Accumulated
          
   
Common Stock 
  
Additional
          
Other
  
Unearned
      
   
Shares
      
paid-in 
  
Comprehensive
  
Retained
  
Comprehensive
  
ESOP
      
   
Outstanding
  
Amount
  
capital
  
Income
  
Earnings
  
Income (Loss)
  
shares
  
Total
  
                                   
Balances, December 31, 2007, as reported
    
4,226,638
  
$
42,266
  
$
32,567,085
        
$
56,725,785
  
$
(414,380
)
$
(1,906,906
)
$
87,013,850
  
                                                   
Comprehensive income
                                                  
                                                   
Net income for the period
                    
$
1,215,261
    
1,215,261
               
1,215,261
 
                                                   
Other comprehensive income, net of tax
                                                  
                                                   
Net unrealized losses on securities
                      
(291,328
)
        
(291,328
)
        
(291,328
)
                                                   
Comprehensive income
                    
$
923,933
                          
                                                   
ESOP shares earned
                
28,407
                     
79,460
   
107,867
 
                                                   
Cash dividends ($.16 per share)
                            
(667,488
)
              
(667,488
)
                                                   
RRP shares earned
                
5,264
                           
5,264
 
                                                   
Stock repurchased and retired
    
(46,759
)
  
(467
)
  
(229,336
)
        
(398,982
)
              
(628,785
)
                                                   
Stock options exercised
    
0
   
0
   
0
                           
0
 
                                                    
Balances, March 31, 2008
    
4,179,879
   
41,799
 
$
32,371,420
        
$
56,874,576
  
$
(705,708
)
$
(1,827,446
)
$
86,754,641
  
 
See notes to consolidated condensed financial statements.
 
3
 
MutualFirst Financial, Inc.
Consolidated Condensed Statements of Cash Flows
(Unaudited)

   
Three Months Ended
  
   
March 31
  
   
2008
  
2007
  
Operating Activities
            
Net income
  
$
1,215,261
  
$
1,044,181
  
Items not requiring (providing) cash
              
Provision for loan losses
    
612,500
   
332,500
 
ESOP shares earned
    
107,867
   
161,240
 
RRP shares earned
    
5,264
   
5,264
 
Depreciation and amortization
    
637,836
   
634,307
 
Deferred income tax
    
(17,000
)
  
(210,000
)
Loans originated for sale
    
(14,544,092
)
  
(4,901,939
)
Proceeds from sales of loans held for sale
    
14,012,948
   
4,970,687
 
Gains on sales of loans held for sale
    
(183,359
)
  
(68,218
)
Change in
              
Interest receivable
    
338,783
   
479,591
 
Other assets
    
21,568
   
(484,407
)
Interest payable
    
(501,298
)
  
(71,643
)
Other liabilities
    
(196,028
)
  
544,977
 
Cash value of life insurance
    
(276,500
)
  
(337,500
)
Other adjustments
    
190,069
   
20,436
 
Net cash provided by operating activities
    
1,423,819
   
2,119,476
 
               
Investing Activities
              
Purchases of securities available for sale
    
(3,705,055
)
  
(293,636
)
Proceeds from matuities and paydowns of securities available for sale
    
1,936,951
   
1,217,395
 
Net change in loans
    
9,244,021
   
10,135,528
 
Purchases of premises and equipment
    
(952,212
)
  
(162,931
)
Proceeds from real estate owned sales
    
147,756
   
300,378
 
Cash paid in acquisition, net
    
-
   
(512,000
)
Other investing activities
    
25,168
   
25,167
 
Net cash provided by investing activities
    
6,696,629
   
10,709,901
 
               
Financing Activities
              
Net change in
              
Noninterest-bearing, interest-bearing demand and savings deposits
    
11,175,376
   
13,108,373
 
Certificates of deposits
    
514,538
   
(15,810,172
)
Repayment of note payable
    
(410,376
)
  
(240,678
)
Proceeds from FHLB advances
    
126,300,000
   
73,800,000
 
Repayment of FHLB advances
    
(136,417,620
)
  
(88,319,618
)
Repayment of other short term borrowing
    
(3,907,394
)
  
-
 
Net change in advances by borrowers for taxes and insurance
    
1,347,772
   
1,184,076
 
Stock repurchased
    
(628,785
)
  
(317,281
)
Proceeds from stock options exercised
    
-
   
87,000
 
Cash dividends
    
(667,488
)
  
(653,048
)
Net cash used in financing activities
    
(2,693,977
)
  
(17,161,348
)
               
Net Change in Cash and Cash Equivalents
    
5,426,471
   
(4,331,971
)
               
Cash and Cash Equivalents, Beginning of Year
    
23,648,171
   
24,914,872
 
               
Cash and Cash Equivalents, End of Year
  
$
29,074,642
  
$
20,582,901
  
               
Additional Cash Flows Information
              
Interest paid
  
$
7,898,078
  
$
7,885,645
  
Income tax paid
    
700,000
   
100,000
 
Transfers from loans to foreclosed real estate
    
321,612
   
80,143
 
Mortgage servicing rights capitalized
    
139,693
   
49,520
 
 
See Notes to Consolidated Condensed 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”), Mutual Federal’s wholly owned subsidiaries, First MFSB Corporation 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 2007 filed with the Securities and Exchange Commission.

The interim consolidated financial statements at March 31, 2008 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, 2007 has been derived from the Audited Consolidated Balance Sheet of the Company as of that date.
 
Note 2: Earnings per share
 
Earnings per share were computed as follows: (Dollars in thousands except per share data)
 
   
Three Months Ended Ended March 31, 
  
   
2008
  
2007
  
       
Weighted-
          
Weighted-
      
       
Average
  
Per-Share
      
Average
  
Per-Share
  
   
Income
  
Shares
  
Amount
  
Income
  
Shares
  
Amount
  
   
(000's)
          
(000's)
          
                           
Basic Earnings Per Share
                                      
Income available to common shareholders
  
$
1,215
    
4,003,509
  
$
0.30
  
$
1,044
    
4,129,925
  
$
0.25
  
Effect of Dilutive securities
                                      
Stock options and RRP grants
          
0
               
67,195
       
Diluted Earnings Per Share
                                      
                                       
Income available to common stockholders and assumed conversions
  
$
1,215
    
4,003,509
 
$
0.30
  
$
1,044
    
4,197,120
 
$
0.25
  

Options of 380,613 and 91,000 shares were not included in the calculation above due to being anti-dilutive to earnings per share as of March 31, 2008 and March 31, 2007.
 
5
 
Note 3: Future Accounting Pronouncements

In December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations (SFAS141R). SFAS 141R established principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for business combinations where the acquisition date is on or after fiscal years beginning after December 15, 2008. SFAS 141R is expected to have an impact on the Company’s accounting for any business combinations closing on or after January 1, 2009.

In December 2007, the FASB issues SFAS 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51 (SFAS 160). SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS 160 shall be applied prospectively. SFAS 160 is effective for fiscal years beginning after December 15, 2008.

Note 4: Disclosures About Fair Value of Assets and Liabilities

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (FAS 157). FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 has been applied prospectively as of the beginning of the year.
 
FAS 157 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. FAS 157 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
 
6
 
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
 
Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.
 
Available-for-sale Securities
 
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. The Company uses a third-party provider to provide market prices on its securities and no securities are priced as Level 1 securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include mortgage-backed, collateralized mortgage, federal agency and certain corporate obligation securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include certain corporate obligation securities.
 
       
Fair Value Measurements Using
  
   
Fair Value
  
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
                   
Available-for-sale securities
  
$
44,481,044
  
$
—
  
$
34,769,704
  
$
9,711,340
  
 
The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs:
 
   
Available-for-
sale securities
  
       
Beginning balance
  
$
9,923,242
  
 
        
Total realized and unrealized gains and losses        
Included in net income
        
Included in other comprehensive income
    
(211,902
)
Purchases, issuances and settlements
        
Transfers in and/or out of Level 3
        
 
        
Ending balance
  
$
9,711,340
  
         
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
  
$
—
  
 
7
 
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-two full service offices located in Delaware, Elkhart, Grant, Kosciusko, Randolph, 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 two subsidiaries, First MFSB Corporation and Mutual Federal Investment Company. 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. MFIC is a Nevada corporation holding approximately $29 million in investments. MFIC currently owns one subsidiary, Mutual Federal REIT. The assets of Mutual Federal REIT consist of approximately $131 million in one-to four-family mortgage loans.

The following should be read in conjunction with the Management’s Discussion and Analysis in the Company’s December 31, 2007 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 65 to 69 of the Annual Report on Form 10-K for the year ended December 31, 2007. 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.
 
8
 
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.
 
9
 
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.

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 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.
 
10
 
The Federal Funds rate set by the Board of Governors of the Federal Reserve System has decreased 200 basis points from December 31, 2007 to March 31, 2008. These decreases in the Federal Funds rate have allowed for deposits and borrowings to reprice lower. Any future decreases in the Federal Funds rate in the upcoming months should allow for continued downward repricing of our deposits and borrowings, reducing pressure on net interest income. Any increase in the Federal Funds rate will increase interest expense and reduce net interest income if there is not a corresponding increase in long term rates.

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 therefore 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 loans to total loans has increased from 35% at the end of 2000 to 45% currently. 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 may increase 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 has increased from 33% to 37% over this time period. These are ongoing strategies that are dependent on current market conditions and competition.

During the first three months of 2008, in keeping with its strategic objective to reduce interest rate risk exposure, the Company also sold $14.0 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 $183,000.

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 three months of 2008, the Company used $629,000 for this purpose, thereby reducing earning assets from where they otherwise would have been and correspondingly reducing net interest income.

On March 22, 2007 the Bank completed the acquisition of Wagley Investment Advisors, Inc. Wagley Investment Advisors, Inc. is now known as Mutual Financial Advisors, providing new and expanded investment management services not previously offered by the Bank.  Mutual Financial Advisors offers a full range of non-bank investment options and money management. 
 
11
 
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 recent acquisition of Wagley Investment Advisors, the Company opened a new branch in Elkhart County in February 2008. The intent of these initiatives 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 affect of increasing non-interest expense with limited immediate offsetting income.

On January 7, 2008, MutualFirst announced it had entered into a definitive agreement with MFB Corp. (“MFB”) and MFB’s savings bank subsidiary, MFB Financial, will be merged with and into the MutualFirst’s savings bank subsidiary, Mutual Federal. MutualFirst has filed the appropriated applications and filings with the appropriate agencies and expects the transaction to take place early in the third quarter of 2008. This transaction will allow Mutual Federal to enter into new markets and to enhance trust services to existing customers through trust powers received from MFB Financial.

Financial Condition

Assets totaled $960.1 million at March 31, 2008, a decrease from December 31, 2007 of $2.4 million, or 0.2%. Gross loans, excluding loans held for sale, decreased $9.0 million, or 1.0%. Consumer loans decreased $5.2 million or 2.3%, and commercial loans increased $4.9 million, or 3.5%, while residential mortgage loans held in the portfolio decreased $8.7 million, or 2.0%. Residential mortgage loans held for sale increased $574,000 and mortgage loans sold during the quarter totaled $14.0 million compared to $5.0 million sold in the first quarter of last year. First quarter seasonality on consumer loans and mortgage loan sales are the primary reasons for the decreased loan balances. Investment securities available for sale increased $889,000, or 2.0%.

Allowance for loan losses was $8.4 million at March 31, 2008, an increase of $88,000 from December 31, 2007. Net charge offs for the quarter ended March 31, 2008 were $524,000 or .26% of average loans on an annualized basis compared to $269,000, or .13% of average loans for the comparable period in 2007. The increase was primarily due to a $200,000 commercial business loan recovery in the first quarter 2007 which was not duplicated in first quarter 2008. On a linked quarter basis net charge offs decreased from .33% of average loans on an annualized basis as of December 31, 2007 compared to .26% as of March 31, 2008. The allowance for loan losses as a percentage of non-performing loans and total loans was 73.14% and 1.05%, respectively at March 31, 2008, compared to 79.72% and 1.03%, respectively at December 31, 2007.

Total deposits were $678.1 million at March 31, 2008 an increase of $11.7 million, or 1.8% from December 31, 2007. This increase was due primarily to increases in core demand, money market and savings deposits of $11.2 million. Total borrowings decreased $14.5 million to $182.2 million at March 31, 2008 from $196.6 million at December 31, 2007 primarily due to the payment of several maturing and variable rate overnight FHLB advances.
 
12
 
Stockholders’ equity was $86.8 million at March 31, 2008, a decrease of $259,000, or 0.3% from December 31, 2007. The repurchase of 47,000 shares of common stock for $629,000 and dividend payments of $667,000 were partially offset by net income of $1.2 million and Employee Stock Ownership Plan (ESOP) and RRP shares earned of $113,000. Also, the market value of securities available for sale compared to their book value decreased $291,000 from a loss of $414,000 at December 31, 2007 to a loss of $706,000 at March 31, 2008 primarily due a significant repricing of risk in the fixed income markets.

Comparison of the Operating Results for the Three Months Ended March 31, 2008 and 2007

Net income for the first quarter ended March 31, 2008 was $1.2 million, or $.30 for basic and diluted earnings per share. This compared to net income for the same period in 2007 of $1.0 million, or $.25 for basic and diluted earnings per share. Annualized return on assets was .51% and return on average tangible equity was 6.80% for the first quarter of 2008 compared to .44% and 5.79% respectively, for the same period of last year.
 
Net interest income before the provision for loan losses increased $365,000 from $6.0 million for the three months ended March 31, 2007 to $6.4 million for the three months ended March 31, 2008. The primary reason for the increase was a 15 basis point increase in the net interest margin to 2.94% compared to 2.79% for the first quarter 2007, reflecting the Bank’s liability sensitive nature, as short term interest rates declined and average interest-earning assets increased $5.6 million, or 0.7%. On a linked quarter basis, net interest margin increased to 2.94% for the three months ended March 31, 2008 compared to 2.84% for the three months ended December 31, 2007.
 
The provision for loan losses for the first quarter of 2008 was $612,000, increased from $332,000 for last year’s comparable period. The increase was due to increased net charge offs and increased delinquency over the comparable period in 2007. On a linked quarter basis, the provision for loan losses decreased $231,000 primarily due to lower charge offs as discussed above. Non-performing loans to total loans at March 31, 2008 were 1.44% compared to 1.29% at December 31, 2007. This increase in non-performing loans was primarily due to an increased weakening in residential property loans and consumer related loans. Non-performing assets to total assets were 1.47% at March 31, 2008 compared to 1.35% at December 31, 2007.

Non-interest income increased $387,000 to $2.1 million, or 22.3% for the three months ended March 31, 2008 compared to the same period in 2007. The increase was primarily due to increases in service fees on transaction accounts of $95,000, or 9.0% primarily due to enhanced service offerings, increases in gains on sales and servicing of loans sold of $119,000, or 130.8% primarily due to increased mortgage production and sales, increases in commission income of $95,000, or 48.0% primarily due to Mutual Financial Advisors and increased investment transactions and $137,000 of non-recurring income due to the mandatory redemption of Visa stock. These increases were partially offset by a decrease in cash surrender value of life insurance of $61,000, or 18.1% primarily due to lower market rates. On a linked quarter basis, non-interest income increased $40,000.
 
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Non-interest expense increased to $6.5 million for the three months ended March 31, 2008 compared to $6.2 million for the same period in 2007. Increases in current quarter non-interest expense compared to the same period in 2007 include increases in salaries and employee benefits of $179,000 primarily due to a new branch opening and annual salary adjustments, increases in occupancy, equipment, and ATM expense of $89,000 primarily due to a new branch in Elkhart County, Indiana, increases in professional fees of $30,000 primarily due to the pending acquisition of MFB Corp., and increases in marketing expense of $21,000. These increases were partially offset by decreased other expenses of $48,000. On a linked quarter basis, non-interest expense decreased $31,000.

Income tax expense increased $18,000 for the three months ended March 31, 2008 compared to the same period in 2007 due to increased taxable income. The effective tax rate decreased from 11.3% to 11.1% due to an increased percentage of non-taxable income to taxable income when comparing the first quarter of 2007 and the first quarter of 2008, 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 March 31, 2008, Mutual Federal had liquid assets of $65.7 million and a liquidity ratio of 7.59%. It is anticipated that this level of liquidity will be adequate for the remainder of 2008.

ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk

Presented below as of March 31, 2008 and 2007 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.
 
March 31, 2008
 
Net Portfolio Value

Changes 
 
 
 
 
 
 
 
NPV as % of PV of Assets
 
In Rates
 
$ Amount
 
$ Change
 
% Change
 
NPV Ratio
 
Change
 
                       
+300 bp
    
62,311
    
-36,565
    
-37
%
  
6.99
%
  
-335
 bp
+200 bp
    
76,308
    
-22,568
    
-23
%
  
8.35
%
  
-198
 bp
+100 bp
    
87,643
    
-11,233
    
-11
%
  
9.38
%
  
-96
 bp
      0 bp
    
98,876
                
10.34
%
      
-100 bp
    
102,800
    
3,924
    
4
%
  
10.56
%
  
23
 bp
-200 bp
    
100,139
    
1,263
    
1
%
  
10.45
%
  
11
bp 
-300 bp
    
n/m
(1) 
  
n/m
(1) 
  
n/m
(1) 
  
n/m
(1) 
  
n/m
(1)

March 31, 2007
 
Net Portfolio Value

Changes 
 
 
 
 
 
 
 
NPV as % of PV of Assets
 
In Rates
 
$ Amount
 
$ Change
 
% Change
 
NPV Ratio
 
Change
 
                       
+300 bp
    
61,725
    
-43,636
    
-41
%
  
7.18
%
  
-421
 bp
+200 bp
    
77,888
    
-27,473
    
-26
%
  
8.83
%
  
-256
 bp
+100 bp
    
91,995
    
-13,366
    
-13
%
  
10.19
%
  
-121
 bp
      0 bp
    
105,361
                
11.40
%
      
-100 bp
    
113,287
    
7,926
    
8
%
  
12.03
%
  
63
 bp
-200 bp
    
118,103
    
12,742
    
12
%
  
12.34
%
  
94
 bp
-300 bp
    
124,379
    
19,018
    
18
%
  
12.75
%
  
135
 bp

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

The analysis at March 31, 2008 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 annual report on Form 10-K for the period ended December 31, 2007.
 
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ITEM - 4 Controls and Procedures.

 
(a)
An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a -15(c) under the Securities Exchange Act of 1934 (the “Act”) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedure as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and the Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. There have been no changes in our internal control over financial reporting (as defined in Rule 13a – 15(f) under the Act) that occurred during the quarter ended March 31, 2008 that has materially affected, or is likely to materially affect our internal control over financial reporting.

The Company intends to continually review and evaluate the design and effectiveness of its disclosure controls and procedures and to improve its controls and procedures over time and to correct any deficiencies that it may discover in the future. The goal is to ensure that senior management has timely access to all material financial and non-financial information concerning the Company’s business. While the Company believes the present design of its disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures.
 
15

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, 2007.

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

On September 12, 2007 the Company’s Board of Directors authorized management to repurchase an additional 5% of the Company’s outstanding stock, or approximately 215,000 shares. Information on the shares purchased during the first quarter of 2008 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
  
               
143,598
(1)
January 1, 2008 - January 31, 2008
    
20,000
 
$
13.33
    
20,000
   
123,598
 
February 1, 2008 - February 29, 2008
    
25,000
   
13.55
    
25,000
   
98,598
 
March 1, 2008 - March 31, 2008
    
1,759
   
13.38
    
1,759
   
96,839
 
                     
     
46,759
 
$
13.45
    
46,759
       
 
(1) Amount represents the number of shares available to be repurchased under the plan as of December 31, 2007

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 – 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.
 
16
 
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: May 12, 2008
 
By: /s/ David W. Heeter
 
David W. Heeter
 
President and Chief Executive Officer
   
Date: May 12, 2008
 
By: /s/ Timothy J. McArdle
 
Timothy J. McArdle
 
Senior Vice President and Treasurer
 
17