UNITED
        STATES
 SECURITIES
        AND EXCHANGE COMMISSION
 Washington,
        D.C.  20549
 __________
 **FORM
        10-K**
 
 x
              ANNUAL
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934For
                  the fiscal year ended December 31, 2007ORo
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934For
                  the transition period from _______to
                  _______
 
 **COMMISSION
        FILE NUMBER 000-27905**
 
 ***MutualFirst*** **Financial, Inc.**
 (Exact
        Name of Registrant as Specified in its Charter)
 
 **Maryland**
              **35-2085640**(State
                  or other jurisdiction of incorporation or
                organization)
              (I.R.S.
                  Employer Identification No.)**110
                  E. Charles Street, Muncie, Indiana**
                
                (Address
                  of principal executive offices)
              **47305-2419**
                
                (Zip
                  Code)
 
 Registrant’s
        telephone number, including area code: **(765)
        747-2800**
 
 Securities
        Registered Pursuant to Section 12(b) of the Act:
 Title
                    of each class
                Name
                    of each exchange on which registered**Common
                    Stock, par value $.01 per share**
                **The
                    NASDAQ Stock Market
                    LLC**
  Securities
        Registered Pursuant to Section 12(g) of the Act:
 
 None
 
 Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act. YES o NO x
 
 Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        Section 13 or Section 15(d) of the Act. YES o NO x
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days. YES x NO o
 
 Indicate
        by check mark if disclosure of delinquent filers pursuant to Item 405 of
        Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
        be contained, to the best of registrant’s knowledge, in definitive proxy or
        information statements incorporated by reference in Part III of this Form
        10-K
        or any amendment to this Form 10-K. o
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, a non-accelerated filer or a smaller reporting company.
        See
        definition of “accelerated filer,” “large accelerated filer” and “smaller
        reporting company” in Rule 12b-2 of the Act. (Check one)
 
 Large
        accelerated filer o Accelerated filer x Non-accelerated filer o Smaller
        reporting company o
 (Do
        not
        check if smaller
 reporting
        company)
 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
        aggregate market value of the voting and non-voting common equity held by
        non-affiliates, computed by reference to the last sale price of such stock
        on
        the Nasdaq Global Market as of June 29, 2007, the last business day of the
        registrant’s most recently completed second fiscal quarter, was approximately
        $58.4 million. (The exclusion from such amount of the market value of the
        shares
        owned by any person shall not be deemed an admission by the registrant that
        such
        person is an affiliate of the registrant.)
 
 As
        of
        March 12, 2008, there were issued and outstanding 4,181,638 shares of the
        registrant’s common stock.
 
 **DOCUMENTS
        INCORPORATED BY REFERENCE**
 
 PART
        III
        of Form 10-K—Portions of registrant’s Proxy Statement for its 2008 Annual
        Meeting of Stockholders.
  
  **Item
        1.**  **Business**
  **General**
  *MutualFirst* Financial, Inc., a Maryland corporation (“ *MutualFirst* ”
or
        the
“Company”), is a savings and loan holding company that has as its wholly-owned
        subsidiary Mutual Federal Savings Bank (“Mutual Federal”). MFS Financial was
        formed in September 1999 to become the holding company of Mutual Federal
        in
        connection with Mutual Federal’s conversion from the mutual to stock form of
        organization on December 29, 1999. In April 2001, MFS Financial formally
        changed
        its corporate name to *MutualFirst* Financial, Inc. (“ *MutualFirst* ”).
        The
        words “we,” “our” and “us” refer to *MutualFirst* and
        Mutual Federal on a consolidated basis.
  At
        December 31, 2007, we had total assets of $962.5 million, deposits of $666.4
        million and stockholders’ equity of $87.0 million. Our executive offices are
        located at 110 E. Charles Street, Muncie, Indiana 47305-2400, and our common
        stock is traded on the Nasdaq Global Market under the symbol “MFSF.”
  Substantially
        all of *MutualFirst* ’s
        business is conducted through Mutual Federal, which is a federal savings
        bank
        subject to extensive regulation by the Office of Thrift Supervision (“OTS”).
        Mutual Federal’s deposits are insured up to applicable limits by the Federal
        Deposit Insurance Corporation (“FDIC”).
  Our
        principal business consists of attracting retail deposits from the general
        public and investing those funds primarily in loans secured by first mortgages
        on owner-occupied, one- to four-family residences, a variety of consumer
        loans,
        loans secured by commercial and multi-family real estate and commercial business
        loans. Funds not invested in loans generally are invested in investment
        securities, including mortgage-backed and mortgage-related
        securities.
  Our
        profitability depends primarily on net interest income, which is the difference
        between interest and dividend income on interest-earning assets, and interest
        expense on interest-bearing liabilities. Interest-earning assets include
        principally loans, investment securities, including mortgage-backed and related
        securities and interest-earning deposits in other institutions. Net interest
        income is dependent upon the level of interest rates and the extent to which
        such rates are changing. Our profitability is also dependent, to a lesser
        extent, on the level of noninterest income, provision for loan losses,
        noninterest expense and income taxes. Our operations and profitability are
        subject to changes in interest rates, applicable statutes and regulations,
        and
        general economic conditions, as well as other factors beyond our
        control.
  We
        offer
        deposit accounts having a wide range of interest rates and terms, which
        generally include passbook and statement savings, money market deposit accounts,
        NOW and interest checking accounts and certificates of deposit with terms
        ranging from seven days to 71 months. We solicit most of our deposits in
        our
        market areas and we occasionally accept brokered deposits. See “Sources of
        Funds – Deposits.”
  1
  On
        January 7, 2008, *MutualFirst* and its
        wholly owned subsidiary, MutualFirst Acquisition Corp. (“Acquisition Corp”),
        entered into a definitive agreement (the “Agreement”) with MFB Corp. (“MFB”),
        pursuant to which MFB will be merged with and into Acquisition Corp. (the
        “Merger”), and MFB’s savings bank subsidiary, MFB Financial, will be merged with
        and into the Registrant’s savings bank subsidiary, Mutual Federal. MFB
        shareholders will be entitled to elect to receive, for each share of MFB
        common
        stock they hold, $41.00 in cash (the “Cash Consideration”), 2.59 shares of the
        Registrant’s common stock (the “Stock Consideration”) or a combination of both,
        subject to reallocation and proration procedures to ensure that 80% of all
        of
        the shares of MFB common stock outstanding immediately before the effective
        time
        of the Merger are exchanged for the Stock Consideration and that the remaining
        20% of the outstanding MFB shares are exchanged for the Cash Consideration.
  MFB
        will
        have the right to terminate the Agreement if the average closing price of
        the
        Registrant’s common stock during the ten consecutive trading days immediately
        preceding the date on which MFB receives written notice that all required
        regulatory and shareholder approvals have been received is less than $12.664
        and
        the Registrant’s common stock has underperformed an index of financial
        institutions by more than fifteen percent, unless the Registrant elects to
        increase the amount of the consideration payable to MFB’s shareholders pursuant
        to a formula specified in the Agreement. In the event the Agreement is
        terminated under certain other specified circumstances, MFB will be required
        to
        pay the Registrant a termination fee of $1.7 million in cash.
  At
        the
        effective time of the Merger, each outstanding option to purchase MFB common
        stock will be converted into an option to purchase the Registrant’s common
        stock, with adjustments to the number of underlying shares and exercise price
        based on the 2.59:1 exchange ratio for the Stock Consideration.
  At
        December 31, 2007, MFB had total assets of $513.8 million, including $404.9
        in
        loans, and deposits of $336.1 million. MFB’s banking subsidiary conducts a trust
        business, which we will acquire if the acquisition is completed. The acquisition
        is expected to occur at the beginning of the third quarter of 2008.
  The
        transaction is subject to customary closing conditions, including the receipt
        of
        regulatory approvals, approval by the shareholders of the Registrant of the
        issuance of the Registrant’s common stock in the Merger and approval by the
        shareholders of MFB of the Merger Agreement. All of the directors of the
        Registrant have agreed to vote their shares of Registrant common stock in
        favor
        of approval of the issuance the Registrant’s common stock in the Merger. All of
        the directors of MFB have agreed to vote their shares of MFB common stock
        in
        favor of approval of the Agreement.
  The
        foregoing summary of the Merger is not complete and is qualified in its entirety
        by reference to the full text of the Agreement, which is incorporated by
        reference to this report as Exhibit 2.1, from our Form 8-K dated January
        8, 2008
        and to the full text of our Rule 425 filings for January 8 and 10,
        2008.
  2
  **Forward-Looking
        Statements**
  This
        Form
        10-K contains various forward-looking statements that are based on assumptions
        and describe our future plans and strategies and our expectations. These
        forward-looking statements are generally identified by words such as “believe,”
“expect,” “intend,” “anticipate,” “estimate,” “project,” or similar words. Our
        ability to predict results or the actual effect of future plans or strategies
        is
        uncertain. Factors which could cause actual results to differ materially
        from
        those estimated include, but are not limited to, changes in interest rates,
        general economic conditions, legislative/regulatory changes, monetary and
        fiscal
        policies of the U.S. Government, including policies of the U.S. Treasury
        and the
        Federal Reserve Board, the quality and composition of our loan and investment
        portfolios, demand for our loan products, deposit flows, our operating expenses,
        competition, demand for financial services in our market areas and accounting
        principles and guidelines. These risks and uncertainties should be considered
        in
        evaluating forward-looking statements, and you should not rely too much on
        these
        statements. We do not undertake, and specifically disclaim, any obligation
        to
        publicly revise 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.
  **Market
        Area**
  We
        are a
        community-oriented financial institution offering a variety of financial
        services to meet the needs of the communities we serve. We are headquartered
        in
        Muncie, Indiana and we offer our financial services through 22 retail offices
        primarily serving Delaware, Elkhart, Grant, Kosciusko, Randolph and Wabash
        counties in Indiana. We also originate mortgage loans in the counties contiguous
        to these counties, and we originate indirect consumer loans throughout Indiana.
        See “Lending Activities — Consumer and Other Lending.”
  3
  **Lending
        Activities**
  ***General.*** Our
        mortgage loans carry either a fixed- or an adjustable-rate of interest. Mortgage
        loans are generally long-term and amortize on a monthly basis with principal
        and
        interest due each month. At December 31, 2007, our net loan portfolio totaled
        $804.1 million, which constituted 83.5% of our total assets.
  Loans
        up
        to $550,000 may be approved by individual loan officers. Loans in excess
        of
        $550,000, but not in excess of $1.0 million, require the signature of the
        recommending officer and signatures from any two Executive Loan Committee
        members. The recommending officer may be one of the Executive Loan Committee
        members approving the loan. Loans in amounts greater than $1.0 million, but
        not
        to exceed $1.5 million, require the signature of the recommending officer
        and
        any three Executive Loan Committee members. Loans not to exceed $1.5 million,
        to
        a borrower whose aggregate debt is not greater than $3.0 million, may be
        approved by a majority vote of the Executive Loan Committee. All loans in
        excess
        of $1.5 million and loans of any amount to a borrower whose aggregate debt
        will
        exceed $3.0 million must be approved by the Board of Directors.
  At
        December 31, 2007, the maximum amount which we could lend to any one borrower
        and the borrower’s related entities was approximately $11.7 million. As of
        December 31, 2007, our largest lending relationship to a single borrower
        or
        group of related borrowers consisted of three loans totaling $4.5 million.
        All
        of these loans are secured by real estate consisting of retail, franchised,
        auto
        service centers guaranteed by the principal owners and supported by long
        term
        leases to the franchisor. Each of these loans to this group of borrowers
        was
        current and performing in accordance with its terms at December 31, 2007.
  4
  The
        following table presents information concerning the composition of our loan
        portfolio in dollar amounts and in percentages as of the dates
        indicated.
  **December
                  31,****2007**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003****Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent****(Dollars
                  in thousands)**Real
                  Estate Loans:One-
                  to four-family
              
              $
              431,018
              (1)
              
              53.02
              %
              $
              433,123
              (2)
              
              53.01
              %
              $
              451,914
              (3)
              
              54.00
              %
              $
              385,678
              (4)
              
              52.96
              %
              $
              393,450
              (5)
              
              54.86
              %Multi-family
              
              
              3,929
              
              
              0.48
              
              
              5,073
              
              
              0.62
              
              
              5,505
              
              
              0.66
              
              
              4,657
              
              
              .64
              
              
              5,353
              
              
              .75Commercial
              
              
              82,116
              
              
              10.10
              
              
              73,912
              
              
              9.05
              
              
              77,270
              
              
              9.23
              
              
              68,067
              
              
              9.35
              
              
              65,430
              
              
              9.12Construction
                  and development
              
              
              13,560
              
              
              1.67
              
              
              14,451
              
              
              1.77
              
              
              22,938
              
              
              2.74
              
              
              20,745
              
              
              2.85
              
              
              17,860
              
              
              2.49Total
                  real estate loans
              
              $
              530,623
              
              
              65.28
              
              $
              526,559
              
              
              64.45
              
              
              557,627
              
              
              66.63
              
              
              479,147
              
              
              65.80
              
              
              482,093
              
              
              67.22Other
                  Loans:Consumer
                  Loans:Automobile
              
              $
              22,917
              
              
              2.82
              
              $
              31,336
              
              
              3.84
              
              
              39,802
              
              
              4.76
              
              
              39,475
              
              
              5.42
              
              
              40,497
              
              
              5.65Home
                  equity
              
              
              27,232
              
              
              3.35
              
              
              30,051
              
              
              3.68
              
              
              31,962
              
              
              3.82
              
              
              29,464
              
              
              4.05
              
              
              25,401
              
              
              3.54Home
                  improvement
              
              
              45,156
              
              
              5.55
              
              
              38,546
              
              
              4.72
              
              
              31,933
              
              
              3.82
              
              
              23,289
              
              
              3.20
              
              
              20,924
              
              
              2.92Manufactured
                  housing
              
              
              992
              
              
              0.12
              
              
              1,422
              
              
              0.17
              
              
              2,106
              
              
              0.25
              
              
              2,879
              
              
              .40
              
              
              4,108
              
              
              .57R.V.
              
              
              77,805
              
              
              9.57
              
              
              71,321
              
              
              8.73
              
              
              64,222
              
              
              7.67
              
              
              58,643
              
              
              8.05
              
              
              58,222
              
              
              8.12Boat
              
              
              47,816
              
              
              5.88
              
              
              46,311
              
              
              5.67
              
              
              40,631
              
              
              4.85
              
              
              38,382
              
              
              5.27
              
              
              38,096
              
              
              5.31Other
              
              
              3,593
              
              
              0.44
              
              
              3,986
              
              
              .48
              
              
              4,305
              
              
              .51
              
              
              3,325
              
              
              .46
              
              
              3,443
              
              
              .48Total
                  consumer loans
              
              
              225,511
              
              
              27.74
              
              
              222,973
              
              
              27.29
              
              
              214,961
              
              
              25.68
              
              
              195,457
              
              
              26.84
              
              
              190,691
              
              
              26.59Commercial
                  business loans
              
              
              56,764
              
              
              6.98
              
              
              67,476
              
              
              8.26
              
              
              64,353
              
              
              7.69
              
              
              53,620
              
              
              7.36
              
              
              44,362
              
              
              6.19Total
                  other loans
              
              
              282,275
              
              
              34.72
              
              
              290,449
              
              
              35.55
              
              
              279,314
              
              
              33.37
              
              
              249,077
              
              
              34.20
              
              
              235,053
              
              
              32.78Total
                  loans receivable, gross
              
              
              812,898
              (1)
              
              100.00
              %
              
              817,008
              (2)
              
              100.00
              %
              
              836,941
              (3)
              
              100.00
              %
              
              728,224
              (4)
              
              100.00
              %
              
              717,146
              (5)
              
              100.00
              %Less:Undisbursed
                  portion of loans
              
              
              3,984
              
              
              
              
              
              5,520
              
              
              
              
              
              7,724
              
              
              
              
              
              9,237
              
              
              
              
              
              8,160Deferred
                  loan fees and costs
              
              
              (3,519
              )
              
              
              
              
              (3,623
              )
              
              
              
              
              (3,453
              )
              
              
              
              
              (3,814
              )
              
              
              
              
              (3,749
              )Allowance
                  for losses
              
              
              8,352
              
              
              
              
              
              8,156
              
              
              
              
              
              8,100
              
              
              
              
              
              6,867
              
              
              
              
              
              6,779Total
                  loans receivable, net
              
              $
              804,081
              
              
              
              
              $
              806,955
              
              
              
              
              $
              824,570
              
              
              
              
              $
              715,934
              
              
              
              
              $
              705,956
 ____________________
 (1) Includes
        loans held for sale of $1.6 million.
 (2) Includes
        loans held for sale of $1.3 million.
 (3) Includes
        loans held for sale of $2.0 million.
 (4) Includes
        loans held for sale of $2.9 million.
 (5) Includes
        loans held for sale of $2.0 million.
  5
 
 The
        following table shows the composition of our loan portfolio by fixed- and
        adjustable-rate at the dates indicated.
  **December
                  31,****2007**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003****Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent****(Dollars
                  in thousands)**Fixed-Rate
                  Loans:Real
                  estate:One-
                  to four-family
              
              $
              254,235
              (1)
              
              31.28
              %
              $
              271,405
              (2)
              
              33.22
              %
              $
              305,911
              (3)
              
              36.55
              %
              $
              262,716
              (4)
              
              38.08
              %
              $
              281,497
              (5)
              
              39.25
              %Multi-family
              
              
              3,610
              
              
              0.44
              
              
              4,488
              
              
              0.55
              
              
              4,587
              
              
              0.55
              
              
              3,427
              
              
              .47
              
              
              3,483
              
              
              .49Commercial
              
              
              17,281
              
              
              2.13
              
              
              9,408
              
              
              1.15
              
              
              9,375
              
              
              1.12
              
              
              6,918
              
              
              .95
              
              
              6,960
              
              
              .97Construction
                  and development
              
              
              10,197
              
              
              1.25
              
              
              8,310
              
              
              1.02
              
              
              12,690
              
              
              1.52
              
              
              15,191
              
              
              2.09
              
              
              13,946
              
              
              1.94Total
                  real estate loans
              
              
              285,323
              
              
              35.10
              
              
              293,611
              
              
              35.94
              
              
              332,563
              
              
              39.74
              
              
              288,251
              
              
              39.58
              
              
              305,886
              
              
              42.65Consumer
              
              
              198,068
              
              
              24.37
              
              
              192,715
              
              
              23.59
              
              
              182,784
              
              
              21.84
              
              
              165,895
              
              
              22.78
              
              
              165,182
              
              
              23.03Commercial
                  business
              
              
              19,842
              
              
              2.44
              
              
              27,093
              
              
              3.32
              
              
              20,000
              
              
              2.39
              
              
              16,347
              
              
              2.24
              
              
              12,099
              
              
              1.69Total
                  fixed-rate loans
              
              
              503,233
              
              
              61.91
              
              
              513,419
              
              
              62.85
              
              
              535,347
              
              
              63.97
              
              
              470,493
              
              
              64.61
              
              
              483,167
              
              
              67.37Adjustable-Rate
                  Loans:Real
                  estate:One-
                  to four-family
              
              
              176,783
              
              
              21.75
              
              
              161,718
              
              
              19.79
              
              
              146,003
              
              
              17.44
              
              
              122,962
              
              
              16.89
              
              
              111,953
              
              
              15.61Multi-family
              
              
              319
              
              
              0.04
              
              
              585
              
              
              .07
              
              
              918
              
              
              0.11
              
              
              1,230
              
              
              .17
              
              
              1,870
              
              
              .26Commercial
              
              
              64,835
              
              
              7.98
              
              
              64,504
              
              
              7.90
              
              
              67,895
              
              
              8.11
              
              
              61,149
              
              
              8.40
              
              
              58,470
              
              
              8.15Construction
                  and development
              
              
              3,363
              
              
              0.41
              
              
              6,141
              
              
              .75
              
              
              10,248
              
              
              1.22
              
              
              5,554
              
              
              .76
              
              
              3,914
              
              
              .55Total
                  real estate loans
              
              
              245,300
              
              
              30.18
              
              
              232,948
              
              
              28.51
              
              
              225,064
              
              
              26.88
              
              
              190,895
              
              
              26.21
              
              
              176,207
              
              
              24.57Consumer
              
              
              27,443
              
              
              3.38
              
              
              30,258
              
              
              3.70
              
              
              32,177
              
              
              3.85
              
              
              29,562
              
              
              4.06
              
              
              25,509
              
              
              3.56Commercial
                  business
              
              
              36,922
              
              
              4.53
              
              
              40,383
              
              
              4.94
              
              
              44,353
              
              
              5.30
              
              
              37,273
              
              
              5.12
              
              
              32,263
              
              
              4.50Total
                  adjustable-rate loans
              
              
              309,665
              
              
              38.09
              
              
              303,589
              
              
              37.15
              
              
              301,594
              
              
              36.03
              
              
              257,730
              
              
              35.39
              
              
              233,979
              
              
              32.63Total
                  loans
              
              
              812,898
              (1)
              
              100.00
              %
              
              817,008
              (2)
              
              100.00
              %
              
              836,941
              (3)
              
              100.00
              %
              
              728,224
              (4)
              
              100.00
              %
              
              717,146
              (5)
              
              100.00
              %Less:Undisbursed
                  portion of loans
              
              
              3,984
              
              
              
              
              
              5,520
              
              
              
              
              
              7,724
              
              
              
              
              
              9,237
              
              
              
              
              
              8,160Deferred
                  loan fees and costs
              
              
              (3,519
              )
              
              
              
              
              (3,623
              )
              
              
              
              
              (3,453
              )
              
              
              
              
              (3,814
              )
              
              
              
              
              (3,749
              )Allowance
                  for loan losses
              
              
              8,352
              
              
              
              
              
              8,156
              
              
              
              
              
              8,100
              
              
              
              
              
              6,867
              
              
              
              
              
              6,779Total
                  loans receivable, net
              
              $
              804,081
              
              
              
              
              $
              806,955
              
              
              
              
              $
              824,570
              
              
              
              
              $
              715,934
              
              
              
              
              $
              705,956
 ____________________
 (1) Includes
        loans held for sale of $1.6 million.
 (2) Includes
        loans held for sale of $1.3 million.
 (3) Includes
        loans held for sale of $2.0 million.
 (4) Includes
        loans held for sale of $2.9 million.
 (5) Includes
        loans held for sale of $2.0 million.
  6
  The
        following schedule illustrates the contractual maturity of our loan portfolio
        at
        December 31, 2007. Mortgages that have adjustable or renegotiable interest
        rates
        are shown as maturing in the period during which the contract is
        due.  The schedule does not reflect the effects of possible
        prepayments or enforcement of due-on-sale clauses.
 
 **Real
                  Estate****One-
                  to Four-Family****(1)**
              
              **Multi-family
                  and**
                **Commercial**
              
              **Construction**
                **and Development(2)**
              
              **Consumer**
              
              **Commercial**
                **Business**
              
              **Total****Amount**
              
              **Weighted**
                **Average**
                **Rate**
              
              **Amount**
              
              **Weighted**
                **Average**
                **Rate**
              
              **Amount**
              
              **Weighted**
                **Average**
                **Rate**
              
              **Amount**
              
              **Weighted**
                **Average**
                **Rate**
              
              **Amount**
              
              **Weighted**
                **Average**
                **Rate**
              
              **Amount**
              
              **Weighted**
                **Average**
                **Rate****(Dollars
                  in thousands)**Due During
                Years Ending
                December 31,2008(3)
              
              $
              168
              
              
              6.36
              %
              $
              7,780
              
              
              7.07
              %
              $
              14
              
              
              9.50
              %
              $
              3,715
              
              
              7.73
              %
              $
              24,219
              
              
              7.97
              %
              $
              35,896
              
              
              7.74
              %2009
              
              
              355
              
              
              6.84
              
              
              694
              
              
              6.67
              
              
              32
              
              
              6.99
              
              
              4,655
              
              
              6.99
              
              
              5,593
              
              
              7.04
              
              
              11,329
              
              
              6.992010
              
              
              549
              
              
              6.44
              
              
              4,588
              
              
              7.45
              
              
              48
              
              
              6.83
              
              
              9,165
              
              
              6.91
              
              
              5,085
              
              
              7.85
              
              
              19,435
              
              
              7.272011
                  and 2012
              
              
              6,511
              
              
              6.16
              
              
              4,065
              
              
              7.86
              
              
              704
              
              
              9.05
              
              
              22,944
              
              
              7.72
              
              
              4,073
              
              
              8.22
              
              
              38,297
              
              
              7.552013
                  to 2014
              
              
              13,365
              
              
              5.78
              
              
              10,433
              
              
              7.49
              
              
              114
              
              
              8.90
              
              
              17,439
              
              
              7.57
              
              
              1,642
              
              
              8.20
              
              
              42,993
              
              
              7.022015
                  to 2029
              
              
              161,235
              
              
              5.94
              
              
              57,391
              
              
              7.21
              
              
              1,900
              
              
              6.26
              
              
              167,047
              
              
              7.71
              
              
              16,071
              
              
              7.13
              
              
              403,644
              
              
              6.902030
                  and following
              
              
              247,190
              
              
              5.92
              
              
              1,094
              
              
              4.62
              
              
              10,748
              
              
              6.40
              
              
              546
              
              
              5.97
              
              
              81
              
              
              7.88
              
              
              259,659
              
              
              5.94Total
              
              $
              429,373
              
              
              5.93
              %
              $
              86,045
              
              
              7.24
              %
              $
              13,560
              
              
              6.55
              %
              $
              225,511
              
              
              7.65
              %
              $
              56,764
              
              
              7.65
              %
              $
              811,253
              
              
              6.68
              %
  
 (1) Does
        not include mortgage loans held for sale.
 (2) Once
        the construction phase has been completed, these loans will automatically
        convert to permanent financing.
 (3) Includes
        demand loans, loans having no stated maturity and overdraft
        loans.
  7
  The
        total
        amount of loans due after December 31, 2008 that have predetermined interest
        rates is $500.0 million, and the total amount of loans due after such date
        which
        have floating or adjustable interest rates is $275.3 million.
  ***One-
        to Four-Family Residential Real Estate Lending.*** We focus
        our real estate lending efforts primarily on the origination of loans secured
        by
        first mortgages on owner-occupied, one- to four-family residences in our
        market
        areas. At December 31, 2007, one- to four-family residential mortgage loans
        totaled $431.0 million, or 53.02% of our gross loan portfolio.
  We
        generally underwrite our one- to four-family loans based on the loan applicant’s
        employment and credit history and the appraised value of the subject property.
        Presently, we lend up to 100% of the lesser of the appraised value or purchase
        price for one- to four-family residential loans. For loans with a loan-to-value
        ratio in excess of 80%, we generally require private mortgage insurance in
        order
        to reduce our exposure to below 80%. Properties securing our one- to four-family
        loans are appraised by independent state licensed fee appraisers approved
        by
        Mutual Federal’s Board of Directors. We require borrowers to obtain title
        insurance in the amount of their mortgage. Hazard insurance and flood insurance,
        if necessary, are required in an amount of the lesser of the value of the
        property improvements or our mortgage amount.
  We
        originate one- to four-family mortgage loans on either a fixed- or
        adjustable-rate basis, as consumer demand dictates. Our pricing strategy
        for
        mortgage loans includes setting interest rates that are competitive with
        the
        secondary market and other local financial institutions and are consistent
        with
        our internal needs. Adjustable-rate mortgage or ARM loans are offered with
        a
        one-year, three-year, five-year, seven-year or ten-year term to the initial
        repricing date. After the initial period, the interest rate for each ARM
        loan
        adjusts annually for the remainder of the term of the loan. We use the weekly
        average of the one-year Treasury Bill Constant Maturity Index to reprice
        our ARM
        loans. During fiscal 2007, we originated $28.3 million of one- to four-family
        ARM loans and $58.3 million of one- to four-family fixed-rate mortgage loans.
        By
        way of comparison, during fiscal 2006, we originated $40.8 million of one-
        to
        four-family ARM loans, and $59.8 million of one- to four-family fixed-rate
        mortgage loans.
  Fixed-rate
        loans secured by one- to four-family residences have contractual maturities
        of
        up to 30 years and are generally fully amortizing, with payments due monthly.
        These loans normally remain outstanding, however, for a substantially shorter
        period of time because of refinancing and other prepayments. A significant
        change in interest rates could alter considerably the average life of a
        residential loan in our portfolio. Our one- to four-family loans are generally
        not assumable, do not contain prepayment penalties and do not permit negative
        amortization of principal. Most are written using underwriting guidelines
        which
        make them saleable in the secondary market. Our real estate loans generally
        contain a “due on sale” clause allowing us to declare the unpaid principal
        balance due and payable upon the sale of the security property.
  8
  Our
        one-
        to four-family residential ARM loans are fully amortizing loans with contractual
        maturities of up to 30 years, with payments due monthly. Our ARM loans generally
        provide for specified minimum and maximum interest rates, with a lifetime
        cap
        and floor, and a periodic adjustment on the interest rate over the rate in
        effect on the date of origination. As a consequence of using caps, the interest
        rates on these loans may not be as rate sensitive as is our cost of funds.
        We
        offer a one-year ARM loan that is convertible into a fixed-rate loan. When
        these
        loans convert, they may be sold in the secondary market.
  In
        order
        to remain competitive in our market areas, we sometimes originate ARM loans
        at
        initial rates below the fully indexed rate. **** ARM
        loans
        generally pose different credit risks than fixed-rate loans, primarily because
        as interest rates rise, the borrower’s payment rises, increasing the potential
        for default. We have not experienced difficulty with the payment history
        for
        these loans. See “Asset Quality — Non-performing Assets” and “— Classified
        Assets.” At December 31, 2007, our one- to four-family ARM loan portfolio
        totaled $176.8 million, or 21.8% of our gross loan portfolio. At that date,
        the
        fixed-rate one- to four-family mortgage loan portfolio totaled $254.2 million,
        or 31.3% of our gross loan portfolio.
  ***Multi-family
        and Commercial Real Estate Lending*** .
        We
        offer a variety of multi-family and commercial real estate loans for
        acquisition, renovation or construction. These loans are secured by the real
        estate and improvements financed. The collateral securing these loans ranges
        from industrial commercial buildings to churches, office buildings and
        multi-family housing complexes. At December 31, 2007, multi-family and
        commercial real estate loans totaled $86.0 million, or 10.6% of our gross
        loan
        portfolio.
  Our
        loans
        secured by multi-family and commercial real estate are originated with either
        a
        fixed or adjustable interest rate. The interest rate on adjustable-rate loans
        is
        based on a variety of indices, generally determined through negotiation with
        the
        borrower. Loan-to-value ratios on our multi-family and commercial real estate
        loans typically do not exceed 80% of the appraised value of the property
        securing the loan. These loans typically require monthly payments, may not
        be
        fully amortizing and generally have maximum maturities of 25 years.
  Loans
        secured by multi-family and commercial real estate are underwritten based
        on the
        income producing potential of the property and the financial strength of
        the
        borrower. The net operating income, which is the income derived from the
        operation of the property less all operating expenses, must be sufficient
        to
        cover the payments related to the outstanding debt. We may require personal
        guarantees of the borrowers in addition to the real estate as collateral
        for
        such loans. We also generally require an assignment of rents or leases in
        order
        to be assured that the cash flow from the real estate can be used to repay
        the
        debt. Appraisals on properties securing multi-family and commercial real
        estate
        loans are performed by independent state licensed fee appraisers approved
        by
        Mutual Federal’s Board of Directors. See “Loan Originations, Purchases, Sales
        and Repayments.”
  We
        generally do not maintain a tax or insurance escrow account for loans secured
        by
        multi-family and commercial real estate. In order to monitor the adequacy
        of
        cash flows on income-producing properties, the borrower is requested or required
        to provide periodic financial information.
  9
  Loans
        secured by multi-family and commercial real estate are generally larger and
        involve a greater degree of credit risk than one- to four-family residential
        mortgage loans. Multi-family and commercial real estate loans typically involve
        large balances to single borrowers or groups of related borrowers. Because
        payments on loans secured by multi-family and commercial real estate are
        often
        dependent on the successful operation or management of the properties, repayment
        of such loans may be subject to adverse conditions in the real estate market
        or
        the economy. If the cash flow from the project is reduced, or if leases are
        not
        obtained or renewed, the borrower’s ability to repay the loan may be impaired.
        See “Asset Quality — Non-performing Assets.”
  ***Construction
        and Development Lending*** .
        We
        originate construction loans primarily secured by existing residential building
        lots. We make construction loans to builders and to individuals for the
        construction of their residences. Substantially all of these loans are secured
        by properties located within our market area. At December 31, 2007, we had
        $13.6
        million in construction and development loans outstanding, representing 1.7%
        of
        our gross loan portfolio.
  Construction
        and development loans are obtained through continued business with builders
        who
        have previously borrowed from us, from walk-in customers and through referrals
        from realtors and architects. The application process includes submission
        of
        complete plans, specifications and costs of the project to be constructed.
        This
        information and an independent appraisal is used to determine the value of
        the
        subject property. Loans are based on the lesser of the current appraised
        value
        and/or the cost of construction, including the land and the building. We
        generally conduct regular inspections of the construction project being
        financed. Residential construction loans are done with one closing for both
        the
        construction period and the long term financing.
  Construction
        loans for one- to four-family homes are generally granted with a construction
        period of up to nine months. During the construction phase, the borrower
        generally pays interest only on a monthly basis. Loan-to-value ratios on
        our
        construction and development loans typically do not exceed 90% of the appraised
        value of the project on an as completed basis. Single family construction
        loans
        with loan-to-value ratios over 90% usually require private mortgage
        insurance.
  Because
        of the uncertainties inherent in estimating construction and development
        costs
        and the market for the project upon completion, it is difficult to evaluate
        accurately the total loan funds required to complete a project, the related
        loan-to-value ratios and the likelihood of ultimate success of the project.
        These loans also involve many of the same risks discussed above regarding
        multi-family and commercial real estate loans and tend to be more sensitive
        to
        general economic conditions than many other types of loans. In addition,
        payment
        of interest from loan proceeds can make it difficult to monitor the progress
        of
        a project.
  10
  ***Consumer
        and Other Lending*** .
        Consumer loans generally have shorter terms to maturity, which reduces our
        exposure to changes in interest rates, and carry higher rates of interest
        than
        one- to four-family residential mortgage loans. In addition, management believes
        that offering consumer loan products helps to expand and create stronger
        ties to
        our customer base by increasing the number of customer relationships and
        providing cross-marketing opportunities. At December 31, 2007, our consumer
        loan
        portfolio totaled $225.5 million, or 27.7% of our gross loan portfolio. We
        offer
        a variety of secured consumer loans, including home equity and lines of credit,
        home improvement, auto, boat and recreational vehicle loans, and loans secured
        by savings deposits. We also offer a limited amount of unsecured loans. We
        originate our consumer loans both in our market area and throughout Indiana
        with
        some customers residing in contiguous states through our indirect lending
        program.
  At
        December 31, 2007, our home equity loans, including lines of credit and home
        improvement loans, totaled $72.4 million, or 8.9% of our gross loan
        portfolio. **** These
        loans may be originated in amounts, together with the amount of the existing
        first mortgage, of up to 100% of the value of the property securing the loan.
        The term to maturity on our home equity and home improvement loans may be
        up to
        15 years. Home equity lines of credit have a maximum term to maturity of
        20
        years and require a minimum monthly payment based on the outstanding loan
        balance per month, which amount may be reborrowed at any time. Other consumer
        loan terms vary according to the type of collateral, length of contract and
        creditworthiness of the borrower.
  We
        directly and indirectly originate auto, boat and recreational vehicle loans.
        We
        generally buy indirect auto loans on a rate basis, paying the dealer a cash
        payment for loans with an interest rate in excess of the rate we require.
        This
        premium is amortized over the remaining life of the loan. Any prepayments
        or
        delinquencies are charged to future amounts owed to that dealer, with no
        dealer
        reserve or other guarantee of payment if the dealer stops doing business
        with
        us.
  We
        employ
        the Fair Isaac’s credit scoring models for all consumer loan applications. These
        models evaluate credit and application attributes. We also originate consumer
        loans through bank personnel and indirect channels. These loans are underwritten
        traditionally, with a review of the borrower’s employment and credit history and
        an assessment of the borrower’s ability to repay the loan.
  At
        December 31, 2007, auto loans totaled $22.9 million, or 2.8% of our gross
        loan
        portfolio. Auto loans may be written for up to six years and usually have
        a
        fixed rate of interest. Loan-to-value ratios are up to 100% of the MSRP or
        120%
        of invoice for new autos and 110% of value on used cars, based on valuation
        from
        official used car guides.
  Loans
        for
        boats and recreational vehicles totaled $125.6 million at December 31, 2007,
        or
        15.5% of our gross loan portfolio. We will finance up to 100% of the purchase
        price for a recreational vehicle and 100% for a boat. Values are based on
        the
        applicable official used vehicle guides. The term to maturity for these types
        of
        loans is up to 15 years for new and used boats and recreational vehicles.
        These
        loans are generally written with a fixed rate of interest.
  11
  At
        December 31, 2007, manufactured housing loans totaled $992,000, or 0.1% of
        our
        gross loan portfolio. Due to increased competition, we no longer offer
        manufactured housing loans, and have allowed this portion of the loan portfolio
        to decline over the past several years.
  Consumer
        loans may entail greater risk than one- to four-family residential mortgage
        loans, especially consumer loans secured by rapidly depreciable assets, such
        as
        automobiles, boats and recreational vehicles. In these cases, any repossessed
        collateral for a defaulted loan may not provide an adequate source of repayment
        of the outstanding loan balance. As a result, consumer loan collections are
        dependent on the borrower’s continuing financial stability and, thus, are more
        likely to be adversely affected by job loss, divorce, illness or personal
        bankruptcy.
  ***Commercial
        Business Lending*** .
        At
        December 31, 2007, commercial business loans totaled $56.8 million, or 7.0%
        of
        our gross loan portfolio. Most of our commercial business loans have been
        extended to finance local businesses and include short-term loans to finance
        machinery and equipment purchases, inventory and accounts receivable. Commercial
        business loans also involve the extension of revolving credit for a combination
        of equipment acquisitions and working capital needs and agricultural purposes
        such as seed, farm equipment and livestock.
  The
        terms
        of loans extended on the security of machinery and equipment are based on
        the
        projected useful life of the machinery and equipment, generally not to exceed
        seven years. Lines of credit generally are available to borrowers for up
        to 13
        months, and may be renewed by us after an annual review of current financial
        information.
  We
        issue
        a few financial-based standby letters of credit which are offered at competitive
        rates and terms and are generally on a secured basis. We continue to expand
        our
        volume of commercial business loans.
  Our
        commercial business lending policy includes credit file documentation and
        analysis of the borrower’s background, capacity to repay the loan, the adequacy
        of the borrower’s capital and collateral as well as an evaluation of other
        conditions affecting the borrower. Analysis of the borrower’s past, present and
        future cash flows also is an important aspect of our credit analysis. We
        may
        obtain personal guarantees on our commercial business loans. Nonetheless,
        these
        loans are believed to carry higher credit risk than traditional single family
        loans.
  Unlike
        residential mortgage loans, commercial business loans are typically made
        on the
        basis of the borrower’s ability to make repayment from the cash flow of the
        borrower’s business. As a result, the availability of funds for the repayment of
        commercial business loans may substantially depend on the success of the
        business itself (which, in turn, often depends in part upon general economic
        conditions). Our commercial business loans are usually secured by business
        assets. However, the collateral securing the loans may depreciate over time,
        may
        be difficult to appraise and may fluctuate in value based on the success
        of the
        business.
  12
  **Loan
        Originations, Purchases, Sales and Repayments**
  We
        originate loans through referrals from real estate brokers and builders,
        our
        marketing efforts, and our existing and walk-in customers. We also originate
        many of our consumer loans through relationships with dealerships. While
        we
        originate both adjustable-rate and fixed-rate loans, our ability to originate
        loans depends upon customer demand for loans in our market areas. Demand
        is
        affected by local competition and the interest rate environment. During the
        last
        several years, due to low market rates of interest, our dollar volume of
        fixed-rate, one- to four-family loans has exceeded the dollar volume of the
        same
        type of adjustable-rate loans. As part of our interest rate risk management
        efforts, we have from time to time sold our fixed rate, one- to four-family
        residential loans. We have also purchased adjustable one- to four-family
        residential and commercial real estate loans.
  In
        periods of economic uncertainty, the ability of financial institutions,
        including us, to originate or purchase large dollar volumes of loans may
        be
        substantially reduced or restricted, with a resultant decrease in interest
        income.
  13
  The
        following table shows our loan origination, purchase, sale and repayment
        activities for the years indicated.
 
 **Year
                  Ended December 31,****2007**
              
              **2006**
              
              **2005****(In
                  thousands)**Originations
                  by type:Adjustable
                  rate:Real
                  estate - one- to four-family
              
              $
              28,275
              
              $
              40,838
              
              $
              37,682-
                  multi-family
              
              
              —
              
              
              96
              
              
              —-
                  commercial
              
              
              11,557
              
              
              7,398
              
              
              9,594-
                  construction or development
              
              
              4,894
              
              
              9,396
              
              
              8,806Non-real
                  estate - consumer
              
              
              56
              
              
              148
              
              
              34-
                  commercial business
              
              
              2,026
              
              
              4,507
              
              
              5,213Total
                  adjustable-rate
              
              
              46,808
              
              
              62,383
              
              
              61,329Fixed
                  rate:Real
                  estate - one- to four-family
              
              
              58,338
              
              
              59,794
              
              
              70,135-
                  commercial
              
              
              2,171
              
              
              351
              
              
              4,207-
                  construction or development
              
              
              11,687
              
              
              9,623
              
              
              14,148Non-real
                  estate - consumer
              
              
              44,423
              
              
              56,086
              
              
              58,446-
                  commercial business
              
              
              3,153
              
              
              8,017
              
              
              8,032Total
                  fixed-rate
              
              
              119,772
              
              
              133,871
              
              
              154,968Total
                  loans originated
              
              
              166,580
              
              
              196,254
              
              
              216,297Purchases:(1)Real
                  estate - one- to four-family
              
              
              16,058
              
              
              5,447
              
              
              59,269-
                  commercial
              
              
              —
              
              
              —
              
              
              3,363-
                  construction or development
              
              
              —
              
              
              —
              
              
              3,628Non-real
                  estate - consumer
              
              
              —
              
              
              1,242
              
              
              8,371-
                  commercial business
              
              
              —
              
              
              —
              
              
              7,610Total
                  loans purchased
              
              
              16,058
              
              
              6,689
              
              
              82,241Sales
                  and Repayments:Sales:Real
                  estate - one- to four-family
              
              
              24,113
              
              
              50,853
              
              
              13,471Total
                  loans sold
              
              
              24,113
              
              
              50,853
              
              
              13,471Principal
                  repayments
              
              
              162,159
              
              
              174,743
              
              
              173,920Total
                  reductions
              
              
              186,272
              
              
              225,596
              
              
              187,391Increase
                  (decrease) in other items, net
              
              
              (476
              )
              
              2,720
              
              
              (2,430
              )Net
                  increase (decreases)
              
              $
              (4,110
              )
              $
              (19,933
              )
              $
              108,717
 ____________________
 (1)  Does
        not
        include market value adjustment for loans related to acquisitions of branches
        from other financial institutions.
  14
  **Asset
        Quality**
  When
        a
        borrower fails to make a payment on a mortgage loan on or before the default
        date, a late charge and delinquency notice is mailed. All delinquent accounts
        are reviewed by a collector, who attempts to cure the delinquency by contacting
        the borrower once the loan is 30 days past due. If the loan becomes 60 days
        delinquent, the collector will generally contact the borrower by phone or
        send a
        letter to the borrower in order to identify the reason for the delinquency.
        Once
        the loan becomes 90 days delinquent, the borrower is asked to pay the delinquent
        amount in full, or establish an acceptable repayment plan to bring the loan
        current. Between 100 and 120 days delinquent a drive-by inspection is made
        to
        determine the condition of the property. If the account becomes 120 days
        delinquent, and an acceptable repayment plan has not been agreed upon, a
        collection officer will generally refer the account to legal counsel, with
        instructions to prepare a notice of intent to foreclose. The notice of intent
        to
        foreclose allows the borrower up to 30 days to bring the account current.
        During
        this 30 day period, the collector may accept a written repayment plan from
        the
        borrower which would bring the account current within the next 90 days. If
        the
        loan becomes 150 days delinquent and an acceptable repayment plan has not
        been
        agreed upon, the collection officer will turn over the account to our legal
        counsel with instructions to initiate foreclosure.
  For
        consumer loans, a similar process is followed, with the initial written contact
        being made once the loan is 30 days past due.
  ***Delinquent
        Loans.*** The
        following table sets forth, as of December 31, 2007, our loans delinquent
        for 60
        to 89 days by type, number, amount and percentage of type.
  **Loans
                  Delinquent For:****60-89
                  Days****Number**
              
              **Amount**
              
              **Percent**
                **of
                  Loan**
                **Category****(Dollars
                  in thousands)**Real
                  Estate:One-
                  to four-family
              
              
              60
              
              $
              3,730
              
              
              0.87
              %Multi-family
              
              
              —
              
              
              —
              
              
              —Commercial
              
              
              2
              
              
              577
              
              
              0.70Construction
                  and development
              
              
              —
              
              
              —
              
              
              —Consumer
              
              
              116
              
              
              1,499
              
              
              0.66Commercial
                  business
              
              
              4
              
              
              107
              
              
              0.19Total
              
              
              182
              
              $
              5,913
              
              
              0.73
              %
  15
  ***Non-performing
        Assets.*** The
        table below sets forth the amounts and categories of non-performing assets
        in
        our loan portfolio at the dates indicated. Generally, loans are placed on
        non-accrual status when the loan becomes more than 90 days delinquent or
        when
        collection of interest becomes doubtful. Foreclosed assets owned include
        assets
        acquired in settlement of loans.
  **December
                  31,****2007**
              
              
              **2006**
              
              
              **2005**
              
              
              **2004**
              
              
              **2003****(Dollars
                  in thousands)**Non-accruing
                  loans:One-
                  to four-family
              
              $
              2,997
              
              $
              2,762
              
              $
              2,967
              
              $
              1,326
              
              $
              1,316Multi-family
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Commercial
                  real estate
              
              
              2,656
              
              
              356
              
              
              569
              
              
              370
              
              
              232Construction
                  and development
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Consumer
              
              
              1,294
              
              
              983
              
              
              628
              
              
              498
              
              
              653Commercial
                  business
              
              
              2,002
              
              
              1,468
              
              
              1,257
              
              
              1,791
              
              
              1,039Total
              
              
              8,949
              
              
              5,569
              
              
              5,421
              
              
              3,985
              
              
              3,270Accruing
                  loans delinquent 90 days or more:One-
                  to four-family
              
              
              —
              
              
              —
              
              
              67
              
              
              —
              
              
              —Multi-family
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Commercial
                  real estate
              
              
              1,421
              
              
              —
              
              
              1,858
              
              
              —
              
              
              —Construction
                  and development
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Consumer
              
              
              —
              
              
              —
              
              
              35
              
              
              119
              
              
              10Commercial
                  business
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Total
              
              
              1,421
              
              
              —
              
              
              1,960
              
              
              119
              
              
              10Total
                  nonperforming loans
              
              
              10,370
              
              
              5,569
              
              
              7,381
              
              
              4,104
              
              
              3,280Restructured
                  loans
              
              
              107
              
              
              111
              
              
              116
              
              
              120
              
              
              —Foreclosed
                  assets:One-
                  to four-family
              
              
              927
              
              
              947
              
              
              912
              
              
              285
              
              
              557Multi-family
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Commercial
                  real estate
              
              
              437
              
              
              326
              
              
              595
              
              
              55
              
              
              40Construction
                  and development
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Consumer
              
              
              1,137
              
              
              1,322
              
              
              978
              
              
              894
              
              
              824Commercial
                  business
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Total
              
              
              2,501
              
              
              2,595
              
              
              2,485
              
              
              1,234
              
              
              1,421Total
                  non-performing assets
              
              $
              12,978
              
              $
              8,275
              
              $
              9,982
              
              $
              5,458
              
              $
              4,676Total
                  as a percentage of total assets
              
              
              1.35
              %
              
              0.86
              %
              
              1.03
              %
              
              0.65
              %
              
              0.57
              %
  For
        the
        year ended December 31, 2007, gross interest income that would have been
        recorded had the non-accruing loans been current in accordance with their
        original terms amounted to $858,000. The amount included in interest income
        on
        these loans for the year ended December 31, 2007, was $577,000.
  16
  At
        December 31, 2007, foreclosed commercial real estate consisted of four
        commercial buildings in Grant County, which are currently being offered for
        sale. In addition, twenty-eight residential properties with a book value
        of
        $927,000 remain as foreclosed assets at December 31, 2007. These properties
        are
        being offered for sale. Non-accruing one- to four-family loans increased
        to $3.0
        million at December 31, 2007. Non-accruing commercial real estate loans
        increased from $356,000 at December 31, 2006, to $2.7 million at December
        31,
        2007. The increase includes a $1.6 million participation loan. At the same
        time,
        non-accrual commercial business loans increased from $1.5 million to $2.0
        million. It is management’s opinion that the non-accruing loans are sufficiently
        reserved as of December 31, 2007 and any additional allowances will be
        insignificant.
  ***Other
        Loans of Concern.*** In
        addition to the non-performing assets set forth in the table above, as of
        December 31, 2007, there was an aggregate of $4.8 million in loans with respect
        to which known information about the possible credit problems of the borrowers
        have caused management to have doubts as to the abilities of the borrowers
        to
        comply with present loan repayment terms and which may result in the future
        inclusion of such items in the non-performing asset categories. These loans
        have
        been considered in management’s determination of the adequacy of our allowance
        for loan losses.
  Included
        in the $4.8 million above are three commercial business loans totaling $703,000,
        five commercial real estate loans totaling $999,000 and thirty-five residential
        mortgage loans totaling $3.0 million. The majority of these loans were current
        as of December 31, 2007.
  ***Classified
        Assets.*** **** Federal
        regulations provide for the classification of loans and other assets, such
        as
        debt and equity securities considered by the OTS to be of lesser quality,
        as
“substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it
        is inadequately protected by the current net worth and paying capacity of
        the
        obligor or of the collateral pledged, if any. “Substandard” assets include those
        characterized by the “distinct possibility” that the insured institution will
        sustain “some loss” if the deficiencies are not corrected. Assets classified as
“doubtful” have all of the weaknesses inherent in those classified
“substandard,” with the added characteristic that the weaknesses present make
“collection or liquidation in full,” on the basis of currently existing facts,
        conditions, and values, “highly questionable and improbable.” Assets classified
        as “loss” are those considered “uncollectible” and of such little value that
        their continuance as assets without the establishment of a specific loss
        reserve
        is not warranted.
  When
        an
        insured institution classifies problem assets as either substandard or doubtful,
        it may establish general allowances for loan losses in an amount deemed prudent
        by management and approved by the board of directors. General allowances
        represent loss allowances which have been established to recognize the inherent
        risk associated with lending activities, but which, unlike specific allowances,
        have not been allocated to particular problem assets. When an insured
        institution classifies problem assets as “loss,” it is required either to
        establish a specific allowance for losses equal to 100% of that portion of
        the
        asset so classified or to charge off such amount. An institution’s determination
        as to the classification of its assets and the amount of its valuation
        allowances is subject to review by the OTS and the FDIC, which may order
        the
        establishment of additional general or specific loss allowances.
  17
  In
        connection with the filing of Mutual Federal’s periodic reports with the OTS and
        in accordance with our classification of assets policy, we regularly review
        the
        problem assets in our portfolio to determine whether any assets require
        classification in accordance with applicable regulations. On the basis of
        management’s review, at December 31, 2007, we had classified $13.6 million of
        Mutual Federal’s loans as substandard, $27,000 as doubtful and $824,000 as loss.
        Loans classified as loss are fully reserved but not charged off, because
        there
        are certain indications that collection is still possible. The total amount
        classified represented 16.56% of our stockholders’ equity and 1.50% of our
        assets at December 31, 2007, compared to 12.48% and 1.13%, respectively,
        at
        December 31, 2006.
  ***Provision
        for Loan Losses*** .
        We
        recorded a provision for loan losses during the year ended December 31, 2007
        of
        $2.2 million, compared to $2.1 million for the year ended December 31, 2006
        and
        $1.8 million for the year ended December 31, 2005. The provision for loan
        losses
        is charged to income to bring our allowance for loan losses to a level deemed
        appropriate by management based on the factors discussed below under “—
Allowance for Loan Losses.”
  ***Allowance
        for Loan Losses*** .
        We
        maintain an allowance for loan losses to absorb losses inherent in the loan
        portfolio. The allowance is based on ongoing, quarterly assessments of the
        estimated losses inherent in the loan portfolio. Our methodology for assessing
        the appropriateness of the allowance consists of several key elements, including
        the general allowance and specific allowances for identified problem loans
        and
        portfolio segments. In addition, the allowance incorporates the results of
        measuring impaired loans as provided in SFAS No. 114, “Accounting by Creditors
        for Impairment of a Loan” and SFAS No. 118, “Accounting by Creditors for
        Impairment of a Loan – Income Recognition and Disclosures.” These
        accounting standards prescribe the measurement methods, income recognition
        and
        disclosures related to impaired loans.
  The
        general allowance is calculated by applying loss factors to outstanding loans
        based on the internal risk evaluation of such loans or pools of loans. Changes
        in risk evaluations of both performing and nonperforming loans affect the
        amount
        of the general allowance. Loss factors are based on our historical loss
        experience as well as on significant factors that, in management’s judgment,
        affect the collectibility of the portfolio as of the evaluation
        date.
  The
        appropriateness of the allowance is reviewed by management based upon its
        evaluation of then-existing economic and business conditions affecting our
        key
        lending areas and other conditions, such as credit quality trends (including
        trends in nonperforming loans expected to result from existing conditions),
        collateral values, loan volumes and concentrations, specific industry conditions
        within portfolio segments and recent loss experience in particular segments
        of
        the portfolio that existed as of the balance sheet date and the impact that
        such
        conditions were believed to have had on the collectibility of the loan. Senior
        management reviews these conditions quarterly in discussions with our senior
        credit officers. To the extent that any of these conditions is evidenced
        by a
        specifically identifiable problem credit or portfolio segment as of the
        evaluation date, management’s estimate of the effect of such condition may be
        reflected as a specific allowance applicable to such credit or portfolio
        segment. Where any of these conditions is not evidenced by a specifically
        identifiable problem credit or portfolio segment as of the evaluation date,
        management’s evaluation of the loss related to this condition is reflected in
        the unallocated allowance. The evaluation of the inherent loss with respect
        to
        these conditions is subject to a higher degree of uncertainty because they
        are
        not identified with specific problem credits or portfolio segments.
  18
  The
        allowance for loan losses is based on estimates of losses inherent in the
        loan
        portfolio. Actual losses can vary significantly from the estimated amounts.
        Our
        methodology as described permits adjustments to any loss factor used in the
        computation of the general allowance in the event that, in management’s
        judgment, significant factors which affect the collectibility of the portfolio
        as of the evaluation date are not reflected in the loss factors. By assessing
        the estimated losses inherent in the loan portfolio on a quarterly basis,
        we are
        able to adjust specific and inherent loss estimates based upon any more recent
        information that has become available. Due to the loss of numerous manufacturing
        jobs in the communities we serve during recent years, including 2007, and
        the
        increase in higher risk loans, like consumer and commercial loans, as a
        percentage of total loans, management has concluded that our allowance for
        loan
        losses should be greater than historical loss experience and specifically
        identified losses would otherwise indicate.
  At
        December 31, 2007, our allowance for loan losses was $8.4 million, or 1.03%
        of
        the total loan portfolio, and approximately 79.7% of total non-performing
        loans.
        Assessing the adequacy of the allowance for loan losses is inherently subjective
        as it requires making material estimates, including the amount and timing
        of
        future cash flows expected to be received on impaired loans, that are
        susceptible to significant change. In the opinion of management, the allowance,
        when taken as a whole, is adequate to absorb reasonable estimated loan losses
        inherent in our loan portfolio.
  19
  The
        following table sets forth an analysis of our allowance for loan
        losses.
 
 **Year
                  Ended December 31,****2007**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003****(Dollars
                  in thousands)**Balance
                  at beginning of period
              $
              8,156
              
              $
              8,100
              
              $
              6,867
              
              $
              6,779
              
              $
              6,286Charge-offs:One-
                  to four-family
              
              645
              
              
              526
              
              
              303
              
              
              249
              
              
              210Multi-family
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Commercial
                  real estate
              
              44
              
              
              102
              
              
              6
              
              
              34
              
              
              173Construction
                  and development
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Consumer
              
              1,731
              
              
              1,288
              
              
              1,276
              
              
              1,093
              
              
              948Commercial
                  business
              
              303
              
              
              387
              
              
              954
              
              
              616
              
              
              302,723
              
              
              2,303
              
              
              2,539
              
              
              1,992
              
              
              1,361Recoveries:One-
                  to four-family
              
              121
              
              
              81
              
              
              22
              
              
              21
              
              
              27Multi-family
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Commercial
                  real estate
              
              —
              
              
              —
              
              
              120
              
              
              326
              
              
              108Construction
                  and development
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Consumer
              
              357
              
              
              199
              
              
              194
              
              
              176
              
              
              159Commercial
                  business
              
              201
              
              
              11
              
              
              15
              
              
              —
              
              
              110679
              
              
              291
              
              
              351
              
              
              523
              
              
              404Net
                  charge-offs
              
              2,044
              
              
              2,012
              
              
              2,188
              
              
              1,469
              
              
              957Amount
                  acquired in branch acquisitions
              
              —
              
              
              —
              
              
              1,646
              
              
              —
              
              
              —Provisions
                  charged to operations
              
              2,240
              
              
              2,068
              
              
              1,775
              
              
              1,557
              
              
              1,450Balance
                  at end of period
              $
              8,352
              
              $
              8,156
              
              $
              8,100
              
              $
              6,867
              
              $
              6,779Ratio
                  of net charge-offs during the periodto
                  average loans outstanding during theperiod
              
              0.25
              %
              
              0.24
              %
              
              0.29
              %
              
              0.21
              %
              
              0.14
              %Allowance
                  as a percentage ofnon-performing
                  loans
              
              79.72
              %
              
              143.59
              %
              
              109.74
              %
              
              167.32
              %
              
              208.26
              %Allowance
                  as a percentage of total loans(end
                  of period)
              
              1.03
              %
              
              1.00
              %
              
              0.98
              %
              
              0.95
              %
              
              0.95
              %
  20
 
 The
        distribution of our allowance for loan losses at the dates indicated is
        summarized as follows:
 
 **December
                  31,****2007**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003****(Dollars
                  in thousands)**Amount
                  of
                Loan
                  Loss
                Allowance
              
              Loan
                Amounts
                by
                Category
              
              Percent
                of
                  Loans
                in
                  Each
                Category
                to
                  Total
                Loans
              
              Amount
                  of
                Loan
                  Loss
                Allowance
              
              Loan
                Amounts
                by
                Category
              
              Percent
                of
                  Loans
                in
                  Each
                Category
                to
                  Total
                Loans
              
              Amount
                  of
                Loan
                  Loss
                Allowance
              
              Loan
                Amounts
                by
                Category
              
              Percent
                of
                  Loans
                in
                  Each
                Category
                to
                  Total
                Loans
              
              Amount
                  of
                Loan
                  Loss
                Allowance
              
              Loan
                Amounts
                by
                Category
              
              Percent
                of
                  Loans
                in
                  Each
                Category
                to
                  Total
                Loans
              
              Amount
                  of
                Loan
                  Loss
                Allowance
              
              Loan
                Amounts
                by
                Category
              
              Percent
                of
                  Loans
                in
                  Each
                Category
                to
                  Total
                LoansOne-
                  to four-family
              
              $
              1,200
              
              
              431,018
              (1)
              
              53.02
              %
              $
              1,219
              
              
              433,123
              (2)
              
              53.01
              %
              $
              1,267
              
              $
              451,914
              (3)
              
              54.00
              %
              $
              1,013
              
              
              385,678
              (4)
              
              52.96
              %
              $
              1,149
              
              $
              393,450
              (5)
              
              54.86
              %Multi-family
              
              
              20
              
              
              3,929
              
              
              0.48
              
              
              61
              
              
              5,073
              
              
              0.62
              
              
              68
              
              
              5,505
              
              
              .66
              
              
              62
              
              
              4,657
              
              
              .64
              
              
              72
              
              
              5,353
              
              
              .75Commercial
                  real estate
              
              
              2,159
              
              
              82,116
              
              
              10.10
              
              
              2,000
              
              
              73,912
              
              
              9.05
              
              
              2,039
              
              
              77,270
              
              
              9.23
              
              
              1,479
              
              
              68,067
              
              
              9.35
              
              
              990
              
              
              65,430
              
              
              9.12Construction or development
              
              
              14
              
              
              13,560
              
              
              1.67
              
              
              72
              
              
              14,451
              
              
              1.77
              
              
              115
              
              
              22,938
              
              
              2.74
              
              
              104
              
              
              20,745
              
              
              2.85
              
              
              89
              
              
              17,860
              
              
              2.49Consumer
              
              
              3,885
              
              
              225,511
              
              
              27.74
              
              
              3,801
              
              
              222,973
              
              
              27.29
              
              
              3,605
              
              
              214,961
              
              
              25.68
              
              
              3,155
              
              
              195,457
              
              
              26.84
              
              
              3,585
              
              
              190,691
              
              
              26.59Commercial
                  business
              
              
              1,075
              
              
              56,764
              
              
              6.99
              
              
              1,003
              
              
              67,476
              
              
              8.26
              
              
              1,006
              
              
              64,353
              
              
              7.69
              
              
              1,054
              
              
              53,620
              
              
              7.36
              
              
              894
              
              
              44,362
              
              
              6.19Unallocated
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Total
              
              $
              8,352
              
              $
              812,898
              
              
              100.00
              %
              $
              8,156
              
              $
              817,008
              
              
              100.00
              %
              $
              8,100
              
              $
              836,941
              
              
              100.00
              %
              $
              6,867
              
              $
              728,224
              
              
              100.00
              %
              $
              6,779
              
              $
              717,146
              
              
              100.00
              %
 ____________________
 (1) Includes
        loans held for sale of $1.6 million.
 (2) Includes
        loans held for sale of $1.3 million.
 (3) Includes
        loans held for sale of $2.0 million.
 (4) Includes
        loans held for sale of $2.9 million.
 (5) Includes
        loans held for sale of $2.0 million.
  21
 
 **Investment
        Acti** **v** **ities**
  Mutual
        Federal may invest in various types of liquid assets, including United States
        Treasury obligations, securities of various federal agencies, including callable
        agency securities, certain certificates of deposit of insured banks and savings
        institutions, certain bankers’ acceptances, repurchase agreements and federal
        funds. Subject to various restrictions, it also may invest in investment
        grade
        commercial paper and corporate debt securities and mutual funds the assets
        of
        which conform to the investments that a federally chartered savings institution
        is otherwise authorized to make directly. See “How We Are Regulated - Mutual
        Federal” for a discussion of additional restrictions on our investment
        activities.
  The
        Chief
        Financial Officer has the basic responsibility for the management of our
        investment portfolio, subject to the direction and guidance of the Asset
        and
        Liability Management Committee. The Chief Financial Officer considers various
        factors when making decisions, including the marketability, maturity and
        tax
        consequences of the proposed investment. The maturity structure of investments
        will be affected by various market conditions, including the current and
        anticipated slope of the yield curve, the level of interest rates, the trend
        of
        new deposit inflows, and the anticipated demand for funds via deposit
        withdrawals and loan originations and purchases.
  The
        general objectives of our investment portfolio are to provide liquidity when
        loan demand is high, to assist in maintaining earnings when loan demand is
        low
        and to maximize earnings while satisfactorily managing risk, including credit
        risk, reinvestment risk, liquidity risk and interest rate risk. See
“Management’s Discussion and Analysis of Financial Condition and Results of
        Operations - Asset and Liability Management and Market Risk” in Item 7 of this
        Form 10-K.
  Our
        investment securities currently consist of U.S. Agency securities,
        mortgage-backed securities, collateralized mortgage obligations, marketable
        equity securities (which consist of shares in mutual funds that invest in
        government obligations, corporate obligations, mortgage-backed securities
        and
        asset-backed securities) and corporate obligations. See Note 6 of the Notes
        to
        Consolidated Financial Statements contained in Item 8 of this Form 10-K.
        At
        December 31, 2007, our investment securities portfolio did not contain any
        tax-exempt securities. Our mortgage-backed securities portfolio currently
        consists of securities issued under government-sponsored agency programs.
  While
        mortgage-backed securities carry a reduced credit risk as compared to whole
        loans, these securities remain subject to the risk that a fluctuating interest
        rate environment, along with other factors like the geographic distribution
        of
        the underlying mortgage loans, may alter the prepayment rate of the mortgage
        loans and affect both the prepayment speed and value of the
        securities.
  In
        the
        past, we also have maintained a trading portfolio of U.S. Government securities.
        We are permitted by the board of directors to have a portfolio of up to $5.0
        million, and to trade up to $2.0 million in these securities at any one time.
        At
        December 31, 2007, however, we did not have a trading portfolio. See Note
        6 of
        the Notes to Consolidated Financial Statements contained in Item 8 of this
        Form
        10-K.
  22
  Effective
        June 30, 2007, Mutual Federal Savings Bank transferred the management of
        approximately $24 million in securities to its wholly owned subsidiary, Mutual
        Federal Investment Company. Mutual Federal Investment Company, a Nevada
        corporation, holds, services, manages and invests that portion of the Bank’s
        investment portfolio as may be transferred from time to time by the Bank
        to
        Mutual Federal Investment Company. Mutual Federal Investment Company’s
        investment policy, for the most part, mirrors that of the Bank. At December
        31,
        2007, of the $43.6 million in consolidated investments held for sale owned
        by
        Mutual Federal Savings Bank, $27.7 million was held by Mutual Federal Investment
        Company.
  Mutual
        Federal has investments in five separate Indiana limited partnerships that
        were
        organized to construct, own and operate two multi-unit apartment complexes
        in
        the Indianapolis area, one in Findley, Ohio, one in Goshen, Indiana, and
        one in
        Niles, Michigan (the Pedcor Projects). The general partner in each of these
        Pedcor Projects is Pedcor Investments. All of the Pedcor Projects are operated
        as multi-family, low and moderate-income housing projects, and have been
        performing as planned for several years. At the inception of the Findley,
        Ohio
        Pedcor Project in February 1998, we invested $2.1 million and committed to
        invest an additional $1.9 million. As of December 31, 2007, $1.1 million
        of this
        commitment remained payable over the next three years. At the inception of
        the
        Niles, Michigan Project in August 1997, we committed to invest $3.6 million
        over
        ten years. As of December 31, 2007, $50,000 remained payable over the next
        year.
        At the inception of the Goshen, Indiana Pedcor Project, in March 2004, we
        made
        the only required investment of $500,000.
  A
        low and
        moderate-income housing project qualifies for certain federal income tax
        credits
        if (1) it is a residential rental property, (2) the units are used on a
        non-transient basis, and (3) at least 20% of the units in the project are
        occupied by tenants whose incomes are 50% or less of the area median gross
        income, adjusted for family size, or alternatively, at least 40% of the units
        in
        the project are occupied by tenants whose incomes are 60% or less of the
        area
        median gross income. Qualified low-income housing projects generally must
        comply
        with these and other rules for 15 years, beginning with the first year the
        project qualified for the tax credit, or some or all of the tax credit together
        with interest may be recaptured. The tax credit is subject to the limitation
        as
        the use of general business credit, but no basis reduction is required for
        any
        portion of the tax credit claimed. As of December 31, 2007, at least 89%
        of the
        units in the Pedcor Projects were occupied, and all of the tenants met the
        income test required for the tax credits.
  We
        received tax credits totaling $811,000 for the year ended December 31, 2007,
        $801,000 for the year ended December 31, 2006, and $811,000 for the year
        ended
        December 31, 2005 from the Pedcor Projects. The Pedcor Projects have
        incurred operating losses in the early years of their operations primarily
        due
        to accelerated depreciation of assets. We have accounted for our investment
        in
        the Pedcor Projects on the equity method. Accordingly, we have recorded our
        share of these losses as reductions to Mutual Federal’s investment in the Pedcor
        Projects.
  23
  The
        following summarizes Mutual Federal’s equity in the Pedcor Projects’ losses and
        tax credits recognized in our consolidated financial statements.
 
 **For
                  the Year Ended December 31,****2007**
              
              **2006**
              
              **2005****(In thousands)**Investments
                  in Pedcor lowincome
                  housing projects
              
              $
              3,246
              
              $
              3,461
              
              $
              4,606Equity
                  in losses, net of income tax effect
              
              $
              (66
              )
              $
              (109
              )
              $
              (104
              )Tax
                  credit
              
              
              811
              
              
              801
              
              
              811Increase
                  in after-tax incomefrom
                  Pedcor Investments
              
              $
              745
              
              $
              692
              
              $
              707
  See
        Note
        9 of the Notes to Consolidated Financial Statements contained in Item 8 of
        this
        Form 10-K for additional information regarding our limited partnership
        investments.
  24
  The
        following table sets forth the composition of our investment and
        mortgage-related securities portfolio and other investments at the dates
        indicated. As of December 31, 2007, our investment securities portfolio did
        not
        contain securities of any issuer with an aggregate book value in excess of
        10%
        of our equity capital, excluding those issued by the United States Government
        or
        its agencies.
  **December
                  31,****2007**
              
              **2006**
              
              **2005****Amortized**
                **Cost**
              
              **Fair**
                **Value**
              
              **Amortized**
                **Cost**
              
              **Fair**
                **Value**
              
              **Amortized**
                **Cost**
              
              **Fair**
                **Value****(In
                  thousands)**Investment
                  securities available-for-sale:Mutual
                  funds
              
              $
              16,382
              
              $
              15,914
              
              $
              16,206
              
              $
              15,817
              
              $
              15,218
              
              $
              14,847Government
                  sponsored entities
              
              
              608
              
              
              605
              
              
              1,117
              
              
              1,099
              
              
              2,137
              
              
              2,106Mortgage-backed
                  securities
              
              
              2,310
              
              
              2,352
              
              
              3,146
              
              
              3,156
              
              
              1,802
              
              
              1,830Collateralized
                  mortgage obligations
              
              
              8,327
              
              
              8,322
              
              
              6,860
              
              
              6,762
              
              
              8,195
              
              
              8,051Corporate
                  obligations
              
              
              16,655
              
              
              16,399
              
              
              14,332
              
              
              14,236
              
              
              13,059
              
              
              12,954Municipal
                  obligations
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Total
                  investment securities held for sale
              
              
              44,282
              
              
              43,592
              
              
              41,661
              
              
              41,070
              
              
              40,411
              
              
              39,788Investment
                  in limited partnerships
              
              
              3,246
              
              
              N/A
              
              
              3,461
              
              
              N/A
              
              
              4,606
              
              
              N/AInvestment
                  in insurance company
              
              
              590
              
              
              N/A
              
              
              590
              
              
              N/A
              
              
              590
              
              
              N/AFederal
                  Home Loan Bank stock
              
              
              10,037
              
              
              N/A
              
              
              9,938
              
              
              N/A
              
              
              10,125
              
              
              N/ATotal
                  investments
              
              $
              58,155
              
              $
              43,592
              
              $
              55,650
              
              $
              41,070
              
              $
              55,732
              
              $
              39,788
  25
  The
        following table indicates, as of December 31, 2007, the composition and
        maturities of our investment securities, excluding Federal Home Loan Bank
        stock.
  **Due
                  in****Less
                  Than**
                **1
                  Year**
              
              **1
                  to 5**
                **Years**
              
              **5
                  to 10**
                **Years**
              
              **Over**
                **10
                  Years**
              
              **Total**
                **Investment
                  Securities****Amortized**
                **Cost**
              
              **Amortized**
                **Cost**
              
              **Amortized**
                **Cost**
              
              **Amortized**
                **Cost**
              
              **Amortized**
                **Cost**
              
              **Fair**
                **Value****(Dollars
                  in thousands)**Corporate
                  obligations
              
              $
              4,006
              
              $
              2,495
              
              $
              —
              
              $
              10,154
              
              $
              16,655
              
              $
              16,399Government
                  sponsored entities
              
              
              501
              
              
              —
              
              
              68
              
              
              39
              
              
              608
              
              
              605Mutual
                  funds
              
              
              16,382
              
              
              —
              
              
              —
              
              
              —
              
              
              16,382
              
              
              15,914Mortgage-backed
                  securities:Freddie
                  Mac
              
              
              —
              
              
              —
              
              
              70
              
              
              1,345
              
              
              1,415
              
              
              1,428Fannie
                  Mae
              
              
              —
              
              
              87
              
              
              573
              
              
              2,931
              
              
              3,591
              
              
              3,635Ginnie
                  Mae
              
              
              —
              
              
              —
              
              
              —
              
              
              243
              
              
              243
              
              
              243Other
              
              
              —
              
              
              300
              
              
              —
              
              
              5,088
              
              
              5,388
              
              
              5,368$
              20,889
              
              $
              2,882
              
              $
              711
              
              $
              19,800
              
              $
              44,282
              
              $
              43,592Weighted
                  average yield
              
              
              4.37
              %
              
              4.32
              %
              
              5.08
              %
              
              6.02
              %
              
              5.56
              %
  **Sources
        of Funds**
  ***General.*** Our
        sources of funds are deposits, borrowings, payment of principal and interest
        on
        loans, interest earned on or maturation of other investment securities and
        funds
        provided from operations.
  ***Deposits*** **.** We offer
        deposit accounts to consumers and businesses having a wide range of interest
        rates and terms. Our deposits consist of savings deposit accounts, NOW and
        demand accounts and certificates of deposit. We solicit deposits in our market
        areas. We primarily rely on competitive pricing policies, marketing and customer
        service to attract and retain these deposits. Beginning in 2005, we began
        accepting brokered deposits. We receive these deposits from **** one
        broker without paying a fee to that broker. At December 31, 2007, our brokered
        deposits totaled $5.3 million with an average interest rate of 5.42% and
        a
        seven-month weighted average maturity.
  The
        flow
        of deposits is influenced significantly by general economic conditions, changes
        in money market and prevailing interest rates, and competition. The variety
        of
        our deposit accounts has allowed us to be competitive in obtaining funds
        and to
        respond to changes in consumer demand. We have become more susceptible to
        short-term fluctuations in deposit flows, as customers have become more interest
        rate conscious. We try to manage the pricing of our deposits in keeping with
        our
        asset/liability management, liquidity and profitability objectives, subject
        to
        competitive factors. Based on our experience, we believe that our deposits
        are
        relatively stable sources of funds. Our ability to attract and maintain these
        deposits, however, and the rates paid on them, has been and will continue
        to be
        affected significantly by market conditions.
  26
  The
        Federal Reserve Board requires all depository institutions to maintain
        non-interest bearing reserves at specified levels against their transaction
        accounts, primarily checking, NOW and Super NOW checking accounts. At December
        31, 2007, we were in compliance with these reserve requirements.
  The
        following table sets forth the dollar amount of savings deposits in the various
        types of deposit programs we offered at the dates indicated.
  **December
                  31,****2007**
              
              **2006**
              
              **2005****Amount**
              
              **Percent**
                **of
                  Total**
              
              **Amount**
              
              **Percent**
                **of
                  Total**
              
              **Amount**
              
              **Percent**
                **of
                  Total****(Dollars
                  in thousands)**Transactions
                  and Savings Deposits:Noninterest
                  bearing accounts
              
              $
              47,172
              
              
              7.08
              %
              $
              47,142
              
              
              6.70
              %
              $
              43,466
              
              
              6.35
              %Passbook
                  accounts
              
              
              50,388
              
              
              7.56
              
              
              55,750
              
              
              7.93
              
              
              60,867
              
              
              8.89Interest-bearing
                  NOW anddemand
                  accounts
              
              
              117,863
              
              
              17.69
              
              
              107,963
              
              
              15.35
              
              
              68,710
              
              
              10.04Money
                  market accounts
              
              
              22,664
              
              
              3.40
              
              
              27,788
              
              
              3.95
              
              
              43,762
              
              
              6.39Total
                  non-certificates
              
              
              238,087
              
              
              35.73
              
              
              238,643
              
              
              33.93
              
              
              216,805
              
              
              31.67Certificates:0.00
                  - 1.99%
              
              $
              8,627
              
              
              1.29
              %
              $
              15,772
              
              
              2.24
              %
              
              41,718
              
              
              6.09
              %2.00
                  - 3.99%
              
              
              47,500
              
              
              7.13
              
              
              82,621
              
              
              11.75
              
              
              224,985
              
              
              32.874.00
                  - 5.99%
              
              
              372,145
              
              
              55.84
              
              
              366,284
              
              
              52.07
              
              
              199,625
              
              
              29.166.00
                  - 7.99%
              
              
              48
              
              
              0.01
              
              
              39
              
              
              0.01
              
              
              1,421
              
              
              0.218.00
                  - 9.99%
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —10.00%
                  and over
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Total
                  certificates
              
              
              428,320
              
              
              64.27
              
              
              464,716
              
              
              66.07
              
              
              467,749
              
              
              68.33Total
                  deposits
              
              $
              666,407
              
              
              100.00
              %
              $
              703,359
              
              
              100.00
              %
              $
              684,554
              
              
              100.00
              %
  27
  The
        following table shows rate and maturity information for our certificates
        of
        deposit as of December 31, 2007.
  **1.00-**
                **1.99%**
              
              **2.00-**
                **3.99%**
              
              **4.00-**
                **5.99%**
              
              **6.00-**
                **7.99%**
              
              **Total**
              
              **Percent**
                **of
                  Total****(Dollars
                  in thousands)**Certificate
                  accounts maturing in quarter ending:March
                  31, 2008
              
              
              5,324
              
              
              8,585
              
              
              140,406
              
              
              —
              
              
              154,315
              
              
              36.01
              %June
                  30, 2008
              
              
              3,301
              
              
              7,257
              
              
              56,840
              
              
              —
              
              
              67,398
              
              
              15.74
              %September
                  30, 2008
              
              
              2
              
              
              11,196
              
              
              47,316
              
              
              40
              
              
              58,554
              
              
              13.67
              %December
                  31, 2008
              
              
              —
              
              
              7,123
              
              
              75,134
              
              
              —
              
              
              82,257
              
              
              19.20
              %March
                  31, 2009
              
              
              —
              
              
              4,006
              
              
              12,173
              
              
              —
              
              
              16,179
              
              
              3.78
              %June
                  30, 2009
              
              
              —
              
              
              2,661
              
              
              5,259
              
              
              —
              
              
              7,920
              
              
              1.85
              %September
                  30, 2009
              
              
              —
              
              
              2,065
              
              
              2,801
              
              
              —
              
              
              4,866
              
              
              1.14
              %December
                  31, 2009
              
              
              —
              
              
              2,198
              
              
              1,121
              
              
              8
              
              
              3,327
              
              
              0.78
              %March
                  31, 2010
              
              
              —
              
              
              161
              
              
              8,798
              
              
              —
              
              
              8,959
              
              
              2.09
              %June
                  30, 2010
              
              
              —
              
              
              69
              
              
              7,108
              
              
              —
              
              
              7,177
              
              
              1.68
              %September
                  30, 2010
              
              
              —
              
              
              439
              
              
              2,800
              
              
              —
              
              
              3,239
              
              
              0.76
              %December
                  31, 2010
              
              
              —
              
              
              745
              
              
              450
              
              
              —
              
              
              1,195
              
              
              0.28
              %Thereafter
              
              
              —
              
              
              995
              
              
              11,939
              
              
              —
              
              
              12,934
              
              
              3.02
              %Total
              
              $
              8,627
              
              $
              47,500
              
              $
              372,145
              
              $
              48
              
              $
              428,320
              
              
              100.00
              %Percent
                  of total
              
              
              2.02
              %
              
              11.09
              %
              
              86.88
              %
              
              0.01
              %
              
              100.00
              %
  The
        following table indicates, as of December 31, 2007, the amount of our
        certificates of deposit and other deposits by time remaining until
        maturity.
  **Maturity****3
                  Months**
                **or
                  Less**
              
              **Over**
                **3
                  to 6**
                **Months**
              
              **Over**
                **6
                  to 12**
                **Months**
              
              **Over**
                **12
                  months**
              
              **Total****(In
                  thousands)**Certificates
                  of deposit less than $100,000
              
              $
              113,439
              
              $
              50,108
              
              $
              95,628
              
              $
              41,868
              
              $
              301,043Certificates
                  of deposit of $100,000 or more
              
              
              37,752
              
              
              16,971
              
              
              44,869
              
              
              21,407
              
              
              120,999Public
                  funds(1)
              
              
              3,124
              
              
              319
              
              
              315
              
              
              2,520
              
              
              6,278Total
                  certificates of deposit
              
              $
              154,315
              
              $
              67,398
              
              $
              140,812
              
              $
              65,795
              
              $
              428,320
 _______________
 (1)  Deposits
        from governmental and other public entities.
  28
  ***Borrowings*** **.** Although
        deposits are our primary source of funds, we utilize borrowings when they
        are a
        less costly source of funds and can be invested at a positive interest rate
        spread, when we desire additional capacity to fund loan demand or when they
        meet
        our asset/liability management goals. Our borrowings historically have consisted
        of advances from the Federal Home Loan Bank of Indianapolis. See Note 12
        of the
        Notes to Consolidated Financial Statements contained in Item 8 of this Form
        10-K.
  We
        may
        obtain advances from the Federal Home Loan Bank of Indianapolis upon the
        security of certain of our mortgage loans and mortgage-backed securities.
        These
        advances may be made pursuant to several different credit programs, each
        of
        which has its own interest rate, range of maturities and call features. At
        December 31, 2007, we had $191.7 million in Federal Home Loan Bank advances
        outstanding. Based on current collateral levels we could borrow an additional
        $104.3 million from the Federal Home Loan Bank at prevailing interest rates.
        We
        believe that we will continue to have sufficient funds, through deposits
        and
        borrowings, to meet our current commitments. See “Management’s Discussion and
        Analysis of Financial Condition and Results of Operations - Liquidity and
        Commitments” contained in Item 7 of this Form 10-K.
  We
        also
        have a revolving line of credit available from LaSalle Bank with a balance
        of
        $497,000 as of December 31, 2007. On December 31, 2007, we had an inadvertent
        $3.4 million overdraft at the FHLB of Indianapolis that was reclassified
        as
        other borrowings. See Note 13 of the Notes to Consolidated Financial Statements
        contained in Item 8 of this Form 10-K.
  We
        also
        are authorized to borrow from the Federal Reserve Bank of Chicago’s “discount
        window” after we have exhausted other reasonable alternative sources of funds,
        including Federal Home Loan Bank borrowings. We have never borrowed from
        our
        Federal Reserve Bank.
  The
        following table sets forth, for the years indicated, the maximum month-end
        balance and average balance of Federal Home Loan Bank advances and other
        borrowings.
  **Year
                  Ended December 31,****2007**
              
              **2006**
              
              **2005****(In
                  thousands)**Maximum
                  Balance:Federal
                  Home Loan Bank advances
              
              $
              191,675
              
              $
              193,345
              
              $
              186,008Notes payable
              
              
              1,427
              
              
              1,784
              
              
              2,146Other
                  borrowings
              
              
              4,311
              
              
              —
              
              
              —Average
                  Balance:Federal
                  Home Loan Bank advances
              
              $
              157,309
              
              $
              168,001
              
              $
              151,184Notes payable
              
              
              1,160
              
              
              1,635
              
              
              1,995Other
                  borrowings
              
              
              155
              
              
              —
              
              
              —
  29
  The
        following table sets forth certain information as to our borrowings at the
        dates
        indicated.
 
 **December
                  31,****2007**
              
              **2006**
              
              **2005****(Dollars
                  in thousands)**Federal
                  Home Loan Bank advances
              
              $
              191,675
              
              $
              157,425
              
              $
              186,008Notes
                  payable
              
              
              1,055
              
              
              1,427
              
              
              1,784Other
                  borrowings
              
              
              3,908
              
              
              —
              
              
              —Total
                  borrowings
              
              $
              196,638
              
              $
              158,852
              
              $
              187,792Weighted
                  average interest rate of FHLBadvances
              
              
              4.88
              %
              
              4.67
              %
              
              3.86
              %Weighted
                  average interest rate of notespayable(1)
              
              
              —
              
              
              —
              
              
              —Weighted
                  average interest rate of otherborrowings(2)
              
              
              6.48
              %
              
              —
              
              
              —
 _______________________
 (1)  Our
        notes
        payable are capitalized loans with no current interest expense as of
        12/31/07.
 (2)  Our
        other
        borrowings are a line of credit and a reclassified overdraft as of
        12/31/07.
  **Subsidiary
        and Other Activities**
  As
        a
        federally chartered savings bank, Mutual Federal is permitted by OTS regulations
        to invest up to 2% of its assets, or $19.2 million at December 31, 2007,
        in the
        stock of, or unsecured loans to, service corporation subsidiaries. Mutual
        Federal may invest an additional 1% of its assets in service corporations
        where
        such additional funds are used for inner-city or community development purposes.
        Service corporations may engage in activities not permitted for Mutual Federal
        and are not required to be controlled by Mutual Federal. Mutual Federal also
        is
        authorized to invest an unlimited amount in operating subsidiaries that only
        may
        engage in activities authorized for Mutual Federal and must be controlled
        by
        Mutual Federal.
  At
        December 31, 2007, Mutual Federal had two active subsidiaries, First M.F.S.B.
        Corporation, which is a service corporation and Mutual Federal Investment
        Company, which is an operating subsidiary. The assets of First M.F.S.B. consists
        of an investment in Family Financial Holdings, Inc., which is an Indiana
        Corporation that provides debt cancellation products to financial institutions.
        As of December 31, 2007, Mutual Federal’s total investment in this subsidiary
        was $590,000. For the year ended December 31, 2007, First M.F.S.B. reported
        income of $36,000. Mutual Federal Investment Company is a Nevada corporation
        that holds and manages a portion of Mutual Federal’s investment portfolio. As of
        December 31, 2007, the market value of securities managed is $27.7 million.
        Mutual Federal Investment Company has one active subsidiary, Mutual Federal
        REIT, Inc. Mutual Federal REIT, Inc. is a Maryland corporation holding
        approximately $138.7 million in one-to four-family mortgage loans.
  30
  On
        January 25, 2003, *MutualFirst* purchased 26.9% of Indiana Title Insurance Co., LLC (“ITIC”), a full service
        title insurance company. As of December 31, 2007, *MutualFirst* ’s
        investment in ITIC was $800,000. For the year ended December 31, 2007, *MutualFirst* recorded
        net income of $54,000 from ITIC, which consisted of title insurance commissions
        and other fees less expenses. The investment in ITIC is being accounted for
        on
        the equity method.
  **Competition**
  We
        face
        strong competition in originating real estate and other loans and in attracting
        deposits. Competition in originating real estate loans comes primarily from
        other savings institutions, commercial banks, credit unions and mortgage
        bankers. Other savings institutions, commercial banks, credit unions and
        finance
        companies provide vigorous competition in consumer lending.
  We
        attract our deposits through our branch office system. Competition for deposits
        comes principally from other savings institutions, commercial banks and credit
        unions located in the same community, as well as mutual funds and other
        alternative investments. We compete for deposits by offering superior service
        and a variety of account types at competitive rates.
  **Employees**
  At
        December 31, 2007, we had a total of 255 full-time and 51 part-time employees.
        Our employees are not represented by any collective bargaining group. Management
        considers its employee relations to be good.
  **How
        We Are Regulated**
  Set
        forth
        below is a brief description of certain laws and regulations that apply to
        us.
        This description, as well as other descriptions of laws and regulations
        contained in this Form 10-K, is not complete and is qualified in its entirety
        by
        reference to the applicable laws and regulations.
  Legislation
        is introduced from time to time in the United States Congress that may affect
        our operations. In addition, the regulations by which we are governed may
        be
        amended from time to time. Any such legislation or regulatory changes could
        adversely affect us. We cannot assure you as to whether or in what form any
        such
        changes will occur.
  ***MutualFirst*** .
        Pursuant to regulations of the OTS and the terms of *MutualFirst* ’s
        Maryland articles of incorporation, the purpose and powers of *MutualFirst* are to
        pursue any or all of the lawful objectives of a thrift holding company and
        to
        exercise any of the powers accorded to a thrift holding company.
  *MutualFirst* is a
        unitary savings and loan holding company subject to regulatory oversight
        by the
        OTS. *MutualFirst* is
        required to register and file reports with the OTS and is subject to regulation
        and examination by the OTS. In addition, the OTS has enforcement authority
        over
        us and our non-savings institution subsidiaries.
  *MutualFirst* generally is not subject to activity restrictions. If *MutualFirst* acquired
        control of another savings institution as a separate subsidiary, it would
        become
        a multiple savings and loan holding company, and its activities and any of
        its
        subsidiaries (other than Mutual Federal or any other savings institution)
        would
        generally become subject to additional restrictions.
  31
  If
        Mutual
        Federal fails the qualified thrift lender test described below, *MutualFirst* must
        obtain the approval of the OTS prior to continuing, directly or through other
        subsidiaries, any business activity other than those approved for multiple
        thrift holding companies or their subsidiaries. In addition, within one year
        of
        such failure *MutualFirst* must
        register as, and will become subject to, the restrictions applicable to bank
        holding companies. The activities authorized for a bank holding company are
        more
        limited than the activities authorized for a unitary or multiple thrift holding
        company.
  **Mutual
        Federal** .
        Mutual
        Federal, as a federally chartered savings institution, is subject to federal
        regulation, periodic examination and oversight by the OTS extending to all
        aspects of Mutual Federal’s operations. Mutual Federal also is subject to
        regulation and examination by the FDIC, which insures the deposits of Mutual
        Federal to the maximum extent permitted by law. This regulation and supervision
        primarily is intended for the protection of depositors and not for the purpose
        of protecting stockholders.
  The
        investment and lending authority of federal savings institutions are prescribed
        by federal laws and regulations, and federal savings institutions are prohibited
        from engaging in any activities not permitted by such laws and regulations.
        In
        addition, all savings institutions, including Mutual Federal, are required
        to
        maintain qualified thrift lender status to avoid certain restrictions on
        their
        operations. This status is maintained by meeting the OTS qualified thrift
        lender
        test, which requires a savings institution to have at least 65% of its portfolio
        assets, as defined by regulation, in qualified thrift investments on a monthly
        average for nine out of every 12 months on a rolling basis. As an alternative,
        the savings institution may maintain 60% of its assets in the assets specified
        in Section 7701(a)(19) of the Internal Revenue Code. Under either test, such
        assets primarily consist of residential housing related loans and investments.
        At December 31, 2007, Mutual Federal met the test and has met the test since
        its
        effectiveness. If Mutual Federal loses qualified thrift status, it becomes
        subject to national bank investment and activity limits.
  The
        OTS
        regularly examines Mutual Federal and prepares reports for the consideration
        of
        Mutual Federal’s board of directors on any deficiencies that it may find in
        Mutual Federal’s operations. When these examinations are conducted, the
        examiners may require Mutual Federal to provide for higher general or specific
        loan loss reserves. Mutual Federal’s relationship with its depositors and
        borrowers also is regulated to a great extent by both Federal and state laws,
        especially in such matters as the ownership of savings accounts and the form
        and
        content of Mutual Federal’s mortgage requirements. The OTS also has extensive
        enforcement authority over all savings institutions and their holding companies,
        including Mutual Federal and *MutualFirst* .
  Mutual
        Federal’s general permissible lending limit for loans-to-one-borrower is equal
        to the greater of $500,000 or 15% of unimpaired capital and surplus (except
        for
        loans fully secured by certain readily marketable collateral, in which case
        this
        limit is increased to 25% of unimpaired capital and surplus). At December
        31,
        2007 Mutual Federal’s lending limit under this restriction was $11.7 million.
        Mutual Federal is in compliance with the loans-to-one-borrower limitation.
  32
  The
        OTS,
        as well as the other federal banking agencies, has adopted guidelines
        establishing safety and soundness standards on such matters as loan underwriting
        and documentation, asset quality, earnings standards, internal controls and
        audit systems, interest rate risk exposure and compensation and other employee
        benefits. Any institution which fails to comply with these standards must
        submit
        a compliance plan.
  **Regulatory
        Capital Requirements.** Federally
        insured savings institutions, such as Mutual Federal, are required to maintain
        a
        minimum level of regulatory capital. The OTS has established capital standards,
        including a leverage ratio or core capital requirement and a risk-based capital
        requirement applicable to such savings institutions. These capital requirements
        must be generally as stringent as the comparable capital requirements for
        national banks. The OTS also may impose capital requirements in excess of
        these
        standards on individual institutions on a case-by-case basis.
  The
        capital standards generally require core capital equal to at least 4.0% of
        adjusted total assets. Core capital consists of tangible capital plus certain
        intangible assets, including a limited amount of purchased credit card
        relationships. At December 31, 2007, Mutual Federal had core capital equal
        to
        $70.4 million, or 7.5% of adjusted total assets, which is $32.7 million above
        the minimum requirement of 4.0% in effect on that date.
  The
        OTS
        also requires savings institutions to have total capital of at least 8.0%
        of
        risk-weighted assets. Total capital consists of core capital, as defined
        above,
        and supplementary capital. Supplementary capital consists of certain permanent
        and maturing capital instruments that do not qualify as core capital and
        general
        valuation loan and lease loss allowances up to a maximum of 1.25% of
        risk-weighted assets. The OTS is also authorized to require a savings
        institution to maintain an additional amount of total capital to account
        for
        concentration of credit risk and the risk of non-traditional activities.
        In
        determining the amount of risk-weighted assets, all assets, including certain
        off-balance sheet items, will be multiplied by a risk weight, ranging from
        0% to
        100%, based on the risk inherent in the type of asset. As of December 31,
        2007,
        Mutual Federal had total risk-based capital of $78.0 million and risk-weighted
        assets of $715.5 million; or total capital of 10.90% of risk-weighted assets.
        This amount was $20.7 million above the 8.0% requirement in effect on that
        date.
  The
        OTS
        and the FDIC are authorized and, under certain circumstances, required to
        take
        actions against savings institutions that fail to meet their capital
        requirements. The OTS is generally required to restrict the activities of
        an
“undercapitalized institution,” which is an institution with less than either a
        4% core capital ratio, a 4% Tier 1 risked-based capital ratio or an 8.0%
        risk-based capital ratio. Any such institution must submit a capital restoration
        plan and, until such plan is approved by the OTS, may not increase its assets,
        acquire another institution, establish a branch or engage in any new activities,
        and generally may not make capital distributions.
  33
  Any
        savings institution that fails to comply with its capital plan or has Tier
        1
        risk-based or core capital ratio of less than 3.0% or a risk-based capital
        ratio
        of less than 6.0% and is considered “significantly undercapitalized” must be
        made subject to one or more additional specified actions and operating
        restrictions which may cover all aspects of its operations and may include
        a
        forced merger or acquisition of the institution. An institution that becomes
        “critically undercapitalized” because it has a tangible capital ratio of 2.0% or
        less is subject to further restrictions on its activities in addition to
        those
        applicable to significantly undercapitalized institutions. In addition, the
        OTS
        must appoint a receiver, or conservator with the concurrence of the FDIC,
        for a
        savings institution, with certain limited exceptions, within 90 days after
        it
        becomes critically undercapitalized. Any undercapitalized institution is
        also
        subject to the general enforcement authority of the OTS and the FDIC, including
        the appointment of a conservator or a receiver.
  The
        OTS
        is also generally authorized to reclassify an institution into a lower capital
        category and impose the restrictions applicable to such category if the
        institution is engaged in unsafe or unsound practices or is in an unsafe
        or
        unsound condition.
  The
        imposition by the OTS or the FDIC of any of these measures on Mutual Federal
        may
        have a substantial adverse effect on our operations and
        profitability.
  **Limitations
        on Dividends and Other Capital Distributions** .
        OTS
        regulations impose various restrictions on distributions of capital, which
        include dividends, stock redemptions or repurchases, cash-out mergers and
        other
        transactions charged to the capital account.
  Generally,
        for savings institutions, such as Mutual Federal, it is required that before
        and
        after the proposed distribution the institution remain well-capitalized.
        Savings
        institutions may make capital distributions during any calendar year equal
        to
        the greater of 100% of net income for the year-to-date plus retained net
        income
        for the two preceding years. However, an institution deemed to be in need
        of
        more than normal supervision by the OTS may have its dividend authority
        restricted by the OTS. Mutual Federal may pay dividends in accordance with
        this
        general authority.
  Savings
        institutions proposing to make any capital distribution need not submit written
        notice to the OTS prior to such distribution unless they are a subsidiary
        of a
        holding company or would not remain well-capitalized following the distribution.
        Savings institutions that do not, or would not meet their current minimum
        capital requirements following a proposed capital distribution or propose
        to
        exceed these net income limitations must obtain OTS approval prior to making
        such distribution. The OTS may object to the distribution during that 30-day
        period based on safety and soundness concerns. See “- Regulatory Capital
        Requirements.”
  **Federal
        Taxation**
  ***General.*** We are
        subject to federal income taxation in the same general manner as other
        corporations, with some exceptions discussed below. The following discussion
        of
        federal taxation is intended only to summarize certain pertinent federal
        income
        tax matters and is not a comprehensive description of the tax rules applicable
        to us. Mutual Federal’s federal income tax returns have been closed without
        audit by the IRS through its year ended December 31, 2003. *MutualFirst* and
        Mutual Federal will file a consolidated federal income tax return for fiscal
        year 2007.
  34
  ***Taxable
        Distributions and Recapture.*** Prior to
        1998, bad debt reserves created prior to the year ended December 31, 1997
        were
        subject to recapture into taxable income if Mutual Federal failed to meet
        certain thrift asset and definitional tests. Federal legislation eliminated
        these thrift recapture rules. However, under current law, pre-1988 reserves
        remain subject to recapture should Mutual Federal make certain non-dividend
        distributions or cease to maintain a thrift/bank charter.
  ***Minimum
        Tax.*** The
        Internal Revenue Code imposes an alternative minimum tax at a rate of 20%
        on a
        base of regular taxable income plus certain tax preferences, called alternative
        minimum taxable income. The alternative minimum tax is payable to the extent
        such alternative minimum taxable income is in excess of an exemption amount.
        Net
        operating losses can offset no more than 90% of alternative minimum taxable
        income. Certain payments of alternative minimum tax may be used as credits
        against regular tax liabilities in future years. Mutual Federal is subject
        to
        the alternative minimum tax, and has $173,000 **** available
        as credits for carryover.
  ***Corporate
        Dividends-Received Deduction.***  *MutualFirst* may
        eliminate from its income dividends received from Mutual Federal as a wholly
        owned subsidiary of *MutualFirst* if
        it
        elects to file a consolidated return with Mutual Federal. The corporate
        dividends-received deduction is 100% or 80%, in the case of dividends received
        from corporations with which a corporate recipient does not file a consolidated
        tax return, depending on the level of stock ownership of the payor of the
        dividend. Corporations which own less than 20% of the stock of a corporation
        distributing a dividend may deduct 70% of dividends received or accrued on
        their
        behalf.
  **State
        Taxation**
  Mutual
        Federal is subject to Indiana’s financial institutions tax, which is imposed at
        a flat rate of 8.5% on “adjusted gross income” apportioned to Indiana. “Adjusted
        gross income,” for purposes of the financial institutions tax, begins with
        taxable income as defined by Section 63 of the Internal Revenue Code and
        incorporates federal tax law to the extent that it affects the computation
        of
        taxable income. Federal taxable income is then adjusted by several Indiana
        modifications including only considering members of the combined group which
        have Indiana nexus.
  Other
        applicable state taxes include generally applicable sales and use taxes plus
        real and personal property taxes.
  **Internet
        Website**
  We
        maintain a website with the address of www.mfsbank.com. The information
        contained on our website is not included as a part of, or incorporated by
        reference into, this Annual Report on Form 10-K. This Annual Report on Form
        10-K
        and our other reports, proxy statements and other information, including
        earnings press releases, filed with the SEC are available on that website
        through a link to the SEC’s website at “Resource Center – Investor
        Relations - SEC Filings.” For more information regarding access to these filings
        on our website, please contact our Corporate Secretary, *MutualFirst* Financial, Inc., 110 E. Charles Street, Muncie, Indiana, 47305-2419; telephone
        number (765) 747-2800.
  35
  **Item
        1A.**  **Risk
        Factors**
  The
        following are certain risk factors that could impact our business, financial
        results and results of operations. Investing in our common stock involves
        risks,
        including those described below. These risk factors should be considered
        by
        prospective and current investors in our common stock when evaluating the
        disclosures in this Annual Report on Form 10-K (particularly the forward-looking
        statements.) These risk factors could cause actual results and conditions
        to
        differ materially from those projected in forward-looking statements. If
        the
        risks we face, including those listed below, actually occur, our business,
        financial condition or results of operations could be negatively impacted,
        and
        the trading price of our common stock could decline, which may cause you
        to lose
        all or part of your investment.
  **Our
        loan portfolio possesses increased risk due to our substantial number of
        multi-family, commercial real estate, consumer and commercial business
        loans.**
  Approximately
        45.3% of our loan portfolio as of December 31, 2007, consists of multi-family,
        commercial real estate, consumer and commercial business loans. Multi-family
        and
        commercial real estate loans accounted for approximately 10.6% of our total
        loan
        portfolio as of December 31, 2007. Our commercial business and consumer loans
        accounted, respectively, for approximately 7.0% and 27.7% of our total loan
        portfolio as of December 31, 2007. Generally, we consider these types of
        loans
        to involve a higher degree of risk compared to first mortgage loans on one-
        to
        four-family, owner-occupied residential properties. In addition, we plan
        to
        increase our emphasis on consumer, commercial real estate and commercial
        business lending. Because of our planned increased emphasis on and increased
        investment in consumer, commercial real estate and commercial business lending,
        it may become necessary to increase the level of our provision for loan losses,
        which could decrease our net profits. For further information concerning
        the
        risks associated with multi-family, commercial real estate, consumer loans
        and
        commercial business loans, see “Lending Activities” and “Asset Quality” in Item
        1.
  **Rising
        interest rates may hurt our profits.**
  To
        be
        profitable, we have to earn more money in interest we receive on loans and
        investments that we make than we pay to our depositors and lenders in interest.
        If interest rates rise, our net interest income and the value of our assets
        could be reduced if interest paid on interest-bearing liabilities, such as
        deposits and borrowings, increases more quickly than interest received on
        interest-earning assets, such as loans, other mortgage-related investments
        and
        investment securities. This is most likely to occur if short-term interest
        rates
        increase at a faster rate than long-term interest rates, which would cause
        income to go down. In addition, rising interest rates may hurt our income,
        because they may reduce the demand for loans and the value of our securities.
        For a further discussion of how changes in interest rates could impact us,
        see
“Management’s Discussion and Analysis of Financial Condition and Results of
        Operations” in Item 7 and “Asset and Liability Management and Market Risk” in
        Item 7A.
  36
  **If
        economic conditions deteriorate, our results of operations and financial
        condition could be adversely impacted as borrowers’ ability to repay loans
        declines and the value of the collateral securing our loans
        decreases.**
  Our
        financial results may be adversely affected by changes in prevailing economic
        conditions, including decreases in real estate values, changes in interest
        rates
        that cause a decrease in interest rate spreads, adverse employment conditions,
        the monetary and fiscal policies of the federal government and other significant
        external events. In addition, we have a significant amount of real estate
        loans.
        Accordingly, decreases in real estate values could adversely affect the value
        of
        collateral securing our loans. Adverse changes in the economy may also have
        a
        negative effect on the ability of our borrowers to make timely repayments
        of
        their loans. In this regard, a substantial majority of our loans are to
        individuals and businesses in north and central eastern Indiana. These factors
        could expose us to an increased risk of loan defaults and losses and have
        an
        adverse impact on our earnings.
  **Strong
        competition within our market area may limit our growth and
        profitability.**
  Competition
        in the banking and financial services industry is intense. In our market
        area,
        we compete with commercial banks, savings institutions, mortgage brokerage
        firms, credit unions, finance companies, mutual funds, insurance companies,
        and
        brokerage and investment banking firms operating locally and elsewhere. Many
        of
        these competitors have substantially greater resources and lending limits
        than
        we do and may offer certain services that we do not or cannot provide. Our
        profitability depends upon our continued ability to successfully compete
        in our
        market.
  **The
        amount of common stock we control, our articles of incorporation and bylaws,
        and
        state and federal statutory provisions could discourage hostile acquisitions
        of
        control.**
  Our
        board
        of directors and executive officers beneficially own 11.8% of our common
        stock,
        and have additional stock options for 310,690 shares, which are exercisable
        within 60 days of March 1, 2008. In addition, our employee stock ownership
        plan
        and charitable foundation controlled, respectively, 10.2% and 5.3% of our
        common
        stock at that date. This inside ownership together with provisions in our
        articles of incorporation and bylaws may have the effect of discouraging
        attempts to acquire *MutualFirst* ,
        pursue
        a proxy contest for control of *MutualFirst* ,
        assume
        control of *MutualFirst* by a
        holder of a large block of common stock and remove *Mutual
        First* ’s
        management, all of which certain stockholders might think are in their best
        interests. These provisions include, among other things: (a) staggered terms
        of
        the members of the board of directors; (b) an 80% shareholder vote requirement
        for approval of any merger or consolidation of *MutualFirst* into any
        entity that directly or indirectly owns 5% or more of *MutualFirst* voting
        stock if the transaction is not approved in advance by at least a majority
        of
        the disinterested members of *MutualFirst’s* board of
        directors; (c) supermajority shareholder vote requirements for the approval
        of
        certain amendments to *MutualFirst’s* articles
        of incorporation and bylaws; (d) a prohibition on any holder of common stock
        voting more than 10% of the outstanding common stock; (e) elimination of
        cumulative voting by stockholders in the election of directors; (f) restrictions
        on the acquisition of our equity securities; and (g) the authorization of
        5
        million shares of preferred stock that may be issued with stockholder approval
        on terms or in circumstances that could deter a future takeover attempt.
        As a
        Maryland corporation, we are subject to the Maryland business corporation
        law,
        which contains certain restrictions on an acquisition of control of *MutualFirst* .
        Furthermore, federal law requires regulatory approval of any acquisition
        of
        control of *MutualFirst* and
        imposes limits on the types of companies that can control us.
  37




**We
      operate in a highly regulated environment, and we may be adversely affected
      by
      changes in laws and regulations.**




Mutual
      Federal is subject to extensive regulation, supervision and examination by
      the
      OTS, its chartering authority, and by the FDIC. *MutualFirst* also is
      subject to regulation and supervision by the OTS. This regulation and
      supervision governs the activities in which we may engage, and are intended
      primarily for the protection of the insurance fund and depositors. Regulatory
      authorities have extensive discretion in their supervisory and enforcement
      activities, including the imposition of restrictions on our operations, the
      classification of our assets and determination of the level of our allowance
      for
      loan losses. Any change in this regulation and oversight, whether in the form
      of
      regulatory policy, regulations, legislation or supervisory action, may have
      a
      material impact on our operations.




**Item
      1B.**  **Unresolved
      Staff Comments**




None




**Item
      2.**  **Properties**




At
      December 31, 2007 we had 21 full service offices. We own the office building
      in
      which our home office and executive offices are located. At December 31, 2007
      we
      owned all but one of our other branch offices. The net book value of our
      investment in premises, equipment and leaseholds, excluding computer equipment,
      was approximately $14.6 million **** at
      December 31, 2007. We believe that our current facilities are adequate to meet
      our present and immediately foreseeable needs.




We
      utilize a third party service provider to maintain our database of depositor
      and
      borrower customer information. At December 31, 2007 the net book value of the
      data processing and computer equipment utilized by us was $1.6
      million **.**




**Item
      3.**  **Legal
      Proceedings**




From
      time
      to time, we are involved as plaintiff or defendant in various legal actions
      arising in the normal course of business. We do not anticipate incurring any
      material liability as a result of such litigation.




**Item
      4.**  **Submission
      of Matters to a Vote of Security Holders**




No
      matter
      was submitted to a vote of security holders, through the solicitation of proxies
      or otherwise, during the quarter ended December 31, 2007.


38





**PART
      II**




**Item
                  5.**
                ******Market
                    for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                    Purchases of Equity
                    Securities**




The
      common stock for *MutualFirst* Financial, Inc. is traded under the symbol “MFSF” on the Nasdaq Global Market.
      The table below shows the high and low closing prices for our common stock
      for
      the periods indicated. This information was provided by the Nasdaq. At December
      31, 2007 there were 4,226,638 shares of common stock issued and outstanding
      and
      approximately 1,200 shareholders of record.





**Stock Price**
            
            **Dividends per Share****2007
                Quarters:**
            
            
            **High**
            
            
            **Low**First
                Quarter (ended 03/31/07)
            
            $
            21.20
            
            $
            19.42
            
            $
            .15Second
                Quarter (ended 06/30/07)
            
            $
            20.00
            
            $
            18.30
            
            $
            .15Third
                Quarter (ended 09/30/07)
            
            $
            19.00
            
            $
            16.52
            
            $
            .15Fourth
                Quarter (ended 12/31/07)
            
            $
            18.58
            
            $
            13.89
            
            $
            .15




**Stock Price**
            
            
            **Dividends per Share****2006
                Quarters:**
            
            
            **High**
            
            
            **Low**First
                Quarter (ended 03/31/06)
            
            $
            22.14
            
            $
            19.91
            
            $
            .14Second
                Quarter (ended 06/30/06)
            
            $
            21.03
            
            $
            19.05
            
            $
            .14Third
                Quarter (ended 09/30/06)
            
            $
            21.63
            
            $
            19.75
            
            $
            .15Fourth
                Quarter (ended 12/31/06)
            
            $
            22.85
            
            $
            20.33
            
            $
            .15




Our
      cash
      dividend payout policy is continually reviewed by management and the Board
      of
      Directors. The Company intends to continue its policy of paying quarterly
      dividends; however, the payment will depend upon a number of factors, including
      capital requirements, regulatory limitations, the Company’s financial condition,
      results of operations and the Bank’s ability to pay dividends to the Company.
      The Company relies significantly upon such dividends originating from the Bank
      to accumulate earnings for payment of cash dividends to shareholders.




Information
      regarding our equity compensation plans is included in Item 12 of this Form
      10-K.




On
      December 22, 2004, the Company’s Board of Directors authorized management to
      repurchase up to 10% of the Company’s outstanding stock, or approximately
      465,000 shares. That repurchase plan was completed during the fourth quarter
      of
      2007. 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 repurchased under both
      plans during the fourth quarter of 2007 is as follows:


39





**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**216,098
            (1)October
                1, 2007 - October 31, 2007
            
            
            —
            
            
            —
            
            
            —
            
            
            216,098November
                1, 2007 - November 30, 2007
            
            
            47,500
            
            $
            17.23
            
            
            47,500
            
            
            168,598December
                1, 2007 - December 31, 2007
            
            
            25,000
            
            $
            16.29
            
            
            25,000
            
            
            143,598**72,500**
            
            **$**
            **16.91**
            
            
            **72,500**





(1)  Amount
      represents the number of shares available to be repurchased under the two
      repurchase plans as of September 30, 2007.


40




Item
      6.  Selected
      Financial Data





**SELECTED
      CONSOLIDATED FINANCIAL AND OTHER DATA**




The
      following information is only a summary and you should read it in conjunction
      with our consolidated financial statements and accompanying notes contained
      in
      Item 8 of this Form 10-K.





**At
                or For the Year Ended December 31,****2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003****(In
                thousands)**Selected
                FinancialCondition
                DataTotal
                assets
            
            $
            962,517
            
            $
            960,842
            
            $
            971,829
            
            $
            839,387
            
            $
            823,791Cash
                and cash equivalents
            
            
            23,648
            
            
            24,915
            
            
            22,365
            
            
            19,743
            
            
            23,068Loans,
                net
            
            
            802,436
            
            
            805,625
            
            
            822,547
            
            
            713,022
            
            
            703,981Investment
                securities:Available-for
                -sale, at fairvalue
            
            
            43,592
            
            
            41,070
            
            
            39,788
            
            
            39,409
            
            
            33,472Total
                deposits
            
            
            666,407
            
            
            703,359
            
            
            684,554
            
            
            600,407
            
            
            579,362Total
                borrowings
            
            
            196,638
            
            
            158,852
            
            
            187,791
            
            
            141,572
            
            
            137,103Total
                stockholders’ equity
            
            
            87,014
            
            
            87,264
            
            
            88,794
            
            
            87,860
            
            
            97,520Selected
                Operations DataTotal
                interest income
            
            $
            56,374
            
            $
            56,119
            
            $
            48,478
            
            $
            44,400
            
            $
            46,442Total
                interest expense
            
            
            32,227
            
            
            29,890
            
            
            21,170
            
            
            17,476
            
            
            19,099Net interest income
            
            
            24,147
            
            
            26,229
            
            
            27,308
            
            
            26,924
            
            
            27,343Provision
                for loan losses
            
            
            2,240
            
            
            2,068
            
            
            1,775
            
            
            1,557
            
            
            1,450Net
                interest income afterprovision
                for loan losses
            
            
            21,907
            
            
            24,161
            
            
            25,533
            
            
            25,367
            
            
            25,893Service
                fee income
            
            
            4,831
            
            
            4,370
            
            
            4,026
            
            
            3,193
            
            
            2,927Gain(loss)
                on sale of loans and investment securities
            
            
            391
            
            
            (669
            )
            
            228
            
            
            727
            
            
            1,364Other
                non-interest income
            
            
            2,549
            
            
            2,941
            
            
            2,478
            
            
            2,304
            
            
            1,684Total
                non-interest income
            
            
            7,771
            
            
            6,642
            
            
            6,732
            
            
            6,224
            
            
            5,975Salaries
                and employeebenefits
            
            
            14,759
            
            
            14,617
            
            
            13,792
            
            
            16,167
            
            
            13,097Other
                expenses
            
            
            10,397
            
            
            10,402
            
            
            9,620
            
            
            8,149
            
            
            7,369Total
                non-interest expense
            
            
            25,156
            
            
            25,019
            
            
            23,412
            
            
            24,316
            
            
            20,466Income
                before taxes
            
            
            4,522
            
            
            5,784
            
            
            8,853
            
            
            7,275
            
            
            11,402Income
                tax expense
            
            
            296
            
            
            1,028
            
            
            2,401
            
            
            1,753
            
            
            3,340Net
                income
            
            $
            4,226
            
            $
            4,756
            
            $
            6,452
            
            $
            5,522
            
            $
            8,062


41





**At
                or For the Year Ended December 31,****2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**Selected
                Financial Ratios and OtherFinancial
                Data:Performance
                Ratios:Return on average assets (ratioof
                net income to average totalassets)
            
            
            0.44
            %
            
            0.49
            %
            
            0.73
            %
            
            0.67
            %
            
            1.01
            %Return
                on average tangible equity (ratioof
                net income to average tangibleequity)
            
            
            5.86
            
            
            6.43
            
            
            7.79
            
            
            5.90
            
            
            8.43Interest
                rate spread information:Average
                during the period
            
            
            2.50
            
            
            2.70
            
            
            3.13
            
            
            3.46
            
            
            3.56Net
                interest margin(1)
            
            
            2.79
            
            
            2.96
            
            
            3.37
            
            
            3.57
            
            
            3.73Ratio
                of operating expense toaverage
                total assets
            
            
            2.64
            
            
            2.57
            
            
            2.89
            
            
            2.94
            
            
            2.56Ratio
                of average interest-earningassets
                to average interest-bearing
                liabilities
            
            
            107.92
            
            
            107.65
            
            
            109.30
            
            
            106.06
            
            
            106.53Efficiency
                ratio(2)
            
            
            78.81
            
            
            76.11
            
            
            68.78
            
            
            73.26
            
            
            61.43Asset
                Quality Ratios:(3)Non-performing
                assets tototal
                assets
            
            
            1.35
            
            
            0.86
            
            
            1.03
            
            
            0.65
            
            
            0.57Non-performing
                loans tototal
                loans
            
            
            1.29
            
            
            0.70
            
            
            0.90
            
            
            0.57
            
            
            0.46Allowance
                for loan losses to non-performing loans
            
            
            79.72
            
            
            143.59
            
            
            108.04
            
            
            167.32
            
            
            208.26Allowance for loan losses to loans receivable, net
            
            
            1.03
            
            
            1.00
            
            
            0.98
            
            
            0.95
            
            
            0.95Capital
                Ratios:Equity
                to total assets(3)
            
            
            9.04
            
            
            9.08
            
            
            9.14
            
            
            10.47
            
            
            11.87Average
                equity to average assets
            
            
            9.16
            
            
            9.08
            
            
            9.90
            
            
            11.50
            
            
            11.97Share
                and Per Share Data:Average
                common shares outstanding:Basic
            
            
            4,103,940
            
            
            4,196,059
            
            
            4,328,965
            
            
            4,625,437
            
            
            4,904,007Diluted
            
            
            4,151,173
            
            
            4,274,039
            
            
            4,439,686
            
            
            4,772,036
            
            
            5,084,514Per
                share:Basic
                earnings
            
            $
            1.03
            
            $
            1.13
            
            $
            1.49
            
            $
            1.19
            
            $
            1.64Diluted
                earnings
            
            $
            1.02
            
            $
            1.11
            
            $
            1.45
            
            $
            1.16
            
            $
            1.59Dividends
            
            $
            0.60
            
            $
            0.58
            
            $
            0.49
            
            $
            0.47
            
            $
            0.42Dividend
                payout ratio(4)
            
            
            58.25
            %
            
            52.25
            %
            
            36.55
            %
            
            40.52
            %
            
            26.42
            %Other
                Data:Number
                of full-service offices
            
            
            21
            
            
            21
            
            
            20
            
            
            18
            
            
            17


____________________


(1)  Net
      interest income divided by average interest earning assets.


(2)  Total
      non-interest expense divided by net interest income plus total non-interest
      income.


(3)  At
      the
      end of the period.


(4)  Dividends
      per share divided by diluted earnings per share.


42




**Item
          7.** **Management’s
          Discussion and Analysis of Financial Condition and Results of
          Operation**





**MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF**


**FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS**




**Introduction**




*MutualFirst* Financial, Inc., a Maryland corporation, is a savings and loan holding company
      and its wholly-owned subsidiary is Mutual Federal Savings Bank, Muncie, Indiana.
      MFS Financial, Inc. was formed in September 1999 to become the holding company
      of Mutual Federal in connection with Mutual Federal’s conversion from the mutual
      to stock form of organization on December 29, 1999. In April 2000, MFS
      Financial, Inc. formally changed its corporate name to *MutualFirst* Financial, Inc. (“ *MutualFirst”)* .
      The
      words “we,” “our” and “us” refer to *MutualFirst* and
      Mutual Federal on a consolidated basis, except that references to us prior
      to
      December 29, 1999 refer only to Mutual Federal.




Our
      principal business consists of attracting retail deposits from the general
      public and investing those funds primarily in permanent loans secured by first
      mortgages on owner-occupied, one-to-four-family residences, a variety of
      consumer loans, loans secured by commercial and multi-family real estate and
      commercial business loans. We are headquartered in Muncie, Indiana with 21
      retail offices primarily serving Delaware, Randolph, Kosciusko, Grant and Wabash
      counties in Indiana. In February 2008, we opened our 22 branch in Elkhart County
      in Indiana. We also originate mortgage loans in counties contiguous to these
      counties, and we originate indirect consumer loans throughout
      Indiana.




The
      following discussion is intended to assist your understanding of our financial
      condition and results of operations. The information contained in this section
      should be read in conjunction with our consolidated financial statements and
      the
      accompanying notes to our consolidated financial statements.




Our
      results of operations depend primarily on the level of our net interest income,
      which is the difference between interest income on interest-earning assets,
      such
      as loans, mortgage-backed securities and investment securities, and interest
      expense on 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.


43




The
      Federal Funds rate set by the Board of Governors of the Federal Reserve System
      has decreased 100 basis points from September 2007 to December 31, 2007. In
      January 2008, the Federal Funds rate decreased an additional 125 basis point,
      and along with any future decreases, should allow for deposits and borrowings
      to
      reprice lower in future months, reducing pressure on net interest income.
      Deposits and borrowings have been repricing upwards, increasing interest expense
      and decreasing 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. 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. Our results of operations also are affected
      by
      the level of our non-interest income and expenses and income tax expense.




In
      August
      2006, Mutual Federal purchased three branch offices in Winchester, Wabash and
      Warsaw, Indiana, resulting in the acquisition of $8.7 million in assets and
      the
      assumption of $12.4 million in liabilities for $1.0 million in cash. 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.




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.




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
      Wagley Investment Advisors acquisitions, the Company anticipates that a new
      branch in Elkhart County will open in the first quarter 2008. The Wagley
      Investment Advisors acquisition assists the Company in continuing 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 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* and its
      wholly owned subsidiary, MutualFirst Acquisition Corp. (“Acquisition Corp”),
      entered into a definitive agreement (the “Agreement”) with MFB Corp. (“MFB”),
      pursuant to which MFB will be merged with and into Acquisition Corp. (the
“Merger”), and MFB’s savings bank subsidiary, MFB Financial, will be merged with
      and into the Registrant’s savings bank subsidiary, Mutual Federal. MFB
      shareholders will be entitled to elect to receive, for each share of MFB common
      stock they hold, $41.00 in cash (the “Cash Consideration”), 2.59 shares of the
      Registrant’s common stock (the “Stock Consideration”) or a combination of both,
      subject to reallocation and proration procedures to ensure that 80% of all
      of
      the shares of MFB common stock outstanding immediately before the effective
      time
      of the Merger are exchanged for the Stock Consideration and that the remaining
      20% of the outstanding MFB shares are exchanged for the Cash Consideration.


44




MFB
      will
      have the right to terminate the Agreement if the average closing price of the
      Registrant’s common stock during the ten consecutive trading days immediately
      preceding the date on which MFB receives written notice that all required
      regulatory and shareholder approvals have been received is less than $12.664
      and
      the Registrant’s common stock has underperformed an index of financial
      institutions by more than fifteen percent, unless the Registrant elects to
      increase the amount of the consideration payable to MFB’s shareholders pursuant
      to a formula specified in the Agreement. In the event the Agreement is
      terminated under certain other specified circumstances, MFB will be required
      to
      pay the Registrant a termination fee of $1.7 million in cash.




At
      the
      effective time of the Merger, each outstanding option to purchase MFB common
      stock will be converted into an option to purchase the Registrant’s common
      stock, with adjustments to the number of underlying shares and exercise price
      based on the 2.59:1 exchange ratio for the Stock Consideration.




At
      December 31, 2007, MFB had total assets of $513.8 million, including $404.9
      in
      loans, and deposits of $336.1 million. MFB’s banking subsidiary conducts a trust
      business, which we will acquire if the acquisition is completed. The acquisition
      is expected to occur at the beginning of the third quarter of 2008.




The
      transaction is subject to customary closing conditions, including the receipt
      of
      regulatory approvals, approval by the shareholders of the Registrant of the
      issuance of the Registrant’s common stock in the Merger and approval by the
      shareholders of MFB of the Merger Agreement. All of the directors of the
      Registrant have agreed to vote their shares of Registrant common stock in favor
      of approval of the issuance the Registrant’s common stock in the Merger. All of
      the directors of MFB have agreed to vote their shares of MFB common stock in
      favor of approval of the Agreement.




The
      foregoing summary of the Merger is not complete and is qualified in its entirety
      by reference to the full text of the Agreement, which is incorporated by
      reference to this report as Exhibit 2.1 from our Form 8-K dated January 8,
      2008
      and to the full text of our Rule 425 filing for January 8 and 10,
      2008.




**Management
      Strategy**




Our
      strategy is to operate as an independent, retail-oriented financial institution
      dedicated to serving customers in our market areas. Our commitment is to provide
      a broad range of products and services to meet the needs of our customers.
      As
      part of this commitment, we are looking to increase our emphasis on commercial
      business products and services. We also operate a fully interactive
      transactional website. In addition, we are continually looking at cost-effective
      ways to expand our market area.




Financial
      highlights of our strategy have included:





·
            ***Continuing
                as a Diversified Lender.***We
                have been successful in diversifying our loan portfolio to reduce
                our
                reliance on any one type of loan. From 1995 through 2000, approximately
                36% of our loan portfolio consisted of loans other than one-to four-
                family real estate loans. Since that time to the end of 2007, that
                percentage has increased to 47%.


45





·
            ***Continuing
                as a Leading One- to Four-Family Lender.***We
                are one of the largest originators of one- to four-family residential
                loans in our five-county market area. During 2007, we originated
                $86.6
                million of one- to four-family residential loans.





·
            ***Continuing
                To Focus On Asset Quality.***Non-performing assets to total assets was 1.35% at December 31, 2007,
                up
                from 0.86% at December 31, 2006. We are confident that our underwriting
                standards will provide for a quality loan portfolio.





·
            ***Continuing
                Our Strong Capital Position.***As
                a result of our consistent profitability, we have historically maintained
                a strong capital position. At December 31, 2007, our ratio of
                stockholders’ equity to total assets was 9.1%.




Since
      2000 it has been *MutualFirst* ’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.




During
      2007, in keeping with its strategic objective to reduce interest rate risk
      exposure, *MutualFirst* also
      sold $24.1 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 $391,000 during the year.




**Financial
      Condition at December 31, 2007 Compared to December 31,
      2006**




**General.** Our
      assets increased $1.7 million during 2007, ending the year at $962.5 million
      compared to $960.8 million at December 31, 2006. Liabilities increased $1.9
      million or 0.22% during 2007 to $875.5 million at December 31, 2007.
      Stockholders’ equity decreased $250,000 to $87.0 million at December 31, 2007 as
      a result of stock repurchases and cash dividends of $5.2 million which were
      partially offset by net income, employee benefits earned and stock options
      exercised of $5.0 million.




**Loans** .
      Our net
      loan portfolio decreased $3.2 million from $805.6 million at December 31, 2006,
      to $802.4 million at December 31, 2007, primarily due to slower loan production
      in 2007. Consumer loans increased $2.5 million or 1.1% from $223.0 million
      at
      December 31, 2006 to $225.5 million at December 31, 2007. Most of the consumer
      loan growth came from recreational vehicle and boat loans, which increased
      $8.0
      million or 6.8% from $117.6 million to $125.6 million and home equity and home
      improvements loans, which increased $3.8 million or 5.5% from $68.6 million
      to
      $72.4 million. These increases were partially offset by a decrease of $8.4
      million or 26.9% in automobile loans. Commercial business loans decreased $10.7
      million or 15.9% from $67.5 million to $56.8 million at December 31, 2007.
      It
      has been our strategy to increase non-real estate mortgage loans as a percentage
      of our loan portfolio in order to mitigate interest rate risk and enhance the
      portfolio yield. Accordingly, we sold $24.1 million of our fixed rate one-
      to
      four-family mortgage loans in 2007. Real estate mortgage loans increased $3.7
      million or 0.7% from $525.2 million to $529.0 million at December 31, 2007
      primarily due to increases in commercial real estate loans of $8.2 million
      or
      11.1%. Mortgage loans held for sale increased $315,000 to $1.6 million at
      December 31, 2007.


46




**Allowance
      For Loan Loss.** The
      allowance for loan losses increased $197,000 to $8.4 million at December 31,
      2007. This increase included additional reserves of $2.2 million for 2007.
      Net
      charge-offs for the year were $2.0 million or 0.25% of average loans compared
      to
      $2.0 million or 0.24% of average loans in 2006. The increase in the allowance
      for loan losses was due to continued poor economic conditions in some of our
      markets and changes in the mix of loans in the portfolio. As of December 31,
      2007, our allowance for loan losses as a percentage of loans receivable and
      non-performing loans was 1.03% and 79.72%, respectively.




**Securities.** Investment securities totaled $43.6 million at December 31, 2007 compared to
      $41.1 million at December 31, 2006, a 6.1% increase.




**Liabilities.** Our
      total liabilities increased $1.9 million or 0.22% to $875.5 million at December
      31, 2007 from $873.6 million at December 31, 2006. Deposits decreased $37.0
      million, and borrowed funds increased $37.8 million as a result of better market
      prices on borrowings when compared to certificate of deposits toward the end
      of
      2007.




**Stockholders’
      Equity.** Stockholders’ equity decreased $254,000 from $87.3 million at December 31, 2006
      to $87.0 million at December 31, 2007. This decrease in stockholders’ equity was
      the result of the repurchase of 155,400 shares of our common stock for $2.8
      million and cash dividend payments of $2.4 million, which were partially offset
      by $4.2 million in net income, earned Employee Stock Ownership Plan shares
      of
      $583,000, earned tax-affected restricted stock shares of $3,000 and exercised
      stock options of $209,000. Also, the market value of securities available for
      sale compared to their book value decreased $60,000 from a loss of $355,000
      at
      December 31, 2006 to a loss of $414,000 at December 31, 2007.




**Average
      Balances, Net Interest Income, Yields Earned and Rates
      Paid**




The
      following table presents for the periods indicated the total dollar amount
      of
      interest income from average interest-earning assets and the resultant yields,
      as well as the interest expense on average interest-bearing liabilities,
      expressed both in dollars and rates. No tax equivalent adjustments were made.
      All average balances are daily average balances. Non-accruing loans have been
      included in the table as loans carrying a zero yield.


47





**Average
      Balances, Net Interest Income, Yields Earned and Rates
      Paid**





**Year
                  ended December 31,****2007**
              
              **2006**
              
              **2005****Average
                  Outstanding****Balance**
              
              **Interest
                  Earned/****Paid**
              
              **Average
                  Yield/****Rate**
              
              **Average
                  Outstanding****Balance**
              
              **Interest
                  Earned/****Paid**
              
              **Average
                  Yield/****Rate**
              
              **Average
                  Outstanding****Balance**
              
              **Interest
                  Earned/****Paid**
              
              **Average
                  Yield/****Rate****(Dollars
                  in thousands)**Interest-Earning
                  Assets:Interest
                  -bearing deposits
              
              $
              2,982
              
              $
              115
              
              
              3.86
              %
              $
              1,918
              
              $
              67
              
              
              3.49
              %
              $
              1,774
              
              $
              34
              
              
              1.92
              %Mortgage-backed
                  securities available-for-sale(1)
              
              
              8,875
              
              
              467
              
              
              5.26
              %
              
              10,532
              
              
              481
              
              
              4.57
              %
              
              10,890
              
              
              48,121
              
              
              4.70Investment
                  securities available-for-sale(1)
              
              
              31,234
              
              
              1,644
              
              
              5.26
              %
              
              30,055
              
              
              1,440
              
              
              4.79
              %
              
              29,591
              
              
              1,113
              
              
              3.76Loans(2)
              
              
              811,991
              
              
              53,686
              
              
              6.61
              %
              
              834,321
              
              
              56,673
              
              
              6.43
              %
              
              759,307
              
              
              42,425
              
              
              6.11Stock
                  in FHLB of Indianapolis
              
              
              9,939
              
              
              462
              
              
              4.65
              %
              
              10,128
              
              
              459
              
              
              4.53
              %
              
              8,749
              
              
              394
              
              
              4.50Total
                  interest-earning assets
              
              
              865,021
              
              
              56,374
              
              
              6.52
              %
              
              886,954
              
              
              56,120
              
              
              6.33
              %
              
              810,311
              
              
              48,478
              
              
              5.98Non-Interest
                      Earning Assets (net of allowance for loan losses and unrealized
                      gain/loss)
              
              
              87,879
              
              
              
              
              
              
              
              
              85,641
              
              
              
              
              
              
              
              
              74,577Total
                  assets
              
              $
              952,900
              
              
              
              
              
              
              
              $
              972,595
              
              
              
              
              
              
              
              $
              884,888Interest-Bearing
                  Liabilities:Demand
                  and NOW accounts
              
              $
              126,034
              
              
              2,841
              
              
              2.25
              %
              $
              101,627
              
              
              1,662
              
              
              1.64
              %
              $
              62,545
              
              
              150
              
              
              0.24Savings
                  deposits
              
              
              54,975
              
              
              281
              
              
              0.51
              %
              
              60,253
              
              
              301
              
              
              0.50
              %
              
              61,301
              
              
              260
              
              
              0.42Money
                  market accounts
              
              
              24,588
              
              
              621
              
              
              2.53
              %
              
              34,920
              
              
              690
              
              
              1.98
              %
              
              49,439
              
              
              809
              
              
              1.64Certificate
                  accounts
              
              
              444,271
              
              
              20,755
              
              
              4.67
              %
              
              461,678
              
              
              19,372
              
              
              4.20
              %
              
              422,107
              
              
              14,066
              
              
              3.33Total
                  deposits
              
              
              649,868
              
              
              24,498
              
              
              3.77
              %
              
              658,478
              
              
              22,025
              
              
              3.34
              %
              
              595,392
              
              
              15,285
              
              
              2.57Borrowings
              
              
              151,636
              
              
              7,729
              
              
              5.10
              %
              
              165,465
              
              
              7,866
              
              
              4.75
              %
              
              145,979
              
              
              5,885
              
              
              4.03Total
                  interest-bearing accounts
              
              
              801,504
              
              
              32,227
              
              
              4.02
              %
              
              823,943
              
              
              29,891
              
              
              3.63
              %
              
              741,371
              
              
              21,170
              
              
              2.85Non-Interest
                  Bearing Accounts
              
              
              48,589
              
              
              
              
              
              
              
              
              45,597
              
              
              
              
              
              
              
              
              41,744Other
                  Liabilities
              
              
              15,478
              
              
              
              
              
              
              
              
              14,759
              
              
              
              
              
              
              
              
              14,206Total
                  Liabilities
              
              
              865,571
              
              
              
              
              
              
              
              
              884,299
              
              
              
              
              
              
              
              
              797,321Stockholders’
                  Equity
              
              
              87,329
              
              
              
              
              
              
              
              
              88,296
              
              
              
              
              
              
              
              
              87,567Total
                  liabilities and stockholders’ equity
              
              $
              952,900
              
              
              
              
              
              
              
              $
              972,595
              
              
              
              
              
              
              
              $
              884,888Net
                  Earning Assets
              
              $
              63,517
              
              
              
              
              
              
              
              $
              63,011
              
              
              
              
              
              
              
              $
              68,940Net
                  Interest Income
              
              
              
              
              $
              24,147
              
              
              
              
              
              
              
              $
              26,229
              
              
              
              
              
              
              
              $
              27,308Net
                  Interest Rate Spread(3)
              
              
              
              
              
              
              
              
              2.50
              %
              
              
              
              
              
              
              
              2.70
              %
              
              
              
              
              
              
              
              3.13
              %Net
                  Yield on Average Interest-Earning Assets(4)
              
              
              
              
              
              
              
              
              2.79
              %
              
              
              
              
              
              
              
              2.96
              %
              
              
              
              
              
              
              
              3.37
              %Average
                    Interest-Earning Assets to Average Interest-Bearing
                    Liabilities
              
              
              107.92
              %
              
              
              
              
              
              
              
              107.65
              %
              
              
              
              
              
              
              
              109.30
              %


____________________


(1) Average
      balances were calculated using amortized cost, which excludes FASB 115 valuation
      allowances.


(2) Calculated
      net of deferred loan fees, loan discounts and loans in process.


(3) Interest
      rate spread is calculated by subtracting weighted average interest rate cost
      from weighted average interest rate yield for the period indicated.


(4) The
      net yield on weighted average interest-earning assets is calculated by dividing
      net interest income by weighted average interest-earning assets for the period
      indicated.


48




**Rate/Volume
      Analysis**




The
      following table presents the dollar amount of changes in interest income and
      interest expense for major components of interest-earning assets and
      interest-bearing liabilities. For each category of interest-earning assets
      and
      interest-bearing liabilities, information is provided on changes attributable
      to
      (1) changes in volume, which are changes in volume multiplied by the old rate,
      and (2) changes in rate, which is a change in rate multiplied by the old volume.
      Changes attributable to both rate and volume, which cannot be segregated, have
      been allocated proportionately to the change due to volume and the change due
      to
      rate.




**Year
                Ended December 31,****2007
                vs. 2006**
            
            
            **2006
                vs. 2005****Increase**
              **(decrease)**
              **Due
                to**
            
            
            **Total**
              **Increase**
            
            
            **Increase**
              **(decrease)**
              **Due
                to**
            
            
            **Total**
              **Increase****Volume**
            
            
            **Rate**
            
            
            **(decrease)**
            
            
            **Volume**
            
            
            **Rate**
            
            
            **(decrease)****(Dollars
                in thousands)**Interest-earning
                assets:Interest-bearing
                deposits
            
            $
            40
            
            $
            8
            
            $
            48
            
            $
            3
            
            $
            30
            
            $
            33Investment
                securitiesavailable-for-sale
            
            
            (24
            )
            
            214
            
            
            190
            
            
            1
            
            
            295
            
            
            296Loans
                receivable
            
            
            (1,456
            )
            
            1,469
            
            
            13
            
            
            4,743
            
            
            2,505
            
            
            7,248Stock
                in FHLB ofIndianapolis
            
            
            (9
            )
            
            12
            
            
            3
            
            
            62
            
            
            3
            
            
            65Total
                interest-earningassets
            
            $
            (1,449
            )
            $
            1,703
            
            $
            254
            
            $
            4,809
            
            $
            2,833
            
            $
            7,642Interest-bearing
                liabilities:Savings
                deposits
            
            $
            (27
            )
            $
            7
            
            $
            (20
            )
            $
            (5
            )
            $
            46
            
            $
            41Money
                market accounts
            
            
            (233
            )
            
            164
            
            
            (69
            )
            
            (254
            )
            
            190
            
            
            (64
            )Demand
                and NOW accounts
            
            
            458
            
            
            721
            
            
            1,179
            
            
            197
            
            
            1,260
            
            
            1,457Certificate
                accounts
            
            
            (751
            )
            
            2,134
            
            
            1,383
            
            
            1,409
            
            
            3,897
            
            
            5,306Borrowings
            
            
            (683
            )
            
            546
            
            
            (137
            )
            
            846
            
            
            1,135
            
            
            1,981Total
                interest-bearingliabilities
            
            $
            (1,236
            )
            $
            3,572
            
            $
            2,336
            
            $
            2,193
            
            $
            6,528
            
            $
            8,721Change
                in net interest income
            
            
            
            
            
            
            
            $
            (2,082
            )
            
            
            
            
            
            
            $
            (1,079
            )


49





**Comparison
      of Results of Operations for Years Ended December 31, 2007 and
      2006.**





**General.** Net
      income for the year ended December 31, 2007 decreased $530,000 or 11.2% to
      $4.2
      million compared to $4.8 million for the year ended December 31, 2006. Diluted
      earnings per share decreased 8.1% from $1.11 in 2006 to $1.02 in 2007. These
      decreases were primarily due to a lower net interest margin.




**Net
      Interest Income.** Net
      interest income before the provision for loan losses decreased $2.1 million
      to
      $24.1 million for the year ended December 31, 2007 compared to $26.2 million
      for
      the year ended December 31, 2006. The reasons for the decrease were a decrease
      in average interest earning assets of $21.9 million, or 2.5% and a decrease
      in
      the net interest margin of 17 basis points from 2.96% for the year ended
      December 31, 2006 to 2.79% for the year ended December 31, 2007.




**Interest
      Income.** Interest
      income increased $254,000 to $56.4 million at December 31, 2007, compared to
      $56.1 million at December 31, 2006. The increase in interest income during
      the
      year ended December 31, 2007 was due to an increase in the average yield on
      our
      earning assets from 6.33% in 2006 to 6.52% in 2007 as a result of increasing
      market interest rates. This increase was partially offset by a $21.9 million
      decrease in average earning assets from $887.0 million during 2006 to $865.0
      million during 2007. The majority of this decrease was in average loans
      receivable, which decreased $22.3 million from $834.3 in 2006 to $812.0 million
      in 2007 primarily due to a large loan sale toward the end of 2006 and lower
      loan
      originations in 2007. The average yield on these loans increased 18 basis points
      from 6.43% in 2006 to 6.61% in 2007.




**Interest
      Expense.** Interest
      expense increased $2.3 million, or 7.8% to $32.2 million at December 31, 2007,
      from $29.9 million at December 31, 2006. The increase in interest expense was
      due to an increase in interest rates and partially offset by a decrease in
      average interest-bearing liabilities during the year. There was a 39 basis
      point
      increase in the cost of our average interest-bearing liabilities from 3.63%
      in
      2006 to 4.02% in 2007 as a result of higher market interest rates, which is
      partially offset by a decrease of $22.4 million in average interest-bearing
      liabilities from $823.9 million in 2006 to $801.5 million in 2007. The majority
      of this decrease was in average deposits, which decreased $8.6 million from
      $658.5 million in 2006 to $649.9 million in 2007 and in average borrowings,
      which decreased $13.8 million from $165.5 million in 2006 to $151.6 million
      in
      2007. The average cost on these deposits increased 43 basis points from 3.34%
      in
      2006 to 3.77% in 2007 and the average cost on these borrowings increased 35
      basis points from 4.75% in 2006 to 5.10% in 2007. The average cost of funds
      comparing the third quarter of 2007 and the fourth quarter of 2007 decreased
      7
      basis points as interest rates began to fall.




**Provision
      for Loan Losses.** The
      provision for loan losses for 2007 was $2.2 million, compared to $2.1 million
      for 2006 due primarily to increased non-performing loans. Non-performing loans
      to total loans at December 31, 2007 were 1.29% compared to 0.70% at December
      31,
      2006. Non-performing assets to total assets were 1.35% at December 31, 2007
      compared to .86% at December 31, 2006. These increases were primarily due to
      a
      weakening in the economy, which has resulted in increased delinquency at year
      ended December 31, 2007 compared to year ended December 31, 2006. It is
      management’s opinion that the non-performing loans are sufficiently reserved as
      of December 31, 2007 and any additional allowances will be
      insignificant .


50




**Other
      Income.** For the
      year ended December 31, 2007, non-interest income increased $1.1 million, or
      17.0%, to $7.8 million, compared to $6.6 million the year ended December 31,
      2006. The increase was due primarily to increases in our service fees on
      transaction accounts of $461,000, or 10.5%, due primarily to adding additional
      fee based services, increases in commission income of $319,000, or 46.8%, due
      primarily to the acquisition of Wagley Investment Advisors and improved earnings
      on cash surrender value of life insurance of $155,000, or 14.4%. An increase
      in
      gain on sale of loans of $1.1 million and a decrease in other income of $966,000
      were due primarily to non-recurring events in the fourth quarter of 2006, which
      included a loss on loans sold of $963,000 due to a large loan sale, a gain
      from
      a land exchange transaction and state tax refunds from previous years.





**Other
      Expense.** Non-interest expense increased $137,000, or 0.6% to $25.2 million for the year
      ended December 31, 2007 compared to $25.0 million for the year ended 2006.
      The
      increase was due primarily to increases in salaries and benefits of $142,000
      and
      increases in occupancy and equipment of $163,000, due primarily to preparations
      for a new branch opening in February of 2008, and data processing expense of
      $160,000 due primarily to technological upgrades. These increases were partially
      offset by a decrease in professional fees of $229,000, a decrease in marketing
      expense of $79,000, and a decrease in other expenses of $20,000.




**Income
      Tax Expense** .
      Income
      tax expense decreased $732,000 compared to the year ended 2006. The decrease
      was
      due primarily to decreased taxable income. The effective tax rate also decreased
      from 17.8% to 6.5% due to a higher percentage of non-taxable income to total
      income before income tax and an increased percentage of low income housing
      tax
      credits to taxable income when comparing the year ended 2007 to the year ended
      2006, respectively.




**Comparison
      of Results of Operations for Years Ended December 31, 2006 and
      2005.**





**General.** Net
      income for the year ended December 31, 2006 decreased $1.7 million or 26.3%
      to
      $4.8 million compared to $6.5 million for the year ended December 31, 2005.
      Diluted earnings per share decreased 23.4% from $1.45 in 2005 to $1.11 in 2006
      primarily due to a lower net interest margin, increased operating expenses,
      and
      several one-time events as discussed below.





**Net
      Interest Income.** Net
      interest income decreased $1.1 million for the year ended December 31, 2006
      compared to the year ended December 31, 2005. Net interest margin compression
      of
      41 basis points was partially offset by an increase in average interest earning
      assets of $76.6 million, or 9.5%. The decrease in the net interest margin
      reflects the Bank’s liability sensitive nature, as short term interest rates
      rose.





**Interest
      Income.** The
      increase in interest income during the year ended December 31, 2006 was due
      to
      an increase in the average yield on our earning assets from 5.98% in 2005 to
      6.33% in 2006 as a result of increasing market interest rates. This increase
      was
      enhanced by a $76.6 million increase in average earning assets from $810.3
      million during 2005 to $887.0 million during 2006. The majority of this increase
      was in average loans receivable, which increased $75.0 million from $759.3
      in
      2005 to $834.3 million in 2006. The average yield on these loans increased
      32
      basis points from 6.11% in 2005 to 6.43% in 2006.


51





**Interest
      Expense.** The
      increase in interest expense was due to an increase in interest rates and an
      increase in average interest bearing liabilities during the year. There was
      a 77
      basis point increase in the cost of our average interest bearing liabilities
      from 2.86% in 2005 to 3.63% in 2006 as a result of higher market interest rates
      and an increase of $82.6 million in average interest bearing liabilities from
      $741.4 million in 2005 to $823.9 million in 2006. The majority of this increase
      was in average deposits, which increased $63.1 million from $595.4 million
      in
      2005 to $658.5 million in 2006. The average cost on these deposits increased
      77
      basis points from 2.57% in 2005 to 3.34% in 2006.





**Provision
      for Loan Losses.** The
      provision for loan losses for 2006 was $2.1 million, compared to $1.8 million
      for 2005 due to a refinement in the allowance calculation and the change in
      mix
      of loans in the portfolio. Non-performing loans to total loans at December
      31,
      2006 were .70% compared to .90% at December 31, 2005. Non-performing assets
      to
      total assets were .86% at December 31, 2006 compared to 1.03% at December 31,
      2005. These decreases were primarily due to a $1.9 million residential real
      estate loan secured by a first mortgage being paid in full.





**Other
      Income.** For the
      year ended December 31, 2006 non-interest income decreased $89,000 to $6.6
      million compared to $6.7 million for the year ended 2005. The decrease was
      due
      to a $898,000 decrease in gain on loan sales, mostly due to the loss on a $24.6
      million loan sale, $317,000 decrease in equity gains in limited partnerships,
      partially due to an SEC accounting rule change, and a $299,000 decrease in
      commission income on annuity and mutual fund sales as short term interest rates
      have made these products less competitive. These decreases were mostly offset
      by
      a $1.1 million increase in other operating income, primarily related to a land
      exchange gain in Elkhart County, Indiana, state tax refunds and a $344,000
      increase in service fees on transaction accounts.





**Other
      Expense.** Non-interest expense increased $1.6 million or 6.9% to $25.0 million for the
      year 2006 compared to $23.4 million for the year 2005. The increase was due
      primarily to the compensation and occupancy costs associated with the opening
      of
      three new branches: one in May of 2005, another with the purchase of Fidelity
      Federal in September of 2005 and the other with the Community First branch
      acquisition in August of 2006. Marketing expenses were up $165,000 primarily
      due
      to a new branding campaign designed to more clearly communicate our strategic
      position. Other expenses increased $436,000, primarily due to increased REO
      expenses due to more repossessed properties, and other general and
      administrative expense increases related to the opening of the new
      branches.





**Income
      Tax Expense.** Income
      tax expense decreased $1.4 million for the year ended December 31, 2006 compared
      to 2005 due to decreased taxable income. The effective tax rate decreased from
      27.1% to 17.8% due to an increased percentage of low income housing tax credits
      to taxable income when comparing 2006 to 2005.


52




**Liquidity
      and Commitments**




Mutual
      Federal is required to maintain adequate levels of investments for liquidity
      purposes to ensure the institution’s safe and sound operations. Liquidity may
      increase or decrease depending upon the availability of funds and comparative
      yields on investments in relation to the return on loans. Historically, we
      have
      maintained liquid assets at levels adequate to meet the requirements of normal
      operations, including potential deposit outflows. Cash flow projections are
      regularly reviewed and updated to ensure that adequate liquidity is maintained.
      At December 31, 2007, our liquidity ratio, which is our liquid assets as a
      percentage of net withdrawable savings deposits and current borrowings, was
      7.59%.




Our
      liquidity, represented by cash and cash equivalents and investment securities,
      is a product of our operating, investing and financing activities. Our primary
      sources of funds are deposits, amortization, prepayments and maturities of
      outstanding loans and mortgage-backed securities, maturities of investment
      securities and other short-term investments and funds provided from operations.
      While scheduled payments from the amortization of loans and mortgage-backed
      securities and maturing investment securities and short-term investments are
      relatively predictable sources of funds, deposit flows and loan prepayments
      are
      greatly influenced by general interest rates, economic conditions and
      competition. In addition, we invest excess funds in short-term interest-earning
      assets, which provide liquidity to meet lending requirements. We also generate
      cash through borrowings. We utilize Federal Home Loan Bank advances to leverage
      our capital base and provide funds for our lending and investment activities,
      and to enhance our interest rate risk management.




Liquidity
      management is both a daily and long-term function of business management. Excess
      liquidity is generally invested in short-term investments such as overnight
      deposits or U.S. Agency securities. We use our sources of funds primarily to
      meet our ongoing commitments, to pay maturing certificates of deposit and
      savings withdrawals, to fund loan commitments and to maintain our portfolio
      of
      mortgage-backed securities and investment securities. At December 31, 2007,
      the
      total approved loan origination commitments outstanding amounted to $30.5
      million. At the same date, the unadvanced portion of construction loans was
      $4.1
      million. At December 31, 2007, unused lines of credit totaled $59.1 million
      and
      outstanding letters of credit totaled $4.2 million. As of December 31, 2007,
      certificates of deposit scheduled to mature in one year or less totaled $362.5
      million, and investment and mortgage-backed securities scheduled to mature
      in
      one year or less totaled $20.9 million. Based on historical experience,
      management believes that a significant portion of maturing deposits will remain
      with us. We anticipate that we will continue to have sufficient funds, through
      deposits and borrowings, to meet our current commitments. The following table
      presents our contractual obligations (excluding deposit products).





**Payments
                due by period****Less
                than**
            
            **1-3**
            
            **3-5**
            
            **More
                than****Total**
            
            **1
                year**
            
            **years**
            
            **Years**
            
            **5
                years**(In
                thousands)Contractual
                ObligationsFederal
                Home Loan Bank Advances
            
            $
            191,675
            
            $
            81,421
            
            $
            99,226
            
            $
            6,283
            
            $
            4,745Notes
                Payable
            
            
            1,055
            
            
            408
            
            
            647
            
            
            —
            
            
            —Other
                Borrowings
            
            
            3,908
            
            
            3,908
            
            
            —
            
            
            —
            
            
            —Total
            
            $
            196,638
            
            $
            85,736
            
            $
            99,873
            
            $
            6,283
            
            $
            4,745


53




**Capital**




Consistent
      with our goals to operate a sound and profitable financial organization, Mutual
      Federal actively strives to remain a “well-capitalized” institution in
      accordance with regulatory standards. Total stockholders’ equity of *MutualFirst* Financial, Inc. was $87.0 million at December 31, 2007, or 9.04% of total assets
      on that date. As of December 31, 2007, Mutual Federal exceeded all capital
      requirements of the OTS, with regulatory capital ratios as follows: core
      capital, 7.5%; Tier I risk-based capital, 9.9%; and total risk-based capital,
      10.9%. The regulatory capital requirements to be considered well capitalized
      are
      5.0%, 6.0% and 10.0%, respectively.




**Critical
      Accounting Policies**




The
      notes
      to the consolidated financial statements in Item 8 of this Form 10-K contain
      a
      summary of MutualFirst’s significant accounting policies. Certain of these
      policies are important to the portrayal of *MutualFirst* ’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 real estate held for development and the valuation
      of intangible assets.




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.




**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.




**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.


54




**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 **.**




**Intangible
      Assets.** *MutualFirst* 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 *MutualFirst’s* judgments, impairment and/or increased amortization charges may be necessary
      to
      reduce the carrying value of these assets to the appropriate value. **




**Impact
      of Inflation.** Our
      consolidated financial statements have been prepared in accordance with
      generally accepted accounting principles. The principles require the measurement
      of financial position and operating results in terms of historical dollars,
      without considering changes in the relative purchasing power of money over
      time
      due to inflation.




Our
      primary assets and liabilities are monetary in nature. As a result, interest
      rates affect our performance more than general levels of inflation. Interest
      rates, however, do not necessarily move in the same direction or with the same
      magnitude as the price of goods and services, since such prices are affected
      by
      inflation. In a period of rapidly rising interest rates, the liquidity and
      maturity structure of our assets and liabilities are critical to the maintenance
      of acceptable performance levels.




The
      principal effect of inflation, as distinct from levels of interest rates, on
      earnings is in the area of non-interest expense. Expense items such as employee
      compensation, employee benefits and occupancy and equipment cost may increase
      because of inflation. Inflation also may increase the dollar value of the
      collateral securing loans that we have made. We are unable to determine the
      extent to which properties securing our loans have appreciated in dollar value
      due to inflation.




**Item
      7A.**  **Quantitative
      and Qualitative Disclosures About Market Risk**




**Asset
      and Liability Management and Market Risk**




***Our
      Risk When Interest Rates Change.*** **** The
      rates
      of interest we earn on assets and pay on liabilities generally is established
      contractually for a period of time. Market interest rates change over time.
      Accordingly, our results of operations, like those of other financial
      institutions, are impacted by changes in interest rates and the interest rate
      sensitivity of our assets and liabilities. The risk associated with changes
      in
      interest rates and our ability to adapt to these changes is known as interest
      rate risk and is our most significant market risk.


55




***How
      We Measure Our Risk of Interest Rate Changes.*** **** As
      part
      of our attempt to manage our exposure to changes in interest rates and comply
      with applicable regulations, we monitor our interest rate risk. In monitoring
      interest rate risk, we continually analyze and manage assets and liabilities
      based on their payment streams and interest rates, the timing of their
      maturities, and their sensitivity to actual or potential changes in market
      interest rates.




In
      order
      to minimize the potential for adverse effects of material and prolonged changes
      in interest rates on our results of operations, we adopted asset and liability
      management policies to better match the maturities and repricing terms of our
      interest-earning assets and interest-bearing liabilities. Mutual Federal’s Board
      of Directors sets and recommends asset and liability policies, which are
      implemented by the asset and liability management committee. The Asset and
      Liability Management Committee is chaired by the chief financial officer and
      is
      comprised of members of our senior management. The purpose of the Asset and
      Liability Management Committee is to communicate, coordinate and control
      asset/liability management issues consistent with our business plan and
      board-approved policies. This committee establishes and monitors the volume
      and
      mix of assets and funding sources taking into account relative costs and
      spreads, interest rate sensitivity and liquidity needs. The objectives are
      to
      manage assets and funding sources consistent with liquidity, capital adequacy,
      growth, risk and profitability goals. The Asset and Liability Management
      Committee generally meets monthly to review, among other things, economic
      conditions and interest rate outlook, current and projected liquidity needs
      and
      capital position, anticipated changes in the volume and mix of assets and
      liabilities and interest rate risk exposure limits versus current projections
      pursuant to a net present value of portfolio equity analysis and income
      simulations. At each meeting, the Asset and Liability Management Committee
      recommends appropriate strategy changes based on this review. The chief
      financial officer is responsible for reviewing and reporting on the effects
      of
      the policy implementations and strategies to the Board of Directors, at least
      quarterly.




In
      order
      to manage our assets and liabilities and achieve the desired liquidity, credit
      quality, interest rate risk, profitability and capital targets, we have sought
      to:





·
            Originate
                and purchase adjustable rate mortgage loans and commercial business
                loans,





·
            Originate
                shorter-duration consumer loans,





·
            Manage
                our deposits to establish stable deposit
                relationships,





·
            Acquire
                longer-term borrowings at fixed rates, when appropriate, to offset
                the
                negative impact of longer-term fixed rate loans in our loan portfolio,
                and





·
            Limit
                the percentage of long-term fixed-rate loans in our
                portfolio.




Depending
      on the level of general interest rates, the relationship between long and
      short-term interest rates, market conditions and competitive factors, the Asset
      and Liability Management Committee may increase our interest rate risk position
      somewhat in order to maintain our net interest margin. We will continue to
      increase our emphasis on the origination of relatively short-term and/or
      adjustable rate loans. In addition, in an effort to avoid an increase in the
      percentage of long-term fixed-rate loans in our portfolio, in 2007, we sold
      $24.1 million of fixed rate, one-to four- family mortgage loans with a term
      to
      maturity of over 10 years in the secondary market.


56




The
      Asset
      and Liability Management Committee regularly reviews interest rate risk by
      forecasting the impact of alternative interest rate environments on net interest
      income and market value of portfolio equity, which is defined as the net present
      value of an institution’s existing assets, liabilities and off-balance sheet
      instruments, and evaluating such impacts against the maximum potential changes
      in net interest income and market value of portfolio equity that are authorized
      by our board of directors.




An
      internal asset-liability model provides Mutual Federal with the information
      presented in the following tables. The tables present the change in our net
      portfolio value at December 31, 2007 and 2006 that would occur upon an immediate
      and sustained change in market interest rates of 100 to 300 basis points as
      required by the OTS, and do not give any effect to actions that management
      might
      take to counteract that change. The changes in net portfolio value under all
      rate changes shown were within guidelines approved by the board of directors.


57




**December
          31, 2007**
  **Net
            Portfolio Value**
 **Changes**
                  **In
                    Rates**
                **$
                    Amount**
                **$
                    Change**
                **%
                    Change**
                **NPV
                    as % of PV of Assets****NPV
                    Ratio**
                **Change**+300
                    bp
                64,185
                -40,736
                -39%
                7.27%
                -380
                    bp+200
                    bp
                79,394
                -25,527
                -24%
                8.77%
                -230
                    bp+100
                    bp
                91,904
                -13,017
                -12%
                9.93%
                -114
                    bp0
                    bp
                104,921
                
                
                11.07%-100
                    bp
                111,493
                6,572
                6%
                11.56%
                49
                    bp-200
                    bp
                111,662
                6,741
                6%
                11.44%
                36
                    bp-300
                    bp
                117,557
                12,636
                12%
                11.80%
                73
                    bp
  **December
        31, 2006**
  **Net
        Portfolio Value**
 **Changes**
                  **In
                    Rates**
                **$
                    Amount**
                **$
                    Change**
                **%
                    Change**
                **NPV
                    as % of PV of Assets****NPV
                    Ratio**
                **Change**+300
                    bp
                51,994
                -46,416
                -47%
                5.99%
                -452
                    bp+200
                    bp
                68,740
                -29,670
                -30%
                7.71%
                -280
                    bp+100
                    bp
                83,901
                -14,509
                -15%
                9.18%
                -133
                    bp0
                    bp
                98,410
                
                
                10.51%-100
                    bp
                107,859
                9,449
                10%
                11.30%
                78
                    bp-200
                    bp
                114,259
                15,849
                16%
                11.76%
                125
                    bp-300
                    bp
                121,737
                23,327
                24%
                12.28%
                177
                    bp


The
      internal asset-liability model uses certain assumptions in assessing the
      interest rate risk of Mutual Federal. These assumptions relate to interest
      rates, loan prepayment rates, deposit decay rates, and the market value of
      certain assets under differing interest rate scenarios, among
      others.




As
      with
      any method of measuring interest rate risk, certain shortcomings are inherent
      in
      the method of analysis presented in the foregoing tables. For example, although
      certain assets and liabilities may have similar maturities or periods to
      repricing, they may react in different degrees to changes in market interest
      rates. Also, the interest rates on certain types of assets and liabilities
      may
      fluctuate in advance of changes in market interest rates, while interest rates
      on other types may lag behind changes in market rates. Additionally, certain
      assets, such as adjustable rate mortgage loans, have features which restrict
      changes in interest rates on a short-term basis and over the life of the asset.
      Further, if interest rates change, expected rates of prepayments on loans and
      early withdrawals from certificates could deviate significantly from those
      assumed in calculating the tables.




58




**Item
      8.**  **Financial
      Statements and Supplementary Data**


***MutualFirst*****Financial, Inc.**
  Accountants’
        Report and Consolidated Financial Statements
  December
        31, 2007, 2006 and 2005
  59
  **Report
        of Independent Registered Public Accounting Firm**
 
 Audit
        Committee, Board of Directors and Stockholders
 *MutualFirst* Financial, Inc.
 Muncie,
        Indiana
 
 We
        have
        audited the accompanying consolidated balance sheets of *MutualFirst* Financial, Inc. as of December 31, 2007, and 2006, and the related consolidated
        statements of income, stockholders’ equity and cash flows for each of the years
        in the three-year period ended December 31, 2007. The Company’s management is
        responsible for these financial statements. Our responsibility is to express
        an
        opinion on these financial statements based on our audits.
  We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audits to obtain reasonable assurance about whether the
        financial statements are free of material misstatement. Our audits included
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements, assessing the accounting principles used and
        significant estimates made by management and evaluating the overall financial
        statement presentation. We believe that our audits provide a reasonable basis
        for our opinion.
  In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of *MutualFirst* Financial, Inc. as of December 31, 2007 and 2006, and the results of its
        operations and its cash flows for each of the years in the three-year period
        ended December 31, 2007, in conformity with accounting principles generally
        accepted in the United States of America.
  As
        discussed in Note 3, the Company changed its method of presentation of cash
        inflows from sales of loans initially originated for retention in its portfolio
        by restating the 2006 consolidated statement of cash flows.
  We
        also
        have audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), *MutualFirst* Financial, Inc.’s internal control over financial reporting as of December 31,
        2007, based on criteria established in *Internal
        Control - Integrated Framework Issued by the Committee of Sponsoring
        Organizations of the Treadway Commission (COSO)* and our
        report dated March 7, 2008, expressed an unqualified opinion on the
        effectiveness of the Company’s internal control over financial
        reporting.
   BKD, LLP
  Indianapolis,
        Indiana
 March
        7,
        2008
  60
  ***MutualFirst*****Financial, Inc.**
 **Consolidated
        Balance Sheets**
 **December
        31, 2007 and 2006**
 **2007**
                
                **2006****Assets**Cash
                    and due from banks
                
                $
                21,003,114
                
                $
                23,235,328Interest-bearing
                    demand deposits
                
                
                2,645,057
                
                
                1,679,544Cash
                    and cash equivalents
                
                
                23,648,171
                
                
                24,914,872Interest-bearing
                    deposits
                
                
                100,000
                
                
                293,000Investment
                    securities available for sale
                
                
                43,592,485
                
                
                41,070,091Loans
                    held for sale
                
                
                1,644,615
                
                
                1,329,700Loans,
                    net of allowance for loan losses of $8,352,000 and
                    $8,156,000
                
                
                802,436,497
                
                
                805,625,486Premises
                    and equipment
                
                
                16,168,434
                
                
                15,431,475Federal
                    Home Loan Bank stock
                
                
                10,036,900
                
                
                9,938,400Investment
                    in limited partnerships
                
                
                3,246,468
                
                
                3,460,818Deferred
                    income tax benefit
                
                
                5,174,082
                
                
                4,376,318Cash
                    value of life insurance
                
                
                30,350,760
                
                
                29,120,760Goodwill
                
                
                14,187,725
                
                
                13,786,468Other
                    assets
                
                
                11,930,875
                
                
                11,495,044Total
                    assets
                
                $
                962,517,012
                
                $
                960,842,432**Liabilities
                    and Stockholders’ Equity****Liabilities**DepositsNoninterest-bearing
                
                $
                47,172,012
                
                $
                47,142,407Interest-bearing
                
                
                619,235,341
                
                
                656,216,247Total
                    deposits
                
                
                666,407,353
                
                
                703,358,654Federal
                    Home Loan Bank advances
                
                
                191,675,155
                
                
                157,425,176Other
                    borrowings
                
                
                3,907,394
                
                
                —Notes
                    payable
                
                
                1,055,433
                
                
                1,426,769Other
                    liabilities
                
                
                12,457,827
                
                
                11,367,515Total
                    liabilities
                
                
                875,503,162
                
                
                873,578,114**Commitments
                    and Contingencies****Stockholders’
                    Equity**Preferred
                    stock, $.01 par valueAuthorized
                    and unissued - 5,000,000 sharesCommon
                    stock, $.01 par valueAuthorized
                    - 20,000,000 sharesIssued
                    and outstanding - 4,226,638 and 4,366,636 shares
                
                
                42,266
                
                
                43,666Additional
                    paid-in capital
                
                
                32,567,085
                
                
                33,101,586Retained
                    earnings
                
                
                56,725,785
                
                
                56,698,546Accumulated
                    other comprehensive loss
                
                
                (414,380
                )
                
                (354,734
                )Unearned
                    benefit plan shares
                
                
                (1,906,906
                )
                
                (2,224,746
                )Total
                    stockholders’ equity
                
                
                87,013,850
                
                
                87,264,318Total
                    liabilities and stockholders’ equity
                
                $
                962,517,012
                
                $
                960,842,432
  *See
          Notes to Consolidated Financial Statements*
  61
  ***MutualFirst*****Financial, Inc.**
 **Consolidated
        Statem****ents
        of
        Income**
 **Years
        Ended December 31, 2007, 2006 and 2005**
 **2007**
                
                **2006**
                
                **2005****Interest
                    and Dividend Income**Loans
                    receivable
                
                $
                53,686,297
                
                $
                53,672,382
                
                $
                46,424,599Investment
                    securities
                
                
                2,110,916
                
                
                1,920,823
                
                
                1,625,288Federal
                    Home Loan Bank stock
                
                
                461,949
                
                
                459,255
                
                
                393,628Deposits
                    with financial institutions
                
                
                114,596
                
                
                67,143
                
                
                34,477Total
                    interest and dividend income
                
                
                56,373,758
                
                
                56,119,603
                
                
                48,477,992**Interest
                    Expense**Deposits
                
                
                24,498,471
                
                
                22,024,156
                
                
                15,285,549Federal
                    Home Loan Bank advances
                
                
                7,656,748
                
                
                7,803,817
                
                
                5,822,073Other
                    interest expense
                
                
                71,833
                
                
                62,424
                
                
                62,424Total
                    interest expense
                
                
                32,227,052
                
                
                29,890,397
                
                
                21,170,046**Net
                    Interest Income**
                
                
                24,146,706
                
                
                26,229,206
                
                
                27,307,946Provision
                    for loan losses
                
                
                2,240,000
                
                
                2,068,000
                
                
                1,775,000**Net
                    Interest Income After Provision for Loan Losses**
                
                
                21,906,706
                
                
                24,161,206
                
                
                25,532,946**Other
                    Income**Service
                    fee income
                
                
                4,831,161
                
                
                4,369,508
                
                
                4,025,671Net
                    realized losses on sales of available-for-sale securities
                
                
                —
                
                
                —
                
                
                (762
                )Commissions
                
                
                1,000,687
                
                
                682,432
                
                
                981,817Equity
                    in income (loss) of limited partnerships
                
                
                (99,654
                )
                
                (181,366
                )
                
                135,216Net
                    gains (losses) on sales of loans
                
                
                390,778
                
                
                (669,389
                )
                
                228,174Net
                    servicing fees
                
                
                81,033
                
                
                62,122
                
                
                192,171Increase
                    in cash value of life insurance
                
                
                1,230,000
                
                
                1,075,403
                
                
                955,000Other
                    income
                
                
                336,554
                
                
                1,303,778
                
                
                215,025Total
                    other income
                
                
                7,770,559
                
                
                6,642,488
                
                
                6,732,312**Other
                    Expenses**Salaries
                    and employee benefits
                
                
                14,758,489
                
                
                14,617,254
                
                
                13,792,355Net
                    occupancy expenses
                
                
                1,549,331
                
                
                1,507,067
                
                
                1,415,377Equipment
                    expenses
                
                
                1,318,932
                
                
                1,221,991
                
                
                1,228,134Data
                    processing fees
                
                
                1,058,357
                
                
                897,998
                
                
                821,863Advertising
                    and promotion
                
                
                887,237
                
                
                966,224
                
                
                801,377Automated
                    teller machine expense
                
                
                723,128
                
                
                699,435
                
                
                654,467Professional
                    fees
                
                
                764,007
                
                
                992,984
                
                
                1,018,485Other
                    expenses
                
                
                4,095,942
                
                
                4,116,326
                
                
                3,680,043Total
                    other expenses
                
                
                25,155,423
                
                
                25,019,279
                
                
                23,412,101**Income
                    Before Income Tax**
                
                
                4,521,842
                
                
                5,784,415
                
                
                8,853,157Income
                    tax expense
                
                
                295,700
                
                
                1,027,900
                
                
                2,400,975**Net
                    Income**
                
                $
                4,226,142
                
                $
                4,756,515
                
                $
                6,452,182**Earnings
                    Per Share**Basic
                
                $
                1.03
                
                $
                1.13
                
                $
                1.49Diluted
                
                
                1.02
                
                
                1.11
                
                
                1.45
  *See
        Notes to Consolidated Financial Statements*
  62
  ***MutualFirst*****Financial, Inc.**
 **Consolidated
        Statements of Stockholders’ Eq****uity**
 **Years
        Ended December 31, 2007, 2006 and 2005**
 **Accumulated****Other**
                
                **Unearned****Comprehensive**
                
                **Benefit****Common**
                
                **Paid-in**
                
                **Retained**
                
                **Income**
                
                **Plan****Stock**
                
                **Capital**
                
                **Earnings**
                
                **(Loss)**
                
                **Shares**
                
                **Total****Balances,
                    January 1, 2005**
                
                $
                47,084
                
                $
                34,385,254
                
                $
                56,826,053
                
                $
                (88,646
                )
                $
                (3,309,602
                )
                $
                87,860,143Comprehensive
                    incomeNet
                    income
                
                
                
                
                
                
                
                
                6,452,182
                
                
                
                
                
                
                
                
                6,452,182Other
                    comprehensive income, net oftax
                    - unrealized holding losses on securities
                
                
                
                
                
                
                
                
                
                
                
                (286,055
                )
                
                
                
                
                (286,055
                )Comprehensive
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                6,166,127Cash
                    dividends ($.53 per share)
                
                
                
                
                
                
                
                
                (2,308,856
                )
                
                
                
                
                
                
                
                (2,308,856
                )Exercise
                    of stock options
                
                
                534
                
                
                758,557
                
                
                
                
                
                
                
                
                
                
                
                759,091Stock
                    repurchased
                
                
                (2,096
                )
                
                (1,815,843
                )
                
                (3,000,902
                )
                
                
                
                
                
                
                
                (4,818,841
                )RRP
                    shares earned
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                256,500
                
                
                256,500Tax
                    benefit on stock options and RRP shares
                
                
                
                
                
                155,000
                
                
                
                
                
                
                
                
                
                
                
                155,000ESOP
                    shares earned
                
                
                
                
                
                406,616
                
                
                
                
                
                
                
                
                317,840
                
                
                724,456**Balances,
                    December 31, 2005**
                
                
                45,522
                
                
                33,889,584
                
                
                57,968,477
                
                
                (374,701
                )
                
                (2,735,262
                )
                
                88,793,620Comprehensive
                    incomeNet
                    income
                
                
                
                
                
                
                
                
                4,756,515
                
                
                
                
                
                
                
                
                4,756,515Other
                    comprehensive income, net oftax
                    - unrealized holding gains on securities
                
                
                
                
                
                
                
                
                
                
                
                19,967
                
                
                
                
                
                19,967Comprehensive
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                4,776,482Cash
                    dividends ($.58 per share)
                
                
                
                
                
                
                
                
                (2,359,547
                )
                
                
                
                
                
                
                
                (2,359,547
                )Exercise
                    of stock options
                
                
                474
                
                
                686,826
                
                
                
                
                
                
                
                
                
                
                
                687,300Stock
                    repurchased
                
                
                (2,330
                )
                
                (1,825,273
                )
                
                (3,107,881
                )
                
                
                
                
                
                
                
                (4,935,484
                )RRP
                    shares earned
                
                
                
                
                
                150,564
                
                
                
                
                
                
                
                
                
                
                
                150,564Tax
                    benefit on stock options and RRP shares
                
                
                
                
                
                45,400
                
                
                
                
                
                
                
                
                
                
                
                45,400ESOP
                    shares earned
                
                
                
                
                
                347,161
                
                
                
                
                
                
                
                
                317,840
                
                
                665,001Reclassification
                    of unearned RRP shares
                
                
                
                
                
                (192,676
                )
                
                
                
                
                
                
                
                192,676
                
                
                —Cumulative
                    effect of applying SAB No. 108
                
                
                
                
                
                
                
                
                (559,018
                )
                
                
                
                
                
                
                
                (559,018
                )**Balances,
                    December 31, 2006**
                
                
                43,666
                
                
                33,101,586
                
                
                56,698,546
                
                
                (354,734
                )
                
                (2,224,746
                )
                
                87,264,318Comprehensive
                    incomeNet
                    income
                
                
                
                
                
                
                
                
                4,226,142
                
                
                
                
                
                
                
                
                4,226,142Other
                    comprehensive income, net oftax
                    - unrealized holding losses on securities
                
                
                
                
                
                
                
                
                
                
                
                (59,646
                )
                
                
                
                
                (59,646
                )Comprehensive
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                4,166,496Cash
                    dividends ($.60 per share)
                
                
                
                
                
                
                
                
                (2,440,121
                )
                
                
                
                
                
                
                
                (2,440,121
                )Exercise
                    of stock options
                
                
                154
                
                
                208,459
                
                
                
                
                
                
                
                
                
                
                
                208,613Stock
                    repurchased
                
                
                (1,554
                )
                
                (1,032,936
                )
                
                (1,758,782
                )
                
                
                
                
                
                
                
                (2,793,272
                )RRP
                    shares earned
                
                
                
                
                
                21,056
                
                
                
                
                
                
                
                
                
                
                
                21,056Tax
                    benefit on stock options and RRP shares
                
                
                
                
                
                3,382
                
                
                
                
                
                
                
                
                
                
                
                3,382ESOP
                    shares earned
                
                
                
                
                
                265,538
                
                
                
                
                
                
                
                
                317,840
                
                
                583,378**Balances
                    December 31, 2007**
                
                $
                42,266
                
                $
                32,567,085
                
                $
                56,725,785
                
                $
                (414,380
                )
                $
                (1,906,906
                )
                $
                87,013,850
  *See
        Notes to Consolidated Financial Statements*
  63
  ***MutualFirst*****Financial, Inc.**
 **Consolidated
        Statements of Ca** **sh
        Flows**
 **Years
        Ended December 31, 2007, 2006 and 2005**
 **(As
                    Restated)****2007**
                
                **2006**
                
                **2005****Operating
                    Activities**Net
                    income
                
                $
                4,226,142
                
                $
                4,756,515
                
                $
                6,452,182Items
                    not requiring (providing) cashProvision
                    for loan losses
                
                
                2,240,000
                
                
                2,068,000
                
                
                1,775,000ESOP
                    shares earned
                
                
                583,378
                
                
                665,001
                
                
                724,456RRP
                    shares earned
                
                
                21,056
                
                
                150,564
                
                
                256,500Depreciation
                    and amortization
                
                
                2,554,786
                
                
                2,863,255
                
                
                2,643,167Deferred
                    income tax
                
                
                (758,000
                )
                
                (192,509
                )
                
                376,614Loans
                    originated for sale
                
                
                (24,427,954
                )
                
                (25,124,598
                )
                
                (12,445,397
                )Proceeds
                    from sales of loans held for sale
                
                
                24,262,686
                
                
                26,303,525
                
                
                13,564,331(Gains)
                    losses on sales of loans
                
                
                (390,778
                )
                
                669,389
                
                
                (228,174
                )Tax
                    benefit on stock options and RRP shares
                
                
                (3,382
                )
                
                (45,400
                )
                
                (155,000
                )Change
                    inInterest
                    receivable
                
                
                (70,746
                )
                
                275,770
                
                
                (443,527
                )Other
                    assets
                
                
                81,102
                
                
                (1,216,116
                )
                
                (941,473
                )Interest
                    payable
                
                
                638,031
                
                
                205,881
                
                
                396,568Other
                    liabilities
                
                
                825,515
                
                
                433,669
                
                
                395,216Cash
                    value of life insurance
                
                
                (1,230,000
                )
                
                (1,075,403
                )
                
                (955,000
                )Other
                    adjustments
                
                
                434,930
                
                
                939,706
                
                
                656,088Net
                    cash provided by operating activities
                
                
                8,986,766
                
                
                11,677,249
                
                
                12,071,551**Investing
                    Activities**Net
                    change in interest earning deposits
                
                
                193,000
                
                
                —
                
                
                —Purchases
                    of securities available for sale
                
                
                (7,810,905
                )
                
                (5,658,192
                )
                
                (10,263,230
                )Proceeds
                    from maturities and paydowns of securities available for
                    sale
                
                
                4,357,422
                
                
                3,946,193
                
                
                7,264,794Proceeds
                    from sales of securities available for sale
                
                
                802,748
                
                
                395,949
                
                
                13,399,931Net
                    change in loans
                
                
                (2,214,872
                )
                
                (6,082,431
                )
                
                (35,099,134
                )Proceeds
                    from sales of loans transferred to held for sale
                
                
                —
                
                
                23,442,643
                
                
                —Purchases
                    of premises and equipment
                
                
                (2,146,757
                )
                
                (2,752,106
                )
                
                (2,431,451
                )Proceeds
                    from real estate owned sales
                
                
                1,314,027
                
                
                1,126,224
                
                
                538,342Cash
                    received (paid) in acquisition, net
                
                
                (515,257
                )
                
                3,894,267
                
                
                (9,349,563
                )Other
                    investing activities
                
                
                100,671
                
                
                1,350,350
                
                
                (385,996
                )Net
                    cash provided by (used in) investing activities
                
                
                (5,919,923
                )
                
                19,662,897
                
                
                (36,326,307
                )**Financing
                    Activities**Net
                    change inNoninterest-bearing,
                    interest-bearing demand and savings deposits
                
                
                (543,777
                )
                
                15,877,096
                
                
                (21,457,623
                )Certificates
                    of deposits
                
                
                (36,407,524
                )
                
                (9,399,360
                )
                
                29,713,925Repayment
                    of note payable
                
                
                (433,760
                )
                
                (419,506
                )
                
                (424,005
                )Proceeds
                    from FHLB advances
                
                
                466,550,000
                
                
                514,450,000
                
                
                425,300,000Repayment
                    of FHLB advances
                
                
                (432,014,627
                )
                
                (542,731,831
                )
                
                (400,301,792
                )Proceeds
                    from other short-term borrowings
                
                
                3,907,394
                
                
                —
                
                
                —Net
                    change in advances by borrowers for taxes and insurance
                
                
                (369,852
                )
                
                (3,925
                )
                
                259,064Stock
                    repurchased
                
                
                (2,793,272
                )
                
                (4,935,484
                )
                
                (4,818,841
                )Proceeds
                    from stock options exercised
                
                
                208,613
                
                
                687,300
                
                
                759,091Tax
                    benefit on stock options and RRP shares
                
                
                3,382
                
                
                45,400
                
                
                155,000Cash
                    dividends
                
                
                (2,440,121
                )
                
                (2,359,547
                )
                
                (2,308,856
                )Net
                    cash provided by (used in) financing activities
                
                
                (4,333,544
                )
                
                (28,789,857
                )
                
                26,875,963**Net
                    Change in Cash and Cash Equivalents**
                
                
                (1,266,701
                )
                
                2,550,289
                
                
                2,621,207**Cash
                    and Cash Equivalents, Beginning of Year**
                
                
                24,914,872
                
                
                22,364,583
                
                
                19,743,376**Cash
                    and Cash Equivalents, End of Year**
                
                $
                23,648,171
                
                $
                24,914,872
                
                $
                22,364,583**Additional
                    Cash Flows Information**Interest
                    paid
                
                $
                31,589,021
                
                $
                29,684,516
                
                $
                20,571,776Income
                    tax paid
                
                
                445,000
                
                
                1,225,000
                
                
                2,502,366Transfers
                    from loans to foreclosed real estate
                
                
                1,970,782
                
                
                1,484,766
                
                
                2,048,232Mortgage
                    servicing rights capitalized
                
                
                241,131
                
                
                437,194
                
                
                134,710
  *See
        Notes to Consolidated Financial Statements*
  64
  ***MutualFirst*****Financial, Inc.**
 **Not** **es
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  **Note
        1:** **Nature
        of Operations and Summary of Significant Accounting
        Policies**
  The
        accounting and reporting policies of *MutualFirst* Financial, Inc. (Company) and its wholly owned subsidiary, Mutual Federal
        Savings Bank (Bank) and the Bank’s wholly owned subsidiaries, First MFSB
        Corporation and Mutual Federal Investment Company and the wholly owned
        subsidiary of Mutual Federal Investment Company, Mutual Federal REIT, Inc.,
        conform to accounting principles generally accepted in the United States
        of
        America and reporting practices followed by the banking industry. The more
        significant of the policies are described below.
  The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and disclosure of contingent assets and liabilities at the date
        of
        the financial statements and the reported amounts of revenues and expenses
        during the reporting period. Actual results could differ from those
        estimates.
  The
        Company is a thrift holding company whose principal activity is the ownership
        of
        the Bank. The Bank operates under a federal thrift charter and provides full
        banking services. As a federally chartered thrift, the Bank is subject to
        regulation by the Office of Thrift Supervision and the Federal Deposit Insurance
        Corporation.
  The
        Bank
        generates mortgage, consumer and commercial loans and receives deposits from
        customers located primarily in north central Indiana. The Bank’s loans are
        generally secured by specific items of collateral including real property,
        consumer assets and business assets. First MFSB Corporation sells various
        insurance products and Mutual Federal Investment Company invests in various
        investment securities and loans through Mutual Federal REIT, Inc.
  **Consolidation** - The
        consolidated financial statements include the accounts of the Company, the
        Bank,
        and the Bank’s subsidiaries, after elimination of all material intercompany transactions.
  **Cash
        Equivalents -** The
        Company considers all liquid investments with original maturities of three
        months or less to be cash equivalents.
  **Investment
        Securities** -
        Securities available for sale are carried at fair value with unrealized gains
        and losses reported separately in accumulated other comprehensive income,
        net of
        tax.
  Amortization
        of premiums and accretion of discounts are recorded using the interest method
        as
        interest income from securities. Realized gains and losses are recorded as
        net
        security gains (losses). Gains and losses on sales of securities are determined
        on the specific-identification method.
  Declines
        in the fair value of securities below their cost that are other-than-temporary
        are reflected as realized losses. In estimating other-than-temporary losses,
        management considers the length of time and extent that fair value has been
        less
        than cost, the financial condition and near term prospects of the issuer,
        and
        the Company’s ability and intent to hold the security for a period sufficient to
        allow for any anticipated recovery in fair value.
  65
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  **Loans
        held for sale** are
        carried at the lower of aggregate cost or market. Market is determined using
        the
        aggregate method. Net unrealized losses, if any, are recognized through a
        valuation allowance by charges to income based on the difference between
        estimated sales proceeds and aggregate cost.
  **Loans** are
        carried at the principal amount outstanding. A loan is impaired when, based
        on
        current information or events, it is probable that the Company will be unable
        to
        collect all amounts due (principal and interest) according to the contractual
        terms of the loan agreement. Payments with insignificant delays not exceeding
        90 days are not considered impaired. Certain significant nonaccrual and
        substantially delinquent loans may be considered to be impaired. The Company
        considers its investment in one-to-four family residential loans and consumer
        loans to be homogeneous and therefore excluded from separate identification
        for
        evaluation of impairment. Interest income is accrued on the principal balances
        of loans. The accrual of interest on impaired and nonaccrual loans is
        discontinued when, in management’s opinion, the borrower may be unable to meet
        payments as they become due. When interest accrual is discontinued, all unpaid
        accrued interest is reversed when considered uncollectible. Interest income
        is
        subsequently recognized only to the extent cash payments are received. Certain
        loan fees and direct costs are being deferred and amortized as an adjustment
        of
        yield on the loans over the contractual maturity of the loans.
  **Allowance
        for loan losses** is
        maintained to absorb loan losses based on management’s continuing review and
        evaluation of the loan portfolio and its judgment as to the impact of economic
        conditions on the portfolio. The evaluation by management includes consideration
        of past loss experience, changes in the composition of the portfolio, the
        current condition and amount of loans outstanding, and the probability of
        collecting all amounts due. Impaired loans are measured by the present value
        of
        expected future cash flows, or the fair value of the collateral of the loan,
        if
        collateral dependent. The allowance is increased by the provision for loan
        losses, which is charged against current period operating results. Loan losses
        are charged against the allowance when management believes the uncollectibility
        of a loan balance is confirmed. Subsequent recoveries, if any, are credited
        to
        the allowance.
  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. Management believes that as of
        December 31, 2007, the allowance for loan losses is adequate based on
        information currently available. A worsening or protracted economic decline
        in
        the areas within which the Bank operates would increase the likelihood of
        additional losses due to credit and market risks and could create the need
        for
        additional loss reserves.
  **Premises
        and equipment** are
        carried at cost net of accumulated depreciation. Depreciation is computed
        using
        the straight-line method based principally on the estimated useful lives
        of the
        assets which range from 3 to 50 years. Maintenance and repairs are expensed
        as incurred while major additions and improvements are capitalized. Gains
        and
        losses on dispositions are included in current operations.
  66
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  **Federal
        Home Loan Bank stock** is a
        required investment for institutions that are members of the Federal Home
        Loan
        Bank system. The required investment in the common stock is based on a
        predetermined formula and is carried at cost.
  **Mortgage
        servicing rights** on
        originated loans that have been sold are recorded at fair value. Capitalized
        servicing rights are amortized in proportion to and over the period of estimated
        servicing revenues. Impairment of mortgage servicing rights is based on the
        fair
        value of those rights. Fair values are estimated using discounted cash flows
        based on a current market interest rate. For purposes of measuring impairment,
        the rights are stratified based on the predominant risk characteristics of
        the
        underlying loans. The predominant characteristic currently used for
        stratification is type of loan. The amount of impairment recognized is the
        amount by which the capitalized mortgage servicing rights for a stratum exceed
        their fair values.
  **Investment
        in limited partnerships** is
        recorded primarily on the equity method of accounting. Losses due to impairment
        are recorded when it is determined that the investment no longer has the
        ability
        to recover its carrying amount. The benefits of low income housing tax credits
        associated with the investment are accrued when earned.
  **Goodwill** is
        tested annually for impairment. If the implied fair value of goodwill is
        lower
        than its carrying amount, a goodwill impairment is indicated and goodwill
        is
        written down to its implied fair value. Subsequent increases in goodwill
        value
        are not recognized in the financial statements.
  **Income
        tax** in the
        consolidated statements of income includes deferred income tax provisions
        or
        benefits for all significant temporary differences in recognizing income
        and
        expenses for financial reporting and income tax purposes. The Company files
        consolidated income tax returns with the Bank.
  **Earnings
        per share** is
        computed based upon the weighted-average common and common equivalent shares
        outstanding during each year. Unearned ESOP shares and RRP shares which have
        not
        vested have been excluded from the computation of average shares
        outstanding.
  **Reclassifications** of
        certain amounts in the 2006 and 2005 consolidated financial statements have
        been
        made to conform to the 2007 presentation.
  **Stock
        Options** are
        accounted for in accordance with Statement of Financial Accounting Standards
        (SFAS) No. 123R, *Share-Based
        Payment* .
        At
        December 31, 2007, the Company has a stock-based employee compensation plan,
        which is described more fully in Note 19. Prior to 2006, 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. Accordingly, in 2005, no stock-based employee
        compensation cost is reflected in net income, as all options granted under
        this
        plan had an exercise price equal to the market value of the underlying common
        stock at the grant date.
  Effective
        January 1, 2006, the Company adopted the fair value recognition provisions
        of
        SFAS No. 123R The Company selected the modified prospective application.
        Accordingly, after January 1, 2006, the Company began expensing the fair
        value of stock options granted, modified, repurchased or cancelled.
  67
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  During
        the period ended December 31, 2005, the Company accelerated the vesting of
        options previously granted, and the vesting period for the 2005 grants was
        established so that those grants would be fully vested by year-end. The term
        of
        the acceleration is such that no expense will be recognized by the Company
        on
        those grants, although it will continue to report the impact of the acceleration
        in its proforma disclosures of the earnings per share.
  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 No. 123,*Share-Based
        Payment*(SFAS
        123).
  **2005**Net
                  income, as reported
              
              $
              6,452Less:
                  Stock-based employee compensation cost determined under the fair
                  value
                  method, net of income taxes
              
              
              (164
              )Pro
                  forma net income
              
              $
              6,288Earnings
                  per shareBasic
                  - as reported
              
              $
              1.49Basic
                  - pro forma
              
              
              1.45Diluted
                  - as reported
              
              
              1.45Diluted
                  - pro forma
              
              
              1.42
  **Future
        Accounting Pronouncements.** On
        September 6, 2006, the FASB issued Statement of Financial Accounting Standards
        (SFAS) No. 157, *Fair
        Value Measurements* .
        SFAS 157 clarifies the fair value measurement objective, its application in
        GAAP and establishes a framework that builds on current practice and
        requirements. The framework simplifies and, where appropriate, codifies the
        similar guidance in existing pronouncements and applies broadly to financial
        and
        non-financial assets and liabilities. The Statement clarifies the definition
        of
        fair value as the price that would be received from selling an asset or paid
        to
        transfer a liability in an orderly transaction between market participants
        at
        the measurement date, known as an exit-price definition of fair value. It
        also
        provides further guidance on the valuation techniques to be used in estimating
        fair value. Current disclosures about the use of fair value to measure assets
        and liabilities are expanded in this Statement. The disclosures focus on
        the
        methods used for fair value measurements and apply whether the assets and
        liabilities are measured at fair value in all periods, such as trading
        securities, or in only some periods, such as impaired assets. The Statement
        is
        effective for all financial statements issued for fiscal years beginning
        after
        November 15, 2007 as well as for interim periods within such fiscal years.
        FASB Staff Position (FSP), FSP FAS 157-2, delays the effective date of SFAS
        157
        for nonfinancial assets and nonfinancial liabilities, except for those items
        that are recognized or disclosed at fair value in the financial statements
        on a
        recurring basis (at least annually) until fiscal years beginning after November
        15, 2008. The Company is currently evaluating the impact of this Statement
        and
        the related FSP on its financial statements.
  68
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  In
        February 2007, the FASB issued Statement of Financial Accounting Standards
        No. 159, *The
        Fair Value Option for Financial Assets and Financial
        Liabilities* - *Including
        an Amendment of FASB Statement No. 115* .
        SFAS 159 allows companies to report selected financial assets and
        liabilities at fair value. The changes in fair value are recognized in earnings
        and the assets and liabilities measured under this methodology are required
        to
        be displayed separately in the balance sheet.  The main intent of the
        Statement is to mitigate the difficulty in determining reported earnings
        caused
        by a “mixed-attribute model” (or reporting some assets at fair value and others
        using a different valuation attribute such as amortized cost). The project
        is
        separated into two phases. This first phase addresses the creation of a fair
        value option for financial assets and liabilities.  A second phase will
        address creating a fair value option for selected non-financial items.
        SFAS 159 is effective for all financial statements issued for fiscal years
        beginning after November 15, 2007.  The Company is currently
        evaluating the impact of this Statement on its financial
        statements.
  **Note
        2:** **Impact
        of Recently Adopted Accounting Pronouncements**
  The
        Company or one of its subsidiaries files income tax returns in U.S. federal
        and
        Indiana jurisdictions. With few exceptions, the Company is no longer subject
        to
        U.S. federal, state and local examinations by tax authorities for years before
        2004.
  The
        Company adopted the provisions of the Financial Accounting Standards Board
        (FASB) Interpretation No. 48 (FIN 48), *Accounting
        for Uncertainty in Income Taxes* -
        an
        interpretation of FASB Statement No. 109, on January 1, 2007. FIN 48 prescribes
        a recognition threshold and measurement attribute for the financial statement
        recognition and measurement of a tax position taken or expected to be taken
        in a
        tax return. FIN 48 also provides guidance on derecognition, classification,
        interest and penalties, accounting in interim periods, disclosure and
        transition. As a result of the implementation of FIN 48, the Company did
        not
        identify any material uncertain tax positions that it believes should be
        recognized in the financial statements.
  In
        accordance with Staff Accounting Bulletin 108, the Company made an adjustment
        to
        the 2006 financial statements to correct an error that had previously been
        considered immaterial. The error arose in 2001 as the Company recognized
        accretion relating to negative goodwill that had been allocated as a pro
        rata
        reduction of an investment in low income housing partnership. Related to
        this
        and subsequent to 2001, the Company recognized its portion of losses on the
        investment although due to the allocation of negative goodwill, the investment
        had no book value. The error was $559,000 and is shown as a cumulative effect
        of
        adopting SAB No. 108 in the consolidated statements of stockholders’ equity.
  69
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  **Note
        3:** **Restatement**
  In
        the
        2006 statement of cash flows, the Company had accounted for all loan sale
        activity as operating activities. Management has now determined that, in
        accordance with Statement of Financial Accounting Standards (SFAS) No. 102, *Statement
        of Cash Flows, Exemption of Certain Enterprises and Classification of Cash
        Flows
        from Certain Securities Acquired for Resale* ,
        sales
        of loans initially originated by the Company for retention in its portfolio
        (as
        opposed to loans originated for the purpose of resale) must be accounted
        for in
        the statement of cash flows as investing activities. As a result, the Company
        has accounted for its loan sale activities in the statements of cash flows
        in
        the manner required by SFAS No. 102 and corrected the classification in the
        prior period statement to be consistent with this presentation.
  The
        restatement will cause net cash provided by operating activities to decrease,
        and net cash provided by (used in) investing activities to increase, dollar
        for
        dollar, by $23.4 million.  The restatement will have no effect on net
        cash provided by (used in) financing activities or the net change in cash
        and
        cash equivalents for fiscal 2006.  The restatement will have no effect on
        the Company’s consolidated statements of financial condition, consolidated
        statements of income or consolidated statements of stockholders’
equity.
  The
        following financial statement line items for fiscal year 2006 were affected
        by
        the correction:
  **As**
                **Restated**
              
              **As**
                **Previously
                  Reported**
              
              **Effect
                  of**
                **Change****Consolidated
                  Statement of Cash Flows**Proceeds
                  from sales of loans held for sale
              
              $
              26,303,525
              
              $
              49,746,168
              
              $
              (23,442,643
              )Net
                  cash provided by operating activities
              
              
              11,677,249
              
              
              35,119,892
              
              
              (23,442,643
              )Proceeds
                  of loans transferred to held for sale
              
              
              23,442,643
              
              
              —
              
              
              23,442,643Net
                  cash used in investing activities
              
              
              19,662,897
              
              
              (3,779,746
              )
              
              23,442,643
  **Note
        4:** **Acquisitions**
  On
        August
        18, 2006, the Bank acquired three branch offices in Warsaw, Wabash and
        Winchester, Indiana of Community First Bank and Trust from First Financial
        Bancorp of Hamilton, Ohio (First Financial). As a result of the acquisition,
        the
        Bank will have an opportunity to increase its deposit base and reduce
        transaction costs. The Bank also expects to reduce costs through economies
        of
        scale.
  70
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  The
        aggregate cash received was $3,690,000. The following table summarizes the
        estimated fair values of the assets acquired and liabilities assumed at the
        date
        of acquisition.
  Cash
                    and cash equivalents
                
                $
                204Loans
                
                
                6,502Premises
                    and equipment
                
                
                803Core
                    deposit intangible
                
                
                313Goodwill
                
                
                842Total
                    assets acquired
                
                
                8,664Deposits
                
                
                12,327Other
                    liabilities
                
                
                27Total
                    liabilities assumed
                
                
                12,354Net
                    liabilities assumed
                
                $
                3,690
  The
        only
        significant intangible asset acquired was the core deposit base, which has
        a
        useful life of approximately ten years and will be amortized using an
        accelerated method. The $842,000 of goodwill is expected to be deductible
        for
        tax purposes ratably over fifteen years.
  On
        September 16, 2005, the Bank acquired substantially all of the assets and
        assumed essentially all of the liabilities of Fidelity Federal Savings Bank
        (Fidelity), an affiliate of First Financial. First Financial did not account
        for
        Fidelity as a separate operating segment and, therefore, complete financial
        statements are not available for purposes of presenting proforma disclosures.
        The results of Fidelity’s operations have been included in the consolidated
        financial statements since that date. Fidelity is a thrift located in Marion,
        Indiana. As a result of the acquisition, the Bank will have an opportunity
        to
        increase its deposit base and reduce transaction costs. The Bank also expects
        to
        reduce costs through economies of scale.
  71
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  The
        aggregate cash purchase price was $20,274,000. The following table summarizes
        the estimated fair values of the assets acquired and liabilities assumed
        at the
        date of acquisition.
 Cash
                    and cash equivalents
                
                $
                10,924Investments
                
                
                12,887Loans
                
                
                79,805Premises
                    and equipment
                
                
                641Core
                    deposit intangible
                
                
                1,011Goodwill
                
                
                12,119Other
                    assets
                
                
                682Total
                    assets acquired
                
                
                118,069Deposits
                
                
                75,890Federal
                    Home Loan Bank advances
                
                
                21,658Other
                    liabilities
                
                
                247Total
                    liabilities assumed
                
                
                97,795Net
                    assets acquired
                
                $
                20,274
  The
        only
        significant intangible asset acquired was the core deposit base, which has
        a
        useful life of approximately ten years and will be amortized using an
        accelerated method. The $12,119,000 of goodwill is expected to be deductible
        for
        tax purposes ratably over fifteen years.
  **Note
        5:** **Restriction
        on Cash**
  The
        Bank
        is required to maintain reserve funds in cash and/or on deposit with the
        Federal
        Reserve Bank. The reserve required at December 31, 2007 was
        $2,056,000.
  72
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  **Note
        6:** **Investment
        Securities Available for Sale**
  **2007****Amortized**
                  **Cost**
                
                **Gross**
                  **Unrealized**
                  **Gains**
                
                **Gross**
                  **Unrealized**
                  **Losses**
                
                **Fair**
                  **Value**Mortgage-backed
                    securities
                
                $
                2,310
                
                $
                45
                
                $
                (3
                )
                $
                2,352Collateralized
                    mortgage obligations
                
                
                8,327
                
                
                38
                
                
                (43
                )
                
                8,322Federal
                    agencies
                
                
                500
                
                
                —
                
                
                (2
                )
                
                498Small
                    Business Administration
                
                
                108
                
                
                —
                
                
                (1
                )
                
                107Corporate
                    obligations
                
                
                16,655
                
                
                11
                
                
                (267
                )
                
                16,399Marketable
                    equity securities
                
                
                16,382
                
                
                —
                
                
                (468
                )
                
                15,914Total
                    investment securities
                
                $
                44,282
                
                $
                94
                
                $
                (784
                )
                $
                43,592
  **2006****Amortized**
                  **Cost**
                
                **Gross**
                  **Unrealized**
                  **Gains**
                
                **Gross**
                  **Unrealized**
                  **Losses**
                
                **Fair**
                  **Value**Mortgage-backed
                    securities
                
                $
                3,146
                
                $
                30
                
                $
                (20
                )
                $
                3,156Collateralized
                    mortgage obligations
                
                
                6,860
                
                
                1
                
                
                (99
                )
                
                6,762Federal
                    agencies
                
                
                1,001
                
                
                —
                
                
                (18
                )
                
                983Small
                    Business Administration
                
                
                116
                
                
                —
                
                
                —
                
                
                116Corporate
                    obligations
                
                
                14,332
                
                
                20
                
                
                (116
                )
                
                14,236Marketable
                    equity securities
                
                
                16,206
                
                
                —
                
                
                (389
                )
                
                15,817Total
                    investment securities
                
                $
                41,661
                
                $
                51
                
                $
                (642
                )
                $
                41,070
  Marketable
        equity securities consist of shares in mutual funds which invest in government
        obligations and mortgage-backed securities.
  73
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  Certain
        investments in debt and marketable equity securities are reported in the
        financial statements at an amount less than their historical cost. Total
        fair
        value of these investments at December 31, 2007 and 2006 was $28,308,000
        and $30,510,000, which is approximately 65 percent and 74 percent of the
        Company’s available-for-sale investment portfolio at those dates. These declines
        primarily resulted from increases in market interest rates. The marketable
        equity securities consist of units in an adjustable rate mortgage (ARM) fund
        and
        were purchased to help the Company’s investment portfolio provide higher levels
        of current income in rising rate environments. This is due to the adjustable
        and
        floating rate securities that comprise the majority of the funds assets.
        As
        fixed rate bonds lose value in rising rate environments, the ARM fund is
        managed
        to minimize market value declines due to the proclivity of the majority of
        the
        fund assets to reset up to market levels in rising rate environments. The
        unrealized losses the Company is experiencing on the ARM fund were expected
        in
        the current rate environment. The ARM fund has consistently followed the
        same
        strategy and asset allocation since its inception. When rates start to rise,
        it
        is anticipated the fund will reinvest in higher rate mortgage instruments.
  Based
        on
        evaluation of available evidence, including recent changes in market interest
        rates, management believes the declines in fair value for these securities
        are
        temporary.
  Should
        the impairment of any of these securities become other than temporary, the
        cost
        basis of the investment will be reduced and the resulting loss recognized
        in net
        income in the period the other-than-temporary impairment is
        identified.
  The
        following tables show our investments’ gross unrealized losses and fair value,
        aggregated by investment category and length of time that individual securities
        have been in a continuous unrealized loss position at December 31, 2007 and
        2006:
  **2007****Less
                    than 12 Months**
                
                **12
                    Months or More**
                
                **Total****Description
                    of**
                  **Securities**
                
                **Fair**
                  **Value**
                
                **Unrealized**
                  **Losses**
                
                **Fair**
                  **Value**
                
                **Unrealized**
                  **Losses**
                
                **Fair**
                  **Value**
                
                **Unrealized**
                  **Losses**Mortgage-backed
                    securities
                
                $
                —
                
                $
                —
                
                $
                270
                
                $
                (3
                )
                $
                270
                
                $
                (3
                )Collateralized
                    mortgage obligations
                
                
                —
                
                
                —
                
                
                3,720
                
                
                (43
                )
                
                3,720
                
                
                (43
                )Federal
                    agencies
                
                
                —
                
                
                —
                
                
                498
                
                
                (2
                )
                
                498
                
                
                (2
                )Small
                    Business Administration
                
                
                107
                
                
                (1
                )
                
                —
                
                
                —
                
                
                107
                
                
                (1
                )Corporate
                    obligations
                
                
                2,730
                
                
                (231
                )
                
                5,463
                
                
                (36
                )
                
                8,193
                
                
                (267
                )Marketable
                    equity securities
                
                
                —
                
                
                —
                
                
                15,520
                
                
                (468
                )
                
                15,520
                
                
                (468
                )Total
                    temporarily impaired securities
                
                $
                2,837
                
                $
                (232
                )
                $
                25,471
                
                $
                (552
                )
                $
                28,308
                
                $
                (784
                )
  74
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  **2006****Less
                    than 12 Months**
                
                **12
                    Months or More**
                
                **Total****Description
                    of**
                  **Securities**
                
                **Fair**
                  **Value**
                
                **Unrealized**
                  **Losses**
                
                **Fair**
                  **Value**
                
                **Unrealized**
                  **Losses**
                
                **Fair**
                  **Value**
                
                **Unrealized**
                  **Losses**Mortgage-backed
                    securities
                
                $
                967
                
                $
                (2
                )
                $
                458
                
                $
                (18
                )
                $
                1,425
                
                $
                (20
                )Collateralized
                    mortgage obligations
                
                
                907
                
                
                (2
                )
                
                4,964
                
                
                (97
                )
                
                5,871
                
                
                (99
                )Federal
                    agencies
                
                
                —
                
                
                —
                
                
                983
                
                
                (18
                )
                
                983
                
                
                (18
                )Corporate
                    obligations
                
                
                —
                
                
                —
                
                
                7,415
                
                
                (116
                )
                
                7,415
                
                
                (116
                )Marketable
                    equity securities
                
                
                —
                
                
                —
                
                
                14,816
                
                
                (389
                )
                
                14,816
                
                
                (389
                )Total
                    temporarily impaired securities
                
                $
                1,874
                
                $
                (4
                )
                $
                28,636
                
                $
                (638
                )
                $
                30,510
                
                $
                (642
                )
  The
        amortized cost and fair value of securities available for sale at
        December 31, 2007, by contractual maturity, are shown below. Expected
        maturities will differ from contractual maturities because issuers may have
        the
        right to call or prepay obligations with or without call or prepayment
        penalties.
 **2007****Amortized**
                  **Cost**
                
                **Fair**
                  **Value**Within
                    one year
                
                $
                4,506
                
                $
                4,500One
                    to five years
                
                
                2,495
                
                
                2,474Five
                    to ten years
                
                
                —
                
                
                —After
                    ten years
                
                
                10,154
                
                
                9,92317,155
                
                
                16,897Mortgage-backed
                    securities
                
                
                2,310
                
                
                2,352Collateralized
                    mortgage obligations
                
                
                8,327
                
                
                8,322Small
                    Business Administration
                
                
                108
                
                
                107Marketable
                    equity securities
                
                
                16,382
                
                
                15,914Totals
                
                $
                44,282
                
                $
                43,592
  The
        carrying value of securities pledged as collateral, to secure public deposits
        and for other purposes, was $16,018,000 and $15,309,000 at December 31, 2007
        and
        2006.
  Proceeds
        from sales of securities available for sale during 2007, 2006 and 2005 were
        $803,000, $396,000 and $13,400,000. Gross losses of $0, $0 and $1,000 in
        2007,
        2006 and 2005 were recognized on those sales.
  75
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  **Note
        7:** **Loans
        and Allowance**
 **2007**
                
                **2006**Real
                    estate loansOne-to-four
                    family
                
                $
                429,373
                
                $
                431,793Multi-family
                
                
                3,929
                
                
                5,073Commercial
                
                
                82,116
                
                
                73,912Construction
                    and development
                
                
                13,560
                
                
                14,451528,978
                
                
                525,229Consumer
                    loansAuto
                
                
                22,917
                
                
                31,336Home
                    equity
                
                
                27,232
                
                
                30,051Home
                    improvement
                
                
                45,156
                
                
                38,546Mobile
                    home
                
                
                992
                
                
                1,422Recreational
                    vehicles
                
                
                77,805
                
                
                71,321Boats
                
                
                47,816
                
                
                46,311Other
                
                
                3,593
                
                
                3,986225,511
                
                
                222,973Commercial
                    business loans
                
                
                56,764
                
                
                67,476Total
                    loans
                
                
                811,253
                
                
                815,678Undisbursed
                    loans in process
                
                
                (3,984
                )
                
                (5,520
                )Unamortized
                    deferred loan costs, net
                
                
                3,519
                
                
                3,623Allowance
                    for loan losses
                
                
                (8,352
                )
                
                (8,156
                )Net
                    loans
                
                $
                802,436
                
                $
                805,625
  **2007**
                
                **2006**
                
                **2005**Allowance
                    for loan lossesBalances,
                    January 1
                
                $
                8,156
                
                $
                8,100
                
                $
                6,867Provision
                    for losses
                
                
                2,240
                
                
                2,068
                
                
                1,775Allowance
                    acquired in acquisition
                
                
                —
                
                
                —
                
                
                1,646Recoveries
                    on loans
                
                
                679
                
                
                291
                
                
                351Loans
                    charged off
                
                
                (2,723
                )
                
                (2,303
                )
                
                (2,539
                )Balances,
                    December 31
                
                $
                8,352
                
                $
                8,156
                
                $
                8,100
  At
        December 31, 2007 and 2006, accruing loans delinquent 90 days or more totaled
        $1,421,000 and $0. Non-accruing loans at December 31, 2007 and 2006 were
        $8,949,000 and $5,569,000.
  76
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  Impaired
        loans totaled $9,371,000 and $5,561,000 at December 31, 2007 and 2006,
        respectively. An allowance for loan losses of $355,000 and $243,000 relates
        to
        impaired loans of $752,000 and $723,000 at December 31, 2007 and 2006,
        respectively. At December 31, 2007, impaired loans of $8,618,000 had no related
        allowance for loan losses.
  Interest
        of $449,000, $203,000 and $165,000 was recognized on average impaired loans
        of
        $9,488,000, $6,288,000 and $6,944,000 for 2007, 2006 and 2005, respectively.
        Interest of $151,000, $7,000 and $2,000 was recognized on impaired loans
        on a
        cash basis during 2007, 2006 and 2005, respectively.
  **Note
        8:** **Premises
        and Equipment**
 **2007**
                
                **2006**CostLand
                
                $
                5,624
                
                $
                5,578Buildings
                    and land improvements
                
                
                13,609
                
                
                12,371Equipment
                
                
                11,622
                
                
                11,622Total
                    cost
                
                
                30,855
                
                
                29,571Accumulated
                    depreciation and amortization
                
                
                (14,687
                )
                
                (14,140
                )Net
                
                $
                16,168
                
                $
                15,431
  **Note
        9:** **Investment
        In Limited Partnerships**
 **2007**
                
                **2006**Pedcor
                    Investments 1990-XI (19.79 percent ownership)
                
                $
                —
                
                $
                5Pedcor
                    Investments 1990-XIII (99.00 percent ownership)
                
                
                625
                
                
                626Pedcor
                    Investments 1997-XXVIII (99.00 percent ownership)
                
                
                2,309
                
                
                2,474Pedcor
                    Investments 1997-XXIX (99.00 percent ownership)
                
                
                —
                
                
                —Pedcor
                    Investments 2001-LI (9.90 percent ownership)
                
                
                312
                
                
                356$
                3,246
                
                $
                3,461
  77
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  The
        limited partnerships build, own and operate apartment complexes. The Company
        records its equity in the net income or loss of the limited partnerships
        based
        on the Company’s interest in the partnerships. The Company recorded income
        (loss) from these limited partnerships of $(100,000), $(181,000) and $135,000
        for 2007, 2006 and 2005. In addition, the Company has recorded the benefit
        of
        low income housing credits of $811,000, $801,000 and $811,000 for 2007, 2006
        and
        2005. Combined financial statements for the limited partnerships recorded
        under
        the equity method of accounting are as follows:
 **2007**
                
                **2006**Combined
                    condensed balance sheetsAssetsCash
                
                $
                179
                
                $
                219Land
                    and property
                
                
                29,243
                
                
                30,092Other
                    assets
                
                
                1,642
                
                
                930Total
                    assets
                
                $
                31,064
                
                $
                31,241LiabilitiesNotes
                    payable
                
                $
                28,228
                
                $
                28,323Other
                    liabilities
                
                
                847
                
                
                1,081Total
                    liabilities
                
                
                29,075
                
                
                29,404Partners'
                    equity (deficit)General
                    partners
                
                
                (2,885
                )
                
                (2,946
                )Limited
                    partners
                
                
                4,874
                
                
                4,783Total
                    partners’ equity
                
                
                1,989
                
                
                1,837Total
                    liabilities and partners' equity
                
                $
                31,064
                
                $
                31,241
  **2007**
                
                **2006**
                
                **2005**Combined
                    condensed statements of operationsTotal
                    revenue
                
                $
                4,007
                
                $
                3,400
                
                $
                3,114Total
                    expenses
                
                
                (4,647
                )
                
                (4,293
                )
                
                (3,832
                )Net
                    loss
                
                $
                (640
                )
                $
                (893
                )
                $
                (718
                )
  78
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  **Note
        10:** **Goodwill**
  The
        changes in the carrying amount of goodwill for the years ended December 31,
        2007
        and 2006, were:
 **2007**
                
                **2006**Balance
                    as of January 1
                
                $
                13,787
                
                $
                12,927Goodwill
                    acquired during the year
                
                
                401
                
                
                860Impairment
                    losses
                
                
                —
                
                
                —Goodwill
                    written off related to sales of branches
                
                
                —
                
                
                —Balance
                    as of December 31
                
                $
                14,188
                
                $
                13,787
  The
        increase in goodwill in 2007 was the result of an immaterial
        acquisition.
  **Note
        11: D** **eposits**
 **2007**
                
                **2006**Noninterest-bearing
                    demand
                
                $
                47,172
                
                $
                47,142Interest-bearing
                    demand
                
                
                117,863
                
                
                107,963Savings
                
                
                50,388
                
                
                55,750Money
                    market savings
                
                
                22,664
                
                
                27,788Certificates
                    and other time deposits of $100,000 or more
                
                
                127,277
                
                
                149,452Other
                    certificates
                
                
                301,043
                
                
                315,264Total
                    deposits
                
                $
                666,407
                
                $
                703,359
  Certifi cates
        including other time deposits of $100,000 or more maturing in years ending
        December 31:
 2008
                
                $
                362,5262009
                
                
                32,2912010
                
                
                20,5692011
                
                
                5,9732012
                
                
                6,889Thereafter
                
                
                72$
                428,320
 79
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  **Note
        12:** **Federal
        Home Loan Bank Advances**
 **Maturities
                    Years Ending December 31**2008
                
                $
                81,4212009
                
                
                48,8402010
                
                
                50,3862011
                
                
                6832012
                
                
                5,600Thereafter
                
                
                4,745$
                191,675
  At
        December 31, 2007, the Company has pledged $427,845,000 in qualifying first
        mortgage loans and investment securities as collateral for advances and
        outstanding letters of credit. Advances, at interest rates from 2.92 to 7.33
        percent at December 31, 2007, are subject to restrictions or penalties in
        the event of prepayment.
  **Note
        13:** **Other
        Borrowings**
  The
        Company has a $3,000,000 revolving line of credit from LaSalle Bank expiring
        in
        February 2008. At December 31, 2007 and 2006, the Company had $497,000 and
        $0 borrowed against this line, respectively. The line is collateralized by
        the
        Bank’s stock. Interest is payable quarterly and is either based on the lender’s
        prime rate or the three month LIBOR rate plus 165 basis points. At December
        31,
        2007, the interest rate was 6.81%, which was based on the three month LIBOR
        rate.
  The
        Bank
        reclassified $3,411,000 as of December 31, 2007, due to an overdraft at the
        Federal Home Loan Bank of Indianapolis.
  **Note
        14:** **Notes
        Payable**
  The
        Bank
        has a noninterest-bearing, unsecured term note payable to Pedcor Investments
        1997-XXVIII, L.P. of $1,073,000 and $1,339,000 at December 31, 2007 and
        2006 payable in semiannual installments through January 1, 2010. At
        December 31, 2007 and 2006, the Bank was obligated under an irrevocable
        direct pay letter of credit for the benefit of a third party in the amount
        of
        $1,038,000 and $1,254,000, respectively, relating to this note and the financing
        for an apartment project by Pedcor Investments 1997-XXVIII L.P.
  80
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  The
        Bank
        also has a noninterest-bearing, unsecured term note payable to Pedcor
        Investments 1997-XXIX, L.P. The note, which is payable in annual installments
        through August 15, 2008, had a balance of $50,000 and $218,000 at December
        31, 2007 and 2006.
 **Maturities
                    Years Ending December 31**2008
                
                $
                4082009
                
                
                4212010
                
                
                226$
                1,055
  **Note
        15:** **Loan
        Servicing**
  Loans
        serviced for others are not included in the accompanying consolidated balance
        sheets. The unpaid principal balances of these loans consist of the
        following:
 **2007**
                
                **2006**
                
                **2005**Loans
                    serviced forFreddie
                    Mac
                
                $
                137,973
                
                $
                139,571
                
                $
                103,279Fannie
                    Mae
                
                
                1,936
                
                
                3,180
                
                
                4,155Federal
                    Home Loan Bank
                
                
                33,998
                
                
                25,914
                
                
                24,379Other
                    investors
                
                
                4,757
                
                
                7,708
                
                
                9,096$
                178,664
                
                $
                176,373
                
                $
                140,909
  The
        aggregate fair value of capitalized mortgage servicing rights is based on
        comparable market values and expected cash flows, with impairment assessed
        based
        on portfolio characteristics including product type and interest rates. The
        fair
        value of mortgage servicing rights at December 31, 2007 was
        $1,629,000.
 **2007**
                
                **2006**
                
                **2005**Mortgage
                    Servicing RightsBalances,
                    January 1
                
                $
                1,261
                
                $
                1,175
                
                $
                1,375Servicing
                    rights capitalized
                
                
                241
                
                
                437
                
                
                135Servicing
                    rights acquired
                
                
                —
                
                
                —
                
                
                52Amortization
                    of servicing rights
                
                
                (376
                )
                
                (351
                )
                
                (387
                )1,126
                
                
                1,261
                
                
                1,175Valuation
                    allowance
                
                
                —
                
                
                —
                
                
                —Balances,
                    December 31
                
                $
                1,126
                
                $
                1,261
                
                $
                1,175
  81
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  Activity
        in the valuation allowance for mortgage servicing right was as
        follows:
 **2007**
                
                **2006**
                
                **2005**Balance,
                    beginning of year
                
                $
                —
                
                $
                —
                
                $
                180Additions
                
                
                —
                
                
                —
                
                
                43Reductions
                
                
                —
                
                
                —
                
                
                (223
                )Balances,
                    end of year
                
                $
                —
                
                $
                —
                
                $
                —
  **Note
        16:** **Income
        Tax**
 **2007**
                
                **2006**
                
                **2005**Income
                    tax expenseCurrently
                    payableFederal
                
                $
                1,012
                
                $
                960
                
                $
                1,527State
                
                
                42
                
                
                260
                
                
                497DeferredFederal
                
                
                (691
                )
                
                (279
                )
                
                231State
                
                
                (67
                )
                
                87
                
                
                146Total
                    income tax expense
                
                $
                296
                
                $
                1,028
                
                $
                2,401Reconciliation
                    of federal statutory to actual tax expenseFederal
                    statutory income tax at 34%
                
                $
                1,537
                
                $
                1,967
                
                $
                3,010Effect
                    of state income taxes
                
                
                (17
                )
                
                229
                
                
                424Low
                    income housing credits
                
                
                (811
                )
                
                (801
                )
                
                (811
                )Tax-exempt
                    income
                
                
                (525
                )
                
                (459
                )
                
                (384
                )Other
                
                
                112
                
                
                92
                
                
                162Actual
                    tax expense
                
                $
                296
                
                $
                1,028
                
                $
                2,401Effective
                    tax rate
                
                
                6.50
                %
                
                17.8
                %
                
                27.1
                %
  82
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  The
        components of the deferred asset included on the balance sheets are as
        follows:
 **2007**
                
                **2006****Assets**Unrealized
                    loss on securities available for sale
                
                $
                276
                
                $
                236Allowance
                    for loan losses
                
                
                3,108
                
                
                2,894Deferred
                    compensation
                
                
                2,858
                
                
                2,724Business
                    tax and AMT credit carryovers
                
                
                1,936
                
                
                1,577Other
                
                
                789
                
                
                825Total
                    assets
                
                
                8,967
                
                
                8,256**Liabilities**Depreciation
                    and amortization
                
                
                (951
                )
                
                (881
                )FHLB
                    stock
                
                
                (510
                )
                
                (510
                )State
                    income tax
                
                
                (199
                )
                
                (176
                )Loan
                    fees
                
                
                (387
                )
                
                (466
                )Investments
                    in limited partnerships
                
                
                (1,279
                )
                
                (1,324
                )Mortgage
                    servicing rights
                
                
                (467
                )
                
                (523
                )Total
                    liabilities
                
                
                (3,793
                )
                
                (3,880
                )$
                5,174
                
                $
                4,376
  The
        Company has unused business income tax credits of $1,763,000 that begin to
        expire in 2025. In addition, the Company has an AMT credit carryover of $173,000
        with an unlimited carryover period.
  Retained
        earnings include approximately $14,743,000 for which no deferred income tax
        liability has been recognized. This amount represents an allocation of income
        to
        bad debt deductions as of December 31, 1987 for tax purposes only.
        Reduction of amounts so allocated for purposes other than tax bad debt losses
        or
        adjustments arising from carryback of net operating losses would create income
        for tax purposes only, which income would be subject to the then-current
        corporate income tax rate. The unrecorded deferred income tax liability on
        the
        above amounts was approximately $5,013,000.
  83
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  **Note
        17:** **Other
        Comprehensive Income (Loss)**
 **2007****Before-Tax**
                  **Amount**
                
                **Tax**
                  **Benefit**
                
                **Net-of-Tax**
                  **Amount**Unrealized
                    losses on securitiesUnrealized
                    holding losses arising during the year
                
                $
                (99
                )
                $
                39
                
                $
                (60
                )Less:
                    reclassification adjustment for losses realized in net
                    income
                
                
                —
                
                
                —
                
                
                —Net
                    unrealized losses
                
                $
                (99
                )
                $
                39
                
                $
                (60
                )
  **2006****Before-Tax**
                  **Amount**
                
                **Tax**
                  **Expense**
                
                **Net-of-Tax**
                  **Amount**Unrealized
                    gains on securitiesUnrealized
                    holding gains arising during the year
                
                $
                33
                
                $
                (13
                )
                $
                20Less:
                    reclassification adjustment for losses realized in net
                    income
                
                
                —
                
                
                —
                
                
                —Net
                    unrealized gains
                
                $
                33
                
                $
                (13
                )
                $
                20
  **2005****Before-TaxAmount**
                
                **Tax**
                  **Benefit**
                
                **Net-of-Tax**
                  **Amount**Unrealized
                    losses on securitiesUnrealized
                    holding losses arising during the year
                
                $
                (475
                )
                $
                188
                
                $
                (287
                )Less:
                    reclassification adjustment for losses realized in net
                    income
                
                
                (1
                )
                
                —
                
                
                (1
                )Net
                    unrealized losses
                
                $
                (474
                )
                $
                188
                
                $
                (286
                )
  **Note
        18:** **Commitments
        and Contingent Liabilities**
  In
        the
        normal course of business there are outstanding commitments and contingent
        liabilities, such as commitments to extend credit and standby letters of
        credit,
        which are not included in the accompanying financial statements. The Company’s
        exposure to credit loss in the event of nonperformance by the other party
        to the
        financial instruments for commitments to extend credit and standby letters
        of
        credit is represented by the contractual or notional amount of those
        instruments. The Company uses the same credit policies in making such
        commitments as it does for instruments that are included in the consolidated
        statements of financial condition.
  84
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  Financial
        instruments whose contract amount represents credit risk as of December 31
        were
        as follows:
 **2007**
                
                **2006**
                
                **2005**Loan
                    commitments
                
                $
                93,662
                
                $
                82,146
                
                $
                73,609Standby
                    letters of credit
                
                
                4,160
                
                
                6,492
                
                
                7,157
  Commitments
        to extend credit are agreements to lend to a customer as long as there is
        no
        violation of any condition established in the contract. Commitments generally
        have fixed expiration dates or other termination clauses and may require
        payment
        of a fee. Since many of the commitments are expected to expire without being
        drawn upon, the total commitment amounts do not necessarily represent future
        cash requirements. The Company evaluates each customer's credit worthiness
        on a
        case-by-case basis. The amount of collateral obtained, if deemed necessary
        by
        the Company upon extension of credit, is based on management's credit
        evaluation. Collateral held varies, but may include residential real estate,
        income-producing commercial properties, or other assets of the
        borrower.
  Standby
        letters of credit are conditional commitments issued by the Company to guarantee
        the performance of a customer to a third party.
  The
        Company and Bank are also subject to claims and lawsuits which arise primarily
        in the ordinary course of business. It is the opinion of management that
        the
        disposition or ultimate resolution of such claims and lawsuits will not have
        a
        material adverse effect on the consolidated financial position of the
        Company.
  The
        Company has entered into employment agreements with certain officers that
        provide for the continuation of salary and certain benefits for a specified
        period of time under certain conditions. Under the terms of the agreement,
        these
        payments could occur in the event of a change in control of the Company,
        as
        defined, along with other specific conditions.
  **Note
        19:** **Stockholders’
        Equity**
  The
        Company is not subject to any regulatory restrictions on the payment of
        dividends to its stockholders.
  Without
        prior approval, current regulations allow the Bank to pay dividends to the
        Company not exceeding retained net income for the previous two calendar years.
        At December 31, 2007, the Bank had no regulatory approval to pay dividends
        to
        the Company.
  85
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  **Note
        20:** **Regulatory
        Capital**
  The
        Bank
        is subject to various regulatory capital requirements administered by the
        federal banking agencies and is assigned to a capital category. The assigned
        capital category is largely determined by three ratios that are calculated
        according to the regulations: total risk adjusted capital, Tier 1
        risk-based capital, and core leverage ratios. The ratios are intended to
        measure
        capital relative to assets and credit risk associated with those assets and
        off-balance sheet exposures of the entity. The capital category assigned
        to an
        entity can also be affected by qualitative judgments made by regulatory agencies
        about the risk inherent in the entity’s activities that are not part of the
        calculated ratios.
  There
        are
        five capital categories defined in the regulations, ranging from well
        capitalized to critically undercapitalized. Classification of a bank in any
        of
        the undercapitalized categories can result in actions by regulators that
        could
        have a material effect on a bank’s operations. At December 31, 2007 and
        2006, the Bank was categorized as well capitalized and met all subject capital
        adequacy requirements. There are no conditions or events since December 31,
        2007 that management believes have changed the Bank’s
        classification.
  The
        Bank’s actual and required capital amounts and ratios are as
        follows:
 **Actual**
                
                **Required
                    for Adequate**
                  **Capital**
                
                **To
                    Be Well**
                  **Capitalized****Amount**
                
                **Ratio**
                
                **Amount**
                
                **Ratio**
                
                **Amount**
                
                **Ratio****As
                    of December 31, 2007**Total
                    risk-based capital (to risk-weighted assets)
                
                $
                77,968
                
                
                10.9
                %
                $
                57,236
                
                
                8.0
                %
                $
                71,546
                
                
                10.0
                %Tier
                    1 risk-based capital (to risk-weighted assets)
                
                
                70,440
                
                
                9.9
                %
                
                28,618
                
                
                4.0
                %
                
                42,927
                
                
                6.0
                %Core
                    capital (to adjusted total assets)
                
                
                70,440
                
                
                7.5
                %
                
                28,339
                
                
                3.0
                %
                
                47,231
                
                
                5.0
                %Core
                    capital (to adjusted tangible assets)
                
                
                70,440
                
                
                7.5
                %
                
                18,892
                
                
                2.0
                %
                
                N/A
                
                
                N/ATangible
                    capital (to adjusted total assets)
                
                
                70,440
                
                
                7.5
                %
                
                14,169
                
                
                1.5
                %
                
                N/A
                
                
                N/A**As
                    of December 31, 2006**Total
                    risk-based capital (to risk-weighted assets)
                
                $
                76,615
                
                
                10.5
                %
                $
                58,410
                
                
                8.0
                %
                $
                73,012
                
                
                10.0
                %Tier
                    1 risk-based capital (to risk-weighted assets)
                
                
                69,007
                
                
                9.5
                %
                
                29,205
                
                
                4.0
                %
                
                43,807
                
                
                6.0
                %Core
                    capital (to adjusted total assets)
                
                
                69,007
                
                
                7.3
                %
                
                28,311
                
                
                3.0
                %
                
                47,185
                
                
                5.0
                %Core
                    capital (to adjusted tangible assets)
                
                
                69,007
                
                
                7.3
                %
                
                18,874
                
                
                2.0
                %
                
                N/A
                
                
                N/ATangible
                    capital (to adjusted total assets)
                
                
                69,007
                
                
                7.3
                %
                
                14,156
                
                
                1.5
                %
                
                N/A
                
                
                N/A
  86
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  **Note
        21:** **Employee
        Benefits**
  The
        Company has a retirement savings 401(k) plan in which substantially all
        employees may participate. The contributions are discretionary and determined
        annually. The Company matches employees' contributions at the rate of 50
        percent
        for the first $600 of participant contributions to the 401(k) and made a
        contribution to the plan of 3 percent of qualified compensation. The
        Company’s expense for the plan was $330,000, $250,000 and $310,000 for 2007,
        2006 and 2005.
  The
        Company has a supplemental retirement plan and deferred compensation
        arrangements for the benefit of certain officers. The Company also has deferred
        compensation arrangements with certain directors whereby, in lieu of currently
        receiving fees, the directors or their beneficiaries will be paid benefits
        for
        an established period following the director’s retirement or death. These
        arrangements are informally funded by life insurance contracts which have
        been
        purchased by the Company. The Company records a liability for these vested
        benefits based on the present value of future payments. The Company’s expense
        for the plan was $682,000, $683,000 and $618,000 for 2007, 2006 and
        2005.
  The
        Company has an ESOP covering substantially all of its employees. At
        December 31, 2007, 2006 and 2005, the Company had 190,706, 222,492 and
        254,275 unearned ESOP shares with a fair value of $2,658,000, $4,717,000
        and
        $5,594,000. Shares are released to participants proportionately as ESOP debt
        is
        repaid. Dividends on allocated shares are recorded as dividends and charged
        to
        retained earnings. Dividends on unallocated shares are used to repay the
        loan.
        Compensation expense is recorded equal to the fair market value of the stock
        committed-to-be-released when contributions, which are determined annually
        by
        the Board of Directors of the Company and Bank, are made to the ESOP. Expense
        under the ESOP for 2007, 2006 and 2005 was $583,000, $665,000 and $724,000.
        The
        following table provides information on ESOP shares at December 31.
 **2007**
                
                **2006**
                
                **2005**Allocated
                    shares
                
                
                207,274
                
                
                186,637
                
                
                159,761Suspense
                    shares
                
                
                190,709
                
                
                222,492
                
                
                254,275Committed-to-be
                    released shares
                
                
                31,783
                
                
                31,783
                
                
                31,783
  The
        Company has a Recognition and Retention Plan (RRP) for the award of up to
        232,784 shares of the common stock of the Company to directors and executive
        officers. Common stock awarded under the RRP vests ratably over a three or
        five-year period commencing with the date of the grants. Expense recognized
        on
        the vested shares totaled approximately $21,000, $151,000 and $257,000 in
        2007,
        2006 and 2005.
  87
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  A
        summary
        of the status of the Company’s RRP shares as of December 31, 2007 and changes
        during the year then ended, is presented below:
 **2007****Shares**
                
                **Weighted-**
                  **Average**
                  **Grant-Date**
                  **Fair
                    Value**RRP,
                    beginning of year
                
                
                14,751
                
                $
                25.66Granted
                
                
                —
                
                
                —Vested
                
                
                4,917
                
                
                25.66Forfeited
                
                
                —
                
                
                —RRP,
                    end of year
                
                
                9,834
                
                $
                25.66
  As
        of
        December 31, 2007 and 2006, there was $21,000 and $42,000 of total unrecognized
        compensation cost related to RRP share-based compensation arrangements granted
        under the Plan. That cost is expected to be recognized over a weighted-average
        period of 0.5 years. The total fair value of shares vested during the years
        ended December 31, 2007, 2006 and 2005, was $99,000, $119,000 and $118,000,
        respectively.
  88
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  **Note
        22:** **Stock
        Option Plan**
  Under
        the
        Company’s stock option plan, which has been accounted for in accordance with
        FAS 123(R), *Share-Based
        Payments* and
        related interpretations, the Company grants selected executives and other
        key
        employees and directors incentive and non-qualified stock option awards which
        vest and become fully exercisable at the discretion of the stock option
        committee as the options are granted. The Company is authorized to grant
        options
        for up to 581,961 shares of the Company’s common stock. Under certain provisions
        of the plan, the number of shares available for grant may be increased without
        shareholder approval by the amount of shares surrendered as payment of the
        exercise price of the stock option and by the number of shares of common
        stock
        of the Company that could be repurchased by the Company using proceeds from
        the
        exercise of stock options. The following is a summary of the status of the
        Company’s stock option plan and changes in that plan for 2007.
 **200****7****Options**
                
                **Shares**
                
                **Weighted-**
                  **Average**
                  **Exercise Price**
                
                **Weighted-**
                  **Average**
                  **Remaining**
                  **Contractual Life**
                
                **Aggregate**
                  **Intrinsic**
                  **Value**Outstanding,
                    beginning of year
                
                
                401,025
                
                $
                16.85Granted
                
                
                —
                
                
                —Exercised
                
                
                (15,412
                )
                
                13.54Forfeited/expired
                
                
                —
                
                
                —Outstanding,
                    end of year
                
                
                385,613
                
                $
                16.98
                
                
                6.8
                    years
                
                $
                —Options
                    exercisable at year end
                
                
                385,613
  The
        weighted-average grant-date fair value of options granted during the year
        2005
        was $3.34. The total intrinsic value of options exercised during the years
        ended
        December 31, 2007, 2006 and 2005, was $79,000, $311,000 and $540,000,
        respectively.
  Cash
        received from options exercised under all share-based payment arrangements
        for
        years ended December 31, 2007, 2006 and 2005 was $209,000, $687,000 and
        $759,000, respectively. The actual tax benefit realized for the tax deductions
        from options exercised and RRP shares vested totaled $3,000, $45,000 and
        $155,000, respectively, for the years ended December 31, 2007, 2006 and
        2005.
  89
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  The
        fair
        value of each option grant was estimated on the grant date using an
        option-pricing model with the following assumptions:
 **2005**Risk-free
                    interest rates
                
                
                4.25
                %Dividend
                    yields
                
                
                2.35
                %Volatility
                    factors of expected market price of common stock
                
                
                9.30
                %Weighted-average
                    expected life of the options
                
                
                8
                    years
  **Note
        23:** **Stock
        Repurchase Plan**
  On
        December 22, 2004, the Company announced that its Board of Directors approved
        a
        stock repurchase program for up to 471,000 of the outstanding common shares
        of
        the Company. As of December 31, 2007, the Company had purchased 471,000 shares
        under the program.
  On
        September 12, 2007, the Company announced that its Board of Directors approved
        a
        stock repurchase program for up to 215,000 of the outstanding common shares
        of
        the Company. Shares may be purchased from time to time in the open market
        and in
        large block privately negotiated transactions. The Company is not obligated
        to
        purchase any shares under the program, and the program may be discontinued
        at
        any time before the maximum number of shares specified by the program are
        purchased. As of December 31, 2007, the Company had purchased 71,402 shares
        under the program.
  **Note
        24:** **Earnings
        Per Share**
  Earnings
        per share were computed as follows:
 **2007****Income**
                
                **Weighted-**
                  **Average**
                  **Shares**
                
                **Per-Share**
                  **Amount****Basic
                    Earnings Per Share**Income
                    available to common stockholders
                
                $
                4,226
                
                
                4,103,940
                
                $
                1.03**Effect
                    of Dilutive Securities**Stock
                    options
                
                
                
                
                
                47,233**Diluted
                    Earnings Per Share**Income
                    available to common stockholders and assumed conversions
                
                $
                4,226
                
                
                4,151,173
                
                $
                1.02
  90
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
 **2006****Income**
                
                **Weighted-**
                  **Average**
                  **Shares**
                
                **Per-Share**
                  **Amount****Basic
                    Earnings Per Share**Income
                    available to common stockholders
                
                $
                4,757
                
                
                4,196,059
                
                $
                1.13**Effect
                    of Dilutive Securities**Stock
                    options
                
                
                
                
                
                77,980**Diluted
                    Earnings Per Share**Income
                    available to common stockholders and assumed conversions
                
                $
                4,757
                
                
                4,274,039
                
                $
                1.11
 **2005****Income**
                
                **Weighted-**
                  **Average**
                  **Shares**
                
                **Per-Share**
                  **Amount****Basic
                    Earnings Per Share**Income
                    available to common stockholders
                
                $
                6,452
                
                
                4,328,965
                
                $
                1.49**Effect
                    of Dilutive Securities**Stock
                    options
                
                
                
                
                
                110,721**Diluted
                    Earnings Per Share**Income
                    available to common stockholders and assumed conversions
                
                $
                6,452
                
                
                4,439,686
                
                $
                1.45
  Options
        to purchase 91,000 and 75,000 shares of common stock at $25.02 and $25.66
        per
        share, respectively, were outstanding at December 31, 2007 and 2006, but
        were not included in the computation of diluted EPS because the options’
exercise price was greater than the average market price of the common shares.
  **Note
        25:** **Fair
        Values of Financial Instruments**
  The
        following methods and assumptions were used to estimate the fair value of
        each
        class of financial instrument:
  **Cash
        and Cash Equivalents** - The
        fair value of cash and cash equivalents approximates carrying
        value.
  91
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  **Investment
        and Mortgage-Backed Securities** - Fair
        values are based on quoted market prices.
  **Loans
        Held For Sale -** Fair
        values are based on quoted market prices.
  **Loans** - The
        fair value for loans are estimated using discounted cash flow analyses using
        interest rates currently being offered for loans with similar terms to borrowers
        of similar credit quality.
  **FHLB
        Stock** - Fair
        value of FHLB stock is based on the price at which it may be resold to the
        FHLB.
  **Interest
        Receivable/Payable** - The
        fair values of interest receivable/payable approximate carrying
        values.
  **Deposits** - The
        fair values of noninterest-bearing, interest-bearing demand and savings accounts
        are equal to the amount payable on demand at the balance sheet date. Fair
        values
        for fixed-rate certificates of deposit are estimated using a discounted cash
        flow calculation that applies interest rates currently being offered on
        certificates to a schedule of aggregated expected monthly maturities on such
        time deposits.
  **Federal
        Home Loan Bank Advances** - The
        fair value of these borrowings are estimated using a discounted cash flow
        calculation, based on current rates for similar debt for periods comparable
        to
        the remaining terms to maturity of these advances.
  **Other
        Borrowings** -
        The
        fair value of these borrowings approximate carrying values.
  **Notes
        Payable** -
        The
        fair value of this note is estimated using a discount calculation based on
        current rates.
  **Advances
        by Borrowers for Taxes and Insurance** - The
        fair value approximates carrying value.
  **Off-Balance
        Sheet Commitments** -
        Commitments include commitments to purchase and originate mortgage loans,
        commitments to sell mortgage loans, and standby letters of credit and are
        generally of a short-term nature. The fair values of such commitments are
        based
        on fees currently charged to enter into similar agreements, taking into account
        the remaining terms of the agreements and the counterparties’ credit standing.
        The carrying amounts of these investments are reasonable estimates of the
        fair
        value of these financial statements.
  92
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  The
        estimated fair values of the Company’s financial instruments are as
        follows:
 **2007**
                
                **2006****Carrying**
                  **Amount**
                
                **Fair**
                  **Value**
                
                **Carrying**
                  **Amount**
                
                **Fair**
                  **Value****Assets**Cash
                    and cash equivalents
                
                $
                23,648
                
                $
                23,648
                
                $
                24,915
                
                $
                24,915Securities
                    available for sale
                
                
                43,592
                
                
                43,592
                
                
                41,070
                
                
                41,070Loans
                    held for sale
                
                
                1,645
                
                
                1,662
                
                
                1,330
                
                
                1,338Loans
                
                
                802,436
                
                
                808,387
                
                
                805,625
                
                
                799,030Stock
                    in FHLB
                
                
                10,037
                
                
                10,037
                
                
                9,938
                
                
                9,938Interest
                    receivable
                
                
                3,693
                
                
                3,693
                
                
                3,622
                
                
                3,622**Liabilities**Deposits
                
                
                666,407
                
                
                666,986
                
                
                703,359
                
                
                700,518FHLB
                    advances
                
                
                191,675
                
                
                194,854
                
                
                157,425
                
                
                157,802Other
                    borrowings
                
                
                3,907
                
                
                3,907
                
                
                —
                
                
                —Notes
                    payable
                
                
                1,055
                
                
                994
                
                
                1,427
                
                
                1,268Interest
                    payable
                
                
                2,467
                
                
                2,467
                
                
                1,829
                
                
                1,829Advances
                    by borrowers for taxes and insurance
                
                
                1,464
                
                
                1,464
                
                
                1,834
                
                
                1,834Off-balance
                    sheet commitments
                
                
                —
                
                
                —
                
                
                —
                
                
                —
  93
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  **Note
        26:** **Condensed
        Financial Information (Parent Company Only)**
  Presented
        below is condensed financial information as to financial position, results
        of
        operations and cash flows of the Company:
 **Condense** **d
            Balance Sheets**
 **2007**
                
                **2006****Assets**Cash
                    on deposit with Bank
                
                $
                25
                
                $
                1,631Cash
                    on deposit with others
                
                
                26
                
                
                118Total
                    cash
                
                
                51
                
                
                1,749Investment
                    in certificate of deposits
                
                
                —
                
                
                100Investment
                    in common stock of Bank
                
                
                86,507
                
                
                84,099Investment
                    in affiliate
                
                
                800
                
                
                1,016Deferred
                    and current income tax
                
                
                143
                
                
                381Other
                    assets
                
                
                9
                
                
                8Total
                    assets
                
                $
                87,510
                
                $
                87,353**Liabilities**-
                    other
                
                $
                496
                
                $
                89**Stockholders'
                    Equity**
                
                
                87,014
                
                
                87,264Total
                    liabilities and stockholders' equity
                
                $
                87,510
                
                $
                87,353
  94
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
 **Condensed
          State****ments
          of
          Income**
 **2007**
                
                **2006**
                
                **2005****Income**Interest
                    income from Bank
                
                $
                29
                
                $
                111
                
                $
                50Interest
                    income from loans
                
                
                —
                
                
                —
                
                
                —Dividends
                    from Bank
                
                
                2,200
                
                
                —
                
                
                12,500Other
                    income
                
                
                56
                
                
                317
                
                
                20Total
                    income
                
                
                2,285
                
                
                428
                
                
                12,570**Expenses**
                
                
                383
                
                
                368
                
                
                345**Income
                    before income tax and equity in undistributed income of the
                    Bank**
                
                
                1,902
                
                
                60
                
                
                12,225**Income
                    tax benefit**
                
                
                (118
                )
                
                (8
                )
                
                (108
                )**Income
                    before equity in undistributed income of the Bank**
                
                
                2,020
                
                
                68
                
                
                12,333**Equity
                    in undistributed income of the Bank**
                
                
                2,206
                
                
                4,689
                
                
                (5,881
                )**Net
                    Income**
                
                $
                4,226
                
                $
                4,757
                
                $
                6,452
  95
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  **Conde** **nsed
        Statements of Cash Flows**
   **2007**
                
                **2006**
                
                **2005****Operating
                    Activities**Net
                    income
                
                $
                4,226
                
                $
                4,757
                
                $
                6,452Item
                    not requiring cashESOP
                    shares earned
                
                
                583
                
                
                665
                
                
                724Deferred
                    income tax benefit
                
                
                
                
                
                26
                
                
                17Distributions
                    in excess of income (equity in undistributed income) of
                    Bank
                
                
                (2,206
                )
                
                (4,689
                )
                
                5,881Tax
                    benefit on stock options and RRP shares
                
                
                (3
                )
                
                (45
                )
                
                (155
                )Other
                
                
                623
                
                
                (300
                )
                
                390Net
                    cash provided by operating activities
                
                
                3,223
                
                
                414
                
                
                13,309**Investing
                    Activities**Purchase
                    of certificate of deposit
                
                
                —
                
                
                —
                
                
                (100
                )Maturity
                    of certificate of deposit
                
                
                100
                
                
                —
                
                
                —Net
                    cash provided by (used in) investing activities
                
                
                100
                
                
                —
                
                
                (100
                )**Financing
                    Activities**Stock
                    repurchased
                
                
                (2,793
                )
                
                (4,935
                )
                
                (4,819
                )Cash
                    dividends
                
                
                (2,440
                )
                
                (2,360
                )
                
                (2,309
                )Proceeds
                    from stock options exercised
                
                
                209
                
                
                687
                
                
                759Tax
                    benefit on stock options and RRP shares
                
                
                3
                
                
                45
                
                
                155Net
                    cash used in financing activities
                
                
                (5,021
                )
                
                (6,563
                )
                
                (6,214
                )**Net
                    Change in Cash**
                
                
                (1,698
                )
                
                (6,149
                )
                
                6,995**Cash,
                    Beginning of Year**
                
                
                1,749
                
                
                7,898
                
                
                903**Cash,
                    End of Year**
                
                $
                51
                
                $
                1,749
                
                $
                7,898
  96
  ***MutualFirst*****Financial, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007, 2006 and 2005**
 (Table
        Dollar Amounts in Thousands, Except Share and Per Share Data)
  **Note
        27: Qu** **arterly
        Results of Operations (Unaudited)**
 **Quarter**
                  **Ended**
                
                **Interest**
                  **Income**
                
                **Interest**
                  **Expense**
                
                **Net**
                  **Interest**
                  **Income**
                
                **Provision**
                  **for**
                  **Loan**
                  **Losses**
                
                **Net**
                  **Income**
                
                **Basic**
                  **Earnings**
                  **Per**
                  **Common**
                  **Share**
                
                **Diluted**
                  **Earnings**
                  **Per**
                  **Common**
                  **Share**2007March
                
                $
                13,809
                
                $
                7,814
                
                $
                5,995
                
                $
                332
                
                $
                1,044
                
                $
                0.25
                
                $
                0.25June
                
                
                14,056
                
                
                7,941
                
                
                6,115
                
                
                533
                
                
                1,129
                
                
                0.27
                
                
                0.27September
                
                
                14,128
                
                
                8,277
                
                
                5,851
                
                
                532
                
                
                1,161
                
                
                0.28
                
                
                0.28December
                
                
                14,380
                
                
                8,195
                
                
                6,185
                
                
                843
                
                
                892
                
                
                0.22
                
                
                0.22Total
                
                $
                56,373
                
                $
                32,227
                
                $
                24,146
                
                $
                2,240
                
                $
                4,226
                
                
                1.03
                
                
                1.022006March
                
                $
                13,589
                
                $
                6,557
                
                $
                7,032
                
                $
                393
                
                $
                1,562
                
                $
                .37
                
                $
                .36June
                
                
                13,912
                
                
                7,158
                
                
                6,754
                
                
                525
                
                
                1,348
                
                
                .32
                
                
                .31September
                
                
                14,335
                
                
                7,991
                
                
                6,344
                
                
                525
                
                
                1,144
                
                
                .27
                
                
                .27December
                
                
                14,284
                
                
                8,184
                
                
                6,100
                
                
                625
                
                
                703
                
                
                .17
                
                
                .17Total
                
                $
                56,120
                
                $
                29,890
                
                $
                26,230
                
                $
                2,068
                
                $
                4,757
                
                
                1.13
                
                
                1.11
  **Note
        28:** **Subsequent
        Event**
  On
        January 7, 2008, the Company entered into a definitive agreement to purchase
        MFB
        Financial. The Company will pay approximately $50 million in stock and cash
        for
        the net assets, subject to adjustments, representing MFB Financial’s operations.
        The purchase has not yet received all the required regulatory approval, but
        assuming approval, the purchase is expected to be completed in July
        2008.
  97




**Item
          9.** **Changes
          In and Disagreements With Accountants on Accounting and Financial
          Disclosure.**




None.




**Item
      9A.**  **Controls
      and Procedures.**




An
      evaluation of our disclosure controls and procedures (as defined in Section
      13(a)-14(c) of the Securities Exchange Act of 1934 (the “Exchange Act”)) as of
      December 31, 2007, was carried out under the supervision and with the
      participation of the our Chief Executive Officer, Principal Financial Officer
      and several other members of our senior management within the 90-day period
      preceding the filing date of this annual report. Our Chief Executive Officer
      and
      Principal Financial Officer concluded that, as of December 31, 2007, our
      disclosure controls and procedures were effective in ensuring that the
      information required to be disclosed by us in the reports we file or submit
      under the Exchange Act is (i) accumulated and communicated to our management
      (including our Chief Executive Officer and Principal 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 controls over financial reporting (as defined
      in
      Rule 13a-15(f) under the Act) that occurred during the quarter ended December
      31, 2007, that have materially affected, or as reasonably likely to materially
      affect, our internal control over financial reporting. The annual report of
      management on the effectiveness of internal control over financial reporting
      and
      the attestation report thereon issued by our independent registered public
      accounting firm are set forth below under “Management’s Report on Internal
      Control Over Financial Reporting” and “Report of the Independent Registered
      Public Accounting Firm on Internal Control over Financial
      Reporting.”




We
      do not
      expect that our disclosure controls and procedures will prevent all error 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 *MutualFirst* have
      been detected. These inherent limitations include the realities that judgment
      in
      decision-making can be faulty, and that breakdowns can occur because of simple
      error or mistake. Additionally, controls can be circumvented by the individual
      acts of some persons, by collusion of two or more people, or by management
      override of the control. The design of any control procedure also is based
      in
      part upon certain assumptions about the likelihood of future events, and there
      can be no assurance that any design will succeed in achieving its stated goals
      under all potential 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.





**Management’s
      Report on Internal Control over Financial Reporting**




The
      management of *MutualFirst* Financial, Inc. is responsible for establishing and maintaining adequate
      internal control over financial reporting, as such term is defined in Exchange
      Act Rule 13a-15(f). The Company’s internal control over financial reporting is a
      process designed to provide reasonable assurance to the Company’s management and
      board of directors regarding the reliability of financial reporting and the
      preparation of the financial statements for external purposes in accordance
      with
      accounting principles generally accepted in the United States of
      America.


98




The
      Company’s internal control over financial reporting includes those policies and
      procedures that (i) pertain to the maintenance of records that, in reasonable
      detail, accurately and fairly reflect the transactions and dispositions of
      the
      assets of the Company; (ii) provide reasonable assurance that transactions
      are
      recorded as necessary to permit preparation of financial statements in
      accordance with accounting principles generally accepted in the United States
      of
      America, and that receipts and expenditures of the Company are being made only
      in accordance with authorizations of management and directors of the Company;
      and (iii) provide reasonable assurance regarding prevention or timely detection
      of unauthorized acquisition, use, or disposition of the Company’s assets that
      could have a material effect on the financial statements.




Because
      of its inherent limitations, internal controls over financial reporting may
      not
      prevent or detect misstatements. All internal control systems, no matter how
      well designed, have inherent limitations, including the possibility of human
      error and the circumvention of overriding controls. Accordingly, even effective
      internal control over financial reporting can provide only reasonable assurance
      with respect to financial statement preparation. Also, projections of any
      evaluation of effectiveness to future periods are subject to the risk that
      controls may become inadequate because of changes in conditions, or that the
      degree of compliance with the policies or procedures may
      deteriorate.




Our
      management assessed the effectiveness of the Company’s internal control over
      financial reporting as of December 31, 2007. In making this assessment, it
      used
      the criteria set forth by the Committee of Sponsoring Organizations of the
      Treadway Commission (COSO) in *Internal Control-Integrated Framework* .
      Based
      on our assessment, we believe that, as of December 31, 2007, the Company’s
      internal control over financial reporting was effective based on those
      criteria.


99




The
      Company’s independent auditors have issued an audit report on our assessment of
      internal control over financial reporting as of December 31, 2007. This report
      is included in this Form 10-K. See “Report of Independent Registered Public
      Accounting Firm,” which follows this report.





Date:
                March 13, 2008
            By:
            /s/
                David W. HeeterDavid
                W. HeeterPresident
                and Chief Executive OfficerBy:
            /s/
                Timothy J. McArdleTimothy
                J. McArdleTreasurer
                and Chief Financial Officer


100





**Report
      of Independent Registered Public Accounting Firm**





Audit
      Committee, Board of Directors and Stockholders


*MutualFirst* Financial, Inc.


Muncie,
      Indiana








We
      have
      audited *MutualFirst* Financial, Inc’s internal control over financial reporting as of
      December 31, 2007, based on criteria established in *Internal
      Control - Integrated Framework issued by the Committee of Sponsoring
      Organizations of the Treadway Commission (COSO)* .
      The
      Company’s management is responsible for maintaining effective internal control
      over financial reporting and for its assessment of the effectiveness of internal
      control over financial reporting, included in the accompanying Management’s
      Report on Internal Control Over Financial Reporting. Our responsibility is
      to
      express an opinion on the Company’s internal control over financial reporting
      based on our audit.




We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, assessing the risk that a material weakness exists and
      testing and evaluating the design and operating effectiveness of internal
      control based on the assessed risk. Our audit also included performing such
      other procedures as we considered necessary in the circumstances. We believe
      that our audit provides a reasonable basis for our opinion.




A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      being made only in accordance with authorizations of management and directors
      of
      the company; and (3) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use or disposition of the company’s
      assets that could have a material effect on the financial
      statements.




Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions or that the degree of compliance
      with the policies or procedures may deteriorate.


101




In
      our
      opinion, *MutualFirst* Financial, Inc. has maintained, in all material respects, effective internal
      control over financial reporting as of December 31, 2007, based on criteria
      established in *Internal
      Control - Integrated Framework issued by the Committee of Sponsoring
      Organizations of the Treadway Commission (COSO)* .




We
      have
      also audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated financial statements of *MutualFirst* Financial, Inc. and our report dated March 7, 2008 expressed an unqualified
      opinion thereon.




/s/BKD,
      LLP




BKD,
      LLP




Indianapolis,
      Indiana


March
      7,
      2008




**Item
      9B.**  **Other
      Information**




None.


102





**PART
      III**




**Item
      10.**  **Directors,
      Executive Officers and Corporate Governance**




**Directors**




Information
      concerning the Company’s directors is incorporated herein by reference from the
      Company’s definitive proxy statement for its Annual Meeting of Stockholders to
      be held in June 2008, except for information contained under the headings
“Compensation Committee Report,” and “Report of the Audit/Compliance Committee,”
a copy of which will be filed not later than 120 days after the close of the
      fiscal year.




**Executive
      Officers**




Information
      concerning the executive officers of the Company who are directors is
      incorporated herein by reference from the Company’s definitive proxy statement
      for its Annual Meeting of Stockholders to be held in June 2008, except for
      information contained under the headings “Compensation Committee Report,” and
“Report of the Audit/Compliance Committee,” a copy of which will be filed not
      later than 120 days after the close of the fiscal year.




The
      business experience for at least the past five years for each of our executive
      officers who do not serve as directors is set forth below.




***John
      H. Bowles*** .
      Age 62
      years. Mr. Bowles is Senior Vice President of Investment and Private Banking,
      a
      position he has held since November 2004. Prior to 2004, he was president of
      Star Financial Bank/NewCastle Region from 1987 to 2004.




***Steven
      R. Campbell*** .
      Age 64
      years. Mr. Campbell is Senior Vice President of Mutual Federal’s Corporate
      Products and Services Division, a position he has held since 1991. He has been
      employed by Mutual Federal since 1984.




***Timothy
      J. McArdle*** .
      Age 57
      years. Mr. McArdle, a certified public accountant, has served as Senior Vice
      President and Chief Financial Officer of Mutual Federal since 1995, and
      Treasurer of Mutual Federal since 1986. He also serves as Senior Vice President,
      Treasurer and Controller of *MutualFirst* Financial. He has been employed by Mutual Federal since 1981.




***Stephen
      C. Selby*** .
      Age 62
      years. Since 1995, Mr. Selby has served as Senior Vice President of the
      Operations Division at Mutual Federal. Prior to 1995, he served as Vice
      President of the Operations Division for nine years. Mr. Selby has served in
      various other capacities at Mutual Federal since 1964.


103




**Audit
      Committee Matters and Audit Committee Financial Expert**




The
      Board
      of Directors of the Company has a standing Audit/Compliance Committee, which
      has
      been established in accordance with Section 3(a)(58)(A) of the Exchange Act.
      The
      members of that committee are Directors Linn A. Crull (Chairman), Wilbur R.
      Davis, Edward J. Dobrow, Jerry D. McVicker and James D. Rosema, all of whom
      are
      considered independent under applicable Nasdaq listing standards. The Board
      of
      Directors has determined that Mr. Crull is an “audit committee financial expert”
as defined in applicable SEC rules. Additional information concerning the audit
      committee of the Company’s Board of Directors is incorporated herein by
      reference from the Company’s definitive proxy statement for its Annual Meeting
      of Stockholders to be held in April 2008, except for information contained
      under
      the headings “Compensation Committee Report,” and “Report of the
      Audit/Compliance Committee,” a copy of which will be filed not later than 120
      days after the close of the fiscal year.




**Section
      16(a) Beneficial Ownership Reporting Compliance**




Section
      16(a) of the Exchange Act requires the Company’s directors and executive
      officers, and persons who own more than 10% of a registered class of the
      Company’s equity securities, to file with the SEC reports of ownership and
      reports of changes in ownership of common stock and other equity securities
      of
      the Company. Officers, directors and greater than 10% stockholders are required
      by SEC regulation to furnish the Company with copies of all Section 16(a) forms
      they file.




To
      the
      Company’s knowledge, based solely on a review of the copies of such reports
      furnished to the Company and written representations that no other reports
      were
      required during the fiscal year ended December 31, 2007, all Section 16(a)
      filing requirements applicable to its officers, directors and greater than
      10%
      beneficial owners were complied with.




**Code
      of Ethics**




The
      Company adopted a written Code of Ethics based upon the standards set forth
      under Item 406 of Regulation S-K of the Securities Exchange Act. The Code of
      Ethics applies to all of the Company’s directors, officers and employees. A copy
      of the Company’s Code of Ethics was filed with the SEC as Exhibit 14 to the
      Annual Report on Form 10-K for the year ended December 31, 2003. You may obtain
      a copy of the Code of Ethics is available on our website at www.mfsbank.com
      at
“Resource Center – About Us – Code of Ethics,” or free of charge from
      the Company by writing to our Corporate Secretary at *MutualFirst* Financial, Inc., 110 E. Charles Street, Muncie, Indiana 47305-2419 or by calling
      (765) 747-2800.




**Nomination
      Procedures**




There
      have been no material changes to the procedures by which stockholders may
      recommend nominees to the Company’s Board of Directors.




**Item
      11.**  **Executive
      Compensation**




Information
      concerning executive compensation is incorporated herein by reference from
      the
      Company’s definitive proxy statement for its Annual Meeting of Stockholders to
      be held in June 2008, except for information contained under the headings
“Compensation Committee Report,” and “Report of the Audit/Compliance Committee,”
a copy of which will be filed not later than 120 days after the close of the
      fiscal year.


104




**Item
          12.** **Security
          Ownership of Certain Beneficial Owners and Management and Related Stockholder
          Matters**




Information
      concerning security ownership of certain beneficial owners and management is
      incorporated herein by reference from the Company’s definitive proxy statement
      for its Annual Meeting of Stockholders to be held in June 2008, except for
      information contained under the headings “Compensation Committee Report,” and
“Report of the Audit/Compliance Committee,” a copy of which will be filed not
      later than 120 days after the close of the fiscal year.




*Equity
      Compensation Plan Information.* The
      following table summarizes our equity compensation plans as of December 31,
      2007.





Plan
                Category
            
            Number
                of securities to
              be
                issued upon exercise
              of
                outstanding options
              warrants
                and rights
            
            Weighted-average
              exercise
                price of
              outstanding
                options
              warrants
                and rights
            
            Number
                of securities
              remaining
                available for
              future
                issuance under
              equity
                compensation plansEquity
                compensationplans
                approved by
              security
                holders
            
            
            385,613
            
            $
            16.98
            
            
            161Equity
                compensationplans
                not approved
              by
                security holders
            
            
            —
            
            
            —
            
            
            —


____________________


(1)  Includes
      161 shares
      available for future grants under *MutualFirst* Financial, Inc’s stock option plan.




**Item
      13.**  **Certain
      Relationships and Related Transactions**




Information
      concerning certain relationships and related transactions, our independent
      directors and our audit and nominating committee charters is incorporated herein
      by reference from the Company’s definitive proxy statement for its Annual
      Meeting of Stockholders to be held in June 2008, except for information
      contained under the headings “Compensation Committee Report,” and “Report of the
      Audit/Compliance Committee,” a copy of which will be filed not later than 120
      days after the close of the fiscal year.




**Item
      14.**  **Principal
      Accountant Fees and Services**




Information
      concerning principal accountant fees and services is incorporated herein by
      reference from the Company’s definitive proxy statement for its Annual Meeting
      of Stockholders to be held in June 2008, except for information contained under
      the headings “Compensation Committee Report,” and “Report of the
      Audit/Compliance Committee,” a copy of which will be filed not later than 120
      days after the close of the fiscal year


105





**PART
      IV**




**Item 15.**  **Exhibits
      and Financial Statement Schedules**




**(a)(1)
      List of Financial Statements**




The
      following are contained in Item 8 of this Form 10-K:





Annual
                Report SectionReport
                of Independent Registered Public Accounting FirmConsolidated
                Balance Sheets at December 31, 2007 and 2006Consolidated
                Statements of Income for the Years Ended December 31, 2007, 2006
                and
                2005Consolidated
                Statements of Stockholders’ Equity for the Years Ended December 31, 2007,2006
                and 2005Consolidated
                Statements of Cash Flows for the Years Ended December 31, 2007, 2006
                and2005Notes
                to Consolidated Financial Statements, December 31, 2007, 2006 and
                2005




**(a)(2)
      List of Financial Statement Schedules:**




All
      financial statement schedules have been omitted as the information is not
      required under the related instructions or is not applicable.


106




**(a)(3)
      List of Exhibits:**




**Regulation**
                **S-K**
                **Exhibit**
                **Number**
              
              **Document**
              
              **Reference to**
                **Prior Filing or**
                **Exhibit**
                **Number**
                **Attached**
                **Hereto**2.1
              
              Agreement
                  and Plan of Merger, dated as of January 7, 2008, by and among*MutualFirst*Financial, Inc.,*MutualFirst*Acquisition Corp. and MFB Corp.
              
              #3(i)
              
              Articles
                  of Incorporation
              
              *3(ii)
              
              Amended
                  Bylaws
              
              ++4
              
              Instruments
                  defining the rights of security holders, including
                  indentures:
                Form
                  of*MutualFirst*Financial, Inc. Common Stock Certificate
              
              *9
              
              Voting
                  Trust Agreement
              
              None10
              
              Material
                  contracts:Employment
                  Agreement with David W. Heeter
              +++Employment
                  Agreement with Patrick C. Botts
              +++Employment
                  Agreement with Timothy J. McArdle
              **Form
                  of Supplemental Retirement Plan Income Agreements for R. Donn
                  Roberts,
                Steven
                  Campbell, Patrick C. Botts, David W. Heeter, Timothy J. McArdle
                  and
                Stephen C. Selby
              
              **Form
                  of Director Shareholder Benefit Program, as amended, for Steven
                  L.
                  Banks
                Form
                  of Executive Shareholder Benefit Program Agreement, as amended,
                  for
                  Steven L.Banks
              
              ++
                ++
                
                ++Form
                  of Director Shareholder Benefit Program Agreement, as amended,
                  for Jerry
                  D.
                McVickerForm of Agreements for Executive Deferred Compensation Plan for R. Donn Roberts,
                Patrick C. Botts, Steven Campbell, David W. Heeter, Timothy J. McArdle and
                Stephen C. Selby
              
              **Registrant’s
                  2001 Stock Option and Incentive Plan
              
              ***Registrant’s
                  2001 Recognition and Retention Plan
              
              ***Named
                  Executive Officer Salary and Bonus Arrangements for 2008
              
              10.1Director
                  Fee Arrangements for 2008
              
              10.2Director
                  Deferred Compensation Plan
              
              ##11
              
              Statement
                  re computation of per share earnings
              
              None12
              
              Statements
                  re computation of ratios
              
              None14
              
              Code
                  of Ethics
              
              +++16
              
              Letter
                  re change in certifying accountant
              
              None18
              
              Letter
                  re change in accounting principles
              
              None21
              
              Subsidiaries
                  of the registrant
              
              2122
              
              Published
                  report regarding matters submitted to vote of security
                  holders
              
              None23
              
              Consents
                  of Experts and Counsel
              
              2324
              
              Power
                  of Attorney
              
              None31.1
              
              Rule
                  13(a)-14(a) Certification (Chief Executive Officer)
              
              31.131.2
              
              Rule
                  13(a)-14(a) Certification (Chief Financial Officer)
              
              31.232
              
              Section
                  1350 Certification
              
              32





#
            Filed
                as an exhibit to the Company’s Form 8-K filed on January 8, 2008 (File No.
                000-27905). Such previously filed document is incorporated herein
                by
                reference in accordance with Item 601 of Regulation
                S-K.


107





*
            Filed
                as an exhibit to the Company’s Form S-1 registration statement filed on
                September 16, 1999 (File No. 333-87239) pursuant to Section 5 of the
                Securities Act of 1933. Such previously filed document is incorporated
                herein by reference in accordance with Item 601 of Regulation
                S-K.


**
            Filed
                as an exhibit to the Company’s Annual Report on Form 10-K filed on March
                30, 2001 (File No. 000-27905). Such previously filed document is
                incorporated herein by reference in accordance with Item 601 of Regulation
                S-K.


***
            Filed
                as an Appendix to the Company’s Form S-4/A Registration Statement filed on
                October 19, 2001 (File No. 333-46510). Such previously filed document
                is
                incorporated herein by reference in accordance with Item 601 of Regulation
                S-K.


++
            Filed
                as an exhibit to the Company’s Annual Report on Form 10-K filed on April
                2, 2002 (File No. 000-27905). Such previously filed document is
                incorporated herein by reference in accordance with Item 601 of Regulation
                S-K.


+++
            Filed
                as an exhibit to the Company’s Annual Report on Form 10-K filed on March
                15, 2005 (File No. 000-27905). Such previously filed document is
                incorporated herein by reference in accordance with Item 601 of Regulation
                S-K.


##
            Filed
                as an exhibit to the Company’s Annual Report on Form 10-K filed on March
                16, 2007 (File No. 000-27905). Such previously filed document is
                incorporated herein by reference in accordance with Item 601 of Regulation
                S-K.




**(b)  Exhibits** -
      Included, see list in (a)(3).




**(c)  Financial
      Statements Schedules** -
      None


108





**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the Registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.





*MutualFirst*Financial, Inc.Date:
                March 13, 2008
            By:
            /s/
                David W. HeeterDavid
                W. Heeter, President and Chief Executive Officer*Duly
                Authorized Representative)*





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the Registrant and in the
      capacities and on the dates indicated.





/s/
                David W. Heeter
            
            /s/
                Wilbur R. DavisDavid
                W. Heeter, President and Director
            
            Wilbur
                R. Davis, Chairman of the Board*(Principal
                Executive Officer)*Date:
                March 13, 2008
            
            Date:
                March 13, 2008/s/
                R. Donn Roberts
            
            /s/
                Edward J. DobrowR.
                Donn Roberts, Director
            
            Edward
                J. Dobrow, DirectorDate:
                March 13, 2008
            
            Date:
                March 13, 2008/s/
                Linn A. Crull
            
            /s/
                James D. RosemaLinn
                A. Crull, Director
            
            James
                D. Rosema, DirectorDate:
                March 13, 2008
            
            Date:
                March 13, 2008/s/
                William V. Hughes
            
            /s/
                Jerry D. McVickerWilliam
                V. Hughes, Director
            
            Jerry
                D. McVicker, DirectorDate:   March
                13, 2008
            
            Date:
                March 13, 2008/s/
                Patrick C. Botts
            
            /s/
                Jon R. MarlerPatrick
                C. Botts, Director
            
            Jon
                R. Marler, DirectorDate:
                March 13, 2008
            
            Date:
                March 13, 2008/s/
                Timothy J. McArdleTimothy
                J. McArdle, Senior Vice PresidentTreasurer
                and Controller*(Principal
                Financial and Accounting Officer)*




Date:
      March 13, 2008







**INDEX
      TO EXHIBITS**





Number
            Description10.1
            Named
                Executive Officer Salary and Bonus Arrangements for
                200810.2
            Director
                Fee Arrangements for 200821
            Subsidiaries
                of the Registrant23
            Consent
                of Accountants31.1
            Rule
                13(a)-14(a) Certification (Chief Executive Officer)31.2
            Rule
                13(a)-14(a) Certification (Chief Financial Officer)32
            Section
                1350 Certification