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
      1934
 For the
fiscal year endedDecember
31, 2009
 OR
  ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 For 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
              
              47305-2419(Address
      of principal executive offices)
              
              (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 registeredCommon
      Stock, par value $.01 per share
              Nasdaq
      Global Market
 
 Securities
Registered Pursuant to Section 12(g) of the Act:
 None
 
 Indicate
by checkmark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.   YES    ̈  
NO   x
 Indicate
by checkmark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.   YES    ̈  
NO   x
 
 Indicate
by checkmark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.     YES  x    NO   ̈
 
 Indicate
by checkmark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).  YES   ̈     NO   ̈
 
 Indicate
by checkmark 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.  x
 
 Indicate
by checkmark 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.
 
 Large accelerated filer   ̈
                Accelerated
      filer   ̈
                Non-accelerated
      filer   ̈
                Smaller
      reporting company  x(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 ̈    NOx
 
 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 30, 2009, the last business day of
the registrant’s most recently completed second fiscal quarter, was
approximately $48.1 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.)
 
 Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock as of the latest practicable date.  As ofMarch 15,2010, there were 6,984,754 shares of
the registrant’s common stock outstanding.
 
 DOCUMENTS
INCORPORATED BY REFERENCE
 
 PART III
of Form 10-K—Portions of registrant’s Proxy Statement for its 2010 Annual
Meeting of Stockholders.
  
  Item 1.   Business
  General
  MutualFirst Financial, Inc.,
a Maryland corporation (“MutualFirst” or the
“Company”), is the holding company of its wholly-owned subsidiary MutualBank, a
federal savings bank (“MutualBank” or the “Bank”).  MutualFirst Financial was
formed in September 1999 to become the holding company of MutualBank in
connection with MutualBank’s conversion from the mutual to stock form of
organization on December 29, 1999.  The words “we,” “our” and “us” in
this Form 10-K refer toMutualFirst and MutualBank on a consolidated basis, unless indicated
otherwise herein.
  At
December 31, 2009, we had total assets of $1.4 billion, deposits of $1.0 billion
and stockholders’ equity of $129.7 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 ofMutualFirst’s
business is conducted through MutualBank, which is a federal savings bank
subject to extensive regulation by the Office of Thrift Supervision (“OTS”).
MutualBank’s deposits are insured up to applicable limits by the Federal Deposit
Insurance Corporation (“FDIC”). MutualBank has 33 retail financial centers,
spanning nine Indiana counties and is the 10th largest
depository institution headquartered in Indiana. MutualBank also has trust
offices in Carmel and Crawfordsville, Indiana and a loan origination office in
New Buffalo, Michigan.
  Our
principal business consists of attracting retail deposits from the general
public, including some brokered deposits, 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.  MutualWealth is the
wealth management division of the bank providing a variety of fee-based
financial services, including trust, investment, insurance, broker advisory,
retirement plan and private banking services, in the Bank’s market
area.  As of December 31, 2009, MutualWealth managed assets of $313.3
million.
  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 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.  The Company continues to reduce the impact of
interest rate changes on its net interest income by shortening the term of its
interest-earning assets to better match the terms of our interest-bearing
liabilities and by selling long-term fixed rate loans.  See
“Quantitavie and Qualitative Disclosures About Market Risk – Asset and Liability
Management and Market Risk” in Item A.
  During
2008 and 2009, market and economic trends in our industry and in Indiana have
declined resulting in increased delinquencies and foreclosures.  A
number of federal legislative and regulatory initiatives have been enacted to
address these conditions.  See “Asset Quality” and “How We Are
Regulated” in Item 1, “Risk Factors” in Item 1A and the “Management’s Discussion
and Analysis” in Item 7.
  On July
18, 2008, the Company acquired MFB Corp and its banking subsidiary, MFB
Financial, in a merger transaction involving the issuance of 2.9 million shares
of common stock and payment of $11.5 million in cash to former stockholders of
MFB Corp.  The Company obtained $167.9 million in residential mortgage
loans, $48.5 million in consumer loans, $91.6 million in commercial real estate
loans and $75.5 million in commercial business loans and assumed $331.1 million
in deposits and $96.4 million in borrowings in the acquisition of MFB
Corp.
  1
  On
December 23, 2008, as part of the Troubled Asset Relief Program (“TARP”) Capital
Purchase Program, the Company entered into a Letter Agreement and Securities
Purchase Agreement (collectively, the “Purchase Agreement”) with the United
States Department of the Treasury (“Treasury”), pursuant to which the Company
(i) sold 32,382 shares of the Company’s Fixed Rate Cumulative Perpetual
Preferred Stock, Series A (the “Series A Preferred Stock”) for a purchase price
of $32,382,000 in cash and (ii) issued a warrant (the “Warrant”) to purchase
625,135 shares of the Company’s common stock, par value $0.01 per share (the
“Common Stock”), for a per share price of $7.77 per share.  The Series
A Preferred Stock is entitled to cumulative dividends at a rate of 5% per annum
for the first five years, and 9% per annum thereafter.  The Series A
Preferred Stock may be redeemed by the Company at any time, subject to
consultation by the Treasury with the Office of Thrift Supervision
(“OTS”).  The Warrant has a 10-year term and is immediately
exercisable upon its issuance, with an exercise price, subject to anti-dilution
adjustments, equal to $7.77 per share of the Common Stock.  If the
Series A Preferred Stock is redeemed, the Warrant will be liquidated at the
current market price.  Treasury has agreed not to exercise voting
power with respect to any shares of Common Stock issued upon exercise of the
Warrant that it holds.
  Pursuant
to the terms of the Purchase Agreement, the ability of the Company to declare or
pay dividends or distributions on, or purchase, redeem or otherwise acquire for
consideration, shares of its Junior Stock (as defined below) and Parity Stock
(as defined below) will be subject to restrictions, including a restriction
against increasing dividends from the last quarterly cash dividend per share
($0.16) declared on the Common Stock prior to December 23, 2008.  The
redemption, purchase or other acquisition of trust preferred securities of the
Company or its affiliates also will be restricted.  These restrictions
will terminate on the earlier of (a) the third anniversary of the date of
issuance of the Series A Preferred Stock, (b) the date on which the Series A
Preferred Stock has been redeemed in whole; and (c) the date Treasury has
transferred all of the Series A Preferred Stock to third parties.  In
addition, the ability of the Company to declare or pay dividends or
distributions on, or repurchase, redeem or otherwise acquire for consideration,
shares of its Junior Stock and Parity Stock will be subject to restrictions in
the event that the Company fails to declare and pay full dividends (or declare
and set aside a sum sufficient for payment thereof) on its Series A Preferred
Stock. “Junior Stock” means the Common Stock and any other class or series of
stock of the Company the terms of which expressly provide that it ranks junior
to the Series A Preferred Stock as to dividend rights and/or rights on
liquidation, dissolution or winding up of the Company. “Parity Stock” means any
class or series of stock of the Company the terms of which do not expressly
provide that such class or series will rank senior or junior to the Series A
Preferred Stock as to dividend rights and/or rights on liquidation, dissolution
or winding up of the Company (in each case without regard to whether dividends
accrue cumulatively or non-cumulatively).
  The
Company placed $29.1 million of its TARP proceeds in the Bank and retained the
remaining $3.2 million as working capital.  The Bank initially placed
approximately $20.0 million of the proceeds in highly rated
securities.  Of the $20.0 million, approximately $14.8 million was
placed in mortgage securities, $3.2 million in municipal securities and $2.0
million in corporate bonds.  These securities provide liquidity as
needed to meet current and future loan demand.  The remaining funds
held at the Bank were placed in working capital, which was used to fund loans
and meet the cash needs of MutualBank.  During 2009, the TARP proceeds
have provided the Bank with a continued ability to lend to businesses and
individuals along with the ability to purchase agency mortgage backed
securities.
  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.
  2
  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 33 full service
retail financial center offices in Delaware, Elkhart, Grant, Kosciusko,
Randolph, St. Joseph and Wabash counties. MutualBank also has trust offices in
Carmel and Crawfordsville, Indiana and a loan origination office in New Buffalo,
Michigan.We also
originate mortgage loans in the counties contiguous to these counties, and we
have historically originated indirect consumer loans throughout Indiana. See
“Lending Activities — Consumer and Other Lending.”
  Lending
Activities
  General.  Our
loans carry either a fixed- or an adjustable-rate of interest.  At
December 31, 2009 our net loan portfolio totaled $1.1 billion, which constituted
75.7% of our total assets.
  Loans up
to $600,000 may be approved by certain individual loan
officers.  Loans in excess of $600,000, but not in excess of $1.2
million, may be approved by the signature of an Executive Loan Committee member
and one other loan officer to the total of their combined individual lending
authority.  Loans not to exceed $3.0 million, to a borrower whose
aggregate debt is not greater than $5.0 million, may be approved by a majority
vote of the Executive Loan Committee.  All loans in excess of $3.0
million and loans of any amount to a borrower whose aggregate debt will exceed
$5.0 million must be approved by the Board of Directors.  The
aggregate limit may be increased or decreased by a specific guidance by the
Board for a specific borrower.
  At
December 31, 2009, the maximum amount that we could lend to any one borrower and
the borrower’s related entities was approximately $20.1 million.  As
of December 31, 2009, our largest lending relationship to a single borrower or
group of related borrowers consisted of fourteen loans totaling a commitment of
$8.2 million, with $6.2 million outstanding at year-end. All of the loans in
this relationship are secured by real estate and  guaranteed by the
principal.  Each of these loans to this group of borrowers was current
and performing in accordance with its terms at December 31,
2009.
  3
  The
following table presents information concerning the composition of our loan
portfolio in dollar amounts and in percentages as of the dates
indicated.
  December 31,2009
                            
                            
                            2008
                            
                            
                            2007
                            
                            
                            2006
                            
                            
                            2005Amount
                            
                            
                            Percent
                            
                            
                            Amount
                            
                            
                            Percent
                            
                            
                            Amount
                            
                            
                            Percent
                            
                            
                            Amount
                            
                            
                            Percent
                            
                            
                            Amount
                            
                            
                            Percent(Dollars in thousands)Real
      Estate Loans:One-
      to four-family
                            
                            $
                            471,015
                            (1)
                            
                            
                            43.69
                            %
                            
                            $
                            521,364
                            (2)
                            
                            
                            46.11
                            %
                            
                            $
                            431,018
                            (3)
                            
                            
                            53.02
                            %
                            
                            $
                            433,123
                            (4)
                            
                            
                            53.01
                            %
                            
                            $
                            451,914
                            (5)
                            
                            
                            54.00
                            %Multi-family
                            
                            
                            2,621
                            
                            
                            
                            0.24
                            
                            
                            
                            2,698
                            
                            
                            
                            0.24
                            
                            
                            
                            3,929
                            
                            
                            
                            0.48
                            
                            
                            
                            5,073
                            
                            
                            
                            0.62
                            
                            
                            
                            5,505
                            
                            
                            
                            0.66Commercial
                            
                            
                            257,368
                            
                            
                            
                            23.88
                            
                            
                            
                            250,693
                            
                            
                            
                            22.17
                            
                            
                            
                            82,116
                            
                            
                            
                            10.10
                            
                            
                            
                            73,912
                            
                            
                            
                            9.05
                            
                            
                            
                            77,270
                            
                            
                            
                            9.23Construction
      and development
                            
                            
                            9,817
                            
                            
                            
                            0.91
                            
                            
                            
                            12,232
                            
                            
                            
                            1.08
                            
                            
                            
                            13,560
                            
                            
                            
                            1.67
                            
                            
                            
                            14,451
                            
                            
                            
                            1.77
                            
                            
                            
                            22,938
                            
                            
                            
                            2.74Total
      real estate loans
                            
                            
                            740,821
                            
                            
                            
                            68.72
                            
                            
                            
                            786,987
                            
                            
                            
                            69.60
                            
                            
                            
                            530,623
                            
                            
                            
                            65.28
                            
                            
                            
                            526,559
                            
                            
                            
                            64.45
                            
                            
                            
                            557,627
                            
                            
                            
                            66.63Other
      Loans:Consumer
      Loans:Automobile
                            
                            
                            18,848
                            
                            
                            
                            1.75
                            
                            
                            
                            22,715
                            
                            
                            
                            2.01
                            
                            
                            
                            22,917
                            
                            
                            
                            2.82
                            
                            
                            
                            31,336
                            
                            
                            
                            3.84
                            
                            
                            
                            39,802
                            
                            
                            
                            4.76Home
      equity
                            
                            
                            64,930
                            
                            
                            
                            6.02
                            
                            
                            
                            66,460
                            
                            
                            
                            5.88
                            
                            
                            
                            27,232
                            
                            
                            
                            3.35
                            
                            
                            
                            30,051
                            
                            
                            
                            3.68
                            
                            
                            
                            31,962
                            
                            
                            
                            3.82Home
      improvement
                            
                            
                            42,116
                            
                            
                            
                            3.91
                            
                            
                            
                            45,339
                            
                            
                            
                            4.01
                            
                            
                            
                            45,156
                            
                            
                            
                            5.55
                            
                            
                            
                            38,546
                            
                            
                            
                            4.72
                            
                            
                            
                            31,933
                            
                            
                            
                            3.82Manufactured
      housing
                            
                            
                            689
                            
                            
                            
                            0.06
                            
                            
                            
                            727
                            
                            
                            
                            0.06
                            
                            
                            
                            992
                            
                            
                            
                            0.12
                            
                            
                            
                            1,422
                            
                            
                            
                            0.17
                            
                            
                            
                            2,106
                            
                            
                            
                            0.25R.V.
                            
                            
                            81,663
                            
                            
                            
                            7.58
                            
                            
                            
                            79,884
                            
                            
                            
                            7.07
                            
                            
                            
                            77,805
                            
                            
                            
                            9.57
                            
                            
                            
                            71,321
                            
                            
                            
                            8.73
                            
                            
                            
                            64,222
                            
                            
                            
                            7.67Boat
                            
                            
                            45,581
                            
                            
                            
                            4.23
                            
                            
                            
                            46,928
                            
                            
                            
                            4.15
                            
                            
                            
                            47,816
                            
                            
                            
                            5.88
                            
                            
                            
                            46,311
                            
                            
                            
                            5.67
                            
                            
                            
                            40,631
                            
                            
                            
                            4.85Other
                            
                            
                            5,961
                            
                            
                            
                            0.55
                            
                            
                            
                            6,339
                            
                            
                            
                            0.56
                            
                            
                            
                            3,593
                            
                            
                            
                            0.44
                            
                            
                            
                            3,986
                            
                            
                            
                            .48
                            
                            
                            
                            4,305
                            
                            
                            
                            .51Total
      consumer loans
                            
                            
                            259,788
                            
                            
                            
                            24.10
                            
                            
                            
                            268,392
                            
                            
                            
                            23.74
                            
                            
                            
                            225,511
                            
                            
                            
                            27.74
                            
                            
                            
                            222,973
                            
                            
                            
                            27.29
                            
                            
                            
                            214,961
                            
                            
                            
                            25.68Commercial
      business loans
                            
                            
                            77,384
                            
                            
                            
                            7.18
                            
                            
                            
                            75,290
                            
                            
                            
                            6.66
                            
                            
                            
                            56,764
                            
                            
                            
                            6.98
                            
                            
                            
                            67,476
                            
                            
                            
                            8.26
                            
                            
                            
                            64,353
                            
                            
                            
                            7.69Total
      other loans
                            
                            
                            337,172
                            
                            
                            
                            31.28
                            
                            
                            
                            343,682
                            
                            
                            
                            30.40
                            
                            
                            
                            282,275
                            
                            
                            
                            34.72
                            
                            
                            
                            290,449
                            
                            
                            
                            35.55
                            
                            
                            
                            279,314
                            
                            
                            
                            33.37Total
      loans receivable, gross
                            
                            
                            1,077,993
                            (1)
                            
                            
                            100.00
                            %
                            
                            
                            1,130,669
                            (2)
                            
                            
                            100.00
                            %
                            
                            
                            812,898
                            (3)
                            
                            
                            100.00
                            %
                            
                            
                            817,008
                            (4)
                            
                            
                            100.00
                            %
                            
                            
                            836,941
                            (5)
                            
                            
                            100.00
                            %Less:Undisbursed
      portion of loans
                            
                            
                            2,546
                            
                            
                            
                            
                            
                            
                            
                            4,372
                            
                            
                            
                            
                            
                            
                            
                            3,984
                            
                            
                            
                            
                            
                            
                            
                            5,520
                            
                            
                            
                            
                            
                            
                            
                            7,724Deferred
      loan fees and costs
                            
                            
                            (3,182)
                            
                            
                            
                            
                            
                            
                            
                            (3,484
                            )
                            
                            
                            
                            
                            
                            
                            (3,519
                            )
                            
                            
                            
                            
                            
                            
                            (3,623
                            )
                            
                            
                            
                            
                            
                            
                            (3,453
                            )Allowance
      for losses
                            
                            
                            16,414
                            
                            
                            
                            
                            
                            
                            
                            15,107
                            
                            
                            
                            
                            
                            
                            
                            8,352
                            
                            
                            
                            
                            
                            
                            
                            8,156
                            
                            
                            
                            
                            
                            
                            
                            8,100Total
      loans receivable, net
                            
                            $
                            1,062,215
                            
                            
                            
                            
                            
                            
                            $
                            1,114,674
                            
                            
                            
                            
                            
                            
                            $
                            804,081
                            
                            
                            
                            
                            
                            
                            $
                            806,955
                            
                            
                            
                            
                            
                            
                            $
                            824,570
 
 
 (1)
              Includes
      loans held for sale of $2.5
million.
 (2)
              Includes
      loans held for sale of $1.5
million.
 (3)
              Includes
      loans held for sale of $1.6
million.
 (4)
              Includes
      loans held for sale of $1.3
million.
 (5)
              Includes
      loans held for sale of $2.0
million.
  4
  The
following table shows the composition of our loan portfolio by fixed- and
adjustable-rate at the dates indicated.
 
 December 31,2009
                                                                                                      
                                                                                                      
                                                                                                      2008
                                                                                                      
                                                                                                      
                                                                                                      2007
                                                                                                      
                                                                                                      
                                                                                                      2006
                                                                                                      
                                                                                                      
                                                                                                      2005Amount
                                                                                                      
                                                                                                      
                                                                                                      Percent
                                                                                                      
                                                                                                      
                                                                                                      Amount
                                                                                                      
                                                                                                      
                                                                                                      Percent
                                                                                                      
                                                                                                      
                                                                                                      Amount
                                                                                                      
                                                                                                      
                                                                                                      Percent
                                                                                                      
                                                                                                      
                                                                                                      Amount
                                                                                                      
                                                                                                      
                                                                                                      Percent
                                                                                                      
                                                                                                      
                                                                                                      Amount
                                                                                                      
                                                                                                      
                                                                                                      Percent(Dollars in thousands)Fixed-Rate
      Loans:Real
      estate:One-
      to four-family
                                                                                                      
                                                                                                      $
                                                                                                      248,485
                                                                                                      (1)
                                                                                                      
                                                                                                      
                                                                                                      23.05
                                                                                                      %
                                                                                                      
                                                                                                      $
                                                                                                      261,969
                                                                                                      (2)
                                                                                                      
                                                                                                      
                                                                                                      23.17
                                                                                                      %
                                                                                                      
                                                                                                      $
                                                                                                      254,235
                                                                                                      (3)
                                                                                                      
                                                                                                      
                                                                                                      31.28
                                                                                                      %
                                                                                                      
                                                                                                      $
                                                                                                      271,405
                                                                                                      (4)
                                                                                                      
                                                                                                      
                                                                                                      33.22
                                                                                                      %
                                                                                                      
                                                                                                      $
                                                                                                      305,911
                                                                                                      (5)
                                                                                                      
                                                                                                      
                                                                                                      36.55
                                                                                                      %Multi-family
                                                                                                      
                                                                                                      
                                                                                                      2,339
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.22
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      2,401
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.21
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3,610
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.44
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      4,488
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.55
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      4,587
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.55Commercial
                                                                                                      
                                                                                                      
                                                                                                      129,297
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      12.00
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      115,922
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      10.25
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      17,281
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      2.13
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      9,408
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1.15
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      9,375
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1.12Construction
      and development
                                                                                                      
                                                                                                      
                                                                                                      8,559
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.79
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      9,724
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.86
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      10,197
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1.25
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      8,310
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1.02
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      12,690
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1.52Total
      real estate loans
                                                                                                      
                                                                                                      
                                                                                                      388,680
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      36.06
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      390,016
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      34.49
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      285,323
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      35.10
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      293,611
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      35.94
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      332,563
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      39.74Consumer
                                                                                                      
                                                                                                      
                                                                                                      215,434
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      19.98
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      229,326
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      20.28
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      198,068
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      24.37
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      192,715
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      23.59
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      182,784
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      21.84Commercial
      business
                                                                                                      
                                                                                                      
                                                                                                      40,025
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3.71
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      37,865
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3.35
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      19,842
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      2.44
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      27,093
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3.32
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      20,000
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      2.39Total
      fixed-rate loans
                                                                                                      
                                                                                                      
                                                                                                      644,139
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      59.75
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      657,207
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      58.12
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      503,233
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      61.91
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      513,419
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      62.85
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      535,347
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      63.97Adjustable-Rate
      Loans:Real
      estate:One-
      to four-family
                                                                                                      
                                                                                                      
                                                                                                      222,530
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      20.64
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      259,395
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      22.94
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      176,783
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      21.75
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      161,718
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      19.79
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      146,003
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      17.44Multi-family
                                                                                                      
                                                                                                      
                                                                                                      282
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.03
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      297
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.03
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      319
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.04
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      585
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      .07
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      918
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.11Commercial
                                                                                                      
                                                                                                      
                                                                                                      128,071
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      11.88
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      134,771
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      11.92
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      64,835
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      7.98
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      64,504
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      7.90
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      67,895
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      8.11Construction
      and development
                                                                                                      
                                                                                                      
                                                                                                      1,258
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.12
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      2,508
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.22
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3,363
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.41
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      6,141
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      .75
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      10,248
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1.22Total
      real estate loans
                                                                                                      
                                                                                                      
                                                                                                      352,141
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      32.67
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      396,971
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      35.11
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      245,300
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      30.18
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      232,948
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      28.51
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      225,064
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      26.88Consumer
                                                                                                      
                                                                                                      
                                                                                                      44,354
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      4.11
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      39,066
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3.46
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      27,443
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3.38
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      30,258
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3.70
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      32,177
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3.85Commercial
      business
                                                                                                      
                                                                                                      
                                                                                                      37,359
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3.47
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      37,425
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3.31
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      36,922
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      4.53
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      40,383
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      4.94
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      44,353
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      5.30Total
      adjustable-rate loans
                                                                                                      
                                                                                                      
                                                                                                      433,854
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      40.25
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      473,462
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      41.88
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      309,665
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      38.09
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      303,589
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      37.15
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      301,594
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      36.03Total
      loans
                                                                                                      
                                                                                                      
                                                                                                      1,077,993
                                                                                                      (1)
                                                                                                      
                                                                                                      
                                                                                                      100.00
                                                                                                      %
                                                                                                      
                                                                                                      
                                                                                                      1,130,669
                                                                                                      (2)
                                                                                                      
                                                                                                      
                                                                                                      100.00
                                                                                                      %
                                                                                                      
                                                                                                      
                                                                                                      812,898
                                                                                                      (3)
                                                                                                      
                                                                                                      
                                                                                                      100.00
                                                                                                      %
                                                                                                      
                                                                                                      
                                                                                                      817,008
                                                                                                      (4)
                                                                                                      
                                                                                                      
                                                                                                      100.00
                                                                                                      %
                                                                                                      
                                                                                                      
                                                                                                      836,941
                                                                                                      (5)
                                                                                                      
                                                                                                      
                                                                                                      100.00
                                                                                                      %Less:Undisbursed
      portion of loans
                                                                                                      
                                                                                                      
                                                                                                      2,546
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      4,372
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3,984
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      5,520
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      7,724Deferred
      loan fees and costs
                                                                                                      
                                                                                                      
                                                                                                      (3,182
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (3,484
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (3,519
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (3,623
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (3,453
                                                                                                      )Allowance
      for loan losses
                                                                                                      
                                                                                                      
                                                                                                      16,414
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      15,107
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      8,352
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      8,156
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      8,100Total
      loans receivable, net
                                                                                                      
                                                                                                      $
                                                                                                      1,062,215
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      1,114,674
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      804,081
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      806,955
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      824,570
 
 
 (1)
              Includes
      loans held for sale of $2.5
million.
 (2)
              Includes
      loans held for sale of $1.5
million.
 (3)
              Includes
      loans held for sale of $1.6
million.
 (4)
              Includes
      loans held for sale of $1.3
million.
 (5)
              Includes
      loans held for sale of $2.0
million.
  5
  The
following schedule illustrates the contractual maturity of our loan portfolio at
December 31, 2009.  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 EstateOne- to Four-Family(1)
                    
                    
                    Multi-family and
                      Commercial
                    
                    
                    Construction
                      and Development(2)
                    
                    
                    Consumer
                    
                    
                    Commercial
                      Business
                    
                    
                    TotalAmount
                    
                    
                    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 31,2010(3)
                    
                    $
                    648
                    
                    
                    
                    6.56
                    %
                    
                    $
                    65,297
                    
                    
                    
                    5.07
                    %
                    
                    $
                    286
                    
                    
                    
                    6.63
                    %
                    
                    $
                    10,506
                    
                    
                    
                    6.73
                    %
                    
                    $
                    30,135
                    
                    
                    
                    4.14
                    %
                    
                    $
                    106,872
                    
                    
                    
                    4.98
                    %2011
                    
                    
                    717
                    
                    
                    
                    5.72
                    
                    
                    
                    17,165
                    
                    
                    
                    6.10
                    
                    
                    
                    214
                    
                    
                    
                    7.63
                    
                    
                    
                    10,464
                    
                    
                    
                    7.23
                    
                    
                    
                    9,332
                    
                    
                    
                    5.18
                    
                    
                    
                    37,892
                    
                    
                    
                    6.192012
                    
                    
                    1,221
                    
                    
                    
                    6.01
                    
                    
                    
                    19,548
                    
                    
                    
                    6.03
                    
                    
                    
                    166
                    
                    
                    
                    8.91
                    
                    
                    
                    13,261
                    
                    
                    
                    7.37
                    
                    
                    
                    13,587
                    
                    
                    
                    5.67
                    
                    
                    
                    47,783
                    
                    
                    
                    6.312013
      and 2014
                    
                    
                    8,054
                    
                    
                    
                    5.70
                    
                    
                    
                    76,629
                    
                    
                    
                    5.95
                    
                    
                    
                    431
                    
                    
                    
                    7.51
                    
                    
                    
                    30,121
                    
                    
                    
                    6.79
                    
                    
                    
                    15,444
                    
                    
                    
                    6.21
                    
                    
                    
                    130,679
                    
                    
                    
                    6.162015
      to 2016
                    
                    
                    9,846
                    
                    
                    
                    5.98
                    
                    
                    
                    7,648
                    
                    
                    
                    7.23
                    
                    
                    
                    19
                    
                    
                    
                    9.81
                    
                    
                    
                    17,886
                    
                    
                    
                    7.37
                    
                    
                    
                    4,172
                    
                    
                    
                    6.11
                    
                    
                    
                    39,571
                    
                    
                    
                    6.872017
      to 2031
                    
                    
                    150,172
                    
                    
                    
                    5.39
                    
                    
                    
                    68,794
                    
                    
                    
                    6.40
                    
                    
                    
                    1,699
                    
                    
                    
                    4.81
                    
                    
                    
                    177,009
                    
                    
                    
                    6.85
                    
                    
                    
                    4,714
                    
                    
                    
                    6.03
                    
                    
                    
                    402,388
                    
                    
                    
                    6.212032
      and following
                    
                    
                    297,836
                    
                    
                    
                    5.55
                    
                    
                    
                    4,908
                    
                    
                    
                    5.85
                    
                    
                    
                    7,002
                    
                    
                    
                    5.13
                    
                    
                    
                    541
                    
                    
                    
                    5.97
                    
                    
                    
                    —
                    
                    
                    
                    0.00
                    
                    
                    
                    310,287
                    
                    
                    
                    5.55Total
                    
                    $
                    468,494
                    
                    
                    
                    5.51
                    %
                    
                    $
                    259,989
                    
                    
                    
                    5.90
                    %
                    
                    $
                    9,817
                    
                    
                    
                    5.35
                    %
                    
                    $
                    259,788
                    
                    
                    
                    6.91
                    %
                    
                    $
                    77,384
                    
                    
                    
                    5.17
                    %
                    
                    $
                    1,075,472
                    
                    
                    
                    5.92
                    %
 
 
 (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.
  6
  The total
amount of loans due after December 31, 2010 that have predetermined interest
rates is $599.5 million, and the total amount of loans due after such date which
have floating or adjustable interest rates is $369.1 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, 2009, one- to four-family residential mortgage
loans totaled $471.0 million, or 43.7% of our gross loan portfolio.
  We
generally underwrite and document our one- to four-family loans based on the
loan applicant’s employment and credit history and the appraised value of the
subject property consistent with secondary market standards or other prudent
underwriting guidelines.  Generally, we lend up to 95% 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 the Bank’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 2009,
we originated $31.5 million of one- to four-family ARM loans and $218.5 million
of one- to four-family fixed-rate mortgage loans.  By way of
comparison, during fiscal 2008, we originated $33.1 million of one- to
four-family ARM loans and $78.0 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.
  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.
  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.  Our payment history for ARM loans has not been substantially
different from fixed rate loans.  See “Asset Quality — Non-performing
Assets” and “— Classified Assets.”  At December 31, 2009, our
one- to four-family ARM loan portfolio totaled $222.5 million, or 20.6% of our
gross loan portfolio.  At that date, the fixed-rate one- to
four-family mortgage loan portfolio totaled $248.5 million, or 23.1% 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 and commercial buildings to churches, office buildings and
multi-family housing complexes.  At December 31, 2009, multi-family
and commercial real estate loans totaled $260.0 million, or 24.1% of our gross
loan portfolio.
  7
  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
current 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.  Developmental loans
are secured by real estate and repaid by the sale of lots.
  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
MutualBank’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 required
to provide periodic financial information.
  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, 2009, we had $9.8 million in construction and development loans
outstanding, representing 0.9% 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 80% 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.
  8
  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, 2009, our consumer loan portfolio
totaled $259.8 million, or 24.1% 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 credit card and
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, 2009, our home equity loans, including lines of credit and home
improvement loans, totaled $107.0 million, or 9.9% 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.  Most 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.  A limited number of home equity lines of credit are approved
with monthly payments of accrued interest only.  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.  As specified in written agreements with these dealers,
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 originate consumer loans through bank financial
centers 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, 2009, auto loans totaled $18.8 million, or 1.8% 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 $127.2 million at December 31, 2009, or
11.8% of our gross loan portfolio.  At December 31, 2009, we decided
to suspend originations of boat and recreational vehicle loans from indirect
sources.
  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, 2009, commercial business
loans totaled $77.4 million, or 7.2% of our gross loan portfolio. Most of our
commercial business loans have been extended to finance businesses in our market
area.  Credit accommodations extended include lines of credit for
working capital needs, term loans to purchase capital goods and real estate,
development lending to foster residential, business and community growth and
agricultural lending for inventory and equipment financing.
  9
  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.
  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. Historically, we have
originated 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 rate 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.
  The
following table shows our loan origination, purchase, sale and repayment
activities for the years indicated.
  10
  Year Ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007(Dollars
      in thousands)Originations
      by type:Adjustable
      rate:Real estate - one- to
      four-family
                  
                  $
                  31,542
                  
                  
                  $
                  33,083
                  
                  
                  $
                  28,275- multi-family
                  
                  
                  56
                  
                  
                  
                  1,323
                  
                  
                  
                  —- commercial
                  
                  
                  7,713
                  
                  
                  
                  7,132
                  
                  
                  
                  11,557- construction or
      development
                  
                  
                  1,138
                  
                  
                  
                  5,617
                  
                  
                  
                  4,894Non-real estate -
      consumer
                  
                  
                  317
                  
                  
                  
                  43
                  
                  
                  
                  56- commercial
    business
                  
                  
                  1,322
                  
                  
                  
                  2,061
                  
                  
                  
                  2,026Total
    adjustable-rate
                  
                  
                  42,088
                  
                  
                  
                  49,259
                  
                  
                  
                  46,808Fixed
      rate:Real estate - one- to
      four-family
                  
                  
                  218,546
                  
                  
                  
                  78,040
                  
                  
                  
                  58,338- multi-family
                  
                  
                  1,444
                  
                  
                  
                  2,052
                  
                  
                  
                  —- commercial
                  
                  
                  16,536
                  
                  
                  
                  12,737
                  
                  
                  
                  2,171- construction or
      development
                  
                  
                  7,382
                  
                  
                  
                  9,171
                  
                  
                  
                  11,687Non-real estate -
      consumer
                  
                  
                  39,745
                  
                  
                  
                  42,465
                  
                  
                  
                  44,423- commercial
    business
                  
                  
                  9,447
                  
                  
                  
                  5,409
                  
                  
                  
                  3,153Total fixed-rate
                  
                  
                  293,100
                  
                  
                  
                  149,874
                  
                  
                  
                  119,772Total loans
      originated
                  
                  
                  335,188
                  
                  
                  
                  199,133
                  
                  
                  
                  166,580Purchases:(1)Real estate - one- to
      four-family
                  
                  
                  —
                  
                  
                  
                  213,441
                  
                  
                  
                  16,058- commercial
                  
                  
                  —
                  
                  
                  
                  93,479
                  
                  
                  
                  —- construction or
      development
                  
                  
                  —
                  
                  
                  
                  1,770
                  
                  
                  
                  —Non-real estate -
      consumer
                  
                  
                  —
                  
                  
                  
                  9,677
                  
                  
                  
                  —- commercial
    business
                  
                  
                  —
                  
                  
                  
                  75,496
                  
                  
                  
                  —Total loans
    purchased
                  
                  
                  —
                  
                  
                  
                  393,863
                  (2)
                  
                  
                  16,058Sales
      and Repayments:Sales:Real estate - one- to
      four-family
                  
                  
                  160,019
                  
                  
                  
                  92,914
                  
                  
                  
                  24,113Total loans sold
                  
                  
                  160,019
                  
                  
                  
                  92,914
                  
                  
                  
                  24,113Principal
      repayments
                  
                  
                  231,254
                  
                  
                  
                  179,187
                  
                  
                  
                  162,159Total reductions
                  
                  
                  391,273
                  
                  
                  
                  272,101
                  
                  
                  
                  186,272Increase
      (decrease) in other items, net
                  
                  
                  2,409
                  
                  
                  
                  (3,124
                  )
                  
                  
                  (476
                  )Net
      increase (decreases)
                  
                  $
                  (53,676)
                  
                  
                  $
                  317,771
                  
                  
                  $
                  (4,110
                  )
  
 (1)
              Does
      not include market value adjustment for loans related to acquisitions of
      branches from other financial
institutions.
 (2)
              Includes
      $385.3 million of loans acquired as part of the Company’s acquisition of
      MFB.
 
 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 30 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 60 days delinquent, the borrower is asked to pay the delinquent
amount in full, or establish an acceptable repayment plan to bring the loan
current. Prior to foreclosure 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 repayment plan from the borrower which would bring
the account current prior to foreclosure. The Bank has suspended foreclosure
activities when directed by government sponsored entities or the Bank’s
regulator.
  11
  For
consumer loans, a similar process is followed, with the initial written contact
being made once the loan is 20 days past due.
  Commercial
loan relationships exceeding $250,000 are reviewed on a regular basis by the
commercial credit department.  Larger relationships are monitored through a
system of internal and external loan review.  All relationships that are
deemed to warrant special attention are monitored at least quarterly. 
Individual commercial officers maintain communication with borrowers and
recommend action plans to a Loan Quality Review committee which meets monthly to
discuss credits graded Special Mention or worse.  The Asset Classification
committee meets quarterly and establishes specific reserves for losses on
relationships that are deemed to be under-collateralized and at risk of
continued non-payment.  Collection and loss mitigation efforts are a
cooperative effort between the Commercial Loan Department and the Risk
Management Division.
  Delinquent
Loans.  The following table sets forth, as of December 31,
2009, our loans delinquent for 60 to 89 days by type, number, amount and
percentage of type.
  Loans Delinquent For:60-89 DaysNumber
                    
                    
                    Amount
                    
                    
                    Percent
                      of Loan
                      Category(Dollars in thousands)Real
      Estate:One-
      to four-family
                    
                    
                    58
                    
                    
                    $
                    4,411
                    
                    
                    
                    0.94
                    %Multi-family
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Commercial
                    
                    
                    6
                    
                    
                    
                    667
                    
                    
                    
                    0.26Construction
      and development
                    
                    
                    3
                    
                    
                    
                    729
                    
                    
                    
                    7.43Consumer
                    
                    
                    116
                    
                    
                    
                    1,992
                    
                    
                    
                    0.77Commercial
      business
                    
                    
                    2
                    
                    
                    
                    111
                    
                    
                    
                    0.14Total
                    
                    
                    185
                    
                    
                    $
                    7,910
                    
                    
                    
                    0.74
                    %
 
 As of December 31, 2008, our total
loans delinquent for 60 to 89 days was $9.1 million or .81% of total
loans.
 
 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.
  12
 December 31,2009
                        
                        
                        2008
                        
                        2007
                        
                        
                        2006
                        
                        2005(Dollars in thousands)Non-accruing
      loans:One-
      to four-family
                        
                        $
                        14,617
                        
                        
                        $
                        7,917
                        
                        $
                        2,997
                        
                        
                        $
                        2,762
                        
                        $
                        2,967Multi-family
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        —Commercial
      real estate
                        
                        
                        8,986
                        
                        
                        
                        7,723
                        
                        
                        2,656
                        
                        
                        
                        356
                        
                        
                        569Construction
      and development
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        —Consumer
                        
                        
                        3,610
                        
                        
                        
                        1,851
                        
                        
                        1,294
                        
                        
                        
                        983
                        
                        
                        628Commercial
      business
                        
                        
                        1,873
                        
                        
                        
                        2,507
                        
                        
                        2,002
                        
                        
                        
                        1,468
                        
                        
                        1,257Total
                        
                        
                        29,086
                        
                        
                        
                        19,998
                        
                        
                        8,949
                        
                        
                        
                        5,569
                        
                        
                        5,421Accruing
      loans delinquent 90 days or more:One-
      to four-family
                        
                        
                        1,861
                        
                        
                        
                        1,284
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        67Multi-family
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        —Commercial
      real estate
                        
                        
                        —
                        
                        
                        
                        189
                        
                        
                        1,421
                        
                        
                        
                        —
                        
                        
                        1,858Construction
      and development
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        —Consumer
                        
                        
                        73
                        
                        
                        
                        —
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        35Commercial
      business
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        —Total
                        
                        
                        1,934
                        
                        
                        
                        1,473
                        
                        
                        1,421
                        
                        
                        
                        —
                        
                        
                        1,960Total
      nonperforming loans
                        
                        
                        31,020
                        
                        
                        
                        21,471
                        
                        
                        10,370
                        
                        
                        
                        5,569
                        
                        
                        7,381Restructured
      loans
                        
                        
                        1,563
                        
                        
                        
                        293
                        
                        
                        107
                        
                        
                        
                        111
                        
                        
                        116Foreclosed
      assets:One-
      to four-family
                        
                        
                        3,483
                        
                        
                        
                        1,786
                        
                        
                        927
                        
                        
                        
                        947
                        
                        
                        912Multi-family
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        —Commercial
      real estate
                        
                        
                        1,941
                        
                        
                        
                        1,193
                        
                        
                        437
                        
                        
                        
                        326
                        
                        
                        595Construction
      and development
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        —Consumer
                        
                        
                        1,927
                        
                        
                        
                        1,861
                        
                        
                        1,137
                        
                        
                        
                        1,322
                        
                        
                        978Commercial
      business
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        —Total
                        
                        
                        7,351
                        
                        
                        
                        4,840
                        
                        
                        2,501
                        
                        
                        
                        2,595
                        
                        
                        2,485Non-performing
      investments
                        
                        
                        100
                        
                        
                        
                        —
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        —Total
      non-performing assets
                        
                        $
                        40,034
                        
                        
                        $
                        26,604
                        
                        $
                        12,978
                        
                        
                        $
                        8,275
                        
                        $
                        9,982Total
      as a percentage of total assets
                        
                        
                        2.86
                        %
                        
                        
                        1.92
                        %
                        
                        1.35
                        %
                        
                        
                        0.86
                        %
                        
                        1.03
                        %
 
 The
majority of the increase in 2009 in non-performing assets is a result of
consumer real estate and other consumer loans increasing in
delinquency.  Commercial loan delinquency has remained mainly flat
between December 31, 2008 and December 31, 2009.
 
 For the
year ended December 31, 2009, gross interest income that would have been
recorded had the non-accruing loans been current in accordance with their
original terms amounted to $1.8 million.  The amount included in
interest income on these loans for the year ended December 31, 2009, was
$827,000.
  At
December 31, 2009, foreclosed commercial real estate consisted of seven
commercial buildings, one in Delaware County, three in Grant County, one in
Elkhart County, one in St. Joseph County and one in Florida, all of which are
currently being offered for sale.  In addition, forty-one residential
properties with a book value of $3.5 million remain as foreclosed assets at
December 31, 2009. These properties are being offered for
sale.  Non-accruing one- to four-family loans increased to $14.6
million at December 31, 2009.  Non-accruing commercial real estate
loans increased from $7.7 million at December 31, 2008, to $9.0 million at
December 31, 2009.At the same time,
non-accrual commercial business loans decreased from $2.5 million to $1.9
million. The increases in non-performing assets are primarily a result of the
current economic slowdown.  Management continues to monitor these
loans aggressively and it is management’s opinion that the non-accruing loans
are sufficiently reserved as of December 31, 2009.
  13
  Other Loans of
Concern.  In addition to the non-performing assets set forth in
the table above, as of December 31, 2009, there was an aggregate of $28.8
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.  Due to current economic conditions, we have seen an
increase in the amount of these loans during 2009.  These loans have
been considered in management’s determination of the adequacy of our allowance
for loan losses.  Management reviews each of these relationships at
least quarterly to determine if further downgrades and specific loan reserves
are prudent.
  Included
in the $28.8 million above are 20 commercial business loans totaling $6.9
million, 35 commercial real estate loans totaling $15.7 million and 48
residential mortgage loans totaling $4.5 million. Loans of $2.1 million had
specific loan loss reserves established and the majority of these loans were
current as of December 31, 2009.
  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.
  In
connection with the filing of the Bank’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, 2009, we had classified $68.1
million of the Bank’s assets as substandard, $2.2 million as doubtful and $2.8
million 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 56.32% of our
stockholders’ equity and 5.22% of our assets at December 31, 2009, compared to
26.20% and 2.46%, respectively, at December 31, 2008.
  Provision for
Loan Losses.  We recorded a provision for loan losses during
the year ended December 31, 2009 of $6.5 million, compared to $7.0 million for
the year ended December 31, 2008 and $2.2 million for the year ended December
31, 2007.  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 FASB ASC 310, Receivables.  These
accounting standards prescribe the measurement methods, income recognition and
disclosures related to impaired loans.
  14
  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 non-performing loans expected to result from existing conditions),
collateral values, loan volumes and concentrations, specific industry conditions
within portfolio segments and recent loss experience in particular segments of
the portfolio that existed as of the balance sheet date and the impact that such
conditions were believed to have had on the 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 general allowance for loan losses.  The
evaluation of the inherent loss with respect to these conditions is subject to a
higher degree of uncertainty because they are not identified with specific
problem credits or portfolio segments.
  The
allowance for loan losses is based on estimates of losses inherent in the loan
portfolio.  Actual losses can vary significantly from the estimated
amounts.  Our methodology as described permits adjustments to any loss
factor used in the computation of the general allowance in the event that, in
management’s judgment, significant factors which affect the collectibility of
the portfolio as of the evaluation date are not reflected in the loss
factors.  By assessing the probable incurred losses inherent in the
loan portfolio on a quarterly basis, we are able to adjust specific and inherent
loss estimates based upon any more recent information that has become
available.  Due to the loss of numerous manufacturing jobs in the
communities we serve during recent years, including 2009, 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, 2009, our allowance for loan losses was $16.4 million, or 1.53% of
the total loan portfolio, and approximately 50.4% 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.
  15
  The
following table sets forth an analysis of our allowance for loan
losses.
  Year Ended December 31,2009
                        
                        
                        2008
                        
                        
                        2007
                        
                        
                        2006
                        
                        
                        2005(Dollars in thousands)Balance
      at beginning of period
                        
                        $
                        15,107
                        
                        
                        $
                        8,352
                        
                        
                        $
                        8,156
                        
                        
                        $
                        8,100
                        
                        
                        $
                        6,867Charge-offs:One-
      to four-family
                        
                        
                        1,728
                        
                        
                        
                        480
                        
                        
                        
                        645
                        
                        
                        
                        526
                        
                        
                        
                        303Multi-family
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Commercial
      real estate
                        
                        
                        1,291
                        
                        
                        
                        1,548
                        
                        
                        
                        44
                        
                        
                        
                        102
                        
                        
                        
                        6Construction
      and development
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Consumer
                        
                        
                        3,154
                        
                        
                        
                        2,174
                        
                        
                        
                        1,731
                        
                        
                        
                        1,288
                        
                        
                        
                        1,276Commercial
      business
                        
                        
                        83
                        
                        
                        
                        230
                        
                        
                        
                        303
                        
                        
                        
                        387
                        
                        
                        
                        9546,256
                        
                        
                        
                        4,432
                        
                        
                        
                        2,723
                        
                        
                        
                        2,303
                        
                        
                        
                        2,539Recoveries:One-
      to four-family
                        
                        
                        110
                        
                        
                        
                        42
                        
                        
                        
                        121
                        
                        
                        
                        81
                        
                        
                        
                        22Multi-family
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Commercial
      real estate
                        
                        
                        184
                        
                        
                        
                        558
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        120Construction
      and development
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Consumer
                        
                        
                        767
                        
                        
                        
                        556
                        
                        
                        
                        357
                        
                        
                        
                        199
                        
                        
                        
                        194Commercial
      business
                        
                        
                        2
                        
                        
                        
                        57
                        
                        
                        
                        201
                        
                        
                        
                        11
                        
                        
                        
                        151,063
                        
                        
                        
                        1,213
                        
                        
                        
                        679
                        
                        
                        
                        291
                        
                        
                        
                        351Net
      charge-offs
                        
                        
                        5,193
                        
                        
                        
                        3,219
                        
                        
                        
                        2,044
                        
                        
                        
                        2,012
                        
                        
                        
                        2,188Amount
      acquired in acquisitions
                        
                        
                        —
                        
                        
                        
                        2,954
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        1,646Provisions
      charged to operations
                        
                        
                        6,500
                        
                        
                        
                        7,020
                        
                        
                        
                        2,240
                        
                        
                        
                        2,068
                        
                        
                        
                        1,775Balance
      at end of period
                        
                        $
                        16,414
                        
                        
                        $
                        15,107
                        
                        
                        $
                        8,352
                        
                        
                        $
                        8,156
                        
                        
                        $
                        8,100Ratio
      of net charge-offs during the period toaverage
      loans outstanding during the period
                        
                        
                        0.47
                        %
                        
                        
                        0.34
                        %
                        
                        
                        0.25
                        %
                        
                        
                        0.24
                        %
                        
                        
                        0.29
                        %Allowance
      as a percentage of non-performing
      loans
                        
                        
                        50.38
                        %
                        
                        
                        69.41
                        %
                        
                        
                        79.72
                        %
                        
                        
                        143.59
                        %
                        
                        
                        109.74
                        %Allowance
      as a percentage of totalloans
      (end of period)
                        
                        
                        1.53
                        %
                        
                        
                        1.34
                        %
                        
                        
                        1.03
                        %
                        
                        
                        1.00
                        %
                        
                        
                        0.98
                        %
  16
  The
distribution of our allowance for loan losses at the dates indicated is
summarized as follows:
  December 31,2009
                                
                                
                                2008
                                
                                
                                2007
                                
                                
                                2006
                                
                                
                                2005Amount 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
                                  Loans(Dollars in thousands)One-
      to four-family
                                
                                $
                                2,359
                                
                                
                                $
                                471,015
                                (1)
                                
                                
                                43.69
                                %
                                
                                $
                                1,997
                                
                                
                                
                                521,364
                                (2)
                                
                                
                                46.11
                                %
                                
                                $
                                1,200
                                
                                
                                
                                431,018
                                (3)
                                
                                
                                53.02
                                %
                                
                                $
                                1,219
                                
                                
                                $
                                433,123
                                (4)
                                
                                
                                53.01
                                %
                                
                                $
                                1,267
                                
                                
                                
                                451,914
                                (5)
                                
                                
                                54.00
                                %Multi-family
                                
                                
                                17
                                
                                
                                
                                2,621
                                
                                
                                
                                0.24
                                
                                
                                
                                73
                                
                                
                                
                                2,698
                                
                                
                                
                                .24
                                
                                
                                
                                20
                                
                                
                                
                                3,929
                                
                                
                                
                                0.48
                                
                                
                                
                                61
                                
                                
                                
                                5,073
                                
                                
                                
                                0.62
                                
                                
                                
                                68
                                
                                
                                
                                5,505
                                
                                
                                
                                .66Commercial
      real estate
                                
                                
                                7,555
                                
                                
                                
                                257,368
                                
                                
                                
                                23.88
                                
                                
                                
                                6,869
                                
                                
                                
                                250,693
                                
                                
                                
                                22.17
                                
                                
                                
                                2,158
                                
                                
                                
                                82,116
                                
                                
                                
                                10.10
                                
                                
                                
                                2,000
                                
                                
                                
                                73,912
                                
                                
                                
                                9.05
                                
                                
                                
                                2,039
                                
                                
                                
                                77,270
                                
                                
                                
                                9.23Construction
      or development
                                
                                
                                10
                                
                                
                                
                                9,817
                                
                                
                                
                                0.91
                                
                                
                                
                                12
                                
                                
                                
                                12,232
                                
                                
                                
                                1.08
                                
                                
                                
                                14
                                
                                
                                
                                13,560
                                
                                
                                
                                1.67
                                
                                
                                
                                72
                                
                                
                                
                                14,451
                                
                                
                                
                                1.77
                                
                                
                                
                                115
                                
                                
                                
                                22,938
                                
                                
                                
                                2.74Consumer
                                
                                
                                4,052
                                
                                
                                
                                259,788
                                
                                
                                
                                24.10
                                
                                
                                
                                3,990
                                
                                
                                
                                268,392
                                
                                
                                
                                23.74
                                
                                
                                
                                3,885
                                
                                
                                
                                225,511
                                
                                
                                
                                27.74
                                
                                
                                
                                3,801
                                
                                
                                
                                222,973
                                
                                
                                
                                27.29
                                
                                
                                
                                3,605
                                
                                
                                
                                214,961
                                
                                
                                
                                25.68Commercial
      business
                                
                                
                                2,421
                                
                                
                                
                                77,384
                                
                                
                                
                                7.18
                                
                                
                                
                                2,166
                                
                                
                                
                                75,290
                                
                                
                                
                                6.66
                                
                                
                                
                                1,075
                                
                                
                                
                                56,764
                                
                                
                                
                                6.99
                                
                                
                                
                                1,003
                                
                                
                                
                                67,476
                                
                                
                                
                                8.26
                                
                                
                                
                                1,006
                                
                                
                                
                                64,353
                                
                                
                                
                                7.69Unallocated
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —Total
                                
                                $
                                16,414
                                
                                
                                $
                                1,077,993
                                
                                
                                
                                100.00
                                %
                                
                                $
                                15,107
                                
                                
                                $
                                1,130,669
                                
                                
                                
                                100.00
                                %
                                
                                $
                                8,352
                                
                                
                                $
                                812,898
                                
                                
                                
                                100.00
                                %
                                
                                $
                                8,156
                                
                                
                                $
                                817,008
                                
                                
                                
                                100.00
                                %
                                
                                $
                                8,100
                                
                                
                                $
                                836,941
                                
                                
                                
                                100.00
                                %
  
 (1)
              Includes
      loans held for sale of $2.5
million.
 (2)
              Includes
      loans held for sale of $1.5
million.
 (3)
              Includes
      loans held for sale of $1.6
million.
 (4)
              Includes
      loans held for sale of $1.3
million.
 (5)
              Includes
      loans held for sale of $2.0
million.
   17
  Investment
Activities
  MutualBank
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 – MutualBank” 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
“Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of this
Form 10-K.
  Our
investment securities currently consist of U.S. Agency securities,
mortgage-backed securities, collateralized mortgage obligations, municipal
securities, 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 5 of the Notes to Consolidated Financial
Statements contained in Item 8 of this Form 10-K.  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, 2009, however, we did not
have a trading portfolio. See Note 5 of the Notes to Consolidated Financial
Statements contained in Item 8 of this Form 10-K.
  In 2007,
MutualBank transferred the management of a portion of its securities portfolio
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,
2009, MutualBank had $139.1 million in consolidated investment
securities.  The portfolio is comprised of $130.9 million in
investments available for sale and $8.1 in investments held to
maturity.  Mutual Federal Investment Company managed $118.4 million of
the total available for sale portfolio.
  MutualBank
evaluates all securities for other-than-temporary impairment (“OTTI”) on a
quarterly basis.  During the year ending December 31, 2009, the Bank
determined that several securities met the definition of OTTI.  The
first security was a Lehman’s corporate bond that was written down
$200,000.  Four securities were pooled trust preferred securities that
had a total write-down of $1.8 million.  Seven securities were private
label mortgage backed securities that were written down
$548,000.  Impairment on these securities was determined after
analyzing the underlying collateral and determining the amount of additional
losses needed in the individual pools to create a shortfall in interest or
principal payments.  All trust preferred securities were priced using
a discounted cash flow analysis as of December 31, 2009.
  18
  Pooled
Trust Preferred Securities.MutualFirstFinancial has a current par balance in
pooled trust preferred securities of $7.2 million, which was originally $10.3
million prior to other than temporary impairment write-downs in 2008 and
2009.  These securities have been written down through other
comprehensive income to a book balance of $2.4 million.  The following
table provides additional information related to the Bank’s investment in trust
preferred securities as of December 31, 2009:
  Original
                                      
                                      
                                      Book
                                      
                                      
                                      Fair
                                      
                                      
                                      Unrealized
                                      
                                      
                                      Realized
                                        Losses
                                      
                                      LowestDeal
                                      
                                      Class
                                      
                                      
                                      Par
                                      
                                      
                                      Value
                                      
                                      
                                      Value
                                      
                                      
                                      Loss
                                      
                                      
                                      2009
                                      
                                      
                                      2008
                                      
                                      Rating(Dollars
      in thousands)Alesco
      Preferred Funding IX
                                      
                                      A2A
                                      
                                      
                                      $
                                      1,000
                                      
                                      
                                      $
                                      893
                                      
                                      
                                      $
                                      431
                                      
                                      
                                      $
                                      (462
                                      )
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      BBAlesco
      Preferred Funding XVII
                                      
                                      C1
                                      
                                      
                                      
                                      1,000
                                      
                                      
                                      
                                      100
                                      
                                      
                                      
                                      2
                                      
                                      
                                      
                                      (98
                                      )
                                      
                                      
                                      (900
                                      )
                                      
                                      
                                      -
                                      
                                      CaPreferred
      Term Securities XIII
                                      
                                      B1
                                      
                                      
                                      
                                      1,000
                                      
                                      
                                      
                                      823
                                      
                                      
                                      
                                      298
                                      
                                      
                                      
                                      (525
                                      )
                                      
                                      
                                      (177
                                      )
                                      
                                      
                                      -
                                      
                                      CaPreferred
      Term Securities XVIII
                                      
                                      C
                                      
                                      
                                      
                                      1,000
                                      
                                      
                                      
                                      965
                                      
                                      
                                      
                                      252
                                      
                                      
                                      
                                      (713
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      CaPreferred
      Term Securities XXVII
                                      
                                      C1
                                      
                                      
                                      
                                      1,000
                                      
                                      
                                      
                                      1,004
                                      
                                      
                                      
                                      189
                                      
                                      
                                      
                                      (815
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      CaU.S.
      Capital Funding I
                                      
                                      B1
                                      
                                      
                                      
                                      3,000
                                      
                                      
                                      
                                      2,891
                                      
                                      
                                      
                                      995
                                      
                                      
                                      
                                      (1,896
                                      )
                                      
                                      
                                      (109
                                      )
                                      
                                      
                                      -
                                      
                                      CCU.S.
      Capital Funding III
                                      
                                      B1
                                      
                                      
                                      
                                      1,000
                                      
                                      
                                      
                                      500
                                      
                                      
                                      
                                      268
                                      
                                      
                                      
                                      (232
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (500
                                      )
                                      Caa1U.S.
      Capital Funding V
                                      
                                      B1
                                      
                                      
                                      
                                      1,300
                                      
                                      
                                      
                                      45
                                      
                                      
                                      
                                      1
                                      
                                      
                                      
                                      (44
                                      )
                                      
                                      
                                      (605
                                      )
                                      
                                      
                                      (650
                                      )
                                      CCTotal
                                      
                                      
                                      
                                      
                                      $
                                      10,300
                                      
                                      
                                      $
                                      7,221
                                      
                                      
                                      $
                                      2,436
                                      
                                      
                                      $
                                      (4,785
                                      )
                                      
                                      $
                                      (1,791
                                      )
                                      
                                      $
                                      (1,150
                                      )
  The OTTI
taken on trust preferred securities in 2009 was the result of significant
deterioration in the performance of the underlying collateral.  The
deterioration was the result of increased defaults and deferrals of dividend
payments in the current year, creating credit impairment along with weakening
financial performance of performing collateral, increasing the risk of future
deferrals of dividends and defaults.
 
 The
Bank’s trust preferred securities valuation was prepared by an independent third
party.  Their approach to determining fair value involved several
steps including:
 
 ·
              Detailed
      credit and structural evaluation of each piece of collateral in the trust
      preferred securities;
 ·
              Collateral
      performance projections for each piece of collateral in the trust
      preferred security;
 ·
              Terms
      of the trust preferred structure, as laid out in the indenture;
      and
 ·
              Discounted
      cash flow modeling.
  MutualFirstFinancial uses
market-based yield indicators as a baseline for determining appropriate discount
rates, and then adjusts the resulting discount rates on the basis of its credit
and structural analysis of specific trust preferred securities.  The
primary focus is on the returns a fixed income investor would require in order
to allocate capital on a risk adjusted basis.  There is currently no
active market for pooled trust preferred securities; however, the Company looks
principally to market yields for stand-alone trust preferred securities issued
by banks, thrifts and insurance companies for which there is an active and
liquid market.  The next step is to make a series of adjustments to
reflect the differences that exist between these products (both credit and
structural) and, most importantly, to reflect idiosyncratic credit performance
differences (both actual and projected) between these products and the
underlying collateral in the specific trust preferred
security.  Importantly, as part of the analysis described above, MutualFirst considers the
fact that structured instruments frequently exhibit leverage not present in
stand-alone instruments, and make adjustments as necessary to reflect this
additional risk.
  19
  The
default and recovery probabilities for each piece of collateral were formed
based on the evaluation of the collateral credit and a review of historical
industry default data and current/near-term operating conditions.  For
collateral that has already defaulted, the Company assumed no
recovery.  For collateral that was in deferral, the Company assumed a
recovery of 10% of par for banks, thrifts or other depository institutions, and
15% of par for insurance companies.  Although the Company
conservatively assumed that the majority of the deferring collateral continues
to defer and eventually defaults, we also recognize there is a possibility that
some deferring collateral may become current at some point in the
future.
 
 Private Label
Mortgage Backed Securities.In 2008, the Company redeemed two
mutual funds and received cash and underlying securities in the mutual fund as
payment.  These held to maturity securities had a par value of $10.1
million and a book value of $7.6 million.  The securities received
were agency and private label mortgage backed securities.  The agency
MBS have a par value of $2.9 million and a book value of $2.7
million.  The private labeled MBS have a par value of $7.2 million and
a book value of $4.9 million.  In 2009, the private label MBS had
other than temporary impairment of $548,000.  An independent analysis
was performed on several MBS that met certain criteria to determine if OTTI was
present.  The average book value of the private label securities is
$51,000.    All of these securities are monitored on a
quarterly basis by management.
 
 Other
information about the private label mortgage backed securities received in the
redemption in-kind transaction include:
 ·
              The
      securities have vintage years between 1993 and 2007, with the majority
      being between 2002 and 2007.
 ·
              The
      securities include sub-prime, Alt-A, and home equity
  loans.
 ·
              Investment
      grade securities total $1.6 million in book value and $3.3 million in book
      value are below investment grade.
  Investment in
Limited Partnerships.MutualBank has investments in eight
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, two in Goshen, Indiana, one in Elkhart, Indiana, and two 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, 2009, $226,000 of this commitment remained payable over the next
year.
  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 for
use as a general business credit, but no basis reduction is required for any
portion of the tax credit claimed. As of December 31, 2009, at least 83% 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 $874,000 for the year ended December 31, 2009,
$1.2 million for the year ended December 31, 2008 and $811,000 for the year
ended December 31, 2007 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 MutualBank’s
investment in the Pedcor Projects.
  20
  The
following summarizes MutualBank’s equity in the Pedcor Projects’ losses and tax
credits recognized in our consolidated financial statements.
  For the Year Ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007(Dollars
      in thousands)Investments
      in Pedcor low income housing projects
                  
                  $
                  4,161
                  
                  
                  $
                  4,561
                  
                  
                  $
                  3,246Equity
      in income (losses), net of income tax effect
                  
                  $
                  71
                  
                  
                  $
                  (104
                  )
                  
                  $
                  (66
                  )Tax
      credit
                  
                  
                  874
                  
                  
                  
                  1,214
                  
                  
                  
                  811Increase
      in after-tax income from Pedcor Investments
                  
                  $
                  945
                  
                  
                  $
                  1,110
                  
                  
                  $
                  745
 
 See Note
10 of the Notes to Consolidated Financial Statements contained in Item 8 of this
Form 10-K for additional information regarding our limited partnership
investments.
  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, 2009, 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 31,2009
                      
                      
                      2008
                      
                      
                      2007Amortized
                        Cost
                      
                      
                      Fair
                        Value
                      
                      
                      Amortized
                        Cost
                      
                      
                      Fair
                        Value
                      
                      
                      Amortized
                        Cost
                      
                      
                      Fair
                        Value(Dollars
      in thousands)Investment
      securities available-for-sale:Mutual funds
                      
                      $
                      1,685
                      
                      
                      $
                      1,643
                      
                      
                      $
                      1,635
                      
                      
                      $
                      1,497
                      
                      
                      $
                      16,382
                      
                      
                      $
                      15,914Government sponsored
      entities
                      
                      
                      158
                      
                      
                      
                      157
                      
                      
                      
                      570
                      
                      
                      
                      572
                      
                      
                      
                      608
                      
                      
                      
                      605Mortgage-backed
      securities
                      
                      
                      29,175
                      
                      
                      
                      29,890
                      
                      
                      
                      14,771
                      
                      
                      
                      15,163
                      
                      
                      
                      2,310
                      
                      
                      
                      2,352Collateralized mortgage
      obligations
                      
                      
                      85,726
                      
                      
                      
                      87,029
                      
                      
                      
                      43,821
                      
                      
                      
                      43,639
                      
                      
                      
                      8,327
                      
                      
                      
                      8,322Corporate
      obligations
                      
                      
                      7,321
                      
                      
                      
                      2,539
                      
                      
                      
                      18,797
                      
                      
                      
                      15,527
                      
                      
                      
                      16,655
                      
                      
                      
                      16,399Municipal
      obligations
                      
                      
                      9,313
                      
                      
                      
                      9,656
                      
                      
                      
                      857
                      
                      
                      
                      857
                      
                      
                      
                      —
                      
                      
                      
                      —Total
      investment securities held for sale
                      
                      
                      133,378
                      
                      
                      
                      130,914
                      
                      
                      
                      80,451
                      
                      
                      
                      77,255
                      
                      
                      
                      44,282
                      
                      
                      
                      43,592Investment
      securities held to maturity:Mortgage-backed
      securities
                      
                      
                      4,619
                      
                      
                      
                      3,275
                      
                      
                      
                      5,498
                      
                      
                      
                      4,983
                      
                      
                      
                      —
                      
                      
                      
                      —Collateralized mortgage
      obligations
                      
                      
                      3,028
                      
                      
                      
                      2,554
                      
                      
                      
                      4,178
                      
                      
                      
                      3,545
                      
                      
                      
                      —
                      
                      
                      
                      —Government sponsored
      entities
                      
                      
                      500
                      
                      
                      
                      504
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Total
      investment securities held to maturity
                      
                      
                      8,147
                      
                      
                      
                      6,333
                      
                      
                      
                      9,676
                      
                      
                      
                      8,528
                      
                      
                      
                      —
                      
                      
                      
                      —Investment
      in limited partnerships
                      
                      
                      4,161
                      
                      
                      
                      N/A
                      
                      
                      
                      4,561
                      
                      
                      
                      N/A
                      
                      
                      
                      3,246
                      
                      
                      
                      N/AInvestment
      in insurance company
                      
                      
                      —
                      
                      
                      
                      N/A
                      
                      
                      
                      590
                      
                      
                      
                      N/A
                      
                      
                      
                      590
                      
                      
                      
                      N/AFederal
      Home Loan Bank stock
                      
                      
                      18,632
                      
                      
                      
                      N/A
                      
                      
                      
                      18,632
                      
                      
                      
                      N/A
                      
                      
                      
                      10,037
                      
                      
                      
                      N/ATotal
      investments
                      
                      $
                      164,318
                      
                      
                      $
                      137,247
                      
                      
                      $
                      113,910
                      
                      
                      $
                      85,783
                      
                      
                      $
                      58,155
                      
                      
                      $
                      43,592
  21
  The
following table indicates, as of December 31, 2009, the composition and
maturities of our investment securities, excluding Federal Home Loan Bank
stock.
  Due inLess Than
                      1 Year
                    
                    
                    1 to 5
                      Years
                    
                    5 to 10
                      Years
                    
                    
                    Over
                      10 Years
                    
                    
                    Total
                      Investment SecuritiesAmortized
                      Cost
                    
                    
                    Amortized
                      Cost
                    
                    Amortized
                      Cost
                    
                    
                    Amortized
                      Cost
                    
                    
                    Amortized
                      Cost
                    
                    
                    Fair
                      Value(Dollars in thousands)Available-for-sale:Corporate
      obligations
                    
                    $
                    100
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    7,221
                    
                    
                    $
                    7,321
                    
                    
                    $
                    2,539Government sponsored
      entities
                    
                    
                    87
                    
                    
                    
                    10
                    
                    
                    
                    2,626
                    
                    
                    
                    6,748
                    
                    
                    
                    9,471
                    
                    
                    
                    9,813Mutual funds
                    
                    
                    1,685
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,685
                    
                    
                    
                    1,643Mortgage-backed
      securities:Freddie Mac
                    
                    
                    —
                    
                    
                    
                    52
                    
                    
                    
                    753
                    
                    
                    
                    47,327
                    
                    
                    
                    48,132
                    
                    
                    
                    49,418Fannie Mae
                    
                    
                    —
                    
                    
                    
                    806
                    
                    
                    
                    36
                    
                    
                    
                    20,382
                    
                    
                    
                    21,224
                    
                    
                    
                    22,097Ginnie Mae
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    33,867
                    
                    
                    
                    33,867
                    
                    
                    
                    33,939Other
                    
                    
                    193
                    
                    
                    
                    —
                    
                    
                    
                    7,177
                    
                    
                    
                    4,308
                    
                    
                    
                    11,678
                    
                    
                    
                    11,465$
                    2,065
                    
                    
                    $
                    868
                    
                    
                    $
                    10,592
                    
                    
                    $
                    119,853
                    
                    
                    $
                    133,378
                    
                    
                    $
                    130,914Weighted
      average yield
                    
                    
                    4.00
                    %
                    
                    
                    4.97
                    %
                    
                    
                    5.52
                    %
                    
                    
                    4.35
                    %
                    
                    
                    4.44
                    %Held-to-maturity:Government sponsored
      entities
                    
                    $
                    —
                    
                    
                    $
                    500
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    500
                    
                    
                    $
                    504Mortgage-backed
      securities:Freddie Mac
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    802
                    
                    
                    
                    802
                    
                    
                    
                    762Fannie Mae
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2,067
                    
                    
                    
                    2,067
                    
                    
                    
                    2,205Other
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    4,778
                    
                    
                    
                    4,778
                    
                    
                    
                    2,862$
                    —
                    
                    
                    $
                    500
                    
                    
                    $
                    —
                    
                    
                    $
                    7,647
                    
                    
                    $
                    8,147
                    
                    
                    $
                    6,333Weighted
      average yield
                    
                    
                    
                    
                    
                    
                    2.00
                    %
                    
                    
                    
                    
                    
                    
                    3.46
                    %
                    
                    
                    3.46
                    %
 
 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.  Occasionally we will accept brokered deposits from a broker
without paying a fee to that broker.  At December 31, 2009, our
brokered deposits totaled $6.9 million, or .7% of total deposits, with an
average interest rate of 1.87% and a 1.5 year 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.
  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, 2009, we were in compliance with these reserve
requirements.
  22
  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 31,2009
                        
                        
                        2008
                        
                        
                        2007Amount
                        
                        
                        Percent
                          of Total
                        
                        
                        Amount
                        
                        
                        Percent
                          of Total
                        
                        
                        Amount
                        
                        
                        Percent
                          of Total(Dollars in thousands)Transactions
      and Savings Deposits:Noninterest bearing
      accounts
                        
                        $
                        98,025
                        
                        
                        
                        9.38
                        %
                        
                        $
                        93,393
                        
                        
                        
                        9.70
                        %
                        
                        $
                        47,172
                        
                        
                        
                        7.08
                        %Passbook
    accounts
                        
                        
                        84,553
                        
                        
                        
                        8.09
                        
                        
                        
                        79,111
                        
                        
                        
                        8.22
                        
                        
                        
                        50,388
                        
                        
                        
                        7.56Interest-bearing
      NOW and demand accounts
                        
                        
                        154,431
                        
                        
                        
                        14.77
                        
                        
                        
                        156,787
                        
                        
                        
                        16.29
                        
                        
                        
                        117,863
                        
                        
                        
                        17.69Money market
      accounts
                        
                        
                        60,479
                        
                        
                        
                        5.79
                        
                        
                        
                        47,584
                        
                        
                        
                        4.94
                        
                        
                        
                        22,664
                        
                        
                        
                        3.40Total
      non-certificates
                        
                        
                        397,488
                        
                        
                        
                        38.03
                        
                        
                        
                        376,875
                        
                        
                        
                        39.16
                        
                        
                        
                        238,087
                        
                        
                        
                        35.73Certificates:0.00
      -1.99%
                        
                        
                        188,995
                        
                        
                        
                        18.08
                        
                        
                        
                        55,064
                        
                        
                        
                        5.72
                        
                        
                        
                        8,627
                        
                        
                        
                        1.292.00
      -3.99%
                        
                        
                        355,758
                        
                        
                        
                        34.04
                        
                        
                        
                        359,899
                        
                        
                        
                        37.39
                        
                        
                        
                        47,500
                        
                        
                        
                        7.134.00
      -5.99%
                        
                        
                        102,894
                        
                        
                        
                        9.84
                        
                        
                        
                        170,611
                        
                        
                        
                        17.73
                        
                        
                        
                        372,145
                        
                        
                        
                        55.846.00
      -7.99%
                        
                        
                        61
                        
                        
                        
                        .01
                        
                        
                        
                        65
                        
                        
                        
                        0.01
                        
                        
                        
                        48
                        
                        
                        
                        0.018.00
      -9.99%
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —10.00%
      and over
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Total
certificates
                        
                        
                        647,708
                        
                        
                        
                        61.97
                        
                        
                        
                        585,639
                        
                        
                        
                        60.84
                        
                        
                        
                        428,320
                        
                        
                        
                        64.27Total deposits
                        
                        $
                        1,045,196
                        
                        
                        
                        100.00
                        %
                        
                        $
                        962,514
                        (1)
                        
                        
                        100.00
                        %
                        
                        $
                        666,407
                        
                        
                        
                        100.00
                        %
  
 (1)
              Includes
      $332.1 million due to MFB
acquisition
 
 The
following table shows rate and maturity information for our certificates of
deposit as of December 31, 2009.
  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 maturingin
      quarter ending:March
      31, 2010
                      
                      $
                      67,890
                      
                      
                      $
                      53,162
                      
                      
                      $
                      12,163
                      
                      
                      $
                      —
                      
                      
                      $
                      133,215
                      
                      20.57
                      %June
      30, 2010
                      
                      
                      38,224
                      
                      
                      
                      53,025
                      
                      
                      
                      9,948
                      
                      
                      
                      —
                      
                      
                      
                      101,197
                      
                      15.61
                      %September
      30, 2010
                      
                      
                      42,161
                      
                      
                      
                      43,011
                      
                      
                      
                      5,019
                      
                      
                      
                      —
                      
                      
                      
                      90,191
                      
                      13.92
                      %December
      31, 2010
                      
                      
                      20,743
                      
                      
                      
                      36,417
                      
                      
                      
                      1,944
                      
                      
                      
                      —
                      
                      
                      
                      59,104
                      
                      9.13
                      %March
      31, 2011
                      
                      
                      7,362
                      
                      
                      
                      15,741
                      
                      
                      
                      1,305
                      
                      
                      
                      —
                      
                      
                      
                      24,408
                      
                      3.77
                      %June
      30, 2011
                      
                      
                      1,453
                      
                      
                      
                      34,402
                      
                      
                      
                      2,151
                      
                      
                      
                      —
                      
                      
                      
                      38,006
                      
                      5.87
                      %September
      30, 2011
                      
                      
                      8,149
                      
                      
                      
                      18,104
                      
                      
                      
                      2,863
                      
                      
                      
                      —
                      
                      
                      
                      29,116
                      
                      4.50
                      %December
      31, 2011
                      
                      
                      1,000
                      
                      
                      
                      22,118
                      
                      
                      
                      5,746
                      
                      
                      
                      61
                      
                      
                      
                      28,925
                      
                      4.47
                      %March
      31, 2012
                      
                      
                      —
                      
                      
                      
                      13,296
                      
                      
                      
                      8,929
                      
                      
                      
                      —
                      
                      
                      
                      22,225
                      
                      3.43
                      %June
      30, 2012
                      
                      
                      384
                      
                      
                      
                      6,101
                      
                      
                      
                      9,178
                      
                      
                      
                      —
                      
                      
                      
                      15,663
                      
                      2.42
                      %September
      30, 2012
                      
                      
                      671
                      
                      
                      
                      1,259
                      
                      
                      
                      5,463
                      
                      
                      
                      —
                      
                      
                      
                      7,393
                      
                      1.14
                      %December
      31, 2012
                      
                      
                      958
                      
                      
                      
                      802
                      
                      
                      
                      2,563
                      
                      
                      
                      —
                      
                      
                      
                      4,323
                      
                      0.67
                      %Thereafter
                      
                      
                      —
                      
                      
                      
                      58,320
                      
                      
                      
                      35,622
                      
                      
                      
                      —
                      
                      
                      
                      93,942
                      
                      14.50
                      %Total
                      
                      $
                      188,995
                      
                      
                      $
                      355,758
                      
                      
                      $
                      102,894
                      
                      
                      $
                      61
                      
                      
                      $
                      647,708
                      
                      100.00
                      %Percent
      of total
                      
                      
                      29.18
                      %
                      
                      
                      54.92
                      %
                      
                      
                      15.89
                      %
                      
                      
                      .01
                      %
                      
                      
                      100.00
                      %
  23
  The
following table indicates, as of December 31, 2009, the amount of our
certificates of deposit and other deposits by time remaining until
maturity.
  Maturity3 Months
                    or Less
                  
                  
                  Over
                    3 to 6
                    Months
                  
                  
                  Over
                    6 to 12
                    Months
                  
                  
                  Over
                    12 months
                  
                  
                  Total(Dollars
      in thousands)Certificates
      of deposit less than $100,000
                  
                  $
                  92,626
                  
                  
                  $
                  71,066
                  
                  
                  $
                  100,063
                  
                  
                  $
                  171,496
                  
                  
                  $
                  435,251Certificates
      of deposit of $100,000 or more
                  
                  
                  39,720
                  
                  
                  
                  29,413
                  
                  
                  
                  48,127
                  
                  
                  
                  92,005
                  
                  
                  
                  209,265Public
      funds(1)
                  
                  
                  869
                  
                  
                  
                  718
                  
                  
                  
                  1,105
                  
                  
                  
                  500
                  
                  
                  
                  3,192Total
      certificates of deposit
                  
                  $
                  133,215
                  
                  
                  $
                  101,197
                  
                  
                  $
                  149,295
                  
                  
                  $
                  264,001
                  
                  
                  $
                  647,708
  
 (1)
              Deposits
      from governmental and other public
entities.
 
 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 14 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, 2009, we had $198.0 million in
Federal Home Loan Bank advances outstanding.  Based on current
collateral levels we could borrow an additional $82.4 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” contained in
Item 7 of this Form 10-K.
  In order
to have access to Federal Home Loan Bank advances, we are required to own stock
in the Federal Home Loan Bank of Indianapolis.  At December 31, 2009,
we had $18,632,000 in that stock.  We continue to monitor the
activities of the Federal Home Loan Bank of Indianapolis and believe they have
the ability to meet our borrowing needs during this difficult economic
environment.
  We also
have a term note with a balance of $10.0 million from First Tennessee Bank, N.A.
as of December 31, 2009. See Note 15 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
Company acquired $5.0 million of issuer trust preferred securities as part of
the acquisition of MFB.  The net balance of the note as of December
31, 2009 was $3.9 million due to the purchase accounting adjustment from the
acquisition.  The securities mature 30 years from the date of
issuance, July 29, 2005.  The securities bear a fixed rate of interest
of 6.22% for the first five years, resetting quarterly thereafter at the
prevailing three-month LIBOR rate plus 170 basis points.  In December
2009, the Company entered into a cash flow hedge with FTN Financial to fix the
floating portion of the issued trust preferred security at 5.15% for the next
five years starting on September 15, 2010.  The Company may redeem the
trust preferred securities, in whole or in part, without penalty, on or after
September 15, 2010, or earlier upon the occurrence of certain events with the
payment of a premium upon redemption.  These securities mature on
September 15, 2035.
  24
  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 31,2009
                  
                  
                  2008
                  
                  
                  2007(Dollars
      in thousands)Maximum
      Balance:Federal Home Loan Bank
      advances
                  
                  $
                  250,566
                  
                  
                  $
                  300,147
                  
                  
                  $
                  191,675Notes payable
                  
                  
                  231
                  
                  
                  
                  1,123
                  
                  
                  
                  1,427Other
borrowings
                  
                  
                  15,359
                  
                  
                  
                  15,967
                  
                  
                  
                  4,311Average
      Balance:Federal Home Loan Bank
      advances
                  
                  $
                  221,896
                  
                  
                  $
                  224,822
                  
                  
                  $
                  157,309Notes payable
                  
                  
                  228
                  
                  
                  
                  718
                  
                  
                  
                  1,160Other
borrowings
                  
                  
                  15,076
                  
                  
                  
                  7,967
                  
                  
                  
                  155
 
 The
following table sets forth certain information as to our borrowings at the dates
indicated.
  December 31,2009
                    
                    
                    2008
                    
                    
                    2007(Dollars in thousands)Federal
      Home Loan Bank advances
                    
                    $
                    197,960
                    
                    
                    $
                    263,113
                    
                    
                    $
                    191,675Notes
      payable
                    
                    
                    226
                    
                    
                    
                    647
                    
                    
                    
                    1,055Other
      borrowings
                    
                    
                    13,888
                    
                    
                    
                    15,345
                    
                    
                    
                    3,908Total borrowings
                    
                    $
                    212,074
                    
                    
                    $
                    279,105
                    
                    
                    $
                    196,638Weighted
      average interest rate of FHLB advances
                    
                    
                    4.00
                    %
                    
                    
                    4.27
                    %
                    
                    
                    4.88
                    %Weighted average interest rate of
      notes payable(1)
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Weighted average interest rate of
      other borrowings(2)
                    
                    
                    5.99
                    %
                    
                    
                    5.28
                    %
                    
                    
                    6.48
  
 (1)
              Our
      notes payable are capitalized loans with no current interest expense as of
      December 31, 2009.
 (2)
              Our
      other borrowings are a term loan and subordinate debt as of December 31,
      2009.
 
 Subsidiary
and Other Activities
  As a
federal savings bank, MutualBank is permitted by OTS regulations to invest up to
2% of its assets, or $28.0 million at December 31, 2009, in the stock of, or
unsecured loans to, service corporation subsidiaries.  MutualBank 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 MutualBank and are not required to be controlled by
MutualBank.  MutualBank also is authorized to invest an unlimited
amount in operating subsidiaries that only may engage in activities authorized
for MutualBank and must be controlled by MutualBank.
  The
Bank's insurance agency subsidiary, Mishawaka Financial Services, Inc., is
engaged in the sale, as agent, of life insurance and credit-life and health
insurance to the Bank's customers and the general public.
  25
  At
December 31, 2009, MutualBank had one active subsidiary, Mutual Federal
Investment Company, which is an operating subsidiary.  Mutual Federal
Investment Company is a Nevada corporation that holds and manages a portion of
MutualBank’s investment portfolio.  As of December 31, 2009, the
market value of securities managed was $118.4 million.  Mutual Federal
Investment Company has one active subsidiary, Mutual Federal REIT,
Inc.  Mutual Federal REIT, Inc. is a Maryland corporation holding
approximately $91.7 million in one-to four-family mortgage loans.
  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, 2009, we had a total of 369 full-time and 67 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.
  Congress
is currently considering significant regulatory reform legislation initially
proposed by the Obama administration.  This legislation, if enacted,
would have a significant impact on the regulation and operations of financial
institutions and their holding companies.  It currently provides for
the elimination of the OTS, our primary regulator, and would require the Company
to become a bank holding company and be subject to regulatory capital
requirements for the first time.  This elimination of OTS may require
MutualBank to convert to a national bank or state bank charter.  The
legislation also provides for the creation of a new consumer financial
protection agency that would issue and enforce consumer protection initiatives
governing financial products and services.  The details and impact of
this regulatory reform proposal cannot be determined until the proposal is
enacted into law.
  MutualFirst.  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.  IfMutualFirst 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 MutualBank or any other savings institution) would
generally become subject to additional restrictions.
  If
MutualBank 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
failureMutualFirst
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.
  26
  MutualBank.  MutualBank,
as a federally chartered savings institution, is subject to federal regulation,
periodic examination and oversight by the OTS extending to all aspects of
MutualBank’s operations. MutualBank also is subject to regulation and
examination by the FDIC, which insures the deposits of MutualBank 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
MutualBank, 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, 2009, MutualBank met the test and has
met the test since its effectiveness.  If MutualBank loses qualified
thrift lender status, it becomes subject to national bank investment and
activity limits.
  The OTS
regularly examines MutualBank and prepares reports for the consideration of
MutualBank’s board of directors on any deficiencies that it may find in
MutualBank’s operations.  When these examinations are conducted, the
examiners may require MutualBank to provide for higher general or specific loan
loss reserves.  MutualBank’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 MutualBank’s mortgage requirements.  The OTS also has
extensive enforcement authority over all savings institutions and their holding
companies, including MutualBank andMutualFirst.
  MutualBank’s
general permissible lending limit for loans extended to one-borrower (including
a group of certain related borrowers) 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, 2009, MutualBank’s
lending limit under this restriction was $20.1 million.  MutualBank
has no loans in excess of the lending limit.
  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.
  FDIC Regulation and Insurance of
Accounts.  The Bank’s deposits are insured up to the applicable
limits by the FDIC, and such insurance is backed by the full faith and credit of
the United States Government.  As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions.  Our deposit insurance
premiums for the year ended December 31, 2009 were $2.3
million.  Those premiums have increased in recent years due to strains
on the FDIC deposit insurance fund due to the cost of large bank failures and
the increase in the number of troubled banks.
  The Bank
is a member of the deposit insurance fund administered by the
FDIC.  Deposits are insured up to the applicable limits by the
FDIC.  Through December 31, 2013, the basic deposit insurance is
$250,000, instead of the $100,000 limit that had been in effect prior to October
2008.  The FDIC also provides unlimited deposit insurance coverage for
noninterest-bearing transaction accounts (typically business checking accounts),
NOW accounts bearing interest at 0.5% or less, and certain funds swept into
noninterest-bearing savings accounts at institutions that opt into this enhanced
deposit insurance coverage.  MutualBank opted into this program, which
is set to expire on June 30, 2010.  The Bank pays a fee of 10 basis
points (annualized) on the balance of each covered account in excess of $250,000
during the period through June 30, 2010.  During 2009, we paid total
fees of $14,000 for participating in this program.
  27
  The FDIC
assesses deposit insurance premiums quarterly on each FDIC-insured institution
based on annualized rates for one of four risk categories applied to its
deposits subject to certain adjustments. Each institution is assigned to one of
four risk categories based on its capital, supervisory ratings and other
factors. Well capitalized institutions that are financially sound with only a
few minor weaknesses are assigned to Risk Category I. Risk Categories II, III
and IV present progressively greater risks to the deposit insurance fund. Under
the FDIC’s risk-based assessment rules, effective April 1, 2009, the initial
base assessment rates prior to adjustments range from 12 to 16 basis points for
Risk Category I, and are 22 basis points for Risk Category II, 32 basis points
for Risk Category III, and 45 basis points for Risk Category IV. Initial base
assessment rates are subject to adjustments based on an institution’s unsecured
debt, secured liabilities and brokered deposits, such that the total base
assessment rates after adjustments range from 7 to 24 basis points for Risk
Category I, 17 to 43 basis points for Risk Category II, 27 to 58 basis points
for Risk Category III, and 40 to 77.5 basis points for Risk Category IV. Rates
increase uniformly by 3 basis points effective January 1, 2011.
  In
addition to the regular quarterly assessments, due to losses and projected
losses attributed to failed institutions, the FDIC imposed a special assessment
of 5 basis points on the amount of each depository institution’s assets reduced
by the amount of its Tier 1 capital (not to exceed 10 basis points of its
assessment base for regular quarterly premiums) as of June 30, 2009, which was
collected on September 30, 2009.
  As a
result of a decline in the reserve ratio (the ratio of the net worth of the
deposit insurance fund to estimated insured deposits) and concerns about
expected failure costs and available liquid assets in the deposit insurance
fund, the FDIC required each insured institution to prepay on December 30, 2009,
the estimated amount of its quarterly assessments for the fourth quarter of 2009
and all quarters through the end of 2012 (in addition to the regular quarterly
assessment for the third quarter which was due on December 30, 2009). The
prepaid amount is recorded as an asset with a zero risk weight and the
institution will continue to record quarterly expenses for deposit insurance.
For purposes of calculating the prepaid amount, assessments are measured at the
institution’s assessment rate as of September 30, 2009, with a uniform increase
of 3 basis points effective January 1, 2011, and are based on the institution’s
assessment base for the third quarter of 2009, with growth assumed quarterly at
an annual rate of 5%. If events cause actual assessments during the prepayment
period to vary from the prepaid amount, institutions will pay excess assessments
in cash, or receive a rebate of prepaid amounts not exhausted after collection
of assessments due on January 13, 2013, as applicable. Collection of the
prepayment does not preclude the FDIC from changing assessment rates or revising
the risk-based assessment system in the future. The rule includes a process for
exemption from the prepayment for institutions whose safety and soundness would
be affected adversely.
  The FDIC
estimates that the reserve ratio will reach the designated reserve ratio of
1.15% by 2017 as required by statute.
  The FDIC
also may prohibit any FDIC-insured institution from engaging in any activity
that it determines by regulation or order to pose a serious risk to the deposit
insurance fund. The FDIC also has the authority to initiate enforcement actions
against the Bank and may terminate our deposit insurance if it determines that
we have engaged in unsafe or unsound practices or are in an unsafe or unsound
condition.
  Regulatory Capital
Requirements. MutualBank is 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. 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, 2009, MutualBank had core capital equal to $130.3
million, or 9.4% of adjusted total assets, which is $74.8 million above the
minimum requirement of 4% in effect on that date.
  28
  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, 2009, MutualBank
had total risk-based capital of $133.9 million and risk-weighted assets of $1.0
billion; or total capital of 12.8% of risk-weighted assets.  This
amount was $50.3 million above the 8% 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.
  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 MutualBank 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 MutualBank, 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.  MutualBank 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.”
  Our
ability to pay dividends on or to repurchase our common stock is subject to
limits due to our participation in the TARP Capital Purchase
Program.  See “General” and Item 1A.
  29
  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. MutualBank’s federal income tax returns have been closed without audit by
the IRS through its year ended December 31, 2005. MutualFirst and MutualBank
will file a consolidated federal income tax return for fiscal year
2009.
  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 MutualBank 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 MutualBank
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.
MutualBank is subject to the alternative minimum tax, and has $173,000available as credits for
carryover.
  Corporate
Dividends-Received Deduction. MutualFirst may eliminate
from its income dividends received from MutualBank as a wholly owned subsidiary
ofMutualFirst if it
elects to file a consolidated return with MutualBank. 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
  MutualBank
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.bankwithmutual.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.
  30
  Item1A.             
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 any of
the events in the following risks actually occur, or if additional risks and
uncertainties not presently known to us or that we believe are immaterial do
materialize, then our business, financial condition or results of operations
could be materially adversely impacted. In addition, the trading price of our
common stock could decline due to any of the events described in these
risks.
  Our
financial condition and results of operations are dependent on the economy,
particularly in the Bank’s market area. The current economic recession in the
market area we serve may continue to impact our earnings adversely and could
increase the credit risk of our loan portfolio.
  Our
primary market area is concentrated in north central and eastern Indiana.
Adverse economic conditions in that market area can reduce our rate of growth,
affect our customers’ ability to repay loans and adversely impact our financial
condition and earnings. General economic conditions, including inflation,
unemployment and money supply fluctuations, also may affect our profitability
adversely. Our market area is undergoing a recession, which has resulted in
higher levels of loan delinquencies, problem assets and foreclosures, decreased
demand for our products and services and a decline in the value of our loan
collateral. If this recession continues or becomes more severe, this negative
impact on our business, financial condition and earnings may
increase.
  A
continuation of recent turmoil in the financial markets could have an adverse
effect on our financial position or results of operations.
  Beginning
in 2008, United States and global financial markets have experienced severe
disruption and volatility, and general economic conditions have declined
significantly. Adverse developments in credit quality, asset values and revenue
opportunities throughout the financial services industry, as well as general
uncertainty regarding the economic, industry and regulatory environment, have
had a marked negative impact on the industry. Dramatic declines in the U.S.
housing market over the past two years, with falling home prices, increasing
foreclosures and increasing unemployment, have negatively affected the credit
performance of mortgage loans and resulted in significant write-downs of asset
values by many financial institutions. The United States and the governments of
other countries have taken steps to try to stabilize the financial system,
including investing in financial institutions, and have also been working to
design and implement programs to improve general economic conditions.
Notwithstanding the actions of the United States and other governments, these
efforts may not succeed in restoring industry, economic or market conditions and
may result in adverse unintended consequences. Factors that could continue to
pressure financial services companies, including the Company, are numerous and
include (i) worsening credit quality, leading among other things to increases in
loan losses and reserves, (ii) continued or worsening disruption and volatility
in financial markets, leading among other things to continuing reductions in
asset values, (iii) capital and liquidity concerns regarding financial
institutions generally, (iv) limitations resulting from or imposed in connection
with governmental actions intended to stabilize or provide additional regulation
of the financial system, or (v) recessionary conditions that are deeper or last
longer than currently anticipated.
  Our
allowance for loan losses may prove to be insufficient to absorb probable losses
in our loan portfolio.
  Lending
money is a substantial part of our business. Every loan carries a certain risk
that it will not be repaid in accordance with its terms or that any underlying
collateral will not be sufficient to assure repayment. This risk is affected by,
among other things:
  ·
              cash
      flow of the borrower and/or the project being
  financed;
  ·
              in
      the case of a collateralized loan, the changes and uncertainties as to the
      future value of the collateral;
  ·
              the
      credit history of a particular
borrower;
  ·
              changes
      in economic and industry conditions;
and
  31
  ·
              the
      duration of the loan.
  We
maintain an allowance for loan losses which we believe is appropriate to provide
for potential losses in our loan portfolio. The amount of this allowance is
determined by our management through a periodic review and consideration of
several factors, including, but not limited to:
  ·
              an
      ongoing review of the quality, size and diversity of the loan
      portfolio;
  ·
              evaluation
      of non-performing loans;
  ·
              historical
      default and loss experience;
  ·
              historical
      recovery experience;
  ·
              existing
      economic conditions;
  ·
              risk
      characteristics of the various classifications of loans;
    and
  ·
              the
      amount and quality of collateral, including guarantees, securing the
      loans.
  If our
loan losses exceed our allowance for probable loan losses, our business,
financial condition and profitability may suffer.
  The
determination of the appropriate level of the allowance for loan losses
inherently involves a high degree of subjectivity and requires us to make
various assumptions and judgments about the collectibility of our loan
portfolio, including the creditworthiness of our borrowers and the value of the
real estate and other assets serving as collateral for the repayment of many of
our loans.  In determining the amount of the allowance for loan
losses, we review our loans and the loss and delinquency experience, and
evaluate economic conditions and make significant estimates of current credit
risks and future trends, all of which may undergo material
changes.  If our estimates are incorrect, the allowance for loan
losses may not be sufficient to cover losses inherent in our loan portfolio,
resulting in the need for additions to our allowance through an increase in the
provision for loan losses.  Continuing deterioration in economic
conditions affecting borrowers, new information regarding existing loans,
identification of additional problem loans and other factors, both within and
outside of our control, may require an increase in the allowance for loan
losses.  Our allowance for loan losses was 1.5% of gross loans held
for investment and 50.4% of nonperforming loans at December 31,
2009.  In addition, bank regulatory agencies periodically review our
allowance for loan losses and may require an increase in the provision for
possible loan losses or the recognition of further loan charge-offs, based on
judgments different than that of management.  If charge-offs in future
periods exceed the allowance for loan losses, we will need additional provisions
to increase the allowance for loan losses.  Any increases in the
provision for loan losses will result in a decrease in net income and may have a
material adverse effect on our financial condition, results of operations and
our capital.
  Our
provision for loan losses has increased substantially and additional increases
in the provision and loan charge-offs may be required, adversely impacting
operations.
  For the
year ended December 31, 2009, we recorded a provision for loan losses of $6.5
million compared to $7.0 million for the 2008 fiscal year.  We also
recorded net loan charge-offs of $5.2 million in 2009, compared to $3.2 million
in 2008.  During 2008 and 2009, we have experienced increasing loan
delinquencies and credit losses.  As a result, nonperforming loans
increased from $21.8 million at the end of 2008 to $32.6 million at the end of
2009.  If the declining trends in the housing, real estate and local
business markets continue, we expect increased levels of delinquencies and
credit losses to continue, which adversely impacts our financial condition and
results of operations.
  32
  If
our investments in real estate are not properly valued or sufficiently reserved
to cover actual losses, or if we are required to increase our valuation
reserves, our earnings could be reduced.
  We obtain
updated valuations in the form of appraisals and broker price opinions when a
loan has been foreclosed and the property taken in as real estate owned (“REO”),
and at certain other times during the assets holding period. Our net book value
(“NBV”) in the loan at the time of foreclosure and thereafter is compared to the
updated market value of the foreclosed property less estimated selling costs
(fair value). A charge-off is recorded for any excess in the asset’s NBV over
its fair value. If our valuation process is incorrect, the fair value of our
investments in real estate may not be sufficient to recover our NBV in such
assets, resulting in the need for additional charge-offs. Additional material
charge-offs to our investments in real estate could have a material adverse
effect on our financial condition and results of operations. Our bank regulator
periodically reviews our REO and may require us to recognize further
charge-offs. Any increase in our charge-offs, as required by such regulator, may
have a material adverse effect on our financial condition and results of
operations.
  Other-than-temporary
impairment charges in our investment securities portfolio could result in losses
and adversely affect our continuing operations.
  During
the year ended December 31, 2009, we recognized a $5.3 million non-cash other
than temporary impairment (“OTTI”) charge on available-for-sale and
held-to-maturity securities we hold for investment. At December 31, 2009, the
fair value of these securities were $2.8 million. Management concluded that the
decline of the estimated fair value below the cost of the security was other
than temporary and recorded a credit loss of $2.6 million through non-interest
income. We determined the remaining decline in value was not related to specific
credit deterioration. We do not intend to sell these securities and it is not
more than likely than not we will be required to sell the securities before
anticipated recovery of the remaining amortized cost basis. We closely monitor
our investment securities for changes in credit risk. The valuation of our
investment securities also is influenced by external market and other factors,
including implementation of Securities and Exchange Commission and Financial
Accounting Standards Board guidance on fair value accounting. Our valuation of
our securities will be influenced by the default rates of specific financial
institutions whose securities provide the underlying collateral for these
securities. The current market environment significantly limits our ability to
mitigate our exposure to valuation changes in these securities by selling them.
Accordingly, if market conditions deteriorate further and we determine our
holdings of these or other investment securities are OTTI, our future earnings,
shareholders’ equity, regulatory capital and continuing operations could be
materially adversely affected.
  Our
business may be adversely affected by credit risk associated with residential
property.
  At
December 31, 2009, $578.1 million, or 53.6% of our total loan portfolio, was
secured by one-to four-family mortgage loans and home equity loans (including
home equity lines of credit). This type of lending is generally sensitive to
regional and local economic conditions that significantly impact the ability of
borrowers to meet their loan payment obligations, making loss levels difficult
to predict. The decline in residential real estate values as a result of the
downturn in the Indiana housing markets has reduced the value of the real estate
collateral securing these types of loans and increased the risk that we would
incur losses if borrowers default on their loans. Continued declines in both the
volume of real estate sales and the sales prices coupled with the current
recession and the associated increases in unemployment may result in higher than
expected loan delinquencies or problem assets, a decline in demand for our
products and services, or lack of growth or a decrease in deposits. These
potential negative events may cause us to incur losses, adversely affect our
capital and liquidity and damage our financial condition and business
operations.
  Our
loan portfolio possesses increased risk due to our substantial number of
multi-family, commercial real estate, consumer and commercial business
loans.
  Approximately
46.4% of our loan portfolio as of December 31, 2009, consisted of multi-family,
commercial real estate, construction, consumer (non-mortgage) and commercial
business loans. Multi-family, commercial and construction real estate loans
accounted for approximately 25.0% of our total loan portfolio as of December 31,
2009. Our commercial business and consumer (non-mortgage) loans accounted,
respectively, for approximately 7.2% and 14.2% of our total loan portfolio as of
December 31, 2009. 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. 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.
  33
  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. In
a rapidly changing interest rate environment, we may not be able to manage our
interest rate risk effectively, which would adversely impact our financial
condition and results of operations. 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.
  We
face risks related to covenants in our loan sales to investors and secondary
mortgage market conditions.
  Our
agreements with investors to sell our loans generally contain covenants that
require us to repurchase loans under certain circumstances, including some
delinquencies, or to return premiums paid by those investors if the loans are
paid off early. If we are required to repurchase sold loans under these
covenants, they may be deemed troubled loans, with the potential for charge-offs
and/or loss provision changes, which could impact our earnings and asset quality
ratios adversely. The Bank was not required to repurchase any loans from our
investors during 2009.
  Our
ability to sell loans on the secondary mortgage market is impacted by interest
rate changes and investor demand or expected return. If this market becomes less
liquid, we may not be able to rely as much on loan sales to reduce our interest
rate and credit risk.
  Declining
economic conditions may adversely impact the fees generated by our asset
management and trust business.
  To the
extent our asset management and trust clients and their assets become adversely
impacted by weak economic and stock market conditions, they may choose to
withdraw the assets managed by us and the value of their assets may decline. Our
asset management revenues are based on the value of the assets we manage. If our
clients withdraw assets or the value of their assets decline, our revenues from
these activities may be adversely affected.
  We
face significant operational risks.
  We
operate in many different financial service businesses and rely on the ability
of our employees and systems to process a significant number of transactions.
Operational risk is the risk of loss from operations, including fraud by
employees or outside persons, employees’ execution of incorrect or unauthorized
transactions, data processing and technology errors or hacking and breaches of
internal control systems.
  Liquidity
risk could impair our ability to fund operations and jeopardize our financial
condition.
  Liquidity
is essential to our business. An inability to raise funds through deposits,
borrowings, the sale of loans and other sources could have a substantial
negative effect on our liquidity. Our access to funding sources in amounts
adequate to finance our activities or on terms that are acceptable to us could
be impaired by factors that affect us specifically or the financial services
industry or economy in general. Factors that could detrimentally impact our
access to liquidity sources include a decrease in the level of our business
activity as a result of a downturn in the markets in which our loans are
concentrated or adverse regulatory action against us. Our ability to borrow
could also be impaired by factors that are not specific to us, such as a
disruption in the financial markets or negative views and expectations about the
prospects for the financial services industry in light of the recent turmoil
faced by banking organizations and the continued deterioration in credit
markets.
  34
  We
may elect or be compelled to seek additional capital in the future, but that
capital may not be available when it is needed.
  We are
required by federal regulatory authorities to maintain adequate levels of
capital to support our operations. In addition, we may elect to raise additional
capital to repay our TARP funds, support our business or to finance
acquisitions, if any, or we may otherwise elect or be required to raise
additional capital. In that regard, a number of financial institutions have
recently raised considerable amounts of capital in response to a deterioration
in their results of operations and financial condition arising from the turmoil
in the mortgage loan market, deteriorating economic conditions, declines in real
estate values and other factors. Should we be required by regulatory authorities
to raise additional capital, we may seek to do so through the issuance of, among
other things, our common stock or preferred stock. The issuance of additional
shares of common stock or convertible securities to new stockholders would be
dilutive to our current stockholders.
  Our
ability to raise additional capital, if needed, will depend on conditions in the
capital markets, economic conditions and a number of other factors, many of
which are outside our control, and on our financial performance. Accordingly, we
cannot assure you of our ability to raise additional capital if needed or on
terms acceptable to us. If we cannot raise additional capital when needed, it
may have a material adverse effect on our financial condition, results of
operations and prospects.
  There
may be future sales of additional common stock or preferred stock or other
dilution of our equity, which may adversely affect the market price of our
common stock.
  We are
not restricted from issuing additional common stock or preferred stock,
including any securities that are convertible into or exchangeable for, or that
represent the right to receive, common stock or preferred stock or any
substantially similar securities. The market value of our common stock could
decline as a result of sales by us of a large number of shares of common stock
or preferred stock or similar securities in the market or the perception that
such sales could occur.
  Anti-takeover
provisions could negatively impact our shareholders.
  Provisions
in our charter and bylaws, the corporate law of the State of Maryland and
federal regulations could delay, defer or prevent a third party from acquiring
us, despite the possible benefit to our stockholders, or otherwise adversely
affect the market price of any class of our equity securities, including our
common stock. These provisions include: a prohibition on voting shares of common
stock beneficially owned in excess of 10% of total shares outstanding,
supermajority voting requirements for certain business combinations with any
person who beneficially owns more than 10% of our outstanding common stock; the
election of directors to staggered terms of three years; advance notice
requirements for nominations for election to our Board of Directors and for
proposing matters that stockholders may act on at stockholder meetings, a
requirement that only directors may fill a vacancy in our Board of Directors,
supermajority voting requirements to remove any of our directors and the other
provisions of our charter. Our charter also authorizes our Board of Directors to
issue preferred stock,
and preferred stock could be issued as a defensive measure in response to a
takeover proposal. In addition, pursuant to OTS regulations, as a general
matter, no person or company, acting individually or in concert with others, may
acquire more than 10% of our common stock without prior approval from the
OTS.
  These
provisions may discourage potential takeover attempts, discourage bids for our
common stock at a premium over market price or adversely affect the market price
of, and the voting and other rights of the holders of, our common stock. These
provisions could also discourage proxy contests and make it more difficult for
holders of our common stock to elect directors other than the candidates
nominated by our Board of Directors.
  35
  The
voting limitation provision in our charter could limit your voting rights as a
holder of our common stock.
  Our
charter provides that any person or group who acquires beneficial ownership of
our common stock in excess of 10% of the outstanding shares may not vote the
excess shares. Accordingly, if you acquire beneficial ownership of more than 10%
of the outstanding shares of our common stock, your voting rights with respect
to the common stock will not be commensurate with your economic interest in our
company.
  Our
core deposit premium could be deemed partially or fully impaired, which could
reduce our earnings and the values of that intangible asset.
  At
December 31, 2009, we had a core deposit premium of $5.9 million due mainly to
the MFB acquisition. Under GAAP, we are required to periodically assess the
value of this intangible asset based on a number of factors to determine if
there is partial or full impairment. The factors taken into consideration
include the market price of our stock, the net present value of our assets and
liabilities and valuation information for similar financial institutions. This
evaluation involves a substantial amount of judgment. If actual conditions
underlying the factors differ from our assessment, the core deposit intangible
could be subjected to faster amortization or partial or complete impairment,
which would reduce the value of this asset and reduce our earnings, perhaps
materially.
  We
currently hold a significant amount of bank-owned life insurance.
  At
December 31, 2009, we held $93.5 million of bank-owned life insurance or BOLI on
key employees and executives, with a cash surrender value of $44.2 million. The
policies are maintained to fund amounts owed under executive supplemental
retirement plans. The eventual repayment of the cash surrender value is subject
to the ability of the various insurance companies to pay death benefits or to
return the cash surrender value to us if needed for liquidity purposes. We
continually monitor the financial strength of the various companies with whom we
carry these policies. However, any one of these companies could experience a
decline in financial strength, which could impair its ability to pay benefits or
return our cash surrender value. If we need to liquidate these policies for
liquidity purposes, we would be subject to taxation on the increase in cash
surrender value and penalties for early termination, both of which would
adversely impact earnings.
  We
may not be able to realize our deferred tax asset fully.
  At
December 31, 2009, we had a $19.5 million deferred income tax benefit based on
differences between the financial statement amounts and tax bases of assets and
liabilities and reflecting mainly an allowance for loan loss timing difference
and business tax and AMT carryover. The value of our deferred income tax benefit
is reviewed regularly under various forecasts and assumptions, including
anticipated levels of taxable net income, to determine the likelihood of
realizing the benefit. If actual results or subsequent forecasts differ from our
current judgments, so that this benefit will not be fully realized, we would
have to write down this asset, which would negatively impact results of
operation and reduce our asset size.
  If
our investment in the Federal Home Loan Bank of Indianapolis becomes impaired,
our earnings and stockholders’ equity could decrease.
  At
December 31, 2009, we owned $18.6 million in Federal Home Loan Bank of
Indianapolis stock. We are required to own this stock to be a member of and to
obtain advances from our Federal Home Loan Bank. This stock is not marketable
and can only be redeemed by our Federal Home Loan Bank, which currently is not
redeeming any excess member stock. Our Federal Home Loan Bank’s financial
condition is linked, in part, to the eleven other members of the Federal Home
Loan Bank System and to accounting rules and asset quality risks that could
materially lower their capital, which would cause our Federal Home Loan Bank
stock to be deemed impaired, resulting in a decrease in our earnings and
assets.
  36
  We
operate in a highly regulated environment and our operations and income may be
affected adversely by changes in laws and regulations governing our operations,
including regulatory reform initiatives of the Obama administration that are
pending in Congress.
  We are
subject to extensive regulation, supervision and examination by the Office of
Thrift Supervision and the Federal Deposit Insurance Corporation. These
regulators govern the activities in which we may engage, primarily for the
protection of depositors and the deposit insurance fund. These regulatory
authorities have extensive discretion in connection with their supervisory and
enforcement activities, including the ability to impose restrictions on a bank’s
operations, reclassify assets, determine the adequacy of a bank’s allowance for
loan losses and determine the level of deposit insurance premiums assessed. Any
change in such regulation and oversight, whether in the form of regulatory
policy, new regulations or legislation or additional deposit insurance premiums
could have a material impact on our operations. Because our business is highly
regulated, the laws and applicable regulations are subject to frequent change.
Any new laws, rules and regulations could make compliance more difficult or
expensive or otherwise adversely affect our business, financial condition or
prospects. For example, initiatives to limit our fees on overdraft protection
programs or our creditor rights could impact our fee income or ability to
resolve problem assets. Pending regulatory reform legislation proposed by the
Obama administration and under consideration by Congress, if enacted, could
change our primary regulator, create a new consumer finance protection agency,
change the Company into a bank holding company with new capital requirements and
require MutualBank to convert to a different charter. These changes could
possibly adversely impact our operations and net income.
  Our
earnings are adversely impacted by increases in deposit insurance premiums and
special FDIC assessments.
  Beginning
in late 2008, the economic environment caused higher levels of bank failures,
which dramatically increased FDIC resolution costs and led to a significant
reduction in the deposit insurance fund. As a result, the FDIC has significantly
increased the initial base assessment rates paid by financial institutions for
deposit insurance. The base assessment rate was increased by seven basis points
(seven cents for every $100 of deposits) for the first quarter of 2009.
Effective April 1, 2009, initial base assessment rates were changed to range
from 12 basis points to 45 basis points across all risk categories with possible
adjustments to these rates based on certain debt-related components. These
increases in the base assessment rate have increased our deposit insurance costs
and negatively impacted our earnings. In addition, in May 2009, the FDIC imposed
a special assessment on all insured institutions due to recent bank and savings
association failures. The emergency assessment amounts to five basis points on
each institution’s assets minus Tier 1 capital as of June 30, 2009, subject to
10 basis points times the institution’s assessment base. Our FDIC deposit
insurance expense for fiscal 2009 was $2.3 million, including the special
assessment of $630,000 recorded in June 2009 and paid on September 30,
2009.
  Additionally,
in November 2009, the FDIC adopted a rule that requires each financial
institution to prepay its estimated quarterly risk-based assessment for the
fourth quarter of 2009 and for all of 2010, 2011 and 2012, which will be
amortized over these periods and adjusted for changes in premium levels or our
financial condition. As a result, this prepayment will not immediately impact
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 name recognition, resources and
lending limits than we do and may offer certain services or prices for services
that we do not or cannot provide. Our profitability depends upon our continued
ability to successfully compete in our market.
  37
  The
securities purchase agreement between us and Treasury limits our ability to pay
dividends on and repurchase our common stock.
  The
securities purchase agreement between us and Treasury provides that prior to the
earlier of (i) December 23, 2011 and (ii) the date on which all of the shares of
the Series A Preferred Stock have been redeemed by us or transferred by Treasury
to third parties, we may not, without the consent of Treasury, (a) increase the
cash dividend on our common stock or (b) subject to limited exceptions, redeem,
repurchase or otherwise acquire shares of our common stock or preferred stock
(other than the Series A Preferred Stock) or any trust preferred securities then
outstanding. In addition, we are unable to pay any dividends on our common stock
unless we are current in our dividend payments on the Series A Preferred Stock.
These restrictions, together with the potentially dilutive impact of the warrant
described in the next risk factor, could have a negative effect on the value of
our common stock. Moreover, holders of our common stock are entitled to receive
dividends only when, as and if declared by our Board of Directors. Although we
have historically paid cash dividends on our common stock, we are not required
to do so and our Board of Directors could reduce or eliminate our common stock
dividend in the future.
  The
Series A Preferred Stock impacts net income available to our common shareholders
and earnings per common share, and the warrant we issued to Treasury may be
dilutive to holders of our common stock.
  The
dividends declared on the Series A Preferred Stock will reduce the net income
available to common shareholders and our earnings per common share. The Series A
Preferred Stock will also receive preferential treatment in the event of
liquidation, dissolution or winding up ofMutualFirst Financial.
Additionally, the ownership interest of the existing holders of our common stock
will be diluted to the extent the warrant we issued to Treasury in conjunction
with the sale to Treasury of the Series A Preferred Stock is exercised. The
shares of common stock underlying the warrant represent approximately 8.2% of
the shares of our common stock outstanding (including the shares issuable upon
exercise of the warrant). Although Treasury has agreed not to vote any of the
shares of common stock it receives upon exercise of the warrant, a transferee of
any portion of the warrant or of any shares of common stock acquired upon
exercise of the warrant is not bound by this restriction.
  If
we are unable to redeem our Series A Preferred Stock before December 2013, the
cost of this capital to us will increase substantially.
  If we are
unable to redeem the Series A Preferred Stock before December 2013, the cost of
the TARP capital will increase substantially from 5.0% per annum (approximately
$1.6 million annually) to 9.0% per annum (approximately $2.9 million annually).
Depending on our financial condition at the time, this increase in the annual
dividend rate on the Series A Preferred Stock could have a material negative
effect on our liquidity.
  We
rely on dividends from MutualBank for substantially all of the Company’s
revenue.
  MutualFirst’s primary source
of revenue is dividends from the Bank. The OTS regulates and must approve the
amount of Bank dividends to the Company. If the Bank is unable to pay dividends,
MutualFirst may not be
able to service its debt, pay its other obligations or pay dividends on the
Company’s common stock which could have a material adverse impact on our
financial condition or the value of your investment in our common
stock.
  Our
common stock trading volume may not provide adequate liquidity for
investors.
  Our
common stock is listed on the Nasdaq Global Market. However, the average daily
trading volume in our common stock is less than that of many larger financial
services companies. A public trading market having the desired depth, liquidity
and orderliness depends on the presence of a sufficient number of willing buyers
and sellers for our common stock at any given time. This presence is impacted by
general economic and market conditions and investors’ views of our Company.
Because our trading volume is limited, any significant sales of our shares could
cause a decline in the price of our common stock.
  Our
directors and executive officers have the ability to influence stockholder
actions in a manner that may be adverse to the personal investment objectives of
our stockholders.
  As of
December 31, 2009, our directors and executive officers as a group beneficially
owned 1,291,870 shares, or 18.5%, of our common stock (including options for
417,390 shares). In addition, our employee stock ownership plan and charitable
foundation controlled, respectively, 7.2% and 3.2% of our common stock on that
date. In addition, as of December 31, 2009, 314,702 shares were reserved under
various stock benefit plans for future awards for our directors, officers and
employees. Due to this significant collective ownership of or control over our
common stock, our directors and executive officers may be able to influence the
outcome of director elections or block significant transactions, such as a
merger or acquisition, or any other matter that might otherwise be favored by
other shareholders.
  38
  Item 1B.
              Unresolved
      Staff Comments
  None
  Item
2.              
Properties
  At
December 31, 2009 we had 33 full service offices. We own the office building in
which our home office and executive offices are located. At December 31, 2009 we
owned all but two of our other branch offices. The net book value of our
investment in premises, equipment and leaseholds, excluding computer equipment,
was approximately $32.4 millionat December 31, 2009. 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, 2009 the net book value of the
data processing and computer equipment utilized by us was $2.1 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.               (Reserved)
  PART II
  Item 5.
                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity
Securities
  The
common stock ofMutualFirst 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, 2009, there were 6,984,754 shares of common stock
outstanding and at that date we also had 32,382 shares of preferred stock
outstanding and approximately 1,400 shareholders of record.
  Stock Price
                        
                        Dividends
                          per
                          Share2009 Quarters:
                        
                        High
                        
                        
                        LowFirst
      Quarter (ended 03/31/09)
                        
                        $
                        7.40
                        
                        
                        $
                        3.51
                        
                        $
                        0.12Second
      Quarter (ended 06/30/09)
                        
                        $
                        10.00
                        
                        
                        $
                        5.05
                        
                        $
                        0.12Third
      Quarter (ended 09/30/09)
                        
                        $
                        8.50
                        
                        
                        $
                        6.60
                        
                        $
                        0.12Fourth
      Quarter (ended 12/31/09)
                        
                        $
                        7.83
                        
                        
                        $
                        5.57
                        
                        $
                        0.06
 
 Stock Price
                        
                        Dividends
                          per
                          Share2008 Quarters:
                        
                        High
                        
                        
                        LowFirst
      Quarter (ended 03/31/08)
                        
                        $
                        13.98
                        
                        
                        $
                        12.80
                        
                        $
                        0.16Second
      Quarter (ended 06/30/08)
                        
                        $
                        13.66
                        
                        
                        $
                        9.81
                        
                        $
                        0.16Third
      Quarter (ended 09/30/08)
                        
                        $
                        11.00
                        
                        
                        $
                        9.34
                        
                        $
                        0.16Fourth
      Quarter (ended 12/31/08)
                        
                        $
                        10.50
                        
                        
                        $
                        6.20
                        
                        $
                        0.16
  39
  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, future dividend payments 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. Our TARP agreement limits our ability to pay dividends to
common stockholders if dividends on the TARP preferred shares are not paid in
full to date.
  Information
regarding our equity compensation plans is included in Item 11 of this Form
10-K.
  On August
13, 2008, the Company’s Board of Directors authorized management to repurchase
an additional 5% of the Company’s outstanding stock, or approximately 350,000
shares. Our ability to repurchase shares is limited under the securities
purchase agreement with Treasury. See Item 1A.
  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 31,2009
                      
                      
                      2008
                      
                      
                      2007
                      
                      
                      2006
                      
                      
                      2005(In thousands)Selected Financial Condition
      DataTotal
      assets
                      
                      $
                      1,399,034
                      
                      
                      $
                      1,388,827
                      
                      
                      $
                      962,517
                      
                      
                      $
                      960,842
                      
                      
                      $
                      971,829Cash
      and cash equivalents
                      
                      
                      46,341
                      
                      
                      
                      39,703
                      
                      
                      
                      23,648
                      
                      
                      
                      24,915
                      
                      
                      
                      22,365Loans,
      net
                      
                      
                      1,059,694
                      
                      
                      
                      1,113,132
                      
                      
                      
                      802,436
                      
                      
                      
                      805,625
                      
                      
                      
                      822,547Investment
      securities:Available-for-sale,
      at fair value
                      
                      
                      130,914
                      
                      
                      
                      77,255
                      
                      
                      
                      43,592
                      
                      
                      
                      41,070
                      
                      
                      
                      39,788Held
      to maturity
                      
                      
                      8,147
                      
                      
                      
                      9,676
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Total
      deposits
                      
                      
                      1,045,196
                      
                      
                      
                      962,514
                      
                      
                      
                      666,407
                      
                      
                      
                      703,359
                      
                      
                      
                      684,554Total
      borrowings
                      
                      
                      212,074
                      
                      
                      
                      279,104
                      
                      
                      
                      196,638
                      
                      
                      
                      158,852
                      
                      
                      
                      187,791Total
      stockholders’ equity
                      
                      
                      129,727
                      
                      
                      
                      130,515
                      
                      
                      
                      87,014
                      
                      
                      
                      87,264
                      
                      
                      
                      88,794Selected Operations DataTotal
      interest income
                      
                      $
                      71,852
                      
                      
                      $
                      65,179
                      
                      
                      $
                      56,374
                      
                      
                      $
                      56,119
                      
                      
                      $
                      48,478Total
      interest expense
                      
                      
                      30,624
                      
                      
                      
                      31,639
                      
                      
                      
                      32,227
                      
                      
                      
                      29,890
                      
                      
                      
                      21,170Net
      interest income
                      
                      
                      41,228
                      
                      
                      
                      33,540
                      
                      
                      
                      24,147
                      
                      
                      
                      26,229
                      
                      
                      
                      27,308Provision
      for loan losses
                      
                      
                      6,500
                      
                      
                      
                      7,020
                      
                      
                      
                      2,240
                      
                      
                      
                      2,068
                      
                      
                      
                      1,775Net
      interest income after provision for loan losses
                      
                      
                      34,728
                      
                      
                      
                      26,520
                      
                      
                      
                      21,907
                      
                      
                      
                      24,161
                      
                      
                      
                      25,533Service
      fee income
                      
                      
                      7,458
                      
                      
                      
                      6,257
                      
                      
                      
                      4,831
                      
                      
                      
                      4,370
                      
                      
                      
                      4,026Gain
      (loss) on sale of loans and investment securities
                      
                      
                      3,132
                      
                      
                      
                      (927
                      )
                      
                      
                      391
                      
                      
                      
                      (669
                      )
                      
                      
                      228Other-than-temporary
      impairment, securities
                      
                      
                      (2,555)
                      
                      
                      
                      (1,350
                      )
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Other
      non-interest income (loss)
                      
                      
                      5,118
                      
                      
                      
                      2,542
                      
                      
                      
                      2,549
                      
                      
                      
                      2,941
                      
                      
                      
                      2,478Total
      non-interest income
                      
                      
                      13,153
                      
                      
                      
                      6,522
                      
                      
                      
                      7,771
                      
                      
                      
                      6,642
                      
                      
                      
                      6,732Salaries
      and employee benefits
                      
                      
                      23,047
                      
                      
                      
                      19,118
                      
                      
                      
                      14,759
                      
                      
                      
                      14,617
                      
                      
                      
                      13,792Other
      expenses
                      
                      
                      21,460
                      
                      
                      
                      44,508
                      
                      
                      
                      10,397
                      
                      
                      
                      10,402
                      
                      
                      
                      9,620Total
      non-interest expense
                      
                      
                      44,507
                      
                      
                      
                      63,626
                      
                      
                      
                      25,156
                      
                      
                      
                      25,019
                      
                      
                      
                      23,412Income
      (loss) before taxes
                      
                      
                      3,374
                      
                      
                      
                      (30,584
                      )
                      
                      
                      4,522
                      
                      
                      
                      5,784
                      
                      
                      
                      8,853Income
      tax expense (benefit)
                      
                      
                      211
                      
                      
                      
                      (8,485
                      )
                      
                      
                      296
                      
                      
                      
                      1,028
                      
                      
                      
                      2,401Net
      income (loss)
                      
                      
                      3,163
                      
                      
                      
                      (22,099
                      )
                      
                      
                      4,226
                      
                      
                      
                      4,756
                      
                      
                      
                      6,452Preferred
      stock dividends and amortization
                      
                      
                      1,803
                      
                      
                      
                      31
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Net
      income (loss) available to common shareholders
                      
                      $
                      1,360
                      
                      
                      $
                      (22,130
                      )
                      
                      $
                      4,226
                      
                      
                      $
                      4,756
                      
                      
                      $
                      6,452
  41
  At or For the Year Ended December 31,2009
                              
                              
                              2008
                              
                              
                              2007
                              
                              
                              2006
                              
                              
                              2005Selected
      Financial Ratios and Other Financial Data:Performance
      Ratios:Return
      on average assets (ratio of  net income to average total
      assets)
                              
                              
                              0.23
                              %
                              
                              
                              (1.91
                              )%
                              
                              
                              0.44
                              %
                              
                              
                              0.49
                              %
                              
                              
                              0.73
                              %Return
      on average tangible equity  (ratio of net income to averagetangible
      equity)
                              
                              
                              1.49
                              
                              
                              
                              (28.04
                              )
                              
                              
                              5.86
                              
                              
                              
                              6.43
                              
                              
                              
                              7.79Interest
      rate spread information:Average
      during the period
                              
                              
                              2.98
                              
                              
                              
                              3.01
                              
                              
                              
                              2.50
                              
                              
                              
                              2.70
                              
                              
                              
                              3.13Net
      interest margin(1)
                              
                              
                              3.22
                              
                              
                              
                              3.22
                              
                              
                              
                              2.79
                              
                              
                              
                              2.96
                              
                              
                              
                              3.37Ratio
      of operating expense to average total assets
                              
                              
                              3.17
                              
                              
                              
                              5.49
                              
                              
                              
                              2.64
                              
                              
                              
                              2.57
                              
                              
                              
                              2.89Ratio
      of average interest-earning assets to average interest-bearing
      liabilities
                              
                              
                              110.67
                              
                              
                              
                              107.14
                              
                              
                              
                              107.92
                              
                              
                              
                              107.65
                              
                              
                              
                              109.30Efficiency
      ratio(2)
                              
                              
                              81.84
                              
                              
                              
                              158.81
                              
                              
                              
                              78.81
                              
                              
                              
                              76.11
                              
                              
                              
                              68.78Asset
      Quality Ratios:(3)Non-performing
      assets to total assets
                              
                              
                              2.86
                              
                              
                              
                              1.92
                              
                              
                              
                              1.35
                              
                              
                              
                              0.86
                              
                              
                              
                              1.03Non-performing
      loans to total loans
                              
                              
                              3.03
                              
                              
                              
                              1.93
                              
                              
                              
                              1.29
                              
                              
                              
                              0.70
                              
                              
                              
                              0.90Allowance
      for loan losses to non-performing loans
                              
                              
                              50.38
                              
                              
                              
                              69.41
                              
                              
                              
                              79.72
                              
                              
                              
                              143.59
                              
                              
                              
                              108.04Allowance
      for loan losses to loans receivable, net
                              
                              
                              1.53
                              
                              
                              
                              1.34
                              
                              
                              
                              1.03
                              
                              
                              
                              1.00
                              
                              
                              
                              0.98Capital
      Ratios:Equity
      to total assets(3)
                              
                              
                              9.27
                              
                              
                              
                              9.40
                              
                              
                              
                              9.04
                              
                              
                              
                              9.08
                              
                              
                              
                              9.14Average
      equity to average assets
                              
                              
                              9.29
                              
                              
                              
                              8.89
                              
                              
                              
                              9.16
                              
                              
                              
                              9.08
                              
                              
                              
                              9.90Share
      and Per Share Data:Average
      common shares outstanding:Basic
                              
                              
                              6,840,659
                              
                              
                              
                              5,249,135
                              
                              
                              
                              4,103,940
                              
                              
                              
                              4,196,059
                              
                              
                              
                              4,328,965Diluted
                              
                              
                              6,840,748
                              
                              
                              
                              5,249,135
                              
                              
                              
                              4,151,173
                              
                              
                              
                              4,274,039
                              
                              
                              
                              4,439,686Per
      share:Basic
      earnings
                              
                              $
                              0.20
                              
                              
                              $
                              (4.22
                              )
                              
                              $
                              1.03
                              
                              
                              $
                              1.13
                              
                              
                              $
                              1.49Diluted
      earnings
                              
                              $
                              0.20
                              
                              
                              $
                              (4.22
                              )
                              
                              $
                              1.02
                              
                              
                              $
                              1.11
                              
                              
                              $
                              1.45Dividends
                              
                              $
                              0.42
                              
                              
                              $
                              0.64
                              
                              
                              $
                              0.60
                              
                              
                              $
                              0.58
                              
                              
                              $
                              0.49Dividend
      payout ratio(4)
                              
                              
                              210.00
                              %
                              
                              
                              (15.20
                              )%
                              
                              
                              58.25
                              %
                              
                              
                              52.25
                              %
                              
                              
                              36.55
                              %Other
      Data:Number
      of full-service offices
                              
                              
                              33
                              
                              
                              
                              33
                              
                              
                              
                              21
                              
                              
                              
                              21
                              
                              
                              
                              20
  (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
  Introduction
  MutualFirst is a savings and
loan holding company and MutualBank is its wholly-owned subsidiary. MutualBank
has been in business since 1889 and currently conducts its business from 33 full
service financial centers located in Delaware, Elkhart, Grant, Kosciusko,
Randolph, St. Joseph and Wabash counties, Indiana, with its main office located
in Muncie. MutualBank also has trust offices in Carmel and Crawfordsville,
Indiana and a loan origination office in New Buffalo, Michigan. MutualBank’s
principal business consists of attracting deposits from the general public and
originating fixed and variable rate loans secured primarily by first mortgage
liens on residential and commercial real estate, consumer goods, and business
assets. MutualBank’s deposit accounts are insured by the Federal Deposit
Insurance Corporation up to applicable limits. We also originate mortgage loans
in counties contiguous to these counties, and we originate indirect consumer
loans throughout Indiana. We provide investment money management and trust
services for our customers.
  In July
2008, the Company acquired MFB Corp. and merged MFB’s subsidiary bank, MFB
Financial into MutualBank. MutualFirst issued an aggregate of 2.9 million shares
of its common stock and paid approximately $11.5 million in cash to MFB
stockholders in the transaction. MutualFirst also assumed 114,500 MFB stock
options, which have converted into approximately 296,555 MutualFirst stock
options with a weighted average exercise price of $9.90 per share. As a result
of the transaction, MutualBank now has 33 retail financial centers, spanning
nine Indiana counties and is the 10thlargest
depository institution headquartered in Indiana.
  In
December 2008, as part of the Troubled Asset Relief Program (“TARP”) Capital
Purchase Program, the Company entered into a Letter Agreement and Securities
Purchase Agreement (collectively, the “Purchase Agreement”) with the United
States Department of the Treasury (“Treasury”), pursuant to which the Company
(i) sold 32,382 shares of the Company’s Fixed Rate Cumulative Perpetual
Preferred Stock, Series A (the “Series A Preferred Stock”) for a purchase price
of $32,382,000 in cash and (ii) issued a warrant (the “Warrant”) to purchase
625,135 shares of the Company’s common stock, par value $0.01 per share (the
“Common Stock”), for a per share price of $7.77 per share. The Series A
Preferred Stock is entitled to cumulative dividends at a rate of 5% per annum
for the first five years, and 9% per annum thereafter. The Series A Preferred
Stock may be redeemed by the Company at any time, subject to consultation by the
Treasury with the Office of Thrift Supervision (“OTS”). The Warrant has a
10-year term and is immediately exercisable upon its issuance, with an exercise
price, subject to anti-dilution adjustments, equal to $7.77 per share of the
Common Stock. If the Series A Preferred Stock is redeemed, the Warrant will be
liquidated at the current market price. Treasury has agreed not to exercise
voting power with respect to any shares of Common Stock issued upon exercise of
the Warrant that it holds.
  Pursuant
to the terms of the Purchase Agreement, the ability of the Company to declare or
pay dividends or distributions on, or purchase, redeem or otherwise acquire for
consideration, shares of its Junior Stock (as defined below) and Parity Stock
(as defined below) will be subject to restrictions, including a restriction
against increasing dividends from the last quarterly cash dividend per share
($0.16) declared on the Common Stock prior to December 23, 2008. The redemption,
purchase or other acquisition of trust preferred securities of the Company or
its affiliates also will be restricted. These restrictions will terminate on the
earlier of (a) the third anniversary of the date of issuance of the Series A
Preferred Stock, (b) the date on which the Series A Preferred Stock has been
redeemed in whole; and (c) the date Treasury has transferred all of the Series A
Preferred Stock to third parties. In addition, the ability of the Company to
declare or pay dividends or distributions on, or repurchase, redeem or otherwise
acquire for consideration, shares of its Junior Stock and Parity Stock will be
subject to restrictions in the event that the Company fails to declare and pay
full dividends (or declare and set aside a sum sufficient for payment thereof)
on its Series A Preferred Stock. “Junior Stock” means the Common Stock and any
other class or series of stock of the Company the terms of which expressly
provide that it ranks junior to the Series A Preferred Stock as to dividend
rights and/or rights on liquidation, dissolution or winding up of the Company.
“Parity Stock” means any class or series of stock of the Company the terms of
which do not expressly provide that such class or series will rank senior or
junior to the Series A Preferred Stock as to dividend rights and/or rights on
liquidation, dissolution or winding up of the Company (in each case without
regard to whether dividends accrue cumulatively or
non-cumulatively).
  The
Company placed $29.1 million of TARP proceeds into its wholly-owned subsidiary
MutualBank, while maintaining $3.2 million with the Company. MutualBank placed
approximately $20.0 million of the proceeds in highly rated securities.
Approximately $14.8 million was placed in mortgage securities, $3.2 million in
municipal securities and $2.0 million in corporate bonds. These securities
provide liquidity as needed to meet current and future loan demand. The
remaining funds held at MutualBank were placed in working capital, which was
used to fund loans and meet the cash needs of MutualBank.
  43





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. The acquisition of MFB Corp. helped reduce the interest rate risk
exposure of MutualBank primarily due to changes in the loan composition, by
increasing the percentage of loans with adjustable rates and reducing the
average duration of the loan portfolio. This decline in MutualBank’s liability
sensitive exposure should provide for less net portfolio value volatility with
future rate movements.




It has
been the Company’s strategic objective to change the repricing structure of its
interest-earning assets from longer term to shorter term to better match the
structure of our interest-bearing liabilities and therefore reduce the impact
interest rate changes have on our net interest income. Strategies employed to
accomplish this objective, in addition to the MFB Corp. acquisition, have been
to increase the originations of variable rate commercial loans and shorter term
consumer loans and to sell longer term mortgage loans. The percentage of
consumer and commercial loans to total loans has increased from 44% at the end
of 2004 to 55% as of December 31, 2009. As we continue to increase our
investment in business-related loans, which are considered to entail greater
risks than one- to four-family residential loans, in order to help offset the
pressure on our net interest margin, our provision for loan losses has increased
to reflect this increased risk. On the liability side of the balance sheet, the
Company is employing strategies intended to increase the balance of core deposit
accounts, such as low cost checking and money market accounts. The percentage of
core deposits to total deposits was 38% at December 31, 2009 compared to 39% at
the end of 2008. The remaining total deposits are mostly retail certificates of
deposit, which continue to provide stable funding for the Company. These are
ongoing strategies that are dependent on current market conditions and
competition.




During
2009, in keeping with our strategic objective to reduce interest rate risk
exposure, the Company also sold $160.0 million of long-term fixed rate loans
that had been held for sale, which reduced potential earning assets and
therefore had a negative impact on net interest income. This was offset, in the
short term, by recognizing a gain on the sale of these loans of $2.4 million.
The Company also will lengthen out FHLB advances when advantageous to lengthen
repricing of the liability side of the balance sheet to reduce interest rate
risk exposure.




The
acquisition of MFB Corp. added trust services to MutualBank, which are being
leveraged through MutualBank’s existing footprint. The Company also opened two
new branches in Elkhart County in 2008. The intent of these initiatives has been
to increase income over the long term. However, on a short term basis, expenses
relating to expanding trust services and new branches will have the affect of
increasing non-interest expense with limited immediate offsetting
income.




Net
interest income should be less vulnerable to changes in interest rates. The
Federal Funds rate set by the Board of Governors of the Federal Reserve System
has decreased to a range of 0 to 25 basis points as of December 31, 2008 and was
the same as of December 31, 2009. The Federal Funds rate flat at this level
decreases the ability to reprice deposits lower in future months. Certificates
of deposit and borrowings may, however, still reprice to lower rates at their
maturities in future time periods, which could reduce the amount of interest
expense assuming rates stay low. Interest income is expected to decrease without
any changes in the current rate environment primarily due to the rates on newly
originated interest-earning assets being lower than the rates on maturing
interest-earning assets. Another factor that may lead to changes in net interest
income is the level of non-performing assets. An increase in non-performing
assets (i.e., loans, repossessed assets, or securities) would also decrease
interest income and may decrease overall net interest income without additional
decreases in interest-bearing liabilities.




Results
of operations are also dependent 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. Regulatory
changes that will take effect in July 2010 are expected to have an impact in
non-interest income later this year. Reg. E has been amended to require that
customers “opt-in” to the overdraft privilege program. The Bank is working
diligently to ensure customers understand this program and sign up for the
continued benefits.




44




MutualWealth,
the wealth management division of the Bank, produces non-interest income for the
Bank that is tied primarily to the market value of the portfolios being managed.
As of December 31, 2009, MutualWealth had $313.3 million of assets under
management. Decreases in market value could have a negative impact on the
non-interest income generated by this division of the Bank.




During
2008 and 2009, the Indiana and national economy and financial markets have
undergone significant decline, which has impacted our financial condition,
operations, net income, stock price and regulatory limitations. The Indiana and
national economy may improve prior to significant improvements in financial
condition and net income. Current troubled loans and securities may continue to
incur losses after recovery has started to occur.




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 and allow consumers to open accounts. 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 2009, that percentage has increased to
  56%.




·
            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 market area.
      During 2009, we originated $250.0 million of one- to four-family
      residential loans.




·
            Continuing
      To Focus On Asset Quality. Non-performing assets to total assets
      was 2.86% at December 31, 2009, an increase from 1.92% at December 31,
      2008. While we are currently higher than we desire, we believe that our
      current underwriting standards will provide for a quality loan portfolio
      once economic activity and unemployment return to more normal
      levels.




·
            Continuing
      Our Strong Capital Position. As a result of our consistent
      operating profitability, we have historically maintained a strong capital
      position. At December 31, 2009, our ratio of stockholders’ equity to total
      assets was 9.3%. We have suspended our origination of RV and boat lending
      to increase our regulatory capital ratios as we continue to strengthen our
      capital position.




·
            Decreasing
      Interest Rate Risk. It has beenMutualFirst’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.




Financial
Condition at December 31, 2009 Compared to December 31, 2008




General. Our assets increased
$10.2 million during 2009, ending the year at $1.4 billion, approximately the
same as of December 31, 2008. The increase was primarily due to increases in the
investment portfolio. Liabilities increased $11.0 million during 2009 to $1.3
billion, approximately the same as of December 31, 2008. The increase was
primarily due to increases in deposits. Stockholders’ equity decreased $788,000
to $129.7 million at December 31, 2009.




45




Loans. Our net loan portfolio
decreased $53.4 million, remaining at $1.1 billion at December 31, 2008 and
December 31, 2009. Consumer loans decreased $8.6 million or 3.2% from $268.4
million at December 31, 2008 to $259.8 million at December 31, 2009. The decline
in consumer loans came from a decrease of $10.3 million in auto loans, home
equity loans, home improvement loans, boat loans and other consumer loans. These
decreases in consumer loans were partially offset by an increase in recreational
vehicle loans of $1.8 million. Commercial business loans increased $2.1 million
or 2.8% from $75.3 million to $77.4 million at December 31, 2009. 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 $160.0 million of our fixed rate one- to four-family
mortgage loans in 2009. In conjunction with the sales of mortgage loans, real
estate mortgage loans decreased $47.1 million or 6.0% from $785.4 million to
$738.3 million at December 31, 2009. Mortgage loans held for sale increased
$979,000 to $2.5 million at December 31, 2009.




Allowance For Loan Loss.
Allowance for loan losses increased $1.3 million to $16.4 million at December
31, 2009 when compared to December 31, 2008. Specific loan loss reserves
increased $1.3 million, while general loan loss reserves have remained
approximately the same as loan balances declined. Net charge offs for the year
2009 were $5.2 million, or .47% of average loans on an annualized basis,
compared to $3.2 million, or .34% of average loans for 2008. The increase was
primarily due to increased charge offs on one-to four-family mortgage and
consumer loans resulting from the depressed economic conditions in our marker
area. As of December 31, 2009, the allowance for loan losses as a percentage of
loans receivable and non-performing loans was 1.53% and 50.38%, respectively,
compared to 1.34% and 69.41%, respectively, at December 31, 2008. Allowance for
loan losses as a percentage of loans receivable increased due to the $1.3
million increase in allowance and a decline in the net loan portfolio of $53.4
million. Allowance for loan losses as a percentage of non-performing loans
decreased due to an increase in non-performing loans of $10.8 million which was
offset by the $1.3 million increase in the allowance.




Securities.Investment securities available
for sale increased $53.7 million, or 69.5%, compared to December 31, 2008 due
primarily to utilizing cash from loan pay downs. Investment securities held to
maturity decreased $1.5 million due to repayment received and other than
temporary impairment write-down on these securities. More discussion on trust
preferred securities and private labeled mortgage backed securities can be found
in Item 1 under investment activities.




Liabilities. Our total
liabilities increased $11.0 million or 0.9% to $1.3 billion at December 31,
2009. Deposits increased $82.7 million as certificates of deposit increased by
$62.1 million and noninterest bearing, interest-bearing, savings and money
market savings deposits increased by $20.6 million as consumers trended to safe
investments for their liquid assets. Borrowed funds decreased $67.0 million with
FHLB advances decreasing $65.2 million. This decrease was primarily a result of
increased deposits.




Stockholders’ Equity.
Stockholders’ equity was $129.7 million at December 31, 2009, a decrease of
$788,000, or 0.6% from December 31, 2008. The decrease was due primarily to
dividend payments of $2.9 million to common shareholders and $1.4 million to
preferred shareholders. This decrease was partially offset by net income of $3.2
million. Accumulated other comprehensive income increased $170,000 as unrealized
gains on securities and derivatives of $325,000 were partially offset by a
$155,000 unrealized loss on a benefit plan. The Bank’s risk-based capital ratio
is 12.81% and the tier one capital ratio is 11.56%. The Bank’s capital ratios
are well in excess of “well-capitalized” levels as defined by all regulatory
standards.




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.




46




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




Year ended December 31,2009
                      
                      
                      2008
                      
                      
                      2007Average
                      
                      
                      Interest
                      
                      
                      Average
                      
                      
                      Average
                      
                      
                      Interest
                      
                      
                      Average
                      
                      
                      Average
                      
                      
                      Interest
                      
                      
                      AverageOutstanding
                      
                      
                      Earned/
                      
                      
                      Yield/
                      
                      
                      Outstanding
                      
                      
                      Earned/
                      
                      
                      Yield/
                      
                      
                      Outstanding
                      
                      
                      Earned/
                      
                      
                      Yield/Balance
                      
                      
                      Paid
                      
                      
                      Rate
                      
                      
                      Balance
                      
                      
                      Paid
                      
                      
                      Rate
                      
                      
                      Balance
                      
                      
                      Paid
                      
                      
                      Rate(Dollars in thousands)Interest-Earning
      Assets:Interest
      -bearing deposits
                      
                      $
                      36,415
                      
                      
                      $
                      49
                      
                      
                      
                      0.13
                      %
                      
                      $
                      8,711
                      
                      
                      $
                      118
                      
                      
                      
                      1.35
                      %
                      
                      $
                      2,982
                      
                      
                      $
                      115
                      
                      
                      
                      3.86
                      %Mortgage-backed
      securities available-for-sale(1)
                      
                      
                      81,317
                      
                      
                      
                      4,019
                      
                      
                      
                      4.94
                      
                      
                      
                      28,648
                      
                      
                      
                      1,596
                      
                      
                      
                      5.57
                      
                      
                      
                      8,875
                      
                      
                      
                      467
                      
                      
                      
                      5.26Investment securities
      available-for-sale(1)
                      
                      
                      26,903
                      
                      
                      
                      1,015
                      
                      
                      
                      3.77
                      
                      
                      
                      28,987
                      
                      
                      
                      1,303
                      
                      
                      
                      4.50
                      
                      
                      
                      31,234
                      
                      
                      
                      1,644
                      
                      
                      
                      5.26Investment
      securities held-to-maturity
                      
                      
                      9,439
                      
                      
                      
                      594
                      
                      
                      
                      6.30
                      
                      
                      
                      3,360
                      
                      
                      
                      314
                      
                      
                      
                      9.35Loans(2)
                      
                      
                      1,107,274
                      
                      
                      
                      65,865
                      
                      
                      
                      5.95
                      
                      
                      
                      956,788
                      
                      
                      
                      61,128
                      
                      
                      
                      6.39
                      
                      
                      
                      811,991
                      
                      
                      
                      53,686
                      
                      
                      
                      6.61Stock
      in FHLB of Indianapolis
                      
                      
                      18,632
                      
                      
                      
                      310
                      
                      
                      
                      1.66
                      
                      
                      
                      14,010
                      
                      
                      
                      720
                      
                      
                      
                      5.14
                      
                      
                      
                      9,939
                      
                      
                      
                      462
                      
                      
                      
                      4.65Total
      interest-earning assets
                      
                      
                      1,279,980
                      
                      
                      
                      71,852
                      
                      
                      
                      5.61
                      
                      
                      
                      1,040,504
                      
                      
                      
                      65,179
                      
                      
                      
                      6.26
                      
                      
                      
                      865,021
                      
                      
                      
                      56,374
                      
                      
                      
                      6.52Non-Interest
      Earning Assets (net of allowance for loan losses and unrealized
      gain/loss)
                      
                      
                      125,668
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      118,673
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      87,879Total
      assets
                      
                      $
                      1,405,648
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      1,159,177
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      952,900Interest-Bearing
      Liabilities:Demand
      and NOW accounts
                      
                      $
                      162,572
                      
                      
                      
                      776
                      
                      
                      
                      0.48
                      
                      
                      $
                      148,703
                      
                      
                      
                      1,564
                      
                      
                      
                      1.05
                      
                      
                      $
                      126,034
                      
                      
                      
                      2,841
                      
                      
                      
                      2.25Savings
      deposits
                      
                      
                      84,883
                      
                      
                      
                      230
                      
                      
                      
                      0.27
                      
                      
                      
                      66,315
                      
                      
                      
                      317
                      
                      
                      
                      0.48
                      
                      
                      
                      54,975
                      
                      
                      
                      281
                      
                      
                      
                      0.51Money
      market accounts
                      
                      
                      45,559
                      
                      
                      
                      510
                      
                      
                      
                      1.12
                      
                      
                      
                      34,000
                      
                      
                      
                      615
                      
                      
                      
                      1.81
                      
                      
                      
                      24,588
                      
                      
                      
                      621
                      
                      
                      
                      2.53Certificate
      accounts
                      
                      
                      633,360
                      
                      
                      
                      19,354
                      
                      
                      
                      3.06
                      
                      
                      
                      492,405
                      
                      
                      
                      18,920
                      
                      
                      
                      3.84
                      
                      
                      
                      444,271
                      
                      
                      
                      20,755
                      
                      
                      
                      4.67Total
      deposits
                      
                      
                      926,374
                      
                      
                      
                      20,870
                      
                      
                      
                      2.25
                      
                      
                      
                      741,423
                      
                      
                      
                      21,416
                      
                      
                      
                      2.89
                      
                      
                      
                      649,868
                      
                      
                      
                      24,498
                      
                      
                      
                      3.77Borrowings
                      
                      
                      234,886
                      
                      
                      
                      9,754
                      
                      
                      
                      4.15
                      
                      
                      
                      229,768
                      
                      
                      
                      10,223
                      
                      
                      
                      4.45
                      
                      
                      
                      151,636
                      
                      
                      
                      7,729
                      
                      
                      
                      5.10Total
      interest-bearing accounts
                      
                      
                      1,161,260
                      
                      
                      
                      30,624
                      
                      
                      
                      2.64
                      
                      
                      
                      971,191
                      
                      
                      
                      31,639
                      
                      
                      
                      3.26
                      
                      
                      
                      801,504
                      
                      
                      
                      32,227
                      
                      
                      
                      4.02Non-Interest
      Bearing Accounts
                      
                      
                      95,762
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      66,746
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      48,589Other
      Liabilities
                      
                      
                      18,077
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      18,138
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      15,478Total
      Liabilities
                      
                      
                      1,275,099
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,056,075
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      865,571Stockholders’
      Equity
                      
                      
                      130,549
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      103,102
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      87,329Total
      liabilities and stockholders’ equity
                      
                      $
                      1,405,648
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      1,159,177
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      952,900Net
      Earning Assets
                      
                      $
                      118,720
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      69,313
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      63,517Net
      Interest Income
                      
                      
                      
                      
                      
                      $
                      41,228
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      33,540
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      24,147Net Interest Rate
      Spread(3)
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2.98
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.01
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2.50
                      %Net Yield on Average
      Interest-Earning Assets(4)
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.22
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.22
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2.79
                      %Average
      Interest-Earning Assets to Average Interest-Bearing
      Liabilities
                      
                      
                      110.22
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      107.14
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      107.92
                      %





(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.


47


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 31,2009 vs. 2008
                  
                  
                  2008 vs. 2007Increase
                    (decrease)
                    Due to
                  
                  
                  Total
                    Increase
                  
                  
                  Increase
                    (decrease)
                    Due to
                  
                  
                  Total
                    IncreaseVolume
                  
                  
                  Rate
                  
                  
                  (decrease)
                  
                  
                  Volume
                  
                  
                  Rate
                  
                  
                  (decrease)(Dollars in thousands)Interest-earning
      assets:Interest-bearing
      deposits
                  
                  $
                  112
                  
                  
                  $
                  (181
                  )
                  
                  $
                  (69
                  )
                  
                  $
                  114
                  
                  
                  $
                  (111
                  )
                  
                  $
                  3Investment
      securities available-for-sale
                  
                  
                  2,613
                  
                  
                  
                  (198
                  )
                  
                  
                  2,415
                  
                  
                  
                  1,259
                  
                  
                  
                  (157
                  )
                  
                  
                  1,102Loans
      receivable
                  
                  
                  9,154
                  
                  
                  
                  (4,417
                  )
                  
                  
                  4,737
                  
                  
                  
                  9,302
                  
                  
                  
                  (1,860
                  )
                  
                  
                  7,442Stock
      in FHLB of Indianapolis
                  
                  
                  185
                  
                  
                  
                  (595
                  )
                  
                  
                  (410
                  )
                  
                  
                  205
                  
                  
                  
                  53
                  
                  
                  
                  258Total
      interest-earning assets
                  
                  $
                  12,064
                  
                  
                  $
                  (5,391
                  )
                  
                  $
                  6,673
                  
                  
                  $
                  10,880
                  
                  
                  $
                  (2,075
                  )
                  
                  $
                  8,805Interest-bearing
      liabilities:Savings
      deposits
                  
                  $
                  74
                  
                  
                  $
                  (161
                  )
                  
                  $
                  (87
                  )
                  
                  $
                  55
                  
                  
                  $
                  (19
                  )
                  
                  $
                  36Money
      market accounts
                  
                  
                  172
                  
                  
                  
                  (277
                  )
                  
                  
                  (105
                  )
                  
                  
                  199
                  
                  
                  
                  (205
                  )
                  
                  
                  (6
                  )Demand
      and NOW accounts
                  
                  
                  134
                  
                  
                  
                  (922
                  )
                  
                  
                  (788
                  )
                  
                  
                  442
                  
                  
                  
                  (1,719
                  )
                  
                  
                  (1,277
                  )Certificate
      accounts
                  
                  
                  4,770
                  
                  
                  
                  (4,336
                  )
                  
                  
                  434
                  
                  
                  
                  2,097
                  
                  
                  
                  (3,932
                  )
                  
                  
                  (1,835
                  )Borrowings
                  
                  
                  224
                  
                  
                  
                  (693
                  )
                  
                  
                  (469
                  )
                  
                  
                  3,576
                  
                  
                  
                  (1,082
                  )
                  
                  
                  2,494Total
      interest-bearing liabilities
                  
                  $
                  5,374
                  
                  
                  $
                  (6,389
                  )
                  
                  $
                  (1,015
                  )
                  
                  $
                  6,369
                  
                  
                  $
                  (6,957
                  )
                  
                  $
                  (588
                  )Change
      in net interest income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  7,688
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  9,393




Comparison
of Results of Operations for Years Ended December 31, 2009 and
2008.




General. Net income for the
year ended December 31, 2009 was $1.4 million, or $.20 for basic and diluted
income per common share. This compared to a net loss in 2008 of $22.1 million,
or $4.22 for basic and diluted loss per common share. Return on assets was .23%
and return on average tangible common equity was 1.49% for the year ended 2009
compared to a negative 1.91% and a negative 28.04% respectively, for the year
ended 2008.




Net Interest Income. Net
interest income before the provision for loan losses increased $7.7 million from
$33.5 million for the year ended December 31, 2008 to $41.2 million for the year
ended December 31, 2009. The primary reason for the increase was an increase in
average earning assets of $239.5 million due to the acquisition of MFB Corp in
the third quarter of 2008. Net interest margin remained unchanged at 3.22% for
the years ended December 31, 2009 and 2008.




Interest Income. Interest
income increased $6.7 million to $71.9 million at December 31, 2009, compared to
$65.2 million at December 31, 2008. The increase in interest income during the
year ended December 31, 2009 was due to an increase in average earning assets of
$239.5 million due to the acquisition of MFB in the third quarter of 2008. This
increase was partially offset by a 65 basis point decrease in the average yield
on our earning assets from 6.26% in 2008 to 5.61% in 2009 as a result of
interest earning assets repricing at lower rates.




48




Interest Expense. Interest
expense decreased $1.0 million, or 3.2% to $30.6 million at December 31, 2009,
from $31.6 million at December 31, 2008. The decrease in interest expense was
due to a decline of 62 basis points on interest-bearing liabilities from 3.26%
for the year ended December 31, 2008 to 2.64% for the year ended December 31,
2009. This decrease was partially offset by an increase in average
interest-bearing liabilities of $190.1 million as a result of the acquisition of
MFB in the third quarter of 2008. Interest expense on deposits decreased
$546,000 due to a 64 basis point decline in average rates paid. This decrease
was partially offset by increases in average interest-bearing deposits of $185.0
million. Interest expense on borrowings decreased $469,000 due to a 30 basis
point decline in average rates, partially offset by an increase in average
borrowings of $5.1 million.




Provision for Loan Losses. The
provision for loan losses for the year ended December 31, 2009 was $6.5 million,
compared to $7.0 million for 2008. Non-performing loans to total loans at
December 31, 2009 were 3.03% compared to 1.93% at December 31, 2008.
Non-performing assets to total assets were 2.86% at December 31, 2009 compared
to 1.92% at December 31, 2008. The decrease in provision was due primarily to a
decline in the loan portfolio in 2009. While the provision decreased in 2009
compared to 2008, allowance for loan losses to total loans increased to 1.53%
compared to 1.34%.




Other Income. Non-interest
income increased $6.6 million to $13.2 million in 2009, compared to $6.5 million
for 2008. The primary reason for the increase was a full year of operations
after the MFB acquisition in the third quarter of 2008. Service fee income,
commission income and increase in cash surrender value of life insurance
increased by $2.7 million, mostly related to operating a full year after the
acquisition. The increase in gain on sale of available for sale securities of
$3.1 million was due primarily to a loss related to the redemption of the AMF
Ultra Funds of $2.6 million in 2008, which was not repeated in 2009. An increase
in equity in limited partnerships was due to gains in refinanced properties in
2009, and an increase in gains on sales of loans and net servicing fees of $1.5
million was primarily due to $160.0 million in loan sales in 2009 and a $500,000
impairment charge on mortgage servicing rights in 2008 not repeated in 2009. The
increases were partially offset by an increase in net other than temporary
losses on securities of $1.2 million as certain trust preferred securities and
private labeled mortgage backed securities were written down. More discussion on
trust preferred securities and private labeled mortgage backed securities can be
found in Item 1 under “Investment Activities.”




Other Expense. Non-interest
expense decreased $19.1 million to $44.5 million for the year ended December 31,
2009 compared to $63.6 million for 2008. The decrease was due primarily to a
goodwill impairment charge of $29.0 million in December 2008. Non-interest
expense increased $9.9 million, excluding the goodwill impairment, primarily due
to a full year of operations after the acquisition of MFB in the third quarter
of 2008. Increase in salaries and employee benefits of $3.9 million, net
occupancy expenses of $891,000, equipment expenses of $150,000, data processing
fees of $319,000, advertising and promotion $69,000, ATM expense of $127,000,
professional fees of $158,000, software, subscriptions and maintenance of
$368,000 and other expenses of $940,000 are directly related to the acquisition
of MFB. Increases in deposit insurance of $1.8 million is due to a $630,000
special assessment as of June 30, 2009, increases in premium rates required to
be paid and increases in deposits as a result of the acquisition and organic
growth. An increase in repossessed asset expense of $1.1 million is directly
related to the increased repossessed assets being held by the bank and to the
current economic challenges.





Income Tax Expense. Income tax
expense increased $8.7 million in 2009 compared to the year ended 2008. The
increase was due primarily to increased taxable income. The effective tax rate
also increased to 6.3% due to a lower percentage of non-taxable income to total
income before income tax and an decreased percentage of low income housing tax
credits to taxable income when comparing the year ended 2009 to the year ended
2008.




Comparison
of Results of Operations for Years Ended December 31, 2008 and
2007.




General. Net loss for the year
ended December 31, 2008 was $22.1 million, or $4.22 for basic and diluted loss
per common share. This compared to net income in 2007 of $4.2 million, or $1.03
for basic and $1.02 for diluted earnings per common share. Annualized return on
average assets was negative 7.13% and return on average tangible equity was
negative 108.92% for year end 2008 compared to .44% and 5.86%, respectively, for
2007.




49


Net Interest Income. Net
interest income before the provision for loan losses increased $9.4 million for
the year ended December 31, 2008 compared to the year ended December 31, 2007.
Average interest earning assets increased $175.5 million, or 20.3% and the net
interest margin increased by 43 basis points from 2.79% for the year ended
December 31, 2007 to 3.22% for 2008 primarily due to the acquisition of MFB and
the declining rate environment.




Interest Income. Interest
income increased $8.8 million to $65.2 million at December 31, 2008, compared to
$56.4 million at December 31, 2007. The increase in interest income during the
year ended December 31, 2008 was due to an increase in average earning assets of
$175.5 million due to the acquisition of MFB. This increase was partially offset
by a 26 basis point decrease in the average yield on our earning assets from
6.52% in 2007 to 6.26% in 2008 as a result of decreasing market interest
rates.




Interest Expense. Interest
expense decreased $588,000, or 1.8% to $31.6 million at December 31, 2008, from
$32.2 million at December 31, 2007. The decrease in interest expense was due to
a decrease in interest rates which lead to a decline of 76 basis points on
interest-bearing liabilities from 4.02% for the year ended December 31, 2007 to
3.26% for the year ended December 31, 2008. This decrease was partially offset
by an increase in average interest-bearing liabilities of $169.7 million as a
result of the acquisition of MFB. Interest expense on deposits decreased $3.1
million due to an 88 basis point decline in average rates paid. This decrease
was partially offset by increases in average interest-bearing deposits of $91.6
million. Interest expense on borrowings increased $2.5 million due to an
increase in average borrowings of $78.1 million, partially offset by a 65 basis
point decrease in average rate.




Provision for Loan Losses. The
provision for loan losses for the year ended December 31, 2008 was $7.0 million,
compared to $2.2 million for 2007. Non-performing loans to total loans at
December 31, 2008 were 1.93% compared to 1.29% at December 31, 2007.
Non-performing assets to total assets were 1.92% at December 31, 2008 compared
to 1.35% at December 31, 2007. The increase in provision was due primarily to
deteriorated asset quality, a weakened economy and an increased loan portfolio
due to the acquisition of MFB.




Other Income. Non-interest
income decreased $1.2 million, or 16.1%, to $6.5 million in 2008, compared to
$7.8 million for 2007. The decrease was due primarily to a loss related to the
sale of the AMF Ultra Funds of $2.6 million, a $1.2 million write down on two
trust preferred securities, a $200,000 write-down on a Lehman’s corporate bond,
a $329,000 loss on the sale of a title insurance subsidiary, and a $500,000
impairment charge on mortgage servicing rights. These decreases were offset by
increases in fees and service charges on deposit accounts of $1.4 million and
commission income of $795,000 due primarily to the acquisition of MFB in the
third quarter of 2008, and increases in gains on sale of loans of $1.0 million
primarily due to the sale of $92.9 million of fixed rate mortgage loans in
2008.




Other Expense. Non-interest
expense increased $38.5 million to $63.6 million for the year ended December 31,
2008 compared to $25.2 million for 2007. The increase was due primarily to a
goodwill impairment charge of $29.0 million. Management engaged a third party
business valuation specialist to perform the annual impairment test of goodwill.
The step one impairment test indicated the fair value of the reporting unit was
below the carrying value as of December 31, 2008. The step two impairment test
was performed by allocating the fair value of the Company to all of the assets
and liabilities of the reporting unit to determine the implied fair value of the
Company. Management determined the carrying amount of goodwill exceeded, in its
entirety, the implied fair value of goodwill. Other expenses also increased due
to increases in salaries and employee benefits of $4.4 million, increases in
occupancy, equipment, data processing and ATM expense of $1.1 million, increases
in marketing expense of $574,000, increases in professional fees of $369,000,
increases in software subscriptions and maintenance of $494,000, increases in
amortization of intangibles of $559,000 and increases in other expenses, such as
supplies, postage and repossessed asset expense of $2.1 million. These increases
were primarily due to the acquisition of MFB Corp. and rebranding of the Bank in
2008.





Income Tax Expense. Income tax
expense decreased $8.8 million in 2008 compared to the year ended 2007. The
decrease was due primarily to decreased taxable income. The effective tax rate
also decreased 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 2008 to the year ended
2007.




50




Liquidity




Liquidity
management is both a daily and long-term function of the management of the
Company and the Bank. Excess liquidity is generally invested in short-term
investments, such as overnight deposits and federal funds. On a longer term
basis, we maintain a strategy of investing in various lending products and
investment securities, including mortgage-backed securities. The Bank uses its
sources of funds primarily to meet its ongoing commitments, pay maturing
deposits, fund deposit withdrawals and fund loan commitments.




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.




We
maintain cash and investments that qualify as liquid assets to maintain adequate
liquidity to ensure safe and sound operation and meet demands for funds
(particularly withdrawals of deposits). At December 31, 2009, the Company had
$177.3 million in cash and investment securities available for sale and $2.5
million in loans held for sale generally available for its cash needs. We can
also generate funds from borrowings, primarily Federal Home Loan Bank advances
and, to a lesser degree, third party loans. At December 31, 2009, the Bank had
the ability to borrow an additional $82.4 million in Federal Home Loan Bank
advances. In addition, we have historically sold 30 year fixed-rate mortgage
loans in the secondary market in order to reduce interest rate risk and to
create another source of liquidity. The Company utilizes dividends from the Bank
as a source of funds to service debt and meet obligations of the Company. These
dividends, however, require regulatory approval.




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.




We use
our sources of funds primarily to meet ongoing commitments, pay maturing
deposits and fund withdrawals, and to fund loan commitments. At December 31,
2009, the approved outstanding loan commitments, including unused lines of
credit, amounted to $150.5 million. Certificates of deposit scheduled to mature
in one year or less at December 31, 2009, totaled $383.7 million. It is
management’s policy to manage deposit rates that are competitive with other
local financial institutions. Based on this management strategy, we believe that
a majority of maturing deposits will remain with the Bank.




Except as
set forth above, management is not aware of any trends, events, or uncertainties
that will have, or that are reasonably likely to have a material impact on
liquidity, capital resources or operations. Further, management is not aware of
any current recommendations by regulatory agencies, which, if they were to be
implemented, would have this effect.




Off-Balance
Sheet Activities




In the
normal course of operations, the Bank engages in a variety of financial
transactions that are not recorded in our financial statements. These
transactions involve varying degrees of off-balance sheet credit, interest rate
and liquidity risks. These transactions are used primarily to manage customers’
requests for funding and take the form of loan commitments and lines of credit.
For the year ended December 31, 2009, we engaged in no off-balance sheet
transactions likely to have a material effect on our financial condition,
results of operations or cash flows.




51




The
following table presents our contractual obligations (excluding deposit
products).




Payments due by periodLess than
                  
                  
                  
                  1-3
                  
                  
                  
                  3-5
                  
                  
                  More
                    thanTotal
                  
                  
                  1 year
                  
                  
                  years
                  
                  
                  Years
                  
                  
                  5 years(Dollars
      in thousands)Contractual
      ObligationsFederal
      Home Loan Bank Advances
                  
                  $
                  197,960
                  
                  
                  $
                  92,923
                  
                  
                  $
                  95,867
                  
                  
                  $
                  7,460
                  
                  
                  $
                  1,710Notes
      Payable
                  
                  
                  226
                  
                  
                  
                  226Other
      Borrowings
                  
                  
                  13,888
                  
                  
                  
                  764
                  
                  
                  
                  2,549
                  
                  
                  
                  6,687
                  
                  
                  
                  3,888Total
                  
                  $
                  212,074
                  
                  
                  $
                  93,913
                  
                  
                  $
                  98,416
                  
                  
                  $
                  14,147
                  
                  
                  $
                  5,598





Capital




Consistent
with our goals to operate a sound and profitable financial organization,
MutualBank actively strives to remain a “well-capitalized” institution in
accordance with regulatory standards. Total stockholders’ equity ofMutualFirst Financial, Inc.
was $129.7 million at December 31, 2009, or 9.3% of total assets on that date.
As of December 31, 2009, MutualBank exceeded all capital requirements of the
OTS, with regulatory capital ratios as follows: core capital, 9.4%; Tier I
risk-based capital, 11.6%; and total risk-based capital, 12.8%. The regulatory
capital requirements to be considered well-capitalized are 5.0%, 6.0% and 10.0%,
respectively.




Impact
of Inflation




The
effects of price changes and inflation can vary substantially for most financial
institutions. While management believes that inflation affects the growth of
total assets, it believes that it is difficult to assess the overall impact.
Management believes this to be the case due to the fact that generally neither
the timing nor the magnitude of the inflationary changes in the consumer price
index (“CPI”) coincides with changes in interest rates. The price of one or more
of the components of the CPI may fluctuate considerably and thereby influence
the overall CPI without having a corresponding affect on interest rates or upon
the cost of those goods and services normally purchased by the Bank. In years of
high inflation and high interest rates, intermediate and long-term interest
rates tend to increase, thereby adversely impacting the market values of
investment securities, mortgage loans and other long-term fixed rate loans. In
addition, higher short-term interest rates caused by inflation tend to increase
the cost of funds. In other years, the opposite may occur.




Critical
Accounting Policies




The notes
to the consolidated financial statements in Item 8 of this Form 10-K contain a
summary ofMutualFirst’s significant accounting policies. Certain of these policies
are important to the portrayal ofMutualFirst’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.




52




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




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




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




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




Securities. Under FASB
Codification Topic 320 (ASC 320), Investments-Debt and Equity
Securities, investment securities must be classified as held-to-maturity,
available-for-sale or trading. Management determines the appropriate
classification at the time of purchase. The classification of securities is
significant since it directly impacts the accounting for unrealized gains and
losses on securities. Debt securities are classified as held-to-maturity and
carried at amortized cost when management has the positive intent and the
Company has the ability to hold the securities to maturity. Securities not
classified as held-to-maturity are classified as available-for-sale and are
carried at fair value, with the unrealized holding gains and losses, net of tax,
reported in other comprehensive income and do not affect earnings until
realized.




The fair
values of the Company’s securities are generally determined by reference to
quoted prices from reliable independent sources utilizing observable inputs.
Certain of the Company’s fair values of securities are determined using models
whose significant value drivers or assumptions are unobservable and are
significant to the fair value of the securities. These models are utilized when
quoted prices are not available for certain securities or in markets where
trading activity has slowed or ceased. When quoted prices are not available and
are not provided by third party pricing services, management judgment is
necessary to determine fair value. As such, fair value is determined using
discounted cash flow analysis models, incorporating default rates, estimation of
prepayment characteristics and implied volatilities.




The
Company evaluates all securities on a quarterly basis, and more frequently when
economic conditions warrant additional evaluations, for determining if an
other-than-temporary impairment (OTTI) exists pursuant to guidelines established
in ASC 320. In evaluating the possible impairment of securities, consideration
is given to the length of time and the extent to which the fair value has been
less than cost, the financial conditions and near-term prospects of the issuer,
and the ability and intent of the company to retain its investment in the issuer
for a period of time sufficient to allow for any anticipated recovery in fair
value. In analyzing an issuer’s financial condition, the company may consider
whether the securities are issued by the federal government or its agencies or
government sponsored agencies, whether downgrades by bond rating agencies have
occurred, and the results of reviews of the issuer’s financial
condition.




53




If
management determines that an investment experienced an OTTI, management must
then determine the amount of the OTTI to be recognized in earnings. If
management does not intend to sell the security and it is more likely than not
that the Company will not be required to sell the security before recovery of
its amortized cost basis less any current period loss, the OTTI will be
separated into the amount representing the credit loss and the amount related to
all other factors. The amount of OTTI related to the credit loss is determined
based on the present value of cash flows expected to be collected and is
recognized in earnings. The amount of the OTTI related to other factors will be
recognized in other comprehensive income, net of applicable taxes. The previous
amortized cost basis less the OTTI recognized in earnings will become the new
amortized cost basis of the investment. If management intends to sell the
security or more likely than not will be required to sell the security before
recovery of its amortized cost basis less any current period credit loss, the
OTTI will be recognized in earnings equal to the entire difference between the
investment’s amortized cost basis and its fair value at the balance sheet date.
Any recoveries related to the value of these securities are recorded as an
unrealized gain (as other comprehensive income (loss) in shareholders’ equity)
and not recognized in income until the security is ultimately sold.




The
Company from time to time may dispose of an impaired security in response to
asset/liability management decisions, future market movements, business plan
changes, or if the net proceeds can be reinvested at a rate of return that is
expected to recover the loss within a reasonable period of time.




Deferred Tax Asset.The
Company has evaluated its deferred tax asset to determine if it is more likely
than not that the asset will be utilized in the future. The Company’s evaluation
indicated that it is more likely than not that the asset will be fully utilized.
The Company has generated average positive pre-tax pre-provision earnings of
$8.1 million, or .71% of pre-tax pre-provision ROA over the previous 5 years,
after excluding the goodwill impairment in 2008. Over the last 5 years, the
Company has grown and at its current asset size, the pre-tax pre-provision
earnings would be approximately $9.9 million using the same historical pre-tax
pre-provision ROA. These earnings would be sufficient to utilize the net
operating losses, tax credit carryforwards and temporary tax differences over
the allowable periods. The
valuation allowance established in 2009 and 2008 is the result of capital losses
sustained in those years with no tax benefit recorded. The analysis supports no
further valuation is necessary.





At the
end of 2009, the Company had $1.2 million in capital losses down from $1.6
million in 2008 as capital gains from the sale of a building and investments
generated the reduction. The Company plans to generate the capital gains needed
to offset the remaining capital loss through capital gains on possible sale of
buildings, investments, and deferred tax liabilities that can generate capital
gain income prior to losing the ability to utilize the capital losses. The
Company will also avoid taking any book tax benefit on future capital losses
without capital gains to offset the current capital losses. See Note 17 of the
Notes to Consolidated Financial Statements contained in Item 8 of this Form
10-K.





Income Tax Accounting. We file a consolidated
federal income tax return. The provision for income taxes is based upon income
in our consolidated financial statements, rather than amounts reported on our
income tax return. Deferred tax assets and liabilities are recognized for future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect of a change in
tax rates on our deferred tax assets and liabilities is recognized as income or
expense in the period that includes the enactment date.




54




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 one of our most significant market risks.




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. MutualBank’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 2009, we sold
$160.0 million of fixed rate, one- to four-family mortgage loans with a term to
maturity of over 10 years in the secondary market.




55




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 MutualBank with the information
presented in the following tables. The tables present the change in our net
portfolio value at December 31, 2009 and 2008 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.




December 31, 2009Net Portfolio Value(Dollars in thousands)Changes
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    NPV as % of PV of AssetsIn Rates
                    
                    $ Amount
                    
                    
                    $ Change
                    
                    
                    % Change
                    
                    
                    NPV Ratio
                    
                    
                    Change+300
                    bp
                    
                    162,643
                    
                    
                    
                    -38,114
                    
                    
                    
                    -19
                    %
                    
                    
                    12.26
                    %
                    
                    
                    -180
                    bp+200
                    bp
                    
                    180,333
                    
                    
                    
                    -20,424
                    
                    
                    
                    -10
                    %
                    
                    
                    13.23
                    %
                    
                    
                    -82
                    bp+100
                    bp
                    
                    190,330
                    
                    
                    
                    -10,426
                    
                    
                    
                    -5
                    %
                    
                    
                    13.66
                    %
                    
                    
                    -40
                    bp0
                    bp
                    
                    200,757
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    14.06
                    %-100
                    bp
                    NM
                    
                    
                    NM
                    
                    
                    NM
                    
                    
                    NM
                    
                    
                    NM-200
                    bp
                    NM
                    
                    
                    NM
                    
                    
                    NM
                    
                    
                    NM
                    
                    
                    NM-300
                    bp
                    NM
                    
                    
                    NM
                    
                    
                    NM
                    
                    
                    NM
                    
                    
                    NM





December 31, 2008Net Portfolio Value(Dollars in thousands)Changes
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    NPV as % of PV of AssetsIn Rates
                    
                    $ Amount
                    
                    
                    $ Change
                    
                    
                    % Change
                    
                    
                    NPV Ratio
                    
                    
                    Change+300
                    bp
                    
                    168,752
                    
                    
                    
                    -16,815
                    
                    
                    
                    -9
                    %
                    
                    
                    12.65
                    %
                    
                    
                    -50
                    bp+200
                    bp
                    
                    178,643
                    
                    
                    
                    -6,924
                    
                    
                    
                    -4
                    %
                    
                    
                    13.12
                    %
                    
                    
                    -3
                    bp+100
                    bp
                    
                    185,612
                    
                    
                    
                    45
                    
                    
                    
                    0
                    %
                    
                    
                    13.37
                    %
                    
                    
                    22
                    bp0
                    bp
                    
                    185,567
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    13.15
                    %-100
                    bp
                    NM
                    
                    
                    NM
                    
                    
                    NM
                    
                    
                    NM
                    
                    
                    NM-200
                    bp
                    NM
                    
                    
                    NM
                    
                    
                    NM
                    
                    
                    NM
                    
                    
                    NM-300
                    bp
                    NM
                    
                    
                    NM
                    
                    
                    NM
                    
                    
                    NM
                    
                    
                    NM


NM= Not
meaningful due to certain market interest rates that would be below zero at that
level of rate shock.




The
internal asset-liability model uses certain assumptions in assessing the
interest rate risk of MutualBank. 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.




The
increase in the interest rate sensitivity at December 31, 2009 compared to
December 31, 2008 is a result of an increased slope on the yield curve in 2009
as certain market interest rates increased on the longer end of the
curve.




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.




56


Item 8.
            Financial
      Statements and Supplementary Data





MutualFirst Financial,
Inc.





Accountants’
Report and Consolidated Financial Statements





December
31, 2009, 2008 and 2007




57




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, 2009 and 2008, 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, 2009.  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, 2009 and 2008, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2009, in
conformity with accounting principles generally accepted in the Unites States of
America.
  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, 2009, 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 18, 2010, expressed an
unqualified opinion on the effectiveness of the Company's internal control over
financial reporting.
  BKD, LLP
  Indianapolis,
Indiana
 March 18,
2010
  58
 
 MutualFirst Financial,
Inc.
  Consolidated
Balance Sheets
 December
31, 2009 and 2008
  2009
                                            
                                            
                                            2008AssetsCash
      and due from banks
                                            
                                            $
                                            27,245,633
                                            
                                            
                                            $
                                            21,654,283Interest-bearing
      demand deposits
                                            
                                            
                                            19,095,264
                                            
                                            
                                            
                                            18,049,169Cash
      and cash equivalents
                                            
                                            
                                            46,340,897
                                            
                                            
                                            
                                            39,703,452Investment
      securities available for sale
                                            
                                            
                                            130,913,670
                                            
                                            
                                            
                                            77,254,925Investment
      securities held to maturity
                                            
                                            
                                            8,147,407
                                            
                                            
                                            
                                            9,675,891Total
      investment securities
                                            
                                            
                                            139,061,077
                                            
                                            
                                            
                                            86,930,816Loans
      held for sale
                                            
                                            
                                            2,520,546
                                            
                                            
                                            
                                            1,541,110Loans,
      net of allowance for loan losses of $16,414,000 and
      $15,107,000
                                            
                                            
                                            1,059,694,135
                                            
                                            
                                            
                                            1,113,132,480Premises
      and equipment
                                            
                                            
                                            34,556,318
                                            
                                            
                                            
                                            36,500,979Federal
      Home Loan Bank stock
                                            
                                            
                                            18,631,500
                                            
                                            
                                            
                                            18,631,500Investment
      in limited partnerships
                                            
                                            
                                            4,160,629
                                            
                                            
                                            
                                            4,560,690Deferred
      income tax benefit
                                            
                                            
                                            19,514,151
                                            
                                            
                                            
                                            21,237,513Cash
      value of life insurance
                                            
                                            
                                            44,247,277
                                            
                                            
                                            
                                            42,637,240Prepaid
      FDIC premiums
                                            
                                            
                                            5,907,149
                                            
                                            
                                            
                                            —Core
      deposit and other intangibles
                                            
                                            
                                            5,881,075
                                            
                                            
                                            
                                            7,406,572Other
      assets
                                            
                                            
                                            18,519,603
                                            
                                            
                                            
                                            16,545,134Total
      assets
                                            
                                            $
                                            1,399,034,357
                                            
                                            
                                            $
                                            1,388,827,486Liabilities
      and Stockholders’ EquityLiabilitiesDepositsNoninterest-bearing
                                            
                                            $
                                            98,024,890
                                            
                                            
                                            $
                                            93,393,362Interest-bearing
                                            
                                            
                                            947,171,169
                                            
                                            
                                            
                                            869,120,808Total
      deposits
                                            
                                            
                                            1,045,196,059
                                            
                                            
                                            
                                            962,514,170Federal
      Home Loan Bank advances
                                            
                                            
                                            197,960,396
                                            
                                            
                                            
                                            263,112,728Other
      borrowings
                                            
                                            
                                            14,113,526
                                            
                                            
                                            
                                            15,991,690Other
      liabilities
                                            
                                            
                                            12,037,299
                                            
                                            
                                            
                                            16,693,959Total
      liabilities
                                            
                                            
                                            1,269,307,280
                                            
                                            
                                            
                                            1,258,312,547Commitments
      and ContingenciesStockholders’
      EquityPreferred
      stock, $.01 par valueAuthorized
      - 5,000,000 sharesIssued
      and outstanding - 32,382 and 32,382 shares;liquidation
      preference $1,000 per share
                                            
                                            
                                            324
                                            
                                            
                                            
                                            324Common
      stock, $.01 par valueAuthorized
      - 20,000,000 sharesIssued
      and outstanding - 6,984,754 and 6,984,754 shares
                                            
                                            
                                            69,847
                                            
                                            
                                            
                                            69,847Additional
      paid-in capital - preferred stock
                                            
                                            
                                            31,645,814
                                            
                                            
                                            
                                            31,461,848Additional
      paid-in capital - common stock
                                            
                                            
                                            72,485,756
                                            
                                            
                                            
                                            72,610,939Retained
      earnings
                                            
                                            
                                            28,654,285
                                            
                                            
                                            
                                            29,989,003Accumulated
      other comprehensive loss
                                            
                                            
                                            (1,857,723
                                            )
                                            
                                            
                                            (2,027,956
                                            )Unearned
      benefit plan shares
                                            
                                            
                                            (1,271,226
                                            )
                                            
                                            
                                            (1,589,066
                                            )Total
      stockholders’ equity
                                            
                                            
                                            129,727,077
                                            
                                            
                                            
                                            130,514,939Total
      liabilities and stockholders’ equity
                                            
                                            $
                                            1,399,034,357
                                            
                                            
                                            $
                                            1,388,827,486
  See
Notes to Consolidated Financial Statements
 59
 
 MutualFirst Financial,
Inc.
  Consolidated
Statements of Income
 Years
Ended December 31, 2009, 2008 and 2007
  2009
                                  
                                  
                                  2008
                                  
                                  
                                  2007Interest
      and Dividend IncomeLoans
      receivable
                                  
                                  $
                                  65,864,742
                                  
                                  
                                  $
                                  61,127,725
                                  
                                  
                                  $
                                  53,686,297Investment
      securities
                                  
                                  
                                  5,628,312
                                  
                                  
                                  
                                  3,213,272
                                  
                                  
                                  
                                  2,110,916Federal
      Home Loan Bank stock
                                  
                                  
                                  310,589
                                  
                                  
                                  
                                  719,886
                                  
                                  
                                  
                                  461,949Deposits
      with financial institutions
                                  
                                  
                                  48,665
                                  
                                  
                                  
                                  118,064
                                  
                                  
                                  
                                  114,596Total
      interest and dividend income
                                  
                                  
                                  71,852,308
                                  
                                  
                                  
                                  65,178,947
                                  
                                  
                                  
                                  56,373,758Interest
      ExpenseDeposits
                                  
                                  
                                  20,870,515
                                  
                                  
                                  
                                  21,416,502
                                  
                                  
                                  
                                  24,498,471Federal
      Home Loan Bank advances
                                  
                                  
                                  8,762,340
                                  
                                  
                                  
                                  9,698,795
                                  
                                  
                                  
                                  7,656,748Other
      interest expense
                                  
                                  
                                  991,472
                                  
                                  
                                  
                                  523,793
                                  
                                  
                                  
                                  71,833Total
      interest expense
                                  
                                  
                                  30,624,327
                                  
                                  
                                  
                                  31,639,090
                                  
                                  
                                  
                                  32,227,052Net
      Interest Income
                                  
                                  
                                  41,227,981
                                  
                                  
                                  
                                  33,539,857
                                  
                                  
                                  
                                  24,146,706Provision
      for loan losses
                                  
                                  
                                  6,500,000
                                  
                                  
                                  
                                  7,020,000
                                  
                                  
                                  
                                  2,240,000Net
      Interest Income After Provision for Loan Losses
                                  
                                  
                                  34,727,981
                                  
                                  
                                  
                                  26,519,857
                                  
                                  
                                  
                                  21,906,706Other
      IncomeService
      fee income
                                  
                                  
                                  7,457,642
                                  
                                  
                                  
                                  6,256,694
                                  
                                  
                                  
                                  4,831,161Net
      realized gain (loss) on sales of available-for-sale
    securities
                                  
                                  
                                  754,990
                                  
                                  
                                  
                                  (2,365,531
                                  )
                                  
                                  
                                  —Commissions
                                  
                                  
                                  3,046,798
                                  
                                  
                                  
                                  1,796,332
                                  
                                  
                                  
                                  1,000,687Equity
      in gains (losses) of limited partnerships
                                  
                                  
                                  108,081
                                  
                                  
                                  
                                  (157,575
                                  )
                                  
                                  
                                  (99,654
                                  )Net
      gains on sales of loans
                                  
                                  
                                  2,377,222
                                  
                                  
                                  
                                  1,438,626
                                  
                                  
                                  
                                  390,778Net
      servicing fees
                                  
                                  
                                  244,807
                                  
                                  
                                  
                                  (298,473
                                  )
                                  
                                  
                                  81,033Increase
      in cash value of life insurance
                                  
                                  
                                  1,573,096
                                  
                                  
                                  
                                  1,322,724
                                  
                                  
                                  
                                  1,230,000Other-than-temporary
      losses on securitiesTotal
      other-than-temporary losses
                                  
                                  
                                  (5,335,121
                                  )
                                  
                                  
                                  (1,350,000
                                  )
                                  
                                  
                                  —Portion
      of loss recognized in other comprehensive income (before
      taxes)
                                  
                                  
                                  2,779,828
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Net
      impairment losses recognized in earnings
                                  
                                  
                                  (2,555,293
                                  )
                                  
                                  
                                  (1,350,000
                                  )
                                  
                                  
                                  —Other
      income (loss)
                                  
                                  
                                  146,359
                                  
                                  
                                  
                                  (120,503
                                  )
                                  
                                  
                                  336,554Total
      other income
                                  
                                  
                                  13,153,702
                                  
                                  
                                  
                                  6,522,294
                                  
                                  
                                  
                                  7,770,559Other
      ExpensesSalaries
      and employee benefits
                                  
                                  
                                  23,046,656
                                  
                                  
                                  
                                  19,117,989
                                  
                                  
                                  
                                  14,758,489Net
      occupancy expenses
                                  
                                  
                                  2,802,258
                                  
                                  
                                  
                                  1,911,495
                                  
                                  
                                  
                                  1,549,331Equipment
      expenses
                                  
                                  
                                  1,780,267
                                  
                                  
                                  
                                  1,629,898
                                  
                                  
                                  
                                  1,318,932Data
      processing fees
                                  
                                  
                                  1,510,194
                                  
                                  
                                  
                                  1,191,655
                                  
                                  
                                  
                                  1,058,357Advertising
      and promotion
                                  
                                  
                                  1,529,744
                                  
                                  
                                  
                                  1,461,225
                                  
                                  
                                  
                                  887,237Automated
      teller machine expense
                                  
                                  
                                  1,094,893
                                  
                                  
                                  
                                  968,078
                                  
                                  
                                  
                                  723,128Deposit
      Insurance
                                  
                                  
                                  2,262,697
                                  
                                  
                                  
                                  512,129
                                  
                                  
                                  
                                  83,086Professional
      fees
                                  
                                  
                                  1,291,389
                                  
                                  
                                  
                                  1,133,012
                                  
                                  
                                  
                                  764,007Software
      subscriptions and maintenance
                                  
                                  
                                  1,378,329
                                  
                                  
                                  
                                  1,010,518
                                  
                                  
                                  
                                  516,503Repossessed
      asset expenses
                                  
                                  
                                  2,025,182
                                  
                                  
                                  
                                  875,223
                                  
                                  
                                  
                                  609,042Goodwill
      impairment
                                  
                                  
                                  —
                                  
                                  
                                  
                                  28,968,993
                                  
                                  
                                  
                                  —Other
      expenses
                                  
                                  
                                  5,785,596
                                  
                                  
                                  
                                  4,845,170
                                  
                                  
                                  
                                  2,887,311Total
      other expenses
                                  
                                  
                                  44,507,205
                                  
                                  
                                  
                                  63,625,385
                                  
                                  
                                  
                                  25,155,423Income
      (Loss) Before Income Tax
                                  
                                  
                                  3,374,478
                                  
                                  
                                  
                                  (30,583,234
                                  )
                                  
                                  
                                  4,521,842Income
      tax expense (benefit)
                                  
                                  
                                  211,000
                                  
                                  
                                  
                                  (8,485,000
                                  )
                                  
                                  
                                  295,700Net
      Income (Loss)
                                  
                                  
                                  3,163,478
                                  
                                  
                                  
                                  (22,098,234
                                  )
                                  
                                  
                                  4,226,142Preferred
      stock dividends and amortization
                                  
                                  
                                  1,803,064
                                  
                                  
                                  
                                  31,482
                                  
                                  
                                  
                                  —Net
      Income (Loss) Available to Common Shareholders
                                  
                                  $
                                  1,360,414
                                  
                                  
                                  $
                                  (22,129,716
                                  )
                                  
                                  $
                                  4,226,142Earnings
      Per ShareBasic
                                  
                                  $
                                  0.20
                                  
                                  
                                  $
                                  (4.22
                                  )
                                  
                                  $
                                  1.03Diluted
                                  
                                  
                                  0.20
                                  
                                  
                                  
                                  (4.22
                                  )
                                  
                                  
                                  1.02
  See
Notes to Consolidated Financial Statements
 60
 
 MutualFirst Financial,
Inc.
  Consolidated
Statements of Stockholders’ Equity
 Years
Ended December 31, 2009, 2008 and 2007
  AccumulatedOther
                            
                            
                            UnearnedPaid-in
                            
                            
                            
                            
                            
                            Paid-in
                            
                            
                            
                            
                            
                            Comprehensive
                            
                            
                            BenefitPreferred
                            
                            
                            Capital
                            
                            
                            Common
                            
                            
                            Capital
                            
                            
                            Retained
                            
                            
                            Income
                            
                            
                            PlanStock
                            
                            
                            Preferred
                            
                            
                            Stock
                            
                            
                            Common
                            
                            
                            Earnings
                            
                            
                            (Loss)
                            
                            
                            Shares
                            
                            
                            TotalBalances,
      January 1, 2007
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            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 of tax - unrealized holding gains on
      securities
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (59,646
                            )
                            
                            
                            
                            
                            
                            
                            (59,646
                            )Total
      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
                            
                            
                            
                            583,378Balances,
      December 31, 2007
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            42,266
                            
                            
                            
                            32,567,085
                            
                            
                            
                            56,725,785
                            
                            
                            
                            (414,380
                            )
                            
                            
                            (1,906,906
                            )
                            
                            
                            87,013,850Comprehensive
      lossNet
      loss
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            (22,098,234
                            )
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (22,098,234
                            )Other
      comprehensive income, net of tax - unrealized holding losses on
      securities
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (1,503,877
                            )
                            
                            
                            
                            
                            
                            
                            (1,503,877
                            )Total
      comprehensive loss
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (23,602,111
                            )Preferred
      stock issued
                            
                            
                            324
                            
                            
                            
                            31,461,848
                            
                            
                            
                            
                            
                            
                            
                            919,828
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            32,382,000Common
      stock issued in acquisition, net of costs
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            29,117
                            
                            
                            
                            39,758,791
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            39,787,908Cash
      dividends ($.64 per share)
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (3,489,747
                            )
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (3,489,747
                            )Stock
      repurchased
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (1,536
                            )
                            
                            
                            (660,334
                            )
                            
                            
                            (1,148,801
                            )
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (1,810,671
                            )RRP
      shares earned
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            21,056
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            21,056Tax
      expense on stock options and RRP shares
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (20,529
                            )
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (20,529
                            )ESOP
      shares earned
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            25,042
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            317,840
                            
                            
                            
                            342,882Other
      adjustment
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (109,699
                            )
                            
                            
                            
                            
                            
                            
                            (109,699
                            )Balances
      December 31, 2008
                            
                            
                            324
                            
                            
                            
                            31,461,848
                            
                            
                            
                            69,847
                            
                            
                            
                            72,610,939
                            
                            
                            
                            29,989,003
                            
                            
                            
                            (2,027,956
                            )
                            
                            
                            (1,589,066
                            )
                            
                            
                            130,514,939Comprehensive
      lossNet
      income
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            3,163,478
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            3,163,478Other
      comprehensive income, net of taxesUnrealized
      holding gains on  available-for-sale securities
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            1,985,376
                            
                            
                            
                            
                            
                            
                            
                            1,985,376Unrealized
      holding losses on available-for-sale securities for which a portion of an
      other-than-temporary impairment has been recognized in
    income
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (1,689,510
                            )
                            
                            
                            
                            
                            
                            
                            (1,689,510
                            )Unrealized
      gain on derivative used for cash flow hedge
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            29,348
                            
                            
                            
                            
                            
                            
                            
                            29,348Unrealized
      loss on defined benefit plan
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (154,981
                            )
                            
                            
                            
                            
                            
                            
                            (154,981
                            )Total
      comprehensive income
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            3,333,711Stock
      options
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            13,401
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            13,401Cash
      dividends, common stock ($.42 per share)
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (2,866,034
                            )
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (2,866,034
                            )Cash
      dividends, preferred stock (5%)
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (1,448,196
                            )
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (1,448,196
                            )Tax
      expense on stock options and RRP shares
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (35,559
                            )
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (35,559
                            )ESOP
      shares earned
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (103,025
                            )
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            317,840
                            
                            
                            
                            214,815Accretion
      of discount on preferred stock
                            
                            
                            
                            
                            
                            
                            183,966
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (183,966
                            )Balances
      December 31, 2009
                            
                            $
                            324
                            
                            
                            $
                            31,645,814
                            
                            
                            $
                            69,847
                            
                            
                            $
                            72,485,756
                            
                            
                            $
                            28,654,285
                            
                            
                            $
                            (1,857,723
                            )
                            
                            $
                            (1,271,226
                            )
                            
                            $
                            129,727,077
  See
Notes to Consolidated Financial Statements
 61
 
 MutualFirst Financial,
Inc.
  Consolidated
Statements of Cash Flows
 Years
Ended December 31, 2009, 2008 and 2007
  2009
                                  
                                  
                                  2008
                                  
                                  
                                  2007Operating
      ActivitiesNet
      income (loss)
                                  
                                  $
                                  3,163,478
                                  
                                  
                                  $
                                  (22,098,234
                                  )
                                  
                                  $
                                  4,226,142Items
      not requiring (providing) cashProvision
      for loan losses
                                  
                                  
                                  6,500,000
                                  
                                  
                                  
                                  7,020,000
                                  
                                  
                                  
                                  2,240,000Impairment
      of goodwill
                                  
                                  
                                  —
                                  
                                  
                                  
                                  28,968,993
                                  
                                  
                                  
                                  —Depreciation
      and amortization
                                  
                                  
                                  4,561,919
                                  
                                  
                                  
                                  2,812,118
                                  
                                  
                                  
                                  2,554,786Deferred
      income tax
                                  
                                  
                                  1,471,381
                                  
                                  
                                  
                                  (9,121,613
                                  )
                                  
                                  
                                  (758,000
                                  )Loans
      originated for sale
                                  
                                  
                                  (160,998,914
                                  )
                                  
                                  
                                  (41,018,545
                                  )
                                  
                                  
                                  (24,427,954
                                  )Proceeds
      from sales of loans held for sale
                                  
                                  
                                  160,817,418
                                  
                                  
                                  
                                  41,737,644
                                  
                                  
                                  
                                  24,262,686Gain
      on loans held for sale
                                  
                                  
                                  (2,377,222
                                  )
                                  
                                  
                                  (1,438,626
                                  )
                                  
                                  
                                  (390,778
                                  )(Gain)
      loss on sale of available for sale
                                  
                                  
                                  (541,992
                                  )
                                  
                                  
                                  2,365,531
                                  
                                  
                                  
                                  —Loss
      on impairment of securities
                                  
                                  
                                  2,555,293
                                  
                                  
                                  
                                  1,350,000
                                  
                                  
                                  
                                  —Gain
      on sale of premises and equipment
                                  
                                  
                                  (187,651
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Other
      equity adjustments
                                  
                                  
                                  214,815
                                  
                                  
                                  
                                  384,467
                                  
                                  
                                  
                                  601,052Change
      inPrepaid
      FDIC premiums
                                  
                                  
                                  (5,907,149
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Interest
      receivable and other assets
                                  
                                  
                                  2,093,289
                                  
                                  
                                  
                                  1,811,318
                                  
                                  
                                  
                                  10,356Interest
      payable and other liabilities
                                  
                                  
                                  (3,197,149
                                  )
                                  
                                  
                                  (387,104
                                  )
                                  
                                  
                                  1,463,546Cash
      value of life insurance
                                  
                                  
                                  (1,573,096
                                  )
                                  
                                  
                                  (1,322,724
                                  )
                                  
                                  
                                  (1,230,000
                                  )Other
      adjustments
                                  
                                  
                                  (925,984
                                  )
                                  
                                  
                                  547,009
                                  
                                  
                                  
                                  434,930Net
      cash provided by operating activities
                                  
                                  
                                  5,668,436
                                  
                                  
                                  
                                  11,610,234
                                  
                                  
                                  
                                  8,986,766Investing
      ActivitiesNet
      change in interest earning deposits
                                  
                                  
                                  —
                                  
                                  
                                  
                                  100,000
                                  
                                  
                                  
                                  193,000Purchases
      of securitiesAvailable
      for sale
                                  
                                  
                                  (84,539,462
                                  )
                                  
                                  
                                  (59,806,429
                                  )
                                  
                                  
                                  (7,810,905
                                  )Held
      to maturity
                                  
                                  
                                  (500,000
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Proceeds
      from redemption-in-kind - investments
                                  
                                  
                                  —
                                  
                                  
                                  
                                  2,282,409
                                  
                                  
                                  
                                  —Proceeds
      from maturities and paydowns of securitiesAvailable
      for sale
                                  
                                  
                                  19,079,510
                                  
                                  
                                  
                                  9,342,878
                                  
                                  
                                  
                                  4,357,422Held
      to maturity
                                  
                                  
                                  1,577,833
                                  
                                  
                                  
                                  348,629
                                  
                                  
                                  
                                  —Proceeds
      from sales of securities available for sale
                                  
                                  
                                  11,167,302
                                  
                                  
                                  
                                  21,519,205
                                  
                                  
                                  
                                  802,748Net
      change in loans
                                  
                                  
                                  38,722,418
                                  
                                  
                                  
                                  4,435,817
                                  
                                  
                                  
                                  (2,214,872
                                  )Proceeds
      from sales of loans transferred to held for sale
                                  
                                  
                                  —
                                  
                                  
                                  
                                  51,577,741
                                  
                                  
                                  
                                  —Proceeds
      from sale of premises and equipment
                                  
                                  
                                  1,033,151
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Purchases
      of premises and equipment
                                  
                                  
                                  (1,091,423
                                  )
                                  
                                  
                                  (3,422,071
                                  )
                                  
                                  
                                  (2,146,757
                                  )Proceeds
      from real estate owned sales
                                  
                                  
                                  1,841,994
                                  
                                  
                                  
                                  1,781,701
                                  
                                  
                                  
                                  1,314,027Cash
      received (paid) in acquisition, net
                                  
                                  
                                  —
                                  
                                  
                                  
                                  331,065
                                  
                                  
                                  
                                  (515,257
                                  )Other
      investing activities
                                  
                                  
                                  2,916,496
                                  
                                  
                                  
                                  (61,895
                                  )
                                  
                                  
                                  100,671Net
      cash provided by (used in) investing activities
                                  
                                  
                                  (9,792,181
                                  )
                                  
                                  
                                  28,429,050
                                  
                                  
                                  
                                  (5,919,923
                                  )Financing
      ActivitiesNet
      change inNoninterest-bearing,
      interest-bearing demand and savings deposits
                                  
                                  
                                  20,106,823
                                  
                                  
                                  
                                  (19,540,396
                                  )
                                  
                                  
                                  (543,777
                                  )Certificates
      of deposits
                                  
                                  
                                  62,575,065
                                  
                                  
                                  
                                  (16,808,138
                                  )
                                  
                                  
                                  (36,407,524
                                  )Proceeds
      from FHLB advances
                                  
                                  
                                  63,100,000
                                  
                                  
                                  
                                  500,225,000
                                  
                                  
                                  
                                  466,550,000Repayment
      of FHLB advances
                                  
                                  
                                  (127,290,189
                                  )
                                  
                                  
                                  (521,337,084
                                  )
                                  
                                  
                                  (432,014,627
                                  )Proceeds
      from other borrowings
                                  
                                  
                                  10,000,000
                                  
                                  
                                  
                                  11,500,000
                                  
                                  
                                  
                                  3,907,394Repayment
      of other borrowings
                                  
                                  
                                  (11,921,210
                                  )
                                  
                                  
                                  (4,383,382
                                  )
                                  
                                  
                                  (433,760
                                  )Proceeds
      from issuance of preferred stock
                                  
                                  
                                  —
                                  
                                  
                                  
                                  32,382,000
                                  
                                  
                                  
                                  —Stock
      repurchased
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (1,810,671
                                  )
                                  
                                  
                                  (2,793,272
                                  )Cash
      dividends
                                  
                                  
                                  (4,314,230
                                  )
                                  
                                  
                                  (3,489,747
                                  )
                                  
                                  
                                  (2,440,121
                                  )Other
      financing activities
                                  
                                  
                                  (1,495,069
                                  )
                                  
                                  
                                  (721,585
                                  )
                                  
                                  
                                  (157,857
                                  )Net
      cash provided by (used in) financing activities
                                  
                                  
                                  10,761,190
                                  
                                  
                                  
                                  (23,984,003
                                  )
                                  
                                  
                                  (4,333,544
                                  )Net
      Change in Cash and Cash Equivalents
                                  
                                  
                                  6,637,445
                                  
                                  
                                  
                                  16,055,281
                                  
                                  
                                  
                                  (1,266,701
                                  )Cash
      and Cash Equivalents, Beginning of Year
                                  
                                  
                                  39,703,452
                                  
                                  
                                  
                                  23,648,171
                                  
                                  
                                  
                                  24,914,872Cash
      and Cash Equivalents, End of Year
                                  
                                  $
                                  46,340,897
                                  
                                  
                                  $
                                  39,703,452
                                  
                                  
                                  $
                                  23,648,171Additional
      Cash Flows InformationInterest
      paid
                                  
                                  $
                                  31,548,480
                                  
                                  
                                  $
                                  31,989,878
                                  
                                  
                                  $
                                  31,589,021Income
      tax paid
                                  
                                  
                                  550,000
                                  
                                  
                                  
                                  900,000
                                  
                                  
                                  
                                  445,000Transfers
      from loans to foreclosed real estate
                                  
                                  
                                  7,172,727
                                  
                                  
                                  
                                  3,138,785
                                  
                                  
                                  
                                  1,970,782Mortgage
      servicing rights capitalized
                                  
                                  
                                  1,579,282
                                  
                                  
                                  
                                  823,032
                                  
                                  
                                  
                                  241,131Redemption
      in kind - investments
                                  
                                  
                                  —
                                  
                                  
                                  
                                  9,934,943
                                  
                                  
                                  
                                  —
  See
Notes to Consolidated Financial Statements
 
 62
  MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (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, MutualBank (Bank) and the Bank’s
wholly owned subsidiaries, Mishawaka Financial Services, 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.  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.  At December 31, 2009 and 2008, cash
equivalents consisted primarily of money market accounts with brokers and
checking accounts with government sponsored entities.
  Effective
October 3, 2008, the FDIC’s insurance limits increased to
$250,000.  The increase in federally insured limits is currently set
to expire December 31, 2013.  At December 31, 2009, the
Company’s cash accounts exceeded federally insured limits by approximately
$14,718,000.  The Company also had uninsured accounts of approximately
$10,524,000 primarily at the Federal Reserve and Federal Home Loan
Bank.
  Investment Securities -
Certain debt securities that management has the positive intent and ability to
hold to maturity are classified as “held to maturity” and recorded at amortized
cost.  Securities not classified as held to maturity, including equity
securities with readily determinable fair values, are classified as “available
for sale” and recorded at fair value, with unrealized gains and losses excluded
from earnings and reported in other comprehensive income.  Purchase
premiums and discounts are recognized in interest income using the interest
method over the terms of the securities.  Gains and losses on the sale
of securities are recorded on the trade date and are determined using the
specific identification method.
 
 63
 
 MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Effective
April 1, 2009, the Company adopted new accounting guidance related to
recognition and presentation of other-than-temporary impairment
(ASC 320-10).  When the Company does not intend to sell a debt
security, and it is more likely than not the Company will not have to sell the
security before recovery of its cost basis, it recognizes the credit component
of an other-than-temporary impairment of a debt security in earnings and the
remaining portion in other comprehensive income.  For held-to-maturity
debt securities, the amount of an other-than-temporary impairment recorded in
other comprehensive income for the noncredit portion of a previous
other-than-temporary impairment is amortized prospectively over the remaining
life of the security on the basis of the timing of future estimated cash flows
of the security.
  As a
result of this guidance, the Company’s consolidated statement of income as of
December 31, 2009, reflects the full impairment (that is, the difference between
the security’s amortized cost basis and fair value) on debt securities that the
Company intends to sell or would more likely than not be required to sell before
the expected recovery of the amortized cost basis.  For
available-for-sale and held-to-maturity debt securities that management has no
intent to sell and believes that it more likely than not will not be required to
sell prior to recovery, only the credit loss component of the impairment is
recognized in earnings, while the noncredit loss is recognized in accumulated
other comprehensive income.  The credit loss component recognized in
earnings is identified as the amount of principal cash flows not expected to be
received over the remaining term of the security as projected based on cash flow
projections.
  Prior to
the adoption of the recent accounting guidance on April 1, 2009, management
considered, in determining whether other-than-temporary impairment exists,
(1) the length of time and the extent to which the fair value has been less
than cost, (2) the financial condition and near-term prospects of the
issuer and (3) the intent and ability of the Company to retain its
investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value.
  For
equity securities, when the Company has decided to sell an impaired
available-for-sale security and the entity does not expect the fair value of the
security to fully recover before the expected time of sale, the security is
deemed other-than-temporarily impaired in the period in which the decision to
sell is made.  The Company recognizes an impairment loss when the
impairment is deemed other than temporary even if a decision to sell has not
been made.
  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.
  Loans held for saleare
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.
 
 64
 
 MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  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 lossesis
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, 2009, 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.
  Federal Home Loan Bank stock
is a required investment for institutions that are members of the Federal Home
Loan Bank (FHLB) 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.
  
 65
 
 MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  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.
  Deferred tax assetsare
evaluated on a quarterly basis for recoverability based on all available
evidence.This
process involves significant management judgment about assumptions that are
subject to change from period to period based on changes in tax laws or
variances between our future projected operating performance and our actual
results.  We are required to establish a valuation allowance for
deferred tax assets if we determine, based on available evidence at the time the
determination is made, that it is more likely than not that some portion or all
of the deferred tax assets will not be realized.  In determining the
more-likely-than-not criterion, we evaluate all positive and negative available
evidence as of the end of each reporting period.  Future adjustments
to the deferred tax asset valuation allowance, if any, will be determined based
upon changes in the expected realization of the net deferred tax
assets.  The realization of the deferred tax assets ultimately depends
on the existence of sufficient taxable income in either the carry back or carry
forward periods under applicable tax laws.  Due to significant
estimates utilized in establishing the valuation allowance and the potential for
changes in facts and circumstances, it is reasonably possible that we will be
required to record adjustments to the valuation allowance in the near term if
estimates of future taxable income during the carry forward period are
reduced.  Such a charge could have a material adverse effect on our
results of operations, financial condition, and capital position.
  Intangible assets are being
amortized on an accelerated basis over periods ranging from five to eleven
years.  Such assets are periodically evaluated as to the
recoverability of their carrying value.
  Goodwill is tested annually
for impairment.  If the implied fair value of goodwill is lower than
its carrying amount, 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.
  As of
December 31, 2008, the total balance of goodwill was considered impaired and it
was written off completely.
  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 2007 and 2008 consolidated financial statements have been made to
conform to the 2009 presentation.
  Stock Optionsare accounted
for in accordance with FASB ASC 718, Stock
Compensation.  At December 31, 2009, the Company has a
stock-based employee compensation plan, which is described more fully in Note
24.
 
 66
 
 MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Current Economic
Conditions.The current protracted economic decline continues
to present financial institutions with circumstances and challenges, which in
some cases have resulted in large and unanticipated declines in the fair values
of investments and other assets, constraints on liquidity and capital and
significant credit quality problems, including severe volatility in the
valuation of real estate and other collateral supporting loans.
  At
December 31, 2009, the Company held $334,752,000 in commercial loans, including
$257,368,000 in loans collateralized by commercial and development real
estate.  Due to national, state and local economic conditions, values
for commercial and development real estate have declined significantly, and the
market for these properties is depressed.
  The
accompanying financial statements have been prepared using values and
information currently available to the Company.
  Given the
volatility of current economic conditions, the values of assets and liabilities
recorded in the financial statements could change rapidly, resulting in material
future adjustments in asset values, the allowance for loan losses and capital
that could negatively impact the Bank’s ability to meet regulatory capital
requirements and maintain sufficient liquidity.
  Note
      2:
                Impact
      of Accounting Pronouncements
  On June
29, 2009, the FASB issued an accounting pronouncement establishing the FASB
Accounting Standards Codification TM  (the “ASC”) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities.  This pronouncement was effective for
financial statements issued for interim and annual periods ending after
September 15, 2009, for most entities.  On the effective date, all
non-SEC accounting and reporting standards will be superseded.  The
Company adopted this new accounting pronouncement for the quarterly period ended
September 30, 2009, as required, and adoption did not have a material impact on
the statements taken as a whole.
  In June
2009, the FASB issued new a new standard regarding accounting for transfers and
servicing of financial assets and extinguishments of liabilities, and will
require more information about transfers of financial assets, including
securitization transactions, and where entities have continuing exposure to the
risks related to transferred financial assets. It eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures.
  At the
same time, FASB also issued another new standard regarding consolidation of
variable interest entities, and changes how a reporting entity determines when
an entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. The determination of whether a
reporting entity is required to consolidate another entity is based on, among
other things, the other entity’s purpose and design and the reporting entity’s
ability to direct the activities of the other entity that most significantly
impact the other entity’s economic performance.
  
 67
 
 MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  The new
standards will require a number of new disclosures. The first enhances
information reported to users of financial statements by providing greater
transparency about transfers of financial assets and an entity’s continuing
involvement in transferred financial assets.  The second will require
a reporting entity to provide additional disclosures about its involvement with
variable interest entities and any significant changes in risk exposure due to
that involvement. A reporting entity will be required to disclose how its
involvement with a variable interest entity affects the reporting entity’s
financial statements.
  The
Federal Reserve is reviewing regulatory capital requirements associated with the
adoption of the new accounting standards by financial institutions. In
conducting this review, the Federal Reserve is considering a broad range of
factors including the maintenance of prudent capital levels, the record of
recent bank experiences with off-balance sheet vehicles, and the results of the
recent Supervisory Capital Assessment Program (SCAP). As part of the SCAP,
participating banking organizations' capital adequacy was assessed using
assumptions consistent with standards ultimately included in these two new
standards.
  The two
new standards discussed above will be effective at the start of a reporting
entity’s first fiscal year beginning after November 15, 2009, or January 1,
2010, for a calendar year-end entity. Early application is not
permitted.  The Company is currently evaluating the potential impact,
if any, of the adoption of these two statements on the Company.
  In
January 2010, the FASB issued an accounting standard providing additional
guidance relating to fair value measurement
disclosures.  Specifically, companies will be required to separately
disclose significant transfers into and out of Level 1 and Level 2
measurements in the fair value hierarchy including when such transfers were
recognized and the reasons for those transfers.  For Level 3 fair
value measurements, the new guidance requires presentation of separate
information about purchases, sales, issuances and
settlements.  Additionally, the FASB also clarified existing fair
value measurement disclosure requirements relating to the level of
disaggregation, inputs, and valuation techniques.  This accounting
standard will be effective at the beginning of 2010, except for the detailed
Level 3 disclosures, which will be effective at the beginning of
2011.  The company is currently evaluating the impact of this standard
on its financial statements.
  Note
      3:
                Acquisitions
  On July
18, 2008, the Bank acquired 100% of the outstanding stock of MFB Corp., the
holding company for MFB Financial (“MFB”) and MFB Statutory Trust I
(“Trust”).  MFB Corp. was merged into the Company, and MFB was merged
into MutualBank.  The Trust was also maintained as a wholly-owned
subsidiary of the Company.
  The
Company issued 2,911,714 shares of its common stock and approximately
$11,526,000 in cash to complete the transaction.  As a result of the
acquisition, the Company will have an opportunity to increase its customer base
and continue to increase its market share. The purchase had a recorded
acquisition price of $51,985,000, including goodwill of $14,781,000.
Additionally, core deposit intangibles totaling $6,645,000 were recognized and
will be amortized over approximately 11 years using the sum of the year digits
or a weighted average term of 3.8 years.  The goodwill generated as a
result of this transaction is not deductible for tax purposes.
  
 68
 
 MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  The
combination was accounted for under the purchase method of accounting. All
assets and liabilities were recorded at their fair values as of July 18,
2008.  The purchase accounting adjustments will be amortized over the
life of the respective asset or liability.  MFB's results of
operations are included in the Company's consolidated income statement beginning
July 18, 2008.
  The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition (in thousands).
  Cash
      and cash equivalents
                                      
                                      $
                                      11,179Investments
                                      
                                      
                                      23,490Loans
                                      
                                      
                                      378,075Premises
      and equipment
                                      
                                      
                                      18,565Core
      deposit intangible
                                      
                                      
                                      6,645Goodwill
                                      
                                      
                                      14,781Other
      assets
                                      
                                      
                                      19,263Total
      assets acquired
                                      
                                      
                                      471,998Deposits
                                      
                                      
                                      332,075Borrowings
                                      
                                      
                                      97,361Other
      liabilities
                                      
                                      
                                      5,346Total
      liabilities assumed
                                      
                                      
                                      434,782Net
      assets acquired
                                      
                                      $
                                      37,216
  The
following pro forma information discloses the results of operations as though
the merger had taken place at the beginning of the year.
  Year Ended December 31
                            
                            2008Net
      Interest Income
                            
                            $
                            42,151Net
      Income (Loss)
                            
                            $
                            (21,202
                            )Net
      Income per Share - CombinedBasic
                            
                            $
                            (3.04
                            )Diluted
                            
                            $
                            (3.04
                            )
  69
 
 MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Note
      4:
                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, 2009 was
$4,556,000.
  Note
      5:
                Investment
      Securities
  2009Available
      for Sale Securities
                                                                          
                                                                          Amortized
                                                                            Cost
                                                                          
                                                                          
                                                                          Gross
                                                                            Unrealized
                                                                            Gains
                                                                          
                                                                          
                                                                          Gross
                                                                            Unrealized
                                                                            Losses
                                                                          
                                                                          
                                                                          Fair
                                                                            ValueMortgage-backed
      securities
                                                                          
                                                                          $
                                                                          29,175
                                                                          
                                                                          
                                                                          $
                                                                          824
                                                                          
                                                                          
                                                                          $
                                                                          (109
                                                                          )
                                                                          
                                                                          $
                                                                          29,890Collateralized
      mortgage obligations
                                                                          
                                                                          
                                                                          85,726
                                                                          
                                                                          
                                                                          
                                                                          1,874
                                                                          
                                                                          
                                                                          
                                                                          (571
                                                                          )
                                                                          
                                                                          
                                                                          87,029Municipals
                                                                          
                                                                          
                                                                          9,313
                                                                          
                                                                          
                                                                          
                                                                          360
                                                                          
                                                                          
                                                                          
                                                                          (17
                                                                          )
                                                                          
                                                                          
                                                                          9,656Small
      Business Administration
                                                                          
                                                                          
                                                                          158
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          (1
                                                                          )
                                                                          
                                                                          
                                                                          157Corporate
      obligations
                                                                          
                                                                          
                                                                          7,321
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          (4,782
                                                                          )
                                                                          
                                                                          
                                                                          2,539Marketable
      equity securities
                                                                          
                                                                          
                                                                          1,685
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          (42
                                                                          )
                                                                          
                                                                          
                                                                          1,643Total
      investment securities
                                                                          
                                                                          $
                                                                          133,378
                                                                          
                                                                          
                                                                          $
                                                                          3,058
                                                                          
                                                                          
                                                                          $
                                                                          (5,522
                                                                          )
                                                                          
                                                                          $
                                                                          130,914Held
      to Maturity SecuritiesMortgage-backed
      securities
                                                                          
                                                                          $
                                                                          4,619
                                                                          
                                                                          
                                                                          $
                                                                          29
                                                                          
                                                                          
                                                                          $
                                                                          (1,373
                                                                          )
                                                                          
                                                                          $
                                                                          3,275Collateralized
      mortgage obligations
                                                                          
                                                                          
                                                                          3,028
                                                                          
                                                                          
                                                                          
                                                                          158
                                                                          
                                                                          
                                                                          
                                                                          (632
                                                                          )
                                                                          
                                                                          
                                                                          2,554Federal
      agencies
                                                                          
                                                                          
                                                                          500
                                                                          
                                                                          
                                                                          
                                                                          4
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          504Total
      investment securities
                                                                          
                                                                          $
                                                                          8,147
                                                                          
                                                                          
                                                                          $
                                                                          191
                                                                          
                                                                          
                                                                          $
                                                                          (2,005
                                                                          )
                                                                          
                                                                          $
                                                                          6,3332008Available
      for Sale Securities
                                                                          
                                                                          Amortized
                                                                            Cost
                                                                          
                                                                          
                                                                          Gross
                                                                            Unrealized
                                                                            Gains
                                                                          
                                                                          
                                                                          Gross
                                                                            Unrealized
                                                                            Losses
                                                                          
                                                                          
                                                                          Fair
                                                                            ValueMortgage-backed
      securities
                                                                          
                                                                          $
                                                                          14,771
                                                                          
                                                                          
                                                                          $
                                                                          393
                                                                          
                                                                          
                                                                          $
                                                                          (1
                                                                          )
                                                                          
                                                                          $
                                                                          15,163Collateralized
      mortgage obligations
                                                                          
                                                                          
                                                                          43,821
                                                                          
                                                                          
                                                                          
                                                                          786
                                                                          
                                                                          
                                                                          
                                                                          (968
                                                                          )
                                                                          
                                                                          
                                                                          43,639Federal
      agencies
                                                                          
                                                                          
                                                                          499
                                                                          
                                                                          
                                                                          
                                                                          3
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          502Municipals
                                                                          
                                                                          
                                                                          857
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          857Small
      Business Administration
                                                                          
                                                                          
                                                                          71
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          (1
                                                                          )
                                                                          
                                                                          
                                                                          70Corporate
      obligations
                                                                          
                                                                          
                                                                          18,797
                                                                          
                                                                          
                                                                          
                                                                          9
                                                                          
                                                                          
                                                                          
                                                                          (3,279
                                                                          )
                                                                          
                                                                          
                                                                          15,527Marketable
      equity securities
                                                                          
                                                                          
                                                                          1,635
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          (138
                                                                          )
                                                                          
                                                                          
                                                                          1,497Total
      investment securities
                                                                          
                                                                          $
                                                                          80,451
                                                                          
                                                                          
                                                                          $
                                                                          1,191
                                                                          
                                                                          
                                                                          $
                                                                          (4,387
                                                                          )
                                                                          
                                                                          $
                                                                          77,255Held
      to Maturity SecuritiesMortgage-backed
      securities
                                                                          
                                                                          $
                                                                          5,498
                                                                          
                                                                          
                                                                          $
                                                                          247
                                                                          
                                                                          
                                                                          $
                                                                          (762
                                                                          )
                                                                          
                                                                          $
                                                                          4,983Collateralized
      mortgage obligations
                                                                          
                                                                          
                                                                          4,178
                                                                          
                                                                          
                                                                          
                                                                          138
                                                                          
                                                                          
                                                                          
                                                                          (771
                                                                          )
                                                                          
                                                                          
                                                                          3,545Total
      investment securities
                                                                          
                                                                          $
                                                                          9,676
                                                                          
                                                                          
                                                                          $
                                                                          385
                                                                          
                                                                          
                                                                          $
                                                                          (1,533
                                                                          )
                                                                          
                                                                          $
                                                                          8,528
  70
 
 MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Marketable
equity securities consist of shares in mutual funds which invest in government
obligations and mortgage-backed securities.
  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, 2009
and 2008 was $35,317,000 and $18,868,000, which is approximately 27 percent and
24 percent of the Company’s investment portfolio at those
dates.  These declines in fair value primarily resulted from changes
in market conditions.
  Based on
evaluation of available evidence, including recent changes in market interest
rates, management believes the declines in fair value for these securities,
other than those discussed below, are temporary.
  Should
the impairment of any of these securities become other than temporary, the cost
basis of the investment will be reduced and the resulting loss recognized in net
income in the period the other-than-temporary impairment is
identified.
  During
2009, the Bank determined that four trust preferred securities, one corporate
bond, and seven private labeled mortgage backed securities were other than
temporarily impaired.  The amount of the impairment totaled $2,555,000 and
$1,350,000 in 2009 and 2008, respectively and is reflected in the statement of
operations.
  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, 2009 and
2008:
  2009Less
      than 12 Months
                                      
                                      
                                      12
      Months or More
                                      
                                      
                                      TotalAvailable
      for Sale
                                      
                                      Fair
                                        Value
                                      
                                      
                                      Unrealized
                                        Losses
                                      
                                      
                                      Fair
                                        Value
                                      
                                      
                                      Unrealized
                                        Losses
                                      
                                      
                                      Fair
                                        Value
                                      
                                      
                                      Unrealized
                                        LossesMortgage-backed
      securities
                                      
                                      $
                                      8,511
                                      
                                      
                                      $
                                      (109
                                      )
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      8,511
                                      
                                      
                                      $
                                      (109
                                      )Collateralized
      mortgage obligations
                                      
                                      
                                      16,829
                                      
                                      
                                      
                                      (251
                                      )
                                      
                                      
                                      4,609
                                      
                                      
                                      
                                      (320
                                      )
                                      
                                      
                                      21,438
                                      
                                      
                                      
                                      (571
                                      )Municipals
                                      
                                      
                                      1,025
                                      
                                      
                                      
                                      (17
                                      )
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      1,025
                                      
                                      
                                      
                                      (17
                                      )Small
      Business Administration
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      157
                                      
                                      
                                      
                                      (1
                                      )
                                      
                                      
                                      157
                                      
                                      
                                      
                                      (1
                                      )Corporate
      obligations
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      2,539
                                      
                                      
                                      
                                      (4,782
                                      )
                                      
                                      
                                      2,539
                                      
                                      
                                      
                                      (4,782
                                      )Marketable
      equity securities
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      1,647
                                      
                                      
                                      
                                      (42
                                      )
                                      
                                      
                                      1,647
                                      
                                      
                                      
                                      (42
                                      )Total
      temporarily impaired securities
                                      
                                      $
                                      26,365
                                      
                                      
                                      $
                                      (377
                                      )
                                      
                                      $
                                      8,952
                                      
                                      
                                      $
                                      (5,145
                                      )
                                      
                                      $
                                      35,317
                                      
                                      
                                      $
                                      (5,522
                                      )Held
      to MaturityMortgage-backed
      securities
                                      
                                      $
                                      239
                                      
                                      
                                      $
                                      (559
                                      )
                                      
                                      $
                                      1,521
                                      
                                      
                                      $
                                      (814
                                      )
                                      
                                      $
                                      1,760
                                      
                                      
                                      $
                                      (1,373
                                      )Collateralized
      mortgage obligations
                                      
                                      
                                      199
                                      
                                      
                                      
                                      (157
                                      )
                                      
                                      
                                      420
                                      
                                      
                                      
                                      (475
                                      )
                                      
                                      
                                      619
                                      
                                      
                                      
                                      (632
                                      )Total
      temporarily impaired securities
                                      
                                      $
                                      438
                                      
                                      
                                      $
                                      (716
                                      )
                                      
                                      $
                                      1,941
                                      
                                      
                                      $
                                      (1,289
                                      )
                                      
                                      $
                                      2,379
                                      
                                      
                                      $
                                      (2,005
                                      )
  71
 
 MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  2008Less
      than 12 Months
                              
                              
                              12
      Months or More
                              
                              
                              TotalAvailable
      for Sale
                              
                              Fair
                                Value
                              
                              
                              Unrealized
                                Losses
                              
                              
                              Fair
                                Value
                              
                              
                              Unrealized
                                Losses
                              
                              
                              Fair
                                Value
                              
                              
                              Unrealized
                                LossesMortgage-backed
      securities
                              
                              $
                              228
                              
                              
                              $
                              (1
                              )
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              228
                              
                              
                              $
                              (1
                              )Collateralized
      mortgage obligations
                              
                              
                              3,841
                              
                              
                              
                              (516
                              )
                              
                              
                              1,559
                              
                              
                              
                              (452
                              )
                              
                              
                              5,400
                              
                              
                              
                              (968
                              )Small
      Business Administration
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              71
                              
                              
                              
                              (1
                              )
                              
                              
                              71
                              
                              
                              
                              (1
                              )Corporate
      obligations
                              
                              
                              9,407
                              
                              
                              
                              (2,100
                              )
                              
                              
                              2,265
                              
                              
                              
                              (1,179
                              )
                              
                              
                              11,672
                              
                              
                              
                              (3,279
                              )Marketable
      equity securities
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              1,497
                              
                              
                              
                              (138
                              )
                              
                              
                              1,497
                              
                              
                              
                              (138
                              )Total
      temporarily impaired securities
                              
                              $
                              13,476
                              
                              
                              $
                              (2,617
                              )
                              
                              $
                              5,392
                              
                              
                              $
                              (1,770
                              )
                              
                              $
                              18,868
                              
                              
                              $
                              (4,387
                              )Held
      to MaturityMortgage-backed
      securities
                              
                              $
                              3,356
                              
                              
                              $
                              (762
                              )
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              3,356
                              
                              
                              $
                              (762
                              )Collateralized
      mortgage obligations
                              
                              
                              2,394
                              
                              
                              
                              (771
                              )
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              2,394
                              
                              
                              
                              (771
                              )Total
      temporarily impaired securities
                              
                              $
                              5,750
                              
                              
                              $
                              (1,533
                              )
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              5,750
                              
                              
                              $
                              (1,533
                              )
  Collateralized
Mortgage Obligations (CMO)
  The
unrealized losses on the Company’s investment in CMOs were caused by interest
rate changes.  The Company expects to recover the amortized cost basis
over the term of the securities.  Because the decline in market value
is attributable to changes in interest rates and not credit quality, and because
the Company does not intend to sell the investments and it is more likely than
not the Company will not be required to sell the investments before recovery of
their amortized cost bases, which may be maturity, the Company does not consider
these investments to be other-than-temporarily impaired at December 31,
2009.
  Corporate
Obligations
  The
Company’s unrealized loss on investments in corporate obligations primarily
relates to investments in pooled trust preferred securities.  The
unrealized losses were primarily caused by (a) a recent decrease in performance
and regulatory capital resulting from exposure to subprime mortgages and (b) a
recent sector downgrade by several industry analysts.  The Company
currently expects some of the securities to settle at a price less than the
amortized cost basis of the investment (that is, the Company expects to recover
less than the entire amortized cost basis of the security).  The
Company has recognized a loss equal to the credit loss for these securities,
establishing a new, lower amortized cost basis.  The credit loss was
calculated by comparing expected discounted cash flows based on performance
indicators of the underlying assets in the security to the carrying value of the
investment.  Because the Company does not intend to sell the
investment and it is likely the Company will not be required to sell the
investments before recovery of its new, lower amortized cost basis, which may be
maturity, it does not consider the remainder of the investments to be
other-than-temporarily impaired at December 31, 2009.
 
 72
 
 MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Other-than-temporary
Impairment
  Upon
acquisition of a security, the Company decides whether it is within the scope of
the accounting guidance for beneficial interests in securitized financial assets
or will be evaluated for impairment under the accounting guidance for
investments in debt and equity securities.
  The
accounting guidance for beneficial interests in securitized financial assets
provides incremental impairment guidance for a subset of the debt securities
within the scope of the guidance for investments in debt and equity
securities.  For securities where the security is a beneficial
interest in securitized financial assets, the Company uses the beneficial
interests in securitized financial asset impairment model.  For
securities where the security is not a beneficial interest in securitized
financial assets, the Company uses debt and equity securities impairment
model.
  The
Company routinely conducts periodic reviews to identify and evaluate each
investment security to determine whether an other-than-temporary impairment has
occurred.  Economic models are used to determine whether an
other-than-temporary impairment has occurred on these
securities.  While all securities are considered, the securities
primarily impacted by other-than-temporary impairment testing are pooled trust
preferred and private-label mortgage-backed securities.  For each
pooled trust preferred and private-label mortgage-backed security in the
investment portfolio (including but not limited to those whose fair value is
less than their amortized cost basis), an extensive, regular review is conducted
to determine if an other-than-temporary impairment has
occurred.  Various inputs to the economic models are used to determine
if an unrealized loss is other-than-temporary.
  The
Bank’s trust preferred securities valuation was prepared by an independent third
party.  Their approach to determining fair value involved several
steps including:
  ·
                Detailed
      credit and structural evaluation of each piece of collateral in the trust
      preferred securities;
 ·
                Collateral
      performance projections for each piece of collateral in the trust
      preferred security;
 ·
                Terms
      of the trust preferred structure, as laid out in the indenture;
      and
 ·
                Discounted
      cash flow modeling.
  MutualFirst
Financial uses market-based yield indicators as a baseline for determining
appropriate discount rates, and then adjusts the resulting discount rates on the
basis of its credit and structural analysis of specific trust preferred
securities.  The primary focus is on the returns a fixed income
investor would require in order to allocate capital on a risk adjusted
basis.  There is currently no active market for pooled trust preferred
securities; however, the Company looks principally to market yields for
stand-alone trust preferred securities issued by banks, thrifts and insurance
companies for which there is an active and liquid market.  The next
step is to make a series of adjustments to reflect the differences that exist
between these products (both credit and structural) and, most importantly, to
reflect idiosyncratic credit performance differences (both actual and projected)
between these products and the underlying collateral in the specific trust
preferred security.  Importantly, as part of the analysis described
above, MutualFirst considers the fact that structured instruments frequently
exhibit leverage not present in stand-alone instruments, and make adjustments as
necessary to reflect this additional risk.
 
 73
 
 MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  The
default and recovery probabilities for each piece of collateral were formed
based on the evaluation of the collateral credit and a review of historical
industry default data and current/near-term operating conditions.  For
collateral that has already defaulted, the Company assumed no
recovery.  For collateral that was in deferral, the Company assumed a
recovery of 10% of par for banks, thrifts or other depository institutions, and
15% of par for insurance companies.  Although the Company
conservatively assumed that the majority of the deferring collateral continues
to defer and eventually defaults, we also recognize there is a possibility that
some deferring collateral may become current at some point in the
future.
  To
determine if the unrealized loss for private-label mortgage-backed securities is
other-than-temporary, the Company projects total estimated defaults of the
underlying assets (mortgages) and multiplies that calculated amount by an
estimate of realizable value upon sale in the marketplace (severity) in order to
determine the projected collateral loss.  The Company also evaluates
the current credit enhancement underlying the bond to determine the impact on
cash flows.  If the Company determines that a given mortgage-backed
security position will be subject to a write-down or loss, the Company records
the expected credit loss as a charge to earnings.
  Credit
Losses Recognized on Investments
  Certain
debt securities have experienced fair value deterioration due to credit losses,
as well as due to other market factors, but are not otherwise
other-than-temporarily impaired.
  The
following table provides information about debt securities for which only a
credit loss was recognized in income and other losses are recorded in other
comprehensive income.
  Accumulated
                          Credit Losses
                        
                        
                        Accumulated
                          Credit Losses2009
                        
                        
                        2008Credit
      losses on debt securities heldBeginning
      of year
                        
                        $
                        (1,350
                        )
                        
                        $
                        —Additions
      related to increases in previously recognized other-than-temporary
      losses
                        
                        
                        (2,555
                        )
                        
                        
                        (1,350
                        )As
      of December 31,
                        
                        $
                        (3,905
                        )
                        
                        $
                        (1,350
                        )
  74
 
 MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  The
amortized cost and fair value of securities available for sale at
December 31, 2009, 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.
  2009Available for Sale
                        
                        
                        Held to MaturityDescription Securities
                        
                        Amortized
                          Cost
                        
                        
                        Fair
                          Value
                        
                        
                        Amortized
                          Cost
                        
                        
                        Fair
                          ValueWithin
      one year
                        
                        $
                        100
                        
                        
                        $
                        100
                        
                        
                        $
                        —
                        
                        
                        $
                        —-One
      to five years
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Five
      to ten years
                        
                        
                        2,564
                        
                        
                        
                        2,709
                        
                        
                        
                        —
                        
                        
                        
                        —After
      ten years
                        
                        
                        13,970
                        
                        
                        
                        9,386
                        
                        
                        
                        —
                        
                        
                        
                        —16,634
                        
                        
                        
                        12,195
                        
                        
                        
                        —
                        
                        
                        
                        —Mortgage-backed
      securities
                        
                        
                        29,175
                        
                        
                        
                        29,890
                        
                        
                        
                        4,619
                        
                        
                        
                        3,275Collateralized
      mortgage obligations
                        
                        
                        85,726
                        
                        
                        
                        87,029
                        
                        
                        
                        3,028
                        
                        
                        
                        2,554Marketable
      equity securities
                        
                        
                        1,685
                        
                        
                        
                        1,643
                        
                        
                        
                        —
                        
                        
                        
                        —Small
      Business Administration
                        
                        
                        158
                        
                        
                        
                        157
                        
                        
                        
                        —
                        
                        
                        
                        —Agency
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        500
                        
                        
                        
                        504Totals
                        
                        $
                        133,378
                        
                        
                        $
                        130,914
                        
                        
                        $
                        8,147
                        
                        
                        $
                        6,333
 
 The
carrying value of securities pledged as collateral, to secure public deposits
and for other purposes, was $2,071,000 and $1,997,000 at December 31, 2009 and
2008.
  Proceeds
from sales of securities available for sale during 2009, 2008 and 2007 were
$11,167,000, $21,519,000 and $803,000.  Gross gains of $542,000,
$204,000, and $0 in 2009, 2008 and 2007 were recognized in those
sales.  In 2009, the realized gain on sale of securities reported also
reflects a gain on sale of subsidiary of $137,000 and the sale of Mastercard
stock of $75,000.  Gross losses of $0, $2,570,000 and $0 in 2009, 2008
and 2007 were recognized on those sales.
 
 75
 
 MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Note
      6:
                Fair
      Values of Financial Instruments
  FASB
Codification Topic 820 (ASC 820), Fair Value Measurements and
Disclosures, defines fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.  ASC 820 also establishes
a fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring
fair value.  The standard describes three levels of inputs that may be
used to measure fair value:
  Level
      1
                      
                      Quoted
      prices in active markets for identical assets or
    liabilitiesLevel
      2
                      
                      Observable
      inputs other than Level 1 prices, such as quoted prices for similar assets
      or liabilities; quoted prices in markets that are not active; or other
      inputs that are observable or can be corroborated by observable market
      data for substantially the full term of the assets or
      liabilitiesLevel
      3
                      
                      Unobservable
      inputs that are supported by little or no market activity and that are
      significant to the fair value of the assets or
  liabilities
  Items
Measured at Fair Value on a Recurring Basis
  Following
is a description of the valuation methodologies and inputs used for instruments
measured at fair value on a recurring basis and recognized in the accompanying
balance sheet, as well as the general classification of such instruments
pursuant to the valuation hierarchy.
  Available-for-Sale
Securities
  Where
quoted market prices are available in an active market, securities are
classified within Level 1 of the valuation hierarchy.  The
Company uses a third-party provider to provide market prices on its securities
and no securities are priced as Level 1 securities.  If quoted
market prices are not available, then fair values are estimated by using pricing
models, quoted prices of securities with similar characteristics or discounted
cash flows.  Level 2 securities include mortgage-backed,
collateralized mortgage obligations, small business administration, marketable
equity, municipal, federal agency and certain corporate obligation
securities.  In certain cases where Level 1 or Level 2 inputs are
not available, securities are classified within Level 3 of the hierarchy and
include certain corporate obligation securities.
  Third
party vendors compile prices from various sources and may apply such techniques
as matrix pricing to determine the value of identical or similar investment
securities (Level 2).  Matrix pricing is a mathematical technique
widely used in the banking industry to value investment securities without
relying exclusively on quoted for specific investment securities but rather
relying on investment securities relationship to other benchmark quoted
investment securities.  Any investment security not valued based upon
the methods above are considered Level 3.
 
 76
 
 MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
 
 Fair Value Measurements UsingFair Value
                      
                      
                      Level 1
                      
                      
                      Level 2
                      
                      
                      Level 3December
      31, 2009Mortgage-backed
      securities
                      
                      $
                      29,890
                      
                      
                      $
                      —
                      
                      
                      $
                      29,890
                      
                      
                      $
                      —Collateralized
      mortgage obligations
                      
                      
                      87,029
                      
                      
                      
                      —
                      
                      
                      
                      87,029
                      
                      
                      
                      —Municipals
                      
                      
                      9,656
                      
                      
                      
                      —
                      
                      
                      
                      9,656
                      
                      
                      
                      —Small
      Business Administration
                      
                      
                      157
                      
                      
                      
                      —
                      
                      
                      
                      157
                      
                      
                      
                      —Corporate
      obligations
                      
                      
                      2,539
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      2,539Marketable
      equity securities
                      
                      
                      1,643
                      
                      
                      
                      1,643
                      
                      
                      
                      —
                      
                      
                      
                      —Available-for-sale
      securities
                      
                      $
                      130,914
                      
                      
                      $
                      1,643
                      
                      
                      $
                      126,732
                      
                      
                      $
                      2,539December
      31, 2008Mortgage-backed
      securities
                      
                      $
                      15,163
                      
                      
                      $
                      —
                      
                      
                      $
                      15,163
                      
                      
                      $
                      —Collateralized
      mortgage obligations
                      
                      
                      43,639
                      
                      
                      
                      —
                      
                      
                      
                      43,639
                      
                      
                      
                      —Federal
      agencies
                      
                      
                      502
                      
                      
                      
                      —
                      
                      
                      
                      502
                      
                      
                      
                      —Municipals
                      
                      
                      857
                      
                      
                      
                      —
                      
                      
                      
                      857
                      
                      
                      
                      —Small
      Business Administration
                      
                      
                      70
                      
                      
                      
                      —
                      
                      
                      
                      70
                      
                      
                      
                      —Corporate
      obligations
                      
                      
                      15,527
                      
                      
                      
                      —
                      
                      
                      
                      9,210
                      
                      
                      
                      6,317Marketable
      equity securities
                      
                      
                      1,497
                      
                      
                      
                      —
                      
                      
                      
                      1,497
                      
                      
                      
                      —Available-for-sale
      securities
                      
                      $
                      77,255
                      
                      
                      $
                      —
                      
                      
                      $
                      70,938
                      
                      
                      $
                      6,317
  The
following is a reconciliation of the beginning and ending balances for the years
ended December 31, 2009 and 2008 of recurring fair value measurements recognized
in the accompanying balance sheet using significant unobservable (Level 3)
inputs:
  2009
                      
                      
                      2008Beginning
      balance
                      
                      $
                      6,317
                      
                      
                      $
                      9,923Total
      realized and unrealized gains and lossesIncluded
      in net income (loss)
                      
                      
                      (2,007
                      )
                      
                      
                      (1,350
                      )Included
      in other comprehensive loss
                      
                      
                      (1,811
                      )
                      
                      
                      (2,745
                      )Purchases,
      issuances and settlements
                      
                      
                      40
                      
                      
                      
                      (11
                      )Transfers
      in/out of Level 3
                      
                      
                      —
                      
                      
                      
                      500Ending
      balance
                      
                      $
                      2,539
                      
                      
                      $
                      6,317Total
      gains or losses for the period included in net income (loss) attributable
      to the change in unrealized gains or losses related to assets and
      liabilities still held at the reporting date
                      
                      $
                      2,007
                      
                      
                      $
                      1,350
 
 
 77
 
 MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
 
 Items
Measured at Fair Value on a Non-Recurring Basis
 From time
to time, certain assets may be recorded at fair value on a non-recurring
basis.  These non-recurring fair value adjustments typically are a
result of the application of lower of cost or fair value accounting or a
write-down occurring during the period.  The following is a
description of the valuation methodologies used for certain assets that are
recorded at fair value.
  Impaired
Loans (Collateral Dependent)
  Loans for
which it is probable that Mutual will not collect all principal and interest due
according to contractual terms are measured for impairment.  Allowable
methods for determining the amount of impairment include estimating fair value
include using the fair value of the collateral for collateral dependent
loans.
  If the
impaired loan is identified as collateral dependent, then the fair value method
of measuring the amount of impairment is utilized.  This method
requires obtaining a current independent appraisal of the collateral and
applying a discount factor to the value.
  Impaired
loans that are collateral dependent are classified within Level 3 of the fair
value hierarchy when impairment is determined using the fair value
method.
  Other
Real Estate Owned
  The fair
value of real estate is generally determined based on appraisals by qualified
licensed appraisers. The appraisers typically determine the value of the real
estate by utilizing an income or market valuation approach. If an appraisal is
not available, the fair value may be determined by using a cash flow
analysis.
  Other
real estate owned is classified within Level 3 of the fair value
hierarchy.
  Mortgage
Servicing Rights
  We
initially measure our mortgage servicing rights at fair value, and amortize them
over the period of estimated net servicing income. They are periodically
assessed for impairment based on fair value at the reporting date. Mortgage
servicing rights do not trade in an active market with readily observable
prices. Accordingly, the fair value is estimated based on a valuation model
which calculates the present value of estimated future net servicing income. The
model incorporates assumptions that market participants use in estimating future
net servicing income, including estimates of prepayment speeds, market discount
rates, cost to service, float earnings rates and other ancillary income,
including late fees. The fair value measurements are classified as
Level 3.
 
 78
 
 MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  The
following table presents the fair value measurement of assets and liabilities
measured at fair value on a nonrecurring basis and the level within the ASC 820
fair value hierarchy in which the fair value measurements:
  Fair Value Measurements UsingFair Value
                        
                        
                        Level 1
                        
                        
                        Level 2
                        
                        
                        Level 3December
      31, 2009Impaired
      loans
                        
                        $
                        4,614
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        4,614Other
      real estate owned
                        
                        
                        977
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        977December
      31, 2008Impaired
      loans
                        
                        $
                        5,997
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        5,997Mortgage
      servicing rights
                        
                        
                        2,776
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        2,776
  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.
  Investment Securities
Available-For-Sale - Fair values are based on quoted market
prices.
  Investment Securities
Held-To-Maturity -The fair values of held-to-maturity securities
approximate carrying values.
  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.
 
 79
  MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  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.
  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.
  The
estimated fair values of the Company’s financial instruments are as
follows:
  2009
                              
                              
                              2008Carrying
                                Amount
                              
                              
                              Fair
                                Value
                              
                              
                              Carrying
                                Amount
                              
                              
                              Fair
                                ValueAssetsCash
      and cash equivalents
                              
                              $
                              46,341
                              
                              
                              $
                              46,341
                              
                              
                              $
                              39,703
                              
                              
                              $
                              39,703Investment
      securities available-for-sale
                              
                              
                              130,914
                              
                              
                              
                              130,914
                              
                              
                              
                              77,255
                              
                              
                              
                              77,255Investment
      securities held-to-maturity
                              
                              
                              8,147
                              
                              
                              
                              6,333
                              
                              
                              
                              9,676
                              
                              
                              
                              8,528Loans
      held for sale
                              
                              
                              2,521
                              
                              
                              
                              2,527
                              
                              
                              
                              1,541
                              
                              
                              
                              1,574Loans
                              
                              
                              1,059,694
                              
                              
                              
                              1,086,805
                              
                              
                              
                              1,113,132
                              
                              
                              
                              1,144,394FHLB
      stock
                              
                              
                              18,632
                              
                              
                              
                              18,632
                              
                              
                              
                              18,632
                              
                              
                              
                              18,632Interest
      receivable
                              
                              
                              4,376
                              
                              
                              
                              4,376
                              
                              
                              
                              5,205
                              
                              
                              
                              5,205LiabilitiesDeposits
                              
                              
                              1,045,196
                              
                              
                              
                              1,007,530
                              
                              
                              
                              962,514
                              
                              
                              
                              974,072FHLB
      advances
                              
                              
                              197,960
                              
                              
                              
                              194,717
                              
                              
                              
                              263,113
                              
                              
                              
                              273,853Other
      borrowings
                              
                              
                              14,114
                              
                              
                              
                              15,083
                              
                              
                              
                              15,992
                              
                              
                              
                              16,813Interest
      payable
                              
                              
                              1,192
                              
                              
                              
                              1,192
                              
                              
                              
                              2,116
                              
                              
                              
                              2,116Advances
      by borrowers for taxes and insurance
                              
                              
                              1,734
                              
                              
                              
                              1,734
                              
                              
                              
                              3,229
                              
                              
                              
                              3,229
  80
  MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Note
      7:
              Loans
      and Allowance
  2009
                            
                            
                            2008Real
      estate loansOne-to-four
      family
                            
                            $
                            468,494
                            
                            
                            $
                            519,822Multi-family
                            
                            
                            2,621
                            
                            
                            
                            2,698Commercial
                            
                            
                            257,368
                            
                            
                            
                            250,693Construction
      and development
                            
                            
                            9,817
                            
                            
                            
                            12,232738,300
                            
                            
                            
                            785,445Consumer
      loansAuto
                            
                            
                            18,848
                            
                            
                            
                            22,715Home
      equity
                            
                            
                            64,930
                            
                            
                            
                            66,460Home
      improvement
                            
                            
                            42,116
                            
                            
                            
                            45,339Mobile
      home
                            
                            
                            689
                            
                            
                            
                            727Recreational
      vehicles
                            
                            
                            81,663
                            
                            
                            
                            79,884Boats
                            
                            
                            45,581
                            
                            
                            
                            46,928Other
                            
                            
                            5,961
                            
                            
                            
                            6,339259,788
                            
                            
                            
                            268,392Commercial
      business loans
                            
                            
                            77,384
                            
                            
                            
                            75,290Total
      loans
                            
                            
                            1,075,472
                            
                            
                            
                            1,129,127Undisbursed
      loans in process
                            
                            
                            (2,546
                            )
                            
                            
                            (4,372
                            )Unamortized
      deferred loan costs, net
                            
                            
                            3,182
                            
                            
                            
                            3,484Allowance
      for loan losses
                            
                            
                            (16,414
                            )
                            
                            
                            (15,107
                            )Net
      loans
                            
                            $
                            1,059,694
                            
                            
                            $
                            1,113,132
  2009
                    
                    
                    2008
                    
                    
                    2007Allowance
      for loan lossesBalances,
      January 1
                    
                    $
                    15,107
                    
                    
                    $
                    8,352
                    
                    
                    $
                    8,156Provision
      for losses
                    
                    
                    6,500
                    
                    
                    
                    7,020
                    
                    
                    
                    2,240Allowance
      acquired in acquisition
                    
                    
                    —
                    
                    
                    
                    2,954
                    
                    
                    
                    —Recoveries
      on loans
                    
                    
                    1,063
                    
                    
                    
                    1,213
                    
                    
                    
                    679Loans
      charged off
                    
                    
                    (6,256
                    )
                    
                    
                    (4,432
                    )
                    
                    
                    (2,723
                    )Balances,
      December 31
                    
                    $
                    16,414
                    
                    
                    $
                    15,107
                    
                    
                    $
                    8,352
  At
December 31, 2009 and 2008, accruing loans delinquent 90 days or more totaled
$1,934,000 and $1,473,000. Non-accruing loans at December 31, 2009 and 2008 were
$29,086,000 and $19,998,000.
  Impaired
loans totaled $28,048,000 and $20,178,000 at December 31, 2009 and 2008,
respectively. An allowance for loan losses of $1,463,000 and $781,000 relates to
impaired loans of $6,102,000 and $2,973,000 at December 31, 2009 and 2008,
respectively. At December 31, 2009, impaired loans of $21,946,000 had no related
allowance for loan losses.
  81
  MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Interest
of $781,000, $839,000 and $449,000 was recognized on average impaired loans of
$22,109,000, $16,481,000 and $9,488,000 for 2009, 2008 and 2007, respectively.
Interest of $138,000, $140,000 and $151,000 was recognized on impaired loans on
a cash basis during 2009, 2008 and 2007, respectively.
  Note
      8:
              Related
      Party Transactions
  The Bank
has entered into transactions with certain directors, executive officers and
significant shareholders of the Company and Bank and their affiliates or
associates (“related parties”). Such transactions were made in the ordinary
course of business on substantially the same terms and conditions, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other customers, and did not, in the opinion of management,
involve more than normal credit risk or present other unfavorable
features.
  The
aggregate amount of loans, as defined, to such related parties was as
follows:
  Balances,
      January 1, 2009
                            
                            $
                            7,575Change
      in composition
                            
                            
                            245New
      loans, including renewals
                            
                            
                            1,573Payments,
      etc., including renewals
                            
                            
                            (893
                            )Balances,
      December 31, 2009
                            
                            $
                            8,500
  Note
      9:
              Premises
      and Equipment
  2009
                                        
                                        
                                        2008CostLand
                                        
                                        $
                                        12,758
                                        
                                        
                                        $
                                        13,248Buildings
      and land improvements
                                        
                                        
                                        25,267
                                        
                                        
                                        
                                        25,272Equipment
                                        
                                        
                                        13,738
                                        
                                        
                                        
                                        14,381Total
      cost
                                        
                                        
                                        51,763
                                        
                                        
                                        
                                        52,901Accumulated
      depreciation and amortization
                                        
                                        
                                        (17,207
                                        )
                                        
                                        
                                        (16,400
                                        )Net
                                        
                                        $
                                        34,556
                                        
                                        
                                        $
                                        36,501
  Note
      10:
              Investment
      In Limited Partnerships
  2009
                              
                              
                              2008Pedcor
      Investments 1990-XIII (99.00 percent ownership)
                              
                              $
                              —
                              
                              
                              $
                              625Pedcor
      Investments 1997-XXVIII (99.00 percent ownership)
                              
                              
                              1,981
                              
                              
                              
                              2,145Pedcor
      Investments 1987-XXXI (49.50 percent ownership)
                              
                              
                              313
                              
                              
                              
                              361Pedcor
      Investments 2000-XLI (50.00 percent ownership)
                              
                              
                              742
                              
                              
                              
                              862Pedcor
      Investments 2001-LI (9.90 percent ownership)
                              
                              
                              223
                              
                              
                              
                              268Pedcor
      Investments 2008-CIII (21.50 percent ownership)
                              
                              
                              902
                              
                              
                              
                              300$
                              4,161
                              
                              
                              $
                              4,561
  82
  MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (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 (losses) from these limited partnerships of $108,000, $(158,000)
and $(100,000) for 2009, 2008 and 2007.  In addition, the Company has
recorded the benefit of low income housing credits of $874,000, $1,214,000 and
$811,000 for 2009, 2008 and 2007.  Combined financial statements for
the limited partnerships recorded under the equity method of accounting are as
follows:
  2009
                    
                    
                    2008Combined
      condensed balance sheetsAssetsCash
                    
                    $
                    573
                    
                    
                    $
                    7,487Land
      and property
                    
                    
                    55,070
                    
                    
                    
                    43,038Other
      assets
                    
                    
                    2,174
                    
                    
                    
                    4,693Total
      assets
                    
                    $
                    57,817
                    
                    
                    $
                    55,218LiabilitiesNotes
      payable
                    
                    $
                    47,878
                    
                    
                    $
                    46,189Other
      liabilities
                    
                    
                    1,087
                    
                    
                    
                    1,835Total
      liabilities
                    
                    
                    48,965
                    
                    
                    
                    48,024Partners'
      equity (deficit)General
      partners
                    
                    
                    (3,124
                    )
                    
                    
                    (3,120
                    )Limited
      partners
                    
                    
                    11,976
                    
                    
                    
                    10,314Total
      partners’ equity
                    
                    
                    8,852
                    
                    
                    
                    7,194Total
      liabilities and partners' equity
                    
                    $
                    57,817
                    
                    
                    $
                    55,218
  2009
                            
                            
                            2008
                            
                            
                            2007Combined
      condensed statements of operationsTotal
      revenue
                            
                            $
                            5,394
                            
                            
                            $
                            5,994
                            
                            
                            $
                            4,007Total
      expenses
                            
                            
                            (6,027
                            )
                            
                            
                            (6,833
                            )
                            
                            
                            (4,647
                            )Net
      loss
                            
                            $
                            (633
                            )
                            
                            $
                            (839
                            )
                            
                            $
                            (640
                            )
  Note
      11:
              Intangibles
  2009
                                    
                                    
                                    2008Gross
                                      Carrying
                                      Amount
                                    
                                    
                                    Accumulated
                                      Amortization
                                    
                                    
                                    Gross
                                      Carrying
                                      Amount
                                    
                                    
                                    Accumulated
                                      AmortizationCore
      deposits
                                    
                                    $
                                    8,047
                                    
                                    
                                    $
                                    2,692
                                    
                                    
                                    $
                                    8,047
                                    
                                    
                                    $
                                    1,249Other
                                    
                                    
                                    675
                                    
                                    
                                    
                                    149
                                    
                                    
                                    
                                    675
                                    
                                    
                                    
                                    66$
                                    8,722
                                    
                                    
                                    $
                                    2,841
                                    
                                    
                                    $
                                    8,722
                                    
                                    
                                    $
                                    1,315
  83
  MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Amortization
expense for the years ended December 31, 2009 and 2008, was $1,525,000 and
$805,000, respectively.  Estimated amortization expense for each of
the following five years is:
  2010
                          
                          $
                          1,3482011
                          
                          
                          1,1602012
                          
                          
                          9622013
                          
                          
                          7822014
                          
                          
                          616Thereafter
                          
                          
                          1,013$
                          5,881
  Note
      12:
              Goodwill
  The
changes in the carrying amount of goodwill for the year ended December 31, 2008,
were:
  2008Balance
      as of January 1
                                  
                                  $
                                  14,188Goodwill
      acquired during the year
                                  
                                  
                                  14,781Impairment
      losses
                                  
                                  
                                  (28,969
                                  )Balance
      as of December 31
                                  
                                  $
                                  —
 
 During
the fourth quarter 2008, the decline in the market value of the Company’s stock
below its book value and the decline in the economic environment in which the
Company operates caused management to engage a third party business valuation
specialist to perform the annual impairment test of goodwill.  The
third-party specialist used three methods of evaluation to determine the fair
value of the reporting unit.  The methods considered comparable
transactions based on pricing ratios recently paid in the sale or merger of
comparable banking franchises, the Company’s trading price and application of an
industry based control premium and the present value of projected dividends and
a terminal value.  The value of each approach was weighted and an
overall summary of the Company’s fair value was calculated.
  The step
one impairment test indicated the fair value of the reporting unit was below the
carrying amount as of December 31, 2008.  The third-party was then
engaged to perform step two impairment testing by allocating the fair value of
the Company to all of the assets and liabilities of the reporting unit to
determine the implied fair value of the Company.  The implied fair
value of goodwill was then compared to the actual carrying amount of
goodwill.  From this testing, management determined the carrying
amount of goodwill exceeded, in its entirety, the implied fair value of
goodwill.
  84
  MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Note
      13:
              Deposits
  2009
                          
                          
                          2008Noninterest-bearing
      demand
                          
                          $
                          98,025
                          
                          
                          $
                          93,393Interest-bearing
      demand
                          
                          
                          154,431
                          
                          
                          
                          156,787Savings
                          
                          
                          84,553
                          
                          
                          
                          79,111Money
      market savings
                          
                          
                          60,479
                          
                          
                          
                          47,584Certificates
      and other time deposits of $100,000 or more
                          
                          
                          212,457
                          
                          
                          
                          192,445Other
      certificates
                          
                          
                          435,251
                          
                          
                          
                          393,194Total
      deposits
                          
                          $
                          1,045,196
                          
                          
                          $
                          962,514
 
 Certificates,
including other time deposits of $100,000 or more, maturing in years ending
December 31:
  2010
                    
                    $
                    383,7072011
                    
                    
                    120,4562012
                    
                    
                    49,6032013
                    
                    
                    37,9562014
                    
                    
                    49,420Thereafter
                    
                    
                    6,566$
                    647,708
  Note
      14:
              Federal
      Home Loan Bank Advances
  Maturities Years Ending December 312010
                                        
                                        $
                                        92,9232011
                                        
                                        
                                        41,9862012
                                        
                                        
                                        40,3062013
                                        
                                        
                                        13,5752014
                                        
                                        
                                        7,347Thereafter
                                        
                                        
                                        1,823$
                                        197,960
  At
December 31, 2009, the Company has pledged $429,299,000 in qualifying first
mortgage loans as collateral for advances and outstanding letters of
credit.  Advances, at interest rates from 0.57 to 7.33 percent at
December 31, 2009, are subject to restrictions or penalties in the event of
prepayment.
  At
December 31, 2009, the Company had a total of $47 million in putable advances
with Federal Home Loan Bank.
  85
  MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Note
      15:
              Other
      Borrowings
  In 2009,
the Company borrowed $10,000,000 from First Tennessee Bank, N.A..  The
Company borrowed these funds at a fixed rate of 5.90%, with principal and
interest payments made quarterly.  The loan is collateralized by the
Bank’s stock.  The loan matures in December 2014.
  As a
condition of the Company’s loan agreements with First Tennessee Bank, N.A.,
MutualFirst must
maintain an annual ROA of .40%.  As of December 31, 2009 the Company
was not in compliance with this debt covenant.  This covenant has been
waived by First Tennessee.
  The
Company assumed $5,000,000 in debentures as the result of the acquisition of MFB
in 2008.  In July 2005, MFB formed MFBC Statutory Trust (MFBC), as
wholly owned business trust, to sell trust preferred securities.  The
proceeds from the sale of the trust preferred securities were used by the trust
to purchase an equivalent amount of subordinated debentures from
MFB.  The junior subordinated debentures are the sole assets of MFBC
and are fully and unconditionally guaranteed by the Company.  The
junior subordinated debentures and the trust preferred securities pay interest
and dividends, respectively, on a quarterly basis.  The securities
bear a fixed rate of interest of 6.22% for the first five years, resetting
quarterly thereafter at the prevailing three-month LIBOR rate plus 170 basis
points.  In 2009, the Company entered into a forward interest rate
swap that will fix the variable rate portion for five years at
5.15%.  The Company may redeem the trust preferred securities, in
whole or in part, without penalty, on or after September 15, 2010, or earlier
upon the occurrence of certain events with the payment of a premium upon
redemption.  These securities mature on September 15,
2035.  The net balance of the note as of December 31, 2009 was
$3,888,000 due to the fair value of the note as of the acquisition.
  The Bank
has a noninterest-bearing, unsecured term note payable to Pedcor Investments
1997-XXVIII, L.P. of $226,000 and $647,000 at December 31, 2009 and 2008
payable in semiannual installments through January 1, 2010.  At
December 31, 2009 and 2008, the Bank was obligated under an irrevocable
direct pay letter of credit for the benefit of a third party in the amount of
$223,000 and $628,000, respectively, relating to this note and the financing for
an apartment project by Pedcor Investments 1997-XXVIII L.P.
  Note Payable Principal Payments Due in Years Ending December 312010
                                      
                                      $
                                      9892011
                                      
                                      
                                      8002012
                                      
                                      
                                      8482013
                                      
                                      
                                      9012014
                                      
                                      
                                      6,688Total
      notes payable
                                      
                                      $
                                      10,226
 
 Other
borrowings consisted of the following components as of December 31:
  2009
                          
                          
                          2008Notes
      payable
                          
                          $
                          10,226
                          
                          
                          $
                          12,147Subordinate
      debentures
                          
                          
                          3,888
                          
                          
                          
                          3,845Total
                          
                          $
                          14,114
                          
                          
                          $
                          15,992
  86
  MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Note
      16:
              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:
  2009
                          
                          
                          2008
                          
                          
                          2007Loans
      serviced forFreddie
      Mac
                          
                          $
                          431,815
                          
                          
                          $
                          384,808
                          
                          
                          $
                          137,973Fannie
      Mae
                          
                          
                          1,589
                          
                          
                          
                          2,148
                          
                          
                          
                          1,936Federal
      Home Loan Bank
                          
                          
                          27,012
                          
                          
                          
                          37,070
                          
                          
                          
                          33,998Other
      investors
                          
                          
                          2,282
                          
                          
                          
                          4,064
                          
                          
                          
                          4,757$
                          462,698
                          
                          
                          $
                          428,090
                          
                          
                          $
                          178,664
  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, 2009 was $3,484,000.
  2009
                          
                          
                          2008
                          
                          
                          2007Mortgage
      Servicing RightsBalances,
      January 1
                          
                          $
                          3,276
                          
                          
                          $
                          1,126
                          
                          
                          $
                          1,261Servicing
      rights capitalized
                          
                          
                          1,579
                          
                          
                          
                          823
                          
                          
                          
                          241Servicing
      rights acquired
                          
                          
                          —
                          
                          
                          
                          1,844
                          
                          
                          
                          —Amortization
      of servicing rights
                          
                          
                          (871
                          )
                          
                          
                          (517
                          )
                          
                          
                          (376
                          )3,984
                          
                          
                          
                          3,276
                          
                          
                          
                          1,126Valuation
      allowance
                          
                          
                          (500
                          )
                          
                          
                          (500
                          )
                          
                          
                          —Balances,
      December 31
                          
                          $
                          3,484
                          
                          
                          $
                          2,776
                          
                          
                          $
                          1,126
  The fair
value of servicing rights subsequently measured using the amortization method
was as follows:
  2009
                      
                      
                      2008Mortgage
      Servicing RightsFair
      value, beginning of period
                      
                      $
                      2,776
                      
                      
                      $
                      1,629Fair
      value, end of period
                      
                      
                      3,510
                      
                      
                      
                      2,776
  Activity
in the valuation allowance for mortgage servicing right was as
follows:
  2009
                          
                          
                          2008
                          
                          
                          2007Balance,
      beginning of year
                          
                          $
                          500
                          
                          
                          $
                          —
                          
                          
                          $
                          —Additions
                          
                          
                          —
                          
                          
                          
                          500
                          
                          
                          
                          —Reductions
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Balances,
      end of year
                          
                          $
                          500
                          
                          
                          $
                          500
                          
                          
                          $
                          —
  87
  MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Note
      17:
              Income
      Tax
  2009
                    
                    
                    2008
                    
                    
                    2007Income
      tax expense (credit)Currently
      payableFederal
                    
                    $
                    (1,270
                    )
                    
                    $
                    281
                    
                    
                    $
                    1,012State
                    
                    
                    9
                    
                    
                    
                    356
                    
                    
                    
                    42DeferredFederal
                    
                    
                    1,481
                    
                    
                    
                    (7,781
                    )
                    
                    
                    (691
                    )State
                    
                    
                    (9
                    )
                    
                    
                    (1,341
                    )
                    
                    
                    (67
                    )Total
      income tax expense (credit)
                    
                    $
                    211
                    
                    
                    $
                    (8,485
                    )
                    
                    $
                    296Reconciliation
      of federal statutory to actual tax expenseFederal
      statutory income tax at 34%
                    
                    $
                    1,147
                    
                    
                    $
                    (10,398
                    )
                    
                    $
                    1,537Effect
      of state income taxes
                    
                    
                    —
                    
                    
                    
                    (650
                    )
                    
                    
                    (17
                    )Low
      income housing credits
                    
                    
                    (874
                    )
                    
                    
                    (1,214
                    )
                    
                    
                    (811
                    )Tax-exempt
      income
                    
                    
                    (733
                    )
                    
                    
                    (539
                    )
                    
                    
                    (525
                    )Increase
      in valuation allowance
                    
                    
                    615
                    
                    
                    
                    —
                    
                    
                    
                    —Goodwill
      impairment
                    
                    
                    —
                    
                    
                    
                    4,280
                    
                    
                    
                    —Other
                    
                    
                    56
                    
                    
                    
                    36
                    
                    
                    
                    112Actual
      tax expense (credit)
                    
                    $
                    211
                    
                    
                    $
                    (8,485
                    )
                    
                    $
                    296Effective
      tax rate
                    
                    
                    6.25
                    %
                    
                    
                    (27.74
                    )%
                    
                    
                    6.50
                    %
  88
  MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (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:
  2009
                    
                    
                    2008AssetsUnrealized
      loss on securities available for sale
                    
                    $
                    843
                    
                    
                    $
                    1,095Allowance
      for loan losses
                    
                    
                    6,815
                    
                    
                    
                    6,072Deferred
      compensation
                    
                    
                    3,516
                    
                    
                    
                    3,102Business
      tax and AMT credit carryovers
                    
                    
                    5,386
                    
                    
                    
                    4,891Capital
      loss carryover
                    
                    
                    1,860
                    
                    
                    
                    1,627Net
      operating loss carryover
                    
                    
                    2,057
                    
                    
                    
                    1,940Goodwill
      impairment
                    
                    
                    4,859
                    
                    
                    
                    5,682Other
                    
                    
                    2,582
                    
                    
                    
                    2,265Total
      assets
                    
                    
                    27,918
                    
                    
                    
                    26,674LiabilitiesDepreciation
      and amortization
                    
                    
                    (2,036
                    )
                    
                    
                    (468
                    )FHLB
      stock
                    
                    
                    (731
                    )
                    
                    
                    (738
                    )State
      income tax
                    
                    
                    (1,044
                    )
                    
                    
                    (525
                    )Loan
      fees
                    
                    
                    —
                    
                    
                    
                    (184
                    )Investments
      in limited partnerships
                    
                    
                    (1,830
                    )
                    
                    
                    (1,649
                    )Mortgage
      servicing rights
                    
                    
                    (1,428
                    )
                    
                    
                    (1,152
                    )Total
      liabilities
                    
                    
                    (7,069
                    )
                    
                    
                    (4,716
                    )Valuation
      AllowanceBeginning
      balance
                    
                    
                    (720
                    )
                    
                    
                    —(Increase)
      decrease during period
                    
                    
                    (615
                    )
                    
                    
                    (720
                    )Ending
      balance
                    
                    
                    (1,335
                    )
                    
                    
                    (720
                    )Net
      deferred tax asset
                    
                    $
                    19,514
                    
                    
                    $
                    21,238
  The
Company has unused business income tax credits of $5,213,000 that begin to
expire in 2024.  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.
  The
Company’s federal income tax returns have been closed without audit by the IRS
through its year ended December 31, 2005.
  89
  MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Note
      18:
              Other
      Comprehensive Income (Loss)
  2009Before-Tax
                                  Amount
                                
                                
                                Tax
                                  (Expense)
                                  Benefit
                                
                                
                                Net-of-Tax
                                  AmountNet
      unrealized gain on securities available-for-sale
                                
                                $
                                1,825
                                
                                
                                $
                                (723
                                )
                                
                                $
                                1,102Less:
      reclassification adjustment for losses realized in net
    income
                                
                                
                                (1,465
                                )
                                
                                
                                582
                                
                                
                                
                                (883
                                )Net
      unrealized loss on securities available-for-sale for which a portion of an
      other-than-temporary impairment has been recognized in
    income
                                
                                
                                (2,796
                                )
                                
                                
                                1,107
                                
                                
                                
                                (1,689
                                )Net
      unrealized gain on derivative used for cash flow hedges
                                
                                
                                44
                                
                                
                                
                                (15
                                )
                                
                                
                                29Net
      unrealized loss relating to defined benefit plan liability
                                
                                
                                (257
                                )
                                
                                
                                102
                                
                                
                                
                                (155
                                )Net
      unrealized gains
                                
                                $
                                281
                                
                                
                                $
                                (111
                                )
                                
                                $
                                170
  2008Before-Tax
                            Amount
                          
                          
                          Tax
                            (Expense)
                            Benefit
                          
                          
                          Net-of-Tax
                            AmountUnrealized
      holding losses arising during the year
                          
                          $
                          (6,206
                          )
                          
                          $
                          2,458
                          
                          
                          $
                          (3,748
                          )Less:
      reclassification adjustment for losses realized in net
    income
                          
                          
                          (3,716
                          )
                          
                          
                          1,472
                          
                          
                          
                          (2,244
                          )Net
      unrealized loss relating to defined benefit plan liability
                          
                          
                          (182
                          )
                          
                          
                          72
                          
                          
                          
                          (110
                          )Net
      unrealized losses
                          
                          $
                          (2,673
                          )
                          
                          $
                          1,058
                          
                          
                          $
                          (1,614
                          )
  2007Before-Tax
                                    Amount
                                  
                                  
                                  Tax
                                    Benefit
                                  
                                  
                                  Net-of-Tax
                                    AmountUnrealized
      holding losses arising during the year
                                  
                                  $
                                  (99
                                  )
                                  
                                  $
                                  39
                                  
                                  
                                  $
                                  (60
                                  )Less:
      reclassification adjustment for losses realized in net
    income
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Net
      unrealized losses
                                  
                                  $
                                  (99
                                  )
                                  
                                  $
                                  39
                                  
                                  
                                  $
                                  (60
                                  )
  90
  MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  The
components of accumulated other comprehensive income, included in stockholders’
equity, are as follows:
  2009
                      
                      
                      2008
                      
                      
                      2007Net
      unrealized gain (loss) on securitiesavailable-for-sale
                      
                      $
                      331
                      
                      
                      $
                      (3,176
                      )
                      
                      $
                      (686
                      )Net
      unrealized loss on securities available-for-sale for which a portion of an
      other-than-temporary impairment has been recognized in
    income
                      
                      
                      (2,796
                      )
                      
                      
                      —
                      
                      
                      
                      —Net
      unrealized gain on derivative used for cash flow hedges
                      
                      
                      44
                      
                      
                      
                      —
                      
                      
                      
                      —Net
      unrealized loss relating to defined benefit plan liability
                      
                      
                      (438
                      )
                      
                      
                      (182
                      )
                      
                      
                      —(2,859
                      )
                      
                      
                      (3,358
                      )
                      
                      
                      (686
                      )Tax
      benefit
                      
                      
                      (1,001
                      )
                      
                      
                      (1,330
                      )
                      
                      
                      (272
                      )Net
      of tax amount
                      
                      $
                      (1,858
                      )
                      
                      $
                      (2,028
                      )
                      
                      $
                      (414
                      )
  Note
      19:
              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.
  Financial
instruments whose contract amount represents credit risk as of December 31 were
as follows:
  2009
                        
                        
                        2008
                        
                        
                        2007Loan
      commitments
                        
                        $
                        145,136
                        
                        
                        $
                        164,922
                        
                        
                        $
                        93,662Standby
      letters of credit
                        
                        
                        5,370
                        
                        
                        
                        7,065
                        
                        
                        
                        4,160
  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.
  91
  MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  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.
  Commitments
to originate mortgage loans that will be held for resale are recorded at their
fair values with subsequent changes in fair value included in current
earnings.  Commitments to originate or acquire fixed-rate mortgage
loans that will be held for resale were $1,600,000 and $12,500,000 at December
31, 2009 and 2008, respectively.
  Note
      20:
              Stockholders’
      Equity
  The
Company is not subject to any regulatory restrictions on the payment of cash
dividends to its stockholders up to $.16 per share (see note below for further
information).
  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.  In the event the Bank becomes unable to pay dividends to the
Company, the Company may not be able to service its debt, pay its other
obligations or pay dividends on its common stock.  At December 31,
2009, the Bank had no regulatory approval to pay dividends to the
Company.
  Note
      21:
              Capital
      Purchase Program
  On
December 23, 2008, the Company entered into a Letter Agreement (Purchase
Agreement) with the U.S. Treasury (Treasury), pursuant to which the Company
agreed to issue and sell (a) 32,382 of the Company’s fixed Rate Cumulative
Perpetual Preferred Stock and (b) a warrant to purchase 625,135 shares of the
Company’s common stock for an aggregate purchase price of $32,382,000 in
cash.
  The
preferred Stock qualifies as Tier I capital and will pay cumulative dividends at
a rate of 5% per annum for the first five years and 9% per annum
thereafter.  The preferred Stock is non-voting except with respect to
certain matters affecting the rights of the holders thereof, and may be redeemed
by the Company at any time with regulatory approval.  The Warrant has
a ten year term and is immediately exercisable with an exercise price of $7.77
per share of Common Stock.  Pursuant to the Purchase Agreement,
Treasury has agreed not to exercise voting power with respect to any shares of
Common Stock issued upon exercise of the Warrant.
  92
  MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  In the
Purchase Agreement, the Company agreed that, until such time as Treasury ceases
to own any debt or equity securities of the Company, acquired pursuant to the
Purchase Agreement, the Company will take all necessary action to ensure that
its benefit plans with respect to its senior executive officers comply with
Section 111(b) of the Emergency Economic Stabilization Act of 2008 (EESA) as
implemented by any guidance or regulation under EESA that has been issued and is
in effect as of the date of issuance of the Preferred Stock and the Warrant, and
has agreed to not adopt any benefit plans with respect to, or which cover, its
senior executive officers that do not comply with the EESA, and the applicable
executives have consented to the foregoing.
  Upon
issuance of the Preferred Stock on December 23, 2008, the ability of the Company
to declare or pay dividends on, or purchase, redeem or otherwise acquire for
consideration, shares of its Common Stock will be subject to restrictions,
including the Company’s restriction against increasing dividends from the last
quarterly cash dividend per share of $.16 declared on the Common Stock prior to
December 23, 2008.  The redemption, purchase or other acquisition of
trust preferred securities of the Company or its affiliates also is
restricted.  These restrictions will terminate the earlier of (a) the
third anniversary of the date of issuance of the Preferred Stock or (b) the date
on which the Preferred Stock has been redeemed in whole or Treasury has
transferred all of the Preferred Stock to third parties.  In addition,
the ability of the Company to declare or pay dividends, or repurchase, redeem or
otherwise acquire for consideration, shares of its Common Stock will be subject
to restrictions in the event that the Company fails to declare and pay full
dividends on its Preferred Stock.
  Note
      22:
              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, 2009 and 2008, the Bank was categorized as well capitalized
and met all subject capital adequacy requirements.  There are no
conditions or events since December 31, 2009 that management believes have
changed the Bank’s classification.
  93
  MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  The
Bank’s actual and required capital amounts and ratios are as
follows:
  Actual
                            
                            
                            Required for Adequate
                              Capital
                            
                            
                            To Be Well
                              CapitalizedAmount
                            
                            
                            Ratio
                            
                            
                            Amount
                            
                            
                            Ratio
                            
                            
                            Amount
                            
                            
                            RatioAs
      of December 31, 2009Total
      risk-based capital (to risk-weighted assets)
                            
                            $
                            133,872
                            
                            
                            
                            12.8
                            %
                            
                            $
                            83,579
                            
                            
                            
                            8.0
                            %
                            
                            $
                            104,474
                            
                            
                            
                            10.0
                            %Tier
      1 risk-based capital (to risk-weighted assets)
                            
                            
                            130,340
                            
                            
                            
                            11.6
                            %
                            
                            
                            41,790
                            
                            
                            
                            4.0
                            %
                            
                            
                            62,685
                            
                            
                            
                            6.0
                            %Core
      capital (to adjusted total assets)
                            
                            
                            130,340
                            
                            
                            
                            9.4
                            %
                            
                            
                            55,580
                            
                            
                            
                            4.0
                            %
                            
                            
                            69,475
                            
                            
                            
                            5.0
                            %Core
      capital (to adjusted tangible assets)
                            
                            
                            130,340
                            
                            
                            
                            9.4
                            %
                            
                            
                            27,790
                            
                            
                            
                            2.0
                            %
                            
                            
                            N/A
                            
                            
                            
                            N/ATangible
      capital (to adjusted total assets)
                            
                            
                            130,340
                            
                            
                            
                            9.4
                            %
                            
                            
                            20,843
                            
                            
                            
                            1.5
                            %
                            
                            
                            N/A
                            
                            
                            
                            N/AAs
      of December 31, 2008Total
      risk-based capital (to risk-weighted assets)
                            
                            $
                            144,897
                            
                            
                            
                            13.3
                            %
                            
                            $
                            87,091
                            
                            
                            
                            8.0
                            %
                            
                            $
                            108,864
                            
                            
                            
                            10.0
                            %Tier
      1 risk-based capital (to risk-weighted assets)
                            
                            
                            131,289
                            
                            
                            
                            12.1
                            %
                            
                            
                            43,546
                            
                            
                            
                            4.0
                            %
                            
                            
                            65,318
                            
                            
                            
                            6.0
                            %Core
      capital (to adjusted total assets)
                            
                            
                            131,289
                            
                            
                            
                            9.5
                            %
                            
                            
                            55,211
                            
                            
                            
                            4.0
                            %
                            
                            
                            69,014
                            
                            
                            
                            5.0
                            %Core
      capital (to adjusted tangible assets)
                            
                            
                            131,289
                            
                            
                            
                            9.5
                            %
                            
                            
                            27,606
                            
                            
                            
                            2.0
                            %
                            
                            
                            N/A
                            
                            
                            
                            N/ATangible
      capital (to adjusted total assets)
                            
                            
                            131,289
                            
                            
                            
                            9.5
                            %
                            
                            
                            20,704
                            
                            
                            
                            1.5
                            %
                            
                            
                            N/A
                            
                            
                            
                            N/A
  Note
      23:
              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 100 percent of participant contributions to the 401(k) up to a
maximum of 6% of their compensation and made a discretionary contribution to the
plan of 3% of qualified compensation.  The Company’s expense for the
plan was $716,000, $505,000 and $330,000 for 2009, 2008 and 2007.
  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 $857,000,
$717,000 and $682,000 for 2009, 2008 and 2007.
  94
  MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  The
Company has an ESOP covering substantially all of its employees.  At
December 31, 2009, 2008 and 2007, the Company had 127,138, 158,922 and
190,706 unearned ESOP shares with a fair value of $760,285, $1,072,724 and
$2,658,000.  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
2009, 2008 and 2007 was $215,000, $343,000 and $583,000.  The
following table provides information on ESOP shares at December 31.
  2009
                        
                        
                        2008
                        
                        
                        2007Allocated
      shares
                        
                        
                        345,195
                        
                        
                        
                        256,089
                        
                        
                        
                        207,274Suspense
      shares
                        
                        
                        127,138
                        
                        
                        
                        158,922
                        
                        
                        
                        190,709Committed-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
$0, $21,000 and $21,000 in 2009, 2008 and 2007.
  A summary
of the status of the Company’s RRP shares as of December 31, 2009 and changes
during the year then ended, is presented below:
  2009Shares
                            
                            
                            Weighted-
                              Average
                              Grant-Date
                              Fair ValueRRP,
      beginning of year
                            
                            
                            4,917
                            
                            
                            $
                            25.66Vested
                            
                            
                            4,917
                            
                            
                            
                            25.66RRP,
      end of year
                            
                            
                            —
                            
                            
                            $
                            —
  As of
December 31, 2009 and 2008, there was $0 and $0 of total unrecognized
compensation cost related to RRP share-based compensation arrangements granted
under the Plan.  The total fair value of shares vested during the
years ended December 31, 2009, 2008 and 2007, was $22,000, $66,000 and $99,000,
respectively.
  95
  MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Note
      24:
              Stock
      Option Plan
  Under the
Company’s stock option plan, which has been accounted for in accordance with
FASB ASC 718, Stock
Compensation, 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 934,702 shares of the Company’s common stock under two
separate stock option plans.  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 fair
value of each option award is estimated on the date of grant using a
Black-Scholes option valuation model that uses the assumptions noted in the
following table.  Expected volatility is based on historical
volatility of the Company’s stock and other factors.  The Company uses
historical data to estimate option exercise and employee termination within the
valuation model; separate groups of employees that have similar historical
exercise behavior are considered separately for valuation
purposes.  The expected term of options granted represents the period
of time that options are expected to be outstanding; the range given below
results from certain groups of employees exhibiting different
behavior.  The risk-free rate for periods within the contractual life
of the option is based on the U.S. Treasury yield curve in effect at the time of
grant.  The discount rate for post-vesting restrictions is estimated
based on the Company’s credit-adjusted risk-free rate of return.
  Assumptions
                            
                            2009Expected
      volatility
                            
                            
                            36.9
                            %Expected
      dividends
                            
                            
                            4.4
                            %Expected
      term (in years)
                            
                            5.6 yearsRisk-free
      rate
                            
                            
                            2.7
                            %
 
 The
following is a summary of the status of the Company’s stock option plan and
changes in that plan for 2009.
  2009Options
                              
                              Shares
                              
                              
                              Weighted-
                                Average
                                Exercise Price
                              
                              Weighted-
                                Average
                                Remaining
                                Contractual Life
                              
                              Aggregate
                                Intrinsic
                                ValueOutstanding,
      beginning of year
                              
                              
                              643,498
                              
                              
                              $
                              13.99Granted
                              
                              
                              59,000
                              
                              
                              
                              5.98Exercised
                              
                              
                              —
                              
                              
                              
                              —Forfeited/expired
                              
                              
                              (72,780
                              )
                              
                              
                              12.39Outstanding,
      end of year
                              
                              
                              629,718
                              
                              
                              $
                              11.58
                              
                              5.2 years
                              
                              $
                              —Options
      exercisable at year end
                              
                              
                              580,718
  96
  MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  The
weighted-average grant-date fair value of options granted during 2009 was
$1.34.  The total intrinsic value of options exercised during the
years ended December 31, 2009, 2008 and 2007, was $0, $0 and $79,000,
respectively.
  Cash
received from options exercised under all share-based payment arrangements for
years ended December 31, 2009, 2008 and 2007 was $0, $0 and $209,000,
respectively.  The actual tax benefit (expense) realized for the tax
deductions from options exercised and RRP shares vested totaled ($36,000),
($21,000) and $3,000, respectively, for the years ended December 31, 2009, 2008
and 2007.
  Note
      25:
              Stock
      Repurchase Plan
  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.  As of July 8, 2008 all 215,000 shares under this plan
had been purchased.
  On August
13, 2008, the Company announced that its Board of Directors approved a stock
repurchase program for up to 350,000 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, 2009, the Company had
purchased 10,000 shares under the program.
  Note
      26:
              Earnings
      Per Share
  Earnings
per share were computed as follows:
  2009Income
                            
                            
                            Weighted-
                              Average
                              Shares
                            
                            
                            Per-Share
                              AmountBasic
      Earnings Per ShareNet
      income
                            
                            $
                            3,163
                            
                            
                            
                            6,840,659
                            
                            
                            $
                            0.46Dividends
      and amortization on preferred stock
                            
                            
                            (1,803
                            )Income
      available to common stockholders
                            
                            
                            1,360
                            
                            
                            
                            6,840,659
                            
                            
                            $
                            0.20Effect
      of Dilutive SecuritiesStock
      options
                            
                            
                            
                            
                            
                            
                            89Diluted
      Earnings Per ShareIncome
      (loss) available to common stockholders and assumed
      conversions
                            
                            $
                            1,360
                            
                            
                            
                            6,840,748
                            
                            
                            $
                            0.20
  97
  MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  2008Loss
                          
                          
                          Weighted-
                            Average
                            Shares
                          
                          
                          Per-Share
                            AmountBasic
      Earnings Per ShareNet
      loss
                          
                          $
                          (22,098
                          )
                          
                          
                          5,249,135
                          
                          
                          $
                          (4.21
                          )Dividends
      and amortization on preferred stock
                          
                          
                          (31
                          )Income
      available to common stockholders
                          
                          
                          (22,129
                          )
                          
                          
                          5,249,135
                          
                          
                          $
                          (4.22
                          )Effect
      of Dilutive SecuritiesStock
      options
                          
                          
                          
                          
                          
                          
                          —Diluted
      Earnings Per ShareIncome
      (loss) available to common stockholders and assumed
      conversions
                          
                          $
                          (22,129
                          )
                          
                          
                          5,249,135
                          
                          
                          $
                          (4.22
                          )
  2007Income
                                      
                                      
                                      Weighted-
                                        Average
                                        Shares
                                      
                                      
                                      Per-Share
                                        AmountBasic
      Earnings Per ShareIncome
      available to common stockholders
                                      
                                      $
                                      4,226
                                      
                                      
                                      
                                      4,103,940
                                      
                                      
                                      $
                                      1.03Effect
      of Dilutive SecuritiesStock
      options
                                      
                                      
                                      
                                      
                                      
                                      
                                      47,233Diluted
      Earnings Per ShareIncome
      available to common stockholders and assumed conversions
                                      
                                      $
                                      4,226
                                      
                                      
                                      
                                      4,151,173
                                      
                                      
                                      $
                                      1.02
 
 Options
to purchase 586,988, 638,318, and 91,000 shares of common stock at $14.33,
$13.89 and $25.02 per share, respectively, were outstanding at December 31,
2009, 2008 and 2007, 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.
  Warrants
to purchase 625,135, 625,135 and 0 shares of common stock at $7.77, $7.77 and $0
per share, respectively, were outstanding at December 31, 2009, 2008 and
2007, 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.
  98
  MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Note
      27:
              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:
  Condensed
Balance Sheets
 
 2009
                    
                    
                    2008AssetsCash
      on deposit with Bank
                    
                    $
                    2,666
                    
                    
                    $
                    2,896Cash
      on deposit with others
                    
                    
                    250
                    
                    
                    
                    —Total
      cash
                    
                    
                    2,916
                    
                    
                    
                    2,896Investment
      in common stock of Bank
                    
                    
                    140,463
                    
                    
                    
                    142,417Deferred
      and current income tax
                    
                    
                    226
                    
                    
                    
                    669Other
      assets
                    
                    
                    50
                    
                    
                    
                    40Total
      assets
                    
                    $
                    143,655
                    
                    
                    $
                    146,022LiabilitiesOther
      borrowings
                    
                    $
                    13,888
                    
                    
                    $
                    15,345Other
      liabilities
                    
                    
                    40
                    
                    
                    
                    162Total
      liabilities
                    
                    
                    13,928
                    
                    
                    
                    15,507Stockholders'
      Equity
                    
                    
                    129,727
                    
                    
                    
                    130,515Total
      liabilities and stockholders' equity
                    
                    $
                    143,655
                    
                    
                    $
                    146,022
  99
  MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Condensed Statements of Income
 
 2009
                                                                        
                                                                        
                                                                        2008
                                                                        
                                                                        
                                                                        2007IncomeInterest
      income from Bank
                                                                        
                                                                        $
                                                                        23
                                                                        
                                                                        
                                                                        $
                                                                        10
                                                                        
                                                                        
                                                                        $
                                                                        29Dividends
      from Bank
                                                                        
                                                                        
                                                                        6,000
                                                                        
                                                                        
                                                                        
                                                                        3,000
                                                                        
                                                                        
                                                                        
                                                                        2,200Other
      income
                                                                        
                                                                        
                                                                        16
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        56Total
      income
                                                                        
                                                                        
                                                                        6,039
                                                                        
                                                                        
                                                                        
                                                                        3,010
                                                                        
                                                                        
                                                                        
                                                                        2,285Expenses
                                                                        
                                                                        
                                                                        1,463
                                                                        
                                                                        
                                                                        
                                                                        1,221
                                                                        
                                                                        
                                                                        
                                                                        383Income
      before income tax and equity in undistributed income of the
      Bank
                                                                        
                                                                        
                                                                        4,576
                                                                        
                                                                        
                                                                        
                                                                        1,789
                                                                        
                                                                        
                                                                        
                                                                        1,902Income
      tax benefit
                                                                        
                                                                        
                                                                        (484
                                                                        )
                                                                        
                                                                        
                                                                        (412
                                                                        )
                                                                        
                                                                        
                                                                        (118
                                                                        )Income
      before equity in undistributed income (distributions in excess of income)
      of the Bank
                                                                        
                                                                        
                                                                        5,060
                                                                        
                                                                        
                                                                        
                                                                        2,201
                                                                        
                                                                        
                                                                        
                                                                        2,020Equity
      in undistributed income (distributions in excess of income) of the
      Bank
                                                                        
                                                                        
                                                                        (1,897
                                                                        )
                                                                        
                                                                        
                                                                        (24,299
                                                                        )
                                                                        
                                                                        
                                                                        2,206Net
      income (loss)
                                                                        
                                                                        
                                                                        3,163
                                                                        
                                                                        
                                                                        
                                                                        (22,098
                                                                        )
                                                                        
                                                                        
                                                                        4,226Preferred
      stock dividends and amortization
                                                                        
                                                                        
                                                                        1,803
                                                                        
                                                                        
                                                                        
                                                                        31
                                                                        
                                                                        
                                                                        
                                                                        —Net
      Income (Loss) Available to Common Shareholders
                                                                        
                                                                        $
                                                                        1,360
                                                                        
                                                                        
                                                                        $
                                                                        (22,130
                                                                        )
                                                                        
                                                                        $
                                                                        4,226
  100
  MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
 
 Condensed
Statements of Cash Flows
 
 2009
                  
                  
                  2008
                  
                  
                  2007Operating
      ActivitiesNet
      income (loss)
                  
                  $
                  3,163
                  
                  
                  $
                  (22,098
                  )
                  
                  $
                  4,226Item
      not requiring cashESOP
      shares earned
                  
                  
                  215
                  
                  
                  
                  343
                  
                  
                  
                  583Deferred
      income tax benefit
                  
                  
                  3
                  
                  
                  
                  (251
                  )
                  
                  
                  —Distributions
      in excess of income (equity in undistributed income) of the
      Bank
                  
                  
                  1,897
                  
                  
                  
                  24,299
                  
                  
                  
                  (2,206
                  )Other
                  
                  
                  591
                  
                  
                  
                  (13
                  )
                  
                  
                  620Net
      cash provided by operating activities
                  
                  
                  5,869
                  
                  
                  
                  2,280
                  
                  
                  
                  3,223Investing
      ActivitiesProceeds
      from sale of investment
                  
                  
                  —
                  
                  
                  
                  431
                  
                  
                  
                  —Loss
      on sale of investment
                  
                  
                  —
                  
                  
                  
                  329
                  
                  
                  
                  —Investment
      in bank
                  
                  
                  —
                  
                  
                  
                  (29,144
                  )
                  
                  
                  —Cash
      paid in acquisition, net
                  
                  
                  —
                  
                  
                  
                  (9,115
                  )
                  
                  
                  —Maturity
      of certificate of deposit
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  100Net
      cash provided by (used in) investing activities
                  
                  
                  —
                  
                  
                  
                  (37,499
                  )
                  
                  
                  100Financing
      ActivitiesRepayment
      of other borrowings
                  
                  
                  (11,500
                  )
                  
                  
                  (496
                  )
                  
                  
                  —Proceeds
      from issuance of long-term debt
                  
                  
                  10,000
                  
                  
                  
                  11,500
                  
                  
                  
                  —Proceeds
      from issuance of preferred stock
                  
                  
                  —
                  
                  
                  
                  32,382
                  
                  
                  
                  —Stock
      repurchased
                  
                  
                  —
                  
                  
                  
                  (1,811
                  )
                  
                  
                  (2,793
                  )Cash
      dividends
                  
                  
                  (4,314
                  )
                  
                  
                  (3,490
                  )
                  
                  
                  (2,440
                  )Proceeds
      from stock options exercised
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  209Tax
      benefit on stock options and RRP shares
                  
                  
                  (35
                  )
                  
                  
                  (21
                  )
                  
                  
                  3Net
      cash provided by (used in) financing activities
                  
                  
                  (5,849
                  )
                  
                  
                  38,064
                  
                  
                  
                  (5,021
                  )Net
      Change in Cash
                  
                  
                  20
                  
                  
                  
                  2,845
                  
                  
                  
                  (1,698
                  )Cash,
      Beginning of Year
                  
                  
                  2,896
                  
                  
                  
                  51
                  
                  
                  
                  1,749Cash,
      End of Year
                  
                  $
                  2,916
                  
                  
                  $
                  2,896
                  
                  
                  $
                  51
  101
  MutualFirst Financial,
Inc.
  Notes
to Consolidated Financial Statements
 December
31, 2009, 2008 and 2007
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Note
      28:
              Quarterly
      Results of Operations (Unaudited)
  Quarter
                                                Ended
                                              
                                              Interest
                                                Income
                                              
                                              
                                              Interest
                                                Expense
                                              
                                              
                                              Net
                                                Interest
                                                Income
                                              
                                              
                                              Provision
                                                for
                                                Loan
                                                Losses
                                              
                                              
                                              Net
                                                Income
                                                (Loss)
                                              
                                              
                                              Net
                                                Income
                                                (Loss)
                                                Available to
                                                Common
                                                Shareholders
                                              
                                              
                                              Basic
                                                Earnings
                                                Per
                                                Common
                                                Share
                                              
                                              
                                              Diluted
                                                Earnings
                                                Per
                                                Common
                                                Share2009March
                                              
                                              $
                                              18,656
                                              
                                              
                                              $
                                              8,264
                                              
                                              
                                              $
                                              10,392
                                              
                                              
                                              $
                                              1,450
                                              
                                              
                                              $
                                              1,796
                                              
                                              
                                              $
                                              1,345
                                              
                                              
                                              $
                                              0.20
                                              
                                              
                                              $
                                              0.20June
                                              
                                              
                                              18,136
                                              
                                              
                                              
                                              7,824
                                              
                                              
                                              
                                              10,312
                                              
                                              
                                              
                                              1,750
                                              
                                              
                                              
                                              1,315
                                              
                                              
                                              
                                              864
                                              
                                              
                                              
                                              0.13
                                              
                                              
                                              
                                              0.13September
                                              
                                              
                                              17,682
                                              
                                              
                                              
                                              7,439
                                              
                                              
                                              
                                              10,243
                                              
                                              
                                              
                                              1,650
                                              
                                              
                                              
                                              1,242
                                              
                                              
                                              
                                              791
                                              
                                              
                                              
                                              0.12
                                              
                                              
                                              
                                              0.12December
                                              
                                              
                                              17,378
                                              
                                              
                                              
                                              7,097
                                              
                                              
                                              
                                              10,281
                                              
                                              
                                              
                                              1,650
                                              
                                              
                                              
                                              (1,189
                                              )
                                              
                                              
                                              (1,640
                                              )
                                              
                                              
                                              (0.24
                                              )
                                              
                                              
                                              (0.24
                                              )Total
                                              
                                              $
                                              71,852
                                              
                                              
                                              $
                                              30,624
                                              
                                              
                                              $
                                              41,228
                                              
                                              
                                              $
                                              6,500
                                              
                                              
                                              $
                                              3,164
                                              
                                              
                                              $
                                              1,360
                                              
                                              
                                              
                                              0.20
                                              
                                              
                                              
                                              0.202008March
                                              
                                              $
                                              13,757
                                              
                                              
                                              $
                                              7,397
                                              
                                              
                                              $
                                              6,360
                                              
                                              
                                              $
                                              612
                                              
                                              
                                              $
                                              1,215
                                              
                                              
                                              $
                                              1,215
                                              
                                              
                                              $
                                              0.30
                                              
                                              
                                              $
                                              0.30June
                                              
                                              
                                              13,489
                                              
                                              
                                              
                                              6,689
                                              
                                              
                                              
                                              6,800
                                              
                                              
                                              
                                              733
                                              
                                              
                                              
                                              1,175
                                              
                                              
                                              
                                              1,175
                                              
                                              
                                              
                                              0.30
                                              
                                              
                                              
                                              0.30September
                                              
                                              
                                              18,825
                                              
                                              
                                              
                                              8,989
                                              
                                              
                                              
                                              9,836
                                              
                                              
                                              
                                              913
                                              
                                              
                                              
                                              359
                                              
                                              
                                              
                                              359
                                              
                                              
                                              
                                              0.06
                                              
                                              
                                              
                                              0.06December
                                              
                                              
                                              19,108
                                              
                                              
                                              
                                              8,564
                                              
                                              
                                              
                                              10,544
                                              
                                              
                                              
                                              4,762
                                              
                                              
                                              
                                              (24,847
                                              )
                                              
                                              
                                              (24,879
                                              )
                                              
                                              
                                              (3.65
                                              )
                                              
                                              
                                              (3.65
                                              )Total
                                              
                                              $
                                              65,179
                                              
                                              
                                              $
                                              31,639
                                              
                                              
                                              $
                                              33,540
                                              
                                              
                                              $
                                              7,020
                                              
                                              
                                              $
                                              (22,098
                                              )
                                              
                                              $
                                              (22,130
                                              )
                                              
                                              
                                              (4.22
                                              )
                                              
                                              
                                              (4.22
                                              )2007March
                                              
                                              $
                                              13,809
                                              
                                              
                                              $
                                              7,814
                                              
                                              
                                              $
                                              5,995
                                              
                                              
                                              $
                                              332
                                              
                                              
                                              $
                                              1,044
                                              
                                              
                                              $
                                              1,044
                                              
                                              
                                              $
                                              0.25
                                              
                                              
                                              $
                                              0.25June
                                              
                                              
                                              14,056
                                              
                                              
                                              
                                              7,941
                                              
                                              
                                              
                                              6,115
                                              
                                              
                                              
                                              533
                                              
                                              
                                              
                                              1,129
                                              
                                              
                                              
                                              1,129
                                              
                                              
                                              
                                              0.27
                                              
                                              
                                              
                                              0.27September
                                              
                                              
                                              14,128
                                              
                                              
                                              
                                              8,277
                                              
                                              
                                              
                                              5,851
                                              
                                              
                                              
                                              532
                                              
                                              
                                              
                                              1,161
                                              
                                              
                                              
                                              1,161
                                              
                                              
                                              
                                              0.28
                                              
                                              
                                              
                                              0.28December
                                              
                                              
                                              14,380
                                              
                                              
                                              
                                              8,195
                                              
                                              
                                              
                                              6,185
                                              
                                              
                                              
                                              843
                                              
                                              
                                              
                                              892
                                              
                                              
                                              
                                              892
                                              
                                              
                                              
                                              0.22
                                              
                                              
                                              
                                              0.22Total
                                              
                                              $
                                              56,373
                                              
                                              
                                              $
                                              32,227
                                              
                                              
                                              $
                                              24,146
                                              
                                              
                                              $
                                              2,240
                                              
                                              
                                              $
                                              4,226
                                              
                                              
                                              $
                                              4,226
                                              
                                              
                                              
                                              1.03
                                              
                                              
                                              
                                              1.02
  Other-than-temporary
impairment of securities of $2.4 million, net of tax, had an adverse impact on
the fourth quarter 2009.  Earnings in the fourth quarter 2008 were
negatively impacted primarily due to a goodwill impairment of $22.6 million, net
of tax and increased loan loss provisions due to the current decline in the
economy.
  102


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, 2009, was carried out under the supervision and with the
participation of 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, 2009, 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, 2009, that have materially affected, or are 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 is
set forth below under “Management’s Report 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, withinMutualFirst 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 ofMutualFirst 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.




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.




103




Our
management assessed the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2009. In making this assessment, it used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) inInternal Control-Integrated Framework. Based on our assessment, we
believe that, as of December 31, 2009, the Company’s internal control over
financial reporting was effective based on those criteria.




Date:
      March 18, 2010
              By:
              /s/David
      W. HeeterDavid
      W. HeeterPresident
      and Chief Executive OfficerBy:
              /s/Timothy
      J. McArdleTimothy
      J. McArdleTreasurer
      and Chief Financial Officer




104


Item 9B.
            Other
      Information





None.




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 April 2010, 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 April 2010, 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 64 years. Mr. Bowles has served as Senior Vice President and
Manager of consumer Banking since January 2009. From November 2004 until January
2009, he served as Senior Vice President and Manager of Investment and Private
Banking. Prior to 2004, he was president of Star Financial Bank/NewCastle Region
from 1987 to 2004.




Timothy J.
McArdle. Age 59 years. Mr. McArdle, a certified public accountant, has
served as Senior Vice President and Chief Financial Officer of MutualBank since
1995, and Treasurer of MutualBank since 1986. He also serves as Senior Vice
President, Treasurer and Controller ofMutualFirst Financial. He
has been employed by MutualBank since 1981.




Stephen C.
Selby. Age 64 years. Since 1995, Mr. Selby has served as Senior Vice
President of the Operations Division at MutualBank. Prior to 1995, he served as
Vice President of the Operations Division for nine years. Mr. Selby has served
in various other capacities at MutualBank since 1964.




Donald R.
Kyle. Age 63 years. Mr. Kyle has served as Senior Vice President of the
Business Banking Division of the Bank since July 2008. Prior to joining the
Bank, he had served as Executive Vice President and Chief Operating Officer of
MFB Financial since July 1999. Previously, he served as Regional President of
National City Bank.




Sharon L.
Ferguson. Age 54 years. Ms. Ferguson has served as Senior Vice President
of Risk Management of the Bank since February 2009. From April 2008 until
February 2009, she served as Senior Vice President of Consumer Banking. From
September 2007 to April 2008 she served as Vice President of Retail Products.
From October 2005 until September 2007 she served as Assistant Vice President,
Retail Products Manager. Prior to October 2005 she served as Assistant Vice
President, Consumer Lending and Deposits Manager. She has been with the Bank
since March 1998.




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, Edward J. Levy, Jonathan C. Kintner
and James D. Rosema, all of whom are considered independent under applicable
Nasdaq listing standards. The Board of Directors has determined that Mr. Crull
and Mr. Levy are both considered to be 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 2010, a copy of which will be filed not
later than 120 days after the close of the fiscal year.




105




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, 2009, 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 on our website at www.bankwithmutual.com at
“Resource Center – About Us – Code of Ethics,” or free of charge from the
Company by writing to our Corporate Secretary atMutualFirst 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 April 2010, a copy of which will be filed not later than 120 days
after the close of the fiscal year.




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 April 2010, 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, 2009.




106




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
      compensation plans approved by security holders
                              
                              
                              629,718
                              
                              
                              $
                              11.58
                              
                              
                              
                              314,702
                              (1)Equity
      compensation plans not approved by security holders
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —





(1)
            Includes
      20,961 shares available for future grants underMutualFirst Financial,
      Inc’s 2001 stock option plan and 293,741 shares available for future
      grants under MutualFirst Financial,
      Inc.’s 2008 stock option plan.





Item 13.
            Certain
      Relationships and Related
Transactions




Information
required by this item 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 April 2010, which will be
filed no later than 120 days after the close of the fiscal year.




Item 14.
            Principal
      Accountant Fees and Services




Information
required by this item 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 April 2010, a copy of which
will be filed not later than 120 days after the close of the fiscal
year




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 Firm
                58Consolidated
      Balance Sheets at December 31, 2009 and 2008
                59Consolidated
      Statements of Income for the Years Ended December 31, 2009, 2008 and
      2007
                60Consolidated
      Statements of Stockholders’ Equity for the Years Ended December 31, 2009,
      2008 and 2007
                61Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and
      2007
                62Notes
      to Consolidated Financial Statements, December 31, 2009, 2008 and
      2007
                63





(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.




107


(a)(3)
List of Exhibits:




Regulation
                S-K
                Exhibit
                Number
              
              Document
              
              Reference
                to Prior
                Filing or
                Exhibit
                Number
                Attached
                Hereto2.1
              
              Agreement
      and Plan of Merger, dated as of January 7, 2008, by and amongMutualFirst Financial,
      Inc.,MutualFirst
      Acquisition Corp. and MFB Corp.
              
              #3.1
              
              Articles
      of Incorporation
              
              *3.2
              
              Articles
      Supplementary for the Series A Preferred Stock
              
              +3.3
              
              Amended
      Bylaws
              
              ###3.4
              
              Articles
      Supplementary to the Company’s Charter re: term of appointed directors
      effective July 15, 2008
              
              $4.1
              
              Form
      of Common Stock Certificate
              
              *4.2
              
              Warrant
      for Purchase of Shares of Common Stock
              
              +4.3
              
              Form
      of Certificate for the Series A Preferred Stock
              
              ++++9
              
              Voting
      Trust Agreement
              
              None10.1
              
              Employment
      Agreement with David W. Heeter
              
              +++10.2
              
              Employment
      Agreement with Patrick C. Botts
              
              +++10.3
              
              Employment
      Agreement with Timothy J. McArdle
              
              **10.4
              
              Form
      of Supplemental Retirement Plan Income Agreements for Steven Campbell, Patrick C. Botts, David
      W. Heeter, Timothy J. McArdle and Stephen C.
      Selby
              
              **10.5
              
              Blank10.6
              
              Form
      of Director Shareholder Benefit Program Agreement, as amended, for Jerry
      D. McVicker
              
              ++10.7
              
              Form
      of Agreements for Executive Deferred Compensation Plan for Patrick C.
      Botts, Steven Campbell, David W. Heeter, Timothy J. McArdle and Stephen C.
      Selby
              
              **10.8
              
              Registrant’s
      2001 Stock Option and Incentive Plan
              
              ***10.9
              
              Registrant’s
      2001 Recognition and Retention Plan
              
              ***10.11
              
              Director
      Fee Arrangements for 2010
              
              10.1110.12
              
              Director
      Deferred Compensation Plan
              
              ##10.13
              
              MutualFirst Financial,
      Inc. 2008 Stock Option and Incentive Plan
              
              ++++10.14
              
              MFB
      Corp. 2002 Stock Option Plan
              
              ++++10.15
              
              MFB
      Corp. 1997 Stock Option Plan
              
              ++++10.16
              
              Employment
      Agreement with Charles J. Viater
              
              ++++10.17
              
              Salary
      Continuation Agreement with Charles J. Viater
              
              ++++10.18
              
              Letter
      Agreement (including Schedule A, Securities Purchase Agreement, dated
      December 23, 2008 betweenMutualFirst Financial,
      Inc. and United States Department of the Treasury with respect to the
      issuance and sale of the Series A Preferred Stock and
    Warrant
              
              +10.19
              
              Form
      of compensation modification agreement and waiver for named executive
      officers
              
              +10.20
              
              Loan
      Agreement with First Tennesee Bank National Association dated
      December 21, 2009.
              
              10.2010.21
              
              Form
      of Incentive Stock Option Agreement for 2008 Stock Option and Incentive
      Plan
              
              10.2110.22
              
              Form
      of Non-Qualified Stock Option Agreement for 2008 Stock Option and
      Incentive Plan
              
              10.2211
              
              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
              
              3299.1
              
              Certification
      of Principal Executive Officer Pursuant to 31 CFR § 30.15
              
              99.199.2
              
              Certification
      of Principal Financial Officer Pursuant to 31 CFR § 30.15
              
              99.2




108




*
            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 and incorporated herein by
    reference.


**
            Filed
      as an exhibit to the Company’s Annual Report on Form 10-K filed on March
      30, 2001.  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 Form 8-K filed on December 23, 2008 (File
      No. 000-27905) and incorporated herein by
  reference.


++
            Filed
      as an exhibit to the Company’s Annual Report on Form 10-K filed on April
      2, 2002.  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, 2004.  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
      23, 2009 and incorporated herein by
reference.


#
            Filed
      as an exhibit to the Company’s Form 8-K filed on January 8, 2008 and
      incorporated herein by reference.


##
            Filed
      as an exhibit to the Company’s Annual Report on Form 10-K filed on March
      16,2007.  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 Form 8-K filed on October 15, 2007 (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 Form 8-K filed on July 15, 2008 and
      incorporated herein by reference.


$$
            Filed
      as an exhibit to the Company’s Form 8-K filed on December 24, 2009 and
      incorporated herein by reference.





(b)  Exhibits
- See list in (a)(3) and the following signature page.




(c)  Financial
Statements Schedules - None




109


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
      18, 2010
                By:
                /s/David
      W. HeeterDavid
      W. Heeter, President and
                  Chief
      Executive OfficerDuly
      Authorized Representative)





POWER
OF ATTORNEY




We, the
undersigned officers and directors of MutualFirst Financial, Inc.,
hereby severally and individually constitute and appoint David W. Heeter and
Timothy J. McArdle, and each of them, the true and lawful attorneys and agents
of each of us to execute in the name, place and stead of each of us
(individually and in any capacity stated below) any and all amendments to this
Annual Report on Form 10-K and all instruments necessary or advisable in
connection therewith and to file the same with the Securities and Exchange
Commission, each of said attorneys and agents to have the power to act with or
without the others and to have full power and authority to do and perform in the
name and on behalf of each of the undersigned every act whatsoever necessary or
advisable to be done in the premises as fully and to all intents and purposes as
any of the undersigned might or could do in person, and we hereby ratify and
confirm our signatures as they may be signed by our said attorneys and agents or
each of them to any and all such amendments and instruments.




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
      18, 2010
              
              Date:  March
      18, 2010/s/Patrick
      C. Botts
              
              /s/Edward
      J. DobrowPatrick
      C. Botts, Director
              
              Edward
      J. Dobrow, DirectorDate:  March
      18, 2010
              
              Date:  March
      18, 2010/s/Linn
      A. Crull
              
              /s/James
      D. RosemaLinn
      A. Crull, Director
              
              James
      D. Rosema, DirectorDate:  March
      18, 2010
              
              Date:  March
      18, 2010/s/William
      V. Hughes
              
              /s/Jerry
      D. McVickerWilliam
      V. Hughes, Director
              
              Jerry
      D. McVicker, DirectorDate:
      March 18, 2010
              
              Date:  March
      18, 2010/s/Jon
      R. Marler
              
              /s/Jonathan
      E. Kintner, O.D.Jon
      R. Marler, Director
              
              Jonathan
      E. Kintner, O.D., DirectorDate:  March
      18, 2010
              
              Date:  March
      18, 2010




110




/s/Edward
      C. Levy
              
              /s/Michael
      J. MarienEdward
      C. Levy, Director
              
              Michael
      J. Marien, DirectorDate:  March
      18, 2010
              
              Date:  March
      18, 2010/s/Charles
      J. Viater
              
              /s/
      Timothy J. McArdleCharles
      J. Viater, Director
              
              Timothy
      J. McArdle, Senior Vice PresidentTreasurer
      and Controller(Principal
      Financial and Accounting Officer)Date:  March
      18, 2010
              
              Date:  March
      18, 2010




111


INDEX
TO EXHIBITS




Number
              
              Description10.11
              
              Director
      Fee Arrangements for 201010.20
              
              Loan
      Agreement with First Tennessee Bank, N.A.10.21
              
              Incentive
      Stock Option Award Agreement10.22
              
              Non-qualified
      Stock Option Award Agreement21
              
              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 Certification99.1
              
              Certification
      of Principal Executive Officer Pursuant to 31 CFR §
  30.1599.2
              
              Certification
      of Principal Financial Officer Pursuant to 31 CFR §
  30.15




i