UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549







FORM
10-K





x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended December 31, 2008OR ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from 
      to





COMMISSION
FILE NUMBER 000-27905





MutualFirst Financial,
Inc.


(Exact
Name of Registrant as Specified in its Charter)





Maryland
            35-2085640(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification No.)110
      E. Charles Street, Muncie, Indiana
            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
                The
      NASDAQ Stock Market LLC




Securities
Registered Pursuant to Section 12(g) of the Act:





None





Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.  YES  ̈    NO
x





Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act.  YES  ̈NO x





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





Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this
chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x





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





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


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


YES  ̈    NO
x





The aggregate market value of the
voting and non-voting  common equity held by non-affiliates, computed
by reference to the last sale price of such stock on the Nasdaq Global Market as
of June 29, 2008, the last business day of the registrant’s most recently
completed second fiscal quarter, was approximately $29.7 million. (The exclusion
from such amount of the market value of the shares owned by any person shall not
be deemed an admission by the registrant that such person is an affiliate of the
registrant.)





As of
March 19, 2009, 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 2009 Annual
Meeting of Stockholders.









Item
1.            Business
  General
  MutualFirst Financial, Inc.,
a Maryland corporation (“MutualFirst” or the
“Company”), is a savings and loan holding company that has as its wholly-owned
subsidiary MutualBank (“Mutual” or the “Bank”).  MFS Financial was
formed in September 1999 to become the holding company of Mutual in connection
with Mutual’s conversion from the mutual to stock form of organization on
December 29, 1999.  In April 2001, MFS Financial formally changed its
corporate name to MutualFirst Financial, Inc.
(“MutualFirst”).  The
words “we,” “our” and “us” refer to MutualFirst and MutualBank on
a consolidated basis.
  At
December 31, 2008, we had total assets of $1.4 billion, deposits of $962.5
million and stockholders’ equity of $130.5 million.  Our executive
offices are located at 110 E. Charles Street, Muncie, Indiana 47305-2400, and
our common stock is traded on the Nasdaq Global Market under the symbol
“MFSF.”
  Substantially
all of MutualFirst’s
business is conducted through Mutual, which is a federal savings bank subject to
extensive regulation by the Office of Thrift Supervision
(“OTS”).  Mutual’s deposits are insured up to applicable limits by the
Federal Deposit Insurance Corporation (“FDIC”).
  Our
principal business consists of attracting retail deposits from the general
public and investing those funds primarily in loans secured by first mortgages
on owner-occupied, one- to four-family residences, a variety of consumer loans,
loans secured by commercial and multi-family real estate and commercial business
loans.  Funds not invested in loans generally are invested in
investment securities, including mortgage-backed and mortgage-related
securities.
  Our
profitability depends primarily on net interest income, which is the difference
between interest and dividend income on interest-earning assets, and interest
expense on interest-bearing liabilities.  Interest-earning assets
include principally loans, investment securities, including mortgage-backed and
related securities and interest-earning deposits in other
institutions.  Net interest income is dependent upon the level of
interest rates and the extent to which such rates are changing.  Our
profitability is also dependent, to a lesser extent, on the level of noninterest
income, provision for loan losses, noninterest expense and income
taxes.  Our operations and profitability are subject to changes in
interest rates, applicable statutes and regulations, and general economic
conditions, as well as other factors beyond our control.
  We offer
deposit accounts having a wide range of interest rates and terms, which
generally include passbook and statement savings, money market deposit accounts,
NOW and interest checking accounts and certificates of deposit with terms
ranging from seven days to 83 months.  We solicit most of our deposits
in our market areas and we occasionally accept brokered deposits.  See
“Sources of Funds – Deposits.”
  MutualWealth,
formerly Community Wealth Management Group, Inc., a wholly-owned subsidiary of
MFB Financial, is the wealth management division of the bank that provides a
variety of complimentary, 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, 2008, MutualWealth
managed assets of $352.0 million.
  1
  On July 18, 2008, the Company acquired
MFB Corp. ("MFB") and merged MFB’s subsidiary bank, MFB Financial, into
MutualBank in accordance with the Agreement and Plan of Merger, dated as of
January 7, 2008 (the "Merger Agreement").  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.  MutualFirstalso assumed
114,500 MFB stock options, which have converted into approximately 296,555 MutualFirststock 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 11th 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.
  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 625,135shares 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
Officer 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.  The Warrant is attached as
Exhibit 4.2 hereto and is incorporated herein by reference.  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).
  2
 
 The
Company placed $29.1 million of TARP proceeds into its wholly-owned subsidiary
MutualBank, while maintaining the $3.2 million with the
Company.  MutualBank 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 will 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.
  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.
  Difficult
market conditions and economic trends have adversely affected our industry and
our business.
  Dramatic
declines in the housing market, with decreasing home prices and increasing
delinquencies and foreclosures, have negatively impacted the credit performance
of mortgage and construction loans and resulted in significant write-downs of
assets by many financial institutions. General downward economic trends, reduced
availability of commercial credit and increasing unemployment have negatively
impacted the credit performance of commercial and consumer credit, resulting in
additional write-downs. Concerns over the stability of the financial markets and
the economy have resulted in decreased lending by some financial institutions to
their customers and to each other. This market turmoil and tightening of credit
has led to increased commercial and consumer deficiencies, lack of customer
confidence, increased market volatility and widespread reduction in general
business activity. Some financial institutions have experienced decreased access
to deposits or borrowings.
  3
  The
resulting economic pressure on the consumer and businesses and the lack of
confidence in the financial markets may adversely affect our business, financial
condition, results of operation and stock price.
  Our
ability to assess the creditworthiness of customers and to estimate the losses
inherent in our credit exposure is made more complex by these difficult market
and economic conditions. We also expect to face increased regulation and
government oversight as a result of these downward trends. This increased
government action may increase our costs and limit our ability to pursue certain
business opportunities. We also may be required to pay even higher Federal
Deposit Insurance Corporation premiums than the recently increased level,
because financial institutions failures resulting from the depressed market
conditions have depleted and may continue to deplete the deposit insurance fund
and reduce its ratio of reserves to insured deposits.
  We do not
believe these difficult conditions are likely to improve in the near future. A
worsening of these conditions would likely exacerbate the adverse effects of
these difficult market and economic conditions on us, our customers and the
other financial institutions in our market. As a result, we may experience
increases in foreclosures, delinquencies and customer bankruptcies, as well as
more restricted access to funds.
  Recent
legislative and regulatory initiatives to address these difficult market and
economic conditions may not stabilize the US banking system.
  The
Emergency Economic Stabilization Act of 2008 (“EESA”) authorizes the United
States Department of Treasury, hereafter the Treasury Department, to purchase
from financial institutions and their holding companies up to $700 billion in
mortgage loans, mortgage-related securities and certain other financial
instruments, including debt and equity securities issued by financial
institutions and their holding companies in a troubled asset relief program. The
purpose of the troubled asset relief program is to restore confidence and
stability to the U.S. banking system and to encourage financial institutions to
increase their lending to customers and to each other. The Treasury Department
has allocated $350 billion towards the troubled asset relief program to the
capital purchase program. Under the capital purchase program, the Treasury
Department will purchase debt or equity securities from participating
institutions. The troubled asset relief program is also expected to include
direct purchases or guarantees of troubled assets of financial
institutions.
  EESA also
increased Federal Deposit Insurance Corporation deposit insurance on most
accounts from $100,000 to $250,000. This increase is in place until the end of
2009 and is not covered by deposit insurance premiums paid by the banking
industry. In addition, the Federal Deposit Insurance Corporation has implemented
two temporary programs to provide deposit insurance for the full amount of most
non-interest bearing transaction accounts through the end of 2009 and to
guarantee certain unsecured debt of financial institutions and their holding
companies through June 2012. Financial institutions have until November 12, 2008
to opt out of these two programs. The purpose of these legislative and
regulatory actions is to stabilize the volatility in the U.S. banking
system.
  4
  EESA, the
troubled asset relief program and the Federal Deposit Insurance Corporation’s
recent regulatory initiatives may not stabilize the U.S. banking system or
financial markets. If the volatility in the market and the economy continue or
worsen, our business, financial condition, results of operations, access to
funds and the price of our stock could be materially and adversely
impacted.
  The
recently enacted American Recovery and Reinvestment Act of 2009 (the “AARA”) is
a broad based economic stimulus bill that contains a broad range of tax
revisions and government spending to address the national economic
decline.  It does not contain any specific provisions governing
financial institutions, except for TARP recipients.  It imposes new
compensation limits and requirements on TARP recipients and allows TARP funds to
be returned with the requirements for replacement capital or the passage of set
time periods included in the TARP agreement.
  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 centers 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 originate
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, 2008, our net loan portfolio totaled $1.1 billion, which
constituted 80.1% of our total assets.
  Loans up
to $600,000 may be approved by 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 by or decreased by a specific guidance by the Board for a specific
borrower.
  At
December 31, 2008, the maximum amount which we could lend to any one borrower
and the borrower’s related entities was approximately $22.5
million.  As of December 31, 2008, our largest lending relationship to
a single borrower or group of related borrowers consisted of four loans totaling
$6.9 million. All of the loans in this relationship are secured by real estate
consisting of retail, franchised, auto service centers guaranteed by the
principal owners and supported by long term leases to the
franchisor.  Each of these loans to this group of borrowers was
current and performing in accordance with its terms at December 31,
2008.
  5
  The
following table presents information concerning the composition of our loan
portfolio in dollar amounts and in percentages as of the dates
indicated.
  December
      31,2008
                              
                              
                              2007
                              
                              
                              2006
                              
                              
                              2005
                              
                              
                              2004Amount
                              
                              
                              Percent
                              
                              
                              Amount
                              
                              
                              Percent
                              
                              
                              Amount
                              
                              
                              Percent
                              
                              
                              Amount
                              
                              
                              Percent
                              
                              
                              Amount
                              
                              
                              Percent(Dollars
      in thousands)Real
      Estate Loans:One-
      to four-family
                              
                              $
                              521,364
                              (1)
                              
                              
                              46.11
                              %
                              
                              $
                              431,018
                              (2)
                              
                              
                              53.02
                              %
                              
                              $
                              433,123
                              (3)
                              
                              
                              53.01
                              %
                              
                              $
                              451,914
                              (4)
                              
                              
                              54.00
                              %
                              
                              $
                              385,678
                              (5)
                              
                              
                              52.96
                              %Multi-family
                              
                              
                              2,698
                              
                              
                              
                              0.24
                              
                              
                              
                              3,929
                              
                              
                              
                              0.48
                              
                              
                              
                              5,073
                              
                              
                              
                              0.62
                              
                              
                              
                              5,505
                              
                              
                              
                              0.66
                              
                              
                              
                              4,657
                              
                              
                              
                              .64Commercial
                              
                              
                              250,693
                              
                              
                              
                              22.17
                              
                              
                              
                              82,116
                              
                              
                              
                              10.10
                              
                              
                              
                              73,912
                              
                              
                              
                              9.05
                              
                              
                              
                              77,270
                              
                              
                              
                              9.23
                              
                              
                              
                              68,067
                              
                              
                              
                              9.35Construction
      and development
                              
                              
                              12,232
                              
                              
                              
                              1.08
                              
                              
                              
                              13,560
                              
                              
                              
                              1.67
                              
                              
                              
                              14,451
                              
                              
                              
                              1.77
                              
                              
                              
                              22,938
                              
                              
                              
                              2.74
                              
                              
                              
                              20,745
                              
                              
                              
                              2.85Total
      real estate loans
                              
                              $
                              786,987
                              
                              
                              
                              69.60
                              
                              
                              $
                              530,623
                              
                              
                              
                              65.28
                              
                              
                              $
                              526,559
                              
                              
                              
                              64.45
                              
                              
                              
                              557,627
                              
                              
                              
                              66.63
                              
                              
                              
                              479,147
                              
                              
                              
                              65.80Other
      Loans:Consumer
      Loans:Automobile
                              
                              $
                              22,715
                              
                              
                              
                              2.01
                              
                              
                              $
                              22,917
                              
                              
                              
                              2.82
                              
                              
                              $
                              31,336
                              
                              
                              
                              3.84
                              
                              
                              
                              39,802
                              
                              
                              
                              4.76
                              
                              
                              
                              39,475
                              
                              
                              
                              5.42Home
      equity
                              
                              
                              66,460
                              
                              
                              
                              5.88
                              
                              
                              
                              27,232
                              
                              
                              
                              3.35
                              
                              
                              
                              30,051
                              
                              
                              
                              3.68
                              
                              
                              
                              31,962
                              
                              
                              
                              3.82
                              
                              
                              
                              29,464
                              
                              
                              
                              4.05Home
      improvement
                              
                              
                              45,339
                              
                              
                              
                              4.01
                              
                              
                              
                              45,156
                              
                              
                              
                              5.55
                              
                              
                              
                              38,546
                              
                              
                              
                              4.72
                              
                              
                              
                              31,933
                              
                              
                              
                              3.82
                              
                              
                              
                              23,289
                              
                              
                              
                              3.20Manufactured
      housing
                              
                              
                              727
                              
                              
                              
                              0.06
                              
                              
                              
                              992
                              
                              
                              
                              0.12
                              
                              
                              
                              1,422
                              
                              
                              
                              0.17
                              
                              
                              
                              2,106
                              
                              
                              
                              0.25
                              
                              
                              
                              2,879
                              
                              
                              
                              .40R.V.
                              
                              
                              79,884
                              
                              
                              
                              7.07
                              
                              
                              
                              77,805
                              
                              
                              
                              9.57
                              
                              
                              
                              71,321
                              
                              
                              
                              8.73
                              
                              
                              
                              64,222
                              
                              
                              
                              7.67
                              
                              
                              
                              58,643
                              
                              
                              
                              8.05Boat
                              
                              
                              46,928
                              
                              
                              
                              4.15
                              
                              
                              
                              47,816
                              
                              
                              
                              5.88
                              
                              
                              
                              46,311
                              
                              
                              
                              5.67
                              
                              
                              
                              40,631
                              
                              
                              
                              4.85
                              
                              
                              
                              38,382
                              
                              
                              
                              5.27Other
                              
                              
                              6,339
                              
                              
                              
                              0.56
                              
                              
                              
                              3,593
                              
                              
                              
                              0.44
                              
                              
                              
                              3,986
                              
                              
                              
                              .48
                              
                              
                              
                              4,305
                              
                              
                              
                              .51
                              
                              
                              
                              3,325
                              
                              
                              
                              .46Total
      consumer loans
                              
                              
                              268,392
                              
                              
                              
                              23.74
                              
                              
                              
                              225,511
                              
                              
                              
                              27.74
                              
                              
                              
                              222,973
                              
                              
                              
                              27.29
                              
                              
                              
                              214,961
                              
                              
                              
                              25.68
                              
                              
                              
                              195,457
                              
                              
                              
                              26.84Commercial
      business loans
                              
                              
                              75,290
                              
                              
                              
                              6.66
                              
                              
                              
                              56,764
                              
                              
                              
                              6.98
                              
                              
                              
                              67,476
                              
                              
                              
                              8.26
                              
                              
                              
                              64,353
                              
                              
                              
                              7.69
                              
                              
                              
                              53,620
                              
                              
                              
                              7.36Total
      other loans
                              
                              
                              343,682
                              
                              
                              
                              30.40
                              
                              
                              
                              282,275
                              
                              
                              
                              34.72
                              
                              
                              
                              290,449
                              
                              
                              
                              35.55
                              
                              
                              
                              279,314
                              
                              
                              
                              33.37
                              
                              
                              
                              249,077
                              
                              
                              
                              34.20Total
      loans receivable, gross
                              
                              
                              1,130,669
                              (1)
                              
                              
                              100.00
                              %
                              
                              
                              812,898
                              (2)
                              
                              
                              100.00
                              %
                              
                              
                              817,008
                              (3)
                              
                              
                              100.00
                              %
                              
                              
                              836,941
                              (4)
                              
                              
                              100.00
                              %
                              
                              
                              728,224
                              (5)
                              
                              
                              100.00
                              %Less:Undisbursed
      portion of loans
                              
                              
                              4,372
                              
                              
                              
                              
                              
                              
                              
                              3,984
                              
                              
                              
                              
                              
                              
                              
                              5,520
                              
                              
                              
                              
                              
                              
                              
                              7,724
                              
                              
                              
                              
                              
                              
                              
                              9,237Deferred
      loan fees and costs
                              
                              
                              (3,484
                              )
                              
                              
                              
                              
                              
                              
                              (3,519
                              )
                              
                              
                              
                              
                              
                              
                              (3,623
                              )
                              
                              
                              
                              
                              
                              
                              (3,453
                              )
                              
                              
                              
                              
                              
                              
                              (3,814
                              )Allowance
      for losses
                              
                              
                              15,107
                              
                              
                              
                              
                              
                              
                              
                              8,352
                              
                              
                              
                              
                              
                              
                              
                              8,156
                              
                              
                              
                              
                              
                              
                              
                              8,100
                              
                              
                              
                              
                              
                              
                              
                              6,867Total
      loans receivable, net
                              
                              $
                              1,114,674
                              
                              
                              
                              
                              
                              
                              $
                              804,081
                              
                              
                              
                              
                              
                              
                              $
                              806,955
                              
                              
                              
                              
                              
                              
                              $
                              824,570
                              
                              
                              
                              
                              
                              
                              $
                              715,934
 ____________________
 (1)      Includes
loans held for sale of $1.5 million.
 (2)      Includes
loans held for sale of $1.6 million.
 (3)      Includes
loans held for sale of $1.3 million.
 (4)      Includes
loans held for sale of $2.0 million.
 (5)      Includes
loans held for sale of $2.9 million.
  6
  The
following table shows the composition of our loan portfolio by fixed- and
adjustable-rate at the dates indicated.
  December
      31,2008
                                            
                                            
                                            2007
                                            
                                            
                                            2006
                                            
                                            
                                            2005
                                            
                                            
                                            2004Amount
                                            
                                            
                                            Percent
                                            
                                            
                                            Amount
                                            
                                            
                                            Percent
                                            
                                            
                                            Amount
                                            
                                            
                                            Percent
                                            
                                            
                                            Amount
                                            
                                            
                                            Percent
                                            
                                            
                                            Amount
                                            
                                            
                                            Percent(Dollars
      in thousands)Fixed-Rate
      Loans:Real
      estate:One-
      to four-family
                                            
                                            $
                                            261,969
                                            (1)
                                            
                                            
                                            23.17
                                            %
                                            
                                            $
                                            254,235
                                            (2)
                                            
                                            
                                            31.28
                                            %
                                            
                                            $
                                            271,405
                                            (3)
                                            
                                            
                                            33.22
                                            %
                                            
                                            $
                                            305,911
                                            (4)
                                            
                                            
                                            36.55
                                            %
                                            
                                            $
                                            262,716
                                            (5)
                                            
                                            
                                            38.08
                                            %Multi-family
                                            
                                            
                                            2,401
                                            
                                            
                                            
                                            0.21
                                            
                                            
                                            
                                            3,610
                                            
                                            
                                            
                                            0.44
                                            
                                            
                                            
                                            4,488
                                            
                                            
                                            
                                            0.55
                                            
                                            
                                            
                                            4,587
                                            
                                            
                                            
                                            0.55
                                            
                                            
                                            
                                            3,427
                                            
                                            
                                            
                                            .47Commercial
                                            
                                            
                                            115,922
                                            
                                            
                                            
                                            10.25
                                            
                                            
                                            
                                            17,281
                                            
                                            
                                            
                                            2.13
                                            
                                            
                                            
                                            9,408
                                            
                                            
                                            
                                            1.15
                                            
                                            
                                            
                                            9,375
                                            
                                            
                                            
                                            1.12
                                            
                                            
                                            
                                            6,918
                                            
                                            
                                            
                                            .95Construction
      and development
                                            
                                            
                                            9,724
                                            
                                            
                                            
                                            0.86
                                            
                                            
                                            
                                            10,197
                                            
                                            
                                            
                                            1.25
                                            
                                            
                                            
                                            8,310
                                            
                                            
                                            
                                            1.02
                                            
                                            
                                            
                                            12,690
                                            
                                            
                                            
                                            1.52
                                            
                                            
                                            
                                            15,191
                                            
                                            
                                            
                                            2.09Total
      real estate loans
                                            
                                            
                                            390,016
                                            
                                            
                                            
                                            34.49
                                            
                                            
                                            
                                            285,323
                                            
                                            
                                            
                                            35.10
                                            
                                            
                                            
                                            293,611
                                            
                                            
                                            
                                            35.94
                                            
                                            
                                            
                                            332,563
                                            
                                            
                                            
                                            39.74
                                            
                                            
                                            
                                            288,252
                                            
                                            
                                            
                                            39.58Consumer
                                            
                                            
                                            229,326
                                            
                                            
                                            
                                            20.28
                                            
                                            
                                            
                                            198,068
                                            
                                            
                                            
                                            24.37
                                            
                                            
                                            
                                            192,715
                                            
                                            
                                            
                                            23.59
                                            
                                            
                                            
                                            182,784
                                            
                                            
                                            
                                            21.84
                                            
                                            
                                            
                                            165,895
                                            
                                            
                                            
                                            22.78Commercial
      business
                                            
                                            
                                            37,865
                                            
                                            
                                            
                                            3.35
                                            
                                            
                                            
                                            19,842
                                            
                                            
                                            
                                            2.44
                                            
                                            
                                            
                                            27,093
                                            
                                            
                                            
                                            3.32
                                            
                                            
                                            
                                            20,000
                                            
                                            
                                            
                                            2.39
                                            
                                            
                                            
                                            16,347
                                            
                                            
                                            
                                            2.24Total
      fixed-rate loans
                                            
                                            
                                            657,207
                                            
                                            
                                            
                                            58.12
                                            
                                            
                                            
                                            503,233
                                            
                                            
                                            
                                            61.91
                                            
                                            
                                            
                                            513,419
                                            
                                            
                                            
                                            62.85
                                            
                                            
                                            
                                            535,347
                                            
                                            
                                            
                                            63.97
                                            
                                            
                                            
                                            470,494
                                            
                                            
                                            
                                            64.61Adjustable-Rate
      Loans:Real
      estate:One-
      to four-family
                                            
                                            
                                            259,395
                                            
                                            
                                            
                                            22.94
                                            
                                            
                                            
                                            176,783
                                            
                                            
                                            
                                            21.75
                                            
                                            
                                            
                                            161,718
                                            
                                            
                                            
                                            19.79
                                            
                                            
                                            
                                            146,003
                                            
                                            
                                            
                                            17.44
                                            
                                            
                                            
                                            122,962
                                            
                                            
                                            
                                            16.89Multi-family
                                            
                                            
                                            297
                                            
                                            
                                            
                                            0.03
                                            
                                            
                                            
                                            319
                                            
                                            
                                            
                                            0.04
                                            
                                            
                                            
                                            585
                                            
                                            
                                            
                                            .07
                                            
                                            
                                            
                                            918
                                            
                                            
                                            
                                            0.11
                                            
                                            
                                            
                                            1,230
                                            
                                            
                                            
                                            .17Commercial
                                            
                                            
                                            134,771
                                            
                                            
                                            
                                            11.92
                                            
                                            
                                            
                                            64,835
                                            
                                            
                                            
                                            7.98
                                            
                                            
                                            
                                            64,504
                                            
                                            
                                            
                                            7.90
                                            
                                            
                                            
                                            67,895
                                            
                                            
                                            
                                            8.11
                                            
                                            
                                            
                                            61,149
                                            
                                            
                                            
                                            8.40Construction
      and development
                                            
                                            
                                            2,508
                                            
                                            
                                            
                                            0.22
                                            
                                            
                                            
                                            3,363
                                            
                                            
                                            
                                            0.41
                                            
                                            
                                            
                                            6,141
                                            
                                            
                                            
                                            .75
                                            
                                            
                                            
                                            10,248
                                            
                                            
                                            
                                            1.22
                                            
                                            
                                            
                                            5,554
                                            
                                            
                                            
                                            .76Total
      real estate loans
                                            
                                            
                                            396,971
                                            
                                            
                                            
                                            35.11
                                            
                                            
                                            
                                            245,300
                                            
                                            
                                            
                                            30.18
                                            
                                            
                                            
                                            232,948
                                            
                                            
                                            
                                            28.51
                                            
                                            
                                            
                                            225,064
                                            
                                            
                                            
                                            26.88
                                            
                                            
                                            
                                            190,895
                                            
                                            
                                            
                                            26.21Consumer
                                            
                                            
                                            39,066
                                            
                                            
                                            
                                            3.46
                                            
                                            
                                            
                                            27,443
                                            
                                            
                                            
                                            3.38
                                            
                                            
                                            
                                            30,258
                                            
                                            
                                            
                                            3.70
                                            
                                            
                                            
                                            32,177
                                            
                                            
                                            
                                            3.85
                                            
                                            
                                            
                                            29,562
                                            
                                            
                                            
                                            4.06Commercial
      business
                                            
                                            
                                            37,425
                                            
                                            
                                            
                                            3.31
                                            
                                            
                                            
                                            36,922
                                            
                                            
                                            
                                            4.53
                                            
                                            
                                            
                                            40,383
                                            
                                            
                                            
                                            4.94
                                            
                                            
                                            
                                            44,353
                                            
                                            
                                            
                                            5.30
                                            
                                            
                                            
                                            37,273
                                            
                                            
                                            
                                            5.12Total
      adjustable-rate loans
                                            
                                            
                                            473,462
                                            
                                            
                                            
                                            41.88
                                            
                                            
                                            
                                            309,665
                                            
                                            
                                            
                                            38.09
                                            
                                            
                                            
                                            303,589
                                            
                                            
                                            
                                            37.15
                                            
                                            
                                            
                                            301,594
                                            
                                            
                                            
                                            36.03
                                            
                                            
                                            
                                            257,730
                                            
                                            
                                            
                                            35.39Total
      loans
                                            
                                            
                                            1,130,669
                                            (1)
                                            
                                            
                                            100.00
                                            %
                                            
                                            
                                            812,898
                                            (2)
                                            
                                            
                                            100.00
                                            %
                                            
                                            
                                            817,008
                                            (3)
                                            
                                            
                                            100.00
                                            %
                                            
                                            
                                            836,941
                                            (4)
                                            
                                            
                                            100.00
                                            %
                                            
                                            
                                            728,224
                                            (5)
                                            
                                            
                                            100.00
                                            %Less:Undisbursed
      portion of loans
                                            
                                            
                                            4,372
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            3,984
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            5,520
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            7,724
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            9,237Deferred
      loan fees and costs
                                            
                                            
                                            (3,484
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            (3,519
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            (3,623
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            (3,453
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            (3,814
                                            )Allowance
      for loan losses
                                            
                                            
                                            15,107
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            8,352
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            8,156
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            8,100
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            6,867Total
      loans receivable, net
                                            
                                            $
                                            1,114,674
                                            
                                            
                                            
                                            
                                            
                                            
                                            $
                                            804,081
                                            
                                            
                                            
                                            
                                            
                                            
                                            $
                                            806,955
                                            
                                            
                                            
                                            
                                            
                                            
                                            $
                                            824,570
                                            
                                            
                                            
                                            
                                            
                                            
                                            $
                                            715,934
 ____________________
 (1)     Includes
loans held for sale of $1.5 million.
 (2)     Includes
loans held for sale of $1.6 million.
 (3)     Includes
loans held for sale of $1.3 million.
 (4)     Includes
loans held for sale of $2.0 million.
 (5)     Includes
loans held for sale of $2.9 million.
  7
  The
following schedule illustrates the contractual maturity of our loan portfolio at
December 31, 2008.  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
      31,2009(3)
                    
                    $
                    385
                    
                    
                    
                    7.02
                    %
                    
                    $
                    69,196
                    
                    
                    
                    5.28
                    %
                    
                    $
                    1,326
                    
                    
                    
                    6.34
                    %
                    
                    $
                    8,492
                    
                    
                    
                    6.74
                    %
                    
                    $
                    35,314
                    
                    
                    
                    3.34
                    %
                    
                    $
                    114,713
                    
                    
                    
                    4.81
                    %2010
                    
                    
                    401
                    
                    
                    
                    6.38
                    
                    
                    
                    16,578
                    
                    
                    
                    5.85
                    
                    
                    
                    438
                    
                    
                    
                    6.37
                    
                    
                    
                    10,804
                    
                    
                    
                    6.80
                    
                    
                    
                    2,701
                    
                    
                    
                    6.37
                    
                    
                    
                    30,922
                    
                    
                    
                    6.242011
                    
                    
                    532
                    
                    
                    
                    6.02
                    
                    
                    
                    26,635
                    
                    
                    
                    6.38
                    
                    
                    
                    274
                    
                    
                    
                    7.34
                    
                    
                    
                    17,780
                    
                    
                    
                    7.23
                    
                    
                    
                    7,209
                    
                    
                    
                    5.34
                    
                    
                    
                    52,430
                    
                    
                    
                    6.532012
      and 2013
                    
                    
                    10,706
                    
                    
                    
                    5.88
                    
                    
                    
                    46,989
                    
                    
                    
                    6.32
                    
                    
                    
                    496
                    
                    
                    
                    7.97
                    
                    
                    
                    38,110
                    
                    
                    
                    7.08
                    
                    
                    
                    20,507
                    
                    
                    
                    6.73
                    
                    
                    
                    116,808
                    
                    
                    
                    6.612014
      to 2015
                    
                    
                    9,351
                    
                    
                    
                    6.11
                    
                    
                    
                    21,562
                    
                    
                    
                    6.76
                    
                    
                    
                    104
                    
                    
                    
                    8.62
                    
                    
                    
                    18,685
                    
                    
                    
                    7.17
                    
                    
                    
                    4,798
                    
                    
                    
                    6.57
                    
                    
                    
                    54,500
                    
                    
                    
                    6.782016
      to 2030
                    
                    
                    151,119
                    
                    
                    
                    5.84
                    
                    
                    
                    69,821
                    
                    
                    
                    6.68
                    
                    
                    
                    1,248
                    
                    
                    
                    6.06
                    
                    
                    
                    173,986
                    
                    
                    
                    7.02
                    
                    
                    
                    4,761
                    
                    
                    
                    6.26
                    
                    
                    
                    400,935
                    
                    
                    
                    6.502031
      and following
                    
                    
                    347,329
                    
                    
                    
                    5.90
                    
                    
                    
                    2,610
                    
                    
                    
                    4.95
                    
                    
                    
                    8,346
                    
                    
                    
                    6.13
                    
                    
                    
                    535
                    
                    
                    
                    5.97
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    358,820
                    
                    
                    
                    5.90Total
                    
                    $
                    519,823
                    
                    
                    
                    5.89
                    %
                    
                    $
                    253,391
                    
                    
                    
                    6.13
                    %
                    
                    $
                    12,232
                    
                    
                    
                    6.28
                    %
                    
                    $
                    268,392
                    
                    
                    
                    7.03
                    %
                    
                    $
                    75,290
                    
                    
                    
                    4.95
                    %
                    
                    $
                    1,129,128
                    
                    
                    
                    6.16
                    %
 ____________________
 (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.
  8
  The total
amount of loans due after December 31, 2009 that have predetermined interest
rates is $633.1 million, and the total amount of loans due after such date which
have floating or adjustable interest rates is $381.3 million.
  One- to
Four-Family Residential Real Estate Lending.  We focus our real
estate lending efforts primarily on the origination of loans secured by first
mortgages on owner-occupied, one- to four-family residences in our market
areas.  At December 31, 2008, one- to four-family residential mortgage
loans totaled $521.4 million, or 46.1% of our gross loan portfolio.
  We
generally underwrite our one- to four-family loans based on the loan applicant’s
employment and credit history and the appraised value of the subject
property.  Generally, we lend up to 97% 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 MutualBank’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 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.  By way of
comparison, prior to the merger of MFB Financial, during fiscal 2007, we
originated $28.3 million of one- to four-family ARM loans and $58.3 million of
one- to four-family fixed-rate mortgage loans.
  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.
  9
  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, 2008, our
one- to four-family ARM loan portfolio totaled $259.4 million, or 22.9% of our
gross loan portfolio.  At that date, the fixed-rate one- to
four-family mortgage loan portfolio totaled $262.0 million, or 23.2% of our
gross loan portfolio.
  Multi-family and
Commercial Real Estate Lending.  We offer a variety of
multi-family and commercial real estate loans for acquisition, renovation or
construction.  These loans are secured by the real estate and
improvements financed.  The collateral securing these loans ranges
from industrial commercial buildings to churches, office buildings and
multi-family housing complexes.  At December 31, 2008, multi-family
and commercial real estate loans totaled $253.4 million, or 22.4% of our gross
loan portfolio.
  Our loans
secured by multi-family and commercial real estate are originated with either a
fixed or adjustable interest rate.  The interest rate on
adjustable-rate loans is based on a variety of indices, generally determined
through negotiation with the borrower.  Loan-to-value ratios on our
multi-family and commercial real estate loans typically do not exceed 80% of the
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.
  10
  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, 2008, we had $12.2
million in construction and development loans outstanding, representing 1.1% 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.
  11
  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, 2008, our consumer loan portfolio
totaled $268.4 million, or 23.7% of our gross loan portfolio. We offer a variety
of secured consumer loans, including home equity and lines of credit, home
improvement, auto, boat and recreational vehicle loans, and loans secured by
savings deposits.  We also offer a limited amount of 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, 2008, our home equity loans, including lines of credit and home
improvement loans, totaled $111.8 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, 2008, auto loans totaled $22.7 million, or 2.0% 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 $126.8 million at December 31, 2008, or
11.2% of our gross loan portfolio. We will finance up to 100% of the purchase
price for a recreational vehicle and 100% for a boat.  Values are
based on the applicable official used vehicle guides.  The term to
maturity for these types of loans is up to 15 years for new and used boats and
recreational vehicles.  These loans are generally written with a fixed
rate of interest.
  12
  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, 2008, commercial business
loans totaled $75.3 million, or 6.7% of our gross loan portfolio. Most of our
commercial business loans have been extended to finance businesses in our
footprint.  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.
  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.
 13
  Loan
Originations, Purchases, Sales and Repayments
  We
originate loans through referrals from real estate brokers and builders, our
marketing efforts, and our existing and walk-in customers.  We also
originate many of our consumer loans through relationships with
dealerships.  While we originate both adjustable-rate and fixed-rate
loans, our ability to originate loans depends upon customer demand for loans in
our market areas.  Demand is affected by local competition and the
interest rate environment.  During the last several years, due to low
market rates of interest, our dollar volume of fixed-rate, one- to four-family
loans has exceeded the dollar volume of the same type of adjustable-rate
loans.  As part of our interest rate risk management efforts, we have
from time to time sold our fixed rate, one- to four-family residential
loans.  We have also purchased adjustable one- to four-family
residential and commercial real estate loans.
  In
periods of economic uncertainty, the ability of financial institutions,
including us, to originate or purchase large dollar volumes of loans may be
substantially reduced or restricted, with a resultant decrease in interest
income.
 
 14
 
 The
following table shows our loan origination, purchase, sale and repayment
activities for the years indicated.
 
 Year
      Ended December 31,2008
                              
                              
                              2007
                              
                              
                              2006(In
      thousands)Originations by type:Adjustable
      rate:Real
      estate - one- to four-family
                              
                              $
                              33,083
                              
                              
                              $
                              28,275
                              
                              
                              $
                              40,838- multi-family
                              
                              
                              1,323
                              
                              
                              
                              —
                              
                              
                              
                              96- commercial
                              
                              
                              7,132
                              
                              
                              
                              11,557
                              
                              
                              
                              7,398- construction or
      development
                              
                              
                              5,617
                              
                              
                              
                              4,894
                              
                              
                              
                              9,396Non-real
      estate - consumer
                              
                              
                              43
                              
                              
                              
                              56
                              
                              
                              
                              148- commercial
      business
                              
                              
                              2,061
                              
                              
                              
                              2,026
                              
                              
                              
                              4,507Total
      adjustable-rate
                              
                              
                              49,259
                              
                              
                              
                              46,808
                              
                              
                              
                              62,383Fixed
      rate:Real
      estate - one- to four-family
                              
                              
                              78,040
                              
                              
                              
                              58,338
                              
                              
                              
                              59,794- multi-family
                              
                              
                              2,052
                              
                              
                              
                              —
                              
                              
                              
                              —- commercial
                              
                              
                              12,737
                              
                              
                              
                              2,171
                              
                              
                              
                              351- construction or
      development
                              
                              
                              9,171
                              
                              
                              
                              11,687
                              
                              
                              
                              9,623Non-real
      estate - consumer
                              
                              
                              42,465
                              
                              
                              
                              44,423
                              
                              
                              
                              56,086- commercial
      business
                              
                              
                              5,409
                              
                              
                              
                              3,153
                              
                              
                              
                              8,017Total
      fixed-rate
                              
                              
                              149,874
                              
                              
                              
                              119,772
                              
                              
                              
                              133,871Total
      loans originated
                              
                              
                              199,133
                              
                              
                              
                              166,580
                              
                              
                              
                              196,254Purchases:(1)Real
      estate - one- to four-family
                              
                              
                              213,441
                              
                              
                              
                              16,058
                              
                              
                              
                              5,447- commercial
                              
                              
                              93,479
                              
                              
                              
                              —
                              
                              
                              
                              —- construction or
      development
                              
                              
                              1,770
                              
                              
                              
                              —
                              
                              
                              
                              —Non-real
      estate - consumer
                              
                              
                              9,677
                              
                              
                              
                              —
                              
                              
                              
                              1,242- commercial
      business
                              
                              
                              75,496
                              
                              
                              
                              —
                              
                              
                              
                              —Total
      loans purchased
                              
                              
                              393,863
                              (2)
                              
                              
                              16,058
                              
                              
                              
                              6,689Sales and Repayments:Sales:Real
      estate - one- to four-family
                              
                              
                              92,914
                              
                              
                              
                              24,113
                              
                              
                              
                              50,853Total
      loans sold
                              
                              
                              92,914
                              
                              
                              
                              24,113
                              
                              
                              
                              50,853Principal
      repayments
                              
                              
                              179,187
                              
                              
                              
                              162,159
                              
                              
                              
                              174,743Total
      reductions
                              
                              
                              272,101
                              
                              
                              
                              186,272
                              
                              
                              
                              225,596Increase
      (decrease) in other items, net
                              
                              
                              (3,124
                              )
                              
                              
                              (476
                              )
                              
                              
                              2,720Net
      increase (decreases)
                              
                              $
                              317,771
                              
                              
                              $
                              (4,110
                              )
                              
                              $
                              (19,933
                              )
 ____________________
 (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.
  15
  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.  If the loan becomes 120 days delinquent and an
acceptable repayment plan has not been agreed upon, the collection officer will
turn over the account to our legal counsel with instructions to initiate
foreclosure.  The Bank has suspended foreclosure activities when
directed by government sponsored entities or the Bank’s regulator.
  For
consumer loans, a similar process is followed, with the initial written contact
being made once the loan is 20 days past due.
  Delinquent
Loans.  The following table sets forth, as of December 31,
2008, 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
                              
                              
                              63
                              
                              
                              $
                              4,848
                              
                              
                              
                              .93
                              %Multi-family
                              
                              
                              1
                              
                              
                              
                              95
                              
                              
                              
                              3.50Commercial
                              
                              
                              10
                              
                              
                              
                              2,096
                              
                              
                              
                              .84Construction
      and development
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —Consumer
                              
                              
                              133
                              
                              
                              
                              1,764
                              
                              
                              
                              .66Commercial
      business
                              
                              
                              3
                              
                              
                              
                              328
                              
                              
                              
                              .44Total
                              
                              
                              210
                              
                              
                              $
                              9,131
                              
                              
                              
                              .81
                              %
  16
  Non-performing
Assets.  The table below sets forth the amounts and categories
of non-performing assets in our loan portfolio at the dates
indicated.  Generally, loans are placed on non-accrual status when the
loan becomes more than 90 days delinquent or when collection of interest becomes
doubtful.  Foreclosed assets owned include assets acquired in
settlement of loans.
  December
      31,2008
                          
                          
                          2007
                          
                          2006
                          
                          
                          2005
                          
                          2004(Dollars
      in thousands)Non-accruing
      loans:One-
      to four-family
                          
                          $
                          7,917
                          
                          
                          $
                          2,997
                          
                          
                          $
                          2,762
                          
                          
                          $
                          2,967
                          
                          
                          $
                          1,326Multi-family
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Commercial
      real estate
                          
                          
                          7,723
                          
                          
                          
                          2,656
                          
                          
                          
                          356
                          
                          
                          
                          569
                          
                          
                          
                          370Construction
      and development
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Consumer
                          
                          
                          1,851
                          
                          
                          
                          1,294
                          
                          
                          
                          983
                          
                          
                          
                          628
                          
                          
                          
                          498Commercial
      business
                          
                          
                          2,507
                          
                          
                          
                          2,002
                          
                          
                          
                          1,468
                          
                          
                          
                          1,257
                          
                          
                          
                          1,791Total
                          
                          
                          19,998
                          
                          
                          
                          8,949
                          
                          
                          
                          5,569
                          
                          
                          
                          5,421
                          
                          
                          
                          3,985Accruing
      loans delinquent 90 days or more:One-
      to four-family
                          
                          
                          1,284
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          67
                          
                          
                          
                          —Multi-family
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Commercial
      real estate
                          
                          
                          189
                          
                          
                          
                          1,421
                          
                          
                          
                          —
                          
                          
                          
                          1,858
                          
                          
                          
                          —Construction
      and development
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Consumer
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          35
                          
                          
                          
                          119Commercial
      business
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Total
                          
                          
                          1,473
                          
                          
                          
                          1,421
                          
                          
                          
                          —
                          
                          
                          
                          1,960
                          
                          
                          
                          119Total
      nonperforming loans
                          
                          
                          21,471
                          
                          
                          
                          10,370
                          
                          
                          
                          5,569
                          
                          
                          
                          7,381
                          
                          
                          
                          4,104Restructured
      loans
                          
                          
                          293
                          
                          
                          
                          107
                          
                          
                          
                          111
                          
                          
                          
                          116
                          
                          
                          
                          120Foreclosed
      assets:One-
      to four-family
                          
                          
                          1,786
                          
                          
                          
                          927
                          
                          
                          
                          947
                          
                          
                          
                          912
                          
                          
                          
                          285Multi-family
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Commercial
      real estate
                          
                          
                          1,193
                          
                          
                          
                          437
                          
                          
                          
                          326
                          
                          
                          
                          595
                          
                          
                          
                          55Construction
      and development
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Consumer
                          
                          
                          1,861
                          
                          
                          
                          1,137
                          
                          
                          
                          1,322
                          
                          
                          
                          978
                          
                          
                          
                          894Commercial
      business
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Total
                          
                          
                          4,840
                          
                          
                          
                          2,501
                          
                          
                          
                          2,595
                          
                          
                          
                          2,485
                          
                          
                          
                          1,234Total
      non-performing assets
                          
                          $
                          26,604
                          
                          
                          $
                          12,978
                          
                          
                          $
                          8,275
                          
                          
                          $
                          9,982
                          
                          
                          $
                          5,458Total
      as a percentage of total assets
                          
                          
                          1.92
                          %
                          
                          
                          1.35
                          %
                          
                          
                          0.86
                          %
                          
                          
                          1.03
                          %
                          
                          
                          0.65
                          %
  For the
year ended December 31, 2008, gross interest income that would have been
recorded had the non-accruing loans been current in accordance with their
original terms amounted to $1.4 million.  The amount included in
interest income on these loans for the year ended December 31, 2008, was
$828,000.
 
 17
  At
December 31, 2008, foreclosed commercial real estate consisted of two commercial
buildings, one in Delaware County and one in Wabash County, which are currently
being offered for sale.  In addition, forty-one residential properties
with a book value of $1.8 million remain as foreclosed assets at
December 31, 2008. These properties are being offered for
sale.  Non-accruing one- to four-family loans increased to $7.9
million at December 31, 2008. Non-accruing commercial real estate loans
increased from $2.7 million at December 31, 2007, to $7.7 million at December
31, 2008. At the
same time, non-accrual commercial business loans increased from $2.0 million to
$2.5 million. These increases are primarily a result of current economic
slowdown.  Management continues to monitor aggressively and it is
management’s opinion that the non-accruing loans are sufficiently reserved as of
December 31, 2008.
  Other Loans of
Concern.  In addition to the non-performing assets set forth in
the table above, as of December 31, 2008, there was an aggregate of $14.9
million in loans with respect to which known information about the possible
credit problems of the borrowers have caused management to have doubts as to the
abilities of the borrowers to comply with present loan repayment terms and which
may result in the future inclusion of such items in the non-performing asset
categories.  These loans have been considered in management’s
determination of the adequacy of our allowance for loan
losses.  Management reviews each of these relationships at least
quarterly to determine if further downgrades are prudent.
  Included
in the $14.9 million above are 30 commercial business loans totaling $3.9
million, 24 commercial real estate loans totaling $8.2 million and 41
residential mortgage loans totaling $2.8 million. Loans of $934,000 had specific
loan loss reserves established and the majority of these loans were current as
of December 31, 2008
  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.
 
 18
  In
connection with the filing of MutualBank’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, 2008, we had classified $30.6
million of MutualBank’s loans as substandard, $2.1 million as doubtful and $1.5
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 26.20% of our
stockholders’ equity and 2.46% of our assets at December 31, 2008, compared to
16.56% and 1.50%, respectively, at December 31, 2007.
  Provision for
Loan Losses.  We recorded a provision for loan losses during
the year ended December 31, 2008 of $7.0 million, compared to $2.2 million for
the year ended December 31, 2007 and $2.1 million for the year ended December
31, 2006.  The provision for loan losses is charged to income to bring
our allowance for loan losses to a level deemed appropriate by management based
on the factors discussed below under “— Allowance for Loan Losses.”
  Allowance for
Loan Losses.  We maintain an allowance for loan losses to
absorb losses inherent in the loan portfolio. The allowance is based on ongoing,
quarterly assessments of the estimated losses inherent in the loan
portfolio.  Our methodology for assessing the appropriateness of the
allowance consists of several key elements, including the general allowance and
specific allowances for identified problem loans and portfolio
segments.  In addition, the allowance incorporates the results of
measuring impaired loans as provided in SFAS No. 114, “Accounting by Creditors
for Impairment of a Loan” and SFAS No. 118, “Accounting by Creditors for
Impairment of a Loan – Income Recognition and Disclosures.”  These
accounting standards prescribe the measurement methods, income recognition and
disclosures related to impaired loans.
  The
general allowance is calculated by applying loss factors to outstanding loans
based on the internal risk evaluation of such loans or pools of loans. Changes
in risk evaluations of both performing and nonperforming loans affect the amount
of the general allowance. Loss factors are based on our historical loss
experience as well as on significant factors that, in management’s judgment,
affect the collectibility of the portfolio as of the evaluation
date.
  The
appropriateness of the allowance is reviewed by management based upon its
evaluation of then-existing economic and business conditions affecting our key
lending areas and other conditions, such as credit quality trends (including
trends in nonperforming loans expected to result from existing conditions),
collateral values, loan volumes and concentrations, specific industry conditions
within portfolio segments and recent loss experience in particular segments of
the portfolio that existed as of the balance sheet date and the impact that such
conditions were believed to have had on the collectibility of the
loan.  Senior management reviews these conditions quarterly in
discussions with our senior credit officers.  To the extent that any
of these conditions is evidenced by a specifically identifiable problem credit
or portfolio segment as of the evaluation date, management’s estimate of the
effect of such condition may be reflected as a specific allowance applicable to
such credit or portfolio segment.  Where any of these conditions is
not evidenced by a specifically identifiable problem credit or portfolio segment
as of the evaluation date, management’s evaluation of the loss related to this
condition is reflected in the unallocated allowance.  The evaluation
of the inherent loss with respect to these conditions is subject to a higher
degree of uncertainty because they are not identified with specific problem
credits or portfolio segments.
 
 19
  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 2008, 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, 2008, our allowance for loan losses was $15.1 million, or 1.34% of
the total loan portfolio, and approximately 69.4% 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.
 
 20
 
 The
following table sets forth an analysis of our allowance for loan
losses.
  Year Ended December 31,2008
                                        
                                        
                                        2007
                                        
                                        
                                        2006
                                        
                                        
                                        2005
                                        
                                        
                                        2004(Dollars
      in thousands)Balance
      at beginning of period
                                        
                                        $
                                        8,352
                                        
                                        
                                        $
                                        8,156
                                        
                                        
                                        $
                                        8,100
                                        
                                        
                                        $
                                        6,867
                                        
                                        
                                        $
                                        6,779Charge-offs:One-
      to four-family
                                        
                                        
                                        480
                                        
                                        
                                        
                                        645
                                        
                                        
                                        
                                        526
                                        
                                        
                                        
                                        303
                                        
                                        
                                        
                                        249Multi-family
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Commercial
      real estate
                                        
                                        
                                        1,548
                                        
                                        
                                        
                                        44
                                        
                                        
                                        
                                        102
                                        
                                        
                                        
                                        6
                                        
                                        
                                        
                                        34Construction
      and development
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Consumer
                                        
                                        
                                        2,174
                                        
                                        
                                        
                                        1,731
                                        
                                        
                                        
                                        1,288
                                        
                                        
                                        
                                        1,276
                                        
                                        
                                        
                                        1,093Commercial
      business
                                        
                                        
                                        230
                                        
                                        
                                        
                                        303
                                        
                                        
                                        
                                        387
                                        
                                        
                                        
                                        954
                                        
                                        
                                        
                                        6164,432
                                        
                                        
                                        
                                        2,723
                                        
                                        
                                        
                                        2,303
                                        
                                        
                                        
                                        2,539
                                        
                                        
                                        
                                        1,992Recoveries:One-
      to four-family
                                        
                                        
                                        42
                                        
                                        
                                        
                                        121
                                        
                                        
                                        
                                        81
                                        
                                        
                                        
                                        22
                                        
                                        
                                        
                                        21Multi-family
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Commercial
      real estate
                                        
                                        
                                        558
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        120
                                        
                                        
                                        
                                        326Construction
      and development
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Consumer
                                        
                                        
                                        556
                                        
                                        
                                        
                                        357
                                        
                                        
                                        
                                        199
                                        
                                        
                                        
                                        194
                                        
                                        
                                        
                                        176Commercial
      business
                                        
                                        
                                        57
                                        
                                        
                                        
                                        201
                                        
                                        
                                        
                                        11
                                        
                                        
                                        
                                        15
                                        
                                        
                                        
                                        —1,213
                                        
                                        
                                        
                                        679
                                        
                                        
                                        
                                        291
                                        
                                        
                                        
                                        351
                                        
                                        
                                        
                                        523Net
      charge-offs
                                        
                                        
                                        3,219
                                        
                                        
                                        
                                        2,044
                                        
                                        
                                        
                                        2,012
                                        
                                        
                                        
                                        2,188
                                        
                                        
                                        
                                        1,469Amount
      acquired in acquisitions
                                        
                                        
                                        2,954
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        1,646
                                        
                                        
                                        
                                        —Provisions
      charged to operations
                                        
                                        
                                        7,020
                                        
                                        
                                        
                                        2,240
                                        
                                        
                                        
                                        2,068
                                        
                                        
                                        
                                        1,775
                                        
                                        
                                        
                                        1,557Balance
      at end of period
                                        
                                        $
                                        15,107
                                        
                                        
                                        $
                                        8,352
                                        
                                        
                                        $
                                        8,156
                                        
                                        
                                        $
                                        8,100
                                        
                                        
                                        $
                                        6,867Ratio
      of net charge-offs during the periodto
      average loans outstanding during theperiod
                                        
                                        
                                        0.34
                                        %
                                        
                                        
                                        0.25
                                        %
                                        
                                        
                                        0.24
                                        %
                                        
                                        
                                        0.29
                                        %
                                        
                                        
                                        0.21
                                        %Allowance
      as a percentage ofnon-performing
      loans
                                        
                                        
                                        69.41
                                        %
                                        
                                        
                                        79.72
                                        %
                                        
                                        
                                        143.59
                                        %
                                        
                                        
                                        109.74
                                        %
                                        
                                        
                                        167.32
                                        %Allowance
      as a percentage of total loans(end
      of period)
                                        
                                        
                                        1.34
                                        %
                                        
                                        
                                        1.03
                                        %
                                        
                                        
                                        1.00
                                        %
                                        
                                        
                                        0.98
                                        %
                                        
                                        
                                        0.95
                                        %
  21
 
 The
distribution of our allowance for loan losses at the dates indicated is
summarized as follows:
  December
      31,2008
                            
                            
                            2007
                            
                            
                            2006
                            
                            
                            2005
                            
                            
                            2004(Dollars in
      thousands)Amount
      of
                              Loan
      Loss
                              Allowance
                            
                            
                            Loan
                              Amounts
                              by
                              Category
                            
                            
                            Percent
                              of
      Loans
                              in
      Each
                              Category
                              to
      Total
                              Loans
                            
                            
                            Amount
      of
                              Loan
      Loss
                              Allowance
                            
                            
                            Loan
                              Amounts
                              by
                              Category
                            
                            
                            Percent
                              of
      Loans
                              in
      Each
                              Category
                              to
      Total
                              Loans
                            
                            
                            Amount
      of
                              Loan
      Loss
                              Allowance
                            
                            
                            Loan
                              Amounts
                              by
                              Category
                            
                            
                            Percent
                              of
      Loans
                              in
      Each
                              Category
                              to
      Total
                              Loans
                            
                            
                            Amount
      of
                              Loan
      Loss
                              Allowance
                            
                            
                            Loan
                              Amounts
                              by
                              Category
                            
                            
                            Percent
                              of
      Loans
                              in
      Each
                              Category
                              to
      Total
                              Loans
                            
                            
                            Amount
      of
                              Loan
      Loss
                              Allowance
                            
                            
                            Loan
                              Amounts
                              by
                              Category
                            
                            
                            Percent
                              of
      Loans
                              in
      Each
                              Category
                              to
      Total
                              LoansOne-
      to four-family
                            
                            $
                            1,997
                            
                            
                            $
                            521,364
                            1)
                            
                            
                            46.11
                            %
                            
                            $
                            1,200
                            
                            
                            
                            431,018
                            (2)
                            
                            
                            53.02
                            %
                            
                            $
                            1,219
                            
                            
                            
                            433,123
                            (3)
                            
                            
                            53.01
                            %
                            
                            $
                            1,267
                            
                            
                            $
                            451,914
                            (4)
                            
                            
                            54.00
                            %
                            
                            $
                            1,013
                            
                            
                            
                            385,678
                            (5)
                            
                            
                            52.96
                            %Multi-family
                            
                            
                            73
                            
                            
                            
                            2,698
                            
                            
                            
                            .24
                            
                            
                            
                            20
                            
                            
                            
                            3,929
                            
                            
                            
                            0.48
                            
                            
                            
                            61
                            
                            
                            
                            5,073
                            
                            
                            
                            0.62
                            
                            
                            
                            68
                            
                            
                            
                            5,505
                            
                            
                            
                            .66
                            
                            
                            
                            62
                            
                            
                            
                            4,657
                            
                            
                            
                            .64Commercial
      real estate
                            
                            
                            6,869
                            
                            
                            
                            250,693
                            
                            
                            
                            22.17
                            
                            
                            
                            2,158
                            
                            
                            
                            82,116
                            
                            
                            
                            10.10
                            
                            
                            
                            2,000
                            
                            
                            
                            73,912
                            
                            
                            
                            9.05
                            
                            
                            
                            2,039
                            
                            
                            
                            77,270
                            
                            
                            
                            9.23
                            
                            
                            
                            1,479
                            
                            
                            
                            68,067
                            
                            
                            
                            9.35Construction
      ordevelopment
                            
                            
                            12
                            
                            
                            
                            12,232
                            
                            
                            
                            1.08
                            
                            
                            
                            14
                            
                            
                            
                            13,560
                            
                            
                            
                            1.67
                            
                            
                            
                            72
                            
                            
                            
                            14,451
                            
                            
                            
                            1.77
                            
                            
                            
                            115
                            
                            
                            
                            22,938
                            
                            
                            
                            2.74
                            
                            
                            
                            104
                            
                            
                            
                            20,745
                            
                            
                            
                            2.85Consumer
                            
                            
                            3,990
                            
                            
                            
                            268,392
                            
                            
                            
                            23.74
                            
                            
                            
                            3,885
                            
                            
                            
                            225,511
                            
                            
                            
                            27.74
                            
                            
                            
                            3,801
                            
                            
                            
                            222,973
                            
                            
                            
                            27.29
                            
                            
                            
                            3,605
                            
                            
                            
                            214,961
                            
                            
                            
                            25.68
                            
                            
                            
                            3,155
                            
                            
                            
                            195,457
                            
                            
                            
                            26.84Commercial
      business
                            
                            
                            2,166
                            
                            
                            
                            75,290
                            
                            
                            
                            6.66
                            
                            
                            
                            1,075
                            
                            
                            
                            56,764
                            
                            
                            
                            6.99
                            
                            
                            
                            1,003
                            
                            
                            
                            67,476
                            
                            
                            
                            8.26
                            
                            
                            
                            1,006
                            
                            
                            
                            64,353
                            
                            
                            
                            7.69
                            
                            
                            
                            1,054
                            
                            
                            
                            53,620
                            
                            
                            
                            7.36Unallocated
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Total
                            
                            $
                            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
                            %
                            
                            $
                            6,867
                            
                            
                            $
                            728,224
                            
                            
                            
                            100.00
                            %
 ____________________
 (1)    Includes
loans held for sale of $1.5 million.
 (2)    Includes
loans held for sale of $1.6 million.
 (3)    Includes
loans held for sale of $1.3 million.
 (4)    Includes
loans held for sale of $2.0 million.
 (5)    Includes
loans held for sale of $2.9 million.
 
 22
 
 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
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Asset and Liability Management and Market Risk” in Item 7 of this
Form 10-K.
  Our
investment securities currently consist of U.S. Agency securities,
mortgage-backed securities, collateralized mortgage obligations, 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, 2008, 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.
 
 23
  Effective
June 30, 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,
2008, MutualBank had $86.9 million in consolidated investment
securities.  The portfolio is comprised of $77.2 million in
investments held for sale and $9.7 in investments held to
maturity.  Mutual Federal Investment Company managed $75.7 million of
the total held for sale portfolio.
  MutualBank
evaluates all securities for other-than-temporary impairment (“OTTI”) on a
quarterly basis.  During the year ending December 31, 2008, the Bank
determined that three securities met the definition of OTTI.  The
first security was a Lehman’s corporate bond that was written down
$200,000.  The other two securities were trust preferred securities
that had a total write-down of $1.2 million.  Impairment on these
securities was determined after analyzing the underlying collateral and
determining the amount of additional losses needed 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,
2008.
  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, 2008, $647,000
of this commitment remained payable over the next two years.
  A low and
moderate-income housing project qualifies for certain federal income tax credits
if (1) it is a residential rental property, (2) the units are used on a
non-transient basis, and (3) at least 20% of the units in the project are
occupied by tenants whose incomes are 50% or less of the area median gross
income, adjusted for family size, or alternatively, at least 40% of the units in
the project are occupied by tenants whose incomes are 60% or less of the area
median gross income.  Qualified low-income housing projects generally
must comply with these and other rules for 15 years, beginning with the first
year the project qualified for the tax credit, or some or all of the tax credit
together with interest may be recaptured. The tax credit is subject to the
limitation as the use of general business credit, but no basis reduction is
required for any portion of the tax credit claimed.  As of December
31, 2008, at least 85% 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 $1.2 million for the year ended December 31, 2008,
$811,000 for the year ended December 31, 2007, and $801,000 for the year ended
December 31, 2006 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.
 
 24
  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 31,2008
                                        
                                        
                                        2007
                                        
                                        
                                        2006(In
      thousands)Investments
      in Pedcor lowincome
      housing projects
                                        
                                        $
                                        4,561
                                        
                                        
                                        $
                                        3,246
                                        
                                        
                                        $
                                        3,461Equity
      in losses, net of income tax effect
                                        
                                        $
                                        (104
                                        )
                                        
                                        $
                                        (66
                                        )
                                        
                                        $
                                        (109
                                        )Tax
      credit
                                        
                                        
                                        1,214
                                        
                                        
                                        
                                        811
                                        
                                        
                                        
                                        801Increase
      in after-tax incomefrom
      Pedcor Investments
                                        
                                        $
                                        1,110
                                        
                                        
                                        $
                                        745
                                        
                                        
                                        $
                                        692
  See Note
9 of the Notes to Consolidated Financial Statements contained in Item 8 of this
Form 10-K for additional information regarding our limited partnership
investments.
 
 25
  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, 2008, 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
      31,2008
                      
                      
                      2007
                      
                      
                      2006Amortized
                        Cost
                      
                      
                      Fair
                        Value
                      
                      
                      Amortized
                        Cost
                      
                      
                      Fair
                        Value
                      
                      
                      Amortized
                        Cost
                      
                      
                      Fair
                        Value(In
      thousands)Investment securities
      available-for-sale:Mutual
      funds
                      
                      $
                      1,635
                      
                      
                      $
                      1,497
                      
                      
                      $
                      16,382
                      
                      
                      $
                      15,914
                      
                      
                      $
                      16,206
                      
                      
                      $
                      15,817Government
      sponsored entities
                      
                      
                      570
                      
                      
                      
                      572
                      
                      
                      
                      608
                      
                      
                      
                      605
                      
                      
                      
                      1,117
                      
                      
                      
                      1,099Mortgage-backed
      securities
                      
                      
                      14,771
                      
                      
                      
                      15,163
                      
                      
                      
                      2,310
                      
                      
                      
                      2,352
                      
                      
                      
                      3,146
                      
                      
                      
                      3,156Collateralized
      mortgage obligations
                      
                      
                      43,821
                      
                      
                      
                      43,639
                      
                      
                      
                      8,327
                      
                      
                      
                      8,322
                      
                      
                      
                      6,860
                      
                      
                      
                      6,762Corporate
      obligations
                      
                      
                      18,797
                      
                      
                      
                      15,527
                      
                      
                      
                      16,655
                      
                      
                      
                      16,399
                      
                      
                      
                      14,332
                      
                      
                      
                      14,236Municipal
      obligations
                      
                      
                      857
                      
                      
                      
                      857
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Total
      investment securities held for sale
                      
                      
                      80,451
                      
                      
                      
                      77,255
                      
                      
                      
                      44,282
                      
                      
                      
                      43,592
                      
                      
                      
                      41,661
                      
                      
                      
                      41,070Investment
      securities held to maturity:Mortgage-backed
      securities
                      
                      
                      5,498
                      
                      
                      
                      4,983
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Collateralized
      mortgage obligations
                      
                      
                      4,178
                      
                      
                      
                      3,545
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Total
      investment securities held to maturity
                      
                      
                      9,676
                      
                      
                      
                      8,528
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Investment
      in limited partnerships
                      
                      
                      4,561
                      
                      
                      
                      N/A
                      
                      
                      
                      3,246
                      
                      
                      
                      N/A
                      
                      
                      
                      3,461
                      
                      
                      
                      N/AInvestment
      in insurance company
                      
                      
                      590
                      
                      
                      
                      N/A
                      
                      
                      
                      590
                      
                      
                      
                      N/A
                      
                      
                      
                      590
                      
                      
                      
                      N/AFederal
      Home Loan Bank stock
                      
                      
                      18,632
                      
                      
                      
                      N/A
                      
                      
                      
                      10,037
                      
                      
                      
                      N/A
                      
                      
                      
                      9,938
                      
                      
                      
                      N/ATotal
      investments
                      
                      $
                      113,910
                      
                      
                      $
                      85,783
                      
                      
                      $
                      58,155
                      
                      
                      $
                      43,592
                      
                      
                      $
                      55,650
                      
                      
                      $
                      41,070
 
 26
  The
following table indicates, as of December 31, 2008, 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
                          
                          $
                          1,800
                          
                          
                          $
                          8,009
                          
                          
                          $
                          —
                          
                          
                          $
                          8,988
                          
                          
                          $
                          18,797
                          
                          
                          $
                          15,527Government
      sponsored entities
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          560
                          
                          
                          
                          867
                          
                          
                          
                          1,427
                          
                          
                          
                          1,429Mutual
      funds
                          
                          
                          1,635
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          1,635
                          
                          
                          
                          1,497Mortgage-backed
      securities:Freddie
      Mac
                          
                          
                          —
                          
                          
                          
                          22
                          
                          
                          
                          39
                          
                          
                          
                          28,055
                          
                          
                          
                          28,116
                          
                          
                          
                          28,708Fannie
      Mae
                          
                          
                          —
                          
                          
                          
                          1,126
                          
                          
                          
                          1,197
                          
                          
                          
                          15,642
                          
                          
                          
                          17,965
                          
                          
                          
                          21,076Ginnie
      Mae
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          164
                          
                          
                          
                          164
                          
                          
                          
                          167Other
                          
                          
                          —
                          
                          
                          
                          279
                          
                          
                          
                          2,618
                          
                          
                          
                          9,450
                          
                          
                          
                          12,347
                          
                          
                          
                          8,851$
                          3,435
                          
                          
                          $
                          9,436
                          
                          
                          $
                          4,414
                          
                          
                          $
                          63,166
                          
                          
                          $
                          80,451
                          
                          
                          $
                          77,255Weighted
      average yield
                          
                          
                          3.23
                          %
                          
                          
                          5.24
                          %
                          
                          
                          5.58
                          %
                          
                          
                          5.66
                          %
                          
                          
                          5.55
                          %Held-to-maturity:Mortgage-backed
      securities:Freddie
      Mac
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          856
                          
                          
                          $
                          856
                          
                          
                          $
                          847Fannie
      Mae
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          2,597
                          
                          
                          
                          2,597
                          
                          
                          
                          2,554Other
                          
                          
                          —
                          
                          
                          
                          206
                          
                          
                          
                          —
                          
                          
                          
                          6,017
                          
                          
                          
                          6,223
                          
                          
                          
                          5,127$
                          —
                          
                          
                          $
                          206
                          
                          
                          $
                          —
                          
                          
                          $
                          9,470
                          
                          
                          $
                          9,676
                          
                          
                          $
                          8,528Weighted
      average yield
                          
                          
                          
                          
                          
                          
                          5.31
                          %
                          
                          
                          
                          
                          
                          
                          4.68
                          %
                          
                          
                          4.71
                          %
  Sources
of Funds
  General.  Our
sources of funds are deposits, borrowings, payment of principal and interest on
loans, interest earned on or maturation of other investment securities and funds
provided from operations.
  Deposits.  We offer deposit
accounts to consumers and businesses having a wide range of interest rates and
terms.  Our deposits consist of savings deposit accounts, NOW and
demand accounts and certificates of deposit.   We solicit
deposits in our market areas.  We primarily rely on competitive
pricing policies, marketing and customer service to attract and retain these
deposits.  Beginning in 2005, we began accepting brokered
deposits.  We receive these deposits fromone broker without
paying a fee to that broker.  At December 31, 2008, our brokered
deposits totaled $6.0 million with an average interest rate of 3.76% and a
seven-month weighted average maturity.
 
 27
  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, 2008, we were in compliance with these reserve
requirements.
  The
following table sets forth the dollar amount of savings deposits in the various
types of deposit programs we offered at the dates indicated.
 
 December
      31,2008
                                  
                                  
                                  2007
                                  
                                  
                                  2006Amount
                                  
                                  
                                  Percent
                                    of
      Total
                                  
                                  
                                  Amount
                                  
                                  
                                  Percent
                                    of
      Total
                                  
                                  
                                  Amount
                                  
                                  
                                  Percent
                                    of
      Total(Dollars
      in thousands)Transactions and Savings
      Deposits:Noninterest
      bearing accounts
                                  
                                  $
                                  93,393
                                  
                                  
                                  
                                  9.70
                                  %
                                  
                                  $
                                  47,172
                                  
                                  
                                  
                                  7.08
                                  %
                                  
                                  $
                                  47,142
                                  
                                  
                                  
                                  6.70
                                  %Passbook
      accounts
                                  
                                  
                                  79,111
                                  
                                  
                                  
                                  8.22
                                  
                                  
                                  
                                  50,388
                                  
                                  
                                  
                                  7.56
                                  
                                  
                                  
                                  55,750
                                  
                                  
                                  
                                  7.93Interest-bearing
      NOW and demand accounts
                                  
                                  
                                  156,787
                                  
                                  
                                  
                                  16.29
                                  
                                  
                                  
                                  117,863
                                  
                                  
                                  
                                  17.69
                                  
                                  
                                  
                                  107,963
                                  
                                  
                                  
                                  15.35Money
      market accounts
                                  
                                  
                                  47,584
                                  
                                  
                                  
                                  4.94
                                  
                                  
                                  
                                  22,664
                                  
                                  
                                  
                                  3.40
                                  
                                  
                                  
                                  27,788
                                  
                                  
                                  
                                  3.95Total
      non-certificates
                                  
                                  
                                  376,875
                                  
                                  
                                  
                                  39.16
                                  
                                  
                                  
                                  238,087
                                  
                                  
                                  
                                  35.73
                                  
                                  
                                  
                                  238,643
                                  
                                  
                                  
                                  33.93Certificates:0.00
      -  1.99%
                                  
                                  
                                  55,064
                                  
                                  
                                  
                                  5.72
                                  
                                  
                                  
                                  8,627
                                  
                                  
                                  
                                  1.29
                                  
                                  
                                  
                                  15,772
                                  
                                  
                                  
                                  2.242.00
      -  3.99%
                                  
                                  
                                  359,899
                                  
                                  
                                  
                                  37.39
                                  
                                  
                                  
                                  47,500
                                  
                                  
                                  
                                  7.13
                                  
                                  
                                  
                                  82,621
                                  
                                  
                                  
                                  11.754.00
      -  5.99%
                                  
                                  
                                  170,611
                                  
                                  
                                  
                                  17.73
                                  
                                  
                                  
                                  372,145
                                  
                                  
                                  
                                  55.84
                                  
                                  
                                  
                                  366,284
                                  
                                  
                                  
                                  52.076.00
      -  7.99%
                                  
                                  
                                  65
                                  
                                  
                                  
                                  0.01
                                  
                                  
                                  
                                  48
                                  
                                  
                                  
                                  0.01
                                  
                                  
                                  
                                  39
                                  
                                  
                                  
                                  0.018.00
      -  9.99%
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —10.00%
      and over
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Total
      certificates
                                  
                                  
                                  585,639
                                  
                                  
                                  
                                  60.84
                                  
                                  
                                  
                                  428,320
                                  
                                  
                                  
                                  64.27
                                  
                                  
                                  
                                  464,716
                                  
                                  
                                  
                                  66.07Total
      deposits
                                  
                                  $
                                  962,514
                                  (1)
                                  
                                  
                                  100.00
                                  %
                                  
                                  $
                                  666,407
                                  
                                  
                                  
                                  100.00
                                  %
                                  
                                  $
                                  703,359
                                  
                                  
                                  
                                  100.00
                                  %
  (1)Includes $332.1 million due to MFB
acquisition
  28
  The
following table shows rate and maturity information for our certificates of
deposit as of December 31, 2008.
 
 1.00-
                      1.99%
                    
                    
                    
                    2.00-
                      3.99%
                    
                    
                    
                    4.00-
                      5.99%
                    
                    
                    
                    6.00-
                      7.99%
                    
                    
                    Total
                    
                    
                    Percent
                      of
      Total(Dollars
      in thousands)Certificate
      accountsmaturing
      in quarterending:March
      31, 2009
                    
                    $
                    30,049
                    
                    
                    $
                    70,961
                    
                    
                    $
                    44,084
                    
                    
                    $
                    —
                    
                    
                    $
                    145,094
                    
                    
                    
                    24.78
                    %June
      30, 2009
                    
                    
                    8,900
                    
                    
                    
                    58,986
                    
                    
                    
                    14,569
                    
                    
                    
                    —
                    
                    
                    
                    82,455
                    
                    
                    
                    14.07
                    %September
      30, 2009
                    
                    
                    7,618
                    
                    
                    
                    60,772
                    
                    
                    
                    7,454
                    
                    
                    
                    —
                    
                    
                    
                    75,844
                    
                    
                    
                    12.95
                    %December
      31, 2009
                    
                    
                    8,497
                    
                    
                    
                    40,677
                    
                    
                    
                    4,363
                    
                    
                    
                    8
                    
                    
                    
                    53,545
                    
                    
                    
                    9.15
                    %March
      31, 2010
                    
                    
                    —
                    
                    
                    
                    36,167
                    
                    
                    
                    11,972
                    
                    
                    
                    —
                    
                    
                    
                    48,139
                    
                    
                    
                    8.22
                    %June
      30, 2010
                    
                    
                    —
                    
                    
                    
                    16,061
                    
                    
                    
                    10,659
                    
                    
                    
                    —
                    
                    
                    
                    26,720
                    
                    
                    
                    4.56
                    %September
      30, 2010
                    
                    
                    —
                    
                    
                    
                    2,422
                    
                    
                    
                    5,224
                    
                    
                    
                    —
                    
                    
                    
                    7,646
                    
                    
                    
                    1.31
                    %December
      31, 2010
                    
                    
                    —
                    
                    
                    
                    3,729
                    
                    
                    
                    2,015
                    
                    
                    
                    —
                    
                    
                    
                    5,744
                    
                    
                    
                    0.98
                    %March
      31, 2011
                    
                    
                    —
                    
                    
                    
                    6,329
                    
                    
                    
                    1,299
                    
                    
                    
                    —
                    
                    
                    
                    7,628
                    
                    
                    
                    1.30
                    %June
      30, 2011
                    
                    
                    —
                    
                    
                    
                    16,117
                    
                    
                    
                    2,263
                    
                    
                    
                    —
                    
                    
                    
                    18,380
                    
                    
                    
                    3.14
                    %September
      30, 2011
                    
                    
                    —
                    
                    
                    
                    18,255
                    
                    
                    
                    2,766
                    
                    
                    
                    —
                    
                    
                    
                    21,021
                    
                    
                    
                    3.59
                    %December
      31, 2011
                    
                    
                    —
                    
                    
                    
                    21,628
                    
                    
                    
                    5,672
                    
                    
                    
                    58
                    
                    
                    
                    27,358
                    
                    
                    
                    4.67
                    %Thereafter
                    
                    
                    —
                    
                    
                    
                    7,795
                    
                    
                    
                    58,270
                    
                    
                    
                    —
                    
                    
                    
                    66,065
                    
                    
                    
                    11.28
                    %Total
                    
                    $
                    55,064
                    
                    
                    $
                    359,899
                    
                    
                    $
                    170,610
                    
                    
                    $
                    66
                    
                    
                    $
                    585,639
                    
                    
                    
                    100.00
                    %Percent
      of total
                    
                    
                    9.40
                    %
                    
                    
                    61.46
                    %
                    
                    
                    29.13
                    %
                    
                    
                    0.01
                    %
                    
                    
                    100.00
                    %
  The
following table indicates, as of December 31, 2008, 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(In
      thousands)Certificates
      of deposit less than $100,000
                        
                        $
                        96,596
                        
                        
                        $
                        57,228
                        
                        
                        $
                        79,434
                        
                        
                        $
                        159,936
                        
                        
                        $
                        393,194Certificates
      of deposit of $100,000 or more
                        
                        
                        35,759
                        
                        
                        
                        25,209
                        
                        
                        
                        48,851
                        
                        
                        
                        67,036
                        
                        
                        
                        176,855Public
      funds(1)
                        
                        
                        12,740
                        
                        
                        
                        18
                        
                        
                        
                        1,105
                        
                        
                        
                        1,727
                        
                        
                        
                        15,590Total
      certificates of deposit
                        
                        $
                        145,095
                        
                        
                        $
                        82,455
                        
                        
                        $
                        129,390
                        
                        
                        $
                        228,699
                        
                        
                        $
                        585,639
 _______________
 (1)      Deposits
from governmental and other public entities.
 
 29
  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 13 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, 2008, we had $263.1 million in
Federal Home Loan Bank advances outstanding.  Based on current
collateral levels we could borrow an additional $73.6 million from the Federal
Home Loan Bank at prevailing interest rates.  We believe that we will
continue to have sufficient funds, through deposits and borrowings, to meet our
current commitments.   See “Management’s Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Commitments”
contained in Item 7 of this Form 10-K.  See Note 14 to
Consolidated Financial Statements.
  We also
have a term note with a balance of $11.5 million and a revolving line of credit
with a balance of $0 from Bank of America as of December 31, 2008. See Note 14
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 issued trust preferred securities as part of
the acquisition of MFB.  The net balance of the note as of December
31, 2008 was $­­­­3.8
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.  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.
 
 30
  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 31,2008
                        
                        
                        2007
                        
                        
                        2006(In
      thousands)Maximum Balance:Federal
      Home Loan Bank advances
                        
                        $
                        300,147
                        
                        
                        $
                        191,675
                        
                        
                        $
                        193,345Notes
      payable
                        
                        
                        1,123
                        
                        
                        
                        1,427
                        
                        
                        
                        1,784Other
      borrowings
                        
                        
                        15,967
                        
                        
                        
                        4,311
                        
                        
                        
                        —Average Balance:Federal
      Home Loan Bank advances
                        
                        $
                        224,822
                        
                        
                        $
                        157,309
                        
                        
                        $
                        168,001Notes
      payable
                        
                        
                        718
                        
                        
                        
                        1,160
                        
                        
                        
                        1,635Other
      borrowings
                        
                        
                        7,967
                        
                        
                        
                        155
                        
                        
                        
                        —
  The
following table sets forth certain information as to our borrowings at the dates
indicated.
 
 December
      31,2008
                                    
                                    
                                    2007
                                    
                                    
                                    2006(Dollars
      in thousands)Federal
      Home Loan Bank advances
                                    
                                    $
                                    263,113
                                    
                                    
                                    $
                                    191,675
                                    
                                    
                                    $
                                    157,425Notes
      payable
                                    
                                    
                                    647
                                    
                                    
                                    
                                    1,055
                                    
                                    
                                    
                                    1,427Other
      borrowings
                                    
                                    
                                    15,345
                                    
                                    
                                    
                                    3,908
                                    
                                    
                                    
                                    ——Total
      borrowings
                                    
                                    $
                                    279,105
                                    
                                    
                                    $
                                    196,638
                                    
                                    
                                    $
                                    158,852Weighted
      average interest rate of FHLBadvances
                                    
                                    
                                    4.27
                                    %
                                    
                                    
                                    4.88
                                    %
                                    
                                    
                                    4.67
                                    %Weighted
      average interest rate of notespayable(1)
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Weighted
      average interest rate of otherborrowings(2)
                                    
                                    
                                    5.28
                                    %
                                    
                                    
                                    6.48
                                    %
                                    
                                    
                                    —
 _______________________
 (1)     Our
notes payable are capitalized loans with no current interest expense as of
December 31, 2008.
 (2)     Our
other borrowings are a line of credit, term loan and subordinate debt as of
December 31, 2008.
  Subsidiary
and Other Activities
  As a
federally chartered savings bank, MutualBank is permitted by OTS regulations to
invest up to 2% of its assets, or $27.8 million at December 31, 2008, 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.
 
 31
  The
Bank's insurance agency subsidiary, Mishawaka Financial Services, Inc. ("MFB
Insurance"), was acquired in the MFB transaction and currently is engaged in the
sale of life insurance and credit-life and health insurance, as agent to the
Bank's customers and the general public.
  The Bank
acquired three additional wholly-owned subsidiaries in the MFB transaction,
which manage a portion of its investment portfolio.  MFB Investments
I, Inc. and MFB Investments II, Inc. are Nevada corporations that jointly own
MFB Investments, LP, a Nevada limited partnership that holds and manages
investment securities previously owned by MFB Financial prior to the MFB
transaction.  As of December 31, 2008, these subsidiaries were merged
with Mutual Federal Investment Company, a wholly owned subsidiary of MutualBank.
The Bank also acquired Community Wealth Management Group, Inc. a subsidiary of
MFB Financial.  This subsidiary was dissolved and is the MutualWealth
division of the Bank.
  At
December 31, 2008, MutualBank had two active subsidiaries, First M.F.S.B.
Corporation, which is a service corporation and Mutual Federal Investment
Company, which is an operating subsidiary.  The assets of First
M.F.S.B. consists of an investment in Family Financial Holdings, Inc., which is
an Indiana Corporation that provides debt cancellation products to financial
institutions.  As of December 31, 2008, MutualBank’s total investment
in this subsidiary was $590,000.  For the year ended December 31,
2008, First M.F.S.B. reported no income.  Mutual Federal Investment
Company is a Nevada corporation that holds and manages a portion of MutualBank’s
investment portfolio.  As of December 31, 2008, the market value of
securities managed is $75.7 million.  Mutual Federal Investment
Company has one active subsidiary, MutualBank REIT, Inc.  MutualBank
REIT, Inc. is a Maryland corporation holding approximately $116.1 million in
one-to four-family mortgage loans.
  On
January 25, 2003, MutualFirst purchased 26.9%
of Indiana Title Insurance Co., LLC (“ITIC”), a full service title insurance
company.  In 2008, MutualFirst sold its share of
ITIC for a loss of $329,000.
  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.
 
 32
  Employees
  At
December 31, 2008, we had a total of 365 full-time and 73 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.
  Recent
Legislative and Regulatory Initiatives to Address Financial and Economic
Crises
  The
Congress, Treasury Department and the federal banking regulators, including the
FDIC, have taken broad action since early September to address volatility in the
U.S. banking system.
  The
Emergency Economic Stabilization Act of 2008 (“EESA”) authorizes the Treasury
Department to purchase from financial institutions and their holding companies
up to $700 billion in mortgage loans, mortgage-related securities and certain
other financial instruments, including debt and equity securities issued by
financial institutions and their holding companies in a troubled asset relief
program (”TARP”).  The purpose of TARP is to restore confidence and
stability to the U.S. banking system and to encourage financial institutions to
increase their lending to customers and to each other.  The Treasury
Department has allocated $250 billion towards the TARP Capital Purchase Program
(“CPP”).  Under the CPP, Treasury will purchase debt or equity
securities from participating institutions.  The TARP also will
include direct purchases or guarantees of troubled asset of financial
institutions.  Participants in the CPP are subject to executive
compensation limits and are encouraged to expand their lending and mortgage loan
modifications.
  EESA also
increased FDIC deposit insurance on most accounts from $100,000 to
$250,000.  This increase is in place until the end of 2009 and is not
covered by deposit insurance premiums paid by the banking industry.
  Following
a systemic risk determination, the FDIC established a Temporary Liquidity
Guarantee Program (“TLGP”) in October 2008.  Under the interim rule
for the TLGP, there are two parts to the program:  the Debt Guarantee
Program (“DGP”) and the Transaction Account Guarantee Program
(“TAGP”).  Eligible entities continue to participate unless they opted
out on or before December 5, 2008.
  For the
DGP, eligible entities are generally US bank holding companies, savings and loan
holding companies, and FDIC-insured institutions.  Under the DGP, the
FDIC guarantees new senior unsecured debt of an eligible entity issued not later
than June 30, 2009 and if an application is approved, guarantees certain
mandatory convertible debt.
 
 33
  For the
TAGP, eligible entities are FDIC-insured institutions.  Under the
TAGP, the FDIC, provides unlimited deposit insurance coverage through December
31, 2009 for non-interest bearing transaction accounts (typically business
checking accounts), NOW accounts bearing interst at 0.5% or less, and certain
funds swept into noninterest-bearing savings accounts.  NOW accounts
and money market deposit accounts are not covered.  Participating
institutions pay fees of 10 basis points (annualized) on the balance of each
covered account in excess of $250,000 during the period through December 31,
2009.
  MutualFirst.  Pursuant
to regulations of the OTS and the terms of MutualFirst’s Maryland
articles of incorporation, the purpose and powers of MutualFirst are to pursue any
or all of the lawful objectives of a thrift holding company and to exercise any
of the powers accorded to a thrift holding company.
  MutualFirst is a unitary
savings and loan holding company subject to regulatory oversight by the OTS.
MutualFirst is required
to register and file reports with the OTS and is subject to regulation and
examination by the OTS.  In addition, the OTS has enforcement
authority over us and our non-savings institution subsidiaries.
  MutualFirst generally is not
subject to activity restrictions.  If MutualFirst acquired control
of another savings institution as a separate subsidiary, it would become a
multiple savings and loan holding company, and its activities and any of its
subsidiaries (other than 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
failure MutualFirst
must register as, and will become subject to, the restrictions applicable to
bank holding companies.  The activities authorized for a bank holding
company are more limited than the activities authorized for a unitary or
multiple thrift holding company.
  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.
 
 34
  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, 2008, MutualBank met the test and has
met the test since its effectiveness.  If MutualBank loses qualified
thrift 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 and MutualFirst.
  MutualBank’s
general permissible lending limit for loans-to-one-borrower is equal to the
greater of $500,000 or 15% of unimpaired capital and surplus (except for loans
fully secured by certain readily marketable collateral, in which case this limit
is increased to 25% of unimpaired capital and surplus).  At December
31, 2008 MutualBank’s lending limit under this restriction was $22.5
million.  MutualBank is in compliance with the loans-to-one-borrower
limitation.
  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, 2008 were $512,000.  Those
premiums will increase in 2009 due to recent strains on the FDIC deposit
insurance fund due to the cost of large bank failures and increase in the number
of troubled banks.
  In
February 2009, the FDIC issued new deposit premium regulations providing for
increases in premiums, higher premiums for institutions with secured debt
(including FHLBank advances) and brokered deposits, and a special assessment in
the second quarter of 2009 to replenish the fund.  Under these new
deposit insurance premium regulations, the FDIC assesses deposit insurance
premiums on all FDIC-insured institutions quarterly based on annualized rates
for four risk categories.  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 (DIF).  Under 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.
 
 35
  The rule
also includes authority for the FDIC to increase or decrease total base
assessment rates in the future by as much as three basis points without formal
rulemaking proceeding.
  In
addition to the regular quarterly assessments, due to losses and projected
losses attributed to failed institutions, the FDIC has adopted a rule imposing
on every insured institution a special assessment equal to 20 basis points of
its assessment base as of June 30, 2009, to be collected on September 30,
2009.  The FDIC has indicated that, if its borrowing authority from
the United States Treasury is increased, it would reduce the special assessment
to 10 basis points.  There is legislation pending to increase that
borrowing authority from $30 billion to $100 billion (and up to $500 billion
under special circumstances).  The special assessment rule also
authorizes the FDIC to impose additional special assessments if the reserve
ratio of the DIF is estimated to fall to a level that the FDIC’s board believes
would adversely affect public confidence or that is close to zero or
negative.  Any additional special assessment would be in an amount up
to 10 basis points on the assessment base for the quarter in which it is imposed
and would be collected at the end of the following quarter.
  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 is in an
unsafe or unsound condition.
  Regulatory Capital Requirements.Federally insured savings institutions, such as MutualBank, are required
to maintain a minimum level of regulatory capital.  The OTS has
established capital standards, including a leverage ratio or core capital
requirement and a risk-based capital requirement applicable to such savings
institutions.  These capital requirements must be generally as
stringent as the comparable capital requirements for national
banks.  The OTS also may impose capital requirements in excess of
these standards on individual institutions on a case-by-case basis.
  The
capital standards generally require core capital equal to at least 4.0% of
adjusted total assets.  Core capital consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships.  At December 31, 2008, MutualBank had core capital
equal to $136.6 million, or 9.86% of adjusted total assets, which is $81.2
million above the minimum requirement of 4% in effect on that date.
 
 36
  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, 2008, MutualBank
had total risk-based capital of $150.2 million and risk-weighted assets of $1.1
billion; or total capital of 13.79% of risk-weighted assets.  This
amount was $63.1 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.
 
 37
  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 repurchase our common stock is subject to limits
due to our participation in the TARP Capital Purchase Program.  See
“General” and Item 1A.
  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,
2004.  MutualFirst and MutualBank
will file a consolidated federal income tax return for fiscal year
2008.
  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.
 
 38
  Corporate
Dividends-Received Deduction.  MutualFirst may eliminate
from its income dividends received from MutualBank as a wholly owned subsidiary
of MutualFirstif 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.
  Item
1A.         Risk
Factors
  The
following are certain risk factors that could impact our business, financial
results and results of operations.  Investing in our common stock
involves risks, including those described below.  These risk factors
should be considered by prospective and current investors in our common stock
when evaluating the disclosures in this Annual Report on Form 10-K (particularly
the forward-looking statements.)  These risk factors could cause
actual results and conditions to differ materially from those projected in
forward-looking statements.  If the risks we face, including those
listed below, actually occur, our business, financial condition or results of
operations could be negatively impacted, and the trading price of our common
stock could decline, which may cause you to lose all or part of your
investment.
  39
  Difficult
market conditions and economic trends have adversely affected our industry and
our business.
 
 Dramatic
declines in the housing market, with decreasing home prices and increasing
delinquencies and foreclosures, have negatively impacted the credit performance
of mortgage and construction loans and resulted in significant write-downs of
assets by many financial institutions.  In addition, the values of
real estate collateral supporting many loans have declined and may continue to
decline. General downward economic trends, reduced availability of
commercial credit and increasing unemployment have negatively affected the
credit performance of commercial and consumer credit, resulting in additional
write-downs.  Concerns over the stability of the financial markets and
the economy have resulted in decreased lending by some financial institutions to
their customers and to each other.  This market turmoil and tightening
of credit has led to increased commercial and consumer delinquencies, lack of
customer confidence, increased market volatility and widespread reduction in
general business activity. Competition among depository institutions
for deposits has increased significantly. Some financial institutions
have experienced decreased access to deposits and/or
borrowings.
  The
resulting economic pressure on consumers and businesses and the lack of
confidence in the financial markets may adversely affect our business, financial
condition, results of operations and stock price.
  Our
ability to assess the creditworthiness of customers and to estimate the losses
inherent in our credit exposure is made more complex by these difficult market
and economic conditions.  As a result of the foregoing factors, there
is a potential for new laws and regulations regarding lending and funding
practices and liquidity standards, and bank regulatory agencies are expected to
be very aggressive in responding to concerns and trends identified in
examinations.  This increased government action may increase our costs and
limit our ability to pursue certain business opportunities.  We
also may be required to pay even higher FDIC premiums than the recently
increased level, because financial institution failures resulting from the
depressed market conditions have depleted and may continue to deplete the
deposit insurance fund and reduce its ratio of reserves to insured
deposits.
  We do not
believe these difficult conditions are likely to improve in the near
future.  A worsening of these conditions would likely exacerbate the
adverse effects of these difficult market and economic conditions on us, our
customers and the other financial institutions in our market area.  As
a result, we may experience increases in foreclosures, delinquencies and
customer bankruptcies, as well as more restricted access to funds.
  Recent
legislative and regulatory initiatives to address difficult market and economic
conditions may not stabilize the U.S. banking system.
  The
recently enacted Emergency Economic Stabilization Act of 2008 (the “EESA”)
authorizes Treasury to purchase from financial institutions and their holding
companies up to $700 billion in mortgage loans, mortgage-related securities and
certain other financial instruments, including debt and equity securities issued
by financial institutions and their holding companies, under a troubled asset
relief program, or “TARP.”  The purpose of TARP is to restore
confidence and stability to the U.S. banking system and to encourage financial
institutions to increase their lending to customers and to each
other.  The Treasury has allocated $250 billion towards the TARP
Capital Purchase Program.  Under the TARP Capital Purchase Program,
Treasury is purchasing equity securities from participating
institutions.  The warrant offered by this prospectus, together with
our Series A Preferred Stock, was issued by us to Treasury pursuant to the TARP
Capital Purchase Program. The EESA also increased federal deposit insurance
on most deposit accounts from $100,000 to $250,000.  This increase is
in place until the end of 2009 and is not covered by deposit insurance premiums
paid by the banking industry.
 
 40
  The EESA
followed, and has been followed by, numerous actions by the Board of Governors
of the Federal Reserve System, the U.S. Congress, Treasury, the FDIC, the SEC
and others to address the current liquidity and credit crisis that has followed
the sub-prime meltdown that commenced in 2007.  These measures include
homeowner relief that encourage loan restructuring and modification; the
establishment of significant liquidity and credit facilities for financial
institutions and investment banks; the lowering of the federal funds rate;
emergency action against short selling practices; a temporary guaranty program
for money market funds; the establishment of a commercial paper funding facility
to provide back-stop liquidity to commercial paper issuers; and coordinated
international efforts to address illiquidity and other weaknesses in the banking
sector. The purpose of these legislative and regulatory actions is to
stabilize the U.S. banking system. The EESA and the other regulatory initiatives
described above may not have their desired effects.  If the volatility
in the markets continues and economic conditions fail to improve or worsen, our
business, financial condition and results of operations could be materially and
adversely affected.
  Current
levels of market volatility are unprecedented.
  The
capital and credit markets have been experiencing volatility and disruption for
more than a year. In recent months, the volatility and disruption has reached
unprecedented levels.  In some cases, the markets have produced
downward pressure on stock prices and credit availability for certain issuers
without regard to those issuers’ underlying financial strength. If current
levels of market disruption and volatility continue or worsen, there can be no
assurance that we will not experience an adverse effect, which may be material,
on our ability to access capital and on our business, financial condition and
results of operations.
  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
 
 ·
                  the
      duration of the loan.
  41
 
 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.
  Our
loan portfolio possesses increased risk due to our substantial number of
multi-family, commercial real estate, consumer and commercial business
loans.
  Approximately
52.8% of our loan portfolio as of December 31, 2008, consists of multi-family,
commercial real estate, consumer and commercial business
loans.  Multi-family and commercial real estate loans accounted for
approximately 22.4% of our total loan portfolio as of December 31,
2008.  Our commercial business and consumer loans accounted,
respectively, for approximately 6.7% and 23.7% of our total loan portfolio as of
December 31, 2008.  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.
  Rising
interest rates may hurt our profits.
  To be
profitable, we have to earn more money in interest we receive on loans and
investments that we make than we pay to our depositors and lenders in
interest.  If interest rates rise, our net interest income and the
value of our assets could be reduced if interest paid on interest-bearing
liabilities, such as deposits and borrowings, increases more quickly than
interest received on interest-earning assets, such as loans, other
mortgage-related investments and investment securities.  This is most
likely to occur if short-term interest rates increase at a faster rate than
long-term interest rates, which would cause income to go down.  In
addition, rising interest rates may hurt our income, because they may reduce the
demand for loans and the value of our securities.  For a further
discussion of how changes in interest rates could impact us, see “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in
Item 7 and “Asset and Liability Management and Market Risk” in Item
7A.
 
 42
 
 If
economic conditions deteriorate, our results of operations and financial
condition could be adversely impacted as borrowers’ ability to repay loans
declines and the value of the collateral securing our loans
decreases.
  Our
financial results may be adversely affected by changes in prevailing economic
conditions, including decreases in real estate values, changes in interest rates
that cause a decrease in interest rate spreads, adverse employment conditions,
the monetary and fiscal policies of the federal government and other significant
external events.  In addition, we have a significant amount of real
estate loans.  Accordingly, decreases in real estate values could
adversely affect the value of collateral securing our loans.  Adverse
changes in the economy may also have a negative effect on the ability of our
borrowers to make timely repayments of their loans.  In this regard, a
substantial majority of our loans are to individuals and businesses in north and
central eastern Indiana.  These factors could expose us to an
increased risk of loan defaults and losses and have an adverse impact on our
earnings.
 
 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 the terms of which 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.
 
 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 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.
 
 43
 
 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.
  If
we are unable to redeem our Series A Preferred Stock after five years, the cost
of this capital to us will increase substantially.
  If we are
unable to redeem the Series A Preferred Stock prior to February 15, 2014, the
cost of this capital to us will increase substantially on that date, from 5.0%
per annum (approximately $1.6 million annually) to 9.0% per annum (approximately
$2.9 million annually).  See “Description of Capital Stock—Series A
Preferred Stock-Redemption and Repurchases.”  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
operate in a highly regulated environment, and we may be adversely affected by
changes in laws and regulations.
  The Bank
is subject to extensive regulation, supervision and examination by the OTS, its
chartering authority, and by the FDIC, as insurer of its deposits. MutualFirst Financial
also is subject to regulation and supervision by the OTS. This regulation and
supervision governs the activities in which we may engage, and are intended
primarily for the protection of the deposit insurance fund and depositors.
Regulatory authorities have extensive discretion in their supervisory and
enforcement activities, including the imposition of restrictions on our
operations, the classification of our assets and determination of the level of
our allowance for loan losses. Any change in this regulation and oversight,
whether in the form of regulatory policy, regulations, legislation or
supervisory action, may have a material impact on our operations.
  Strong
competition within our market area may limit our growth and
profitability.
  Competition
in the banking and financial services industry is intense.  In our
market area, we compete with commercial banks, savings institutions, mortgage
brokerage firms, credit unions, finance companies, mutual funds, insurance
companies, and brokerage and investment banking firms operating locally and
elsewhere.  Many of these competitors have substantially greater
resources and lending limits than we do and may offer certain services that we
do not or cannot provide.   Our profitability depends upon our
continued ability to successfully compete in our market.
 
 44
 
 We
rely on dividends from the Bank for substantially all of our
revenue.
  MutualFirst receives
substantially all of its revenue as dividends from the Bank.  OTS
regulations limit the amount of dividends that the Bank may pay to MutualFirst
Financial.  See “Regulatory Considerations.”  In the event
the Bank becomes unable to pay dividends to MutualFirst Financial, MutualFirst Financial may not
be able to service its debt, pay its other obligations or pay dividends on its
common stock.  Accordingly, our inability to receive dividends from
the Bank could also have a material adverse effect on our business, financial
condition and results of operations and the value of your investment in our
common stock. As of
December 31, 2008, the Bank is required to receive regulatory approval prior to
declaring dividends to the Company.
 
 The
price of our common stock may fluctuate significantly, and this may make it
difficult for you to resell our common stock when you want or at prices you find
attractive.
  We cannot
predict how our common stock will trade in the future. The market value
of our common stock will likely continue to fluctuate in response to a
number of factors including the following, most of which are beyond our control,
as well as the other factors described in this “Risk Factors”
section:
  ·
                  actual
      or anticipated quarterly fluctuations in our operating and financial
      results;
 ·
                  developments
      related to investigations, proceedings or litigation that involve
      us;
 ·
                  changes
      in financial estimates and recommendations by financial
      analysts;
 ·
                  dispositions,
      acquisitions and financings;
 ·
                  fluctuations
      in the stock prices and operating results of our
    competitors;
 ·
                  regulatory
      developments; and
 ·
                  other
      developments related to the financial services
  industry.
  The
market value of our common stock may also be affected by conditions affecting
the financial markets in general, including price and trading fluctuations.
These conditions may result in (i) volatility in the level of, and
fluctuations in, the market prices of stocks generally and, in turn, our
common stock and (ii) sales of substantial amounts of our common stock in
the market, in each case that could be unrelated or disproportionate to changes
in our operating performance. These broad market fluctuations may adversely
affect the market value of our common stock. Our common stock also has
a low average daily trading volume relative to many other stocks, which may
limit an investor’s ability to quickly accumulate or divest themselves of large
blocks of our stock. This can lead to significant price swings even when a
relatively small number of shares are being traded.
  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.
 
 45
 
 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.  For
further information, see “Description of Capital Stock—Preferred
Stock.”   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.
  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.
  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.
 
 46
  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 of MutualFirst
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 in total shares
outstanding).  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
  The
amount of common stock we control, our articles of incorporation and bylaws, and
state and federal statutory provisions could discourage hostile acquisitions of
control.
  Our board
of directors and executive officers beneficially own 12.38% of our common stock,
and have additional stock options for 413,390 shares which are exercisable
within 60 days of March 2, 2009.  In addition, our employee stock
ownership plan(s) and charitable foundation controlled, respectively, 6.4% and
3.2% of our common stock.  As of December 31, 2008, 357,902 shares
were reserved under various stock benefit plans for future awards for directors,
officers and employees of the Company and the Bank.  This inside
ownership together with provisions in our articles of incorporation and bylaws
may have the effect of discouraging attempts to acquire MutualFirst, pursue a proxy
contest for control of MutualFirst, assume control
of MutualFirst by a
holder of a large block of common stock and remove MutualFirst’s management, all
of which certain stockholders might think are in their best
interests.  These provisions include, among other things: (a)
staggered terms of the members of the board of directors; (b) an 80% shareholder
vote requirement for approval of any merger or consolidation of MutualFirst into any entity
that directly or indirectly owns 5% or more of MutualFirst voting stock if
the transaction is not approved in advance by at least a majority of the
disinterested members of MutualFirst’s board of
directors; (c) supermajority shareholder vote requirements for the approval of
certain amendments to MutualFirst’s articles of
incorporation and bylaws; (d) a prohibition on any holder of common stock voting
more than 10% of the outstanding common stock; (e) elimination of cumulative
voting by stockholders in the election of directors; (f) restrictions on the
acquisition of our equity securities; and (g) the authorization of 5 million
shares of preferred stock that may be issued with stockholder approval on terms
or in circumstances that could deter a future takeover attempt.  As a
Maryland corporation, we are subject to the Maryland business corporation law,
which contains certain restrictions on an acquisition of control of MutualFirst.  Furthermore,
federal law requires regulatory approval of any acquisition of control of MutualFirst and imposes
limits on the types of companies that can control us.
 
 47
  Item
1B.         Unresolved Staff
Comments
  None
  Item
2.            Properties
  At
December 31, 2008 we had 33 full service offices.  We own the office
building in which our home office and executive offices are
located.  At December 31, 2008 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 $34.2
millionat December
31, 2008.  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, 2008 the net book
value of the data processing and computer equipment utilized by us was $2.3
million.
  Item
3.            Legal
Proceedings
  From time
to time, we are involved as plaintiff or defendant in various legal actions
arising in the normal course of business.  We do not anticipate
incurring any material liability as a result of such litigation.
  Item
4.            Submission
of Matters to a Vote of Security Holders
  No matter
was submitted to a vote of security holders, through the solicitation of proxies
or otherwise, during the quarter ended December 31, 2008.
 
 48


PART
II




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




The
common stock for MutualFirst Financial, Inc.
is traded under the symbol “MFSF” on the Nasdaq Global Market.  The
table below shows the high and low closing prices for our common stock for the
periods indicated.  This information was provided by the
Nasdaq.  At December 31, 2008 there were 6,984,754 shares of common
stock 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 Share2008
      Quarters:
                        
                        High
                        
                        
                        LowFirst
      Quarter (ended 03/31/08)
                        
                        $
                        13.98
                        
                        
                        $
                        12.80
                        
                        
                        $
                        .16Second
      Quarter (ended 06/30/08)
                        
                        $
                        13.66
                        
                        
                        $
                        9.81
                        
                        
                        $
                        .16Third
      Quarter (ended 09/30/08)
                        
                        $
                        11.00
                        
                        
                        $
                        9.34
                        
                        
                        $
                        .16Fourth
      Quarter (ended 12/31/08)
                        
                        $
                        10.50
                        
                        
                        $
                        6.20
                        
                        
                        $
                        .16Stock
      Price
                        
                        
                        Dividends
      per Share2007
      Quarters:
                        
                        High
                        
                        
                        LowFirst
      Quarter (ended 03/31/07)
                        
                        $
                        21.20
                        
                        
                        $
                        19.42
                        
                        
                        $
                        .15Second
      Quarter (ended 06/30/07)
                        
                        $
                        20.00
                        
                        
                        $
                        18.30
                        
                        
                        $
                        .15Third
      Quarter (ended 09/30/07)
                        
                        $
                        19.00
                        
                        
                        $
                        16.52
                        
                        
                        $
                        .15Fourth
      Quarter (ended 12/31/07)
                        
                        $
                        18.58
                        
                        
                        $
                        13.89
                        
                        
                        $
                        .15




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




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




On
September 12, 2007, the Company’s Board of Directors authorized management to
repurchase an additional 5% of the Company’s outstanding stock, or approximately
215,000 shares.  This purchase plan was completed during the third
quarter of 2008.  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 1 A.


49




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 31,2008
                        
                        
                        2007
                        
                        
                        2006
                        
                        
                        2005
                        
                        
                        2004(In
      thousands)Selected
      FinancialCondition
      DataTotal
      assets
                        
                        $
                        1,388,827
                        
                        
                        $
                        962,517
                        
                        
                        $
                        960,842
                        
                        
                        $
                        971,829
                        
                        
                        $
                        839,387Cash
      and cash equivalents
                        
                        
                        39,703
                        
                        
                        
                        23,648
                        
                        
                        
                        24,915
                        
                        
                        
                        22,365
                        
                        
                        
                        19,743Loans,
      net
                        
                        
                        1,113,132
                        
                        
                        
                        802,436
                        
                        
                        
                        805,625
                        
                        
                        
                        822,547
                        
                        
                        
                        713,022Investment
      securities:Available-for
      -sale, at fair value
                        
                        
                        77,255
                        
                        
                        
                        43,592
                        
                        
                        
                        41,070
                        
                        
                        
                        39,788
                        
                        
                        
                        39,409Held
      to maturity
                        
                        
                        9,676
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Total
      deposits
                        
                        
                        962,514
                        
                        
                        
                        666,407
                        
                        
                        
                        703,359
                        
                        
                        
                        684,554
                        
                        
                        
                        600,407Total
      borrowings
                        
                        
                        279,104
                        
                        
                        
                        196,638
                        
                        
                        
                        158,852
                        
                        
                        
                        187,791
                        
                        
                        
                        141,572Total
      stockholders’ equity
                        
                        
                        130,515
                        
                        
                        
                        87,014
                        
                        
                        
                        87,264
                        
                        
                        
                        88,794
                        
                        
                        
                        87,860Selected
      Operations DataTotal
      interest income
                        
                        $
                        65,179
                        
                        
                        $
                        56,374
                        
                        
                        $
                        56,119
                        
                        
                        $
                        48,478
                        
                        
                        $
                        44,400Total
      interest expense
                        
                        
                        31,639
                        
                        
                        
                        32,227
                        
                        
                        
                        29,890
                        
                        
                        
                        21,170
                        
                        
                        
                        17,476Net
      interest income
                        
                        
                        33,540
                        
                        
                        
                        24,147
                        
                        
                        
                        26,229
                        
                        
                        
                        27,308
                        
                        
                        
                        26,924Provision
      for loan losses
                        
                        
                        7,020
                        
                        
                        
                        2,240
                        
                        
                        
                        2,068
                        
                        
                        
                        1,775
                        
                        
                        
                        1,557Net
      interest income after provision for loan losses
                        
                        
                        26,520
                        
                        
                        
                        21,907
                        
                        
                        
                        24,161
                        
                        
                        
                        25,533
                        
                        
                        
                        25,367Service
      fee income
                        
                        
                        6,257
                        
                        
                        
                        4,831
                        
                        
                        
                        4,370
                        
                        
                        
                        4,026
                        
                        
                        
                        3,193Gain(loss)
      on sale of loans andinvestment
      securities
                        
                        
                        (2,277
                        )
                        
                        
                        391
                        
                        
                        
                        (669
                        )
                        
                        
                        228
                        
                        
                        
                        727Other
      non-interest income (loss)
                        
                        
                        2,542
                        
                        
                        
                        2,549
                        
                        
                        
                        2,941
                        
                        
                        
                        2,478
                        
                        
                        
                        2,304Total
      non-interest income
                        
                        
                        6,522
                        
                        
                        
                        7,771
                        
                        
                        
                        6,642
                        
                        
                        
                        6,732
                        
                        
                        
                        6,224Salaries
      and employee benefits
                        
                        
                        19,118
                        
                        
                        
                        14,759
                        
                        
                        
                        14,617
                        
                        
                        
                        13,792
                        
                        
                        
                        16,167Other
      expenses
                        
                        
                        44,508
                        
                        
                        
                        10,397
                        
                        
                        
                        10,402
                        
                        
                        
                        9,620
                        
                        
                        
                        8,149Total
      non-interest expense
                        
                        
                        63,626
                        
                        
                        
                        25,156
                        
                        
                        
                        25,019
                        
                        
                        
                        23,412
                        
                        
                        
                        24,316Income
      (loss) before taxes
                        
                        
                        (30,583
                        )
                        
                        
                        4,522
                        
                        
                        
                        5,784
                        
                        
                        
                        8,853
                        
                        
                        
                        7,275Income
      tax expense (benefit)
                        
                        
                        (8,485
                        )
                        
                        
                        296
                        
                        
                        
                        1,028
                        
                        
                        
                        2,401
                        
                        
                        
                        1,753Net
      income (loss)
                        
                        $
                        (22,098
                        )
                        
                        $
                        4,226
                        
                        
                        $
                        4,756
                        
                        
                        $
                        6,452
                        
                        
                        $
                        5,522




50





At
      or For the Year Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005
                    
                    
                    2004Selected
      Financial Ratios and Other Financial
      Data:Performance
      Ratios:Return
      on average assets (ratio of net income to average total
      assets)
                    
                    
                    (1.91
                    )%
                    
                    
                    0.44
                    %
                    
                    
                    0.49
                    %
                    
                    
                    0.73
                    %
                    
                    
                    0.67
                    %Return
      on average tangible equity (ratioof
      net income to average tangibleequity)
                    
                    
                    (28.04
                    )
                    
                    
                    5.86
                    
                    
                    
                    6.43
                    
                    
                    
                    7.79
                    
                    
                    
                    5.90Interest
      rate spread information:Average
      during the period
                    
                    
                    3.01
                    
                    
                    
                    2.50
                    
                    
                    
                    2.70
                    
                    
                    
                    3.13
                    
                    
                    
                    3.46Net
      interest margin(1)
                    
                    
                    3.22
                    
                    
                    
                    2.79
                    
                    
                    
                    2.96
                    
                    
                    
                    3.37
                    
                    
                    
                    3.57Ratio
      of operating expense toaverage total assets
                    
                    
                    5.49
                    
                    
                    
                    2.64
                    
                    
                    
                    2.57
                    
                    
                    
                    2.89
                    
                    
                    
                    2.94Ratio
      of average interest-earningassets to average interest-bearing
      liabilities
                    
                    
                    107.14
                    
                    
                    
                    107.92
                    
                    
                    
                    107.65
                    
                    
                    
                    109.30
                    
                    
                    
                    106.06Efficiency
      ratio(2)
                    
                    
                    158.81
                    
                    
                    
                    78.81
                    
                    
                    
                    76.11
                    
                    
                    
                    68.78
                    
                    
                    
                    73.26Asset
      Quality Ratios:(3)Non-performing
      assets tototal
      assets
                    
                    
                    1.92
                    
                    
                    
                    1.35
                    
                    
                    
                    0.86
                    
                    
                    
                    1.03
                    
                    
                    
                    0.65Non-performing
      loans tototal loans
                    
                    
                    1.93
                    
                    
                    
                    1.29
                    
                    
                    
                    0.70
                    
                    
                    
                    0.90
                    
                    
                    
                    0.57Allowance
      for loan lossesto
      non-performing loans
                    
                    
                    69.41
                    
                    
                    
                    79.72
                    
                    
                    
                    143.59
                    
                    
                    
                    108.04
                    
                    
                    
                    167.32Allowance
      for loan lossesto
      loans receivable, net
                    
                    
                    1.34
                    
                    
                    
                    1.03
                    
                    
                    
                    1.00
                    
                    
                    
                    0.98
                    
                    
                    
                    0.95Capital
      Ratios:Equity
      to total assets(3)
                    
                    
                    9.40
                    
                    
                    
                    9.04
                    
                    
                    
                    9.08
                    
                    
                    
                    9.14
                    
                    
                    
                    10.47Average
      equity to average assets
                    
                    
                    8.89
                    
                    
                    
                    9.16
                    
                    
                    
                    9.08
                    
                    
                    
                    9.90
                    
                    
                    
                    11.50Share
      and Per Share Data:Average
      common shares outstanding:Basic
                    
                    
                    5,249,135
                    
                    
                    
                    4,103,940
                    
                    
                    
                    4,196,059
                    
                    
                    
                    4,328,965
                    
                    
                    
                    4,625,437Diluted
                    
                    
                    5,253,477
                    
                    
                    
                    4,151,173
                    
                    
                    
                    4,274,039
                    
                    
                    
                    4,439,686
                    
                    
                    
                    4,772,036Per
      share:Basic
      earnings
                    
                    $
                    (4.22
                    )
                    
                    $
                    1.03
                    
                    
                    $
                    1.13
                    
                    
                    $
                    1.49
                    
                    
                    $
                    1.19Diluted
      earnings
                    
                    $
                    (4.22
                    )
                    
                    $
                    1.02
                    
                    
                    $
                    1.11
                    
                    
                    $
                    1.45
                    
                    
                    $
                    1.16Dividends
                    
                    $
                    0.64
                    
                    
                    $
                    0.60
                    
                    
                    $
                    0.58
                    
                    
                    $
                    0.49
                    
                    
                    $
                    0.47Dividend
      payout ratio(4)
                    
                    
                    (15.20
                    )%
                    
                    
                    58.25
                    %
                    
                    
                    52.25
                    %
                    
                    
                    36.55
                    %
                    
                    
                    40.52
                    %Other
      Data:Number
      of full-service offices
                    
                    
                    33
                    
                    
                    
                    21
                    
                    
                    
                    21
                    
                    
                    
                    20
                    
                    
                    
                    18





(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.


51




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




Introduction




MutualFirst Financial, Inc.,
a Maryland corporation, is a savings and loan holding company and its
wholly-owned subsidiary is MutualBank, Muncie, Indiana.  MFS
Financial, Inc. 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.  In April 2000, MFS
Financial, Inc. formally changed its corporate name to MutualFirst Financial, Inc.
(“MutualFirst”).  The
words “we,” “our” and “us” refer to MutualFirst and MutualBank on
a consolidated basis, except that references to us prior to December 29, 1999
refer only to MutualBank.





Our
principal business consists of attracting retail deposits from the general
public and investing those funds primarily in permanent loans secured by first
mortgages on owner-occupied, one-to four-family residences, a variety of
consumer loans, loans secured by commercial and multi-family real estate and
commercial business loans. We are headquartered in Muncie, Indiana with 33
retail offices primarily serving 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 counties contiguous to these
counties, and we originate indirect consumer loans throughout
Indiana.




In August
2006, MutualBank purchased three branch offices in Winchester, Wabash and
Warsaw, Indiana, resulting in the acquisition of $8.7 million in assets and the
assumption of $12.4 million in liabilities for $1.0 million in
cash.  The assets purchased included residential real estate mortgage
loans of $5.4 million, and consumer loans of $1.2 million.  The
liabilities assumed included total deposits of $12.3 million.




On March
22, 2007 the Bank completed the acquisition of Wagley Investment Advisors,
Inc.  Wagley Investment Advisors, Inc. is now known as Mutual
Financial Advisors, providing new and expanded investment management services
not previously offered by the Bank.  Mutual Financial Advisors offers a
full range of non-bank investment options and money
management.




On July 18, 2008, the Company acquired
MFB Corp. ("MFB") 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.  MutualFirstalso assumed
114,500 MFB stock options, which have converted into approximately 296,555 MutualFirststock 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 11th largest
depository institution headquartered in Indiana.  MutualBank also has
a trust office in Carmel and Crawfordsville, Indiana and a loan origination
office in New Buffalo, Michigan.




52


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
625,135shares 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 Officer 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.  The Warrant
is attached as Exhibit 4.2 hereto and is incorporated herein by
reference.  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 the $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 will 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.


53




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 in July 2008 and the sale of $92.9 million of fixed rate
mortgages in 2008 helped change the structure of MutualBank’s balance
sheet.  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.  The Federal Funds rate 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.  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 are 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.  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, 2008,
MutualWealth had $352.0 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.


54




Difficult
market conditions and economic trends have adversely affected our industry and
our business.




Dramatic
declines in the housing market, with decreasing home prices and increasing
delinquencies and foreclosures, have negatively impacted the credit performance
of mortgage and construction loans and resulted in significant write-downs of
assets by many financial institutions. General downward economic trends, reduced
availability of commercial credit and increasing unemployment have negatively
impacted the credit performance of commercial and consumer credit, resulting in
additional write-downs. Concerns over the stability of the financial markets and
the economy have resulted in decreased lending by financial institutions to
their customers and to each other. This market turmoil and tightening of credit
has led to increased commercial and consumer deficiencies, lack of customer
confidence, increased market volatility and widespread reduction in general
business activity. Financial institutions have experienced decreased access to
deposits or borrowings.




The
resulting economic pressure on the consumer and businesses and the lack of
confidence in the financial markets may adversely affect our business, financial
condition, results of operation and stock price.




Our
ability to assess the creditworthiness of customers and to estimate the losses
inherent in our credit exposure is made more complex by these difficult market
and economic conditions. We also expect to face increased regulation and
government oversight as a result of these downward trends. This increased
government action may increase our costs and limit our ability to pursue certain
business opportunities. We also may be required to pay even higher Federal
Deposit Insurance Corporation premiums than the recently increased level,
because financial institutions failures resulting from the depressed market
conditions have depleted and may continue to deplete the deposit insurance fund
and reduce its ratio of reserves to insured deposits.




We do not
believe these difficult conditions are likely to improve in the near future. A
worsening of these conditions would likely exacerbate the adverse effects of
these difficult market and economic conditions on us, our customers and the
other financial institutions in our market. As a result, we may experience
increases in foreclosures, delinquencies and customer bankruptcies, as well as
more restricted access to funds.




Recent
legislative and regulatory initiatives to address these difficult market and
economic conditions may not stabilize the US banking system.




The
Emergency Economic Stabilization Act of 2008 (“EESA”) authorizes the United
States Department of Treasury, hereafter the Treasury Department, to purchase
from financial institutions and their holding companies up to $700 billion in
mortgage loans, mortgage-related securities and certain other financial
instruments, including debt and equity securities issued by financial
institutions and their holding companies in a troubled asset relief program. The
purpose of the troubled asset relief program is to restore confidence and
stability to the U.S. banking system and to encourage financial institutions to
increase their lending to customers and to each other. The Treasury Department
has allocated $350 billion towards the troubled asset relief program to the
capital purchase program. Under the capital purchase program, the Treasury
Department will purchase debt or equity securities from participating
institutions. The troubled asset relief program is also expected to include
direct purchases or guarantees of troubled assets of financial
institutions.


55




EESA also
increased Federal Deposit Insurance Corporation deposit insurance on most
accounts from $100,000 to $250,000. This increase is in place until the end of
2009 and is not covered by deposit insurance premiums paid by the banking
industry. In addition, the Federal Deposit Insurance Corporation has implemented
two temporary programs to provide deposit insurance for the full amount of most
non-interest bearing transaction accounts through the end of 2009 and to
guarantee certain unsecured debt of financial institutions and their holding
companies through June 2012. Financial institutions have until November 12, 2008
to opt out of these two programs. The purpose of these legislative and
regulatory actions is to stabilize the volatility in the U.S. banking
system.




EESA, the
troubled asset relief program and the Federal Deposit Insurance Corporation’s
recent regulatory initiatives may not stabilize the U.S. banking system or
financial markets. If the volatility in the market and the economy continue or
worsen, our business, financial condition, results of operations, access to
funds and the price of our stock could be materially and adversely
impacted.




The
recently enacted American Recovery and Reinvestment Act of 2009 (the “AARA”) is
a broad based economic stimulus bill that contains a broad range of tax
revisions and government spending to address the national economic
decline.  It does not contain any specific provisions governing
financial institutions, except for TARP recipients.  It imposes new
compensation limits and requirements on TARP recipients and allows TARP funds to
be returned with the requirements for replacement capital or the passage of set
time periods included in the TARP agreement.




Management
Strategy




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




Financial
highlights of our strategy have included:





·
            Continuing
      as a Diversified Lender.  We have been successful in
      diversifying our loan portfolio to reduce our reliance on any one type of
      loan.  From 1995 through 2000, approximately 36% of our loan
      portfolio consisted of loans other than one-to four- family real estate
      loans.  Since that time to the end of 2008, that percentage has
      increased to 53%.





·
            Continuing
      as a Leading One- to Four-Family Lender.  We are one of
      the largest originators of one- to four-family residential loans in our
      five-county market area.  During 2008, we originated $111.1
      million of one- to four-family residential
  loans.




·
              Continuing
      To Focus On Asset Quality.  Non-performing assets to
      total assets was 1.92% at December 31, 2008, up from 1.35% at December 31,
      2007. We believe that our underwriting standards will provide for a
      quality loan portfolio.


56





·
            Continuing
      Our Strong Capital Position.  As a result of our
      consistent operating profitability, we have historically maintained a
      strong capital position.  At December 31, 2008, our ratio of
      stockholders’ equity to total assets was
9.4%.




Since
2000 it has been MutualFirst’s strategic
objective to change the repricing structure of its interest-earning assets from
longer term to shorter term to better match the structure of our interest
bearing liabilities and therefore reduce the impact interest rate changes have
on our net interest income.  Strategies employed to accomplish this
objective have been to increase the originations of variable rate commercial
loans and shorter term consumer loans and to sell longer term mortgage
loans.




During
2008, in keeping with its strategic objective to reduce interest rate risk
exposure, MutualFirst
also sold $92.9 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 $1.4 million during the
year.




Financial
Condition at December 31, 2008 Compared to December 31, 2007




General.  Our assets
increased $426.3 million during 2008, ending the year at $1.4 billion compared
to $962.5 million at December 31, 2007.  Liabilities increased $382.8
million or 43.7% during 2008 to $1.3 billion at December 31,
2008.  Stockholders’ equity increased $43.5 million to $130.5 million
at December 31, 2008.  These increases were primarily due to the
acquisition of MFB and are discussed in further detail below.




Loans.  Our net loan
portfolio increased $310.7 million from $802.4 million at December 31, 2007, to
$1.1 billion at December 31, 2008, primarily due to the acquisition of
MFB.  Consumer loans increased $42.9 million or 19.0% from $225.5
million at December 31, 2007 to $268.4 million at December 31,
2008.  Most of the consumer loan growth came from home equity loans
acquired from MFB, which increased $39.2 million or 144.1% from $27.2 million to
$66.5 million. Recreational vehicles increased $2.1 million to $79.9 million and
other consumer loans increased $3.0 million to $5.8 million at December 31,
2008.  The remainder of the consumer portfolio decreased
slightly.  Commercial business loans increased $18.5 million or 32.6%
from $56.8 million to $75.3 million at December 31, 2008.  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 $92.9 million of our fixed rate one- to
four-family mortgage loans in 2008.  Despite this, real estate
mortgage loans increased $256.5 million or 48.5% from $529.0 million to $785.4
million at December 31, 2008 primarily due to the acquisition of
MFB.  Mortgage loans held for sale decreased $104,000 to $1.5 million
at December 31, 2008.


57




Allowance For Loan
Loss.  Allowance for loan losses increased $6.8 million,
including $3.0 million acquired with MFB, to $15.1 million at December 31, 2008
when compared to December 31, 2007.  Specific loan loss reserves have
increased $658,000, while general loan loss reserves have increased $6.1 million
since December 31, 2007.  Net charge offs for the year 2008 were $3.2
million, or .34% of average loans on an annualized basis, compared to $2.0
million, or .25% of average loans for the comparable period in 2007. The
increase was primarily due to increased charge offs on commercial real estate
loans during 2008.  As of December 31, 2008, the allowance for loan
losses as a percentage of loans receivable and non-performing loans was 1.34%
and 69.41%, respectively, compared to 1.03% and 79.72%, respectively, at
December 31, 2007.





Securities.  Investment
securities available for sale increased $33.7 million, or 77.1%, compared to
December 31, 2007 due primarily to $23.9 million acquired with
MFB.  Investment securities held to maturity increased $9.7 million
due to securities received in the third quarter of 2008 through a redemption in
kind as a result of a liquidation of a mutual fund.




Liabilities.  Our
total liabilities increased $382.8 million or 43.7% to $1.3 billion at December
31, 2008 from $875.5 million at December 31, 2007.  Deposits increased
$296.1 million, and borrowed funds increased $82.5 million as a result of the
acquisition of MFB.




Stockholders’ Equity.Stockholders’
equity increased $43.5 million, or 50.0%, from $87.0 million at December 31,
2007, to $130.5 million at December 31, 2008.  The increase was due
primarily to stock issued to acquire MFB of $39.8 million, preferred stock
issued to the United States Treasury Department of $32.4 million, and Employee
Stock Ownership Plan (ESOP) and RRP shares earned of $364,000. This increase was
partially offset by a net loss of $22.1 million, the repurchase of 154,000
shares of common stock for $1.8 million and dividend payments of $3.5
million.  Also, the market value of securities available for sale
compared to their book value decreased $1.5 million from a loss of $414,000 at
December 31, 2007 to a loss of $1.9 million at December 31, 2008. An increase on
a postretirement benefit obligation decreased equity $110,000.  As of
December 31, 2008, the Bank’s capital ratio was 13.79%, well in excess of
“well-capitalized” levels as defined by all regulatory standards. The Company’s
tangible equity to tangible asset ratio was 6.79%.




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




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




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


58




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




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




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




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




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




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


59


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





Year
      ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006Average
                        Outstanding
                        Balance
                      
                      
                      Interest
                        Earned/
                        Paid
                      
                      
                      Average
                        Yield/
                        Rate
                      
                      
                      Average
                        Outstanding
                        Balance
                      
                      
                      Interest
                        Earned/
                        Paid
                      
                      
                      Average
                        Yield/
                        Rate
                      
                      
                      Average
                        Outstanding
                        Balance
                      
                      
                      Interest
                        Earned/
                        Paid
                      
                      
                      Average
                        Yield/
                        Rate(Dollars
      in thousands)Interest-Earning
      Assets:Interest
      -bearing deposits
                      
                      $
                      8,711
                      
                      
                      $
                      118
                      
                      
                      
                      1.35
                      %
                      
                      $
                      2,982
                      
                      
                      $
                      115
                      
                      
                      
                      3.86
                      %
                      
                      $
                      1,918
                      
                      
                      $
                      67
                      
                      
                      
                      3.49
                      %Mortgage-backed
      securities available-for-sale(1)
                      
                      
                      28,648
                      
                      
                      
                      1,596
                      
                      
                      
                      5.57
                      %
                      
                      
                      8,875
                      
                      
                      
                      467
                      
                      
                      
                      5.26
                      %
                      
                      
                      10,532
                      
                      
                      
                      481
                      
                      
                      
                      4.57
                      %Investment securities
      available-for-sale(1)
                      
                      
                      28,987
                      
                      
                      
                      1,303
                      
                      
                      
                      4.50
                      %
                      
                      
                      31,234
                      
                      
                      
                      1,644
                      
                      
                      
                      5.26
                      %
                      
                      
                      30,055
                      
                      
                      
                      1,440
                      
                      
                      
                      4.79
                      %Investment
      securities held-to-maturity
                      
                      
                      3,360
                      
                      
                      
                      314
                      
                      
                      
                      9.35
                      %Loans(2)
                      
                      
                      956,788
                      
                      
                      
                      61,128
                      
                      
                      
                      6.39
                      %
                      
                      
                      811,991
                      
                      
                      
                      53,686
                      
                      
                      
                      6.61
                      %
                      
                      
                      834,321
                      
                      
                      
                      56,673
                      
                      
                      
                      6.43
                      %Stock
      in FHLB of Indianapolis
                      
                      
                      14,010
                      
                      
                      
                      720
                      
                      
                      
                      5.14
                      %
                      
                      
                      9,939
                      
                      
                      
                      462
                      
                      
                      
                      4.65
                      %
                      
                      
                      10,128
                      
                      
                      
                      459
                      
                      
                      
                      4.53
                      %Total
      interest-earning assets
                      
                      
                      1,040,504
                      
                      
                      
                      65,179
                      
                      
                      
                      6.26
                      %
                      
                      
                      865,021
                      
                      
                      
                      56,374
                      
                      
                      
                      6.52
                      %
                      
                      
                      886,954
                      
                      
                      
                      56,120
                      
                      
                      
                      6.33
                      %Non-Interest
      Earning Assets (net of allowance for loan losses and unrealized
      gain/loss)
                      
                      
                      118,673
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      87,879
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      85,641Total
      assets
                      
                      $
                      1,159,177
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      952,900
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      972,595Interest-Bearing
      Liabilities:Demand
      and NOW accounts
                      
                      $
                      148,703
                      
                      
                      
                      1,564
                      
                      
                      
                      1.05
                      %
                      
                      $
                      126,034
                      
                      
                      
                      2,841
                      
                      
                      
                      2.25
                      %
                      
                      $
                      101,627
                      
                      
                      
                      1,662
                      
                      
                      
                      1.64
                      %Savings
      deposits
                      
                      
                      66,315
                      
                      
                      
                      317
                      
                      
                      
                      0.48
                      %
                      
                      
                      54,975
                      
                      
                      
                      281
                      
                      
                      
                      0.51
                      %
                      
                      
                      60,253
                      
                      
                      
                      301
                      
                      
                      
                      0.50
                      %Money
      market accounts
                      
                      
                      34,000
                      
                      
                      
                      615
                      
                      
                      
                      1.81
                      %
                      
                      
                      24,588
                      
                      
                      
                      621
                      
                      
                      
                      2.53
                      %
                      
                      
                      34,920
                      
                      
                      
                      690
                      
                      
                      
                      1.98
                      %Certificate
      accounts
                      
                      
                      492,405
                      
                      
                      
                      18,920
                      
                      
                      
                      3.84
                      %
                      
                      
                      444,271
                      
                      
                      
                      20,755
                      
                      
                      
                      4.67
                      %
                      
                      
                      461,678
                      
                      
                      
                      19,372
                      
                      
                      
                      4.20
                      %Total
      deposits
                      
                      
                      741,423
                      
                      
                      
                      21,416
                      
                      
                      
                      2.89
                      %
                      
                      
                      649,868
                      
                      
                      
                      24,498
                      
                      
                      
                      3.77
                      %
                      
                      
                      658,478
                      
                      
                      
                      22,025
                      
                      
                      
                      3.34
                      %Borrowings
                      
                      
                      229,768
                      
                      
                      
                      10,223
                      
                      
                      
                      4.45
                      %
                      
                      
                      151,636
                      
                      
                      
                      7,729
                      
                      
                      
                      5.10
                      %
                      
                      
                      165,465
                      
                      
                      
                      7,866
                      
                      
                      
                      4.75
                      %Total
      interest-bearing accounts
                      
                      
                      971,191
                      
                      
                      
                      31,639
                      
                      
                      
                      3.26
                      %
                      
                      
                      801,504
                      
                      
                      
                      32,227
                      
                      
                      
                      4.02
                      %
                      
                      
                      823,943
                      
                      
                      
                      29,891
                      
                      
                      
                      3.63
                      %Non-Interest
      Bearing Accounts
                      
                      
                      66,746
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      48,589
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      45,597Other
      Liabilities
                      
                      
                      18,138
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      15,478
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      14,759Total
      Liabilities
                      
                      
                      1,056,075
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      865,571
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      884,299Stockholders’
      Equity
                      
                      
                      103,102
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      87,329
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      88,296Total
      liabilities and stockholders’ equity
                      
                      $
                      1,159,177
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      952,900
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      972,595Net
      Earning Assets
                      
                      $
                      69,313
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      63,517
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      63,011Net
      Interest Income
                      
                      
                      
                      
                      
                      $
                      33,540
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      24,147
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      26,229Net Interest Rate
      Spread(3)
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.01
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2.50
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2.70
                      %Net Yield on Average
      Interest-Earning Assets(4)
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.22
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2.79
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2.96
                      %Average
      Interest-Earning Assets toAverage Interest-Bearing
      Liabilities
                      
                      
                      107.14
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      107.92
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      107.65
                      %





(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.




60




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 31,2008
      vs. 2007
                                                
                                                
                                                2007
      vs. 2006Increase
                                                  (decrease)
                                                  Due
      to
                                                
                                                
                                                Total
                                                  Increase
                                                  (decrease)
                                                
                                                
                                                Increase
                                                  (decrease)
                                                  Due
      to
                                                
                                                
                                                Total
                                                  Increase
                                                  (decrease)Volume
                                                
                                                
                                                Rate
                                                
                                                
                                                Volume
                                                
                                                
                                                Rate(Dollars
      in thousands)Interest-earning
      assets:Interest-bearing
      deposits
                                                
                                                $
                                                114
                                                
                                                
                                                $
                                                (111
                                                )
                                                
                                                $
                                                3
                                                
                                                
                                                $
                                                40
                                                
                                                
                                                $
                                                8
                                                
                                                
                                                $
                                                48Investment
      securities available-for-sale
                                                
                                                
                                                1,259
                                                
                                                
                                                
                                                (157
                                                )
                                                
                                                
                                                1,102
                                                
                                                
                                                
                                                (24
                                                )
                                                
                                                
                                                214
                                                
                                                
                                                
                                                190Loans
      receivable
                                                
                                                
                                                9,302
                                                
                                                
                                                
                                                (1,860
                                                )
                                                
                                                
                                                7,442
                                                
                                                
                                                
                                                (1,456
                                                )
                                                
                                                
                                                1,469
                                                
                                                
                                                
                                                13Stock
      in FHLB of Indianapolis
                                                
                                                
                                                205
                                                
                                                
                                                
                                                53
                                                
                                                
                                                
                                                258
                                                
                                                
                                                
                                                (9
                                                )
                                                
                                                
                                                12
                                                
                                                
                                                
                                                3Total
      interest-earning assets
                                                
                                                $
                                                10,880
                                                
                                                
                                                $
                                                (2,075
                                                )
                                                
                                                $
                                                8,805
                                                
                                                
                                                $
                                                (1,449
                                                )
                                                
                                                $
                                                1,703
                                                
                                                
                                                $
                                                254Interest-bearing
      liabilities:Savings
      deposits
                                                
                                                $
                                                55
                                                
                                                
                                                $
                                                (19
                                                )
                                                
                                                $
                                                36
                                                
                                                
                                                $
                                                (27
                                                )
                                                
                                                $
                                                7
                                                
                                                
                                                $
                                                (20
                                                )Money
      market accounts
                                                
                                                
                                                199
                                                
                                                
                                                
                                                (205
                                                )
                                                
                                                
                                                (6
                                                )
                                                
                                                
                                                (233
                                                )
                                                
                                                
                                                164
                                                
                                                
                                                
                                                (69
                                                )Demand
      and NOW accounts
                                                
                                                
                                                442
                                                
                                                
                                                
                                                (1,719
                                                )
                                                
                                                
                                                (1,277
                                                )
                                                
                                                
                                                458
                                                
                                                
                                                
                                                721
                                                
                                                
                                                
                                                1,179Certificate
      accounts
                                                
                                                
                                                2,097
                                                
                                                
                                                
                                                (3,932
                                                )
                                                
                                                
                                                (1,835
                                                )
                                                
                                                
                                                (751
                                                )
                                                
                                                
                                                2,134
                                                
                                                
                                                
                                                1,383Borrowings
                                                
                                                
                                                3,576
                                                
                                                
                                                
                                                (1,082
                                                )
                                                
                                                
                                                2,494
                                                
                                                
                                                
                                                (683
                                                )
                                                
                                                
                                                546
                                                
                                                
                                                
                                                (137
                                                )Total
      interest-bearing liabilities
                                                
                                                $
                                                6,369
                                                
                                                
                                                $
                                                (6,957
                                                )
                                                
                                                $
                                                (588
                                                )
                                                
                                                $
                                                (1,236
                                                )
                                                
                                                $
                                                3,572
                                                
                                                
                                                $
                                                2,336Change
      in net interest income
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                9,393
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                (2,082
                                                )


61


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.




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 of 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 reasons for the
decrease were 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.


62




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.




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




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




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




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


63


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




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




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




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




64


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




Liquidity
and Commitments




MutualBank
is required to maintain adequate levels of investments for liquidity purposes to
ensure the institution’s safe and sound operations.  Liquidity may
increase or decrease depending upon the availability of funds and comparative
yields on investments in relation to the return on
loans.  Historically, we have maintained liquid assets at levels
adequate to meet the requirements of normal operations, including potential
deposit outflows.  Cash flow projections are regularly reviewed and
updated to ensure that adequate liquidity is maintained.  At December
31, 2008, our liquidity ratio, which is our liquid assets as a percentage of net
withdrawable savings deposits and current borrowings, was 8.39%.




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




Liquidity
management is both a daily and long-term function of business
management.  Excess liquidity is generally invested in short-term
investments such as overnight deposits or U.S. Agency securities.  We
use our sources of funds primarily to meet our ongoing commitments, to pay
maturing certificates of deposit and savings withdrawals, to fund loan
commitments and to maintain our portfolio of mortgage-backed securities and
investment securities.  At December 31, 2008, the total approved loan
origination commitments outstanding amounted to $18.3 million.  At the
same date, the unadvanced portion of construction loans was $4.2
million.  At December 31, 2008, unused lines of credit totaled $134.1
million and outstanding letters of credit totaled $8.3 million.  As of
December 31, 2008, certificates of deposit scheduled to mature in one year or
less totaled $356.9 million, and investment and mortgage-backed securities
scheduled to mature in one year or less totaled $3.4 million.  Based
on historical experience, management believes that a significant portion of
maturing deposits will remain with us.  We anticipate that we will
continue to have sufficient funds, through deposits and borrowings, to meet our
current commitments.




The
Company utilizes dividends from the bank as a source of funds to service debt
and meet obligations of the Company.  The dividends from the bank,
require regulatory approval






65






Payments
      due by periodLess
      than
                
                
                
                1-3
                
                
                
                3-5
                
                
                More
                  thanTotal
                
                
                1 year
                
                
                years
                
                
                Years
                
                
                5 years(In
      thousands)Contractual
      ObligationsFederal
      Home Loan Bank Advances
                
                $
                263,113
                
                
                $
                102,152
                
                
                $
                153,716
                
                
                $
                5,535
                
                
                $
                1,710Notes
      Payable
                
                
                647
                
                
                
                421
                
                
                
                226
                
                
                
                —
                
                
                
                —Other
      Borrowings
                
                
                15,345
                
                
                
                500
                
                
                
                6,000
                
                
                
                5,000
                
                
                
                3,845Total
                
                $
                279,105
                
                
                $
                103,073
                
                
                $
                159,942
                
                
                $
                10,535
                
                
                $
                5,555





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 of
MutualFirst Financial,
Inc. was $130.5 million at December 31, 2008, or 9.39% of total assets on that
date.  As of December 31, 2008, MutualBank exceeded all capital
requirements of the OTS, with regulatory capital ratios as
follows:  core capital, 9.9%; Tier I risk-based capital, 12.5%; and
total risk-based capital, 13.8%.  The regulatory capital requirements
to be considered well capitalized are 5.0%, 6.0% and 10.0%,
respectively.




Critical
Accounting Policies




The notes
to the consolidated financial statements in Item 8 of this Form 10-K contain a
summary of MutualFirst’s significant
accounting policies.  Certain of these policies are important to the
portrayal of MutualFirst’s financial
condition, since they require management to make difficult, complex or
subjective judgments, some of which may relate to matters that are inherently
uncertain.  Management believes that its critical accounting policies
include determining the allowance for loan losses, the valuation of foreclosed
assets, mortgage servicing rights and real estate held for development and the
valuation of intangible assets.




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




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


66




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




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




Goodwill
andIntangible Assets. MutualFirst MutualFirst’s




Valuation
Measurements.  Valuation methodologies often involve a
significant degree of judgment, particularly when there are no observable active
markets for the items being valued. Investment securities and derivatives are
carried at fair value, as defined in SFAS No. 157 “Fair Value
Measurement” (“SFAS 157”), which requires key judgments affecting how fair
value for such assets and liabilities is determined. In addition, the outcomes
of valuations have a direct bearing on the carrying amounts of goodwill,
mortgage servicing rights, investments and other postretirement benefit
obligations. To determine the values of these assets and liabilities, as well as
the extent to which related assets may be impaired, Management makes assumptions
and estimates related to discount rates, asset returns, prepayment rates and
other factors. The use of different discount rates or other valuation
assumptions could produce significantly different results, which could affect
the Company’s results of operations.




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




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




67




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




Item
      7A.
            Quantitative
      and Qualitative Disclosures About Market
Risk




Asset
and Liability Management and Market Risk




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




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.


68




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
2008, we sold $92.9 million of fixed rate, one-to four- family mortgage loans
with a term to maturity of over 10 years in the secondary market.




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, 2008 and 2007 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.




69




December 31, 2008Net
      Portfolio ValueChanges
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    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





December 31, 2007Net
      Portfolio ValueChanges
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              NPV as % of PV of AssetsIn
      Rates
                              
                              
                              $
      Amount
                              
                              
                              $
      Change
                              
                              
                              %
      Change
                              
                              
                              NPV
      Ratio
                              
                              
                              Change+300
                              bp
                              
                              
                              64,185
                              
                              
                              
                              -40,736
                              
                              
                              
                              -39
                              %
                              
                              
                              7.27
                              %
                              
                              
                              -380
                              bp+200
                              bp
                              
                              
                              79,394
                              
                              
                              
                              -25,527
                              
                              
                              
                              -24
                              %
                              
                              
                              8.77
                              %
                              
                              
                              -230
                              bp+100
                              bp
                              
                              
                              91,904
                              
                              
                              
                              -13,017
                              
                              
                              
                              -12
                              %
                              
                              
                              9.93
                              %
                              
                              
                              -114
                              bp0
                              bp
                              
                              
                              104,921
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              11.07
                              %-100
                              bp
                              
                              
                              111,493
                              
                              
                              
                              6,572
                              
                              
                              
                              6
                              %
                              
                              
                              11.56
                              %
                              
                              
                              49
                              bp-200
                              bp
                              
                              
                              111,662
                              
                              
                              
                              6,741
                              
                              
                              
                              6
                              %
                              
                              
                              11.44
                              %
                              
                              
                              36
                              bp-300
                              bp
                              
                              
                              117,557
                              
                              
                              
                              12,636
                              
                              
                              
                              12
                              %
                              
                              
                              11.80
                              %
                              
                              
                              73
                              bp


NM= Not
meaningful due to certain market interest rates 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
decline in the interest rate sensitivity between December 31, 2008 and December
31, 2007 is a result of the acquisition of MFB, the strategies employed to
mitigate interest rate risk and the current interest rate
environment.




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.




70


Item
      8.
              Financial
      Statements and Supplementary Data
  MutualFirst Financial,
Inc.
 Accountants’
Report and Consolidated Financial Statements
  December
31, 2008, 2007 and 2006
  
  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, 2008 and 2007, 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, 2008.  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, 2008 and 2007, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2008, in
conformity with accounting principles generally accepted in the United States of
America.
  As
discussed in Note 25, the Company changed its method of accounting for fair
value measurements in accordance with Statement of Financial Accounting
Standards No. 157 in 2008.
  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, 2008, 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 23, 2009, expressed an unqualified
opinion on the effectiveness of the Company's internal control over financial
reporting.
  BKD,LLP
  Indianapolis,
Indiana
 March 23,
2009
  
  MutualFirst Financial,
Inc.
 Consolidated
Balance Sheets
 December
31, 2008 and 2007
  2008
                                                        
                                                        
                                                        2007AssetsCash
      and due from banks
                                                        
                                                        $
                                                        21,654,283
                                                        
                                                        
                                                        $
                                                        21,003,114Interest-bearing
      demand deposits
                                                        
                                                        
                                                        18,049,169
                                                        
                                                        
                                                        
                                                        2,645,057Cash
      and cash equivalents
                                                        
                                                        
                                                        39,703,452
                                                        
                                                        
                                                        
                                                        23,648,171Interest-bearing
      deposits
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        100,000Investment
      securities available for sale
                                                        
                                                        
                                                        77,254,925
                                                        
                                                        
                                                        
                                                        43,592,485Investment
      securities held to maturity
                                                        
                                                        
                                                        9,675,891
                                                        
                                                        
                                                        
                                                        —Total
      investment securities
                                                        
                                                        
                                                        86,930,816
                                                        
                                                        
                                                        
                                                        43,592,485Loans
      held for sale
                                                        
                                                        
                                                        1,541,110
                                                        
                                                        
                                                        
                                                        1,644,615Loans,
      net of allowance for loan losses of $15,107,000 and
    $8,352,000
                                                        
                                                        
                                                        1,113,132,480
                                                        
                                                        
                                                        
                                                        802,436,497Premises
      and equipment
                                                        
                                                        
                                                        36,500,979
                                                        
                                                        
                                                        
                                                        16,168,434Federal
      Home Loan Bank stock
                                                        
                                                        
                                                        18,631,500
                                                        
                                                        
                                                        
                                                        10,036,900Investment
      in limited partnerships
                                                        
                                                        
                                                        4,560,690
                                                        
                                                        
                                                        
                                                        3,246,468Deferred
      income tax benefit
                                                        
                                                        
                                                        21,237,513
                                                        
                                                        
                                                        
                                                        5,174,082Cash
      value of life insurance
                                                        
                                                        
                                                        42,637,240
                                                        
                                                        
                                                        
                                                        30,350,760Core
      deposit and other intangibles
                                                        
                                                        
                                                        7,406,572
                                                        
                                                        
                                                        
                                                        1,005,703Goodwill
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        14,187,725Other
      assets
                                                        
                                                        
                                                        16,545,134
                                                        
                                                        
                                                        
                                                        10,925,172Total
      assets
                                                        
                                                        $
                                                        1,388,827,486
                                                        
                                                        
                                                        $
                                                        962,517,012Liabilities
      and Stockholders’ EquityLiabilitiesDepositsNoninterest-bearing
                                                        
                                                        $
                                                        93,393,362
                                                        
                                                        
                                                        $
                                                        47,172,012Interest-bearing
                                                        
                                                        
                                                        869,120,808
                                                        
                                                        
                                                        
                                                        619,235,341Total
      deposits
                                                        
                                                        
                                                        962,514,170
                                                        
                                                        
                                                        
                                                        666,407,353Federal
      Home Loan Bank advances
                                                        
                                                        
                                                        263,112,728
                                                        
                                                        
                                                        
                                                        191,675,155Other
      borrowings
                                                        
                                                        
                                                        15,991,690
                                                        
                                                        
                                                        
                                                        4,962,827Other
      liabilities
                                                        
                                                        
                                                        16,693,959
                                                        
                                                        
                                                        
                                                        12,457,827Total
      liabilities
                                                        
                                                        
                                                        1,258,312,547
                                                        
                                                        
                                                        
                                                        875,503,162Commitments
      and ContingenciesStockholders’
      EquityPreferred
      stock, $.01 par valueAuthorized
      - 5,000,000 sharesIssued
      and outstanding – 32,382 and 0 shares;
                                                          liquidation
      preference $1,000 per share
                                                        
                                                        
                                                        324
                                                        
                                                        
                                                        
                                                        —Common
      stock, $.01 par valueAuthorized
      - 20,000,000 sharesIssued
      and outstanding – 6,984,754 and 4,226,638 shares
                                                        
                                                        
                                                        69,847
                                                        
                                                        
                                                        
                                                        42,266Additional
      paid-in capital – preferred stock
                                                        
                                                        
                                                        31,461,848
                                                        
                                                        
                                                        
                                                        —Additional
      paid-in capital – common stock
                                                        
                                                        
                                                        72,610,939
                                                        
                                                        
                                                        
                                                        32,567,085Retained
      earnings
                                                        
                                                        
                                                        29,989,003
                                                        
                                                        
                                                        
                                                        56,725,785Accumulated
      other comprehensive loss
                                                        
                                                        
                                                        (2,027,956
                                                        )
                                                        
                                                        
                                                        (414,380
                                                        )Unearned
      benefit plan shares
                                                        
                                                        
                                                        (1,589,066
                                                        )
                                                        
                                                        
                                                        (1,906,906
                                                        )Total
      stockholders’ equity
                                                        
                                                        
                                                        130,514,939
                                                        
                                                        
                                                        
                                                        87,013,850Total
      liabilities and stockholders’ equity
                                                        
                                                        $
                                                        1,388,827,486
                                                        
                                                        
                                                        $
                                                        962,517,012
  See
Notes to Consolidated Financial Statements
  2
  MutualFirst Financial,
Inc.
 Consolidated
Statements of Operations
 Years
Ended December 31, 2008, 2007 and 2006
  2008
                                                
                                                
                                                2007
                                                
                                                
                                                2006Interest
      and Dividend IncomeLoans
      receivable
                                                
                                                $
                                                61,127,725
                                                
                                                
                                                $
                                                53,686,297
                                                
                                                
                                                $
                                                53,672,382Investment
      securities
                                                
                                                
                                                3,213,272
                                                
                                                
                                                
                                                2,110,916
                                                
                                                
                                                
                                                1,920,823Federal
      Home Loan Bank stock
                                                
                                                
                                                719,886
                                                
                                                
                                                
                                                461,949
                                                
                                                
                                                
                                                459,255Deposits
      with financial institutions
                                                
                                                
                                                118,064
                                                
                                                
                                                
                                                114,596
                                                
                                                
                                                
                                                67,143Total
      interest and dividend income
                                                
                                                
                                                65,178,947
                                                
                                                
                                                
                                                56,373,758
                                                
                                                
                                                
                                                56,119,603Interest
      ExpenseDeposits
                                                
                                                
                                                21,416,502
                                                
                                                
                                                
                                                24,498,471
                                                
                                                
                                                
                                                22,024,156Federal
      Home Loan Bank advances
                                                
                                                
                                                9,698,795
                                                
                                                
                                                
                                                7,656,748
                                                
                                                
                                                
                                                7,803,817Other
      interest expense
                                                
                                                
                                                523,793
                                                
                                                
                                                
                                                71,833
                                                
                                                
                                                
                                                62,424Total
      interest expense
                                                
                                                
                                                31,639,090
                                                
                                                
                                                
                                                32,227,052
                                                
                                                
                                                
                                                29,890,397Net
      Interest Income
                                                
                                                
                                                33,539,857
                                                
                                                
                                                
                                                24,146,706
                                                
                                                
                                                
                                                26,229,206Provision
      for loan losses
                                                
                                                
                                                7,020,000
                                                
                                                
                                                
                                                2,240,000
                                                
                                                
                                                
                                                2,068,000Net
      Interest Income After Provision for Loan Losses
                                                
                                                
                                                26,519,857
                                                
                                                
                                                
                                                21,906,706
                                                
                                                
                                                
                                                24,161,206Other
      IncomeService
      fee income
                                                
                                                
                                                6,256,694
                                                
                                                
                                                
                                                4,831,161
                                                
                                                
                                                
                                                4,369,508Net
      realized losses on sales of available-for-sale securities
                                                
                                                
                                                (3,715,531
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —Commissions
                                                
                                                
                                                1,796,332
                                                
                                                
                                                
                                                1,000,687
                                                
                                                
                                                
                                                682,432Equity
      in losses of limited partnerships
                                                
                                                
                                                (157,575
                                                )
                                                
                                                
                                                (99,654
                                                )
                                                
                                                
                                                (181,366
                                                )Net
      gains (losses) on sales of loans
                                                
                                                
                                                1,438,626
                                                
                                                
                                                
                                                390,778
                                                
                                                
                                                
                                                (669,389
                                                )Net
      servicing fees
                                                
                                                
                                                (298,473
                                                )
                                                
                                                
                                                81,033
                                                
                                                
                                                
                                                62,122Increase
      in cash value of life insurance
                                                
                                                
                                                1,322,724
                                                
                                                
                                                
                                                1,230,000
                                                
                                                
                                                
                                                1,075,403Other
      income (loss)
                                                
                                                
                                                (120,503
                                                )
                                                
                                                
                                                336,554
                                                
                                                
                                                
                                                1,303,778Total
      other income
                                                
                                                
                                                6,522,294
                                                
                                                
                                                
                                                7,770,559
                                                
                                                
                                                
                                                6,642,488Other
      ExpensesSalaries
      and employee benefits
                                                
                                                
                                                19,117,989
                                                
                                                
                                                
                                                14,758,489
                                                
                                                
                                                
                                                14,617,254Net
      occupancy expenses
                                                
                                                
                                                1,911,495
                                                
                                                
                                                
                                                1,549,331
                                                
                                                
                                                
                                                1,507,067Equipment
      expenses
                                                
                                                
                                                1,629,898
                                                
                                                
                                                
                                                1,318,932
                                                
                                                
                                                
                                                1,221,991Data
      processing fees
                                                
                                                
                                                1,191,655
                                                
                                                
                                                
                                                1,058,357
                                                
                                                
                                                
                                                897,998Advertising
      and promotion
                                                
                                                
                                                1,461,225
                                                
                                                
                                                
                                                887,237
                                                
                                                
                                                
                                                966,224Automated
      teller machine expense
                                                
                                                
                                                968,078
                                                
                                                
                                                
                                                723,128
                                                
                                                
                                                
                                                699,435Professional
      fees
                                                
                                                
                                                1,133,012
                                                
                                                
                                                
                                                764,007
                                                
                                                
                                                
                                                992,984Supplies
                                                
                                                
                                                791,579
                                                
                                                
                                                
                                                314,846
                                                
                                                
                                                
                                                278,403Goodwill
      impairment
                                                
                                                
                                                28,968,993
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —Other
      expenses
                                                
                                                
                                                6,451,461
                                                
                                                
                                                
                                                3,781,096
                                                
                                                
                                                
                                                3,837,923Total
      other expenses
                                                
                                                
                                                63,625,385
                                                
                                                
                                                
                                                25,155,423
                                                
                                                
                                                
                                                25,019,279Income
      (Loss) Before Income Tax
                                                
                                                
                                                (30,583,234
                                                )
                                                
                                                
                                                4,521,842
                                                
                                                
                                                
                                                5,784,415Income
      tax expense (credit)
                                                
                                                
                                                (8,485,000
                                                )
                                                
                                                
                                                295,700
                                                
                                                
                                                
                                                1,027,900Net
      Income (Loss)
                                                
                                                $
                                                (22,098,234
                                                )
                                                
                                                $
                                                4,226,142
                                                
                                                
                                                $
                                                4,756,515Earnings
      Per ShareBasic
                                                
                                                $
                                                (4.22
                                                )
                                                
                                                $
                                                1.03
                                                
                                                
                                                $
                                                1.13Diluted
                                                
                                                
                                                (4.22
                                                )
                                                
                                                
                                                1.02
                                                
                                                
                                                
                                                1.11
  See
Notes to Consolidated Financial Statements
 3
  MutualFirst Financial,
Inc.
 Consolidated
Statements of Stockholders’ Equity
 Years
Ended December 31, 2008, 2007 and 2006
 AccumulatedOther
                                                      
                                                      
                                                      UnearnedPaid-in
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      Paid-in
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      Comprehensive
                                                      
                                                      
                                                      BenefitPreferred
                                                      
                                                      
                                                      Capital
                                                      
                                                      
                                                      Common
                                                      
                                                      
                                                      Capital
                                                      
                                                      
                                                      Retained
                                                      
                                                      
                                                      Income
                                                      
                                                      
                                                      PlanStock
                                                      
                                                      
                                                      Preferred
                                                      
                                                      
                                                      Stock
                                                      
                                                      
                                                      Common
                                                      
                                                      
                                                      Earnings
                                                      
                                                      
                                                      (Loss)
                                                      
                                                      
                                                      Shares
                                                      
                                                      
                                                      TotalBalances,
      January 1, 2006
                                                      
                                                      $
                                                      —
                                                      
                                                      
                                                      $
                                                      —
                                                      
                                                      
                                                      $
                                                      45,522
                                                      
                                                      
                                                      $
                                                      33,889,584
                                                      
                                                      
                                                      $
                                                      57,968,477
                                                      
                                                      
                                                      $
                                                      (374,701
                                                      )
                                                      
                                                      $
                                                      (2,735,262
                                                      )
                                                      
                                                      $
                                                      88,793,620Comprehensive
      incomeNet
      income
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      4,756,515
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      4,756,515Other
      comprehensive income, net of tax - unrealized holding gains on
      securities
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      19,967
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      19,967Comprehensive
      income
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      4,776,482Cash
      dividends ($.58 per share)
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (2,359,547
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (2,359,547
                                                      )Exercise
      of stock options
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      474
                                                      
                                                      
                                                      
                                                      686,826
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      687,300Stock
      repurchased
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (2,330
                                                      )
                                                      
                                                      
                                                      (1,825,273
                                                      )
                                                      
                                                      
                                                      (3,107,881
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (4,935,484
                                                      )RRP
      shares earned
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      150,564
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      150,564Tax
      benefit on stock options and RRP shares
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      45,400
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      45,400ESOP
      shares earned
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      347,161
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      317,840
                                                      
                                                      
                                                      
                                                      665,001Reclassification
      of unearned RRP shares
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (192,676
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      192,676
                                                      
                                                      
                                                      
                                                      —Cumulative
      effect of applying SAB No. 108
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (559,018
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (559,018
                                                      )Balances,
      December 31, 2006
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      43,666
                                                      
                                                      
                                                      
                                                      33,101,586
                                                      
                                                      
                                                      
                                                      56,698,546
                                                      
                                                      
                                                      
                                                      (354,734
                                                      )
                                                      
                                                      
                                                      (2,224,746
                                                      )
                                                      
                                                      
                                                      87,264,318Comprehensive
      incomeNet
      income
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      4,226,142
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      4,226,142Other
      comprehensive income, net of tax - unrealized holding losses on
      securities
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (59,646
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (59,646
                                                      )Comprehensive
      income
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      4,166,496Cash
      dividends ($.60 per share)
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (2,440,121
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (2,440,121
                                                      )Exercise
      of stock options
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      154
                                                      
                                                      
                                                      
                                                      208,459
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      208,613Stock
      repurchased
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (1,554
                                                      )
                                                      
                                                      
                                                      (1,032,936
                                                      )
                                                      
                                                      
                                                      (1,758,782
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (2,793,272
                                                      )RRP
      shares earned
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      21,056
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      21,056Tax
      benefit on stock options and RRP shares
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      3,382
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      3,382ESOP
      shares earned
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      265,538
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      317,840
                                                      
                                                      
                                                      
                                                      583,378Balances
      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
                                                      )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
                                                      )
                                                      
                                                      $
                                                      130,514,939
  See
Notes to Consolidated Financial Statements
  4
  MutualFirst Financial,
Inc.
 Consolidated
Statements of Cash Flows
 Years
Ended December 31, 2008, 2007 and 2006
  (As Restated)2008
                                      
                                      
                                      2007
                                      
                                      
                                      2006Operating
      ActivitiesNet
      income (loss)
                                      
                                      $
                                      (22,098,234
                                      )
                                      
                                      $
                                      4,226,142
                                      
                                      
                                      $
                                      4,756,515Items
      not requiring (providing) cashProvision
      for loan losses
                                      
                                      
                                      7,020,000
                                      
                                      
                                      
                                      2,240,000
                                      
                                      
                                      
                                      2,068,000Impairment
      of goodwill
                                      
                                      
                                      28,968,993
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Depreciation
      and amortization
                                      
                                      
                                      2,812,118
                                      
                                      
                                      
                                      2,554,786
                                      
                                      
                                      
                                      2,863,255Deferred
      income tax
                                      
                                      
                                      (9,121,613
                                      )
                                      
                                      
                                      (758,000
                                      )
                                      
                                      
                                      (192,509
                                      )Loans
      originated for sale
                                      
                                      
                                      (41,018,545
                                      )
                                      
                                      
                                      (24,427,954
                                      )
                                      
                                      
                                      (25,124,598
                                      )Proceeds
      from sales of loans held for sale
                                      
                                      
                                      41,737,644
                                      
                                      
                                      
                                      24,262,686
                                      
                                      
                                      
                                      26,303,525(Gain)
      loss on loans held for sale
                                      
                                      
                                      (1,438,626
                                      )
                                      
                                      
                                      (390,778
                                      )
                                      
                                      
                                      669,389Loss  on
      investments available for sale
                                      
                                      
                                      3,715,531
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Other
      equity adjustments
                                      
                                      
                                      384,467
                                      
                                      
                                      
                                      601,052
                                      
                                      
                                      
                                      770,165Change
      inInterest
      receivable and other assets
                                      
                                      
                                      1,811,318
                                      
                                      
                                      
                                      10,356
                                      
                                      
                                      
                                      (940,346
                                      )Interest
      payable and other liabilities
                                      
                                      
                                      (387,104
                                      )
                                      
                                      
                                      1,463,546
                                      
                                      
                                      
                                      639,550Cash
      value of life insurance
                                      
                                      
                                      (1,322,724
                                      )
                                      
                                      
                                      (1,230,000
                                      )
                                      
                                      
                                      (1,075,403
                                      )Other
      adjustments
                                      
                                      
                                      547,009
                                      
                                      
                                      
                                      434,930
                                      
                                      
                                      
                                      939,706Net
      cash provided by operating activities
                                      
                                      
                                      11,610,234
                                      
                                      
                                      
                                      8,986,766
                                      
                                      
                                      
                                      11,677,249Investing
      ActivitiesNet
      change in interest earning deposits
                                      
                                      
                                      100,000
                                      
                                      
                                      
                                      193,000
                                      
                                      
                                      
                                      —Purchases
      of securities available for sale
                                      
                                      
                                      (59,806,429
                                      )
                                      
                                      
                                      (7,810,905
                                      )
                                      
                                      
                                      (5,658,192
                                      )Proceeds
      from redemption-in-kind – investments
                                      
                                      
                                      2,282,409
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Proceeds
      from maturities and paydowns of investmentsAvailable
      for sale
                                      
                                      
                                      9,342,878
                                      
                                      
                                      
                                      4,357,422
                                      
                                      
                                      
                                      3,946,193Held
      to maturity
                                      
                                      
                                      348,629
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Proceeds
      from sales of securities available for sale
                                      
                                      
                                      21,519,205
                                      
                                      
                                      
                                      802,748
                                      
                                      
                                      
                                      395,949Net
      change in loans
                                      
                                      
                                      4,435,817
                                      
                                      
                                      
                                      (2,214,872
                                      )
                                      
                                      
                                      (6,082,431
                                      )Proceeds
      from sales of loans transferred to held for sale
                                      
                                      
                                      51,577,741
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      23,442,643Purchases
      of premises and equipment
                                      
                                      
                                      (3,422,071
                                      )
                                      
                                      
                                      (2,146,757
                                      )
                                      
                                      
                                      (2,752,106
                                      )Proceeds
      from real estate owned sales
                                      
                                      
                                      1,781,701
                                      
                                      
                                      
                                      1,314,027
                                      
                                      
                                      
                                      1,126,224Cash
      received (paid) in acquisition, net
                                      
                                      
                                      331,065
                                      
                                      
                                      
                                      (515,257
                                      )
                                      
                                      
                                      3,894,267Other
      investing activities
                                      
                                      
                                      (61,895
                                      )
                                      
                                      
                                      100,671
                                      
                                      
                                      
                                      1,350,350Net
      cash provided by (used in) investing activities
                                      
                                      
                                      28,429,050
                                      
                                      
                                      
                                      (5,919,923
                                      )
                                      
                                      
                                      19,662,897Financing
      ActivitiesNet
      change inNoninterest-bearing,
      interest-bearing demand and savings deposits
                                      
                                      
                                      (19,540,396
                                      )
                                      
                                      
                                      (543,777
                                      )
                                      
                                      
                                      15,877,096Certificates
      of deposits
                                      
                                      
                                      (16,808,138
                                      )
                                      
                                      
                                      (36,407,524
                                      )
                                      
                                      
                                      (9,399,360
                                      )Proceeds
      from FHLB advances
                                      
                                      
                                      500,225,000
                                      
                                      
                                      
                                      466,550,000
                                      
                                      
                                      
                                      514,450,000Repayment
      of FHLB advances
                                      
                                      
                                      (521,337,084
                                      )
                                      
                                      
                                      (432,014,627
                                      )
                                      
                                      
                                      (542,731,831
                                      )Proceeds
      from other borrowings
                                      
                                      
                                      11,500,000
                                      
                                      
                                      
                                      3,907,394
                                      
                                      
                                      
                                      —Repayment
      of other borrowings
                                      
                                      
                                      (4,383,382
                                      )
                                      
                                      
                                      (433,760
                                      )
                                      
                                      
                                      (419,506
                                      )Proceeds
      from issuance of preferred stock
                                      
                                      
                                      32,382,000
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Stock
      repurchased
                                      
                                      
                                      (1,810,671
                                      )
                                      
                                      
                                      (2,793,272
                                      )
                                      
                                      
                                      (4,935,484
                                      )Cash
      dividends
                                      
                                      
                                      (3,489,747
                                      )
                                      
                                      
                                      (2,440,121
                                      )
                                      
                                      
                                      (2,359,547
                                      )Other
      financing activities
                                      
                                      
                                      (721,585
                                      )
                                      
                                      
                                      (157,857
                                      )
                                      
                                      
                                      728,775Net
      cash used in financing activities
                                      
                                      
                                      (23,984,003
                                      )
                                      
                                      
                                      (4,333,544
                                      )
                                      
                                      
                                      (28,789,857
                                      )Net
      Change in Cash and Cash Equivalents
                                      
                                      
                                      16,055,281
                                      
                                      
                                      
                                      (1,266,701
                                      )
                                      
                                      
                                      2,550,289Cash
      and Cash Equivalents, Beginning of Year
                                      
                                      
                                      23,648,171
                                      
                                      
                                      
                                      24,914,872
                                      
                                      
                                      
                                      22,364,583Cash
      and Cash Equivalents, End of Year
                                      
                                      $
                                      39,703,452
                                      
                                      
                                      $
                                      23,648,171
                                      
                                      
                                      $
                                      24,914,872Additional
      Cash Flows InformationInterest
      paid
                                      
                                      $
                                      31,989,878
                                      
                                      
                                      $
                                      31,589,021
                                      
                                      
                                      $
                                      29,684,516Income
      tax paid
                                      
                                      
                                      900,000
                                      
                                      
                                      
                                      445,000
                                      
                                      
                                      
                                      1,225,000Transfers
      from loans to foreclosed real estate
                                      
                                      
                                      3,138,785
                                      
                                      
                                      
                                      1,970,782
                                      
                                      
                                      
                                      1,484,766Mortgage
      servicing rights capitalized
                                      
                                      
                                      823,032
                                      
                                      
                                      
                                      241,131
                                      
                                      
                                      
                                      437,194Redemption
      in kind – investments
                                      
                                      
                                      9,934,943
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
  5
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Note
      1:
                Nature
      of Operations and Summary of Significant Accounting
    Policies
  The
accounting and reporting policies of MutualFirst Financial, Inc.
(Company) and its wholly owned subsidiary, Mutual Federal Savings Bank (Bank)
and the Bank’s wholly owned subsidiaries, First MFSB Corporation and Mutual
Federal Investment Company and the wholly owned subsidiary of Mutual Federal
Investment Company, Mutual Federal REIT, Inc., conform to accounting principles
generally accepted in the United States of America and reporting practices
followed by the banking industry.  The more significant of the
policies are described below.
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from those
estimates.
  The
Company is a thrift holding company whose principal activity is the ownership of
the Bank.  The Bank operates under a federal thrift charter and
provides full banking services.  As a federally chartered thrift, the
Bank is subject to regulation by the Office of Thrift Supervision and the
Federal Deposit Insurance Corporation.
  The Bank
generates mortgage, consumer and commercial loans and receives deposits from
customers located primarily in north central Indiana.  The Bank’s
loans are generally secured by specific items of collateral including real
property, consumer assets and business assets.  First MFSB Corporation
sells various insurance products and Mutual Federal Investment Company invests
in various investment securities and loans through Mutual Federal REIT,
Inc.
  Consolidation - The
consolidated financial statements include the accounts of the Company, the Bank,
and the Bank’s subsidiaries, after elimination of all material intercompany
transactions.
  Cash Equivalents -The Company
considers all liquid investments with original maturities of three months or
less to be cash equivalents.
  Investment Securities -
Securities available for sale are carried at fair value with unrealized gains
and losses reported separately in accumulated other comprehensive income, net of
tax.  Securities held to maturity are carried at amortized
cost.
  Amortization
of premiums and accretion of discounts are recorded using the interest method as
interest income from securities.  Realized gains and losses are
recorded as net security gains (losses).  Gains and losses on sales of
securities are determined on the specific-identification method.
  Declines
in the fair value of securities below their cost that are other-than-temporary
are reflected as realized losses.  In estimating other-than-temporary
losses, management considers the length of time and extent that fair value has
been less than cost, the financial condition and near term prospects of the
issuer, and the Company’s ability and intent to hold the security for a period
sufficient to allow for any anticipated recovery in fair value.
  6
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  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.
  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, 2008, 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 system.  The required investment in the common stock is
based on a predetermined formula and is carried at cost.
 7
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Mortgage servicing rights on
originated loans that have been sold are recorded at fair
value.  Capitalized servicing rights are amortized in proportion to
and over the period of estimated servicing revenues.  Impairment of
mortgage servicing rights is based on the fair value of those
rights.  Fair values are estimated using discounted cash flows based
on a current market interest rate.  For purposes of measuring
impairment, the rights are stratified based on the predominant risk
characteristics of the underlying loans.  The predominant
characteristic currently used for stratification is type of loan.  The
amount of impairment recognized is the amount by which the capitalized mortgage
servicing rights for a stratum exceed their fair values.
  Investment in limited
partnerships is recorded primarily on the equity method of
accounting.  Losses due to impairment are recorded when it is
determined that the investment no longer has the ability to recover its carrying
amount.  The benefits of low income housing tax credits associated
with the investment are accrued when earned.
  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.
  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 2006 consolidated financial statements have been made to
conform to the 2008 presentation.
  Stock Optionsare accounted
for in accordance with Statement of Financial Accounting Standards (SFAS) No.
123(R), Share-Based
Payment  At December 31, 2008, the Company has a stock-based
employee compensation plan, which is described more fully in Note
23.
  Effective
January 1, 2006, the Company adopted the fair value recognition provisions of
SFAS No. 123R.  The Company selected the modified prospective
application.  Accordingly, after January 1, 2006, the Company
began expensing the fair value of stock options granted, modified, repurchased
or cancelled.
  Current Economic
Conditions.The current economic environment presents
financial institutions with unprecedented circumstances and challenges which in
some cases have resulted in large declines in the fair values of investments and
other assets, constraints on liquidity and significant credit quality problems,
including severe volatility in the valuation of real estate and other collateral
supporting loans.  The financial statements have been prepared using
values and information currently available to the Company.
  8
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Given the
volatility of the 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 Company’s ability to meet
regulatory capital requirements and maintain sufficient
liquidity.
  Future Accounting
Pronouncements.  Statement of Financial Accounting Standards
No. 141 (Revised 2007), Business Combinations
(SFAS 141(R)).  During December 2007, the FASB issued
SFAS 141(R).  This Statement replaces SFAS 141 Business Combinations
(Statement 141).  SFAS 141(R) retains the fundamental
requirements in Statement 141 that the acquisition method of accounting (called
the ’purchase method’) be used for all business combinations and for an acquirer
to be identified for each business combination.  This Statement
defines the acquirer as the entity that obtains control of one or more
businesses, including those sometimes referred to as “true mergers” or “mergers
of equals” and combinations achieved without the transfer of consideration, for
example, by contract alone or through the lapse of minority veto
rights.  This is broader than in Statement 141 which applied only to
business combinations in which control was obtained by transferring
consideration.  This Statement requires an acquirer to recognize the
assets acquired, liabilities assumed and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of that date.
SFAS 141(R) recognizes and measures the goodwill acquired in the business
combination and defines a bargain purchase as a business combination in which
the total acquisition-date fair value of the identifiable net assets acquired
exceeds the fair value of the consideration transferred plus any noncontrolling
interest in the acquiree, and it requires the acquirer to recognize that excess
as a gain attributable to the acquirer.  In contrast, Statement 141
required the “negative goodwill” amount to be allocated as a pro rata reduction
of the amounts assigned to assets acquired. SFAS 141(R) applies
prospectively to business combinations for which the acquisition date is on or
after December 15, 2008.  An entity may not apply it before that
date.
 Statement
of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51 (SFAS 160)
 During December 2007, the FASB issued SFAS 160 to establish
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statement, but separate from the parent’s equity. Before the Statement
was issued these so-called minority interests were reported in the consolidated
statement of financial position as liabilities or in the mezzanine section
between liabilities and equity. The amount of consolidated net income
attributable to the parent and to the noncontrolling interest must be clearly
identified and presented in the consolidated statement of income. This Statement
requires that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated. SFAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008.
Earlier adoption is prohibited. Management does not anticipate that this
Statement will have a material impact on the Company’s consolidated financial
condition or results of operations.
  9
 
 MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Statement
of Financial Accounting Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FASB Statement
No. 133 (“SFAS 161”).  During March 2008, the FASB issued
SFAS 161.  SFAS 161 amends and expands the disclosure
requirement of SFAS 133 No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133) with the intent to
provide users of financial statements with an enhanced understanding of:
(a) how and why an entity uses derivative instruments; (b) how
derivative instrument and related hedged items are accounted for under
SFAS 133 and its related interpretations; and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows.  To meet those objectives,
SFAS 161 requires qualitative disclosures about objectives and strategies
for using derivative, quantitative disclosures about fair value amounts of and
gains and losses on derivative instruments, and disclosures about
credit-risk-related contingent features in derivative
agreements.  SFAS 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15,
2008. Early application is encouraged.
 Statement
of Financial Accounting Standards, The Hierarchy of Generally Accepted
Accounting Principles (SFAS 162)  During May 2008, the
FASB issued SFAS 162.  This Statement identifies the sources of
account principles and the framework for selecting the principles to be used in
the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States.  This Statement is effective 60 days following
the SEC approval of the Public Company Accounting Oversight Board amendments to
AU Section 411, The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles.  Adoption of SFAS 162 will not be a change in
the Company’s current accounting practices; therefore, it will not have a
material impact on the Company’s consolidated financial condition or results of
operations.
  FASB
Staff Position EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating Securities
(FSP EITF 03-6-1).  During June 2008, the FASB issued FSP
EITF 03-6-1.  FSP EITF 03-6-1 clarifies whether instruments,
such as restricted stock, granted in share-based payments are participating
securities prior to vesting.
  Such
participating securities must be included in the computation of earnings per
share under the two-class method as described in SFAS No. 128, Earnings per
Share.  FSP EITF 03-6-1 requires companies to treat
unvested share-based payment awards that have non-forfeitable rights to dividend
or dividend equivalents as a separate class of securities in calculating
earnings per share. FSP EITF 03-6-1 is effective for financial statements
issued for fiscal years and interim periods beginning after December 15,
2008, and requires a company to retrospectively adjust its earning per share
data. Early adoption is not permitted. It is not expected that the adoption of
FSP EITF 03-6-1 will have a material effect on consolidated results of
operations or earnings per share.
  10
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
 Note
      2:
                  Impact
      of Recently Adopted Accounting
Pronouncements
  The
Company adopted the provisions of the Financial Accounting Standards Board
(FASB) Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109, on January 1,
2007.  FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.  FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.  As a result
of the implementation of FIN 48, the Company did not identify any material
uncertain tax positions that it believes should be recognized in the financial
statements.
 In
accordance with Staff Accounting Bulletin 108, the Company made an adjustment to
the 2006 financial statements to correct an error that had previously been
considered immaterial.  The error arose in 2001 as the Company
recognized accretion relating to negative goodwill that had been allocated as a
pro rata reduction of an investment in low income housing
partnership.  Related to this and subsequent to 2001, the Company
recognized its portion of losses on the investment although due to the
allocation of negative goodwill, the investment had no book
value.  The error was $559,000 and is shown as a cumulative effect of
adopting SAB No. 108 in the consolidated statements of stockholders’
equity.
  Effective
January 1, 2008, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 157, Fair Value
Measurements.  SFAS 157 clarifies the fair value
measurement objective, its application in GAAP and establishes a framework that
builds on current practice and requirements.  The framework simplifies
and, where appropriate, codifies the similar guidance in existing pronouncements
and applies broadly to financial and non-financial assets and
liabilities.  The Statement clarifies the definition of fair value as
the price that would be received from selling an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date, known as an exit-price definition of fair value.  It
also provides further guidance on the valuation techniques to be used in
estimating fair value.  Current disclosures about the use of fair
value to measure assets and liabilities are expanded in this
Statement.  The disclosures focus on the methods used for fair value
measurements and apply whether the assets and liabilities are measured at fair
value in all periods, such as trading securities, or in only some periods, such
as impaired assets.  The adoption of SFAS 157 did not have a material
impact on the consolidated financial condition, results of operations or
liquidity.
  FASB
Staff Position (FSP), FSP FAS 157-2, delays the effective date of SFAS 157 for
nonfinancial assets and nonfinancial liabilities, except for those items that
are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually) until fiscal years beginning after November
15, 2008.  The Company anticipates increased financial disclosure as a
result of the adoption of this Statement.
  11
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  On
October 10, 2008 the Financial Accounting Standards Board (FASB) issued FSP
FAS 157-3, Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active (FSP FAS 157-3).  FSP FAS 157-3 clarifies the
application of SFAS 157 in a market that is not active and provides an
example to illustrate key consideration in determining the fair value of a
financial asset when the market for that financial asset is not active. FSP
FAS 157-3 is effective upon issuance, including prior periods for which
financial statements have not been issued.  The Company adopted FSP
FAS 157-3 for the period ended September 30, 2008 and the adoption did
not have any significant impact on consolidated statements of financial
position, consolidated statement of operations, or disclosures.
 In
February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115.  SFAS 159 allows companies to
report selected financial assets and liabilities at fair value.  The
changes in fair value are recognized in earnings and the assets and liabilities
measured under this methodology are required to be displayed separately in the
balance sheet.  The main intent of the Statement is to mitigate the
difficulty in determining reported earnings caused by a “mixed-attribute model”
(or reporting some assets at fair value and others using a different valuation
attribute such as amortized cost).  The project is separated into two
phases.  This first phase addresses the creation of a fair value
option for financial assets and liabilities.  A second phase will address
creating a fair value option for selected non-financial
items.  SFAS 159 is effective for all financial statements issued
for fiscal years beginning after November 15, 2007.  The Company was
not impacted by the adoption of this Statement.
  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.
  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.
  12
 MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
 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
                                      
                                      2008
                                      
                                      
                                      2007Net
      Interest Income
                                      
                                      $
                                      42,151
                                      
                                      
                                      $
                                      42,056Net
      Income (Loss)
                                      
                                      $
                                      (21,202
                                      )
                                      
                                      $
                                      8,244Net
      Income per Share - CombinedBasic
                                      
                                      $
                                      (3.04
                                      )
                                      
                                      $
                                      1.20Diluted
                                      
                                      $
                                      (3.04
                                      )
                                      
                                      $
                                      1.19
  On August
18, 2006, the Bank acquired three branch offices in Warsaw, Wabash and
Winchester, Indiana of Community First Bank and Trust from First Financial
Bancorp of Hamilton, Ohio (First Financial).  As a result of the
acquisition, the Bank will have an opportunity to increase its deposit base and
reduce transaction costs.  The Bank also expects to reduce costs
through economies of scale.
  13
  The
aggregate cash received was $3,690,000.  The following table
summarizes the estimated fair values of the assets acquired and liabilities
assumed at the date of acquisition.
  Cash
      and cash equivalents
                                    
                                    $
                                    204Loans
                                    
                                    
                                    6,502Premises
      and equipment
                                    
                                    
                                    803Core
      deposit intangible
                                    
                                    
                                    313Goodwill
                                    
                                    
                                    842Total
      assets acquired
                                    
                                    
                                    8,664Deposits
                                    
                                    
                                    12,327Other
      liabilities
                                    
                                    
                                    27Total
      liabilities assumed
                                    
                                    
                                    12,354Net
      liabilities assumed
                                    
                                    $
                                    3,690
  The only
significant intangible asset acquired was the core deposit base, which has a
useful life of approximately ten years and will be amortized using an
accelerated method.  The $842,000 of goodwill is expected to be
deductible for tax purposes ratably over fifteen years.
  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, 2008 was
$3,940,000.
  14
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Note
      5:
                  Investment
      Securities
  2008Available 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
  2007Description of Available
                                    for Sale Securities
                                  
                                  Amortized
                                    Cost
                                  
                                  
                                  Gross
                                    Unrealized
                                    Gains
                                  
                                  
                                  Gross
                                    Unrealized
                                    Losses
                                  
                                  
                                  Fair
                                    ValueMortgage-backed
      securities
                                  
                                  $
                                  2,310
                                  
                                  
                                  $
                                  45
                                  
                                  
                                  $
                                  (3
                                  )
                                  
                                  $
                                  2,352Collateralized
      mortgage obligations
                                  
                                  
                                  8,327
                                  
                                  
                                  
                                  38
                                  
                                  
                                  
                                  (43
                                  )
                                  
                                  
                                  8,322Federal
      agencies
                                  
                                  
                                  500
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (2
                                  )
                                  
                                  
                                  498Small
      Business Administration
                                  
                                  
                                  108
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (1
                                  )
                                  
                                  
                                  107Corporate
      obligations
                                  
                                  
                                  16,655
                                  
                                  
                                  
                                  11
                                  
                                  
                                  
                                  (267
                                  )
                                  
                                  
                                  16,399Marketable
      equity securities
                                  
                                  
                                  16,382
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (468
                                  )
                                  
                                  
                                  15,914Total
      investment securities
                                  
                                  $
                                  44,282
                                  
                                  
                                  $
                                  94
                                  
                                  
                                  $
                                  (784
                                  )
                                  
                                  $
                                  43,592
  Marketable
equity securities consist of shares in mutual funds which invest in government
obligations and mortgage-backed securities.
  15
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Certain
investments in debt and marketable equity securities are reported in the
financial statements at an amount less than their historical
cost.  Total fair value of these investments at December 31, 2008
and 2007 was $24,618,000 and $28,308,000, which is approximately 29 percent and
65 percent of the Company’s investment portfolio at those
dates.  These declines 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 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
2008, the Bank determined that two trust preferred securities and one corporate
bond were other than temporarily impaired.  The amount of the
impairment totaled $1,350,000 and is reflected in the statement of
operations.  The Bank also sold its shares of the AMF Ultra Short and
AMF Ultra Short Mortgage Funds for cash and securities.  This
redemption in-kind resulted in a loss of $2,571,000 and the receipt of
$9,935,000 of held to maturity mortgage backed securities.
  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, 2008 and
2007:
  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
                                                                            )Federal
      agencies
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            —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
                                                                            )
  16
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  2007Less than 12 Months
                                    
                                    
                                    12 Months or More
                                    
                                    
                                    TotalDescription of Available
                                      for Sale Securities
                                    
                                    Fair
                                      Value
                                    
                                    
                                    Unrealized
                                      Losses
                                    
                                    
                                    Fair
                                      Value
                                    
                                    
                                    Unrealized
                                      Losses
                                    
                                    
                                    Fair
                                      Value
                                    
                                    
                                    Unrealized
                                      LossesMortgage-backed
      securities
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    270
                                    
                                    
                                    $
                                    (3
                                    )
                                    
                                    $
                                    270
                                    
                                    
                                    $
                                    (3
                                    )Collateralized
      mortgage obligations
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    3,720
                                    
                                    
                                    
                                    (43
                                    )
                                    
                                    
                                    3,720
                                    
                                    
                                    
                                    (43
                                    )Federal
      agencies
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    498
                                    
                                    
                                    
                                    (2
                                    )
                                    
                                    
                                    498
                                    
                                    
                                    
                                    (2
                                    )Small
      Business Administration
                                    
                                    
                                    107
                                    
                                    
                                    
                                    (1
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    107
                                    
                                    
                                    
                                    (1
                                    )Corporate
      obligations
                                    
                                    
                                    2,730
                                    
                                    
                                    
                                    (231
                                    )
                                    
                                    
                                    5,463
                                    
                                    
                                    
                                    (36
                                    )
                                    
                                    
                                    8,193
                                    
                                    
                                    
                                    (267
                                    )Marketable
      equity securities
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    15,520
                                    
                                    
                                    
                                    (468
                                    )
                                    
                                    
                                    15,520
                                    
                                    
                                    
                                    (468
                                    )Total
      temporarily impaired securities
                                    
                                    $
                                    2,837
                                    
                                    
                                    $
                                    (232
                                    )
                                    
                                    $
                                    25,471
                                    
                                    
                                    $
                                    (552
                                    )
                                    
                                    $
                                    28,308
                                    
                                    
                                    $
                                    (784
                                    )
  The
amortized cost and fair value of securities available for sale at
December 31, 2008, 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.
  2008Available for Sale
                                    
                                    
                                    Held to MaturityDescription Securities
                                    
                                    Amortized
                                      Cost
                                    
                                    
                                    Fair
                                      Value
                                    
                                    
                                    Amortized
                                      Cost
                                    
                                    
                                    Fair
                                      ValueWithin
      one year
                                    
                                    $
                                    1,800
                                    
                                    
                                    $
                                    1,803
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    —One
      to five years
                                    
                                    
                                    8,009
                                    
                                    
                                    
                                    7,824
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Five
      to ten years
                                    
                                    
                                    499
                                    
                                    
                                    
                                    502
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —After
      ten years
                                    
                                    
                                    8,988
                                    
                                    
                                    
                                    5,900
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —19,296
                                    
                                    
                                    
                                    16,029
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Mortgage-backed
      securities
                                    
                                    
                                    14,771
                                    
                                    
                                    
                                    15,163
                                    
                                    
                                    
                                    5,498
                                    
                                    
                                    
                                    4,983Collateralized
      mortgage obligations
                                    
                                    
                                    43,821
                                    
                                    
                                    
                                    43,639
                                    
                                    
                                    
                                    4,178
                                    
                                    
                                    
                                    3,545Municipals
                                    
                                    
                                    857
                                    
                                    
                                    
                                    857
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Small
      Business Administration
                                    
                                    
                                    71
                                    
                                    
                                    
                                    70
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Marketable
      equity securities
                                    
                                    
                                    1,635
                                    
                                    
                                    
                                    1,497
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Totals
                                    
                                    $
                                    80,451
                                    
                                    
                                    $
                                    77,255
                                    
                                    
                                    $
                                    9,676
                                    
                                    
                                    $
                                    8,528
  The
carrying value of securities pledged as collateral, to secure public deposits
and for other purposes, was $1,997,000 and $16,018,000 at December 31, 2008 and
2007.
  Proceeds
from sales of securities available for sale during 2008, 2007 and 2006 were
$21,519,000, $803,000 and $396,000.  Gross gains of $204,000, $0, and
$0 in 2008, 2007 and 2006 were recognized in those sales.  Gross
losses of $2,570,000, $0 and $0 in 2008, 2007 and 2006 were recognized on those
sales.
  Other
than temporarily impaired losses were recognized on available for sale
investments during 2008 of $1,350,000.
  17
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Note
      6:
                  Loans
      and Allowance
  2008
                                              
                                              
                                              2007Real
      estate loansOne-to-four
      family
                                              
                                              $
                                              519,822
                                              
                                              
                                              $
                                              429,373Multi-family
                                              
                                              
                                              2,698
                                              
                                              
                                              
                                              3,929Commercial
                                              
                                              
                                              250,693
                                              
                                              
                                              
                                              82,116Construction
      and development
                                              
                                              
                                              12,232
                                              
                                              
                                              
                                              13,560785,445
                                              
                                              
                                              
                                              528,978Consumer
      loansAuto
                                              
                                              
                                              22,715
                                              
                                              
                                              
                                              22,917Home
      equity
                                              
                                              
                                              66,460
                                              
                                              
                                              
                                              27,232Home
      improvement
                                              
                                              
                                              45,339
                                              
                                              
                                              
                                              45,156Mobile
      home
                                              
                                              
                                              727
                                              
                                              
                                              
                                              992Recreational
      vehicles
                                              
                                              
                                              79,884
                                              
                                              
                                              
                                              77,805Boats
                                              
                                              
                                              46,928
                                              
                                              
                                              
                                              47,816Other
                                              
                                              
                                              6,339
                                              
                                              
                                              
                                              3,593268,392
                                              
                                              
                                              
                                              225,511Commercial
      business loans
                                              
                                              
                                              75,290
                                              
                                              
                                              
                                              56,764Total
      loans
                                              
                                              
                                              1,129,127
                                              
                                              
                                              
                                              811,253Undisbursed
      loans in process
                                              
                                              
                                              (4,372
                                              )
                                              
                                              
                                              (3,984
                                              )Unamortized
      deferred loan costs, net
                                              
                                              
                                              3,484
                                              
                                              
                                              
                                              3,519Allowance
      for loan losses
                                              
                                              
                                              (15,107
                                              )
                                              
                                              
                                              (8,352
                                              )Net
      loans
                                              
                                              $
                                              1,113,132
                                              
                                              
                                              $
                                              802,436
 
 2008
                                        
                                        
                                        2007
                                        
                                        
                                        2006Allowance
      for loan lossesBalances,
      January 1
                                        
                                        $
                                        8,352
                                        
                                        
                                        $
                                        8,156
                                        
                                        
                                        $
                                        8,100Provision
      for losses
                                        
                                        
                                        7,020
                                        
                                        
                                        
                                        2,240
                                        
                                        
                                        
                                        2,068Allowance
      acquired in acquisition
                                        
                                        
                                        2,954
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Recoveries
      on loans
                                        
                                        
                                        1,213
                                        
                                        
                                        
                                        679
                                        
                                        
                                        
                                        291Loans
      charged off
                                        
                                        
                                        (4,432
                                        )
                                        
                                        
                                        (2,723
                                        )
                                        
                                        
                                        (2,303
                                        )Balances,
      December 31
                                        
                                        $
                                        15,107
                                        
                                        
                                        $
                                        8,352
                                        
                                        
                                        $
                                        8,156
  At
December 31, 2008 and 2007, accruing loans delinquent 90 days or more totaled
$1,473,000 and $1,421,000.  Non-accruing loans at December 31, 2008 and
2007 were $19,998,000 and $8,949,000.
  18
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Impaired
loans totaled $20,178,000 and $9,371,000 at December 31, 2008 and 2007,
respectively.  An allowance for loan losses of $781,000 and $355,000
relates to impaired loans of $2,973,000 and $752,000 at December 31, 2008 and
2007, respectively.  At December 31, 2008, impaired loans of
$17,205,000 had no related allowance for loan losses.
  Interest
of $839,000, $449,000 and $203,000 was recognized on average impaired loans of
$16,481,000, $9,488,000 and $6,288,000 for 2008, 2007 and 2006,
respectively.  Interest of $140,000, $151,000 and $7,000 was
recognized on impaired loans on a cash basis during 2008, 2007 and 2006,
respectively.
 
 Note
      7:
                  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, 2007
                              
                              $
                              4,215Change
      in composition
                              
                              
                              3,303New
      loans, including renewals
                              
                              
                              3,421Payments,
      etc., including renewals
                              
                              
                              (3,364
                              )Balances,
      December 31, 2008
                              
                              $
                              7,575
  Note
      8:
                  Premises
      and Equipment
  2008
                                    
                                    
                                    2007CostLand
                                    
                                    $
                                    13,248
                                    
                                    
                                    $
                                    5,624Buildings
      and land improvements
                                    
                                    
                                    25,272
                                    
                                    
                                    
                                    13,609Equipment
                                    
                                    
                                    14,381
                                    
                                    
                                    
                                    11,622Total
      cost
                                    
                                    
                                    52,901
                                    
                                    
                                    
                                    30,855Accumulated
      depreciation and amortization
                                    
                                    
                                    (16,400
                                    )
                                    
                                    
                                    (14,687
                                    )Net
                                    
                                    $
                                    36,501
                                    
                                    
                                    $
                                    16,168
  19
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Note
      9:
                  Investment
      In Limited Partnerships
  2008
                            
                            
                            2007Pedcor
      Investments 1990-XIII (99.00 percent ownership)
                            
                            $
                            625
                            
                            
                            $
                            625Pedcor
      Investments 1997-XXVIII (99.00 percent ownership)
                            
                            
                            2,145
                            
                            
                            
                            2,309Pedcor
      Investments 1987-XXXI (49.50 percent ownership)
                            
                            
                            361
                            
                            
                            
                            —Pedcor
      Investments 2000-XLI (50.00 percent ownership)
                            
                            
                            862
                            
                            
                            
                            —Pedcor
      Investments 2001-LI (9.90 percent ownership)
                            
                            
                            268
                            
                            
                            
                            312Pedcor
      Investments 2008-CIII (21.50 percent ownership)
                            
                            
                            300
                            
                            
                            
                            —$
                            4,561
                            
                            
                            $
                            3,246
  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 losses from these limited partnerships of $(158,000), $(100,000) and
$(181,000) for 2008, 2007 and 2006.  In addition, the Company has
recorded the benefit of low income housing credits of $1,214,000, $811,000 and
$801,000 for 2008, 2007 and 2006.  Combined financial statements for
the limited partnerships recorded under the equity method of accounting are as
follows:
  2008
                                                  
                                                  
                                                  2007Combined
      condensed balance sheetsAssetsCash
                                                  
                                                  $
                                                  7,487
                                                  
                                                  
                                                  $
                                                  179Land
      and property
                                                  
                                                  
                                                  43,038
                                                  
                                                  
                                                  
                                                  29,243Other
      assets
                                                  
                                                  
                                                  4,693
                                                  
                                                  
                                                  
                                                  1,642Total
      assets
                                                  
                                                  $
                                                  55,218
                                                  
                                                  
                                                  $
                                                  31,064LiabilitiesNotes
      payable
                                                  
                                                  $
                                                  46,189
                                                  
                                                  
                                                  $
                                                  28,228Other
      liabilities
                                                  
                                                  
                                                  1,835
                                                  
                                                  
                                                  
                                                  847Total
      liabilities
                                                  
                                                  
                                                  48,024
                                                  
                                                  
                                                  
                                                  29,075Partners'
      equity (deficit)General
      partners
                                                  
                                                  
                                                  (3,120
                                                  )
                                                  
                                                  
                                                  (2,885
                                                  )Limited
      partners
                                                  
                                                  
                                                  10,314
                                                  
                                                  
                                                  
                                                  4,874Total
      partners’ equity
                                                  
                                                  
                                                  7,194
                                                  
                                                  
                                                  
                                                  1,989Total
      liabilities and partners' equity
                                                  
                                                  $
                                                  55,218
                                                  
                                                  
                                                  $
                                                  31,064
  20
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  2008
                              
                              
                              2007
                              
                              
                              2006Combined
      condensed statements of operationsTotal
      revenue
                              
                              $
                              5,994
                              
                              
                              $
                              4,007
                              
                              
                              $
                              3,400Total
      expenses
                              
                              
                              (6,833
                              )
                              
                              
                              (4,647
                              )
                              
                              
                              (4,293
                              )Net
      loss
                              
                              $
                              (839
                              )
                              
                              $
                              (640
                              )
                              
                              $
                              (893
                              )
  Note
      10:
                  Core
      Deposit Intangible
  2008
                                    
                                    
                                    2007Core
      deposits
                                    
                                    $
                                    6,797
                                    
                                    
                                    $
                                    909Other
                                    
                                    
                                    610
                                    
                                    
                                    
                                    97$
                                    7,407
                                    
                                    
                                    $
                                    1,006
  Amortization
expense for the years ended December 31, 2008 and 2007, was $805,000 and
$247,000, respectively.  Estimated amortization expense for each of
the following five years is:
  2009
                              
                              $
                              1,5252010
                              
                              
                              1,3482011
                              
                              
                              1,1602012
                              
                              
                              9622013
                              
                              
                              782Thereafter
                              
                              
                              1,630$
                              7,407
  Note
      11:
                  Goodwill
  The
changes in the carrying amount of goodwill for the years ended December 31, 2008
and 2007, were:
  2008
                                
                                
                                2007Balance
      as of January 1
                                
                                $
                                14,188
                                
                                
                                $
                                13,787Goodwill
      acquired during the year
                                
                                
                                14,781
                                
                                
                                
                                401Impairment
      losses
                                
                                
                                (28,969
                                )
                                
                                
                                —Balance
      as of December 31
                                
                                $
                                —
                                
                                
                                $
                                14,188
  21
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  During
the fourth quarter 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.
  Note
      12:
                  Deposits
  2008
                                      
                                      
                                      2007Noninterest-bearing
      demand
                                      
                                      $
                                      93,393
                                      
                                      
                                      $
                                      47,172Interest-bearing
      demand
                                      
                                      
                                      156,787
                                      
                                      
                                      
                                      117,863Savings
                                      
                                      
                                      79,111
                                      
                                      
                                      
                                      50,388Money
      market savings
                                      
                                      
                                      47,584
                                      
                                      
                                      
                                      22,664Certificates
      and other time deposits of $100,000 or more
                                      
                                      
                                      192,445
                                      
                                      
                                      
                                      127,277Other
      certificates
                                      
                                      
                                      393,194
                                      
                                      
                                      
                                      301,043Total
      deposits
                                      
                                      $
                                      962,514
                                      
                                      
                                      $
                                      666,407
  Certificates
including other time deposits of $100,000 or more maturing in years ending
December 31:
  2009
                              
                              $
                              356,9422010
                              
                              
                              88,2482011
                              
                              
                              74,3842012
                              
                              
                              27,9302013
                              
                              
                              37,505Thereafter
                              
                              
                              630$
                              585,639
  22
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Note
      13:
                  Federal
      Home Loan Bank Advances
  Maturities Years Ending December 312009
                                    
                                    $
                                    102,1522010
                                    
                                    
                                    88,9232011
                                    
                                    
                                    34,4862012
                                    
                                    
                                    30,3072013
                                    
                                    
                                    5,075Thereafter
                                    
                                    
                                    2,170$
                                    263,113
  At
December 31, 2008, the Company has pledged $521,319,000 in qualifying first
mortgage loans and investment securities as collateral for advances and
outstanding letters of credit.  Advances, at interest rates from 0.65
to 7.33 percent at December 31, 2008, are subject to restrictions or
penalties in the event of prepayment.
  At
December 31, 2008, the Company had a total of $62 million in putable advances
with Federal Home Loan Bank.
  Note
      14:
                  Other
      Borrowings
  MutualFirst Financial, Inc.
borrowed $11,500,000 from Bank of America for the cash portion of the purchase
of MFB Corp.  The Company borrowed $7,000,000 at a fixed rate of 5.91%
and $4,500,000 at an adjustable rate of the three-month labor rate plus 175
basis points or the Prime rate, at borrowers discretion on a quarterly
basis.  At December 31, 2008, the interest rate on the adjustable
portion of this note was 3.25%, which was based on the Prime
rate.  This loan matures in July 2012.
  The
Company has a $3,000,000 revolving line of credit from Bank of America expiring
in July 2009.  At December 31, 2008 and 2007, the Company had $0
and $497,000 borrowed against this line, respectively.  The line is
collateralized by the Bank’s stock.  Interest is payable quarterly and
is either based on the lender’s Prime rate or the three month LIBOR rate plus
175 basis points.  At December 31, 2008, the interest rate was 3.25%,
which was based on the Prime rate. Subsequent
to December 31, 2008 the revolving line of credit was
closed.
  As a
condition of the Company’s loan agreements with Bank of America, MutualFirst must maintain an
annual ROA of .50%.  As of December 31, 2008 the Company was not in
compliance with this debt covenant.  This covenant has been waived by
Bank of America.
  23
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  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.  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, 2008 was
$3,845,000 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 $647,000 and $1,073,000 at December 31, 2008 and 2007
payable in semiannual installments through January 1, 2010.  At
December 31, 2008 and 2007, the Bank was obligated under an irrevocable
direct pay letter of credit for the benefit of a third party in the amount of
$628,000 and $1,038,000, respectively, relating to this note and the financing
for an apartment project by Pedcor Investments 1997-XXVIII L.P.
  The Bank
also had a noninterest-bearing, unsecured term note payable to Pedcor
Investments 1997-XXIX, L.P.  The note, which was payable in annual
installments through August 15, 2008, had a balance of $0 and $50,000 at
December 31, 2008 and 2007.
  The Bank
reclassified $3,411,000 as of December 31, 2007, due to an overdraft at the
Federal Home Loan Bank of Indianapolis.
  Note Payable Principal Payments Due in Years Ending December 312009
                                    
                                    $
                                    9212010
                                    
                                    
                                    2,2262011
                                    
                                    
                                    2,0002012
                                    
                                    
                                    2,0002013
                                    
                                    
                                    5,000Total
      notes payable
                                    
                                    $
                                    12,147
  Other
borrowings consisted of the following components as of December 31:
  2008
                        
                        
                        2007Notes
      payable
                        
                        $
                        12,147
                        
                        
                        $
                        1,552Subordinate
      debentures
                        
                        
                        3,845
                        
                        
                        
                        —Other
                        
                        
                        —
                        
                        
                        
                        3,411Total
                        
                        $
                        15,992
                        
                        
                        $
                        4,963
  24
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Note
      15:
                  Loan
      Servicing
  Loans
serviced for others are not included in the accompanying consolidated balance
sheets.  The unpaid principal balances of these loans consist of the
following:
  2008
                                  
                                  
                                  2007
                                  
                                  
                                  2006Loans
      serviced forFreddie
      Mac
                                  
                                  $
                                  384,808
                                  
                                  
                                  $
                                  137,973
                                  
                                  
                                  $
                                  139,571Fannie
      Mae
                                  
                                  
                                  2,148
                                  
                                  
                                  
                                  1,936
                                  
                                  
                                  
                                  3,180Federal
      Home Loan Bank
                                  
                                  
                                  37,070
                                  
                                  
                                  
                                  33,998
                                  
                                  
                                  
                                  25,914Other
      investors
                                  
                                  
                                  4,064
                                  
                                  
                                  
                                  4,757
                                  
                                  
                                  
                                  7,708$
                                  428,090
                                  
                                  
                                  $
                                  178,664
                                  
                                  
                                  $
                                  176,373
  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, 2008 was $2,776,000.
  2008
                                  
                                  
                                  2007
                                  
                                  
                                  2006Mortgage
      Servicing RightsBalances,
      January 1
                                  
                                  $
                                  1,126
                                  
                                  
                                  $
                                  1,261
                                  
                                  
                                  $
                                  1,175Servicing
      rights capitalized
                                  
                                  
                                  823
                                  
                                  
                                  
                                  241
                                  
                                  
                                  
                                  437Servicing
      rights acquired
                                  
                                  
                                  1,844
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Amortization
      of servicing rights
                                  
                                  
                                  (517
                                  )
                                  
                                  
                                  (376
                                  )
                                  
                                  
                                  (351
                                  )3,276
                                  
                                  
                                  
                                  1,126
                                  
                                  
                                  
                                  1,261Valuation
      allowance
                                  
                                  
                                  (500
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Balances,
      December 31
                                  
                                  $
                                  2,776
                                  
                                  
                                  $
                                  1,126
                                  
                                  
                                  $
                                  1,261
  The fair
value of servicing rights subsequently measured using the amortization method
was as follows:
  2008
                          
                          
                          2007Mortgage
      Servicing RightsFair
      value, beginning of period
                          
                          $
                          1,629
                          
                          
                          $
                          1,660Fair
      value, end of period
                          
                          
                          2,776
                          
                          
                          
                          1,629
  25
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
 Activity
in the valuation allowance for mortgage servicing right was as
follows:
  2008
                                    
                                    
                                    2007
                                    
                                    
                                    2006Balance,
      beginning of year
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    —Additions
                                    
                                    
                                    500
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Reductions
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Balances,
      end of year
                                    
                                    $
                                    500
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    —
  Note
      16:
                  Income
      Tax
  2008
                                              
                                              
                                              2007
                                              
                                              
                                              2006Income
      tax expenseCurrently
      payableFederal
                                              
                                              $
                                              281
                                              
                                              
                                              $
                                              1,012
                                              
                                              
                                              $
                                              960State
                                              
                                              
                                              356
                                              
                                              
                                              
                                              42
                                              
                                              
                                              
                                              260DeferredFederal
                                              
                                              
                                              (7,781
                                              )
                                              
                                              
                                              (691
                                              )
                                              
                                              
                                              (279
                                              )State
                                              
                                              
                                              (1,341
                                              )
                                              
                                              
                                              (67
                                              )
                                              
                                              
                                              87Total income tax expense
      (credit)
                                              
                                              $
                                              (8,485
                                              )
                                              
                                              $
                                              296
                                              
                                              
                                              $
                                              1,028Reconciliation
      of federal statutory to actual tax expenseFederal
      statutory income tax at 34%
                                              
                                              $
                                              (10,398
                                              )
                                              
                                              $
                                              1,537
                                              
                                              
                                              $
                                              1,967Effect
      of state income taxes
                                              
                                              
                                              (650
                                              )
                                              
                                              
                                              (17
                                              )
                                              
                                              
                                              229Low
      income housing credits
                                              
                                              
                                              (1,214
                                              )
                                              
                                              
                                              (811
                                              )
                                              
                                              
                                              (801
                                              )Tax-exempt
      income
                                              
                                              
                                              (539
                                              )
                                              
                                              
                                              (525
                                              )
                                              
                                              
                                              (459
                                              )Goodwill
      impairment
                                              
                                              
                                              4,280
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Other
                                              
                                              
                                              36
                                              
                                              
                                              
                                              112
                                              
                                              
                                              
                                              92Actual tax
      expense (credit)
                                              
                                              $
                                              (8,485
                                              )
                                              
                                              $
                                              296
                                              
                                              
                                              $
                                              1,028Effective
      tax rate
                                              
                                              
                                              (27.74
                                              )%
                                              
                                              
                                              6.50
                                              %
                                              
                                              
                                              17.8
                                              %
  26
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (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:
  2008
                                                    
                                                    
                                                    2007AssetsUnrealized
      loss on securities available for sale
                                                    
                                                    $
                                                    1,095
                                                    
                                                    
                                                    $
                                                    276Allowance
      for loan losses
                                                    
                                                    
                                                    6,072
                                                    
                                                    
                                                    
                                                    3,108Deferred
      compensation
                                                    
                                                    
                                                    3,102
                                                    
                                                    
                                                    
                                                    2,858Business
      tax and AMT credit carryovers
                                                    
                                                    
                                                    4,891
                                                    
                                                    
                                                    
                                                    1,936Capital
      loss carryover
                                                    
                                                    
                                                    1,627
                                                    
                                                    
                                                    
                                                    —Net
      operating loss carryover
                                                    
                                                    
                                                    1,940
                                                    
                                                    
                                                    
                                                    —Goodwill
      impairment
                                                    
                                                    
                                                    5,682
                                                    
                                                    
                                                    
                                                    —Other
                                                    
                                                    
                                                    2,265
                                                    
                                                    
                                                    
                                                    789Total
      assets
                                                    
                                                    
                                                    26,674
                                                    
                                                    
                                                    
                                                    8,967LiabilitiesDepreciation
      and amortization
                                                    
                                                    
                                                    (468
                                                    )
                                                    
                                                    
                                                    (951
                                                    )FHLB
      stock
                                                    
                                                    
                                                    (738
                                                    )
                                                    
                                                    
                                                    (510
                                                    )State
      income tax
                                                    
                                                    
                                                    (525
                                                    )
                                                    
                                                    
                                                    (199
                                                    )Loan
      fees
                                                    
                                                    
                                                    (184
                                                    )
                                                    
                                                    
                                                    (387
                                                    )Investments
      in limited partnerships
                                                    
                                                    
                                                    (1,649
                                                    )
                                                    
                                                    
                                                    (1,279
                                                    )Mortgage
      servicing rights
                                                    
                                                    
                                                    (1,152
                                                    )
                                                    
                                                    
                                                    (467
                                                    )Total
      liabilities
                                                    
                                                    
                                                    (4,716
                                                    )
                                                    
                                                    
                                                    (3,793
                                                    )Valuation
      AllowanceBeginning
      balance
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —(Increase)
      decrease during period
                                                    
                                                    
                                                    (720
                                                    )
                                                    
                                                    
                                                    —Ending
      balance
                                                    
                                                    
                                                    (720
                                                    )
                                                    
                                                    
                                                    —Net
      deferred tax asset
                                                    
                                                    $
                                                    21,238
                                                    
                                                    
                                                    $
                                                    5,174
  The
Company has unused business income tax credits of $4,718,000 that begin to
expire in 2025.  In addition, the Company has an AMT credit carryover
of $173,000 with an unlimited carryover period.
  Retained
earnings include approximately $14,743,000 for which no deferred income tax
liability has been recognized.  This amount represents an allocation
of income to bad debt deductions as of December 31, 1987 for tax purposes
only.  Reduction of amounts so allocated for purposes other than tax
bad debt losses or adjustments arising from carryback of net operating losses
would create income for tax purposes only, which income would be subject to the
then-current corporate income tax rate.  The unrecorded deferred
income tax liability on the above amounts was approximately
$5,013,000.
  The
Company’s federal income tax returns have been closed without audit by the IRS
through its year ended December 31, 2004.
  27
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Note
      17:
                  Other
      Comprehensive Income (Loss)
  2008Before-Tax
                                Amount
                              
                              
                              Tax
                                Benefit
                              
                              
                              Net-of-Tax
                                AmountUnrealized
      losses on securitiesUnrealized
      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 losses
                              
                              $
                              (2,490
                              )
                              
                              $
                              986
                              
                              
                              $
                              (1,504
                              )
  2007Before-Tax
                                Amount
                              
                              
                              Tax
                                Benefit
                              
                              
                              Net-of-Tax
                                AmountUnrealized
      losses on securitiesUnrealized
      holding losses arising during the year
                              
                              $
                              (99
                              )
                              
                              $
                              39
                              
                              
                              $
                              (60
                              )Less:
      reclassification adjustment for losses realized in net
    income
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —Net
      unrealized losses
                              
                              $
                              (99
                              )
                              
                              $
                              39
                              
                              
                              $
                              (60
                              )
  2006Before-Tax
                                Amount
                              
                              
                              Tax
                                Expense
                              
                              
                              Net-of-Tax
                                AmountUnrealized
      gains on securitiesUnrealized
      holding gains arising during the year
                              
                              $
                              33
                              
                              
                              $
                              (13
                              )
                              
                              $
                              20Less:
      reclassification adjustment for losses realized in net
    income
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —Net
      unrealized gains
                              
                              $
                              33
                              
                              
                              $
                              (13
                              )
                              
                              $
                              20
  The
components of accumulated other comprehensive income, included in stockholders’
equity, are as follows:
  2008
                              
                              
                              2007
                              
                              
                              2006Net
      unrealized loss on securitiesavailable
      for sale
                              
                              $
                              3,176
                              
                              
                              $
                              686
                              
                              
                              $
                              588Net
      loss relating to benefit liability
                              
                              
                              182
                              
                              
                              
                              —
                              
                              
                              
                              —3,358
                              
                              
                              
                              686
                              
                              
                              
                              587Tax
      effect (benefit)
                              
                              
                              (1,330
                              )
                              
                              
                              (272
                              )
                              
                              
                              (233
                              )Net
      of tax amount
                              
                              $
                              2,028
                              
                              
                              $
                              414
                              
                              
                              $
                              355
  28
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Note
      18:
                  Commitments
      and Contingent Liabilities
  In the
normal course of business there are outstanding commitments and contingent
liabilities, such as commitments to extend credit and standby letters of credit,
which are not included in the accompanying financial statements.  The
Company’s exposure to credit loss in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual or notional amount of those
instruments.  The Company uses the same credit policies in making such
commitments as it does for instruments that are included in the consolidated
statements of financial condition.
  Financial
instruments whose contract amount represents credit risk as of December 31 were
as follows:
  2008
                                
                                
                                2007
                                
                                
                                2006Loan
      commitments
                                
                                $
                                164,922
                                
                                
                                $
                                93,662
                                
                                
                                $
                                82,146Standby
      letters of credit
                                
                                
                                7,065
                                
                                
                                
                                4,160
                                
                                
                                
                                6,492
  Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract.  Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee.  Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.  The Company evaluates
each customer's credit worthiness on a case-by-case basis.  The amount
of collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation.  Collateral held
varies, but may include residential real estate, income-producing commercial
properties, or other assets of the borrower.
  Standby
letters of credit are conditional commitments issued by the Company to guarantee
the performance of a customer to a third party.
  The
Company and Bank are also subject to claims and lawsuits which arise primarily
in the ordinary course of business.  It is the opinion of management
that the disposition or ultimate resolution of such claims and lawsuits will not
have a material adverse effect on the consolidated financial position of the
Company.
  The
Company has entered into employment agreements with certain officers that
provide for the continuation of salary and certain benefits for a specified
period of time under certain conditions. Under the terms of the agreement, these
payments could occur in the event of a change in control of the Company, as
defined, along with other specific conditions.
  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 $12,500,000 and $5,300,000 at December
31, 2008 and 2007, respectively.
  29
 MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Note
      19:
                Stockholders’
      Equity
  The
Company is not subject to any regulatory restrictions on the payment of
dividends to its stockholders.
  Without
prior approval, current regulations allow the Bank to pay dividends to the
Company not exceeding retained net income for the previous two calendar
years.  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,
2008, the Bank had no regulatory approval to pay dividends to the
Company.
  Note
      20:
                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.
  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.
  30
  MutualFirstFinancial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Note
      21:
                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, 2008 and 2007, the Bank was categorized as well capitalized
and met all subject capital adequacy requirements.  There are no
conditions or events since December 31, 2008 that management believes have
changed the Bank’s classification.
  The
Bank’s actual and required capital amounts and ratios are as
follows:
  Actual
                        
                        
                        Required for Adequate
                          Capital
                        
                        
                        To Be Well
                          CapitalizedAmount
                        
                        
                        Ratio
                        
                        
                        Amount
                        
                        
                        Ratio
                        
                        
                        Amount
                        
                        
                        RatioAs
      of December 31, 2008Total
      risk-based capital (to risk-weighted assets)
                        
                        $
                        150,164
                        
                        
                        
                        13.8
                        %
                        
                        $
                        87,091
                        
                        
                        
                        8.0
                        %
                        
                        $
                        108,864
                        
                        
                        
                        10.0
                        %Tier
      1 risk-based capital (to risk-weighted assets)
                        
                        
                        136,556
                        
                        
                        
                        12.5
                        %
                        
                        
                        43,546
                        
                        
                        
                        4.0
                        %
                        
                        
                        65,318
                        
                        
                        
                        6.0
                        %Core
      capital (to adjusted total assets)
                        
                        
                        136,556
                        
                        
                        
                        9.9
                        %
                        
                        
                        55,393
                        
                        
                        
                        4.0
                        %
                        
                        
                        69,242
                        
                        
                        
                        5.0
                        %Core
      capital (to adjusted tangible assets)
                        
                        
                        136,556
                        
                        
                        
                        9.9
                        %
                        
                        
                        27,697
                        
                        
                        
                        2.0
                        %
                        
                        
                        N/A
                        
                        
                        
                        N/ATangible
      capital (to adjusted total assets)
                        
                        
                        136,556
                        
                        
                        
                        9.9
                        %
                        
                        
                        20,773
                        
                        
                        
                        1.5
                        %
                        
                        
                        N/A
                        
                        
                        
                        N/AAs
      of December 31, 2007Total
      risk-based capital (to risk-weighted assets)
                        
                        $
                        77,968
                        
                        
                        
                        10.9
                        %
                        
                        $
                        57,236
                        
                        
                        
                        8.0
                        %
                        
                        $
                        71,546
                        
                        
                        
                        10.0
                        %Tier
      1 risk-based capital (to risk-weighted assets)
                        
                        
                        70,440
                        
                        
                        
                        9.9
                        %
                        
                        
                        28,618
                        
                        
                        
                        4.0
                        %
                        
                        
                        42,927
                        
                        
                        
                        6.0
                        %Core
      capital (to adjusted total assets)
                        
                        
                        70,440
                        
                        
                        
                        7.5
                        %
                        
                        
                        37,785
                        
                        
                        
                        4.0
                        %
                        
                        
                        47,231
                        
                        
                        
                        5.0
                        %Core
      capital (to adjusted tangible assets)
                        
                        
                        70,440
                        
                        
                        
                        7.5
                        %
                        
                        
                        18,892
                        
                        
                        
                        2.0
                        %
                        
                        
                        N/A
                        
                        
                        
                        N/ATangible
      capital (to adjusted total assets)
                        
                        
                        70,440
                        
                        
                        
                        7.5
                        %
                        
                        
                        14,169
                        
                        
                        
                        1.5
                        %
                        
                        
                        N/A
                        
                        
                        
                        N/A
  31
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Note
      22:
                Employee
      Benefits
  The
Company has a retirement savings 401(k) plan in which substantially all
employees may participate.  The contributions are discretionary and
determined annually.  The Company matches employees' contributions at
the rate of 50 percent for the first $600 of participant contributions to the
401(k) and made a contribution to the plan of 3 percent of qualified
compensation.  The Company’s expense for the plan was $505,000,
$330,000 and $250,000 for 2008, 2007 and 2006.
  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 $717,000,
$682,000 and $683,000 for 2008, 2007 and 2006.
  The
Company has an ESOP covering substantially all of its employees.  At
December 31, 2008, 2007 and 2006, the Company had 158,922, 190,706 and
222,492 unearned ESOP shares with a fair value of $1,072,724, $2,658,000 and
$4,717,000.  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
2008, 2007 and 2006 was $343,000, $583,000 and $665,000.  The
following table provides information on ESOP shares at December 31.
  2008
                
                
                2007
                
                
                2006Allocated
      shares
                
                
                256,089
                
                
                
                207,274
                
                
                
                186,637Suspense
      shares
                
                
                158,922
                
                
                
                190,709
                
                
                
                222,492Committed-to-be
      released shares
                
                
                31,783
                
                
                
                31,783
                
                
                
                31,783
 
 The
Company has a Recognition and Retention Plan (RRP) for the award of up to
232,784 shares of the common stock of the Company to directors and executive
officers.  Common stock awarded under the RRP vests ratably over a
three or five-year period commencing with the date of the
grants.  Expense recognized on the vested shares totaled approximately
$21,000, $21,000 and $151,000 in 2008, 2007 and 2006.
  32
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  A summary
of the status of the Company’s RRP shares as of December 31, 2007 and changes
during the year then ended, is presented below:
  2008Shares
                                              
                                              
                                              Weighted-
                                                Average
                                                Grant-Date
                                                Fair ValueRRP,
      beginning of year
                                              
                                              
                                              9,834
                                              
                                              
                                              $
                                              25.66Vested
                                              
                                              
                                              4,917
                                              
                                              
                                              
                                              25.66RRP,
      end of year
                                              
                                              
                                              4,917
                                              
                                              
                                              $
                                              25.66
  As of
December 31, 2008 and 2007, there was $0 and $21,000 of total unrecognized
compensation cost related to RRP share-based compensation arrangements granted
under the Plan.  That cost is expected to be recognized over a
weighted-average period of 0.5 years.  The total fair value of shares
vested during the years ended December 31, 2008, 2007 and 2006, was $66,000,
$99,000 and $119,000, respectively.
  Note
      23:
                Stock
      Option Plan
  Under the
Company’s stock option plan, which has been accounted for in accordance with
FAS 123(R), Share-Based
Payments and related interpretations, the Company grants selected
executives and other key employees and directors incentive and non-qualified
stock option awards which vest and become fully exercisable at the discretion of
the stock option committee as the options are granted.  The Company is
authorized to grant options for up to 581,961 shares of the Company’s common
stock.  Under certain provisions of the plan, the number of shares
available for grant may be increased without shareholder approval by the amount
of shares surrendered as payment of the exercise price of the stock option and
by the number of shares of common stock of the Company that could be repurchased
by the Company using proceeds from the exercise of stock options.  The
following is a summary of the status of the Company’s stock option plan and
changes in that plan for 2007.
  2008Options
                
                Shares
                
                
                Weighted-
                  Average
                  Exercise Price
                
                Weighted-
                  Average
                  Remaining
                  Contractual Life
                
                Aggregate
                  Intrinsic
                  ValueOutstanding,
      beginning of year
                
                
                385,613
                
                
                $
                16.98Exercised
                
                
                —
                
                
                
                22.00Issued
      in acquisition
                
                
                296,555
                
                
                
                9.90Forfeited/expired
                
                
                (38,670
                )
                
                
                —Outstanding,
      end of year
                
                
                643,498
                
                
                $
                13.99
                
                5.7 years
                
                $
                —Options
      exercisable at year end
                
                
                643,498
  33
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  The total
intrinsic value of options exercised during the years ended December 31, 2008,
2007 and 2006, was $0, $79,000 and $311,000, respectively.
  Cash
received from options exercised under all share-based payment arrangements for
years ended December 31, 2008, 2007 and 2006 was $0, $209,000 and $687,000,
respectively.  The actual tax benefit realized for the tax deductions
from options exercised and RRP shares vested totaled $21,000, $3,000 and
$45,000, respectively, for the years ended December 31, 2008, 2007 and
2006.
 Note
      24:
                Stock
      Repurchase Plan
  On
December 22, 2004, the Company announced that its Board of Directors approved a
stock repurchase program for up to 471,000 of the outstanding common shares of
the Company.  As of December 31, 2007, the Company had purchased
471,000 shares under the program.
  On
September 12, 2007, the Company announced that its Board of Directors approved a
stock repurchase program for up to 215,000 of the outstanding common shares of
the Company.  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, 2008, the Company had
purchased 10,000 shares under the program.
  Note
      25:
                Earnings
      Per Share
  Earnings
per share were computed as follows:
  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
                )
  34
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  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
 2006Income
                
                
                Weighted-
                  Average
                  Shares
                
                
                Per-Share
                  AmountBasic
      Earnings Per ShareIncome
      available to common stockholders
                
                $
                4,757
                
                
                
                4,196,059
                
                
                $
                1.13Effect
      of Dilutive SecuritiesStock
      options
                
                
                
                
                
                
                77,980Diluted
      Earnings Per ShareIncome
      available to common stockholders and assumed conversions
                
                $
                4,757
                
                
                
                4,274,039
                
                
                $
                1.11
  Options
to purchase 638,318, 91,000, and 75,000 shares of common stock at $13.89, $25.02
and $25.66 per share, respectively, were outstanding at December 31, 2008,
2007 and 2006, but were not included in the computation of diluted EPS because
the options’ exercise price was greater than the average market price of the
common shares.
  Warrants
to purchase 625,135, 0 and 0 shares of common stock at $7.77, $0 and $0 per
share, respectively, were outstanding at December 31, 2008, 2007 and 2006,
but were not included in the computation of diluted EPS because the options’
exercise price was greater than the average market price of the common
shares.
  35
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Note
      26:
                Fair
      Values of Financial Instruments
  Effective
January 1, 2008, the Company adopted Statement of Financial Accounting Standards
No. 157 (FAS 157), Fair
Value Measurements.  FAS 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements.  FAS 157 has been applied prospectively as of the
beginning of the year.
  FAS 157
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date.  FAS 157 also establishes a fair value hierarchy
which requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value.  The
standard describes three levels of inputs that may be used to measure fair
value:
  Level 1
                Quoted
      prices in active markets for identical assets or
    liabilities
  Level 2
                Observable
      inputs other than Level 1 prices, such as quoted prices for similar assets
      or liabilities; quoted prices in markets that are not active; or other
      inputs that are observable or can be corroborated by observable market
      data for substantially the full term of the assets or
      liabilities
  Level 3
                Unobservable
      inputs that are supported by little or no market activity and that are
      significant to the fair value of the assets or
  liabilities
  ITEMS
MEASURED AT FAIR VALUE ON A RECURRING BASIS
  Following
is a description of the valuation methodologies used for instruments measured at
fair value on a recurring basis and recognized in the accompanying balance
sheet, as well as the general classification of such instruments pursuant to the
valuation hierarchy.
  Available-for-sale
Securities
  Where
quoted market prices are available in an active market, securities are
classified within Level 1 of the valuation hierarchy.  The
Company uses a third-party provider to provide market prices on its securities
and no securities are priced as Level 1 securities.  If quoted
market prices are not available, then fair values are estimated by using pricing
models, quoted prices of securities with similar characteristics or discounted
cash flows.  Level 2 securities include mortgage-backed,
collateralized mortgage, federal agency and certain corporate obligation
securities.  In certain cases where Level 1 or Level 2 inputs are not
available, securities are classified within Level 3 of the hierarchy and include
certain corporate obligation securities.
  36
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Fair Value Measurements UsingFair Value
                        
                        
                        Level 1
                        
                        
                        Level 2
                        
                        
                        Level 3Available-for-sale
      securities
                        
                        $
                        77,255
                        
                        
                        $
                        —
                        
                        
                        $
                        70,938
                        
                        
                        $
                        6,317
  The
following is a reconciliation of the beginning and ending balances for the year
ended December 31, 2008 of recurring fair value measurements recognized in the
accompanying balance sheet using significant unobservable (Level 3)
inputs:
  Available-for-sale
                              securitiesBeginning
      balance
                            
                            $
                            9,923Total
      realized and unrealized gains and lossesIncluded
      in net income
                            
                            
                            (1,350
                            )Included
      in other comprehensive income
                            
                            
                            (2,745
                            )Purchases,
      issuances and settlements
                            
                            
                            (11
                            )Transfers
      in and/or out of Level 3
                            
                            
                            500Ending
      balance
                            
                            $
                            6,317Total
      gains or losses for the period included in net income attributable to the
      change in unrealized gains or losses related to assets and liabilities
      still held at the reporting date
                            
                            $
                            1,350
  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.
  37
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Impaired
Loans
  Loans for
which it is probable that the Bank will not collect all principal and interest
due according to contractual terms are measured for impairment in accordance
with the provisions of Financial Accounting Standard No. 114 (FAS 114), Accounting by Creditors for
Impairment of a Loan.  Allowable methods for estimating fair
value include using the fair value of the collateral for collateral dependent
loans or, where a loan is determined not to be collateral dependent, using the
discounted cash flow method.
  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.
  If the
impaired loan is determined not to be collateral dependent, then the discounted
cash flow method is used.  This method requires the impaired loan to
be recorded at the present value of expected future cash flows discounted at the
loan’s effective interest rate.  The effective interest rate of a loan
is the contractual interest rate adjusted for any net deferred loan fees or
costs, premiums or discount existing at origination or acquisition of the
loan.
  Impaired
loans are classified within Level 3 of the fair value hierarchy.
  Mortgage
Servicing Rights
  Mortgage
servicing rights do not trade in an active, open market with readily observable
prices.  Accordingly, fair value is estimated using discounted cash
flow models.  Due to the nature of the valuation inputs, mortgage
servicing rights are classified within Level 3 of the hierarchy.
  Acquisition
  Purchase
accounting requires recording all assets and liabilities at their fair
value.  Fair values of financial assets and liabilities related to the
Company’s acquisition of MFB Corp. were primarily determined using discounted
cash flow models.  Due to the nature of the valuation inputs, these
acquisition items are classified with Level 3 of the hierarchy.
  Fair Value Measurements UsingFair Value
                            
                            
                            Level 1
                            
                            
                            Level 2
                            
                            
                            Level 3Impaired
      loans
                            
                            $
                            5,997
                            
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            5,997Mortgage
      servicing rights
                            
                            
                            2,776
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            2,776AcquisitionLoans
                            
                            
                            378,075
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            378,075Deposits
                            
                            
                            332,075
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            332,075Borrowings
                            
                            
                            97,361
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            97,361
  38
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  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.
  Interest-Bearing Deposits -
The fair value of interest-bearing deposits approximates carrying
value.
  Investment and Mortgage-Backed
Securities - Fair values are based on quoted market prices.
  Loans Held For Sale -Fair
values are based on quoted market prices.
  Loans - The fair value for
loans are estimated using discounted cash flow analyses using interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality.
  FHLB Stock - Fair value of
FHLB stock is based on the price at which it may be resold to the
FHLB.
  Interest Receivable/Payable -
The fair values of interest receivable/payable approximate carrying
values.
  Deposits - The fair values of
noninterest-bearing, interest-bearing demand and savings accounts are equal to
the amount payable on demand at the balance sheet date.  Fair values
for fixed-rate certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on such
time deposits.
  Federal Home Loan Bank
Advances - The fair value of these borrowings are estimated using a
discounted cash flow calculation, based on current rates for similar debt for
periods comparable to the remaining terms to maturity of these
advances.
  Other Borrowings- The fair
value of these borrowings approximate carrying values.
  Notes Payable- The fair value
of this note is estimated using a discount calculation based on current
rates.
  Advances by Borrowers for Taxes and
Insurance - The fair value approximates carrying value.
  Off-Balance Sheet Commitments
- Commitments include commitments to purchase and originate mortgage loans,
commitments to sell mortgage loans, and standby letters of credit and are
generally of a short-term nature.  The fair values of such commitments
are based on fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the counterparties’
credit standing.  The carrying amounts of these investments are
reasonable estimates of the fair value of these financial
statements.
  39
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  The
estimated fair values of the Company’s financial instruments are as
follows:
  2008
                
                
                2007Carrying
                  Amount
                
                
                Fair
                  Value
                
                
                Carrying
                  Amount
                
                
                Fair
                  ValueAssetsCash
      and cash equivalents
                
                $
                39,703
                
                
                $
                39,703
                
                
                $
                23,648
                
                
                $
                23,648Interest-bearing
      deposits
                
                
                —
                
                
                
                —
                
                
                
                100
                
                
                
                100Securities
      available for sale
                
                
                77,255
                
                
                
                77,255
                
                
                
                43,592
                
                
                
                43,592Securities
      held to maturity
                
                
                9,676
                
                
                
                8,528
                
                
                
                —
                
                
                
                —Loans
      held for sale
                
                
                1,541
                
                
                
                1,574
                
                
                
                1,645
                
                
                
                1,662Loans
                
                
                1,113,132
                
                
                
                1,144,394
                
                
                
                802,436
                
                
                
                808,387Stock
      in FHLB
                
                
                18,632
                
                
                
                18,632
                
                
                
                10,037
                
                
                
                10,037Interest
      receivable
                
                
                5,205
                
                
                
                5,205
                
                
                
                3,693
                
                
                
                3,693LiabilitiesDeposits
                
                
                962,514
                
                
                
                974,072
                
                
                
                666,407
                
                
                
                666,986FHLB
      advances
                
                
                263,113
                
                
                
                273,853
                
                
                
                191,675
                
                
                
                194,854Other
      borrowings
                
                
                15,345
                
                
                
                16,173
                
                
                
                3,907
                
                
                
                3,907Notes
      payable
                
                
                647
                
                
                
                640
                
                
                
                1,055
                
                
                
                994Interest
      payable
                
                
                2,116
                
                
                
                2,116
                
                
                
                2,467
                
                
                
                2,467Advances
      by borrowers for taxes and insurance
                
                
                3,229
                
                
                
                3,229
                
                
                
                1,464
                
                
                
                1,464Off-balance
      sheet commitments
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
  40
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (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 Sheets2008
                
                
                2007AssetsCash
      on deposit with Bank
                
                $
                2,896
                
                
                $
                25Cash
      on deposit with others
                
                
                —
                
                
                
                26Total
      cash
                
                
                2,896
                
                
                
                51Investment
      in common stock of Bank
                
                
                142,417
                
                
                
                86,507Investment
      in affiliate
                
                
                —
                
                
                
                800Deferred
      and current income tax
                
                
                669
                
                
                
                143Other
      assets
                
                
                40
                
                
                
                9Total
      assets
                
                $
                146,022
                
                
                $
                87,510LiabilitiesOther
      borrowings
                
                $
                15,345
                
                
                $
                496Other
      liabilities
                
                
                162
                
                
                
                —Total
      liabilities
                
                
                15,507
                
                
                
                496Stockholders'
      Equity
                
                
                130,515
                
                
                
                87,014Total
      liabilities and stockholders' equity
                
                $
                146,022
                
                
                $
                87,510
  41
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Condensed Statements of Operations2008
                      
                      
                      2007
                      
                      
                      2006IncomeInterest
      income from Bank
                      
                      $
                      10
                      
                      
                      $
                      29
                      
                      
                      $
                      111Dividends
      from Bank
                      
                      
                      3,000
                      
                      
                      
                      2,200
                      
                      
                      
                      —Other
      income
                      
                      
                      —
                      
                      
                      
                      56
                      
                      
                      
                      317Total
      income
                      
                      
                      3,010
                      
                      
                      
                      2,285
                      
                      
                      
                      428Expenses
                      
                      
                      1,221
                      
                      
                      
                      383
                      
                      
                      
                      368Income
      before income tax and equity in undistributed income of the
      Bank
                      
                      
                      1,789
                      
                      
                      
                      1,902
                      
                      
                      
                      60Income
      tax benefit
                      
                      
                      (412
                      )
                      
                      
                      (118
                      )
                      
                      
                      (8
                      )Income
      before equity in undistributed income (distributions in excess of income)
      of the Bank
                      
                      
                      2,201
                      
                      
                      
                      2,020
                      
                      
                      
                      68Equity
      in undistributed income (distributions in excess of income) of the
      Bank
                      
                      
                      (24,299
                      )
                      
                      
                      2,206
                      
                      
                      
                      4,689Net
      income (loss)
                      
                      $
                      (22,098
                      )
                      
                      $
                      4,226
                      
                      
                      $
                      4,757
  42
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (Table
Dollar Amounts in Thousands, Except Share and Per Share Data)
  Condensed Statements of Cash Flows2008
                
                
                2007
                
                
                2006Operating
      ActivitiesNet
      income (loss)
                
                $
                (22,098
                )
                
                $
                4,226
                
                
                $
                4,757Item
      not requiring cashESOP
      shares earned
                
                
                343
                
                
                
                583
                
                
                
                665Deferred
      income tax benefit
                
                
                (251
                )
                
                
                —
                
                
                
                26Distributions
      in excess of income (equity in undistributed income) of the
      Bank
                
                
                24,299
                
                
                
                (2,206
                )
                
                
                (4,689
                )Other
                
                
                (13
                )
                
                
                620
                
                
                
                (345
                )Net
      cash provided by operating activities
                
                
                2,280
                
                
                
                3,223
                
                
                
                414Investing
      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
                
                
                —
                
                
                
                100
                
                
                
                —Net
      cash provided by (used in) investingactivities
                
                
                (37,499
                )
                
                
                100
                
                
                
                —Financing
      ActivitiesRepayment
      of other borrowings
                
                
                (496
                )
                
                
                —
                
                
                
                —Proceeds
      from issuance of long-term debt
                
                
                11,500
                
                
                
                —
                
                
                
                —Proceeds
      from issuance of preferred stock
                
                
                32,382
                
                
                
                —
                
                
                
                —Stock
      repurchased
                
                
                (1,811
                )
                
                
                (2,793
                )
                
                
                (4,935
                )Cash
      dividends
                
                
                (3,490
                )
                
                
                (2,440
                )
                
                
                (2,360
                )Proceeds
      from stock options exercised
                
                
                —
                
                
                
                209
                
                
                
                687Tax
      benefit on stock options and RRP shares
                
                
                (21
                )
                
                
                3
                
                
                
                45Net
      cash provided by (used in) financing activities
                
                
                38,064
                
                
                
                (5,021
                )
                
                
                (6,563
                )Net
      Change in Cash
                
                
                2,845
                
                
                
                (1,698
                )
                
                
                (6,149
                )Cash,
      Beginning of Year
                
                
                51
                
                
                
                1,749
                
                
                
                7,898Cash,
      End of Year
                
                $
                2,896
                
                
                $
                51
                
                
                $
                1,749
  43
  MutualFirst Financial,
Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (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)
                
                
                Basic
                  Earnings
                  Per
                  Common
                  Share
                
                
                Diluted
                  Earnings
                  Per
                  Common
                  Share2008March
                
                $
                13,757
                
                
                $
                7,397
                
                
                $
                6,360
                
                
                $
                612
                
                
                $
                1,215
                
                
                $
                0.30
                
                
                $
                0.30June
                
                
                13,489
                
                
                
                6,689
                
                
                
                6,800
                
                
                
                733
                
                
                
                1,175
                
                
                
                0.30
                
                
                
                0.30September
                
                
                18,825
                
                
                
                8,989
                
                
                
                9,836
                
                
                
                913
                
                
                
                359
                
                
                
                0.06
                
                
                
                0.06December
                
                
                19,108
                
                
                
                8,564
                
                
                
                10,544
                
                
                
                4,762
                
                
                
                (24,847
                )
                
                
                (3.65
                )
                
                
                (3.65
                )Total
                
                $
                65,179
                
                
                $
                31,639
                
                
                $
                33,540
                
                
                $
                7,020
                
                
                $
                (22,098
                )
                
                
                (4.22
                )
                
                
                (4.22
                )2007March
                
                $
                13,809
                
                
                $
                7,814
                
                
                $
                5,995
                
                
                $
                332
                
                
                $
                1,044
                
                
                $
                0.25
                
                
                $
                0.25June
                
                
                14,056
                
                
                
                7,941
                
                
                
                6,115
                
                
                
                533
                
                
                
                1,129
                
                
                
                0.27
                
                
                
                0.27September
                
                
                14,128
                
                
                
                8,277
                
                
                
                5,851
                
                
                
                532
                
                
                
                1,161
                
                
                
                0.28
                
                
                
                0.28December
                
                
                14,380
                
                
                
                8,195
                
                
                
                6,185
                
                
                
                843
                
                
                
                892
                
                
                
                0.22
                
                
                
                0.22Total
                
                $
                56,373
                
                
                $
                32,227
                
                
                $
                24,146
                
                
                $
                2,240
                
                
                $
                4,226
                
                
                
                1.03
                
                
                
                1.02
  Earnings
in the fourth quarter 2009 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.
  Note
      29:
                Federal
      Deposit Insurance Corporation (FDIC) Special
  Assessment
  Subsequent
to December 31, 2008, the Board of Directors of the FDIC voted to adopt an
interim rule that would impose a special assessment on insured institutions of
between 10 and 20 basis points on outstanding deposits as of June 30,
2009.  This assessment is to be collected on September 30,
2009.  The interim rule would also permit the Board to impose an
emergency special assessment after June 30, 2009, of up to 10 basis points on
outstanding deposits, if deemed necessary by the Board.
  44


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, 2008, was carried out under the supervision and with the
participation of the our Chief Executive Officer, Principal Financial Officer
and several other members of our senior management within the 90-day period
preceding the filing date of this annual report.  Our Chief Executive
Officer and Principal Financial Officer concluded that, as of December 31, 2008,
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, 2008, that have materially affected, or as reasonably likely to materially
affect, our internal control over financial reporting.  The annual
report of management on the effectiveness of internal control over financial
reporting and the attestation report thereon issued by our independent
registered public accounting firm are set forth below under “Management’s Report
on Internal Control Over Financial Reporting” and “Report of the Independent
Registered Public Accounting Firm on Internal Control over Financial
Reporting.”




We do not
expect that our disclosure controls and procedures will prevent all error and
all fraud.  A control procedure, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control procedure are met.  Because of the inherent
limitations in all control procedures, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within MutualFirst have
been detected.  These inherent limitations include the realities that
judgment in decision-making can be faulty, and that breakdowns can occur because
of simple error or mistake.  Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control.  The design of any
control procedure also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may
deteriorate.  Because of the inherent limitations in a cost-effective
control procedure, misstatements due to error or fraud may occur and not be
detected.


71


Management’s
Report on Internal Control over Financial Reporting




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




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




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




Our
management assessed the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2008. 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, 2008, the Company’s internal control over
financial reporting was effective based on those criteria.




The
Company’s independent auditors have issued an audit report on our assessment of
internal control over financial reporting as of December 31,
2008.  This report is included in this Form 10-K. See “Report of
Independent Registered Public Accounting Firm,” which follows this
report.





Date:
      March 23, 2009
              By:
              /s/  David W.
    HeeterDavid
      W. HeeterPresident
      and Chief Executive OfficerBy:
              /s/  Timothy J.
      McArdleTimothy
      J. McArdleTreasurer
      and Chief Financial
Officer


72


Report
of Independent Registered Public Accounting Firm





Audit
Committee, Board of Directors and Stockholders


MutualFirst Financial,
Inc.


Muncie,
Indiana





We have
audited MutualFirst
Financial, Inc’s internal control over financial reporting as of December 31,
2008, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).  The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control Over
Financial Reporting.  Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our
audit.




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




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




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




73


In our
opinion, MutualFirst
Financial, Inc. has maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on criteria
established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).




We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements of MutualFirst Financial, Inc.
and our report dated March 23,
2009 expressed an unqualified opinion thereon.




/s/BKD,
LLP




BKD,
LLP




Indianapolis,
Indiana


March 23,
2009




Item
      9B.
            Other
      Information




None.


74


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 2009, except for information contained under the headings
“Compensation Committee Report,” and “Report of the Audit/Compliance Committee,”
a copy of which will be filed not later than 120 days after the close of the
fiscal year.




Executive
Officers




Information
concerning the executive officers of the Company who are directors is
incorporated herein by reference from the Company’s definitive proxy statement
for its Annual Meeting of Stockholders to be held in April 2009, except for
information contained under the headings “Compensation Committee Report,” and
“Report of the Audit/Compliance Committee,” a copy of which will be filed not
later than 120 days after the close of the fiscal year.




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




John H.
Bowles.  Age 63 years.  Mr. Bowles is Senior Vice
President of Investment and Private Banking, a position he has held since
November 2004.  Prior to 2004, he was president of Star Financial
Bank/NewCastle Region from 1987 to 2004.




Timothy J.
McArdle.  Age 58 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 of MutualFirst
Financial.  He has been employed by MutualBank since
1981.




Stephen C.
Selby.  Age 63 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 62 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 53 years.  Ms. Ferguson has served as
Senior Vice President of the Risk Management of the Bank since January
2009.  Prior was Senior Vice President of Consumer Banking effective
April 1, 2008.  She has been with the bank since March
1998.


75




James P. Coleman,
III.Age
62 years.  Mr. Coleman has served as Senior Vice President of the
Wealth Management, Trust and Private Banking Division of the Bank’s since July
2008.  Prior to joining the Bank, he served as Executive Vice
President and Director of Wealth Management) at MFB Financial since June
2004.  Previously, he served as President of STAR Wealth Management in
Fort Wayne, Indiana and as Senior Vice President of 1st Source Bank in South
Bend, Indiana prior to his employment with STAR.




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 2008, except for information contained under the headings
“Compensation Committee Report,” and “Report of the Audit/Compliance Committee,”
a copy of which will be filed not later than 120 days after the close of the
fiscal year.




Section
16(a) Beneficial Ownership Reporting Compliance




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




To the
Company’s knowledge, based solely on a review of the copies of such reports
furnished to the Company and written representations that no other reports were
required during the fiscal year ended December 31, 2008, 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 at MutualFirst Financial, Inc.,
110 E. Charles Street, Muncie, Indiana 47305-2419 or by calling (765)
747-2800.


76




Nomination
Procedures




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




Item
      11.
            Executive
      Compensation




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




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




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




Equity Compensation Plan
Information.  The following table summarizes our equity
compensation plans as of December 31, 2008.





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
                
                
                643,498
                
                
                $
                13.99
                
                
                
                357,902
                (1)Equity
      compensation plans not approved by security holders
                
                
                —
                
                
                
                —
                
                
                
                —





(1)      Includes
5,161 shares available for future grants under MutualFirst Financial, Inc’s
2001 stock option plan and 352,741 shares available for future grants under
MutualFirst Financial,
Inc.’s 2008 stock option plan.




Item
      13.
            Certain
      Relationships and Related
Transactions




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


77




Item
      14.
            Principal
      Accountant Fees and Services




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





PART
IV




Item
      15.
            Exhibits
      and Financial Statement Schedules




(a)(1)
List of Financial Statements




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





Annual
      Report SectionReport
      of Independent Registered Public Accounting FirmConsolidated
      Balance Sheets at December 31, 2008 and 2007Consolidated
      Statements of Operations
      for the Years Ended December 31, 2008, 2007 and 2006Consolidated
      Statements of Stockholders’ Equity for the Years Ended December 31,
      2008,2007 and 2006Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008, 2007
      and2006Notes
      to Consolidated Financial Statements, December 31, 2008, 2007 and
      2006




(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.




78




(a)(3)
List of Exhibits:  [REVIEW AND DETERMINE IF THIS IS
COMPLETE]


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 among MutualFirst
      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
                                                                  
                                                                  ###4.1
                                                                  
                                                                  Form
      of Common Stock Certificate
                                                                  
                                                                  *4.2
                                                                  
                                                                  Form
      of Certificate for the Series A Preferred Stock
                                                                  
                                                                  4.24.3
                                                                  
                                                                  Warrant
      for Purchase of Shares of Common 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
                                                                  
                                                                  **10.5
                                                                  
                                                                  Campbell,
      Patrick C. Botts, David W. Heeter, Timothy J. McArdle and Stephen C. Selby10.6
                                                                  
                                                                  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
                                                                  
                                                                  ***10.10
                                                                  
                                                                  Named
      Executive Officer Bonus Arrangements for 2009
                                                                  
                                                                  10.1010.11
                                                                  
                                                                  Director
      Fee Arrangements for 2009
                                                                  
                                                                  10.1110.12
                                                                  
                                                                  Director
      Deferred Compensation Plan
                                                                  
                                                                  ##10.13
                                                                  
                                                                  MutualFirstFinancial, Inc. 2008 Stock Option and Incentive
      Plan
                                                                  
                                                                  10.1310.14
                                                                  
                                                                  MFB
      Corp. 2002 Stock Option Plan
                                                                  
                                                                  10.1410.15
                                                                  
                                                                  MFB
      Corp. 1997 Stock Option Plan
                                                                  
                                                                  10.1510.16
                                                                  
                                                                  Employment
      Agreement with Charles J. Viater
                                                                  
                                                                  10.1610.17
                                                                  
                                                                  Salary
      Continuation Agreement with Charles J. Viater
                                                                  
                                                                  10.1710.18
                                                                  
                                                                  Letter
      Agreement (including Schedule A, Securities Purchase Agreement, dated
      December 23, 2008 between MutualFirst
      Financial, Inc. and United States Department of the Treasury with respect
      to the issuance and sale of the Series A Preferred Stock and
      Warrant
                                                                  
                                                                  +


79





Regulation
                                          S-K
                                          Exhibit
                                          Number
                                        
                                        Document
                                        
                                        Reference to
                                          Prior Filing or
                                          Exhibit Number
                                          Attached
                                          Hereto10.19
                                        
                                        Form
      of compensation modification
                                        
                                        +11
                                        
                                        Statement
      re computation of per share earnings
                                        
                                        None12
                                        
                                        Statements
      re computation of ratios
                                        
                                        None14
                                        
                                        Code
      of Ethics
                                        
                                        +++16
                                        
                                        Letter
      re change in certifying accountant
                                        
                                        None18
                                        
                                        Letter
      re change in accounting principles
                                        
                                        None21
                                        
                                        Subsidiaries
      of the registrant
                                        
                                        2122
                                        
                                        Published
      report regarding matters submitted to vote of security
    holders
                                        
                                        None23
                                        
                                        Consents
      of Experts and Counsel
                                        
                                        2324
                                        
                                        Power
      of Attorney
                                        
                                        None31.1
                                        
                                        Rule
      13(a)-14(a) Certification (Chief Executive Officer)
                                        
                                        31.131.2
                                        
                                        Rule
      13(a)-14(a) Certification (Chief Financial Officer)
                                        
                                        31.232
                                        
                                        Section
      1350 Certification
                                        
                                        32





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


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


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


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


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


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


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


80





+
            Filed
      as an exhibit to the Company’s Form 8-K filed on December 23, 2008 (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 October15, 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 Appendix to the Company’s Form S-4 Registration Statement filed on
      April 8, 2008 (File No. 333-150138).  Such previously filed
      document is incorporated herein by reference in accordance with Item 601
      of Regulation S-K.




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




(c)  Financial Statements
Schedules - None


81




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
      23, 2009
                By:
                /s/  David W.
    HeeterDavid
      W. Heeter, President and Chief Executive OfficerDuly
      Authorized Representative)





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




/s/  David W.
    Heeter
                            
                            /s/  Wilbur R.
    DavisDavid
      W. Heeter, President and Director
                            
                            Wilbur
      R. Davis, Chairman of the Board(Principal
      Executive Officer)Date:  March
      23, 2009
                            
                            Date:  March
      23, 2009/s/  Patrick C.
    Botts
                            
                            /s/  Edward J.
    DobrowPatrick
      C. Botts, Director
                            
                            Edward
      J. Dobrow, DirectorDate:  March
      23, 2009
                            
                            Date:  March
      23, 2009/s/  Linn A.
Crull
                            
                            /s/  James D.
    RosemaLinn
      A. Crull, Director
                            
                            James
      D. Rosema, DirectorDate:  March
      23, 2009
                            
                            Date:  March
      23, 2009/s/  William V.
      Hughes
                            
                            /s/  Jerry D.
      McVickerWilliam
      V. Hughes, Director
                            
                            Jerry
      D. McVicker, DirectorDate:
      March 23, 2009
                            
                            Date:  March
      23, 2009/s/  Jon R.
Marler
                            
                            /s/Jonathan E. Kintner,
O.D.Jon
      R. Marler, Director
                            
                            Jonathan
      E. Kintner, O.D.,
      DirectorDate:  March
      23, 2009
                            
                            Date:  March
      23, 2009/s/Edward C. Levy
                            
                            /s/Michael J. MarienEdward
      C. Levy,
      Director
                            
                            Michael
      J. Marien,
      DirectorDate:  March
      23, 2009
                            
                            Date:  March
      23, 2009/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
      23, 2009
                            
                            Date:  March
      23,
2009





INDEX
TO EXHIBITS





Number
                  Description4.2
                  Form
      of Certificate for the Series A Preferred Stock10.10
                  Named
      Executive Officer Bonus Arrangements for 200910.11
                  Director
      Fee Arrangements for 200910.13
                  MutualFirst  Financial,
      Inc. 2008 Stock Option and Incentive Plan10.14
                  MFB
      Corp. 2002 Stock Option Plan10.15
                  MFB
      Corp. 1997 Stock Option Plan10.16
                  Employment
      Agreement with Charles J. Viater10.17
                  Salary
      Continuation Agreement with Charles J. Viater21
                  Subsidiaries
      of the Registrant23
                  Consent
      of Accountants31.1
                  Rule
      13(a)-14(a) Certification (Chief Executive Officer)31.2
                  Rule
      13(a)-14(a) Certification (Chief Financial Officer)32
                  Section
      1350
Certification