Edgar Filing: MUTUALFIRST FINANCIAL INC

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________________ to ___________________

Commission File Number 000-27905

MutualFirst Financial, Inc.

(Exact Name of Registrant as Specified in its Charter)

Maryland		35-2085640
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

110 E. Charles Street, Muncie, Indiana		47305-2419
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (765) 747-2800

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

Title of each class	Name of each exchange on which registered
Common Stock, par value $.01 per share	Nasdaq Global Market

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

None

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

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

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

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ¨ NO ¨

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ 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 30, 2009, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $48.1 million. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.)

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date. As of March 15, 2010, there were 6,984,754 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

PART III of Form 10-K—Portions of registrant’s Proxy Statement for its 2010 Annual Meeting of Stockholders.

Item 1. Business

General

MutualFirst Financial, Inc., a Maryland corporation (“MutualFirst” or the “Company”), is the holding company of its wholly-owned subsidiary MutualBank, a federal savings bank (“MutualBank” or the “Bank”). MutualFirst Financial was formed in September 1999 to become the holding company of MutualBank in connection with MutualBank’s conversion from the mutual to stock form of organization on December 29, 1999. The words “we,” “our” and “us” in this Form 10-K refer to MutualFirst and MutualBank on a consolidated basis, unless indicated otherwise herein.

At December 31, 2009, we had total assets of $1.4 billion, deposits of $1.0 billion and stockholders’ equity of $129.7 million. Our executive offices are located at 110 E. Charles Street, Muncie, Indiana 47305-2400, and our common stock is traded on the Nasdaq Global Market under the symbol “MFSF.”

Substantially all of MutualFirst’s business is conducted through MutualBank, which is a federal savings bank subject to extensive regulation by the Office of Thrift Supervision (“OTS”). MutualBank’s deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”). MutualBank has 33 retail financial centers, spanning nine Indiana counties and is the 10th largest depository institution headquartered in Indiana. MutualBank also has trust offices in Carmel and Crawfordsville, Indiana and a loan origination office in New Buffalo, Michigan.

Our principal business consists of attracting retail deposits from the general public, including some brokered deposits, and investing those funds primarily in loans secured by first mortgages on owner-occupied, one- to four-family residences, a variety of consumer loans, loans secured by commercial and multi-family real estate and commercial business loans. Funds not invested in loans generally are invested in investment securities, including mortgage-backed and mortgage-related securities. MutualWealth is the wealth management division of the bank providing a variety of fee-based financial services, including trust, investment, insurance, broker advisory, retirement plan and private banking services, in the Bank’s market area. As of December 31, 2009, MutualWealth managed assets of $313.3 million.

Our profitability depends primarily on net interest income, which is the difference between interest and dividend income on interest-earning assets, and interest expense on interest-bearing liabilities. Interest-earning assets include principally loans, investment securities, including mortgage-backed and related securities and interest-earning deposits in other institutions. Net interest income is dependent upon the level of interest rates and the extent to which such rates are changing. Our profitability is also dependent on the level of noninterest income, provision for loan losses, noninterest expense and income taxes. Our operations and profitability are subject to changes in interest rates, applicable statutes and regulations, and general economic conditions, as well as other factors beyond our control. The Company continues to reduce the impact of interest rate changes on its net interest income by shortening the term of its interest-earning assets to better match the terms of our interest-bearing liabilities and by selling long-term fixed rate loans. See “Quantitavie and Qualitative Disclosures About Market Risk – Asset and Liability Management and Market Risk” in Item A.

During 2008 and 2009, market and economic trends in our industry and in Indiana have declined resulting in increased delinquencies and foreclosures. A number of federal legislative and regulatory initiatives have been enacted to address these conditions. See “Asset Quality” and “How We Are Regulated” in Item 1, “Risk Factors” in Item 1A and the “Management’s Discussion and Analysis” in Item 7.

On July 18, 2008, the Company acquired MFB Corp and its banking subsidiary, MFB Financial, in a merger transaction involving the issuance of 2.9 million shares of common stock and payment of $11.5 million in cash to former stockholders of MFB Corp. The Company obtained $167.9 million in residential mortgage loans, $48.5 million in consumer loans, $91.6 million in commercial real estate loans and $75.5 million in commercial business loans and assumed $331.1 million in deposits and $96.4 million in borrowings in the acquisition of MFB Corp.

On December 23, 2008, as part of the Troubled Asset Relief Program (“TARP”) Capital Purchase Program, the Company entered into a Letter Agreement and Securities Purchase Agreement (collectively, the “Purchase Agreement”) with the United States Department of the Treasury (“Treasury”), pursuant to which the Company (i) sold 32,382 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) for a purchase price of $32,382,000 in cash and (ii) issued a warrant (the “Warrant”) to purchase 625,135 shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), for a per share price of $7.77 per share. The Series A Preferred Stock is entitled to cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Series A Preferred Stock may be redeemed by the Company at any time, subject to consultation by the Treasury with the Office of Thrift Supervision (“OTS”). The Warrant has a 10-year term and is immediately exercisable upon its issuance, with an exercise price, subject to anti-dilution adjustments, equal to $7.77 per share of the Common Stock. If the Series A Preferred Stock is redeemed, the Warrant will be liquidated at the current market price. Treasury has agreed not to exercise voting power with respect to any shares of Common Stock issued upon exercise of the Warrant that it holds.

Pursuant to the terms of the Purchase Agreement, the ability of the Company to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration, shares of its Junior Stock (as defined below) and Parity Stock (as defined below) will be subject to restrictions, including a restriction against increasing dividends from the last quarterly cash dividend per share ($0.16) declared on the Common Stock prior to December 23, 2008. The redemption, purchase or other acquisition of trust preferred securities of the Company or its affiliates also will be restricted. These restrictions will terminate on the earlier of (a) the third anniversary of the date of issuance of the Series A Preferred Stock, (b) the date on which the Series A Preferred Stock has been redeemed in whole; and (c) the date Treasury has transferred all of the Series A Preferred Stock to third parties. In addition, the ability of the Company to declare or pay dividends or distributions on, or repurchase, redeem or otherwise acquire for consideration, shares of its Junior Stock and Parity Stock will be subject to restrictions in the event that the Company fails to declare and pay full dividends (or declare and set aside a sum sufficient for payment thereof) on its Series A Preferred Stock. “Junior Stock” means the Common Stock and any other class or series of stock of the Company the terms of which expressly provide that it ranks junior to the Series A Preferred Stock as to dividend rights and/or rights on liquidation, dissolution or winding up of the Company. “Parity Stock” means any class or series of stock of the Company the terms of which do not expressly provide that such class or series will rank senior or junior to the Series A Preferred Stock as to dividend rights and/or rights on liquidation, dissolution or winding up of the Company (in each case without regard to whether dividends accrue cumulatively or non-cumulatively).

The Company placed $29.1 million of its TARP proceeds in the Bank and retained the remaining $3.2 million as working capital. The Bank initially placed approximately $20.0 million of the proceeds in highly rated securities. Of the $20.0 million, approximately $14.8 million was placed in mortgage securities, $3.2 million in municipal securities and $2.0 million in corporate bonds. These securities provide liquidity as needed to meet current and future loan demand. The remaining funds held at the Bank were placed in working capital, which was used to fund loans and meet the cash needs of MutualBank. During 2009, the TARP proceeds have provided the Bank with a continued ability to lend to businesses and individuals along with the ability to purchase agency mortgage backed securities.

Forward-Looking Statements

This Form 10-K contains various forward-looking statements that are based on assumptions and describe our future plans and strategies and our expectations. These forward-looking statements are generally identified by words such as “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar words. Our ability to predict results or the actual effect of future plans or strategies is uncertain. Factors which could cause actual results to differ materially from those estimated include, but are not limited to, changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of our loan and investment portfolios, demand for our loan products, deposit flows, our operating expenses, competition, demand for financial services in our market areas and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements, and you should not rely too much on these statements. We do not undertake, and specifically disclaim, any obligation to publicly revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Market Area

We are a community-oriented financial institution offering a variety of financial services to meet the needs of the communities we serve. We are headquartered in Muncie, Indiana and we offer our financial services through 33 full service retail financial center offices in Delaware, Elkhart, Grant, Kosciusko, Randolph, St. Joseph and Wabash counties. MutualBank also has trust offices in Carmel and Crawfordsville, Indiana and a loan origination office in New Buffalo, Michigan. We also originate mortgage loans in the counties contiguous to these counties, and we have historically originated indirect consumer loans throughout Indiana. See “Lending Activities — Consumer and Other Lending.”

Lending Activities

General. Our loans carry either a fixed- or an adjustable-rate of interest. At December 31, 2009 our net loan portfolio totaled $1.1 billion, which constituted 75.7% of our total assets.

Loans up to $600,000 may be approved by certain individual loan officers. Loans in excess of $600,000, but not in excess of $1.2 million, may be approved by the signature of an Executive Loan Committee member and one other loan officer to the total of their combined individual lending authority. Loans not to exceed $3.0 million, to a borrower whose aggregate debt is not greater than $5.0 million, may be approved by a majority vote of the Executive Loan Committee. All loans in excess of $3.0 million and loans of any amount to a borrower whose aggregate debt will exceed $5.0 million must be approved by the Board of Directors. The aggregate limit may be increased or decreased by a specific guidance by the Board for a specific borrower.

At December 31, 2009, the maximum amount that we could lend to any one borrower and the borrower’s related entities was approximately $20.1 million. As of December 31, 2009, our largest lending relationship to a single borrower or group of related borrowers consisted of fourteen loans totaling a commitment of $8.2 million, with $6.2 million outstanding at year-end. All of the loans in this relationship are secured by real estate and guaranteed by the principal. Each of these loans to this group of borrowers was current and performing in accordance with its terms at December 31, 2009.

The following table presents information concerning the composition of our loan portfolio in dollar amounts and in percentages as of the dates indicated.

	December 31,
	2009						2008						2007						2006						2005
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real Estate Loans:
One- to four-family	$	471,015	(1)		43.69	%	$	521,364	(2)		46.11	%	$	431,018	(3)		53.02	%	$	433,123	(4)		53.01	%	$	451,914	(5)		54.00	%
Multi-family		2,621			0.24			2,698			0.24			3,929			0.48			5,073			0.62			5,505			0.66
Commercial		257,368			23.88			250,693			22.17			82,116			10.10			73,912			9.05			77,270			9.23
Construction and development		9,817			0.91			12,232			1.08			13,560			1.67			14,451			1.77			22,938			2.74
Total real estate loans		740,821			68.72			786,987			69.60			530,623			65.28			526,559			64.45			557,627			66.63

Other Loans:
Consumer Loans:
Automobile		18,848			1.75			22,715			2.01			22,917			2.82			31,336			3.84			39,802			4.76
Home equity		64,930			6.02			66,460			5.88			27,232			3.35			30,051			3.68			31,962			3.82
Home improvement		42,116			3.91			45,339			4.01			45,156			5.55			38,546			4.72			31,933			3.82
Manufactured housing		689			0.06			727			0.06			992			0.12			1,422			0.17			2,106			0.25
R.V.		81,663			7.58			79,884			7.07			77,805			9.57			71,321			8.73			64,222			7.67
Boat		45,581			4.23			46,928			4.15			47,816			5.88			46,311			5.67			40,631			4.85
Other		5,961			0.55			6,339			0.56			3,593			0.44			3,986			.48			4,305			.51
Total consumer loans		259,788			24.10			268,392			23.74			225,511			27.74			222,973			27.29			214,961			25.68
Commercial business loans		77,384			7.18			75,290			6.66			56,764			6.98			67,476			8.26			64,353			7.69
Total other loans		337,172			31.28			343,682			30.40			282,275			34.72			290,449			35.55			279,314			33.37
Total loans receivable, gross		1,077,993	(1)		100.00	%		1,130,669	(2)		100.00	%		812,898	(3)		100.00	%		817,008	(4)		100.00	%		836,941	(5)		100.00	%

Less:
Undisbursed portion of loans		2,546						4,372						3,984						5,520						7,724
Deferred loan fees and costs		(3,182)						(3,484	)					(3,519	)					(3,623	)					(3,453	)
Allowance for losses		16,414						15,107						8,352						8,156						8,100
Total loans receivable, net	$	1,062,215					$	1,114,674					$	804,081					$	806,955					$	824,570

(1)	Includes loans held for sale of $2.5 million.

(2)	Includes loans held for sale of $1.5 million.

(3)	Includes loans held for sale of $1.6 million.

(4)	Includes loans held for sale of $1.3 million.

(5)	Includes loans held for sale of $2.0 million.

The following table shows the composition of our loan portfolio by fixed- and adjustable-rate at the dates indicated.

	December 31,
	2009						2008						2007						2006						2005
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)
Fixed-Rate Loans:
Real estate:
One- to four-family	$	248,485	(1)		23.05	%	$	261,969	(2)		23.17	%	$	254,235	(3)		31.28	%	$	271,405	(4)		33.22	%	$	305,911	(5)		36.55	%
Multi-family		2,339			0.22			2,401			0.21			3,610			0.44			4,488			0.55			4,587			0.55
Commercial		129,297			12.00			115,922			10.25			17,281			2.13			9,408			1.15			9,375			1.12
Construction and development		8,559			0.79			9,724			0.86			10,197			1.25			8,310			1.02			12,690			1.52
Total real estate loans		388,680			36.06			390,016			34.49			285,323			35.10			293,611			35.94			332,563			39.74

Consumer		215,434			19.98			229,326			20.28			198,068			24.37			192,715			23.59			182,784			21.84
Commercial business		40,025			3.71			37,865			3.35			19,842			2.44			27,093			3.32			20,000			2.39
Total fixed-rate loans		644,139			59.75			657,207			58.12			503,233			61.91			513,419			62.85			535,347			63.97

Adjustable-Rate Loans:
Real estate:
One- to four-family		222,530			20.64			259,395			22.94			176,783			21.75			161,718			19.79			146,003			17.44
Multi-family		282			0.03			297			0.03			319			0.04			585			.07			918			0.11
Commercial		128,071			11.88			134,771			11.92			64,835			7.98			64,504			7.90			67,895			8.11
Construction and development		1,258			0.12			2,508			0.22			3,363			0.41			6,141			.75			10,248			1.22
Total real estate loans		352,141			32.67			396,971			35.11			245,300			30.18			232,948			28.51			225,064			26.88

Consumer		44,354			4.11			39,066			3.46			27,443			3.38			30,258			3.70			32,177			3.85
Commercial business		37,359			3.47			37,425			3.31			36,922			4.53			40,383			4.94			44,353			5.30
Total adjustable-rate loans		433,854			40.25			473,462			41.88			309,665			38.09			303,589			37.15			301,594			36.03
Total loans		1,077,993	(1)		100.00	%		1,130,669	(2)		100.00	%		812,898	(3)		100.00	%		817,008	(4)		100.00	%		836,941	(5)		100.00	%

Less:
Undisbursed portion of loans		2,546						4,372						3,984						5,520						7,724
Deferred loan fees and costs		(3,182	)					(3,484	)					(3,519	)					(3,623	)					(3,453	)
Allowance for loan losses		16,414						15,107						8,352						8,156						8,100
Total loans receivable, net	$	1,062,215					$	1,114,674					$	804,081					$	806,955					$	824,570

(1)	Includes loans held for sale of $2.5 million.

(2)	Includes loans held for sale of $1.5 million.

(3)	Includes loans held for sale of $1.6 million.

(4)	Includes loans held for sale of $1.3 million.

(5)	Includes loans held for sale of $2.0 million.

The following schedule illustrates the contractual maturity of our loan portfolio at December 31, 2009. Mortgages that have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due. The schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.

	Real Estate
	One- to Four-Family(1)					Multi-family and Commercial					Construction and Development(2)					Consumer					Commercial Business					Total
	Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate
	(Dollars in thousands)

Due During Years Ending December 31,
2010(3)	$	648		6.56	%	$	65,297		5.07	%	$	286		6.63	%	$	10,506		6.73	%	$	30,135		4.14	%	$	106,872		4.98	%
2011		717		5.72			17,165		6.10			214		7.63			10,464		7.23			9,332		5.18			37,892		6.19
2012		1,221		6.01			19,548		6.03			166		8.91			13,261		7.37			13,587		5.67			47,783		6.31
2013 and 2014		8,054		5.70			76,629		5.95			431		7.51			30,121		6.79			15,444		6.21			130,679		6.16
2015 to 2016		9,846		5.98			7,648		7.23			19		9.81			17,886		7.37			4,172		6.11			39,571		6.87
2017 to 2031		150,172		5.39			68,794		6.40			1,699		4.81			177,009		6.85			4,714		6.03			402,388		6.21
2032 and following		297,836		5.55			4,908		5.85			7,002		5.13			541		5.97			—		0.00			310,287		5.55
Total	$	468,494		5.51	%	$	259,989		5.90	%	$	9,817		5.35	%	$	259,788		6.91	%	$	77,384		5.17	%	$	1,075,472		5.92	%

(1) Does not include mortgage loans held for sale.

(2) Once the construction phase has been completed, these loans will automatically convert to permanent financing.

(3) Includes demand loans, loans having no stated maturity and overdraft loans.

The total amount of loans due after December 31, 2010 that have predetermined interest rates is $599.5 million, and the total amount of loans due after such date which have floating or adjustable interest rates is $369.1 million.

One- to Four-Family Residential Real Estate Lending. We focus our real estate lending efforts primarily on the origination of loans secured by first mortgages on owner-occupied, one- to four-family residences in our market areas. At December 31, 2009, one- to four-family residential mortgage loans totaled $471.0 million, or 43.7% of our gross loan portfolio.

We generally underwrite and document our one- to four-family loans based on the loan applicant’s employment and credit history and the appraised value of the subject property consistent with secondary market standards or other prudent underwriting guidelines. Generally, we lend up to 95% of the lesser of the appraised value or purchase price for one- to four-family residential loans. For loans with a loan-to-value ratio in excess of 80%, we generally require private mortgage insurance in order to reduce our exposure to below 80%. Properties securing our one- to four-family loans are appraised by independent state licensed fee appraisers approved by the Bank’s Board of Directors. We require borrowers to obtain title insurance in the amount of their mortgage. Hazard insurance and flood insurance, if necessary, are required in an amount of the lesser of the value of the property improvements or our mortgage amount.

We originate one- to four-family mortgage loans on either a fixed- or adjustable-rate basis, as consumer demand dictates. Our pricing strategy for mortgage loans includes setting interest rates that are competitive with the secondary market and other local financial institutions and are consistent with our internal needs. Adjustable-rate mortgage or ARM loans are offered with a one-year, three-year, five-year, seven-year or ten-year term to the initial repricing date. After the initial period, the interest rate for each ARM loan adjusts annually for the remainder of the term of the loan. We use the weekly average of the one-year Treasury Bill Constant Maturity Index to reprice our ARM loans. During fiscal 2009, we originated $31.5 million of one- to four-family ARM loans and $218.5 million of one- to four-family fixed-rate mortgage loans. By way of comparison, during fiscal 2008, we originated $33.1 million of one- to four-family ARM loans and $78.0 million of one- to four-family fixed-rate mortgage loans.

Fixed-rate loans secured by one- to four-family residences have contractual maturities of up to 30 years and are generally fully amortizing, with payments due monthly. These loans normally remain outstanding, however, for a substantially shorter period of time because of refinancing and other prepayments. A significant change in interest rates could alter considerably the average life of a residential loan in our portfolio. Our one- to four-family loans are generally not assumable, do not contain prepayment penalties and do not permit negative amortization of principal. Most are written using underwriting guidelines which make them saleable in the secondary market. Our real estate loans generally contain a “due on sale” clause allowing us to declare the unpaid principal balance due and payable upon the sale of the security property.

Our one- to four-family residential ARM loans are fully amortizing loans with contractual maturities of up to 30 years, with payments due monthly. Our ARM loans generally provide for specified minimum and maximum interest rates, with a lifetime cap and floor, and a periodic adjustment on the interest rate over the rate in effect on the date of origination. As a consequence of using caps, the interest rates on these loans may not be as rate sensitive as is our cost of funds.

In order to remain competitive in our market areas, we sometimes originate ARM loans at initial rates below the fully indexed rate. ARM loans generally pose different credit risks than fixed-rate loans, primarily because as interest rates rise, the borrower’s payment rises, increasing the potential for default. Our payment history for ARM loans has not been substantially different from fixed rate loans. See “Asset Quality — Non-performing Assets” and “— Classified Assets.” At December 31, 2009, our one- to four-family ARM loan portfolio totaled $222.5 million, or 20.6% of our gross loan portfolio. At that date, the fixed-rate one- to four-family mortgage loan portfolio totaled $248.5 million, or 23.1% of our gross loan portfolio.

Multi-family and Commercial Real Estate Lending. We offer a variety of multi-family and commercial real estate loans for acquisition, renovation or construction. These loans are secured by the real estate and improvements financed. The collateral securing these loans ranges from industrial and commercial buildings to churches, office buildings and multi-family housing complexes. At December 31, 2009, multi-family and commercial real estate loans totaled $260.0 million, or 24.1% of our gross loan portfolio.

Our loans secured by multi-family and commercial real estate are originated with either a fixed or adjustable interest rate. The interest rate on adjustable-rate loans is based on a variety of indices, generally determined through negotiation with the borrower. Loan-to-value ratios on our multi-family and commercial real estate loans typically do not exceed 80% of the current appraised value of the property securing the loan. These loans typically require monthly payments, may not be fully amortizing and generally have maximum maturities of 25 years. Developmental loans are secured by real estate and repaid by the sale of lots.

Loans secured by multi-family and commercial real estate are underwritten based on the income producing potential of the property and the financial strength of the borrower. The net operating income, which is the income derived from the operation of the property less all operating expenses, must be sufficient to cover the payments related to the outstanding debt. We may require personal guarantees of the borrowers in addition to the real estate as collateral for such loans. We also generally require an assignment of rents or leases in order to be assured that the cash flow from the real estate can be used to repay the debt. Appraisals on properties securing multi-family and commercial real estate loans are performed by independent state licensed fee appraisers approved by MutualBank’s Board of Directors. See “Loan Originations, Purchases, Sales and Repayments.”

We generally do not maintain a tax or insurance escrow account for loans secured by multi-family and commercial real estate. In order to monitor the adequacy of cash flows on income-producing properties, the borrower is required to provide periodic financial information.

Loans secured by multi-family and commercial real estate are generally larger and involve a greater degree of credit risk than one- to four-family residential mortgage loans. Multi-family and commercial real estate loans typically involve large balances to single borrowers or groups of related borrowers. Because payments on loans secured by multi-family and commercial real estate are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. If the cash flow from the project is reduced, or if leases are not obtained or renewed, the borrower’s ability to repay the loan may be impaired. See “Asset Quality — Non-performing Assets.”

Construction and Development Lending. We originate construction loans primarily secured by existing residential building lots. We make construction loans to builders and to individuals for the construction of their residences. Substantially all of these loans are secured by properties located within our market area. At December 31, 2009, we had $9.8 million in construction and development loans outstanding, representing 0.9% of our gross loan portfolio.

Construction and development loans are obtained through continued business with builders who have previously borrowed from us, from walk-in customers and through referrals from realtors and architects. The application process includes submission of complete plans, specifications and costs of the project to be constructed. This information and an independent appraisal is used to determine the value of the subject property. Loans are based on the lesser of the current appraised value and/or the cost of construction, including the land and the building. We generally conduct regular inspections of the construction project being financed. Residential construction loans are done with one closing for both the construction period and the long term financing.

Construction loans for one- to four-family homes are generally granted with a construction period of up to nine months. During the construction phase, the borrower generally pays interest only on a monthly basis. Loan-to-value ratios on our construction and development loans typically do not exceed 90% of the appraised value of the project on an as completed basis. Single family construction loans with loan-to-value ratios over 80% usually require private mortgage insurance.

Because of the uncertainties inherent in estimating construction and development costs and the market for the project upon completion, it is difficult to evaluate accurately the total loan funds required to complete a project, the related loan-to-value ratios and the likelihood of ultimate success of the project. These loans also involve many of the same risks discussed above regarding multi-family and commercial real estate loans and tend to be more sensitive to general economic conditions than many other types of loans. In addition, payment of interest from loan proceeds can make it difficult to monitor the progress of a project.

Consumer and Other Lending. Consumer loans generally have shorter terms to maturity, which reduces our exposure to changes in interest rates, and carry higher rates of interest than one- to four-family residential mortgage loans. In addition, management believes that offering consumer loan products helps to expand and create stronger ties to our customer base by increasing the number of customer relationships and providing cross-marketing opportunities. At December 31, 2009, our consumer loan portfolio totaled $259.8 million, or 24.1% of our gross loan portfolio. We offer a variety of secured consumer loans, including home equity and lines of credit, home improvement, auto, boat and recreational vehicle loans, and loans secured by savings deposits. We also offer a limited amount of credit card and unsecured loans. We originate our consumer loans both in our market area and throughout Indiana with some customers residing in contiguous states through our indirect lending program.

At December 31, 2009, our home equity loans, including lines of credit and home improvement loans, totaled $107.0 million, or 9.9% of our gross loan portfolio. These loans may be originated in amounts, together with the amount of the existing first mortgage, of up to 100% of the value of the property securing the loan. The term to maturity on our home equity and home improvement loans may be up to 15 years. Most home equity lines of credit have a maximum term to maturity of 20 years and require a minimum monthly payment based on the outstanding loan balance per month, which amount may be reborrowed at any time. A limited number of home equity lines of credit are approved with monthly payments of accrued interest only. Other consumer loan terms vary according to the type of collateral, length of contract and creditworthiness of the borrower.

We directly and indirectly originate auto, boat and recreational vehicle loans. We generally buy indirect auto loans on a rate basis, paying the dealer a cash payment for loans with an interest rate in excess of the rate we require. This premium is amortized over the remaining life of the loan. As specified in written agreements with these dealers, prepayments or delinquencies are charged to future amounts owed to that dealer, with no dealer reserve or other guarantee of payment if the dealer stops doing business with us.

We employ the Fair Isaac’s credit scoring models for all consumer loan applications. These models evaluate credit and application attributes. We originate consumer loans through bank financial centers and indirect channels. These loans are underwritten traditionally, with a review of the borrower’s employment and credit history and an assessment of the borrower’s ability to repay the loan.

At December 31, 2009, auto loans totaled $18.8 million, or 1.8% of our gross loan portfolio. Auto loans may be written for up to six years and usually have a fixed rate of interest. Loan-to-value ratios are up to 100% of the MSRP or 120% of invoice for new autos and 110% of value on used cars, based on valuation from official used car guides.

Loans for boats and recreational vehicles totaled $127.2 million at December 31, 2009, or 11.8% of our gross loan portfolio. At December 31, 2009, we decided to suspend originations of boat and recreational vehicle loans from indirect sources.

Consumer loans may entail greater risk than one- to four-family residential mortgage loans, especially consumer loans secured by rapidly depreciable assets, such as automobiles, boats and recreational vehicles. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan collections are dependent on the borrower’s continuing financial stability and, thus, are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

Commercial Business Lending. At December 31, 2009, commercial business loans totaled $77.4 million, or 7.2% of our gross loan portfolio. Most of our commercial business loans have been extended to finance businesses in our market area. Credit accommodations extended include lines of credit for working capital needs, term loans to purchase capital goods and real estate, development lending to foster residential, business and community growth and agricultural lending for inventory and equipment financing.

The terms of loans extended on the security of machinery and equipment are based on the projected useful life of the machinery and equipment, generally not to exceed seven years. Lines of credit generally are available to borrowers for up to 13 months, and may be renewed by us after an annual review of current financial information.

We issue a few financial-based standby letters of credit which are offered at competitive rates and terms and are generally on a secured basis. We continue to expand our volume of commercial business loans.

Our commercial business lending policy includes credit file documentation and analysis of the borrower’s background, capacity to repay the loan, the adequacy of the borrower’s capital and collateral as well as an evaluation of other conditions affecting the borrower. Analysis of the borrower’s past, present and future cash flows also is an important aspect of our credit analysis. We may obtain personal guarantees on our commercial business loans. Nonetheless, these loans are believed to carry higher credit risk than traditional single family loans.

Unlike residential mortgage loans, commercial business loans are typically made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may substantially depend on the success of the business itself (which, in turn, often depends in part upon general economic conditions). Our commercial business loans are usually secured by business assets. However, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.

Loan Originations, Purchases, Sales and Repayments

We originate loans through referrals from real estate brokers and builders, our marketing efforts, and our existing and walk-in customers. Historically, we have originated many of our consumer loans through relationships with dealerships. While we originate both adjustable-rate and fixed-rate loans, our ability to originate loans depends upon customer demand for loans in our market areas. Demand is affected by local competition and the interest rate environment. During the last several years, due to low market rates of interest, our dollar volume of fixed-rate, one- to four-family loans has exceeded the dollar volume of the same type of adjustable-rate loans. As part of our interest rate risk management efforts, we have from time to time sold our fixed rate, one- to four-family residential loans. We have also purchased adjustable rate one- to four-family residential and commercial real estate loans.

In periods of economic uncertainty, the ability of financial institutions, including us, to originate or purchase large dollar volumes of loans may be substantially reduced or restricted, with a resultant decrease in interest income.

The following table shows our loan origination, purchase, sale and repayment activities for the years indicated.

	Year Ended December 31,
	2009		2008			2007
	(Dollars in thousands)

Originations by type:
Adjustable rate:
Real estate - one- to four-family	$	31,542	$	33,083		$	28,275
- multi-family		56		1,323			—
- commercial		7,713		7,132			11,557
- construction or development		1,138		5,617			4,894
Non-real estate - consumer		317		43			56
- commercial business		1,322		2,061			2,026
Total adjustable-rate		42,088		49,259			46,808
Fixed rate:
Real estate - one- to four-family		218,546		78,040			58,338
- multi-family		1,444		2,052			—
- commercial		16,536		12,737			2,171
- construction or development		7,382		9,171			11,687
Non-real estate - consumer		39,745		42,465			44,423
- commercial business		9,447		5,409			3,153
Total fixed-rate		293,100		149,874			119,772
Total loans originated		335,188		199,133			166,580

Purchases:(1)
Real estate - one- to four-family		—		213,441			16,058
- commercial		—		93,479			—
- construction or development		—		1,770			—
Non-real estate - consumer		—		9,677			—
- commercial business		—		75,496			—
Total loans purchased		—		393,863	(2)		16,058

Sales and Repayments:
Sales:
Real estate - one- to four-family		160,019		92,914			24,113
Total loans sold		160,019		92,914			24,113
Principal repayments		231,254		179,187			162,159
Total reductions		391,273		272,101			186,272
Increase (decrease) in other items, net		2,409		(3,124	)		(476	)
Net increase (decreases)	$	(53,676)	$	317,771		$	(4,110	)

(1)	Does not include market value adjustment for loans related to acquisitions of branches from other financial institutions.

(2)	Includes $385.3 million of loans acquired as part of the Company’s acquisition of MFB.

Asset Quality

When a borrower fails to make a payment on a mortgage loan on or before the default date, a late charge and delinquency notice is mailed. All delinquent accounts are reviewed by a collector, who attempts to cure the delinquency by contacting the borrower once the loan is 30 days past due. If the loan becomes 30 days delinquent, the collector will generally contact the borrower by phone or send a letter to the borrower in order to identify the reason for the delinquency. Once the loan becomes 60 days delinquent, the borrower is asked to pay the delinquent amount in full, or establish an acceptable repayment plan to bring the loan current. Prior to foreclosure a drive-by inspection is made to determine the condition of the property. If the account becomes 120 days delinquent, and an acceptable repayment plan has not been agreed upon, a collection officer will generally refer the account to legal counsel, with instructions to prepare a notice of intent to foreclose. The notice of intent to foreclose allows the borrower up to 30 days to bring the account current. During this 30 day period, the collector may accept a repayment plan from the borrower which would bring the account current prior to foreclosure. The Bank has suspended foreclosure activities when directed by government sponsored entities or the Bank’s regulator.

For consumer loans, a similar process is followed, with the initial written contact being made once the loan is 20 days past due.

Commercial loan relationships exceeding $250,000 are reviewed on a regular basis by the commercial credit department. Larger relationships are monitored through a system of internal and external loan review. All relationships that are deemed to warrant special attention are monitored at least quarterly. Individual commercial officers maintain communication with borrowers and recommend action plans to a Loan Quality Review committee which meets monthly to discuss credits graded Special Mention or worse. The Asset Classification committee meets quarterly and establishes specific reserves for losses on relationships that are deemed to be under-collateralized and at risk of continued non-payment. Collection and loss mitigation efforts are a cooperative effort between the Commercial Loan Department and the Risk Management Division.

Delinquent Loans. The following table sets forth, as of December 31, 2009, our loans delinquent for 60 to 89 days by type, number, amount and percentage of type.

	Loans Delinquent For:
	60-89 Days
	Number		Amount		Percent of Loan Category
	(Dollars in thousands)

Real Estate:
One- to four-family		58	$	4,411		0.94	%
Multi-family		—		—		—
Commercial		6		667		0.26
Construction and development		3		729		7.43
Consumer		116		1,992		0.77
Commercial business		2		111		0.14

Total		185	$	7,910		0.74	%

As of December 31, 2008, our total loans delinquent for 60 to 89 days was $9.1 million or .81% of total loans.

Non-performing Assets. The table below sets forth the amounts and categories of non-performing assets in our loan portfolio at the dates indicated. Generally, loans are placed on non-accrual status when the loan becomes more than 90 days delinquent or when collection of interest becomes doubtful. Foreclosed assets owned include assets acquired in settlement of loans.

	December 31,
	2009			2008			2007			2006			2005
	(Dollars in thousands)
Non-accruing loans:
One- to four-family	$	14,617		$	7,917		$	2,997		$	2,762		$	2,967
Multi-family		—			—			—			—			—
Commercial real estate		8,986			7,723			2,656			356			569
Construction and development		—			—			—			—			—
Consumer		3,610			1,851			1,294			983			628
Commercial business		1,873			2,507			2,002			1,468			1,257
Total		29,086			19,998			8,949			5,569			5,421

Accruing loans delinquent 90 days or more:
One- to four-family		1,861			1,284			—			—			67
Multi-family		—			—			—			—			—
Commercial real estate		—			189			1,421			—			1,858
Construction and development		—			—			—			—			—
Consumer		73			—			—			—			35
Commercial business		—			—			—			—			—
Total		1,934			1,473			1,421			—			1,960
Total nonperforming loans		31,020			21,471			10,370			5,569			7,381

Restructured loans		1,563			293			107			111			116

Foreclosed assets:
One- to four-family		3,483			1,786			927			947			912
Multi-family		—			—			—			—			—
Commercial real estate		1,941			1,193			437			326			595
Construction and development		—			—			—			—			—
Consumer		1,927			1,861			1,137			1,322			978
Commercial business		—			—			—			—			—
Total		7,351			4,840			2,501			2,595			2,485

Non-performing investments		100			—			—			—			—

Total non-performing assets	$	40,034		$	26,604		$	12,978		$	8,275		$	9,982
Total as a percentage of total assets		2.86	%		1.92	%		1.35	%		0.86	%		1.03	%

The majority of the increase in 2009 in non-performing assets is a result of consumer real estate and other consumer loans increasing in delinquency. Commercial loan delinquency has remained mainly flat between December 31, 2008 and December 31, 2009.

For the year ended December 31, 2009, gross interest income that would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to $1.8 million. The amount included in interest income on these loans for the year ended December 31, 2009, was $827,000.

At December 31, 2009, foreclosed commercial real estate consisted of seven commercial buildings, one in Delaware County, three in Grant County, one in Elkhart County, one in St. Joseph County and one in Florida, all of which are currently being offered for sale. In addition, forty-one residential properties with a book value of $3.5 million remain as foreclosed assets at December 31, 2009. These properties are being offered for sale. Non-accruing one- to four-family loans increased to $14.6 million at December 31, 2009. Non-accruing commercial real estate loans increased from $7.7 million at December 31, 2008, to $9.0 million at December 31, 2009. At the same time, non-accrual commercial business loans decreased from $2.5 million to $1.9 million. The increases in non-performing assets are primarily a result of the current economic slowdown. Management continues to monitor these loans aggressively and it is management’s opinion that the non-accruing loans are sufficiently reserved as of December 31, 2009.

Other Loans of Concern. In addition to the non-performing assets set forth in the table above, as of December 31, 2009, there was an aggregate of $28.8 million in loans with respect to which known information about the possible credit problems of the borrowers have caused management to have doubts as to the abilities of the borrowers to comply with present loan repayment terms and which may result in the future inclusion of such items in the non-performing asset categories. Due to current economic conditions, we have seen an increase in the amount of these loans during 2009. These loans have been considered in management’s determination of the adequacy of our allowance for loan losses. Management reviews each of these relationships at least quarterly to determine if further downgrades and specific loan reserves are prudent.

Included in the $28.8 million above are 20 commercial business loans totaling $6.9 million, 35 commercial real estate loans totaling $15.7 million and 48 residential mortgage loans totaling $4.5 million. Loans of $2.1 million had specific loan loss reserves established and the majority of these loans were current as of December 31, 2009.

Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the OTS to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.

When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances for loan losses in an amount deemed prudent by management and approved by the board of directors. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS and the FDIC, which may order the establishment of additional general or specific loss allowances.

In connection with the filing of the Bank’s periodic reports with the OTS and in accordance with our classification of assets policy, we regularly review the problem assets in our portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of management’s review, at December 31, 2009, we had classified $68.1 million of the Bank’s assets as substandard, $2.2 million as doubtful and $2.8 million as loss. Loans classified as loss are fully reserved but not charged off, because there are certain indications that collection is still possible. The total amount classified represented 56.32% of our stockholders’ equity and 5.22% of our assets at December 31, 2009, compared to 26.20% and 2.46%, respectively, at December 31, 2008.

Provision for Loan Losses. We recorded a provision for loan losses during the year ended December 31, 2009 of $6.5 million, compared to $7.0 million for the year ended December 31, 2008 and $2.2 million for the year ended December 31, 2007. The provision for loan losses is charged to income to bring our allowance for loan losses to a level deemed appropriate by management based on the factors discussed below under “— Allowance for Loan Losses.”

Allowance for Loan Losses. We maintain an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on ongoing, quarterly assessments of the estimated losses inherent in the loan portfolio. Our methodology for assessing the appropriateness of the allowance consists of several key elements, including the general allowance and specific allowances for identified problem loans and portfolio segments. In addition, the allowance incorporates the results of measuring impaired loans as provided in FASB ASC 310, Receivables. These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans.

The general allowance is calculated by applying loss factors to outstanding loans based on the internal risk evaluation of such loans or pools of loans. Changes in risk evaluations of both performing and nonperforming loans affect the amount of the general allowance. Loss factors are based on our historical loss experience as well as on significant factors that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation date.

The appropriateness of the allowance is reviewed by management based upon its evaluation of then-existing economic and business conditions affecting our key lending areas and other conditions, such as credit quality trends (including trends in non-performing loans expected to result from existing conditions), collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments and recent loss experience in particular segments of the portfolio that existed as of the balance sheet date and the impact that such conditions were believed to have had on the collectibility of the loan. Senior management reviews these conditions quarterly in discussions with our senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s estimate of the effect of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s evaluation of the loss related to this condition is reflected in the general allowance for loan losses. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments.

The allowance for loan losses is based on estimates of losses inherent in the loan portfolio. Actual losses can vary significantly from the estimated amounts. Our methodology as described permits adjustments to any loss factor used in the computation of the general allowance in the event that, in management’s judgment, significant factors which affect the collectibility of the portfolio as of the evaluation date are not reflected in the loss factors. By assessing the probable incurred losses inherent in the loan portfolio on a quarterly basis, we are able to adjust specific and inherent loss estimates based upon any more recent information that has become available. Due to the loss of numerous manufacturing jobs in the communities we serve during recent years, including 2009, and the increase in higher risk loans, like consumer and commercial loans, as a percentage of total loans, management has concluded that our allowance for loan losses should be greater than historical loss experience and specifically identified losses would otherwise indicate.

At December 31, 2009, our allowance for loan losses was $16.4 million, or 1.53% of the total loan portfolio, and approximately 50.4% of total non-performing loans. Assessing the adequacy of the allowance for loan losses is inherently subjective as it requires making material estimates, including the amount and timing of future cash flows expected to be received on impaired loans, that are susceptible to significant change. In the opinion of management, the allowance, when taken as a whole, is adequate to absorb reasonable estimated loan losses inherent in our loan portfolio.

The following table sets forth an analysis of our allowance for loan losses.

	Year Ended December 31,
	2009			2008			2007			2006			2005
	(Dollars in thousands)

Balance at beginning of period	$	15,107		$	8,352		$	8,156		$	8,100		$	6,867

Charge-offs:
One- to four-family		1,728			480			645			526			303
Multi-family		—			—			—			—			—
Commercial real estate		1,291			1,548			44			102			6
Construction and development		—			—			—			—			—
Consumer		3,154			2,174			1,731			1,288			1,276
Commercial business		83			230			303			387			954
		6,256			4,432			2,723			2,303			2,539

Recoveries:
One- to four-family		110			42			121			81			22
Multi-family		—			—			—			—			—
Commercial real estate		184			558			—			—			120
Construction and development		—			—			—			—			—
Consumer		767			556			357			199			194
Commercial business		2			57			201			11			15
		1,063			1,213			679			291			351

Net charge-offs		5,193			3,219			2,044			2,012			2,188
Amount acquired in acquisitions		—			2,954			—			—			1,646
Provisions charged to operations		6,500			7,020			2,240			2,068			1,775
Balance at end of period	$	16,414		$	15,107		$	8,352		$	8,156		$	8,100

Ratio of net charge-offs during the period to average loans outstanding during the period		0.47	%		0.34	%		0.25	%		0.24	%		0.29	%

Allowance as a percentage of non-performing loans		50.38	%		69.41	%		79.72	%		143.59	%		109.74	%

Allowance as a percentage of total loans (end of period)		1.53	%		1.34	%		1.03	%		1.00	%		0.98	%

The distribution of our allowance for loan losses at the dates indicated is summarized as follows:

	December 31,
	2009								2008								2007								2006								2005
	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 Loans
	(Dollars in thousands)
One- to four-family	$	2,359	$	471,015	(1)		43.69	%	$	1,997		521,364	(2)		46.11	%	$	1,200		431,018	(3)		53.02	%	$	1,219	$	433,123	(4)		53.01	%	$	1,267		451,914	(5)		54.00	%
Multi-family		17		2,621			0.24			73		2,698			.24			20		3,929			0.48			61		5,073			0.62			68		5,505			.66
Commercial real estate		7,555		257,368			23.88			6,869		250,693			22.17			2,158		82,116			10.10			2,000		73,912			9.05			2,039		77,270			9.23
Construction or development		10		9,817			0.91			12		12,232			1.08			14		13,560			1.67			72		14,451			1.77			115		22,938			2.74
Consumer		4,052		259,788			24.10			3,990		268,392			23.74			3,885		225,511			27.74			3,801		222,973			27.29			3,605		214,961			25.68
Commercial business		2,421		77,384			7.18			2,166		75,290			6.66			1,075		56,764			6.99			1,003		67,476			8.26			1,006		64,353			7.69
Unallocated		—		—						—		—			—			—		—			—			—		—			—			—		—			—
Total	$	16,414	$	1,077,993			100.00	%	$	15,107	$	1,130,669			100.00	%	$	8,352	$	812,898			100.00	%	$	8,156	$	817,008			100.00	%	$	8,100	$	836,941			100.00	%

(1)	Includes loans held for sale of $2.5 million.

(2)	Includes loans held for sale of $1.5 million.

(3)	Includes loans held for sale of $1.6 million.

(4)	Includes loans held for sale of $1.3 million.

(5)	Includes loans held for sale of $2.0 million.

Investment Activities

MutualBank may invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, including callable agency securities, certain certificates of deposit of insured banks and savings institutions, certain bankers’ acceptances, repurchase agreements and federal funds. Subject to various restrictions, it also may invest in investment grade commercial paper and corporate debt securities and mutual funds the assets of which conform to the investments that a federally chartered savings institution is otherwise authorized to make directly. See “How We Are Regulated – MutualBank” for a discussion of additional restrictions on our investment activities.

The Chief Financial Officer has the basic responsibility for the management of our investment portfolio, subject to the direction and guidance of the Asset and Liability Management Committee. The Chief Financial Officer considers various factors when making decisions, including the marketability, maturity and tax consequences of the proposed investment. The maturity structure of investments will be affected by various market conditions, including the current and anticipated slope of the yield curve, the level of interest rates, the trend of new deposit inflows, and the anticipated demand for funds via deposit withdrawals and loan originations and purchases.

The general objectives of our investment portfolio are to provide liquidity when loan demand is high, to assist in maintaining earnings when loan demand is low and to maximize earnings while satisfactorily managing risk, including credit risk, reinvestment risk, liquidity risk and interest rate risk. See “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of this Form 10-K.

Our investment securities currently consist of U.S. Agency securities, mortgage-backed securities, collateralized mortgage obligations, municipal securities, marketable equity securities (which consist of shares in mutual funds that invest in government obligations, corporate obligations, mortgage-backed securities and asset-backed securities) and corporate obligations. See Note 5 of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K. Our mortgage-backed securities portfolio currently consists of securities issued under government-sponsored agency programs.

While mortgage-backed securities carry a reduced credit risk as compared to whole loans, these securities remain subject to the risk that a fluctuating interest rate environment, along with other factors like the geographic distribution of the underlying mortgage loans, may alter the prepayment rate of the mortgage loans and affect both the prepayment speed and value of the securities.

In the past, we also have maintained a trading portfolio of U.S. Government securities. We are permitted by the board of directors to have a portfolio of up to $5.0 million and to trade up to $2.0 million in these securities at any one time. At December 31, 2009, however, we did not have a trading portfolio. See Note 5 of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K.

In 2007, MutualBank transferred the management of a portion of its securities portfolio to its wholly owned subsidiary, Mutual Federal Investment Company. Mutual Federal Investment Company, a Nevada corporation, holds, services, manages and invests that portion of the Bank’s investment portfolio as may be transferred from time to time by the Bank to Mutual Federal Investment Company. Mutual Federal Investment Company’s investment policy, for the most part, mirrors that of the Bank. At December 31, 2009, MutualBank had $139.1 million in consolidated investment securities. The portfolio is comprised of $130.9 million in investments available for sale and $8.1 in investments held to maturity. Mutual Federal Investment Company managed $118.4 million of the total available for sale portfolio.

MutualBank evaluates all securities for other-than-temporary impairment (“OTTI”) on a quarterly basis. During the year ending December 31, 2009, the Bank determined that several securities met the definition of OTTI. The first security was a Lehman’s corporate bond that was written down $200,000. Four securities were pooled trust preferred securities that had a total write-down of $1.8 million. Seven securities were private label mortgage backed securities that were written down $548,000. Impairment on these securities was determined after analyzing the underlying collateral and determining the amount of additional losses needed in the individual pools to create a shortfall in interest or principal payments. All trust preferred securities were priced using a discounted cash flow analysis as of December 31, 2009.

Pooled Trust Preferred Securities. MutualFirst Financial has a current par balance in pooled trust preferred securities of $7.2 million, which was originally $10.3 million prior to other than temporary impairment write-downs in 2008 and 2009. These securities have been written down through other comprehensive income to a book balance of $2.4 million. The following table provides additional information related to the Bank’s investment in trust preferred securities as of December 31, 2009:

		Original		Book		Fair		Unrealized			Realized Losses						Lowest
Deal	Class	Par		Value		Value		Loss			2009			2008			Rating
	(Dollars in thousands)
Alesco Preferred Funding IX	A2A	$	1,000	$	893	$	431	$	(462	)	$	-		$	-		BB
Alesco Preferred Funding XVII	C1		1,000		100		2		(98	)		(900	)		-		Ca
Preferred Term Securities XIII	B1		1,000		823		298		(525	)		(177	)		-		Ca
Preferred Term Securities XVIII	C		1,000		965		252		(713	)		-			-		Ca
Preferred Term Securities XXVII	C1		1,000		1,004		189		(815	)		-			-		Ca
U.S. Capital Funding I	B1		3,000		2,891		995		(1,896	)		(109	)		-		CC
U.S. Capital Funding III	B1		1,000		500		268		(232	)		-			(500	)	Caa1
U.S. Capital Funding V	B1		1,300		45		1		(44	)		(605	)		(650	)	CC

Total		$	10,300	$	7,221	$	2,436	$	(4,785	)	$	(1,791	)	$	(1,150	)

The OTTI taken on trust preferred securities in 2009 was the result of significant deterioration in the performance of the underlying collateral. The deterioration was the result of increased defaults and deferrals of dividend payments in the current year, creating credit impairment along with weakening financial performance of performing collateral, increasing the risk of future deferrals of dividends and defaults.

The Bank’s trust preferred securities valuation was prepared by an independent third party. Their approach to determining fair value involved several steps including:

Detailed credit and structural evaluation of each piece of collateral in the trust preferred securities;

Collateral performance projections for each piece of collateral in the trust preferred security;

Terms of the trust preferred structure, as laid out in the indenture; and

Discounted cash flow modeling.

MutualFirst Financial uses market-based yield indicators as a baseline for determining appropriate discount rates, and then adjusts the resulting discount rates on the basis of its credit and structural analysis of specific trust preferred securities. The primary focus is on the returns a fixed income investor would require in order to allocate capital on a risk adjusted basis. There is currently no active market for pooled trust preferred securities; however, the Company looks principally to market yields for stand-alone trust preferred securities issued by banks, thrifts and insurance companies for which there is an active and liquid market. The next step is to make a series of adjustments to reflect the differences that exist between these products (both credit and structural) and, most importantly, to reflect idiosyncratic credit performance differences (both actual and projected) between these products and the underlying collateral in the specific trust preferred security. Importantly, as part of the analysis described above, MutualFirst considers the fact that structured instruments frequently exhibit leverage not present in stand-alone instruments, and make adjustments as necessary to reflect this additional risk.

The default and recovery probabilities for each piece of collateral were formed based on the evaluation of the collateral credit and a review of historical industry default data and current/near-term operating conditions. For collateral that has already defaulted, the Company assumed no recovery. For collateral that was in deferral, the Company assumed a recovery of 10% of par for banks, thrifts or other depository institutions, and 15% of par for insurance companies. Although the Company conservatively assumed that the majority of the deferring collateral continues to defer and eventually defaults, we also recognize there is a possibility that some deferring collateral may become current at some point in the future.

Private Label Mortgage Backed Securities. In 2008, the Company redeemed two mutual funds and received cash and underlying securities in the mutual fund as payment. These held to maturity securities had a par value of $10.1 million and a book value of $7.6 million. The securities received were agency and private label mortgage backed securities. The agency MBS have a par value of $2.9 million and a book value of $2.7 million. The private labeled MBS have a par value of $7.2 million and a book value of $4.9 million. In 2009, the private label MBS had other than temporary impairment of $548,000. An independent analysis was performed on several MBS that met certain criteria to determine if OTTI was present. The average book value of the private label securities is $51,000. All of these securities are monitored on a quarterly basis by management.

Other information about the private label mortgage backed securities received in the redemption in-kind transaction include:

The securities have vintage years between 1993 and 2007, with the majority being between 2002 and 2007.

The securities include sub-prime, Alt-A, and home equity loans.

Investment grade securities total $1.6 million in book value and $3.3 million in book value are below investment grade.

Investment in Limited Partnerships. MutualBank has investments in eight separate Indiana limited partnerships that were organized to construct, own and operate two multi-unit apartment complexes in the Indianapolis area, one in Findley, Ohio, two in Goshen, Indiana, one in Elkhart, Indiana, and two in Niles, Michigan (the Pedcor Projects). The general partner in each of these Pedcor Projects is Pedcor Investments. All of the Pedcor Projects are operated as multi-family, low and moderate-income housing projects, and have been performing as planned for several years. At the inception of the Findley, Ohio Pedcor Project in February 1998, we invested $2.1 million and committed to invest an additional $1.9 million. As of December 31, 2009, $226,000 of this commitment remained payable over the next year.

A low and moderate-income housing project qualifies for certain federal income tax credits if (1) it is a residential rental property, (2) the units are used on a non-transient basis, and (3) at least 20% of the units in the project are occupied by tenants whose incomes are 50% or less of the area median gross income, adjusted for family size, or alternatively, at least 40% of the units in the project are occupied by tenants whose incomes are 60% or less of the area median gross income. Qualified low-income housing projects generally must comply with these and other rules for 15 years, beginning with the first year the project qualified for the tax credit, or some or all of the tax credit together with interest may be recaptured. The tax credit is subject to the limitation for use as a general business credit, but no basis reduction is required for any portion of the tax credit claimed. As of December 31, 2009, at least 83% of the units in the Pedcor Projects were occupied, and all of the tenants met the income test required for the tax credits.

We received tax credits totaling $874,000 for the year ended December 31, 2009, $1.2 million for the year ended December 31, 2008 and $811,000 for the year ended December 31, 2007 from the Pedcor Projects. The Pedcor Projects have incurred operating losses in the early years of their operations primarily due to accelerated depreciation of assets. We have accounted for our investment in the Pedcor Projects on the equity method. Accordingly, we have recorded our share of these losses as reductions to MutualBank’s investment in the Pedcor Projects.

The following summarizes MutualBank’s equity in the Pedcor Projects’ losses and tax credits recognized in our consolidated financial statements.

	For the Year Ended December 31,
	2009		2008			2007
	(Dollars in thousands)

Investments in Pedcor low income housing projects	$	4,161	$	4,561		$	3,246

Equity in income (losses), net of income tax effect	$	71	$	(104	)	$	(66	)
Tax credit		874		1,214			811
Increase in after-tax income from Pedcor Investments	$	945	$	1,110		$	745

See Note 10 of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K for additional information regarding our limited partnership investments.

The following table sets forth the composition of our investment and mortgage-related securities portfolio and other investments at the dates indicated. As of December 31, 2009, our investment securities portfolio did not contain securities of any issuer with an aggregate book value in excess of 10% of our equity capital, excluding those issued by the United States Government or its agencies.

	December 31,
	2009				2008				2007
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)

Investment securities available-for-sale:
Mutual funds	$	1,685	$	1,643	$	1,635	$	1,497	$	16,382	$	15,914
Government sponsored entities		158		157		570		572		608		605
Mortgage-backed securities		29,175		29,890		14,771		15,163		2,310		2,352
Collateralized mortgage obligations		85,726		87,029		43,821		43,639		8,327		8,322
Corporate obligations		7,321		2,539		18,797		15,527		16,655		16,399
Municipal obligations		9,313		9,656		857		857		—		—
Total investment securities held for sale		133,378		130,914		80,451		77,255		44,282		43,592

Investment securities held to maturity:
Mortgage-backed securities		4,619		3,275		5,498		4,983		—		—
Collateralized mortgage obligations		3,028		2,554		4,178		3,545		—		—
Government sponsored entities		500		504		—		—		—		—
Total investment securities held to maturity		8,147		6,333		9,676		8,528		—		—

Investment in limited partnerships		4,161		N/A		4,561		N/A		3,246		N/A
Investment in insurance company		—		N/A		590		N/A		590		N/A
Federal Home Loan Bank stock		18,632		N/A		18,632		N/A		10,037		N/A

Total investments	$	164,318	$	137,247	$	113,910	$	85,783	$	58,155	$	43,592

The following table indicates, as of December 31, 2009, the composition and maturities of our investment securities, excluding Federal Home Loan Bank stock.

	Due in
	Less Than 1 Year			1 to 5 Years			5 to 10 Years				Over 10 Years			Total Investment Securities
	Amortized Cost			Amortized Cost			Amortized Cost				Amortized Cost			Amortized Cost			Fair Value
	(Dollars in thousands)

Available-for-sale:
Corporate obligations	$	100		$	—			$	—		$	7,221		$	7,321		$	2,539
Government sponsored entities		87			10				2,626			6,748			9,471			9,813
Mutual funds		1,685			—				—			—			1,685			1,643
Mortgage-backed securities:
Freddie Mac		—			52				753			47,327			48,132			49,418
Fannie Mae		—			806				36			20,382			21,224			22,097
Ginnie Mae		—			—				—			33,867			33,867			33,939
Other		193			—				7,177			4,308			11,678			11,465
	$	2,065		$	868			$	10,592		$	119,853		$	133,378		$	130,914

Weighted average yield		4.00	%		4.97	%			5.52	%		4.35	%		4.44	%

Held-to-maturity:
Government sponsored entities	$	—		$	500			$	—		$	—		$	500		$	504
Mortgage-backed securities:
Freddie Mac		—			—				—			802			802			762
Fannie Mae		—			—				—			2,067			2,067			2,205
Other		—			—				—			4,778			4,778			2,862
	$	—		$	500			$	—		$	7,647		$	8,147		$	6,333

Weighted average yield					2.00	%						3.46	%		3.46	%

Sources of Funds

General. Our sources of funds are deposits, borrowings, payment of principal and interest on loans, interest earned on or maturation of other investment securities and funds provided from operations.

Deposits. We offer deposit accounts to consumers and businesses having a wide range of interest rates and terms. Our deposits consist of savings deposit accounts, NOW and demand accounts and certificates of deposit. We solicit deposits in our market areas. We primarily rely on competitive pricing policies, marketing and customer service to attract and retain these deposits. Occasionally we will accept brokered deposits from a broker without paying a fee to that broker. At December 31, 2009, our brokered deposits totaled $6.9 million, or .7% of total deposits, with an average interest rate of 1.87% and a 1.5 year weighted average maturity.

The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates, and competition. The variety of our deposit accounts has allowed us to be competitive in obtaining funds and to respond to changes in consumer demand. We have become more susceptible to short-term fluctuations in deposit flows, as customers have become more interest rate conscious. We try to manage the pricing of our deposits in keeping with our asset/liability management, liquidity and profitability objectives, subject to competitive factors. Based on our experience, we believe that our deposits are relatively stable sources of funds. Our ability to attract and maintain these deposits, however, and the rates paid on them, has been and will continue to be affected significantly by market conditions.

The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts, primarily checking, NOW and Super NOW checking accounts. At December 31, 2009, we were in compliance with these reserve requirements.

The following table sets forth the dollar amount of savings deposits in the various types of deposit programs we offered at the dates indicated.

	December 31,
	2009					2008						2007
	Amount		Percent of Total			Amount			Percent of Total			Amount		Percent of Total
	(Dollars in thousands)

Transactions and Savings Deposits:

Noninterest bearing accounts	$	98,025		9.38	%	$	93,393			9.70	%	$	47,172		7.08	%
Passbook accounts		84,553		8.09			79,111			8.22			50,388		7.56
Interest-bearing NOW and demand accounts		154,431		14.77			156,787			16.29			117,863		17.69
Money market accounts		60,479		5.79			47,584			4.94			22,664		3.40
Total non-certificates		397,488		38.03			376,875			39.16			238,087		35.73

Certificates:

0.00 -1.99%		188,995		18.08			55,064			5.72			8,627		1.29
2.00 -3.99%		355,758		34.04			359,899			37.39			47,500		7.13
4.00 -5.99%		102,894		9.84			170,611			17.73			372,145		55.84
6.00 -7.99%		61		.01			65			0.01			48		0.01
8.00 -9.99%		—		—			—			—			—		—
10.00% and over		—		—			—			—			—		—

Total certificates		647,708		61.97			585,639			60.84			428,320		64.27
Total deposits	$	1,045,196		100.00	%	$	962,514	(1)		100.00	%	$	666,407		100.00	%

(1)	Includes $332.1 million due to MFB acquisition

The following table shows rate and maturity information for our certificates of deposit as of December 31, 2009.

		1.00- 1.99%			2.00- 3.99%			4.00- 5.99%			6.00- 7.99%		Total			Percent of Total
	(Dollars in thousands)
Certificate accounts maturing in quarter ending:
March 31, 2010	$	67,890		$	53,162		$	12,163		$	—		$	133,215		20.57	%
June 30, 2010		38,224			53,025			9,948			—			101,197		15.61	%
September 30, 2010		42,161			43,011			5,019			—			90,191		13.92	%
December 31, 2010		20,743			36,417			1,944			—			59,104		9.13	%
March 31, 2011		7,362			15,741			1,305			—			24,408		3.77	%
June 30, 2011		1,453			34,402			2,151			—			38,006		5.87	%
September 30, 2011		8,149			18,104			2,863			—			29,116		4.50	%
December 31, 2011		1,000			22,118			5,746			61			28,925		4.47	%
March 31, 2012		—			13,296			8,929			—			22,225		3.43	%
June 30, 2012		384			6,101			9,178			—			15,663		2.42	%
September 30, 2012		671			1,259			5,463			—			7,393		1.14	%
December 31, 2012		958			802			2,563			—			4,323		0.67	%
Thereafter		—			58,320			35,622			—			93,942		14.50	%
Total	$	188,995		$	355,758		$	102,894		$	61		$	647,708		100.00	%

Percent of total		29.18	%		54.92	%		15.89	%		.01	%		100.00	%

The following table indicates, as of December 31, 2009, the amount of our certificates of deposit and other deposits by time remaining until maturity.

	Maturity
	3 Months or Less		Over 3 to 6 Months		Over 6 to 12 Months		Over 12 months		Total
	(Dollars in thousands)

Certificates of deposit less than $100,000	$	92,626	$	71,066	$	100,063	$	171,496	$	435,251

Certificates of deposit of $100,000 or more		39,720		29,413		48,127		92,005		209,265

Public funds(1)		869		718		1,105		500		3,192

Total certificates of deposit	$	133,215	$	101,197	$	149,295	$	264,001	$	647,708

(1)	Deposits from governmental and other public entities.

Borrowings. Although deposits are our primary source of funds, we utilize borrowings when they are a less costly source of funds and can be invested at a positive interest rate spread, when we desire additional capacity to fund loan demand or when they meet our asset/liability management goals. Our borrowings historically have consisted of advances from the Federal Home Loan Bank of Indianapolis. See Note 14 of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K.

We may obtain advances from the Federal Home Loan Bank of Indianapolis upon the security of certain of our mortgage loans and mortgage-backed securities. These advances may be made pursuant to several different credit programs, each of which has its own interest rate, range of maturities and call features. At December 31, 2009, we had $198.0 million in Federal Home Loan Bank advances outstanding. Based on current collateral levels we could borrow an additional $82.4 million from the Federal Home Loan Bank at prevailing interest rates. We believe that we will continue to have sufficient funds, through deposits and borrowings, to meet our current commitments. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity” contained in Item 7 of this Form 10-K.

In order to have access to Federal Home Loan Bank advances, we are required to own stock in the Federal Home Loan Bank of Indianapolis. At December 31, 2009, we had $18,632,000 in that stock. We continue to monitor the activities of the Federal Home Loan Bank of Indianapolis and believe they have the ability to meet our borrowing needs during this difficult economic environment.

We also have a term note with a balance of $10.0 million from First Tennessee Bank, N.A. as of December 31, 2009. See Note 15 of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K.

We also are authorized to borrow from the Federal Reserve Bank of Chicago’s “discount window” after we have exhausted other reasonable alternative sources of funds, including Federal Home Loan Bank borrowings. We have never borrowed from our Federal Reserve Bank.

The Company acquired $5.0 million of issuer trust preferred securities as part of the acquisition of MFB. The net balance of the note as of December 31, 2009 was $3.9 million due to the purchase accounting adjustment from the acquisition. The securities mature 30 years from the date of issuance, July 29, 2005. The securities bear a fixed rate of interest of 6.22% for the first five years, resetting quarterly thereafter at the prevailing three-month LIBOR rate plus 170 basis points. In December 2009, the Company entered into a cash flow hedge with FTN Financial to fix the floating portion of the issued trust preferred security at 5.15% for the next five years starting on September 15, 2010. The Company may redeem the trust preferred securities, in whole or in part, without penalty, on or after September 15, 2010, or earlier upon the occurrence of certain events with the payment of a premium upon redemption. These securities mature on September 15, 2035.

The following table sets forth, for the years indicated, the maximum month-end balance and average balance of Federal Home Loan Bank advances and other borrowings.

	Year Ended December 31,
	2009		2008		2007
	(Dollars in thousands)

Maximum Balance:
Federal Home Loan Bank advances	$	250,566	$	300,147	$	191,675
Notes payable		231		1,123		1,427
Other borrowings		15,359		15,967		4,311

Average Balance:
Federal Home Loan Bank advances	$	221,896	$	224,822	$	157,309
Notes payable		228		718		1,160
Other borrowings		15,076		7,967		155

The following table sets forth certain information as to our borrowings at the dates indicated.

	December 31,
	2009			2008			2007
	(Dollars in thousands)

Federal Home Loan Bank advances	$	197,960		$	263,113		$	191,675
Notes payable		226			647			1,055
Other borrowings		13,888			15,345			3,908

Total borrowings	$	212,074		$	279,105		$	196,638

Weighted average interest rate of FHLB advances		4.00	%		4.27	%		4.88	%

Weighted average interest rate of notes payable(1)		—			—			—

Weighted average interest rate of other borrowings(2)		5.99	%		5.28	%		6.48

(1)	Our notes payable are capitalized loans with no current interest expense as of December 31, 2009.

(2)	Our other borrowings are a term loan and subordinate debt as of December 31, 2009.

Subsidiary and Other Activities

As a federal savings bank, MutualBank is permitted by OTS regulations to invest up to 2% of its assets, or $28.0 million at December 31, 2009, in the stock of, or unsecured loans to, service corporation subsidiaries. MutualBank may invest an additional 1% of its assets in service corporations where such additional funds are used for inner-city or community development purposes. Service corporations may engage in activities not permitted for MutualBank and are not required to be controlled by MutualBank. MutualBank also is authorized to invest an unlimited amount in operating subsidiaries that only may engage in activities authorized for MutualBank and must be controlled by MutualBank.

The Bank's insurance agency subsidiary, Mishawaka Financial Services, Inc., is engaged in the sale, as agent, of life insurance and credit-life and health insurance to the Bank's customers and the general public.

At December 31, 2009, MutualBank had one active subsidiary, Mutual Federal Investment Company, which is an operating subsidiary. Mutual Federal Investment Company is a Nevada corporation that holds and manages a portion of MutualBank’s investment portfolio. As of December 31, 2009, the market value of securities managed was $118.4 million. Mutual Federal Investment Company has one active subsidiary, Mutual Federal REIT, Inc. Mutual Federal REIT, Inc. is a Maryland corporation holding approximately $91.7 million in one-to four-family mortgage loans.

Competition

We face strong competition in originating real estate and other loans and in attracting deposits. Competition in originating real estate loans comes primarily from other savings institutions, commercial banks, credit unions and mortgage bankers. Other savings institutions, commercial banks, credit unions and finance companies provide vigorous competition in consumer lending.

We attract our deposits through our branch office system. Competition for deposits comes principally from other savings institutions, commercial banks and credit unions located in the same community, as well as mutual funds and other alternative investments. We compete for deposits by offering superior service and a variety of account types at competitive rates.

Employees

At December 31, 2009, we had a total of 369 full-time and 67 part-time employees. Our employees are not represented by any collective bargaining group. Management considers its employee relations to be good.

How We Are Regulated

Set forth below is a brief description of certain laws and regulations that apply to us. This description, as well as other descriptions of laws and regulations contained in this Form 10-K, is not complete and is qualified in its entirety by reference to the applicable laws and regulations.

Legislation is introduced from time to time in the United States Congress that may affect our operations. In addition, the regulations by which we are governed may be amended from time to time. Any such legislation or regulatory changes could adversely affect us. We cannot assure you as to whether or in what form any such changes will occur.

Congress is currently considering significant regulatory reform legislation initially proposed by the Obama administration. This legislation, if enacted, would have a significant impact on the regulation and operations of financial institutions and their holding companies. It currently provides for the elimination of the OTS, our primary regulator, and would require the Company to become a bank holding company and be subject to regulatory capital requirements for the first time. This elimination of OTS may require MutualBank to convert to a national bank or state bank charter. The legislation also provides for the creation of a new consumer financial protection agency that would issue and enforce consumer protection initiatives governing financial products and services. The details and impact of this regulatory reform proposal cannot be determined until the proposal is enacted into law.

MutualFirst. MutualFirst is a unitary savings and loan holding company subject to regulatory oversight by the OTS. MutualFirst is required to register and file reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over us and our non-savings institution subsidiaries.

MutualFirst generally is not subject to activity restrictions. 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.

The investment and lending authority of federal savings institutions are prescribed by federal laws and regulations, and federal savings institutions are prohibited from engaging in any activities not permitted by such laws and regulations. In addition, all savings institutions, including MutualBank, are required to maintain qualified thrift lender status to avoid certain restrictions on their operations. This status is maintained by meeting the OTS qualified thrift lender test, which requires a savings institution to have at least 65% of its portfolio assets, as defined by regulation, in qualified thrift investments on a monthly average for nine out of every 12 months on a rolling basis. As an alternative, the savings institution may maintain 60% of its assets in the assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under either test, such assets primarily consist of residential housing related loans and investments. At December 31, 2009, MutualBank met the test and has met the test since its effectiveness. If MutualBank loses qualified thrift lender status, it becomes subject to national bank investment and activity limits.

The OTS regularly examines MutualBank and prepares reports for the consideration of MutualBank’s board of directors on any deficiencies that it may find in MutualBank’s operations. When these examinations are conducted, the examiners may require MutualBank to provide for higher general or specific loan loss reserves. MutualBank’s relationship with its depositors and borrowers also is regulated to a great extent by both Federal and state laws, especially in such matters as the ownership of savings accounts and the form and content of MutualBank’s mortgage requirements. The OTS also has extensive enforcement authority over all savings institutions and their holding companies, including MutualBank and MutualFirst.

MutualBank’s general permissible lending limit for loans extended to one-borrower (including a group of certain related borrowers) is equal to the greater of $500,000 or 15% of unimpaired capital and surplus (except for loans fully secured by certain readily marketable collateral, in which case this limit is increased to 25% of unimpaired capital and surplus). At December 31, 2009, MutualBank’s lending limit under this restriction was $20.1 million. MutualBank has no loans in excess of the lending limit.

The OTS, as well as the other federal banking agencies, has adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings standards, internal controls and audit systems, interest rate risk exposure and compensation and other employee benefits. Any institution which fails to comply with these standards must submit a compliance plan.

FDIC Regulation and Insurance of Accounts. The Bank’s deposits are insured up to the applicable limits by the FDIC, and such insurance is backed by the full faith and credit of the United States Government. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. Our deposit insurance premiums for the year ended December 31, 2009 were $2.3 million. Those premiums have increased in recent years due to strains on the FDIC deposit insurance fund due to the cost of large bank failures and the increase in the number of troubled banks.

The Bank is a member of the deposit insurance fund administered by the FDIC. Deposits are insured up to the applicable limits by the FDIC. Through December 31, 2013, the basic deposit insurance is $250,000, instead of the $100,000 limit that had been in effect prior to October 2008. The FDIC also provides unlimited deposit insurance coverage for noninterest-bearing transaction accounts (typically business checking accounts), NOW accounts bearing interest at 0.5% or less, and certain funds swept into noninterest-bearing savings accounts at institutions that opt into this enhanced deposit insurance coverage. MutualBank opted into this program, which is set to expire on June 30, 2010. The Bank pays a fee of 10 basis points (annualized) on the balance of each covered account in excess of $250,000 during the period through June 30, 2010. During 2009, we paid total fees of $14,000 for participating in this program.

The FDIC assesses deposit insurance premiums quarterly on each FDIC-insured institution based on annualized rates for one of four risk categories applied to its deposits subject to certain adjustments. Each institution is assigned to one of four risk categories based on its capital, supervisory ratings and other factors. Well capitalized institutions that are financially sound with only a few minor weaknesses are assigned to Risk Category I. Risk Categories II, III and IV present progressively greater risks to the deposit insurance fund. Under the FDIC’s risk-based assessment rules, effective April 1, 2009, the initial base assessment rates prior to adjustments range from 12 to 16 basis points for Risk Category I, and are 22 basis points for Risk Category II, 32 basis points for Risk Category III, and 45 basis points for Risk Category IV. Initial base assessment rates are subject to adjustments based on an institution’s unsecured debt, secured liabilities and brokered deposits, such that the total base assessment rates after adjustments range from 7 to 24 basis points for Risk Category I, 17 to 43 basis points for Risk Category II, 27 to 58 basis points for Risk Category III, and 40 to 77.5 basis points for Risk Category IV. Rates increase uniformly by 3 basis points effective January 1, 2011.

In addition to the regular quarterly assessments, due to losses and projected losses attributed to failed institutions, the FDIC imposed a special assessment of 5 basis points on the amount of each depository institution’s assets reduced by the amount of its Tier 1 capital (not to exceed 10 basis points of its assessment base for regular quarterly premiums) as of June 30, 2009, which was collected on September 30, 2009.

As a result of a decline in the reserve ratio (the ratio of the net worth of the deposit insurance fund to estimated insured deposits) and concerns about expected failure costs and available liquid assets in the deposit insurance fund, the FDIC required each insured institution to prepay on December 30, 2009, the estimated amount of its quarterly assessments for the fourth quarter of 2009 and all quarters through the end of 2012 (in addition to the regular quarterly assessment for the third quarter which was due on December 30, 2009). The prepaid amount is recorded as an asset with a zero risk weight and the institution will continue to record quarterly expenses for deposit insurance. For purposes of calculating the prepaid amount, assessments are measured at the institution’s assessment rate as of September 30, 2009, with a uniform increase of 3 basis points effective January 1, 2011, and are based on the institution’s assessment base for the third quarter of 2009, with growth assumed quarterly at an annual rate of 5%. If events cause actual assessments during the prepayment period to vary from the prepaid amount, institutions will pay excess assessments in cash, or receive a rebate of prepaid amounts not exhausted after collection of assessments due on January 13, 2013, as applicable. Collection of the prepayment does not preclude the FDIC from changing assessment rates or revising the risk-based assessment system in the future. The rule includes a process for exemption from the prepayment for institutions whose safety and soundness would be affected adversely.

The FDIC estimates that the reserve ratio will reach the designated reserve ratio of 1.15% by 2017 as required by statute.

The FDIC also may prohibit any FDIC-insured institution from engaging in any activity that it determines by regulation or order to pose a serious risk to the deposit insurance fund. The FDIC also has the authority to initiate enforcement actions against the Bank and may terminate our deposit insurance if it determines that we have engaged in unsafe or unsound practices or are in an unsafe or unsound condition.

Regulatory Capital Requirements. MutualBank is required to maintain a minimum level of regulatory capital. The OTS has established capital standards, including a leverage ratio or core capital requirement and a risk-based capital requirement applicable to such savings institutions. The OTS also may impose capital requirements in excess of these standards on individual institutions on a case-by-case basis.

The capital standards generally require core capital equal to at least 4.0% of adjusted total assets. Core capital consists of tangible capital plus certain intangible assets, including a limited amount of purchased credit card relationships. At December 31, 2009, MutualBank had core capital equal to $130.3 million, or 9.4% of adjusted total assets, which is $74.8 million above the minimum requirement of 4% in effect on that date.

The OTS also requires savings institutions to have total capital of at least 8.0% of risk-weighted assets. Total capital consists of core capital, as defined above, and supplementary capital. Supplementary capital consists of certain permanent and maturing capital instruments that do not qualify as core capital and general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. The OTS is also authorized to require a savings institution to maintain an additional amount of total capital to account for concentration of credit risk and the risk of non-traditional activities. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet items, will be multiplied by a risk weight, ranging from 0% to 100%, based on the risk inherent in the type of asset. As of December 31, 2009, MutualBank had total risk-based capital of $133.9 million and risk-weighted assets of $1.0 billion; or total capital of 12.8% of risk-weighted assets. This amount was $50.3 million above the 8% requirement in effect on that date.

The OTS and the FDIC are authorized and, under certain circumstances, required to take actions against savings institutions that fail to meet their capital requirements. The OTS is generally required to restrict the activities of an “undercapitalized institution,” which is an institution with less than either a 4% core capital ratio, a 4% Tier 1 risked-based capital ratio or an 8.0% risk-based capital ratio. Any such institution must submit a capital restoration plan and, until such plan is approved by the OTS, may not increase its assets, acquire another institution, establish a branch or engage in any new activities, and generally may not make capital distributions.

Any savings institution that fails to comply with its capital plan or has Tier 1 risk-based or core capital ratio of less than 3.0% or a risk-based capital ratio of less than 6.0% and is considered “significantly undercapitalized” must be made subject to one or more additional specified actions and operating restrictions which may cover all aspects of its operations and may include a forced merger or acquisition of the institution. An institution that becomes “critically undercapitalized” because it has a tangible capital ratio of 2.0% or less is subject to further restrictions on its activities in addition to those applicable to significantly undercapitalized institutions. In addition, the OTS must appoint a receiver, or conservator with the concurrence of the FDIC, for a savings institution, with certain limited exceptions, within 90 days after it becomes critically undercapitalized. Any undercapitalized institution is also subject to the general enforcement authority of the OTS and the FDIC, including the appointment of a conservator or a receiver.

The OTS is also generally authorized to reclassify an institution into a lower capital category and impose the restrictions applicable to such category if the institution is engaged in unsafe or unsound practices or is in an unsafe or unsound condition.

The imposition by the OTS or the FDIC of any of these measures on MutualBank may have a substantial adverse effect on our operations and profitability.

Limitations on Dividends and Other Capital Distributions. OTS regulations impose various restrictions on distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account.

Generally, for savings institutions such as MutualBank, it is required that before and after the proposed distribution the institution remain well-capitalized. Savings institutions may make capital distributions during any calendar year equal to the greater of 100% of net income for the year-to-date plus retained net income for the two preceding years. However, an institution deemed to be in need of more than normal supervision by the OTS may have its dividend authority restricted by the OTS. MutualBank may pay dividends in accordance with this general authority.

Savings institutions proposing to make any capital distribution need not submit written notice to the OTS prior to such distribution unless they are a subsidiary of a holding company or would not remain well-capitalized following the distribution. Savings institutions that do not, or would not meet their current minimum capital requirements following a proposed capital distribution or propose to exceed these net income limitations must obtain OTS approval prior to making such distribution. The OTS may object to the distribution during that 30-day period based on safety and soundness concerns. See “– Regulatory Capital Requirements.”

Our ability to pay dividends on or to repurchase our common stock is subject to limits due to our participation in the TARP Capital Purchase Program. See “General” and Item 1A.

Federal Taxation

General. We are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to us. MutualBank’s federal income tax returns have been closed without audit by the IRS through its year ended December 31, 2005. MutualFirst and MutualBank will file a consolidated federal income tax return for fiscal year 2009.

Taxable Distributions and Recapture. Prior to 1998, bad debt reserves created prior to the year ended December 31, 1997 were subject to recapture into taxable income if MutualBank failed to meet certain thrift asset and definitional tests. Federal legislation eliminated these thrift recapture rules. However, under current law, pre-1988 reserves remain subject to recapture should MutualBank make certain non-dividend distributions or cease to maintain a thrift/bank charter.

Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, called alternative minimum taxable income. The alternative minimum tax is payable to the extent such alternative minimum taxable income is in excess of an exemption amount. Net operating losses can offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. MutualBank is subject to the alternative minimum tax, and has $173,000 available as credits for carryover.

Corporate Dividends-Received Deduction. MutualFirst may eliminate from its income dividends received from MutualBank as a wholly owned subsidiary of MutualFirst if it elects to file a consolidated return with MutualBank. The corporate dividends-received deduction is 100% or 80%, in the case of dividends received from corporations with which a corporate recipient does not file a consolidated tax return, depending on the level of stock ownership of the payor of the dividend. Corporations which own less than 20% of the stock of a corporation distributing a dividend may deduct 70% of dividends received or accrued on their behalf.

State Taxation

MutualBank is subject to Indiana’s financial institutions tax, which is imposed at a flat rate of 8.5% on “adjusted gross income” apportioned to Indiana. “Adjusted gross income,” for purposes of the financial institutions tax, begins with taxable income as defined by Section 63 of the Internal Revenue Code and incorporates federal tax law to the extent that it affects the computation of taxable income. Federal taxable income is then adjusted by several Indiana modifications including only considering members of the combined group which have Indiana nexus.

Other applicable state taxes include generally applicable sales and use taxes plus real and personal property taxes.

Internet Website

We maintain a website with the address of www.bankwithmutual.com. The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. This Annual Report on Form 10-K and our other reports, proxy statements and other information, including earnings press releases, filed with the SEC are available on that website through a link to the SEC’s website at “Resource Center – Investor Relations - SEC Filings.” For more information regarding access to these filings on our website, please contact our Corporate Secretary, MutualFirst Financial, Inc., 110 E. Charles Street, Muncie, Indiana, 47305-2419; telephone number (765) 747-2800.

Item1A. Risk Factors

The following are certain risk factors that could impact our business, financial results and results of operations. Investing in our common stock involves risks, including those described below. These risk factors should be considered by prospective and current investors in our common stock when evaluating the disclosures in this Annual Report on Form 10-K (particularly the forward-looking statements). These risk factors could cause actual results and conditions to differ materially from those projected in forward-looking statements. If any of the events in the following risks actually occur, or if additional risks and uncertainties not presently known to us or that we believe are immaterial do materialize, then our business, financial condition or results of operations could be materially adversely impacted. In addition, the trading price of our common stock could decline due to any of the events described in these risks.

Our financial condition and results of operations are dependent on the economy, particularly in the Bank’s market area. The current economic recession in the market area we serve may continue to impact our earnings adversely and could increase the credit risk of our loan portfolio.

Our primary market area is concentrated in north central and eastern Indiana. Adverse economic conditions in that market area can reduce our rate of growth, affect our customers’ ability to repay loans and adversely impact our financial condition and earnings. General economic conditions, including inflation, unemployment and money supply fluctuations, also may affect our profitability adversely. Our market area is undergoing a recession, which has resulted in higher levels of loan delinquencies, problem assets and foreclosures, decreased demand for our products and services and a decline in the value of our loan collateral. If this recession continues or becomes more severe, this negative impact on our business, financial condition and earnings may increase.

A continuation of recent turmoil in the financial markets could have an adverse effect on our financial position or results of operations.

Beginning in 2008, United States and global financial markets have experienced severe disruption and volatility, and general economic conditions have declined significantly. Adverse developments in credit quality, asset values and revenue opportunities throughout the financial services industry, as well as general uncertainty regarding the economic, industry and regulatory environment, have had a marked negative impact on the industry. Dramatic declines in the U.S. housing market over the past two years, with falling home prices, increasing foreclosures and increasing unemployment, have negatively affected the credit performance of mortgage loans and resulted in significant write-downs of asset values by many financial institutions. The United States and the governments of other countries have taken steps to try to stabilize the financial system, including investing in financial institutions, and have also been working to design and implement programs to improve general economic conditions. Notwithstanding the actions of the United States and other governments, these efforts may not succeed in restoring industry, economic or market conditions and may result in adverse unintended consequences. Factors that could continue to pressure financial services companies, including the Company, are numerous and include (i) worsening credit quality, leading among other things to increases in loan losses and reserves, (ii) continued or worsening disruption and volatility in financial markets, leading among other things to continuing reductions in asset values, (iii) capital and liquidity concerns regarding financial institutions generally, (iv) limitations resulting from or imposed in connection with governmental actions intended to stabilize or provide additional regulation of the financial system, or (v) recessionary conditions that are deeper or last longer than currently anticipated.

Our allowance for loan losses may prove to be insufficient to absorb probable losses in our loan portfolio.

Lending money is a substantial part of our business. Every loan carries a certain risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things:

cash flow of the borrower and/or the project being financed;

in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral;

the credit history of a particular borrower;

changes in economic and industry conditions; and

the duration of the loan.

We maintain an allowance for loan losses which we believe is appropriate to provide for potential losses in our loan portfolio. The amount of this allowance is determined by our management through a periodic review and consideration of several factors, including, but not limited to:

an ongoing review of the quality, size and diversity of the loan portfolio;

evaluation of non-performing loans;

historical default and loss experience;

historical recovery experience;

existing economic conditions;

risk characteristics of the various classifications of loans; and

the amount and quality of collateral, including guarantees, securing the loans.

If our loan losses exceed our allowance for probable loan losses, our business, financial condition and profitability may suffer.

The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and the loss and delinquency experience, and evaluate economic conditions and make significant estimates of current credit risks and future trends, all of which may undergo material changes. If our estimates are incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in the need for additions to our allowance through an increase in the provision for loan losses. Continuing deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. Our allowance for loan losses was 1.5% of gross loans held for investment and 50.4% of nonperforming loans at December 31, 2009. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than that of management. If charge-offs in future periods exceed the allowance for loan losses, we will need additional provisions to increase the allowance for loan losses. Any increases in the provision for loan losses will result in a decrease in net income and may have a material adverse effect on our financial condition, results of operations and our capital.

Our provision for loan losses has increased substantially and additional increases in the provision and loan charge-offs may be required, adversely impacting operations.

For the year ended December 31, 2009, we recorded a provision for loan losses of $6.5 million compared to $7.0 million for the 2008 fiscal year. We also recorded net loan charge-offs of $5.2 million in 2009, compared to $3.2 million in 2008. During 2008 and 2009, we have experienced increasing loan delinquencies and credit losses. As a result, nonperforming loans increased from $21.8 million at the end of 2008 to $32.6 million at the end of 2009. If the declining trends in the housing, real estate and local business markets continue, we expect increased levels of delinquencies and credit losses to continue, which adversely impacts our financial condition and results of operations.

If our investments in real estate are not properly valued or sufficiently reserved to cover actual losses, or if we are required to increase our valuation reserves, our earnings could be reduced.

We obtain updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed and the property taken in as real estate owned (“REO”), and at certain other times during the assets holding period. Our net book value (“NBV”) in the loan at the time of foreclosure and thereafter is compared to the updated market value of the foreclosed property less estimated selling costs (fair value). A charge-off is recorded for any excess in the asset’s NBV over its fair value. If our valuation process is incorrect, the fair value of our investments in real estate may not be sufficient to recover our NBV in such assets, resulting in the need for additional charge-offs. Additional material charge-offs to our investments in real estate could have a material adverse effect on our financial condition and results of operations. Our bank regulator periodically reviews our REO and may require us to recognize further charge-offs. Any increase in our charge-offs, as required by such regulator, may have a material adverse effect on our financial condition and results of operations.

Other-than-temporary impairment charges in our investment securities portfolio could result in losses and adversely affect our continuing operations.

During the year ended December 31, 2009, we recognized a $5.3 million non-cash other than temporary impairment (“OTTI”) charge on available-for-sale and held-to-maturity securities we hold for investment. At December 31, 2009, the fair value of these securities were $2.8 million. Management concluded that the decline of the estimated fair value below the cost of the security was other than temporary and recorded a credit loss of $2.6 million through non-interest income. We determined the remaining decline in value was not related to specific credit deterioration. We do not intend to sell these securities and it is not more than likely than not we will be required to sell the securities before anticipated recovery of the remaining amortized cost basis. We closely monitor our investment securities for changes in credit risk. The valuation of our investment securities also is influenced by external market and other factors, including implementation of Securities and Exchange Commission and Financial Accounting Standards Board guidance on fair value accounting. Our valuation of our securities will be influenced by the default rates of specific financial institutions whose securities provide the underlying collateral for these securities. The current market environment significantly limits our ability to mitigate our exposure to valuation changes in these securities by selling them. Accordingly, if market conditions deteriorate further and we determine our holdings of these or other investment securities are OTTI, our future earnings, shareholders’ equity, regulatory capital and continuing operations could be materially adversely affected.

Our business may be adversely affected by credit risk associated with residential property.

At December 31, 2009, $578.1 million, or 53.6% of our total loan portfolio, was secured by one-to four-family mortgage loans and home equity loans (including home equity lines of credit). This type of lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. The decline in residential real estate values as a result of the downturn in the Indiana housing markets has reduced the value of the real estate collateral securing these types of loans and increased the risk that we would incur losses if borrowers default on their loans. Continued declines in both the volume of real estate sales and the sales prices coupled with the current recession and the associated increases in unemployment may result in higher than expected loan delinquencies or problem assets, a decline in demand for our products and services, or lack of growth or a decrease in deposits. These potential negative events may cause us to incur losses, adversely affect our capital and liquidity and damage our financial condition and business operations.

Our loan portfolio possesses increased risk due to our substantial number of multi-family, commercial real estate, consumer and commercial business loans.

Approximately 46.4% of our loan portfolio as of December 31, 2009, consisted of multi-family, commercial real estate, construction, consumer (non-mortgage) and commercial business loans. Multi-family, commercial and construction real estate loans accounted for approximately 25.0% of our total loan portfolio as of December 31, 2009. Our commercial business and consumer (non-mortgage) loans accounted, respectively, for approximately 7.2% and 14.2% of our total loan portfolio as of December 31, 2009. Generally, we consider these types of loans to involve a higher degree of risk compared to first mortgage loans on one- to four-family, owner-occupied residential properties. For further information concerning the risks associated with multi-family, commercial real estate, consumer loans and commercial business loans, see “Lending Activities” and “Asset Quality” in Item 1.

Rising interest rates may hurt our profits.

To be profitable, we have to earn more money in interest we receive on loans and investments that we make than we pay to our depositors and lenders in interest. If interest rates rise, our net interest income and the value of our assets could be reduced if interest paid on interest-bearing liabilities, such as deposits and borrowings, increases more quickly than interest received on interest-earning assets, such as loans, other mortgage-related investments and investment securities. This is most likely to occur if short-term interest rates increase at a faster rate than long-term interest rates, which would cause income to go down. In addition, rising interest rates may hurt our income, because they may reduce the demand for loans and the value of our securities. In a rapidly changing interest rate environment, we may not be able to manage our interest rate risk effectively, which would adversely impact our financial condition and results of operations. For a further discussion of how changes in interest rates could impact us, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and “Asset and Liability Management and Market Risk” in Item 7A.

We face risks related to covenants in our loan sales to investors and secondary mortgage market conditions.

Our agreements with investors to sell our loans generally contain covenants that require us to repurchase loans under certain circumstances, including some delinquencies, or to return premiums paid by those investors if the loans are paid off early. If we are required to repurchase sold loans under these covenants, they may be deemed troubled loans, with the potential for charge-offs and/or loss provision changes, which could impact our earnings and asset quality ratios adversely. The Bank was not required to repurchase any loans from our investors during 2009.

Our ability to sell loans on the secondary mortgage market is impacted by interest rate changes and investor demand or expected return. If this market becomes less liquid, we may not be able to rely as much on loan sales to reduce our interest rate and credit risk.

Declining economic conditions may adversely impact the fees generated by our asset management and trust business.

To the extent our asset management and trust clients and their assets become adversely impacted by weak economic and stock market conditions, they may choose to withdraw the assets managed by us and the value of their assets may decline. Our asset management revenues are based on the value of the assets we manage. If our clients withdraw assets or the value of their assets decline, our revenues from these activities may be adversely affected.

We face significant operational risks.

We operate in many different financial service businesses and rely on the ability of our employees and systems to process a significant number of transactions. Operational risk is the risk of loss from operations, including fraud by employees or outside persons, employees’ execution of incorrect or unauthorized transactions, data processing and technology errors or hacking and breaches of internal control systems.

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities or on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets.

We may elect or be compelled to seek additional capital in the future, but that capital may not be available when it is needed.

We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. In addition, we may elect to raise additional capital to repay our TARP funds, support our business or to finance acquisitions, if any, or we may otherwise elect or be required to raise additional capital. In that regard, a number of financial institutions have recently raised considerable amounts of capital in response to a deterioration in their results of operations and financial condition arising from the turmoil in the mortgage loan market, deteriorating economic conditions, declines in real estate values and other factors. Should we be required by regulatory authorities to raise additional capital, we may seek to do so through the issuance of, among other things, our common stock or preferred stock. The issuance of additional shares of common stock or convertible securities to new stockholders would be dilutive to our current stockholders.

Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital if needed or on terms acceptable to us. If we cannot raise additional capital when needed, it may have a material adverse effect on our financial condition, results of operations and prospects.

There may be future sales of additional common stock or preferred stock or other dilution of our equity, which may adversely affect the market price of our common stock.

We are not restricted from issuing additional common stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities. The market value of our common stock could decline as a result of sales by us of a large number of shares of common stock or preferred stock or similar securities in the market or the perception that such sales could occur.

Anti-takeover provisions could negatively impact our shareholders.

Provisions in our charter and bylaws, the corporate law of the State of Maryland and federal regulations could delay, defer or prevent a third party from acquiring us, despite the possible benefit to our stockholders, or otherwise adversely affect the market price of any class of our equity securities, including our common stock. These provisions include: a prohibition on voting shares of common stock beneficially owned in excess of 10% of total shares outstanding, supermajority voting requirements for certain business combinations with any person who beneficially owns more than 10% of our outstanding common stock; the election of directors to staggered terms of three years; advance notice requirements for nominations for election to our Board of Directors and for proposing matters that stockholders may act on at stockholder meetings, a requirement that only directors may fill a vacancy in our Board of Directors, supermajority voting requirements to remove any of our directors and the other provisions of our charter. Our charter also authorizes our Board of Directors to issue preferred stock, and preferred stock could be issued as a defensive measure in response to a takeover proposal. In addition, pursuant to OTS regulations, as a general matter, no person or company, acting individually or in concert with others, may acquire more than 10% of our common stock without prior approval from the OTS.

These provisions may discourage potential takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, our common stock. These provisions could also discourage proxy contests and make it more difficult for holders of our common stock to elect directors other than the candidates nominated by our Board of Directors.

The voting limitation provision in our charter could limit your voting rights as a holder of our common stock.

Our charter provides that any person or group who acquires beneficial ownership of our common stock in excess of 10% of the outstanding shares may not vote the excess shares. Accordingly, if you acquire beneficial ownership of more than 10% of the outstanding shares of our common stock, your voting rights with respect to the common stock will not be commensurate with your economic interest in our company.

Our core deposit premium could be deemed partially or fully impaired, which could reduce our earnings and the values of that intangible asset.

At December 31, 2009, we had a core deposit premium of $5.9 million due mainly to the MFB acquisition. Under GAAP, we are required to periodically assess the value of this intangible asset based on a number of factors to determine if there is partial or full impairment. The factors taken into consideration include the market price of our stock, the net present value of our assets and liabilities and valuation information for similar financial institutions. This evaluation involves a substantial amount of judgment. If actual conditions underlying the factors differ from our assessment, the core deposit intangible could be subjected to faster amortization or partial or complete impairment, which would reduce the value of this asset and reduce our earnings, perhaps materially.

We currently hold a significant amount of bank-owned life insurance.

At December 31, 2009, we held $93.5 million of bank-owned life insurance or BOLI on key employees and executives, with a cash surrender value of $44.2 million. The policies are maintained to fund amounts owed under executive supplemental retirement plans. The eventual repayment of the cash surrender value is subject to the ability of the various insurance companies to pay death benefits or to return the cash surrender value to us if needed for liquidity purposes. We continually monitor the financial strength of the various companies with whom we carry these policies. However, any one of these companies could experience a decline in financial strength, which could impair its ability to pay benefits or return our cash surrender value. If we need to liquidate these policies for liquidity purposes, we would be subject to taxation on the increase in cash surrender value and penalties for early termination, both of which would adversely impact earnings.

We may not be able to realize our deferred tax asset fully.

At December 31, 2009, we had a $19.5 million deferred income tax benefit based on differences between the financial statement amounts and tax bases of assets and liabilities and reflecting mainly an allowance for loan loss timing difference and business tax and AMT carryover. The value of our deferred income tax benefit is reviewed regularly under various forecasts and assumptions, including anticipated levels of taxable net income, to determine the likelihood of realizing the benefit. If actual results or subsequent forecasts differ from our current judgments, so that this benefit will not be fully realized, we would have to write down this asset, which would negatively impact results of operation and reduce our asset size.

If our investment in the Federal Home Loan Bank of Indianapolis becomes impaired, our earnings and stockholders’ equity could decrease.

At December 31, 2009, we owned $18.6 million in Federal Home Loan Bank of Indianapolis stock. We are required to own this stock to be a member of and to obtain advances from our Federal Home Loan Bank. This stock is not marketable and can only be redeemed by our Federal Home Loan Bank, which currently is not redeeming any excess member stock. Our Federal Home Loan Bank’s financial condition is linked, in part, to the eleven other members of the Federal Home Loan Bank System and to accounting rules and asset quality risks that could materially lower their capital, which would cause our Federal Home Loan Bank stock to be deemed impaired, resulting in a decrease in our earnings and assets.

We operate in a highly regulated environment and our operations and income may be affected adversely by changes in laws and regulations governing our operations, including regulatory reform initiatives of the Obama administration that are pending in Congress.

We are subject to extensive regulation, supervision and examination by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. These regulators govern the activities in which we may engage, primarily for the protection of depositors and the deposit insurance fund. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on a bank’s operations, reclassify assets, determine the adequacy of a bank’s allowance for loan losses and determine the level of deposit insurance premiums assessed. Any change in such regulation and oversight, whether in the form of regulatory policy, new regulations or legislation or additional deposit insurance premiums could have a material impact on our operations. Because our business is highly regulated, the laws and applicable regulations are subject to frequent change. Any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or prospects. For example, initiatives to limit our fees on overdraft protection programs or our creditor rights could impact our fee income or ability to resolve problem assets. Pending regulatory reform legislation proposed by the Obama administration and under consideration by Congress, if enacted, could change our primary regulator, create a new consumer finance protection agency, change the Company into a bank holding company with new capital requirements and require MutualBank to convert to a different charter. These changes could possibly adversely impact our operations and net income.

Our earnings are adversely impacted by increases in deposit insurance premiums and special FDIC assessments.

Beginning in late 2008, the economic environment caused higher levels of bank failures, which dramatically increased FDIC resolution costs and led to a significant reduction in the deposit insurance fund. As a result, the FDIC has significantly increased the initial base assessment rates paid by financial institutions for deposit insurance. The base assessment rate was increased by seven basis points (seven cents for every $100 of deposits) for the first quarter of 2009. Effective April 1, 2009, initial base assessment rates were changed to range from 12 basis points to 45 basis points across all risk categories with possible adjustments to these rates based on certain debt-related components. These increases in the base assessment rate have increased our deposit insurance costs and negatively impacted our earnings. In addition, in May 2009, the FDIC imposed a special assessment on all insured institutions due to recent bank and savings association failures. The emergency assessment amounts to five basis points on each institution’s assets minus Tier 1 capital as of June 30, 2009, subject to 10 basis points times the institution’s assessment base. Our FDIC deposit insurance expense for fiscal 2009 was $2.3 million, including the special assessment of $630,000 recorded in June 2009 and paid on September 30, 2009.

Additionally, in November 2009, the FDIC adopted a rule that requires each financial institution to prepay its estimated quarterly risk-based assessment for the fourth quarter of 2009 and for all of 2010, 2011 and 2012, which will be amortized over these periods and adjusted for changes in premium levels or our financial condition. As a result, this prepayment will not immediately impact our earnings.

Strong competition within our market area may limit our growth and profitability.

Competition in the banking and financial services industry is intense. In our market area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors have substantially greater name recognition, resources and lending limits than we do and may offer certain services or prices for services that we do not or cannot provide. Our profitability depends upon our continued ability to successfully compete in our market.

The securities purchase agreement between us and Treasury limits our ability to pay dividends on and repurchase our common stock.

The securities purchase agreement between us and Treasury provides that prior to the earlier of (i) December 23, 2011 and (ii) the date on which all of the shares of the Series A Preferred Stock have been redeemed by us or transferred by Treasury to third parties, we may not, without the consent of Treasury, (a) increase the cash dividend on our common stock or (b) subject to limited exceptions, redeem, repurchase or otherwise acquire shares of our common stock or preferred stock (other than the Series A Preferred Stock) or any trust preferred securities then outstanding. In addition, we are unable to pay any dividends on our common stock unless we are current in our dividend payments on the Series A Preferred Stock. These restrictions, together with the potentially dilutive impact of the warrant described in the next risk factor, could have a negative effect on the value of our common stock. Moreover, holders of our common stock are entitled to receive dividends only when, as and if declared by our Board of Directors. Although we have historically paid cash dividends on our common stock, we are not required to do so and our Board of Directors could reduce or eliminate our common stock dividend in the future.

The Series A Preferred Stock impacts net income available to our common shareholders and earnings per common share, and the warrant we issued to Treasury may be dilutive to holders of our common stock.

The dividends declared on the Series A Preferred Stock will reduce the net income available to common shareholders and our earnings per common share. The Series A Preferred Stock will also receive preferential treatment in the event of liquidation, dissolution or winding up 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). Although Treasury has agreed not to vote any of the shares of common stock it receives upon exercise of the warrant, a transferee of any portion of the warrant or of any shares of common stock acquired upon exercise of the warrant is not bound by this restriction.

If we are unable to redeem our Series A Preferred Stock before December 2013, the cost of this capital to us will increase substantially.

If we are unable to redeem the Series A Preferred Stock before December 2013, the cost of the TARP capital will increase substantially from 5.0% per annum (approximately $1.6 million annually) to 9.0% per annum (approximately $2.9 million annually). Depending on our financial condition at the time, this increase in the annual dividend rate on the Series A Preferred Stock could have a material negative effect on our liquidity.

We rely on dividends from MutualBank for substantially all of the Company’s revenue.

MutualFirst’s primary source of revenue is dividends from the Bank. The OTS regulates and must approve the amount of Bank dividends to the Company. If the Bank is unable to pay dividends, MutualFirst may not be able to service its debt, pay its other obligations or pay dividends on the Company’s common stock which could have a material adverse impact on our financial condition or the value of your investment in our common stock.

Our common stock trading volume may not provide adequate liquidity for investors.

Our common stock is listed on the Nasdaq Global Market. However, the average daily trading volume in our common stock is less than that of many larger financial services companies. A public trading market having the desired depth, liquidity and orderliness depends on the presence of a sufficient number of willing buyers and sellers for our common stock at any given time. This presence is impacted by general economic and market conditions and investors’ views of our Company. Because our trading volume is limited, any significant sales of our shares could cause a decline in the price of our common stock.

Our directors and executive officers have the ability to influence stockholder actions in a manner that may be adverse to the personal investment objectives of our stockholders.

As of December 31, 2009, our directors and executive officers as a group beneficially owned 1,291,870 shares, or 18.5%, of our common stock (including options for 417,390 shares). In addition, our employee stock ownership plan and charitable foundation controlled, respectively, 7.2% and 3.2% of our common stock on that date. In addition, as of December 31, 2009, 314,702 shares were reserved under various stock benefit plans for future awards for our directors, officers and employees. Due to this significant collective ownership of or control over our common stock, our directors and executive officers may be able to influence the outcome of director elections or block significant transactions, such as a merger or acquisition, or any other matter that might otherwise be favored by other shareholders.

Item 1B.

Unresolved Staff Comments

None

Item 2. Properties

At December 31, 2009 we had 33 full service offices. We own the office building in which our home office and executive offices are located. At December 31, 2009 we owned all but two of our other branch offices. The net book value of our investment in premises, equipment and leaseholds, excluding computer equipment, was approximately $32.4 million at December 31, 2009. We believe that our current facilities are adequate to meet our present and immediately foreseeable needs.

We utilize a third party service provider to maintain our database of depositor and borrower customer information. At December 31, 2009 the net book value of the data processing and computer equipment utilized by us was $2.1 million.

Item 3. Legal Proceedings

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

Item 4. (Reserved)

PART II

Item 5.

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

The common stock of 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, 2009, there were 6,984,754 shares of common stock outstanding and at that date we also had 32,382 shares of preferred stock outstanding and approximately 1,400 shareholders of record.

	Stock Price				Dividends per Share
2009 Quarters:	High		Low
First Quarter (ended 03/31/09)	$	7.40	$	3.51	$	0.12
Second Quarter (ended 06/30/09)	$	10.00	$	5.05	$	0.12
Third Quarter (ended 09/30/09)	$	8.50	$	6.60	$	0.12
Fourth Quarter (ended 12/31/09)	$	7.83	$	5.57	$	0.06

	Stock Price				Dividends per Share
2008 Quarters:	High		Low
First Quarter (ended 03/31/08)	$	13.98	$	12.80	$	0.16
Second Quarter (ended 06/30/08)	$	13.66	$	9.81	$	0.16
Third Quarter (ended 09/30/08)	$	11.00	$	9.34	$	0.16
Fourth Quarter (ended 12/31/08)	$	10.50	$	6.20	$	0.16

Our cash dividend payout policy is continually reviewed by management and the Board of Directors. The Company intends to continue its policy of paying quarterly dividends; however, future dividend payments will depend upon a number of factors, including capital requirements, regulatory limitations, the Company’s financial condition, results of operations and the Bank’s ability to pay dividends to the Company. The Company relies significantly upon such dividends originating from the Bank to accumulate earnings for payment of cash dividends to shareholders. Our TARP agreement limits our ability to pay dividends to common stockholders if dividends on the TARP preferred shares are not paid in full to date.

Information regarding our equity compensation plans is included in Item 11 of this Form 10-K.

On August 13, 2008, the Company’s Board of Directors authorized management to repurchase an additional 5% of the Company’s outstanding stock, or approximately 350,000 shares. Our ability to repurchase shares is limited under the securities purchase agreement with Treasury. See Item 1A.

Item 6.

Selected Financial Data

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

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

	At or For the Year Ended December 31,
	2009		2008			2007		2006			2005
	(In thousands)

Selected Financial Condition Data

Total assets	$	1,399,034	$	1,388,827		$	962,517	$	960,842		$	971,829
Cash and cash equivalents		46,341		39,703			23,648		24,915			22,365
Loans, net		1,059,694		1,113,132			802,436		805,625			822,547
Investment securities:
Available-for-sale, at fair value		130,914		77,255			43,592		41,070			39,788
Held to maturity		8,147		9,676			—		—			—
Total deposits		1,045,196		962,514			666,407		703,359			684,554
Total borrowings		212,074		279,104			196,638		158,852			187,791
Total stockholders’ equity		129,727		130,515			87,014		87,264			88,794

Selected Operations Data
Total interest income	$	71,852	$	65,179		$	56,374	$	56,119		$	48,478
Total interest expense		30,624		31,639			32,227		29,890			21,170
Net interest income		41,228		33,540			24,147		26,229			27,308
Provision for loan losses		6,500		7,020			2,240		2,068			1,775
Net interest income after provision for loan losses		34,728		26,520			21,907		24,161			25,533
Service fee income		7,458		6,257			4,831		4,370			4,026
Gain (loss) on sale of loans and investment securities		3,132		(927	)		391		(669	)		228
Other-than-temporary impairment, securities		(2,555)		(1,350	)		—		—			—
Other non-interest income (loss)		5,118		2,542			2,549		2,941			2,478
Total non-interest income		13,153		6,522			7,771		6,642			6,732
Salaries and employee benefits		23,047		19,118			14,759		14,617			13,792
Other expenses		21,460		44,508			10,397		10,402			9,620
Total non-interest expense		44,507		63,626			25,156		25,019			23,412
Income (loss) before taxes		3,374		(30,584	)		4,522		5,784			8,853
Income tax expense (benefit)		211		(8,485	)		296		1,028			2,401
Net income (loss)		3,163		(22,099	)		4,226		4,756			6,452
Preferred stock dividends and amortization		1,803		31			—		—			—
Net income (loss) available to common shareholders	$	1,360	$	(22,130	)	$	4,226	$	4,756		$	6,452

	At or For the Year Ended December 31,
	2009			2008			2007			2006			2005
Selected Financial Ratios and Other Financial Data:

Performance Ratios:

Return on average assets (ratio of net income to average total assets)		0.23	%		(1.91	)%		0.44	%		0.49	%		0.73	%
Return on average tangible equity (ratio of net income to average tangible equity)		1.49			(28.04	)		5.86			6.43			7.79
Interest rate spread information:
Average during the period		2.98			3.01			2.50			2.70			3.13
Net interest margin(1)		3.22			3.22			2.79			2.96			3.37
Ratio of operating expense to average total assets		3.17			5.49			2.64			2.57			2.89
Ratio of average interest-earning assets to average interest-bearing liabilities		110.67			107.14			107.92			107.65			109.30
Efficiency ratio(2)		81.84			158.81			78.81			76.11			68.78

Asset Quality Ratios:(3)

Non-performing assets to total assets		2.86			1.92			1.35			0.86			1.03
Non-performing loans to total loans		3.03			1.93			1.29			0.70			0.90
Allowance for loan losses to non-performing loans		50.38			69.41			79.72			143.59			108.04
Allowance for loan losses to loans receivable, net		1.53			1.34			1.03			1.00			0.98

Capital Ratios:
Equity to total assets(3)		9.27			9.40			9.04			9.08			9.14
Average equity to average assets		9.29			8.89			9.16			9.08			9.90

Share and Per Share Data:

Average common shares outstanding:
Basic		6,840,659			5,249,135			4,103,940			4,196,059			4,328,965
Diluted		6,840,748			5,249,135			4,151,173			4,274,039			4,439,686
Per share:
Basic earnings	$	0.20		$	(4.22	)	$	1.03		$	1.13		$	1.49
Diluted earnings	$	0.20		$	(4.22	)	$	1.02		$	1.11		$	1.45
Dividends	$	0.42		$	0.64		$	0.60		$	0.58		$	0.49

Dividend payout ratio(4)		210.00	%		(15.20	)%		58.25	%		52.25	%		36.55	%

Other Data:
Number of full-service offices		33			33			21			21			20

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

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

(3)	At the end of the period.

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

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

Introduction

MutualFirst is a savings and loan holding company and MutualBank is its wholly-owned subsidiary. MutualBank has been in business since 1889 and currently conducts its business from 33 full service financial centers located in Delaware, Elkhart, Grant, Kosciusko, Randolph, St. Joseph and Wabash counties, Indiana, with its main office located in Muncie. MutualBank also has trust offices in Carmel and Crawfordsville, Indiana and a loan origination office in New Buffalo, Michigan. MutualBank’s principal business consists of attracting deposits from the general public and originating fixed and variable rate loans secured primarily by first mortgage liens on residential and commercial real estate, consumer goods, and business assets. MutualBank’s deposit accounts are insured by the Federal Deposit Insurance Corporation up to applicable limits. We also originate mortgage loans in counties contiguous to these counties, and we originate indirect consumer loans throughout Indiana. We provide investment money management and trust services for our customers.

In July 2008, the Company acquired MFB Corp. and merged MFB’s subsidiary bank, MFB Financial into MutualBank. MutualFirst issued an aggregate of 2.9 million shares of its common stock and paid approximately $11.5 million in cash to MFB stockholders in the transaction. MutualFirst also assumed 114,500 MFB stock options, which have converted into approximately 296,555 MutualFirst stock options with a weighted average exercise price of $9.90 per share. As a result of the transaction, MutualBank now has 33 retail financial centers, spanning nine Indiana counties and is the 10th largest depository institution headquartered in Indiana.

In December 2008, as part of the Troubled Asset Relief Program (“TARP”) Capital Purchase Program, the Company entered into a Letter Agreement and Securities Purchase Agreement (collectively, the “Purchase Agreement”) with the United States Department of the Treasury (“Treasury”), pursuant to which the Company (i) sold 32,382 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) for a purchase price of $32,382,000 in cash and (ii) issued a warrant (the “Warrant”) to purchase 625,135 shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), for a per share price of $7.77 per share. The Series A Preferred Stock is entitled to cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Series A Preferred Stock may be redeemed by the Company at any time, subject to consultation by the Treasury with the Office of Thrift Supervision (“OTS”). The Warrant has a 10-year term and is immediately exercisable upon its issuance, with an exercise price, subject to anti-dilution adjustments, equal to $7.77 per share of the Common Stock. If the Series A Preferred Stock is redeemed, the Warrant will be liquidated at the current market price. Treasury has agreed not to exercise voting power with respect to any shares of Common Stock issued upon exercise of the Warrant that it holds.

The Company placed $29.1 million of TARP proceeds into its wholly-owned subsidiary MutualBank, while maintaining $3.2 million with the Company. MutualBank placed approximately $20.0 million of the proceeds in highly rated securities. Approximately $14.8 million was placed in mortgage securities, $3.2 million in municipal securities and $2.0 million in corporate bonds. These securities provide liquidity as needed to meet current and future loan demand. The remaining funds held at MutualBank were placed in working capital, which was used to fund loans and meet the cash needs of MutualBank.

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

Our results of operations depend primarily on the level of our net interest income, which is the difference between interest income on interest-earning assets, such as loans, mortgage-backed securities and investment securities, and interest expense on interest-bearing liabilities, primarily deposits and borrowings. The structure of our interest-earning assets versus the structure of interest-bearing liabilities, along with the shape of the yield curve, has a direct impact on our net interest income. Historically, our interest-earning assets have been longer term in nature (i.e., fixed-rate mortgage loans) and interest-bearing liabilities have been shorter term (i.e., certificates of deposit, regular savings accounts, etc.). This structure would impact net interest income favorably in a decreasing rate environment, assuming a normally shaped yield curve, as the rates on interest-bearing liabilities would decrease more rapidly than rates on the interest-earning assets. Conversely, in an increasing rate environment, assuming a normally shaped yield curve, net interest income would be impacted unfavorably as rates on interest-earning assets would increase at a slower rate than rates on interest-bearing liabilities. The acquisition of MFB Corp. helped reduce the interest rate risk exposure of MutualBank primarily due to changes in the loan composition, by increasing the percentage of loans with adjustable rates and reducing the average duration of the loan portfolio. This decline in MutualBank’s liability sensitive exposure should provide for less net portfolio value volatility with future rate movements.

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

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

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

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

Results of operations are also dependent upon the level of the Company’s non-interest income, including fee income and service charges, and the level of its non-interest expense, including general and administrative expenses. Regulatory changes that will take effect in July 2010 are expected to have an impact in non-interest income later this year. Reg. E has been amended to require that customers “opt-in” to the overdraft privilege program. The Bank is working diligently to ensure customers understand this program and sign up for the continued benefits.

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

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

Management Strategy

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

Financial highlights of our strategy have included:

Continuing as a Diversified Lender. We have been successful in diversifying our loan portfolio to reduce our reliance on any one type of loan. From 1995 through 2000, approximately 36% of our loan portfolio consisted of loans other than one- to four-family real estate loans. Since that time to the end of 2009, that percentage has increased to 56%.

Continuing as a Leading One- to Four-Family Lender. We are one of the largest originators of one- to four-family residential loans in our market area. During 2009, we originated $250.0 million of one- to four-family residential loans.

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

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

Decreasing Interest Rate Risk. It has 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.

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

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

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

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

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

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

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

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

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

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

	Year ended December 31,
	2009								2008								2007
	Average			Interest		Average			Average			Interest		Average			Average			Interest		Average
	Outstanding			Earned/		Yield/			Outstanding			Earned/		Yield/			Outstanding			Earned/		Yield/
	Balance			Paid		Rate			Balance			Paid		Rate			Balance			Paid		Rate
	(Dollars in thousands)

Interest-Earning Assets:
Interest -bearing deposits	$	36,415		$	49		0.13	%	$	8,711		$	118		1.35	%	$	2,982		$	115		3.86	%
Mortgage-backed securities available-for-sale(1)		81,317			4,019		4.94			28,648			1,596		5.57			8,875			467		5.26
Investment securities available-for-sale(1)		26,903			1,015		3.77			28,987			1,303		4.50			31,234			1,644		5.26
Investment securities held-to-maturity		9,439			594		6.30			3,360			314		9.35
Loans(2)		1,107,274			65,865		5.95			956,788			61,128		6.39			811,991			53,686		6.61
Stock in FHLB of Indianapolis		18,632			310		1.66			14,010			720		5.14			9,939			462		4.65
Total interest-earning assets		1,279,980			71,852		5.61			1,040,504			65,179		6.26			865,021			56,374		6.52
Non-Interest Earning Assets (net of allowance for loan losses and unrealized gain/loss)		125,668								118,673								87,879
Total assets	$	1,405,648							$	1,159,177							$	952,900

Interest-Bearing Liabilities:
Demand and NOW accounts	$	162,572			776		0.48		$	148,703			1,564		1.05		$	126,034			2,841		2.25
Savings deposits		84,883			230		0.27			66,315			317		0.48			54,975			281		0.51
Money market accounts		45,559			510		1.12			34,000			615		1.81			24,588			621		2.53
Certificate accounts		633,360			19,354		3.06			492,405			18,920		3.84			444,271			20,755		4.67
Total deposits		926,374			20,870		2.25			741,423			21,416		2.89			649,868			24,498		3.77
Borrowings		234,886			9,754		4.15			229,768			10,223		4.45			151,636			7,729		5.10
Total interest-bearing accounts		1,161,260			30,624		2.64			971,191			31,639		3.26			801,504			32,227		4.02
Non-Interest Bearing Accounts		95,762								66,746								48,589
Other Liabilities		18,077								18,138								15,478
Total Liabilities		1,275,099								1,056,075								865,571
Stockholders’ Equity		130,549								103,102								87,329
Total liabilities and stockholders’ equity	$	1,405,648							$	1,159,177							$	952,900

Net Earning Assets	$	118,720							$	69,313							$	63,517

Net Interest Income				$	41,228							$	33,540							$	24,147

Net Interest Rate Spread(3)							2.98	%							3.01	%							2.50	%

Net Yield on Average Interest-Earning Assets(4)							3.22	%							3.22	%							2.79	%

Average Interest-Earning Assets to Average Interest-Bearing Liabilities		110.22	%							107.14	%							107.92	%

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

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

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

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

Rate/Volume Analysis

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

	Year Ended December 31,
	2009 vs. 2008								2008 vs. 2007
	Increase (decrease) Due to					Total Increase			Increase (decrease) Due to					Total Increase
	Volume		Rate			(decrease)			Volume		Rate			(decrease)
	(Dollars in thousands)
Interest-earning assets:
Interest-bearing deposits	$	112	$	(181	)	$	(69	)	$	114	$	(111	)	$	3
Investment securities available-for-sale		2,613		(198	)		2,415			1,259		(157	)		1,102
Loans receivable		9,154		(4,417	)		4,737			9,302		(1,860	)		7,442
Stock in FHLB of Indianapolis		185		(595	)		(410	)		205		53			258

Total interest-earning assets	$	12,064	$	(5,391	)	$	6,673		$	10,880	$	(2,075	)	$	8,805

Interest-bearing liabilities:
Savings deposits	$	74	$	(161	)	$	(87	)	$	55	$	(19	)	$	36
Money market accounts		172		(277	)		(105	)		199		(205	)		(6	)
Demand and NOW accounts		134		(922	)		(788	)		442		(1,719	)		(1,277	)
Certificate accounts		4,770		(4,336	)		434			2,097		(3,932	)		(1,835	)
Borrowings		224		(693	)		(469	)		3,576		(1,082	)		2,494

Total interest-bearing liabilities	$	5,374	$	(6,389	)	$	(1,015	)	$	6,369	$	(6,957	)	$	(588	)

Change in net interest income						$	7,688							$	9,393

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Income Tax Expense. Income tax expense decreased $8.8 million in 2008 compared to the year ended 2007. The decrease was due primarily to decreased taxable income. The effective tax rate also decreased due to a higher percentage of non-taxable income to total income before income tax and an increased percentage of low income housing tax credits to taxable income when comparing the year ended 2008 to the year ended 2007.

Liquidity

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

Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Historically, we have maintained liquid assets at levels adequate to meet the requirements of normal operations, including potential deposit outflows. Cash flow projections are regularly reviewed and updated to ensure that adequate liquidity is maintained.

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

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

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

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

Off-Balance Sheet Activities

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

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

	Payments due by period
			Less than			1-3		3-5	More than
	Total		1 year		years		Years		5 years
			(Dollars in thousands)
Contractual Obligations

Federal Home Loan Bank Advances	$	197,960	$	92,923	$	95,867	$	7,460	$	1,710
Notes Payable		226		226
Other Borrowings		13,888		764		2,549		6,687		3,888

Total	$	212,074	$	93,913	$	98,416	$	14,147	$	5,598

Capital

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

Impact of Inflation

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

Critical Accounting Policies

The notes to the consolidated financial statements in Item 8 of this Form 10-K contain a summary 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.

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

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

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

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

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

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

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

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

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

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

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

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

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

Asset and Liability Management and Market Risk

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

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

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

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

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

Originate shorter-duration consumer loans,

Manage our deposits to establish stable deposit relationships,

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

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

Depending on the level of general interest rates, the relationship between long and short-term interest rates, market conditions and competitive factors, the Asset and Liability Management Committee may increase our interest rate risk position somewhat in order to maintain our net interest margin. We will continue to increase our emphasis on the origination of relatively short-term and/or adjustable rate loans. In addition, in an effort to avoid an increase in the percentage of long-term fixed-rate loans in our portfolio, in 2009, we sold $160.0 million of fixed rate, one- to four-family mortgage loans with a term to maturity of over 10 years in the secondary market.

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

An internal asset-liability model provides MutualBank with the information presented in the following tables. The tables present the change in our net portfolio value at December 31, 2009 and 2008 that would occur upon an immediate and sustained change in market interest rates of 100 to 300 basis points as required by the OTS, and do not give any effect to actions that management might take to counteract that change. The changes in net portfolio value under all rate changes shown were within guidelines approved by the board of directors.

December 31, 2009

Net Portfolio Value
(Dollars in thousands)
Changes									NPV as % of PV of Assets
In Rates		$ Amount		$ Change		% Change			NPV Ratio			Change

+300	bp		162,643		-38,114		-19	%		12.26	%		-180	bp
+200	bp		180,333		-20,424		-10	%		13.23	%		-82	bp
+100	bp		190,330		-10,426		-5	%		13.66	%		-40	bp
0	bp		200,757							14.06	%
-100	bp	NM		NM		NM			NM			NM
-200	bp	NM		NM		NM			NM			NM
-300	bp	NM		NM		NM			NM			NM

December 31, 2008

Net Portfolio Value
(Dollars in thousands)
Changes									NPV as % of PV of Assets
In 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	bp
0	bp		185,567							13.15	%
-100	bp	NM		NM		NM			NM			NM
-200	bp	NM		NM		NM			NM			NM
-300	bp	NM		NM		NM			NM			NM

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

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

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

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

	2009			2008
Assets

Cash and due from banks	$	27,245,633		$	21,654,283
Interest-bearing demand deposits		19,095,264			18,049,169
Cash and cash equivalents		46,340,897			39,703,452
Investment securities available for sale		130,913,670			77,254,925
Investment securities held to maturity		8,147,407			9,675,891
Total investment securities		139,061,077			86,930,816
Loans held for sale		2,520,546			1,541,110
Loans, net of allowance for loan losses of $16,414,000 and $15,107,000		1,059,694,135			1,113,132,480
Premises and equipment		34,556,318			36,500,979
Federal Home Loan Bank stock		18,631,500			18,631,500
Investment in limited partnerships		4,160,629			4,560,690
Deferred income tax benefit		19,514,151			21,237,513
Cash value of life insurance		44,247,277			42,637,240
Prepaid FDIC premiums		5,907,149			—
Core deposit and other intangibles		5,881,075			7,406,572
Other assets		18,519,603			16,545,134

Total assets	$	1,399,034,357		$	1,388,827,486

Liabilities and Stockholders’ Equity

Liabilities
Deposits
Noninterest-bearing	$	98,024,890		$	93,393,362
Interest-bearing		947,171,169			869,120,808
Total deposits		1,045,196,059			962,514,170
Federal Home Loan Bank advances		197,960,396			263,112,728
Other borrowings		14,113,526			15,991,690
Other liabilities		12,037,299			16,693,959
Total liabilities		1,269,307,280			1,258,312,547

Commitments and Contingencies

Stockholders’ Equity
Preferred stock, $.01 par value
Authorized - 5,000,000 shares
Issued and outstanding - 32,382 and 32,382 shares; liquidation preference $1,000 per share		324			324
Common stock, $.01 par value
Authorized - 20,000,000 shares
Issued and outstanding - 6,984,754 and 6,984,754 shares		69,847			69,847
Additional paid-in capital - preferred stock		31,645,814			31,461,848
Additional paid-in capital - common stock		72,485,756			72,610,939
Retained earnings		28,654,285			29,989,003
Accumulated other comprehensive loss		(1,857,723	)		(2,027,956	)
Unearned benefit plan shares		(1,271,226	)		(1,589,066	)
Total stockholders’ equity		129,727,077			130,514,939

Total liabilities and stockholders’ equity	$	1,399,034,357		$	1,388,827,486

														Accumulated
														Other			Unearned
			Paid-in					Paid-in						Comprehensive			Benefit
	Preferred		Capital		Common			Capital			Retained			Income			Plan
	Stock		Preferred		Stock			Common			Earnings			(Loss)			Shares			Total
Balances, January 1, 2007	$	—	$	—	$	43,666		$	33,101,586		$	56,698,546		$	(354,734	)	$	(2,224,746	)	$	87,264,318
Comprehensive income
Net income												4,226,142									4,226,142
Other comprehensive income, net of tax - unrealized holding gains on securities															(59,646	)					(59,646	)
Total comprehensive income																					4,166,496
Cash dividends ($.60 per share)												(2,440,121	)								(2,440,121	)
Exercise of stock options						154			208,459												208,613
Stock repurchased						(1,554	)		(1,032,936	)		(1,758,782	)								(2,793,272	)
RRP shares earned									21,056												21,056
Tax benefit on stock options and RRP shares									3,382												3,382
ESOP shares earned									265,538									317,840			583,378

Balances, December 31, 2007						42,266			32,567,085			56,725,785			(414,380	)		(1,906,906	)		87,013,850
Comprehensive loss
Net loss											$	(22,098,234	)								(22,098,234	)
Other comprehensive income, net of tax - unrealized holding losses on securities															(1,503,877	)					(1,503,877	)
Total comprehensive loss																					(23,602,111	)
Preferred stock issued		324		31,461,848					919,828												32,382,000
Common stock issued in acquisition, net of costs						29,117			39,758,791												39,787,908
Cash 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												21,056
Tax expense on stock options and RRP shares									(20,529	)											(20,529	)

ESOP shares earned									25,042									317,840			342,882
Other 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
Comprehensive loss
Net income												3,163,478									3,163,478
Other comprehensive income, net of taxes
Unrealized holding gains on available-for-sale securities															1,985,376						1,985,376
Unrealized holding losses on available-for-sale securities for which a portion of an other-than-temporary impairment has been recognized in income															(1,689,510	)					(1,689,510	)
Unrealized gain on derivative used for cash flow hedge															29,348						29,348
Unrealized loss on defined benefit plan															(154,981	)					(154,981	)
Total comprehensive income																					3,333,711
Stock options									13,401												13,401
Cash dividends, common stock ($.42 per share)												(2,866,034	)								(2,866,034	)
Cash dividends, preferred stock (5%)												(1,448,196	)								(1,448,196	)
Tax expense on stock options and RRP shares									(35,559	)											(35,559	)
ESOP shares earned									(103,025	)								317,840			214,815
Accretion of discount on preferred stock				183,966								(183,966	)

Balances December 31, 2009	$	324	$	31,645,814	$	69,847		$	72,485,756		$	28,654,285		$	(1,857,723	)	$	(1,271,226	)	$	129,727,077

Cash and cash equivalents	$	11,179
Investments		23,490
Loans		378,075
Premises and equipment		18,565
Core deposit intangible		6,645
Goodwill		14,781
Other assets		19,263
Total assets acquired		471,998

Deposits		332,075
Borrowings		97,361
Other liabilities		5,346
Total liabilities assumed		434,782

Net assets acquired	$	37,216

Year Ended December 31	2008

Net Interest Income	$	42,151

Net Income (Loss)	$	(21,202	)

Net Income per Share - Combined
Basic	$	(3.04	)
Diluted	$	(3.04	)

	2009
Available for Sale Securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

Mortgage-backed securities	$	29,175	$	824	$	(109	)	$	29,890
Collateralized mortgage obligations		85,726		1,874		(571	)		87,029
Municipals		9,313		360		(17	)		9,656
Small Business Administration		158		—		(1	)		157
Corporate obligations		7,321		—		(4,782	)		2,539
Marketable equity securities		1,685		—		(42	)		1,643

Total investment securities	$	133,378	$	3,058	$	(5,522	)	$	130,914

Held to Maturity Securities

Mortgage-backed securities	$	4,619	$	29	$	(1,373	)	$	3,275
Collateralized mortgage obligations		3,028		158		(632	)		2,554
Federal agencies		500		4		—			504

Total investment securities	$	8,147	$	191	$	(2,005	)	$	6,333
	2008
Available for Sale Securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

Mortgage-backed securities	$	14,771	$	393	$	(1	)	$	15,163
Collateralized mortgage obligations		43,821		786		(968	)		43,639
Federal agencies		499		3		—			502
Municipals		857		—		—			857
Small Business Administration		71		—		(1	)		70
Corporate obligations		18,797		9		(3,279	)		15,527
Marketable equity securities		1,635		—		(138	)		1,497

Total investment securities	$	80,451	$	1,191	$	(4,387	)	$	77,255

Held to Maturity Securities

Mortgage-backed securities	$	5,498	$	247	$	(762	)	$	4,983
Collateralized mortgage obligations		4,178		138		(771	)		3,545

Total investment securities	$	9,676	$	385	$	(1,533	)	$	8,528

	2009
	Less than 12 Months					12 Months or More					Total
Available for Sale	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

Mortgage-backed securities	$	8,511	$	(109	)	$	—	$	—		$	8,511	$	(109	)
Collateralized mortgage obligations		16,829		(251	)		4,609		(320	)		21,438		(571	)
Municipals		1,025		(17	)		—		—			1,025		(17	)
Small Business Administration		—		—			157		(1	)		157		(1	)
Corporate obligations		—		—			2,539		(4,782	)		2,539		(4,782	)
Marketable equity securities		—		—			1,647		(42	)		1,647		(42	)

Total temporarily impaired securities	$	26,365	$	(377	)	$	8,952	$	(5,145	)	$	35,317	$	(5,522	)

Held to Maturity

Mortgage-backed securities	$	239	$	(559	)	$	1,521	$	(814	)	$	1,760	$	(1,373	)
Collateralized mortgage obligations		199		(157	)		420		(475	)		619		(632	)

Total temporarily impaired securities	$	438	$	(716	)	$	1,941	$	(1,289	)	$	2,379	$	(2,005	)

	Accumulated Credit Losses			Accumulated Credit Losses
	2009			2008

Credit losses on debt securities held
Beginning of year	$	(1,350	)	$	—
Additions related to increases in previously recognized other-than-temporary losses		(2,555	)		(1,350	)

As of December 31,	$	(3,905	)	$	(1,350	)

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

			Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3

December 31, 2009
Mortgage-backed securities	$	29,890	$	—	$	29,890	$	—
Collateralized mortgage obligations		87,029		—		87,029		—
Municipals		9,656		—		9,656		—
Small Business Administration		157		—		157		—
Corporate obligations		2,539		—		—		2,539
Marketable equity securities		1,643		1,643		—		—

Available-for-sale securities	$	130,914	$	1,643	$	126,732	$	2,539

December 31, 2008
Mortgage-backed securities	$	15,163	$	—	$	15,163	$	—
Collateralized mortgage obligations		43,639		—		43,639		—
Federal agencies		502		—		502		—
Municipals		857		—		857		—
Small Business Administration		70		—		70		—
Corporate obligations		15,527		—		9,210		6,317
Marketable equity securities		1,497		—		1,497		—

Available-for-sale securities	$	77,255	$	—	$	70,938	$	6,317

	2009			2008

Beginning balance	$	6,317		$	9,923

Total realized and unrealized gains and losses
Included in net income (loss)		(2,007	)		(1,350	)
Included in other comprehensive loss		(1,811	)		(2,745	)
Purchases, issuances and settlements		40			(11	)
Transfers in/out of Level 3		—			500

Ending balance	$	2,539		$	6,317

Total gains or losses for the period included in net income (loss) attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date	$	2,007		$	1,350

	2009				2008
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets
Cash and cash equivalents	$	46,341	$	46,341	$	39,703	$	39,703
Investment securities available-for-sale		130,914		130,914		77,255		77,255
Investment securities held-to-maturity		8,147		6,333		9,676		8,528
Loans held for sale		2,521		2,527		1,541		1,574
Loans		1,059,694		1,086,805		1,113,132		1,144,394
FHLB stock		18,632		18,632		18,632		18,632
Interest receivable		4,376		4,376		5,205		5,205

Liabilities
Deposits		1,045,196		1,007,530		962,514		974,072
FHLB advances		197,960		194,717		263,113		273,853
Other borrowings		14,114		15,083		15,992		16,813
Interest payable		1,192		1,192		2,116		2,116
Advances by borrowers for taxes and insurance		1,734		1,734		3,229		3,229

	2009			2008
Real estate loans
One-to-four family	$	468,494		$	519,822
Multi-family		2,621			2,698
Commercial		257,368			250,693
Construction and development		9,817			12,232
		738,300			785,445
Consumer loans
Auto		18,848			22,715
Home equity		64,930			66,460
Home improvement		42,116			45,339
Mobile home		689			727
Recreational vehicles		81,663			79,884
Boats		45,581			46,928
Other		5,961			6,339
		259,788			268,392
Commercial business loans		77,384			75,290
Total loans		1,075,472			1,129,127

Undisbursed loans in process		(2,546	)		(4,372	)
Unamortized deferred loan costs, net		3,182			3,484
Allowance for loan losses		(16,414	)		(15,107	)

Net loans	$	1,059,694		$	1,113,132

Balances, January 1, 2009	$	7,575
Change in composition		245
New loans, including renewals		1,573
Payments, etc., including renewals		(893	)

Balances, December 31, 2009	$	8,500

	2009			2008

Cost
Land	$	12,758		$	13,248
Buildings and land improvements		25,267			25,272
Equipment		13,738			14,381
Total cost		51,763			52,901
Accumulated depreciation and amortization		(17,207	)		(16,400	)

Net	$	34,556		$	36,501

	2009		2008

Pedcor Investments 1990-XIII (99.00 percent ownership)	$	—	$	625
Pedcor Investments 1997-XXVIII (99.00 percent ownership)		1,981		2,145
Pedcor Investments 1987-XXXI (49.50 percent ownership)		313		361
Pedcor Investments 2000-XLI (50.00 percent ownership)		742		862
Pedcor Investments 2001-LI (9.90 percent ownership)		223		268
Pedcor Investments 2008-CIII (21.50 percent ownership)		902		300

	$	4,161	$	4,561

	2009			2008
Combined condensed balance sheets
Assets
Cash	$	573		$	7,487
Land and property		55,070			43,038
Other assets		2,174			4,693

Total assets	$	57,817		$	55,218

Liabilities
Notes payable	$	47,878		$	46,189
Other liabilities		1,087			1,835
Total liabilities		48,965			48,024

Partners' equity (deficit)
General partners		(3,124	)		(3,120	)
Limited partners		11,976			10,314
Total partners’ equity		8,852			7,194

Total liabilities and partners' equity	$	57,817		$	55,218

	2009				2008
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization

Core deposits	$	8,047	$	2,692	$	8,047	$	1,249
Other		675		149		675		66

	$	8,722	$	2,841	$	8,722	$	1,315

2010	$	1,348
2011		1,160
2012		962
2013		782
2014		616
Thereafter		1,013

	$	5,881

	2008

Balance as of January 1	$	14,188
Goodwill acquired during the year		14,781
Impairment losses		(28,969	)

Balance as of December 31	$	—

	2009		2008

Noninterest-bearing demand	$	98,025	$	93,393
Interest-bearing demand		154,431		156,787
Savings		84,553		79,111
Money market savings		60,479		47,584
Certificates and other time deposits of $100,000 or more		212,457		192,445
Other certificates		435,251		393,194

Total deposits	$	1,045,196	$	962,514

2010	$	383,707
2011		120,456
2012		49,603
2013		37,956
2014		49,420
Thereafter		6,566

	$	647,708

Maturities Years Ending December 31

2010	$	92,923
2011		41,986
2012		40,306
2013		13,575
2014		7,347
Thereafter		1,823

	$	197,960

Note Payable Principal Payments Due in Years Ending December 31

2010	$	989
2011		800
2012		848
2013		901
2014		6,688

Total notes payable	$	10,226

	2009		2008
Mortgage Servicing Rights
Fair value, beginning of period	$	2,776	$	1,629
Fair value, end of period		3,510		2,776

				2009
	Before-Tax Amount			Tax (Expense) Benefit			Net-of-Tax Amount

Net unrealized gain on securities available-for-sale	$	1,825		$	(723	)	$	1,102
Less: reclassification adjustment for losses realized in net income		(1,465	)		582			(883	)
Net unrealized loss on securities available-for-sale for which a portion of an other-than-temporary impairment has been recognized in income		(2,796	)		1,107			(1,689	)
Net unrealized gain on derivative used for cash flow hedges		44			(15	)		29
Net unrealized loss relating to defined benefit plan liability		(257	)		102			(155	)

Net unrealized gains	$	281		$	(111	)	$	170

				2007
	Before-Tax Amount			Tax Benefit		Net-of-Tax Amount

Unrealized holding losses arising during the year	$	(99	)	$	39	$	(60	)
Less: reclassification adjustment for losses realized in net income		—			—		—

Net unrealized losses	$	(99	)	$	39	$	(60	)

	Actual					Required for Adequate Capital					To Be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio

As of December 31, 2009
Total risk-based capital (to risk-weighted assets)	$	133,872		12.8	%	$	83,579		8.0	%	$	104,474		10.0	%
Tier 1 risk-based capital (to risk-weighted assets)		130,340		11.6	%		41,790		4.0	%		62,685		6.0	%
Core capital (to adjusted total assets)		130,340		9.4	%		55,580		4.0	%		69,475		5.0	%
Core capital (to adjusted tangible assets)		130,340		9.4	%		27,790		2.0	%		N/A		N/A
Tangible capital (to adjusted total assets)		130,340		9.4	%		20,843		1.5	%		N/A		N/A

As of December 31, 2008
Total risk-based capital (to risk-weighted assets)	$	144,897		13.3	%	$	87,091		8.0	%	$	108,864		10.0	%
Tier 1 risk-based capital (to risk-weighted assets)		131,289		12.1	%		43,546		4.0	%		65,318		6.0	%
Core capital (to adjusted total assets)		131,289		9.5	%		55,211		4.0	%		69,014		5.0	%
Core capital (to adjusted tangible assets)		131,289		9.5	%		27,606		2.0	%		N/A		N/A
Tangible capital (to adjusted total assets)		131,289		9.5	%		20,704		1.5	%		N/A		N/A

	2009
	Shares		Weighted- Average Grant-Date Fair Value

RRP, beginning of year		4,917	$	25.66
Vested		4,917		25.66

RRP, end of year		—	$	—

Assumptions	2009
Expected volatility		36.9	%
Expected dividends		4.4	%
Expected term (in years)	5.6 years
Risk-free rate		2.7	%

	2009
Options	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life	Aggregate Intrinsic Value

Outstanding, beginning of year		643,498		$	13.99
Granted		59,000			5.98
Exercised		—			—
Forfeited/expired		(72,780	)		12.39

Outstanding, end of year		629,718		$	11.58	5.2 years	$	—

Options exercisable at year end		580,718