Edgar Filing: MUTUALFIRST FINANCIAL INC

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

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
	OR
o	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 specified in its charter)

Maryland		35-2085640

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

110 East Charles Street
Muncie, Indiana 47305
(765) 747-2800

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days.

Yes x

No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes x

No o

Indicate by check mark whether the Registrant is a large accelerated; an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12 b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

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

Yes o

No x

The number of shares of the Registrant’s common stock, with $.01 par value, outstanding as of August 8, 2006 was 4,365,620.

FORM 10 – Q
MutualFirst Financial, Inc.

INDEX		Page Number

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements
	Consolidated Condensed Balance Sheets	1
	Consolidated Condensed Statements of Income	2
	Consolidated Condensed Statement of Stockholders’ Equity	3
	Consolidated Condensed Statements of Cash Flows	4
	Notes to Unaudited Consolidated Condensed Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	7
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	16
Item 4.	Controls and Procedures	16

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	17

Item 1A.	Risk Factors	17

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	17

Item 3.	Defaults Upon Senior Securities	17

Item 4.	Submission of Matters to a Vote of Security Holders	17

Item 5.	Other Information	18

Item 6.	Exhibits	18

Signature Page		18

Exhibits

PART 1 FINANCIAL INFORMATION
ITEM 1. Financial Statements

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY
Consolidated Condensed Balance Sheets

	June 30, 2006			December 31, 2005

	(Unaudited)
Assets
Cash	$	18,584,178		$	20,481,168
Interest-bearing demand deposits		1,479,392			1,883,415

Cash and cash equivalents		20,063,570			22,364,583
Interest-bearing deposits		293,000			293,000
Investment securities available for sale		40,612,843			39,787,608
Loans held for sale		3,335,994			2,022,390
Loans		837,125,506			830,647,714
Allowance for loan losses		(8,177,369	)		(8,100,349	)

Net loans		828,948,137			822,547,365
Premises and equipment		14,289,184			14,169,464
Federal Home Loan Bank of Indianapolis stock, at cost		10,256,300			10,124,700
Investment in limited partnerships		4,546,675			4,605,898
Cash surrender value of life insurance		28,549,357			28,045,357
Foreclosed real estate		1,360,894			1,507,224
Interest receivable		3,616,119			3,897,903
Core deposit intangibles and goodwill		13,891,253			13,964,377
Deferred income tax benefit		3,980,658			3,817,287
Other assets		5,136,908			4,682,142

Total assets	$	978,880,892		$	971,829,298

Liabilities
Deposits
Non-interest-bearing	$	47,082,752		$	43,466,048
Interest bearing		637,228,699			641,087,825

Total deposits		684,311,451			684,553,873
Federal Home Loan Bank advances		193,345,249			186,007,669
Other borrowings		1,784,384			1,783,851
Advances by borrowers for taxes and insurance		2,171,302			1,837,586
Interest payable		1,930,549			1,623,287
Other liabilities		7,161,965			7,229,412

Total liabilities		890,704,900			883,035,678

Commitments and Contingent Liabilities
Stockholders’ Equity
Preferred stock, $.01 par value
Authorized and unissued --- 5,000,000 shares
Common stock, $.01 par value
Authorized --- 20,000,000 shares
Issued and outstanding ---4,440,620 and 4,552,218 shares		44,406			45,522
Additional paid-in capital		33,240,443			33,889,584
Retained earnings		57,816,493			57,968,477
Accumulated other comprehensive income		(541,684	)		(374,701	)
Unearned employee stock ownership plan (ESOP) shares		(2,383,666	)		(2,542,586	)
Unearned recognition and retention plan (RRP) shares		—			(192,676	)

Total stockholders’ equity		88,175,992			88,793,620

Total liabilities and stockholders’ equity	$	978,880,892		$	971,829,298

See notes to consolidated condensed financial statements.

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

	Three Months Ended June 30						Six Months Ended June 30

	2006			2005			2006			2005

Interest Income
Loans receivable, including fees	$	13,304,483		$	11,014,590		$	26,327,949		$	21,801,273
Investment seurities:
Mortgage-backed securities		115,587			128,087			221,862			258,397
Federal Home Loan Bank stock		124,825			81,043			244,825			165,842
Other investments		352,202			275,549			678,728			504,032
Deposits with financial institutions		14,615			7,195			26,862			13,765

Total interest income		13,911,712			11,506,464			27,500,226			22,743,309

Interest Expense
Passbook savings		77,705			67,942			154,579			107,689
Certificates of deposit		4,575,898			3,188,931			8,939,815			6,208,836
Daily Money Market accounts		173,246			192,651			360,363			358,158
Demand and NOW acounts		331,161			40,120			490,955			73,437
Federal Home Loan Bank advances		1,984,551			1,309,574			3,738,263			2,598,021
Other interest expense		15,606			15,606			31,212			31,212

Total interest expense		7,158,167			4,814,824			13,715,187			9,377,353

Net Interest Income		6,753,545			6,691,640			13,785,039			13,365,956
Provision for losses on loans		525,000			443,750			918,000			887,500

Net Interest Income After Provision for Loan Losses		6,228,545			6,247,890			12,867,039			12,478,456

Other Income
Service fee income		1,112,769			990,070			2,119,867			1,875,842
Net realized loss on sale of available-for-sale securities		0			0			0			(762	)
Equity in losses of limited partnerships		(13,437	)		(9,369	)		(1,875	)		(26,239	)
Commissions		154,357			341,190			352,450			554,779
Net gains on sales of loans		96,255			123,977			193,261			203,278
Net servicing fees (expense)		5,180			(7,244	)		41,948			62,623
Increase in cash surrender value of life insurance		267,000			250,000			504,000			515,000
Other income		54,950			29,210			131,281			69,679

Total other income		1,677,074			1,717,834			3,340,932			3,254,200

Other Expenses
Salaries and employee benefits		3,626,434			3,379,867			7,375,396			6,785,904
Net occupancy expenses		328,309			321,806			716,198			670,590
Equipment expenses		308,834			307,558			621,088			620,688
Data processing fees		214,152			201,607			431,773			395,728
Automated teller machine		194,364			160,611			372,991			320,915
Professional fees		232,963			231,081			491,427			441,164
Advertising and promotion		298,061			193,527			442,476			332,283
Other expenses		1,018,247			838,213			1,990,632			1,615,988

Total other expenses		6,221,364			5,634,270			12,441,981			11,183,260

Income Before Income Tax		1,684,255			2,331,454			3,765,990			4,549,396
Income tax expense		336,800			642,250			856,450			1,252,250

Net Income	$	1,347,455		$	1,689,204		$	2,909,540		$	3,297,146

Basic earnings per share	$	0.32		$	0.39		$	0.68		$	0.76
Diluted earnings per share	$	0.31		$	0.38		$	0.67		$	0.74
Dividends per share	$	0.14		$	0.13		$	0.28		$	0.26

See notes to consolidated condensed financial statements.

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY
Consolidated Condensed Statement of Stockholders’ Equity
For the Six Months Ended June 30, 2006
(Unaudited)

	Common Stock						Additional paid-in capital

	Shares Outstanding			Amount						Comprehensive Income			Retained Earnings			Accumulated Other Comprehensive Income			Unearned ESOP shares			Unearned RRP shares			Total

Balances, December 31, 2005		4,552,218		$	45,522		$	33,889,584					$	57,968,477		$	(374,701	)	$	(2,542,586	)	$	(192,676	)	$	88,793,620
Comprehensive income
Net income for the period										$	2,909,540		$	2,909,540												2,909,540
Other comprehensive income, net of tax
Net unrealized losses on securities											(166,983	)					(166,983	)								(166,983	)

Comprehensive income										$	2,742,557

ESOP shares earned								173,869												158,920						332,789
Cash dividends ($.28 per share)														(1,218,611	)											(1,218,611	)
Reclassification of Unearned RRP shares to Additional paid-in capital								(192,676	)														192,676			0
RRP shares earned								75,282																		75,282
Stock repurchased and retired		(137,598	)		(1,376	)		(1,082,356	)					(1,842,913	)											(2,926,645	)
Stock options exercised		26,000			260			376,740																		377,000
Balances, June 30, 2006		4,440,620		$	44,406		$	33,240,443					$	57,816,493		$	(541,684	)	$	(2,383,666	)	$	0		$	88,175,992

See notes to consolidated condensed financial statements.

MutualFirst Financial, Inc.
Consolidated Condensed Statements of Cash Flows
(Unaudited)

	Six Months Ended June 30,

	2006			2005

Operating Activities
Net income	$	2,909,540		$	3,297,146
Items not requiring (providing) cash
Provision for loan losses		918,000			887,500
ESOP shares earned		332,789			370,433
RRP shares earned		75,282			128,250
Depreciation and amortization		1,293,976			1,530,372
Deferred income tax		(52,049	)		(70,165	)
Loans originated for sale		(12,663,431	)		(9,131,315	)
Proceeds from sales of loans held for sale		11,543,088			12,247,743
Gains on sales of loans held for sale		(193,261	)		(203,278	)
Change in
Interest receivable		281,784			(328,204	)
Other assets		(568,264	)		(1,503,863	)
Interest payable		307,262			(115,250	)
Other liabilities		(67,447	)		835,213
Cash value of life insurance		(504,000	)		(515,000	)
Other adjustments		550,835			148,660

Net cash provided by operating activities		4,164,104			7,578,242

Investing Activities
Purchases of securities available for sale		(3,560,872	)		(8,412,749	)
Proceeds from matuities and paydowns of securities available for sale		2,261,590			4,459,637
Proceeds from sales of securities available fro sale		154,840			1,155,010
Net change in loans		(8,960,183	)		(19,882,294	)
Purchases of premises and equipment		(900,274	)		(1,998,078	)
Proceeds from real estate owned sales		840,777			131,304
Other investing activities		(81,265	)		(261,765	)

Net cash used in investing activities		(10,245,387	)		(24,808,935	)

Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits		15,690,593			(10,539,160	)
Certificates of deposits		(15,933,015	)		16,476,608
Repayment of note payable		(30,679	)		(30,679	)
Proceeds from FHLB advances		257,750,000			185,800,000
Repayment of FHLB advances		(250,262,089	)		(173,651,583	)
Net change in advances by borrowers for taxes and insurance		333,716			211,022
Stock repurchased		(2,926,645	)		(3,273,201	)
Proceeds from stock options exercised		377,000			584,350
Cash dividends		(1,218,611	)		(1,217,764	)

Net cash provided by financing activities		3,780,270			14,359,593

Net Change in Cash and Cash Equivalents		(2,301,013	)		(2,871,100	)
Cash and Cash Equivalents, Beginning of Year		22,364,583			19,743,376

Cash and Cash Equivalents, End of Year	$	20,063,570		$	16,872,276

Additional Cash Flows Information
Interest paid	$	13,407,925		$	9,492,603
Income tax paid		1,050,000			1,880,366
Transfers from loans to foreclosed real estate		936,779			382,248
Mortgage servicing rights capitalized		113,498			121,622

See notes to consolidated condensed financial statements.

MutualFirst Financial, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 1: Basis of Presentation

The consolidated condensed financial statements include the accounts of MutualFirst Financial, Inc. (the “Company”), its wholly owned subsidiary, Mutual Federal Savings Bank, a federally chartered savings bank (“Mutual Federal”), and Mutual Federal’s wholly owned subsidiary, First MFSB Corporation. All significant inter-company accounts and transactions have been eliminated in consolidation.

Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report for 2005 filed with the Securities and Exchange Commission.

The interim consolidated condensed financial statements at June 30, 2006 have not been audited by independent accountants, but in the opinion of management, reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for such periods. The results of operations for the period are not necessarily indicative of the results to be expected for the full year.

The Consolidated Condensed Balance Sheet of the Company as of December 31, 2005 has been derived from the Audited Consolidated Balance Sheet of the Company as of that date.

Note 2 -- Earnings per share

Earnings per share were computed as follows: (Dollars in thousands except per share data)

	Three Months Ended Ended June 30,

	2006						2005

	Income		Weighted- Average Shares		Per-Share Amount		Income		Weighted- Average Shares		Per-Share Amount

	(000’s)						(000’s)
Basic Earnings Per Share
Income available to common shareholders	$	1,347		4,227,308	$	0.32	$	1,689		4,352,236	$	0.39
Effect of Dilutive securities
Stock options and RRP grants				76,346						111,878

Diluted Earnings Per Share
Income available to common stockholders and assumed conversions	$	1,347		4,303,654	$	0.31	$	1,689		4,464,114	$	0.38

	Six Months Ended Ended June 30,

	2006						2005

	Income		Weighted- Average Shares		Per-Share Amount		Income		Weighted- Average Shares		Per-Share Amount

	(000’s)						(000’s)
Basic Earnings Per Share
Income available to common shareholders	$	2,910		4,248,603	$	0.68	$	3,297		4,359,063	$	0.76
Effect of Dilutive securities
Stock options and RRP grants				82,311						123,889

Diluted Earnings Per Share
Income available to common stockholders and assumed conversions	$	2,910		4,330,914	$	0.67	$	3,297		4,482,952	$	0.74

Note 3: Accounting Changes

In March 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 156. This Statement amends SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities.

SFAS No. 156 requires an entity to initially recognize a servicing asset or servicing liability at fair value each time it undertakes an obligation to service a financial asset by entering into a servicing contract in other specific situations.

In addition, SFAS No. 156 permits an entity to choose either of the following subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities:

	•	Amortization method-Amortize servicing assets or servicing liabilities in proportion to and over the period of estimated net servicing income or net servicing loss and assess servicing assets or servicing liabilities for impairment or increased obligation based on fair value at each reporting date.

	•	Fair value measurement method-Measure servicing assets or servicing liabilities at fair value at each reporting date and report changes in fair value in earnings in the period in which the changes occur.

SFAS No. 156 is effective at the beginning of an entity’s first fiscal year that begins after September 15, 2006, and should be applied prospectively for recognition and initial measurement of servicing assets and servicing liabilities. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year.

The Company did not early adopt SFAS No. 156 on January 1, 2006. The Company is currently evaluating the effect of adoption of this Statement on the Company’s financial condition or results of operations.

Note 4: Change in Accounting Principle

The Company has a stock-based employee compensation plan, which is described in Notes of Financial Statements included in the December 31, 2005 Form 10-K Annual Report.

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (“SFAS 123(R)”). SFAS 123(R) addresses all forms of share-based payment awards, including shares under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS 123(R) requires all share-based payments to be recognized as expense, based upon their fair values, in the financial statements over the vesting period of the awards. The Company has elected the modified prospective application and, as a result, has recorded no compensation expense related to vested stock options less estimated forfeitures for the three or six month period ended June 30, 2006, due to all options being fully vested as of December 31, 2005.

Prior to the adoptions of SFAS 123(R), the Company accounted for this plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost was reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the grant date. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

	Three Months Ended June 30, 2005			Six Months Ended June 30, 2005

Net income, as reported	$	1,689		$	3,297
Less: Total stock-based employee compensation cost determined under the fair value based method, net of income taxes		(26	)		(52	)

Pro forma net income	$	1,663		$	3,245

Earnings per share:
Basic - as reported	$	0.39		$	0.76
Basic - proforma	$	0.38		$	0.74
Diluted - as reported	$	0.38		$	0.74
Diluted - proforma	$	0.37		$	0.72

Prior to the adoption of SFAS 123(R), unearned compensation related to restricted stock awards was classified as a separate component of stockholder’s equity. In accordance with the provisions of SFAS 123(R), on January 1, 2006, the balance in unearned compensation was reclassified to additional paid-in capital on the balance sheet and the statement of stockholders equity.

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations.

General

MutualFirst Financial, Inc., a Maryland corporation (the “Company”), was organized in September 1999. On December 29, 1999, it acquired the common stock of Mutual Federal Savings Bank (“Mutual Federal”) upon the conversion of Mutual Federal from a federal mutual savings bank to a federal stock savings bank.

Mutual Federal was originally organized in 1889 and currently conducts its business from twenty full service offices located in Delaware, Randolph, Grant, and Kosciusko counties, Indiana, with its main office located in Muncie. Mutual Federal’s principal business consists of attracting deposits from the general public and originating fixed and variable rate loans secured primarily by first mortgage liens on residential and commercial real estate, consumer goods, and business assets. Mutual Federal’s deposit accounts are insured by the Federal Deposit Insurance Corporation up to applicable limits.

Mutual Federal currently owns one subsidiary, First MFSB Corporation. The assets of First MFSB Corporation consist of an investment in Family Financial Holdings Incorporated. Family Financial is an ordinary Indiana corporation that provides debt cancellation products to financial institutions.

The following should be read in conjunction with the Management’s Discussion and Analysis in the Company’s December 31, 2005 Annual Report on Form 10-K.

Critical Accounting Policies

The notes to the consolidated financial statements contain a summary of the Company’s significant accounting policies presented on pages 67 to 70 of the Form 10-K for the year ended December 31, 2005. Certain of these policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management believes that its critical accounting policies include determining the allowance for loan losses, the valuation of foreclosed assets, mortgage servicing rights and intangible assets.

Allowance for Loan Losses

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

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

Foreclosed Assets

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

Mortgage Servicing Rights

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

Intangible Assets

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

Forward Looking Statements

This quarterly report on Form 10-Q (“Form 10-Q”) contains statements which constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may appear in a number of places in this Form 10-Q and include statements regarding the intent, belief, outlook, estimate or expectations of the company, its directors or its officers primarily with respect to future events and the future financial performance of the company. Readers of this Form 10-Q are cautioned that any such forward looking statements are not guarantees of future events or performance and involve risk and uncertainties, and that actual results may differ materially from those in the forward looking statements as a result of various factors. The accompanying information contained in this Form 10-Q identifies important factors that could cause such differences. These factors include changes in interest rates; the loss of deposits and loan demand to competitors; substantial changes in financial markets; changes in real estate values and the real estate market; or regulatory changes.

The Company does not undertake – and specifically disclaims any obligation – to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Overview

The Company’s results of operations depend primarily on the level of net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and investments, and costs incurred with respect to interest-bearing liabilities, primarily deposits and borrowings. The structure of our interest-earning assets versus the structure of interest-bearing liabilities along with the shape of the yield curve has a direct impact on our net interest income.

Historically, our interest-earning assets have been longer term in nature (i.e. fixed-rate mortgage loans) and interest-bearing liabilities have been shorter term (i.e. certificates of deposit, regular savings accounts, NOW 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.

Since 2000 it has been the Company’s strategic objective to change the repricing structure of its interest-earning assets from longer term to shorter term to better match the structure of our interest bearing liabilities and therefore reduce the impact interest rate changes have on our net interest income. Strategies employed to accomplish this objective have been to increase the originations of variable rate commercial loans and shorter term consumer loans and to sell longer term mortgage loans. The percentage of consumer and commercial loans to total loans has increased from 35% at the end of 2000 to 44% at June 30, 2006. On the liability side of the balance sheet, the Company is employing strategies to increase the balance of core deposit accounts such as low cost checking and money market accounts. The percentage of core deposits to total deposits has remained at 33% over this time period primarily due to the recent acquisition of Fidelity Federal which had a lower percentage of core deposits. These are ongoing strategies that are dependent on current market conditions and competition.

During the first six months of 2006, in keeping with its strategic objective to reduce interest rate risk exposure, the Company also sold $11.3 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 $193,000 in the first six months of this year.

Recent increases in short-term interest rates, as a result of increases in the Federal Funds rate by the Board of Governors of the Federal Reserve System, without a corresponding increase in long-term interest rates will result in an increase in interest expense and a reduction in net interest income in 2006. The effect of the flattening yield curve is to increase our cost of funds at a faster rate than our yield on loans and investments, due to the longer-term nature of our interest earning assets. In 2006, as we increase our investment in business-related loans, which are considered to entail greater risks than one-to-four-family residential loans, in order to help offset the pressure on our net interest margin, our provision for loan losses may increase to reflect this increased risk.

The Company converted to a public company at the end of 1999, and at the end of 2000 bought a $200 million thrift for stock. Since that time the Company has been buying back the Company’s stock to manage capital levels and enhance earnings per share. During the first six months of 2006, the Company used $2.9 million for this purpose, thereby reducing earning assets from where they otherwise would have been and correspondingly reducing net interest income.

On September 16, 2005 the Bank purchased certain assets totaling $106 million and assumed certain liabilities totaling $96.6 million representing the operations of Fidelity Federal Savings Bank (“Fidelity”) located in Marion, Indiana for $20 million in cash. The assets purchased included residential real estate mortgage loans of $55.0 million, consumer loans of $14.0 million, commercial real estate loans of $9.2 million and commercial business loans of $3.6 million. The liabilities assumed included total deposits of $75.9 million (including $23.5 million core savings and transaction accounts) and Federal Home Loan Bank advances of $20.5 million.

In addition, the Bank announced in May 2006 that it had entered into a definitive agreement to purchase assets of approximately $10.1 million and assume liabilities of approximately $12.7 million representing the Winchester, Wabash and Warsaw offices owned by First Financial Bank, NA, which are operated as branches of Community First Bank and Trust (“First Financial”). We plan to consolidate First Financial’s Warsaw office into the Bank’s Warsaw office and the Bank’s supermarket branch in Winchester into First Financial’s office in Winchester. First Financial’s Wabash office will continue as a separate branch of the Bank. The purchase of First Financial’s offices has been approved by all necessary regulatory bodies and should be accretive to income in the quarter immediately following closing due to substantial cost saves. The transaction is expected to close on August 18, 2006.

Results of operations also depend upon the level of the Company’s non-interest income, including fee income and service charges, and the level of its non-interest expense, including general and administrative expenses. In addition to the Fidelity acquisition, the Company expanded through the addition of a new branch office that opened in June 2005 located in Syracuse, Indiana in Kosciusko County and the recent purchase of land in Madison County in preparation for possible expansion towards the greater Indianapolis area. In addition, it is anticipated that construction will begin on a new branch in Elkhart County later in the year. The Company also continues to work toward the development of an Investment Management and Private Banking Division in order to better service clients with more specialized financial needs. The intent of all these expansion transactions is to increase income over the long term. However, on a short term basis, expenses relating to the new branches and a new division will have the affect of increasing non-interest expense with no immediate offsetting income.

Financial Condition

Assets totaled $978.9 million at June 30, 2006, an increase from December 31, 2005 of $7.1 million, or .7%. Gross loans, excluding loans held for sale, increased $6.4 million or .8%. Consumer loans increased $8.3 million, or 3.9%, and commercial business loans increased $3.9 million, or 6.0%, while residential and commercial real estate loans held in the portfolio decreased $6.4 million, furthering our strategy to reduce the percentage of real estate mortgage loans to total loans. Mortgage loans held for sale increased $1.3 million and mortgage loans sold during the first half of 2006 totaled $11.3 million. Second quarter seasonality (traditionally higher loan production activity) is the primary reasons for the increased loan balances. Mortgage loan production increased $17.0 million from the first to the second quarter in 2006, however when comparing the first half of 2006 to the first half of 2005 mortgage loan production fell $5.9 million, or 9.1%, primarily due to higher market interest rates. Consumer loan production increased $10.6 million, or 88.7% from the first to the second quarter in 2006 and increased $8.7 million, or 33.7% when comparing the first half of 2006 to the first half of 2005, as demand for loans on recreational vehicles, boats and for home improvements was steady. Commercial business loan production increased $16.4 million, or 283.7% from the first to the second quarter in 2006 and decreased $3.5 million, or 11.2% when comparing the first half of 2006 to the first half of 2005 primarily due to a slow first quarter. Commercial business loan production was up $6.9 million, or 43.6% when comparing the second quarter of 2006 to that of 2005. Investment securities available for sale increased $825,000 or 2.1% in order to maintain liquidity targets set by the Board of Directors.

Premises and equipment increased $120,000 or .8% due to the purchase of land for the purpose of building a branch office in Madison County in the yet to be determined future. The land purchase was partially offset by normal depreciation.

Allowance for loan losses increased $77,000 to $8.2 million when comparing December 31, 2005 to June 30, 2006. Net charge offs for the first half of 2006 were $841,000 or .20% of average loans on an annualized basis compared to $846,000, or .23% of average loans for the comparable period in 2005. A large portion of the net charge offs in the second quarter of 2006 was related to a $300,000 write-down of a $623,000 commercial business loan on a property and business located Muncie, Indiana. The loan is in default and the value of the real estate and business is not sufficient to pay off the total debt. As of June 30, 2006 the allowance for loan losses as a percentage of loans receivable and non-performing loans was .98% and 122.91%, respectively.

Total deposits were $684.3 million at June 30, 2006 a small decrease from $684.6 at December 31, 2005. Increases in core demand and savings accounts of $29.9 million and brokered deposits of $2.7 million were offset by reductions in public deposits of $21.8 million and daily money market account’s of $11.0 million. A new market rate checking account was introduced during the second quarter. The account pays an interest rate (indexed to the fed funds rate) that is tiered based on the balance of the checking account. The higher the balance the higher the interest rate paid. As of June 30, 2006 the balance in this account was $21.9 million. Total borrowings increased $7.3 million to $195.1 million at June 30, 2006 from $187.8 million at December 31, 2005 to help fund loan growth and stock repurchases..

Stockholders’ equity decreased $618,000, or .7%, from $88.8 million at December 31, 2005, to $88.2 million at June 30, 2006. The decrease was due primarily to the repurchase of 139,000 shares of common stock for $2.9 million and dividend payments of $1.2 million. This decrease was partially offset by net income of $2.9 million, Employee Stock Ownership Plan (ESOP) shares earned of $333,000, and RRP shares earned of $75,000. Also, the market value of securities available for sale compared to their book value decreased $167,000 from a loss of $375,000 at December 31, 2005 to a loss of $542,000 at June 30, 2006.

Comparison of the Operating Results for the Three Months Ended June 30, 2006 and 2005

Net income for the second quarter ended June 30, 2006 was $1.3 million, or $.32 for basic and $.31 for diluted earnings per share. This compared to net income for the comparable period in 2005 of $1.7 million, or $.39 for basic and $.38 for diluted earnings per share. Annualized return on assets was .56% and return on tangible equity was 7.18% for the second quarter of 2006 compared to .80% and 7.77% respectively, for the same period last year.

Net interest income before the provision for loan losses increased $61,000 from $6.7 million for the three months ended June 30, 2005 to $6.8 million for the three months ended June 30, 2006. The primary reason for the improvement was due to a $108.9 million, or 14.0% increase in average interest earning assets (mainly due to the Fidelity Federal purchase in September of 2005), partially offset by a 40 basis point decrease in the net interest margin reflecting the Bank’s liability sensitive nature, as short term interest rates continued to rise.

The provision for loan losses for the second quarter of 2006 was $525,000, compared to $444,000 for last year’s comparable period. The increase was due primarily to higher non-performing loans and higher loan portfolio balances (mainly due to the Fidelity Federal purchase in September of 2005). Non-performing loans to total loans at June 30, 2006 were .79% compared to .70% at June 30, 2005. Non-performing assets to total assets were .90% at June 30, 2006 compared to .76% at June 30, 2005. It should be noted that, subsequent to June 30, 2006 and prior to the filing date of this report, a non-performing loan in the amount of approximately $1.9 million was paid in full.

Non-interest income was basically unchanged at $1.7 million for the three months ended June 30, 2006 compared to the same period in 2005. Increases in service fees on transaction accounts of $123,000, or 12.4% were offset by a reduction in commission income on annuity and mutual fund sales as short term interest rates have risen making these products less competitive.

Non-interest expense increased $587,000 or 10.4% to $6.2 million for the three months ended June 30, 2006 compared to $5.6 million for the same period in 2005. The increase was due primarily to increased salaries and benefits which were up $246,000 due to annual salary adjustments, increased health insurance costs and increased staffing for two new branches opened; one in May of 2005 and the other with the purchase of Fidelity Federal in September of 2005. Marketing expenses were up $105,000 primarily due to a new branding campaign designed to more clearly communicate our strategic position. Other expenses increased $180,000 due to increased professional fees primarily related to regulatory compliance requirements and legal costs related to REO, increased REO expenses (other than legal costs) resulting from more repossessed properties, and other general and administrative expense increases related to the opening of the previously mentioned new branches. On a linked quarter basis non-interest expense was flat at $6.2 million.

Income tax expense decreased $305,000 for the three months ended June 30, 2006 compared to the same period in 2005 due to less taxable income. The effective tax rate decreased from 27.5% to 20.0% due to an increased percentage of low income housing tax credits to taxable income when comparing the second quarter of 2006 to the second quarter of 2005.

Comparison of the Operating Results for the Six-Months Ended June 30, 2006 and 2005.

Net income for the six months ended June 30, 2006 was $2.9 million or $.68 for basic and $.67 for diluted earnings per share. This compared to net income for the comparable period in 2005 of $3.3 million or $.76 for basic and $.74 for diluted earnings per share. The primary reason for the decrease was a shrinking net interest margin brought on by increased short term interest rates. Annualized return on average assets was .60% and return on average tangible equity was 7.75% for the first half of 2006 compared to .78% and 7.62% respectively, for the same period last year.

Net interest income before the provision for loan losses increased $419,000 for the six months ended June 30, 2006 compared to the six months ended June 30, 2005. The primary reason for the increase was due to a $109.0 million, or 14.1% increase in average interest earning assets (mainly due to the Fidelity Federal purchase in September of 2005), partially offset by a 33 basis point decrease in the net interest margin reflecting the Bank’s liability sensitive nature, as short term interest rates continued to rise.

The provision for loan losses for the first half of 2006 was $918,000, compared to $888,000 for last year’s comparable period. The increase was due to higher non-performing loans at the end of the period compared to a year ago. Non-performing loans to total loans at June 30, 2006 were .79% compared to .70% at June 30, 2005. Non-performing assets to total assets were .90% at June 30, 2006 compared to .76% at June 30, 2005. As previously noted, subsequent to June 30, 2006 and prior to the filing date of this report, a non-performing loan in the amount of approximately $1.9 million was paid in full. Had this loan been paid as of June 30, 2006, the non-performing loans to total loans would have been .57% and non-performing assets to total assets would have been .71%.

For the six month period ended June 30, 2006 non-interest income has remained flat at $3.3 million compared to the same period in 2005. Increases in service fees on transaction accounts of $244,000, or 13.0% and other income increases of $62,000 (primarily increased gains on sale of REO) were offset by a reduction in commission income on annuity and mutual fund sales as short term interest rates have risen making these products less competitive. Also, income from gain on sale of loans and loan servicing fees were down $31,000 when comparing the first six months of 2006 to those of 2005 primarily due to lower mortgage loan production in the 2006 period.

Non-interest expense increased $1.2 million or 11.3% to $12.4 million for the six months ended June 30, 2006 compared to $11.2 million for the same period in 2005. The increase was due primarily to increased salaries and benefits which were up $589,000 due to annual salary adjustments, increased health insurance costs and increased staffing for two new branches opened; one in May of 2005 and the other with the purchase of Fidelity Federal in September of 2005. Marketing expenses were up $110,000 primarily due to a new branding campaign designed to more clearly communicate our strategic position. Other expenses increased $375,000 due to increased professional fees primarily related to regulatory compliance requirements and legal costs related to REO, increased REO expenses (other than legal costs) due to more repossessed properties, and other general and administrative expense increases primarily related to the opening of the new branches.

For the six-month period ended June 30, 2006, income tax expense decreased $396,000 compared to the same period in 2005. The decrease was due primarily to decreased taxable income. The effective tax rate decreased from 27.5% to 22.7% due to an increased percentage of low income housing tax credits to taxable income when comparing the first half of 2006 to the first half of 2005.

Liquidity and Capital Resources

The standard measure of liquidity for savings associations is the ratio of cash and eligible investments to a certain percentage of the net-withdrawable savings accounts and borrowings due within one year. As of June 30, 2006, Mutual Federal had liquid assets of $60.5 million and a liquidity ratio of 6.94%. It is anticipated that this level of liquidity will be adequate for the remainder of 2006.

ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk

Presented below as of June 30, 2006 and 2005 is an analysis of Mutual Federal’s interest rate risk as measured by changes in Mutual Federal’s net portfolio value (“NPV”) assuming an instantaneous and sustained parallel shift in the yield curve, in 100 basis point increments.

June 30, 2006

Net Portfolio Value

								NPV as % of PV of Assets

Changes In Rates	$ Amount		$ Change		% Change			NPV Ratio			Change

+300 bp		52,500		-45,832		-47	%		5.89	%		-440 bp
+200 bp		68,204		-30,128		-31	%		7.48	%		-281 bp
+100 bp		83,485		-14,847		-15	%		8.94	%		-135 bp
0 bp		98,332							10.29	%
-100 bp		111,179		12,847		13	%		11.38	%		109 bp
-200 bp		117,805		19,473		20	%		11.86	%		157 bp
-300 bp		121,809		23,477		24	%		12.08	%		179 bp

June 30, 2005

Net Portfolio Value

										NPV as % of PV of Assets

Changes In Rates	$ Amount			$ Change			% Change			NPV Ratio			Change

+300 bp		67,887			-32,857			-33	%		8.54	%		-322 bp
+200 bp		79,692			-21,052			-21	%		9.78	%		-198 bp
+100 bp		91,196			-9,548			-9	%		10.91	%		-85 bp
0 bp		100,744									11.76	%
-100 bp		103,803			3,059			3	%		11.90	%		14 bp
-200 bp		99,545			-1,199			-1	%		11.27	%		-49 bp
-300 bp		n/m	(1)		n/m	(1)		n/m	(1)		n/m	(1)		n/m	(1)


(1)	Not meaningful because some market rates would compute to a zero rate or less.

The analysis at June 30, 2006, indicates that there have been no material changes in market interest rates for Mutual Federal’s interest rate sensitivity instruments which would cause a material change in the market risk exposures that effect the quantitative and qualitative risk disclosures as presented in item 7A of the Company’s Form 10-K for the period ended December 31, 2005.

ITEM - 4 Controls and Procedures.

An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a -15(c) under the Securities Exchange Act of 1934 (the “Act”) was carried out, as of March 31, 2006, under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2006, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and the Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. There were no changes in our internal control over financial reporting (as defined in Rule 13a – 15(f) under the Act) that occurred during the quarter ended June 30, 2006, that has materially affected, or is likely to materially affect our internal control over financial reporting.

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

PART II.		OTHER INFORMATION

Item 1.		Legal Proceedings

		None.

Item 1A.		Risk Factors

		There are no material changes to the risk factors disclosed in the Company’s Form 10-K for the year ended December 31, 2005.

Item 2.		Unregistered sales of Equity Securities and Use of Proceeds

		On December 22, 2004 the Company’s Board of Directors authorized management to repurchase an additional 10% of the Company’s outstanding stock, or approximately 470,000 shares over a twelve-month period. Information on the shares purchased during the Second Quarter of 2006 is as follows:

	Total Number of Shares Purchased		Average Price Per Share		Total Number of Shares Purchased As Part of Publicly Announced Plan		Maximum Number of Shares that May Yet Be Purchased Under the Plan

								245,827	⁽¹⁾
April 1, 2006 - April 30, 2006		—				—		245,827
May 1, 2006 - May 31, 2006		34,500		21.09		34,500		211,327
June 1, 2006 - June 30, 2006		41,867		20.75		41,867		169,460

		76,367	$	20.90		76,367


(1)	Amount represents the number of shares available to be repurchased under the plan as of March 31, 2006

Item 3.		Defaults Upon Senior Securities.

		None.

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

		The following is a record of the votes cast at the Company’s Annual Meeting of Stockholders held on April 26, 2006 in the election of directors of the Company:

	FOR	VOTE WITHHELD

Patrick C. Botts	3,158,926	42,879
William V. Hughes	3,159,357	42,448
Jerry D. McVicker	3,156,561	45,244
R. Donn Roberts	3,158,926	42,879
James D. Rosema	3,165,162	36,643
Lynne D. Richardson	3,165,055	36,750

		Accordingly, the individuals named above, were declared to be duly elected directors of the Company for terms to expire in 2009.

		The following is a record of the votes cast for the proposal to ratify the appointment of BKD,LLP as the Company’s independent auditors for the fiscal year ending December 31, 2006.

		FOR		3,200,063
		AGAINST		667
		ABSTAIN		1,075

	Accordingly, the proposal described above was declared to be duly adopted by the stockholders of the Corporation.

Item 5.	Other Information.

	None.

Item 6.	Exhibits.

	(a)	Exhibits

		Exhibit 31.1 – Rule 13a – 14(a) Certification – Chief Executive Officer

		Exhibit 31.2 – Rule 13a – 14(a) Certification – Chief Financial Officer

		Exhibit 32 – Section 1350 - Certificate of the Chief Executive Officer and Chief Financial Officer

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	MutualFirstFinancial, Inc.


Date: August 9, 2006	By:	/s/ David W. Heeter

		David W. Heeter
		President and Chief Executive Officer


Date: August 9, 2006	By:	/s/ Timothy J. McArdle

		Timothy J. McArdle
		Senior Vice President and Treasurer

Commission File Number: 000-27905