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 September 30, 2012     

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXHANGE 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	(I.R.S. Employer
incorporation or organization)	Identification No.)
110 East Charles Street, Muncie, Indiana                                                                                     47305
(Address of principal executive offices)                                                                                  (Zip Code)

(765) 747-2800

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 x    No ¨

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
  Yes ¨   No x

As of November 9, 2012, there were 6,994,637 shares of the registrant’s common stock outstanding.

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 Statements of Comprehensive Income	3
	Consolidated Condensed Statement of Stockholders’ Equity	4
	Consolidated Condensed Statements of Cash Flows	5
	Notes to Unaudited Consolidated Condensed Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	47
Item 4.	Controls and Procedures	48
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Changes in Securities and Use of Proceeds	49
Item 3.	Defaults Upon Senior Securities	49
Item 4.	Submission of Matters to a Vote of Security Holders	49
Item 5.	Other Information	49
Item 6.	Exhibits	50
Signature   Page		53
Exhibits		54

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY

Consolidated Condensed Balance Sheets

(Table Dollar Amounts in Thousands, Except Share and Per Share Data)

	September 30, 2012			December 31, 2011
	(Unaudited)
Assets
Cash	$	7,111		$	7,710
Interest-bearing demand deposits		37,208			47,513
Cash and cash equivalents		44,319			55,223
Interest-bearing deposits		-			1,415
Investment securities available for sale		342,863			330,878
Loans held for sale		4,072			1,441
Loans		962,911			917,275
Allowance for loan losses		(15,536	)		(16,815	)
Net loans		947,375			900,460
Premises and equipment		32,344			32,025
Federal Home Loan Bank of Indianapolis stock, at cost		14,391			14,391
Investment in limited partnerships		2,730			3,113
Deferred income tax benefit		14,896			17,386
Income tax receivable		278			1,344
Cash surrender value of life insurance		48,076			47,023
Prepaid FDIC premium		1,947			2,821
Core deposit and other intangibles		2,634			3,373
Foreclosed real estate		6,184			6,525
Other assets		10,287			9,775
Total assets	$	1,472,396		$	1,427,193
Liabilities
Deposits
Non-interest-bearing	$	133,244		$	122,215
Interest-bearing		1,059,787			1,044,422
Total deposits		1,193,031			1,166,637
Federal Home Loan Bank advances		113,194			101,451
Other borrowings		11,812			12,410
Other liabilities		15,084			14,068
Total liabilities		1,333,121			1,294,566
Commitments and contingencies
Stockholders' Equity
Preferred stock, $.01 par value
Authorized - 5,000,000 shares Issued and outstanding - 28,923 shares; liquidation preference $1,000 per share		1			1
Common stock, $.01 par value
Authorized - 20,000,000 shares Issued and outstanding - 6,993,971 and 6,987,586 shares		70			70
Additional paid-in capital - preferred stock		28,923			28,923
Additional paid-in capital - common stock		71,944			71,796
Retained earnings		34,171			31,270
Accumulated other comprehensive income		4,563			1,203
Unearned employee stock ownership plan (ESOP) shares		(397	)		(636	)
Total stockholders' equity		139,275			132,627
Total liabilities and stockholders' equity	$	1,472,396		$	1,427,193

See notes to consolidated condensed financial statements. 

1

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY

Consolidated Condensed Statements of Income

(Unaudited)

(Table Dollar Amounts in Thousands, Except Share and Per Share Data)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Interest Income
Loans receivable, including fees	$	11,532		$	12,992		$	34,760		$	40,091
Investment securities:
Mortgage-backed securities		2,054			1,964			6,161			5,805
Federal Home Loan Bank stock		107			107			323			315
Other investments		201			170			634			460
Deposits with financial institutions		14			17			29			68
Total interest income		13,908			15,250			41,907			46,739
Interest Expense
Passbook savings		13			27			39			98
Certificates of deposit		2,523			3,459			8,032			11,007
Daily Money Market accounts		102			127			302			370
Demand and NOW accounts		226			292			674			886
Federal Home Loan Bank advances		533			741			1,733			2,486
Other interest expense		196			208			593			628
Total interest expense		3,593			4,854			11,373			15,475
Net Interest Income		10,315			10,396			30,534			31,264
Provision for losses on loans		1,475			3,200			4,675			9,100
Net Interest Income After Provision for Loan Losses		8,840			7,196			25,859			22,164
Other Income
Service fee income		1,644			1,862			5,049			5,193
Net realized gain on sale of securities		1,095			1,764			1,575			1,839
Equity in losses of limited partnerships		(124	)		(107	)		(372	)		(256	)
Commissions		859			879			2,914			2,835
Net gains on sales of loans		541			245			1,388			685
Net servicing fees (expenses)		(16	)		(337	)		(126	)		(293	)
Increase in cash surrender value of life insurance		340			346			1,017			1,071
Gain (loss) on sale of other real estate and repossessed assets		30			(22	)		(523	)		(358	)
Other-than-temporary losses on securities
Total other-than-temporary losses		-			-			-			(723	)
Portion of loss recognized in other comprehensive income (before taxes)		-			-			-			530
Net impairment losses recognized in earnings		-			-			-			(193	)
Other income		12			34			93			100
Total other income		4,381			4,664			11,015			10,623
Other Expenses
Salaries and employee benefits		5,273			5,240			15,910			16,103
Net occupancy expenses		641			583			1,744			1,917
Equipment expenses		454			505			1,346			1,487
Data processing fees		361			373			1,178			1,153
Automated teller machine		258			241			743			776
Deposit insurance		312			330			939			1,170
Professional fees		420			433			1,188			1,169
Advertising and promotion		488			453			1,214			1,053
Software subscriptions and maintenance		384			338			1,145			969
Intangible amortization		229			280			745			894
Other real estate and repossessed assets		247			279			691			746
Other expenses		1,066			982			2,816			2,801
Total other expenses		10,133			10,037			29,659			30,238
Income Before Income Tax		3,088			1,823			7,215			2,549
Income tax expense		915			375			1,971			114
Net Income		2,173			1,448			5,244			2,435
Preferred stock dividends and amortization		362			852			1,085			1,753
Net Income Available to Common Shareholders	$	1,811		$	596		$	4,159		$	682
Basic earnings per common share	$	0.26		$	0.09		$	0.60		$	0.10
Diluted earnings per common share	$	0.26		$	0.09		$	0.59		$	0.10
Dividends per common share	$	0.06		$	0.06		$	0.18		$	0.18

See notes to consolidated condensed financial statements.

2

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY

Consolidated Condensed Statements of Comprehensive Income

(Unaudited)

(Table Dollar Amounts in Thousands, Except Share and Per Share Data)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Net income	$	2,173		$	1,448		$	5,244		$	2,435
Other comprehensive income:
Net unrealized holding gain on securities available-for-sale		2,643			3,802			6,724			11,724
Net unrealized gain (loss) on securities available-for-sale for which a portion of an other-than-temporary impairment has been recognized in income		132			(418	)		(20	)		(136	)
Less: Reclassification adjustment for realized gains included in net income		(1,095	)		(1,764	)		(1,575	)		(1,646	)
Net unrealized gain (loss) on derivative used for cash flow hedges		2			(119	)		16			(162	)
Income taxes related to other comprehensive income		(578	)		(528	)		(1,785	)		(3,448	)
Other comprehensive income		1,104			973			3,360			6,332
Comprehensive income	$	3,277		$	2,421		$	8,604		$	8,767

See notes to consolidated condensed financial statements.

3

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY

Consolidated Condensed Statement of Stockholders' Equity

For the Period Ended September 30, 2012

(Unaudited)

(Table Dollar Amounts in Thousands, Except Share and Per Share Data) 

	Common Stock							Preferred Stock									Accumulated
					Additional							Additional					Other		Unearned
	Shares				paid-in			Shares				paid-in		Retained			Comprehensive		ESOP
	Outstanding		Amount		capital			Outstanding		Amount		capital		Earnings			Income		shares			Total
Balances,  January 1, 2012		6,987,586	$	70	$	71,796			28,923	$	1	$	28,923	$	31,270		$	1,203	$	(636	)	$	132,627
Net income for the period															5,244								5,244
Other comprehensive income, net of tax																		3,360					3,360
ESOP shares earned						(1	)													239			238
Stock options vested						102																	102
Stock options exercised		6,385		-		47																	47
Cash dividends ($.18 per common share)															(1,258	)							(1,258	)
Cash dividends - preferred stock															(1,085	)							(1,085	)
Balances,  September 30, 2012		6,993,971	$	70	$	71,944			28,923	$	1	$	28,923	$	34,171		$	4,563	$	(397	)	$	139,275

See notes to consolidated condensed financial statements.

4

MutualFirst Financial, Inc.

Consolidated Condensed Statements of Cash Flows

(Unaudited)

(Table Dollar Amounts in Thousands, Except Share and Per Share Data) 

	Nine Months Ended
	September 30,
	2012			2011
Operating Activities
Net income	$	5,244		$	2,435
Items not requiring (providing) cash
Provision for loan losses		4,675			9,100
Depreciation and amortization		4,337			4,648
Deferred income tax		705			(336	)
Loans originated for sale		(30,184	)		(16,976	)
Proceeds from sales of loans held for sale		32,203			26,355
Gains on sales of loans held for sale		(1,388	)		(685	)
Gain on sale of securities-available-for sale		(1,575	)		(1,839	)
Loss on sale of premise and equipment		-			44
Loss on other real estate and repossessed assets		523			2,630
Loss on other-than-temporary impairment, securities		-			193
Other equity adjustments		340			255
Change in
Prepaid FDIC premium		874			1,088
Interest receivable and other assets		588			(21,987	)
Interest payable and other liabilities		(46	)		721
Cash value of life insurance		(1,017	)		(1,071	)
Other adjustments		468			(56	)
Net cash provided by operating activities		15,747			4,519
Investing Activities
Net change in interest earning assets		1,415			-
Purchases of securities available-for-sale		(104,448	)		(119,349	)
Proceeds from maturities and paydowns of securities available-for-sale		50,641			29,714
Proceeds from sale of securities-available for sale		47,141			56,436
Redemption of Federal Home Loan Bank Stock		-			2,292
Net change in loans		(63,700	)		18,458
Proceeds from sales of loans transferred to held for sale		3,669			-
Purchases of premises and equipment		(1,702	)		(452	)
Proceeds from real estate owned sales		4,132			3,396
Other investing activities		(22	)		(37	)
Net cash used in investing activities		(62,874	)		(9,542	)
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits		81,587			60,709
Certificates of deposit		(55,193	)		(4,157	)
Proceeds from FHLB advances		382,250			47,600
Repayment of FHLB advances		(370,450	)		(81,375	)
Repayment of other borrowings		(630	)		(595	)
Preferred stock issued		-			28,923
Stock/warrants repurchased		-			(33,282	)
Cash dividends paid		(2,343	)		(2,517	)
Other financing activities		1,002			742
Net cash provided by financing activities		36,223			16,048
Net Change in Cash and Cash Equivalents		(10,904	)		11,025
Cash and Cash Equivalents, Beginning of Period		55,223			26,821
Cash and Cash Equivalents, End of Period	$	44,319		$	37,846
Additional Cash Flows Information
Interest paid	$	11,480		$	15,132
Income tax paid		200			200
Transfers from loans to foreclosed real estate		4,102			7,344
Mortgage servicing rights capitalized		231			397

See Notes to Consolidated Condensed Financial Statements

5

MutualFirst Financial, Inc. and Subsidiaries

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Table Dollar Amounts in Thousands, Except Share and Per Share Data)

Note 1:  Basis of Presentation

The consolidated condensed financial statements include the accounts of MutualFirst Financial, Inc. (MutualFirst or the “Company”), its wholly owned subsidiary MutualBank, an Indiana commercial bank (“Mutual” or the “Bank”), Mutual’s wholly owned subsidiaries, First MFSB Corporation, Mishawaka Financial Services, and Mutual Federal Investment Company (“MFIC”), and MFIC majority owned subsidiary, Mutual Federal REIT, Inc. 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 annual report on Form 10-K for year ended December 31, 2011, filed with the Securities and Exchange Commission on March 16, 2012.

The interim consolidated financial statements at September 30, 2012, 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 periods 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, 2011 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:

	Three Months Ended September 30,
	2012							2011
				Weighted-							Weighted-
	Net			Average		Per-Share		Net			Average		Per-Share
	Income			Shares		Amount		Income			Shares		Amount
Basic Earnings Per Share
Net income	$	2,173			6,992,831			$	1,448			6,911,597
Dividends and accretion on preferred stock		(362	)						(852	)
Income available to common stockholders		1,811			6,992,831	$	0.26		596			6,911,597	$	0.09
Effect of Dilutive securities
Stock options and RRP grants					82,065							15,836
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions	$	1,811			7,074,896	$	0.26	$	596			6,927,433	$	0.09

6

	Nine Months Ended September 30,
	2012							2011
				Weighted-							Weighted-
	Net			Average		Per-Share		Net			Average		Per-Share
	Income			Shares		Amount		Income			Shares		Amount
Basic Earnings Per Share
Net income	$	5,244			6,937,229			$	2,435			6,902,676
Dividends and accretion on preferred stock		(1,085	)						(1,753	)
Income available to common stockholders		4,159			6,937,229	$	0.60		682			6,902,676	$	0.10
Effect of Dilutive securities
Stock options and RRP grants					94,803							89,753
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions	$	4,159			7,032,032	$	0.59	$	682			6,992,429	$	0.10

Options to purchase 250,681 and 499,637 shares of common stock were outstanding at September 30, 2012 and 2011 for the three and nine months ended, respectively, but were not included in the computation of diluted EPS above, because the average exercise price of the options was greater than the average market price of the common shares.

Note 3:  Impact of Accounting Pronouncements

The FASB has issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs.

The amendments to the FASB Accounting Standards Codification (Codification) in this ASU are to be applied prospectively. For public entities, the amendments were effective during interim and annual periods beginning after December 15, 2011, and did not have a material impact on the Company’s financial statements.

The FASB has issued Accounting Standards Update (ASU) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU amendment allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 is to be applied retrospectively. For public entities, the amendments were effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of ASU No. 2011-05 did not have a material impact on the Company’s financial statements.

7

The FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.  This ASU defers the effective date of the requirement to present separate line items on the income statement for reclassification adjustments of items out of accumulated other comprehensive income into net income for all periods presented. The ASU does not change the other requirements of FASB ASU No. 2011-05, Presentation of Comprehensive Income. Entities are still required to present reclassification adjustments within other comprehensive income either on the face of the statement that reports other comprehensive income or in the notes to the financial statements. The requirement to present comprehensive income in either a single continuous statement or two consecutive condensed statements remains for both annual and interim reporting. The deferral of the requirement for the presentation of reclassification adjustments is intended to be temporary until the FASB reconsiders the operational concerns and needs of financial statement users.

The Company adopted the amendments in this Update at the same time as ASU 2011-05, which became effective beginning in the interim period ended March 31, 2012. As the Company had no reclassifications adjustments within other comprehensive income, ASU No. 2011-12 had no impact on its financial statements.

The FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. This ASU amends Topic 210 to require an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivate instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement. ASU 2011-11 is effective for annual and interim period beginning on January 1, 2013, and is not expected to have a significant impact on the Corporation’s financial statements.

Note 4: Investments

The amortized cost and approximate fair values of securities as of September 30, 2012 and December 31, 2011 are as follows.

	September 30, 2012
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available for Sale Securities
Mortgage-backed securities
Government sponsored agencies	$	179,467	$	7,972	$	-		$	187,439
Collateralized mortgage obligations
Government sponsored agencies		125,153		3,845		(34	)		128,964
Federal agencies		3,000		18		0			3,018
Municipals		3,129		158		(15	)		3,272
Small Business Administration		9		-		-			9
Corporate obligations		24,099		397		(4,335	)		20,161
Total	$	334,857	$	12,390	$	(4,384	)	$	342,863

	December 31, 2011
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available for Sale Securities
Mortgage-backed securities
Government sponsored agencies	$	198,039	$	4,813	$	(6	)	$	202,846
Collateralized mortgage obligations
Government sponsored agencies		97,098		2,963		-			100,061
Federal agencies		2,000		2		-			2,002
Municipals		3,364		208		(14	)		3,558
Small Business Administration		12		-		-			12
Corporate obligations		27,488		-		(5,089	)		22,399
Total	$	328,001	$	7,986	$	(5,109	)	$	330,878

8

The amortized cost and fair value of available-for-sale securities at September 30, 2012, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available for Sale
	Amortized		Fair
Description Securities	Cost		Value
Security obligations due
One to five years	$	17,356	$	17,752
Five to ten years		4,946		4,972
After ten years		7,926		3,727
		30,228		26,451
Mortgage-backed securities		179,467		187,439
Collateralized mortgage obligations		125,153		128,964
Small Business Administration		9		9
Totals	$	334,857	$	342,863

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $2.6 million at September 30, 2012.

Gross gains of $1.6 million and $1.9 million resulting from sales of securities were realized for the nine months ended September 30, 2012 and 2011, respectively. Losses recognized on the sale of securities for the nine months ended September 30, 2012 and 2011 were $0 and $22,000, respectively.  Other-than-temporary impairment losses were recognized on securities for the nine months ended September 30, 2012 and 2011 of $0 and $193,000, respectively.

Certain investments in debt and marketable equity securities are reported in the financial statements at an amount less than their historical cost.  Total fair value of these investments at September 30, 2012, was $11.3 million, a decrease from $28.5 million at December 31, 2011, which is approximately 3% and 9%, respectively, of the Bank's portfolio.  The Bank has continued to see an improvement since year-end due to increased market values.

Based on evaluation of available evidence, including recent changes in market interest rates, management believes the declines in fair value for these securities, other than those discussed below, are temporary. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

The following tables show our investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2012 and December 31, 2011:

	September 30, 2012
	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Available for Sale
Collateralized mortgage obligations
Government sponsored agencies	$	8,010	$	(34	)	$	-	$	-		$	8,010	$	(34	)
Municipals		876		(15	)		-		-			876		(15	)
Corporate obligations		-		-			2,408		(4,335	)		2,408		(4,335	)
Total temporarily impaired securities	$	8,886	$	(49	)	$	2,408	$	(4,335	)	$	11,294	$	(4,384	)

9

	December 31, 2011
	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Available for Sale
Mortgage-backed securities
Government sponsored agencies	$	5,076	$	(6	)	$	-	$	-		$	5,076	$	(6	)
Municipals		971		(14	)		-		-			971		(14	)
Corporate obligations		19,957		(790	)		2,454		(4,299	)		22,411		(5,089	)
Total temporarily impaired securities	$	26,004	$	(810	)	$	2,454	$	(4,299	)	$	28,458	$	(5,109	)

Mortgage-Backed Securities (MBS) and Collateralized Mortgage Obligations (CMO)

The unrealized losses on the Company’s investment in MBSs and CMOs were caused by interest rate changes.  The Company expects to recover the amortized cost basis over the term of the securities.  Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is more likely than not the Company will not be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2012.

Corporate Obligations

The Company’s unrealized loss on investments in corporate obligations primarily relates to investments in pooled trust preferred securities. The unrealized losses were primarily caused by (a) a decrease in performance and regulatory capital at the underlying banks resulting from exposure to subprime mortgages and (b) a sector downgrade by several industry analysts. The Company currently expects some of the securities to settle at a price less than the amortized cost basis of the investment (that is, the Company expects to recover less than the entire amortized cost basis of the security). The Company has recognized a loss equal to the credit loss for these securities, establishing a new, and lower amortized cost basis. The credit loss was calculated by comparing expected discounted cash flows based on performance indicators of the underlying assets in the security to the carrying value of the investment. Because the Company does not intend to sell the investments and it is likely the Company will not be required to sell the investments before recovery of its new, lower amortized cost basis, which may be maturity, it does not consider the remainder of the investments to be other-than-temporarily impaired at September 30, 2012.

Mutual evaluates securities for other-than-temporary impairment (“OTTI”) on a quarterly basis. During the quarter ended September 30, 2012, the Bank’s evaluation indicated that there was no other-than-temporary impairment of securities. Impairment on securities is determined after analyzing the estimated cash flows to be received, 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 valued using a discounted cash flow analysis as of September 30, 2012.

Other-than-temporary Impairment

Upon acquisition of a security, the Company decides whether it is within the scope of the accounting guidance for beneficial interests in securitized financial assets or will be evaluated for impairment under the accounting guidance for investments in debt and equity securities.

The accounting guidance for beneficial interests in securitized financial assets provides incremental impairment guidance for a subset of the debt securities within the scope of the guidance for investments in debt and equity securities. For securities where the security is a beneficial interest in securitized financial assets, the Company uses the beneficial interests in securitized financial asset impairment model. Where the security is not a beneficial interest in securitized financial assets, the Company uses the debt and equity securities impairment model.

The Company routinely conducts reviews to identify and evaluate each investment security to determine whether an other-than-temporary impairment has occurred.  Economic models are used to determine whether an other-than-temporary impairment has occurred on these securities.  While all securities are considered, the securities primarily impacted by other-than-temporary impairment testing are pooled trust preferred securities.  For each pooled trust preferred security in the investment portfolio (including but not limited to those whose fair value is less than their amortized cost basis), an extensive, regular review is conducted to determine if an other-than-temporary impairment has occurred.  Various inputs to the economic models are used to determine if an unrealized loss is other-than-temporary.

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The Bank’s trust preferred securities valuation was prepared by an independent third party.  The 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 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.

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Pooled Trust Preferred Securities

At September 30, 2012, MutualFirst had an amortized cost in pooled trust preferred securities of $6.7 million, which had an original par value of $8.0 million.  These securities had a fair value of $2.4 million at September 30, 2012.  The following table provides additional information related to the Bank’s investment in trust preferred securities as of September 30, 2012:

Deal	Class		Original Par		Book Value		Fair Value		Unrealized Loss		Recognized Losses 2012		Lowest Rating	Number of Banks/Insurance Companies Currently Performing		Actual Deferrals/Defaults (as % of original collateral)			Total Projected Defaults (as a % of performing collateral)a			Excess Subordination (after taking into account best estimate of future deferrals/defaults)b
Alesco Preferred Funding IX		A2A	$	1,000	$	902	$	375	$	527	$	-	B2		44		16.64	%		15.38	%		44.11	%
Preferred Term Securities XIII		B1		1,000		823		254		569		-	Ca		40		34.94	%		27.67	%		0.84	%
Preferred Term Securities XVIII		C		1,000		917		210		707		-	Ca		48		29.43	%		16.14	%		1.73	%
Preferred Term Securities XXVII		C1		1,000		710		200		510		-	C		34		26.61	%		22.84	%		6.09	%
U.S. Capital Funding I		B1		3,000		2,891		1,148		1,743		-	Caa1		30		15.90	%		14.84	%		1.55	%
U.S. Capital Funding III		B1		1,000		500		221		279		-	Ca		28		27.94	%		16.86	%		0.00	%
Total			$	8,000	$	6,743	$	2,408	$	4,335	$	-

(a)

A 10% recovery is applied to all projected defaults.  A 15% recovery is applied to all projected insurance defaults.  No recovery is applied to current defaults.

(b)

Excess subordination represents the additional defaults in excess of both current and projected defaults that the CDO can absorb before the bond experiences any credit impairment. Excess subordinated percentage is calculated by (a) determining what percentage of defaults a deal can experience before the bond has credit impairment, and (b) subtracting from this default breakage percentage both total current and expected future default percentages.

Credit Losses Recognized on Investments

Certain debt securities have experienced fair value deterioration due to credit losses, as well as due to other market factors, but are not otherwise other-than-temporarily impaired.

The following table provides information about debt securities for which only a credit loss was recognized in income and other losses are recorded in other comprehensive income.

	Accumulated Credit Losses Three Months Ended September 30,
	2012			2011
Credit losses on debt securities held
Beginning of period	$	(1,205	)	$	(1,205	)
Additions related to increases in previously recognized other-than-temporary losses for the three months ended		-			-
As of September 30,	$	(1,205	)	$	(1,205	)

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	Accumulated Credit Losses Nine Months Ended September 30,
	2012			2011
Credit losses on debt securities held
Beginning of year	$	(1,205	)	$	(1,179	)
Additions related to increases in previously recognized other-than-temporary losses for the nine months ended		-			(26	)
As of September 30,	$	(1,205	)	$	(1,205	)

Note 5: Accumulated Other Comprehensive Income

The following table represents the components of accumulated other comprehensive income:

	September 30,			December 31,
	2012			2011
Net unrealized gain on securities available-for-sale	$	11,815		$	6,666
Net unrealized loss on securities available-for-sale for which a portion of other-than-temporary impairment has been recognized in income		(3,808	)		(3,788	)
Net unrealized loss on derivative used for cash flow hedges		(456	)		(472	)
Net unrealized loss relating to defined benefit plan liability		(448	)		(448	)
		7,103			1,958
Tax expense		2,540			755
Net-of-tax amount	$	4,563		$	1,203

Note 6: Disclosures About Fair Value of Assets and Liabilities

FASB Codification Topic 820 (ASC 820), Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  

The standard describes three levels of inputs that may be used to measure fair value:

Level 1	Quoted prices in active markets for identical assets or liabilities
Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Items Measured at Fair Value on a Recurring Basis

Following is a description of the valuation methodologies and inputs used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy.

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Available-for-Sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy.  The Company uses a third-party provider to provide market prices on its securities.  Level 1 securities include the marketable equity securities.  If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.  Level 2 securities include mortgage-backed, collateralized mortgage obligations, small business administration, marketable equity, municipal, federal agency and certain corporate obligation securities.  In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include certain corporate obligation securities.

Third party vendors compile prices from various sources and may apply such techniques as matrix pricing to determine the value of identical or similar investment securities (Level 2). Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather relying on investment securities relationship to other benchmark quoted investment securities. Any investment security not valued based upon the methods above are considered Level 3.

Fair value determinations for Level 3 measurements of securities are the responsibility of the Treasury function of the Company.  The Company contracts with a pricing specialist to generate fair value estimates on a monthly basis.  The Treasury function of the Company challenges the reasonableness of the assumptions used and reviews the methodology to ensure the estimated fair value complies with accounting standards generally accepted in the United States, analyzes the changes in fair value and compares these changes to internally developed expectations and monitors these changes for appropriateness.

The following table presents the fair value measurement of assets measured at fair value on a recurring basis and the level within the ASC 820 fair value hierarchy used for such fair value measurements:

			Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
September 30, 2012
Mortgage-backed securities
Government sponsored agencies	$	187,439	$	-	$	187,439	$	-
Collateralized mortgage obligations
Government sponsored agencies		128,964		-		128,964		-
Federal agencies		3,018		-		3,018		-
Municipals		3,272		-		3,272		-
Small Business Administration		9		-		9		-
Corporate obligations		20,161		-		17,753		2,408
Available-for-sale securities	$	342,863	$	-	$	340,455	$	2,408
December 31, 2011
Mortgage-backed securities
Government sponsored agencies	$	202,846	$	-	$	202,846	$	-
Collateralized mortgage obligations
Government sponsored agencies		100,061		-		100,061		-
Federal agencies		2,002		-		2,002		-
Municipals		3,558		-		3,558		-
Small Business Administration		12		-		12		-
Corporate obligations		22,399		-		19,945		2,454
Available-for-sale securities	$	330,878	$	-	$	328,424	$	2,454

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The following is a reconciliation of the beginning and ending balances for the three months ended September 30, 2012 and 2011 of recurring fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs:

	2012		2011
Beginning balance	$	2,264	$	2,958
Total realized and unrealized gains and losses
Included in net income		-		-
Included in other comprehensive loss		144		(418	)
Purchases, issuances and settlements		-		13
Ending balance	$	2,408	$	2,553
Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets still held at the reporting date	$	-	$	-

The following is a reconciliation of the beginning and ending balances for the nine months ended September 30, 2012 and 2011 of recurring fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs:

	2012			2011
Beginning balance	$	2,454		$	2,645
Total realized and unrealized gains and losses
Included in net income		-			(193	)
Included in other comprehensive loss		(36	)		57
Purchases, issuances and settlements		(10	)		44
Ending balance	$	2,408		$	2,553
Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets still held at the reporting date	$	-		$	(193	)

Items Measured at Fair Value on a Non-Recurring Basis

From time to time, certain assets may be recorded at fair value on a non-recurring basis.  These non-recurring fair value adjustments typically are a result of the application of lower of cost or fair value accounting or a write-down occurring during the period.  The following is a description of the valuation methodologies used for certain assets that are recorded at fair value.

Impaired Loans (Collateral Dependent)

Loans for which it is probable that Mutual will not collect all principal and interest due according to contractual terms are measured for impairment.  Allowable methods for determining the amount of impairment include estimating fair value include using the fair value of the collateral for collateral dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized.  This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.

Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method. 

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Other Real Estate Owned

The fair value of real estate is generally determined based on appraisals by qualified licensed appraisers. The appraisers typically determine the value of the real estate by utilizing an income or market valuation approach. If an appraisal is not available, the fair value may be determined by using a cash flow analysis.

The estimated fair value of other real estate owned is based on current appraisal, less discount to reflect realizable value and estimated cost to sell.  Other real estate owned is classified within Level 3 of the fair value hierarchy.  Appraisals of other real estate owned are obtained when the real estate is acquired and subsequently as deemed necessary by the asset classification committee.  The Risk Management division reviews the appraisals for accuracy and consistency.  Appraisals are selected from the list of approved appraisers maintained by the Board.  The reductions in fair value of other real estate owned were $456,000 and $276,000 for the nine months ended September 30, 2012 and 2011, respectively. The changes were recorded as adjustments to current earnings through other real estate owned related expenses.

Mortgage Servicing Rights

We initially measure our mortgage servicing rights at fair value, and amortize them over the period of estimated net servicing income. They are periodically assessed for impairment based on fair value at the reporting date. Mortgage-servicing rights do not trade in an active market with readily observable prices. Accordingly, the fair value is estimated based on a valuation model which calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost to service, float earnings rates and other ancillary income, including late fees. The fair value measurements are classified as Level 3.

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the ASC 820 fair value hierarchy in which the fair value measurements fall:

			Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
September 30, 2012
Impaired loans (collateral dependent)	$	7,235	$	-	$	-	$	7,235
Foreclosed real estate		2,136		-		-		2,136
Mortgage servicing rights		2,109						2,109
December 31, 2011
Impaired loans (collateral dependent)	$	16,511	$	-	$	-	$	16,511
Foreclosed real estate		202		-		-		202
Mortgage-servicing rights		2,626		-		-		2,626

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The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements.

	Fair Value at September 30, 2012		Valuation Technique	Unobservable Inputs	Range
Trust Preferred Securities	$	2,408	Discounted cash flow	Discount rate Constant prepayment rate Cumulative projected prepayments Probability of default Projected cures given deferral Loss severity		9.0% - 16.0% 2.0%  30.0% 1.5%-2.4% 0%-15.0% 56.7% – 81.4%
Impaired loans (collateral dependent)	$	7,235	Third party valuations	Discount to reflect realizable value		0%-40%
Foreclosed real estate	$	2,136	Third party valuations	Discount to reflect realizable value less estimated selling costs		0%-25%
Mortgage servicing rights	$	2,109	Third party valuations	Prepayment speeds Discount rates Servicing fee		220%-700% 9.0% 0.25%

The estimated fair values of the Company’s financial instruments not carried at fair value in the consolidated condensed balance sheets as of dates noted below are as follows:

	Carrying				Fair Value Measurements Using
September 30,  2012	Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	44,319	$	44,319	$	44,319	$	-	$	-
Loans held for sale		4,072		4,216		-		4,216		-
Loans		947,375		977,803		-		-		977,803
FHLB stock		14,391		14,391		-		14,391		-
Interest receivable		3,930		3,930		-		3,930		-
Liabilities
Deposits		1,193,031		1,210,969		596,913		-		614,056
FHLB advances		113,194		115,174		-		115,174		-
Other borrowings		11,812		13,006		-		13,006		-
Interest payable		447		447		-		447		-
Advances by borrowers for taxes and insurance		2,675		2,675		-		2,675		-

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	December 31, 2011
	Carrying Amount		Fair Value
Assets
Cash and cash equivalents	$	55,223	$	55,223
Interest-bearing deposits		1,415		1,415
Loans held for sale		1,441		1,459
Loans		900,460		921,212
FHLB stock		14,391		14,391
Interest receivable		4,248		4,248
Liabilities
Deposits	$	1,166,637	$	1,132,031
FHLB advances		101,451		103,980
Other borrowings		12,410		13,083
Interest payable		340		340
Advances by borrowers for taxes and insurance		1,720		1,720

The following methods and assumptions were used to estimate the fair value of each class of financial instruments listed above:

Cash and Cash Equivalents - The fair value of cash and cash equivalents approximates carrying value.

Interest-Bearing Deposits - The fair value of interest-bearing deposits approximates carrying value.

Loans Held For Sale - Fair values are based on current investor purchase commitments.

Loans - The fair value for loans is estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

FHLB Stock - Fair value of FHLB stock is based on the price at which it may be resold to the FHLB.

Interest Receivable/Payable - The fair values of interest receivable/payable approximate carrying values.

Deposits - The fair values of noninterest-bearing, interest-bearing demand and savings accounts are equal to the amount payable on demand at the balance sheet date.  Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on such time deposits.

Federal Home Loan Bank Advances - The fair value of these borrowings are estimated using a discounted cash flow calculation, based on current rates for similar debt for periods comparable to the remaining terms to maturity of these advances.

Other Borrowings - The fair value of other borrowings are estimated using a discount calculation based on current rates.

Advances by Borrowers for Taxes and Insurance - The fair value approximates carrying value.

Off-Balance Sheet Commitments - Commitments include commitments to purchase and originate mortgage loans, commitments to sell mortgage loans, and standby letters of credit and are generally of a short-term nature.  The fair values of such commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.  The fair value of commitments is immaterial.

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Note 7: Loans

Categories of loans at September 30, 2012 and December 31, 2011 include:

	September 30,			December 31,
	2012			2011
Commercial
Real estate	$	195,465		$	197,390
Construction and development		16,718			20,831
Other		61,876			64,628
		274,059			282,849
Residential Mortgage
One- to four- family		491,012			434,976
Consumer loans
Real estate		98,572			96,864
Auto		15,337			15,203
Boat/RVs		79,175			83,557
Other		6,692			6,760
		199,776			202,384
Total loans		964,847			920,209
Undisbursed loans in process		(4,372	)		(5,352	)
Unamortized deferred loan costs, net		2,436			2,418
Allowance for loan losses		(15,536	)		(16,815	)
Net loans	$	947,375		$	900,460

The risk characteristics of each loan portfolio segment are as follows:

Commercial

Commercial real estate

These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

Construction and Development

Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates and financial analyses of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

19

Commercial other

Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Mortgage and Consumer

With respect to residential loans that are secured by 1-4 family residences and are primarily owner occupied, the Company generally establishes a maximum loan-to-value ratio and requires PMI if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Nonaccrual Loan and Past Due Loans. 

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due.  The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection.  Past due status is based on contractual terms of the loan.  In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income.  The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Non-accrual loans, segregated by class of loans, as of September 30, 2012 and December 31, 2011 are as follows:

	September 30,		December 31,
	2012		2011
Commercial
Real Estate	$	2,688	$	7,592
Construction and development		6,301		9,314
Other		1,412		1,160
Residential Mortgage		9,862		10,080
Consumer
Real estate		1,942		2,081
Auto		39		24
Boat/RV		784		371
Other		104		89
	$	23,112	$	30,711

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An age analysis of Company’s past due loans, segregated by class of loans, as of September 30, 2012 and December 31, 2011 is as follows:

	September 30, 2012
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days and Accruing
Commercial
Real Estate	$	816	$	161	$	2,508	$	3,485	$	191,980	$	195,465	$	-
Construction and development		563		-		5,805		6,368		10,350		16,718		-
Other		1,167		158		780		2,105		59,771		61,876		-
Residential Mortgage		10,566		3,006		9,345		22,917		468,095		491,012		756
Consumer
Real estate		587		353		1,442		2,382		96,190		98,572		-
Auto		63		4		33		100		15,237		15,337		-
Boat/RV		1,409		735		378		2,522		76,653		79,175		-
Other		155		6		68		229		6,463		6,692		1
	$	15,326	$	4,423	$	20,359	$	40,108	$	924,739	$	964,847	$	757

	December 31, 2011
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days and Accruing
Commercial
Real Estate	$	1,173	$	1,439	$	6,569	$	9,181	$	188,209	$	197,390	$	-
Construction  and development		845		3,595		4,850		9,290		11,541		20,831		-
Other		791		99		955		1,845		62,783		64,628		-
Residential Mortgage		13,309		3,427		11,207		27,943		407,033		434,976		1,127
Consumer
Real estate		1,395		1,167		2,081		4,643		92,221		96,864		-
Auto		143		28		24		195		15,008		15,203		-
Boat/RV		2,084		825		371		3,280		80,277		83,557		-
Other		227		5		89		321		6,439		6,760		-
	$	19,967	$	10,585	$	26,146	$	56,698	$	863,511	$	920,209	$	1,127

Impaired Loans.  

Loans are considered impaired in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan.  Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties.  These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

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Loans are individually evaluated for impairment based on internal limits outlined in our lending policies. The current threshold for these evaluations is set at $250,000. Although all troubled debt restructurings are considered impaired loans they are not necessarily individually evaluated for impairment based on the guidelines noted previously.

Interest on impaired loans is recorded based on the performance of the loan.  All interest received on impaired loans that are on nonaccrual is accounted for on the cash-basis method until qualifying for return to accrual.  Interest is accrued per contract for impaired loans that are performing.

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The following tables present impaired loans for the three and nine month periods ended September 30, 2012 and 2011 and the year ended December 31, 2011.

	September 30, 2012
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans - Quarter		Average Investment in Impaired Loans - YTD		Interest Income Recognized - Quarter		Interest Income Recognized - YTD
Loans without a specific valuation allowance
Commercial
Real estate	$	3,570	$	4,122	$	-	$	4,546	$	5,646	$	37	$	147
Construction and development		7,111		9,101		-		7,669		9,092		11		35
Other		1,076		1,076		-		2,098		3,028		5		28
Residential Mortgage		3,960		5,048		-		3,613		4,124		19		58
Loans with a specific valuation allowance
Commercial
Construction and development		1,364		4,337		375		1,364		1,482		18		55
Other		1,178		1,178		357		1,191		1,206		9		35
Residential Mortgage		529		529		37		530		532		18		35
Total
Commercial
Real estate	$	3,570	$	4,122	$	-	$	4,546	$	5,646	$	37	$	147
Construction and development	$	8,475	$	13,438	$	375	$	9,033	$	10,574	$	29	$	90
Other	$	2,254	$	2,254	$	357	$	3,289	$	4,234	$	14	$	63
Residential Mortgage	$	4,489	$	5,577	$	37	$	4,143	$	4,656	$	37	$	93

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	December 31, 2011
							Average
			Unpaid				Investment in		Interest
	Recorded		Principal		Specific		Impaired		Income
	Balance		Balance		Allowance		Loans		Recognized
Loans without a specific valuation allowance
Commercial
Real estate	$	4,883	$	5,275	$	-	$	4,221	$	137
Construction and development		5,872		11,801		-		9,451		348
Other		4,030		4,167		-		1,480		211
Residential Mortgage		5,378		6,870		-		5,532		142
Loans with a specific valuation allowance
Commercial
Real estate		2,083		2,489		209		1,086		74
Construction and development		7,071		7,281		1,437		3,775		233
Other		1,470		1,524		543		246		60
Residential Mortgage		537		537		36		67		36
Total
Commercial
Real estate	$	6,966	$	7,764	$	209	$	5,307	$	211
Construction and development	$	12,943	$	19,082	$	1,437	$	13,226	$	581
Other	$	5,500	$	5,691	$	543	$	1,726	$	271
Residential Mortgage	$	5,915	$	7,407	$	36	$	5,599	$	178

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	September 30, 2011
	Average Investment in Impaired Loans - Quarter		Average Investment in Impaired Loans - YTD		Interest Income Recognized - Quarter		Interest Income Recognized - YTD
Loans without a specific valuation allowance
Commercial
Real estate	$	3,349	$	4,890	$	4	$	81
Construction and development		9,158		11,776		31		227
Other		1,358		1,972		1		28
Residential Mortgage		4,765		5,866		47		119
Loans with a specific valuation allowance
Commercial
Real estate		1,640		1,648		8		52
Construction and development		3,985		4,122		24		60
Other		125		250		3		7
Residential Mortgage		-		-		-		-
Total
Commercial
Real estate	$	4,989	$	6,538	$	12	$	133
Construction and development	$	13,143	$	15,898	$	55	$	287
Other	$	1,483	$	2,222	$	4	$	35
Residential Mortgage	$	4,765	$	5,866	$	47	$	119

Commercial Loan Grades

Definition of Loan Grades.  Loan grades are numbered 1 through 8.  Grades 1-4 are "pass" credits, grade 5 [Special Mention] loans are "criticized" assets, and grades 6 [Substandard], 7 [Doubtful] and 8 [Loss] are "classified" assets.  The use and application of these grades by the Bank are uniform and conform to the Bank's policy and regulatory definitions.

Pass.  Pass credits are loans in grades prime through fair.  These are at least considered to be credits with acceptable risks and would be granted in the normal course of lending operations.

Special Mention.  Special mention credits have potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the credits or in the Bank’s credit position at some future date.  If weaknesses cannot be identified, classifying as special mention is not appropriate.  Special mention credits are not adversely classified and do not expose the Bank to sufficient risk to warrant an adverse classification.  No apparent loss of principal or interest is expected.

Substandard.  Credits which are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged.  Financial statements normally reveal some or all of the following:  poor trends, lack of earnings and cash flow, excessive debt, lack of liquidity, and the absence of creditor protection.  Credits so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

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Doubtful.  An  extension of credit “doubtful” has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.  The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.  Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans.  A Doubtful classification for an entire credit should be avoided when collection of a specific portion appears highly probable with the adequately secured portion graded Substandard.  

Retail Loan Grades

Pass.  Pass credits are loans that are currently performing as agreed and are not troubled debt restructurings.

Special Mention.  Special mention credits have potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the credits or in the Bank’s credit position at some future date.  If weaknesses cannot be identified, classifying as special mention is not appropriate.  Special mention credits are not adversely classified and do not expose the Bank to sufficient risk to warrant an adverse classification.  No apparent loss of principal or interest is expected.

Substandard.  Substandard credits are loans that have reason to be considered to have a well defined weakness and placed on non-accrual.  This would include all retail loans over 90 days and troubled debt restructurings which were delinquent at the time of modification.

The following information presents the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of September 30, 2012 and December 31, 2011.

September 30, 2012
Commercial Credit Exposure Credit Risk Profile
Internal Rating	Real estate		Construction and Development		Other
Pass	$	169,089	$	8,686	$	57,472
Special Mention		15,392		172		300
Substandard		10,984		7,860		3,234
Doubtful		-		-		870
Total	$	195,465	$	16,718	$	61,876

Retail Credit Exposure Credit Risk Profile
	Mortgage		Consumer
	Residential		Real Estate		Auto		Boat/RV		Other
Pass	$	474,440	$	95,994	$	15,287	$	78,012	$	6,595
Special Mention		2,031		-		-		-		-
Substandard		14,541		2,578		50		1,163		97
Total	$	491,012	$	98,572	$	15,337	$	79,175	$	6,692

December 31, 2011
Commercial Credit Exposure Credit Risk Profile
			Construction
			and
Internal Rating	Real estate		Development		Other
Pass	$	167,991	$	8,093	$	56,691
Special Mention		11,940		538		880
Substandard		16,488		12,105		6,260
Doubtful		971		95		797
Total	$	197,390	$	20,831	$	64,628

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Retail Credit Exposure Credit Risk Profile
	Mortgage		Consumer
	Residential		Real Estate		Auto		Boat/RV		Other
Pass	$	417,772	$	94,066	$	15,135	$	82,639	$	6,680
Special Mention		2,473		-		-		-		-
Substandard		14,731		2,798		68		918		80
Total	$	434,976	$	96,864	$	15,203	$	83,557	$	6,760

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 collectability 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 collectability 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 collectability 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 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.

The following table details activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2012 and 2011 and year ended December 31, 2011.  Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other segments.

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	Three Months Ended September 30, 2012
	Commercial		Mortgage		Consumer		Total
Allowance for loan losses:
Balance, beginning of period	$	10,004	$	3,392	$	2,607	$	16,003
Provision charged to expense		985		480		10		1,475
Losses charged off		1,484		505		268		2,257
Recoveries		16		196		103		315
Balance, end of period	$	9,521	$	3,563	$	2,452	$	15,536

	Nine Months Ended September 30, 2012
	Commercial		Mortgage		Consumer		Total
Allowance for loan losses:
Balance, beginning of year	$	10,602	$	3,444	$	2,769	$	16,815
Provision charged to expense		2,410		1,571		694		4,675
Losses charged off		4,034		1,652		1,354		7,040
Recoveries		543		200		343		1,086
Balance, end of period	$	9,521	$	3,563	$	2,452	$	15,536
Ending balance:
Individually evaluated for impairment	$	732	$	37	$	-	$	769
Collectively evaluated for impairment	$	8,789	$	3,526	$	2,452	$	14,767
Loans:
Ending balance
Individually evaluated for impairment	$	14,299	$	4,489	$	-	$	18,788
Collectively evaluated for impairment	$	259,760	$	486,523	$	199,776	$	946,059

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	Year Ended December 31, 2011
	Commercial		Mortgage		Consumer		Total
Allowance for loan losses:
Balance, beginning of year	$	10,124	$	2,212	$	4,036	$	16,372
Provision charged to expense		8,592		4,390		118		13,100
Losses charged off		8,260		3,432		2,126		13,818
Recoveries		146		274		741		1,161
Balance, end of period	$	10,602	$	3,444	$	2,769	$	16,815
Ending balance:
Individually evaluated for impairment	$	2,189	$	36	$	-	$	2,225
Collectively evaluated for impairment	$	8,413	$	3,408	$	2,769	$	14,590
Loans:
Ending balance
Individually evaluated for impairment	$	25,409	$	5,915	$	-	$	31,324
Collectively evaluated for impairment	$	257,440	$	429,061	$	202,384	$	888,885

	Three Months Ended September 30, 2011
	Commercial		Mortgage		Consumer		Total
Allowance for loan losses:
Balance, beginning of year	$	9,790	$	2,135	$	4,032	$	15,957
Provision charged to expense		2,915		100		185		3,200
Losses charged off		2,017		464		556		3,037
Recoveries		64		63		234		361
Balance, end of period	$	10,752	$	1,834	$	3,895	$	16,481

	Nine Months Ended September 30, 2011
	Commercial		Mortgage		Consumer		Total
Allowance for loan losses:
Balance, beginning of year	$	10,124	$	2,212	$	4,036	$	16,372
Provision charged to expense		6,145		2,100		855		9,100
Losses charged off		5,582		2,644		1,647		9,873
Recoveries		65		166		651		882
Balance, end of period	$	10,752	$	1,834	$	3,895	$	16,481

Management’s general practice is to proactively charge down loans individually evaluated for impairment to the fair value of the underlying collateral.

For all loan portfolio segments except 1-4 family residential properties and consumer, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

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The Company charges-off 1-4 family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down of 1-4 family first and junior lien mortgages to the net realizable value less costs to sell when the loan is 180 days past due, charge-off of unsecured open-end loans when the loan is 180 days past due, and charge-down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged-off.

Information on non-performing assets, excluding performing restructured loans, is provided below:

	September 30,
	2012		2011
Non-performing assets
Non-accrual loans	$	23,112	$	25,937
Accruing loans 90 days + past due		757		1,103
Total non-performing loans		23,869		27,040
Foreclosed real estate		6,184		5,686
Other repossessed assets		573		1,142
Total non-performing assets	$	30,626	$	33,868

Troubled Debt Restructurings

Included in certain loan categories of impaired loans are certain loans that have been modified in a troubled debt restructuring, where economic concessions have been granted to borrowers who have experienced financial difficulties.  These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions.  Modifications of terms for our loans and their inclusion as troubled debt restructurings are based on individual facts and circumstances.

When we modify loans in a troubled debt restructuring, we evaluate any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or use the current fair value of the collateral, less selling costs for collateral dependent loans. If we determined that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through a specific reserve or a charge-off to the allowance.

Loans retain their accrual status at the time of their modification.  As a result, if a loan is on nonaccrual at the time it is modified, it stays as nonaccrual until a period of satisfactory performance, generally six months, is obtained.  If a loan is on accrual at the time of the modification, the loan is evaluated to determine the collection of principal and interest is reasonably assured and generally stays on accrual.

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The following tables provide detail regarding troubled debts restructured in the three and nine month periods ended September 30, 2012 and 2011.

Three Months Ended September 30, 2012
			Pre- Modification		Post- Modification
			Outstanding		Outstanding
	No. of Loans		Recorded Balance		Recorded Balance
Commercial
Real Estate		1	$	439	$	439
Construction and development		1		172		172
Other		2		46		46
Residential Mortgage		10		719		734
Consumer
Real estate		14		439		438
Auto		2		9		8
Boat/RV		4		96		95
Other		2		36		36

Three Months Ended September 30, 2011
			Pre- Modification		Post- Modification
			Outstanding		Outstanding
	No. of Loans		Recorded Balance		Recorded Balance
Commercial
Real Estate		1	$	113	$	70
Residential Mortgage		6		463		492
Consumer
Real estate		10		231		231
Auto		1		10		10
Boat/RV		4		134		133

Nine Months Ended September 30, 2012
			Pre- Modification		Post- Modification
			Outstanding		Outstanding
	No. of Loans		Recorded Balance		Recorded Balance
Commercial
Real Estate		4	$	1,359	$	1,520
Construction and development		1		172		172
Other		5		262		324
Residential Mortgage		28		2,455		2,596
Consumer
Real estate		24		830		830
Auto		3		16		15
Boat/RV		7		154		153
Other		4		53		52

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Nine Months Ended September 30, 2011
			Pre- Modification		Post- Modification
			Outstanding		Outstanding
	No. of Loans		Recorded Balance		Recorded Balance
Commercial
Real Estate		1	$	113	$	70
Construction and development		2		3,728		3,728
Other		1		103		103
Residential Mortgage		22		2,529		2,598
Consumer
Real estate		22		555		551
Auto		1		10		10
Boat/RV		12		364		357
Other		1		14		1

The impact to the allowance for loan losses due to these modifications was insignificant.

Newly restructured loans by types are as follows:

Three Months Ended September 30, 2012
	Interest Only		Term		Combination		Total Modification
Commercial
Real Estate	$	-	$	-	$	439	$	439
Construction and development		-		-		172		172
Other		-		46		-		46
Residential Mortgage		-		36		698		734
Consumer
Real estate		-		22		416		438
Auto		-		4		4		8
Boat/RV		-		95		-		95
Other		-		-		36		36

Nine Months Ended September 30, 2012
	Interest Only		Term		Combination		Total Modification
Commercial
Real Estate	$	-	$	403	$	1,117	$	1,520
Construction and development		-		-		172		172
Other		-		143		181		324
Residential Mortgage		320		169		2,107		2,596
Consumer
Real estate		-		55		775		830
Auto		-		11		4		15
Boat/RV		-		153		-		153
Other		-		8		44		52

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The following tables provide detail regarding troubled debts restructured in the last twelve months that have defaulted in the quarter ended September 30, 2012.

Three and Nine Months Ended September 30, 2012
			Post- Modification
			Outstanding
	No. of Loans		Recorded Balance
Commercial
Real Estate		1	$	109
Other		1		518
Residential Mortgage		1		31
Consumer
Other		1		14

We had no defaults of any loans modified as troubled debt restructurings made for the three and nine months ended September 30, 2011. Default is defined as any loan that becomes more than 90 days past due.

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

Overview and Significant Events in the Three and Nine Months Ended September 30, 2012

The following should be read in conjunction with the Management’s Discussion and Analysis in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, which was filed with the SEC on March 16, 2012.

The Company is a Maryland corporation and a bank holding company headquartered in Muncie, Indiana, with operations in Delaware, Elkhart, Grant, Kosciusko, Randolph, St. Joseph and Wabash counties in Indiana. It owns MutualBank, an Indiana commercial bank with 32 bank branches in Indiana, trust offices in Carmel and Crawfordsville, Indiana and a loan origination office in New Buffalo, Michigan. The Company is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System (“FRB”), and the Bank is subject to regulation, supervision and examination by the Indiana Department of Financial Institutions (“IDFI”)and the Federal Deposit Insurance Corporation (“FDIC”).

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. We also obtain funds from FHLB advances and other borrowings.

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 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.

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Third Quarter Highlights. At September 30, 2012, we had $1.5 billion in assets, $962.9 million in loans, $1.2 billion in deposits and $139.3 million in stockholders’ equity. The Bank’s total risk-based capital ratio at September 30, 2012 was 15.01%, exceeding the 10.00% requirement for a well-capitalized institution. The ratio of tangible common equity was 7.33% as of September 30, 2012, an increase from 7.05% at December 31, 2011. For the quarter ended September 30, 2012, income available to common shareholders totaled $1.8 million, or $.26 per basic and diluted share, compared with net income of $596,000 available to common shareholders, or $.09 per basic and diluted share for the quarter ended September 30, 2011.

Key aspects of our operations in the third quarter of 2012, include the following:

· Gross loans increased $8.5 million.

· Deposits increased $21.5 million.

· Tangible common equity increased to 7.33% in the third quarter of 2012 and tangible book value increased to $15.40.

· Non-performing assets declined $2.2 million, or 6.7% in the third quarter of 2012 and declined $8.6 million, or 21.9% compared to December 31, 2011. Classified assets declined $5.8 million, or 9.5% in the third quarter of 2012 to $54.9 million compared to $60.6 million at December 31, 2011.

· Net charge offs on an annualized basis were .81% in the third quarter of 2012 compared to 1.11% in the same period of 2011. Net charge offs on a linked quarter basis decreased from 1.04%.

· Net interest margin was 3.05% for the third quarter of 2012 compared to 3.19% in the same period of 2011. On a linked quarter basis, net interest margin declined from 3.10%.

· Non-interest income for the quarter ended September 30, 2012 decreased $283,000 compared to the same period in 2011. On a linked quarter basis, non-interest income increased $676,000.

· Non-interest expense for the third quarter of 2012 increased $97,000 over the same period in 2011. Non-interest expense increased $200,000 over the linked quarter.

The Management’s Discussion and Analysis in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, contains a summary of our management strategy. The financial highlights of our strategy during the quarter include: increasing core deposits by 0.4% during the quarter to 49.6% of total deposits; decreasing non-performing assets to total assets from 2.23% at June 30, 2012 to 2.08% at the end of the quarter; and maintaining increased capital ratios from year-end levels.

Critical Accounting Policies

Note 1 to the Notes to the Consolidated Financial Statements in Item 8 of the Form 10-K for the year ended December 31, 2011 contains a summary of MutualFirst ’s significant accounting policies. 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.

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Management recently reviewed the Bank’s processes for foreclosed properties and deemed they are in compliance with regulations and state laws.

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. The Company periodically assesses the potential impairment of its core deposit intangible.  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.    

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.

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 securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations, to determine 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.  For investments in debt securities, 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 stockholders’ equity) and not recognized in income until the security is ultimately sold.

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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.

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.

Forward-Looking Statements

This Form 10-Q contains and our future filings with the SEC, Company press releases, other public pronouncements, stockholder communications and oral statements made by or with the approval of an authorized executive officer will contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “project,” “could,” “intend,” “target” and other similar words and expressions of the future. These forward-looking statements include, but are not limited to: (i) statements of our goals, intentions and expectations; (ii) statements regarding our business plans, prospects, growth and operating strategies; (iii) statements regarding the asset quality of our loan and investment portfolios; and (iv) estimates of our risks and future costs and benefits. These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. The Company does not undertake and specifically declines any obligation to publicly release the result of any revisions that 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 unanticipated events.

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The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements: (i) the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets; (ii) changes in general economic conditions, either nationally or in our market areas; (iii) changes in the levels of general interest rates and the relative differences between short- and long-term interest rates, deposit interest rates, our net interest margin and funding sources; (v) fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; (vi) decreases in the secondary market for the sale of loans that we originate; (vii) results of examinations of us by the IDFI, FDIC, FRB or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; (viii) legislative or regulatory changes that adversely affect our business including the effect of Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act”), changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules, including changes that increase our capital requirements; (ix) the uncertainties arising from our participation in the SBLF or any future redemption of the SBLF shares issued to Treasury; (x) our ability to attract and retain deposits; (xi) increases in premiums for deposit insurance; (xii) management’s assumptions in determining the adequacy of the allowance for loan losses; (xiii) our ability to control operating costs and expenses; (xiv) the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; (xv) difficulties in reducing risks associated with the loans on our balance sheet; (xvi) staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; (xvii) a failure or security breach in the computer systems on which we depend; (xviii) our ability to retain key members of our senior management team; (xix) costs and effects of litigation, including settlements and judgments; (xx) our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; (xxi) increased competitive pressures among financial services companies; (xxii) changes in consumer spending, borrowing and savings habits; (xxiii) the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; (xxiv) adverse changes in the securities markets; (xv) inability of key third-party providers to perform their obligations to us; (xvi) changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board; and (xvii) other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described elsewhere in this report.

The Company wishes to advise readers that these factors could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. 

Financial Condition

General. Total assets at September 30, 2012 were $1.5 billion and increased $45.2 million since December 31, 2011, primarily as a result of a 4.9% increase in gross loans, excluding loans held for sale, and a 3.6% increase in investment securities, which were offset in part by a decrease in cash and cash equivalents. Average interest-earning assets increased $29.3 million or 2.2% to $1.34 billion at September 30, 2012 from $1.31 billion at December 31, 2011, reflecting an increase in average investments. Average interest-bearing liabilities increased by $13.0 million or 1.1% to $1.17 billion at September 30, 2012, from $1.16 billion at December 31, 2011, reflecting an increase in average borrowings. Stockholders’ equity increased by $6.6 million or 5.0% during the nine months ended September 30, 2012.

Loans. Our gross loan portfolio, excluding loans held for sale, increased $44.6 million or 4.9% to $964.8 million at September 30, 2012 from $920.2 million at December 31, 2011.

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The following table reflects the changes in the gross amount of loans, excluding loans held for sale, by type during the period:

	At
	September 30, 2012		December 31, 2011		Amount Change			Percent Change
Commercial Loans:
Real Estate	$	195,465	$	197,390	$	(1,925	)		(0.98	)%
Construction and Development		16,718		20,831		(4,113	)		(19.74	)
Other		61,876		64,628		(2,752	)		(4.26	)
Total Commercial		274,059		282,849		(8,790	)		(3.11	)
Residential Mortgages		491,012		434,976		56,036			12.88
Consumer Loans:
Real estate		98,572		96,864		1,708			1.76
Auto		15,337		15,203		134			0.88
Boat/RV		79,175		83,557		(4,382	)		(5.24	)
Other		6,692		6,760		(68	)		(1.01	)
Total Consumer		199,776		202,384		(2,608	)		(1.29	)
Total Loans	$	964,847	$	920,209	$	44,638			4.85	%

Although the Bank has an overall strategy to increase commercial and consumer loans, the strategy has been hindered by depressed economic conditions in Indiana as a result of the recent recession. Due to increased unemployment and decreased real estate values, loan demand, especially for business loans, has remained sluggish. We are seeking opportunities to refinance sound commercial borrowers from other financial institutions. The decrease in the commercial and consumer portfolios was offset by an increase in residential mortgage lending of $56.0 million during the period. The lower rates have allowed consumers to refinance their mortgage loans and the Bank continues to see this business as strong with less credit risk. Currently the bank is also selling 30-year fixed-rate mortgage loans which helps reduce risk.

Delinquencies and Non-performing Assets. As of September 30, 2012, our total loans delinquent 30-to-89 days were $19.7 million or 2.0% of total loans compared to $30.5 million or 2.9% at December 31, 2011.

At September 30, 2012, our non-performing assets totaled $30.6 million or 2.08% of total assets, compared to $39.2 million or 2.75% of total assets at December 31, 2011. This $8.6 million, or 21.9% decrease was primarily the result of a decrease of non-performing commercial real estate loans. The table below sets forth the amounts and categories of non-performing assets in our loan portfolio at the dates indicated.

	At
	September 30,  2012		December 31, 2011		Amount Change			Percent Change
Non-accruing loans	$	23,112	$	30,711	$	(7,599	)		(24.74	)%
Accruing loans delinquent 90 days or more		757		1,127		(370	)		(32.83	)
Foreclosed assets		6,757		7,392		(635	)		(8.59	)
Total	$	30,626	$	39,230	$	(8,604	)		(21.93	)%

Our non-performing assets have decreased dramatically due to continued improvement in the economic environment and being able to work through problem credits. As of September 30, 2012, we have seen our third consecutive quarter of decreases as non-performing assets were down $2.2 million and $8.6 million at the three and nine months ended September 30, 2012, respectively. The Bank is diligently monitoring and writing down loans that appear to have irreversible weakness. In addition to the decrease in non-performing assets, the Company has seen significant improvement during the year in total classified assets. Total classified assets decreased 20.9% from $69.4 million at December 31, 2011 to $54.9 million at September 30, 2012. The Bank works to ensure possible problem loans have been identified and steps have been taken to reduce loss by restructuring loans to improve cash flow or by increasing collateral, when necessary.

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At September 30, 2012, foreclosed commercial real estate totaled $1.9 million and consisted of 13 commercial buildings in our existing lending footprint. In addition, 44 residential properties with a book value of $4.3 million remained as foreclosed assets at September 30, 2012. Of the total foreclosed assets, one property held in real estate owned totaled $2.4 million. At September 30, 2012, the Bank had $573,000 in other repossessed assets. Non-accruing commercial real estate loans, including construction and development loans, decreased $1.9 million in the quarter from $10.9 million at June 30, 2011, to $9.0 million at September 30, 2012. During the quarter, non-accruing one- to four-family loans remained fairly consistent, only increasing by $130,000. Management continues to monitor these loans aggressively and it is management’s opinion that the non-accruing loans are sufficiently reserved as of September 30, 2012.  

Allowance For Loan Loss. Allowance for loan losses decreased $945,000 to $15.5 million at September 30, 2012 when compared to September 30, 2011 as reflected below.

	At and For the Nine Months Ended September 30,
	2012			2011
Balance at beginning of period	$	16,815		$	16,372
Charge-offs		7,040			9,873
Recoveries		1,086			882
Net charge-offs		5,954			8,991
Provisions charged to operations		4,675			9,100
Balance at end of period	$	15,536		$	16,481
Ratio of net charge-offs during the period to average loans outstanding during the period		0.81	%		1.24	%
Allowance as a percentage of non-performing loans		65.09	%		60.95	%
Allowance as a percentage of total loans (end of period)		1.61	%		1.72	%

Specific loan loss allocations related to loans that have been individually evaluated for impairment decreased and general loan loss reserves have remained approximately the same. Charge-offs were taken against loans that had previous specific loan loss reserves. Net charge offs for the first nine months of 2012 were $6.0 million, or 0.84% of average loans on an annualized basis, compared to $9.0 million, or 1.24% of average loans for the first nine months of 2011. The decrease was due to what management believes is a stabilization of the loan portfolio. As of September 30, 2012, the allowance for loan losses as a percentage of loans receivable and non-performing loans was 1.61% and 65.09%, respectively, compared to 1.83% and 52.81% respectively, at December 31, 2011. Allowance for loan losses as a percentage of loans receivable decreased due to an increase in the net loan portfolio of $44.6 million since year-end. Allowance for loan losses as a percentage of non-performing loans increased due to the decrease in non-performing loans in the first nine months of 2012.

Over 24.8% of our non-accrual loans are comprised of four commercial loans totaling $5.7 million. All of these loans are commercial real estate loans, including construction and development loans.

Deposits. Total deposits increased $26.4 million to $1.19 billion at September 30, 2012, primarily due to increased activity in new and existing core deposit relationships as reflected in the table below with corresponding weighted average rates partially offset by a decrease in certificates of deposit. The increase in non-interest bearing deposits reflects an increase in business checking. These changes are consistent with the Bank’s strategy to grow and strengthen core deposit relationships.

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	At
	September 30, 2012					December 31, 2011
	Amount		Weighted Average Rate			Amount		Weighted Average Rate
Type of Account
Non-interest Checking	$	133,244		0.00	%	$	122,215		0.00	%
Interest-bearing NOW		252,791		0.35			218,916		0.49
Savings		106,859		0.05			98,122		0.05
Money Market		98,308		0.44			85,069		0.65
Certificates of Deposit		601,829		1.70			642,315		1.91
Total	$	1,193,031		0.97	%	$	1,166,637		1.22	%

Borrowings. Total borrowings increased $11.1 million, or 9.8%, to $125.0 million at September 30, 2012 primarily due to an $11.7 million increase in FHLB advances to $113.2 million at the end of the period. The increase in advances was necessary to fund current loan demand. Other borrowings, consisting of a bank loan and a subordinated debenture, decreased $598,000 to $11.8 million at September 30, 2012 due to regular loan payments.

In 2009, the Company borrowed $10.0 million from First Tennessee Bank, N.A. to refinance existing long-term debt. The loan bears a 5.9% interest rate, has a term expiring in December 2014 and is secured by Bank stock. The balance of that loan was $8.0 million at September 30, 2012.

The Company acquired $5.0 million of issuer trust preferred securities in a 2008 acquisition of another financial institution. The net balance of the note as of September 30, 2012 was $4.0 million due to the purchase accounting adjustment from the acquisition. The securities were issued on July 29, 2005. The securities bore a fixed rate of interest of 6.22% through July 2010, and, thereafter, the rate was to reset quarterly 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 has had the right to redeem the trust preferred securities, in whole or in part, without penalty, since establishing the cash flow hedge. These securities mature on September 15, 2035.

Stockholders’ Equity. Stockholders’ equity was $139.3 million at September 30, 2012, an increase of $6.6 million from December 31, 2011. The increase was due primarily to net income of $5.2 million and unrealized gains on securities of $3.3 million. The increase was offset by dividend payments of $2.3 million to common and preferred shareholders. The Company’s tangible book value per share as of September 30, 2012 increased to $15.40 compared to $14.38 as of December 31, 2011 and the tangible common equity ratio was 7.33% as of September 30, 2012 compared to 7.05% as of December 31, 2011.

Comparison of Results of Operations for the Three Months Ended September 30, 2012 and 2011

General. Net income available to common shareholders for the three months ended September 30, 2012 was $1.8 million or $0.26 basic and diluted earnings per common share compared to net income of $596,000, or $0.09 basic and diluted earnings per common share for the three months ended September 30, 2011. The primary reason for this increase was a reduction in the provision for loan loss of $1.7 million compared to the same period last year. Annualized return on assets was .59% and return on average tangible common equity was 6.83% for the third quarter of 2012 compared to .41% and 2.37% respectively, for the same period last year.

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Interest Income. Total interest income decreased $1.3 million, or 8.8%, to $13.9 million during the three months ended September 30, 2012 from $15.2 million during the three months ended September 30, 2011. The decrease was a result of a decline in net interest yield on interest-earning assets of 56 basis points, partially offset by an increase in average earning assets of $46.8 million comparing the third quarter of 2012 with the same period in 2011. The decline in yield was primarily due to the decline in national and local prevailing interest rates and the mix of interest-earning assets. Interest income on loans in the third quarter of 2012 was $11.5 million compared to $13.0 million for same period in 2011, reflecting a slight decrease in the average balance of the loan portfolio at September 30, 2012 and a 60 basis point decrease in the weighted average yield on loans for the three months ended September 30, 2012 to 4.79%. Interest income on investment securities for the third quarter 2012 was $2.4 million compared to $2.2 million for the same period in 2011, reflecting a $51.3 million increase in our average investment securities portfolio to $368.9 million as of September 30, 2012.

Interest Expense. Interest expense decreased $1.3 million, or 26.0%, to $3.6 million during the three months ended September 30, 2012 compared to $4.9 million during the three months ended September 30, 2011. The primary reason for this decrease was a decline of 47 basis points in the average cost of interest-bearing liabilities from 1.69% in the 2011 period to 1.22% in the 2012 period, which was primarily due to continued re-pricing of deposit accounts and reduction of higher rate FHLB advances. Interest expense on deposits decreased $1.0 million, due to a 40 basis point decline in average rates. Interest expense on borrowings decreased $220,000 as a result of a 139 basis point decline in average rates, partially offset by a $31.4 million increase in average borrowings in the third quarter 2012.

Net Interest Income. Net interest income before the provision for loan losses decreased $80,000 for the quarter ended September 30, 2012 compared to the same period in 2011. The decrease was a result of a decline in net interest margin by 14 basis points, partially offset by an increase in average earning assets of $46.8 million comparing the third quarter of 2012 with the same period in 2011. For more information on our asset/liability management, especially as it relates to interest rate risk, see Item 7A - Quantitative and Qualitative Disclosures About Market Risk” on Form 10-K for the period ended December 31, 2011.

Provision for Loan Losses. The provision for loan losses for the third quarter of 2012 decreased to $1.5 million compared to $3.2 million during last year’s comparable period. The decrease was due to management’s ongoing evaluation of the adequacy of the allowance for loan losses, which was partially attributable to net charge offs decreasing to $1.9 million, or .81% of loans on an annualized basis in the third quarter of 2012 compared to net charge offs of $2.7 million, or 1.11% of loans on an annualized basis in the third quarter of 2011. Net charge offs exceeded the provision primarily due to charge offs related to previously identified loans which had established specific allocations. Non-performing loans to total loans at September 30, 2012 were 2.48% compared to 2.82% at September 30, 2011. Non-performing assets to total assets were 2.08% at September 30, 2012 compared to 2.43% at September 30, 2011.

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Other Income. Other (non-interest) income decreased by $283,000 to $4.4 million in the third quarter of 2012 compared to $4.7 million in the same period in 2011.

	Three Months Ended						Amount			Percent
Non-Interest Income	9/30/2012			9/30/2011			Change			Change
Service fee income	$	1,644		$	1,862		$	(218	)		-11.7	%
Net realized gain on sale of securities		1,095			1,764			(669	)		-37.9	%
Equity in losses of limited partnerships		(124	)		(107	)		(17	)		-15.9	%
Commissions		859			879			(20	)		-2.3	%
Net gains on sales of loans		541			245			296			120.8	%
Net servicing fees (costs)		(16	)		(337	)		321			95.3	%
Increase in cash surrender value of life insurance		340			346			(6	)		-1.7	%
Loss on sale of other real estate and repossessed assets		30			(22	)		52			236.4	%
Other income		12			34			(22	)		-64.7	%
Total Non-Interest Income	$	4,381		$	4,664		$	(283	)		-6.1	%

The decrease in non-interest income is primarily due to the decrease in gain on sale of securities. Service fee income on deposit accounts also decreased as fees collected on overdrafts have declined as overdraft transactions have decreased. This was partially offset by the increase in gain on sale of loans and servicing of loans due to the increased activity in the mortgage banking market. On a linked quarter basis, non-interest income increased $676,000 primarily due to gain on sale of investments.

Other Expense. Other (non-interest) expense increased by $96,000 to $10.1 million in the third quarter of 2012 compared to $10.0 million in the same period in 2011.

	Three Months Ended				Amount			Percent
Non-Interest Expense	9/30/2012		9/30/2011		Change			Change
Salaries and employee benefits	$	5,273	$	5,240	$	33			0.6	%
Net occupancy expenses		641		583		58			10.0	%
Equipment expenses		454		505		(51	)		-10.1	%
Data processing fees		361		373		(12	)		-3.2	%
Automated teller machine		258		241		17			7.1	%
Deposit insurance		312		330		(18	)		-5.5	%
Professional fees		420		433		(13	)		-3.0	%
Advertising and promotion		488		453		35			7.7	%
Software subscriptions and publications		384		338		46			13.6	%
Intangible amortization		229		280		(51	)		-18.2	%
Other real estate and repossessed assets		247		279		(32	)		-11.5	%
Other expenses		1,066		982		84			8.5	%
Total Non-Interest Expense	$	10,133	$	10,037	$	96			1.0	%

The increase in non-interest expense was primarily due to an approximately $200,000 expense related to property taxes to maintain secure collateral on a large problem loan, which was partially offset by the decrease in intangible amortization and equipment expenses. On a linked quarter, non-interest expense increased $200,000 for the above stated reason.

42

Income Tax Expense. Income tax expense for the quarter ended September 30, 2012 increased $540,000 compared to the same period in 2011 because of increased earnings. The Company’s effective tax rate increased to 29.6% in the 2012 period from 20.6% in the 2011 period because of increased net income and decreased low income housing credits as a percentage of net income.

Comparison of Results of Operations for the Nine Months Ended September 30, 2012 and 2011

General. Net income available to common stockholders for the nine months ended September 30, 2012 was $4.2 million or $0.60 basic and $0.59 diluted earnings per common share compared to net income of $682,000, or $0.10 basic and diluted earnings per common share for the nine months ended September 30, 2011. The primary reason for this increase was a decrease in provision for loan loss due to stabilization of the loan portfolio. Annualized return on assets was .48% and return on average tangible common equity was 5.31% for the nine months ended in 2012 compared to .23% and .93% respectively, for the same period last year.

Interest Income. Total interest income decreased $4.8 million, or 10.3%, to $41.9 million during the nine months ended September 30, 2012 from $46.7 million during the same period ended September 30, 2011, reflecting the decrease in our average yield on interest-earning assets by 57 basis points to 4.18% for the period ended September 30, 2012 compared to 4.75% for the period ended September 30, 2011 as national and local prevailing interest rates continued to decline and the mix of interest-earning assets shifted towards lower yielding investment securities. Interest income on loans in the first nine months of 2012 was $34.8 million compared to $40.1 million for same period in 2011, reflecting a $19.5 million increase in the average loan portfolio to $950.0 million at September 30, 2012 and a 63 basis point decrease in the weighted average yield on loans for the nine months ended September 30, 2012 to 4.88%. Interest income on investment securities for the first nine months of 2012 was $7.1 million compared to $6.6 million for the same period in 2011, reflecting a $60.0 million increase in our average investment securities portfolio to $365.0 million for the period ended September 30, 2012.

Interest Expense. Interest expense decreased $4.1 million, or 26.5%, to $11.4 million during the nine months ended September 30, 2012 compared to $15.5 million during the nine months ended September 30, 2011. The primary reason for this decrease was a decline of 48 basis points on interest-bearing liabilities from 1.77% in 2011 to 1.29% in 2012, which was primarily due to continued re-pricing of deposit accounts and reduction of higher rate FHLB advances. Interest expense on deposits decreased $3.3 million, due to a 42 basis point decline in average rates partially offset by an $819,000 increase in average interest-bearing deposits. Interest expense on borrowings decreased $788,000 as a result of a 107 basis point decline in average rates which was partially offset by an $8.7 million increase in average borrowings in the first nine months of 2012.

Net Interest Income. Net interest income before the provision for loan losses decreased $730,000 for the nine months ended of 2012 compared to the same period in 2011. The decrease was a result of the decline in the net interest margin from 3.18% in the first nine months of 2011 to 3.05% in the first nine months of 2012, which was partially offset by an increase in average earning assets of $23.8 million. For more information on our asset/liability management, especially as it relates to interest rate risk, see Item 7A - Quantitative and Qualitative Disclosures About Market Risk” on Form 10-K for the period ended December 31, 2011

Provision for Loan Losses. The provision for loan losses for the first nine months of 2012 decreased to $4.7 million compared to $9.1 million during last year’s comparable period. The decrease was due to management’s ongoing evaluation of the adequacy of the allowance for loans losses, which was partially attributable to a reduction in net charge offs to $6.0 million in the first nine months of 2012 compared to net charge offs of $9.0 million in the same period in 2011. Non-performing loans to total loans at September 30, 2012 were 2.48% compared to 3.47% at December 31, 2011. Non-performing loans decreased $8.0 million, or 25% as of September 30, 2012 compared to December 31, 2011.

43

Other Income. Other (non-interest) income increased by $392,000 to $11.0 million during nine months of 2012 compared to $10.6 million in the same period in 2011.

	Nine Months Ended						Amount			Percent
Non-Interest Income	9/30/2012			9/30/2011			Change			Change
Service fee income	$	5,049		$	5,193		$	(144	)		-2.8	%
Net realized gain on sale of securities		1,575			1,839			(264	)		-14.4	%
Equity in losses of limited partnerships		(372	)		(256	)		(116	)		-45.3	%
Commissions		2,914			2,835			79			2.8	%
Net gains on sales of loans		1,388			685			703			102.6	%
Net servicing fees (costs)		(126	)		(293	)		126			-43.0	%
Increase in cash surrender value of life insurance		1,017			1,071			(54	)		-5.0	%
Loss on sale of other real estate and repossessed assets		(523	)		(358	)		(165	)		-46.1	%
Net other-than-temporary losses on securities		-			(193	)		193			100.0	%
Other income		93			100			(7	)		-7.0	%
Total Non-Interest Income	$	11,015		$	10,623		$	392			3.7	%

The increase in non-interest income was primarily due to additional gains on sales of loans and decreased servicing costs of loans as the increased production in the mortgage banking area in combination with the lower market rates allowed for mortgage loans to be sold at gains. Partially offsetting these increases was a decrease in gain on sale of securities due to decreased investment sales in 2012 as well as the decrease in service fee income on deposits due to the reduction in overdraft fee income.

Other Expense. Other (non-interest) expense decreased by $579,000 to $29.7 million in the first nine months of 2012 compared to $30.2 million in the same period in 2011.

	Nine Months Ended				Amount			Percent
Non-Interest Expense	9/30/2012		9/30/2011		Change			Change
Salaries and employee benefits	$	15,910	$	16,103	$	(193	)		-1.2	%
Net occupancy expenses		1,744		1,917		(173	)		-9.0	%
Equipment expenses		1,346		1,487		(141	)		-9.5	%
Data processing fees		1,178		1,153		25			2.2	%
Automated teller machine		743		776		(33	)		-4.3	%
Deposit insurance		939		1,170		(231	)		-19.7	%
Professional fees		1,188		1,169		19			1.6	%
Advertising and promotion		1,214		1,053		161			15.3	%
Software subscriptions and publications		1,145		969		176			18.2	%
Intangible amortization		745		894		(149	)		-16.7	%
Other real estate and repossessed assets		691		746		(55	)		-7.4	%
Other expenses		2,816		2,801		15			0.5	%
Total Non-Interest Expense	$	29,659	$	30,238	$	(579	)		-1.9	%

Non-interest expense decreased primarily as a result of decreased occupancy and equipment expense due to operating one less branch that was closed in March of 2011 and a much milder winter than normal; decreased salaries and benefits primarily due to changes in employee benefits; and decreased FDIC expense due to the decreased assessment base established in 2011 by the FDIC. These decreases were partially offset by increases in software subscriptions and maintenance and an increase in marketing expense.

44

Income Tax Expense. Income tax expense for the nine months ended September 30, 2012 increased $1.9 million compared to the same period in 2011 because of increased net income. The Company’s effective tax rate increased to 27.3% in the 2012 period from 4.5% in the 2011 period because of increased net income and the decreased low income housing credits as a percentage of net income.

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. We also have off-balance sheet obligations to repay borrowings and deposits. During the quarter ended September 30, 2012, we engaged in no off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows. At September 30, 2012, the Bank had $57.4 million in commitments to make loans, $5.7 million in undisbursed portions of closed loans, $84.1 million in unused lines of credit and $2.3 million in standby letters of credit.

Liquidity

Information about the Company’s liquidity needs and management is included in Item 7 of the Form 10-K for the year ended December 31, 2011, filed with the SEC on March 16, 2012, under the heading “Liquidity.”

During the third quarter of 2012, our liquidity levels stayed fairly consistent with that of the prior quarter. The Board of Directors requires the Bank to maintain a minimum liquidity ratio of 10% of deposits. At September 30, 2012, our ratio was 29.9%.

At September 30, 2012, the Company on a consolidated basis, had $387.1 million in cash and investment securities available for sale and $4.1 million in loans held for sale generally available for its cash needs. At September 30, 2012, the Bank had the ability to borrow an additional $183.3 million in FHLB advances and other available funding sources, if needed.

The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its own operating expenses (many of which are paid to the Bank), the Company is responsible for paying SBLF dividends to the Treasury, amounts owed on its trust preferred securities, any dividends declared to its common shareholders, and interest and principal on outstanding debt. The Company’s primary source of funds is Bank dividends, which are subject to regulatory limits. At September 30, 2012, the Company, on an unconsolidated basis, had $1.7 million in cash, interest-bearing deposits and liquid investments generally available for its cash needs.

At September 30, 2012, the approved outstanding loan commitments, including unused lines of credit, amounted to $149.8 million. Certificates of deposit scheduled to mature in one year or less at September 30, 2012, totaled $239.8 million; however, due to our competitive rates, 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.

Capital Resources

Effective with the conversion to an Indiana bank charter on January 1, 2012, the Bank became subject to minimum capital requirements imposed by the FDIC, which are substantially the same as the requirements the Bank was previously subject to as a federal savings bank. At September 30, 2012, the Bank’s regulatory capital exceeded these regulatory requirements, and the Bank was well-capitalized under regulatory prompt corrective action standards, consistent with our goals to operate a sound and profitable organization. The FDIC may require the Bank to have additional capital above specific regulatory levels if it believes the Bank is subject to increased risk due to asset problems, high interest rate risk and other risks. The FDIC has not required such additional capital.

45

When the Company became a bank holding company on January 1, 2012, it became subject to minimum capital requirements imposed by the FRB, which are substantially similar to those imposed on the Bank, including guidelines for bank holding companies to be considered well-capitalized. At September 30, 2012, the Company’s capital levels exceeded the bank holding company capital requirements and it was considered well-capitalized under FRB guidelines, consistent with our goals to operate a sound and profitable organization. 

The Company’s and Bank’s relevant capital ratios at September 30, 2012, are reflected below:

	Actual Capital Levels					Minimum Regulatory Capital Levels					Minimum Required To be Considered Well-Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Leverage Capital Level(1):
MutualFirst (Consolidated)	$	123,181		8.47	%	$	57,693		4.0	%	$	72,117		N/A
MutualBank		129,997		8.94			58,140		4.0			72,674		5.0
Tier 1 Risk-Based Capital Level(2) :
MutualFirst (Consolidated)	$	123,181		13.02	%	$	37,837		4.0	%	$	56,756		6.0	%
MutualBank		129,997		13.76			37,796		4.0			56,694		6.0
Total Risk-Based Capital Level(3) :
MutualFirst (Consolidated)	$	135,038		14.28	%	$	75,674		8.0	%	$	94,593		10.0	%
MutualBank		141,854		15.01			75,592		8.0			94,490		10.0

1. Tier 1 Capital to Average Total Assets of $1.5 billion for the Bank and Company, respectively.

2. Tier 1 Capital to Risk-Weighted Assets of $944.9 million and $945.9 for the Bank and Company, respectively.

3. Total Capital to Risk-Weighted Assets of $944.9 million and $945.9 for the Bank and Company, 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 economic value 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 changes in the consumer price index coincides with changes in interest rates or asset values.  For example, the price of one or more of the components of the consumer price index may fluctuate considerably, influencing composite consumer price index, without having a corresponding affect on interest rates, asset values, or the cost of those goods and services normally purchased by us.  In years of high inflation and high interest rates, intermediate and long-term interest rates tend to increase, adversely impacting the market values of investment securities, mortgage loans and other long-term fixed rate loans.  In addition, higher short-term interest rates tend to increase the cost of funds.  In other years, the opposite may occur.

46

Item 3 - Quantitative and Qualitative Disclosures about Market Risk

Information about the Company’s asset and liability management and market and interest-rate risks is included in Item 7A of the Form 10-K for the year ended December 31, 2011, filed with the SEC on March 16, 2012.

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.

The Bank’s Board of Directors sets and recommends these 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 team. 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, during the quarter ended September 30, 2012, we sold in the secondary market $19.5 million of fixed rate, one- to four-family mortgage loans with a term to maturity of over 15 years.

47

In connection with our conversion to a commercial bank charter in the first quarter of 2012; we formulated a new interest rate risk measurement process that measures both earnings and capital risk in accordance with the FDIC guidance on interest rate risk. The following chart indicates the Bank’s percentage change in net income and capital assuming the most severe movement in interest rates as an immediate parallel rate shock in a range from down 100 basis points to up 400 basis points as of September 30, 2012.

Rate Shock	Net Interest Income  (% Change)			Capital  (% Change)
Up 400 bp		(29.1	)%		(30.4	)%
Up 300 bp		(20.8	)		(18.5	)
Up 200 bp		(13.0	)		(7.7	)
Up 100 bp		(6.0	)		(0.4	)
Down 100 bp		(5.9	)		(20.8	)

The Company also does interest rate shocks that are not immediate parallel shocks in various rate scenarios. Management currently believes that interest rate risk is managed appropriately in more practical rate shock scenarios than those in the chart above.

Item - 4 Controls and Procedures.

An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a -15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), as of September 30, 2012, was carried out under the supervision of and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management since that date. The Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2012, 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 Exchange 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 have been no changes in our internal control over financial reporting (as defined in Rule 13a - 15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2012 that have materially affected, or are 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 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 is 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 can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.  The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential 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.

The Company intends to continually review and to evaluate the design and effectiveness of its disclosure controls and procedures and to improve its controls and procedures over time and to correct any deficiencies that it may discover in the future.  The goal is to ensure that senior management has timely access to all material financial and non-financial information concerning the Company’s business.  While the Company believes the present design of its disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures.

48

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 Annual Report on Form 10-K for the year ended December 31, 2011.

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

None.

Item 3.  Defaults Upon Senior Securities.

None.

Item 4.  Mine Safety Disclosures.

Not applicable.

Item 5.  Other Information.

None.

49

Item 6.  Exhibits.

Regulation S-K Exhibit Number	Document	Reference to Prior Filing or Exhibit Number Attached Hereto
3.1	Articles of Incorporation	b
3.2	Articles Supplementary for the Series A Preferred Stock	c
3.3	Articles Supplementary for the SBLF Preferred Stock	a
3.4	Amended Bylaws	k
3.5	Articles Supplementary to the Company’s Charter re: term of appointed directors	l
4.1	Form of Common Stock Certificate	b
4.2	Warrant for Purchase of Shares of Common Stock	c
4.3	Form of Certificate for the Series A Preferred Stock	d
4.4	Form of Certificate for the SBLF Preferred Stock	a
10.1	Employment Agreement with David W. Heeter	p
10.2	Employment Agreement with Patrick C. Botts	p
10.3	Form of Supplemental Retirement Plan Income Agreements for Patrick C. Botts	f
	and David W. Heeter
10.4	Named Executive Officer Salaries and Bonus Arrangements for 2012	n
10.5	Form of Director Shareholder Benefit Program Agreement, as amended, for Jerry D. McVicker	g
10.6	Form of Agreements for Executive Deferred Compensation Plan for Patrick C. Botts and David W. Heeter	f
10.7	Registrant’s 2001 Stock Option and Incentive Plan	h
10.8	Registrant’s 2001 Recognition and Retention Plan	h
10.9	Director Fee Arrangements for 2012	o
10.10	Director Deferred Compensation Plan	i
10.11	MutualFirst Financial, Inc. 2008 Stock Option and Incentive Plan	d
10.12	MFB Corp. 2002 Stock Option Plan	d
10.13	MFB Corp. 1997 Stock Option Plan	d
10.14	Employment Agreement with Charles J. Viater	p
10.15	Salary Continuation Agreement with Charles J. Viater	d
10.16	Letter Agreement (including Schedule A, Securities Purchase Agreement, dated December 23, 2008 between MutualFirst Financial, Inc. and United States Department of the Treasury with respect to the issuance and sale of the Series A Preferred Stock and Warrant	c
10.17	Loan Agreement with First Tennessee Bank National Association dated December 21, 2009.	m
10.18	Form of Incentive Stock Option Agreement for 2008 Stock Option and Incentive Plan	j
10.19	Form of Non-Qualified Stock Option Agreement for 2008 Stock Option and Incentive Plan	j
10.20	Small Business Lending Fund - Securities Purchase Agreement, dated August 25, 2011, between MutualFirst Financial, Inc. and the Secretary of the Treasury, with respect to the issuance and sale of the SBLF Preferred Stock	a
10.21	Repurchase Agreement dated August 25, 2011, between MutualFirst Financial, Inc. and the United States Department of the Treasury, with respect to the repurchase and redemption of the TARP Preferred Stock	a
10.22	Employment Agreement with Christopher D. Cook	p

50

11	Statement re computation of per share earnings	None
12	Statements re computation of ratios	None
18	Letter re change in accounting principles	None
19	Report furnished to security holders	None
22	Published report regarding matters submitted to vote of security holders	None
23	Consents of Experts and Counsel	None
24	Power of Attorney	None
31.1	Rule 13(a)-14(a) Certification (Chief Executive Officer)	31.1
31.2	Rule 13(a)-14(a) Certification (Chief Financial Officer)	31.2
32	Section 1350 Certification	32
101	Financial Statements from the Company’s Form 10-Q for the period ended September 30, 2012, formatted in Extensive Business Reporting Language (XBRL); (i) Consolidated Condensed Balance Sheets as of September 30, 2012 and December 31, 2011; (ii) Consolidated Condensed Statements of Income for the Three and Nine Months Ended September 30, 2012 and 2011; (iii) Consolidated Condensed Statement of Stockholders’ Equity for the Period Ended September 30, 2012; (iv) Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011; and (vi) Notes to Consolidated Financial Statements for the Three and Nine Months Ended September 30, 2012 and 2011, as follows:	101
	101.INS                XBRL Instance Document	101.INS
	101.SCH               XBRL Taxonomy Extension Schema Document	101.SCH
	101.CAL               XBRL Taxonomy Extension Calculation Linkbase Document	101.CAL
	101.DEF               XBRL Taxonomy Extension Definition Linkbase Document	101.DEF
	101.LAB               XBRL Taxonomy Extension Labels Linkbase Document	101.LAB
	101.PRE                XBRL Taxonomy Extension Presentation Linkbase Document	101.PRE

a	Filed as an exhibit to the Company’s Form 8-K filed on August 26, 2011 and incorporated herein by reference.
b	Filed as an exhibit to the Company’s Form S-1 registration statement filed on September 16, 1999 (File No. 333-87239) pursuant to Section 5 of the Securities Act of 1933 and incorporated herein by reference.
c	Filed as an exhibit to the Company’s Form 8-K filed on December 23, 2008 (File No. 000-27905) and incorporated herein by reference.
d	Filed as an Exhibit to the Company’s Annual Report on Form 10-K filed on March 23, 2009 and incorporated herein by reference.
e	Filed as an exhibit to the Company’s Annual Report on Form 10-K filed on March 15, 2004. Such previously filed document is incorporated herein by reference in accordance with Item 601 of Regulation S-K.
f	Filed as an exhibit to the Company’s Annual Report on Form 10-K filed on March 30, 2001. Such previously filed document is incorporated herein by reference in accordance with Item 601 of Regulation S-K.
g	Filed as an exhibit to the Company’s Annual Report on Form 10-K filed on April 2, 2002. Such previously filed document is incorporated herein by reference in accordance with Item 601 of Regulation S-K.
h	Filed as an Appendix to the Company’s Form S-4/A Registration Statement filed on October 19, 2001 (File No. 333-46510). Such previously filed document is incorporated herein by reference in accordance with Item 601 of Regulation S-K.
i	Filed as an exhibit to the Company’s Annual Report on Form 10-K filed on March 16, 2007. Such previously filed document is incorporated herein by reference in accordance with Item 601 of Regulation S-K.
j	Filed as an exhibit to the Company’s Form 10-K filed on March 23, 2010 and incorporated herein by reference.
k	Filed as an exhibit to the Company’s Form 8-K filed on October 15, 2007 (File No. 000-27905). Such previously filed document is incorporated herein by reference in accordance with Item 601 of Regulation S-K.
l	Filed as an exhibit to the Company’s Form 8-K filed on July 15, 2008 and incorporated herein by reference.

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m	Filed as an exhibit to the Company’s Form 8-K filed on December 24, 2009 and incorporated herein by reference.
n	Filed as an exhibit to the Company’s Form 8-K filed on February 15, 2012 and incorporated herein by reference.
o	Filed as an exhibit to the Company’s Form 10-K filed on March 16, 2012 and incorporated herein by reference.
p	Filed as an exhibit to the Company’s Form 10-Q filed on November 14, 2012 and incorporated herein by reference.

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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.

Date:  November 14, 2012	By:	/s/David W. Heeter
		David W. Heeter
		President and Chief Executive Officer
Date:  November 14, 2012	By:	/s/Christopher D. Cook
		Christopher D. Cook
		Senior Vice President, Treasurer and Chief Financial Officer

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INDEX TO EXHIBITS

Number	Description
10.1	Employment Agreement with David W. Heeter
10.2	Employment Agreement with Patrick C. Botts
10.14	Employment Agreement with Charles J. Viater
10.22	Employment Agreement with Christopher D. Cook
31.1	Rule 13(a)-14(a) Certification (Chief Executive Officer)
31.2	Rule 13(a)-14(a) Certification (Chief Financial Officer)
32	Section 1350 Certification
101	Financial Statements from the Company’s Form 10-Q for the period ended September 30, 2012, formatted in Extensive Business Reporting Language (XBRL); (i) Consolidated Condensed Balance Sheets as of September 30, 2012 and December 31, 2011; (ii) Consolidated Condensed Statements of Income for the Three and Nine Months Ended September 30, 2012 and 2011; (iii) Consolidated Condensed Statement of Stockholders’ Equity for the Period Ended September 30, 2012; (iv) Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011; and (vi) Notes to Consolidated Financial Statements Three and Nine Months Ended September 30, 2012 and 2011, as follows:
	101.INS	XBRL Instance Document
	101.SCH	XBRL Taxonomy Extension Schema Document
	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
	101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
	101.LAB	XBRL Taxonomy Extension Labels Linkbase Document
	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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