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FORM 10 - Q
MutualFirst Financial, Inc.

INDEX

PART 1     FINANCIAL INFORMATION
ITEM 1.     Financial Statements

See notes to consolidated condensed financial statements.

See notes to consolidated condensed financial statements.

See notes to consolidated condensed financial statements.

Note 1: Basis of Presentation

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

Certain information and note disclosures normally included in the Company's annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-K annual report for 2002 filed with the Securities and Exchange Commission.

The interim consolidated financial statements at September 30, 2003 have not been audited by independent accountants, but in the opinion of management, reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for such periods. The results of operations for the period are not necessarily indicative of the results to be expected for the full year.

The Consolidated Condensed Balance Sheet of the Company as of December 31, 2002 has been derived from the Audited Consolidated Balance Sheet of the Company as of that date.

Note 2: Benefit Plans

On December 1, 2000, the stockholders of the Company approved a Stock Option Plan and a Recognition and Retention Plan (RRP). These plans allow for the purchase in the open market or through the issuance of authorized and unissued shares of up to 581,961 shares of common stock for the Stock Option Plan and 232,784 shares of common stock for the RRP. Under the Stock Option Plan, stock option rights covering 581,961 shares of stock may be granted to officers, key employees and directors of the Company and its subsidiaries. Options for 507,000 of such shares were granted effective January 12, 2001. The options have an exercise price per share equal to the market value at the date of grant. Of the options granted, 247,248 have a 15-year term and 259,752 have a 10-year term. 212,000 of these options become exercisable at the rate of 33.3% per year and 295,000 become exercisable at a rate of 20% per year. Under the RRP plan, stock awards covering 232,784 shares of common may be awarded to the directors and key employees of the Company and its subsidiaries. Grants of 209,000 of such shares have been awarded effective January 12, 2001. Beginning March 20, 2001, 122,000 of these shares vest at a rate of 20% per year and 87,000 shares were fully vested as of March 20, 2002. Expense under the RRP plan was $112,500 and $337,500 for the three- and nine-month periods ended September 30, 2003, respectively.

Note 3: Stock Options

The Company has a stock-based employee compensation plan, which is described more fully in Notes to Financial Statements included in the December 31, 2002 Annual Report to shareholders. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the grant date. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. (Dollars in thousands except for per share data)

Note 4 -- Earnings per share

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

Note 5: Effect of Recent Accounting Pronouncements

In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 establishes standards for classification and measurement in the statement of financial position of certain financial instruments with characteristics of both liabilities and equity.

SFAS 150 was effective for [public entities'] mandatorily redeemable financial instruments on July 1, 2003 [for public companies with fiscal year ends]. The Statement was to apply to [nonpublic companies'] fiscal periods beginning after December 15, 2003. However, the FASB has proposed to defer provisions related to mandatorily redeemable financial instruments to periods beginning after December 15, 2004 for specified nonpublic companies. MutualFirst Financial Inc. has determined that it has no such instruments.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement clarifies reporting of contracts as either derivatives or hybrid instruments. MutualFirst Financial, Inc. has determined that it has no such instruments.

In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities. FIN 46 provides guidance with respect to variable interest entities and when the assets, liabilities, non-controlling interest, and results of operations of a variable interest entity need to be included in a company's consolidated financial statements. A variable interest entity exists when either the total equity investment at risk is not sufficient to permit the entity to finance its activities by itself, or the equity investors lack one of three characteristics associated with owning a controlling financial interest. Those characteristics are the direct or indirect ability to make decisions about an entity's activities through voting rights or similar rights, the obligation to absorb the expected losses of an entity if they occur, and the right to receive the expected residual returns of the entity if they occur.

FIN No. 46 was effective immediately for new entities that were created or acquired after January 31, 2003. The effective date for entities in which MutualFirst Financial had a variable interest prior to February 1, 2003 was originally July 1, 2003 but the FASB delayed the effective date for these entities to December 15, 2003. MutualFirst Financial, Inc. adopted FIN No. 46 on a prospective basis and, accordingly will not restate prior periods. The effect of the adoption did not have a material impact on the results of operations, financial position or cash flows of MutualFirst Financial, Inc.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-based Compensation - - Transition and Disclosure, which provides guidance for transition from the intrinsic value method of accounting for stock-based compensation under Accounting Principles Board ("APB") Opinion No. 25 to SFAS No. 123's fair value method of accounting, if a company so elects. MutualFirst Financial applies APB Opinion No. 25 and related Interpretations in accounting for the stock option plan. Accordingly, no compensation costs have been recognized, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Had compensation cost for MutualFirst Financial's stock option plan been recorded based on the fair value at the grant dates for awards under the plan consistent with the method prescribed by SFAS No. 123, net income and net income per share would have been adjusted to the proforma amounts indicated in Note 3.

In November 2002, FASB Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others was issued. FIN 45 requires the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The most significant FIN 45 instruments of MutualFirst Financial are standby letters of credit. MutualFirst Financial has determined that its standby letters of credit obligations under FIN 45 are not material for disclosure.

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

General

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

Mutual Federal was originally organized in 1889 and currently conducts its business from seventeen full service offices located in Delaware, Randolph, Grant, and Kosciusko counties, Indiana, with its main office located in Muncie. Mutual Federal's principal business consists of attracting deposits from the general public and originating fixed rate and adjustable rate loans secured primarily by first mortgage liens on one- to four- family residential real estate as well as commercial real estate and loans on consumer goods. The Savings Association Insurance Fund (SAIF) of the FDIC insures Mutual Federal's deposit accounts up to applicable limits.

Mutual Federal currently owns two subsidiaries, First MFSB Corporation and Third MFSB Corporation. The assets of First MFSB Corporation consist of an investment in Family Financial Life Insurance Company. Family Financial is an Indiana stock insurance company that primarily engages in retail sales of mortgage and credit life insurance products in connection with loans originated by its shareholder financial institutions. Third MFSB, which does business as Mutual Financial Services, offers tax-deferred annuities and long-term health and life insurance products. All securities- related products and services made available through Mutual Financial Services are offered by a third party independent broker-dealer.

The Company's results of operations depend primarily on the level of net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and investments, and costs incurred with respect to interest-bearing liabilities, primarily deposits and borrowings. Results of operations also depend upon the level of the Company's non-interest income, including fee income and service charges, and the level of its non-interest expense, including general and administrative expenses.

Critical Accounting Policies

The notes to the consolidated financial statements contain a summary of the Company's significant accounting policies presented on pages 22 to 24 of the Annual Report to Shareholders for the year ended December 31, 2002. Certain of these policies are important to the portrayal of the Company's financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management believes that its critical accounting policies include determining the allowance for loan losses, the valuation of foreclosed assets, mortgage servicing rights and intangible assets.

Allowance for Loan Losses

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

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

Foreclosed Assets

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

Mortgage Servicing Rights

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

Intangible Assets

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

Forward Looking Statements

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

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

Financial Condition

Assets totaled $813.7 million at September 30, 2003, an increase of $37.9 million from $775.8 million at December 31, 2002. The primary reason for the increase was a $47.8 million increase in loans, including loans held for sale, from $655.2 million at December 31, 2002 to $703.0 million at September 30, 2003. This increase was partially offset by a reduction in investment securities available for sale of $12.0 million from $42.4 million at December 31, 2002 to $30.4 million at September 30, 2003 to help fund the increases in loans. Excluding loans held for sale, the real estate mortgage loan portfolio increased $33.9 million during the period, consumer loans increased $16.2 million and commercial business loans increased $4.6 million.

Allowance for loan losses increased $421,000 from $6.3 million at December 31, 2002 to $6.7 million at September 30, 2003. The Company determined to increase its allowance primarily due to a continued slow economy in some of our market areas. Net charge offs for the first nine months of 2003 were $654,000 or .13% of average loans on an annualized basis, compared to $188,000, or .04% for the first nine months of 2002 which included a substantial recovery.

Total deposits were $576.0 million at September 30, 2003 an increase of $25.7 million or 4.7% from $550.4 million at December 31, 2002. Of this growth, $12.2 million was in core (demand, savings and money market) deposits. Total borrowings increased $8.8 million to $127.1 million at September 30, 2003 from $118.3 million at December 31, 2002.

Stockholders' equity decreased $349,000 to $96.4 million at September 30, 2003 from $96.7 million at December 31, 2002. The decrease was due primarily to the repurchase of 285,000 shares of common stock for $6.1 million and dividend payments of $1.6 million. These decreases were partially offset by net income of $6.4 million, Employee Stock Ownership Plan (ESOP) shares earned of $545,000, and RRP shares earned of $338,000. Also, unrealized gain on securities available for sale decreased $273,000 from $464,000 at December 31, 2002 to $191,000 at September 30, 2003 due to an increase in interest rates.

Comparison of the Operating Results for the Three Months Ended September 30, 2003 and 2002.

Net income for the quarter ended September 30, 2003 was $2.0 million, or $.41 for basic and $.39 for diluted earnings per share. This compared to net income for the comparable period in 2002 of $2.3 million, or $.44 for basic and $.43 for diluted earnings per share. Annualized return on average assets was .98% and return on average equity was 8.27% for the third quarter of 2003, compared to 1.19% and 9.50%, respectively, for the same period last year.

Interest income decreased $1.0 million, or 8.1%, from $12.5 million for the three months ended September 30, 2002 to $11.5 million for the three months ended September 30, 2003 due to a decrease in the yield on average interest-earning assets from 7.02% for the 2002 period to 6.24% for the 2003 period. The decrease in average yield was partially offset by an increase in average interest-earning assets from $715.4 million during the three months ended September 30, 2002 to $739.0 million during the comparable period in 2003. Interest expense decreased $1.0 million, or 17.7%, from $5.7 million for the three months ended September 30, 2002, to $4.7 million for the three months ended September 30, 2003 due to a decrease in the average cost of interest-bearing liabilities from 3.42% for the 2002 period to 2.71% for the 2003 period. The decrease in average cost was partially offset by an increase in the average interest-bearing liabilities from $667.2 million during the three months ended September 30, 2002 to $694.2 million during the comparable period in 2003. As a result, net interest income for the three-month period ended September 30, 2003 was flat at $6.8 million compared to the same period in 2002. The interest rate spread decreased from 3.60% for the three-month period ended September 30, 2002, to 3.55% for the comparable period in 2003 as yields on interest earning-assets decreased at a slightly faster rate than the decrease in the cost of interest-bearing liabilities.

The provision for loan losses for the third quarter of 2003 was $325,000, $50,000 less than last year's comparable period. Non-performing loans to total loans at September 30, 2003 were .42% compared to .78% at December 31, 2002. Non-performing assets to total assets were .52% at September 30, 2003, compared to .89% at December 31, 2002.

Non-interest income decreased $611,000 to $1.1 million for the three months ended September 30, 2003 compared to $1.7 million for the same period in 2002. The decrease was primarily due to a reduction in gains on sale of loans of $623,000 in the third quarter of 2003 compared to the comparable 2002 quarter due to a lower volume of loans sold and less favorable pricing due to increased interest rates.

Included in the reduction in gains of sale of loans was a $320,000 valuation impairment allowance on the Bank's originated mortgage servicing rights asset. Mortgage servicing rights are created when mortgage loans are sold and the Bank retains the servicing. Mortgage servicing rights are amortized to loan servicing income over the estimated average life of the loans sold so that when the loan pays off, as expected over time, the mortgage servicing asset will be amortized to zero over the same time frame. When interest rates increase, the value of the servicing rights will usually increase due to decreased prepayment speeds. When rates decline, their value will usually fall due to increased prepayment speeds. An independent valuation of the Bank's mortgage serving rights has indicated that the impairment allowance was warranted due to the recent decrease in interest rates and increased prepayment speeds. The valuation also indicated that if interest rates were to increase, a portion or all of the impairment allowance may be recovered, and if rates continue to fall additional impairment allowances would be necessary.

Non-interest expense increased $99,000 or 2.0% to $5.0 million for the three months ended September 30, 2003 compared to $4.9 million for the same period in 2002.

Income tax expense decreased $323,000 for the three months ended September 30, 2003 compared to the same period in 2002. The decrease resulted from decreased taxable income and a decrease in the effective tax rate from 29.4% to 24.5% due to increased low income housing tax credits as a percentage of taxable income.

Comparison of the Operating Results for the Nine-Months Ended September 30, 2003 and 2002.

Net income for the nine month period ended September 30, 2003 was $6.4 million or $1.28 for basic and $1.24 for diluted earnings per share. This compared to $6.2 million or $1.11 for basic and $1.09 for diluted earnings per share for the comparable period in 2002. The 13.8% increase in diluted earnings per share was a result of share repurchases and increased earnings during the period. The annualized return on average assets was 1.09% and the annualized return on average equity was 9.03% for the first nine months of 2003, compared to 1.07% and 8.04%, respectively, for the same period in 2002.

Interest income decreased $3.0 million, or 7.8% from $38.0 million for the nine months ended September 30, 2002 to $35.0 million for the nine months ended September 30, 2003. Interest expense decreased $3.2 million, or 18.2% from $17.7 million for the nine months ended September 30, 2002 to $14.5 million for the same period in 2003. As a result, net interest income for the nine-month period ended September 30, 2003 increased $273,000 or 1.3% compared to the same period in 2002. The average interest rate spread increased from 3.55% for the nine months ended September 30, 2002 to 3.61% for the comparable period in 2003.

Non-interest income for the nine months ended September 30, 2003 increased $221,000, or 5.1% from $4.3 million for the nine months ended September 30, 2002 to $4.5 million. This increase was due primarily to a $97,000 increase in gain on sale of loans (net of the aforementioned impairment allowance), a $148,000 increase in cash surrender value of life insurance and a $182,000 increase in service fee income in the 2003 period compared to the comparable period in 2002. These increases were partially offset by a decrease in other income of $151,000 due primarily to an increased amortization rate of mortgage servicing rights compared to the comparable period in 2002.

Non-interest expense increased $499,000 or 3.4% for the nine months ended September 30, 2003 compared to the same period in 2002. The majority of this increase was due to a $345,000 increase in salaries and employee benefits (which included a $175,000 increase in health insurance costs).

Income tax expense increased $40,000 for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002. The increase was due primarily to increased taxable income. The effective tax rate decreased from 27.7% to 27.3% when comparing the two nine month periods ended September 30, 2002 and 2003, respectively.

Liquidity and Capital Resources

The standard measure of liquidity for savings associations is the ratio of cash and eligible investments to a certain percentage of the net-withdrawable savings accounts and borrowings due within one year. As of September 30, 2003, Mutual Federal had liquid assets of $56.7 million and a liquidity ratio of 8.16 %.

ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk

Presented below as of September 30, 2003 and 2002 is an analysis of Mutual Federal's interest rate risk as measured by changes in Mutual Federal's net portfolio value ("NPV") assuming an instantaneous and sustained parallel shift in the yield curve, in 100 basis point increments.

The analysis at September 30, 2003 indicates that there have been no material changes in market interest rates for Mutual Federal's interest rate sensitivity instruments which would cause a material change in the market risk exposures that effect the quantitative and qualitative risk disclosures as presented in item 7A of the Company's annual report on Form 10-K for the period ended December 31, 2002.

Item 4. Controls and Procedures.

The Company intends to continually review and 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.

PART II. OTHER INFORMATION

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.