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

FORM 10-Q

(Mark One)

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ].

The number of shares of the Registrant's common stock, with $.01 par value, outstanding as of March 31, 2004, was 5,199,725.

FORM 10 - Q

MutualFirst Financial, Inc.

INDEX

Signature Page

PART 1 FINANCIAL INFORMATION

Item 1. Financial Statements

MUTUALFIRST FINANCIAL, INC.
Consolidated Condensed Balance Sheets

See notes to consolidated condensed financial statements.

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

    See notes to consolidated condensed financial statements.

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY
Consolidated Condensed Statement of Stockholders' Equity
For the Three Months Ended March 31, 2004
(Unaudited)

See notes to consolidated condensed financial statements.

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)

See notes to consolidated condensed financial statements.

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

Note 1: Basis of Presentation

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

Certain information and note disclosures normally included in the Company's annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-K annual report for 2003 filed with the Securities and Exchange Commission.

The interim consolidated condensed financial statements at March 31, 2004, 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, 2003, has been derived from the audited consolidated balance sheet of the Company as of that date.

The Company has a stock-based employee compensation plan that is described more fully in Notes to Financial Statements included in the December 31, 2003 Annual Report to stockholders. 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 2: Earnings per share

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

Certain securities were not included in the earnings per share calculation because they were antidilutive as of March 31, 2004.

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 of the Federal Deposit Insurance Corporation insures Mutual Federal's deposit accounts up to applicable limits.

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

The 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 23 to 25 of the Annual Report to Stockholders for the year ended December 31, 2003. Certain of these policies are important to the portrayal of the Company's financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management believes that its critical accounting policies include determining the allowance for loan losses, the valuation of foreclosed assets, mortgage servicing rights and intangible assets.

Allowance for Loan Losses

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

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

Foreclosed Assets

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

Mortgage Servicing Rights

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

Intangible Assets

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

Forward Looking Statements

This quarterly report on Form 10-Q ("Form 10-Q") contains statements that 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 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 anticipated or unanticipated events.

Financial Condition

Assets totaled $809.5 million at March 31, 2004, a decrease from December 31, 2003 of $14.3 million, or 1.7%. Gross loans, excluding loans held for sale, decreased $19.3 million, or 2.7%. Consumer loans decreased $1.8 million, or 1.0%, and commercial business loans increased $203,000, or .5%, while residential and commercial mortgage loans held in portfolio decreased $18.7 million, or 3.9%. The primary reason for the decrease was the sale of fixed-rate mortgage loans during the quarter, totaling $19.6 million, in order to control our interest rate risk exposure.

Allowance for loan losses was $6.8 million at March 31, 2004, virtually unchanged from December 31, 2003. Net charge offs for the quarter ended March 31, 2004, were $207,000 or .12% of average loans on an annualized basis compared to $220,000, or .13%, of average loans for the comparable period in 2003. As of March 31, 2004, the allowance for loan losses as a percentage of non-performing loans and total loans was 174.07% and .98%, respectively, compared to 208.26% and .95%, respectively at December 31, 2003.

Total deposits were $572.9 million at March 31, 2004, a decrease of $6.4 million, or 1.1%, from December 31, 2003. This decrease was due primarily to a reduction of short-term public deposits of $13.5 million and retail certificates of deposit of $6.3 million. This decrease was partially offset by growth in demand and savings deposits of $13.4 million. Total borrowings decreased $9.0 million to $128.1 million at March 31, 2004, from $137.1 million at December 31, 2003, due to the maturity of several FHLB advances.

Stockholders' equity decreased $758,000 from $97.5 million at December 31, 2003, to $96.8 million at March 31, 2004. The decrease was due primarily to the repurchase of 102,105 shares of common stock for $2.6 million and dividend payments of $575,000. These decreases were partially offset by net income of $2.0 million, Employee Stock Ownership Plan (ESOP) shares earned of $197,000, RRP shares earned of $150,000 and options exercised netting $126,000. Also, unrealized gain on securities available for sale decreased $73,000 from $234,000 at December 31, 2003, to $161,000 at March 31, 2004, due to a slight increase in interest rates.

Comparison of the Operating Results for the Three Months Ended March 31, 2004 and 2003

Net income for the quarter ended March 31, 2004, was $2.0 million, or $.41 for basic and $.40 for diluted earnings per share. This compared to net income for the comparable period in 2003 of $2.1 million, or $.42 for basic and $.40 for diluted earnings per share. Annualized return on average assets was .96% and return on average equity was 8.08% for the first quarter of 2004, compared to 1.07% and 8.68%, respectively, for the same period last year.

Interest income decreased $594,000, or 5.0%, from $11.8 million for the three months ended March 31, 2003, to $11.2 million for the three months ended March 31, 2004, due to a decrease in the yield on average interest-earning assets from 6.64% for the 2003 period to 5.97% for the 2004 period, primarily due to a decline in market rates of interest. The decrease in average yield was partially offset by an increase in average interest-earning assets from $710.0 million during the three months ended March 31, 2003, to $750.8 million during the first quarter in 2004. Interest expense decreased $597,000, or 12.0%, from $5.0 million for the three months ended March 31, 2003, to $4.4 million for the three months ended March 31, 2004, due to a decrease in the average cost of interest-bearing liabilities from 2.99% for the 2003 period to 2.48% for the 2004 period, primarily due to a decline in market rates of interest. The decrease in average cost was partially offset by an increase in average interest-bearing liabilities from $664.9 million during the three months ended March 31, 2003, to $704.8 million during the comparable period in 2004. As a result, net interest income, before provision for loan losses, was unchanged at $6.8 million for the three months ended March 31, 2004, compared to the three months ended March 31, 2003. The interest rate margin decreased from 3.85% for the three-month period ended March 31, 2003, to 3.64% for the comparable period in 2004 as yields on interest-earning assets decreased at a more rapid rate than the decrease in the cost of interest-bearing liabilities. This lower margin was offset by a $40.8 million increase in average interest-earning assets, when comparing the first quarter of 2004 to that of 2003.

The provision for loan losses for the first quarter of 2004 was $226,000, down from $375,000 for last year's comparable period. Non-performing loans to total loans at March 31, 2004, were .56% compared to .46% at December 31, 2003. Non-performing assets to total assets were .62% at March 31, 2004, compared to .57% at December 31, 2003. The provision for loan losses was lower for the 2004 period, even with an increase in non-performing loans, because of a recovery on a previously charged-off loan.

Non-interest income increased $135,000, or 9.6%, to $1.5 million for the three months ended March 31, 2004, compared to $1.4 million for the same period in 2003. The increase was due primarily to a $150,000 increase in income from limited partnerships for the 2004 quarter compared to the comparable 2003 quarter due to higher comparable occupancy rates in these low-income housing developments.

Non-interest expense increased $386,000 or 7.8% to $5.3 million for the three months ended March 31, 2004 compared to $4.9 million for the same period in 2003. The increase was due to a $184,000 increase in salaries and employee benefits, of which $61,000 was increased health insurance costs and $27,000 was increased ESOP expense due to the increased market value of the Company's stock. Also, the deferred compensation relating to loan origination costs as required by FASB Statement No. 91 was $91,000 less in the 2004 period compared to the 2003 period due to less loan origination activity. Occupancy and equipment expense was up $56,000 due primarily to costs related to loan origination and other software application upgrades. Data processing fees increased $38,000 due to increased communication line charges and other enhanced services. Other expenses increased $111,000 due to increases in legal and consulting services of $40,000 and other general and administrative expense increases.

Income tax expense was unchanged for the three months ended March 31, 2004 compared to the same period in 2003. The effective tax rate increased from 28.8% to 29.8%, when comparing the first quarter of 2003 and the first quarter of 2004, respectively. This increase was due to a decrease in available low income housing tax credits.

Liquidity and Capital Resources

The standard measure of liquidity for Mutual Federal 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 March 31, 2004, Mutual Federal had liquid assets of $ 62.2 million and a liquidity ratio of 8.84 %.

Item 3 - Quantitative and Qualitative Disclosures about Market Risk

Presented below as of March 31, 2004 and 2003 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 March 31, 2004, indicates that there have been no material changes in market interest rates for Mutual Federal's interest rate sensitivity instruments that 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, 2003.  

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 "Act") as of March 31, 2004, was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and several other members of the Company's senior management. The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedure as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and the Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. There have been no changes in our internal control over financial reporting (as defined in Rule 13a - 15(f) under the act) that occurred during the quarter ended March 31, 2004, that has materially affected, or is likely to materially affect our internal control over financial reporting.

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.