MUTUALFIRST FINANCIAL INC - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - MUTUALFIRST FINANCIAL INC	Financial_Report.xls
EX-31.1 - EXHIBIT 31.1 - MUTUALFIRST FINANCIAL INC	v385286_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - MUTUALFIRST FINANCIAL INC	v385286_ex31-2.htm
EX-32 - EXHIBIT 32 - MUTUALFIRST FINANCIAL INC	v385286_ex32.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2014
	OR
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ___________________ to ___________________

Commission File Number 000-27905

MutualFirst Financial, Inc.

(Exact name of registrant as specified in its charter)

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

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

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

Securities registered pursuant to Section 12(b) of the Act:

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

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

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

Indicate by 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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Act.

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

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

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date. As of July 29, 2014, there were 7,170,979 shares of the registrant’s common stock outstanding.

MutualFirst Financial, Inc.

Form 10-Q Quarterly Report for the Period Ended June 30, 2014

Table of Contents

		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	38

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	54

Item 4.	Controls and Procedures	57

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	58

Item 1A.	Risk Factors	58

Item 2.	Unregistered Sales of Equity Changes in Securities and Use of Proceeds	58

Item 3.	Defaults Upon Senior Securities	58

Item 4.	Mine Safety Disclosure	58

Item 5.	Other Information	58

Item 6.	Exhibits	59

Signature Page		62

Exhibits		63

MutualFirst Financial, Inc.

Consolidated Condensed Balance Sheets
(In Thousands, Except Share and Per Share Data)

	June 30,		December 31,
	2014		2013
	(Unaudited)
Assets
Cash and due from banks	$	6,911	$	8,013
Interest-bearing demand deposits		21,823		17,272
Cash and cash equivalents		28,734		25,285
Investment securities available for sale		267,225		264,348
Loans held for sale		5,482		1,888
Loans, net of allowance for loan losses of $13,243 and $13,412, at June 30, 2014 and December 31, 2013, respectively		981,063		965,966
Premises and equipment, net		31,104		31,471
Federal Home Loan Bank stock		14,391		14,391
Investment in limited partnerships		1,837		2,092
Deferred tax asset		13,543		17,002
Cash value of life insurance		50,414		49,843
Core deposit and other intangibles		1,406		1,629
Other assets		15,323		17,490
Total assets	$	1,410,522	$	1,391,405

Liabilities and Stockholders’ Equity
Liabilities
Deposits
Noninterest-bearing	$	149,940	$	144,195
Interest-bearing		929,360		968,889
Total deposits		1,079,300		1,113,084
Federal Home Loan Bank advances		187,046		142,928
Other borrowings		10,532		10,890
Other liabilities		13,857		12,861
Total liabilities		1,290,735		1,279,763

Commitments and Contingencies

Stockholders’ Equity
Common stock, $.01 par value
Authorized - 20,000,000 shares
Issued and outstanding - 7,157,979 and 7,117,179 shares		72		71
Additional paid-in capital		73,785		73,336
Retained earnings		45,172		41,650
Accumulated other comprehensive income (loss)		758		(3,415	)
Total stockholders’ equity		119,787		111,642
Total liabilities and stockholders’ equity	$	1,410,522	$	1,391,405

See notes to consolidated condensed financial statements.

MutualFirst Financial, Inc.

Consolidated Condensed Statements of Income
(Unaudited)

(In Thousands, Except Share and Per Share Data)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
Interest and Dividend Income
Loans receivable	$	10,817		$	11,040		$	21,584		$	22,063
Investment securities		1,793			1,705			3,560			3,450
Federal Home Loan Bank stock		131			125			331			252
Deposits with financial institutions		3			7			7			14
Total interest and dividend income		12,744			12,877			25,482			25,779

Interest Expense
Deposits		1,527			2,410			3,227			4,920
Federal Home Loan Bank advances		516			299			990			562
Other		143			148			288			298
Total interest expense		2,186			2,857			4,505			5,780

Net Interest Income		10,558			10,020			20,977			19,999
Provision for loan losses		500			550			850			1,500
Net Interest Income After Provision for Loan Losses		10,058			9,470			20,127			18,499

Other Income
Service fee income		1,538			1,364			2,879			2,935
Net realized gain on sales of available-for-sale securities		211			43			362			382
Commissions		1,178			1,174			2,260			2,156
Equity in losses of limited partnerships		(92	)		(128	)		(184	)		(254	)
Net gains on sales of loans		382			134			486			569
Net servicing fees (costs)		3			435			(22	)		407
Increase in cash value of life insurance		304			304			571			621
Gain (loss) on sale of other real estate and repossessed assets		(178	)		37			(240	)		56
Other income		68			97			175			225
Total other income		3,414			3,460			6,287			7,097

Other Expenses
Salaries and employee benefits		5,500			5,532			11,372			11,083
Net occupancy expenses		600			534			1,269			1,229
Equipment expenses		435			457			894			923
Data processing fees		402			371			807			755
Advertising and promotion		306			438			607			709
ATM expense		316			270			606			511
Deposit insurance		270			316			540			640
Professional fees		439			319			878			655
Software subscriptions and maintenance		386			311			802			679
Other real estate and repossessed assets		151			176			286			349
Other expenses		1,048			1,178			2,038			2,282
Total other expenses		9,853			9,902			20,099			19,815

Income Before Income Tax		3,619			3,028			6,315			5,781
Income tax expense		1,062			916			1,794			1,693

Net Income		2,557			2,112			4,521			4,088
Preferred stock dividends and accretion		-			278			-			640

Net Income Available to Common Shareholders	$	2,557		$	1,834		$	4,521		$	3,448

Earnings Per Share
Basic	$	0.36		$	0.26		$	0.63		$	0.49
Diluted	$	0.35		$	0.25		$	0.61		$	0.48

Dividends per common share	$	0.08		$	0.06		$	0.14		$	0.12

See notes to consolidated condensed financial statements.

MutualFirst Financial, Inc.

Consolidated Condensed Statements of Comprehensive Income
(Unaudited)

(In Thousands)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
Net Income	$	2,557		$	2,112		$	4,521		$	4,088
Other Comprehensive Income
Net unrealized holding gain (loss) on securities available-for-sale		3,164			(5,771	)		5,846			(6,711	)
Net unrealized gain on securities available-for-sale for which a portion of an other-than-temporary impairment has been recognized in income		205			475			839			465
Reclassification adjustment for realized gains included in net income		(211	)		(43	)		(362	)		(382	)
Net unrealized gain on derivative used for cash flow hedges		17			54			49			91
		3,175			(5,285	)		6,372			(6,537	)
Income tax (expense) benefit related to other comprehensive income		(1,100	)		1,838			(2,199	)		2,276
Other comprehensive income (loss)		2,075			(3,447	)		4,173			(4,261	)

Comprehensive Income (Loss)	$	4,632		$	(1,335	)	$	8,694		$	(173	)

See notes to consolidated condensed financial statements.

MutualFirst Financial, Inc.

Consolidated Condensed Statements of Stockholders’ Equity
For the Period Ended June 30, 2014

(Unaudited)

(In Thousands, Except Share and Per Share Data)

	Common Stock		Paid-in Capital Common		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balances December 31, 2013	$	71	$	73,336	$	41,650		$	(3,415	)	$	111,642
Net income						4,521						4,521
Other comprehensive income, net of taxes									4,173			4,173
Stock options, exercised		1		449								450
Cash dividends, common stock ($.14 per share)						(999	)					(999	)
Balances June 30, 2014	$	72	$	73,785	$	45,172		$	758		$	119,787

See notes to consolidated condensed financial statements.

MutualFirst Financial, Inc.

Consolidated Condensed Statements of Cash Flows
(Unaudited)

(In Thousands, Except Share and Per Share Data)

	Six Months Ended
	June 30,
	2014			2013
Operating Activities
Net income	$	4,521		$	4,088
Items not requiring (providing) cash
Provision for loan losses		850			1,500
Depreciation and amortization		962			2,503
Deferred income tax		1,260			169
Loans originated for sale		(18,990	)		(45,529	)
Proceeds from sales of loans held for sale		15,770			42,633
Gain on sale of loans held for sale		(486	)		(569	)
Gain on sale of securities - available for sale		(362	)		(382	)
(Gain) loss on sale of other real estate and repossessed assets		240			(56	)
Loss on sale of premises and equipment		8			-
Prepaid FDIC premium		-			1,647
Change in
Interest receivable and other assets		774			1,164
Interest payable and other liabilities		1,045			267
Cash value of life insurance		(571	)		(621	)
Other equity adjustments		275			223
Other adjustments		-			240
Net cash provided by operating activities		5,296			7,277

Investing Activities
Purchases of securities, available for sale		(34,623	)		(65,623	)
Proceeds from maturities and paydowns of securities, available for sale		14,800			33,017
Proceeds from sales of securities, available for sale		23,226			31,539
Net change in loans		(16,589	)		8,154
Purchases of premises and equipment		(481	)		(332	)
Proceeds from real estate owned sales		2,414			2,305
Net cash provided by (used in) investing activities		(11,253	)		9,060

Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits		16,512			(1,543	)
Certificates of deposit		(50,296	)		(28,040	)
Proceeds from FHLB advances		320,200			144,500
Repayment of FHLB advances		(276,082	)		(122,426	)
Repayment of other borrowings		(379	)		(379	)
Redemption of preferred stock		-			(7,231	)
Cash dividends		(999	)		(1,489	)
Other financing activities		450			377
Net cash provided by (used in) financing activities		9,406			(16,231	)

Net Change in Cash and Cash Equivalents		3,449			106

Cash and Cash Equivalents, Beginning of Period		25,285			32,778

Cash and Cash Equivalents, End of Period	$	28,734		$	32,884

Additional Cash Flows Information
Interest paid	$	4,432		$	5,825
Income tax paid		500			1,800
Transfers from loans to foreclosed real estate		1,148			788
Mortgage servicing rights capitalized		113			259

See notes to consolidated condensed financial statements.

MutualFirst Financial, Inc.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(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 Form 10-K annual report for the year ended December 31, 2013, filed with the Securities and Exchange Commission on March 14, 2014.

The interim consolidated condensed financial statements at June 30, 2014, 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, 2013 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 June 30,
	2014						2013
	Income		Weighted- Average Shares		Per- Share Amount		Income			Weighted- Average Shares		Per- Share Amount
Basic Earnings Per Share
Net income	$	2,557		7,133,233			$	2,112			7,073,792
Dividends and accretion on preferred stock		-						(278	)
Income available to common stockholders		2,557		7,133,233	$	0.36		1,834			7,073,792	$	0.26
Effect of Dilutive Securities
Stock options		-		227,167				-			182,248
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions	$	2,557		7,360,400	$	0.35	$	1,834			7,256,040	$	0.25

	Six Months Ended June 30,
	2014						2013
	Income		Weighted- Average Shares		Per- Share Amount		Income			Weighted- Average Shares		Per- Share Amount
Basic Earnings Per Share
Net income	$	4,521		7,126,082			$	4,088			7,041,139
Dividends and accretion on preferred stock		-						(640	)
Income available to common stockholders		4,521		7,126,082	$	0.63		3,448			7,041,139	$	0.49
Effect of Dilutive Securities
Stock options		-		230,680				-			170,087
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions	$	4,521		7,356,762	$	0.61	$	3,448			7,211,226	$	0.48

Options to purchase 44,161 and 82,000 shares of common stock were outstanding at June 30, 2014 and 2013, respectively, but were not included in the computation of diluted EPS because the options’ exercise price was greater than the average market price of the common shares.

Note 3: Impact of Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board (FASB), issued Accounting Standards Update (ASU) 2014-12 “Compensation – Stock Compensation”. This update defines the accounting treatment for share-based payments and “resolves the diverse accounting treatment of those awards in practice.” The new requirement mandates that “a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition.” Compensation cost will now be recognized in the period in which it becomes likely that the performance target will be met.

The amendments in this Update are effective for annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

In June 2014, FASB, issued ASU 2014-11 “Transfers and Servicing”. This update addresses the concerns of stakeholders’ by changing the accounting practices surrounding repurchase agreements. The new guidance changes the “accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements.”

The amendments in this Update are effective for annual reporting periods beginning after December 15, 2015. Early adoption is prohibited. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

In May 2014, FASB, in joint cooperation with IASB, issued ASU 2014-09 “Revenue from Contracts with Customers”. The topic of Revenue Recognition had become broad, with several other regulatory agencies issuing standards which lacked cohesion. The new guidance establishes a “common framework” and “reduces the number of requirements to which an entity must consider in recognizing revenue” and yet provides improved disclosures to assist stakeholders reviewing financial statements.

The amendments in this Update are effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

In April 2014, FASB issued ASU 2014-08 “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. This update seeks to better define the groups of assets which qualify for discontinued operations, in order to ease the burden and cost for prepares and stakeholders. This issue changed “the criteria for reporting discontinued operations” and related reporting requirements, including the provision for disclosures about the “disposal of and individually significant component of an entity that does not qualify for discontinued operations presentation.”

The amendments in this Update are effective for fiscal years beginning after December 15, 2014. Early adoption is permitted only for disposals or classifications as held for sale. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

In January 2014, FASB issued ASU 2014-04, “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure,” to reduce diversity by clarifying when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

In January 2014, the FASB issued ASU 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects,” to permit entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The ASU modifies the conditions that an entity must meet to be eligible to use a method other than the equity or cost methods to account for qualified affordable housing project investments. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

Note 4: Investment Securities

The amortized costs and approximate fair values, together with gross unrealized gains and losses on securities, are as follows:

	June 30, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for Sale Securities
Mortgage-backed securities
Government-sponsored agencies	$	115,083	$	2,704	$	(560	)	$	117,227
Collateralized mortgage obligations
Government-sponsored agencies		100,289		1,511		(1,145	)		100,655
Federal agencies		5		-		-			5
Municipal obligations		26,355		1,329		(17	)		27,667
Corporate obligations		24,143		56		(2,528	)		21,671
Total investment securities	$	265,875	$	5,600	$	(4,250	)	$	267,225

	December 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for Sale Securities
Mortgage-backed securities
Government-sponsored agencies	$	104,006	$	1,700	$	(2,189	)	$	103,517
Collateralized mortgage obligations
Government-sponsored agencies		108,305		1,207		(1,934	)		107,578
Federal agencies		5,005		-		(231	)		4,774
Municipal obligations		27,357		257		(276	)		27,338
Corporate obligations		24,648		18		(3,525	)		21,141
Total investment securities	$	269,321	$	3,182	$	(8,155	)	$	264,348

The amortized cost and fair value of securities available for sale at June 30, 2014, 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
Description Securities	Amortized Cost		Fair Value
Security obligations due
One to five years	$	9,593	$	9,621
Five to ten years		10,838		10,847
After ten years		30,072		28,875
		50,503		49,343
Mortgage-backed securities
Government-sponsored agencies		115,083		117,227
Collateralized mortgage obligations
Government-sponsored agencies		100,289		100,655
Totals	$	265,875	$	267,225

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $2.0 million and $2.5 million at June 30, 2014 and December 31, 2013, respectively.

Proceeds from sales of securities available for sale for the three and six months ended June 30, 2014 and 2013 were $7.7 million and $23.2 million compared to $14.1 million and $31.5 million, respectively. Gross gains of $253,000 and $569,000 compared to $106,000 and $445,000 for the three and six months ended June 30, 2014 and 2013, respectively, were recognized on those sales. Gross losses of $42,000 and $207,000 compared to $63,000 and $0 for the three and six months ended June 30, 2014 and 2013, respectively, were recognized on those sales.

All mortgage-backed securities and collateralized-mortgage obligations held by the Company as of June 30, 2014 were in government-sponsored or federal agency securities.

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at June 30, 2014 and December 31, 2013 was $100.7 million and $147.8 million, which is approximately 37.7 percent and 55.9 percent of the Company’s investment portfolio at those dates.

Based on our evaluation of available evidence, including recent changes in market interest rates, management believes the declines in fair value for these securities, for the periods presented, 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.

During the first half of 2014 and 2013, the Bank determined that its holdings in trust preferred securities had no further other than temporary impairment.

The following tables show the gross unrealized losses and fair value of the Company’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2014 and December 31, 2013:

	June 30, 2014
	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Available for Sale
Mortgage-backed securities
Government-sponsored agencies	$	2,818	$	(26	)	$	37,835	$	(534	)	$	40,653	$	(560	)
Collateralized mortgage obligations
Government-sponsored agencies		18,731		(62	)		32,484		(1,083	)		51,215		(1,145	)
Municipal obligations		-		-			621		(17	)		621		(17	)
Corporate obligations		-		-			8,165		(2,528	)		8,165		(2,528	)
Total temporarily impaired securities	$	21,549	$	(88	)	$	79,105	$	(4,162	)	$	100,654	$	(4,250	)

	December 31, 2013
	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Available for Sale
Mortgage-backed securities
Government-sponsored agencies	$	67,130	$	(2,189	)	$	-	$	-		$	67,130	$	(2,189	)
Collateralized mortgage obligations
Government-sponsored agencies		51,753		(1,934	)		-		-		$	51,753	$	(1,934	)
Federal agencies		4,769		(231	)							4,769		(231	)
Municipal obligations		11,264		(245	)		741		(31	)		12,005		(276	)
Corporate obligations		8,849		(151	)		3,336		(3,374	)		12,185		(3,525	)
Total temporarily impaired securities	$	143,765	$	(4,750	)	$	4,077	$	(3,405	)	$	147,842	$	(8,155	)

Mortgage-Backed Securities (MBS), Collateralized Mortgage Obligations (CMO) and Federal Agencies

The unrealized losses on the Company’s investment in MBSs, CMOs and Federal Agencies were caused by interest rate changes. The Company expects to recover the amortized cost basis over the term of the securities. Because (1) the decline in market value is attributable to changes in interest rates and not credit quality, (2) the Company does not intend to sell the investments and (3) 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 at maturity, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2014.

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 (1) a decrease in performance and regulatory capital resulting from exposure to subprime mortgages and (2) 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, 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 these investments and it is likely that the Company will not be required to sell the investments before recovery of its new, lower amortized cost basis, which may be at maturity, it does not consider the remainder of the investments to be other-than-temporarily impaired at June 30, 2014.

Other-Than-Temporary Impairment (OTTI)

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 whether it 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 that are a beneficial interest in securitized financial assets, the Company uses the beneficial interests in securitized financial asset impairment model. For securities where the security is not a beneficial interest in securitized financial assets, the Company uses debt and equity securities impairment model.

The Company conducts periodic 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 private-label mortgage-backed securities and trust preferred securities.

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

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
	June 30,
	2014			2013
Credit losses on debt securities held
Beginning of year	$	1,205		$	1,205
Reductions related to actual losses incurred		(500	)		-
As of June 30,	$	705		$	1,205

	Accumulated Credit Losses
	Six Months Ended
	June 30,
	2014			2013
Credit losses on debt securities held
Beginning of year	$	1,205		$	1,205
Reductions related to actual losses incurred		(500	)		-
As of June 30,	$	705		$	1,205

Pooled Trust Preferred Securities. The Company has invested in pooled trust preferred securities. At June 30, 2014, the current book balance of our pooled trust preferred securities was $6.2 million. The original par value of these securities was $7.0 million prior to the OTTI write-downs in 2011 and earlier, based on valuations by a third party. OTTI taken on trust preferred securities previously was the result of deterioration in the performance of the underlying collateral. The deterioration was the result of increased defaults and deferrals of dividend payments in that year, creating credit impairment along with weakening financial performance of performing collateral, increasing the risk of future deferrals of dividends and defaults. No additional OTTI was determined in the first quarter of 2014. All pooled trust preferred securities owned by the Bank are exempt from the Volcker Rule.

The following table provides additional information related to the Bank’s investment in trust preferred securities as of June 30, 2014.

Deal Name	Class	Original Par		Book Value		Fair Value		Unrealized gain (loss)			Realized Losses YTD		Lowest Ratings	Number of Banks / Insurance Cos. Currently Performing		Total Number of Banks and Insurance Cos. In Issuance (Unique)		Actual Deferrals/ Defaults (as a % of original collateral)			Total Projected Defaults (as a % of performing collateral) ⁽¹⁾			Excess subordination (after taking into account best estimate of future deferrals/ defaults) ⁽²⁾
	(Dollars in Thousands)
Alesco Preferred Funding IX	B+	$	1,000	$	909	$	559	$	(350	)	$	-	B2		41		52		14.69	%		15.78	%		54.50	%
Preferred Term Securities XIII	Caa3		1,000		766		422		(344	)		-	Ca		44		61		25.75	%		20.21	%		4.36	%
Preferred Term Securities XVIII	Caa3		1,000		917		433		(484	)		-	Ca		52		72		22.51	%		10.03	%		6.43	%
Preferred Term Securities XXVII	C		1,000		710		388		(322	)		-	Ca		33		46		22.62	%		16.29	%		10.02	%
U.S. Capital Funding I	Caa1		3,000		2,891		1,936		(955	)		-	Caa1		28		33		9.44	%		8.60	%		8.90	%
		$	7,000	$	6,193	$	3,738	$	(2,455	)	$	-

(1)

A 10% recovery is applied to all projected defaults by depository institutions. A 15% recovery is applied to all projected defaults by insurance companies. No recovery is applied to current defaults.

(2)

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.

(1)

A 10% recovery is applied to all projected defaults by depository institutions. A 15% recovery is applied to all projected defaults by insurance companies. No recovery is applied to current defaults.

(2)

Note 5: Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income, included in stockholders’ equity, are as follows:

	June 30,			December 31,
	2014			2013
Net unrealized gain (loss) on securities available-for-sale	$	3,455		$	(2,029	)
Net unrealized loss on securities available-for-sale for which a portion of an other-than-temporary impairment has been recognized in income		(2,105	)		(2,945	)
Net unrealized loss on derivative used for cash flow hedges		(259	)		(259	)
Net unrealized loss relating to defined benefit plan liability		100			100
		1,191			(5,133	)
Tax benefit		433			(1,718	)
Net of tax amount	$	758		$	(3,415	)

The following table presents the reclassification adjustments out of accumulated other comprehensive income (loss) that were included in net income in the Consolidated Statements of Income for the three months ended June 30, 2014 and 2013.

	Amount Reclassified from Accumulated Other Comprehensive Income For the Three Months Ended June 30,
Details about Accumulated Other Comprehensive Income Components	2014			2013			Affected Line Item in the Statements of Income
Unrealized gains (losses) on available-for-sale securities
Realized securities gains reclassified into income	$	211		$	43		Other income - net realized gains on sale of available-for-sale securities
Related income tax expense		(72	)		(15	)	Income tax expense

Total reclassifications for the period, net of tax	$	139		$	28

	Amount Reclassified from Accumulated Other Comprehensive Income For the Six Months Ended June 30,
Details about Accumulated Other Comprehensive Income Components	2014			2013			Affected Line Item in the Statements of Income
Unrealized gains (losses) on available-for-sale securities
Realized securities gains reclassified into income	$	362		$	382		Other income - net realized gains on sale of available-for-sale securities
Related income tax expense		(123	)		(130	)	Income tax expense

Total reclassifications for the period, net of tax	$	239		$	252

Note 6: Fair Values of Financial Instruments

Fair value is 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. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of 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 supported by little or no market activity and 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 comparative balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.

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. Prices are evaluated by a third party. Level 1 securities include 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.

The following table presents the fair value measurements of assets measured at fair value on a recurring basis and 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
June 30, 2014
Mortgage-backed securities
Government sponsored agencies	$	117,227	$	-	$	117,227	$	-
Collateralized mortgage obligations
Government sponsored agencies		100,655		-		100,655		-
Federal agencies		5		-		5		-
Municipal obligations		27,667		-		27,667		-
Corporate obligations		21,671		-		17,933		3,738
Available-for-sale securities	$	267,225	$	-	$	263,487	$	3,738

			Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
December 31, 2013
Mortgage-backed securities
Government sponsored agencies	$	103,517	$	-	$	103,517	$	-
Collateralized mortgage obligations
Government sponsored agencies		107,578		-		107,578		-
Federal agencies		4,774		-		4,774		-
Municipal obligations		27,338		-		27,338		-
Corporate obligations		21,141		-		17,805		3,336
Available-for-sale securities	$	264,348	$	-	$	261,012	$	3,336

The following is a reconciliation of the beginning and ending balances for the three months ended June 30, 2014 and 2013 of recurring fair value measurements recognized in the accompanying balance sheets using significant unobservable (Level 3) inputs:

	2014			2013
Beginning balance	$	4,043		$	2,464
Total realized and unrealized gains (losses)
Included in net income		56			-
Included in other comprehensive income (loss)		205			536
Purchases, sales, issuances and settlements		(566	)		-
Ending balance	$	3,738		$	3,000
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	$	0		$	0

The following is a reconciliation of the beginning and ending balances for the six months ended June 30, 2014 and 2013 of recurring fair value measurements recognized in the accompanying balance sheets using significant unobservable (Level 3) inputs:

	2014			2013
Beginning balance	$	3,336		$	2,475
Total realized and unrealized gains (losses)
Included in net income		56			-
Included in other comprehensive income (loss)		920			525
Purchases, issuances and settlements		(574	)		-
Ending balance	$	3,738		$	3,000
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	$	0		$	0

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 the Bank 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 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.

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.

Other real estate owned is classified within Level 3 of the fair value hierarchy.

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
June 30, 2014
Other real estate owned	$	614	$	-	$	-	$	614

			Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
December 31, 2013
Impaired loans	$	925	$	-	$	-	$	925
Other real estate owned		1,677		-		-		1,677
Mortgage-servicing rights		2,106		-		-		2,106

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

June 30, 2014	Fair Value		Valuation Technique	Unobservable Inputs	Range
Trust Preferred Securities	$	3,738	Discounted cash flow	Discount rate		8.0-14.0	%
				Constant prepayment rate		2.0	%
				Cumulative projected prepayments		40.0	%
				Probability of default		1.8-2.8	%
				Projected cures given deferral		0-15.0	%
				Loss severity		35.4-70.4	%
Impaired loans (collateral dependent)	$	-	Third party valuations	Discount to reflect realizable value		0.0-0.00	%
Other real estate owned	$	614	Third party valuations	Discount to reflect realizable value less estimated selling costs		10.0-36.7	%
Mortgage-servicing rights	$	1,530	Third party valuations	Prepayment speeds		105-700	%
				Discount rates		10.0	%
				Servicing fee		0.25	%

December 31, 2013	Fair Value		Valuation Technique	Unobservable Inputs	Range
Trust Preferred Securities	$	3,336	Discounted cash flow	Discount rate		10.0-17.0	%
				Constant prepayment rate		2.0	%
				Cumulative projected prepayments		40.0	%
				Probability of default		1.5-2.7	%
				Projected cures given deferral		0-15.0	%
				Loss severity		46.9-73.7	%
Impaired loans (collateral dependent)	$	925	Third party valuations	Discount to reflect realizable value		7.3-78.3	%
Other real estate owned	$	1,677	Third party valuations	Discount to reflect realizable value less estimated selling costs		0-25.0	%
Mortgage-servicing rights	$	2,106	Third party valuations	Prepayment speeds		105-700	%
				Discount rates		10.0	%
				Servicing fee		0.25	%

The following methods and assumptions were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value:

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

Loans Held For Sale - Fair values are based on quoted market prices.

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.

FHLB Advances - The fair value of these borrowings is 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 these borrowings is estimated using discounted cash flow analyses using interest rates for similar financial instruments.

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 these instruments is insignificant.

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

					Fair Value Measurements Using
June 30, 2014	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	28,734	$	28,734	$	28,734	$		$
Loans held for sale		5,482		5,675				5,675
Loans, net		981,063		961,172						961,172
FHLB stock		14,391		14,391				14,391
Interest receivable		3,617		3,617				3,617
Liabilities
Deposits		1,079,300		1,047,390		619,666				427,724
FHLB advances		187,046		185,565				185,565
Other borrowings		10,532		10,532				10,532
Interest payable		230		230				230

					Fair Value Measurements Using
December 31, 2013	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	25,285	$	25,285	$	25,285	$	-	$	-
Loans held for sale		1,888		1,905		-		1,905		-
Loans, net		965,966		935,414		-		-		935,414
FHLB stock		14,391		14,391		-		14,391		-
Interest receivable		3,775		3,775		-		3,775		-
Liabilities
Deposits		1,113,084		1,068,422		593,457		-		474,965
FHLB advances		142,928		141,526		-		141,526		-
Other borrowings		10,890		10,890		-		10,890		-
Interest payable		157		157		-		157		-

Note 7: Loans and Allowance

Classes of loans at June 30, 2014 and December 31, 2013 include:

	June 30,			December 31,
	2014			2013
Real estate
Commercial	$	198,019		$	200,817
Commercial construction and development		21,600			13,321
Consumer closed end first mortgage		518,492			531,272
Consumer open end and junior liens		69,593			69,354
		807,704			814,764
Other loans
Consumer loans
Auto		14,277			14,856
Boat/RVs		89,308			79,419
Other		5,540			5,766
Commercial and industrial		84,141			75,402
		193,266			175,443
Total loans		1,000,970			990,207
Undisbursed loans in process		(9,724	)		(13,346	)
Unamortized deferred loan costs, net		3,060			2,517
Allowance for loan losses		(13,243	)		(13,412	)
Net loans	$	981,063		$	965,966

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

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.

Commercial and Industrial

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.

Consumer Real Estate and Other Consumer Loans

With respect to residential loans that are secured by consumer closed end first mortgages and are primarily owner occupied, the Company generally establishes a maximum loan-to-value ratio and requires PMI if that ratio is exceeded. Consumer open end and junior lien loans are typically secured by a subordinate interest in 1-4 family residences, and other 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 Loans 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. Loans are placed on non-accrual status when, in managements’ opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions, but never greater than 90 days past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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 and generally only after six months of satisfactory performance.

Nonaccrual loans, segregated by class of loans, as of June 30, 2014 and December 31, 2013 are as follows:

	June 30,		December 31,
	2014		2013
Real estate
Commercial	$	1,154	$	1,349
Commercial construction and development		711		1,103
Consumer closed end first mortgage		2,891		4,057
Consumer open end and junior liens		141		421
Consumer loans
Auto		-		10
Boat/RVs		142		339
Other		40		12
Commercial and industrial		683		1,109
	$	5,762	$	8,400

An age analysis of the Company’s past due loans, segregated by class of loans, as of June 30, 2014 and December 31, 2013 are as follows:

	June 30, 2014
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans Receivable		Total Loans 90 Days or More and Accruing
Real estate
Commercial	$	4,486	$	337	$	654	$	5,477	$	192,542	$	198,019	$	-
Commercial construction and development		198		-		549		747		20,853		21,600		-
Consumer closed end first mortgage		7,781		1,164		2,564		11,509		506,983		518,492		348
Consumer open end and junior liens		494		85		113		692		68,901		69,593		-
Consumer loans
Auto		39		1		-		40		14,237		14,277		-
Boat/RVs		873		51		142		1,066		88,242		89,308		-
Other		55		8		29		92		5,448		5,540		-
Commercial and industrial		276		-		494		770		83,371		84,141		-
	$	14,202	$	1,646	$	4,545	$	20,393	$	980,577	$	1,000,970	$	348

	December 31, 2013
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans Receivable		Total Loans 90 Days or More and Accruing
Real estate
Commercial	$	763	$	196	$	1,196	$	2,155	$	198,662	$	200,817	$	-
Commercial construction and development		333		-		915		1,248		12,073		13,321		-
Consumer closed end first mortgage		11,680		2,122		3,515		17,317		513,955		531,272		175
Consumer open end and junior liens		609		185		394		1,188		68,166		69,354		-
Consumer loans
Auto		54		8		9		71		14,785		14,856		-
Boat/RVs		1,410		262		202		1,874		77,545		79,419		13
Other		61		3		-		64		5,702		5,766		-
Commercial and industrial		67		393		531		991		74,411		75,402		-
	$	14,977	$	3,169	$	6,762	$	24,908	$	965,299	$	990,207	$	188

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.

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 the contract for impaired loans that are performing.

The following tables present impaired loans as of June 30, 2014 and 2013 and the year ended December 31, 2013:

	June 30, 2014
	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
Real estate
Commercial	$	2,863	$	2,863	$	-	$	2,907	$	2,988	$	33	$	65
Commercial construction and development		1,272		2,643		-		1,424		1,495		8		15
Consumer closed end first mortgage		847		847		-		851		978		3		5
Consumer open end and junior liens		-		-		-		125		167		1		3
Commercial and industrial		748		922		-		954		1,032		5		11

Total
Real estate
Commercial	$	2,863	$	2,863	$	-	$	2,907	$	2,988	$	33	$	65
Commercial construction and development	$	1,272	$	2,643	$	-	$	1,424	$	1,495	$	8	$	15
Consumer closed end first mortgage	$	847	$	847	$	-	$	851	$	978	$	3	$	5
Consumer open end and junior liens	$	-	$	-	$	-	$	125	$	167	$	1	$	3
Commercial and industrial	$	748	$	922	$	-	$	954	$	1,032	$	5	$	11

There were no loans with a specific valuation allowance as of June 30, 2014.

	December 31, 2013
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
Loans without a specific valuation allowance
Real estate
Commercial	$	3,148	$	3,660	$	-	$	3,894	$	160
Commercial construction and development		1,294		3,218		-		5,386		46
Consumer closed end first mortgage		1,483		2,071		-		2,582		33
Commercial and industrial		764		764		-		897		2

Loans with a specific valuation allowance
Real estate
Commercial construction and development		344		371		100		344		-
Commercial and industrial		424		624		235		566		20

Total
Real estate
Commercial	$	3,148	$	3,660	$	-	$	3,894	$	160
Commercial construction and development	$	1,638	$	3,589	$	100	$	5,730	$	46
Consumer closed end first mortgage	$	1,483	$	2,071	$	-	$	2,582	$	33
Commercial and industrial	$	1,188	$	1,388	$	235	$	1,463	$	22

	June 30, 2013
	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
Real estate
Commercial	$	3,011	$	4,075	$	-	$	3,503	$	3,762	$	29	$	69
Commercial construction and development		2,890		5,618		-		3,418		3,685		26		34
Consumer closed end first mortgage		2,328		3,267		-		2,597		2,768		18		37
Consumer open end first mortgage		250		250		-		125		83		1		1
Commercial and industrial		916		1,216		-		926		942		5		8

Loans with a specific valuation allowance
Real estate
Commercial		206		206		100		206		207		3		6
Commercial construction and development		3,966		6,127		690		3,975		4,001		2		8
Consumer closed end first mortgage		306		306		21		307		307		-		3
Commercial and industrial		434		634		235		534		660		3		9

Total
Real estate
Commercial	$	3,217	$	4,281	$	100	$	3,709	$	3,969	$	32	$	75
Commercial construction and development	$	6,856	$	11,745	$	690	$	7,393	$	7,686	$	28	$	42
Consumer closed end first mortgage	$	2,634	$	3,573	$	21	$	2,904	$	3,075	$	18	$	40
Consumer open end first mortgage	$	250	$	250	$	-	$	125	$	83	$	1	$	1
Commercial and industrial	$	1,350	$	1,850	$	235	$	1,460	$	1,602	$	8	$	17

The following information presents the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of June 30, 2014.

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 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. Substandard credits 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 of the deficiencies are not corrected.

Doubtful. A doubtful extension of credit has all the weaknesses inherent in a substandard asset 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. 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 weakness and placed on non-accrual. This would include all retail loans over 90 days and troubled debt restructurings.

June 30, 2014
Commercial Credit Exposure Credit Risk Profile
Internal Rating	Real Estate		Construction and Development		Commercial and Industrial
Pass	$	187,615	$	18,411	$	82,654
Special Mention		3,471		1,788		394
Substandard		6,933		1,401		599
Doubtful		-		-		494
Total	$	198,019	$	21,600	$	84,141

Consumer Credit Exposure Credit Risk Profile
Internal Rating	Closed End First Mortgage		Real Estate Open End and Junior Liens		Auto		Boat/RV		Other
Pass	$	511,183	$	69,311	$	14,277	$	88,894	$	5,471
Special Mention		1,741		-		-		-		-
Substandard		5,568		282		-		414		69
Total	$	518,492	$	69,593	$	14,277	$	89,308	$	5,540

December 31, 2013
Commercial Credit Exposure Credit Risk Profile
Internal Rating	Real Estate		Construction and Development		Commercial and Industrial
Pass	$	190,041	$	9,910	$	73,648
Special Mention		3,308		1,659		223
Substandard		7,468		1,752		1,000
Doubtful		-		-		531
Total	$	200,817	$	13,321	$	75,402

Consumer Credit Exposure Credit Risk Profile
Internal Rating	Closed End First Mortgage		Real Estate Open End and Junior Liens		Auto		Boat/RV		Other
Pass	$	522,352	$	68,445	$	14,834	$	78,863	$	5,415
Special Mention		1,783		-		-		-		-
Substandard		7,137		909		22		556		351
Total	$	531,272	$	69,354	$	14,856	$	79,419	$	5,766

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 six month periods ended June 30, 2014 and 2013 and year ended December 31, 2013. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other segments.

	Three Months Ended June 30, 2014
	Commercial			Mortgage			Consumer			Total
Allowance for loan losses:
Balance, beginning of period	$	7,899		$	3,305		$	2,166		$	13,370
Provision charged to expense		78			208			214			500
Losses charged off		(244	)		(170	)		(351	)		(765	)
Recoveries		30			1			107			138
Balance, end of period	$	7,763		$	3,344		$	2,136		$	13,243

	Six Months Ended June 30, 2014
	Commercial			Mortgage			Consumer			Total
Allowance for loan losses:
Balance, beginning of year	$	8,148		$	3,124		$	2,140		$	13,412
Provision charged to expense		(187	)		465			572			850
Losses charged off		(244	)		(250	)		(718	)		(1,212	)
Recoveries		46			5			142			193
Balance, end of period	$	7,763		$	3,344		$	2,136		$	13,243
Ending balance:
Individually evaluated for impairment	$	-		$	-		$	-		$	-
Collectively evaluated for impairment		7,763			3,344			2,136			13,243
Total allowance for loan losses	$	7,763		$	3,344		$	2,136		$	13,243

Loans:
Ending balance
Individually evaluated for impairment	$	4,883		$	847		$	-		$	5,730
Collectively evaluated for impairment		298,877			517,645			178,718			995,240
Total Loans	$	303,760		$	518,492		$	178,718		$	1,000,970

	Year Ended December 31, 2013
	Commercial			Mortgage			Consumer			Total
Allowance for loan losses:
Balance, beginning of year	$	9,908		$	3,394		$	2,736		$	16,038
Provision charged to expense		884			343			73			1,300
Losses charged off		(2,713	)		(886	)		(940	)		(4,539	)
Recoveries		69			273			271			613
Balance, end of period	$	8,148		$	3,124		$	2,140		$	13,412
Ending balance:
Individually evaluated for impairment	$	335		$	-		$	-		$	335
Collectively evaluated for impairment		7,813			3,124			2,140			13,077
Total allowance for loan losses	$	8,148		$	3,124		$	2,140		$	13,412

Loans:
Ending balance
Individually evaluated for impairment	$	5,974		$	1,483		$	-		$	7,457
Collectively evaluated for impairment		283,566			529,789			169,395			982,750
Total Loans	$	289,540		$	531,272		$	169,395		$	990,207

	Three Months Ended June 30, 2013
	Commercial			Mortgage			Consumer			Total
Allowance for loan losses:
Balance, beginning of period	$	9,873		$	3,534		$	2,584		$	15,991
Provision charged to expense		471			184			(105	)		550
Losses charged off		(731	)		(59	)		(180	)		(970	)
Recoveries		20			3			107			130
Balance, end of period	$	9,633		$	3,662		$	2,406		$	15,701

	Six Months Ended June 30, 2013
	Commercial			Mortgage			Consumer			Total
Allowance for loan losses:
Balance, beginning of year	$	9,908		$	3,394		$	2,736		$	16,038
Provision charged to expense		671			684			145			1,500
Losses charged off		(968	)		(442	)		(660	)		(2,070	)
Recoveries		22			26			185			233
Balance, end of period	$	9,633		$	3,662		$	2,406		$	15,701

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 consumer real estate and other consumer loans, 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.

The Company charges-off consumer real estate and other 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:

	June 30,
	2014		2013
Non-performing assets
Non-accrual loans	$	5,762	$	18,647
Accruing loans delinquent 90 days or more and past due		348		236
Total non-performing loans		6,110		18,883
Foreclosed real estate		6,719		5,603
Other repossessed assets		379		456
Total non-performing assets	$	13,208	$	24,942

Troubled Debt Restructurings

Certain categories of impaired loans include loans that have been modified in a troubled debt restructuring, that involves granting economic concessions 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 we use the current fair value of the collateral, less selling costs for collateral dependent loans. If we determine 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.

At June 30, 2014, the Company had a number of loans that were modified in troubled debt restructurings and impaired. The modification of terms of such loans included one or a combination of the following: an extension of maturity, a reduction of the stated interest rate or a permanent reduction of the recorded investment in the loan.

The following tables describe troubled debts restructured during the three and six month periods ended June 30, 2014 and 2013.

	Three Months Ended June 30, 2014
	No. of Loans		Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance
Real estate
Commercial		1	$	250	$	250
Consumer closed end first mortgage		7		367		380
Commercial and industrial		2		193		223

	Three Months Ended June 30, 2013
	No. of Loans		Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance
Real estate
Commercial		1	$	1,290	$	1,284
Consumer closed end first mortgage		8		253		264
Consumer open end and junior liens		14		451		453
Consumer loans
Boat/RVs		3		97		96
Commercial and industrial		1		113		112

	Six Months Ended June 30, 2014
	No. of Loans		Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance
Real estate
Commercial		1	$	250	$	250
Consumer closed end first mortgage		10		748		774
Commercial and industrial		2		193		223

	Six Months Ended June 30, 2013
	No. of Loans		Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance
Real estate
Commercial		2	$	1,340	$	1,334
Consumer closed end first mortgage		19		1,003		1,321
Consumer open end and junior liens		18		671		682
Consumer loans
Auto		2		22		22
Boat/RVs		4		127		126
Other		1		11		11
Commercial and industrial		3		1,122		835

The impact on the allowance for loan losses was insignificant as a result of these modifications.

Newly restructured loans by type for the three and six months ended June 30, 2014 and 2013 are as follows:

	Three Months Ended June 30, 2014
	Interest Only		Term		Combination		Total Modification
Real Estate
Commercial	$	-	$	-	$	250	$	250
Consumer closed end first mortgage		-		18		362		380
Commercial and industrial		-		223		-		223

	Three Months Ended June 30, 2013
	Interest Only		Term		Combination		Total Modification
Real Estate
Commercial	$	-	$	-	$	1,284	$	1,284
Consumer closed end first mortgage		-		29		235		264
Consumer open end junior lien		250		52		151		453
Consumer Loans
Boat/RVs		-		91		5		96
Commercial and industrial		-		112		-		112

	Six Months Ended June 30, 2014
	Interest Only		Term		Combination		Total Modification
Real Estate
Commercial	$	-	$	-	$	250	$	250
Consumer closed end first mortgage		-		18		756		774
Commercial and industrial		-		223		-		223

	Six Months Ended June 30, 2013
	Interest Only		Term		Combination		Total Modification
Real Estate
Commercial	$	-	$	-	$	1,334	$	1,334
Consumer closed end first mortgage		-		29		1,292		1,321
Consumer open end junior lien		250		265		167		682
Consumer Loans
Auto		-		4		18		22
Boat/RVs		-		121		5		126
Other		-		-		11		11
Commercial and industrial		-		200		635		835

Defaults of any loans modified as troubled debt restructurings made in the three and six months ended June 30, 2014 and 2013, respectively, are listed in the table below. Defaults are defined as any loans that become 90 days past due.

	Three Months Ended June 30, 2014
	No. of Loans		Post-Modification Outstanding Recorded Balance
Real Estate
Consumer closed end first mortgage		1	$	340

	Six Months Ended June 30, 2014
	No. of Loans		Post-Modification Outstanding Recorded Balance
Real Estate
Consumer closed end first mortgage		3	$	432
Consumer open end and junior liens		1		23

	Six Months Ended June 30, 2013
	No. of Loans		Post-Modification Outstanding Recorded Balance
Real Estate
Commercial		1	$	518
Commercial and industrial		1		109

There were no modified loans that defaulted during the second quarter of 2013.

Note 7: Subsequent Events

On July 2, 2014, MutualBank announced that it had entered into a definitive agreement with Summit Mortgage, Inc., a mortgage banking company headquartered in Ft. Wayne, Indiana. The transaction has received all regulatory approval and closed on August 1, 2014. The acquisition of Summit Mortgage, Inc. will not have a material impact on the operations or financial statements of the company.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation

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, 2013, which was filed with the SEC on March 14, 2014.

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 30 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 and the Federal Deposit Insurance Corporation.

Our principal business consists of attracting retail and commercial deposits from the general public and businesses, including some brokered deposits, and investing those funds primarily in loans secured by consumer closed end first mortgages and consumer open end and junior liens on owner-occupied, one- to four-family residences, a variety of other consumer loans, loans secured by commercial real estate, commercial construction and development and commercial and industrial 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.

Second Quarter Highlights. At June 30, 2014, we had $1.4 billion in assets, $981.1 million in loans, $1.1 billion in deposits and $119.8 million in stockholders’ equity. The Company’s total risk-based capital ratio at June 30, 2014 was 12.9%, exceeding the 10.0% requirement for a well-capitalized institution. Tangible common equity increased to 8.4% as of June 30, 2014 compared to 7.9% and 7.7% at December 31, 2013 and June 30, 2013, respectively. For the quarter ended June 30, 2014, net income available to common shareholders was $2.6 million, or $.36 per basic and $.35 per diluted share, compared with net income available to common shareholders of $1.8 million, or $0.26 per basic and $0.25 per diluted share for the quarter ended June 30, 2013.

Financial highlights for the second quarter ended June 30, 2014 included:

Gross loan balances increased by $16.5 million, or 6.7% on an annualized basis in the second quarter of 2014.

Asset quality continues to improve as non-performing loans to total loans were 0.61% as of June 30, 2014 compared to 0.80% as of March 31, 2014 and non-performing assets to total assets were 0.94% as of June 30, 2014 compared to 1.12% as of March 31, 2014.

Classified loans decreased approximately 17% in the second quarter of 2014 and 20% since December 31, 2013.

Deposits decreased $25.7 million in the second quarter of 2014 primarily due to a decrease in certificates of deposit of $25.8 million.

Tangible common equity to total assets is 8.40% and tangible book value per share is $16.54 as of June 30, 2014 compared to tangible common equity to total assets of 7.91% and tangible book value per share of $15.46 as of December 31, 2013.

Cash dividend on common stock increased by 33%.

Net interest income for the second quarter of 2014 increased by $139,000 on a linked quarter basis and $538,000 compared to the second quarter of 2013.

Net interest margin was 3.28% for the second quarter 2014 compared to 3.10% in the second quarter 2013.

Non-interest income in the second quarter of 2014 increased by $541,000 on a linked quarter basis and decreased by $46,000 when compared to the second quarter of 2013.

Non-interest expense decreased in the second quarter of 2014 by $394,000 on a linked quarter basis and $49,000 when compared to the second quarter of 2013.

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, 2013, contains a summary of our management strategy. The financial highlights of our strategy during the quarter include: increasing commercial and non-real estate consumer lending by $23.3 million since year-end 2013; core deposits increased to 61%, from 58% at year-end 2013, and decreasing non-performing assets to total assets from 1.22% at year-end 2013 to .94% at the end of the quarter.

Critical Accounting Policies

Note 1 to the Consolidated Financial Statements in Item 8 of the Form 10-K for the year ended December 31, 2013 contains a summary of the Company’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, valuation of intangible assets and securities, deferred tax asset and income tax accounting.

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

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

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

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

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

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

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

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

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

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

Deferred Tax Asset. The Company has evaluated its deferred tax asset to determine if it is more likely than not that the asset will be utilized in the future. The Company’s most recent evaluation indicated that it is more likely than not that the asset will be fully utilized. The Company has generated average positive pre-tax pre-provision earnings of $14.5 million, or 1.0% of pre-tax pre-provision ROA over the previous five calendar years. These earnings would be sufficient to utilize the net operating losses, tax credit carryforwards and temporary tax differences over the allowable periods. The valuation allowances established from 2009 through 2013 were the result of capital losses sustained in those years with no tax benefit recorded. The analyses at June 30, 2014 and December 31, 2013 supported no additional valuation allowance was necessary.

At the end of 2013, the Company had $548,000 in capital losses, a decrease from $557,000 in capital losses in 2012 as capital gains from the sale of available for sale securities were generated. The Company has avoided and will continue to avoid taking any book tax benefit on future capital losses without capital gains to offset the current capital losses. See Note 14 to the Consolidated Financial Statements in Item 8 of the Form 10-K for the year ended December 31, 2013.

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.

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) our ability to attract and retain deposits; (x) increases in premiums for deposit insurance; (xi) management’s assumptions in determining the adequacy of the allowance for loan losses; (xii) our ability to control operating costs and expenses; (xiii) 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; (xiv) difficulties in reducing risks associated with the loans on our balance sheet; (xv) staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; (xvi) a failure or security breach in the computer systems on which we depend; (xvii) our ability to retain key members of our senior management team; (xviii) costs and effects of litigation, including settlements and judgments; (xix) 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; (xx) increased competitive pressures among financial services companies; (xxi) changes in consumer spending, borrowing and savings habits; (xxii) the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; (xxiii) adverse changes in the securities markets; (xxiv) inability of key third-party providers to perform their obligations to us; (xv) 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 (xvi) 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 June 30, 2014 were $1.4 billion, reflecting a $19.1 million increase since December 31, 2013, primarily as a result of a $15.1 million increase in net loans. Average interest-earning assets decreased $9.0 million, or .7%, to $1.28 billion for the six months ended June 30, 2014 from $1.29 billion compared to the year ended December 31, 2013. Average interest-bearing liabilities decreased by $1.0 million, or .1% to $1.11 billion for the six months ended June 30, 2014 reflecting a decrease in term deposits. Average stockholders’ equity decreased by $16.1 million or 12.2% for the six months ended June 30, 2014 due to the redemption of the preferred stock associated with the United State Treasury’s Small Business Lending Fund program.

Loans. Our gross loan portfolio, excluding loans held for sale, increased to $1.0 billion at June 30, 2014 from $990.2 million at December 31, 2013. The following table reflects the changes in the gross amount of loans, excluding loans held for sale, by type during the six month period:

	At
	June 30,		December 31,		Amount			Percent
	2014		2013		Change			Change
	(Dollars in thousands)
Real estate
Commercial	$	198,019	$	200,817	$	(2,798	)		(1.39	)%
Commercial construction and development		21,600		13,321		8,279			62.15
Consumer closed end first mortgage		518,492		531,272		(12,780	)		(2.41	)
Consumer open end and junior liens		69,593		69,354		239			0.34
Total real estate loans		807,704		814,764		(7,060	)		(0.87	)

Consumer loans
Auto		14,277		14,856		(579	)		(3.90	)
Boat/RV		89,308		79,419		9,889			12.45
Other		5,540		5,766		(226	)		(3.92	)
Total consumer other		109,125		100,041		9,084			9.08
Commercial and industrial		84,141		75,402		8,739			11.59
Total other loans		193,266		175,443		17,823			10.16

Total Loans	$	1,000,970	$	990,207	$	10,763			1.09	%

The Bank’s strategy to increase commercial and consumer loans remains a primary focus as we continued to see growth in these areas during the first half of 2014 as commercial and non-real estate consumer loans grew by $23.3 million. We continue to seek opportunities to provide sound commercial borrowers opportunities for new loans to meet their growing demands, refinance loans currently served by other financial institutions and building relationships with commercial clients in our footprint. The increase in the commercial and other consumer portfolios was offset by the decrease in the consumer real estate portfolios during the period of $12.5 million. Lower rates have allowed consumers to refinance their mortgage loans; however we have seen a significant decrease in those activities. The Bank continues to sell longer term fixed-rate mortgage loans to reduce related interest rate risk.

Delinquencies and Non-performing Assets. As of June 30, 2014, our total loans delinquent 30-to-89 days were $15.8 million or 1.6% of total loans, compared to $18.1 million or 1.8% of total loans at the end of 2013.

At June 30, 2014, our non-performing assets totaled $13.2 million or .94% of total assets, compared to $17.0 million or 1.22% of total assets at December 31, 2013. This $3.8 million, or 22.4% decrease was primarily due to a decrease in non-performing consumer first mortgage and commercial real estate loans as well as a reduction in foreclosed assets. The table below sets forth the amounts and categories of non-performing assets in our loan portfolio at the dates indicated.

	At
	June 30,		December 31,		Amount			Percent
	2014		2013		Change			Change
	(Dollars in thousands)
Non-accruing loans	$	5,762	$	8,400	$	(2,638	)		(31.40	)%
Accruing loans delinquent 90 days		348		188		160			85.11
Foreclosed assets		7,098		8,433		(1,335	)		(15.83	)
Total	$	13,208	$	17,021	$	(3,813	)		(22.40	)%

Our non-performing assets continued to decrease in the second quarter of 2014 as local economic conditions continued to improve. The Bank diligently monitors and writes down loans that appear to have irreversible weaknesses. 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. In addition to the decrease in non-performing assets, the Company saw improvement during the quarter in total classified assets. Total classified assets decreased by 16.6% from $35.1 million at December 31, 2013 to $29.2 million at June 30, 2014.

At June 30, 2014 foreclosed commercial real estate totaled $2.5 million and consisted of seven commercial properties in our existing lending footprint. The Bank has seen a decrease in this area as overall real estate owned sales volumes are up. At June 30, 2014, the Bank had 26 residential properties with a book value of $4.2 million. Two properties, one commercial construction and development and the other is residential real estate, account for $4.1 million of the total REO balance. As of June 30, 2014, the Bank also held $379,000 in other repossessed assets, such as autos, boats, RVs and horse trailers.

Allowance for Loan Loss. Allowance for loan losses decreased $2.5 million from $15.7 million at June 30, 2013 to $13.2 million at June 30, 2014 as reflected below:

	At and For the Six Months Ended
	June 30,
	2014			2013
	(Dollars in thousands)
Balance at beginning of period	$	13,412		$	16,038
Charge-offs		1,212			2,070
Recoveries		193			233
Net charge-offs		1,019			1,837
Provisions charged to operations		850			1,500
Balance at end of period	$	13,243		$	15,701

Ratio of net charge-offs during the period to average loans outstanding during the period		0.21	%		0.37	%

Allowance as a percentage of non-performing loans		216.74	%		83.15	%
Allowance as a percentage of total loans (end of period)		1.33	%		1.61	%

Net charge offs for the first half of 2014 were $1.0 million, or 0.21% of loans on an annualized basis, compared to $1.8 million, or 0.37% of loans on an annualized basis, for the first half of 2013. The allowance for loan losses to non-performing loans as of June 30, 2014 increased to 216.7% compared to 156.2% as of December 31, 2013. The allowance for loan losses to total loans as of June 30, 2014 was 1.33%, down from 1.37% as of December 31, 2013 due to the increase in our total loan portfolio.

Deposits. Deposits decreased by $33.8 million in the first half of 2014. The decrease in deposits has been primarily in certificates of deposit, which decreased $50.3 million, while core transactional deposits increased $16.5 million in the first half of 2014. Core transactional deposits increased to 61% of the Bank’s total deposits as of June 30, 2014 compared to 58% as of December 31, 2013. These changes are consistent with the Bank’s strategy to grow and strengthen core deposit relationships.

	At
	June 30, 2014					December 31, 2013
	Amount		Weighted Average Rate			Amount		Weighted Average Rate
	(Dollars in thousands)
Type of Account:
Non-interest Checking	$	149,940		0.00	%	$	144,195		0.00	%
Interest-bearing NOW		250,037		0.23			262,114		0.23
Savings		125,981		0.01			119,380		0.01
Money Market		131,825		0.23			115,600		0.24
Certificates of Deposit		421,517		1.16			471,795		1.39
Total	$	1,079,300		0.54	%	$	1,113,084		0.67	%

Borrowings. Total borrowings increased to $197.6 million at June 30, 2014, up $43.8 million, or 28.4%, since year-end 2013 primarily due to a $44.1 million increase in FHLB advances to help fund increasing loan demand. Other borrowings, consisting of a bank loan and subordinate debenture, decreased $358,000 to $10.5 million at June 30, 2014 due to regular loan payments.

In 2013, the Company borrowed $7.6 million from First Tennessee Bank, N.A. to refinance existing long-term debt. The loan was originated at a variable rate of LIBOR plus 2.80%; however the Company entered into an interest rate swap that fixed the rate of the note at 3.915% for the term of the note. The balance of the loan at June 30, 2014 was $6.5 million and it matures in December 2017.

The Company acquired $5.0 million of issuer trust preferred securities in a 2008 acquisition of another financial institution, which had a net balance of $4.1 million at June 30, 2014 due to the purchase accounting adjustment in the acquisition. These securities mature 30 years from the date of issuance, or September 15, 2035. The securities bore a fixed rate of interest of 6.22% through July 2010 and thereafter were 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.

Stockholders’ Equity. Stockholders’ equity was $119.8 million at June 30, 2014, an increase of $8.1 million from December 31, 2013. The increase was primarily due to net income to common shareholders of $4.5 million and an increase in other comprehensive income of $4.2 million due to favorable movement in market interest rates, which created greater unrealized gains in the securities portfolio. These increases were partially offset by common stock dividends of $999,000. The Company’s tangible book value per share as of June 30, 2014 increased to $16.54 compared to $15.46 as of December 31, 2013 and the tangible common equity ratio increased to 8.40% as of June 30, 2014 compared to 7.91% as of December 31, 2013. The Company’s and the Bank’s risk-based capital ratios were well in excess of “well-capitalized” levels as defined by all regulatory standards as of June 30, 2014.

Comparison of Results of Operations for the Three Months Ended June 30, 2014 and 2013.

General. Net income available to common shareholders for the three months ended June 30, 2014 was $2.6 million, or $.36 basic and $.35 diluted earnings per common share compared to net income available to common shareholders of $1.8 million, or $.26 basic and $.25 diluted earnings per common share for the three months ended June 30, 2013. Annualized return on assets was .73% and return on average tangible common equity was 8.81% for the second quarter of 2014 compared to .60% and 6.59% respectively, for the same period of last year.

Interest Income. Total interest income decreased $133,000, or 1.0%, to $12.7 million during the three months ended June 30, 2014 from $12.9 million during the same period in 2013, reflecting the $3.4 million decline in average interest-earning assets during the quarter ended June 30, 2014, primarily due to the decrease in our mortgage-backed securities.

Interest Expense. Interest expense decreased $671,000, or 23.5%, to $2.2 million during the three months ended June 30, 2014 compared to $2.9 million during the three months ended June 30, 2013. The primary reason for this decrease was a decline of 25 basis points on interest-bearing liabilities from 1.03% as of June 30, 2013 to 0.78% at June 30, 2014, which was primarily due to continued re-pricing of deposit accounts and a changing mix of the deposits to a larger amount of transaction accounts as a percentage of interest bearing liabilities.

Net Interest Income. Net interest income before the provision for loan losses increased $538,000 for the quarter ended June 30, 2014 compared to the same period in 2013. The increase in net interest income was as a result of an 18 basis point increase in net interest margin to 3.28%. The increase in the margin was the result of interest bearing liabilities repricing downward faster than earning assets. Average earning assets declined $3.4 million primarily due to a decline of $14.7 million in the investment portfolio, mainly offset by a $12.9 million increase in the loan portfolio. The impact of the decrease in average earning assets was partially offset by the increase in net interest margin from 3.10% in the second quarter of 2013 to 3.28% in the second quarter of 2014. On a linked quarter basis, net interest income before the provision for loan losses increased $139,000 as net interest margin increased by 2 basis points and average earning assets increased by $10.9 million primarily due to increases in the loan portfolio. 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” in this Form 10-K.

Provision for Loan Losses. The provision for loan losses for the second quarter of 2014 decreased to $500,000 compared to $550,000 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 decreased net charge offs of $627,000, or .25% of loans on an annualized basis in the second quarter of 2014 compared to charge offs of $840,000, or .34% of loans on an annualized basis in the second quarter of 2013. Non-performing loans to total loans at June 30, 2014 was .61% compared to .88% at December 31, 2013. Non-performing assets to total assets were .94% at June 30, 2014 compared to 1.22% at December 31, 2013.

Other Income. Other (non-interest) income decreased slightly by $46,000 to $3.4 million in the second quarter of 2014 compared to $3.5 million in the second quarter of 2013.

	Three Months Ended						Amount			Percent
	6/30/2014			6/30/2013			Change			Change
	(Dollars in thousands)
Non-Interest Income:
Service fee income	$	1,538		$	1,364		$	174			12.76	%
Net realized gain on sale of available-for-sale securities		211			43			168			390.70
Commissions		1,178			1,174			4			0.34
Equity in losses of limited partnerships		(92	)		(128	)		36			28.13
Net gains on sales of loans		382			134			248			185.07
Net servicing fees		3			435			(432	)		(99.31	)
Increase in cash value of life insurance		304			304			-			0.00
Gain (loss) on sale of other real estate and repossessed assets		(178	)		37			(215	)		(581.08	)
Other income		68			97			(29	)		(29.90	)
Total	$	3,414		$	3,460		$	(46	)		(1.33	)%

Decreases in non-interest income include declines in net servicing fees of $432,000 primarily due to a $456,000 mortgage servicing rights recovery in the second quarter of 2013 not repeated in 2014. Another reason for the decrease was an increase in losses on sale of other real estate by $215,000 in the second quarter of 2014 compared to the same time period in 2013. This decrease was mainly offset by increases in gain on sale of loans of $248,000 primarily due to a less volatile rate environment as compared to the second quarter of 2013, increases in fees and service charges on deposit accounts of $174,000 primarily due to income on debit card transactions and increases in gain on sale of investments of $168,000. On a linked quarter basis, non-interest income increased $541,000, due to increases in gain on sale of mortgage loans primarily due to an increase in mortgage activity and increases in fees and service charges on deposit accounts primarily due to seasonality in fee income.

Other Expense. Other (non-interest) expense decreased $49,000 to $9.9 million for the second quarter 2014.

	Three Months Ended				Amount			Percent
	6/30/2014		6/30/2013		Change			Change
	(Dollars in thousands)
Non-Interest Expense:
Salaries and employee benefits	$	5,500	$	5,532	$	(32	)		(0.58	)%
Net occupancy expenses		600		534		66			12.36
Equipment expenses		435		457		(22	)		(4.81	)
Data processing fees		402		371		31			8.36
Advertising and promotion		306		438		(132	)		(30.14	)
ATM expense		316		270		46			17.04
Deposit insurance		270		316		(46	)		(14.56	)
Professional fees		439		319		120			37.62
Software subscriptions and maintenance		386		311		75			24.12
Other real estate and repossessed assets		151		176		(25	)		(14.20	)
Other expenses		1,048		1,178		(130	)		(11.04	)
Total	$	9,853	$	9,902	$	(49	)		(0.49	)%

The decrease was primarily due to declines in advertising and promotion expenses by $132,000 and other expenses of $130,000. The declines were partially offset by increases in professional fees of $120,000 primarily due to revenue enhancement and acquisition activity, which included the acquisition of a trust business and a mortgage company, in the second quarter of 2014 and software subscription and maintenance of $75,000 primarily due to technological improvements. On a linked quarter basis, non-interest expense decreased $394,000 primarily due to decreases in salaries and benefit expenses of $373,000 due in part to a reduction in payroll taxes that are seasonally higher in the first quarter and other benefit expense management.

Income Tax Expense. Income tax expense for the second quarter 2014 increased by $146,000 due to an increase in taxable income compared to the same period in 2013. The Company’s effective tax rate decreased to 29.3% for the three months ended June 30, 2014 compared to 30.3% for the three months ended June 30, 2013 because of an increase in non-taxable income.

Comparison of Results of Operations for the Six Months Ended June 30, 2014 and 2013.

General. Net income available to common shareholders for the six months ended June 30, 2014 was $4.5 million or $.63 basic and $.61 diluted earnings per common share compared to net income available to common shareholders of $3.4 million, or $.49 basic and $.48 diluted earnings per common share for the six months ended June 30, 2013. Annualized return on assets was .65% and return on average tangible common equity was 7.91% for the first half of 2014 compared to .58% and 6.27% respectively, for the same period of last year.

Interest Income. Total interest income decreased $297,000, or 1.2%, to $25.5 million during the six months ended June 30, 2014 from $25.8 million during the same period in 2013, reflecting the $13.7 million decline in average interest-earning assets during the six months ended June 30, 2014, primarily due to the decrease in our mortgage-backed securities.

Interest Expense. Interest expense decreased $1.3 million, or 22.1%, to $4.5 million during the six months ended June 30, 2014 compared to $5.8 million during the six months ended June 30, 2013. The primary reason for this decrease was a decline of 22 basis points on interest-bearing liabilities from 1.03% as of June 30, 2013 to 0.81% at June 30, 2014, which was primarily due to continued re-pricing of deposit accounts and a changing mix of the deposits to a larger amount of transaction accounts as a percentage of interest bearing liabilities.

Net Interest Income. Net interest income before the provision for loan losses increased $978,000 for the first half of 2014 compared to the same period in 2013. The increase was a result of the net interest margin increasing to 3.27% in the first half of 2014 compared to 3.08% in the first half of 2013. This increase was partially offset by a decrease of $13.7 million in average earning assets due to a decline in the average investment portfolio of $14.4 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” in this Form 10-K.

Provision for Loan Losses. The provision for loan losses for the first half of 2014 decreased to $850,000 compared to $1.5 million during last year’s comparable period. The decrease was primarily due to a decline in net charge offs and improving asset quality. Net charge offs for the first half of 2014 equaled $1.0 million, or .21% of loans on an annualized basis compared to $1.8 million, or .37% in the same period of 2013.

Other Income. Non-interest income for the first half of 2014 was $6.3 million, a decrease of $810,000 compared to the first half of 2013.

	Six Months Ended						Amount			Percent
	6/30/2014			6/30/2013			Change			Change
	(Dollars in thousands)
Non-Interest Income:
Service fee income	$	2,879		$	2,935		$	(56	)		(1.91	)%
Net realized gain on sale of available-for-sale securities		362			382			(20	)		(5.24	)
Commissions		2,260			2,156			104			4.82
Equity in losses of limited partnerships		(184	)		(254	)		70			27.56
Net gains on sales of loans		486			569			(83	)		(14.59	)
Net servicing fees (costs)		(22	)		407			(429	)		(105.41	)
Increase in cash value of life insurance		571			621			(50	)		(8.05	)
Gain (loss) on sale of other real estate and repossessed assets		(240	)		56			(296	)		(528.57	)
Other income		175			225			(50	)		(22.22	)
Total	$	6,287		$	7,097		$	(810	)		(11.41	)%

The decrease was primarily due to a $429,000 change in servicing fee income due to mortgage valuation reserves released in the second quarter of 2013 that was not repeated in 2014. Excluding the reserves released, servicing fee income was up $373,000 during the six months ended June 30, 2014. Increase in losses on sale of other real estate of $296,000 was another reason for the decline, primarily attributable to larger write-downs of certain real estate owned properties compared to the first half of 2013 when there were several large gains on sale of real estate owned properties.

Other Expense. Non-interest expense increased $284,000 when comparing the first half of 2014 with the same period in 2013.

	Six Months Ended				Amount			Percent
	6/30/2014		6/30/2013		Change			Change
	(Dollars in thousands)
Non-Interest Expense:
Salaries and employee benefits	$	11,372	$	11,083	$	289			2.61	%
Net occupancy expenses		1,269		1,229		40			3.25
Equipment expenses		894		923		(29	)		(3.14	)
Data processing fees		807		755		52			6.89
Advertising and promotion		607		709		(102	)		(14.39	)
ATM expense		606		511		95			18.59
Deposit insurance		540		640		(100	)		(15.63	)
Professional fees		878		655		223			34.05
Software subscriptions and maintenance		802		679		123			18.11
Other real estate and repossessed assets		286		349		(63	)		(18.05	)
Other expenses		2,038		2,282		(244	)		(10.69	)
Total	$	20,099	$	19,815	$	284			1.43	%

Increases were primarily a result of salaries and employee benefits increasing by $289,000, primarily due to increases in employee benefit costs, increases in professional fees of $223,000, primarily due to revenue enhancement and acquisition opportunities. These increases were partially offset by reductions in other expenses of $244,000, in marketing expense of $102,000, and deposit insurance of $100,000.

Income Tax Expense. Income tax expense for the first half of 2014 increased by $101,000 compared to the same period in 2013. The Company’s effective tax rate decreased to 28.4% for the six months ended June 30, 2014 compared to 29.3% for the six months ended June 30, 2013 because of the increase in non-taxable income.

Liquidity

We are required to have enough cash and investments that qualify as liquid assets in order to maintain sufficient liquidity to ensure safe and sound operation. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Historically, we have maintained liquid assets above levels believed to be adequate to meet the requirements of normal operations, including potential deposit outflows. Cash flow projections are regularly reviewed and updated to assure that adequate liquidity is maintained. Since 2011, we have maintained higher levels of liquidity as we grew our deposits and marketable equity securities and received paydowns within our loan portfolio.

Liquidity management involves the matching of cash flow requirements of customers, who may be either depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs and the ability of the Company to manage those requirements. The Company strives to maintain an adequate liquidity position by managing the balances and maturities of interest-earning assets and interest-bearing liabilities so that the balance it has in short-term investments at any given time will cover adequately any reasonably anticipated, immediate need for funds. Additionally, the Bank maintains relationships with correspondent banks, which could provide funds on short-term notice if needed. Our liquidity, represented by cash and cash-equivalents and investment securities, is a product of our operating, investing and financing activities.

Liquidity management is both a daily and long-term function of the management of the Company and the Bank. It is overseen by the Asset and Liability Management Committee. The Board of Directors required the Bank to maintain a minimum liquidity ratio of 10% of deposits. At June 30, 2014, our ratio was 27.2%. The Company is currently in excess of the minimum liquidity ratio set by the Board due to a larger than historical investment portfolio. Management continues to seek to utilize liquidity off of the investment portfolio to fund loan growth over the next few years as demand for loans increase. Excess liquidity is generally invested in short-term investments, such as overnight deposits and federal funds. On a longer term basis, we maintain a strategy of investing in various lending products and investment securities, including mortgage-backed securities. The Bank uses its sources of funds primarily to meet its ongoing commitments, pay maturing deposits, fund deposit withdrawals and fund loan commitments.

We maintain cash and investments that qualify as liquid assets to maintain adequate liquidity to ensure safe and sound operation and meet demands for funds (particularly withdrawals of deposits). At June 30, 2014, on a consolidated basis, the Company had $296.0 million in cash and investment securities available for sale and $5.5 million in loans held for sale generally available for its cash needs. We can also generate funds from borrowings, primarily FHLB advances, and, to a lesser degree, third party loans. At June 30, 2014, the Bank had the ability to borrow an additional $90.0 million in FHLB advances. In addition, we have historically sold 15- and 30-year long-term, fixed-rate mortgage loans in the secondary market in order to reduce interest rate risk and to create another source of liquidity. 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 amounts owed on its trust preferred securities, any dividends declared to its common stockholders, and interest and principal on outstanding debt. The Company’s primary source of funds is Bank dividends, the payment of which is subject to regulatory limits. At June 30, 2014, the Company, on an unconsolidated basis, had $1.4 million in cash, interest-bearing deposits and liquid investments generally available for its cash needs.

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

We use our sources of funds primarily to meet ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan commitments. At June 30, 2014, the approved outstanding loan commitments, including unused lines of credit, amounted to $186.8 million. Certificates of deposit scheduled to mature in one year or less at June 30, 2014, totaled $184.4 million. It is management’s policy to offer deposit rates that are competitive with other local financial institutions. Based on this management strategy, we believe that a majority of maturing deposits will remain with the Bank.

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

Off-Balance Sheet Activities

In the normal course of operations, the Bank engages in a variety of financial transactions that are not recorded in our financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. We also have off-balance sheet obligations to repay borrowings and deposits. For the quarter ended June 30, 2014, 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 June 30, 2014, the Bank had $88.2 million in commitments to make loans, $10.5 million in undisbursed portions of closed loans, $85.2 million in unused lines of credit and $2.8 million in standby letters of credit. In addition, on a consolidated basis, at June 30, 2014, the Company had $197.6 million in outstanding non-deposit borrowings, of which $59.8 million is due in the next twelve months.

Capital Resources

The Bank is subject to minimum capital requirements imposed by the FDIC. See ‘Item 1 - Business- How We Are Regulated - Regulatory Capital Requirements.” The FDIC may require the Bank to have additional capital above the 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 Company is 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. The FDIC and FRB have issued proposals to revise these capital requirements, which would increase the levels required, particularly if the Bank and the Company want to continue paying dividends or executive bonuses.

At June 30, 2014, the Bank’s regulatory capital exceeded the FDIC regulatory requirements, and the Bank was well-capitalized under regulatory prompt corrective action standards. In addition, at June 30, 2014, the Company’s capital levels exceeded the FRB’s requirements, and the Company was considered well-capitalized under FRB guidelines. Consistent with our goals to operate a sound and profitable organization, our policy is for the Bank to maintain well-capitalized status.

Our capital ratios at June 30, 2014 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	$	115,359		8.3	%	$	55,558		4.0	%	$	69,447		5.0	%
MutualBank		120,140		8.5			56,008		4.0			70,011		5.0
Tier 1 Risk-Based Capital Level⁽²⁾ :
MutualFirst Consolidated	$	115,359		11.6	%	$	39,729		4.0	%	$	59,593		6.0	%
MutualBank		120,140		12.1			39,710		4.0			59,565		6.0
Total Risk-Based Capital Level⁽³⁾ :
MutualFirst Consolidated	$	127,798		12.9	%	$	79,458		8.0	%	$	99,322		10.0	%
MutualBank		132,579		13.3			79,420		8.0			99,275		10.0

(1) Tier 1 Capital to Average Total Assets of $1.4 billion for the Bank and $1.4 billion for the Company at June 30, 2014

(2) Tier 1 Capital to Risk-Weighted Assets of $992.7 million for the Bank and $993.2 million for the Company at June 30, 2014.

(3) Total Capital to Risk-Weighted Assets.

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 the inflationary changes in the consumer price index (“CPI”) coincides with changes in interest rates. For example, the price of one or more of the components of the CPI may fluctuate considerably and thereby influence the overall CPI without having a corresponding effect on interest rates or upon 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, thereby adversely impacting the market values of investment securities, mortgage loans and other long-term fixed rate loans. In addition, higher short-term interest rates caused by inflation tend to increase the cost of funds. In other years, the opposite may occur.

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, 2013, filed with the SEC on March 14, 2014.

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.

Management continues to evaluate options to mitigate interest rate risk in an increasing interest rate environment during this cycle of extremely low interest rates. This includes shortening assets and lengthening liabilities when possible.

How We Measure Our Risk of Interest Rate Changes. As part of our attempt to manage our exposure to changes in interest rates, 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, the Bank’s board of directors establishes asset and liability management policies to better match the maturities and repricing terms of our interest-earning assets and interest-bearing liabilities.

These asset and liability policies are implemented by the Asset and Liability Management Committee, which 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. The 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 objective of these actions is 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 and improve earnings. 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 first half of 2014 we sold in the secondary market $15.8 million of fixed rate, one- to four-family mortgage loans with a term to maturity of 15 years or greater.

The following chart reflects 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 June 30, 2014.

	Percentage Change in
	Net Interest Income			Capital
Rate Shock:
Up 400 basis points		(32.9	)%		(37.9	)%
Up 300 basis points		(23.8	)%		(29.2	)%
Up 200 basis points		(15.1	)%		(17.8	)%
Up 100 basis points		(7.1	)%		(7.1	)%
Down 100 basis points		1.3	%		(4.7	)%

The above chart assumes instantaneous rate shocks that reprice all loans and deposits that can reprice at the same amount as the rate shock. If past rate movements are an indication of future changes, they usually are neither instantaneous nor do a majority of core deposits reprice at the same level as rates change. The following chart indicates the Company’s percentage change in net interest income and capital assuming rate movements that are not instantaneous, but change over a period of time, and a majority of core deposits changing at a percentage of the rate shock instead of the full amount of the rate shock.

	Percentage Change in
	Net Interest Income			Capital
Rate Shock:
Up 400 basis points		(6.6	)%		13.2	%
Up 300 basis points		(3.3	)%		11.2	%
Up 200 basis points		(0.5	)%		11.2	%
Up 100 basis points		1.6	%		9.4	%
Down 100 basis points		(0.1	)%		(7.3	)%

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

Evaluation of Disclosure Controls and Procedures

We maintain a system of disclosure controls and (as defined in sec Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) that is designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported accurately and within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate. An evaluation of the Company’s disclosure controls and procedures as of June 30, 2014, was carried out under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and several other members of our senior management preceding the filing date of this annual report. Our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2014, 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 our Chief Executive Officer and 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.

The Company does not expect that its disclosure controls and procedures will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within MutualFirst have been detected. These inherent limitations include the realities that judgment 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 future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal controls over financial reporting (as defined in SEC Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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, 2013.

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.

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	Form of Certificate for the Series A Preferred Stock	c
4.3	Form of Certificate for the SBLF Preferred Stock	a
9	Voting Trust Agreement	None
10.1	Employment Agreement with David W. Heeter	e
10.2	Employment Agreement with Patrick C. Botts	e
10.3	Form of Supplemental Retirement Plan Income Agreements for Patrick C. Botts and David W. Heeter	f
10.4	Named Executive Officer Salaries and Bonus Arrangements for 2013	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 2013	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	e
10.15	Salary Continuation Agreement with Charles J. Viater	d
10.16	Loan Agreement with First Tennessee Bank National Association dated January 4, 2013.	m
10.17	Form of Incentive Stock Option Agreement for 2008 Stock Option and Incentive Plan	j
10.18	Form of Non-Qualified Stock Option Agreement for 2008 Stock Option and Incentive Plan	j
10.21	Employment Agreement with Christopher D. Cook.	e
11	Statement re computation of per share earnings	None
12	Statements re computation of ratios	None
14	Code of Ethics	o
16	Letter re change in certifying accountant	None
18	Letter re change in accounting principles	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-K for the year ended December 31, 2013, formatted in Extensive Business Reporting Language (XBRL); (i) Consolidated Condensed Balance Sheets as of December 31, 2013 and 2012; (ii) Consolidated Condensed Statements of Income for the Years Ended December 31, 2013, 2012 and 2011; (iii) Consolidated Condensed Statements of Comprehensive Income for the Years Ended December 31, 2013, 2012 and 2011; (iv) Consolidated Condensed Statement of Stockholders’ Equity for the Years Ended December 31, 2013, 2012 and 2011 (v) Consolidated Condensed Statements of Cash Flows for the Years Ended December 31, 2013, 2012 and 2011; and (vi) Notes to Consolidated Financial Statements, December 31, 2013, 2012 and 2011, as follows:
	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 and incorporated herein by reference.
c	Filed as an exhibit to the Company’s Form 8-K filed on December 23, 2008 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 Form 10-Q filed on November 14, 2012 and incorporated herein by reference.
f	Filed as an exhibit to the Company’s Annual Report on Form 10-K filed on March 30, 2001 and incorporated herein by reference.
g	Filed as an exhibit to the Company’s Annual Report on Form 10-K filed on April 2, 2002 and incorporated herein by reference.
h	Filed as an Appendix to the Company’s Form S-4/A Registration Statement filed on October 19, 2001 and incorporated herein by reference.
i	Filed as an exhibit to the Company’s Annual Report on Form 10-K filed on March 16, 2007 and incorporated herein by reference.
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 and incorporated herein by reference.
l	Filed as an exhibit to the Company’s Form 8-K filed on July 15, 2008 and incorporated herein by reference.

m	Filed as an exhibit to the Company’s Form 10-Q filed on May 9, 2014 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 Annual Report on Form 10-K filed on March 14, 2014 and incorporated herein by reference.

(b) Exhibits - See list in (a)(3) and the Exhibit Index following the signature page.

(c) Financial Statements Schedules - None

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: August 4, 2014	By:	/s/David W. Heeter
		David W. Heeter
		President and Chief Executive Officer

Date: August 4, 2014	By:	/s/Christopher D. Cook
		Christopher D. Cook
		Senior Vice President, Treasurer and Chief Financial Officer

INDEX TO EXHIBITS

Number	Description

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 three months ended June 30, 2014 and year ended December 31, 2013, formatted in Extensive Business Reporting Language (XBRL); (i) Consolidated Condensed Balance Sheets as of June 30, 2014 and 2013; (ii) Consolidated Condensed Statements of Income for the Three Months Ended June 30, 2014 and 2013; (iii) Consolidated Condensed Statement of Stockholders’ Equity for the Period Ended June 30, 2014; (iv) Consolidated Condensed Statements of Cash Flows for the Three Months Ended June 30, 2014 and 2013; and (vi) Notes to Consolidated Financial Statements Three Months Ended June 30, 2014 and 2013, 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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