MutualFirst Announces Third Quarter 2007 Earnings

Wednesday, October 24, 2007

FOR MORE INFORMATION CONTACT:
Tim McArdle, Senior Vice President and Treasurer of MutualFirst Financial, Inc.
(765) 747-2818

MUNCIE, INDIANA - MutualFirst Financial, Inc. (NASDAQ: MFSF), the holding company of Mutual Federal Savings Bank (the "Bank"), announced today that net income for the third quarter ended September 30, 2007 was $1.2 million, or $.28 for basic and diluted earnings per share. This compared to net income for the comparable period in 2006 of $1.1 million, or $.27 for basic and diluted earnings per share. Annualized return on assets was .49% and return on average tangible equity was 6.45% for the third quarter of 2007 compared to .47% and 6.23%, respectively, for the same period last year. On a linked quarter basis, third quarter 2007 basic and diluted earnings per share also increased $.01, or 3.7% when compared to the second quarter of 2007.

Net income for the nine months ended September 30, 2007 was $3.3 million, or $.81 for basic and $.80 for diluted earnings per share. This compared to net income for the comparable period in 2006 of $4.1 million, or $.96 for basic and $.94 for diluted earnings per share. Annualized return on average assets was .47% and return on average tangible equity was 6.16% for the first nine months of 2007 compared to .56% and 7.25% respectively, for the same period last year.

Net income for the three months ended September 30, 2007 increased primarily due to increasing non-interest income, management of non-interest expense, and a reduction in income tax expense. Net income for the nine months ended September 30, 2007 decreased primarily due to decreasing net interest income, partially offset by the above mentioned items.

Assets totaled $966.8 million at September 30, 2007, an increase from December 31, 2006 of $5.9 million, or 0.6%. Loans, excluding loans held for sale, increased $4.9 million or 0.6%. Consumer loans increased $5.2 million, or 2.3%, and residential mortgage loans held in the portfolio increased $1.0 million, or 0.2%, while commercial loans decreased $1.3 million, or 0.9%. Mortgage loans held for sale increased $1.1 million and mortgage loans sold during the first nine months of 2007 totaled $17.2 million. The increased loan balances are due primarily to increased production and loan purchases in the third quarter of 2007. Investment securities available for sale decreased $655,000, or 1.6%, compared to December 31, 2006.

Allowance for loan losses increased $26,000 to $8.2 million at September 30, 2007 when compared to December 31, 2006. Net charge offs for the first nine months of 2007 were $1.4 million, or .23% of average loans on an annualized basis, compared to $1.5 million, or .24% of average loans for the comparable period in 2006. The decrease was primarily due to larger recoveries during the 2007 period. As of September 30, 2007 the allowance for loan losses as a percentage of loans receivable and non-performing loans was 1.00% and 78.62%, respectively, compared to 1.00% and 143.59%, respectively, at December 31, 2006.

Total deposits were $706.4 million at September 30, 2007, an increase from $703.4 at December 31, 2006. This increase was due primarily to increases in core demand, money market and savings deposits of $8.0 million and wholesale deposit increases of $2.7 million. These increases were partially offset by decreases in retail certificates of deposit of $7.7 million. Total borrowings increased $1.4 million to $160.2 million at September 30, 2007 from $158.9 million at December 31, 2006.

Stockholders' equity increased $507,000, or 0.6%, from $87.3 million at December 31, 2006, to $87.8 million at September 30, 2007. The increase was due primarily to net income of $3.3 million, Employee Stock Ownership Plan (ESOP) and RRP shares earned of $469,000 and exercised stock options of $209,000. This increase was partially offset by the repurchase of 83,000 shares of common stock for $1.6 million and dividend payments of $1.9 million. Also, the market value of securities available for sale compared to their book value increased $8,000 from a loss of $355,000 at December 31, 2006 to a loss of $347,000 at September 30, 2007.

Net interest income before the provision for loan losses decreased $493,000 from $6.3 million for the three months ended September 30, 2006 to $5.9 million for the three months ended September 30, 2007. The reasons for the decrease were a $28.5 million, or 3.2%, decrease in average interest earning assets and a 14 basis point decrease in the net interest margin reflecting the Bank's liability sensitive nature. The reduction in average interest earning assets was due primarily to a restructuring of the balance sheet in the fourth quarter of 2006 and decreased loan balances during the first half of 2007.

Net interest income before the provision for loan losses decreased $2.2 million for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006. The reasons for the decrease were similar to those stated above. Average interest earning assets decreased $24.1 million, or 2.7% and the net interest margin decreased by 26 basis points from 3.03% for the nine months ended September 30, 2006 to 2.77% for the same period in 2007.

The provision for loan losses for the third quarter of 2007 was $532,000, compared to $525,000 for last year's comparable period. Non-performing loans to total loans at September 30, 2007 were 1.27% compared to .60% at September 30, 2006. Non-performing assets to total assets were 1.37% at September 30, 2007 compared to .76% at September 30, 2006. The increase in non-performing loans is primarily related to five different commercial loan relationships all of which the Bank's evaluation indicates that adequate collateral exists. CEO Dave Heeter commented, "We feel that we have adequately evaluated our risk on these loans and are taking appropriate actions to mitigate any potential loss."

The provision for loan losses for the nine months ended September 30, 2007 remained flat at $1.4 million compared to the same period in 2006.

Non-interest income increased $256,000 to $2.0 million, or 14.6%, for the three months ended September 30, 2007 compared to the same period in 2006. The increase was due primarily to increases in commission income of $182,000, or 134.8%, increases in service fees on transaction accounts of $119,000, or 10.4%, and improved earnings on cash surrender value of life insurance of $31,000, or 11.6%. These increases were partially offset by decreases in gain on sale of loans of $31,000 and decreases in other income of $35,000. On a linked quarter basis, non-interest income increased $50,000, or 2.6%, primarily due to increases in commission income and service fees on transaction accounts.

For the nine month period ended September 30, 2007 non-interest income increased $602,000, or 11.8%, to $5.7 million compared to $5.1 million for the same period in 2006. The reasons are similar to those mentioned above.

Non-interest expense remained flat at $6.2 million for the three months ended September 30, 2007 compared to the same period in 2006. Increases in current quarter non-interest expense compared to the same period in 2006 include increases in data processing expense of $31,000 due primarily to technological upgrades, increases in occupancy expense of $35,000, increases in salaries and employee benefits of $42,000, and increases in other expenses of $42,000. These increases were offset by decreases in marketing expense of $100,000 and professional fees of $60,000. On a linked quarter basis non-interest expense was flat at $6.2 million. CEO Heeter added, "Our team has done an excellent job at expanding our franchise from a year ago while managing costs."

Non-interest expense decreased slightly to $18.6 million for the nine months ended September 30, 2007 compared to $18.7 million for the same period in 2006.

Income tax expense decreased $251,000 for the three months ended September 30, 2007 compared to the same period in 2006 due primarily to less taxable income and a tax benefit from the creation of a Nevada investment subsidiary. The effective tax rate also decreased from 15.8% to (3.2)% due to a higher percentage of non-taxable income to total income before income tax and an increased percentage of low income housing tax credits to taxable income when comparing the third quarter of 2007 to the third quarter of 2006, respectively.

For the nine-month period ended September 30, 2007, income tax expense decreased $771,000 compared to the same period in 2006. The decrease was due primarily to decreased taxable income and a tax benefit from the creation of a Nevada investment subsidiary. The effective tax rate also decreased from 20.9% to 8.3% due to a higher percentage of non-taxable income to total income before income tax and an increased percentage of low income housing tax credits to taxable income when comparing the first nine months of 2007 to the first nine months of 2006, respectively.

MutualFirst Financial, Inc. and Mutual Federal Savings Bank are headquartered in Muncie, Indiana with twenty-one full service offices in Delaware, Grant, Kosciusko, Randolph, and Wabash counties.

Statements contained in this release, which are not historical facts, are forward-looking statements, as that term is defined in the Private Securities Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those currently anticipated due to a number of factors, which include, but are not limited to changes in interest rates; the loss of deposits and loan demand to competitors; substantial changes in financial markets; changes in real estate values and the real estate market; or regulatory changes.