MutualFirst Financial, Inc. Accounces Second Quarter 2006 Earnings

MutualFirst Financial, Inc. (NASDAQ: MFSF), the holding company of Mutual Federal Savings Bank (the "Bank"), announced today that net income for the second quarter ended June 30, 2006 was $1.3 million, or $.32 for basic and $.31 for diluted earnings per share. This compared to net income for the comparable period in 2005 of $1.7 million, or $.39 for basic and $.38 for diluted earnings per share. Annualized return on assets was .56% and return on tangible equity was 7.18% for the second quarter of 2006 compared to .80% and 7.77% respectively, for the same period last year.

Net income for the six months ended June 30, 2006 was $2.9 million or $.68 for basic and $.67 for diluted earnings per share. This compared to net income for the comparable period in 2005 of $3.3 million or $.76 for basic and $.74 for diluted earnings per share. Annualized return on average assets was .60% and return on average tangible equity was 7.75% for the first half of 2006 compared to .78% and 7.62% respectively, for the same period last year.

Assets totaled $978.9 million at June 30, 2006, an increase from December 31, 2005 of $7.1 million, or .7%. Loans, excluding loans held for sale, increased $6.4 million or .8%. Consumer loans increased $8.3 million, or 3.9%, and commercial business loans increased $3.9 million, or 6.0%, while residential and commercial real estate loans held in the portfolio decreased $6.4 million, furthering our strategy to reduce the percentage of real estate mortgage loans to total loans. Mortgage loans held for sale increased $1.3 million and mortgage loans sold during the first half of 2006 totaled $11.3 million.

Allowance for loan losses increased $77,000 to $8.2 million when comparing December 31, 2005 to June 30, 2006. Net charge offs for the first half of 2006 were $841,000 or .20% of average loans on an annualized basis compared to $846,000, or .23% of average loans for the comparable period in 2005. A large portion of the net charge offs in the second quarter of 2006 was a $300,000 write-down of a $623,000 commercial business loan on a property and business located Muncie, Indiana. The loan is in default and the value of the real estate and business is not sufficient to pay off the total debt. As of June 30, 2006 the allowance for loan losses as a percentage of loans receivable and non-performing loans was .98% and 122.91%, respectively.

Total deposits were $684.3 million at June 30, 2006 a small decrease from $684.6 at December 31, 2005. Total borrowings increased $7.3 million to $195.1 million at June 30, 2006 from $187.8 million at December 31, 2005.

Stockholders' equity decreased $618,000, or .7%, from $88.8 million at December 31, 2005, to $88.2 million at June 30, 2006. The decrease was due primarily to the repurchase of 139,000 shares of common stock for $2.9 million and dividend payments of $1.2 million. This decrease was partially offset by net income of $2.9 million, Employee Stock Ownership Plan (ESOP) shares earned of $333,000, and RRP shares earned of $75,000. Also, the market value of securities available for sale compared to their book value decreased $167,000 from a loss of $375,000 at December 31, 2005 to a loss of $542,000 at June 30, 2006.

Net interest income before the provision for loan losses increased $61,000 from $6.7 million for the three months ended June 30, 2005 to $6.8 million for the three months ended June 30, 2006. The primary reason for the improvement was due to a $108.9 million, or 14.0% increase in average interest earning assets (mainly due to the Fidelity Federal purchase in September of 2005), partially offset by a 40 basis point decrease in the net interest margin reflecting the Bank's liability sensitive nature, as short term interest rates continued to rise.

Net interest income before the provision for loan losses increased $419,000 for the six months ended June 30, 2006 compared to the six months ended June 30, 2005. The reasons for the increase were similar to those stated above. Average interest earning assets increased $109.0 million, or 14.1% and the net interest margin decreased by 33 basis points from 3.46% for the six months ended June 30, 2005 to 3.13% for the same period in 2006.

The provision for loan losses for the second quarter of 2006 was $525,000, compared to $444,000 for last year's comparable period. The increase was due primarily to higher non-performing loans and higher loan portfolio balances (mainly due to the Fidelity Federal purchase in September of 2005). Non-performing loans to total loans at June 30, 2006 were .79% compared to .70% at June 30, 2005. Non-performing assets to total assets were .90% at June 30, 2006 compared to .76% at June 30, 2005. It should be noted that subsequent to June 30, 2006 and prior to today's earnings release, a non-performing loan in the amount of approximately $1.9 million was paid in full.

Non-interest income was basically unchanged at $1.7 million for the three months ended June 30, 2006 compared to the same period in 2005. Increases in service fees on transaction accounts of $123,000, or 12.4% were offset by a reduction in commission income on annuity and mutual fund sales as short term interest rates have risen making these products less competitive.

For the six month period ended June 30, 2006 non-interest income has remained flat at $3.3 million compared to the same period in 2005. The reasons are similar to those mentioned above.

Non-interest expense increased $587,000 or 10.4% to $6.2 million for the three months ended June 30, 2006 compared to $5.6 million for the same period in 2005. The increase was due primarily to increased salaries and benefits which were up $246,000 due to annual salary adjustments, increased health insurance costs and increased staffing for two new branches opened; one in May of 2005 and the other with the purchase of Fidelity Federal in September of 2005. Marketing expenses were up $105,000 primarily due to a new branding campaign designed to more clearly communicate our strategic position. Other expenses increased $180,000 due to increased professional fees primarily related to regulatory compliance requirements and legal costs related to REO, increased REO expenses (other than legal costs) due to more repossessed properties, and other general and administrative expense increases related to the opening of the new branches. On a linked quarter basis non-interest expense was flat at $6.2 million.

Non-interest expense increased $1.2 million or 11.3% to $12.4 million for the six months ended June 30, 2006 compared to $11.2 million for the same period in 2006 for similar reasons mentioned above.

Income tax expense decreased $305,000 for the three months ended June 30, 2006 compared to the same period in 2005 due to less taxable income. The effective tax rate decreased from 27.5% to 20.0% due to an increased percentage of low income housing tax credits to taxable income when comparing the second quarter of 2006 to the second quarter of 2005.

For the six-month period ended June 30, 2006, income tax expense decreased $396,000 compared to the same period in 2005. The decrease was due primarily to decreased taxable income. The effective tax rate decreased from 27.5% to 22.7% due to an increased percentage of low income housing tax credits to taxable income when comparing the first half of 2006 to the first half of 2005.

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