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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

__________________________


FORM 10-K


[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
            For the fiscal year ended December 31, 2000

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
(State or other jurisdiction of incorporation or organization)

35-2085640
(I.R.S. Employer Identification No.)

110 E. Charles Street, Muncie, Indiana
(Address of principal executive offices)
47305-2419
(Zip Code)
Registrant's telephone number, including area code: (765) 747-2800


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

None

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

Common Stock, par value $.01 per share
(Title of Class)


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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X ]

             The aggregate market value of the voting common stock held by non-affiliates of the registrant, computed by reference to the last sale price of such stock on the Nasdaq National Market on March 1, 2001, was approximately $113.3 million. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.)

            As of March 1, 2001, there were issued and outstanding 8,376,623 shares of the registrant's common stock.

DOCUMENTS INCORPORATED BY REFERENCE

PART II of Form 10-K--Portions of registrant's Annual Report to Stockholders for the fiscal year ended December 31, 2000.
PART III of Form 10-K--Portions of registrant's Proxy Statement for its 2001 Annual Meeting of Stockholders.


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Item 1. Business

General

            MutualFirst Financial, Inc., a Maryland corporation, is a savings and loan holding company which has as its wholly-owned subsidiary Mutual Federal Savings Bank. MFS Financial was formed in September 1999 to become the holding company of Mutual Federal in connection with Mutual Federal's conversion from the mutual to stock form of organization on December 29, 1999. In April 2000, MFS Financial formally changed its corporate name to MutualFirst Financial, Inc. ("MutualFirst"). The words "we," "our" and "us" refer to MutualFirst and Mutual Federal on a consolidated basis, except that references to us prior to December 29, 1999 refer only to Mutual Federal.

            At December 31, 2000, we had total assets of $770 million, deposits of $515 million and stockholders' equity of $130 million. Our executive offices are located at 110 E. Charles Street, Muncie, Indiana 47305-2400.

            Our principal business consists of attracting retail deposits from the general public and investing those funds primarily in permanent loans secured by first mortgages on owner-occupied, one- to four-family residences and a variety of consumer loans. We also originate loans secured by commercial and multi-family real estate, commercial business loans and construction loans secured primarily by residential real estate.

            Our revenues are derived principally from interest on loans and interest on investments and mortgage-backed securities.

            We offer deposit accounts having a wide range of interest rates and terms, which generally include passbook and statement savings accounts, money market deposit accounts, NOW and non-interest bearing checking accounts and certificates of deposit with terms ranging from seven days to 71 months. We solicit deposits in our market areas and we have not accepted brokered deposits.

            On December 8, 2000, MutualFirst Financial, Inc. completed a strategic alliance with Marion Capital Holdings, Inc. ("Marion Capital") in Marion, Indiana. Marion Capital had assets totaling $198.3 million and equity of $30.3 million held primarily through its wholly owned subsidiary, First Federal Saving Bank of Marion. MutualFirst issued approximately 2.5 million MutualFirst shares to Marion Capital shareholders in exchange for their Marion Capital shares. The combination was accounted for using the purchase accounting method and created no goodwill.

Forward-Looking Statements

            This Form 10-K contains various forward-looking statements which are based on assumptions and describe our future plans and strategies and our expectations. These forward-looking statements are generally identified by words such as "believe," "expect," "intend," "anticipate," "estimate," "project," or similar words. Our ability to predict results or the actual


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effect of future plans or strategies is uncertain. Factors which could cause actual results to differ materially from those estimated include, but are not limited to, changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of our loan and investment portfolios, demand for our loan products, deposit flows, our operating expenses, competition, demand for financial services in our market areas and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and you should not rely too much on these statements.

Market Areas

            We are a community-oriented financial institution offering a variety of financial services to meet the needs of the communities we serve. We are headquartered in Muncie, Indiana and with our recent merger with Marion Capitol Holdings, Inc., we offer our financial services through 17 retail offices primarily serving Delaware, Randolph, Kosciusko and Grant counties in Indiana. We also originate mortgage loans in contiguous counties and we originate indirect consumer loans throughout Indiana and western Ohio. See "Lending Activities -- Consumer and Other Lending."

Lending Activities

            General. Our mortgage loans carry either a fixed or an adjustable rate of interest. Mortgage loans are generally long-term and amortize on a monthly basis with principal and interest due each month. At December 31, 2000, our net loan portfolio totaled $643 million, which constituted 83.5% of our total assets.

            Loans up to $550,000 may be approved by individual loan officers. Loans in excess of $550,000, but not in excess of $1.0 million, require the signatures of the recommending officer and any two signatures from the Executive Loan Committee. Loans in amounts greater than $1.0 million, but not to exceed $1.5 million, require the signatures of the recommending officer and any three Executive Loan Committee members. All loans in excess of $1.5 million and loans of any amount to a borrower whose aggregate debt will exceed $3.0 million must be approved by the Board of Directors.

            At December 31, 2000, the maximum amount which we could lend to any one borrower and the borrower's related entities was approximately $15.6 million. At December 31, 2000, our largest lending relationship to a single borrower or a group of related borrowers consisted of ten loans to a local developer/entrepreneur and related entities totaling $3.6 million. Although the relationship dates back to 1980, 88.2% of the outstanding debt has been originated since June 30, 1998, and consists of refinancing existing debt. The loans are diverse and are secured by apartment complexes, medical facilities and a bank branch, each with independent income streams to support debt service requirements. Each of the loans to this group of borrowers was current and performing in accordance with its terms at December 31, 2000.


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            The following table presents information concerning the composition of our loan portfolio in dollar amounts and in percentages as of the dates indicated.

December 31,
2000
 1999
1998
1997
1996
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
(Dollars in Thousands)
Real Estate Loans:
   One- to four-family(1) $392,832 60.19% $286,578 63.70% $264,461 65.42% $266,971 65.77% $244,518 63.17%
    Multi-family 9,787 1.50    5,544 1.23    6,282 1.56    7,694 1.90    9,598 2.48   
   Commercial 53,197 8.15    14,559 3.24    10,293 2.54    8,131 2.00    7,878 2.03   
   Construction and development 13,591
 2.08   
 12,470
 2.77   
 11,805
 2.92   
 10,385
 2.56   
 22,040
 5.69   
      Total real estate loans 469,407
 71.92   
 319,151
 70.94   
 292,841
 72.44   
 293,181
 72.23   
 284,034
 73.37   
Other Loans:
   Consumer Loans:
   Automobile 28,909 4.43    19,887 4.42    17,820 4.41    19,977 4.92    20,164 5.21   
   Home equity 17,428 2.67    10,585 2.36    10,253 2.54    11,366 2.80    10,885 2.81   
   Home improvement 23,304 3.57    14,588 3.24    12,108 2.99    14,485 3.57    12,066 3.12   
   Manufactured housing 9,865 1.51    12,305 2.74    15,466 3.83    20,017 4.93    24,933 6.44   
   R.V. 34,744 5.32    25,629 5.70    19,100 4.72    14,564 3.59    11,503 2.97   
   Boat 35,180 5.39    32,374 7.20    23,608 5.84    21,553 5.31    17,244 4.45   
   Other 7,508
 1.15   
 4,554
 1.01   
 5,753
 1.42   
 5,585
 1.38   
 5,676
 1.47   
      Total consumer loans 156,938 24.04    119,922 26.67    104,108 25.75    107,547 26.50    102,471 26.47   
   Commercial business loans 26,375
 4.04   
 10,764
 2.39   
 7,285
 1.81   
 5,211
 1.27   
 596
 0.16   
      Total other loans 183,313
 28.08   
 130,686
 29.06   
 111,393
 27.56    112,758
 27.77   
 103,067
 26.63   
   Total loans receivable, gross(1) 652,720 100.00%
 449,837 100.00%
 404,234 100.00%
 405,939 100.00%
 387,101 100.00%
Less:
   Undisbursed portion of loans 5,247 4,844 3,353 3,998 6,073
   Deferred loan fees and costs (2,274) (1,446) (689) (440) (252)
   Allowance for losses 6,472
 3,652
 3,424
 3,091
 2,990
   Total loans receivable, net $643,275
 $442,787
 $398,146
 $399,290
 $378,290
_______________
(1) Includes loans held for sale.





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            The following table shows the composition of our loan portfolio by fixed- and adjustable-rate at the dates indicated.

December 31,
2000
 1999
1998
1997
1996
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
(Dollars in Thousands)
Fixed-Rate Loans:
Real estate:
   One- to four-family(1) $179,656 27.52% $178,033 39.58% $163,262 40.39% $141,024 34.74% $132,095 34.12%
   Multi-family 3,248 0.50    2,270 .50    2,656 0.66    2,485 0.61    3,161 0.82   
   Commercial 10,197 1.56    6,220 1.38    2,398 0.59    1,447 0.36    1,280 0.33   
   Construction and development 6,713
 1.03   
 5,043
 1.12   
 8,076
 2.00   
 4,108
 1.01   
 11,271
 2.91   
      Total real estate loans 199,814 30.61    191,566 42.58    176,392 43.64    149,064 36.72    147,807 38.18   
   Consumer 137,003 20.99    106,563 23.69    93,855 23.22    96,181 23.70    91,586 23.66   
   Commercial business 11,607
 1.78   
 3,320
 .74   
 1,972
 0.49   
 4,454
 1.09   
 596
 0.16   
      Total fixed-rate loans 348,424
 53.38   
 301,449
 67.01   
 272,219
 67.35   
 249,699
 61.51   
 239,989
 62.00   
Adjustable-Rate Loans:
Real estate:
   One- to four-family 213,176 32.66    108,545 24.13    101,199 25.03    125,947 31.03    112,423 29.05   
   Multi-family 6,539 1.00    3,274 .73    3,626 0.90    5,209 1.29    6,437 1.66   
   Commercial 43,000 6.59    8,339 1.85    7,895 1.95    6,684 1.64    6,598 1.70   
   Construction and development 6,878
 1.05   
 7,427
 1.65   
 3,729
 0.92   
 6,277
 1.55   
 10,769
 2.78   
      Total real estate loans 269,593 41.30    127,585 28.36    116,449 28.80    144,117 35.51    136,227 35.19   
   Consumer 19,935 3.06    13,359 2.97    10,253 2.53    11,366 2.80    10,885 2.81   
   Commercial business 14,768
 2.26   
 7,444
 1.66   
 5,313
 1.32   
 757
 0.18   
 ---
 --- 
      Total adjustable-rate loans 304,296
 46.62 
 148,388
 32.99   
 132,015
 32.65   
 156,240
 38.49   
 147,112
 38.00   
      Total loans(1) 652,720 100.00%
 449,837 100.00%
 404,234 100.00%
 405,939 100.00%
 387,101 100.00%
Less:
   Undisbursed portion of loans 5,247 4,844 3,353 3,998 6,073
   Deferred loan fees and costs (2,274) (1,446) (689) (440) (252)
   Allowance for loan losses 6,472
 3,652
 3,424
 3,091
 2,990
      Total loans receivable, net $643,275
 $442,787
 $398,146
 $399,290
 $378,290
________________
(1) Includes loans held for sale.



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            The following schedule illustrates the contractual maturity of our loan portfolio at December 31, 2000. Mortgages which have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due. The schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.

Real Estate
One- to Four-Family(3)
 Multi-family and
Commercial
 Construction
and Development(1)
 Consumer
 Commercial
Business
 Total
Amount
 Weighted
Average
Rate
 Amount
 Weighted
Average
Rate
 Amount
 Weighted
Average
Rate
 Amount
 Weighted
Average
Rate
 Amount
 Weighted
Average
Rate
 Amount
 Weighted
Average
Rate
(Dollars in Thousands)
Due During
Years Ending December 31,
2001(2) $ 851 8.011% $ 659 10.121% $ 792 9.024% $ 7,271 10.219% $ 9,441 9.961% $ 19,014 9.939%
2002 600 8.609    276 8.479    129 10.081    5,205 9.386    2,078 9.655    8,288 9.378   
2003 2,400 7.669    1,655 8.778    --- ---    8,895 9.135    1,403 9.965    14,353 8.930   
2004 and 2005 5,325 8.532    5,330 8.933    748 9.707    30,634 9.081    6,715 9.538    48,752 9.076   
2006 to 2007 10,514 8.057    4,950 8.556    353 9.095    14,592 9.426    2,520 9.628    32,929 8.870   
2008 to 2022 182,330 7.733    49,487 8.842    4,466 8.646    90,085 9.413    4,218 7.697    330,586 8.369   
2023 and following 186,899
 7.514    627
 9.290    7,103
 8.252    256
 11.191    ---
 0.000    194,885
 7.551   
Total $388,919
 $62,984
 $13,591
 $156,938
 $26,375
 $648,807
_______________
(1) Once the construction phase has been completed, these loans will automatically convert to permanent financing.
(2) Includes demand loans, loans having no stated maturity and overdraft loans.
(3) Does not include mortgage loans held for sale.


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            The total amount of loans due after December 31, 2001 which have predetermined interest rates is $336 million, while the total amount of loans due after such date which have floating or adjustable interest rates is $294 million.

            One- to Four-Family Residential Real Estate Lending. We focus our lending efforts primarily on the origination of loans secured by first mortgages on owner-occupied, one- to four-family residences in our market areas. At December 31, 2000, one- to four-family residential mortgage loans totaled $392.8 million, or 60.2% of our gross loan portfolio.

            We generally underwrite our one- to four-family loans based on the applicant's employment and credit history and the appraised value of the subject property. Presently, we lend up to 100% of the lesser of the appraised value or purchase price for one- to four-family residential loans. For loans with a loan-to-value ratio in excess of 80%, we generally require private mortgage insurance in order to reduce our exposure to below 80%. Properties securing our one- to four-family loans are appraised by independent state licensed fee appraisers approved by Mutual Federal's board of directors. We require borrowers to obtain title and hazard insurance, and flood insurance, if necessary, in an amount not less than the value of the property improvements.

            We originate one- to four-family mortgage loans on either a fixed- or adjustable-rate basis, as consumer demand dictates. Our pricing strategy for mortgage loans includes setting interest rates that are competitive with Freddie Mac and other local financial institutions, and consistent with our internal needs. Adjustable-rate mortgage, or ARM, loans are offered with a six-month, one-year, three-year, five-year or seven-year term to the initial repricing date. After the initial period, the interest rate for each ARM loan adjusts consistently with the initial term for the six-month, one-year and three-year terms, respectively, and annually for the five-year and seven-year terms, for the remainder of the term of the loan. We use the weekly average of the appropriate term Treasury Bill Constant Maturity Index to reprice our ARM loans. During fiscal 2000, we originated $18.6 million of one- to four-family ARM loans and $32.7 million of one- to four-family fixed rate mortgage loans. By way of comparison, during fiscal 1999, we originated $23.0 million of one- to four-family ARM loans, and $48.3 million of one- to four-family fixed-rate mortgage loans.

            Fixed-rate loans secured by one- to four-family residences have contractual maturities of up to 30 years, and are generally fully amortizing, with payments due monthly. These loans normally remain outstanding, however, for a substantially shorter period of time because of refinancing and other prepayments. A significant change in interest rates could alter considerably the average life of a residential loan in our portfolio. Our one- to four-family loans are generally not assumable, do not contain prepayment penalties and do not permit negative amortization of principal. Most are written using underwriting guidelines which make them saleable in the secondary market. Our real estate loans generally contain a "due on sale" clause allowing us to declare the unpaid principal balance due and payable upon the sale of the security property.

            Our one- to four-family residential ARM loans are fully amortizing loans with contractual maturities of up to 30 years, with payments due monthly. Our ARM loans generally provide for specified minimum and maximum interest rates, with a lifetime cap and floor, and a periodic


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adjustment on the interest rate over the rate in effect on the date of origination. As a consequence of using caps, the interest rates on these loans may not be as rate sensitive as is our cost of funds. We offer a one-year ARM loan that is convertible into a fixed-rate loan. When these loans convert, they are usually sold in the secondary market.

            In order to remain competitive in our market areas, we originate ARM loans at initial rates below the fully indexed rate. ARM loans generally pose different credit risks than fixed-rate loans, primarily because as interest rates rise, the borrower's payment rises, increasing the potential for default. We have not experienced difficulty with the payment history for these loans. See "Asset Quality -- Non-performing Assets" and "-- Classified Assets." At December 31, 2000, our one- to four-family ARM loan portfolio totaled $213.2 million, or 32.7% of our gross loan portfolio. At that date, the fixed-rate one- to four-family mortgage loan portfolio totaled $179.7 million, or 27.5% of our gross loan portfolio.

            Multi-family and Commercial Real Estate Lending. We offer a variety of multi-family and commercial real estate loans for acquisition, renovation or construction. These loans are secured by the real estate and improvements financed. The collateral securing these loans ranges from industrial commercial buildings, churches, office buildings and multi-family housing complexes. At December 31, 2000, multi-family and commercial real estate loans totaled $63 million, or 9.7% of our gross loan portfolio.

            Our loans secured by multi-family and commercial real estate are originated with either a fixed or adjustable interest rate. The interest rate on adjustable-rate loans is based on a variety of indices, generally determined through negotiation with the borrower. Loan-to-value ratios on our multi-family and commercial real estate loans typically do not exceed 80% of the appraised value of the property securing the loan. These loans typically require monthly payments, may not be fully amortizing and have maximum maturities of 20 years.

            Loans secured by multi-family and commercial real estate are underwritten based on the income producing potential of the property and the financial strength of the borrower. The net operating income, which is the income derived from the operation of the property less all operating expenses, must be sufficient to cover the payments related to the outstanding debt. We generally require personal guarantees of the borrowers in addition to the security property as collateral for such loans. We also generally require an assignment of rents or leases in order to be assured that the cash flow from the project will be used to repay the debt. Appraisals on properties securing multi-family and commercial real estate loans are performed by independent state licensed fee appraisers approved by Mutual Federal's board of directors. See "Loan Originations, Purchases, Sales and Repayments."

            We generally do not maintain a tax or insurance escrow account for loans secured by multi-family and commercial real estate. In order to monitor the adequacy of cash flows on income-producing properties, the borrower is requested or required to provide periodic financial information.

            Loans secured by multi-family and commercial real estate are generally larger and involve a greater degree of credit risk than one- to four-family residential mortgage loans. Multi-family


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and commercial real estate loans typically involve large balances to single borrowers or groups of related borrowers. Because payments on loans secured by multi-family and commercial real estate are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. If the cash flow from the project is reduced, or if leases are not obtained or renewed, the borrower's ability to repay the loan may be impaired. See "Asset Quality -- Non-performing Assets."

            Construction and Development Lending. We originate construction loans primarily secured by existing residential building lots. We make construction loans to builders and to individuals for the construction of their residences. Substantially all of these loans are secured by properties located within our market areas. At December 31, 2000, we had $13.6 million in construction and development loans outstanding, representing 2.1% of our gross loan portfolio.

            Construction and development loans are obtained through continued business with builders who have previously borrowed from us, from walk-in customers and through referrals from realtors and architects. The application process includes submission of accurate plans, specifications and costs of the project to be constructed. These items are used to determine the appraised value of the subject property. Loans are based on the lesser of the current appraised value and/or the cost of construction, including the land and the building. We generally conduct regular inspections of the construction project being financed.

            Construction loans for one- to four-family homes are generally granted with a construction period of up to one year. During the construction phase, the borrower generally pays interest only on a monthly basis. Loans to individuals for the construction of their residences may be either short term construction financing or a construction/permanent loan which automatically converts to a long term mortgage consistent with our one- to four-family residential loan products. Loan-to-value ratios on our construction and development loans typically do not exceed 80% of the appraised value of the project on an as completed basis. Single family construction loans with loan-to-value ratios over 80% require private mortgage insurance.

            Because of the uncertainties inherent in estimating construction and development costs and the market for the project upon completion, it is difficult to evaluate accurately the total loan funds required to complete a project, the related loan-to-value ratios and the likelihood of ultimate success of the project. These loans also involve many of the same risks discussed above regarding multi-family and commercial real estate loans and tend to be more sensitive to general economic conditions than many other types of loans. In addition, payment of interest from loan proceeds can make it difficult to monitor the progress of a project.

            Consumer and Other Lending. Consumer loans generally have shorter terms to maturity, which reduces our exposure to changes in interest rates, and carry higher rates of interest than one- to four-family residential mortgage loans. In addition, management believes that offering consumer loan products helps to expand and create stronger ties to our customer base by increasing the number of customer relationships and providing cross-marketing opportunities. At December 31, 2000, our consumer loan portfolio totaled $156.9 million, or


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24% of our gross loan portfolio. We offer a variety of secured consumer loans, including home equity and lines of credit, home improvement, auto, boat and recreational vehicle, manufactured housing and loans secured by savings deposits. We also offer a limited amount of unsecured loans. We originate our consumer loans both in our market areas and throughout Indiana and western Ohio.

            At December 31, 2000, our home equity loans, including lines of credit, and home improvement loans totaled $40.7 million, or 6.2% of our gross loan portfolio. These loans may be originated in amounts, together with the amount of the existing first mortgage, of up to 100% of the value of the property securing the loan. The term to maturity on our home equity and home improvement loans may be up to 15 years. Home equity lines of credit have a maximum term to maturity of 20 years and require a minimum monthly payment based on the outstanding loan balance per month, which amount may be reborrowed at any time. Other consumer loan terms vary according to the type of collateral, length of contract and creditworthiness of the borrower.

            We directly and indirectly originate auto loans, boat and recreational vehicle loans and manufactured housing loans. We generally buy indirect auto loans on a rate basis, paying the dealer a cash payment for loans with an interest rate in excess of the rate we require. This premium is amortized over the remaining life of the loan. Any prepayments or delinquencies are charged to future amounts owed to that dealer, with no dealer reserve or other guarantee of payment if the dealer stops doing business with us.

            We underwrite indirect auto loans using the Fair-Isaacs credit scoring system. We also directly originate auto loans through bank personnel. These loans are underwritten more traditionally, with a review of the borrower's employment and credit history and an assessment of the borrower's ability to repay the loan.

            At December 31, 2000, auto loans totaled $28.9 million, or 4.4% of our gross loan portfolio. Auto loans may be written for up to six years and usually have fixed rates of interest. Loan to value ratios are up to 100% of the sale price for new autos and 110% of value on used cars, based on valuation from official used car guides.

            Our boat and recreational vehicle loans are generally originated on an indirect basis. We utilize an independent company to market our loan products and help service and collect our boat and RV loans, keeping down our marketing, collection and related personnel costs. We pay a fee based on a percentage of the loan amounts originated through this company as well as monthly service fees, for these services. We pay dealers a premium for each loan based on the interest rate charged on each loan. We amortize this premium, which is usually significantly smaller than the premium we pay dealers for our indirect auto loans, over the estimated life of each loan.

            For a few of our largest boat and RV dealers, we also offer a program where we pay for each loan on a rate basis, just as with our indirect auto loans. Under this program, however, we pay only a portion of the cash payment due, holding back a reserve in a Mutual Federal savings account. This dealer holdback is released to the dealer pro-rata over the life of the loan.



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            We underwrite indirect boat and RV loans using the Fair-Isaacs credit scoring system and, as with our indirect auto loans, tend to accept only the more qualified buyers based on our scoring.

            Loans for boats and recreational vehicles totaled $69.9 million at December 31, 2000, or 10.7% of our gross loan portfolio. This has been the fastest growing portion of our consumer loan portfolio over the past five years. We will finance up to 100% of the purchase price for a new recreational vehicle and 95% for a new boat. The maximum loan to value ratio is 100% for used recreational vehicles and 95% for boats. Values are based on the applicable official used vehicle guides. The term to maturity for these types of loans is up to 10 years for used boats and recreational vehicles and up to 15 years for new boats and recreational vehicles. These loans are generally written with fixed rates of interest.

            At December 31, 2000, manufactured housing loans totaled $9.9 million, or 1.5% of our gross loan portfolio. This amount has decreased significantly over the last five years, due to increased competition. Manufactured housing loans are offered at fixed or adjustable rates of interest for terms up to 25 years, and at a maximum loan to value ratio of 95%.

            Consumer loans may entail greater risk than one- to four-family residential mortgage loans, especially consumer loans secured by rapidly depreciable assets, such as automobiles, boats and recreational vehicles. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan collections are dependent on the borrower's continuing financial stability and, thus, are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

            Commercial Business Lending. At December 31, 2000, commercial business loans totaled $26.4 million, or 4% of our gross loan portfolio. Most of our commercial business loans have been extended to finance local businesses and include short term loans to finance machinery and equipment purchases, inventory and accounts receivable. Commercial business loans also involve the extension of revolving credit for a combination of equipment acquisitions and working capital needs and agricultural purposes such as seed, farm equipment and livestock.

            The terms of loans extended on the security of machinery and equipment are based on the projected useful life of the machinery and equipment, generally not to exceed seven years. Lines of credit generally are available to borrowers for up to 13 months, and may be renewed by us.

            We issue a few financial-based standby letters of credit which are offered at competitive rates and terms and are generally on a secured basis. We are attempting to expand our volume of commercial business loans.

            Our commercial business lending policy includes credit file documentation and analysis of the borrower's background, capacity to repay the loan, the adequacy of the borrower's capital and collateral as well as an evaluation of other conditions affecting the borrower. Analysis of the borrower's past, present and future cash flows also is an important aspect of our credit analysis. We generally obtain personal guarantees on our commercial business loans. Nonetheless, these loans are believed to carry higher credit risk than traditional single family loans.


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            Unlike residential mortgage loans, commercial business loans are typically made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial business loans may substantially depend on the success of the business itself (which, in turn, often depends in part upon general economic conditions). Our commercial business loans are usually secured by business assets. However, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.

Loan Originations, Purchases, Sales and Repayments

            We originate loans through referrals from real estate brokers and builders, our marketing efforts, and our existing and walk-in customers. We also originate many of our consumer loans through relationships with dealerships. While we originate both adjustable-rate and fixed-rate loans, our ability to originate loans depends upon customer demand for loans in our market areas. Demand is affected by local competition and the interest rate environment. During the last several years, due to low market interest rates, our dollar volume of fixed-rate, one- to four-family loans has exceeded the dollar volume of the same type of adjustable-rate loans. From time to time, we sell fixed rate, one- to four-family residential loans. We have also, on a very limited basis, purchased one- to four-family residential and commercial real estate loans. Furthermore, during the past few years, we, like many other financial institutions, have experienced significant prepayments on loans due to the low interest rate environment prevailing in the United States.

            In periods of economic uncertainty, the ability of financial institutions, including us, to originate or purchase large dollar volumes of real estate loans may be substantially reduced or restricted, with a resultant decrease in interest income.


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            The following table shows our loan origination, purchase, sale and repayment activities for the years indicated.


Year Ended December 31,
2000
 1999
1998
(In Thousands)
Originations by type:
   Adjustable rate:
      Real estate - one- to four-family $18,565 $23,002 $ 19,835
                          - multi-family 1,356 37 1,051
                          - commercial 8,626 3,008 2,701
                          - construction or development 8,285 8,710 4,160
      Non-real estate - consumer --- --- ---
                                  - commercial business 5,417
 611
 3,003
                  Total adjustable-rate 42,249
 35,368
 30,750
   Fixed rate:
      Real estate - one- to four-family 32,716 48,307 96,672
                          - multi-family --- --- 514
                          - commercial 709 4,032 1,240
                          - construction or development 6,141 8,486 7,297
      Non-real estate - consumer 53,130 47,925 32,492
                                   - - commercial business 4,969
 491
 810
            Total fixed-rate 97,665
 109,241
 139,025
            Total loans originated 139,914
 144,609
 169,775
Purchases(1):
   Real estate - one- to four-family 113,064 3,324 ---
                       - multi-family 49,035 --- ---
                       - commercial 2,036 --- 325
                        - construction or development 2,229 --- ---
      Non-real estate - consumer 4,168 --- ---
                                  - commercial business 9,819
 ---
 ---
            Total loans purchased 180,351
 3,324
 325
Sales and Repayments:
Sales:
      Real estate - one- to four-family 7,866 --- 35,123
                           - multi-family --- --- ---
                           - commercial --- --- ---
                           - construction or development --- --- ---
      Non-real estate - consumer --- --- ---
                                   - - commercial business ---
---
 ---
             Total loans sold 7,866 --- 35,123
Principal repayments 112,549
100,480
 135,909
             Total reductions 120,415 100,480 171,032
Increase (decrease) in other items, net 3,033
(1,850)
 (773)
             Net increase (decrease) $202,883
 $ 45,603
 $ (1,705)
_____________
(1) Includes loans acquired in the merger with Marion Capital Holdings, Inc.


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Asset Quality

            When a borrower fails to make a payment on a mortgage loan on or before the default date, a late charge notice is mailed 16 days after the due date. When the loan is 31 days past due (16 days for an ARM), we mail a delinquency notice to the borrower. All delinquent accounts are reviewed by a collector, who attempts to cure the delinquency by contacting the borrower once the loan is 30 days past due. If the loan becomes 60 days delinquent, the collector will generally contact the borrower by phone or send a letter to the borrower in order to identify the reason for the delinquency. Once the loan becomes 90 days delinquent, the borrower is asked to pay the delinquent amount in full, or establish an acceptable repayment plan to bring the loan current. Between 100 and 120 days delinquent a drive-by inspection is made. If the account becomes 120 days delinquent, and an acceptable repayment plan has not been agreed upon, a collection officer will generally refer the account to legal counsel, with instructions to prepare a notice of intent to foreclose. The notice of intent to foreclose allows the borrower up to 30 days to bring the account current. During this 30 day period, the collector may accept a written repayment plan from the borrower which would bring the account current within the next 90 days. If the loan becomes 150 days delinquent and an acceptable repayment plan has not been agreed upon, the collection officer will turn over the account to our legal counsel with instructions to initiate foreclosure.

            For consumer loans, a similar process is followed, with the initial written contact being made once the loan is 30 days past due.

            Delinquent Loans. The following table sets forth, as of December 31, 2000, our loans delinquent 60 - 89 days by type, number, amount and percentage of type.

Loans Delinquent For:
60-89 Days
Number
 Amount
 Percent
of Loan
Category
(Dollars in Thousands)
Real Estate:
   One- to four-family 45 $1,827 .465%
   Multi-family 0 0 0   
   Commercial 0 0 0   
   Construction and
       development 		0 0 0   
Consumer 111 1,017 .648   
Commercial business 0
 0
 0   
      Total 156
 $2,844
 .436%

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            Non-performing Assets. The table below sets forth the amounts and categories of non-performing assets in our loan portfolio at the dates indicated. Loans are placed on non-accrual status when the loan becomes more than 90 days delinquent. At all dates presented, we had no troubled debt restructurings which involve forgiving a portion of interest or principal on any loans or making loans at a rate materially less than that of market rates. Foreclosed assets owned include assets acquired in settlement of loans.

December 31,
2000
 1999
 1998
 1997
 1996
(Dollars in Thousands)
Non-accruing loans:
   One- to four-family $ 710 $ 385 $ 500 $ 243 $ 558
   Multi-family --- --- --- --- ---
   Commercial real estate 1,548 --- 31 108 471
   Construction and development --- --- --- --- ---
   Consumer 761 368 485 331 ---
   Commercial business ---
 ---
 ---
 ---
 ---
      Total 3,022
 753
 1,016
 682
 1,029
Accruing loans delinquent 90 days or more:
   One- to four-family 232 16 88 27 8
   Multi-family --- --- --- --- ---
   Commercial real estate 137 12 --- --- ---
   Construction and development --- --- --- --- ---
   Consumer 31 --- 10 51 507
   Commercial business ---
 ---
 ---
 ---
 ---
      Total 400
 28
 98
 78
 515
      Total nonperfoming loans 3,422
 781
 1,114
 760
 1,544
Foreclosed assets:
   One- to four-family 80 304 46 83 20
   Multi-family --- --- --- --- ---
   Commercial real estate 764 425 --- 1,498 ---
   Construction and development --- --- --- --- ---
   Consumer 90 122 223 486 561
   Commercial business ---
 ---
 ---
 ---
 ---
      Total 934
 851
 269
 2,067
 581
Total non-performing assets $4,356
 $1,632
 $1,383
 $2,827
 $2,125
Total as a percentage of total assets 0.56%
0.30%
0.29%
 0.62%
0.49%

            For the year ended December 31, 2000, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to $126,900. The amount included in interest income on these loans for the year ended December 31, 2000 was $81,300.
            At December 31, 1997, foreclosed commercial real estate consisted of two properties acquired during 1997 from a troubled debtor. The properties, comprised of a 50 unit apartment building and a food pantry, were sold in 1998.


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            At December 31, 2000, foreclosed commercial real estate consisted of an office building in Muncie, which is currently being offered for sale and the remaining condominium units in a project acquired from a troubled debtor. Based on the sales of other units in this project, the condominiums are expected to generate sufficient funds to result in 100% recovery of the outstanding principal. In addition, one residential property was acquired in 2000 with a book value of $62,000. This property is also being offered for sale.

            Other Loans of Concern. In addition to the non-performing assets set forth in the table above, as of December 31, 2000, there was an aggregate of $3.4 million in loans with respect to which known information about the possible credit problems of the borrowers have caused management to have doubts as to the abilities of the borrowers to comply with present loan repayment terms and which may result in the future inclusion of such items in the non-performing asset categories. These loans have been considered in management's determination of the adequacy of our allowance for loan losses.

            Included in the $3.4 million above are one multi-family loan totaling $419,000, two commercial business loans totaling $96,000 and four nursing home loans totaling $2.9 million. All of these loans, according to financial statements submitted by the borrowers, indicate insufficient cash flow to meet all expenses. All of the above loans were current as of December 31, 2000.

            Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the Office of Thrift Supervision to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.

            When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances for loan losses in an amount deemed prudent by management and approved by the board of directors. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the Office of Thrift Supervision and the FDIC, which may order the establishment of additional general or specific loss allowances.



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            In connection with the filing of Mutual Federal's periodic reports with the Office of Thrift Supervision and in accordance with our classification of assets policy, we regularly review the problem assets in our portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of management's review, at December 31, 2000, we had classified $4.1 million of Mutual Federal's assets as substandard and $883,000 as loss. We did not classify any assets as doubtful. The total amount classified represented 4.8% of our stockholders' equity and 0.65% of our assets at December 31, 2000.

            Provision for Loan Losses. We recorded a provision for loan losses during the year ended December 31, 2000 of $685,000, compared to $760,000 million for the year ended December 31, 1999 and $1.3 million for the year ended December 31, 1998. The provision for loan losses is charged to income to bring our allowance for loan losses to a level deemed appropriate by management based on the factors discussed below under "-- Allowance for Loan Losses." The provision for loan losses during the year ended December 31, 2000 was based on management's review of such factors which indicated that the allowance for loan losses was adequate to cover losses inherent in the loan portfolio as of December 31, 2000.

            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, which include the formula allowance, specific allowances for identified problem loans and portfolio segments and the unallocated allowance. In addition, the allowance incorporates the results of measuring impaired loans as provided in SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans.

            The formula 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 formula allowance. Loss factors are based on our historical loss experience as well as on significant factors that, in management's judgment, affect the collectibility 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 nonperforming 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 collectibility 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



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evaluation date, management's evaluation of the loss related to this condition is reflected in the unallocated allowance. 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 formula allowance in the event that, in management's judgment, significant factors which affect the collectibility of the portfolio as of the evaluation date are not reflected in the loss factors. By assessing the estimated 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 local community 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 would otherwise indicate.

            At December 31, 2000, our allowance for loan losses was $6.5 million, or 1.01% of the total loan portfolio, and approximately 189% of total non-performing loans. Assessing the adequacy of the allowance for loan losses is inherently subjective as it requires making material estimates, including the amount and timing of future cash flows expected to be received on impaired loans, that are susceptible to significant change. In the opinion of management, the allowance, when taken as a whole, is adequate to absorb reasonable estimated loan losses inherent in our loan portfolio.






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            The following table sets forth an analysis of our allowance for loan losses.

Year Ended December 31,
2000
 1999
 1998
 1997
 1996
(Dollars in Thousands)
Balance at beginning of period $3,652
 $3,424
 $3,091
 $2,990
 $2,754
Charge-offs:
   One- to four-family 504 63 446 3 30
   Multi-family 75 --- 38 --- ---
   Commercial real estate 50 167 43 237 ---
   Construction and development --- --- --- --- ---
   Consumer 453 421 511 450 353
   Commercial business 12
 ---
 ---
---
---
1,094
 651
 1,038
 690
 383
Recoveries:
   One- to four-family 23 81 40 47 6
   Multi-family --- --- --- --- ---
   Commercial real estate --- 7 --- --- ---
   Construction and development --- --- --- --- ---
   Consumer 34 31 66 44 43
   Commercial business ---
 ---
 ---
 ---
 ---
57
 119