Third Century Bancorp
2004 Annual Report
TABLE OF CONTENTS
Letter to Shareholders.........................................................1
Selected Consolidated Financial Data...........................................2
Management's Discussion and Analysis or Plan of Operation......................3
Report of Independent Registered Public Accounting Firm.......................22
Consolidated Balance Sheets...................................................23
Consolidated Statements of Income.............................................24
Consolidated Statements of Stockholders' Equity...............................25
Consolidated Statements of Cash Flows.........................................26
Notes to Consolidated Financial Statements....................................27
Market Price of Third Century's Common Shares and Related Shareholder Matters.43
Directors and Executive Officers..............................................44
Directors Emeritus............................................................45
Officers of Mutual Savings Bank...............................................45
General Information For Shareholders..........................................46
COMPANY OVERVIEW
Third Century Bancorp ("Third Century" or "we"), an Indiana corporation,
was formed in April 2004 for the primary purpose of purchasing all of the issued
and outstanding common stock of Mutual Savings Bank ("Mutual" or the "Bank") in
its conversion from mutual to stock form. The conversion offering was completed
on June 14, 2004. On June 29, 2004, Third Century used $7,911,000 of the net
conversion proceeds to purchase all of the outstanding common shares of Mutual.
Mutual was founded in 1890 as a mutual building and loan association under
the name Mutual Building and Loan Association. In 1994, Mutual converted to a
state-chartered savings bank and changed its name to the current name of Mutual
Savings Bank, which it retained after its conversion to a stock savings bank on
June 29, 2004. Mutual conducts its business from six offices in Johnson County,
Indiana. Mutual offers a variety of lending, deposit and other financial
services to its retail and commercial customers.
Third Century is a registered bank holding company subject to the
regulations of the Federal Reserve Board under the Bank Holding Company Act of
1956, as amended. Mutual is organized under the laws of Indiana and as such is
subject to the supervision of the Indiana Department of Financial Institutions
("DFI"), whose examiners conduct periodic examinations of state banks. Mutual's
principal federal regulator is the Federal Deposit Insurance Corporation
("FDIC"), which also conducts periodic examination of Mutual. Mutual's deposits
are insured by the Savings Association Insurance Fund administered by the FDIC.
LETTER TO SHAREHOLDERS
Dear Shareholder:
Converting from a mutual institution to a state chartered stock savings
bank on June 29, 2004 was without question one of the most exciting events in
our 115-year history, but we also found the challenges of operating as a stock
institution to be just as exciting.
We were very encouraged that the stock offering easily sold out at the
first level, reflecting significant interest from the customers who reside in
our market area. The individuals and families we have served for more than a
century showed their support for our style of banking by subscribing to our
offering.
We'll also remember 2004 as a year in which the economy strengthened and we
took several steps beyond the stock conversion to bolster our financial
position. For example, early in the year, we executed a planned strategy to sell
a portion of the bank's 15-to-30-year fixed rate mortgage loans in the secondary
market, reducing our exposure to rising interest rates. Even though this had a
dampening effect on the bank's total loan growth in 2004, strong consumer
lending and increased commercial lending activity in the second half allowed us
to post a modest overall increase in loans outstanding, from $98 million
outstanding at the end of 2003 to $99.9 million as of end of 2004. Deposits
increased by $7.7 million, or 9.78%, to $86.4 million, largely due to deposit
accounts that held a significant portion of the conversion proceeds for Third
Century Bancorp.
Net income for the year was $625,000, which represented an increase of
26.26% over the prior year. The primary reasons for the increase were the
addition of mortgage servicing rights to the financial statements and a
reduction in funding for the bank's loan loss provision, which was $36,000 in
2004, compared to $200,000 in 2003.
With intense competition and an increasingly burdensome regulatory climate,
the challenges we face as a public company are certainly evident. However, we
believe there are excellent growth opportunities in the market we serve. We plan
to seriously and prudently pursue high-quality growth by increasing service to
our existing customer base and looking for opportunities to expand the markets
we serve. As we have for 115 years as a mutual institution, we will approach
each of these strategies with the long-term goal of improving financial
performance and solidity.
Thank you for being a shareholder and supporter of Third Century Bancorp
and its subsidiary, Mutual Savings Bank. We appreciate your continued confidence
as we prepare for the challenges of the future.
Sincerely,
/s/ Robert D. Heuchan
Robert D. Heuchan
President and CEO
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth certain information concerning the
consolidated financial condition, earnings, and other data regarding Third
Century at the dates and for the periods indicated.
At December 31,
-------------------------
2004 2003
-------------------------
Selected Consolidated Financial Condition Data: (In Thousands)
Total Amount of:
Assets.................................... $126,163 $ 106,561
Loans Receivable-Net...................... 98,822 96,955
Cash and Cash Equivalents................. 12,057 4,739
Interest-bearing time deposits............ 200 -
Investment Securities..................... 10,455 688
Deposits.................................. 86,408 78,708
FHLB Advances............................. 16,500 19,500
Shareholders' Equity-Net ................. 22,833 8,040
At December 31,
-------------------------
2004 2003
-------------------------
Selected Consolidated Earnings Data: (In Thousands, Except
Share Data)
Total Interest Income......................... $ 6,048 $ 6,012
Total Interest Expense........................ 1,876 1,954
------------------------
Net Interest Income........................... 4,172 4,058
Provision of Losses on Loans.................. 36 200
------------------------
Net Interest Income After Provision for Losses on
Loans..................................... 4,136 3,858
Other Income.................................. 892 724
General, Administrative and Other Expenses.... 3,992 3,756
------------------------
Earnings Before Income Tax Expense............ 1,036 826
Income Tax Expense............................ 411 331
------------------------
Net Earnings.............................. $ 625 $ 495
========================
Basic Earnings per Share(1)................... n/a n/a
Diluted Earnings per Share(1)................. n/a n/a
Selected Financial Ratios and Other Data:
Interest Rate Spread During Period............ 3.35% 3.79%
Net Yield on Interest-Earning Assets.......... 5.35 5.98
Return on Assets.............................. 0.54 0.48
Return on Equity.............................. 4.16 6.22
Equity to Assets.............................. 18.10 7.54
Average Interest-Earning Assets to Average
Interest-Bearing Liabilities.............. 120.93 112.82
Non-Performing Assets to Total Assets......... 0.15 0.40
Allowance for Loan Losses to Total Loans
Outstanding............................... 1.01 1.08
Allowance for Loan Losses to Non-Performing Loans 4048.00 245.92
Net Charge-Offs to Average Total Loans Outstanding 0.08 0.03
General, Administrative and Other Expense to
Average Assets............................ 3.44 3.63
Dividend Payout Ratio......................... 21.16 n/a
Number of Full Service Offices................ 6 6
---------------------------
(1) As Third Century had no earnings prior to June 29, 2004, no earnings per
share has been presented as it is not meaningful.
2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
GENERAL
As discussed previously, Third Century was incorporated for the primary
purpose of owning all of the outstanding shares of Mutual. As a result, the
discussion that follows focuses on Mutual's financial condition and results of
operations for the periods presented. The following discussion and analysis of
the financial condition as of December 31, 2004 and the results of operations
for periods prior to that date should be read in conjunction with the
consolidated financial statements and the notes thereto, included elsewhere in
this Annual Report.
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Third Century's operations and its actual results could differ
significantly from those discussed in the forward-looking statements. Some of
the factors that could cause or contribute to such differences are discussed
herein but also include, but are not limited to, changes in the economy and
interest rates in the nation and Third Century's general market area. The
forward-looking statements contained herein include those with respect to the
following matters:
1. Management's determination as to the amount and adequacy of the loan
loss allowance; and
2. The effect of changes in interest rates on financial condition and
results of operations.
CRITICAL ACCOUNTING POLICIES
Generally accepted accounting principles are complex and require management
to apply significant judgments to various accounting, reporting and disclosure
matters. Management of Third Century must use assumptions and estimates to apply
these principles where actual measurement is not possible or practical. For a
complete discussion of Third Century's significant accounting policies, see Note
1 to the Consolidated Financial Statements as of December 31, 2004. Certain
policies are considered critical because they are highly dependent upon
subjective or complex judgments, assumptions and estimates. Changes in such
estimates may have a significant impact on the financial statements. Management
has reviewed the application of these policies with the Audit Committee of Third
Century's Board of Directors. Those policies include the following:
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management's estimate of probable
losses inherent in the Bank's loan portfolios. In determining the appropriate
amount of the allowance for loan losses, management makes numerous assumptions,
estimates and assessments.
The strategy also emphasizes diversification on an industry and customer
level, regular credit quality reviews and quarterly management reviews of large
credit exposures and loans experiencing deterioration of credit quality.
Mutual's allowance consists of three components: probable losses estimated
from individual reviews of specific loans, probable losses estimated from
historical loss rates, and probable losses resulting from economic or other
deterioration above and beyond what is reflected in the first two components of
the allowance.
Larger commercial loans that exhibit probable or observed credit weaknesses
are subject to individual review. Where appropriate, reserves are allocated to
individual loans based on management's estimate of the borrower's ability to
repay the loan given the availability of collateral, other sources of cash flow
and legal options available to Mutual. Included in the review of individual
loans are those that are impaired as provided in SFAS No. 114, Accounting
3
by Creditors for Impairment of a Loan. Any allowances for impaired loans are
determined by the present value of expected future cash flows discounted at the
loan's effective interest rate or fair value of the underlying collateral.
Mutual evaluates the collectibility of both principal and interest when
assessing the need for a loss accrual. Historical loss rates are applied to
other commercial loans not subject to specific reserve allocations.
Homogenous smaller balance loans, such as consumer installment and
residential mortgage loans are not individually risk graded. Reserves are
established for each pool of loans based on the expected net charge-offs for one
year. Loss rates are based on the average net charge-off history by loan
category.
Historical loss rates for commercial and consumer loans may be adjusted for
significant factors that, in management's judgment, reflect the impact of any
current conditions on loss recognition. Factors which management considers in
the analysis include the effects of the national and local economies, trends in
the nature and volume of loans (delinquencies, charge-offs and nonaccrual
loans), changes in mix, asset quality trends, risk management and loan
administration, changes in the internal lending policies and credit standards,
collection practices and examination results from bank regulatory agencies and
the Bank's internal loan review.
An unallocated reserve is maintained to recognize the imprecision in
estimating and measuring loss when evaluating reserves for individual loans or
pools of loans. Allowances on individual loans are reviewed quarterly and
historical loss rates are reviewed annually and adjusted as necessary based on
changing borrower and/or collateral conditions and actual collection and
charge-off experience.
Mutual's primary market area for lending is Johnson County, Indiana. When
evaluating the adequacy of allowance, consideration is given to this regional
geographic concentration and the closely associated effect changing economic
conditions have on Mutual's customers.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights (MSRs) associated with loans originated and sold,
where servicing is retained, are capitalized and included in other intangible
assets in the consolidated balance sheet. The value of the capitalized servicing
rights represents the present value of the future servicing fees arising from
the right to service loans in the portfolio. Critical accounting policies for
MSRs relate to the initial valuation and subsequent impairment tests. The
methodology used to determine the valuation of MSRs requires the development and
use of a number of estimates, including anticipated principal amortization and
prepayments of that principal balance. Events that may significantly affect the
estimates used are changes in interest rates, mortgage loan prepayment speeds
and the payment performance of the underlying loans. The carrying value of the
MSRs is periodically reviewed for impairment based on a determination of fair
value. For purposes of measuring impairment, the servicing rights are compared
to a valuation prepared based on a discounted cash flow methodology, utilizing
current prepayment speeds and discount rates. Impairment, if any, is recognized
through a valuation allowance and is recorded as amortization of intangible
assets.
EXECUTIVE SUMMARY
In the past two years, Mutual has experienced two significant conversions.
In 2003, we converted to another data processor and committed financial
resources to completely upgrade the Bank's technology. While there were
significant costs involved, we believe that in the long term, the data
processing change and technology upgrades place the Bank in a better position to
grow. In 2004, the Bank converted from a mutual savings bank to a stock savings
bank. A primary reason for that conversion was to provide adequate capital to
prudently grow in what we believe is a market that, while quite competitive,
provides excellent opportunities in the years ahead.
Expanded services offered by the Bank, the increased need for greater
internal controls, an increasingly challenging regulatory climate for banks and
the responsibilities of being a
4
publicly traded company are resulting in significantly higher expenses as we
have added the staff necessary to adequately confront these challenges. In
addition, continued increases in personnel expenses, specifically in pension and
medical insurance costs, have to be recognized when considering our overall
expenses.
Over the past year, the growth in assets (primarily loans) has been
limited, mainly due to a decision to sell off a portion of our fixed rate
mortgage portfolio in the first half of 2004. This move was made for the purpose
of bringing the Bank's interest rate risk levels into the ranges prescribed by
the interest rate risk guidelines. With the sale of mortgage loans to the
secondary market, we reduced the borrowings to the Federal Home Loan Bank.
Commercial loan growth has been limited the past two years with economic, credit
risk and other factors influencing total growth. We were encouraged, however, by
a surge in commercial loan growth in the fourth quarter of 2004, and an overall
strong year in consumer loan activity.
We look forward to 2005 in many areas, including (but not limited to),
possible expansion into other markets, the implementation of a more aggressive
sales program that will allow us to take advantage of opportunities to grow both
the loans and deposits of the Bank prudently, a review of the Bank's benefit
programs, and an increased focus on the profitability structure of the Bank.
5
AVERAGE BALANCES AND INTEREST RATES AND YIELDS
The following table presents Mutual's interest-earnings assets and
interest-bearing liabilities and the yields and rates on such balances for 2004
and 2003 and at December 31, 2004 and the average daily balances of each
category of Mutual's interest-earning assets and interest-bearing liabilities,
the interest earned or paid on those balances and the average yields earned and
interest rates paid on such balances. Such yields and costs are determined by
dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods presented.
At December 31, Year Ended December 31,
-------------------------------------------------------------------------------------------
2004 2004 2003
-------------------------------------------------------------------------------------------
Average Interest Average Average Interest Average
Balance Yield/Rate Balance Earned/Paid Yield/Rate Balance Earned/Paid Yield/Rate
-------------------------------------------------------------------------------------------
Assets:
Interest Earning Assets:
Interest Bearing Deposits............. $ 11,323 1.99% $ 12,032 $ 139 1.16% $ 4,854 $ 37 0.76%
Interest Bearing Time Deposits........ 200 2.96 94 3 3.19 - - -
Securities Held to Maturity........... 10,455 2.16 3,066 55 1.79 3,599 62 1.72
Loans Receivable(1)................... 99,834 5.94 96,949 5,803 5.99 91,268 5,877 6.44
Stock in FHLB of Indianapolis......... 1,020 4.25 999 48 4.80 771 36 4.67
-------- ---------- ---------- ---------- --------
Total Interest Earning Assets...... 122,832 5.24% 113,140 6,048 5.35% 100,492 6,012 5.98
---------- --------
Non-Interest Earning Assets, Net of
Allowance for Loan Losses............. 3,331 2,818 2,902
--------- ---------- ----------
Total Assets....................... $126,163 $115,958 $103,394
========= ========== ==========
Liabilities and Retained Earnings:
Interest Bearing Liabilities:
Savings Deposits...................... $ 39,672 0.66% $ 38,746 $ 232 0.60% $ 36,798 $ 236 0.64
Interest Bearing Demand Deposits...... 1,404 0.68 1,500 7 0.46 400 2 0.50
Certificates of Deposit............... 35,572 2.67 35,905 931 2.59 36,633 1,109 3.03
FHLB Advances......................... 16,500 3.99 17,404 706 4.06 15,244 607 3.98
-------- ---------- ---------- ---------- --------
Total Interest Bearing
Liabilities...................... 93,148 2.02% 93,555 1,876 2.00% 89,075 1,954 2.19
---------- --------
Other Liabilities....................... 10,118 7,375 6,361
--------- ---------- ----------
Total Liabilities.................. 103,266 100,930 95,436
Equity Contributed by ESOP.............. 64 64
Stockholders' Equity.................... 22,833 14,964 7,958
--------- ---------- ----------
Total Liabilities and
Stockholders' Equity.............. $126,163 $115,958 $103,394
========= ========== ==========
6
At December 31, Year Ended December 31,
-------------------------------------------------------------------------------------------
2004 2004 2003
-------------------------------------------------------------------------------------------
Average Interest Average Average Interest Average
Balance Yield/Rate Balance Earned/Paid Yield/Rate Balance Earned/Paid Yield/Rate
-------------------------------------------------------------------------------------------
Net Earning Assets...................... 29,684 $ 11,417
==========
Net Interest Income..................... $ 4,172 $4,058
========== ========
Interest Rate Spread(2)................. 3.22% 3.35% 3.79%
======= =======
Net Yield on Average Earning Assets(3).. n/a 3.69% 4.04%
======= =======
Interest Earning Assets to Interest
Bearing Liabilities .................. 131.87% 120.93% 112.82%
--------------------------------------------------------
(1) Nonaccruing loans have been included in the average balances.
(2) Interest rate spread is calculated by subtracting weighted average interest
rate cost from weighted average interest rate yield for the period
indicated.
(3) The net yield on weighted average interest earning assets is calculated by
dividing net interest income by weighted average interest earning assets
for the period indicated.
7
INTEREST RATE SPREAD
Mutual's results of operations have been determined primarily by net
interest income and, to a lesser extent, non-interest income and non-interest
expenses. Net interest income is determined by the interest rate spread between
the yields earned on interest-earning assets and the rates paid on
interest-bearing liabilities and by the relative amounts of interest-earning
assets and interest-bearing liabilities.
The following table sets forth the weighted average effective interest rate
earned by Mutual on its loan and investment portfolios and other
interest-earning assets, the weighted average effective cost of Mutual's
deposits and borrowings, the interest rate spread of Mutual, and the net yield
on weighted average interest-earning assets for the periods and as of the date
shown. Average balances are based on average daily balances.
At December 31, Year Ended December 31,
2004 2004 2003
Weighted Average Interest Rate Earned On:
Interest Bearing Deposits 1.99% 1.16% 0.76%
Interest Bearing Time Deposits 2.96 3.19 n/a
Securities to be Held to Maturity 2.16 1.79 1.72
Loans Receivable 5.94 5.99 6.44
FHLB Stock 4.25 4.80 4.67
Total Interest Earning Assets 5.24 5.35 5.98
Weighted Average Interest Rate Cost of:
Savings, NOW and Money Market 0.66 0.60 0.64
Interest Bearing Demand Deposits 0.68 0.46 0.50
Certificates of Deposit 2.67 2.59 3.03
FHLB Advances 3.99 4.06 3.98
Total Interest Bearing Liabilities 2.02 2.00 2.19
Interest Rate Spread 3.22 3.35 3.79
Net Yield on Weighted Average Interest Earning
Assets n/a 3.69 4.04
The following table describes the extent to which changes in interest rates
and changes in volume of interest-related assets and liabilities have affected
Mutual's interest income and expense during the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to (1) changes in rate (changes in rate
multiplied by old volume) and (2) changes in volume (changes in volume
multiplied by old rate). Changes attributable to both rate and volume which
cannot be segregated have been allocated proportionally to the change due to
volume and the change due to rate.
8
Increase (Decrease) in Net Interest Income
-------------------------------------------------
Total Net
Due to Rate Due to Volume Change
-------------------------------------------------
(In Thousands)
Year Ended December 31, 2004, Compared to Year Ended
December 31, 2003
Interest Earning Assets:
Interest Bearing Deposits $ 26 $ 76 $ 102
Interest Bearing Time Deposits - 3 3
Securities to be Held to Maturity 2 (9) (7)
Loans Receivable (428) 354 (74)
FHLB Stock 1 11 12
------ ------ ------
Total (399) 435 36
Interest Bearing Liabilities
Savings Deposits (16) 12 (4)
Interest Bearing Demand Deposits - 5 5
Certificates of Deposit (156) (22) (178)
FHLB Advances 12 87 99
------ ------ ------
Total (160) 82 (78)
------ ------ ------
Net Change in Net Interest Income $ (239) $ 353 $ 114
====== ====== ======
Year Ended December 31, 2003, Compared to Year Ended
December 31, 2002
Interest Earning Assets:
Interest Bearing Deposits $ (33) $ (29) $ (62)
Securities to be Held to Maturity (61) (74) (135)
Loans Receivable (244) 609 365
FHLB Stock (8) 11 3
------ ------ ------
Total (346) 517 171
Interest Bearing Liabilities
Savings Deposits (170) 12 (158)
Interest Bearing Demand Deposits (1) 2 1
Certificates of Deposit (461) (15) (476)
FHLB Advances (81) 411 330
------ ------ ------
Total (713) 410 (303)
------ ------ ------
Net Change in Net Interest Income $ 367 $ 107 $ 474
====== ====== ======
FINANCIAL CONDITION AT DECEMBER 31, 2004 COMPARED TO
FINANCIAL CONDITION AT DECEMBER 31, 2003
Total assets increased $19.6 million at December 31, 2004 from December 31,
2003. The growth in total assets was due to an increase in our cash and cash
equivalents by $7.3 million, or 154.42%, and securities held to maturity by $9.8
million, or 1419.62%. The increase in both categories was a direct result of the
capital raised through the initial offering of Third Century stock which was
completed on June 29, 2004. Third Century infused the majority of this capital
into Mutual. Mutual invested $9.8 million of this excess cash in federal agency
securities and $200,000 in certificates of deposit during the year. The federal
agency notes will mature over the next twelve months and the
9
certificates of deposit will mature in twelve months. Mutual plans to continue
investing its excess cash in either loans to customers or short-term
investments.
Average assets increased from $103.4 million for 2003, to $115.9 million
for 2004, an increase of 12.15%. Average interest-earning assets represented
97.57% and 97.19% of average assets for 2004 and 2003 respectively. During 2004,
average loans increased $5.7 million and average interest-bearing deposits
increased $7.2 million. Average interest-earning assets as a percentage of
average interest-earning liabilities were 120.93% and 112.82% for 2004 and 2003
respectively. This increase was largely a result of the capital raised through
the initial offering of Third Century stock as discussed in the previous
paragraph.
INVESTMENT SECURITIES
Total securities increased approximately $9.8 million from December 31,
2003 to December 31, 2004, which represents an increase of 1419.62%. Third
Century infused the majority of the capital, raised through its initial stock
offering, into Mutual. Mutual invested $9.8 million of this excess cash in
federal agency securities that will mature over the next twelve months. Because
of historically low interest rates the Bank maintained a short maturity period
on its investments. Expectations of management are to take advantage of higher
yields via anticipated higher interest rates on investment securities or
allocation to loans.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Average loans increased $5.7 million or 6.22% during 2004. The growth in
loans was funded primarily by the proceeds received from the initial stock
offering of Third Century. Average loans were $96.9 million for 2004 and $91.3
million for 2003. The average yield on loans was 5.99% for 2004 and 6.44% for
2003, a decrease of 45 basis points.
The allowance for loan losses as a percentage of gross loans decreased to
1.01% at December 31, 2004 from 1.08% a year earlier. The ratio of the allowance
for loan losses to non-performing loans was 4048.00% at December 31, 2004
compared to 245.92% at December 31, 2003. The Bank's loan loss allowance was
$1.0 million as of December 31, 2004 and $1.1 million as of December 31, 2003.
During 2004, total loans charged off through allowance totaled $111,000 and the
Bank recovered $32,000. Total net charges to the allowance in 2004 were $79,000.
The Bank also added $36,000 to the loan loss allowance during the year ended
December 31, 2004.
DEPOSITS
Deposits increased $7.7 million from $78.7 million to $86.4 million during
2004. Average total deposits increased $2.3 million to $76.1 million for 2004
contrasted to $73.8 million for 2003.
BORROWED FUNDS
Borrowed funds decreased $3.0 million from December 31, 2003 to December
31, 2004. Management paid off notes as they matured during 2004 with the excess
cash provided from the initial stock offering of Third Century. Average borrowed
funds increased to $17.4 million for the year ended December 31, 2004 compared
to $15.2 million for the year ended December 31, 2003. Based on its liquidity,
the Bank stopped renewing its borrowings and paid them off during the latter
half of the year. During 2003 and 2004, Mutual offered higher rates on
certificates of deposit with a five-year maturity to offset the interest rate
risk associated with its mortgage portfolio, but received little response from
its customer base due to this offer. Management exercised its next option by
offsetting the interest rate risk associated with the mortgage growth with
borrowed funds from the Federal Home Loan Bank of Indianapolis (the "FHLB").
10
Third Century formed an employee stock ownership plan (ESOP) and the ESOP
purchased 132,250 shares at an average price of $11.32. The ESOP started to
release shares during the third quarter of 2004. The total shares released for
2004 were 5,352 at an average price of $12.17 per share for total ESOP expense
of $65,147. In addition, the Board of Third Century declared a $66,125 cash
dividend to the shareholders of record as of September 22, 2004 payable on
October 5, 2004 and as of December 22, 2004 payable January 3, 2005.
Mutual does not have any additional long-term commitments beyond those
previously discussed.
SHAREHOLDERS' EQUITY CAPITAL
Shareholders' equity increased $14.8 million to $22.8 million at December
31, 2004 compared to $8.0 million at December 31, 2003. The change in equity
primarily resulted from the sale of common stock in Third Century for net
proceeds of $15.7 million. The book value per share as of December 2004 was
$13.81 based on 1,653,125 shares outstanding.
FINANCIAL CONDITION AT DECEMBER 31, 2003 COMPARED TO
FINANCIAL CONDITION AT DECEMBER 31, 2002
Total assets increased $10.1 million at December 31, 2003 from December 31,
2002. The increase was primarily a result of an increase in net loans of $17.6
million, or 22.20%, offset by decreases in cash and cash equivalents of $2.4
million and decreases in investments of $5.4 million.
Average assets increased from $99.9 million for 2002, to $103.4 million for
2003, an increase of 3.53%. Average interest-earning assets represented 97.19%
and 97.14% of average assets for 2003 and 2002 respectively. During 2003,
average loans increased $9.3 million. Average interest-earning assets as a
percentage of average interest-earning liabilities were 112.82% and 124.24% for
2003 and 2002 respectively. This decrease was largely a result of the rapid
growth of the borrowings in proportion to the slower growth of the mortgage
portfolio.
INVESTMENT SECURITIES
Total securities decreased approximately $5.4 million from December 31,
2002 to December 31, 2003 which represents a decrease of 88.76%. The reduction
was the result of scheduled maturities and repayments, with the proceeds from
these maturities and repayments used to assist in funding the growth in loans.
Historically, Mutual has not maintained a significant investment portfolio due
to its high percentage of loans to deposits.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Average loans increased $9.3 million or 11.41% during 2003. The growth in
loans was funded primarily by increased average borrowings of $10.0 million.
Average loans were $91.3 million for 2003 and $81.9 million for 2002. The
average yield on loans was 6.44% for 2003 and 6.73% for 2002, a decrease of 29
basis points.
The majority of loan growth was within the category of one- to four-family
residential loans. This growth was driven by the continued low rate interest
environment and the related refinancing of loans. During 2002, Mutual began to
retain all originated mortgages. At that time, Mutual's interest rate risk rate
was relatively low based on the policy guidelines set by the Board. Mutual
experienced strong growth in its fixed-rate mortgage portfolio during the last
quarter of 2002. Mutual's Asset Liability Committee re-examined the interest
rate risk position of Mutual as of December 31, 2002 and found it remained well
within Board policy guidelines. The Asset Liability Committee continued to
monitor its ability to offset the interest rate risk associated with newly
originated fixed-rate mortgages with the interest rate risk associated with
newly borrowed
11
funds from the FHLB. In March 2003, the Asset Liability Committee decided to
sell all newly originated fixed-rate mortgages with maturities of twenty years
or more to the secondary market and offer ten-year and twelve-year fixed rate
mortgages in an attempt to shorten the average weighted maturity of Mutual's
fixed-rate mortgage portfolio. In May 2003, the Asset Liability Committee
reviewed the interest rate risk measurement for the first quarter of 2003 and
noted Mutual's increased sensitivity to an instantaneous 300 basis point change
in rates. The Asset Liability Committee decided to sell all newly originated
fixed-rate mortgages with maturities greater than twelve years effective June
2003. The Asset Liability Committee has continued the strategy of selling these
fixed-rate mortgages to the secondary market and borrowing wholesale funds from
the FHLB to reduce Mutual's interest rate risk in a rising rate environment.
The allowance for loan losses as a percentage of gross loans decreased to
1.08% at December 31, 2003 from 1.10% a year earlier. The ratio of the allowance
for loan losses to non-performing loans was 245.92% at December 31, 2003
compared to 532.53% at December 31, 2002. In 2003, Mutual continued to increase
the amount of allowance for loan losses to assure adequate reserves as Mutual
continued its loan portfolio diversification into commercial real estate, other
commercial, and consumer lending.
DEPOSITS
Deposits increased $600,000 from $78.1 million to $78.7 million during
2003. Average total deposits increased $1.0 million to $73.8 million for 2003
contrasted to $72.8 million for 2002.
BORROWED FUNDS
Borrowed funds increased $9.0 million from December 31, 2002 to December
31, 2003. Management continued to fund a portion of Mutual's loan growth with
advances from the FHLB. Average borrowed funds increased to $15.2 million for
the year ended December 31, 2003 compared to $5.3 million for the year ended
December 31, 2002. During 2002 and 2003, Mutual offered higher rates on
certificates of deposit with a five-year maturity to offset the interest rate
risk associated with its mortgage portfolio. Mutual received little response
from its customer base due to a forty-year low in interest rates. Management
exercised its next option by offsetting the interest rate risk associated with
the mortgage growth with borrowed funds from FHLB.
Mutual does not have any additional long-term commitments beyond the FHLB
advances.
SHAREHOLDERS' EQUITY CAPITAL
Equity capital increased $500,000 to $8.0 million at December 31, 2003
compared to $7.5 million at December 31, 2002. The increase was due to net
income during the period.
COMPARISON OF OPERATING RESULTS
FOR YEARS ENDED DECEMBER 31, 2004 AND 2003
GENERAL
Net income for 2004 increased $130,000, or 26.26%, to $625,000 compared to
$495,000 for 2003. Return on average assets for 2004 and 2003 was .54%, and
.48%, respectively. Return on average equity was 4.16% for 2004 and 6.22% for
2003.
The increase in net income for the year ended December 31, 2004 resulted
from the gains from the sale of loans and the related capitalization of mortgage
servicing rights. In addition, the increase was impacted by the reduction in the
allocation to the Bank's loan loss provision based upon management's continued
evaluation of the adequacy of the allowance for loan losses.
12
Mortgage servicing rights recorded in 2004 totaled $126,000. In 2004, additions
to the loan loss provision were $36,000, compared to $200,000 in the year ended
2003.
Non-interest income increased $168,000 from 2003 to $892,000 for 2004. The
largest component making up the increase in non-interest income was the addition
of mortgage servicing rights, which added a net total of $126,000. This, along
with increased fees from loans sold and charges and fees on bank accounts,
offset a significant reduction in fees from commercial and mortgage loan
originations from the prior year.
Non-interest expense increased $236,000 during 2004. The largest component
of the increase of non-interest expense was salary expense, which increased a
total of $101,334. While the Bank realized cost savings from a reduction in
overtime paid to hourly employees from 2003 to 2004 (data processing and
mortgage refinancing dominated 2003), there were several additions to the staff
in 2004 which increased the overall salary expense. In 2004, the Bank added a
construction loan officer in the Mortgage Department. Further, there were
additions to staff, by the creation of an Audit Department consisting of two
full-time persons who will be responsible for regulatory compliance (including
Sarbanes-Oxley 404) and internal control auditing matters. Also, a staff
accountant was added to assist with the preparation of all regulatory and SEC
reporting.
INTEREST INCOME
Mutual's total interest income was $6.0 million for 2004 which represented
no growth from December 31, 2003. Increased volume, primarily in loans,
accounted for $435,000 of an increase but was offset by decreases resulting from
lower interest rates totaling $399,000 with the majority of this decrease
relating to declining yields on loans. Average earning assets increased $12.6
million from $100.5 million to $113.1 million from 2003 to 2004. The increase in
average earning assets was accompanied by a decrease in average yields to 5.35%
in 2004 from 5.98% in 2003. The yield on loans decreased from 6.44% for 2003 to
5.99% for 2004, and this decrease in the yield on loans accounted for the
majority of the total decrease in yield on earning assets.
INTEREST EXPENSE
Interest expense decreased $78,000 during 2004 compared to 2003. Average
interest-bearing liabilities increased $4.5 million to $93.6 million for 2004
from $89.1 million for 2003, with advances from the FHLB accounting for
approximately $2.2 million of this increase as Mutual utilized these advances to
fund loan growth. The decrease in interest expense was primarily a result of a
decrease in the average cost of interest-bearing liabilities due to declining
rates. The average cost of interest-bearing liabilities decreased from 2.19% for
2003 to 2.00% for 2004. Declining rates accounted for $164,000 of the decrease,
offset by an increase of $82,000 due to volume increases of interest-bearing
liabilities.
NET INTEREST INCOME
Net interest income increased approximately $114,000 for 2004 to
approximately $4.2 million compared to $4.1 million for 2003. As previously
discussed, the increase was primarily due to increased volumes on
interest-bearing assets and decreased rates on interest-bearing liabilities.
There is no assurance that Mutual can continue to increase the volume of
interest-earning assets in the future to the extent attained during 2004 and
this may negatively affect net interest income. Mutual's interest rate spread
for 2004 was 3.35% compared to 3.79% for 2003.
PROVISION FOR LOAN LOSSES
Mutual's provision for loan losses for 2004 was $36,000 compared to
$200,000 for 2003. The decrease in the provision for 2004 was based on
management's analysis of the adequacy of the allowance for loan losses, total
net charge offs of $79,000, the level of the allowance and
13
other factors including the size, condition and components of the loan
portfolio, economic conditions, trends national and local bankruptcies as well
as other qualitative factors.
NON-INTEREST INCOME
Non-interest income increased $168,000 from $724,000 for 2003 to $892,000
for 2004. The largest component making up the increase in non-interest income
was the increase on gain on sale of loans of $144,000. This gain included the
capitalization of mortgage servicing rights on loans sold where the servicing
was retained. This, along with increased discount fees from loans sold and
service charges and fees on bank accounts, offset a significant reduction in
fees from commercial and mortgage loan originations.
NON-INTEREST EXPENSE
Non-interest expense increased $236,000 from $3.8 million in 2003 to $4.0
million in 2004 which represents an increase of 6.28%. The largest component of
the increase of non-interest expense was salary expense, which increased a total
of $101,334. While the Bank realized cost savings from a reduction in overtime
paid to hourly employees from 2003 to 2004, there were several additions to the
staff in 2004 as previously discussed.
INCOME TAX EXPENSE
Income tax expense was $411,000 for 2004 compared to $331,000 for 2003. The
level of tax expense was consistent with the level of taxable income in each
year. The effective tax rates were 39.7%, and 40.1% for 2004 and 2003
respectively.
COMPARISON OF OPERATING RESULTS
FOR YEARS ENDED DECEMBER 31, 2003 AND 2002
GENERAL
Net income for 2003 decreased $115,000, or 18.92%, to $495,000 compared to
$610,000 for 2002. Return on average assets for 2003 and 2002 was .48%, and
.61%, respectively. Return on average equity was 6.22% for 2003 and 8.29% for
2002.
The decline in net income for the year ended December 31, 2003 resulted
from a combination of factors that included an increase in net interest income
as higher volumes on interest-earning assets outpaced the decline in overall
rates earned on these assets. Conversely, the higher volumes on interest-bearing
liabilities were offset by the decline in interest rates on these liabilities.
This increase in net interest income was similar to that experienced by many
community banks in 2003 as interest-bearing liabilities typically reprice faster
than interest-earning assets.
Non-interest income remained relatively stable from 2002 to 2003. Mutual
experienced declining revenue in the area of fiduciary activities as the 2002
year included fee income related to a large estate trust that was settled during
2002. This decrease in fiduciary activity was offset by increased gains on loan
sales as a result of the high levels of mortgage loan refinancing activity
experienced in 2003.
Non-interest expense increased approximately $583,000 during 2003 as
additional personnel were added to enhance Mutual's ability to originate
commercial loans as well as in response to the volume of mortgage loan
refinancing handled by Mutual. During 2003, Mutual also elected to change
vendors for its core processing and accordingly incurred approximately $117,000
in expense directly related to this conversion in 2003 that will not recur.
14
INTEREST INCOME
Mutual's total interest income was $6.0 million for 2003 compared to $5.8
million for 2002. Increased volume, primarily on loans, accounted for $517,000
of the increase and was offset by decreases resulting from lower interest rates
totaling $346,000 with the majority of this decrease relating to declining
yields on loans. Average earning assets increased $3.5 million from $97.0
million to $100.5 million from 2002 to 2003. The increase in average earning
assets was accompanied by a decrease in average yields to 5.98% in 2003 from
6.02% in 2002. The yield on loans decreased from 6.73% for 2002 to 6.44% for
2003, and this decrease in the yield on loans accounted for the majority of the
total decrease in yield on earning assets.
INTEREST EXPENSE
Interest expense decreased $303,000 during 2003 compared to 2002. Average
interest-bearing liabilities increased to $89.1 million for 2003 from $78.1
million for 2002, with advances from the FHLB accounting for approximately $10.0
million of this increase as Mutual utilized these advances to fund loan growth.
The decrease in interest expense was primarily a result of a decrease in the
average cost of interest-bearing liabilities due to declining rates. The average
cost of interest-bearing liabilities decreased from 2.89% for 2002 to 2.19% for
2003. Declining rates accounted for $713,000 of the decrease, offset by an
increase of $410,000 due to volume increases of interest-bearing liabilities.
NET INTEREST INCOME
Net interest income increased approximately $475,000 for 2003 to
approximately $4.1 million compared to $3.6 million for 2002. As previously
discussed, the increase was primarily due to increased volumes on
interest-bearing assets and decreased rates on interest-bearing liabilities.
There is no assurance that Mutual can continue to increase the volume of
interest-earning assets in the future to the extent attained during 2003 and
this may negatively affect net interest income. Mutual's interest rate spread
for 2003 was 3.79% compared to 3.13% for 2002.
PROVISION FOR LOAN LOSSES
Mutual's provision for loan losses for 2003 was $200,000 compared to
$140,000 for 2002. The increase in the provision for 2003 was based on
management's analysis of the adequacy of the allowance for loan losses, total
net charge offs of $29,000, the level of the allowance and other factors
including the size, condition and components of the loan portfolio, economic
conditions, trends national and local bankruptcies as well as other qualitative
factors. Mutual increased the loan loss provision as it continued its loan
portfolio diversification into commercial real estate, other commercial and
consumer loans, which typically are of higher risk than one- to four-family real
estate mortgage loans.
NON-INTEREST INCOME
Non-interest income remained relatively level from 2002 to 2003. However,
there were several fluctuations within the overall classification of
non-interest income and the more significant of those are discussed below.
Service Charges
---------------
Service charges on deposit accounts increased to $204,000 for 2003 from
$178,000 for 2002 which represents an increase of 14.78%. This increase was a
result of continued growth in the number of fee-oriented checking accounts.
Mutual also implemented a revised service charge schedule in 2003, which is
responsible for a large portion of the increase.
15
Fiduciary Activities
--------------------
Income from fiduciary activities decreased $45,000 from $126,000 for the
year ended 2002 to $81,000 for the year ended 2003 which represents a decrease
of 35.99%. In 2002, Mutual served as trustee for a large estate and received
fees from this estate of approximately $56,450 which was included in
non-interest income. Management views 2003 as a more typical year for trust fee
income.
Gains on Loan Sales
-------------------
Gains on the sales of loans increased $23,000 from $49,000 in 2002 to
$72,000 in 2003. This increase resulted from higher volumes of loan sales
throughout 2003 due to management's decision in June 2003 to sell all newly
originated fixed-rate mortgages with maturities greater than twelve years.
NON-INTEREST EXPENSE
Non-interest expense increased $583,000 from $3.2 million in 2002 to $3.8
million in 2003 which represents an increase of 18.37%. The significant
fluctuations in non-interest expense included salaries and employee benefits,
data processing and conversion costs and income tax expense.
Mutual's non-interest expense for 2003 was higher than that of its peer
group. Mutual's higher non-interest expense is largely due to Mutual having more
offices than its peers. Also, Mutual's salary expense increased in 2003 because
of the additional hours employees worked to cover the significant increase in
Mutual's mortgage loan production and to complete a data processing conversion.
In addition, because of its geographic proximity to Indianapolis and the
extremely competitive nature of commercial banking and mortgage lending
activities in its market area, Mutual found it necessary in 2003 to make
significant adjustments to the salaries of officers and employees so that it
could remain competitive from a compensation standpoint.
Management has been taking, and intends to continue to take, steps to
reduce non-interest expense. Mutual expects to achieve significant expense
reduction as a consequence of its conversion in 2003 of its data processing
services from BISYS to Intrieve and also from the transfer of all check
processing and statement production from the FHLB to Intrieve. Management also
expects salary expense increases to moderate in 2004 due to significant
reductions in overtime pay and to the fact that its more competitive salary
structure is in place.
Salaries and Employee Benefits
------------------------------
Salaries and benefits increased $334,000 to $2.1 million for 2003 compared
to $1.8 million for 2002 which represents an increase of 18.7%. This increase
was the result of several factors: Mutual's merit and other increases to
employees as of January 1, 2003 totaled $61,100 for 2003; Mutual hired a
mortgage originator and a commercial loan originator; two part-time employees
began working full-time schedules due to the mortgage refinancing volume and the
data-processing conversion, respectively; Mutual increased its matching of
employees' 401(k) contributions from 100% on the first 6% of gross salaries to
100% on the first 8% of gross salaries; health insurance premiums paid by Mutual
increased by $22,728 (or 14.1%); pensions costs increased by $19,661 (or 23.6%);
and Mutual paid more in commissions to its mortgage loan originators due to
increased volume of originations during 2003.
Data Processing and Conversion Expense
--------------------------------------
Data processing and conversion costs increased $173,000, or 60.0%, in 2003
compared to 2002. During 2003, management evaluated Mutual's data processing
needs and made a change in core processors. Expenses related to this conversion
totaled $117,000 in 2003. Data processing
16
costs increased $56,000 in 2003 from $289,000 to $345,000 in connection with the
system conversion.
INCOME TAX EXPENSE
Income tax expense was $331,000 for 2003 compared to $402,000 for 2002. The
level of tax expense was consistent with the level of taxable income in each
year. The effective tax rates were 40.1%, and 39.7% for 2003 and 2002
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the ability of a financial institution to generate
sufficient cash to fund current loan demand, meet savings deposit withdrawals
and pay operating expenses. Mutual's primary sources of funds are deposits,
borrowings from the FHLB, proceeds from principal and interest payments on loans
and proceeds from maturing securities. While FHLB advances and maturities and
scheduled amortization of loans are a predictable source of funds, deposit flows
and mortgage prepayments are greatly influenced by general interest rates,
economic conditions, competition and the restructuring of the thrift industry.
The primary investing activity of the Bank is the origination of loans.
During 2004 and 2003, the Bank originated one- to four-family mortgage loans in
the amounts of $10.0 million, and $26.4 million, respectively.
During 2004 and 2003, the Bank also originated consumer loans of $8.1
million and $5.5 million, commercial and commercial real estate loans of $17.3
million and $10.0 million, land loans of $337,000 and $878,000, and construction
loans of $8.1 million and $2.0 million during these periods. Loan repayments and
other deductions were $42.2 million and $27.0 million during the respective
years.
During 2004 and 2003, the Bank purchased securities in the amounts of $16.4
million and $711,000, respectively. Maturities and repayments of securities were
$6.4 million in 2004 and $6.0 million in 2003. During 2004, deposits grew
approximately $7.7 million. FHLB advances decreased $3.0 million during 2004 and
increased $9.0 million during 2003.
The Bank had outstanding loan commitments of $1.4 million and unused lines
of credit of $11.9 million at December 31, 2004. We anticipate that the Bank
will have sufficient funds from loan repayments and access to FHLB advances if
needed to meet its current commitments. Certificates of deposit scheduled to
mature in one year or less at December 31, 2004 totaled $21.0 million. Our
management believes that a significant portion of such deposits will remain with
Mutual based upon historical deposit flow data and Mutual's competitive pricing
in its market area, although there can be no guarantee that this will be the
case.
The Bank intends to continue selling new fixed-rate mortgage loans as part
of its strategy of achieving compliance with its interest rate policy and will
continue to sell those loans as long as necessary for interest rate risk
purposes. Mutual may sell portfolio loans as management deems necessary and as
opportunities arise. Loans will be sold for a gain, if available, or at par.
Liquidity management is both a daily and long-term function of the Bank's
management strategy. In the event that Mutual should require funds beyond its
ability to generate them internally, additional funds are available through the
use of FHLB advances. Mutual regularly monitors its interest rate spread
position to determine the appropriate mix between retail and wholesale funds
available to fund its loan activities. From time to time, Mutual offers higher
cost deposit products to generate funds for loans. Mutual also relies on
advances from the FHLB to fund its lending activities when the cost of
alternative sources of funds makes it prudent to do so. Mutual will continue to
monitor its interest rate spread position and mix of deposits and
17
alternative sources of funds. FHLB advances were $16.5 million at December 31,
2004. Mutual had approximately $48.7 million in eligible assets available as
collateral for advances from the FHLB as of December 31, 2004. Based on Mutual's
blanket collateral agreements, advances from the FHLB must be collateralized by
145% of eligible assets. Therefore, Mutual's eligible collateral would have
supported approximately $33.6 million in advances from the FHLB as of December
31, 2004. Accordingly, Mutual had approximately $17.1 million available to
borrow from the FHLB at December 31, 2004. Mutual's Board of Directors has by
resolution limited the amount of authorized borrowings to $40.0 million at
December 31, 2004. As liquidity needs present themselves, the Board of Directors
may elect to increase the amount of authorized borrowings from the FHLB through
a Board resolution.
The following is a summary of cash flows for Mutual, which are of three
major types. Cash flows from operating activities consist primarily of net
income generated by cash. Investing activities generate cash flows through the
origination and principal collection on loans as well as purchases and sales of
securities. Investing activities will generally result in negative cash flows
when Mutual is experiencing loan growth. Cash flows from financing activities
include savings deposits, withdrawals and maturities and changes in borrowings.
The following table summarizes cash flows for each of the years ended December
31, 2004 and 2003.
Year Ended December 31,
---------------------------
2004 2003
---------------------------
(In Thousands)
Operating Activities ..................................................... $ 519 $ 922
Investing Activities:
Net Change in Interest-bearing Time Deposits.......................... (200) -
Purchase of Held-to-Maturity Securities .............................. (16,195) (711)
Proceeds from Maturities to Held-to-Maturity Securities .............. 6,406 6,037
Net Change in Loans .................................................. (1,903) (17,819)
Purchases of Premises and Equipment .................................. (188) (73)
Purchase of FHLB Stock ............................................... - (425)
--------- ---------
Net Cash Used by Investing Activities ............................. (12,080) (12,991)
--------- ---------
Financing Activities
Net Change in Demand Deposits, Money Market, NOW and Savings Accounts 7,332 364
Net Change in Certificates of Deposit ................................ 368 217
Proceeds from FHLB Advances .......................................... 1,500 12,000
Payments on FHLB Advances ............................................ (4,500) (3,000)
Other ................................................................ 14,179 41
--------- ---------
Net Cash Provided by Financing Activities ......................... 18,879 9,622
--------- ---------
Net Change in Cash and Cash Equivalents .................................. $ 7,318 $ (2,447)
========= =========
During 2004, operating activities provided $519,000 of cash flows with
$625,000 of this representing net income from operations. The majority of the
remainder of the $519,000 was provided by certain "non-cash" items which in
effect did not require a cash outlay in 2004 but reduced net income from
operations such as depreciation and amortization expenses and the provision for
loan losses. Investing activities resulted in negative cash flows of $12.1
million primarily due to the purchase of new investments with the infusion of
cash from Third Century as a result of its initial stock offering. New
investment security purchases, net of maturities, used
18
$10.0 million of investing cash flows. During 2004, financing activities
provided $18.9 million of cash flows for Mutual. These financing cash flows were
primarily generated by the initial stock offering of Third Century, which
contributed $14.1 million. Increases in deposits provided approximately $7.7
million of cash flows during 2004.
During 2003, operating activities provided $922,000 of cash flows with
$495,000 of this representing net income from operations. The majority of the
remainder of the $922,000 was provided by certain "non-cash" items which in
effect did not require a cash outlay in 2003 but reduced net income from
operations such as depreciation and amortization expenses and the provision for
loan losses. Investing activities resulted in negative cash flows of $13.0
million primarily due to the net originations of loans. Investment security
maturities, net of new purchases, provided $5.3 million of investing cash flows.
During 2003, financing activities provided $9.6 million of cash flows for
Mutual. These financing cash flows were primarily generated by additional net
borrowings from the FHLB of $9.0 million. Increases in deposits provided
approximately $581,000 of cash flows during 2003.
Mutual is subject to certain capital requirements set by regulatory
agencies and it is management's policy to maintain a "well capitalized" rating
from regulatory authorities. Mutual was classified as "well capitalized" at
December 31, 2004, under the criteria established by the FDIC and exceeded all
capital requirements. The following table provides the minimum regulatory
capital requirements and Mutual's capital ratios as of December 31, 2004.
At December 31, 2004
Mutual's Capital Levels
----------------------------------------------------
Amount of Excess Over
------------------------------
Minimum Well Capitalized
Requirement Requirement
Minimum Well-Capitalized
Ratio Amount Ratio Amount Ratio Amount Requirement Requirement
(Dollars in Thousands)
Tier I Capital to
Risk-Weighted Assets.... 4.0% $3,299 6.0% $4,948 18.36% $15,143 $11,844 $10,195
Total Risk Based to Risk
Weighted Assets......... 8.0 6,598 10.0 8,247 19.59 16,155 9,557 7,908
Tier I Leverage Assets...... 4.0 4,945 5.0 6,181 12.25 15,143 10,198 8,962
As of December 31, 2004, management is not aware of any current
recommendations by regulatory authorities which, if they were to be implemented,
would have, or are reasonably likely to have, a material adverse effect on
Mutual's liquidity, capital resources, or results of operations.
OFF-BALANCE SHEET ARRANGEMENTS
Third Century does not have any off-balance sheet arrangements that have,
or are reasonably likely to have, a current or future effect on its financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that would be
material to investors.
Mutual evaluates the need for the establishment of reserves for loan
commitments based on each customer's credit worthiness on a case by case basis.
If management determines a reserve is required based upon its evaluation, a
reserve is established and maintained as an other liability.
19
There were no reserves recorded at December 31, 2004 or 2003 for loan
commitments or any other off-balance sheet items.
CURRENT ACCOUNTING ISSUES
In March 2004, the Emerging Issues Task Force (EITF) finalized and issued
EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments (EITF 03-1). EITF 03-1 provides recognition and measurement
guidance regarding when impairments of equity and debt securities are considered
other-than-temporary requiring a charge to earnings, and also requires
additional annual disclosures for investments in unrealized loss positions. The
additional annual disclosure requirements were previously issued by the EITF in
November 2003 and were effective for the year ended December 31, 2003. In
September 2004, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position (FSP) EITF 03-1-1, which delays the recognition and measurement
provisions of EITF 03-1 pending the issuance of further implementation guidance.
We are currently evaluating the effect of the recognition and measurement
provisions of EITF 03-1. While our analysis is pending the FASB's revisions to
EITF 03-1, we currently believe the adoption of EITF 03-1 will not result in a
material impact on Third Century's results of operations or financial condition.
On December 12, 2003, the American Institute of Certified Public
Accountants issued Statement of Position No. 03-3, Accounting for Certain Loans
or Debt Securities Acquired in a Transfer (SOP 03-3). SOP 03-3 requires acquired
loans with poor credit quality to be recorded at fair value and prohibits
carrying over or creation of valuation allowances in the initial accounting for
the loans. SOP 03-3 also limits the yield that may be accreted to income. SOP
03-3 applies to the purchase of an individual loan, a pool of loans, a group of
loans, and loans acquired in a business combination. SOP 03-3 is effective for
loans acquired in fiscal years beginning after December 31, 2004. SOP 03-3 is
not expected to have a material impact on Third Century's results of operations
or financial condition.
In December, 2004, the FASB issued an amendment to SFAS 123 (SFAS 123R)
which eliminates the ability to account for share-based compensation
transactions using Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and generally requires that such transactions be
accounted for using a fair value-based method. SFAS 123R will be effective for
Third Century for the first quarter of 2006.
SFAS123R applies to all awards granted after the required effective date
and to awards modified, repurchased, or cancelled after that date. The
cumulative effect of initially applying this Statement, if any, is recognized as
of the required effective date.
As of the required effective date, Third Century will apply SFAS 123R using
a modified version of prospective application. Under that transition method,
compensation cost is recognized on or after the required effective date for the
portion of outstanding awards for which the requisite service has not yet been
rendered, based on the grant-date fair value of those awards calculated under
SFAS 123 for either recognition or pro forma disclosures. For periods before the
required effective date, a company may elect to apply a modified version of
retrospective application under which financial statements for prior periods are
adjusted on a basis consistent with the pro forma disclosures required for those
periods by SFAS 123.
Third Century will be required to first report compensation cost under SFAS
123R in the first quarter of 2006. We are currently evaluating the effect of the
recognition and measurement provisions of SFAS 123R but we currently believe the
adoption of SFAS 123R will not result in a material impact on Third Century's
results of operations or financial condition.
20
IMPACT OF INFLATION
The consolidated financial statements presented herein have been prepared
in accordance with generally accepted accounting principles. These principles
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
Our primary assets and liabilities are monetary in nature. As a result,
interest rates have a more significant impact on our performance than the
effects of general levels of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services, since such prices are affected by inflation. In a period
of rapidly rising interest rates, the liquidity and maturities structures of our
assets and liabilities are critical to the maintenance of acceptable performance
levels.
The principal effect of inflation, as distinct from levels of interest
rates, on earnings is in the area of noninterest expense. Such expense items as
employee compensation, employee benefits and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans that we have made. We are unable to determine the extent, if any,
to which properties securing our loans have appreciated in dollar value due to
inflation.
21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Third Century Bancorp
Franklin, Indiana
We have audited the accompanying consolidated balance sheets of Third Century
Bancorp as of December 31, 2004 and 2003, and the related consolidated
statements of income, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Third Century
Bancorp as of December 31, 2004 and 2003, and the results of its operations and
its cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ BKD, LLP
Indianapolis, Indiana
January 28, 2005
22
Third Century Bancorp
Consolidated Balance Sheets
December 31, 2004 and 2003
Assets
2004 2003
----------------------------------------
Cash and due from banks $ 734,157 $ 779,294
Interest-bearing demand deposits 11,322,946 3,959,471
--------------- ---------------
Cash and cash equivalents 12,057,103 4,738,765
Interest-bearing time deposits 200,000 --
Held-to-maturity securities 10,454,621 688,609
Loans, net of allowance for loan losses of $1,012,242 and
$1,054,766 at December 31, 2004 and 2003 98,821,858 96,955,033
Premises and equipment 2,136,039 2,081,815
Federal Home Loan Bank stock 1,019,600 975,000
Interest receivable 482,916 463,551
Other 990,921 658,507
--------------- ---------------
Total assets $ 126,163,058 $ 106,561,280
=============== ===============
Liabilities and Stockholders' Equity
Liabilities
Deposits
Demand $ 11,163,961 $ 6,989,144
Savings, NOW and money market 39,672,287 35,779,346
Time 35,571,892 35,939,575
--------------- ---------------
Total deposits 86,408,140 78,708,065
Federal Home Loan Bank advances 16,500,000 19,500,000
Interest payable and other liabilities 357,696 313,010
--------------- ---------------
Total liabilities 103,265,836 98,521,075
--------------- ---------------
Commitments and Contingencies
Equity Contributed by ESOP 64,405 --
--------------- ---------------
Stockholders' Equity
Common stock, authorized 20,000,000 shares, outstanding 1,653,125
shares 14,289,635 --
Retained earnings 8,543,182 8,040,205
--------------- ---------------
Total stockholders' equity 22,832,817 8,040,205
--------------- ---------------
Total liabilities and stockholders' equity $ 126,163,058 $ 106,561,280
=============== ===============
See Notes to Consolidated Financial Statements
23
Third Century Bancorp
Consolidated Statements of Income
Years Ended December 31, 2004 and 2003
2004 2003
--------------------------
Interest and Dividend Income
Loans $ 5,802,430 $ 5,877,351
Securities 55,063 62,047
Dividends on Federal Home Loan Bank stock 48,400 35,647
Deposits with financial institutions 141,516 36,677
----------- ----------
Total interest and dividend income 6,047,409 6,011,722
----------- ----------
Interest Expense
Deposits 1,170,226 1,346,831
Federal Home Loan Bank advances 705,524 607,125
----------- ----------
Total interest expense 1,875,750 1,953,956
----------- ----------
Net Interest Income 4,171,659 4,057,766
Provision for Loan Losses 36,000 200,000
----------- ----------
Net Interest Income After Provision for Loan Losses 4,135,659 3,857,766
----------- ----------
Noninterest Income
Fiduciary activities 69,727 80,772
Service charges on deposits accounts 221,025 204,004
Other service charges and fees 209,003 223,005
Net gains on loan sales 216,114 72,363
Merchant processing 108,559 100,851
Other 67,541 42,832
----------- ----------
Total noninterest income 891,969 723,827
----------- ----------
Noninterest Expense
Salaries and employee benefits 2,335,722 2,122,203
Net occupancy expense 371,414 349,581
Equipment expense 64,543 72,896
Data processing fees 408,373 344,803
Conversion expense -- 117,038
Professional fees 88,763 62,119
Directors' fees 122,300 89,500
Bank charges 61,484 144,195
Merchant processing 94,077 80,789
ATM expense 87,677 63,634
Other 357,628 309,234
----------- ----------
Total noninterest expense 3,991,981 3,755,992
----------- ----------
Income Before Income Tax 1,035,647 825,601
Provision for Income Taxes 411,000 330,810
----------- ----------
Net Income $ 624,647 $ 494,791
=========== ==========
See Notes to Consolidated Financial Statements
24
Third Century Bancorp
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2004 and 2003
Common Stock Retained
Amount Earnings Total
--------------------------------------------------------
Balance, January 1, 2003 $ -- $ 7,545,414 $ 7,545,414
Net income 494,791 494,791
-------------- ------------- -------------
Balance, December 31, 2003 -- 8,040,205 8,040,205
Net income 624,647 624,647
Dividends on common stock, $.08 per share
outstanding (121,670) (121,670)
Stock issued in conversion, at no par, net of
conversion costs 15,786,451 15,786,451
Contribution of unearned ESOP shares (1,496,816) (1,496,816)
-------------- ------------- -------------
Balance, December 31, 2004 $ 14,289,635 $ 8,543,182 $ 22,832,817
============== ============= =============
See Notes to Consolidated Financial Statements
25
Third Century Bancorp
Consolidated Statements of Cash Flows
Years Ended December 31, 2004 and 2003
2004 2003
----------------------------------------
Operating Activities
Net income $ 624,647 $ 494,791
Items not requiring (providing) cash
Depreciation and amortization 177,028 168,947
Loss on disposal of fixed assets 5,175 --
Provision for loan losses 36,000 200,000
ESOP shares earned 64,405 --
Amortization of premiums and discounts on securities 22,818 109,504
Capitalization of mortgage servicing rights (139,558) --
Deferred income taxes 163,000 (61,000)
FHLB stock dividends (44,600) --
Loans originated for sale (8,538,907) (4,408,723)
Sale of loans 8,615,463 4,481,086
Gains on sales of loans (76,556) (72,363)
Changes in
Interest receivable (19,365) 61,022
Other assets (403,506) 13,891
Interest payable and other liabilities 33,290 (65,271)
-------------- --------------
Net cash provided by operating activities 519,334 921,884
-------------- --------------
Investing Activities
Purchase of interest-bearing time deposits (200,000) --
Purchases of held-to-maturity securities (16,194,830) (711,006)
Proceeds from maturities of held-to-maturity securities 6,406,000 6,037,302
Net change in loans (1,902,825) (17,819,008)
Purchase of premises and equipment (188,777) (73,921)
Purchase of Federal Home Loan Bank stock -- (425,000)
--------------- --------------
Net cash used in investing activities (12,080,432) (12,991,633)
-------------- --------------
Financing Activities
Net increase in demand deposits, money market, NOW and savings
accounts 7,332,392 364,446
Net increase in certificates of deposit 367,683 216,661
Proceeds from Federal Home Loan Bank advances (4,500,000) 12,000,000
Repayment of Federal Home Loan Bank advances 1,500,000 (3,000,000)
Net increase in advances from borrowers for taxes and insurance (49,439) 41,243
Issuance of stock 14,289,635 --
Dividends paid (60,835) --
-------------- ---------------
Net cash provided by financing activities 18,879,436 9,622,350
-------------- --------------
Change in Cash and Cash Equivalents 7,318,338 (2,447,399)
Cash and Cash Equivalents, Beginning of Year 4,738,765 7,186,164
-------------- --------------
Cash and Cash Equivalents, End of Year $ 12,057,103 $ 4,738,765
============== ==============
Supplemental Cash Flows Information
Interest paid $ 1,871,835 $ 1,977,285
Income taxes paid (net of refunds) 331,035 377,500
See Notes to Consolidated Financial Statements
26
Third Century Bancorp
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Note 1: Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Third Century Bancorp (Company) is a bank holding company whose
principal activity is the ownership and management of its wholly-owned
subsidiary, Mutual Savings Bank.
Mutual Savings Bank (Bank) is primarily engaged in providing a full
range of banking and financial services to individual and corporate
customers in Johnson County and surrounding counties. The Bank is
subject to competition from other financial institutions. The Bank is
subject to the regulation of certain federal and state agencies and
undergoes periodic examinations by those regulatory authorities. The
Bank is a 100 percent owner of Mutual Financial Services, Inc.
(Financial), a service corporation providing insurance services for
the customers of the Bank.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company, Bank and Financial. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for loan losses.
In connection with the determination of the allowance for loan losses,
management obtains independent appraisals for significant properties.
Cash Equivalents
The Company considers all liquid investments with original maturities
of three months or less to be cash equivalents.
Securities
Held-to-maturity securities, which include any security for which the
Company has the positive intent and ability to hold until maturity,
are carried at historical cost adjusted for amortization of premiums
and accretion of discounts.
Amortization of premiums and accretion of discounts are recorded as
interest income from securities. Realized gains and losses are
recorded as net security gains (losses). Gains and losses on sales of
securities are determined on the specific-identification method.
27
Third Century Bancorp
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary
market are carried at the lower of cost or fair value in the
aggregate. Net unrealized losses, if any, are recognized through a
valuation allowance by charges to income. Commitments to originate
loans held for sale, if any, are recorded at fair value. There were no
loans held for sale or commitments to originate loans to be sold at
December 31, 2004 or 2003.
Loans
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their
outstanding principal balances adjusted for any charge-offs, the
allowance for loan losses, any deferred fees or costs on originated
loans and unamortized premiums or discounts on purchased loans.
Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term.
Generally, loans are placed on non-accrual status at ninety days past
due and interest is considered a loss, unless the loan is well-secured
and in the process of collection.
Discounts and premiums on purchased residential real estate loans are
amortized to income using the interest method over the remaining
period to contractual maturity, adjusted for anticipated prepayments.
Discounts and premiums on purchased consumer loans are recognized over
the expected lives of the loans using methods that approximate the
interest method.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated
to have occurred through a provision for loan losses charged to
income. Loan losses are charged against the allowance when management
believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available.
28
Third Century Bancorp
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status,
collateral value and the probability of collecting scheduled principal
and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as
impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration
all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the
borrower's prior payment record and the amount of the shortfall in
relation to the principal and interest owed. Impairment is measured on
a loan-by-loan basis for commercial and construction loans by either
the present value of expected future cash flows discounted at the
loan's effective interest rate, the loan's obtainable market price or
the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogenous loans are collectively
evaluated for impairment. Accordingly, the Company does not separately
identify individual consumer and residential loans for impairment
measurements.
Premises and Equipment
Depreciable assets are stated at cost less accumulated depreciation.
Depreciation is charged to expense using the straight-line and
accelerated methods over the estimated useful lives of the assets.
Federal Home Loan Bank Stock
Federal Home Loan Bank stock is a required investment for institutions
that are members of the Federal Home Loan Bank system. The required
investment in the common stock is based on a predetermined formula.
Mortgage Servicing Rights
Mortgage servicing rights on originated loans that have been sold are
capitalized by allocating the total cost of the mortgage loans between
the mortgage servicing rights and the loans based on their relative
fair values. Capitalized servicing rights are amortized in proportion
to and over the period of estimated servicing revenues. Impairment of
mortgage-servicing rights is assessed based on the fair value of those
rights. Fair values are estimated using discounted cash flows based on
a current market interest rate. For purposes of measuring impairment,
the rights are stratified based on the predominant risk
characteristics of the underlying loans. The predominant
characteristic currently used for stratification is type of loan. The
amount of impairment recognized is the amount by which the capitalized
mortgage servicing rights for a stratum exceed their fair value. At
December 31, 2004, capitalized mortgage servicing rights totaled
$126,000.
29
Third Century Bancorp
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Income Taxes
Deferred tax assets and liabilities are recognized for the tax effects
of differences between the financial statement and tax bases of assets
and liabilities. A valuation allowance is established to reduce
deferred tax assets if it is more likely than not that a deferred tax
asset will not be realized.
Earnings Per Share
Earnings per share will be computed based upon the weighted-average
common and common equivalent shares outstanding during each year.
Unearned ESOP shares will be excluded from average shares outstanding.
As Third Century Bancorp had no earnings prior to June 29, 2004, no
earnings per share calculation has been provided as it is not
meaningful.
Reclassifications
Certain reclassifications have been made to the 2003 financial
statements to conform to the 2004 financial statement presentation.
These reclassifications had no effect on net income.
Note 2: Conversion
On June 29, 2004, the Bank completed the conversion from a state
chartered mutual institution to a state chartered stock savings bank
and the formation of the Company as the holding company of the Bank.
As part of the conversion, the Company issued 1,653,125 shares of
common stock at $10 per share. Net proceeds of the Company's stock
issuance were $15,786,450, after costs, of which $7,910,841 was used
to acquire 100% of the stock and ownership of the Bank. The
transaction was accounted for at historical cost in a manner similar
to that utilized in a pooling of interests. The Company used
$1,496,816 of the proceeds to purchase 132,250 shares for the Employee
Stock Ownership Plan (ESOP).
Note 3: Restriction on Cash and Due From Banks
The Bank is required to maintain reserve funds in cash and/or on
deposit with the Federal Reserve Bank. The reserve required at
December 31, 2004 was $190,000.
30
Third Century Bancorp
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Note 4: Securities
The amortized cost and approximate fair values of held-to-maturity
securities are as follows:
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
-------------------------------------------------------------------
December 31, 2004:
U. S. Treasuries $ 3,973,830 $ -- $ -- $ 3,973,830
U. S. Government agencies 6,480,791 -- 9,183 6,471,608
------------- ------------ ------------ ------------
$ 10,454,621 $ -- $ 9,183 $ 10,445,438
============= ============ ============ ============
December 31, 2003:
U. S. Government agencies $ 201,365 $ 513 $ -- $ 201,878
Corporate obligations 487,244 337 -- 487,581
------------- ----------- ------------- ------------
$ 688,609 $ 850 $ -- $ 689,459
============= =========== ============= ============
At December 31, 2004, $6.5 million mature within one year and $2.0
million mature in 2006. 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. At
December 31, 2004 and 2003, the Company did not have any investments
in a continuous unrealized loss position of twelve months or more.
Note 5: Loans and Allowance for Loan Losses
Categories of loans at December 31, include:
2004 2003
------------------------------------------
Residential real estate
One-to-four family residential $ 52,124,503 $ 56,132,745
Multi-family residential 337,858 362,509
Construction and land development 6,133,402 7,236,399
Commercial 29,611,807 24,993,360
Consumer and other 11,670,797 9,327,126
--------------- ---------------
Total loans 99,878,367 98,052,139
Less
Net deferred loan fees, premiums and discounts 44,267 42,340
Allowance for loan losses 1,012,242 1,054,766
--------------- ---------------
Net loans $ 98,821,858 $ 96,955,033
=============== ===============
31
Third Century Bancorp
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Activity in the allowance for loan losses was as follows:
2004 2003
-------------------------------------------
Balance, beginning of year $ 1,054,766 $ 884,185
Provision charged to expense 36,000 200,000
Losses charged off, net of recoveries of $32,862 for 2004
and $2,202 for 2003 (78,524) (29,419)
--------------- ---------------
Balance, end of year $ 1,012,242 $ 1,054,766
=============== ===============
There were no impaired loans at December 31, 2004. Impaired loans
totaled $359,350 at December 31, 2003. An allowance for loan losses of
$55,578 was recorded on impaired loans at December 31, 2003.
No interest was recognized on average impaired loans of $142,000 for
2004. Interest of $14,600 was recognized on average impaired loans of
$378,000 for 2003. Interest of $14,600 was recognized on impaired
loans on a cash basis during 2003.
Non-accruing loans at December 31, 2004 and 2003 were $25,000 and
$429,000, respectively.
Note 6: Premises and Equipment
Major classifications of premises and equipment, stated at cost, are
as follows:
2004 2003
----------------------------------------
Land $ 310,507 $ 205,295
Buildings and improvements 2,260,596 2,247,596
Equipment 1,031,179 914,785
--------------- ---------------
3,602,282 3,367,676
Less accumulated depreciation (1,466,243) (1,285,861)
--------------- ---------------
Net premises and equipment $ 2,136,039 $ 2,081,815
=============== ===============
32
Third Century Bancorp
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Note 7: Loan Servicing
Mortgage loans serviced for others are not included in the
accompanying consolidated balance sheets. The unpaid principal
balances of mortgage loans serviced for others was $16,920,000 and
$10,962,000 at December 31, 2004 and 2003, respectively.
Note 8: Interest-Bearing Deposits
Interest-bearing deposits in denominations of $100,000 or more were
$6,690,000 on December 31, 2004, and $6,841,000 on December 31, 2003.
At December 31, 2004, the scheduled maturities of time deposits are as
follows:
2005 $ 21,042,763
2006 9,847,139
2007 2,105,913
2008 1,281,731
2009 1,294,346
---------------
$ 35,571,892
===============
Note 9: Federal Home Loan Bank Advances
The Federal Home Loan Bank advances are secured by mortgage loans
totaling $48,701,000 and $57,311,000 at December 31, 2004 and 2003.
Advances at December 31, 2004, at interest rates ranging from 2.86 to
5.96 percent are subject to restrictions or penalties in the event of
prepayment.
Aggregate annual maturities of the advances at December 31, 2004, are:
2005 $ 2,000,000
2006 2,000,000
2007 3,000,000
2008 2,000,000
2009 2,500,000
Thereafter 5,000,000
---------------
$ 16,500,000
===============
33
Third Century Bancorp
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Note 10: Income Taxes
The provision for income taxes includes these components:
2004 2003
--------------------------
Taxes currently payable
Federal $ 184,000 $ 306,241
State 64,000 85,569
Deferred income taxes payable
Federal 138,000 (50,000)
State 25,000 (11,000)
-------- --------
Income tax expense $ 411,000 $ 330,810
======== ========
A reconciliation of income tax expense at the statutory rate to the
Bank's actual income tax expense is shown below:
2004 2003
--------------------------
Computed at the statutory rate (34%) $ 352,120 $ 301,440
Increase (decrease) resulting from
State income taxes 58,740 49,215
Other 140 (19,845)
-------- --------
Actual tax expense $ 411,000 $ 330,810
======== ========
The tax effects of temporary differences related to deferred taxes
shown on the balance sheets were:
2004 2003
--------------------------
Deferred tax assets
Allowance for loan losses $ 430,203 $ 447,738
Deferred compensation 1,855 3,219
Other 11,475 11,556
-------- --------
443,533 462,513
-------- --------
Deferred tax liabilities
Depreciation 61,328 75,832
FHLB stock dividend 30,473 11,504
Prepaid 77,914 --
Mortgage servicing rights 53,588 --
Other 22,209 14,156
-------- --------
245,512 101,492
-------- --------
Net deferred tax asset $ 198,021 $ 361,021
======== ========
34
Third Century Bancorp
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Retained earnings at December 31, 2004 and 2003, includes
approximately $1,038,000 for which no deferred federal income tax
liability has been recognized. These amounts represent an allocation
of income to bad debt deductions for tax purposes only. Reduction of
amounts so allocated for purposes other than tax bad debt losses or
adjustments arising from carryback of net operating losses would
create income for tax purposes only, which would be subject to the
then-current corporate income tax rate. The deferred income tax
liabilities on the preceding amounts that would have been recorded if
they were expected to reverse into taxable income in the foreseeable
future were approximately $353,000 at December 31, 2004 and 2003.
Note 11: Stockholders' Equity and Regulatory Matters
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below). Management believes, as of December 31,
2004 and 2003, that the Bank meets all capital adequacy requirements
to which it is subject.
As of December 31, 2004, the most recent notification categorized the
Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank
must maintain minimum total risk-based, Tier I risk-based and Tier I
leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed
the Bank's category.
The Bank's actual capital amounts and ratios are also presented in the
table.
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------------
As of December 31, 2004
Total risk-based capital
(to risk-weighted
assets) $ 16,155,000 19.6% $ 6,598,000 8.0% $8,247,000 10.0%
Tier I capital
(to risk-weighted
assets) 15,143,000 18.4 3,299,000 4.0 4,948,000 6.0
Tier I capital
(to adjusted total
assets) 15,143,000 12.2 4,945,000 4.0 6,181,000 5.0
As of December 31, 2003
Total risk-based capital
(to risk-weighted
assets) $ 8,991,000 11.8% $ 6,076,000 8.0% $7,596,000 10.0%
Tier I capital
(to risk-weighted
assets) 8,040,000 10.6 3,038,000 4.0 4,557,000 6.0
Tier I capital
(to adjusted total
assets) 8,040,000 7.5 4,274,000 4.0 5,343,000 5.0
35
Third Century Bancorp
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
At December 31, 2004, the stockholder's equity of the Bank was
$15,143,000, of which approximately $1,119,000 was available for the
payment of dividends to the Company.
At the time of conversion, a liquidation account was established in an
amount equal to the Bank's net worth as reflected in the latest
statements of condition used in its final conversion offering
circular. The liquidation account is maintained for the benefit of
eligible deposit account holders who maintain their deposit account in
the Bank after conversion. In the event of a complete liquidation, and
only in such event, each eligible deposit account holder will be
entitled to receive a liquidation distribution from the liquidation
account in the amount of the then current adjusted subaccount balance
for deposit accounts then held, before any liquidation distribution
may be made to shareholders. Except for the repurchase of stock and
payment of dividends, the existence of the liquidation account will
not restrict the use or application of net worth. The initial balance
of the liquidation account was $8,158,000.
Note 12: Related Party Transactions
The Company has entered into transactions with certain executive
officers, directors and their affiliates (related parties). In
management's opinion, such loans and other extensions of credit and
deposits were made in the ordinary course of business and were made on
substantially the same terms (including interest rates and collateral)
as those prevailing at the time for comparable transactions with other
persons. Further, in management's opinion, these loans did not involve
more than normal risk of collectibility or present other unfavorable
features.
The aggregate amount of loans, as defined, to such related parties is
as follows:
Balance, January 1 $ 1,274,000
New loans 786,000
Repayments (213,000)
Change in composition 71,000
---------------
Balance, December 31 $ 1,918,000
===============
Deposits from related parties, as defined, held by the Company at
December 31, 2004 and 2003 totaled $920,000 and $1,296,000,
respectively.
36
Third Century Bancorp
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Note 13: Employee Benefits
The Company is a participant in a pension fund known as the Financial
Institutions Retirement Fund (FIRF). This plan is a multi-employer
plan; separate actuarial valuations are not made with respect to each
participating employer. This plan provides pension benefits for
substantially all of the Company's employees. According to FIRF
administrators, the value of the vested benefits exceeded the market
value of the fund's assets at the most recent valuation date and
accordingly the Company recorded a pension liability of $39,000 at
December 31, 2003. No liability was necessary at December 31, 2004.
Pension expense was $130,000 and $121,500 for 2004 and 2003.
The Company has a retirement savings plan covering substantially all
employees. Employees may contribute up to 50 percent of their
compensation with the Company matching 100 percent of the employee's
contribution on the first 8 percent of the employee's compensation.
Employer contributions charged to expense for 2004 and 2003 were
$86,000 and $58,000, respectively.
An ESOP covers substantially all employees of the Company. The ESOP
acquired 132,250 shares at $11.32 per share in the conversion with
funds provided by a loan from the Company. The ESOP provides for the
Company to issue a put option (option) to any participant who receives
a distribution of Company stock. The option permits the participant to
sell the stock to the Company at any time during two option periods,
as defined in the plan, at the fair market value of the stock.
Accordingly, the $1,496,816 of stock acquired by the ESOP is reflected
as a reduction to the ESOP equity accounts. Unearned ESOP shares
totaled 126,898 at December 31, 2004 and had a fair value of
$1,662,000 at December 31, 2004. Shares are released to participants
proportionately as the loan is repaid. Dividends on allocated shares
are recorded as dividends and charged to retained earnings. Cash
dividends on unallocated shares will be applied to principal and
interest due on the loan. Compensation expense is recorded equal to
the fair market value of the stock when contributions are made to the
ESOP. The expense under the ESOP was $64,405 for the year ended
December 31, 2004. At December 31, 2004, the ESOP had 5,352 allocated
shares and 126,898 suspense shares.
Below are the transactions affecting the ESOP equity accounts:
Additional Unearned
Common Paid-in ESOP
Stock Capital Shares Total
-----------------------------------------------------------------
Common stock acquired by ESOP $ 1,496,816 $ -- $ (1,496,816) $ --
ESOP shares earned -- 3,869 60,536 64,405
------------ ----------- ------------- ------------
Balance, December 31, 2004 $ 1,496,816 $ 3,869 $ (1,436,280) $ 64,405
============ =========== ============= ============
37
Third Century Bancorp
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Note 14: Leases
The Company has several noncancellable operating leases, primarily for
branch facilities, that expire over the next three years. Rental
expense for these leases was $40,800 for the years ended December 31,
2004 and 2003, respectively. Future lease commitments are immaterial.
Note 15: Disclosures About Fair Value of Financial Instruments
The following table presents estimated fair values of the Company's
financial instruments. The fair values of certain of these instruments
were calculated by discounting expected cash flows, which involves
significant judgments by management and uncertainties. Fair value is
the estimated amount at which financial assets or liabilities could be
exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. Because no market exists for certain
of these financial instruments and because management does not intend
to sell these financial instruments, the Bank does not know whether
the fair values shown below represent values at which the respective
financial instruments could be sold individually or in the aggregate.
December 31, 2004 December 31, 2003
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------------------------
Financial assets
Cash and cash equivalents $ 12,057,103 $ 12,057,103 $ 4,738,765 $ 4,738,765
Interest-bearing time deposits 200,000 200,000 -- --
Held-to-maturity securities 10,454,621 10,445,438 688,609 689,459
Loans, net of allowance for
loan losses 98,821,858 98,615,000 96,955,033 101,015,000
Federal Home Loan Bank stock 1,019,600 1,019,600 975,000 975,000
Interest receivable 482,916 482,916 463,551 463,551
Financial liabilities
Deposits 86,408,140 86,694,000 78,708,065 79,389,000
Federal Home Loan Bank advances 16,500,000 18,369,000 19,500,000 20,320,000
Interest payable 141,992 141,992 138,077 138,077
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments.
Cash and Cash Equivalents, Interest-Bearing Deposits, Federal Home Loan
Bank Stock, Interest Receivable, Interest Payable and Advances From
Borrowers for Taxes and Insurance
The carrying amount approximates fair value.
Securities
Fair values equal quoted market prices, if available. If quoted market
prices are not available, fair value is estimated based on quoted
market prices of similar securities.
38
Third Century Bancorp
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Loans
The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities. Loans with similar characteristics were aggregated for
purposes of the calculations. The carrying amount of accrued interest
approximates its fair value.
Deposits
Deposits include demand deposits, savings accounts, NOW accounts and
certain money market deposits. The carrying amount approximates fair
value. The fair value of fixed-maturity time deposits is estimated
using a discounted cash flow calculation that applies the rates
currently offered for deposits of similar remaining maturities.
Federal Home Loan Bank Advances
Rates currently available to the Company for debt with similar terms
and remaining maturities are used to estimate the fair value of
existing debt.
Commitments to Originate Loans, Letters of Credit and Lines of Credit
The fair value of commitments to originate loans is estimated using
the fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. The fair value of
forward sale commitments is estimated based on current market prices
for loans of similar terms and credit quality. The fair values of
letters of credit and lines of credit are based on fees currently
charged for similar agreements or on the estimated cost to terminate
or otherwise settle the obligations with the counterparties at the
reporting date.
Note 16: Commitments
Commitments to Originate Loans
Commitments to originate loans are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since a portion
of the commitments may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. Each customer's creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary, is based on management's credit evaluation of the
counterparty. Collateral held varies, but may include accounts
receivable; inventory; property, plant and equipment; commercial real
estate and residential real estate.
39
Third Century Bancorp
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
At December 31, 2004 and 2003, the Company had outstanding commitments
to originate loans aggregating approximately $1,353,000 and $212,000,
respectively. The commitments extended over varying periods of time
with the majority being disbursed within a one-year period and were at
fixed rates of interest.
Letters of Credit
Letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. These
guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing and
similar transactions. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loans to
customers.
The Company had total outstanding performance letters of credit
amounting to $73,000 at December 31, 2004 and 2003 and were with terms
of less than two years.
Lines of Credit
Lines of credit are agreements to lend to a customer as long as there
is no violation of any condition established in the contract. Lines of
credit generally have fixed expiration dates. Since a portion of the
line may expire without being drawn upon, the total unused lines do
not necessarily represent future cash requirements. Each customer's
creditworthiness is evaluated on a case-by-case basis. The amount of
collateral obtained, if deemed necessary, is based on management's
credit evaluation of the counterparty. Collateral held varies but may
include accounts receivable, inventory, property, plant and equipment,
commercial real estate and residential real estate. Management uses
the same credit policies in granting lines of credit as it does for
on-balance-sheet instruments.
At December 31, 2004 and 2003, the Bank had granted unused lines of
credit to borrowers aggregating approximately $11,917,000 and
$11,608,000 for commercial lines and open-end consumer lines.
40
Third Century Bancorp
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Note 17: Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial
position, results of operations and cash flows of the Company:
Condensed Balance Sheet
(Amounts in thousands)
December 31,
2004
----------------------
Assets
Cash and cash equivalents $ 2,280
Interest-bearing time deposit 100
Securities held-to-maturity 3,974
ESOP note receivable 1,447
Investment in common stock of subsidiaries 15,143
Other assets 21
---------------
Total assets $ 22,965
===============
Liabilities - other $ 68
Equity Contributed by ESOP 64
Stockholders' Equity 22,833
---------------
Total liabilities and stockholders' equity $ 22,965
===============
Condensed Statement of Income
(Amounts in thousands)
Year Ending
December 31,
2004
--------------------
Income
Interest income $ 35
-------------
Expenses
Directors fees 14
Other expenses 21
-------------
Total expenses 35
-------------
Income Before Income Tax and Equity in Undistributed Income of Subsidiaries --
Income Tax Expense --
--------------
Income Before Equity in Undistributed Income of Subsidiaries --
Equity in Undistributed Income of Subsidiaries 625
-------------
Net Income $ 625
=============
41
Third Century Bancorp
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Condensed Statement of Cash Flows
(Amounts in thousands)
Year Ending
December 31,
2004
---------------------
Operating Activities
Net income $ 625
Items not providing cash (638)
--------------
Net cash used in operating activities (13)
--------------
Investing Activities
Purchase of interest-bearing time deposit (100)
Purchase of investments held to maturity (3,974)
Purchase of stock of subsidiary (7,911)
Loan to ESOP (1,497)
Payment received on ESOP loan 50
--------------
Net cash used in investing activities (13,432)
--------------
Financing Activities
Proceeds from issuance of stock 15,786
Dividends paid (61)
--------------
Net cash provided by financing activities 15,725
--------------
Net Change in Cash and Cash Equivalents 2,280
Cash and Cash Equivalents at Beginning of Year --
--------------
Cash and Cash Equivalents at End of Year $ 2,280
==============
42
MARKET PRICE OF THIRD CENTURY'S COMMON SHARES
AND RELATED SHAREHOLDER MATTERS
There were 1,653,125 common shares of Third Century outstanding at February
25, 2005, held of record by approximately 358 shareholders. The number of
shareholders does not reflect the number of persons or entities who may hold
stock in nominee or "street name." Since June 30, 2004, Third Century's common
shares have been quoted on the OTC Bulletin Board under the symbol of "TDCB.OB."
Presented below are the high and low bid prices for Third Century's common
shares, as well as cash distributions paid thereon, since the shares began
trading on June 30, 2004. Such quotations reflect inter-dealer prices, without
retail financial markups, markdowns or commissions and may not represent actual
transactions.
Quarter Ended High Low Cash Distributions
--------------------------------------------------------------------------------
December 31, 2004....... $14.00 $11.50 $ .04/share
September 30, 2004...... 11.40 11.00 $ .04/share
June 30, 2004........... 11.50 10.90 none
Under Federal Reserve Board supervisory policy, a bank holding company
generally should not maintain its existing rate of cash dividends on common
shares unless (i) the organization's net income available to common shareholders
over the past year has been sufficient to fully fund the dividends and (ii) the
prospective rate of earnings retention appears consistent with the
organization's capital needs, asset quality, and overall financial condition.
The FDIC also has authority under the Financial Institutions Supervisory Act to
prohibit a bank from paying dividends if, in its opinion, the payment of
dividends would constitute an unsafe or unsound practice in light of the
financial condition of the bank. Under Indiana law, Third Century is precluded
from paying cash dividends if, after giving effect to such dividends, Third
Century would be unable to pay its debts as they become due or Third Century's
total assets would be less than its liabilities and obligations to preferential
shareholders.
Pursuant to the plan of conversion, Mutual established a liquidation
account for the benefit of Eligible Account Holders and Supplemental Eligible
Account Holders. Mutual is not permitted to pay dividends to Third Century if
its net worth would be reduced below the amount required for the liquidation
account.
Under Indiana law, Mutual may pay dividends without the approval of the DFI
so long as its capital is unimpaired and those dividends in any calendar year do
not exceed its net profits for that year plus its retained net profits for the
previous two years. Dividends may not exceed undivided profits on hand (less
losses, bad debts and expenses). Additional stringent regulatory requirements
affecting dividend payments by Mutual, however, are established by the Federal
Deposit Insurance Corporation Improvement Act, to which Mutual is subject.
Mutual's capital levels at December 31, 2004 exceeded the criteria established
to be designated as a "well capitalized" institution. Such institutions are
required to have a total risk-based capital ratio of 10% or greater, a Tier I
risk-based capital ratio of 6% or greater and a leverage ratio of 5% or greater.
43
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS EXECUTIVE OFFICERS
David A. Coffey Robert D. Heuchan
Robert L. Ellett President and Chief Executive Officer
Robert D. Heuchan David A. Coffey
Jerry D. Petro Executive Vice President and Chief
Robert D. Schafstall Operating Officer
Debra K. Harlow
Chief Financial Officer
================================================================================
David A. Coffey (age 42) has served as Executive Vice President, Chief
Operating Officer and a director of Third Century since its formation in March
2004 and of Mutual since 1999. He began serving Mutual as the Chief Operating
Officer in 1998, and was a Senior Vice President prior to being named Executive
Vice President. Mr. Coffey is a graduate of Franklin College.
Robert L. Ellett (age 67) has served as Chairman of the Board of Directors
of Third Century since its formation in March 2004 and of Mutual since 1999. He
has served as a Director of Mutual since 1987. Mr. Ellett also serves as
Chairman of Mutual Financial Services, Inc., a subsidiary of Mutual engaged in
mortgage life insurance sales and servicing. He was the General Manager of Rytex
Company, a stationery products company, until his retirement in December 2001.
Debra K. Harlow (age 53) has served as Chief Financial Officer of Third
Century since its formation in March 2004 and of Mutual since January 2004.
Prior to that time she served Mutual as the EDP Coordinator.
Robert D. Heuchan (age 51) has served as the President, Chief Executive
Officer and director of Third Century since its formation in March 2004 and of
Mutual since 1991. He has served as Vice Chairman of the Mutual Board of
Directors since 1999. He also has been President of Mutual Financial Services,
Inc. since its formation in 1991. Mr. Heuchan is a graduate of Franklin College
and has an MBA from the University of Indianapolis.
Jerry D. Petro (age 59) has served as a member of the Board of Directors of
Third Century since its formation in March 2004 and of Mutual since 1997. Mr.
Petro is the owner and President of J.D. Petro & Associates, Inc., which sells
protective coatings in Indiana, and R.T.I.L.L.C., which sells protective
coatings in Kentucky. He also is the owner and President of R.T.I, which sells
chemical and architectural coatings; Petro's Water Conditioning of Johnson
County; Petro Group, Inc., a manufacturer of buildings for light industrial use;
and Petro Group, L.L.C., which leases office space.
Robert D. Schafstall (age 61) has served as a member of the Board of
Directors of Third Century since its formation in March 2004 and of Mutual since
1999. Mr. Schafstall has been the Franklin City Judge and an attorney in the law
firm of Cutsinger and Schafstall since 1972.
44
DIRECTORS EMERITUS
David B. Ditmars
Sterling M. Haltom
Robert G. Smith
OFFICERS OF MUTUAL SAVINGS BANK
Robert D. Heuchan President and Chief Executive Officer
David A. Coffey Executive Vice President and Chief Operating Officer
Debra K. Harlow Chief Financial Officer
Connie Paris Carson Vice President and Commercial Loan Manager
Debra L. Morrison Vice President and Mortgage Loan Officer
Christa D. Pearson Main Office Branch Manager
Nell R. Pettit Vice President and Manager of Main Street Branch
R. Kent Plummer Vice President and Mortgage Loan Officer
Security Officer
Linda L. Prouty Vice President and Loan Operations Manager
Jennifer D. Rector Nineveh Branch Manager
Jacob W. Sappenfield Commercial Loan Officer
Chris A. Schaefer Compliance Officer
Pamela J. Spencer Vice President and Trust Officer
Trust Department Manager
Board Secretary
Elaine R. Stewart Methodist Community Branch Manager
Jill M. Sweeney Trafalgar Branch Manager
Melissa L. Jones Mortgage Loan Officer
Lynne L. Haste Vice President and Construction Loan Officer
45
GENERAL INFORMATION FOR SHAREHOLDERS
ANNUAL AND OTHER REPORTS
Additional copies of this Annual Report to Shareholders and copies of the
most recent Form 10-KSB may be obtained without charge by contacting Debra K.
Harlow, at the Corporation, 80 East Jefferson Street, Franklin, Indiana 46131.
BRANCHES OF MUTUAL SAVINGS BANK
OFFICE ADDRESS
Main Office 80 East Jefferson Street
Franklin, Indiana 46131
Trafalgar 2 Trafalgar Square
Trafalgar, Indiana 46181
Main Street 1124 North Main Street
Franklin, Indiana 46131
Methodist Community 1070 West Jefferson Street
Franklin, Indiana 46131
Indiana Masonic Home 690 South State Street
Franklin, Indiana 46131
Nineveh 7459 South Nineveh Road
Nineveh, Indiana 46164
INTERNET AND E-MAIL ADDRESS: http://www.mutualsavingsbank.net
TRANSFER AGENT AND REGISTRAR
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
CORPORATE COUNSEL
Barnes & Thornburg LLP
11 South Meridian Street
Indianapolis, Indiana 46204
ANNUAL MEETING
THE ANNUAL MEETING OF SHAREHOLDERS OF THIRD CENTURY BANCORP WILL BE
HELD ON WEDNESDAY, JULY 20, 2005, AT 9:00 A.M., AT HILLVIEW COUNTRY
CLUB, 1800 EAST KING STREET, FRANKLIN, INDIANA.
46