SUBSCRIPTION AND DIRECT COMMUNITY OFFERING PROSPECTUS
Up to 1,653,125 Shares of common stock
Third Century Bancorp
80 East Jefferson Street
Franklin, Indiana 46131
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Mutual Savings Bank based in Franklin, Indiana, is converting from the mutual
form to the stock form of organization. Upon completion of the conversion,
Mutual Savings Bank will become a wholly-owned subsidiary of Third Century
Bancorp, which was formed on March 15, 2004. The common stock of Third Century
Bancorp is being offered to the public under the terms of a plan of conversion
that must be approved by a majority of the votes eligible to be cast by members
of Mutual Savings Bank. The offering will not go forward if Mutual Savings Bank
does not receive this approval.
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TERMS OF OFFERING
An independent appraiser has estimated the market value of the converted
Mutual Savings Bank to be between $10,625,000 and $14,375,000, which establishes
the number of shares to be offered based upon a price of $10.00 per share. The
maximum number of shares to be offered may be increased to 1,653,125 shares.
Based on these estimates, we are making the following offering of shares of
common stock.
Maximum,
Minimum Midpoint Maximum As Adjusted
o Price Per Share: $10 $10 $10 $10
o Number of Shares 1,062,500 1,250,000 1,437,500 1,653,125
o Gross Offering Proceeds $10,625,000 $12,500,000 $14,375,000 $16,531,250
o Estimated offering expenses
excluding underwriting
commissions and expenses $406,325 $414,200 $406,075 $405,731
o Underwriting commissions
and expenses (1) $135,675 $163,800 $191,925 $224,269
o Net Proceeds to Third Century
Bancorp $10,083,000 $11,922,000 $13,777,000 $15,901,250
o Net Proceeds per share to
Third Century Bancorp $9.49 $9.54 $9.58 $9.62
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(1) See "The Conversion - Marketing Arrangements" at page 91 for a discussion
of Keefe, Bruyette & Woods, Inc.'s compensation for this offering.
Investing in the common stock involves a high degree of risk.
Please read "Risk Factors" beginning on page 12 of this document.
These securities are not deposits or accounts and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. The securities are subject to investment risks, including possible loss
of the principal invested.
Neither the Securities and Exchange Commission, the Indiana Department of
Financial Institutions, the Federal Deposit Insurance Corporation nor any state
securities regulator has approved or disapproved of these securities or
determined if this Prospectus is accurate or complete. Any representation to the
contrary is a criminal offense.
Keefe, Bruyette & Woods, Inc. will use its best efforts to assist Third
Century Bancorp in selling at least the minimum number of shares but does not
guarantee this number will be sold. All funds received from subscribers will be
held in an escrow savings account at Mutual Savings Bank earning interest at its
passbook rate, which is currently 0.15% per annum, until the completion or
termination of the conversion. Keefe, Bruyette & Woods, Inc. intends to apply
for and maintain quotation of the common stock on the OTC "Electronic Bulletin
Board."
This offering will end at 12:00 p.m., Franklin time, on June 14, 2004, and
may be extended, under certain circumstances, to no later than June 21, 2006. If
we fail to sell 1,062,500 shares by July 29, 2004, you will receive a prompt
refund of your payment to us, plus interest, unless you affirmatively elect to
continue your subscription through any extension period. You will not be able to
revoke your subscription for common stock unless we extend the offering beyond
July 29, 2004. Shares purchased by our management will count toward the number
of shares sold in the conversion.
For information on how to subscribe, call the Stock Information Center at
(317) 736-7492.
KEEFE, BRUYETTE & WOODS
Prospectus dated May 13, 2004
TABLE OF CONTENTS
Page
Questions and Answers About the Stock Offering ..................................... 4
Summary ............................................................................ 6
Risk Factors ....................................................................... 12
Recent Developments ................................................................ 16
Proposed Purchases by Directors and Executive Officers ............................. 20
Third Century Bancorp .............................................................. 21
Mutual Savings Bank ................................................................ 21
Market Area ........................................................................ 22
Use of Proceeds .................................................................... 22
Dividend Policy .................................................................... 23
Market for the Common Stock ........................................................ 24
Competition ........................................................................ 25
Capitalization ..................................................................... 25
Pro Forma Data ..................................................................... 27
Regulatory Capital Compliance ...................................................... 30
Selected Consolidated Financial Data of Mutual Savings Bank and Subsidiary ......... 31
Management's Discussion and Analysis or Plan of Operation .......................... 32
Business of Mutual Savings Bank .................................................... 47
Management ......................................................................... 64
Executive Compensation and Related Transactions .................................... 66
Regulation ......................................................................... 74
Taxation ........................................................................... 81
The Conversion ..................................................................... 81
Restrictions of Acquisition of Third Century Bancorp ............................... 97
Description of Capital Stock ....................................................... 103
Transfer Agent ..................................................................... 104
Registration Requirements .......................................................... 104
Legal and Tax Matters .............................................................. 104
Experts ............................................................................ 105
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 105
Additional Information ............................................................. 105
Mutual Savings Bank Financial Statements ........................................... F-1
This document contains forward-looking statements that involve risks and
uncertainties. Third Century Bancorp's actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Risk Factors" beginning on page 12 of this Prospectus.
2
[Map of Indiana indicating branch locations omitted.]
3
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q: How do I purchase the stock?
A: You must complete and return the Stock Order Form to us, together with your
payment, on or before 12:00 p.m., Franklin time, on June 14, 2004.
Q. How much stock may I purchase?
A: The minimum purchase is $250 (25 shares). No individual or individuals,
through a single account, may purchase more than $150,000 (15,000 shares).
Purchases cannot exceed $250,000 (25,000 shares) when made by any person or
persons who may be acting together with you, such as your spouse or other
relatives, or companies or trusts in which you have an interest. We may
decrease or increase the maximum purchase limitation without notifying you.
The following examples illustrate how these purchase limitations may apply
to you.
o If you hold more than one account at Mutual Savings Bank
("Mutual"), each in your individual capacity, you will be deemed
to hold a single account and may only purchase up to 15,000
shares in the Subscription Offering.
o If you hold only one joint account with one or more persons, you
and such joint holders may only purchase in the aggregate up to
15,000 shares in the Subscription Offering with respect to that
account.
o If you have a single account and one joint account with another
person (such as your spouse), you and that other person may each
purchase up to 15,000 shares in the Subscription Offering subject
to the overall maximum of 25,000 shares.
o If you hold two separate joint accounts with another person, you
and that other person may each purchase up to 15,000 shares in
the Subscription Offering, subject to the overall maximum of
25,000 shares.
These examples do not address every situation and do not modify the
purchase limitations included in the plan of conversion described in this
Prospectus. Due to the complexity of the rules governing the number of
shares you may purchase, we encourage you to call the Stock Information
Center at (317) 736-7492 if you have any questions.
If we have a Direct Community Offering, each purchaser may purchase up to
15,000 shares in that offering. However, your total purchases in the
conversion combined with persons associated with you may not exceed 25,000
shares (or $250,000).
In certain instances, your purchase may be grouped together with purchases
by other persons who are associated with you. We may increase or decrease
the maximum purchase limitation. If the offering is oversubscribed, shares
will be allocated based upon a formula.
Q. Can I change my mind after I place an order to subscribe for stock?
A. No. After we receive your order form and payment, you may not cancel or
modify your order unless we extend the offering beyond July 29, 2004. If
you cancel your order, you will receive a prompt refund plus interest.
Q: How may I pay for my shares of stock?
A: First, you may pay for stock by check or money order. Interest will be paid
by Mutual on these funds at its passbook rate, which is currently 0.15% per
annum, from the day the funds are received until
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the completion or termination of the conversion. Second, you may authorize
us to withdraw funds from your savings account(s) or certificate(s) of
deposit at Mutual for the amount of funds you specify for payment. You will
not have access to these funds from the day we receive your order until
completion or termination of the conversion.
Q: Can I purchase shares using funds in any IRA accounts I hold?
A: You may use your IRA to purchase shares using your IRA funds if you have or
establish a self-directed IRA. Please call our Stock Information Center for
more information as soon as possible but no later than June 7, 2004.
Q: Who can help answer any other questions I may have about the stock
offering?
A: In order to make an informed investment decision, you should read this
entire document. After reading this document, if you have questions or need
assistance, you should contact:
Stock Information Center
Mutual Savings Bank
80 East Jefferson Street
Franklin, Indiana 46131
(317) 736-7492
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SUMMARY
This summary highlights selected information from this document and may not
contain all the information that is important to you. To understand the stock
offering fully, you should read carefully this entire document, including the
financial statements and the notes to the financial statements of Mutual Savings
Bank.
The Companies
Third Century Bancorp
80 East Jefferson Street
Franklin, Indiana 46131
(317) 736-7151
Third Century Bancorp is not currently an operating company and has not
engaged in any significant business to date. We were formed on March 15, 2004,
as an Indiana corporation to be the holding company for Mutual Savings Bank. The
holding company structure will provide us with greater flexibility in terms of
operations, expansion and diversification. See page 21.
Mutual Savings Bank
80 East Jefferson Street
Franklin, Indiana 46131
(317) 736-7151
Mutual Savings Bank is a community- and customer-oriented Indiana mutual
savings bank that provides financial services to individuals, families and small
businesses. Historically, Mutual has attracted deposits from the general public
and has made one- to four-family mortgage loans, commercial real estate loans,
home equity loans, second mortgage loans, other consumer loans, real estate
construction loans and commercial loans. On December 31, 2003, we had total
assets of $106.6 million, deposits of $78.7 million and equity capital of $8.0
million. See page F-4.
The Stock Offering
We are offering for sale between 1,062,500 and 1,437,500 shares of our
common stock at $10.00 per share. This offering may be increased to 1,653,125
shares without further notice to you if market or financial conditions change
prior to the completion of this stock offering.
The offering means that you will have the opportunity to share in our
future as a shareholder of the newly formed holding company named Third Century
Bancorp that will own Mutual Savings Bank. The stock offering will increase our
capital and the amount of funds available to us for lending and investment
activities. This will give us greater flexibility to diversify operations and
expand into other geographic markets if we choose to do so. As a stock savings
bank operating through a holding company structure, we will have the ability to
plan and develop long-term growth and improve our future access to the capital
markets. In addition, our shareholders might also receive dividends and benefit
from any long-term appreciation of our stock price if our earnings are
sufficient in the future.
Stock Purchases
We will offer shares of our common stock to our depositors who held deposit
accounts as of certain dates and to our borrowers. The shares will be offered
first in a Subscription Offering and any remaining shares may be offered in a
Direct Community Offering to members of the general public with preference given
to residents of Johnson County. See pages 86 to 91. We have engaged Keefe,
Bruyette & Woods, Inc. to assist in the marketing of the common stock.
6
You presently have voting rights while Mutual is in the mutual form;
however, once Mutual converts to the stock form you will lose your voting rights
unless you purchase stock. Even if you do purchase stock, your voting rights
will depend on the amount of stock that you own and not on your deposit account
or loan at Mutual. You are not required to purchase stock. Your deposit account,
certificate accounts and any loans you may have with us will not otherwise be
affected by the conversion.
The Amount of Stock You May Purchase
The minimum purchase is $250 (25 shares). No individual or individuals,
through a single account (including an IRA), may purchase more than $150,000
(15,000 shares). If any of the following persons purchase stock, their purchases
when combined with your purchases cannot exceed $250,000:
o relatives of you or your spouse living in your house
o accounts registered to the same address
o companies, trusts or other entities in which you have an interest or
hold a position
o other persons who may be acting together with you
We may decrease or increase the maximum purchase limitation without
notifying you.
You might not receive any or all of the shares you want to purchase. If
there is an over-subscription, the stock will be offered on a priority basis to
the following persons:
o Persons who had a deposit account with us on December 31, 2002
("Eligible Account Holders"). Any remaining shares will be offered to:
o The employee stock ownership plan of Third Century Bancorp. Any
remaining shares will be offered to:
o Persons who had a deposit account with us on March 31, 2004
("Supplemental Account Holders"). Any remaining shares will be offered
to:
o Other depositors of ours and our borrowers, as of April 30, 2004
("Other Members").
If the above persons do not subscribe for all of the shares, the remaining
shares will be offered to certain members of the general public in a Direct
Community Offering, with preference given to people who live in Johnson County,
Indiana.
Prohibition on Transfer of Subscription Rights
You may not sell or assign your subscription rights. Any transfer of
subscription rights is prohibited by law. If you exercise your subscription
rights, you will be required to certify that you are purchasing shares solely
for yourself and that you have no agreement or understanding regarding the sale
or transfer of shares. We intend to pursue any and all legal and equitable
remedies in the event we become aware of the transfer of subscription rights and
will not honor orders known by us to involve the transfer of such rights. In
addition, persons who violate the purchase limitations may be subject to
sanctions and penalties imposed by the Federal Deposit Insurance Corporation or
the Indiana Department of Financial Institutions.
The Offering Range and Determination of the Price Per Share
The offering range is based on an independent appraisal of the pro forma
market value of the common stock by Keller & Company, Inc., an appraisal firm
experienced in appraisals of savings banks. Keller & Company has estimated in
its conversion appraisal that, as of February 27, 2004, the aggregate pro forma
market value of the common stock ranged between $10,625,000 and $14,375,000
(with a
7
mid-point of $12,500,000) (the "Estimated Value Range"). Based on this valuation
and the $10.00 per share price, the number of shares of common stock being
offered for sale in the offering will range from 1,062,500 to 1,437,500 shares.
The appraisal was based in part upon our financial condition and operations, the
effect of the additional capital raised by the sale of common stock in this
offering and an analysis of a peer group of ten publicly traded thrift
institutions.
Compared to the average pricing of the peer group, Third Century's pro
forma pricing ratios indicated a premium of 51.81% on a price-to-earnings basis
and a discount of 45.48% on a price-to-book basis at the mid-point of the
Estimated Valuation Range and a premium of 78.93% on a price-to-earnings basis
and a discount of 42.44% on a price to-book basis at the maximum of the
Estimated Valuation Range. The estimated appraised value and the resulting
premium/discount took into consideration the potential financial impact of the
conversion. As of December 31, 2003, thrifts located in Indiana had as a group a
price-to-earnings multiple of 22.66 and a price-to-book value ratio of 128.66%.
The following table presents a summary of selected pricing ratios for the
peer group companies and Third Century. This information is based on earnings
for the twelve months ended December 31, 2003, and book value as of December 31,
2003.
Pro forma Pro forma Pro forma
price-to-core price-to-book price-to-tangible
earnings multiple value ratio book value ratio
----------------- ------------- -----------------
Third Century
Minimum .................... 20.68x 63.06% 63.06%
Midpoint ................... 24.75 67.78 67.71
Maximum .................... 28.95 71.55 71.55
Valuation of peer group companies
as of December 31, 2003
Averages ................... 18.88x 124.31% 126.07%
Medians .................... 19.39 123.29 124.49
The $10.00 price per share was determined by our board of directors and is
the price most commonly used in stock offerings involving conversions of mutual
savings banks or associations. If the pro forma market value of the common stock
changes to either below $10,625,000 or above $16,531,250, we will notify you and
provide you with the opportunity to modify or cancel your order. See page 97.
Our directors and officers are expected to purchase in the aggregate
158,000 shares of the common stock at the same $10.00 purchase price to be paid
by all other subscribers in the offering. Assuming that 1,250,000 shares (the
midpoint of the estimated value range) of the common stock will be sold, the
158,000 shares to be purchased by the directors and officers would represent
12.6% of the shares sold in the offering. See "Proposed Purchases by Directors
and Executive Officers."
Shares of common stock sold in the conversion may trade at a premium
immediately following the offering. Based on information included in the
appraisal, the trading price of all FDIC-insured thrifts that completed their
conversions between January 1, 2003, and February 27, 2004 (the date of the
appraisal), increased an average of 31.76% on the first day of trading.
Termination of the Offering
The Subscription Offering will terminate at 12:00 p.m., Franklin time, on
June 14, 2004. The Direct Community Offering, if any, may terminate at any time
without notice but no later than July 29, 2004, without approval by the Indiana
Department of Financial Institutions.
Benefits to Management from the Offering
Mutual's full-time employees will participate in an employee stock
ownership plan, which is a form of retirement plan to which we plan to lend
enough money for it to purchase 8% of our shares issued to investors. We also
intend to implement a management recognition and retention plan (for 4% of the
shares issued in the conversion) and a stock option plan (reserving 10% of the
shares issued in the conversion) following completion of the conversion, which
will benefit our directors, directors emeriti and officers, in addition to other
employees. We intend to buy shares under the recognition and retention plan on
the open market. If we award shares under the stock option plan out of our
authorized but unissued shares of common stock, your ownership and voting
interests would be diluted by 9.1%, assuming the sale of 1,250,000 shares.
Assuming the sale of 1,062,500 shares, and giving no effect to the use of
proceeds received from the exercise of stock options, net income per share would
decrease by $.06 or 11.8%, and net income per share would decrease by $.04 or
10.8% if 1,437,500 shares are sold in the offering and the options are awarded
from authorized but unissued shares under the stock option plan. If we award
shares under the recognition and retention plan out of our authorized but
unissued shares of common stock, your ownership and voting interests would be
diluted by 3.8%, assuming the sale of 1,250,000 shares in the conversion. The
management recognition and retention plan and stock option plan
8
may not be adopted until at least six months after the conversion and are
subject to shareholder approval and compliance with the regulations of the
Federal Deposit Insurance Corporation. See pages 71 to 73.
If proposed changes to the accounting rules for stock options are adopted,
Third Century would be required to recognize an additional expense at the time
it grants the options. The following table estimates the fair value, and the
related pre-tax expense, of (1) options granted for 10% of the shares sold in
the conversion and (2) options expected to be granted to Third Century's
executive officers, for a range of stock prices at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Value Range as they would be
estimated pursuant to Statement of Financial Accounting Standards No. 123,
Accounting for Stock Based Compensation, as currently in effect.
15% Above
Minimum Midpoint Maximum Maximum
------- -------- ------- ---------
Fair value of total options granted:
------------------------------------
Options granted (10% of total
shares issued) 106,250 125,000 143,750 165,313
Date of grant fair value of options
based on stock price of: (1)
$8.00 $ 1.81 $ 1.81 $ 1.81 $ 1.81
$10.00 $ 2.27 $ 2.27 $ 2.27 $ 2.27
$12.00 $ 2.72 $ 2.72 $ 2.72 $ 2.72
Pre-tax expense to be recognized
over vesting period of options
based upon fair value at date
of grant of:
$8.00 $192,313 $226,250 $260,188 $299,217
$10.00 $241,188 $283,750 $326,313 $375,261
$12.00 $289,000 $340,000 $391,000 $449,651
9
Fair value of options granted
-----------------------------
to executive officers:
----------------------
15% Above
Minimum Midpoint Maximum Maximum
------- -------- ------- ---------
Number of options granted
(2.86% of total shares issued) 30,388 35,750 41,113 47,280
Fair value of options based on
stock prices of:
$8.00 $ 55,001 $ 64,708 $ 74,414 $ 85,576
$10.00 $ 68,980 $ 81,153 $ 93,325 $107,325
$12.00 $ 82,654 $ 97,240 $111,826 $128,600
----------------------
(1) The fair value is determined utilizing the Black-Scholes methodology with
the followings assumptions:
Risk free rate 4.25%
Volatility 7.00%
Dividend yield 1.36%
Expected life 10 years
The exercise price of the options will equal the market value of the shares at
the date of grant of the options.
We also have entered into three-year employment contracts with Robert D.
Heuchan, our President and Chief Executive Officer, and with David A. Coffey,
our Chief Operating Officer, in connection with the conversion. The employment
contracts provide for the payment of severance pay to Mr. Heuchan and Mr. Coffey
in an amount up to three times their annual salary in the event their employment
is terminated without cause following a change in control of Third Century
Bancorp. See page 67.
Use of the Proceeds Raised from the Sale of Common Stock
We will retain 50% of the net proceeds that remain after we pay expenses
incurred in connection with the conversion and will use the other 50% of the net
proceeds to purchase all of the capital stock to be issued by Mutual Savings
Bank. We intend to use a portion of the proceeds that we will retain to make a
loan to our employee stock ownership plan in the amount necessary to fund its
purchase of 8% of the common stock to be issued to investors in the conversion.
We will retain the balance of the net proceeds as a possible source of funds to
increase our net worth, support future deposit growth, increase the amount of
funds available for real estate-based and other lending, provide greater
resources for possible branching and the expansion of customer services or for
other general corporate purposes. On a short-term basis, both Third Century
Bancorp and Mutual Savings Bank may invest the net proceeds that they retain in
short- or intermediate-term investments. See pages 22 to 23.
Our Business Strategy
Our business strategy is to operate a well-capitalized, profitable and
independent community savings bank dedicated to offering a variety of banking
services with an emphasis on personal services. Our banking services include:
o Residential lending
o Commercial lending
o Consumer lending
o Deposit services
o Trust services
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We have sought to implement this strategy by:
o Pursuing opportunities to expand our asset and deposit bases
o Increasing the origination of one- to four-family residential mortgage
loans in our market area of Johnson County
o Increasing commercial and consumer lending in Johnson County
o Maintaining levels of capital well in excess of regulatory
requirements
We currently have not adopted a policy regarding the payment of dividends,
if any, on our outstanding shares of common stock. If we do decide to pay
dividends following completion of the conversion, the payment of dividends will
depend on a number of factors. These factors include the amount of the net
proceeds we retain in the conversion and the investment opportunities available
for those proceeds. Other factors include the financial condition and results of
operations of Third Century Bancorp and Mutual Savings Bank, tax considerations,
statutory and regulatory limitations, capital requirements and general economic
conditions. There can be no assurances that we will in fact pay dividends on the
common stock, or that we will not in future periods reduce or eliminate any
dividends that we elect to pay. See pages 23 to 24.
Market for the Common Stock
Keefe, Bruyette & Woods intends to apply for and maintain quotation for the
common stock over-the-counter through the OTC "Electronic Bulletin Board." Since
the size of the offering is relatively small, it is unlikely that an active and
liquid trading market for the shares will develop and be maintained. The common
stock may not be appropriate as a short-term investment. If you purchase shares,
you may not be able to sell them when you want to at a price that is equal to or
more than the price you paid. See page 24.
Important Risks in Owning Third Century Bancorp's Common Stock
Before you decide to purchase stock in the offering, you should read the
Risk Factors section on pages 12 to 15 of this document.
How You May Obtain Additional Information Regarding the Stock Offering
If you have any questions regarding the stock offering or the conversion,
please call the Stock Information Center at (317) 736-7492 Monday through Friday
between 8:30 a.m. and 4:30 p.m. Franklin, Indiana time.
11
RISK FACTORS
Before investing in shares of the common stock offered by this Prospectus,
prospective investors should consider carefully the matters presented below.
Mutual's Commercial Real Estate, Commercial Business, Construction and Consumer
Loans Expose It to Increased Credit Risk
At December 31, 2003, only $56.1 million, or 57.25%, of Mutual's total
loans were one- to four-family real estate mortgage loans. As of that date,
Mutual's portfolio of commercial real estate loans totaled $15.6 million, or
15.88%, of total loans; its portfolio of commercial business loans totaled $7.1
million, or 7.21%, of total loans; its portfolio of residential and commercial
construction loans totaled $5.4 million, or 5.46%, of total loans; and its
portfolio of consumer loans totaled $9.3 million, or 9.51%, of total loans.
Commercial real estate, commercial business and construction loans generally
involve a higher degree of credit risk compared to first mortgage loans on one-
to four-family, owner-occupied residential properties because the repayment of
the loans often depends on the successful business operations of the borrowers.
Consumer lending also is generally considered to have a higher degree of credit
risk than long-term financing of residential real estate because the loans are
collateralized, if at all, with assets that may not provide an adequate source
of payment of the loans due to depreciation, damage or loss.
Mutual's portfolio of commercial and construction loans and to a lesser
extent consumer loans is relatively unseasoned. Although net charge-offs for
these loans were only $6,000 and $14,000 for 2003 and 2002, nonperforming
commercial, construction and consumer loans increased from $154,000 at December
31, 2002, to $359,000 at December 31, 2003, and substandard loans in these loan
categories increased from $133,000 to $1.8 million during 2003. Because of the
increase in these loan types and related substandard loans, Mutual added
$251,000 to the allowance for loan losses during 2003 for these loans.
For further information concerning the risks associated with commercial
real estate, commercial business, construction and consumer loans, see "Business
of Mutual Savings Bank - Lending Activities" and "- Non-Performing and Problem
Assets."
Changes in Interest Rates Could Adversely Affect Our Earnings
Our ability to make a profit, like that of most financial institutions,
substantially depends upon Mutual's net interest income, which is the difference
between the interest income Mutual earns on interest-earning assets, such as
mortgage loans, and the interest expense it pays on interest-bearing
liabilities, such as deposits. Because interest rates on deposit liabilities
generally re-price more quickly than the interest rates on fixed-rate loans,
Mutual's net interest income generally improves during periods of declining
interest rates and decreases during periods of rising interest rates. In an
environment of decreasing interest rates, however, the average life of the loans
in Mutual's portfolio may decrease as the result of borrowers refinancing their
mortgage loans to reduce their borrowing costs. Under these circumstances,
Mutual is subject to reinvestment risk to the extent that it is not able to
reinvest such prepayments at rates which are comparable to the rates that Mutual
previously earned on the prepaid loans or securities. Further, during periods of
rapidly declining interest rates, Mutual's interest expense may adjust more
slowly in the short term than its interest income because a majority of its
deposit accounts consist of certificates of deposit that have fixed terms and
generally higher interest rates than its other deposit products, while its
adjustable-rate mortgage loans may adjust as frequently as every six months.
Mutual uses the net portfolio value methodology as part of its efforts to
monitor and manage interest rate risk. For example, if Mutual had experienced an
immediate 300 basis point increase in interest rates as of March 31, 2004, under
the net portfolio method, we estimate that Mutual's net portfolio value would
have decreased by 2.16% and that in the event of an immediate 75 basis point
12
decrease in interest rates the net portfolio value would have decreased 0.35%.
This would not have been in compliance with Mutual's interest rate policy and
Mutual is taking steps to bring itself into compliance with that policy. See
"Management's Discussion and Analysis of Financial Condition or Plan of
Operation--Asset/Liability Management" and "Recent Developments--Asset/Liability
Management."
The Future Price of Our Stock May Be Less than the Purchase Price in the
Offering
The shares of common stock offered by this Prospectus are not savings
accounts or deposits, are not insured or guaranteed by the Federal Deposit
Insurance Corporation (the "FDIC"), the Savings Association Insurance Fund or
any other governmental agency, and involve investment risk, including the
possible loss of principal. Due to various factors, including certain risk
factors discussed in this document, we cannot assure you that, following the
conversion, the trading price of our common stock will be at or above the
initial per share offering price. Publicly traded stocks, including stocks of
financial institutions, have recently experienced substantial market price
volatility. These market fluctuations may be unrelated to the operating
performance of particular companies whose shares are traded. The purchase price
of our common stock in the offering is based on the independent appraisal by
Keller & Company. After our shares begin trading, the trading price of our
common stock will be determined by the marketplace and may be influenced by many
factors, including prevailing interest rates, investor perceptions and general
industry and economic conditions.
We have never issued common stock to the public. Consequently, there is no
established market for the common stock. Even though Keefe Bruyette & Woods
intends to apply for and maintain quotation of the common stock on the OTC
"Electronic Bulletin Board," there can be no guarantee that an active trading
market will develop and be maintained. If an active market does not develop, you
may not be able to sell your shares promptly or perhaps at all, or sell your
shares at a price equal to or above the price you paid for the shares. The
common stock may not be appropriate as a short-term investment. See "Market for
the Common Stock."
Our Return on Stockholders' Equity Will Be Reduced as a Result of the Offering
and Could Negatively Impact the Price of Our Stock.
Net income divided by average stockholders' equity, known as "return on
equity," is a ratio many investors use to compare the performance of a financial
institution with its peers. Mutual's return on equity historically has been
below that of its peers. The proceeds we receive in the conversion will
significantly increase our capital and it will take time for us to use this
capital in our business operations. Our compensation expenses also will increase
because of the costs associated with the employee stock ownership plan and
stock-based incentive plans. We expect our return on equity to decrease
following the conversion as compared to our performance in recent years until we
are able to leverage the additional capital raised in the offering. Therefore,
until we can increase our income, we expect our return on equity to continue to
be below historical levels and below our peers, which may negatively affect the
value of our common stock. At December 31, 2003, our return on average equity
was 6.22% while the return on average equity of our peer group was 7.06%. As of
December 31, 2003, our pro forma return on average equity assuming the issuance
of 1,250,000 shares at the midpoint of the Offering Range (and assuming that
equity of $18,462,000 is average equity) was 2.56%.
Competition in Our Primary Market Area May Limit Our Growth and Profitability
Mutual faces increasingly stronger competition in its primary market area
from state and federal banks, a federal savings association, credit unions and
certain nonbanking consumer lenders currently in the market area, and from new
entrants into the market area. Mutual also faces competition from mutual funds
and brokerage and investment banking firms operating locally and elsewhere. Many
of these competitors have substantially greater resources than are available to
us and may offer services that we do
13
not or cannot provide. According to the FDIC Market Share Report (available at
www2.fdic.gov/sod) based on the amount of deposits held on June 30, 2003 (the
most recent date for which information is available), Mutual Savings Bank held
6.45% of the deposits held by the FDIC-insured institutions in Johnson County,
Indiana, and 0.33% of the deposits held by such institutions in the Indianapolis
Metropolitan Statistical Area. The competitive environment for both loans and
deposits may limit Mutual's ability to significantly increase its market share
in its primary market area and to leverage quickly the net proceeds we receive
in this offering. As a result, Mutual's return on equity in the near term is
likely to be modest or could even decline from present levels because we likely
will invest a large portion of the net proceeds of the offering in short- or
intermediate-term investment securities. These types of investments generally
carry a lower yield than residential mortgage loans. Any increase in the
proportion of our assets consisting of these securities would adversely affect
Mutual's asset yield and interest rate spread. See "Competition."
We Intend to Remain Independent Which May Mean You Will Not Receive a Premium
for Your Common Stock
We intend to remain independent for the foreseeable future. Because we do
not plan on seeking possible acquirors, it is unlikely that we will be acquired
in the foreseeable future. Accordingly, you should not purchase our common stock
with any expectation that a takeover premium will be paid to you in the near
term.
Our Stock Value May Suffer from Our Ability to Impede Potential Takeovers
Provisions in our articles of incorporation and bylaws, the corporation law
of the state of Indiana, the Indiana Financial Institutions Act, and certain
federal regulations may make it difficult and expensive to pursue a tender
offer, change in control or takeover attempt that our management opposes. As a
result, shareholders who might desire to participate in such a transaction may
not have an opportunity to do so. Such provisions will also render the removal
of our current board of directors or management, or the appointment of new
directors to the board, more difficult. For example, our by-laws provide that
directors must be residents of Johnson County or Bartholomew County, Indiana,
must have maintained a deposit or loan relationship with us for at least nine
months prior to their nomination to the Board (or in the case of existing
directors, prior to March 16, 2004), and, with respect to a non-employee
director, must have served as a member of a civic or community organization in
Johnson County for at least 12 months in the five-year period prior to being
nominated to the board. Our board may waive one or more of these requirements
for new directors appointed in connection with the acquisition of another
financial institution or the acquisition or opening of a new branch. Further
restrictions include: restrictions on the acquisition of our equity securities
and limitations on voting rights; certain provisions relating to meetings of
shareholders; denial of cumulative voting by shareholders in the election of
directors; the issuance of preferred stock and additional shares of common stock
without shareholder approval; and super majority provisions for the approval of
certain business combinations. In addition, our articles of incorporation
provide for the classification of the terms of the members of the board of
directors. The Indiana Business Corporation Law provides that the terms of
initial directors of a corporation expire at the first shareholders' meeting at
which directors are elected even if the corporation's articles of incorporation
provide for a classified board. Therefore, at the first shareholders' meeting,
shareholders will be voting on the election of five director nominees to serve
terms ranging from one to three years. These provisions may adversely affect the
trading price of our stock. See "Restrictions on Acquisition of Third Century
Bancorp."
Expected Voting Control by Directors and Officers Could Impede Potential
Takeovers
Our directors and executive officers intend to subscribe for 158,000 shares
of common stock which, at the midpoint of the Estimated Valuation Range, would
constitute 12.6% of the outstanding shares.
14
These shares purchased by our management will count toward the minimum number of
shares we must sell in this offering. When aggregated with the shares of common
stock our executive officers and directors expect to acquire through the stock
option plan and recognition and retention plan, subject to shareholder approval
at the first shareholder meeting following the conversion, our executive
officers and directors would own approximately 272,075 shares of common stock,
or 20.56% of the outstanding shares at the midpoint of the Estimated Valuation
Range (assuming that shares issued pursuant to the recognition and retention
plan are acquired on the open market and shares issued pursuant to the stock
option plan are issued from authorized but unissued shares). This ownership of
common stock by our management could make it difficult to obtain majority
support for shareholder proposals that are opposed by management. In addition,
by voting these shares, our management could likely block the approval of
transactions requiring the approval of 80% or more of the shareholders. Examples
of transactions that could be blocked include certain business combinations or
amendments to our articles of incorporation. See "Proposed Purchases by
Directors and Executive Officers," "Executive Compensation and Related
Transactions," "Description of Capital Stock," and "Restrictions on Acquisition
of Third Century Bancorp."
The Implementation of Stock-based Employee Benefit Plans Will Increase Future
Compensation Expense, Reduce Earnings and Cause Dilution
If the conversion is completed and shareholders approve the recognition and
retention plan and stock option plan, we intend to issue shares to our officers
and other employees and our directors through these plans. It is anticipated
that shares for the recognition and retention plan will be acquired on the open
market. If the shares for the stock option plan are issued from our authorized
but unissued stock, your voting control could be diluted by up to approximately
9.1% at the midpoint of the Estimated Valuation Range. We also have established
an employee stock ownership plan for employees of Mutual. We plan to loan the
employee stock ownership plan the amount it needs to purchase 8% of the shares
issued to investors in the conversion. If insufficient shares are available
after filling the subscriptions of Eligible Account Holders, the employee stock
ownership plan may purchase all or some of its shares following the conversion
in the open market or in private transactions. The subsequent purchase of shares
in the open market or in private transactions rather than in the conversion is
likely to increase the amount of the loan that we make to the employee stock
ownership plan. These plans will increase our future costs of compensating our
officers, employees and directors, thereby reducing our earnings. See "Pro Forma
Data" and "Executive Compensation and Related Transactions."
A Delay in Completing the Conversion Could Significantly Increase Our Costs
Although we expect to complete the conversion within the time periods
indicated in this Prospectus, it is possible that adverse market, economic or
other factors could significantly delay the completion of the conversion, which
could significantly increase our conversion costs. In this case, however, you
would have the right to modify or rescind your subscription and to have your
subscription funds returned to you promptly, with interest. In the event that
the conversion is not completed, Mutual will remain a mutual savings bank, and
all subscription funds will be promptly returned to subscribers, with interest.
See "The Conversion."
A Determination by the Internal Revenue Service that Subscription Rights Are
Taxable Could Increase Your Taxable Income
If the Internal Revenue Service were to determine that the subscription
rights offered to you in connection with the conversion have an ascertainable
value, your exercise of your subscription rights could result in the recognition
of taxable income. In the opinion of Keller & Company, however, the subscription
rights do not have an ascertainable fair market value. See "The Conversion --
Principal Effects of Conversion -- Tax Effects."
15
A Downturn in the Indiana Economy May Adversely Affect Our Earnings
At December 31, 2003, substantially all of our real estate mortgage loans
were secured by properties located in Indiana. A substantial portion of such
loans is located in our primary market area of Johnson County. The local
economic conditions in our market area have a significant impact on the ability
of the borrowers to repay loans and the value of the collateral securing these
loans. A significant decline in general economic conditions caused by inflation,
recession, unemployment or other factors beyond our control would affect these
local economic conditions. While we currently believe that Mutual's loans are
adequately secured or reserved for, in the event that real estate prices in
Johnson County substantially weaken or economic conditions in our primary market
area deteriorate, reducing the value of properties securing Mutual's loans, it
is possible both that some borrowers may default and that the value of the real
estate collateral may be insufficient to fully secure the loans. In either
event, Mutual may experience increased levels of delinquencies and related
losses having an adverse impact on net income.
RECENT DEVELOPMENTS
The following tables contain certain information concerning the financial
position and results of operations of Mutual Savings Bank at the date and for
the periods indicated. The data presented at March 31, 2004 and 2003 and for the
three month periods then ended are derived from unaudited condensed consolidated
financial statements but, in the opinion of management, reflect all adjustments
necessary to present fairly the results for these interim periods. These
adjustments consist only of normal recurring adjustments. The information set
forth below does not purport to be complete and should be read in conjunction
with, and is qualified in its entirety by, our financial statements and related
notes beginning on page F-1. The results of operations for the three months
ended March 31, 2004 are not necessarily indicative of the results of operations
that may be expected for the year ended December 31, 2004.
At At
March 31, December 31,
2004 2003
--------- ------------
(In Thousands)
Summary of Financial Condition Data:
Total assets ................................................... $106,994 $106,561
Loans receivable ............................................... 94,312 98,010
Allowance for loan losses ...................................... (1,033) (1,055)
-------- --------
Net loans receivable ........................................... 93,279 96,955
Cash and cash equivalents ...................................... 7,350 4,739
Securities to be held to maturity .............................. 1,699 689
FHLB advances .................................................. 17,000 19,500
Deposits ....................................................... 81,282 78,708
Retained Earnings-substantially restricted ..................... 8,158 8,040
16
For the Three Months
Ended March 31,
--------------------------
2004 2003
------ ------
Summary of Operating Data:
Total interest income .......................................... $1,474 $1,469
Total interest expense ......................................... 466 493
------ ------
Net interest income ......................................... 1,008 976
Provision for loan losses ...................................... 12 --
------ ------
Net interest income after provision for loan loss ........... 996 976
Noninterest income:
Service charges on deposit accounts ......................... 53 42
Other service charges and fees .............................. 47 71
Net gains on loan sales ..................................... 50 11
Other ....................................................... 52 44
------ ------
Total noninterest income ................................. 202 168
------ ------
Noninterest expense:
Salaries and employee benefits .............................. 561 484
Net occupancy and equipment expense ......................... 116 100
Data processing fees ........................................ 97 102
Service bureau conversion expense ........................... (11) 15
Other ....................................................... 211 184
------ ------
Total noninterest expense ................................ 974 885
------ ------
Income before income taxes ..................................... 224 259
Income tax expense ............................................. 106 97
------ ------
Net income ............................................... $118 $162
====== ======
Supplemental Data:
Interest rate spread during period ............................. 3.61% 3.81%
Net yield on interest-earning assets (1) ....................... 3.83 4.05
Return on assets (2) ........................................... .44 0.65
Return on equity (3) ........................................... 5.76 8.44
Equity to assets (4) ........................................... 7.62 7.68
Average interest-earning assets to average interest-bearing
liabilities ................................................. 112.47 111.85%
Non-performing assets to total assets (4) ...................... .47 0.31
Allowance for loan losses to total loans outstanding (4) ....... 1.10 1.01
Allowance for loan losses to non-performing loans (4) .......... 662.18 276.28
Net charge-offs to average total loans outstanding ............. 0.03 0.02
Other expenses to average assets ............................... 3.60 3.57
Number of full service offices (4) ............................. 6 6
--------------------------
(1) Net interest income divided by average interest-earning assets.
(2) Net income divided by average total assets.
(3) Net income divided by average total equity.
(4) At end of period.
(5) Other expenses divided by average assets.
17
Comparison of Financial Condition at March 31, 2004 and December 31, 2003.
Total assets increased $433,000 or 0.40% to $107.0 million at March 31,
2004 from $106.6 million at December 31, 2003. The growth in total assets was
primarily due to increases in our cash and cash equivalents by $2.6 million and
investments held to maturity by $1.0 million. The growth in total assets was
funded by the increase in deposits outstanding by $2.5 million and the sale of
$2.9 million in fixed-rate mortgages to the secondary market. Currently, Mutual
is selling all fixed rate mortgage loans with terms of 15 years or more. During
the first quarter of 2004, Mutual adopted a policy that if an applicant applies
for a first mortgage loan of 15 years or longer and it is determined that a
fixed-rate loan made to that applicant would not qualify for sale to the
secondary market, then Mutual will offer the applicant only an adjustable rate
mortgage product.
Retained earnings at March 31, 2004 increased to $8.1 million as compared
to $8.0 million at December 31, 2003. The change consisted of Mutual's net
income for the three months ended March 31, 2004 of $118,000.
Comparison of Operating Results for the Quarters Ended March 31, 2004 and March
31, 2003.
General. Net income for the quarter ended March 31, 2004 was $118,000
compared to a net income of $162,000 for the quarter ended March 31, 2003. The
decrease was primarily the result of an increase of $77,000 in salaries and
employee benefits which was offset by an increase in noninterest income of
$34,000. See below for more details regarding these fluctuations.
Interest Income. Interest income for the quarter ended March 31, 2004, and
the quarter ended March 31, 2003, was held at $1.5 million compared to interest
income for the quarter ended March 31, 2003. The lack of change was primarily
the result of an increase in the average balance of interest earning assets to
$105.3 million for the quarter ended March 31, 2004 from $96.2 million for the
quarter ended March 31, 2003. The average yield earned on interest-earning
assets decreased 51 basis points to 5.60% for the quarter ended March 31, 2004
from 6.11% for the same period last year.
Interest Expense. Interest expense for the quarter ended March 31, 2004 was
$466,000 compared to $493,000 for the quarter ended March 31, 2003, a decrease
of $27,000 or 5.48%. The decrease in interest expense was primarily the result
of an increase in the average balance of interest-bearing liabilities of $93.6
million for the quarter ended March 31, 2004 from $86.0 million for the quarter
ended March 31, 2003. The average cost of funds on interest-bearing liabilities
decreased 30 basis points to 1.99% for the quarter ended March 31, 2004 from
2.29% for the same period last year.
Net Interest Income. Net interest income of $1.0 million for the quarter
ended March 31, 2004 reflects an increase of $32,000 or 3.28% from the same
period in 2003. The increase in net interest income was primarily the result of
the decrease in Mutual Savings Bank's interest-earning assets and
interest-earning liabilities. The net interest spread of 3.61% for the quarter
ended March 31, 2004 was a decrease from 3.81% for the quarter ended March 31,
2003. In addition, the net interest margin fell to 3.83% from 4.05% for the same
period.
Provision for Loan Losses. Mutual Savings Bank's provision for loan losses
for the quarter ended March 31, 2004 increased $12,000 while no provision was
made during the quarter ended March 31, 2003 primarily due to an increase in
loans outstanding and non-performing loans. In evaluating the adequacy of loan
loss allowances, management considers factors such as delinquency trends,
portfolio composition, past loss experience and other factors such as general
economic conditions. During the past year, Mutual Savings Bank's level of
nonperforming assets increased from $315,000 at March 31, 2003, to $508,000 at
March 31, 2004 and the percentage of nonperforming assets to total assets
increased from 0.31% to 0.47% for the same respective time periods. The increase
in nonperforming assets is due to a foreclosure in the first quarter of 2004 on
the commercial real estate property of $352,000 noted on the books as
non-performing as of December 31, 2003. At March 31, 2004 the allowance for loan
losses to nonperforming loans was 662.18% as compared to 276.28% at March 31,
2003.
18
Noninterest Income. Noninterest income for the quarter ended March 31, 2004
was $202,000 compared to $168,000 for the quarter ended March 31, 2003, an
increase of $34,000 or 20.24%. The increase in noninterest income was primarily
the result of a $39,000 increase in net gains on loan sales.
Noninterest Expense. Noninterest expense for the quarter ended March 31,
2004 was $974,000 compared to $885,000 for the same period last year, an
increase of $89,000 or 10.06%. The increase in noninterest expense was
attributable to a $77,000 increase in compensation and benefits and a $27,000
increase in other expense.
Income Taxes. Mutual recognized income tax expense of $106,000 for the
quarter ended March 31, 2004, as compared to $97,000 for the quarter ended March
31, 2003, which represents an increase in the effective tax rate from 37.45% to
47.32%.
Asset/Liability Management. The following table presents interest rate risk
information for Mutual as of March 31, 2004:
2004 2004
2004 Net Portfolio Value NPV as % of PV of Assets
Change in -------------------- 2004 ------------------------
Rates $ Amount $ Change % Change NPV Ratio Change
------------ -------- -------- -------- --------- ------
+300 bp* 5,472 (2,390) -30.4% 5.39% -2.16%
0 bp 7,862 7.10%
-75 bp 7,478 (384) -4.9% 6.66% -0.35%
Based upon the March 31, 2004, estimation, Mutual's net portfolio value
would decrease by 2.16% of assets in the event of an immediate 300 basis point
increase in interest rates and decrease 0.35% of assets in the event of an
immediate 75 basis point decrease in interest rates. Therefore, as of March 31,
2004, Mutual was not in compliance with its interest rate policy. Mutual also
was not in compliance with its interest rate policy at December 31, 2003.
Management views its present non-compliance with its interest rate policy
as a temporary situation. As part of its strategy to bring Mutual within
interest rate limits, Mutual has made changes in its mortgage pricing strategy
for mortgage loans not sold to the secondary market and has sold mortgage loans
in excess of $2.9 million to the Federal Home Loan Mortgage Corporation during
the first quarter of 2004. Although Mutual was not in compliance with its
interest rate policy as of March 31, 2004, it did decrease its interest rate
risk in the case of an immediate 300 basis point increase from 2.69% to 2.16% of
assets. Mutual sold loans and a percentage of the loan portfolio to total assets
declined during the first quarter of 2004. See "Management's Discussion and
Analysis or Plan of Operation--Asset/Liability Management."
Liquidity and Capital Resources. In the period December 31, 2003 to March
31, 2004, Mutual has seen a significant improvement in its liquidity levels.
This is the result of increased deposits and the sale of existing loans to the
secondary market. Total loans declined $3.7 million during the first quarter of
2004, due to the secondary market sales and payoffs in the commercial loan
department. Since the end of 2003, Mutual has paid off $2.5 million in Federal
Home Loan Bank advances, and management believes that liquidity and cash are at
reasonable levels.
Management does not expect the volume of mortgage lending experienced in
2003 to be equaled in 2004. The first reason for this is that Mutual is now
selling all loans mortgage loans of 15 years or longer that are eligible for
sale to the secondary market. Also, all first mortgage loans of 15 years or
longer that would not qualify for sale to the secondary market are now being
made using an adjustable rate mortgage product. Finally, recent increases in
interest rates have greatly reduced the level of refinancing that Mutual has
experienced in recent years. See "Management's Discussion and Analysis or Plan
of Operation--Liquidity and Capital Resources."
19
PROPOSED PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the intended purchases of common stock in
the conversion by each director and executive officer of Mutual Savings Bank and
their associates. All directors and executive officers will pay the same
purchase price of $10.00 per share as all subscribers and will be subject to the
same terms and conditions. In addition, directors and executive officers may not
re-sell the shares of common stock that they purchase in the conversion for at
least one year from the date of the conversion. All shares will be purchased for
investment purposes and not for purposes of resale. The table assumes that
1,250,000 shares (the midpoint of the estimated value range) of the common stock
will be sold at $10.00 per share. Shares purchased by management will count
towards the minimum number of shares that we must sell in this offering.
Aggregate Total Shares
Price of Proposed to
Intended be Subscribed Percent of
Name Position Purchases For (1) Shares (2)
--------------------------- -------------------------- --------- ------------- ----------
David A. Coffey Chief Operating Officer, $250,000 25,000 2.0%
Executive Vice
President and Director
Robert L Ellett Director $250,000 25,000 2.0%
Debra K. Harlow Chief Financial Officer $ 50,000 5,000 0.4%
Robert D. Heuchan President, Chief Executive $250,000 25,000 2.0%
Officer and Director
Jerry D. Petro Director $250,000 25,000 2.0%
Robert D. Schafstall Director $250,000 25,000 2.0%
David B. Ditmars Director Emeritus $ 25,000 2,500 0.2%
Sterling M. Haltom Director Emeritus $250,000 25,000 2.0%
Robert G. Smith Director Emeritus $ 5,000 500 0.04%
All Directors and
Executive Officers
as a group (9 persons)(3) 158,000 12.6%
----------------------
(1) Does not include shares subject to stock options that may be granted under
the stock option plan or shares that may be awarded under the recognition
and retention plan.
(2) Based upon the midpoint of the Estimated Valuation Range of 1,250,000
shares.
(3) Assuming that all shares awarded under the recognition and retention plan
are purchased on the open market and all shares subject to stock options
are issued from authorized but unissued shares, and upon (i) the full
vesting of the restricted stock awards to directors and executive officers
contemplated under the recognition and retention plan during the first year
following the conversion and (ii) the exercise in full of all options
expected to be granted to directors and executive officers under the stock
option plan during the first year following the conversion, all directors
and executive officers as a group would beneficially own 254,964 shares
(22.67%), 272,075 shares (20.56%), 289,187 shares (19.00%), and 308,864
shares (17.65%) upon sales at the minimum, midpoint, maximum, and 15% above
the maximum of the Estimated Valuation Range, respectively. See "Executive
Compensation and Related Transactions -- Recognition And Retention Plan"
and "-- Stock Option Plan."
20
THIRD CENTURY BANCORP
Third Century Bancorp was formed on March 15, 2004, as an Indiana
corporation to be the holding company for Mutual. Third Century Bancorp, which
is referred to at times in this Prospectus as "Third Century," has not engaged
in any significant business to date and, for that reason, its financial
statements are not included in this Prospectus. The holding company structure
will provide increased flexibility in conducting future business activities
related to Mutual. Prior to the closing of the conversion, Third Century must
receive the approval from the Federal Reserve Board to become a bank holding
company through the acquisition of all of the common stock of Mutual to be
issued upon completion of the conversion.
As an Indiana corporation, Third Century is authorized to engage in any
activity that is permitted by the Indiana Business Corporation Law, as amended.
The board of directors of Third Century anticipates that, after completion of
the conversion, Third Century will conduct its business initially as a bank
holding company and its activities will be limited to those permitted by Federal
Reserve Board regulations. The holding company structure will provide Third
Century with greater flexibility than Mutual to diversify its business
activities, either through newly-formed subsidiaries or through acquisitions.
Neither Mutual nor Third Century has any arrangements, discussions or
agreements, written or oral, regarding any such business activities or
acquisitions at this time. However, after the conversion Third Century will be
able to take advantage of favorable business or acquisition opportunities that
may arise. The assets of Third Century will initially consist of the common
stock of Mutual and 50% of the net proceeds of the conversion.
We intend to use a portion of the net proceeds of the conversion to make a
loan to the employee stock ownership plan in the amount needed to allow the
employee stock ownership plan to purchase 8% of the shares of common stock
issued to investors in the conversion. We may also use such funds for general
corporate purposes, including the payment of dividends and repurchases of shares
of our common stock in the future, subject to regulatory restrictions on
repurchases. Our activities will initially be funded from such net proceeds and
through future dividends from Mutual, which are subject to certain limitations.
See "Dividend Policy," "Regulation -- Dividend Limitations," "Use of Proceeds"
and "The Conversion--Restrictions on Repurchase of Stock by Third Century."
Our executive office is located at 80 East Jefferson Street, Franklin,
Indiana, 46131. Our telephone number is (317) 736-7151.
MUTUAL SAVINGS BANK
Mutual has been open in Franklin, Indiana for more than 114 years. 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
Saving Bank. Mutual's main office continues to be in Franklin, Indiana. We
believe that Mutual developed a solid reputation among its loyal customer base
because of its commitment to personal service and its strong support of the
local community. Mutual offers a variety of lending, deposit and other financial
services to its retail and commercial customers.
Mutual attracts deposits from the general public and primarily from
residents of Johnson County. Mutual originates loans secured generally by one-
to four-family residential real property in Johnson County and the surrounding
counties. Mutual also offers commercial real estate loans, commercial business
loans, construction loans and consumer loans. Mutual derives most of the funds
for its lending from deposits of its customers consisting primarily of
certificates of deposit, savings accounts and checking accounts.
21
Mutual has attained its good capital position by focusing on residential
real estate mortgages in Johnson County. At December 31, 2003, Mutual had total
assets of $106.6 million, deposits of $78.7 million and equity capital of $8.0
million. For the fiscal year ended December 31, 2003, Mutual had net income of
$495,000, a return on assets of 0.48% and a return on equity of 6.22%.
MARKET AREA
Mutual's primary market area for both lending and deposits is Johnson
County in central Indiana. Mutual's main office is located in Franklin, Indiana,
and Mutual has five other offices in Franklin and at other locations in Johnson
County. Mutual's offices in Franklin are on North Main Street and at the
Franklin United Methodist Community (retirement community) and the Indiana
Masonic Home (retirement community). Mutual also has offices in Trafalgar and
Nineveh. As of June 30, 2003, the most recent date for which information is
available, Mutual's share of deposits among Johnson County financial
institutions was 6.45%.
Franklin, the county seat of Johnson County, is approximately 20 miles
south of Indianapolis. According to the U.S. Bureau of Census, Franklin had a
population of 19,463, and Johnson County had a population of 115,209 at the time
of the 2000 census.
According to the Indiana Department of Workforce Development, the total
work force in Johnson County was 66,130 as of November 2003. As of the same
date, 63,800 persons were employed, resulting in an unemployment rate for
Johnson County of approximately 3.5%. As of the same date, the unemployment rate
for Indiana was 4.7%, and the nationwide unemployment rate was 5.9%.
Johnson County's largest employer with approximately 750 employees, is
Musicland/Best Buy, which distributes CDs, videos and cassettes. Johnson
County's second largest employer with approximately 550 employees, is Mitsubishi
Heavy Industry Climate Control, which manufactures air conditioning units.
USE OF PROCEEDS
We will retain 50% of the net proceeds that remain after we pay expenses
incurred in connection with the conversion and will use the other 50% of the net
proceeds to purchase all of the capital stock to be issued by Mutual. A portion
of the net proceeds we retain will be loaned to our employee stock ownership
plan to provide it with the amount needed to purchase of 8% of the shares sold
to investors in the conversion. On a short-term basis, the balance of the net
proceeds we retain initially may be invested in cash and short-term investments.
We may also use the proceeds as a source of funds to pay dividends, if any, to
shareholders or to repurchase shares of common stock, although we do not intend
to repurchase shares for one year following the conversion.
Mutual intends to use a portion of the net proceeds that it receives from
us to support its lending activities and deposit growth. Mutual also may use a
portion of the net proceeds to fund the purchase of up to 4% of our shares for
the recognition and retention plan, which it anticipates will be adopted by its
board following the conversion, subject to the approval of our shareholders. We
anticipate that Mutual will use the remainder of the net proceeds it receives
for general corporate purposes, including the possible repayment of Federal Home
Loan Bank advances and future branch expansion. On an interim basis, we may use
some of the net proceeds to invest in short- or intermediate-term U.S.
government securities and other federal agency securities. See "Business of
Mutual Savings Bank - Investments and Federal Home Loan Bank Stock." Neither
Third Century nor Mutual has any current intention to acquire any other
financial institutions or other entities.
22
The following table shows estimated gross and net proceeds based upon shares of
common stock being sold in the conversion at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range.
15% Above
Minimum Percentage Midpoint, Percentage Maximum, Percentage Maximum Percentage
1,062,500 of 1,250,000 of 1,437,500 of 1,653,125 of
Shares Gross Shares Gross Shares Gross Shares Gross
Sold at Proceeds Sold at Proceeds Sold at Proceeds Sold at Proceeds
Price of of Price of of Price of of Price of of
$10.00 $10,625 $10.00 $12,500 $10.00 $14,375 $10.00(1) $16,531
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Gross Proceeds $10,625 100.0% $12,500 100.0% $14,375 100.0% $16,531 100.0%
Less:
Estimated Underwriting
Commissions and
Other Expenses (2) (542) (5.1%) (578) (4.6%) (598) (4.2%) (630) (4.2%)
------- ----- ------- ------ ------- ----- ------- -----
Estimated net conversion
proceeds (2) 10,083 94.9% 11,922 95.4% 13,777 95.8% 15,901 95.8%
Less:
Purchase of 100% of
capital stock of Bank (5,042) (47.5%) (5,961) (47.7%) (6,889) (47.9%) (7,951) (47.9%)
Loan to employee stock
ownership plan (850) (8.0%) (1,000) (8.0%) (1,150) (8.0%) (1,322) (8.0%)
------- ----- ------- ------ ------- ----- ------- -----
Net proceeds retained by
Third Century Bancorp $ 4,191 39.4% $ 4,961 39.7% $ 5,738 39.9% $ 6,628 39.9%
======= ===== ======= ====== ======= ===== ======= =====
--------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to
15% to reflect changes in market and financial conditions following the
commencement of the Subscription Offering and the Direct Community
Offering, if any.
(2) In calculating estimated net conversion proceeds, it has been assumed that
no sales will be made through selected dealers.
The actual net proceeds may differ from the estimated net proceeds
calculated above for various reasons, including variances in the actual amount
of legal and accounting expenses incurred in connection with the conversion,
commissions paid for any sales made through other dealers, and the actual number
of shares of common stock sold in the conversion. Any variance in the actual net
proceeds from the estimates provided in the table above is not expected to be
material.
DIVIDEND POLICY
Upon conversion, our board of directors will have the authority to declare
dividends on the common stock, subject to statutory and regulatory requirements.
The board of directors may consider a policy of paying cash dividends on the
common stock in the future. However, no decision has been made as to the amount
or timing of any such dividends. The declaration and payment of dividends, if
any, will depend upon a number of factors, including our then-current and
projected consolidated operating results and financial condition, regulatory
restrictions, future growth plans and such other factors as the board of
directors deems relevant.
After the conversion, Mutual will be the sole direct subsidiary of Third
Century. Initially, Third Century will have no independent operations or other
subsidiaries to generate income. Consequently, other than the net proceeds of
the conversion that we will retain (after funding the loan to the employee stock
ownership plan) and repayments of the employee stock ownership plan loan, our
ability to
23
accumulate earnings for the payment of cash dividends to our shareholders or
possible repurchases of shares of common stock will depend upon the ability of
Mutual to pay dividends to us.
In connection with the conversion, Mutual will establish a liquidation
account which will serve to protect Eligible Account Holders and Supplemental
Eligible Account Holders in the unlikely event of a liquidation of Mutual.
Mutual will not pay dividends to Third Century to the extent the liquidation
account would be impaired. The balance of the liquidation account will initially
be $8,158,000 and will gradually decline. See "The Conversion -- Principal
Effects of Conversion -- Effect on Liquidation Rights." In addition, the extent
to which Mutual may pay dividends or make capital distributions is subject to
other regulatory restrictions. See "Regulation -- Dividend Limitations."
Income of Mutual appropriated to bad debt reserves and deducted from gross
income for federal income tax purposes is not available for payment of cash
dividends or other distributions to Third Century without the payment of federal
income taxes by Mutual at the then-current income tax rate on the amount deemed
distributed, which would include the amount of any federal income taxes
attributable to the distribution. See "Taxation--Federal Taxation" and the Notes
to Consolidated Financial Statements beginning on page F-8. We do not
contemplate any distribution by Mutual that would result in a recapture of its
bad debt reserve or otherwise create federal tax liabilities.
Generally, there is no regulatory restriction on the payment of dividends
by Third Century. 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.
Indiana law, however, would prohibit Third Century from paying a dividend, if,
after giving effect to the payment of that dividend, Third Century would not be
able to pay its debts as they become due in the usual course of business or
Third Century's total assets would be less than the sum of its total liabilities
plus preferential rights of holders of preferred stock, if any. See "Regulation
-- Dividend Limitations."
MARKET FOR THE COMMON STOCK
Third Century has never issued common stock to the public. Consequently,
there is no established market for the common stock. Keefe, Bruyette & Woods,
Inc. intends to apply for and maintain quotation of the common stock
over-the-counter on the OTC "Electronic Bulletin Board" upon the successful
closing of the offering, and Third Century intends to request that Keefe,
Bruyette & Woods, Inc. undertake to match offers to buy and offers to sell the
common stock. There can be no assurance that timely or accurate quotations will
be available on the OTC "Electronic Bulletin Board."
The existence of a public trading market will depend upon the presence in
the market of both willing buyers and willing sellers at any given time. The
presence of a sufficient number of buyers and sellers at any given time is a
factor over which neither Third Century nor any broker or dealer has control.
Although the shares issued in the conversion are expected to be traded on the
OTC "Electronic Bulletin Board," there can be no guarantee that an active or
liquid trading market for the common stock will be developed and be maintained.
Further, the absence of an active and liquid trading market may make it
difficult to sell the common stock and may have an adverse effect on the price
of the common stock. Purchasers should consider the potentially illiquid and
long-term nature of their investment in the shares offered hereby.
The aggregate price of the common stock is based upon an independent
appraisal of the pro forma market value of the common stock. However, there can
be no assurance that an investor will be able to sell the common stock purchased
in the conversion at or above $10.00 per share.
24
COMPETITION
Mutual originates most of its loans to and accepts most of its deposits
from residents of Johnson County, Indiana, and the counties surrounding Johnson
County. Mutual is subject to competition from various financial institutions,
including state and federal banks and a federal savings association, and credit
unions and certain nonbanking consumer lenders that provide similar services in
those counties with significantly greater resources than are available to us.
Fourteen banks, one savings association and two credit unions are located in
Johnson County. We also compete with money market funds with respect to deposit
accounts and with insurance companies with respect to individual retirement
accounts.
The primary factors influencing competition for deposits are interest
rates, service and convenience of office locations. Mutual competes for loan
originations primarily through the efficiency and quality of the services that
it provides borrowers and through interest rates and loan fees charged.
Competition is affected by, among other things, the general availability of
lendable funds, general and local economic conditions, current interest rate
levels, and other factors that we cannot readily predict.
CAPITALIZATION
The following table presents the historical capitalization of Mutual at
December 31, 2003, and the pro forma consolidated capitalization of Third
Century as of that date, giving effect to the sale of common stock offered by
this Prospectus based on the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range, and subject to the other assumptions
set forth below. The pro forma data set forth below may change significantly at
the time Third Century completes the conversion due to, among other factors, a
change in the Estimated Valuation Range for the shares or a change in the
current estimated expenses of the conversion. If the Estimated Valuation Range
changes so that between 1,062,500 and 1,653,125 shares are not sold in the
conversion, subscriptions will be returned to subscribers who do not
affirmatively elect to continue their subscriptions during the offering at the
revised Estimated Valuation Range.
25
At December 31, 2003
------------------------------------------------------
Pro Forma Holding Company
Capitalization Based on Sale of
------------------------------------------------------
1,062,500 1,250,000 1,437,500 1,653,125
Shares Shares Shares Shares
Sold at Sold at Sold at Sold at
Bank Price of Price of Price of Price of
Historical $10.00 $10.00 $10.00 $10.00
----------------------------------------------------------------------
(In thousands, except share data)
Deposits (2) ...................... $78,708 $78,708 $78,708 $78,708 $78,708
Federal Home Loan Bank advances ... $19,500 $19,500 $19,500 $19,500 $19,500
Equity Capital:
Preferred stock, without par
value, 2,000,000 shares
authorized, none issued ..... $ -- $ -- $ -- $ -- $ --
Common stock, without par
value, 20,000,000 shares
authorized:
sold in conversion (3) ... -- 10,083 11,922 13,777 15,901
Equity capital (4) .......... 8,040 8,040 8,040 8,040 8,040
Common stock acquired by
employee stock ownership
plan (5) .................... -- (850) (1,000) (1,150) (1,322)
Common stock acquired by
the recognition and retention
plan (6) .................... -- (425) (500) (575) (661)
Equity Capital .................... $ 8,040 $16,848 $18,462 $20,092 $21,958
-----------------------
(1) As adjusted to give effect to an increase in the number of shares which could occur due to an
increase in the Estimated Valuation Range of up to 15% to reflect changes in market and financial
conditions following the commencement of the Subscription Offering and Direct Community Offering,
if any.
(2) Excludes accrued interest. Withdrawals from deposit accounts for the purchase of common stock are
not reflected. Such withdrawals will reduce pro forma deposits by the amount thereof.
(3) The number of shares to be issued in the conversion may be increased or decreased based on market
and financial conditions prior to the completion of the conversion. Assumes estimated expenses of
$542,000, $578,000, $598,000 and $630,000 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range. See "Use of Proceeds."
(4) Equity capital is substantially restricted. See Notes to the Consolidated Financial Statements. See
also "The Conversion -- Principal Effects of Conversion -- Effect on Liquidation Rights." Equity
capital does not reflect the federal income tax consequences of the restoration to income of
Mutual's special bad debt reserve for income tax purposes which would be required in the unlikely
event of a liquidation or if a substantial portion of equity capital were otherwise used for a
purpose other than absorption of bad debt losses and are required as to post-1987 reserves. See
"Taxation -- Federal Taxation."
(5) Assumes purchases by the employee stock ownership plan of a number of shares equal to 8% of the
shares sold in the conversion. The funds used to acquire the employee stock ownership plan shares
will be borrowed from Third Century. See "Use of Proceeds." Mutual intends to make contributions to
the employee stock ownership plan sufficient to service and ultimately retire its debt. The common
stock acquired by the employee stock ownership plan is reflected as a reduction of equity capital.
See "Executive Compensation and Related Transactions -- Employee Stock Ownership Plan and Trust."
(6) Assuming the receipt of shareholder approval, Third Century intends to implement the recognition
and retention plan. Assuming such implementation, the recognition and retention plan will purchase
an amount of shares equal to 4% of the common stock sold in the conversion. Such shares may be
purchased from authorized but unissued shares or on the open market. Third Century currently
intends that the recognition and retention plan will purchase the shares on the open market. Under
the terms of the recognition and retention plan, assuming it is adopted within one year of the
conversion, shares will
26
vest at the rate of 20% per year. The common stock to be purchased by the
recognition and retention plan represents unearned compensation and is,
accordingly, reflected as a reduction to pro forma equity capital. As
shares of the common stock granted pursuant to the recognition and
retention plan vest, a corresponding reduction in the charge against
capital will occur. In the event that authorized but unissued shares are
acquired, the interests of existing shareholders will be diluted. Assuming
that 1,250,000 shares of common stock are issued in the conversion, the
midpoint of the estimated valuation range, and that all awards under the
recognition and retention plan are from authorized but unissued shares,
Third Century estimates that the per share book value for the common stock
would be diluted $.57 per share, or 3.9% on a pro forma basis as of
December 31, 2003. The dilution would be $.61 per share (3.8%) and $.53 per
share (3.8%) at the minimum and maximum levels, respectively, of the
estimated valuation range on a pro forma basis as of December 31, 2003.
PRO FORMA DATA
We estimate that we will receive net conversion proceeds in an amount
ranging from $10.1 million to $15.9 million. This estimate assumes that all
shares of common stock are sold in the Subscription Offering. The following
tables set forth the pro forma combined consolidated net income of Third Century
for the year ended December 31, 2003, as though the conversion offering had been
consummated at the beginning of that period and the investable net proceeds had
been invested at 1.25% for the year ended December 31, 2003. The actual net
proceeds to Third Century from the sale of common stock cannot be determined
until the conversion is completed. Pro forma yield has been calculated assuming
a yield based on one-year U.S. government securities. The pro forma after-tax
return for Third Century on a consolidated basis is assumed to be .75% for the
year ended December 31, 2003, after giving effect to (i) the yield on investable
net proceeds from the conversion offering and (ii) adjusting for taxes using a
federal statutory tax rate of 34% and a net state statutory income tax rate of
6%. Historical and per share amounts have been calculated by dividing historical
amounts and pro forma amounts by the indicated number of shares of common stock,
as adjusted to give effect to the shares purchased by the employee stock
ownership plan, assuming that such number of shares had been outstanding during
each of the entire periods.
Book value represents the difference between the stated amount of
consolidated assets and consolidated liabilities of Third Century computed in
accordance with generally accepted accounting principles. Book value does not
necessarily reflect current market value of assets and liabilities, or the
amounts, if any, that would be available for distribution to shareholders in the
event of liquidation. See "The Conversion -- Principal Effects of Conversion --
Effect on Liquidation Rights." Book value also does not reflect the federal
income tax consequences of the restoration to income of our special bad debt
reserves for income tax purposes, which would be required in the unlikely event
of liquidation or if a substantial portion of retained earnings were otherwise
used for a purpose other than absorption of bad debt losses. See "Taxation --
Federal Taxation." Pro forma book value includes only net proceeds from the
conversion offering as though it occurred as of the indicated dates and does not
include earnings on the proceeds for the periods then ended.
The pro forma book values at the dates indicated should not be considered
as reflecting the potential trading value of Third Century's stock. There can be
no assurance that an investor will be able to sell the common stock purchased in
the conversion at prices within the range of the pro forma book values of the
common stock or at or above $10.00 per share. The pro forma net income derived
from the assumptions set forth above should not be considered indicative of the
actual results of operations of Third Century that would have been attained for
any period if the conversion had been actually consummated at the beginning of
such periods and the assumptions regarding investment yields should not be
considered indicative of the actual yield expected to be achieved during any
future period. Actual conversion expenses may vary from the estimates set forth
below. In addition, the following tables do not reflect withdrawals from deposit
accounts for the purchase of common stock. Such withdrawals will reduce pro
forma deposits by the amount thereof.
27
1,062,500 1,250,000 1,437,500 1,653,125
Shares Shares Shares Shares
Sold at Sold at Sold at Sold at
$10.00 $10.00 $10.00 $10.00
Per Share Per Share Per Share Per Share
----------------------------------------------------------
Year Year Year Year
ended ended ended ended
12/31/2003 12/31/2003 12/31/2003 12/31/2003
----------------------------------------------------------
(In thousands, except share data)
Gross proceeds .............................. $ 10,625 $ 12,500 $ 14,375 $ 16,531
Less offering expenses ...................... (542) (578) (598) (630)
--------- ---------- --------- ----------
Estimated net conversion proceeds (2) ....... 10,083 11,922 13,777 15,901
Less:
Common Stock acquired by ESOP (3) ..... (850) (1,000) (1,150) (1,322)
Common Stock acquired by the RRP (4) .. (425) (500) (575) (661)
--------- ---------- --------- ----------
Investable net proceeds ..................... $ 8,808 $ 10,422 $ 12,052 $ 13,918
========= ========== ========= =========
Consolidated net income:
Historical ............................... $ 495 $ 495 $ 495 $ 495
Proforma income on investable
net proceeds (5) ...................... 66 78 90 104
Pro forma ESOP adjustment (3) ............... (34) (40) (46) (53)
Pro forma RRP adjustment (4) ................ (51) (60) (69) (79)
--------- ---------- --------- ----------
Pro forma net income ........................ $ 476 $ 473 $ 470 $ 467
========= ========== ========= =========
Consolidated net income per share (7):
Historical ............................... $ 0.53 $ 0.45 $ 0.39 $ 0.34
Pro forma income on investable net proceeds . 0.07 0.07 0.07 0.07
Pro forma ESOP adjustment (3) ............... (0.04) (0.04) (0.04) (0.04)
Pro forma RRP adjustment (4) ................ (0.05) (0.05) (0.05) (0.05)
--------- ---------- --------- ----------
Pro forma earnings per share ................ $ 0.51 $ 0.43 $ 0.37 $ 0.32
========= ========== ========= =========
Consolidated book value (6):
Historical ............................... $ 8,040 $ 8,040 $ 8,040 $ 8,040
Estimated net conversion proceeds (2) ....... 10,083 11,922 13,777 15,901
Less:
Common Stock acquired by ESOP (3) ..... (850) (1,000) (1,150) (1,322)
Common Stock acquired by the RRP (4) .. (425) (500) (575) (661)
--------- ---------- --------- ----------
Pro forma book value ........................ $ 16,848 $ 18,462 $ 20,092 $ 21,958
========= ========== ========= =========
Consolidated book value per share (6)(8):
Historical ............................... $ 7.57 $ 6.43 $ 5.59 $ 4.86
Estimated net conversion proceeds ........... 9.49 9.54 9.58 9.62
Less:
Common Stock acquired by ESOP (3) ..... (0.80) (0.80) (0.80) (0.80)
Common Stock acquired by the RRP (4) .. (0.40) (0.40) (0.40) (0.40)
--------- ---------- --------- ----------
Pro forma book value per share .............. $ 15.86 $ 14.77 $ 13.97 $ 13.28
========= ========== ========= =========
Offering price as a percentage of pro forma
book value per share ..................... 63.05% 67.70% 71.58% 75.30%
========= ========== ========= =========
Ratio of offering price to pro forma earnings
per share ................................ 19.61x 23.26x 27.03x 31.25x
========= ========== ========= =========
Number of shares used in calculating book
value .................................... 1,062,500 1,250,000 1,437,500 1,653,125
Average unearned employee stock ownership
shares ................................... (82,167) (96,667) (111,167) (127,842)
Average unearned recognition and retention
shares ................................... (38,250) (45,000) (51,750) (59,513)
--------- ---------- --------- ----------
Number of shares used in calculating EPS (7) 942,083 1,108,333 1,274,583 1,465,770
========= ========== ========= =========
Footnotes on following page.
28
(1) As adjusted to give effect to an increase in the number of shares which could occur
due to an increase in the Estimated Valuation Range of up to 15% to reflect changes
in market and financial conditions following commencement of the Subscription
Offering and the Direct Community Offering, if any.
(2) See "Use of Proceeds" for assumptions utilized to determine the investable net
proceeds of the sale of common stock.
(3) It is assumed that 8% of the shares of common stock sold in the conversion will be
purchased by the employee stock ownership plan. The funds used to acquire the
employee stock ownership plan shares will be borrowed by the employee stock ownership
plan from Third Century (see "Use of Proceeds"). Mutual intends to make annual
contributions to the employee stock ownership plan in an amount at least equal to the
principal and interest requirements on the debt. Mutual's total annual expense in
payment of the employee stock ownership plan debt is based upon 15 equal annual
installments of principal with an assumed tax benefit of 40%. The pro forma net
income assumes: (i) Mutual's total contributions are equivalent to the debt service
requirement for the year; (ii) that 5,667, 6,667, 7,667 and 8,817 shares at the
minimum, midpoint, maximum and 15% above the maximum of the range, respectively, were
committed to be released during the year ended December 31, 2003 at an average fair
value of $10.00 per share in accordance with SOP 93-6; (iii) only the employee stock
ownership plan shares committed to be released were considered outstanding for
purposes of the net income per share calculations; and (iv) the effective tax rate
applicable to the debt was 40%. Expense for the employee stock ownership plan will be
based on the number of shares committed to be released to participants for the year
at the average market value of the shares during the year. Accordingly, Mutual's
total annual expense in payment of the employee stock ownership plan for such years
may be higher than that discussed above. The loan to the employee stock ownership
plan is reflected as a reduction of book value.
(4) Assuming the receipt of shareholder approval, Third Century intends to implement the
recognition and retention plan. Assuming such implementation, the recognition and
retention plan will purchase an amount of shares equal to 4% of the common stock sold
in the conversion, or 42,500, 50,000, 57,500 and 66,125 shares of common stock at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated Price Range,
respectively, for issuance to directors, officers and key employees of Third Century
and Mutual. Such shares may be purchased from authorized but unissued shares or on
the open market. Third Century currently intends that the recognition and retention
plan will purchase the shares on the open market, and the estimated net conversion
proceeds have been reduced for the purchase of the shares in determining estimated
proceeds available for investment. Under the terms of the recognition and retention
plan, if it is adopted within one year of the conversion, shares will vest at the
rate of 20% per year. A tax benefit of 40% has been assumed. The common stock to be
purchased by the recognition and retention plan represents unearned compensation and
is, accordingly, reflected as a reduction to pro forma book value. As shares of the
common stock granted pursuant to the recognition and retention plan vest, a
corresponding reduction in the charge against capital will occur. In the event that
authorized but unissued shares are acquired by the recognition and retention plan,
the interests of existing shareholders will be diluted. Assuming that 1,250,000
shares of common stock are issued in the conversion, the midpoint of the estimated
valuation range, and that all awards under the recognition and retention plan are
from authorized but unissued shares, Third Century estimates that the per share book
value for the common stock would be diluted $.57 per share, or 3.9% on a pro forma
basis as of December 31, 2003. The dilution would be $.61 per share (3.8%) and $.53
per share (3.8%) at the minimum and maximum levels, respectively, of the estimated
valuation range on a pro forma basis as of December 31, 2003.
(5) Assuming investable net proceeds had been invested since the beginning of the period
at 1.25% for the year ended December 31, 2003 (the yield on one-year U.S. government
securities) and an assumed effective tax rate of 40%.
(6) Book value represents the excess of assets over liabilities. The effect of the
liquidation account is not reflected in these computations. (For additional
information regarding the liquidation account, see "The Conversion --Principal
Effects of Conversion -- Effect on Liquidation Rights.")
(7) The number of shares used in calculating net income per share was calculated using
the indicated number of shares sold reduced by the assumed number of unearned
employee stock ownership plan shares and unearned recognition and retention plan
shares for the period.
(8) Assuming the receipt of shareholder approval, Third Century intends to implement the
stock option plan. Assuming such implementation, common stock in an aggregate amount
equal to 10% of the shares sold in the conversion will be reserved for issuance by
Third Century upon the exercise of the stock options granted under the stock option
plan. No effect has been given to the shares of common stock reserved for issuance
under the stock option plan. Upon the exercise of stock options granted under the
stock option plan, the interest of existing shareholders will be diluted. Third
Century estimates that the per share book value for the common stock would be diluted
$.43 per share, or 2.9% on a pro forma basis as of December 31, 2003, assuming the
sale of 1,250,000 shares in the conversion, the midpoint of the Estimated Valuation
Range and the exercise of 125,000 options at an exercise price of $10.00 per share.
This dilution further assumes that the shares will be issued from authorized, but
unissued, shares. The dilution would be $.54 per share (3.4%) and $.35 per share
(2.5%) at the minimum and maximum levels, respectively, of the Estimated Valuation
Range on a pro forma basis as of December 31, 2003.
29
REGULATORY CAPITAL COMPLIANCE
The following table compares Mutual's historical and pro forma regulatory
capital levels as of December 31, 2003, to Mutual's capital requirements
historically and after giving effect to the conversion.
At December 31, 2003
Pro Forma Capital Based on Sale of
------------------------------------------------------------------------------------------
1,062,500 Shares 1,250,000 Shares 1,437,500 Shares 1,653,125 Shares
Bank Sold at Price of Sold at Price of Sold at Price of Sold at Price of
Historical $10.00 $10.00 $10.00 $10.00
Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------------------------
(Dollars in thousands)
Equity capital based upon
generally accepted
accounting principles ......... $8,040 7.5% $11,807 10.7% $12,501 11.2% $13,204 11.8% $14,008 12.4%
====== ==== ======= ==== ======= ==== ======= ==== ======= ====
Tier 1 to adjusted total assets
Historical or pro forma ....... $8,040 7.5% $11,807 10.7% $12,501 11.2% $13,204 11.8% $14,008 12.4%
Required ...................... 4,274 4.0% 4,425 4.0% 4,452 4.0% 4,481 4.0% 4,513 4.0%
------ ---- ------- ---- ------- ---- ------- ---- ------- ----
Excess ...................... $3,766 3.5% $ 7,382 6.7% $ 8,049 7.2% $ 8,723 7.8% $ 9,495 8.4%
====== ==== ======= ==== ======= ==== ======= ==== ======= ====
Tier 1 to adjusted risk wtd assets
Historical or pro forma ....... $8,040 10.6% $11,807 15.4% $12,501 16.3% $13,204 17.2% $14,008 18.2%
Required ...................... 3,038 4.0% 3,068 4.0% 3,068 4.0% 3,073 4.0% 3,078 4.0%
------ ---- ------- ---- ------- ---- ------- ---- ------- ----
Excess ...................... $5,002 6.6% $ 8,739 11.4% $ 9,433 12.3 $10,131 13.2% $10,930 14.2%
====== ==== ======= ==== ======= ==== ======= ==== ======= ====
Total risk-based capital (3):
Historical or pro forma ....... $8,991 11.8% $12,758 16.6% $12,702 16.6% $13,292 17.3% $13,967 18.2%
Required ...................... 6,076 8.0% 6,137 8.0% 6,136 8.0% 6,145 8.0% 6,156 8.0%
------ ---- ------- ---- ------- ---- ------- ---- ------- ----
Excess ...................... $2,915 3.8% $ 6,621 8.6% $ 6,566 8.6% $ 7,147 9.3% $ 7,811 10.2%
====== ==== ======= ==== ======= ==== ======= ==== ======= ====
---------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to
15% and to reflect changes in market and financial conditions following
commencement of the Subscription Offering and the Direct Community
Offering, if any.
(2) Tangible and core capital levels are shown as a percentage of total assets;
risk-based capital levels are shown as a percentage of risk-weighted
assets.
(3) Pro forma risk-based capital amounts and percentages assume net proceeds
have been invested in 20% risk-weighted assets. Computations of ratios are
based on historical adjusted total assets of $106,851,000 and risk-weighted
assets of $75,956,000.
(4) Capital levels are increased for contribution of the net proceeds of the
Offering not retained by Third Century and reduced for charges to capital
resulting from the employee stock ownership plan and recognition and
retention plan. See notes (3) and (4) to the table in "Pro Forma Data"
beginning on page 27.
30
SELECTED CONSOLIDATED FINANCIAL DATA OF
MUTUAL SAVINGS BANK AND SUBSIDIARY
The following selected consolidated financial data of Mutual Savings Bank
is qualified in its entirety by, and should be read in conjunction with, the
consolidated financial statements, including notes thereto, included elsewhere
in this Prospectus.
At or For the Twelve
Months Ended December 31
----------------------------
2003 2002
----------------------------
(In Thousands)
Summary of Financial Condition Data:
Total assets .......................................................... $106,561 $ 96,509
Loans receivable ...................................................... 98,010 80,220
Allowance for loan losses ............................................. (1,055) (884)
-------- --------
Net loans receivable .................................................. 96,955 79,336
Cash and cash equivalents ............................................. 4,739 7,186
Securities to be held to maturity ..................................... 689 6,124
FHLB advances ......................................................... 19,500 10,500
Deposits .............................................................. 78,708 78,127
Retained Earnings-substantially restricted ............................ 8,040 7,545
Summary of Operating Data:
Total interest income ................................................. $6,012 $5,840
Total interest expense ................................................ 1,954 2,257
-------- --------
Net interest income ................................................ 4,058 3,583
Provision for loan losses ............................................. 200 140
-------- --------
Net interest income after provision for loan loss .................. 3,858 3,443
Noninterest income:
Service charges on deposit accounts ................................ 204 178
Other service charges and fees ..................................... 223 233
Net gains on loan sales ............................................ 72 49
Other .............................................................. 225 282
-------- --------
Total noninterest income ........................................ 724 742
-------- --------
Noninterest expense:
Salaries and employee benefits ..................................... 2,122 1,788
Net occupancy and equipment expense ................................ 423 366
Data processing fees ............................................... 345 289
Service bureau conversion expense .................................. 117 --
Other .............................................................. 749 730
-------- --------
Total noninterest expense ....................................... 3,756 3,173
-------- --------
Income before income taxes ............................................ 826 1,012
Income tax expense .................................................... 331 402
-------- --------
Net income ...................................................... $ 495 $ 610
======== ========
Supplemental Data:
Interest rate spread during period .................................... 3.79% 3.13%
Net yield on interest-earning assets (1) .............................. 4.04 3.69
Return on assets (2) .................................................. 0.48 0.61
Return on equity (3) .................................................. 6.22 8.29
Equity to assets (4) .................................................. 7.54 7.82
Average interest-earning assets to average interest-bearing liabilities 112.82% 124.24%
Non-performing assets to total assets (4) ............................. 0.40 0.30
Allowance for loan losses to total loans outstanding (4) .............. 1.08 1.10
Allowance for loan losses to non-performing loans (4) ................. 245.92 532.53
Net charge-offs to average total loans outstanding .................... 0.03 0.03
Other expenses to average assets ...................................... 3.63 3.18
Number of full service offices (4) .................................... 6 6
-------------------------------
(1) Net interest income divided by average interest-earning assets.
(2) Net income divided by average total assets.
(3) Net income divided by average total equity.
(4) At end of period.
(5) Other expenses divided by average assets.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
Forward-Looking Statements
This Prospectus contains forward-looking statements, which can be
identified by the use of such words such as "estimate," "project," "believe,"
"intend," "anticipate," "plan," "seek," "expect" and words of similar meaning.
These forward-looking statements include, but are not limited to:
o statements of our goals, intentions and expectations;
o statements regarding our business plans, prospects, growth and o
operating strategies;
o statements regarding the asset quality of our loan and investment
portfolios; and
o estimates of our risks and future costs and benefits.
These forward-looking statements are based on current beliefs and
expectations of our management and are inherently subject to significant
business, economic and competitive uncertainties and contingencies, many of
which are beyond our control. In addition, these forward-looking statements are
subject to assumptions with respect to future business strategies and decisions
that are subject to change.
The following factors, among others, could cause actual results to differ
materially from the anticipated results or other expectations expressed in the
forward-looking statements:
o general economic conditions, either nationally or in our market area,
that are worse than expected;
o competition among depository and other financial institutions;
o inflation and changes in the interest rate environment that reduce our
margins or reduce the fair value of financial instruments;
o adverse changes in the securities markets;
o changes in laws or government regulations or policies affecting
financial institutions, including changes in regulatory fees and
capital requirements;
o our ability to enter new markets successfully and capitalize on growth
opportunities;
o our ability to successfully integrate acquired entities;
o changes in consumer spending, borrowing and savings habits;
o changes in accounting policies and practices, as may be adopted by
Mutual regulatory agencies and the Financial Accounting Standards
Board; and
o changes in our organization, compensation and benefit plans.
Because of these and other uncertainties, our actual future results may be
materially different from the results indicated by these forward-looking
statements. Please see "Risk Factors" beginning on page 12.
General
Third Century Bancorp ("Third Century" or "we") was formed as an Indiana
corporation on March 15, 2004, for the purpose of issuing common stock and
owning all of the outstanding common stock of Mutual Savings Bank (the "Bank")
to be issued in the conversion as a bank holding company. As a newly formed
corporation, Third Century Bancorp has no operating history. All information in
this
32
section should be read in conjunction with the consolidated financial statements
of Mutual and notes thereto included beginning on page F-1 of this document.
The principal business of Mutual has historically consisted of attracting
deposits from the general public and making loans secured by residential real
estate. Our earnings are primarily dependent upon our net interest income, which
is the difference between our interest income and interest expense. Interest
income is a function of the balances of loans and investments outstanding during
a given period and the yield earned on such loans and investments. Interest
expense is a function of the amount of deposits and borrowings outstanding
during the same period and interest rates paid on such deposits and borrowings.
Our earnings are also affected by provisions for loan losses, service charges
and other non-interest income, operating expenses and income taxes.
We also are significantly affected by prevailing economic conditions, as
well as government policies and regulations concerning, among other things,
monetary and fiscal affairs, housing and financial institutions. See
"Regulation." Deposit flows are influenced by a number of factors, including
interest rates paid on competing investments, account maturities and level of
personal income and savings within our market. In addition, deposit growth is
affected by how customers perceive the stability of the financial services
industry amid various current events such as regulatory changes, failures of
other financial institutions and financing of the deposit insurance fund.
Lending activities are influenced by the demand for and supply of housing
lenders, the availability and cost of funds and various other items. Sources of
funds for our lending activities include deposits, payments on loans, borrowings
and income provided from operations.
Current Business Strategy
Our business strategy is to operate a well-capitalized, profitable and
independent community savings bank dedicated to offering a variety of banking
services, including residential lending, commercial and consumer lending,
deposit services and trust services, all of this with an emphasis on personal
service. We have sought to implement this strategy by (i) pursuing opportunities
to expand our asset base and deposit base, (ii) emphasizing the origination of
one- to four-family residential mortgage loans in our market area and (iii)
maintaining levels of capital well in excess of regulatory requirements. As
outlined in other sections of this Prospectus, Mutual meets all regulatory
capital requirements. However, management believes that it is in the best
long-term interest of Mutual to improve its capital position. This will better
position Mutual to take advantage of market opportunities which may arise, or to
expand into other markets. Additional capital will also assist in protecting
Mutual from adverse consequences of a downturn in the economic environment.
The highlights of our business strategy are as follows:
o Growth. We intend to focus on continuing the growth of our business.
Although no assurance can be made regarding future growth, we have
grown at a steady rate over the last 10 years, including growth in
assets from $52.7 million to $106.6 million and growth in deposits
from $46.1 million to $78.7 million. Our management, which has
overseen this growth, intends to continue to emphasize increasing our
assets while maintaining our historical emphasis on conservative
underwriting standards and the safe and sound operation of our
business.
o Origination of One- to Four-Family Residential Loans. We intend to
continue to emphasize the origination of one- to four-family
residential mortgage loans by expanding our range of products. Our
primary lending activity is the origination of one- to four-family
residential loans secured by property in our primary market area. As
of December 31, 2003, substantially all of the loans in this category
in our portfolio were secured by property located in Johnson County,
Indiana, and the counties contiguous to Johnson County.
33
Mortgage lending activities significantly increased during 2003 with
the continuation of the interest in refinancings due to historically
low interest rates. As of December 31, 2003, total mortgage loans held
and those serviced for the secondary market increased by $10.6
million, from $56.5 million to $67.1 million, representing a 18.71%
increase. In the year prior, total mortgage loans held and serviced
increased from $50.9 million to $56.5 million, an increase of $5.6
million, or 11.0%. In 2003 Mutual moved its entire mortgage operations
into the new Mortgage Center, adjacent to the Main Street Branch in
Franklin. The addition of another mortgage lender in late 2001, the
moving of two of the mortgage lenders to a salary-plus-incentive based
pay structure (as opposed to strictly salary based), the continuing
low interest rate environment, and the introduction of a lower-rate 10
and 12 year mortgage product all contributed to a significant increase
in mortgage originations in 2003.
During 2003, Mutual followed a policy of retaining all first mortgage
loans of 15 years or longer that would not qualify for sale to the
secondary market. Mutual changed this policy during the first quarter
of 2004 and currently will make fixed-rate first mortgage loans for 15
years or longer only if they will qualify for resale to the secondary
market. See "Recent Developments." Mutual plans to continue to be
aggressive in the origination of mortgage loans in the future. This is
one of the reasons Mutual invested in the Mortgage Center. Mutual's
management plans for Mutual to become more proactive in working with
area builders to promote construction lending, which leads to home
financing. Additional incentive-based mortgage lenders may be
considered in order to move into additional mortgage markets in our
area.
o Consumer, Commercial and Commercial Real Estate Loans. We intend to
continue our recent emphasis on originating higher-yielding consumer,
commercial real estate and commercial loans. We believe that the
yields that we earn on consumer, commercial real estate and commercial
loans will increase our profitability, although there can be no
assurances that they will do so. In the two years ended December 31,
2003, these loans have decreased $5.1 million, or 14.13%. As a
percentage of total loans, consumer loans decreased from 16.31% to
9.51% and commercial loans decreased from 33.44% to 23.09% over that
two-year period. The decline in these categories as a percent of our
gross loans receivable is primarily due to the rapid growth of the
mortgage portfolio during the same time period. The forty-year low in
mortgage interest rates allowed consumers to pay off consumer debt
with the refinancing of their mortgages. The same trend occurred with
commercial real estate loans. Consumer lending continues to be mostly
real estate based; however, we offer vehicle and other consumer loans.
Mutual is not involved in any indirect financing of any kind.
o Capital Position. In recent years, Mutual, while exceeding regulatory
capital requirements, has trended down in comparison to similar
financial institutions in the state of Indiana. This is primarily
attributable to Mutual's growth in total assets exceeding comparable
growth in capital. We intend to continue to emphasize maintaining a
strong capital position. At December 31, 2003, we exceeded all of our
regulatory capital requirements. Assuming net proceeds at the midpoint
of the Estimated Valuation Range, our pro forma equity to assets ratio
(excluding 50% of net proceeds to be retained by Third Century
Bancorp) at such date would have been 11.2%. Assuming net proceeds at
the minimum, maximum and 15% above the maximum of the Estimated
Valuation Range, our pro forma equity to assets ratio (excluding the
proceeds to be retained by Third Century Bancorp) at such date would
have been 10.7%, 11.8% and 12.4%, respectively. This increase in our
equity capital, along with the likely increase in our expenses
following the conversion, will likely cause our return on equity to
decline, which could adversely affect the trading price of the shares
of common stock.
34
Critical Accounting Policy
Generally accepted accounting principles require management to apply
significant judgment to certain accounting, reporting and disclosure matters.
Management must use assumptions and estimates to apply those principles where
actual measurement is not possible or practical. For a complete discussion of
Mutual's significant accounting policy, see the notes to the consolidated
financial statements (beginning on page F-8) and discussion throughout this
Prospectus. Below is a discussion of Mutual's critical accounting policy for
determining the adequacy of the allowance for loan losses. This policy is
critical because it is highly dependent upon subjective or complex judgments,
assumptions and estimates. Changes in such estimates may have a significant
impact on Mutual's financial statements. Management has reviewed the application
of this policy with Mutual's Audit Committee.
Allowance for Loan Losses. The allowance for loan losses represents
management's estimate of probable losses inherent in Mutual'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 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
Mutual'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.
35
Mutual's primary market area for lending is Johnson County. 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.
Mutual has not substantively changed any aspect of its overall approach in
the determination of the allowance for loan losses. There have been no material
changes in assumptions or estimation techniques as compared to prior periods
that impacted the determination of the current period allowance.
Asset/Liability Management
Mutual, like other financial institutions, is subject of interest rate risk
to the extent that its interest-earning assets reprice differently than its
interest-bearing liabilities. As part of its effort to monitor and manage
interest rate risk, Mutual uses the net portfolio value ("NPV") methodology.
Mutual utilizes the services of an outside consulting firm to assist management
in the monitoring and management of its interest rate sensitivity.
Generally, NPV is the difference between discounted present value of
incoming cash flows on interest-earning assets and the present value of outgoing
cash flows on interest-bearing liabilities. Interest rate risk is evaluated by
stressing the balance sheet by applying hypothetical instantaneous parallel
shifts in market interest rates of plus and minus 300 basis points (one basis
point equals a .01%). Due to the current low level of market interest rates, the
down 300 basis point case is temporarily limited to down 75 basis points. The
resulting NPV's are compared with the NPV in a base case of no change in market
rates. Management uses this information to determine what actions should be
taken to maximize profits within the guidelines of an acceptable level of
interest rate risk.
Federally chartered thrifts are required to provide standardized asset
liability management data on their call reports and are provided asset liability
management reports by their regulator using interest rate scenarios of -300
basis points (b.p.) to +300 b.p. in increments of 100 b.p. However, as a state
chartered, FDIC insured savings bank, there is no standard set of rate scenarios
required, nor provided, by our regulators. All of our asset liability management
policies, reports, and analyses typically use an instantaneous, parallel shift
in the yield curve of plus and minus 300 b.p. We believe that these extreme
cases are most important in evaluating our interest rate risk, and that the
intermediate cases would provide little additional information about our risk
while adding significant complexity and cost.
Recently, the very low interest rates have necessitated a temporary
adjustment in the minus 300 b.p. scenario. Since short-term interest rates used
in our asset liability management model, e.g. the 3-month Treasury bills, are
currently below 1%, it is impossible to evaluate a parallel shift in the entire
yield curve of minus 1% or more. So out of necessity we have temporarily reduced
our down rate case to -75 b.p. Similarly in 2002, the low interest rates
necessitated an adjustment to the model and it could only accommodate a down
rate case to -100 b.p. We will return to the use of the minus 300 b.p. scenario
once rates rise to the level which will accommodate such a parallel shift.
If estimated changes in NPV exceed the guidelines established by the Board,
management implements a program to adjust Mutual's asset and liability mix to
bring interest rate risk within the Board's guidelines. The current Board
approved limit is a two percent decrease in NPV relative to assets for a 300
basis point instantaneous change in interest rates. Presented below, as of
December 31, 2003 and 2002, are analyses prepared by the outside consulting firm
of Mutual's interest rate risk as measured by changes in NPV for instantaneous
and sustained parallel shifts of +300/-75 basis point and +300/-100 basis point
changes in market interest rates for 2003 and 2002, respectively.
36
2003 2003
2003 Net Portfolio Value NPV as % of PV of Assets
Change in ------------------- 2003 ------------------------
Rates $ Amount $ Change % Change NPV Ratio Change
------------- -------- -------- --------- --------- ------
+300 bp* $5,963 $(2,983) -33.3% 5.90% -2.69%
0 bp 8,946 8.08
-75 bp 8,604 (342) -3.8 7.67 -0.31
2002 2002
2002 Net Portfolio Value NPV as % of PV of Assets
Change in ------------------- 2002 ------------------------
Rates $ Amount $ Change % Change NPV Ratio Change
------------- -------- -------- --------- --------- ------
+300 bp* $8,540 $(1,017) -10.6% 8.81% -0.98%
0 bp 9,557 9.24
-100 bp 8,357 (1,200) -12.6 8.01 -1.16
----------------------------------
*Basis points.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the methods of analysis presented above. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rate. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable-rate loans, have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. Further, in
the event of a change in interest rates, expected rates of prepayments on loans
and early withdrawals from certificates could likely deviate significantly from
those assumed in calculating the table.
Based upon the December 31, 2003 estimation, Mutual's NPV would decrease by
2.69 percent of assets in the event of an immediate 300 basis point increase in
interest rates and decrease 0.31 percent in the event of an immediate 75 basis
point decrease in interest rates. Therefore, as of December 31, 2003, Mutual was
not in compliance with its interest rate policy. This deviation was primarily
due to a significant expansion of Mutual's mortgage portfolio last year as we
seized an opportunity to grow due to the unprecedented refinancing of mortgages
that occurred in response to record low interest rates. Mutual views the present
non-compliance with its interest rate policy as a temporary situation. See
"Recent Developments."
Management has implemented a program to bring the interest rate risk within
established guidelines over time. This program includes:
1. Selling a portion of its fixed-rate mortgages with maturities greater
than twelve years to the secondary market;
2. Borrowing long-term fixed-rate advances from the Federal Home Loan
Bank of Indianapolis; and
3. Continuing the origination of variable, non-residential loans.
These routine actions by management help offset the interest rate risk
associated with Mutual's fixed-rate mortgage portfolio. Management will continue
to follow this strategy until the interest rate risk measurement for an
immediate 300 basis point increase complies with the policy established by the
Board.
The data in the above table are based, in part, upon assumptions about the
future behavior of borrowers, depositors and investors. While these assumptions
are reasonable based upon past behavior, it is important to be mindful that any
such projections are subject to error.
37
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 2003
and 2002 and at December 31, 2003 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,
----------------------------------------------------------------------------------
2003 2003 2002
----------------------------------------------------------------------------------
Interest Average Interest Average
Yield/ Average Earned/ Yield/ Average Earned/ Yield/
Balance Rate Balance Paid Rate Balance Paid Rate
----------------------------------------------------------------------------------
(Dollars in thousands)
Assets
Interest-earning assets:
Interest-bearing deposits ........ $ 3,959 0.95% $ 4,854 $ 37 0.76% $ 7,643 $ 99 1.30%
Securities held to maturity ...... 689 1.43 3,599 62 1.72 6,901 197 2.85
Loans receivable (1) ............. 98,010 5.99 91,268 5,877 6.44 81,920 5,512 6.73
Stock in FHLB of Indianapolis .......... 975 5.00 771 36 4.67 550 33 6.00
-------- -------- ------ ------- ------
Total interest-earning assets ....... 103,633 5.76 100,492 6,012 5.98 97,014 5,841 6.02
------ ------
Non-interest earning assets,
net of allowance for loan
losses .............................. 2,928 2,902 2,858
-------- -------- -------
Total assets ..................... $106,561 $103,394 $99,872
======== ======== =======
Liabilities and retained earnings:
Interest-bearing liabilities
Savings deposits ................. $ 35,779 0.50 $ 36,798 $236 0.64 $35,713 $ 392 1.10
Interest-bearing demand deposits .... 1,041 0.98 400 2 0.50 110 1 0.91
Certificates of deposit .......... 35,940 2.69 36,633 1,109 3.03 36,982 1,587 4.29
FHLB advances .................... 19,500 3.79 15,244 607 3.98 5,280 277 5.25
-------- -------- ------ ------- ------
Total interest-bearing liabilities 92,260 2.05 89,075 1,954 2.19 78,085 2,257 2.89
------ ------
Other liabilities ...................... 6,261 6,361 14,424
-------- -------- -------
Total liabilities ...................... 98,521 95,436 92,509
Retained earnings ...................... 8,040 7,958 7,363
-------- -------- -------
Total liabilities and retained
earnings ......................... $106,561 $103,394 $99,872
======== ======== =======
Net earning assets ..................... $ 11,373 $ 11,417 $18,929
======== ======== =======
Net interest income .................... $4,058 $3,584
====== ======
Interest rate spread ................... 3.71% 3.79% 3.13%
==== ==== ====
Net yield on average earning assets .... 4.04% 3.69%
==== ====
Interest-earning assets to
interest-bearing liabilities ........ 113.22% 112.82% 124.24%
--------------------
(1) Nonaccruing loans have been included in the average balances.
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.
38
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,
--------------- -----------------------
2003 2003 2002
------------------------------------------
Weighted average interest rate earned on:
Interest-bearing deposits ........................ 0.95% 0.76% 1.30%
Securities to be held to maturity ................ 1.43 1.72 2.85
Loans receivable ................................. 5.99 6.44 6.73
FHLB Stock ....................................... 5.00 4.67 6.00
Total interest-earning assets ................. 5.76 5.98 6.02
Weighted average interest rate cost of
Savings, NOW and money market .............. 0.50 0.64 1.10
Interest-bearing demand deposits ................. 0.98 0.50 0.91
Certificates ..................................... 2.69 3.03 4.29
FHLB advances .................................... 3.79 3.98 5.25
Total interest-bearing liabilities ............ 2.05 2.19 2.89
Interest rate spread ................................ 3.70 3.79 3.13
Net yield on weighted average interest-earning assets N/A 4.04 3.69
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.
Increase (Decrease) in Net Interest Income
------------------------------------------
Total
Due to Due to Net
Rate Volume Change
------------------------------------------
(In thousands)
Year ended December 31, 2003, compared to
year ended December 31, 2002
Interest-earning assets:
Interest-earning 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 deposits (461) (15) (476)
FHLB advances (81) 411 330
----- ----- -----
Total (713) 410 (303)
----- ----- -----
Net change in net interest income $ 367 $ 107 $ 474
===== ===== =====
39
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 funds from the Federal Home Loan Bank of Indianapolis. 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 Federal
Home Loan Bank of Indianapolis 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
continues 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.
40
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 of Indianapolis. 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 of
Indianapolis.
Mutual does not have any additional long-term commitments beyond the FHLB
advances.
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, 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 are typically repricing
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 in
2004.
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
41
the decrease and was 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 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. In recent years, Mutual has significantly increased the
loan loss provision and Mutual continues its loan portfolio diversification into
commercial real estate, other commercial and consumer 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.
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 the 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
42
data processing services from BISYS to Intrieve and also from the transfer of
all check processing and statement production from the Federal Home Loan Bank 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. There were no conversion related costs in 2002. Data processing costs
increased $56,000 in 2003 from $289,000 to $345,000 in connection with the
system conversion. It is anticipated that these costs will decrease in 2004
as the conversion was completed in the fourth quarter of 2003.
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 rate was 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 Savings Bank'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 Mutual is the origination of loans.
During 2003 and 2002, Mutual originated one- to four-family mortgage loans in
the amounts of $26.4 million, and $17.0 million, respectively.
Management does not expect the volume of mortgage lending experienced in
2003 to continue. See "Recent Developments."
During 2003 and 2002, Mutual also originated consumer loans of $5.5 million
and $6.4 million, commercial and commercial real estate loans of $10.0 million
and $10.5 million, land loans of $878,000 and $269,000, and construction loans
of $2.0 million and $1.2 million during these periods. Loan repayments and other
deductions were $27.0 million and $29.4 million during the respective years.
During 2003 and 2002, Mutual purchased securities (including
mortgage-backed securities) in the amounts of $711,000 and $12.4 million,
respectively. No securities were purchased after March 21, 2003. Maturities and
repayments of securities were $6.0 million in 2003 and $6.3 million in 2002.
43
During 2003, deposits grew approximately $581,000. FHLB advances increased $9.0
million and $5.5 million during 2003 and 2002, respectively.
Mutual had outstanding loan commitments of $212,000 and unused lines of
credit of $4.5 million at December 31, 2003. We anticipate that Mutual 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, 2003 totaled $23.0 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.
Mutual 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 Mutual'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 of Indianapolis 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
alternative sources of funds. FHLB advances were $19.5 million at December 31,
2003. Mutual had approximately $57.3 million in eligible assets available as
collateral for advances from the FHLB of Indianapolis as of December 31, 2003.
Based on Mutual's blanket collateral agreements, advances from the FHLB of
Indianapolis must be collateralized by 145% of eligible assets. Therefore,
Mutual's eligible collateral would have supported approximately $39.5 million in
advances from the FHLB of Indianapolis as of December 31, 2003. Accordingly,
Mutual had approximately $20.0 million available to borrow from the FHLB at
December 31, 2003. Mutual's Board of Directors has by resolution limited the
amount of authorized borrowings to $40.0 million at December 31, 2003. 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, 2003 and 2002.
44
Year Ended December 31,
------------------------
2003 2002
------------------------
(In thousands)
Operating Activities $ 922 $ 730
Investing Activities:
Purchase of held-to-maturity securities (711) (12,373)
Proceeds from maturities to held-to-maturity securities 6,037 6,335
Net change in loans (17,819) (5,982)
Purchases of premises and equipment (73) (494)
Purchase of FHLB stock (425) --
-------------------------
Net cash used by investing activities (12,991) (12,514)
-------------------------
Financing Activities:
Net change in demand deposits, money market,
NOW and savings accounts 364 2,315
Net changes in certificates deposit 217 (2,929)
Proceeds from FHLB advances 12,000 6,500
Payments on FHLB advances (3,000) (1,000)
Other 41 19
-------------------------
Net cash provided by financing activities 9,622 4,905
-------------------------
Net decrease in cash and cash equivalents $ (2,447) $ (6,879)
=========================
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, provide $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.
During 2002, operating activities provided $730,000 of cash flows with
$610,000 representing net income from operations. Investing activities resulted
in negative cash flows of $12.5 million with $6.0 million representing the net
increases in loans and $6.0 million representing net investment increases.
Additionally during 2002, Mutual invested approximately $494,000 for purchases
of premises and equipment primarily related to Mutual's Loan Center. Financing
activities provided cash flows of $4.9 million primarily as a result of net
additional borrowings from the FHLB of $5.5 million. Deposits that were
withdrawn from Mutual resulted in negative cash flows of $614,000 during 2002.
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, 2003, 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, 2003.
45
At December 31, 2003
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% $3,038 6.0% $4,557 10.6% $8,040 $5,002 $3,483
Total Risk-Based to
Risk-Weighted Assets 8.0 6,076 10.0 7,596 11.8 8,991 2,915 1,395
Tier I Leverage Assets 4.0 4,274 5.0 5,343 7.5 8,040 3,766 2,697
As of December 31, 2003, 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 of its financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
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. There were no
reserves recorded at December 31, 2003 or 2002 for loan commitments or any other
off-balance sheet items.
Current Accounting Issues
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS 150 establishes standards for classification and measurement in the
statement of financial position of certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability. The
FASB's Staff Position 150-3 deferred indefinitely the guidance in SFAS No. 150
on certain mandatorily redeemable noncontrolling interests.
In January of 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51, and in December 2003 the FASB deferred certain effective dates of
Interpretation No. 46. For all variable interest entities other than special
purpose entities, the revised Interpretation is effective for periods ending
after March 15, 2004. For variable interest entities meeting the definition of
special purpose entities under earlier accounting rules, the Interpretation
remains effective for periods ending after December 31, 2003. The Interpretation
requires the consolidation of entities in which an enterprise absorbs a majority
of the entity's expected losses, receives a majority of the entity's expected
residual returns, or both, as a result of ownership, contractual or other
financial interests in the entity. Currently, entities are generally
consolidated by an enterprise when it has a controlling interest through
ownership of a majority voting interest in the entity. In December 2003 the FASB
deferred certain effective dates for Interpretation No. 46. For all variable
interest entities other than special purpose entities, the revised
Interpretation is effective for periods ending after March 15, 2004. For
variable interest entities meeting the definition of special purpose
46
entities under earlier accounting rules, the Interpretation remains effective
for periods ending after December 31, 2003. Third Century has determined that it
has no such instruments.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement clarifies
reporting of contracts as either derivatives or hybrid instruments. Third
Century has determined that it has no such instruments.
In November 2002, FASB Interpretation No. 45 ("FIN 45"), Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others was issued. FIN 45 requires the disclosures
to be made by a guarantor in its financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The most
significant FIN45 instruments of the Company are standby letters of credit.
Third Century has determined that its standby letters of credit obligations
under FIN 45 are not material for disclosure.
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.
BUSINESS OF MUTUAL SAVINGS BANK
General
Mutual was originally organized in 1890 as the Mutual Building and Loan
Association. In 1994, Mutual became an Indiana savings bank and changed its name
to "Mutual Savings Bank." Mutual currently conducts its business from six
offices in Johnson County, Indiana. Its main office and three other offices are
in Franklin and it also has offices in Trafalgar and Nineveh. Mutual's principal
business consists of attracting deposits from the general public, originating
long-term, fixed-rate loans secured primarily by first mortgage liens on one- to
four-family real estate and other commercial and consumer loans. Its deposit
accounts are insured up to applicable limits by the Savings Association
Insurance Fund of the FDIC.
Mutual is one of the oldest continuously operating financial institutions
headquartered in Johnson County, Indiana. We believe that Mutual has developed a
solid reputation among its loyal customer base because of its commitment to
personal service and its strong support of the local community. Mutual offers a
number of financial services, including: (i) one- to four-family residential
real estate loans; (ii) consumer loans, including home equity loans, lines of
credit and automobile loans; (iii) commercial
47
real estate loans; (iv) real estate construction loans; (v) commercial loans;
(vi) multi-family residential loans; (vii) certificates of deposit; (viii)
savings accounts, including passbook accounts; (ix) money market saving
accounts; (x) negotiable order of withdrawal accounts; (xi) business checking;
(xii) merchant services; (xiii) online banking; and (xiv) trust services.
Lending Activities
Mutual has historically concentrated its lending activities on the
origination of loans secured by first mortgage liens for the purchase,
construction or refinancing of one- to four-family residential real property.
One- to four-family residential mortgage loans continue to be the major focus of
its loan origination activities, representing 57.25% of its total loan portfolio
at December 31, 2003. Mutual also offers commercial real estate loans, real
estate construction loans and consumer loans. Mortgage loans secured by
commercial real estate totaled approximately 15.88% of Mutual's total loan
portfolio at December 31, 2003, while residential construction loans totaled
approximately 3.00%, commercial construction loans totaled approximately 2.40%,
and consumer loans totaled approximately 9.51% of its total loans at December
31, 2003. To a limited extent, Mutual also offers multi-family and commercial
loans.
Under Indiana law, the total loans and extensions of credit by an
Indiana-chartered savings bank to a borrower outstanding at one time and not
fully secured may not exceed 15% of such bank's capital and unimpaired surplus.
At December 31, 2003, 15% of Mutual's capital and unimpaired surplus was $1.2
million. Assuming we sell shares at the maximum of the Estimated Valuation
Range, this amount would increase to $2.0 million. An additional amount up to
10% of our capital and unimpaired surplus may be loaned to the same borrower if
such loan is fully secured by readily marketable collateral having a market
value, as determined by reliable and continuously available price quotations, at
least equal to the amount of such additional loans outstanding.
Loan Portfolio Data. The following table sets forth the composition of
Mutual's loan portfolio by loan type and security type as of the dates
indicated, including a reconciliation of gross loans receivable after
consideration of the allowance for loan losses and loans in process.
48
At December 31,
--------------------------------------------------------
2003 2002
--------------------------------------------------------
Percent Percent
Amount of Total Amount of Total
--------------------------------------------------------
(Dollars in thousands)
TYPE OF LOAN
Real estate mortgage loans:
Land ................................ $ 4,234 4.32% $ 2,561 3.19%
One- to four-family ................. 56,133 57.25 41,011 51.10
Multi-family ........................ 363 0.37 386 0.48
Commercial .......................... 15,567 15.88 13,562 16.90
Construction ........................... 5,352 5.46 4,755 5.92
Consumer loans:
Home equity ......................... 3,413 3.48 3,100 3.86
Automobiles ......................... 2,483 2.53 2,835 3.53
Lines of credit ..................... 3,102 3.16 2,924 3.64
Other ............................... 329 0.34 212 0.27
Commercial loans ....................... 7,076 7.21 8,914 11.11
------- ------ ------- -------
Gross loans receivable ........... $98,052 100.00% $80,260 100.00%
======= ====== ======= =======
TYPE OF SECURITY
Land ................................... $ 4,234 4.32% $ 2,561 3.19%
One- to four-family .................... 62,548 63.79 46,318 57.71
Multi-family ........................... 363 0.37 386 0.48
Commercial real estate ................. 15,567 15.88 13,562 16.90
Automobiles ............................ 2,483 2.53 2,835 3.53
Other security ......................... 11,245 11.47 11,994 14.95
Unsecured .............................. 1,612 1.64 2,604 3.24
------- ------ ------- -------
Gross loans receivable ............. $98,052 100.00% $80,260 100.00%
------- ====== ------- =======
Deduct:
Deferred loan fees .................. 42 40
Allowance for loan losses ........... 1,055 884
------- ----------
Net loans receivable ............. $96,955 $ 79,336
======= ==========
Mortgage loans:
Adjustable-rate ..................... $23,448 $ 23,780
Fixed-rate .......................... 52,849 33,739
------- ----------
Total ............................ $76,297 $ 57,519
======= ==========
The following table sets forth certain information at December 31, 2003,
regarding the dollar amount of loans maturing in Mutual's loan portfolio based
on the contractual terms to maturity. Demand loans having no stated schedule of
repayments and no stated maturity and overdrafts are reported as due in one year
or less. This schedule does not reflect the effects of possible prepayments or
enforcement of due-on-sale clauses. Management expects prepayments will cause
actual maturities to be shorter.
49
Due During Years Ended December 31,
Balance ------------------------------------------------------------------------
Outstanding at 2005 2007 2009 2014 2024
December 31, to to to to and
2003 2004 2006 2008 2013 2023 following
------------------------------------------------------------------------------------------------------------------------
Real estate mortgage loans:
Land .................... $ 4,234 $ 1,536 889 $ 24 $ 338 $ 1,447 $ --
One- to four-family loans 56,133 2 110 551 7,918 33,675 13,877
Multi-family loans ...... 363 -- 9 -- -- 354
Commercial loans ........ 15,567 733 1,531 154 1,229 11,676 244
Construction loans ......... 5,352 4,210 516 -- 626 -- --
Consumer loans:
Home equity loans ....... 3,413 133 240 193 2,847 -- --
Automobiles ............. 2,483 69 952 1,300 139 23 --
Lines of credit ......... 3,102 2,946 76 80 -- -- --
Other consumer loans .... 329 250 25 34 20 -- --
Commercial loans ........... 7,076 2,930 1,144 520 518 1,071 893
-------------------------------------------------------------------------------------
Total ................ $98,052 $12,809 $ 5,492 $ 2,855 $13,635 $48,246 $15,014
=====================================================================================
The following table sets forth as of December 31, 2003, the dollar amounts
of all loans due after one year that have fixed interest rates or adjustable
rates.
Due after December 31, 2004
----------------------------------------------
Fixed Rates Variable Rates Total
----------------------------------------------
Real estate mortgage loans:
Land .......................... $ 1,868 $ 830 $ 2,698
One- to four-family loans...... 47,615 8,516 56,131
Multi-family loans ............ -- 363 363
Commercial loans .............. 2,842 11,992 14,834
Construction loans ............... 663 479 1,142
Consumer loans:
Home equity loans ............. -- 3,280 3,280
Automobiles ................... 2,414 -- 2,414
Lines of credit ............... 140 16 156
Other consumer loans .......... 79 -- 79
Commercial loans ................. 2,519 1,626 4,146
---------------------------------------------
Total ....................... $ 58,141 $27,102 $85,243
=============================================
One- to Four-Family Residential Loans. Mutual's primary lending activity
consists of the origination of one- to four-family residential mortgage loans
secured by property located in its primary market area. Mutual generally does
not originate one- to four-family residential mortgage loans if the ratio of the
loan amount to the lesser of the current cost or appraised value of the property
exceeds 95%. Mutual generally requires private mortgage insurance on loans with
a loan-to-value ratio in excess of 80%. The cost of such insurance is factored
into the annual percentage rate on such loans. All properties also have title
and, to the extent applicable, flood insurance.
Mutual also offers second mortgages on one- to four-family residential
properties at a fixed rate. Second mortgages are generally written for up to 80%
of the available equity (the appraised value of the property less any first
mortgage amount).
Mutual's current underwriting criteria for one- to four-family residential
loans focus on the collateral securing the loan, income, debt-to-income ratio,
stability of earnings and credit history of a potential borrower, in making
credit decisions. Mutual also has incorporated uniform underwriting criteria
based
50
on the Federal Home Loan Mortgage Corporation ("FHLMC") lending criteria,
recognizing that the sale of mortgage loans has become an important tool in
liquidity and interest rate risk management. Mutual originates fixed-rate loans
which provide for the payment of principal and interest over a period of up to
30 years.
In addition, Mutual offers loans that are fixed for the first one, three,
five or seven years and then have an adjustable rate for subsequent years. The
adjustable-rate mortgage loans that it originates provide for a maximum interest
rate adjustment of 2% over a one-year period and a maximum adjustment of 5% over
the life of the loan. Mutual's residential adjustable-rate mortgages are
amortized for terms up to 30 years. Although Mutual would generally prefer to
originate mortgage loans that have adjustable rather than fixed interest rates,
the current low-interest rate environment has reduced borrower demand for
adjustable-rate mortgage loans. Mutual also offers fixed-rate second mortgages.
All of the fixed-rate loans that Mutual originates for sale are written to
FHLMC standards. Mutual generally sells any owner-occupied mortgages that are
for terms of more than 12 years. It retains the servicing rights on the loans
that it sells.
Adjustable-rate mortgage loans decrease the risk associated with changes in
interest rates by periodically repricing but involve other risks because, as
interest rates increase, the underlying payments by the borrower also increase,
thus increasing the potential for default by the borrower. At the same time, the
marketability of the underlying collateral may be adversely affected by higher
interest rates. Upward adjustment of the contractual interest rate is also
limited by the maximum periodic and lifetime interest rate adjustment permitted
by the loan documents, and, therefore, is potentially limited in effectiveness
during periods of rapidly rising interest rates. Mutual retains all
adjustable-rate mortgage loans that its originates and, at December 31, 2003,
approximately 15.17% of its one- to four-family residential loans had adjustable
rates of interest.
All of the one- to four-family residential mortgage loans that Mutual
originates include "due-on-sale" clauses, which give it the right to declare a
loan immediately due and payable in the event that, among other things, the
borrower sells or otherwise disposes of the real property subject to the
mortgage and the loan is not repaid. However, Mutual occasionally permits
assumptions of existing residential mortgage loans on a case-by-case basis.
At December 31, 2003, approximately $56.1 million, or 57.25% of Mutual's
portfolio of loans, consisted of one- to four-family residential loans.
Approximately $70,000, or .12% of total one- to four-family residential loans,
were included in nonperforming assets as of that date. See "-- Non-Performing
and Problem Assets."
Commercial Real Estate Loans. Our commercial real estate loans at December
31, 2003, were secured by churches, office buildings and other commercial
properties ($14.8 million), agricultural properties ($784,000) and apartments
consisting of five or more units ($363,000). Mutual originates commercial real
estate loans with terms no greater than 20 years. Mutual generally requires a
loan-to-value ratio of no more than 80% on commercial real estate loans. Mutual
originates both fixed-rate and adjustable-rate commercial loans.
Commercial real estate loans generally are larger than one- to four-family
residential loans and involve a greater degree of risk. Commercial real estate
loans often involve large loan balances to single borrowers or groups of related
borrowers. Payments on these loans depend to a large degree on results of
operations and management of the properties and may be affected to a greater
extent by adverse conditions in the real estate market or the economy in
general. Accordingly, the nature of the loans makes them more difficult for
management to monitor and evaluate. In addition, balloon loans may involve a
greater degree of risk to the extent the borrower is unable to obtain financing
or cannot repay the loan when the loan matures or a balloon payment is due.
51
At December 31, 2003, approximately $15.6 million, or 15.88% of Mutual's
total loan portfolio, consisted of commercial real estate loans. On the same
date, no commercial real estate loans were included in nonperforming assets.
At December 31, 2003, approximately $363,000, or 0.37%, of Mutual's total
loan portfolio, consisted of mortgage loans secured by multi-family dwellings.
Multi-family residential real estate loans generally are secured by multi-family
rental properties, such as walk-up apartments. At December 31, 2003, there were
no multi-family loans included in nonperforming assets.
Multi-family loans, like commercial real estate loans, involve greater risk
than do residential loans and carry larger loan balances This increased credit
risk is a result of several factors, including the concentration of principal in
a limited number of loans and borrowers, the effects of general economic
conditions on income producing properties, and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multi-family real estate typically depends upon the successful
operation of the related real estate property. If the cash flow from the project
is reduced, the borrower's ability to repay the loan may be impaired. Also, the
loans-to-one-borrower limitation limits Mutual's ability to make loans to
developers of apartment complexes and other multi-family units.
Construction Loans. Mutual offers construction loans to individuals for the
purpose of constructing one- to four-family residences, but only where the
borrower commits to permanent financing on the finished project with Mutual or
another qualified lender. During the construction phase, the loan agreement
requires monthly interest payments by the borrower on the amount drawn on the
loan. When the construction of the residence is completed, the construction
rider terminates and the loan converts into a one- to four-family residential
mortgage loan.
Mutual also offers construction loans to builders or developers who are on
Mutual's approved list for the construction of residential properties on a
speculative basis (i.e., before the builder/developer obtains a commitment from
a buyer), or for the construction of commercial or multi-family properties. In
such cases, Mutual typically structures the loan as a short-term loan with a
fixed interest rate, with interest payable quarterly. Construction loans to
builders or developers typically have a higher interest rate than residential
construction loans to individuals unless Mutual has the long-term commitment for
financing. Mutual also offers construction loans to businesses and organizations
for the purpose of constructing business-related facilities, including, but not
limited to, the new construction and remodeling of small office buildings and
church facilities. At December 31, 2003, approximately 3.0 million or 3.00% of
Mutual's total loan portfolio consisted of residential construction loans and
$2.4 million or 2.40% of its total loan portfolio consisted of commercial
construction loans. At December 31, 2003, there were construction loans in the
aggregate of $359,000 included in nonperforming assets.
The maximum loan-to-value ratio for a construction loan is based upon the
nature of the construction project. For example, a construction loan to an
individual for the construction of a one- to four-family residence may be
written with a maximum loan-to-value ratio of 95%, while a construction loan for
a commercial project may be written with a maximum loan-to-value ratio of 80%.
Inspections generally are made prior to any disbursement under a construction
loan, and Mutual normally charges a commitment fee for construction loans.
While providing Mutual with a comparable, and in some cases higher, yield
than conventional mortgage loans, construction loans sometimes involve a higher
level of risk. For example, if a project is not completed and the borrower
defaults, Mutual may have to hire another contractor to complete the project at
a higher cost. Also, a project may be completed, but may not be salable,
resulting in the borrower defaulting and Mutual's taking title to the project.
52
Consumer Loans. Mutual's consumer loans at December 31, 2003, consisted
primarily of variable- and fixed-rate home equity loans ($3.4 million
representing 3.48% of our total loan portfolio) and lines of credit ($3.1
million representing 3.16% of our total loan portfolio) and automobile loans
($2.5 million representing 2.53% of our total loan portfolio). Consumer loans
tend to have shorter terms and higher yields than permanent residential mortgage
loans. At December 31, 2003, Mutual's consumer loans aggregated approximately
$9.3 million, or 9.51%, of its total loan portfolio.
Home equity lines of credit are generally written for up to 80% of the
appraised value less any first mortgage amount. Mutual generally will write
automobile loans for up to 100% of the acquisition price for a new automobile
and the lower of the purchase price or the trade-in value for a used automobile.
The repayment schedule of loans covering both new and used vehicles is
consistent with the expected life and normal depreciation of the vehicle.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans that are unsecured or are secured by
rapidly depreciable assets, such as automobiles. Further, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance. In addition, consumer loan
collections depend on the borrower's continuing financial stability, and thus
are more likely to be affected by adverse personal circumstances. Furthermore,
the application of various federal and state laws, including bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans. See
"-- Non-Performing and Problem Assets."
Commercial Loans. Mutual offers commercial loans, which consist primarily
of loans to businesses that are secured by assets other than real estate, with
examples of such assets being equipment, inventory and receivables. In some
cases the loans are unsecured. As of December 31, 2003, commercial loans
amounted to $7.1 million, or 7.21%, of Mutual's total loan portfolio. Commercial
loans tend to bear somewhat greater risk than residential mortgage loans,
depending on the ability of the underlying enterprise to repay the loan. As of
December 31, 2003, no commercial loans were included in nonperforming assets.
The following table shows Mutual's loan origination, purchase and repayment
activity for during the periods indicated.
Year Ended December 31,
-----------------------
2003 2002
-----------------------
(In thousands)
Loans Originated:
Real estate mortgage loans:
Land .................................. $ 878 $ 269
One- to four-family loans ............. 26,429 16,986
Commercial loans ...................... 6,384 4,745
Construction loans .................... 2,045 1,187
Consumer loans:
Home equity and home improvement loans 1,668 1,779
Other consumer loans .................. 3,809 4,616
Commercial loans ......................... 3,643 5,737
--------------------
Total originations .................... 44,856 35,319
Reductions:
Principal loan repayments ............... 27,065 29,473
Transfers from loans to real estate owned -- 16
--------------------
Total reductions .................... 27,065 29,489
Decrease in other items .................... 172 109
--------------------
Net increase ............................... $17,619 $ 5,721
====================
53
Origination and Other Fees. Mutual realizes income from origination fees,
late charges, checking account service charges and fees for other miscellaneous
services. Late charges are generally assessed if payment is not received within
a specified number of days after it is due. The grace period depends on the
individual loan documents.
Non-Performing and Problem Assets
Mutual reviews loans on a regular basis and loans are placed on a
non-accrual status when the loans become contractually past due ninety days or
more. Mutual's policy is that all earned but uncollected interest on all loans
be reviewed monthly to determine if any portion thereof should be classified as
uncollectible for any loan past due less than 90 days. Mutual sends a written
notice when loans are 30 days past due and sends a letter or makes verbal
contact when loans are 60 days past due. Loans that reach 90 days past due are
brought before the Asset Classification Committee. The Asset Classification
Committee discusses all delinquent loans at its monthly meetings and decides
what additional actions should be taken with respect to each delinquent loan.
Management is authorized to commence foreclosure proceedings for any loan upon
making a determination that it is prudent to do so. All loans for which
foreclosure proceedings have been commenced are placed on non-accrual status.
Non-performing assets. At December 31, 2003, $429,000, or 0.40% of Mutual's
total assets, were non-performing assets (loans delinquent more than 90 days,
non-accruing loans and foreclosed assets) compared to $286,000, or 0.30%, of our
total assets at December 31, 2002.
The table below sets forth the amounts and categories of our non-performing
assets.
At December 31,
----------------------
2003 2002
----------------------
(Dollars in thousands)
Non-performing assets:
Non-performing loans ................. $ 429 $166
Foreclosed assets .................... -- 120
---------------------
Total non-performing assets ....... $ 429 $286
=====================
Non-performing loans to total loans ..... 0.44% 0.21%
Non-performing assets to total assets ... 0.40% 0.30%
At December 31, 2003, Mutual held loans delinquent from 30 to 89 days
totaling $1.2 million.
There were no loans past due 90 days or more and still accruing interest at
December 31, 2003. At December 31, 2002, loans totaling $104,000 were 90 days
past due and still accruing interest. Loans totaling $70,000 at December 31,
2003, were on non-accrual but were not considered impaired as the loans were
deemed to be well collateralized. Additionally, at December 31, 2002, loans
totaling $62,000 were on non-accrual and were not deemed impaired as those loans
were well collateralized.
54
The following table reflects the amount of loans in a delinquent status as
of the dates indicated:
At December 31, 2003 At December 31, 2002
----------------------------------------------------------------------------------------------
30-89 Days 90 Days or More 30-89 Days 90 Days or More
----------------------------------------------------------------------------------------------
Principal Principal Principal Principal
Number Balance of Number Balance of Number Balance of Number Balance of
of Loans Loans of Loans Loans of Loans Loans of Loans Loans
----------------------------------------------------------------------------------------------
(Dollars in thousands)
Real estate mortgage loans
One- to four-family loans .. 15 $ 846 2 $ 70 9 $ 295 1 $ 12
Multi-family loans ......... 1 9 -- -- 1 14 -- --
Construction loans ......... 1 130 1 359 2 313 1 104
Home equity and home
improvement loans .......... 9 102 -- -- 2 25 -- --
Other consumer loans .......... 6 42 -- -- 1 5 --
Commercial loans .............. 4 92 -- -- 5 479 2 50
----------------------------------------------------------------------------------------------
Total ...................... 36 $1,221 3 $ 429 20 $1,131 4 $ 166
==============================================================================================
Delinquent loans to total loans 1.98% 1.24% 0.17% 0.44% 1.15% 1.41% 0.23% 0.21%
Classified assets. Mutual's Asset Classification Policy provides for the
classification of loans and other assets such as debt and equity securities
considered to be of lesser quality as "substandard," "doubtful" or "loss"
assets. An asset is considered "substandard" if it is inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the institution will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted.
An insured institution is required to establish general allowances for loan
losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount.
55
At December 31, 2003 and 2002, the aggregate amount of Mutual's classified
assets, and of its general and specific loss allowances were as follows:
Year Ended December 31,
-----------------------
2003 2002
------------------
(In thousands)
Substandard loans ................ $1,950 $ 246
Doubtful loans ................... 30 --
Loss loans ....................... 14 12
====== ======
Total classified loans......... $1,994 $ 258
General loss allowance ........... $ 692 $ 779
Specific loss allowances ......... 363 105
------ ------
Total allowances .............. $1,055 $ 884
====== ======
Assets that do not currently expose the insured institution to sufficient
risk to warrant classification in one of the aforementioned categories but
possess weaknesses are required to be designated "special mention" by
management. At December 31, 2003 and 2002, Mutual classified $828,000 and $1.1
million of loans as "special mention." The "special mention" classification
refers to assets that do not currently expose Mutual to a significant degree of
risk but do possess credit deficiencies or potential weakness deserving
management's close attention. There is a significant increase in the number of
substandard assets as shown above for the years 2002 and 2003. The significant
increase from 2002 to 2003 can be attributed to several factors, including the
unusually low amount of substandard assets for 2002, and the addition of two
commercial loans at December 31, 2003, which had balances of $232,677 and
$242,609. Another factor was the addition of one borrower in December 2003. This
borrower had loans totaling $931,296 which counted toward the 2003 substandard
asset total. The loan to the borrower that constitutes a significant part of the
total amount was made for one project. Mutual expects the project to be
completed satisfactorily. Mutual added the borrower's loans to the watch list
for monitoring purposes. As of December 31, 2003, and as of March 31, 2004, this
borrower had no loans in which any payment was past due over 30 days.
The above table shows one loan in the amount of $14,000 and one loan in the
amount of $12,000 for the years 2003 and 2002, respectively, classified in the
"loss" category. Even though these loans were classified as "loss," neither had
been charged off as of their respective year end dates. While management
recognized the probability of a charge-off on both loans in their entire
amounts, the circumstances to warrant the actual charge to the loan loss
provision had not yet occurred. The $14,000 in loan losses were charged off in
the first quarter of 2004. Additionally, beginning in 2004, Third Century has
implemented procedures whereby loans that are identified as losses are charged
off in the period the loans are deemed uncollectible.
Mutual regularly reviews its loan portfolio to determine whether any loans
require classification in accordance with applicable regulations. Not all of
Mutual's classified assets constitute non-performing assets.
Allowance for Loan Losses
The allowance for loan losses is maintained to absorb losses inherent in
the loan portfolio. The allowance is based on ongoing, quarterly assessments of
the probable estimated losses inherent in the loan portfolio. The allowance is
increased by the provision for loan losses, which is charged against current
period operating results and decreased by the amount of chargeoffs, net of
recoveries. Mutual's methodology for assessing the appropriateness of the
allowance consists of several key elements, which
56
include the general allowance, specific allowances for identified problem loans,
and the unallocated allowance.
The general allowance is calculated by applying loss factors to outstanding
loans based upon Mutual's historical loss experience and may be adjusted for
significant factors that, in management's judgment, affect the collectibility of
the portfolio as of the evaluation date. The general allowance is utilized to
estimate incurred losses on Mutual's homogeneous unclassified loan pools.
Specific allowances are established in cases where management has
identified significant conditions or circumstances related to a credit that
management believes indicate the probability that a loss has been incurred in
excess of the amount determined by the application of the formula allowance. The
loans that are reviewed for specific allowances are generally those loans
internally classified as substandard, doubtful or loss.
The unallocated allowance is based upon management's evaluation of various
conditions, the effects of which are not directly measured in the determination
of the formula and specific allowances. The evaluation of the inherent loss with
respect to these conditions is subject to a higher degree of uncertainty because
they are not identified with specific credits. The conditions evaluated in
connection with the unallocated allowance may include existing general economic
and business conditions affecting Mutual's key lending areas, credit quality
trends, collateral values, loan volumes and concentrations, seasoning of the
loan portfolio, specific industry conditions within portfolio segments, recent
loss experience in particular segments of the portfolio, duration of the current
business cycle, bank regulatory examination results, and findings of an
independent third party conducting reviews of the loan portfolio.
Summary of Loan Loss Experience. The following table analyzes changes in
the allowance for loan losses during the years ended December 31, 2003 and 2002.
Year Ended December 31,
-----------------------
2003 2002
-----------------------
(In thousands)
Balance at beginning of period ................................... $ 884 $ 772
Charge-offs:
One- to four-family mortgage loans ............................ 23 14
Consumer loans ................................................ 8 19
Commercial loans .............................................. -- 19
-------------------
Total charge-offs .......................................... 31 52
Recoveries:
One- to four-family mortgage loans ............................ -- --
Consumer loans ................................................ 2 14
Commercial loans .............................................. -- 10
-------------------
Total recoveries ........................................... 2 24
Net charge-offs .................................................. 29 28
Provision for losses on loans .................................... 200 140
-------------------
Balance end of period ............................................ $1,055 $ 884
===================
Allowance for loan losses as a percent of total loans outstanding 1.08% 1.10%
Ratio of net charge-offs to average loans outstanding ............ 0.03% 0.03%
Allocation of Allowance for Loan Losses. The following table presents an
analysis of the allocation of Mutual's allowance for loan losses at the dates
indicated.
57
At December 31,
------------------------------------------------------
2003 2002
------------------------------------------------------
Percent of Percent of
loans in each loans in each
category to category to
Amount total loans Amount total loans
------------------------------------------------------
(Dollars in thousands)
Balance at end of period applicable to:
Land ................................. $ -- 4.32% $ 13 3.19%
Real estate mortgage loans
One- to four-family .............. 122 57.25 83 51.10
Commercial ....................... 372 16.25 311 17.38
Construction loans ................... 102 5.46 9 5.92
Home equity and home improvement loans 1 3.48 -- 3.86
Other consumer loans ................. 148 6.03 113 7.44
Commercial loans ..................... 64 7.21 5 11.11
Unallocated .......................... 246 350
---------------------------------------------------
Total ....................... $1,055 100.00% $ 884 100.00%
====================================================
Other Sources of Revenue
Trust Services. Mutual's Trust Department provides agency services, trust
services, guardianships and estate services to individuals and families. The
Trust Department establishes and manages trusts, administers estates,
establishes power of attorney arrangements and offers individual retirement
accounts in addition to other products and services. As of December 31, 2003,
the Trust Department had 188 accounts representing $6.0 million, including
funeral trusts. For the year ended December 31, 2003, revenues generated by the
Trust Department totaled $81,000.
Credit Card Underwriting. Mutual also issues the Mutual Savings Bank Credit
Card, which are personal unsecured lines of credit in amounts from $2,500 to
$50,000. The annual percentage rate is 9.90%. There is no annual fee.
Other Fees. Mutual also realizes income from checking account service
charges, safe deposit fees and fees for other miscellaneous services.
Investments and Federal Home Loan Bank Stock
Mutual's investment policy is designed primarily to maximize the yield on
the investment portfolio subject to minimal liquidity risk, default risk,
interest rate risk, and prudent asset/liability management. Mutual has retained
an investment advisor registered with the Securities and Exchange Commission to
provide it with investment and financial advice including recommendations
regarding risk strategies and risk assessment, investment purchases and sales,
and dealer selection.
Mutual's investment portfolio consists of U.S. government agency
securities, state and municipal bonds, mortgage-backed securities, corporate
obligations, and Federal Home Loan Bank stock. At December 31, 2003,
approximately $1.7 million or 1.6% of its total assets, consisted of such
investments. All of Mutual's securities, except for Federal Home Loan Bank
stock, were classified as held to maturity at December 31, 2003.
The following table sets forth the carrying value and market value of
Mutual's investments at the dates indicated.
58
At December 31,
------------------------------------------
2003 2002
------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------------------------------------
(In thousands)
Held to Maturity:
Agency securities ............. $ 201 $ 202 $2,902 $2,925
State and municipal .......... -- -- 600 604
Mortgage-backed securities ... -- -- 1,713 1,699
Corporate obligations ........ 488 488 909 911
FHLB stock (1) .................. 975 975 550 550
-----------------------------------------
Total investment securities ..... $ 1,664 $1,665 $6,674 $6,689
=========================================
--------------------------
(1) Market value is based on the price at which the stock may be resold to the
FHLB of Indianapolis.
Investment securities, excluding Federal Home Loan Bank stock, which has no
stated maturity, all mature within one year of December 31, 2003. At December
31, 2003, the weighted average yield on agency securities, mortgage-backed
securities and FHLB stock was 1.49%, 1.41% and 5.0%, respectively.
Management intends to temporarily hold the proceeds from the conversion in
U.S. government securities, other U.S. agency securities and equity securities.
See "Use of Proceeds."
Sources of Funds
General. Deposits have traditionally been Mutual's primary source of funds
for use in lending and investment activities. In addition to deposits, Mutual
derives funds from scheduled loan payments, loan prepayments, retained earnings
and income on earning assets. While scheduled loan payments and income on
earning assets are relatively stable sources of funds, deposit inflows and
outflows can vary widely and are influenced by prevailing interest rates, market
conditions and levels of competition. Mutual can use borrowings from the Federal
Home Loan Bank of Indianapolis in the short-term to compensate for reductions in
deposits or deposit inflows at less than projected levels. Mutual occasionally
borrows on a longer-term basis, for example to assist in asset/liability
management.
Deposits. Mutual attracts deposits principally from within Johnson County
through the offering of a broad selection of deposit instruments including
fixed-rate certificates of deposit, NOW and other transaction accounts, and
savings accounts. Mutual does not actively solicit or advertise for deposits
outside of Johnson County. Substantially all of its depositors are residents of
Johnson County. Deposit account terms vary, with the principal differences being
the minimum balance required, the amount of time the funds remain on deposit and
the interest rate. Mutual does not pay a fee for any deposits it receives.
Mutual establishes the interest rates paid, maturity terms, service fees
and withdrawal penalties on a periodic basis. Determination of rates and terms
are predicated on funds acquisition and liquidity requirements, rates paid by
competitors, growth goals, and applicable regulations. Mutual relies, in part,
on customer service and long-standing relationships with customers to attract
and retain its deposits. Mutual also closely prices its deposits in relation to
rates offered by its competitors.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The variety of deposit accounts Mutual offers has allowed it to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. Mutual has become more susceptible to short-term fluctuations
in deposit flows as customers
59
have become more interest rate sensitive. Mutual manages the pricing of its
deposits in keeping with its asset/liability management and profitability
objectives. Based on its experience, Mutual's management believes that Mutual's
passbook, NOW, money market savings and non-interest-bearing checking accounts
are relatively stable sources of deposits. However, Mutual's ability to attract
and maintain certificates of deposit, and the rates paid on these deposits, has
been and will continue to be significantly affected by market conditions.
An analysis of Mutual's deposit accounts by type, maturity, and rate at December
31, 2003, is as follows:
Balance at Weighted
December 31, % of Average
Type of Account 2003 Deposits Rate
-----------------------------------------------------------------------------------------------
Withdrawable:
Non-interest bearing demand ..... $ 5,948 7.56% 0.00%
Interest bearing demand ......... 1,041 1.32 0.98
Savings, NOW and money market ... 35,779 45.46 0.50
------- -----
Total Withdrawable ........... 42,768 54.34 0.44
Certificates (original terms):
91-day .......................... 823 1.05 1.30
182-day ......................... 2,587 3.29 1.44
Short-term ...................... 33 0.04 5.14
12 month ........................ 6,415 8.15 2.01
15 month ........................ 3,169 4.03 2.01
18 month ........................ 3,796 4.82 2.51
24 month ........................ 6,106 7.76 3.10
30 month ........................ 2,407 3.06 2.99
36 month ........................ 2,203 2.80 3.85
42 month ........................ 43 0.05 3.11
48 month ........................ 806 1.02 4.68
60 month ........................ 2,718 3.45 4.71
IRA ............................. 4,834 6.14 2.41
------- ------
Total certificates .......... $35,940 45.66% 2.69%
------- ------
Total Deposits ..................... $78,708 100.00% 1.47%
======= =======
The following table sets forth by various interest rate categories the
composition of Mutual's term deposits at the dates indicated.
At December 31,
-----------------------
2003 2002
-----------------------
(In thousands)
1.00% to 1.99% .................................. $ 12,656 $ 4,939
2.00% to 2.99% .................................. 11,038 11,517
3.00% to 3.99% .................................. 7,063 8,783
4.00% to 4.99% .................................. 3,307 5,513
5.00% to 5.99% .................................. 1,238 2,862
6.00% to 8.00% .................................. 638 2,109
-------- -------
Total .................................. $ 35,940 $35,723
======== =======
60
The following table represents, by various interest rate categories, the
amounts of term deposits maturing during each of the three years following
December 31, 2003, and the total amount maturing thereafter. Matured
certificates that have not been renewed as of December 31, 2003, have been
allocated based on certain rollover assumptions.
Amounts at December 31, 2003
--------------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
--------------------------------------------------
(In thousands)
1.00% to 1.99% ............................ $ 9,239 $3,236 181 $ --
2.00% to 2.99% ............................ 7,892 2,465 591 90
3.00% to 3.99% ............................ 3,992 2,156 374 541
4.00% to 4.99% ............................ 1,215 702 336 1,054
5.00% to 5.99% ............................ 277 250 176 535
6.00% to 8.00% ............................ 382 256 -- --
----------------------------------------------
Total ................................. $22,997 $9,065 $1,658 $ 2,220
==============================================
The following table indicates the amount of Mutual's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
2003.
At December 31, 2003
--------------------
(In thousands)
Maturity Period
Three months or less ............................ $2,123
Greater than three month through six months ..... 932
Greater than six months through twelve months.... 1,456
Over twelve months .............................. 2,330
------
Total ........................................ $6,841
======
The following table indicates the change in deposit balances during 2002
and 2003.
Year Ended December 31,
------------------------
2003 2002
------------------------
(In thousands)
Beginning Balance ........................................ $ 35,723 $ 38,652
Net deposits (withdrawals) before interest credited.... (899) (4,514)
Interest credited ..................................... 1,116 1,585
-----------------------
Net increase in deposits .............................. 217 (2,929)
------------------------
Ending Balance ........................................... $ 35,940 $ 35,723
========================
In the unlikely event that Mutual's liquidation occurs after the
conversion, all claims of creditors (including those of deposit account holders,
to the extent of their deposit balances) would be paid first and followed by
distribution of the liquidation account to certain deposit account holders, with
any assets remaining thereafter distributed to Third Century as the sole
shareholder of Mutual's capital stock. See "The Conversion -- Principal Effects
of Conversion -- Effect on Liquidation Rights."
Borrowings. Mutual focuses on generating high quality loans and then seeks
the best source of funding from deposits, investments or borrowings. At December
31, 2003, Mutual had $19.5 million in borrowings from the Federal Home Loan Bank
of Indianapolis. Mutual had approximately $57 million in eligible assets
available as collateral for advances from the Federal Home Loan Bank of
Indianapolis as of December 31, 2003. Based on Mutual's blanket collateral
agreements, advances from the Federal Home Loan Bank of Indianapolis must be
collateralized by 145% of eligible assets. Therefore, Mutual's
61
eligible collateral would have supported approximately $39.5 million in advances
from the Federal Home Loan Bank of Indianapolis as of December 31, 2003.
Mutual's Board of Directors has adopted a resolution that limits the amount of
authorized borrowings. As of December 31, 2003, authorized borrowings were
limited by that resolution to $40 million. Mutual does not anticipate any
difficulty in obtaining advances appropriate to meet its requirements in the
future.
The following table presents certain information relating to Mutual's
borrowings at or for the years ended December 31, 2003 and 2002.
Year Ended December 31,
-----------------------
2003 2002
-----------------------
(In thousands)
FHLB Advances:
Outstanding at end of period ........................ $19,500 $10,500
Average balance outstanding for period .............. 15,244 5,280
Maximum amount outstanding at any month-end
during the period .......................... 19,500 10,500
Weighted average interest rate during the period..... 3.98% 5.25%
Weighted average interest rate at end of period...... 3.79% 4.38%
Amounts at December 31, 2003
--------------------------------------------------------
2008
2004 2005 2006 2007 thru 2012
-------------------------------------------------------
(In thousands)
1.00% to 1.99%................................... $2,000 $ -- $ -- $ -- $ --
2.00% to 2.99%................................... -- 500 -- -- --
3.00% to 3.99%................................... -- 500 2,000 3,000 5,000
4.00% to 4.99%................................... -- -- -- -- 4,000
5.00% to 5.99%................................... 1,000 1,000 -- -- 500
Above 5.99%...................................... -- -- -- -- --
------------------------------------------------------
Total $3,000 $2,000 $2,000 $3,000 $9,500
======================================================
Properties
Mutual conducts its business from its main office at 80 East Jefferson
Street, Franklin, Indiana 46131. In addition to its main office, it has three
other offices in Franklin: on North Main Street, at the Franklin United
Methodist Community (retirement community) and the Indiana Masonic Home
(retirement community). It also has an office in Trafalgar and an office in
Nineveh. All of its offices are in Johnson County. Mutual owns its main office,
its office on North Main Street in Franklin and its Trafalgar office and it
leases its other offices.
Mutual currently operates three automatic teller machines, with one ATM
located at its office on North Main Street in Franklin and one located at each
of its offices in Trafalgar and Nineveh. Mutual's ATMs participate in the
STAR(R) network.
62
The following table provides certain information with respect to Mutual's
offices as of December 31, 2003:
Net Book
Value
Owned Lease of Property, Approximate
Description or Expiration Year Total Furniture Square
and Address Leased Date Opened Deposits & Fixtures Footage
------------------------------------------------------------------------------------------------------------------------
Main Office
80 East Jefferson Street Owned N/A 1890 $38,014,582 $ 704,296 18,000
Main Street Office
1124 North Main Street Owned N/A 1995 $14,534,055 $ 906,944 4,800
Methodist Community
1070 West Jefferson Street Leased 2004(1) 1997 $10,420,864 $ 22,020 770
Indiana Masonic Home
690 South State Street Leased 2004(2) 2001 $ 1,409,988 $ 7,378 184
Trafalgar Office
2 Trafalgar Square Owned N/A 1993 $ 8,192,329 $ 367,421 2,400
Nineveh Office
7459 South Nineveh Road Leased 2007(3) 2001 $ 6,136,266 $ 73,756 1,300
---------------------
(1) The lease is for a period of five years beginning on January 1, 2000.
(2) The original lease term ended December 31, 2002, and Mutual has options to
renew the lease for additional two-year periods.
(3) The lease is for a term of five years commencing on January 1, 2002.
Mutual's management believes that Mutual's properties are in good condition
and are suitable and adequate for continuing to conduct its business as it is
now being conducted.
Mutual owns the computer and data processing equipment that it uses for
transaction processing, loan origination, and accounting. The net book value of
this equipment was approximately $106,000 at December 31, 2003. The Bank also
has contracted for the data processing and reporting services of Intrieve
Incorporated in Cincinnati, Ohio. The cost of these data processing services is
approximately $27,000 per month.
Service Corporation Subsidiary
Mutual's service corporation subsidiary, Mutual Financial Services, Inc.
("Mutual Financial Services"), was organized in 1991 and has historically
engaged in mortgage life insurance sales and servicing. Mutual Financial
Services purchased its insurance business from Robert D. Heuchan, the President
and Chief Executive Officer of Mutual. All of Mutual's loan officers who solicit
and sell mortgage loans have limited agent licenses issued by the Indiana
Department of Insurance. Mutual sells mortgage insurance products in affiliation
with American General Financial Group, Inc. Mr. Heuchan receives a $100 monthly
management fee for the services he provides for Mutual Financial Services.
All of Mutual's directors serve as directors of Mutual Financial Services
and the executive officers of Mutual Financial Services are as follows:
Robert L. Ellett Chairman
Robert D. Heuchan President and Secretary
Pamela J. Spencer Treasurer
63
Employees
As of December 31, 2003, Mutual employed 42 persons on a full-time basis
and four persons on a part-time basis. None of its employees is represented by a
collective bargaining group. Management considers employee relations to be good.
Mutual's employee benefits for full-time employees include, among other
things, the Financial Institutions Retirement Fund defined contribution pension
plan and the Financial Institutions Thrift Plan 401(k) plan, both of which are
sponsored by Pentegra Group. Other benefits include medical, dental, and
short-term and long-term disability insurance.
Employee benefits are considered by management to be competitive with those
offered by other financial institutions and major employers in our area. See
"Executive Compensation and Related Transactions."
Legal Proceedings
Although Mutual is involved, from time to time, in various legal
proceedings in the normal course of business, there are no material legal
proceedings to which Mutual presently is a party or to which any of its property
is subject.
MANAGEMENT
Directors and Executive Officers of Third Century Bancorp
The board of directors of Third Century consists of the same individuals
who serve as directors of Mutual. Third Century's articles of incorporation and
by-laws require that directors be divided into three classes, as nearly equal in
number as possible. Each class of directors serves for a three-year period, with
approximately one-third of the directors elected each year. Third Century's
officers will be elected annually by its board of directors and will serve at
the board's discretion. The terms of the present directors expire at Third
Century's first shareholders' meeting, which is anticipated to be held in April
2005. At that meeting, it is anticipated that the directors will be nominated to
serve for the following terms: the terms of David A. Coffey and Jerry D. Petro
will expire in 2006; the term of Robert D. Heuchan will expire in 2007; and the
terms of Robert L. Ellett and Robert D. Schafstall will expire in 2008.
The executive officers of Third Century are identified below. The executive
officers of Third Century are elected annually by Third Century's board of
directors.
Name Position with Third Century Bancorp
----------------- ----------------------------------------------------
Robert D. Heuchan President and Chief Executive Officer
David A. Coffey Executive Vice President and Chief Operating Officer
Debra K. Harlow Chief Financial Officer
Directors of Mutual Savings Bank
Mutual's board of directors currently consists of five persons. Each
director holds office for a term of three years, and approximately one-third of
the board is elected at each annual meeting of Mutual's members. There are no
arrangements or understandings between Mutual and any person pursuant to which
that person has been selected a director. Each of Mutual's directors also serves
as a director of Mutual Financial Services.
Mutual's board of directors met 15 times during the fiscal year ended
December 31, 2003. No director attended fewer than 75% of the meetings of the
board of directors held while he served as a director and the meetings of
committees on which he served.
64
Listed below are the directors of Mutual:
Director of
Mutual Savings Expiration
Director Bank Since of Term Position with Mutual Savings Bank
----------------------------------------------- ------- ---------------------------------
David A. Coffey 1999 2006 Chief Operating Officer, Executive
Vice President and Director
Robert L. Ellett 1987 2005 Chairman
Robert D. Heuchan 1991 2007 President, Chief Executive Officer,
Vice Chairman and Director
Jerry D. Petro 1997 2006 Director
Robert D. Schafstall 1999 2005 Director
Presented below is certain information concerning the directors of Mutual:
David A. Coffey (age 41) has served as Chief Operating Officer of Mutual
since 1998 and as a director of Mutual since 1999. He also has served as
Executive Vice President of Mutual since 1999. He was a Senior Vice President
prior to being named Executive Vice President. Mr. Coffey is a graduate of
Franklin College.
Robert L. Ellett (age 64) has served as Chairman of the board of directors
of Mutual since 1999 and as a director of Mutual since 1987. Mr. Ellett also
serves Chairman of Mutual Financial Services. He was the General Manager of
Rytex Company, a stationery products company, until his retirement in December
2001.
Robert D. Heuchan (age 50) has served as the President, Chief Executive
Officer and director of Mutual since 1991. He has served on Mutual Board of
Directors since 1991 and has served as Vice Chairman of the Board since 1999. He
also has been President of Mutual Financial Services 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 58) has served as a director of Mutual since 1997. He
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 60) has served as a director of Mutual since
1999. Since 1972, he has been the Franklin City judge and an attorney in the law
firm of Cutsinger and Schafstall.
Three former directors of Mutual, David B. Ditmars, Sterling M. Haltom and
Robert G. Smith, serve as directors emeritus. They attend Board of Director
meetings and certain committee meetings but do not vote on matters.
Executive Officers of Mutual Savings Bank Who Are Not Directors
Presented below is certain information regarding the executive officer of
Mutual who is not a director:
Name Position
--------------- -----------------------
Debra K. Harlow Chief Financial Officer
Debra K. Harlow (age 52) has served as Chief Financial Officer since January 1,
2004. Prior to that time she had served as EDP Coordinator.
65
Committees of the Boards of Directors of Mutual Savings Bank and Third Century
Bancorp
Third Century has one standing committee, the Audit Committee. The members
of the Audit Committee are Robert L. Ellett, Jerry D. Petro and Robert D.
Schafstall. Emeritus Director Robert G. Smith also attends meetings of the Audit
Committee. The Audit Committee oversees Mutual's internal and external auditors
and monitors Mutual's compliance with regulations.
Mutual has the following committees:
Asset Classification Committee Executive Committee
------------------------------ -------------------
Sterling M. Haltom, Chairman Robert L. Ellett
Robert L. Ellett, Alternate Jerry D. Petro
Jerry D. Petro, Alternate Robert D. Schafstall
Robert D. Schafstall, Alternate
Audit Committee Loan Committee
--------------- --------------
Jerry D. Petro, Chairman Robert L. Ellett
Robert L. Ellett Jerry D. Petro
Robert D. Schafstall Robert D. Schafstall
Robert G. Smith
Compensation Committee Trust Committee
---------------------- ---------------
Robert L. Ellett, Chairman Robert D. Schafstall, Chairman
Jerry D. Petro David B. Ditmars
Robert D. Schafstall
The Asset Classification Committee reviews the monthly past due and problem
loans and monthly loan review report and the quarterly review of loans to one
borrower. The Audit Committee conducts a quarterly review of the internal audit
program of Mutual and meetings with Mutual's external auditors no less
frequently that annually. Mutual's internal auditor and Accounting Department
manager also attend Audit Committee meetings. The Compensation Committee meets
annually to review salary and bonus recommendations for officers and staff and
to set the salary and bonus for Mutual's President. The Executive Committee
provides the outside board members with a manner in which to meet in private
session concerning management and other issues of Mutual on an as needed basis.
The Loan Committee meets as needed to review and approve those loans as outlined
in Mutual's Loan Policy. Lending personnel from Mutual also attend the meetings.
The Trust Committee meets at least quarterly or on an as needed basis to review
trust accounts and policies as outlined in Mutual's Trust Policy. The Trust
Department Manager, Pamela J. Spencer, Mutual's President, Robert D. Heuchan,
and Mutual's Executive Vice President, David A. Coffey, also attend the Trust
Department meetings.
EXECUTIVE COMPENSATION AND RELATED TRANSACTIONS
Compensation of Named Executive Officer
The following table sets forth information as to annual, long-term and
other compensation for services in all capacities to Mutual's President and
Chief Executive Officer and for Mutual's Chief Operating Officer for the fiscal
year ended December 31, 2003. Mutual did not have any other executive officers
who earned over $100,000 in salary and bonuses during that fiscal year.
66
Summary Compensation Table
Annual Compensation
Name and ---------------------------- All Other
Principal Position Year Salary ($) Bonus ($) Compensation
------------------ ---- -------------- ------------ ------------
Robert D. Heuchan,
President and Chief
Executive Officer 2003 $100,000 (1) $30,000 $21,040 (2)
David A. Coffey,
Chief Operating Officer 2003 $ 83,500 (1) $20,000 $17,366 (3)
----------------------
(1) For 2004, Mr. Heuchan's salary is $120,000 and Mr. Coffey's salary is
$100,000.
(2) Consists of director fees in the amount of $12,900, matching contributions
under the Thrift Plan in the amount of $6,340 and $1,800 in fees from
Mutual Financial Services.
(3) Consists of director fees in the amount of $12,000, matching contributions
under the Thrift Plan in the amount of $5,266 and $100 in fees from Mutual
Financial Services.
The value of perquisites and other personal benefits received by Mr.
Heuchan and Mr. Coffey did not exceed the disclosure threshold of the lesser of
$50,000 or 10% of total annual salary and bonus.
Employment Contracts
We have entered into three-year employment contracts with Robert D. Heuchan
and with David A. Coffey. The contracts become effective as of the effective
date of the conversion and extend annually for an additional one-year term to
maintain their three-year term if our board of directors determines to so extend
them, unless notice not to extend is properly given by either party to the
contract. Mr. Heuchan and Mr. Coffey receive an initial salary under the
contract equal to their current salary, subject to increases approved by the
board of directors. Each contract also provides, among other things, for
participation in other fringe benefits and benefit plans available to our
employees.
Mr. Heuchan or Mr. Coffey may terminate his employment upon sixty days'
written notice to us. We may discharge Mr. Heuchan or Mr. Coffey for cause (as
defined in the contract) at any time. If we terminate Mr. Heuchan's or Mr.
Coffey's employment for other than cause or if either of them terminates his own
employment for cause (as defined in the contract), he will receive his base
compensation under the contract for an additional three years if the termination
follows a change of control in Third Century (as defined below), or for the
remaining term of the contract if the termination does not follow a change of
control. In addition, during such period, Mr. Heuchan and Mr. Coffey will
continue to participate in our group insurance plans and retirement plans, or
receive comparable benefits. Moreover, within a period of three months after
such termination following a change of control, each of them will have the right
to cause us to purchase any stock options he holds for a price equal to the fair
market value (as defined in the contact) of the shares subject to such options
minus their option price. If the payments provided for in the contract, together
with any other payments made to Mr. Heuchan or Mr. Coffey, are deemed to be
payments in violation of the "golden parachute" rules of the Internal Revenue
Code, such payments will be reduced to the largest amount which would not cause
us to lose a tax deduction for such payments under those rules. As of the date
hereof, the cash compensation which would be paid under the contracts to Mr.
Heuchan and Mr. Coffey if the contracts were terminated either after a change of
control of Third Century, without cause by us, or for cause by either Mr.
Heuchan or Coffey, would be $360,000 for Mr. Heuchan and $300,000 for Mr.
Coffey. For purposes of these employment contracts, a change of control of Third
Century is generally an acquisition of control, as defined in regulations issued
under the Change in Bank Control Act and the Bank Holding Company Act.
67
The employment contracts provide us with protection of our confidential
business information and protection from competition by Mr. Heuchan and Mr.
Coffey should either of them voluntarily terminate their employment without
cause or be terminated by us for cause.
Compensation of Directors
All of our Bank directors are entitled to receive monthly director fees for
their services. The Chairman receives $1,050 per month, the Vice Chairman
receives $975 per month and each of the other directors receives $900 per month.
Directors also receive $200 for each board meeting attended and $100 for each
committee meeting attended. Emeritus directors receive $450 per month and
non-employee directors receive $100 for each committee meeting attended.
Aggregate fees paid to our directors for the year ended December 31, 2003, were
$70,000 and the aggregate fees paid to our emeritus directors were $14,900.
Directors of Third Century are paid $500 for each quarterly Board meeting
attended.
Each director of Mutual Financial Services receives a quarterly director
fee of $25. In addition to the quarterly fee, Mr. Heuchan also receives a
monthly management fee in the amount of $100. The Board of Mutual Financial
Services meets quarterly.
Benefits
Insurance Plans. Our directors, officers and employees are provided with
medical, vision and dental insurance under group plans sponsored by the Indiana
Financial Institutions Group Insurance Trust and short-term and long-term
disability insurance and accidental death insurance under group plans sponsored
by the GE Group Life Assurance Company. Pension Plan. Our full-time employees
are included in the Financial Institutions Retirement Fund, which is a
noncontributory multiple employer comprehensive pension plan sponsored by
Pentegra Group. Separate actuarial valuations are not made for individual
employer members of the pension plan. Our employees are eligible to participate
in the plan once they have completed one year of service for us and attained age
21, if they complete 1,000 hours of service in a calendar year. An employee's
pension benefits are 100% vested after five years of service.
The pension plan provides for monthly or lump sum retirement benefits
determined as a percentage of the employee's average salary for the employee's
highest five consecutive years of salary multiplied by the employee's years of
service. Salary includes base annual salary as of each January 1, exclusive of
overtime, bonuses, fees and other special payments. Early retirement,
disability, and death benefits are also payable under the pension plan,
depending upon the participant's age and years of service. We expensed $121,500
for the pension plan during the fiscal year ended December 31, 2003.
The estimated base annual retirement benefits presented on a straight-line
basis payable at normal retirement age (65) under the pension plan to persons in
specified salary and years of service classifications are as follows (benefits
noted in the table are not subject to any offset).
68
Pension Plan Table
Years of Service at Age 65
--------------------------------------------------------------------------------
Remuneration 15 20 25 30 35
--------------------------------------------------------------------------------
$125,000 $ 37,500 $ 50,000 $ 62,500 $ 75,000 $ 87,500
150,000 45,000 60,000 75,000 90,000 105,000
175,000 52,500 70,000 87,500 105,000 122,500
200,000 60,000 80,000 100,000 120,000 140,000
225,000 67,500 90,000 112,500 135,000 157,500
250,000 75,000 100,000 125,000 150,000 175,000
300,000 90,000 120,000 150,000 180,000 210,000
400,000 120,000 160,000 200,000 240,000 280,000
450,000 135,000 180,000 225,000 270,000 315,000
500,000 150,000 200,000 250,000 300,000 350,000
Benefits are currently subject to maximum Internal Revenue Code limitations
of $160,000 per year. Robert D. Heuchan and David A. Coffey are the only named
executive officers covered by Mutual's Retirement Plan. Years of service for
pension plan purposes of named executive officers are as follows: Mr. Heuchan -
14 and Mr. Coffey- 5.
Thrift Plan. Employees also participate in a 401(k) called the "Financial
Institutions Thrift Plan" and sponsored by Pentegra Group. The thrift plan is a
contributory multiple employer tax-exempt trust and savings plan. Participants
may elect to make monthly contributions up to 50% of their salary. We make a
matching contribution of 100% of the employee's contribution that does not
exceed 8% of salary. All employee and employer contributions under the plan are
fully vested. During the fiscal year ended December 31, 2003, we made
contributions aggregating $58,337 to this plan, of which $6,340 were allocable
to Mr. Heuchan and $5,266 were allocable to Mr. Coffey.
Currently, participants may invest their accounts under the thrift plan in
and among several funds with varying investment characteristics including equity
funds, government bond funds and money market funds. We intend to add, as an
investment option, an employer stock fund, in which participants may invest all
or a portion of their account balances primarily in Third Century common stock,
within the limitations set forth in the plan document. In connection with the
conversion, a participant's ability to invest in the employer stock fund may be
based on his or her status as an Eligible Account Holder or Supplemental
Eligible Account Holder in the conversion. Regardless of the source of funds,
Eligible Account Holders and Supplemental Eligible Account Holders will be
subject to the restrictions that otherwise apply to the purchase of common stock
in the conversion. See "The Conversion -- Limitations on Common Stock
Purchases."
Generally, distributions from the thrift plan may commence upon a
participant's separation from service for any reason. However, participants may
request in-service distributions from the thrift plan in the form of hardship
withdrawals and loans. The normal distribution is a lump sum upon termination of
employment, but other payment options may be elected. Distributions from the
thrift plan are generally subject to federal and state income taxes and
distributions made before a participant attains age 59 1/2 may also be subject
to a federal excise tax.
Bonus Program. During each of the years ended December 31, 2003 and 2002,
Mutual has paid discretionary cash bonuses to its officers and other employees
pursuant to a bonus program adopted by the board of directors. The bonus program
provides that cash bonuses are paid to Mutual's officers and other employees in
the discretion of the board of directors based the officer's or employee's
responsibilities, the performance of Mutual and the officer's or employee's
performance. For the year
69
ended December 31, 2003, Mutual paid an aggregate of $101,615 in cash bonuses
under the bonus program.
Employee Stock Ownership Plan and Trust
We have established for eligible employees of Mutual an employee stock
ownership plan effective June 1, 2004, subject to the conversion to stock form.
Employees who have completed at least one year of service with Mutual and who
have attained age 21 are eligible to participate. (An employee completes a year
of service when he or she is credited with 1,000 hours of service with Mutual
within a certain consecutive 12-month period of time.) Employees who already
meet the employee stock ownership plan's eligibility requirements on June 1,
2004 will automatically become participants in the employee stock ownership plan
at that time. Otherwise, they must wait until the following July 1 or January 1
after they become eligible to participate.
As part of the conversion, we intend to loan to the employee stock
ownership plan the amount the employee stock ownership plan needs to purchase a
number of shares equal to 8% of the common stock to be sold in the conversion.
The employee stock ownership plan will purchase the shares in the subscription
offering to the extent that sufficient shares remain available after the
purchase of shares by Eligible Account Holders. If insufficient shares are
available for the purchase of 8% of the shares to be sold in the conversion, the
employee stock ownership plan will purchase shares following the conversion in
the open market or in private transactions to the extent that shares are
available for purchase on reasonable terms. The purchase price of shares
purchased in the open market or private transactions is likely to exceed the $10
per share price to be paid in the conversion and, therefore, the purchase of
shares in the open market or private transactions would increase the amount of
the loan that we would need to make to the employee stock purchase plan.
Collateral for the loan to the employee stock ownership plan will be the common
stock purchased by the employee stock ownership plan. The loan will be repaid
principally from our discretionary contributions to the employee stock ownership
plan over a period of 15 years. The initial interest rate for the loan will be
the prime rate on the date the loan is executed. Shares purchased by the
employee stock ownership plan will be held in a suspense account for allocation
among participant accounts as the loan is repaid.
Contributions to the employee stock ownership plan and shares released from
the suspense accounts in an amount proportional to the repayment of the employee
stock ownership plan loan will be allocated among employee stock ownership plan
participant accounts based on each participant's compensation. Benefits
generally become 100% vested after five years of credited service. Participants
in the employee stock ownership plan will receive credit for service prior to
the effective date of the employee stock ownership plan. Prior to the completion
of five years of credited service, a participant who terminates employment for
reasons other than death, retirement, or disability will not receive any
benefits under the employee stock ownership plan. Forfeitures will first be used
to reinstate forfeitures for any re-employed participants, and the remaining
forfeitures, if any, will be reallocated among the remaining accounts of
eligible participating employees as soon as possible after the end of the year
in which the forfeitures occur.
Upon death, early, normal or deferred retirement, disability, or severance
from employment, a participant, beneficiary or surviving spouse, where
applicable, may receive his benefits in cash or stock, with fractional shares of
stock payable in cash. The employee stock ownership plan provides for Third
Century to issue a put option to any participant, beneficiary or surviving
spouse who receives a distribution of common stock. The option permits the
participant (or beneficiary or surviving spouse, if applicable) to sell the
common stock to Third Century at any time during two option periods, as defined
in the employee stock ownership plan, at the then fair market value of the
common stock.
70
If any recipient of shares of stock from the employee stock ownership plan
decides to sell all or a portion of his or her stock, the recipient must notify
the Trustee in writing if an offer to purchase the stock is received. The
Trustee will have the right to purchase the stock for the employee stock
ownership plan before any other potential buyer. However, this right will lapse
within 14 days after the Trustee receives notice of the offer. If the Trustee
does, in fact, buy the stock, the price paid will not be less than the fair
market value of the stock or the price offered by another potential buyer (that
is not Mutual or Third Century) in a good faith, bona fide offer, whichever
price is greater. The Trustee's right of first refusal ends if the stock becomes
publicly traded on a readily established market.
Our contributions to the employee stock ownership plan are not fixed, so
benefits payable under the employee stock ownership plan cannot be estimated. In
1993, the American Institute of Certified Public Accountants issued Statement of
Position 93-6, which requires us to record compensation expense in an amount
equal to the fair market value of the shares released from the suspense account.
In connection with the establishment of the employee stock ownership plan,
Third Century has established a committee of Mutual employees to administer the
employee stock ownership plan. HomeFederal Bank will serve as Trustee of the
employee stock ownership plan. The employee stock ownership plan committee may
instruct the Trustee regarding investment of funds contributed to the employee
stock ownership plan. The employee stock ownership plan Trustee, subject to its
fiduciary duty, must vote all allocated shares held in the employee stock
ownership plan in accordance with the instructions of participating employees
or, if applicable, their beneficiaries. Under the employee stock ownership plan,
subject to the Trustee's fiduciary duty, nondirected shares, and shares held in
the suspense account, will be voted in proportion to the instructions it has
received from participants regarding the allocated stock so long as such vote is
in accordance with the provisions of the Employee Retirement Income Security Act
of 1974, as amended. In all other cases, the employee stock ownership plan
committee is authorized to vote shares of stock held in the employee stock
ownership plan.
Stock Option Plan
At a meeting of Third Century's shareholders to be held at least six months
after the completion of the conversion, the board of directors intends to submit
for shareholder approval the stock option plan for directors, officers and key
employees of Mutual and Third Century. If approved by the shareholders and as of
the date of such approval, common stock in an aggregate amount equal to 10% of
the shares issued in the conversion will be reserved for issuance by Third
Century upon the exercise of the stock options granted under the stock option
plan. Assuming the sale of 1,250,000 shares in the conversion, an aggregate of
125,000 shares would be reserved for issuance under the stock option plan. No
options would be granted under the stock option plan until the date on which
shareholder approval is received. At that time, it is anticipated that options
for the following percentages of shares issued in the conversion will be granted
to the following directors, executive officers and employees of Mutual and Third
Century:
Percentage of Shares
Optionee Issued in Conversion
------------------------ --------------------
Robert D. Heuchan 1.33%
David A. Coffey 1.20%
Other Executive Officers .33%
Other Directors 3.00%
All other employees 2.79%
----
Total 8.65%
====
It is anticipated that these options would be granted for terms of 10 years
(in the case of incentive options) or 10 years and one day (in the case of
non-qualified options), and at an option price per share
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equal to the fair market value of the shares on the date of the grant of the
stock options. If the stock option plan is adopted within one year following the
conversion, options will become exercisable at a rate of 20% at the end of each
twelve (12) months of service with us after the date of grant, subject to early
vesting in the event of death or disability, or a change in control of Third
Century. Options granted under the stock option plan are adjusted for capital
changes such as stock splits and stock dividends. Unless Third Century decides
to call an earlier special meeting of shareholders, the date of grant of these
options is expected to be the date of Third Century's annual meeting of
shareholders to be held at least six months after the conversion.
The stock option plan will be administered by a committee of non-employee
members of Third Century's board of directors. Options granted under the stock
option plan to employees could be "incentive" stock options designed to result
in a beneficial tax treatment to the employee but no tax deduction to Third
Century. Non-qualified stock options could also be granted under the stock
option plan and will be granted to the non-employee directors who receive grants
of stock options. In the event an option recipient terminated his or her
employment or service as an employee or director, the options would terminate
during certain specified periods.
Recognition and Retention Plan
At a meeting of Third Century's shareholders to be held at least six months
after the completion of the conversion, the board of directors also intends to
submit the recognition and retention plan for shareholder approval. The
recognition and retention plan will provide our directors, officers and key
employees with an ownership interest in Third Century in a manner designed to
encourage them to continue their service with us. Mutual will contribute funds
to the recognition and retention plan from time to time to enable it to acquire
an aggregate amount of common stock equal to up to 4% of the shares of common
stock sold in the conversion, either directly from Third Century or on the open
market. Four percent of the shares sold in the conversion would amount to 42,500
shares, 50,000 shares, 57,500 shares or 66,125 shares at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range,
respectively. In the event that additional authorized but unissued shares would
be acquired by the recognition and retention plan after the conversion, the
interests of existing shareholders would be diluted. Our executive officers and
directors will be awarded common stock under the recognition and retention plan
without having to pay cash for the shares.
No awards under the recognition and retention plan would be made until the
date the recognition and retention plan is approved by Third Century's
shareholders. At that time, it is anticipated that awards of the following
number of shares would be made to the following directors and executive officers
of Third Century and Mutual:
Percentage of Shares
Issued in Conversion to
Be Awarded Under
Recipient of Awards Recognition and Retention Plan
------------------------- ------------------------------
Robert D. Heuchan 1.00%
David A. Coffey 1.00%
Other Executive Officers .07%
Other Directors 1.20%
All other employees 0.50%
----
Total 3.77%
====
Awards would be nontransferable and nonassignable, and during the lifetime
of the recipient could only be earned by and made to him or her. If the
recognition and retention plan is adopted within one year of the conversion, the
shares which are subject to an award would vest and be earned by the recipient
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at a rate of 20% of the shares awarded at the end of each full twelve (12)
months of service with us after the date of grant of the award. Awards are
adjusted for capital changes such as stock dividends and stock splits.
Notwithstanding the foregoing, awards would be 100% vested upon termination of
employment or service due to death or disability and upon a change in control of
Third Century. Assuming the recognition and retention plan is adopted within one
year of the conversion, if an executive officer's or director's employment
and/or service were to terminate for other reasons, the grantee would forfeit
any nonvested award. If employment or service is terminated for cause (as would
be defined in the recognition and retention plan), or if conduct would have
justified termination or removal for cause, shares not already delivered under
the recognition and retention plan, whether or not vested, could be forfeited by
resolution of the board of directors of Third Century.
When shares become vested and could actually be distributed in accordance
with the recognition and retention plan, the participants would also receive
amounts equal to accrued dividends and other earnings or distributions payable
with respect thereto. When shares become vested under the recognition and
retention plan, the participant will recognize income equal to the fair market
value of the common stock earned, determined as of the date of vesting, unless
the recipient makes an election under Section 83(b) of the Internal Revenue Code
to be taxed earlier. The amount of income recognized by the participant would be
a deductible expense for tax purposes for Mutual.
Transactions With Certain Related Persons
We follow a policy of offering to our directors, officers, and employees
real estate mortgage loans secured by their principal residence and other loans.
These loans are made in the ordinary course of business with the same
collateral, interest rates and underwriting criteria as those of comparable
transactions prevailing at the time and do not involve more than the normal risk
of collectibility or present other unfavorable features. All such loans at
December 31, 2003 were secured by the principal residences of directors and
executive officers, except that Mr. Ellett has a loan secured by rental real
estate and a loan secured by commercial real estate and Mr. Petro has two loans
secured by commercial real estate and a loan secured by a commercial vehicle.
Current law requires that all loans or extensions of credit to executive
officers, directors, and principal shareholders be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with the general public and must not involve
more than the normal risk of repayment or present other unfavorable features. In
addition, Mutual's lending to each of its executive officers for loans other
than the purchase of a residence is limited to an amount equal to the greater of
$25,000 or 2.5 percent of Mutual's capital and unimpaired surplus, but not to
exceed $100,000. Our policy regarding loans to directors and all employees meets
the requirements of current law. All loans to our officers, directors and
employees are and have been approved by a majority of the disinterested members
of the board of directors. The aggregate amount of loans to directors and
executive officers at December 31, 2003, was approximately $1.3 million.
Bob Heuchan, Mutual's President and Chief Executive Officer, also serves as
President and Treasurer of Mutual Financial Services. He receives a $100 monthly
management fee for the services he provides to Mutual Financial Services, which
include keeping the financial records and preparing financial statements,
negotiating agreements with insurance companies and overseeing compliance with
insurance regulations. The disinterest directors on Mutual's Board of Board of
Directors review and approve his services and fee on a quarterly basis.
The law firm of Cutsinger and Schafstall, of which Director Robert D.
Schafstall is a partner, serves as counsel to Mutual in connection with loan
delinquencies and related matters. Mutual expects to continue to use the service
of this law firm for such matters following the conversion.
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REGULATION
Bank Holding Company Regulation
Third Century will become registered as a bank holding company and will be
subject to the regulations of the Federal Reserve Board under the Bank Holding
Company Act of 1956, as amended. Bank holding companies are required to file
periodic reports with, and are subject to periodic examination by, the Federal
Reserve Board. The Federal Reserve Board has issued regulations under the Bank
Holding Company Act requiring a bank holding company to serve as a source of
financial and managerial strength to its subsidiary banks. It is the policy of
the Federal Reserve Board that, pursuant to this requirement, a bank holding
company should stand ready to use its resources to provide adequate capital
funds to its subsidiary banks during periods of financial stress or adversity.
Additionally, under the Federal Deposit Insurance Corporation Improvement Act of
1991, a bank holding company is required to guarantee the compliance of any
insured depository institution subsidiary that may become "undercapitalized" (as
defined in the statute) with the terms of any capital restoration plan filed by
such subsidiary with its appropriate federal banking agency up to the lesser of
(i) an amount equal to 5% of the institution's total assets at the time the
institution became undercapitalized, or (ii) the amount that is necessary (or
would have been necessary) to bring the institution into compliance with all
applicable capital standards as of the time the institution fails to comply with
such capital restoration plan. Under the Bank Holding Company Act, the Federal
Reserve Board has the authority to require a bank holding company to terminate
any activity or relinquish control of a nonbank subsidiary (other than a nonbank
subsidiary of a bank) upon the Federal Reserve Board's determination that such
activity or control constitutes a serious risk to the financial soundness and
stability of any bank subsidiary of the bank holding company.
Third Century will be prohibited by the Bank Holding Company Act from
acquiring direct or indirect control of more than 5% of the outstanding shares
of any class of voting stock or substantially all of the assets of any bank or
merging or consolidating with another bank holding company without prior
approval of the Federal Reserve Board. Additionally, Third Century will be
prohibited by the Bank Holding Company Act from engaging in or from acquiring
ownership or control of more than 5% of the outstanding shares of any class of
voting stock of any company engaged in a nonbanking business unless such
business is determined by the Federal Reserve Board to be so closely related to
banking as to be a proper incident thereto.
Capital Adequacy Guidelines for Bank Holding Companies
The Federal Reserve Board is the federal regulatory and examining authority
for bank holding companies. The Federal Reserve Board has adopted capital
adequacy guidelines for bank holding companies.
Bank holding companies are required to comply with the Federal Reserve
Board's risk-based capital guidelines which require a minimum ratio of total
capital to risk-weighted assets (including certain off-balance sheet activities
such as standby letters of credit) of 8%. At least half of the total required
capital must be "Tier I capital," consisting principally of common stockholders'
equity, noncumulative perpetual preferred stock, a limited amount of cumulative
perpetual preferred stock and minority interests in the equity accounts of
consolidated subsidiaries, less certain goodwill items. The remainder ("Tier II
capital") may consist of a limited amount of subordinated debt and
intermediate-term preferred stock, certain hybrid capital instruments and other
debt securities, cumulative perpetual preferred stock, and a limited amount of
the general loan loss allowance. In addition to the risk-based capital
guidelines, the Federal Reserve Board has adopted a Tier I (leverage) capital
ratio under which a bank holding company must maintain a minimum level of Tier I
capital to average total consolidated assets of 3% in the case of bank holding
companies which have the highest regulatory examination ratings and are not
contemplating significant growth or expansion. All other bank holding companies
are expected to maintain a ratio of at least 1% to 2% above the stated minimum.
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Bank Regulation
Mutual is organized under the laws of Indiana and as such is subject to the
supervision of the Indiana Department of Financial Institutions (the "DFI"),
whose examiners conduct periodic examinations of state banks. We are not a
member of the Federal Reserve System, so our principal federal regulator is the
FDIC, which also conducts periodic examinations of us. Our deposits continue to
be insured by the Savings Association Insurance Fund administered by the FDIC
and are subject to FDIC's rules and regulations respecting the insurance of
deposits. See "-- Insurance of Deposits."
Both federal and state law extensively regulate various aspects of the
banking business such as reserve requirements, truth-in-lending and
truth-in-savings disclosure, equal credit opportunity, fair credit reporting,
trading in securities and other aspects of banking operations. Current federal
law also requires banks, among other things, to make deposited funds available
within specified time periods.
Insured state-chartered banks are prohibited under the FDIC Improvement Act
from engaging as principal in activities that are not permitted for national
banks, unless: (i) the FDIC determines that the activity would pose no
significant risk to the appropriate deposit insurance fund, and (ii) the bank
is, and continues to be, in compliance with all applicable capital standards.
Federal Home Loan Bank System
We are a member of the Federal Home Loan Bank System, which consists of 12
regional banks. The Federal Home Loan Bank System provides a central credit
facility primarily for member savings and loan associations and savings banks
and other member financial institutions. At December 31, 2003, our investment in
stock of the Federal Home Loan Bank of Indianapolis was $975,000. For the year
ended December 31, 2003, dividends paid to us by the Federal Home Loan Bank of
Indianapolis totaled $35,647.
All 12 Federal Home Loan Banks are required by law to provide funds to
establish affordable housing programs through direct loans or interest subsidies
on advances to members to be used for lending at subsidized interest rates for
low- and moderate-income, owner-occupied housing projects, affordable rental
housing, and certain other community projects. These contributions and
obligations could adversely affect the value of the Federal Home Loan Bank stock
in the future. A reduction in the value of such stock may result in a
corresponding reduction in our capital.
The Federal Home Loan Bank of Indianapolis serves as a reserve or central
bank for member institutions within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the Federal
Home Loan Bank System. It makes advances to members in accordance with policies
and procedures established by the Federal Home Loan Bank and the Board of
Directors of the Federal Home Loan Bank of Indianapolis.
All Federal Home Loan Bank advances must be fully secured by sufficient
collateral as determined by the Federal Home Loan Bank. Eligible collateral
includes first mortgage loans less than 60 days delinquent or securities
evidencing interests therein, securities (including mortgage-backed securities)
issued, insured or guaranteed by the federal government or any agency thereof,
Federal Home Loan Bank deposits and, to a limited extent, real estate with
readily ascertainable value in which a perfected security interest may be
obtained. Other forms of collateral may be accepted as over collateralization
or, under certain circumstances, to renew outstanding advances. All long-term
advances are required to provide funds for residential home financing and the
Federal Home Loan Bank has established standards of community service that
members must meet to maintain access to long-term advances.
Interest rates charged for advances vary depending upon maturity, the cost
of funds to the Federal Home Loan Bank of Indianapolis and the purpose of the
borrowing.
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Insurance of Deposits
Deposit Insurance. The FDIC is an independent federal agency that insures
the deposits, up to prescribed statutory limits, of banks and thrifts and
safeguards the safety and soundness of the banking and thrift industries. The
FDIC administers two separate insurance funds, the Bank Insurance Fund for
commercial banks and state savings banks and the Savings Association Insurance
Fund for savings institutions and banks that have acquired deposits from savings
institutions or that previously were savings institutions.
Assessments. The FDIC is authorized to establish separate annual assessment
rates for deposit insurance for members of the Bank Insurance Fund and members
of the Savings Association Insurance Fund. The FDIC may increase assessment
rates for either fund if necessary to restore the fund's ratio of reserves to
insured deposits to the target level within a reasonable time and may decrease
such rates if such target level has been met. The FDIC has established a
risk-based assessment system for both Savings Association Insurance Fund and
Bank Insurance Fund members. Under this system, assessments vary depending on
the risk the institution poses to its deposit insurance fund. Such risk level is
determined based on the institution's capital level and the FDIC's level of
supervisory concern about the institution. In addition to the assessment for
deposit insurance, insured institutions are required to pay on bonds issued in
the late 1980s by the Financing Corporation, which is a federally-chartered
corporation that was organized to provide some of the financing to resolve the
thrift crisis in the 1980s. By law, payments on Financing Corporation
obligations have been shared equally between Bank Insurance Fund members and
Savings Association Insurance Fund members since January 1, 2000.
Although Congress has considered merging the Savings Association Insurance
Fund and the Bank Insurance Fund, unless and until that occurs, savings banks
with Savings Association Insurance Fund deposits may not transfer deposits into
the Bank Insurance Fund system without paying various exit and entrance fees.
Such exit and entrance fees need not be paid if a Savings Association Insurance
Fund institution converts to a bank charter or merges with a bank, as long as
the resulting bank continues to pay applicable insurance assessments to the
Savings Association Insurance Fund, and as long as certain other conditions are
met. Therefore, although Mutual converted to a state savings bank in 1994, its
deposits continue to be insured by the Savings Association Insurance Fund.
Bank Regulatory Capital
The FDIC has adopted risk-based capital ratio guidelines to which Mutual
generally is subject. The guidelines establish a systematic analytical framework
that makes regulatory capital requirements more sensitive to differences in risk
profiles among banking organizations. Risk-based capital ratios are determined
by allocating assets and specified off-balance sheet commitments to four risk
weighted categories, with higher levels of capital being required for the
categories perceived as representing greater risk.
Like the capital guidelines established by the Federal Reserve Board for
Third Century, these guidelines divide a bank's capital into two tiers. The
first tier ("Tier I") includes common equity, certain non-cumulative perpetual
preferred stock (excluding auction rate issues) and minority interests in equity
accounts of consolidated subsidiaries, less goodwill and certain other
intangible assets (except mortgage servicing rights and purchased credit card
relationships, subject to certain limitations). Supplementary ("Tier II")
capital includes, among other items, cumulative perpetual and long-term
limited-life preferred stock, mandatory convertible securities, certain hybrid
capital instruments, term subordinated debt and the allowance for loan and lease
losses, subject to certain limitations, less required deductions. Banks are
required to maintain a total risk-based capital ratio of 8.0%, of which 4% must
be Tier I capital. The FDIC may, however, set higher capital requirements when a
bank's particular circumstances warrant.
76
Banks experiencing or anticipating significant growth are expected to maintain
capital ratios, including tangible capital positions, well above the minimum
levels.
In addition, the FDIC established guidelines prescribing a minimum Tier I
leverage ratio (Tier I capital to adjusted total assets as specified in the
guidelines). These guidelines provide for a minimum Tier I leverage ratio of 3%
for banks that meet certain specified criteria, including that they have the
highest regulatory rating and are not experiencing or anticipating significant
growth. All other banks are required to maintain a Tier I leverage ratio of 3%
plus an additional cushion of at least 100 to 200 basis points.
Prompt Corrective Regulatory Action
The Federal Deposit Insurance Corporation Improvement Act requires, among
other things, federal bank regulatory authorities to take "prompt corrective
action" with respect to banks that do not meet minimum capital requirements. For
these purposes, the Federal Deposit Insurance Corporation Improvement Act
establishes five capital tiers: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. At December 31, 2003, Mutual was categorized as "well
capitalized," meaning that its total risk-based capital ratio exceeded 10%, its
Tier I risk-based capital ratio exceeded 6%, its leverage ratio exceeded 5%, and
it was not subject to a regulatory order, agreement or directive to meet and
maintain a specific capital level for any capital measure.
The FDIC may order savings banks that have insufficient capital to take
corrective actions. For example, a savings bank that is categorized as
"undercapitalized" would be subject to growth limitations and would be required
to submit a capital restoration plan, and a holding company that controls such a
savings bank would be required to guarantee that the savings bank complies with
the restoration plan. "Significantly undercapitalized" savings banks would be
subject to additional restrictions. Savings banks deemed by the FDIC to be
"critically undercapitalized" would be subject to the appointment of a receiver
or conservator.
Dividend Limitations
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 will establish a liquidation
account for the benefit of Eligible Account Holders and Supplemental Eligible
Account Holders. See "The Conversion -- Principal Effects of Conversion." Mutual
will not be 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 prompt
corrective action provisions of the Federal Deposit Insurance Corporation
Improvement Act, which are discussed above. Mutual's capital levels at
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December 31, 2003 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.
Repurchase Limitations
Regulations promulgated by the Federal Reserve Board provide that a bank
holding company must file written notice with the Federal Reserve Board prior to
any repurchase of its equity securities if the gross consideration for the
purchase, when aggregated with the net consideration paid by the bank holding
company for all repurchases during the preceding 12 months, is equal to 10% or
more of the holding company's consolidated net worth. This notice requirement is
not applicable, however, to a bank holding company that exceeds the thresholds
established for a well capitalized bank and that satisfies certain other
regulatory requirements.
Under Indiana law, Third Century will be precluded from repurchasing its
equity securities if, after giving effect to such repurchase, Third Century
would be unable to pay its debts as they become due or Third Century's assets
would be less than its liabilities and obligations to preferential shareholders.
Loans-to-One Borrower
Under Indiana law, the total loans and extension of credit by an
Indiana-chartered savings bank to a borrower outstanding at one time and not
fully secured may not exceed 15% of such bank's capital and unimpaired surplus.
An additional amount up to 10% of the bank's capital and unimpaired surplus may
be loaned to the same borrower if such loan is fully secured by readily
marketable collateral having a market value, as determined by reliable and
continuously available price quotations, at least equal to the amount of such
additional loans outstanding.
As of December 31, 2003, the principal amount of the largest aggregate
amount of loans which Mutual had to any one borrower was approximately $894,828.
Mutual had no loans outstanding which management believes violate the applicable
loans-to-one borrower limits. Mutual does not believe that the loans-to-one
borrower limits will have a significant impact on its business, operations and
earnings following the conversion.
Limitations on Rates Paid for Deposits
Regulations promulgated by the FDIC pursuant to the Federal Deposit
Insurance Corporation Improvement Act place limitations on the ability of
insured depository institutions to accept, renew or roll over deposits by
offering rates of interest which are significantly higher than the prevailing
rates of interest on deposits offered by other insured depository institutions
having the same type of charter in such depository institution's normal market
area. Under these regulations, "well-capitalized" depository institutions may
accept, renew or roll such deposits over without restriction, "adequately
capitalized" depository institutions may accept, renew or roll such deposits
over with a waiver from the FDIC (subject to certain restrictions on payments of
rates) and "undercapitalized" depository institutions may not accept, renew or
roll such deposits over. The regulations contemplate that the definitions of
"well capitalized," "adequately capitalized" and "undercapitalized" will be the
same as the definition adopted by the agencies to implement the corrective
action provisions of the Federal Deposit Insurance Corporation Improvement Act.
Mutual does not believe that these regulations will have a materially adverse
effect on its current operations.
Federal Reserve System
Federal Reserve Board regulations require savings institutions and savings
banks to maintain reserves against their transaction accounts (primarily
negotiable order of withdrawal accounts) and certain
78
nonpersonal time deposits. The reserve requirements are subject to adjustment by
the Federal Reserve Board. As of December 31, 2003, Mutual was in compliance
with the applicable reserve requirements of the Federal Reserve Board.
Additional Limitations on Activities
Laws and regulations of the FDIC generally provide that Mutual may not
engage as principal in any type of activity, or in any activity in an amount,
not permitted for national banks, or directly acquire or retain any equity
investment of a type or in an amount not permitted for national banks. The FDIC
has authority to grant exceptions from these prohibitions (other than with
respect to non-service corporation equity investments) if it determines no
significant risk to the insurance fund is posed by the amount of the investment
or the activity to be engaged in, and if Mutual is and continues to be in
compliance with fully phased-in capital standards. National banks are generally
not permitted to hold equity investments other than shares of service
corporations and certain federal agency securities. Moreover, the activities in
which service corporations are permitted to engage are limited to those of
service corporations for national banks.
Other Indiana Regulations
As an Indiana-chartered savings bank, Mutual derives its authority from,
and is regulated by, the DFI. The DFI has the right to promulgate rules and
regulations necessary for the supervision and regulation of Indiana-chartered
savings banks under its jurisdiction and for the protection of the public
investing in such institutions. The regulatory authority of the DFI includes,
but is not limited to, the establishment of reserve requirements; the regulation
of the payment of dividends; the regulation of stock repurchases, the regulation
of incorporators, shareholders, directors, officers and employees; the
establishment of permitted types of withdrawable accounts and types of contracts
for savings programs, loans and investments; and the regulation of the conduct
and management of savings banks, chartering and branching of institutions,
mergers, conversions and conflicts of interest.
The DFI generally conducts regular annual examinations of Indiana-chartered
savings banks such as Mutual. The purpose of such examination is to assure that
institutions are being operated in compliance with applicable Indiana law and
regulations and in a safe and sound manner. In addition, the DFI is required to
conduct an examination of any institution as often as it deems necessary. The
DFI has the power to issue cease and desist orders if any person or institution
is engaging in, or has engaged in, any unsafe or unsound practice in the conduct
of its business or has or is violating any other law, rule or regulation and, as
to officers and directors of an Indiana savings bank, breached his fiduciary
duty as an officer or director.
With the approval of the DFI, a savings bank may merge or consolidate with
another savings bank, a state bank, a national bank, or a federal or state
savings association. In considering whether to approve or disapprove such a
merger or consolidation, the DFI is to consider the following factors: (i)
whether the institutions are operated in a safe, sound and prudent manner; (ii)
whether the financial conditions of any of the institutions will jeopardize the
financial stability of the other institutions; (iii) whether the proposed merger
or consolidation will result in an institution that has inadequate capital,
unsatisfactory management or poor earnings prospects; (iv) whether the
management or other principals of the resulting institution are qualified by
character and financial responsibility to control and operate in a legal and
proper manner the resulting institution; (v) whether the interests of the
depositors and creditors of the institutions and the public generally will be
jeopardized by the transaction; and (vi) whether the institutions furnish all of
the information the DFI requires in reaching its decision.
Acquisitions of control of Mutual by a bank or bank holding company would
require the prior approval of the DFI. Control is defined as the power, directly
or indirectly, (i) to vote 25.0% or more of
79
the voting stock of an Indiana-chartered savings bank or (ii) to exercise a
controlling influence over the management or policies of a savings bank.
Safety and Soundness Standards
In 1995, the federal banking agencies adopted final safety and soundness
standards for all insured depository institutions. The standards, which were
issued in the form of guidelines rather than regulations, relate to internal
controls, information systems, internal audit systems, loan underwriting and
documentation, compensation and interest rate exposure. In general, the
standards are designed to assist the federal banking agencies in identifying and
addressing problems at insured depository institutions before capital becomes
impaired. If an institution fails to meet these standards, the appropriate
federal banking agency may require the institution to submit a compliance plan.
Failure to submit a compliance plan may result in enforcement proceedings.
Transactions with Affiliates
Mutual is subject to Sections 22(h), 23A and 23B of the Federal Reserve
Act, which restrict financial transactions between banks and affiliated
companies. The statute limits credit transactions between a bank and its
executive officers and its affiliates, prescribes terms and conditions for bank
affiliate transactions deemed to be consistent with safe and sound banking
practices, and restricts the types of collateral security permitted in
connection with a bank's extension of credit to an affiliate.
Federal Securities Law
The shares of common stock of Third Century will be registered with the
Securities and Exchange Commission under the Securities Exchange Act of 1934
(the "1934 Act"). Third Century will be subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the 1934
Act and the rules of the Securities and Exchange Commission issued under the
1934 Act. After three years following Mutual's conversion to stock form, if
Third Century has fewer than 300 shareholders of record, it may deregister its
shares under the 1934 Act and cease to be subject to the foregoing requirements.
Shares of common stock held by persons who are affiliates of Third Century
may not be resold without registration unless sold in accordance with the resale
restrictions of Rule 144 under the Securities Act of 1933 as amended (the "1933
Act"). If Third Century meets the current public information requirements under
Rule 144, each affiliate of Third Century who complies with the other conditions
of Rule 144 (including those that require the affiliate's sale to be aggregated
with those of certain other persons) would be able to sell in the public market,
without registration, a number of shares not to exceed, in any three-month
period, the greater of (i) 1% of the outstanding shares of Third Century or (ii)
the average weekly volume of trading in such shares during the preceding four
calendar weeks.
Community Reinvestment Act Matters
Federal law requires disclosures of depository institutions' ratings under
the Community Reinvestment Act of 1977. The disclosure includes both a four-unit
descriptive rating -- outstanding, satisfactory, needs to improve, and
substantial noncompliance -- and a written evaluation of each institution's
performance. Each Federal Home Loan Bank is required to establish standards of
community investment or service that its members must maintain for continued
access to long-term advances from the Federal Home Loan Banks. The standards
take into account a member's performance under the Community Reinvestment Act
and its record of lending to first-time home buyers. The examiners have
determined that Mutual has a satisfactory record of meeting community credit
needs.
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TAXATION
Federal Taxation
Historically, savings institutions, such as Mutual, have been permitted to
compute bad debt deductions using either the bank experience method or the
percentage of taxable income method. However, for years beginning after December
31, 1995, no savings institution could use the percentage of taxable income
method of computing its allowable bad debt deduction for tax purposes. Instead,
all savings institutions are required to compute their allowable deduction using
the experience method. As a result of the repeal of the percentage of taxable
income method, reserves taken after 1987 using the percentage of taxable income
method generally must be included in future taxable income over a six-year
period, although a two-year delay may be permitted for associations meeting a
residential mortgage loan origination test. We do not have any reserves taken
after 1987 that must be recaptured. However, our pre-1988 reserve, for which no
deferred taxes have been recorded, must be recaptured into income if (i) Mutual
no longer qualifies as a bank under the Internal Revenue Code, or (ii) it pays
out excess dividends or distributions. Although we do have some reserves from
before 1988, we are not required to recapture these reserves.
Depending on the composition of its items of income and expense, a savings
institution may be subject to the alternative minimum tax. A savings institution
must pay an alternative minimum tax on the amount (if any) by which 20% of
alternative minimum taxable income, as reduced by an exemption varying with
alternative minimum taxable income, exceeds the regular tax due. Alternative
minimum taxable income equals regular taxable income increased or decreased by
certain tax preferences and adjustments, including depreciation deductions in
excess of that allowable for alternative minimum tax purposes, tax-exempt
interest on most private activity bonds issued after August 7, 1986 (reduced by
any related interest expense disallowed for regular tax purposes), the amount of
the bad debt reserve deduction claimed in excess of the deduction based on the
experience method and 75% of the excess of adjusted current earnings over
alternative minimum taxable income (before this adjustment and before any
alternative tax net operating loss). Alternative minimum taxable income may be
reduced only up to 90% by net operating loss carryovers, but alternative minimum
tax paid can be credited against regular tax due in later years.
For federal income tax purposes, we have been reporting our income and
expenses on the accrual method of accounting. Our federal income tax returns
have not been audited in recent years.
State Taxation
Mutual is subject to Indiana's Financial Institutions Tax, which is imposed
at a flat rate of 8.5% on "adjusted gross income." "Adjusted gross income," for
purposes of the Financial Institutions Tax, begins with taxable income as
defined by Section 63 of the Internal Revenue Code and, thus, incorporates
federal tax law to the extent that it affects the computation of taxable income.
Federal taxable income is then adjusted by several Indiana modifications. Other
applicable state taxes include generally applicable sales and use taxes and real
and personal property taxes. Mutual's state income tax returns have not been
audited in recent years.
For further information relating to the tax consequences of the conversion,
see "The Conversion -- Principal Effects of Conversion -- Tax Effects."
THE CONVERSION
The boards of directors of Mutual and Third Century and the DFI have
approved the plan of conversion subject to approval of the plan of conversion by
our members at a special meeting of members and subject to the satisfaction of
certain other conditions imposed by the DFI. The approval of the plan of
conversion
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by the DFI does not constitute a recommendation or endorsement of the plan of
conversion by the DFI. A Notice of Intent to Convert from mutual to stock form
was filed with the FDIC and we have received a letter of non-objection from the
FDIC.
General
On February 12, 2004, our board of directors adopted a plan of conversion
pursuant to which we will convert from an Indiana mutual savings bank to an
Indiana stock savings bank and become a wholly owned subsidiary of Third
Century. The plan was amended on March 12, 2004. The conversion will include
adoption of the proposed Articles of Stock Charter Conversion and Code of
By-Laws that will authorize our issuance of capital stock. Under the plan of
conversion, our capital stock is being sold to Third Century and the common
stock of Third Century is being offered to our customers and, if necessary, to
the general public, with a preference given to residents of Johnson County,
Indiana.
We have mailed a proxy statement to each person eligible to vote at the
special meeting. The proxy statement contains information concerning the
business purposes of the conversion and the effects of the plan of conversion
and the conversion with respect to voting rights, liquidation rights,
continuation of our business and of existing savings accounts, FDIC insurance
and loans. The proxy statement also describes the manner in which the plan of
conversion may be amended or terminated.
Reasons for Conversion
As a stock institution, we will be structured in the form used by
commercial banks, most business entities, and most savings institutions.
Converting to the stock form is intended to have a positive effect on our future
growth and performance by: (i) affording our depositors, other customers and
employees the opportunity to become shareholders of Third Century and thereby
participate more directly in both Mutual's and Third Century's future; (ii)
providing Third Century with the flexibility, if deemed appropriate, to engage
in new banking-related activities, to improve the breadth of services offered by
Mutual, and potentially to expand through mergers and acquisitions by permitting
the offering of equity participations to the shareholders of acquired companies;
(iii) providing substantially increased net worth and equity capital for
investment in our business, thus enabling management to pursue new and
additional lending and investment opportunities and to expand operations; and
(iv) providing future access to capital markets through the sale of stock of
Third Century in order to generate additional capital to accommodate or promote
future growth. We believe that the increased capital and operating flexibility
will enhance our competitiveness with other types of financial services
organizations. Although our current members will, upon conversion, lose the
voting and liquidation rights they presently have as members (except to the
limited extent of their rights in the liquidation account established in the
conversion), they are being offered a priority right to purchase shares in the
conversion and thereby obtain voting and liquidation rights in Third Century.
The net proceeds to us from the sale of common stock offered hereby, after
retention by Third Century of 50% of the net proceeds, will increase our net
worth and thus provide an even stronger capital base to support our lending and
investment activities. This increase in our net worth, when combined with the
extra expenses we will incur as a publicly-traded company, will also, however,
likely cause our return on equity to decrease in comparison with our performance
in previous years. The conversion also will provide us with new opportunities to
attract and retain talented and experienced personnel through offering stock
incentive programs.
Our board of directors believes that the conversion to a holding company
structure is the best way to enable us to diversify our business activities
should we choose to do so. Currently, there are no plans, written or oral, for
Third Century to engage in any material activities apart from holding our shares
of stock, although the board may determine to expand Third Century's activities
after the conversion.
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The preferred stock and additional common stock of Third Century being
authorized in the conversion will be available for future acquisitions (although
Third Century has no current discussions, arrangements or agreements, written or
oral, with respect to any acquisition) and for issuance and sale to raise
additional equity capital, subject to market conditions and generally without
shareholder approval. Third Century's ability to raise additional funds through
the sale of debt securities to the public or institutional investors also should
be enhanced by the increase in its equity capital base provided by the
conversion. Although Third Century currently has no plans with respect to future
issuances of equity or debt securities, the more flexible operating structure
provided by Third Century and the stock form of ownership is expected to assist
us in competing aggressively with other financial institutions in our market
area.
The conversion also will permit our members who subscribe for shares of
common stock to become shareholders of Third Century, thereby allowing members
to indirectly own stock in the financial organization in which they maintain
deposit accounts. Such ownership may encourage shareholders to promote us to
others, thereby further contributing to our growth.
Principal Effects of Conversion
General. Each savings depositor in a mutual savings bank such as Mutual has
both a savings account and a pro rata ownership in the net worth of that
institution, based upon the balance in his or her savings account, which has no
tangible market value separate from the savings account. Any other depositor who
opens a savings account obtains a pro rata interest in the net worth of the
savings bank without any additional payment beyond the amount of the deposit. A
depositor who reduces or closes his or her account receives a portion or all of
the balance in the account but nothing for his or her ownership interest, which
is lost to the extent that the balance in the account is reduced. As a result,
depositors normally can only realize the value of their ownership in the
unlikely event that the mutual bank is liquidated. In such event, the depositors
of record at that time, as owners, would share pro rata in any residual retained
earnings (any remaining net worth) after other claims are paid.
Upon conversion to stock form, the ownership of our net worth will be
represented by the outstanding shares of stock that will be owned by Third
Century. Certificates representing ownership of the common stock of Third
Century will be issued and shareholders will be able to transfer these
certificates with no effect on any account the seller may hold with us.
Continuity. While the conversion is being accomplished, we will continue
without interruption our normal business of accepting deposits and making loans.
After the conversion, we will continue to provide services for account holders
and borrowers under current policies carried on by our present management and
staff.
Our directors at the time of conversion will continue to serve as our
directors after the conversion until the expiration of their current terms, and
thereafter, if reelected. All of our executive officers at the time of
conversion will retain their positions after the conversion.
Effect on Deposit Accounts. Under the plan of conversion, each of our
depositors at the time of the conversion will automatically continue as a
depositor after the conversion, and each deposit account will remain the same
with respect to deposit balance, interest rate and other terms. Each account
also will continue to be insured by the FDIC in exactly the same way as before.
Depositors will continue to hold their existing certificates, passbooks and
other evidence of their accounts.
Effect on Loans of Borrowers. None of our loans will be affected by the
conversion. The amount, interest rate, maturity and security for each loan will
be unchanged.
Effect on Voting Rights of Members. Currently in our mutual form, our
depositor and borrower members have voting rights and may vote for the election
of directors. Following the conversion,
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depositors and borrowers will cease to have voting rights. All voting rights in
Mutual will be vested in Third Century as our sole shareholder. Voting rights in
Third Century will be vested exclusively in its shareholders, with one vote for
each share of common stock. Neither the common stock to be sold in the
conversion nor the capital stock of Mutual will be insured by the FDIC or by any
other government entity.
Effect on Liquidation Rights. If Mutual were to liquidate as a mutual
savings bank, all claims of creditors (including those of deposit account
holders, to the extent of their deposit balances) would be paid first and, if
there were any assets remaining, account holders would then receive such
remaining assets, pro rata, based upon the deposit balances in their deposit
accounts just prior to liquidation. If Mutual were to liquidate after the
conversion, all claims of creditors (including those of deposit account holders,
to the extent of their deposit balances) would also be paid first, followed by
distribution of the "liquidation account" to certain deposit account holders,
with any assets remaining thereafter distributed to Third Century as the sole
shareholder of Mutual.
The plan of conversion provides for the establishment of a "liquidation
account" by us for the benefit of our Eligible Account Holders, who are our
deposit account holders with balances of no less than $50.00 on December 31,
2002, and our Supplemental Eligible Account Holders, who are our deposit account
holders with balances of no less than $50.00 on March 31, 2004, who continue to
maintain their accounts with us after the conversion. The liquidation account,
which will be an account that does not appear on our balance sheet, will be
credited with the net worth of Mutual as reflected in the latest statement of
financial condition in the final prospectus used in the conversion. Each
Eligible Account Holder and Supplemental Eligible Account Holder will have, with
respect to each deposit account held, a related inchoate interest in a portion
of the balance of the liquidation account. This inchoate interest is referred to
in the plan of conversion as a "subaccount balance." In the event of a complete
liquidation of Mutual after the conversion (and only in such event), Eligible
Account Holders and Supplemental Eligible Account Holders would be entitled to a
distribution from the liquidation account in an amount equal to the then current
adjusted subaccount balance then held, before any liquidation distribution would
be made to Third Century as our sole shareholder. We believe that a liquidation
of Mutual is unlikely.
Each Eligible Account Holder will have a subaccount balance in the
liquidation account for each deposit account held as of the Eligibility Record
Date, which is December 31, 2002. Each Supplemental Eligible Account Holder will
have a subaccount balance in the liquidation account for each deposit account
held as of the Supplemental Eligibility Record Date, which is March 31, 2004.
Each initial subaccount balance will be the amount determined by multiplying the
total opening balance in the liquidation account by a fraction, the numerator of
which is the amount of the qualifying deposit (a deposit of at least $50.00 as
of December 31, 2002, or March 31, 2004) of such deposit account, and the
denominator of which is the total of all qualifying deposits on that date. If
the amount in the deposit account on any subsequent annual closing date of
Mutual is less than the balance in such deposit account on any other annual
closing date, or the balance in such account on the Eligibility Record Date or
the Supplemental Eligibility Record Date, as the case may be, this interest in
the liquidation account will be reduced by an amount proportionate to any such
reduction and will not thereafter be increased despite any subsequent increase
in the related deposit account. An Eligible Account Holder's, as well as a
Supplemental Eligible Account Holder's, interest in the liquidation account will
cease to exist if the deposit account is closed. The liquidation account will
never increase and will be correspondingly reduced as the interests in the
liquidation account are reduced or cease to exist. In the event of liquidation,
any assets remaining after the above liquidation rights of Eligible Account
Holders and Supplemental Eligible Account Holders are satisfied will be
distributed to Third Century as our sole shareholder.
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A merger, consolidation, sale of bulk assets, or similar combination or
transaction in which we are not the surviving entity would not be considered to
be a "liquidation" under which distribution of the liquidation account could be
made, provided the surviving institution is insured by the FDIC. In such a
transaction, the liquidation account would be assumed by the surviving
institution.
The creation and maintenance of the liquidation account will not restrict
the use of or application of any of the net worth accounts, except that we may
not declare or pay a cash dividend on or repurchase our capital stock if the
effect of such dividend or repurchase would be to cause our net worth to be
reduced below the aggregate amount then required for the liquidation account.
Tax Effects. We intend to proceed with the conversion on the basis of an
opinion from our special counsel, Barnes & Thornburg LLP, Indianapolis, Indiana,
as to certain tax matters. The opinion is based, among other things, on certain
representations made by us, including the representation that the exercise price
of the subscription rights to purchase Third Century common stock will be
approximately equal to the fair market value of the stock at the time of the
completion of the conversion. We have received an opinion of Keller & Company
which, based on certain assumptions, concludes that the subscription rights to
purchase the common stock issued in the conversion do not have any economic
value at the time of distribution or the time the subscription rights are
exercised, whether or not a Direct Community Offering takes place. Barnes &
Thornburg LLP's opinion is given in reliance on the Keller & Company opinion.
Barnes & Thornburg LLP's opinion provides substantially as follows:
1. The change in form of Mutual from a mutual savings bank to a stock
savings bank will qualify as a reorganization under Section
368(a)(1)(F) of the Internal Revenue Code and no gain or loss will be
recognized to Mutual in either its mutual form or its stock form by
reason of the conversion.
2. No gain or loss will be recognized by the converted bank upon receipt
of money from Third Century for the converted bank's capital stock,
and no gain or loss will be recognized to Third Century upon the
receipt of money for common stock of Third Century.
3. The basis of the assets of the converted bank will be the same as the
basis in Mutual's hands prior to the conversion.
4. The holding period of the assets of the converted bank will include
the period during which the assets were held by Mutual in its mutual
form prior to conversion.
5. No gain or loss will be realized by the deposit account holders of
Mutual, upon the constructive issuance to them of withdrawable deposit
accounts of the converted bank immediately after the conversion,
interests in the liquidation account, and/or on the distribution to
them of nontransferable subscription rights to purchase Third Century
common stock.
6. The basis of an account holder's deposit accounts in the converted
bank after the conversion will be the same as the basis of his or her
deposit account in Mutual prior to the conversion.
7. The basis of each account holder's interest in the liquidation account
will be zero. The basis of the non-transferable subscription rights
will be zero.
8. The basis of Third Century common stock to its shareholders will be
the actual purchase price ($10.00) thereof, and a shareholder's
holding period for Third Century common stock acquired through the
exercise of subscription rights will begin on the date on which the
subscription rights are exercised.
9. No taxable income will be realized by Eligible Account Holders,
Supplemental Eligible Account Holders or Other Members as a result of
the exercise of the nontransferable subscription rights.
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10. The converted bank in its stock form will succeed to and take into
account the earnings and profits or deficit in earnings and profits of
Mutual, in its mutual form, as of the date of conversion.
The opinion also concludes in effect that:
1. No taxable income will be realized by Mutual on the issuance of
subscription rights to eligible subscribers to purchase shares of
Third Century common stock at fair market value.
2. The converted bank will succeed to and take into account the dollar
amounts of those accounts of Mutual in its mutual form that represent
bad debt reserves in respect of which Mutual in its mutual form has
taken a bad debt deduction for taxable years on or before the date of
the transfer.
3. The creation of the liquidation account will have no effect on
Mutual's taxable income, deductions, or additions to bad debt reserves
or distributions to shareholders under Section 593 of the Internal
Revenue Code.
Special counsel also has concluded that there are no other material federal
income tax consequences in connection with the conversion.
Barnes & Thornburg LLP also has issued an opinion stating in essence that
the conversion will not be a taxable transaction to Third Century or to us under
any Indiana tax statute imposing a tax on income, and that our depositors will
be treated under such laws in a manner similar to the manner in which they will
be treated under federal income tax law.
The opinions of Barnes & Thornburg LLP and Keller & Company, unlike a
letter ruling issued by the Internal Revenue Service, are not binding on the
Service and the conclusions expressed in this Prospectus may be challenged at a
future date. The Internal Revenue Service has issued favorable rulings for
transactions substantially similar to the proposed conversion, but any such
ruling may not be cited as precedent by any taxpayer other than the taxpayer to
whom the ruling is addressed. We do not plan to apply for a letter ruling
concerning the transactions described in this Prospectus.
Offering of Third Century Common Stock
Under the plan of conversion, up to 1,437,500 shares of common stock are
being offered for sale, initially through the Subscription Offering (subject to
a possible increase to 1,653,125 shares). See "-- Subscription Offering." The
plan of conversion requires, with certain exceptions, that a number of shares
equal to at least 1,062,500 be sold in order for the conversion to be effective.
Shares also may be offered to the public in a Direct Community Offering that
will commence concurrently with the Subscription Offering. The Direct Community
Offering may expire as early as June 14, 2004 or at any time thereafter (until
July 29, 2004, unless extended by us and Third Century) when orders for at least
1,062,500 shares have been received in the Subscription Offering and Direct
Community Offering. The offering may be extended until 24 months following the
members' approval of the plan of conversion, or until June 21, 2006. The actual
number of shares to be sold in the conversion will depend upon market and
financial conditions at the time of the conversion, provided that no fewer than
1,062,500 shares or more than 1,653,125 shares will be sold in the conversion.
The per share price to be paid by purchasers in the Direct Community Offering
for any remaining shares will be $10.00, the same price paid by subscribers in
the Subscription Offering. See "-- Stock Pricing."
The Subscription Offering expires at 12:00 p.m., Franklin time, on June 14,
2004. The plan of conversion requires that we complete the sale of common stock
within 45 days after the close of the Subscription Offering. This 45-day period
expires on July 29, 2004. In the event we are unable to complete the sale of
common stock within the 45-day period, an extension of this time period may be
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provided by us and Third Century. If an extension is granted, we will promptly
notify subscribers of the granting of the extension of time and will promptly
return subscriptions unless subscribers affirmatively elect to continue their
subscriptions during the period of extension. Such extensions may not be made
beyond June 21, 2006.
The plan of conversion provides that if, for any reason, shares remain
unsold after the Subscription Offering and the Direct Community Offering, if
any, the board of directors of Mutual will seek to make other arrangements for
the sale of the remaining shares. Such other arrangements will be subject to the
approval of the DFI. If such other purchase arrangements cannot be made, the
plan of conversion will terminate. In the event that the conversion is not
effected, Mutual will remain a mutual savings bank, all subscription funds will
be promptly returned to subscribers with interest earned thereon at the passbook
rate, which is currently 0.15% per annum (except for payments to have been made
through withdrawal authorizations which will have continued to earn interest at
the contractual account rates), and all withdrawal authorizations will be
canceled.
Subscription Offering
In accordance with applicable law, nontransferable rights to subscribe for
the purchase of Third Century's common stock have been granted under the plan of
conversion to the following persons in the following order of priority: (1)
Mutual's Eligible Account Holders; (2) the employee stock ownership plan; (3)
Mutual's Supplemental Eligible Account Holders; and (4) Mutual's members other
than Eligible Account Holders and Supplemental Eligible Account Holders at the
close of business on the voting record date for the special meeting ("Other
Members"). Mutual's account holders have rights to subscribe for shares in the
conversion if they had "qualifying deposits" in their accounts at Mutual on
certain specified dates as discussed below for Categories I, III and IV. For
determining the rights of account holders, a holder has "qualifying deposits" if
the aggregate balance of the holder's deposit accounts at Mutual is not less
than $50.00 on the applicable date. The voting record date for the special
meeting is April 30, 2004. All subscriptions received will be subject to the
availability of common stock after satisfaction of all subscriptions of all
persons having prior rights in the Subscription Offering, and to the maximum and
minimum purchase limitations set forth in the plan of conversion (and described
below). The December 31, 2002 date for determination of Eligible Account Holders
and the March 31, 2004 date for determination of Supplemental Eligible Account
Holders were selected in accordance with statutes and regulations applicable to
the conversion.
Category I: Eligible Account Holders. Each Eligible Account Holder, acting
through a single account (counting all persons on a single joint account as one
Eligible Account Holder), will receive, without payment therefor,
nontransferable subscription rights to purchase up to 15,000 shares of the
common stock offered in the conversion, provided that each Eligible Account
Holder may not subscribe for more than 25,000 shares in the conversion,
including shares subscribed for by such person's Associates or persons acting in
concert as a group.
If sufficient shares are not available in this Category I, shares will be
allocated in a manner that will allow each Eligible Account Holder, to the
extent possible, to purchase a number of shares sufficient to make his or her
allocation consist of the lesser of 100 shares or the amount subscribed for.
Thereafter, unallocated shares will be allocated to subscribing Eligible Account
Holders in the proportion that the amounts of their respective qualifying
deposits bear to the total amount of qualifying deposits of all subscribing
Eligible Account Holders. For example, if an Eligible Account Holder with an
unfilled subscription had qualifying deposits totaling $100, and the total
amount of qualifying deposits for all Eligible Account Holders were $1,000, then
the number of shares that may be allocated to that Eligible Account Holder's
subscription would be 10% of the shares remaining available, up to the amount
subscribed for.
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The "qualifying deposits" of an Eligible Account Holder is the amount of
the deposit balances (provided such aggregate balance is not less than $50.00)
in his or her deposit accounts as of the close of business on December 31, 2002.
Subscription rights received by directors and officers in this category based
upon their increased deposits in Mutual during the year preceding December 31,
2002, are subordinated to the subscription rights of other Eligible Account
Holders.
Category II: The Employee Stock Ownership Plan. Third Century's
tax-qualified employee stock ownership plan is permitted to subscribe for up to
8% of the aggregate number of shares of Third Century common stock sold in the
conversion, provided that shares remain available after satisfying the
subscription rights of Eligible Account Holders. The employee stock ownership
plan currently intends to purchase 8% of the shares sold to investors in the
conversion. The employee stock ownership plan's right to purchase shares of
common stock under this category shall be subordinated to all rights received by
the Eligible Account Holders to purchase shares pursuant to Category I. Any
purchase by the employee stock ownership plan of authorized but unissued shares
could dilute the interests of Third Century's shareholders.
Category III: Supplemental Eligible Account Holders. Each Supplemental
Eligible Account Holder, acting through a single account (counting all persons
on a single account as one Supplemental Eligible Account Holder), will receive,
without payment therefor, nontransferable subscription rights to purchase up to
15,000 shares of the common stock offered in the conversion; provided that each
Supplemental Account Holder may not subscribe for more than 25,000 shares in the
conversion including shares subscribed for by the person's Associates or persons
acting in concert as a group, to the extent that shares of Third Century common
stock remain available for purchase after satisfaction of the subscription
rights of all Eligible Account Holders and the employee stock ownership plan.
Such subscription rights will be applicable only to such shares as remain
available after the subscriptions of the Eligible Account Holders and the
employee stock ownership plan have been satisfied. Any subscription rights
received by a person as a result of his or her status as an Eligible Account
Holder will reduce to the extent thereof the subscription rights granted to such
person as a result of his or her status as a Supplemental Eligible Account
Holder.
If sufficient shares are not available in this Category III, shares will be
allocated in a manner that will allow each Supplemental Eligible Account Holder,
to the extent possible, to purchase a number of shares sufficient to make his or
her allocation consist of the lesser of 100 shares or the amount subscribed for.
Thereafter, unallocated shares will be allocated to subscribing Supplemental
Eligible Account Holders in the proportion that the amounts of their respective
qualifying deposits bear to the total amount of qualifying deposits of all
subscribing Supplemental Eligible Account Holders.
The "qualifying deposits" of a Supplemental Eligible Account Holder is the
amount of the deposit balances (provided such aggregate balance is not less than
$50) in his or her deposit accounts as of the close of business on March 31,
2004.
Category IV: Other Members. Each deposit account holder, other than an
Eligible Account Holder or a Supplemental Eligible Account Holder, who is
entitled to vote at the special meeting of members due to the existence of a
deposit account on April 30, 2004 and each borrower of Mutual on April 30, 2004,
through a single account (counting all persons on a single joint account as one
Other Member) will receive non-transferable subscription rights for up to 15,000
shares of Third Century common stock, provided that each Other Member may not
subscribe for more than 25,000 shares in the conversion, including shares
subscribed for by such person's Associates or persons acting in concert as a
group. Such subscription rights will be applicable only to such shares as remain
available after the subscriptions of Eligible Account Holders, the employee
stock ownership plan and Supplemental Eligible Account Holders have been
satisfied.
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If sufficient shares are not available in this Category IV, shares will be
allocated pro rata among subscribing Other Members in the same proportion that
the number of shares subscribed for by each Other Member bears to the total
number of shares subscribed for by all Other Members.
Timing of Offering and Method of Payment. The Subscription Offering will
expire at 12:00 p.m., Franklin time, on June 14, 2004 (the "Expiration Date").
The Expiration Date may be extended by Mutual and Third Century for successive
90-day periods, subject to regulatory approval, to June 21, 2006.
Subscribers must, before the Expiration Date, or such date to which the
Expiration Date may be extended, return Order Forms to us that list each account
at Mutual held by the subscriber and that is otherwise properly completed,
together with checks or money orders in an amount equal to the purchase price
($10.00 per share) multiplied by the number of shares for which subscription is
made. Payment for stock purchases can also be accomplished through authorization
on the Order Form of withdrawals from accounts (including a certificate of
deposit but excluding IRA accounts). Funds must actually be in the account when
an order for the purchase of common stock is submitted. We have the right to
reject any orders transmitted by facsimile and any payments made by wire
transfer.
The beneficiaries of IRA accounts are deemed to have the same subscription
rights as other depositors. However, the IRA accounts maintained with us do not
permit investment in the common stock. A depositor interested in using his or
her IRA funds to purchase common stock must do so through a self-directed IRA
account. Depositors wishing to establish self-directed IRA accounts should call
the Stock Information Center at (317) 736-7492 for information. There will be no
early withdrawal or Internal Revenue Service interest penalties for any such
transfer of your IRA account with Mutual to a self-directed account. The new
trustee would hold the common stock in a self-directed account in the same
manner that we now hold the depositor's IRA funds. An annual administrative fee
would be payable to the new trustee.
In the event an Order Form (i) is not delivered and is returned to us by
the United States Postal Service or we are unable to locate the addressee, (ii)
is not received or is received after the Expiration Date, (iii) is defectively
completed or executed, or (iv) is not accompanied by full payment for the shares
subscribed for (including instances where a savings account or certificate
balance from which withdrawal is authorized is insufficient to fund the amount
of such required payment), the subscription rights for the person to whom such
rights have been granted will lapse as though that person failed to return the
completed Order Form within the time period specified. We may, but will not be
required to, waive any irregularity on any Order Form or require the submission
of corrected Order Forms or the remittance of full payment for subscribed shares
by such date as we specify. The waiver of an irregularity on an Order Form in no
way obligates us to waive any other irregularity on that, or any irregularity on
any other, Order Form. Waivers will be considered on a case by case basis.
Photocopies of Order Forms, payments from private third parties, or electronic
transfers of funds will not be accepted. Our interpretation of the terms and
conditions of the plan of conversion and of the acceptability of the Order Forms
will be final. We have the right to investigate any irregularity on any Order
Form.
To ensure that each purchaser receives a prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the 1934 Act, no
prospectus will be mailed any later than five days prior to such date or
delivered by hand to persons who come to the Stock Information Center any later
than two days prior to such date. Execution of the Order Form will confirm
receipt or delivery in accordance with Rule 15c2-8. Order Forms will only be
distributed with a prospectus.
Until completion or termination of the conversion, subscribers who elect to
make payment through authorization of withdrawal from accounts with us will not
be permitted to reduce the deposit balance in any such accounts below the amount
required to purchase the shares for which they subscribed. In such
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cases interest will continue to be credited on deposits authorized for
withdrawal until the completion of the conversion. Interest at the passbook
rate, which is currently 0.15% per annum, will be paid on amounts submitted in
cash or by check. Authorized withdrawals from certificate accounts for the
purchase of common stock will be permitted without the imposition of early
withdrawal penalties or loss of interest. However, withdrawals from certificate
accounts that reduce the balance of such accounts below the required minimum for
specific interest rate qualification will cause the cancellation of the
certificate accounts at the effective date of the conversion, and the remaining
balance will earn interest at the passbook savings rate. Stock subscriptions
received and accepted by us may not be revoked by the purchaser. Subscriptions
may be withdrawn only if we extend the Expiration Date of the Subscription
Offering as described above.
Members in Non-Qualified States or Foreign Countries. We will make
reasonable efforts to comply with the securities laws of all states in the
United States in which persons entitled to subscribe for stock pursuant to the
plan of conversion reside. However, no person will be offered or sold or receive
any stock pursuant to the Subscription Offering if such person resides in a
foreign country or resides in a state in the United States with respect to which
all of the following apply: (i) a small number of persons otherwise eligible to
subscribe for shares of common stock reside in such state; (ii) the granting of
subscription rights or the offer or sale of common stock to such persons would
require us or Third Century or our respective officers and directors, under the
securities laws of such state, to register as a dealer, dealer, salesman or
selling agent, or to register or otherwise qualify the common stock for sale in
such state; and (iii) such registration, qualification or filing in our judgment
or the judgment of Third Century would be impracticable or unduly burdensome for
reasons of cost or otherwise.
To assist in the Subscription and Direct Community Offerings, Third Century
has established a Stock Information Center. The phone number for the Stock
Information Center is (317) 736-7492. Callers to the Stock Information Center
will be able to request a Subscription and Direct Community Offering Prospectus
and other information relating to the offering.
Direct Community Offering
To the extent such shares remain available after satisfaction of all orders
received in the Subscription Offering, we may offer shares of Third Century
common stock in a Direct Community Offering to the general public, with
preference given to residents of Johnson County. The right of any person to
purchase shares in the Direct Community Offering is subject to our right to
accept or reject such purchase in whole or in part. We have the right to
terminate the Direct Community Offering as soon as we have received orders for
at least the minimum number of shares available for purchase in the conversion.
The Direct Community Offering may expire as early as June 14, 2004, or at
any time thereafter (until July 29, 2004, unless extended by Mutual and Third
Century) when orders for at least 1,062,500 shares have been received in the
Subscription Offering and Direct Community Offering. Accordingly, persons
wishing to purchase stock in the Direct Community Offering directly from Third
Century, if the Direct Community Offering is conducted, should return the Order
Form on or before June 14, 2004, to Mutual, properly completed, together with
check or money order in the amount equal to the purchase price ($10.00 per
share) multiplied by the number of shares which that person desires to purchase.
As mentioned above, Mutual may terminate the Direct Community Offering as soon
as it has received orders for at least the minimum number of shares available
for purchase in the conversion.
The maximum number of shares of common stock which may be purchased in the
Direct Community Offering by any person (including such person's Associates) or
persons acting in concert is 15,000 in the aggregate. A member who, together
with his Associates and persons acting in concert, has subscribed for shares in
the Subscription Offering may subscribe for a number of additional shares in the
Direct
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Community Offering that does not exceed the lesser of (i) 15,000 shares or (ii)
the number of shares which, when added to the number of shares subscribed for by
the member (and his Associates and persons acting in concert) in the
Subscription Offering, would not exceed 25,000.
If all Third Century common stock offered in the Subscription Offering is
subscribed for, no Third Century common stock will be available for purchase in
the Direct Community Offering and all funds submitted pursuant to the Direct
Community Offering will be promptly refunded, with interest, as hereafter
described. Purchase orders received during the Direct Community Offering will be
filled up to a maximum of 2% of the total number of shares of common stock
issued in the conversion, with any remaining unfilled purchase orders to be
allocated on an equal number of shares basis. If the Direct Community Offering
extends beyond 45 days following the expiration of the Subscription Offering,
subscribers will have the right to increase, decrease or rescind subscriptions
for stock previously submitted. All sales of Third Century common stock in the
Direct Community Offering will be at the same price per share as the sales of
Third Century common stock in the Subscription Offering.
Cash and checks received in the Direct Community Offering will be placed in
a special escrow account at Mutual, and will earn interest at the passbook rate,
which is currently 0.15% per annum, from the date of deposit until completion or
termination of the conversion. In the event that the conversion is not
consummated for any reason, all funds submitted pursuant to the Direct Community
Offering will be promptly refunded with interest as described above.
Delivery of Certificates
Certificates representing shares issued in the Subscription Offering and in
the Direct Community Offering pursuant to Order Forms will be mailed to the
persons entitled to them at the last addresses of such persons appearing on the
books of Mutual or to such other addresses as may be specified in properly
completed Order Forms as soon as practicable following consummation of the
conversion. Any certificates returned as undeliverable will be held by Third
Century until claimed by the person legally entitled to them or otherwise
disposed of in accordance with applicable law.
Marketing Arrangements
To assist us and Third Century in marketing the common stock, we have
retained the services of Keefe, Bruyette & Woods, Inc. as our financial advisor.
Keefe, Bruyette & Woods is a broker-dealer registered with the Securities and
Exchange Commission and a member of the National Association of Securities
Dealers, Inc. Keefe, Bruyette & Woods will assist us in the conversion as
follows: (1) in training and educating our employees regarding the mechanics and
regulatory requirements of the conversion process; (2) in conducting
informational meetings for subscribers and other potential purchasers; (3) in
keeping records of all stock subscriptions; and (4) in obtaining proxies from
our members with respect to the special meeting. For providing these services,
we have agreed to pay Keefe, Bruyette & Woods a success fee of 1.50% based on
the aggregate purchase price of the common stock sold in the Subscription
Offering and the Direct Community Offering (excluding shares purchased by
Mutual's officers, directors and employees and members of their immediate
families, the ESOP, and compensation or similar plans (other than IRAs) created
by Mutual for directors or employees). Keefe, Bruyette & Woods also will receive
a management fee of $25,000 for services provided in connection with the stock
offering, which fee will be credited against the 1.50% success fee. Offers and
sales in the Direct Community Offering will be on a best efforts basis and, as a
result, Keefe, Bruyette & Woods is not obligated to purchase any shares of the
common stock.
We also have agreed to reimburse Keefe, Bruyette & Woods for out-of-pocket
expenses in an amount not to exceed $10,000 and for legal fees in an amount not
to exceed $35,000. The total cost of the fees and expenses to be paid to Keefe,
Bruyette & Woods is estimated to be as follows at the indicated points
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in the estimated value range: Minimum: $135,675; Midpoint: $163,800; Maximum:
$191,925; and 15% Above the Maximum: $224,269. We and Third Century also have
agreed to indemnify Keefe, Bruyette & Woods, under certain circumstances,
against liabilities and expenses (including legal fees) arising out of Keefe,
Bruyette & Woods' engagement by us, including liabilities under the Securities
Act of 1933.
Our directors and executive officers may participate in the solicitation of
offers to purchase common stock by mailing written materials to our members and
other prospective investors, responding to inquiries of prospective investors,
and performing ministerial or clerical work. In each jurisdiction in which the
securities laws require that the offer and/or sale of the common stock be made
through a broker-dealer registered in such jurisdiction, all written materials
will be mailed under cover of a letter from Keefe, Bruyette & Woods. Certain of
our employees may participate in the offering in ministerial capacities or by
performing clerical work in effecting a sales transaction. Such other employees
have been instructed not to solicit offers to purchase common stock or provide
advice regarding the purchase of common stock. Questions of prospective
purchasers will be directed to executive officers or registered representatives.
We will rely on Rule 3a4-1 under the 1934 Act, and sales of common stock will be
conducted within the requirements of Rule 3a4-1, so as to permit officers,
directors and employees to participate in the sale of common stock. We will not
compensate our officers, directors or employees in connection with their
participation by the payment of commissions or other remuneration based either
directly or indirectly on the transactions in the common stock.
Selected Dealers
If any shares of common stock remain available after the Subscription
Offering and any Direct Community Offering, Mutual may decide, upon consultation
with Keefe, Bruyette & Woods, to enter into an agreement with certain dealers to
assist in the sale of those shares. We have agreed to pay Keefe, Bruyette &
Woods a fee of 5.5% of the aggregate purchase price of the shares remaining
after the Subscription Offering and Direct Community Offering. From this fee,
Keefe, Bruyette & Woods will pass on fees to any dealers who assist in the sale
of shares.
Limitations on Common Stock Purchases
The plan of conversion includes a number of limitations on the number of
shares of common stock which may be purchased during the conversion. These are
summarized below:
1. No fewer than 25 shares may be purchased by any person purchasing
shares of common stock in the conversion (provided that sufficient
shares are available).
2. No Eligible Account Holder, Supplemental Eligible Account Holder or
Other Member, acting through a single account (including all persons
on a single joint account as one member), may subscribe for more than
15,000 shares. Notwithstanding the foregoing, the maximum number of
shares of common stock which may be purchased in the conversion by any
Eligible Account Holder, Supplemental Eligible Account Holder or Other
Member (including such person's Associates or group acting in concert
and counting all persons on a single joint account as one member)
shall be 25,000 shares in the aggregate, except that the employee
stock ownership plan may purchase in the aggregate not more than 10%
of the total number of shares offered in the conversion. The maximum
number of shares of common stock which may be purchased in the Direct
Community Offering, if any, by any person (including such person's
Associates or persons acting in concert) is 15,000 in the aggregate. A
member who, together with his Associates and persons acting in
concert, has subscribed for shares in the Subscription Offering may
subscribe for a number of additional shares in the Direct Community
Offering that does not exceed the lesser of (i) 15,000 shares or (ii)
the number of shares which, when added to the number of shares
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subscribed for by the member (and his Associates and persons acting in
concert) in the Subscription Offering (including all persons on a
joint account), would not exceed 25,000. The employee stock ownership
plan expects to purchase a number of shares equal to 8% of the total
number of shares sold in the conversion. Mutual's and Third Century's
boards of directors may, however, in their sole discretion, increase
the maximum purchase limitation set forth above up to 9.99% of the
shares of common stock sold in the conversion, provided that orders
for shares exceeding 5% of the shares of common stock sold in the
conversion may not exceed, in the aggregate, 10% of the shares sold in
the conversion. The maximum purchase limitation likely would be
increased only if an insufficient number of subscriptions is received
to sell the number of shares of common stock at the minimum of the
Estimated Valuation Range. If the boards of directors decide to
increase the purchase limitation, all persons who subscribe for shares
of common stock offered in the conversion will be given the
opportunity to increase their subscriptions accordingly, subject to
the rights and preferences of any person who has priority subscription
rights. Subscribers will be notified in writing delivered to the
address indicated on their respective Stock Order Forms. The overall
purchase limitation may be reduced in the sole discretion of the
boards of directors of Third Century and Mutual. See "Questions and
Answers" at page 4.
3. No more than 33% of the shares of common stock may be purchased in the
conversion by directors and officers of Mutual and Third Century. This
restriction does not apply to shares purchased by the employee stock
ownership plan.
Applicable regulations define "acting in concert" as (i) knowing
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement, or (ii) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise.
Third Century Bancorp and Mutual Savings Bank may presume that certain persons
are acting in concert based upon, among other things, joint account
relationships or the fact that such persons have filed joint Schedules 13D with
the Securities and Exchange Commission with respect to other companies.
The term "Associate" of a person is defined to mean (i) any corporation or
organization (other than Mutual or its subsidiary or Third Century) of which
such person is a director, officer, partner or 10% stockholder; (ii) any trust
or other estate in which such person has a substantial beneficial interest or
serves as trustee or in a similar fiduciary capacity; provided, however that
such term shall not include any employee stock benefit plan of Third Century or
Mutual in which such a person has a substantial beneficial interest or serves as
a trustee or in a similar fiduciary capacity, and (iii) any relative or spouse
of such person, or relative of such spouse, who either has the same home as such
person or who is a director or officer of Mutual or its subsidiary or Third
Century. Directors are not treated as Associates of one another solely because
of their board membership. Compliance with the foregoing limitations does not
necessarily constitute compliance with other regulatory restrictions on
acquisitions of the common stock. For a further discussion of limitations on
purchases of Third Century common stock during and subsequent to conversion, see
"-- Restrictions on Sale of Stock by Directors and Officers," "-- Restrictions
on Purchase of Stock by Directors and Officers Following Conversion," and
"Restrictions on Acquisition of Third Century Bancorp."
Restrictions on Repurchase of Stock by Third Century
Regulations promulgated by the Federal Reserve Board provide that a bank
holding company must file written notice with the Federal Reserve Board prior to
any repurchase of its equity securities if the gross consideration for the
purchase, when aggregated with the net consideration paid by the bank holding
company for all repurchases during the preceding 12 months, is equal to 10% or
more of the bank
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holding company's consolidated net worth. This notice requirement is not
applicable, however, to a bank holding company that exceeds the thresholds
established for a well capitalized bank and that satisfies certain other
regulatory requirements.
Regulations promulgated by the FDIC provide that an insured mutual state
savings bank that has converted from the mutual to stock form of ownership may
not repurchase its capital stock within one year following the date of its
conversion to stock form, except that stock repurchases of no greater than 5% of
the bank's outstanding capital stock may be repurchased during this one-year
period where compelling and valid business reasons are established, to the
satisfaction of the FDIC. Any stock repurchases are subject to the prior
approval of the FDIC.
Under Indiana law, Third Century will be precluded from repurchasing its
equity securities if, after giving effect to such repurchase, Third Century
would be unable to pay its debts as they become due or Third Century's assets
would be less than its liabilities and obligations to preferential shareholders.
Restrictions on Sale of Stock by Directors and Officers
All shares of the common stock purchased by directors and officers of
Mutual or Third Century in the conversion will be subject to the restriction
that such shares may not be sold or otherwise disposed of for value for a period
of one year following the date of purchase, except for any disposition of such
shares (i) following the death of the original purchaser or (ii) by reason of an
exchange of securities in connection with a merger or acquisition approved by
the applicable regulatory authorities. Sales of shares of the common stock by
Third Century's directors and officers also will be subject to certain insider
trading and other transfer restrictions under the federal securities laws. See
"Regulation -- Federal Securities Laws" and "Description of Capital Stock."
Each certificate for such restricted shares will bear a legend prominently
stamped on its face giving notice of the restrictions on transfer, and
instructions will be issued to Third Century's transfer agent to the effect that
any transfer within such time period of any certificate or record ownership of
such shares other than as provided above is a violation of the restriction. Any
shares of common stock issued pursuant to a stock dividend, stock split or
otherwise with respect to restricted shares will be subject to the same
restrictions on sale.
Restrictions on Purchase of Stock by Directors and Officers Following Conversion
For a period of three years following the conversion, without prior written
approval of the DFI, neither directors nor officers of Mutual or Third Century
nor their Associates may purchase shares of the common stock of Third Century,
except from a dealer registered with the Securities and Exchange Commission.
This restriction does not, however, apply to negotiated transactions involving
more than one percent of Third Century's outstanding common stock, to shares
purchased pursuant to stock option or other incentive stock plans approved by
Third Century's shareholders, or to shares purchased by employee benefit plans
maintained by Third Century that may be attributable to individual officers or
directors.
Restrictions on Transfer of Subscription Rights and Common Stock
Prior to the completion of the conversion, the plan of conversion prohibits
any person with subscription rights, including Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members, from transferring or
entering into any agreement or understanding to transfer the legal or beneficial
ownership of the subscription rights issued under the plan of conversion or the
shares of common stock to be issued upon their exercise. Such rights may be
exercised only by the person to whom they are guaranteed and only for his/her
account. Each person exercising such subscription rights
94
will be required to certify that he/she is purchasing shares solely for his/her
own account and that he/she has no agreement or understanding regarding the sale
or transfer of such shares.
Third Century and Mutual will pursue any and all legal and equitable
remedies in the event they become aware of the transfer of subscription rights
and will not honor orders known by them to involve the transfer of such rights.
Stock Pricing
The aggregate purchase price of Third Century common stock being sold in
the conversion will be based on the appraised aggregate pro forma market value
of the common stock, as determined by an independent valuation. We retained
Keller & Company, which is experienced in the valuation and appraisal of
business entities, including savings institutions involved in the conversion
process, to prepare an appraisal. Keller & Company will receive a fee of $28,000
for its appraisal, plus out-of-pocket expenses of $500. Keller & Company also
has prepared a business plan for Mutual for a fee of $10,000, plus out-of-pocket
expenses of $250. We have agreed to indemnify Keller & Company, under certain
circumstances, against liabilities and expenses (including legal fees) arising
out of Keller & Company's engagement by us.
Keller & Company has prepared an appraisal of the estimated pro forma
market value of the common stock. Keller & Company's appraisal concluded that as
of February 27, 2004, the appropriate valuation range (the "Estimated Valuation
Range") for the estimated pro forma market value of the common stock was from a
minimum of $10,625,000 to a maximum of $14,375,000, with a midpoint of
$12,500,000. A copy of the appraisal is on file and available for inspection at
the offices of Mutual, 80 East Jefferson Street, Franklin, Indiana 46131. The
appraisal also has been filed as an exhibit to Third Century's Registration
Statement with the Securities and Exchange Commission, and may be reviewed at
the Securities and Exchange Commission's public reference facilities and at the
website of the Securities and Exchange Commission (the "SEC"). See "Additional
Information." The appraisal involved a comparative evaluation of the operating
and financial statistics of Mutual with those of a peer group of ten
publicly-traded thrift institutions.
Compared to the average pricing of the peer group, Third Century's pro
forma pricing ratios indicated a premium of 51.81% on a price-to-earnings basis
and a discount of 45.48% on a price-to-book basis at the mid-point of the
Estimated Valuation Range and a premium of 78.93% on a price-to-earnings basis
and a discount of 42.44% on a price to-book basis at the maximum of the
Estimated Valuation Range. The estimated appraised value and the resulting
premium/discount took into consideration the potential financial impact of the
conversion.
The appraisal also took into account such other factors as the market for
savings institutions generally, prevailing economic conditions, both nationally
and in Indiana, which affect the operations of savings institutions, the
competitive environment within which Mutual operates, and the effect of Mutual
becoming a subsidiary of Third Century. No detailed individual analysis of the
separate components of Mutual's and Third Century's assets and liabilities was
performed in connection with the evaluation. The board of directors reviewed
with management Keller & Company's methods and assumptions and accepted Keller &
Company's appraisal as reasonable and adequate. Third Century, has determined to
offer the common stock in the conversion at a price of $10.00 per share. Third
Century's decision regarding the purchase price was based solely on its
determination that $10.00 per share is a customary purchase price in conversion
transactions. The Estimated Valuation Range may be increased or decreased to
reflect market and financial conditions prior to the completion of the
conversion.
Promptly after the completion of the Subscription Offering and the Direct
Community Offering, if any, Keller & Company will confirm to Mutual that, to the
best of Keller & Company's knowledge and judgment, nothing of a material nature
has occurred which would cause Keller & Company to conclude
95
that the amount of the aggregate proceeds received from the sale of the common
stock in the conversion was incompatible with its estimate of the total pro
forma market value of Mutual at the time of the sale. If, however, the facts do
not justify such a statement, a new Estimated Valuation Range and price per
share may be set. Under such circumstances, Third Century may resolicit
subscriptions. In that event, subscribers would have the right to modify or
rescind their subscriptions and to have their subscription funds returned
promptly with interest and holds on funds authorized for withdrawal from deposit
accounts would be released or reduced; provided that if the pro forma market
value of Mutual upon conversion has increased to an amount which does not exceed
$16,531,250 (15% above the maximum of the Estimated Valuation Range), Third
Century and Mutual do not intend to resolicit subscriptions.
Depending upon market and financial conditions, the number of shares issued
may be more or less than the range in number of shares shown above. A change in
the number of shares to be issued in the conversion will not affect subscription
rights. In the event of an increase in the maximum number of shares being
offered, persons who exercise their maximum subscription rights will be notified
of such increase and of their right to purchase additional shares. Conversely,
in the event of a decrease in the maximum number of shares being offered,
persons who exercise their maximum subscription rights will be notified of such
decrease and of the concomitant reduction in the number of shares for which
subscriptions may be made. In the event of a resolicitation, subscribers will be
afforded the opportunity to increase, decrease or maintain their previously
submitted order. Third Century will be required to resolicit if the price per
share is changed such that the total aggregate purchase price is not within the
minimum and 15% above the maximum of the Estimated Valuation Range.
THE INDEPENDENT VALUATION IS NOT INTENDED AND MUST NOT BE CONSTRUED AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF VOTING TO APPROVE THE
CONVERSION OR OF PURCHASING THE SHARES OF THE COMMON STOCK. MOREOVER, BECAUSE
SUCH VALUATION IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER
OF MATTERS (INCLUDING CERTAIN ASSUMPTIONS AS TO THE AMOUNT OF NET PROCEEDS AND
THE EARNINGS THEREON), ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO
ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING SHARES IN THE CONVERSION WILL
THEREAFTER BE ABLE TO SELL THE SHARES AT PRICES RELATED TO THE FOREGOING
VALUATION OF THE PRO FORMA MARKET VALUE.
Number of Shares to Be Issued
It is anticipated that the total offering of common stock (the number of
shares of common stock issued in the conversion multiplied by the purchase price
of $10.00 per share) will be within the current minimum and 15% above the
maximum of the Estimated Valuation Range. Unless otherwise required by the DFI,
no resolicitation of subscribers will be made and subscribers will not be
permitted to modify or cancel their subscriptions so long as the change in the
number of shares to be issued in the conversion, in combination with the
purchase price, results in an offering within the minimum and 15% above the
maximum of the Estimated Valuation Range.
An increase in the total number of shares of common stock to be issued in
the conversion would decrease both a subscriber's ownership interest and Third
Century's pro forma net worth on a per share basis while increasing (assuming no
change in the per share price) pro forma net income and net worth on an
aggregate basis. A decrease in the number of shares to be issued in the
conversion would increase both a subscriber's ownership interest and Third
Century's pro forma net worth on a per share basis while decreasing (assuming no
change in the per share price) pro forma net income and net worth on an
aggregate basis. For a presentation of the effects of such changes, see "Pro
Forma Data."
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Interpretation and Amendment of the Plan of Conversion
To the extent permitted by law, all interpretations of the plan of
conversion by Mutual and Third Century will be final. The plan of conversion
provides that, if deemed necessary or desirable by the Boards of Directors of
Third Century and Mutual, the plan of conversion may be substantively amended by
the boards of directors, as a result of comments from regulatory authorities or
otherwise. Moreover, if the plan of conversion is so amended, subscriptions that
have been received prior to such amendment will not be refunded unless otherwise
required by the DFI.
Conditions and Termination
Completion of the conversion requires the approval of the plan of
conversion by the affirmative vote of not less than a majority of the total
number of votes of the members of Mutual eligible to be cast at the special
meeting and the sale of all shares of the common stock within 24 months
following approval of the plan of conversion by the members. If these conditions
are not satisfied, the plan of conversion will be terminated and we will
continue our business in the mutual form of organization. The plan of conversion
may be terminated by the boards of directors of Mutual and Third Century at any
time prior to the special meeting and, with the approval of the DFI, by such
boards of directors at any time thereafter. Furthermore, the plan of conversion
requires that Third Century complete the sale of common stock within 45 days
after the close of the Subscription Offering. Third Century and Mutual may
extend this time period if necessary, but no assurance can be given that an
extension would be undertaken. See "-- Offering of Third Century Common Stock."
RESTRICTIONS ON ACQUISITION OF THIRD CENTURY BANCORP
General
Although the boards of directors of Mutual and Third Century are not aware
of any effort that might be made to obtain control of Third Century after the
conversion, the boards of directors believe that it is appropriate to include
certain provisions in Third Century's articles of incorporation to protect the
interests of Third Century and its shareholders from unsolicited changes in the
control of Third Century in circumstances that the board of directors of Third
Century concludes will not be in the best interests of Mutual, Third Century or
Third Century's shareholders.
Although Third Century's board of directors believes that the restrictions
on acquisition described below are beneficial to shareholders, the provisions
may have the effect of rendering Third Century less attractive to potential
acquirors, thereby discouraging future takeover attempts that would not be
approved by the board of directors but that certain shareholders might deem to
be in their best interest or pursuant to which shareholders might receive a
substantial premium for their shares over then current market prices. These
provisions also will render the removal of the incumbent board of directors and
of management more difficult. The board of directors has, however, concluded
that the potential benefits of these restrictive provisions outweigh the
possible disadvantages.
The following general discussion contains a summary of the material
provisions of Third Century's the articles of incorporation and Code of By-Laws
and certain other regulatory provisions, that may be deemed to have an effect of
delaying, deferring or preventing a change in the control of Third Century. The
following description of certain of these provisions is general and not
necessarily complete, and with respect to provisions contained in the articles
of incorporation and by-laws, reference should be made in each case to the
document in question, each of which is part of our application for approval of
the conversion and Third Century's Registration Statement filed with the SEC.
See "Additional Information."
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Provisions of Third Century's Articles of Incorporation and By-Laws
Directors. Certain provisions in the articles of incorporation and by-laws
will impede changes in majority control of the board of directors of Third
Century. The articles of incorporation provide that the board of directors of
Third Century will be divided into three classes, with directors in each class
elected for three-year staggered terms. The Indiana Business Corporation Law
provides, however, that the terms of initial directors of a corporation expire
at the first shareholders' meeting at which directors are elected even if the
corporation's articles of incorporation provide for a classified board.
Therefore, at the first shareholders' meeting, shareholders will be voting on
the election of the five director nominees to serve terms ranging from one to
three years. After that first shareholders' meeting, it would take two annual
elections to replace a majority of Third Century's board. Moreover, our by-laws
provide that our directors must be residents of Johnson County or Bartholomew
County in Indiana, must have had a loan or deposit relationship with us which
they have maintained for nine months prior to their nomination to the board (or
in the case of existing directors, prior to March 16, 2004), and, if nonemployee
directors, must have served as a member of a civic or community organization
based in Johnson County, Indiana for at least twelve months during the five
years prior to their nomination to the board. Our board may waive one or more of
these requirements for new members appointed to the board in connection with our
acquisition of another financial institution or the acquisition or opening of a
new branch by Mutual. Therefore, the ability of a shareholder to attract
qualified nominees to oppose persons nominated by the board of directors may be
limited.
The articles of incorporation also provide that the size of the board of
directors shall range between five and fifteen directors, with the exact number
of directors to be fixed from time to time exclusively by the board of directors
pursuant to a resolution adopted by a majority of the total number of directors
of Third Century.
The articles of incorporation provide that any vacancy occurring in the
board of directors, including a vacancy created by an increase in the number of
directors, shall be filled for the remainder of the unexpired term only by a
majority vote of the directors then in office. Finally, the by-laws impose
certain notice and information requirements in connection with the nomination by
shareholders of candidates for election to the board of directors or the
proposal by shareholders of business to be acted upon at an annual meeting of
shareholders.
The articles of incorporation provide that a director or the entire board
of directors may be removed only for cause and only by the affirmative vote of
at least 80% of the shares eligible to vote generally in the election of
directors.
Restrictions on Call of Special Meetings. The articles of incorporation
provide that a special meeting of shareholders may be called only by the
chairman of the board of Third Century or pursuant to a resolution adopted by a
majority of the total number of directors of Third Century. Shareholders are not
authorized to call a special meeting.
No Cumulative Voting. The articles of incorporation provide that there
shall be no cumulative voting rights in the election of directors.
Authorization of Preferred Stock. The articles of incorporation authorize
2,000,000 shares of preferred stock, without par value. Third Century is
authorized to issue preferred stock from time to time in one or more series
subject to applicable provisions of law, and the board of directors is
authorized to fix the designations, powers, preferences and relative
participating, optional and other special rights of such shares, including
voting rights (if any and which could be as a separate class) and conversion
rights. In the event of a proposed merger, tender offer or other attempt to gain
control of Third Century not approved by the board of directors, it might be
possible for the board of directors to authorize the issuance of a series of
preferred stock with rights and preferences that would impede the completion of
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such a transaction. An effect of the possible issuance of preferred stock,
therefore, may be to deter a future takeover attempt. The board of directors has
no present plans or understandings for the issuance of any preferred stock and
does not intend to issue any preferred stock except on terms which the board of
directors deems to be in the best interests of Third Century and its
shareholders.
Limitations on 10% Shareholders. The articles of incorporation provide
that: (i) no person shall directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10% of any class of equity security of Third
Century (provided that such limitation shall not apply to the acquisition of
equity securities by any one or more tax-qualified employee stock benefit plans
maintained by Third Century, if the plan or plans beneficially own no more than
25% of any class of such equity security of Third Century); and that (ii) shares
beneficially owned in violation of the stock ownership restriction described
above shall not be entitled to vote and shall not be voted by any person or
counted as voting stock in connection with any matter submitted to a vote of
shareholders. For these purposes, a person (including management) who has
obtained the right to vote shares of the common stock pursuant to revocable
proxies shall not be deemed to be the "beneficial owner" of those shares if that
person is not otherwise deemed to be a beneficial owner of those shares.
Evaluation of Offers. The articles of incorporation of Third Century
provide that the board of directors of Third Century, when determining to take
or refrain from taking corporate action on any matter, including making or
declining to make any recommendation to Third Century's shareholders, may, in
connection with the exercise of its judgment in determining what is in the best
interest of Third Century, Mutual and the shareholders of Third Century, give
due consideration to all relevant factors, including, without limitation, the
social and economic effects of acceptance of such offer on Third Century's
customers and Mutual's present and future account holders, borrowers, employees
and suppliers; the effect on the communities in which Third Century and Mutual
operate or are located; and the effect on the ability of Third Century to
fulfill the objectives of a holding company and of Mutual or future financial
institution subsidiaries to fulfill the objectives of a financial institution
under applicable statutes and regulations. The articles of incorporation of
Third Century also authorize the board of directors to take certain actions to
encourage a person to negotiate for a change of control of Third Century or to
oppose such a transaction deemed undesirable by the board of directors including
the adoption of so-called shareholder rights plans. By having these standards
and provisions in the articles of incorporation of Third Century, the board of
directors may be in a stronger position to oppose such a transaction if the
board concludes that the transaction would not be in the best interest of Third
Century, even if the price offered is significantly greater than the then market
price of any equity security of Third Century.
Procedures for Certain Business Combinations. The articles of incorporation
require that certain business combinations between Third Century (or any
majority-owned subsidiary thereof) and a 10% or greater shareholder either be
approved (i) by at least 80% of the total number of outstanding voting shares of
Third Century or (ii) by a majority of certain directors unaffiliated with such
10% or greater shareholder or involve consideration per share generally equal to
the higher of (A) the highest amount paid by such 10% shareholder or its
affiliates in acquiring any shares of the common stock or (B) the "Fair Market
Value" (generally, the highest closing bid paid for the common stock during the
thirty days preceding the date of the announcement of the proposed business
combination or on the date the 10% or greater shareholder became such, whichever
is higher).
Amendments to Articles of Incorporation and Bylaws. Amendments to the
articles of incorporation must be approved by a majority vote of Third Century's
board of directors and also by a majority of the outstanding shares of Third
Century's voting shares; provided, however, that approval by at least 80% of the
outstanding voting shares is required for certain provisions (i.e., provisions
relating to number, classification, and removal of directors; provisions
relating to the manner of amending the by-laws; call
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of special shareholder meetings; criteria for evaluating certain offers; certain
business combinations; and amendments to provisions relating to the foregoing).
The provisions concerning limitations on the acquisition of shares may be
amended only by an 80% vote of Third Century's outstanding shares unless at
least two-thirds of Third Century's Continuing Directors (directors of Third
Century on March 16, 2004, or directors recommended for appointment or election
by a majority of such directors) approve such amendments in advance of their
submission to a vote of shareholders (in which case only a majority vote of
shareholders is required).
The by-laws may be amended only by a majority vote of the total number of
directors of Third Century.
Purpose and Effects of the Anti-Takeover Provisions of Third Century's
Articles of Incorporation and By-Laws. Third Century's board of directors
believes that the provisions described above are prudent and will reduce Third
Century's vulnerability to takeover attempts and certain other transactions
which have not been negotiated with and approved by its board of directors.
These provisions will also assist in the orderly deployment of the conversion
proceeds into productive assets during the initial period after the conversion.
The board of directors believes these provisions are in the best interest of
Mutual and Third Century and its shareholders. In the judgment of the board of
directors, Third Century's board of directors will be in the best position to
determine the true value of Third Century and to negotiate more effectively for
what may be in the best interests of Third Century and its shareholders. The
board of directors believes that these provisions will encourage potential
acquirors to negotiate directly with the board of directors of Third Century and
discourage hostile takeover attempts. It is also the view of the board of
directors that these provisions should not discourage persons from proposing a
merger or other transaction at prices reflecting the true value of Third Century
and which is in the best interests of all shareholders.
Attempts to take over financial institutions and their holding companies
have recently increased. Takeover attempts that have not been negotiated with
and approved by the board of directors present to shareholders the risk of a
takeover on terms that may be less favorable than might otherwise be available.
A transaction that is negotiated and approved by the board of directors, on the
other hand, can be carefully planned and undertaken at an opportune time to
obtain maximum value for Third Century and its shareholders, with due
consideration given to matters such as the management and business of the
acquiring corporation and maximum strategic development of Third Century's
assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it to undertake defensive measures at a
great expense. Although a tender offer or other takeover attempt may be made at
a price substantially above then current market prices, such offers are
sometimes made for less than all of the outstanding shares of a target company.
As a result, shareholders may be presented with the alternative of partially
liquidating their investment at a time that may be disadvantageous, or retaining
their investment in an enterprise which is under different management and whose
objective may not be similar to that of the remaining shareholders. The
concentration of control, which could result from a tender offer or other
takeover attempt, could also deprive Third Century's remaining shareholders of
the benefits of certain protective provisions of the 1934 Act if the number of
shareholders of record becomes less than 300 and Third Century terminates its
registration under the 1934 Act.
Despite the belief of Third Century's board of directors in the benefits to
shareholders of the foregoing provisions, the provisions may also have the
effect of discouraging future takeover attempts that would not be approved by
the board of directors but that certain shareholders might deem to be in their
best interest or pursuant to which shareholders might receive a substantial
premium for their shares over then current market prices. As a result,
shareholders who might desire to participate in such a transaction may not have
an opportunity to do so. These provisions will also render the removal of the
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incumbent board of directors and of management more difficult. The board of
directors has, however, concluded that the potential benefits of these
restrictive provisions outweigh the possible disadvantages.
Other Restrictions on Acquisition of Third Century and Mutual
State Law. Under Indiana law, no person can acquire effective control
(including, without limitation, acquisition of 25% or more of its voting stock)
of Third Century or Mutual without prior approval of the DFI.
Several provisions of the Indiana Business Corporation Law could also
affect the acquisition of shares of the common stock or otherwise affect the
control of Third Century. Chapter 43 of the Indiana Business Corporation Law
prohibits certain business combinations, including mergers, sales of assets,
recapitalizations, and reverse stock splits, between corporations such as Third
Century (assuming that it has over 100 shareholders) and an interested
shareholder, defined as the beneficial owner of 10% or more of the voting power
of the outstanding voting shares, for five years following the date on which the
shareholder obtained 10% ownership unless the acquisition was approved in
advance of that date by the board of directors. If prior approval is not
obtained, several price and procedural requirements must be met before the
business combination can be completed. These requirements are similar to those
contained in Third Century's articles and described in " -- Provisions of Third
Century's Articles and By-Laws -- Procedures for Certain Business Combinations".
In general, the price requirements contained in the Indiana Business Corporation
Law may be more stringent than those imposed in Third Century's articles.
However, the procedural restraints imposed by Third Century's articles are
somewhat broader than those imposed by the Indiana Business Corporation Law.
Also, the provisions of the Indiana Business Corporation Law may change at some
future date, but the relevant provisions of Third Century's articles may only be
amended by an 80% vote of the shareholders of Third Century.
In addition, the Indiana Business Corporation Law contains provisions
designed to assure that minority shareholders have some say in their future
relationship with Indiana corporations in the event that a person made a tender
offer for, or otherwise acquired, shares giving that person more than 20%, 33
1/3%, and 50% of the outstanding voting securities of corporations having 100 or
more shareholders (the "Control Share Acquisitions Statute"). Under the Control
Share Acquisitions Statute, if an acquiror purchases those shares at a time that
the corporation is subject to the Control Share Acquisitions Statute, then until
each class or series of shares entitled to vote separately on the proposal, by a
majority of all votes entitled to be cast by that group (excluding shares held
by officers of the corporation, by employees of the corporation who are
directors thereof and by the acquiror), approves in a special or annual meeting
the rights of the acquiror to vote the shares which take the acquiror over each
level of ownership as stated in the statute, the acquiror cannot vote these
shares. An Indiana corporation otherwise subject to the Control Share
Acquisitions Statute may elect not to be covered by the statute by so providing
in its Articles of Incorporation or By-Laws. Third Century, however, will be
subject to this statute following the conversion because of its desire to
discourage non-negotiated hostile takeovers by third parties.
The Indiana Business Corporation Law specifically authorizes Indiana
corporations to issue options, warrants or rights for the purchase of shares or
other securities of the corporation or any successor in interest of the
corporation. These options, warrants or rights may, but need not be, issued to
shareholders on a pro rata basis.
The Indiana Business Corporation Law specifically authorizes directors, in
considering the best interest of a corporation, to consider the effects of any
action on shareholders, employees, suppliers, and customers of the corporation,
and communities in which offices or other facilities of the corporation are
located, and any other factors the directors consider pertinent. As described
above, Third Century's articles contain a provision having a similar effect.
Under the Indiana Business Corporation Law, directors are not required to
approve a proposed business combination or other corporate action if the
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directors determine in good faith that such approval is not in the best interest
of the corporation. In addition, the Indiana Business Corporation Law states
that directors are not required to redeem any rights under or render
inapplicable a shareholder rights plan or to take or decline to take any other
action solely because of the effect such action might have on a proposed change
of control of the corporation or the amounts to be paid to shareholders upon
such a change of control. The Indiana Business Corporation Law explicitly
provides that the different or higher degree of scrutiny imposed in Delaware and
certain other jurisdictions upon director actions taken in response to potential
changes in control will not apply. The Delaware Supreme Court has held that
defensive measures in response to a potential takeover must be "reasonable in
relation to the threat posed."
In taking or declining to take any action or in making any recommendation
to a corporation's shareholders with respect to any matter, directors are
authorized under the Indiana Business Corporation Law to consider both the
short-term and long-term interests of the corporation as well as interests of
other constituencies and other relevant factors. Any determination made with
respect to the foregoing by a majority of the disinterested directors shall
conclusively be presumed to be valid unless it can be demonstrated that such
determination was not made in good faith.
Because of the foregoing provisions of the Indiana Business Corporation
Law, the Board will have flexibility in responding to unsolicited proposals to
acquire Third Century, and accordingly it may be more difficult for an acquiror
to gain control of Third Century in a transaction not approved by the Board.
Federal Limitations. The Change in Bank Control Act provides that no
"person," acting directly or indirectly, or through or in concert with one or
more persons, other than a company, may acquire control of a bank or of a bank
holding company unless at least 60 days' prior written notice is given to the
Federal Reserve Board and the Federal Reserve Board has not objected to the
proposed acquisition.
The Bank Holding Company Act also prohibits any "company," directly or
indirectly or acting in concert with one or more other persons, or through one
or more subsidiaries or transactions, from acquiring control of an insured
institution without the prior approval of the Federal Reserve Board. In
addition, any company that acquires such control becomes a "bank holding
company" subject to registration, examination and regulation as a bank holding
company by the Federal Reserve Board.
The term "control" for purposes of the Change in Bank Control Act and the
Bank Holding Company Act includes the power, directly or indirectly, to vote
more than 25% of any class of voting stock of the insured institution or to
control, in any manner, the election of a majority of the directors of the
insured institution. It also includes a determination by the Federal Reserve
Board that such company or person has the power, directly or indirectly, to
exercise a controlling influence over or to direct the management or policies of
the insured institution.
Federal Reserve Board regulations also set forth certain "rebuttable
control determinations" which arise upon (a) the acquisition of any voting
securities of a state member bank or bank holding company if, after the
transaction, the acquiring person (or persons acting in concert) owns, controls,
or holds with power to vote 25 percent or more of any class of voting securities
of the institution; or (b) the acquisition of any voting securities of a state
member bank or bank holding company if, after the transaction, the acquiring
person (or persons acting in concert) owns, controls, or holds with power to
vote 10 percent or more (but less than 25 percent) of any class of voting
securities of the institution, and if (i) the institution has registered
securities under Section 12 of the 1934 Act or (ii) no other person will own a
greater percentage of that class of voting securities immediately after the
transaction.
The regulations also specify the criteria which the Federal Reserve Board
uses to evaluate control applications. The Federal Reserve Board is empowered to
disapprove an acquisition of control if it finds, among other things, that (i)
the acquisition would substantially lessen competition, (ii) the financial
condition of the acquiring person might jeopardize the institution or its
depositors, or (iii) the
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competency, experience, or integrity of the acquiring person indicates that it
would not be in the interest of the depositors, the institution, or the public
to permit the acquisition of control by such person.
DESCRIPTION OF CAPITAL STOCK
Third Century is authorized to issue 20,000,000 shares of Third Century
common stock, without par value, all of which have identical rights and
preferences, and 2,000,000 shares of preferred stock, without par value. Third
Century expects to issue up to 16,531,250 shares of common stock and no shares
of preferred stock in the conversion. Third Century has received an opinion of
its counsel that the shares of common stock issued in the conversion will be
validly issued, fully paid, and not liable for further call or assessment. This
opinion was filed with the SEC as an exhibit to Third Century's Registration
Statement under the 1933 Act. The following sets forth the material aspects of
the common stock.
Shareholders of Third Century will have no preemptive rights to acquire
additional shares of Third Century common stock that may be subsequently issued.
The common stock will represent nonwithdrawable capital, will not be of an
insurable type and will not be federally insured by the FDIC or any government
entity.
Under Indiana law, the holders of the common stock will possess exclusive
voting power in Third Century, unless preferred stock is issued and voting
rights are granted to the holders thereof. Each shareholder will be entitled to
one vote for each share held on all matters voted upon by shareholders, subject
to the limitations discussed under the caption "Restrictions on Acquisition of
Third Century Bancorp." Shareholders may not cumulate their votes in the
election of the board of directors. Holders of common stock will be entitled to
payment of dividends as may be declared from to time by Third Century's board of
directors.
In the unlikely event of the liquidation or dissolution of Mutual and Third
Century, the holders of the common stock will be entitled to receive, after
payment or provision for payment of all debts and liabilities of Third Century
(including all deposits in Mutual and accrued liabilities thereon) and after
payment of the liquidation account established in the conversion for the benefit
of Eligible Account Holders and Supplemental Eligible Account Holders who
continue their deposit accounts at Mutual, all assets of Third Century available
for distribution, in cash or in kind. See "The Conversion -- Principal Effects
of Conversion -- Effect on Liquidation Rights." If preferred stock is issued
subsequent to the conversion, the holders thereof may have a priority over the
holders of common stock in the event of liquidation or dissolution.
The board of directors of Third Century will be authorized to issue
preferred stock in series and to fix and state the voting powers, designations,
preferences and relative, participating, optional or other special rights of the
shares of each such series and the qualifications, limitations and restrictions
thereof. Preferred stock may rank prior to the common stock as to dividend
rights, liquidation preferences, or both, and may have full or limited voting
rights. The holders of preferred stock will be entitled to vote as a separate
class or series under certain circumstances, regardless of any other voting
rights which such holders may have.
Except as discussed elsewhere herein, Third Century has no specific plans
for the issuance of the additional authorized shares of common stock or for the
issuance of any shares of preferred stock. In the future, the authorized but
unissued and unreserved shares of common stock will be available for general
corporate purposes including, but not limited to, possible issuance as stock
dividends or stock splits, in future mergers or acquisitions, under a cash
dividend reinvestment and stock purchase plan, or in future underwritten or
other public or private offerings. The authorized but unissued shares of
preferred stock will similarly be available for issuance in future mergers or
acquisitions, in future underwritten public offerings or private placements or
for other general corporate purposes. Except as described above or as otherwise
required to approve the transaction in which the additional authorized shares of
common stock
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or authorized shares of preferred stock would be issued, no shareholder approval
will be required for the issuance of these shares. Accordingly, Third Century's
board of directors without shareholder approval can issue preferred stock with
voting and conversion rights which could adversely affect the voting power of
the holders of common stock.
The offering and sale of common stock in the conversion will be registered
under the 1933 Act. The subsequent sale or transfer of common stock is governed
by the 1933 Act, which requires that sales or exchanges of subject securities be
made pursuant to an effective registration statement or qualified for an
exemption from registration requirements of the 1933 Act. Similarly, the
securities laws of the various states also require generally the registration of
shares offered for sale unless there is an applicable exemption from
registration.
Third Century, as a newly organized corporation, has never issued capital
stock, and, accordingly, there is no market for the common stock. See "Market
for the Common Stock" and "Restrictions on Acquisition of Third Century Bancorp
-- Provisions of Third Century's Articles and By-Laws" for a description of
certain provisions of Third Century's Articles and By-Laws that may affect the
ability of Third Century's shareholders to participate in certain transactions
relating to acquisitions of control of Third Century. Also, see "Dividend
Policy" for a description of certain matters relating to the possible future
payment of dividends on the common stock.
TRANSFER AGENT
Registrar and Transfer Company will act as transfer agent and registrar for
the common stock. Registrar and Transfer Company's phone number is (800)
368-5948.
REGISTRATION REQUIREMENTS
Upon the conversion, Third Century's common stock will be registered
pursuant to Section 12(g) of the 1934 Act and will not be deregistered for a
period of at least three years following the conversion. As a result of the
registration under the 1934 Act, certain holders of common stock will be subject
to certain reporting and other requirements imposed by the 1934 Act. For
example, beneficial owners of more than 5% of the outstanding common stock will
be required to file reports pursuant to Section 13(d) or Section 13(g) of the
1934 Act, and officers, directors and 10% shareholders of Third Century will
generally be subject to reporting requirements of Section 16(a) and to the
liability provisions for profits derived from purchases and sales of Third
Century common stock occurring within a six-month period pursuant to Section
16(b) of the 1934 Act. In addition, certain transactions in common stock, such
as proxy solicitations and tender offers, will be subject to the disclosure and
filing requirements imposed by Section 14 of the 1934 Act and the regulations
promulgated thereunder.
LEGAL AND TAX MATTERS
Barnes & Thornburg LLP, 11 South Meridian Street, Indianapolis, Indiana
46204, special counsel to Mutual, will pass upon the legality and validity of
the shares of common stock being issued in the conversion. Barnes & Thornburg
LLP has issued an opinion concerning certain federal and state income tax
aspects of the conversion and that the conversion, as proposed, constitutes a
tax-free reorganization under federal and Indiana law. Barnes & Thornburg LLP
has consented to the references herein to their opinions. Certain legal matters
related to this offering will be passed upon for Keefe, Bruyette & Woods, Inc.,
by Luse Gorman Pomerenk & Schick, P.C., 5335 Wisconsin Ave., N.W., Suite 400,
Washington, D.C. 20015.
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EXPERTS
Our consolidated financial statements at and for the year ended December
31, 2003, appearing in this Prospectus and the Registration Statement have been
audited by BKD, LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
Our consolidated financial statements at and for the year ended December
31, 2002, appearing in this Prospectus and Registration Statement have been
audited by Woodbury & Company, LLC, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
Keller & Company has consented to the publication of the summary herein of
its appraisal report as to the estimated pro forma market value of the common
stock of Third Century to be issued in the conversion, to the reference to its
opinion relating to the value of the subscription rights, and to the filing of
the appraisal report as an exhibit to the registration statement filed by Third
Century under the 1933 Act.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On May 27, 2003, Mutual engaged the accounting firm of BKD, LLP to examine
the consolidated financial statements of Mutual as of and for the year ended
December 31, 2003. This action was taken following a recommendation of Mutual's
Audit Committee to the board of directors to take such action and the approval
of the change in auditors by the board of directors. Woodbury & Company, LLC,
which had acted as the independent public accountant for Mutual since 1975 and
whose audited consolidated financial statements as of and for the one-year
period ended December 31, 2002, are in this Prospectus, was notified on May 27,
2003, of Mutual's decision to engage BKD, LLP.
The audit reports issued by Woodbury & Company, LLC, with respect to
Mutual's consolidated financial statements as of and for the year ended December
31, 2002, did not contain an adverse opinion or disclaimer of opinion, and were
not qualified as to uncertainty, audit scope or accounting principles. During
the year ended December 31, 2002 (and any subsequent interim period), there had
been no disagreements between Mutual and Woodbury & Company, LLC on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Woodbury & Company, LLC would have caused it to make a reference
to the subject matter of the disagreement in connection with its audit report.
Moreover, none of the events listed in Item 304(a)(1)(iv)(B) of Regulation S-B
occurred during the year ended December 31, 2002, or any subsequent interim
period.
Prior to its engagement, BKD, LLP had not been consulted by Mutual as to
the application of accounting principles to a specific completed or contemplated
transaction or the type of audit opinion that might be rendered on Mutual's
financial statements.
ADDITIONAL INFORMATION
Third Century Bancorp has filed with the SEC a registration statement under
the 1933 Act with respect to the common stock offered by this Prospectus. As
permitted by the rules and regulations of the SEC, this Prospectus does not
contain all the information set forth in the registration statement. Such
information can be inspected and copied at the SEC's public reference facilities
located at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's
Regional Offices in New York (233 Broadway, New York, New York 10279) and
Chicago (Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511) and copies of such material can be obtained from the Public
Reference
105
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. This information can also be found on the SEC's website,
located at www.sec.gov.
Third Century Bancorp has also filed with the Federal Reserve Bank of
Chicago an Application on Form FR Y-3. This Prospectus omits certain information
contained in such Application. The Application may be inspected at the offices
at the Federal Reserve Board of Chicago, 230 South LaSalle Street, Chicago,
Illinois 60604-1413.
Mutual Savings Bank has filed with the DFI an Application to Convert to an
Indiana stock savings bank. This Prospectus omits certain information contained
in such Application. The Application may be inspected at the offices of the
Indiana Department of Financial Institutions, 402 West Washington Street, Room
W-066, Indianapolis, Indiana 46204. A Notice of Intent to Convert and a copy of
the Application to Convert that was filed with the DFI have been filed with the
Federal Deposit Insurance Corporation, Chicago Regional Office, 500 W. Monroe,
Suite 300, Chicago, Illinois 60661-3697.
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Mutual Savings Bank
Accountants' Report and Consolidated Financial Statements
December 31, 2003 and 2002
Contents
Independent Accountants' Reports ......................... F-2
Consolidated Financial Statements.........................
Balance Sheets ........................................ F-4
Statements of Income .................................. F-5
Statements of Equity Capital .......................... F-6
Statements of Cash Flows .............................. F-7
Notes to Financial Statements ......................... F-8
F-1
Independent Accountants' Report
Board of Directors
Mutual Savings Bank
Franklin, Indiana
We have audited the accompanying consolidated balance sheet of Mutual
Savings Bank as of December 31, 2003, and the related consolidated statements of
income, equity capital and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. The financial statements of Mutual
Savings Bank as of and for the year ended December 31, 2002, were audited by
other accountants whose report dated February 18, 2003, expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 2003 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Mutual
Savings Bank as of December 31, 2003, and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ BKD, LLP
Indianapolis, Indiana
January 16, 2004, except for Note 15
as to which the date is February 12, 2004
F-2
Independent Auditor's Report
Board of Directors
Mutual Savings Bank
80 East Jefferson Street
Franklin, Indiana 46131
We have audited the accompanying statement of financial condition of Mutual
Savings Bank as of December 31, 2002 and 2001, and the related statements of
income, retained earnings, and cash flows, for the years then ended. These
financial statements are the responsibility of the bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. 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 financial statements referred to above present fairly
in all material respects the financial position of Mutual Savings Bank as of
December 31, 2002 and 2001, 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/ Woodbury & Company, LLC
February 18, 2003
Franklin, Indiana
F-3
Mutual Savings Bank
Consolidated Balance Sheets
December 31, 2003 and 2002
2003 2002
-------------------------------
Assets
Cash and due from banks ............................................. $ 779,294 $ 790,371
Interest-bearing demand deposits .................................... 3,959,471 6,395,793
-------------------------------
Cash and cash equivalents ........................................ 4,738,765 7,186,164
Held-to-maturity securities ......................................... 688,609 6,124,409
Loans, net of allowance for loan losses of $1,054,766 and
$884,185 at December 31, 2003 and 2002 ........................... 96,955,033 79,336,025
Premises and equipment .............................................. 2,081,815 2,176,841
Federal Home Loan Bank stock ........................................ 975,000 550,000
Interest receivable ................................................. 463,551 524,573
Other ............................................................... 658,507 611,398
-------------------------------
Total assets ................................................... $106,561,280 $ 96,509,410
===============================
Liabilities and Equity Capital
Liabilities
Deposits
Demand ........................................................ $ 6,989,144 $ 4,797,990
Savings, NOW and money market ................................. 35,779,346 37,606,054
Time .......................................................... 35,939,575 35,722,914
-------------------------------
Total deposits ............................................. 78,708,065 78,126,958
Federal Home Loan Bank advances .................................. 19,500,000 10,500,000
Interest payable and other liabilities ........................... 313,010 337,038
-------------------------------
Total liabilities ......................................... 98,521,075 88,963,996
Commitments and Contingencies
Equity Capital-- retained earnings ..................................... 8,040,205 7,545,414
-------------------------------
Total liabilities and equity capital ...................... $106,561,280 $ 96,509,410
===============================
See Notes to Consolidated Financial Statements
F-4
Mutual Savings Bank
Consolidated Statements of Income
Years Ended December 31, 2003 and 2002
2003 2002
----------------------------
Interest and Dividend Income
Loans .......................................... $5,877,351 $5,511,815
Securities ..................................... 62,047 196,681
Dividends on Federal Home Loan Bank stock ...... 35,647 33,343
Deposits with financial institutions ........... 36,677 98,775
----------------------------
Total interest and dividend income .......... 6,011,722 5,840,614
----------------------------
Interest Expense
Deposits ....................................... 1,346,831 1,980,287
Federal Home Loan Bank advances ................ 607,125 277,040
----------------------------
Total interest expense ...................... 1,953,956 2,257,327
----------------------------
Net Interest Income ............................... 4,057,766 3,583,287
Provision for Loan Losses ......................... 200,000 140,000
----------------------------
Net Interest Income After Provision for Loan Losses 3,857,766 3,443,287
----------------------------
Noninterest Income
Fiduciary activities ........................... 80,772 126,183
Service charges on deposits accounts ........... 204,004 177,735
Other service charges and fees ................. 223,005 233,386
Net gains on loan sales ........................ 72,363 48,516
Merchant processing ............................ 100,851 83,045
Loan servicing fees ............................ 23,581 49,027
Other .......................................... 19,251 24,222
----------------------------
Total noninterest income ................... 723,827 742,114
----------------------------
Noninterest Expense
Salaries and employee benefits ................. 2,122,203 1,787,961
Net occupancy expense .......................... 349,581 310,740
Equipment expense .............................. 72,896 55,089
Data processing fees ........................... 344,803 288,606
Conversion expense ............................. 117,038 --
Professional fees .............................. 62,119 51,046
Directors' fees ................................ 89,500 82,413
Bank charges ................................... 144,195 152,168
Merchant processing ............................ 80,789 72,501
Other .......................................... 372,868 372,696
----------------------------
Total noninterest expense ................... 3,755,992 3,173,220
----------------------------
Income Before Income Tax .......................... 825,601 1,012,181
Provision for Income Taxes ........................ 330,810 401,885
----------------------------
Net Income ........................................ $ 494,791 $ 610,296
============================
See Notes to Consolidated Financial Statements
F-5
Mutual Savings Bank
Consolidated Statements of Equity Capital
Years Ended December 31, 2003 and 2002
Retained
Earnings
----------
Balance, January 1, 2002 ........................... $6,935,118
Net income ..................................... 610,296
----------
Balance, December 31, 2002 ......................... 7,545,414
Net income ..................................... 494,791
----------
Balance, December 31, 2003 ......................... $8,040,205
==========
See Notes to Consolidated Financial Statements
F-6
Mutual Savings Bank
Consolidated Statements of Cash Flows
Years Ended December 31, 2003 and 2002
2003 2002
----------------------------------
Operating Activities
Net income ............................................ $ 494,791 $ 610,296
Items not requiring (providing) cash
Depreciation and amortization ...................... 168,947 144,951
Provision for loan losses .......................... 200,000 140,000
Amortization of premiums and discounts on securities 109,504 (87,108)
Deferred income taxes .............................. (61,000) (28,520)
Loans originated for sale ............................. (4,408,723) (6,513,017)
Sale of loans ......................................... 4,481,086 6,561,533
Gains on sales of loans ............................... (72,363) (48,516)
Changes in
Interest receivable ................................ 61,022 (8,304)
Other assets ....................................... 13,891 101,604
Interest payable and other liabilities ............. (65,271) (143,318)
----------------------------------
Net cash provided by operating activities ....... 921,884 729,601
----------------------------------
Investing Activities
Purchases of held to-maturity securities .............. (711,006) (12,373,207)
Proceeds from maturities of held-to-maturity securities 6,037,302 6,335,906
Net change in loans ................................... (17,819,008) (5,982,152)
Purchase of premises and equipment .................... (73,921) (494,308)
Purchase of Federal Home Loan Bank stock .............. (425,000) --
----------------------------------
Net cash used in investing activities ............. (12,991,633) (12,513,761)
----------------------------------
Financing Activities
Net increase in demand deposits, money market, NOW
and savings accounts ............................... 364,446 2,315,077
Net increase (decrease) in certificates of deposit .... 216,661 (2,928,743)
Proceeds from Federal Home Loan Bank advances ......... 12,000,000 6,500,000
Repayment of Federal Home Loan Bank advances .......... (3,000,000) (1,000,000)
Net increase in advances from borrowers for taxes
and insurance ...................................... 41,243 18,559
----------------------------------
Net cash provided by financing activities ....... 9,622,350 4,904,893
----------------------------------
Decrease in Cash and Cash Equivalents .................... (2,447,399) (6,879,267)
Cash and Cash Equivalents, Beginning of Year ............. 7,186,164 14,065,431
----------------------------------
Cash and Cash Equivalents, End of Year ................... $ 4,738,765 $ 7,186,164
==================================
Supplemental Cash Flows Information
Interest paid ......................................... $ 1,977,285 $ 2,345,234
Income taxes paid (net of refunds) .................... 377,500 265,500
See Notes to Consolidated Financial Statements
F-7
Mutual Savings Bank
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
Note 1: Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Mutual Savings Bank (Mutual) is primarily engaged in providing a full
range of banking and financial services to individual and corporate
customers in Johnson County and surrounding counties. Mutual is
subject to competition from other financial institutions. Mutual 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 Mutual.
Principles of Consolidation
The consolidated financial statements include the accounts of Mutual
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
Mutual 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
Bank 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.
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, 2003 or 2002.
F-8
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.
A loan is considered impaired when, based on current information and
events, it is probable that Mutual 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, Mutual does not separately
identify individual consumer and residential loans for impairment
measurements.
F-9
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.
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.
Reclassifications
Certain reclassifications have been made to the 2002 financial
statements to conform to the 2003 financial statement presentation.
These reclassifications had no effect on net income.
Note 2: 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, 2003:
U. S. Government agencies ..... $ 201,365 $ 513 $ -- $ 201,878
Corporate obligations ......... 487,244 337 -- 487,581
----------------------------------------------------------
$ 688,609 $ 850 $ -- $ 689,459
==========================================================
December 31, 2002:
U. S. Government agencies ..... $2,902,365 $22,300 $ -- $2,924,665
Mortgage-backed securities .... 1,712,715 -- 13,891 1,698,824
State and political subdivision 600,000 4,458 -- 604,458
Corporate obligations ......... 909,329 2,085 -- 911,414
----------------------------------------------------------
$6,124,409 $28,843 $13,891 $6,139,361
==========================================================
At December 31, 2003, all securities mature within one year. 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.
F-10
Note 3: Loans and Allowance for Loan Losses
Categories of loans at December 31, include:
2003 2002
---------------------------
Residential real estate
One- to four-family residential .............. $56,132,745 $41,011,083
Multi-family residential ..................... 362,509 386,079
Construction and land development ............ 7,236,399 4,768,230
Commercial ...................................... 24,993,360 25,024,673
Consumer and other .............................. 9,327,126 9,070,296
---------------------------
Total loans .................................. 98,052,139 80,260,361
Less
Net deferred loan fees, premiums and discounts 42,340 40,151
Allowance for loan losses .................... 1,054,766 884,185
---------------------------
Net loans ................................ $96,955,033 $79,336,025
===========================
Activity in the allowance for loan losses was as follows:
2003 2002
--------------------------
Balance, beginning of year ........................ $ 884,185 $771,548
Provision charged to expense ...................... 200,000 140,000
Losses charged off, net of recoveries of $2,202 for
2003 and $24,557 for 2002 ...................... (29,419) (27,363)
--------------------------
Balance, end of year .............................. $1,054,766 $884,185
==========================
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. There
were no impaired loans at December 31, 2002.
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, 2003 and 2002 were $429,000 and $62,000,
respectively. Non-accruing loans at December 31, 2003 and 2002 totaling $70,000
and $62,000 were not deemed impaired as those loans were considered well
collateralized.
Note 4: Premises and Equipment
Major classifications of premises and equipment, stated at cost, are
as follows:
2003 2002
--------------------------------
Land ......................... $ 205,295 $ 205,295
Buildings and improvements ... 2,247,596 2,250,895
Equipment .................... 914,785 854,539
--------------------------------
3,367,676 3,310,729
Less accumulated depreciation (1,285,861) (1,133,888)
--------------------------------
Net premises and equipment $ 2,081,815 $ 2,176,841
================================
F-11
Note 5: 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 $10,962,000 and
$15,509,000 at December 31, 2003 and 2002, respectively.
Note 6: Interest-Bearing Deposits
Interest-bearing deposits in denominations of $100,000 or more were
$6,841,000 on December 31, 2003, and $6,705,000 on December 31, 2002.
At December 31, 2003, the scheduled maturities of time deposits are as
follows:
2004 .................................. $22,995,668
2005 .................................. 9,065,216
2006 .................................. 1,659,449
2007 .................................. 1,159,704
2008 .................................. 1,059,538
-----------
$35,939,575
===========
Note 7: Federal Home Loan Bank Advances
The Federal Home Loan Bank advances are secured by mortgage loans
totaling $57,311,000 and $42,597,000 at December 31, 2003 and 2002.
Advances at December 31, 2003, at interest rates ranging from 1.11 to
5.96 percent are subject to restrictions or penalties in the event of
prepayment.
Aggregate annual maturities of the advances at December 31, 2003, are:
2004 .................................. $ 3,000,000
2005 .................................. 2,000,000
2006 .................................. 2,000,000
2007 .................................. 3,000,000
2008 .................................. 2,000,000
Thereafter .................................. 7,500,000
-----------
$19,500,000
===========
Note 8: Income Taxes
The provision for income taxes includes these components:
2003 2002
------------------------
Taxes currently payable
Federal .................. $306,241 $333,379
State .................... 85,569 97,026
Deferred income taxes payable
Federal .................. (50,000) (19,908)
State .................... (11,000) (8,612)
------------------------
Income tax expense .... $330,810 $401,885
========================
F-12
A reconciliation of income tax expense at the statutory rate to
Mutual's actual income tax expense is shown below:
2003 2002
-------------------------
Computed at the statutory rate (34%) $301,440 $344,140
Increase (decrease) resulting from
State income taxes .............. 49,215 58,353
Other ........................... (19,845) (608)
-------------------------
Actual tax expense ........... $330,810 $401,885
=========================
The tax effects of temporary differences related to deferred taxes shown on the
balance sheets were:
2003 2002
------------------------
Deferred tax assets
Allowance for loan losses $447,738 $382,674
Deferred compensation .... 3,219 3,223
Other .................... 11,556 3,035
------------------------
462,513 388,932
------------------------
Deferred tax liabilities
Depreciation ............. 75,832 88,911
FHLB stock dividend ...... 11,504 --
Other .................... 14,156 --
------------------------
101,492 88,911
------------------------
Net deferred tax asset $361,021 $300,021
========================
Retained earnings at December 31, 2003 and 2002, 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, 2003 and 2002.
Note 9: Regulatory Matters
Mutual 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 Mutual's financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, Mutual must meet specific capital guidelines
that involve quantitative measures of Mutual's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory
accounting practices. Mutual's capital amounts and classification are
also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
F-13
Quantitative measures established by regulation to ensure capital
adequacy require Mutual to maintain minimum amounts and ratios (set
forth in the table below). Management believes, as of December 31,
2003 and 2002, that Mutual meets all capital adequacy requirements to
which it is subject.
As of December 31, 2003, the most recent notification categorized
Mutual as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, Mutual 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
Mutual's category.
Mutual's actual capital amounts and ratios are also presented in the
table.
For Capital To Be Well Capitalized
Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
-----------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------
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
As of December 31, 2002
Total risk-based capital
(to risk-weighted assets) $8,379,000 12.6% $5,047,000 8.0% $6,667,000 10.0%
Tier I capital
(to risk-weighted assets) 7,545,000 11.3 2,667,000 4.0 4,000,000 6.0
Tier I capital
(to adjusted total assets) 7,545,000 8.0 3,770,000 4.0 4,712,000 5.0
Note 10: Related Party Transactions
Mutual has entered into transactions with certain executive officers,
directors and their affiliates. 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................................. $1,603,000
New loans.......................................... 535,000
Repayments......................................... (966,000)
Change in composition.............................. 102,000
----------
Balance, December 31............................... $1,274,000
==========
F-14
Deposits from related parties, as defined, held by the Bank at
December 31, 2003 and 2002 totaled $1,296,000 and $1,474,000,
respectively.
Note 11: Employee Benefits
Mutual 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 Mutual'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 Mutual recorded a pension liability of $39,000 at December
31. Pension expense was $121,500 and $71,600 for 2003 and 2002.
Mutual has a retirement savings plan covering substantially all
employees. Employees may contribute up to 50 percent of their
compensation with Mutual matching 100 percent of the employee's
contribution on the first 8 percent of the employee's compensation.
Employer contributions charged to expense for 2003 and 2002 were
$58,000 and $40,000, respectively.
Note 12: Leases
Mutual has several noncancellable operating leases, primarily for
branch facilities, that expire over the next three years. Rental
expense for these leases was $40,800 and $44,400 for the years ended
December 31, 2003 and 2002, respectively. Future lease commitments are
immaterial.
Note 13: Disclosures About Fair Value of Financial Instruments
The following table presents estimated fair values of Mutual'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, Mutual 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.
F-15
December 31, 2003
---------------------------
Carrying Fair
Amount Value
---------------------------
Financial assets
Cash and cash equivalents ............. $ 4,738,765 $ 4,738,765
Held-to-maturity securities ........... 688,609 689,459
Loans, net of allowance for loan losses 96,955,033 101,015,000
Federal Home Loan Bank stock .......... 975,000 975,000
Interest receivable ................... 463,551 463,551
Financial liabilities
Deposits .............................. 78,708,065 79,389,000
Federal Home Loan Bank advances ....... 19,500,000 20,320,000
Interest payable ...................... 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.
Loans Held for Sale
For homogeneous categories of loans, such as mortgage loans held for
sale, fair value is estimated using the quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics.
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.
F-16
Federal Home Loan Bank Advances
Rates currently available to Mutual 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 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 14: 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.
At December 31, 2003 and 2002, Mutual had outstanding commitments to
originate loans aggregating approximately $212,000 and $450,000,
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 Mutual 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.
Mutual had total outstanding letters of credit amounting to $73,000 at
December 31, 2003 with terms of three years and Mutual has assessed
any liabilities associated with these letters of credit as immaterial.
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
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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, 2003, Mutual had granted unused lines of credit to
borrowers aggregating approximately $4,478,000 and $7,130,000 for
commercial lines and open-end consumer lines, respectively. At
December 31, 2002, unused lines of credit to borrowers aggregated
approximately $4,784,000 for commercial lines and $6,015,000 for
open-end consumer lines.
Note 15: Subsequent Event - Plan of Conversion
On February 12, 2004, the Board of Directors adopted a plan of
conversion (Plan) whereby Mutual will convert from a state-chartered
mutual savings bank to a state-chartered stock savings bank. The Plan
is subject to approval of regulatory authorities and members at a
special meeting. The stock of Mutual will be issued to Third Century
Bancorp, a holding company formed in connection with the conversion,
and Mutual will become a wholly-owned subsidiary of Third Century
Bancorp. Pursuant to the Plan, shares of capital stock of Third
Century Bancorp are expected to be offered initially for subscription
to eligible members of Mutual and certain other persons as of
specified dates subject to various subscription priorities as provided
in the Plan. The capital stock will be offered at a price to be
determined by the Board of Directors based upon an appraisal to be
made by an independent appraisal firm. The exact number of shares to
be offered will be determined by the Board of Directors in conjunction
with the determination of the subscription price. At least the minimum
number of shares offered in the conversion must be sold. Any stock not
purchased in the subscription offering will be sold in a community
offering expected to be commenced following the subscription offering.
The Plan provides that when the conversion is completed, a liquidation
account will be established in an amount equal to the retained income
of Mutual as of the date of the most recent financial statements
contained in the final conversion prospectus. The liquidation account
is established to provide a limited priority claim to the assets of
Mutual to qualifying depositors (eligible account holders) at December
31, 2002 and other depositors (supplemental eligible account holders)
as of March 31, 2004, who continue to maintain deposits in Mutual
after conversion. In the unlikely event of a complete liquidation of
Mutual, and only in such event, eligible account holders would receive
from the liquidation account a liquidation distribution based on their
proportionate share of the then total remaining qualifying deposits.
Current regulations allow Mutual to pay dividends on its stock after
the conversion equal to net retained profits for the current year and
the two preceding years, and if its regulatory capital would not
thereby be reduced below the amount then required for the liquidation
account.
Costs of conversion will be netted from proceeds of sale of common
stock and recorded as a reduction of additional paid-in capital or
common stock.
Third Century Bancorp plans to set up an employee stock ownership plan
(ESOP), a tax-qualified benefit plan, for officers and employees of
Third Century Bancorp and the Mutual. It is assumed that
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eight percent of the shares of common stock sold in the conversion
will be purchased by the ESOP with funds loaned by Third Century
Bancorp. Third Century Bancorp and Mutual intend to make annual
contributions to the ESOP in an amount equal to the principal and
interest requirement of the debt.
Following consummation of the conversion, Third Century Bancorp
intends to adopt a stock option plan and recognition and reward plan,
pursuant to which Third Century Bancorp intends to reserve a number of
shares of common stock equal to an aggregate of ten and four percent,
respectively, of the common stock issued in the conversion for
issuance pursuant to stock options and stock grants.
F-19
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No person has been authorized to give any information or to make any
representation other than as contained in this Prospectus and, if given or made,
such information or representation must not be relied upon as having been
authorized by Third Century Bancorp or Mutual Savings Bank. This Prospectus does
not constitute an offer to sell or the solicitation of an offer to buy any
security other than the shares of common stock offered hereby to any person in
any jurisdiction in which such offer or solicitation is not authorized, or in
which the person making such offer or solicitation is not qualified to do so, or
to any person to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this Prospectus nor any sale hereunder shall, under any
circumstances, create any implication that information herein is correct as of
any time subsequent to the date hereof.
Third Century Bancorp
(Holding Company for
Mutual Savings Bank)
1,437,500 Shares
(Anticipated Maximum)
(Subject to Increase to Up to 1,653,125 Shares)
Common Stock
(without par value)
SUBSCRIPTION AND
DIRECT COMMUNITY OFFERING
PROSPECTUS
KEEFE, BRUYETTE & WOODS
May 13, 2004
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED
Until August 11, 2004, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.