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FORM 10-KSB
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2004 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _______________
000-50828
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Commission File Number
THIRD CENTURY BANCORP
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(Name of Small Business Issuer)
INDIANA 20-0857725
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
80 EAST JEFFERSON STREET
FRANKLIN, INDIANA 46131
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(Address of principal executive offices) (Zip code)
Issuer's Telephone Number:
(317) 736-7151
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, WITHOUT PAR VALUE
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such requirements for the past 90 days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The issuer had $6.9 million in revenues for the fiscal year ended December 31,
2004.
The aggregate market value of the voting Common Stock held by non-affiliates of
the issuer, computed by reference to the average bid and asked price of such
stock on March 1, 2005 was $20,087,927.
As of March 1, 2005, there were issued and outstanding 1,653,125 shares of the
issuer's Common Stock.
Documents Incorporated By Reference
Portions of the Annual Report to Shareholders for the year ended December 31,
2004 are incorporated into Part II.
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]
Exhibit Index on Page E-1
Page 1 of 39 pages
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THIRD CENTURY BANCORP
FORM 10-KSB
INDEX
PAGE
PART I.........................................................................3
FORWARD-LOOKING STATEMENTS.....................................................3
Item 1. Description Of Business.........................................3
Item 2. Description of Property........................................27
Item 3. Legal Proceedings..............................................28
Item 4. Submission of Matters to a Vote of Security Holders............28
Item 4.5. Executive Officers of the Registrant...........................28
PART II.......................................................................29
Item 5. Market for Common Equity, Related Stockholder Matters
and Small Business Issuer Purchases of Equity Securities......29
Item 6. Management's Discussion and Analysis or Plan of Operation.....29
Item 7. Financial Statements...........................................31
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure...........................31
Item 8A. Controls and Procedures........................................32
Item 8B. Other Information..............................................32
PART III......................................................................32
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.............32
Item 10. Executive Compensation.........................................33
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters....................35
Item 12. Certain Relationships and Related Transactions.................36
Item 13. Exhibits.......................................................37
Item 14. Principal Accountant Fees and Services.........................38
SIGNATURES....................................................................39
Exhibit Index
2
PART I
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-KSB ("Form 10-KSB") contains statements that
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-KSB and include statements regarding the intent, belief,
outlook, estimates or expectations of Third Century Bancorp, its directors, or
its officers primarily with respect to future events and the future financial
performance of Third Century Bancorp. Readers of this Form 10-KSB are cautioned
that any such forward-looking statements are not guarantees of future events or
performance and involve risks and uncertainties, and that actual results may
differ materially from those in the forward-looking statements as a result of
various factors. The accompanying information contained in this Form 10-KSB
identifies important factors that could cause such differences. These factors
include but are not limited to changes in interest rates; loss of deposits and
loan demand to other savings and financial institutions; substantial changes in
financial markets; changes in real estate values and the real estate market;
regulatory changes; or unanticipated results in pending legal proceedings.
ITEM 1. DESCRIPTION OF BUSINESS.
Third Century Bancorp ("Third Century" and, together with Mutual Savings
Bank, the "Company" or "we") was formed on March 15, 2004, as an Indiana
corporation to be the holding company for Mutual Savings Bank ("Mutual" or the
"Bank"). On June 29, 2004, Third Century acquired the common stock of Mutual
upon the conversion of Mutual from a state mutual savings bank to a state stock
savings bank.
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.
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 22.73% of its total loan portfolio
at December 31, 2004. Mutual also offers commercial real estate loans, real
estate construction loans and consumer loans. Mortgage loans secured by
commercial real estate totaled approximately 22.59% of Mutual's total loan
portfolio at December 31, 2004, while residential construction loans totaled
approximately 13.63%, commercial construction loans totaled approximately 0.05%,
and consumer loans totaled approximately 35.43% of its total loans at December
31, 2004. 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, 2004, 15% of Mutual's capital and unimpaired surplus was $3.4
million. An additional amount up to 10% of capital and unimpaired surplus may be
loaned to the same borrower if such loan is fully secured by readily marketable
3
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.
At December 31,
---------------------------------------------------------------------------
2004 2003
-------------------------------------- ------------------------------------
Amount Percent of Total Amount Percent of Total
------------------ ------------------------------------ -------------------
(Dollars in Thousands)
TYPE OF LOAN
Real Estate Mortgage Loans:
Land............................ $ 1,368 1.37% $ 4,234 4.32%
One-to-Four-Family.............. 52,125 52.19 56,133 57.25
Multi-Family.................... 338 0.34 363 0.37
Commercial...................... 21,629 21.66 15,567 15.88
Construction........................ 4,765 4.77 5,352 5.46
Consumer Loans:
Home Equity..................... 3,813 3.82 3,413 3.48
Automobiles..................... 3,876 3.88 2,483 2.53
Lines of Credit................. 3,563 3.57 3,102 3.16
Other........................... 419 0.42 329 0.34
Commercial Loans.................... $ 7,982 7.98 $ 7,076 7.21
-------- ------ -------- ------
Gross Loans Receivable.......... $ 99,878 100.00% $ 98,052 100.00%
======== ====== ======== ======
TYPE OF SECURITY
Land................................ $ 1,368 1.37% $ 4,234 4.32%
One-to-four-family.................. 52,125 52.19 62,548 63.79
Multi-family........................ 338 0.34 363 0.37
Commercial Real Estate.............. 21,629 21.66 15,567 15.88
Automobiles......................... 3,876 3.88 2,483 2.53
Other Security...................... 18,583 18.60 11,245 11.47
Unsecured........................... 1,959 1.96 1,612 1.64
-------- ------ --------- ------
Gross Loans Receivable.......... $ 99,878 100.00% $ 98,052 100.00%
======== ====== ======== ======
DEDUCT:
Deferred Loan Fees.................. 44 42
Allowance for Loan Losses........... 1,012 1,055
-------- --------
Net Loans Receivable............ $ 98,822 $ 96,955
======== ========
MORTGAGE LOANS:
Adjustable-Rate..................... $ 27,955 $ 23,448
Fixed-Rate.......................... 47,505 52,849
-------- --------
Total........................... $ 75,460 $ 76,297
======== =========
The following table sets forth certain information at December 31, 2004,
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.
4
Balance
Outstanding
at December Due During Years Ended December 31,
31, 2006 to 2008 to 2010 to 2015 to 2025 and
2004 2005 2007 2009 2014 2024 Following
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(Dollars in Thousands)
Real Estate Mortgage Loans:
Land.......................... $ 1,368 $ 309 $ - $ 31 $ 132 $ 896 $ -
One-to-Four-Family............ 52,125 746 369 768 6,919 24,648 18,675
Multi-Family.................. 338 5 - - 70 263 -
Commercial.................... 21,629 1,458 2,173 288 1,553 14,929 1,228
Construction...................... 4,765 4,471 294 - - - -
Consumer Loans:
Home Equity................... 3,813 57 272 201 2,215 1,068 -
Automobiles................... 3,876 111 1,080 2,529 156 - -
Lines of Credit............... 3,563 2,459 1,055 49 - - -
Other......................... 419 70 90 212 47 - -
Commercial Loans.................. $ 7,982 4,181 420 765 1,200 541 875
-------- -------- ------ ------- -------- ------- -------
Total......................... $ 99,878 $13,867 $5,753 $ 4,843 $ 12,292 $42,345 $20,778
======== ======= ====== ======= ======== ======= ========
The following table sets forth as of December 31, 2004, the dollar amount
of all loans due after one year that have fixed interest rates or adjustable
rates.
Due After December 31, 2005
---------------------------------------------------------------------------
Fixed Rates Variable Rates Total
---------------------------------------------------------------------------
(Dollars in Thousands)
Real Estate Mortgage Loans:
Land............................ $ 666 $ 393 $ 1,059
One-to-Four-Family.............. 40,614 10,765 51,379
Multi-Family.................... - 333 333
Commercial...................... 4,915 15,256 20,171
Construction........................ 294 - 294
Consumer Loans:
Home Equity..................... - 3,756 3,756
Automobiles..................... 3,765 - 3,765
Lines of Credit................. 114 990 1,104
Other........................... 349 - 349
Commercial Loans.................... 2,002 1,799 3,801
-------- -------- --------
Total........................... $ 52,719 $ 33,292 $ 86,011
======== ========= =========
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
5
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 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 it originates and, at December 31, 2004,
approximately 20.89% 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, 2004, approximately $52.1 million, or 52.19% of Mutual's
portfolio of loans, consisted of one- to four-family residential loans.
Approximately $195,000, or 0.37% of total one- to four-family residential loans,
was included in non-performing assets as of that date.
COMMERCIAL REAL ESTATE LOANS. Our commercial real estate loans at December
31, 2004, were secured by churches, office buildings and other commercial
properties ($21.6 million), and apartments consisting of five or more units
($338,000). 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.
6
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.
At December 31, 2004, approximately $21.6 million, or 21.66% of Mutual's
total loan portfolio, consisted of commercial real estate loans. On the same
date, no commercial real estate loans were included in non-performing assets.
At December 31, 2004, approximately $338,000, or 0.34% 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, 2004, there were
no multi-family loans included in non-performing 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, 2004, approximately $4.1 million or 4.09% of
Mutual's total loan portfolio consisted of residential construction loans and
$678,000 or 0.68% of its total loan portfolio consisted of commercial
construction loans. At December 31, 2004, there were no construction loans
included in non-performing 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
7
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.
CONSUMER LOANS. Mutual's consumer loans at December 31, 2004, consisted
primarily of variable- and fixed-rate home equity loans ($3.8 million
representing 3.82% of our total loan portfolio) and lines of credit ($3.6
million representing 3.57% of our total loan portfolio) and automobile loans
($3.9 million representing 3.88% of our total loan portfolio). Consumer loans
tend to have shorter terms and higher yields than permanent residential mortgage
loans. At December 31, 2004, Mutual's consumer loans aggregated approximately
$11.7 million, or 11.69%, 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.
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, 2004, commercial loans
amounted to $8.0 million, or 7.98%, 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, 2004, no commercial loans were included in non-performing assets.
The following table shows Mutual's loan origination, purchase and repayment
activity during the periods indicated.
8
Year Ended December 31,
2004 2003
------------------------------------------
(Dollars in Thousands)
Loans Originated:
Real Estate Mortgage Loans:
Land............................................. $ 337 $ 878
One-to-Four-Family............................... 10,009 26,429
Commercial....................................... 9,950 6,384
Construction..................................... 8,181 2,045
Consumer Loans:
Home Equity and Home Improvement................. 776 1,668
Other............................................ 7,415 3,809
Commercial Loans................................... 7,375 3,643
------- ---------
Total Originations............................... 44,043 44,856
Reductions:
Principal Loan Repayments.......................... 42,048 27,065
Transfers from Loans to Real Estate Owned.......... 170 -
------- ----------
Total Reductions................................. 42,218 27,065
Decrease in Other Items.............................. (42) 172
------- ---------
Net Increase......................................... $ 1,867 $ 17,619
======= =========
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 90 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, 2004, $195,000, or 0.15% of Mutual's
total assets, were non-performing assets (loans delinquent more than 90 days,
non-accruing loans and foreclosed assets) compared to $429,000, or 0.40%, of our
total assets at December 31, 2003. The table below sets forth the amounts and
categories of our non-performing assets.
9
Year Ended December 31,
------------------------------------------
2004 2003
------------------------------------------
(Dollars in Thousands)
Non-Performing Assets:
Non-Performing Loans............................ $ 25 $ 429
Foreclosed Assets............................... 170 -
------ -------
Total Non-Performing Assets .................... $ 195 $ 429
====== =======
Non-Performing Loans to Total Loans............. 0.20% 0.44%
Non-Performing Assets to Total Assets........... 0.15% 0.40%
At December 31, 2004, Mutual held loans delinquent from 30 to 89 days
totaling $1.9 million.
There was one loan for $25,000 past due 90 days or more and still accruing
interest at December 31, 2004, for which interest was fully reserved. No loans
at December 31, 2004 were on non-accrual.
The following table reflects the amount of loans in a delinquent status as
of the dates indicated:
At December 31, 2004 At December 31, 2003
------------------------------------------------ -----------------------------------------------
30 - 89 Days 90 Days or More 30 - 89 Days 90 Days or More
------------------------ ----------------------- ----------------------- -----------------------
Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans
----------- ------------ ----------- ----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
Real Estate Mortgage Loans:
One-to-Four-Family..... 5 $ 303 1 $ 25 15 $ 846 2 $ 70
Multi-Family........... 1 4 - - 1 9 - -
Construction .......... - - - - 1 130 1 359
Home Equity and Home
Improvement................ 1 23 - - 9 102 - -
Other Consumer Loans....... 9 96 - - 6 42 - -
Commercial Loans........... 4 1,456 - - 4 92 - -
-- ------- -- ---- -- ------- -- ----
Total.................. 20 $ 1,883 1 $ 25 36 $ 1,221 3 $429
== ======= == ==== == ======= == ====
Delinquent Loans to Total
Loans...................... 1.02% 1.89% 0.05% 0.03% 1.98% 1.24% 0.17% 0.44%
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
10
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.
At December 31, 2004 and 2003, the aggregate amount of Mutual's classified
assets, and of its general and specific loss allowances were as follows:
Year Ended December 31,
-----------------------------------
2004 2003
-----------------------------------
(Dollars in Thousands)
Substandard Loans..................... $ 299 $ 1,950
Doubtful Loans........................ 10 30
Loss Loans............................ - 14
--------- -----------
Total Classified Loans............ $ 309 $ 1,994
========= ===========
General Loss Allowance................ $ 859 $ 692
Specific Loss Allowance............... 153 363
--------- -----------
Total Allowances ................. $ 1,012 $ 1,055
========= ===========
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, 2004 and 2003, Mutual classified $2.1 million and
$828,000 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.
The above table shows one loan in the amount of $14,000 for the year 2003
classified in the "loss" category. Even though this loan was classified as
"loss," it was charged off as of the year-end date. While management recognized
the probability of a charge-off on the loan in its entire amount, 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 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 charge-offs, net of
recoveries. Mutual's methodology for assessing the appropriateness of the
allowance consists of several key elements, which 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.
11
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, 2004 and 2003.
Year Ended December 31,
-----------------------------
2004 2003
-----------------------------
(Dollars in Thousands)
Balance at Beginning of Period................ $ 1,055 $ 884
Charge-Offs:
One-to-Four-Family Mortgage Loans......... - 23
Consumer Loans............................ 37 8
Commercial Loans.......................... 74 -
---------- ---------
Total Charge-Offs......................... 111 31
---------- ---------
Recoveries:
One-to-Four-Family Mortgage Loans......... 2 -
Consumer Loans............................ 2 2
Commercial Loans.......................... 28 -
---------- ---------
Total Charge-Offs......................... 32 2
---------- ---------
Net Charge-Offs............................... 79 29
Provision for Losses on Loans................. 36 200
---------- ---------
Balance End of Period......................... $ 1,012 $ 1,055
========== ==========
Allowance for Loan Losses as a Percent
of Total Loss Outstanding.................. 1.01% 1.08%
Ratio of Net Charge-Offs to Average Loans
Outstanding................................ 0.08% 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.
12
At December 31,
----------------------------------------------------------------
2004 2003
-------------------------------- -------------------------------
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....................................... $ - 1.37% $ - 4.32%
Real Estate Mortgage Loans:
One-to-Four-Family......................... 170 52.19 122 57.25
Commercial and Multi-Family................ 226 21.66 372 16.25
Construction Loans......................... 30 4.77 102 5.46
Home Equity and Home Improvements.......... - 3.82 1 3.48
Other Consumer Loans....................... 140 7.87 148 6.03
Commercial Loans........................... 104 7.98 64 7.21
Unallocated................................ 342 - 246 -
--------- ------- --------- -------
Total................................... $ 1,012 100.00% $ 1,055 100.00%
========= ======= ========= =======
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, 2004,
the Trust Department had 178 accounts representing $6.7 million, including
funeral trusts. For the year ended December 31, 2004, revenues generated by the
Trust Department totaled $70,000.
CREDIT CARD UNDERWRITING. Mutual also issues Mutual Savings Bank Credit
Cards, 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
and Federal Home Loan Bank stock. At December 31, 2004, approximately $11.5
million or 9.09% 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, 2004.
The following table sets forth the carrying value and market value of
Mutual's investments at the dates indicated.
13
At December 31,
----------------------------------------------------------------
2004 2003
------------------------------- --------------------------------
Amortized Cost Amortized
Cost Fair Value Cost Fair Value
--------------- --------------- -------------- -----------------
(Dollars in Thousands)
Held to Maturity:
Agency Securities...................... $ 10,455 $ 10,445 $ 201 $ 202
State and Municipal.................... - - - -
Mortgage Backed Securities............. - - - -
Corporate Obligations.................. - - 488 488
FHLB Stock (1)............................. 1,020 1,020 975 975
--------- -------- ------- --------
Total Investment Securities................ $ 11,475 $ 11,465 $ 1,664 $ 1,665
========= ======== ======= ========
(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, will mature as follows: $8.5 million by December 31, 2005 and
$2.0 million by December 31, 2006. At December 31, 2004, the weighted average
yield on agency securities and FHLB stock was 1.79% and 4.80%, respectively.
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 have become more interest rate sensitive. Mutual
manages the
14
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, 2004, is as follows:
Balance at December Weighted Average
Type of Account 31, 2004 % of Deposits Rate
------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Withdrawable:
Non-Interest Bearing Demand............ $ 9,760 11.30% 0.00%
Interest Bearing Demand................ 1,404 1.62 0.68
Savings, NOW and Money Market.......... 39,672 45.91 0.66
-------- ------
Total Withdrawable.................. $ 50,836 58.83% 0.58%
-------- ------
Certificates (Original Terms):
91 Day................................. $ 566 0.66% 1.30%
182 Day................................ 1,832 2.12 1.44
Short Term............................. 34 0.04 5.14
12 Month............................... 6,297 7.29 2.01
15 Month............................... 2,851 3.30 2.01
18 Month............................... 3,658 4.23 2.51
24 Month............................... 6,430 7.44 3.10
30 Month............................... 2,392 2.77 2.99
36 Month............................... 2,527 2.92 3.85
42 Month............................... 13 0.02 3.11
48 Month............................... 1,042 1.21 4.68
60 Month............................... 3,794 4.39 4.71
IRA.................................... 4,136 4.79 2.41
-------- ------
Total Certificates.................. $ 35,572 41.17% 2.69%
-------- ------
Total Deposits............................. $ 86,408 100.00% 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,
------------------------------------------
2004 2003
------------------------------------------
(Dollars in Thousands)
1.00% to 1.99%....................................... $ 11,056 $ 12,656
2.00% to 2.99%....................................... 13,743 11,038
3.00% to 3.99%....................................... 6,557 7,063
4.00% to 4.99%....................................... 2,752 3,307
5.00% to 5.99%....................................... 985 1,238
6.00% to 8.00%....................................... 479 638
-------- ------------
Total............................................ $ 35,572 $ 35,940
======== ============
The following table represents, by various interest rate categories, the
amounts of term deposits maturing during each of the three years following
December 31, 2004, and the total amount maturing thereafter. Matured
certificates that have not been renewed as of December 31, 2004, have been
allocated based on certain rollover assumptions.
15
Amounts at December 31, 2004
----------------------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
--------------- ----------- ---------- -------------------
(Dollars in Thousands)
1.00% to 1.99%........................... $10,692 $ 364 $ - $ -
2.00% to 2.99%........................... 6,935 6,467 266 75
3.00% to 3.99%........................... 2,048 2,357 848 1,304
4.00% to 4.99%........................... 696 404 461 1,191
5.00% to 5.99%........................... 263 185 531 6
6.00% to 8.00%........................... 409 70 - -
------- ------- ------- -------
Total................................ $21,043 $ 9,847 $ 2,106 $ 2,576
======= ======= ======= =======
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,
2004.
At December 31, 2004
----------------------
(Dollars in Thousands)
Maturity Period
Three Months or Less................................. $2,290
Greater than Three Months through Six Months ........ 455
Greater than Six Months through Twelve Months ....... 1,338
Over Twelve Months................................... 2,607
------
Total.......................................... $6,690
======
The following table indicates the change in time deposit balances during
2003 and 2004.
Year Ended December 31,
----------------------------------
2004 2003
----------------------------------
(Dollars in Thousands)
Beginning Balance.................. $ 35,940 $ 35,723
Net Deposits.................... (1,301) (899)
Interest Credited............... 933 1,116
---------- ------------
Net Increase in Deposits........ (368) 217
---------- ------------
Ending Balance..................... $ 35,572 $ 35,940
========== ============
In the unlikely event that Mutual would liquidate, 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 (created in connection with Mutual's conversion from mutual to stock
form) to certain deposit account holders, with any assets remaining thereafter
distributed to Third Century as the sole shareholder of Mutual's capital stock.
BORROWINGS. Mutual focuses on generating high quality loans and then seeks
the best source of funding from deposits, investments or borrowings. At December
31, 2004, Mutual had $16.5 million in borrowings from the Federal Home Loan Bank
of Indianapolis. Mutual had approximately $48.7 million in eligible assets
available as collateral for advances from the Federal Home Loan Bank of
Indianapolis as of December 31, 2004. 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 eligible
collateral would have supported approximately $33.6 million in advances from the
Federal Home Loan Bank of Indianapolis as of December 31, 2004. Mutual's Board
of Directors has adopted a resolution that limits the amount of authorized
borrowings. As of December 31, 2004, 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.
16
The following tables present certain information relating to Mutual's
borrowings at or for the years ended December 31, 2004 and 2003.
Year Ended December 31,
------------------------------------------
2004 2003
------------------------------------------
(Dollars in Thousands)
FHLB Advances
Outstanding at End of Period....................... $ 16,500 $ 19,500
Average Balance Outstanding for Period............. 17,404 15,244
Maximum Amount Outstanding at any Month-End During the
Period........................................... 19,500 19,500
Weighted Average Interest Rate During the Period... 3.34% 3.98%
Weighted Average Interest Rate at End of Period.... 3.23% 3.79%
----------------------------------------------------------------------
Amounts at December 31, 2004
----------------------------------------------------------------------
2010
thru
2005 2006 2007 2008 2009 2013
(Dollars in Thousands)
1.00% to 1.99%.................... $ - $ - $ - $ - $ - $ -
2.00% to 2.99%.................... 500 - - - - -
3.00% to 3.99%.................... 500 2,000 3,000 500 2,500 2,000
4.00% to 4.99%.................... - - - 1,500 - 2,000
5.00% to 5.99%.................... 1,000 - - - - 1,000
Above 5.99%....................... - - - - - -
------- ------- ------- ------- ------- --------
Total......................... $ 2,000 $ 2,000 $ 3,000 $ 2,000 $ 2,500 $ 5,000
======= ======= ======= ======= ======= ========
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
EMPLOYEES
As of December 31, 2004, Mutual employed 44 persons on a full-time basis
and 9 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
managed by Pentegra Group. Other benefits include medical, dental, and
short-term and long-term disability insurance.
17
Employee benefits are considered by management to be competitive with those
offered by other financial institutions and major employers in the area.
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.
REGULATION
BANK HOLDING COMPANY REGULATION
Third Century is a registered bank holding company and is 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 is 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 is 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
18
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, called
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.
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 Mutual. Mutual's deposits are
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.
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.
19
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, 2004, our investment in
stock of the Federal Home Loan Bank of Indianapolis was $1.0 million. For the
year ended December 31, 2004, dividends paid to us by the Federal Home Loan Bank
of Indianapolis totaled $48,400.
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.
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
20
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 noncumulative 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 capital ("Tier
II") 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%, of which 4% must be
Tier I capital. The FDIC may, however, set higher capital requirements when a
bank's particular circumstances warrant. 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,
21
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized. At December 31, 2004, 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 established a liquidation
account for the benefit of Eligible Account Holders and Supplemental Eligible
Account Holders. Mutual is not permitted to pay dividends to Third Century if
its net worth would be reduced below the amount required for the liquidation
account.
Under Indiana law, Mutual may pay dividends without the approval of the DFI
so long as its capital is unimpaired and those dividends in any calendar year do
not exceed its net profits for that year plus its retained net profits for the
previous two years. Dividends may not exceed undivided profits on hand (less
losses, bad debts and expenses). Additional stringent regulatory requirements
affecting dividend payments by Mutual, however, are established by the prompt
corrective action provisions of the Federal Deposit Insurance Corporation
Improvement Act, which are discussed above. Mutual's capital levels at December
31, 2004 exceeded the criteria established to be designated as a "well
capitalized" institution. Such institutions are required to have a total
risk-based capital ratio of 10% or greater, a Tier I risk-based capital ratio of
6% or greater and a leverage ratio of 5% or greater.
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.
22
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, 2004, the principal amount of the largest aggregate
amount of loans which Mutual had to any one borrower was approximately $1.7
million. 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 has a significant impact on its business,
operations and earnings.
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 prompt
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 nonpersonal time deposits.
The reserve requirements are subject to adjustment by the Federal Reserve Board.
As of December 31, 2004, 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
23
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% or more of 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
24
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 are registered with the
Securities and Exchange Commission under the Securities Exchange Act of 1934
(the "1934 Act"). Third Century is 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.
SARBANES-OXLEY ACT OF 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002 (the "Sarbanes-Oxley Act). The Sarbanes-Oxley Act's stated goals include
enhancing corporate responsibility, increasing penalties for accounting and
auditing improprieties at publicly traded companies and protecting investors by
improving the accuracy and reliability of corporate disclosures pursuant to the
securities laws. The Sarbanes-Oxley Act generally applies to all companies that
file or are required to file periodic reports with the Securities and Exchange
Commission under the 1934 Act.
25
Among other things, the Sarbanes-Oxley Act creates the Public Company
Accounting Oversight Board as an independent body subject to SEC supervision
with responsibility for setting auditing, quality control and ethical standards
for auditors of public companies. The Sarbanes-Oxley Act also requires public
companies to make faster and more-extensive financial disclosures, requires the
chief executive officer and chief financial officer of public companies to
provide signed certifications as to the accuracy and completeness of financial
information filed with the SEC, and provides enhanced criminal and civil
penalties for violations of the federal securities laws.
The Sarbanes-Oxley Act also addresses functions and responsibilities of
audit committees of public companies. The statute makes the audit committee
directly responsible for the appointment, compensation and oversight of the work
of the company's outside auditor, and requires the auditor to report directly to
the audit committee. The Sarbanes-Oxley Act authorizes each audit committee to
engage independent counsel and other advisors, and requires a public company to
provide the appropriate funding, as determined by its audit committee, to pay
the company's auditors and any advisors that its audit committee retains. The
Sarbanes-Oxley Act also requires public companies to include an internal control
report and assessment by management, along with an attestation to this report
prepared by the company's registered public accounting firm, in their annual
reports to stockholders.
Although the Company will incur additional expense in complying with the
provisions of the Sarbanes-Oxley Act and the resulting regulations, management
does not expect that such compliance will have a material impact on the
Company's results of operations or financial condition.
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
26
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.
The Company and Mutual do not anticipate electing to file a consolidated
federal income tax return for 2004 or 2005. Accordingly, the Company will be
taxed separately on its earnings as an ordinary corporation.
STATE TAXATION
The Company, Mutual and Mutual Financial Services are 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.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company 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. The Company owns its main
office, its office on North Main Street in Franklin and its Trafalgar office and
it leases its other offices.
The Company 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.
The following table provides certain information with respect to the
Company's offices as of December 31, 2004:
27
Net Book
Value of
Lease Property,
Owned or Expiration Year Total Furniture & Approximate
Description and Address Leased Date Opened Deposits Fixtures Square Footage
---------------------------------- ------------- ------------- ---------- -------------- --------------- ---------------
Main Office
80 East Jefferson Street Owned N/A 1890 $42,344,488 $ 666,720 18,000
Main Street Office
1124 North Main Street Owned N/A 1995 $ 9,324,941 $ 1,000,213 4,800
Methodist Community
1070 West Jefferson Street Leased 2009(1) 1997 $15,741,963 $ 23,734 770
Indiana Masonic Home
690 South State Street Leased 2004(2) 2001 $10,306,266 $ 6,113 184
Trafalgar Office
2 Trafalgar Square Owned N/A 1993 $ 1,560,227 $ 380,631 2,400
Nineveh Office
7459 South Nineveh Road Leased 2007(3) 2001 $ 7,130,254 $ 58,627 1,300
(1) The lease is for a term of five years commencing on September 1, 2004.
(2) The original lease term ended December 31, 2002, and the Company has
options to renew the lease for additional two-year periods. The Company
will close this branch on April 30, 2005 as announced in a January 28, 2005
press release.
(3) The lease is for a term of five years commencing on January 1, 2002.
Management believes that the Company's properties are in good condition and
are suitable and adequate for continuing to conduct its business as it is now
being conducted.
The Company 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 $134,010 at December 31, 2004. The Company
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 $28,000 per month.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any pending legal proceedings, other than
routine litigation incidental to the business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of Third Century's shareholders during
the quarter ended December 31, 2004.
ITEM 4.5. EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of Third Century are identified below. The executive
officers of Mutual are elected annually by Third Century's Board of Directors.
Name Position with Third Century Position with Mutual
Robert D. Heuchan President and Chief Executive Officer President and Chief Executive Officer
David A. Coffey Executive Vice President and Chief Executive Vice President and Chief
Operating Officer Operating Officer
Debra K. Harlow Chief Financial Officer Chief Financial Officer
28
Robert D. Heuchan (age 51) has served as the President, Chief Executive
Officer and director of Third Century since its formation in March 2004 and of
Mutual since 1991. He has served as Vice Chairman of the Mutual Board of
Directors since 1999. He also has been President of Mutual Financial Services
since its formation in 1991. Mr. Heuchan is a graduate of Franklin College and
has an MBA from the University of Indianapolis.
David A. Coffey (age 42) has served as Executive Vice President, Chief
Operating Officer and a director of Third Century since its formation in March
2004 and of Mutual since 1999. He began serving Mutual as the Chief Operating
Officer in 1998, and was a Senior Vice President prior to being named Executive
Vice President. Mr. Coffey is a graduate of Franklin College.
Debra K. Harlow (age 53) has served as Chief Financial Officer of Third
Century since its formation in March 2004 and of Mutual since January 2004.
Prior to that time she served Mutual as the EDP Coordinator.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES.
The information required by this item is incorporated by reference to the
material under the heading "Market Price of Third Century's Common Shares and
Related Shareholder Matters" on page 43 of Third Century's 2004 Shareholder
Annual Report in the form attached to this report as Exhibit 13 (the
"Shareholder Annual Report").
The Company repurchased no shares of its common stock during the fourth
quarter of 2004.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The information required by this item is incorporated by reference to pages
3 through 21 of the Shareholder Annual Report.
ASSET/LIABILITY MANAGEMENT
Mutual, like other financial institutions, is subject to 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 ("b.p.") (one
basis point equals .01%). Due to the current low level of market interest rates,
the minus 300 b.p. case is temporarily limited to minus 200 b.p. for 2004 and 75
b.p. for 2003. The resulting NPVs 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.
29
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 minus 300
b.p. to plus 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 3%, it is impossible to evaluate a parallel shift in the entire
yield curve of minus 3% or more. So out of necessity we have temporarily reduced
our down rate case to minus 200 b.p. In 2003, the 3-month Treasury bills were
below 1%, thus we used minus 75 b.p. for the down rate case. 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 2% decrease in NPV relative to assets for a 300 b.p.
instantaneous change in interest rates. Presented below, as of December 31, 2004
and 2003, 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/-200 b.p. and +300/-75 b.p. changes in market interest
rates for 2004 and 2003, respectively.
2004 2004 2004
----------------- ---------------------------------- -------- -----------------------------------------------
Change in Net Portfolio Value 2004 NPV as % of PV of Assets
Rates $ Amount $ Change % Change NPV Ratio Change
----------------- ---------------- ----------------- -------- ----------------- -------------- --------------
+300 b.p.* $11,043 $ (2,511) -18.5% 9.76% -2.06%
0 b.p. 13,553 11.11
-200 b.p. 12,068 (1,486) -11.0 9.58 -1.22
2003 2003 2003
----------------- ---------------------------------- -------- -----------------------------------------------
Change in Net Portfolio Value 2003 NPV as % of PV of Assets
Rates $ Amount $ Change % Change NPV Ratio Change
----------------- ---------------- ----------------- -------- ----------------- -------------- --------------
+300 b.p.* $5,963 $ (2,983) -33.3% 5.90% -2.69%
0 b.p. 8,946 8.08
-75 b.p. 8,604 (342) -3.8 7.67 -0.31
*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.
30
Based upon the December 31, 2004 estimation, Mutual's NPV would decrease by
2.06% of assets in the event of an immediate 300 b.p. increase in interest rates
and decrease 1.22% in the event of an immediate 200 b.p. decrease in interest
rates. Therefore, as of December 31, 2004, Mutual was in compliance with its
interest rate policy.
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.
ITEM 7. FINANCIAL STATEMENTS.
The Company's Consolidated Financial Statements and Notes to Consolidated
Financial Statements contained on the pages in the Shareholder Annual Report set
forth below are incorporated herein by reference.
Financial Statements Annual Report Page
No.
-------------------------------------------------------------------------------------- ----------------------
Report of Independent Registered Public Accounting Firm............................ 22
Consolidated Balance Sheets at December 31, 2004 and 2003.......................... 23
Consolidated Statements of Income for the Years Ended December 31,
2004 and 2003................................................................... 24
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2004 and 2003...................................................... 25
Consolidated Statements of Cash Flows for the Years Ended December 31,
2004 and 2003................................................................... 26
Notes to Consolidated Financial Statements......................................... 27
All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or related
notes.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On May 27, 2003, the Bank engaged the accounting firm of BKD, LLP to
examine the consolidated financial statements of the Bank as of and for the year
ended December 31, 2003. This action was taken following a recommendation of the
Bank'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 the Bank
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 the Bank's decision to engage BKD, LLP.
The audit reports issued by Woodbury & Company, LLC, with respect to the
Bank'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 the Bank 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.
31
Prior to its engagement, BKD, LLP had not been consulted by the Bank 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 the Bank's
financial statements.
ITEM 8A. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures. Third Century's Chief
Executive Officer and Chief Financial Officer, after evaluating the
effectiveness of the Company's disclosure controls and procedures (as defined in
Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as
amended), as of the end of the most recent fiscal quarter covered by this annual
report (the "Evaluation Date"), have concluded that as of the Evaluation Date,
the Company's disclosure controls and procedures are adequate and are designed
to ensure that material information relating to the Company would be made known
to such officers by others within the Company on a timely basis.
(b) Changes in internal controls. There were no significant changes in the
Company's internal control over financial reporting identified in connection
with the Company's evaluation of controls that occurred during the Company's
last fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
ITEM 8B. OTHER INFORMATION.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
Directors
Presented below is certain information concerning the directors of the
Company:
David A. Coffey (age 42) has served as Chief Operating Officer of the Bank
since 1998 and as Executive Vice President of the Bank 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 67) has served as Chairman of the Board of Directors
of the Bank since 1999. Mr. Ellett also serves Chairman of Mutual Financial
Services, Inc., a subsidiary of the Bank engaged in mortgage life insurance
sales and servicing. He was the General Manager of Rytex Company, a stationery
products company, until his retirement in December 2001.
Robert D. Heuchan (age 51) has served as the President and Chief Executive
Officer of the Bank since 1991. He has also served as Vice Chairman of the Board
since 1999. He also has been President of Mutual Financial Services, Inc. since
its formation in 1991. Mr. Heuchan is a graduate of Franklin College and has an
MBA from the University of Indianapolis.
Jerry D. Petro (age 59) is the owner and President of J.D. Petro &
Associates, Inc., which sells protective coatings in Indiana, and R.T.I. L.L.C.,
which sells protective coatings in Kentucky. He also is the owner and President
of R.T.I., which sells chemical and architectural coatings; Petro's Water
Conditioning of Johnson County; Petro Group, Inc., a manufacturer of buildings
for light industrial use; and Petro Group, L.L.C., which leases office space.
Robert D. Schafstall (age 61) has been the Franklin City judge and an
attorney in the law firm of Cutsinger and Schafstall since 1972.
32
The terms of such directors are set forth in Item 11 hereof.
Executive Officers
Information concerning the Executive Officers of the Company is
incorporated by reference to Item 4.5 hereof.
Audit Committee
The Audit Committee, which has been established in accordance with
ss.3(a)(58)(A) of the Securities Exchange Act of 1934, recommends the
appointment of the Company's independent accountants, and meets with them to
outline the scope and review the results of such audit. The members of the Audit
Committee are Robert L. Ellett and Jerry D. Petro
The Company's Audit Committee is comprised of Messrs. Ellett and Petro.
Each of these members meets the current requirements for independence of Audit
Committee members set forth in the Listing Standards of the National Association
of Securities Dealers. In addition, the Board of Directors has determined that
Jerry D. Petro is a "financial expert" as that term is defined in Item 401(h)(2)
of Regulation S-K promulgated under the Securities Exchange Act of 1934.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the 1934 Act requires that the Company's officers and
directors and persons who own more than 10% of the Company's Common Stock file
reports of ownership and changes in ownership with the Securities and Exchange
Commission (the "SEC"). Officers, directors and greater than 10% shareholders
are required by SEC regulations to furnish the Company with copies of all
Section 16(a) forms that they file.
Based solely on its review of the copies of such forms received by it,
and/or written representations from certain reporting persons that no Forms 5
were required for those persons, the Company believes that during the fiscal
year ended December 31, 2004, all filing requirements applicable to its
officers, directors and greater than 10% beneficial owners with respect to
Section 16(a) of the 1934 Act were satisfied in a timely manner.
Code of Ethics
The Company has adopted a Code of Ethics that applies, among other persons,
to its principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions. A
copy of that Code of Ethics is filed as an exhibit to this Report.
ITEM 10. EXECUTIVE COMPENSATION.
Management Remuneration
During the fiscal year ended December 31, 2004, no cash compensation was
paid directly by the Company to any of its executive officers. Each of such
officers was compensated by the Bank.
The following table sets forth information as to annual, long-term and
other compensation for services in all capacities to our President and Chief
Executive Officer and our Chief Operating Officer (the "Named Executive
Officers") for the two fiscal years ended December 31, 2004. We had no other
executive officers who earned over $100,000 in salary and bonuses during that
fiscal year.
33
Summary Compensation Table
Annual Compensation Other Annual
Name and --------------------------- Compensation All Other
Principal Position Year Salary ($)(1) Bonus ($) ($)(2) Compensation(3)
------------------- ---- ------------- --------- --------------------- ---------------
Robert D. Heuchan, 2004 $120,000 $33,000 $35,565
President and Chief 2003 $100,000 $30,000 $21,040
Executive Officer
David A. Coffey, 2004 $100,000 $22,000 $30,671
Chief Operating Officer 2003 $ 83,500 $20,000 $17,366
-------------------------------------------------------------------------------------------------------------------------
(1) Includes amounts deferred by the Bank's executive officers pursuant to ss.
401(k) of the Internal Revenue Code of 1986, as amended (the "Code"), under
the Bank's ss. 401(k) Plan.
(2) Mr. Heuchan and Mr. Coffey received certain perquisites, but the
incremental cost of providing such perquisites did not exceed the lesser of
$50,000 or 10% of their salary and bonus. These perquisites include the
payment of annual Hillview Country Club dues in the amount of $2,490 for
Mr. Heuchan and $540 for Mr. Coffey.
(3) Consists of director fees in the amount of $12,000, the Bank's matching
contributions under the ss. 401(k) Plan, fees from Mutual Financial
Services, Inc., and contributions made in 2004 to the ESOP on behalf of the
Named Executive Officer.
Stock Options
No stock options were granted during fiscal 2004 to, or held as of December
31, 2004, by, the Named Executive Officers.
Employment Contract
The Bank entered into three-year employment contracts with Robert D.
Heuchan and with David A. Coffey. The contracts became effective on June 20,
2004, and extend annually to maintain their three-year term if the Bank's 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 the Bank's employees.
Mr. Heuchan or Mr. Coffey may terminate his employment upon sixty days'
written notice to the Bank. The Bank may discharge Mr. Heuchan or Mr. Coffey for
cause (as defined in the contract) at any time. If the Bank terminates 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 of the Company (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 the Bank's 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 the Bank 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
34
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 the Company, without cause by the Bank, or for cause by either Mr.
Heuchan or Coffey, would be $378,000 for Mr. Heuchan and $315,000 for Mr.
Coffey. For purposes of these employment contracts, a change of control of the
Company is generally an acquisition of control, as defined in regulations issued
under the Change in Bank Control Act and the Bank Company Act.
The employment contracts provide the Bank with protection of its
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 the Bank 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. Aggregate
fees paid to the Bank's directors for the year ended December 31, 2004, were
$84,800 and the aggregate fees paid to the Bank's emeritus directors were
$18,150. Directors of the Company are paid $500 for each Board meeting attended,
provided, however that no more than $500 per month is payable to such directors.
Each director of Mutual Financial Services, Inc. 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, Inc. meets quarterly.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Voting Securities and Principal Holders Thereof
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of March 21, 2005, by each person who is known
by the Company to own beneficially 5% or more of the Common Stock. Unless
otherwise indicated, the named beneficial owner has sole voting and dispositive
power with respect to the shares.
Number of Shares
Name and Address of Common Stock Percent
of Beneficial Owner(1) Beneficially Owned of Class
------------------------- ------------------ --------
HomeFederal Bank, Trustee
501 Washington Street
Columbus, Indiana 47201 132,250(2) 8.0%
Wellington Management Company, LLP
75 State Street
Boston, MA 02109 118,900(3) 7.2%
------------------------------------------------------------------------------------------------
(1) The information in this chart is based on Schedule 13G and 13D Reports
filed by the above-listed persons with the Securities and Exchange
Commission (the "SEC") containing information concerning shares held by
them. It does not reflect any changes in those shareholdings which may have
occurred since the date of such filings.
(2) These shares are held by the Trustee of the Third Century Bancorp Employee
Stock Ownership Plan and Trust (the "ESOP"). The Employees participating in
that Plan are entitled to instruct the Trustee how to vote shares held in
their accounts under the Plan. Unallocated shares held in a suspense
35
account under the Plan are required under the Plan terms to be voted by the
Trustee in the same proportion as allocated shares are voted.
(3) In a Schedule 13G filed with the SEC, Wellington Management Company, LLP
indicates that it is the beneficial owner of the foregoing shares, and that
it has shared dispositive power and no voting power with respect to those
shares. Wellington Management Company, LLP ("WMC") is a Massachusetts
limited partnership and a registered investment advisor. First Financial
Fund, Inc. is one of its clients, with whom WMC shares dispositive power as
to 110,500 of these shares. First Financial Fund, Inc., 1680 38th Street,
Suite 800, Boulder, Colorado 80301, has sole voting power with respect to
those 110,500 shares.
The following table sets forth certain information regarding the directors
of the Company, including the number and percent of shares of Common Stock
beneficially owned by such persons as of March 21, 2005. Unless otherwise
indicated, each nominee has sole investment and/or voting power with respect to
the shares shown as beneficially owned by him. No director is related to any
other director or executive officer of the Company by blood, marriage, or
adoption. The table also sets forth the number of shares of Company Common Stock
beneficially owned by all directors and executive officers of the Company as a
group.
Director Common Stock
Expiration of Director of the of the Beneficially
Term as Holding Bank Owned as of Percentage
Name Director Company Since Since 3/21/2005 (1) of Class
------------------------ ------------- ---------------- -------- ------------- ----------
David A. Coffey 2006 2004 1999 26,192(2) 1.6%
Robert L. Ellett 2008 2004 1987 25,000 1.5%
Robert D. Heuchan 2007 2004 1991 26,592(3) 1.6%
Jerry D. Petro 2006 2004 1997 30,000(4) 1.8%
Robert D. Schafstall 2008 2004 1999 25,500(5) 1.5%
All directors and
executive officers
as a group (6 persons) 137,555(6) 8.3%
--------------------------------------------------------------------------------------------------------------------------------
* Less than 1% of outstanding shares.
(1) Based upon information furnished by the respective director nominees. Under
applicable regulations, shares are deemed to be beneficially owned by a
person if he or she directly or indirectly has or shares the power to vote
or dispose of the shares, whether or not he or she has any economic power
with respect to the shares. Includes shares beneficially owned by members
of the immediate families of the directors residing in their homes.
(2) Includes 17,718 shares held jointly with Mr. Coffey's spouse, 8,088 shares
held in the Bank's 401(k) plan as of December 31, 2004, and 386 shares
allocated to Mr. Coffey's account under the Bank's ESOP as of December 31,
2004.
(3) Includes 10,000 shares held jointly with Mr. Heuchan's spouse, 16,128
shares held in the Bank's 401(k) plan as of December 31, 2004, and 464
shares allocated to Mr. Heuchan's account under the Bank's ESOP as of
December 31, 2004.
(4) Includes 10,000 shares in trust for the benefit of Mr. Petro, 15,000 shares
in trust for the benefit of Mr. Petro's spouse, and 5,000 shares held in a
profit-sharing plan for Mr. Petro's benefit.
(5) These shares are held jointly with Mr. Schafstall's spouse.
(6) Includes 24,216 shares held in the Bank's 401(k) plan and 850 shares held
in the Bank's ESOP as of December 31, 2004.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Transactions With Certain Related Persons
The Bank follows a policy of offering to its directors, officers, and
employees real estate mortgage loans secured by their principal residence and
other loans. These loans are made in the
36
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, 2004, 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, the Bank'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% of the Bank's capital and unimpaired surplus, but not to exceed
$100,000. The Bank's policy regarding loans to directors and all employees meets
the requirements of current law. All loans to the Bank's 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, 2004, was approximately $1.79 million.
Bob Heuchan, the Bank's President and Chief Executive Officer, also serves
as President and Treasurer of Mutual Financial Services, Inc. He receives a $100
monthly management fee for the services he provides to Mutual Financial
Services, Inc. which include keeping the financial records and preparing
financial statements, negotiating agreements with insurance companies and
overseeing compliance with insurance regulations. The disinterested directors on
the Bank'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
services of this law firm for such matters following the conversion.
ITEM 13. EXHIBITS.
EXHIBIT NO. DESCRIPTION
3(1) Registrant's Articles of Incorporation are incorporated by
reference to Exhibit 3(1) to the Registration Statement on
Form SB-2 (Registration No. 333-113691) (the "Registration
Statement").
3(2) Registrant's Amended Code of By-Laws is incorporated by
reference to Exhibit 3(1) to the Registrant's Form 10-QSB
for the quarter ended September 30, 2004.
10(1) Form of Third Century Stock Option Plan is incorporated by
reference to Exhibit 10(1) to the Registration Statement.
10(2) Form of Mutual Savings Bank Recognition and Retention Plan
and Trust is incorporated by reference to Exhibit 10(2) to
the Registration Statement.
10(3) Form of Employment Agreement between Mutual Savings Bank and
Robert D. Heuchan is incorporated by reference to Exhibit
10(3) to the Registration Statement.
10(4) Form of Employment Agreement between Mutual Savings Bank and
David A. Coffey is incorporated by reference to Exhibit
10(4) to the Registration Statement.
10(5) Form of Third Century Bancorp Employee Stock Ownership Plan
and Trust Agreement is incorporated by reference to Exhibit
10(5) to the Registration Statement.
37
10(6) Service Agreement with Intrieve, Incorporated is
incorporated by reference to Exhibit 10(6) to the
Registration Statement.
10(7) Exempt Loan and Share Purchase Agreement
10(8) Share Pledge Agreement
10(9) Contract for Sale of Real Estate
13 2004 Shareholder Annual Report
14 Code of Ethics
21 Subsidiaries of the Registrant
23 Consent of BKD, LLP
31(1) CEO Certification
31(2) CFO Certification
32 Section 906 Certification
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The firm of BKD, LLP ("BKD") served as the Company's independent public
accountants for each of its last two fiscal years ended December 31, 2003 and
2004.
Audit Fees. The aggregate fees billed by BKD for the audit of the Company's
financial statements included in its annual report on Form 10-KSB and for the
review of its financial statements included in its quarterly reports on Form
10-QSB for the fiscal years ended December 31, 2004 and 2003, were $130,349
(including fees for the comfort letter BKD provided in connection with Mutual's
stock conversion) and $7,590, respectively.
Audit-Related Fees. There were no fees billed for fiscal 2004 and 2003 that
were not covered in the Audit Fees disclosure above.
Tax Fees. The aggregate fees billed in each of fiscal 2004 and 2003 for
professional services rendered by BKD for tax compliance, tax advice or tax
planning were $3,500 and $0, respectively.
All Other Fees. There were no fees billed for fiscal 2004 or for 2003 for
professional services rendered by BKD other than those disclosed above.
Board of Directors Pre-Approval. The Company's Audit Committee formally
adopted resolutions pre-approving the engagement of BKD to act as the Company's
independent auditor for the last two fiscal years ended December 31, 2003 and
2004, respectively. The Audit Committee has not adopted pre-approval policies
and procedures in accordance with paragraph (c) (7) (i) of Rule 2-01 of
Regulation S-X, because it anticipates that in the future the engagement of BKD
will be made by the Audit Committee and all non-audit and audit services to be
rendered by BKD will be pre-approved by the Audit Committee. The Board of
Directors for the last two fiscal years pre-approved audit-related and tax
services provided by BKD.
38
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THIRD CENTURY BANCORP
Date: March 29, 2005 By: /s/ Robert D. Heuchan
------------------------------------
Robert D. Heuchan, President and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signatures Title Date
---------------------------------------- ------------------------------------------- ------------------------
(1) Principal Executive Officer:
/s/ Robert D. Heuchan
--------------------------
Robert D. Heuchan President and Chief Executive Officer March 29, 2005
(2)Principal Financial and Accounting
Officer:
/s/ Debra K. Harlow
--------------------------
Debra K. Harlow Chief Financial Officer March 29, 2005
(3) The Board of Directors
/s/ David A. Coffey
--------------------------
David A. Coffey Director March 29, 2005
/s/ Robert L. Ellett
--------------------------
Robert L. Ellett Director March 29, 2005
/s/ Robert D. Heuchan
--------------------------
Robert D. Heuchan Director March 29, 2005
/s/ Jerry D. Petro
--------------------------
Jerry D. Petro Director March 29, 2005
/s/ Robert D. Schafstall
--------------------------
Robert D. Schafstall Director March 29, 2005
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3(1) Registrant's Articles of Incorporation are incorporated by
reference to Exhibit 3(1) to the Registration Statement on
Form SB-2 (Registration No. 333-113691) (the "Registration
Statement").
3(2) Registrant's Amended Code of By-Laws is incorporated by
reference to Exhibit 3(1) to the Registrant's Form 10-QSB
for the quarter ended September 30, 2004.
10(1) Form of Third Century Stock Option Plan is incorporated by
reference to Exhibit 10(1) to the Registration Statement.
10(2) Form of Mutual Savings Bank Recognition and Retention Plan
and Trust is incorporated by reference to Exhibit 10(2) to
the Registration Statement.
10(3) Form of Employment Agreement between Mutual Savings Bank and
Robert D. Heuchan is incorporated by reference to Exhibit
10(3) to the Registration Statement.
10(4) Form of Employment Agreement between Mutual Savings Bank and
David A. Coffey is incorporated by reference to Exhibit
10(4) to the Registration Statement.
10(5) Form of Third Century Bancorp Employee Stock Ownership Plan
and Trust Agreement is incorporated by reference to Exhibit
10(5) to the Registration Statement.
10(6) Service Agreement with Intrieve, Incorporated is
incorporated by reference to Exhibit 10(6) to the
Registration Statement.
10(7) Exempt Loan and Share Purchase Agreement
10(8) Share Pledge Agreement
10(9) Contract for Sale of Real Estate
13 2004 Shareholder Annual Report
14 Code of Ethics
21 Subsidiaries of the Registrant
23 Consent of BKD, LLP
31(1) CEO Certification
31(2) CFO Certification
32 Section 906 Certification
E-1