SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission file number: 000-50828
THIRD CENTURY BANCORP
(Exact name of small business issuer as specified in its charter)
Indiana 20-0857725
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
80 East Jefferson Street
Franklin, Indiana 46131
(Address of principal executive offices)
(317) 736-7151
(Issuer's telephone number)
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: July 31, 2004 - 1,653,125 common
shares
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
1
THIRD CENTURY BANCORP
FORM 10-QSB
INDEX
Page
No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets 3
Consolidated Condensed Statements of Income 4
Consolidated Condensed Statement of Stockholders' Equity 6
Consolidated Condensed Statements of Cash Flows 7
Notes to Unaudited Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis or Plan of Operation 9
Item 3. Controls and Procedures 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Small Business Issuer Purchases of Equity
Securities 12
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
EXHIBIT INDEX
2
Item 1. Financial Statements
THIRD CENTURY BANCORP
Consolidated Condensed Balance Sheets
June 30, December 31,
2004 2003
(Unaudited) (in thousands)
Assets
Cash and due from banks $ 4,180 $ 780
Interest-bearing demand deposits 14,893 3,959
------------------------------------------
Cash and cash equivalents
19,073 4,739
Held to maturity securities
- 689
Loans, net of allowance for loan losses
of $1,006 and $1,055 96,458 96,955
Premises and equipment
2,121 2,082
Federal Home Loan Bank stock
998 975
Interest receivable
478 463
Other assets
1,001 658
-------------------------------------
Total assets $ 120,129 $106,561
-------------------------------------
Liabilities
Deposits
Demand $ 7,214 $ 6,989
Savings, NOW and money market 36,966 35,779
Time 35,387 35,940
-------------------------------------
Total deposits 79,567 78,708
Federal Home Loan Bank Advances 17,000 19,500
Other liabilities 460 313
-------------------------------------
Total liabilities 97,027 98,521
-------------------------------------
Commitments and Contingencies
Stockholders' Equity
Preferred stock, without par value, authorized and
unissued 2,000,000 shares
Common stock, without par value
Authorized - 20,000,000 shares
Issued and outstanding - 1,653,125 shares 15,822 -
Retained earnings 8,412 8,040
Unearned ESOP (1,132) -
-------------------------------------
Total stockholders' equity 23,102 8,040
-------------------------------------
Total liabilities and stockholders' equity $ 120,129 $106,561
=====================================
See notes to consolidated condensed financial statements.
3
THIRD CENTURY BANCORP
Consolidated Condensed Statements of Income
(Unaudited)
Six Months Ended Three Months
June 30, June 30,
(in thousands)
----------------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------------
Interest income
Loans receivable $ 2,888 $ 2,904 $ 1,442 $ 1,494
Investment securities 5 50 2 18
Federal Home Loan Bank stock 26 17 11 8
Interest-bearing deposits 31 26 20 8
----------------------------------------------------------
Total interest income 2,950 2,997 1,475 1,528
----------------------------------------------------------
Interest expense
Deposits 573 728 287 356
Federal Home Loan Bank advances 354 265 174 144
----------------------------------------------------------
Total interest expense 927 993 461 500
----------------------------------------------------------
Net interest income 2,023 2,004 1,014 1,028
Provision for loan losses 24 - 12 -
----------------------------------------------------------
Net interest income after provision for loan losses 1,999 2,004 1,002 1,028
----------------------------------------------------------
Other income
Service charges on deposit accounts 109 92 56 49
Other service charges and fees 103 118 57 48
Net gains on loan sales 138 29 92 28
Other income 144 105 88 51
----------------------------------------------------------
Total other income 494 344 293 176
----------------------------------------------------------
Other expenses
Salaries and employee benefits 1,098 998 537 514
Net occupancy and equipment expenses 221 199 105 99
Data processing fees 200 188 103 86
Service bureau conversion expense - 56 - 41
Other expenses 359 368 159 184
----------------------------------------------------------
Total other expenses 1,878 1,809 904 924
----------------------------------------------------------
Income before income tax 615 539 391 280
Income tax expense 243 205 137 108
----------------------------------------------------------
Net income $ 372 $ 334 $ 254 $ 172
==========================================================
See notes to consolidated condensed financial statements.
4
THIRD CENTURY BANCORP
Consolidated Condensed Statements of Stockholders' Equity
(Unaudited)
(Dollar amounts in thousands)
Common Stock Unearned
Shares Retained ESOP
Outstanding Amount Earnings Shares Total
----------------------------------------------------------------------
Balances, January 1, 2004 - $ - $8,040 $ - $ 8,040
Net and comprehensive income - - 372 - 372
Proceeds from stock issued in
conversion, net of costs 1,653,125 15,822 - - 15,822
Contribution to ESOP - - - (1,132) (1,132)
---------- ------- ------ -------- ----------
Balances, June 30, 2004 $1,653,125 $15,822 $8,412 $(1,132) $ 23,102
========== ======= ====== ======== ==========
See notes to consolidated condensed financial statements.
5
THIRD CENTURY BANCORP
Consolidated Condensed Statement of Cash Flows
(Unaudited)
Six-months ended June 30
----------------------------
2004 2003
----------------------------
(in Thousands)
Operating Activities
Net income $ 372 $ 334
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses 24
Depreciation 94 83
Investment securities accretion, net 4 66
Gain on sale of loans (53) (29)
Loans originated for sale in the secondary market (5,078) (1,435)
Proceeds from sale of loans in the secondary market 5,131 1,464
Net change in
Interest receivable (15) (13)
Other assets (343) 145
Other liabilities 147 291
----------------------------
Net cash provided (used) by operating activities (283) 906
----------------------------
Investing Activities
Purchases of FHLB stock (23) (225)
Purchases of securities held to maturity (3,196)
Proceeds from maturities of securities held to maturity 685 6,061
Net changes in loans 473 (12,779)
Purchases of premises and equipment (133) (15)
----------------------------
Net cash used by investing activities (1,002) (10,154)
----------------------------
Financing Activities
Net change in
Demand and savings deposits 1,412 (500)
Certificate of deposits (553) 1,015
Net proceeds from stock conversion 15,822
Purchase of ESOP shares (1,132)
Proceeds from FHLB advances 1,500 6,000
Payments on FHLB advances (4,000) (1,000)
----------------------------
Net cash provided by financing activities 13,049 5,515
----------------------------
Net Change in Cash and Equivalents 14,334 (3,733)
Cash and Cash Equivalents, Beginning of Period 4,739 7,186
----------------------------
Cash and Cash Equivalents, End of Period $19,073 $ 3,453
============================
Additional Cash Flows Information
Interest paid $ 868 $ 1,000
Income tax paid $ 157 $ 196
See notes to consolidated financial statements.
6
THIRD CENTURY BANCORP
Notes to Unaudited Consolidated Condensed Financial Statements
Third Century Bancorp (Third Century) is an Indiana corporation that was formed
on March 15, 2004 for the purpose of owning all of the capital stock of Mutual
Savings Bank following the completion of Mutual Savings Bank's mutual-to-stock
conversion. Third Century offered for sale 1,653,125 shares of its common stock
at $10.00 per share in a public offering to eligible depositors that was
completed on June 29, 2004. On that date, Third Century purchased all of the
capital stock issued by Mutual Savings Bank. Prior to that date, Third Century
had no assets or liabilities.
The activities of Third Century are primarily limited to holding the stock of
Mutual Savings Bank. Mutual Savings Bank conducts business primarily in Johnson
County and surrounding counties. Mutual Savings Bank attracts deposits from the
general public and originates loans for consumer, residential and commercial
purposes. Mutual Savings Bank's profitability is significantly dependent on net
interest income, which is the difference between interest income generated from
interest-earning assets (i.e. loans and investments) and the interest expense
paid on interest-bearing liabilities (i.e. customer deposits and borrowed
funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances. The level of interest paid or received by
Mutual Savings Bank can be significantly influenced by a number of factors, such
as governmental monetary policy, competition within our market area and the
performance of the national and local economies.
Mutual Savings Bank also owns one subsidiary, Mutual Financial Services, Inc.
(Financial), which is engaged primarily in mortgage life insurance sales and
servicing.
Note 1: Basis of Presentation
The accompanying unaudited consolidated condensed financial statements were
prepared in accordance with instructions for Form 10-QSB and, therefore, do not
include information or footnotes necessary for a complete presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. Accordingly, these financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto of Mutual Savings Bank for the fiscal year ended
December 31, 2003 included in Third Century's Registration Statement on Form
SB-2 which was declared effective by the Securities and Exchange Commission on
May 13, 2004 (SEC File No. 333-113691). However, in the opinion of management,
all adjustments (consisting of only normal recurring accruals) which are
necessary for a fair representation of the financial statements have been
included. The results of operations for the six- and three-month periods ended
June 30, 2004, are not necessarily indicative of the results which may be
expected for the entire year.
The consolidated condensed balance sheet of Third Century as of December 31,
2003 has been derived from the audited consolidated balance sheet of Third
Century as of that date.
Note 2: Principles of Consolidation
The consolidated financial statements include the accounts of Third Century,
Mutual Savings Bank and Financial. All significant intercompany balances and
transactions have been eliminated in the accompanying consolidated financial
statements.
7
Note 3: Earnings Per Share
Third Century had no earnings prior to June 29, 2004. Accordingly, an earnings
per share computation is not provided.
Note 4: Effect of Recent Accounting Pronouncements
In March 2004, the SEC issued Staff Accounting Bulletin No. 105 (SAB 105),
Application of Accounting Principles to Loan Commitments. Current accounting
guidance requires the commitment to originate mortgage loans to be held for sale
be recognized on the balance sheet at fair value from inception through
expiration or funding. SAB 105 requires that the fair-value measurement include
only differences between the guaranteed interest rate in the loan commitment and
a market interest rate, excluding any expected future cash flows related to the
customer relationship or loan servicing. SAB 105 is effective for commitments to
originate mortgage loans to be held for sale that are entered into after March
31, 2004. Its adoption is not expected to have a material impact on the
consolidated financial position or results of operations of Third Century.
In March 2004, the FASB's Emerging Issues Task Force reached a consensus on EITF
Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments. The guidance prescribes a three-step model
for determining whether an investment is other-than-temporarily impaired and
requires disclosures about unrealized losses on investments. The accounting
guidance is effective for reporting periods beginning after June 15, 2004. This
pronouncement is not expected to have a material impact on the consolidated
financial position on results of operations of Third Century.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Forward Looking Statements
This Quarterly Report on Form 10-QSB ("Form 10-QSB") contains statements which
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-QSB and include statements regarding the intent, belief,
outlook, estimate or expectations of Third Century (as defined in the notes to
the consolidated condensed financial statements), its directors or its officers
primarily with respect to future events and the future financial performance of
Third Century. Readers of the Form 10-QSB 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-QSB identifies important
factors that could cause such differences. These factors include changes in
interest rates; loss of deposits and loan demand to other financial
institutions; substantial changes in financial markets; changes in real estate
values and the real estate market; or regulatory changes.
Critical Accounting Policies
Generally accepted accounting principles are complex and require management to
apply significant judgments to various accounting, reporting and disclosure
matters. Management of Third Century must use assumptions and estimates to apply
these principles where actual measurement is not possible or practical. For a
complete discussion of Third Century's significant accounting policies, see Note
1 to the Consolidated Financial Statements as of December 31, 2003. Certain
policies are considered critical because they are highly dependent upon
subjective or complex judgments, assumptions and estimates. Changes in such
estimates may have a significant impact on the financial statements. Management
has reviewed the application of these policies with the Audit Committee of Third
Century's Board of Directors. Those policies include the following:
8
Allowance for Loan Losses
The allowance for loan losses represents management's estimate of probable
losses inherent in Mutual Savings Bank's loan portfolios. In determining the
appropriate amount of the allowance for loan losses, management makes numerous
assumptions, estimates and assessments.
The strategy also emphasizes diversification on an industry and customer level,
regular credit quality reviews and quarterly management reviews of large credit
exposures and loans experiencing deterioration of credit quality.
Mutual Savings Bank's allowance consists of three components: probable losses
estimated from individual reviews of specific loans, probable losses estimated
from historical loss rates, and probable losses resulting from economic or other
deterioration above and beyond what is reflected in the first two components of
the allowance.
Larger commercial loans that exhibit probable or observed credit weaknesses are
subject to individual review. Where appropriate, reserves are allocated to
individual loans based on management's estimate of the borrower's ability to
repay the loan given the availability of collateral, other sources of cash flow
and legal options available to Mutual Savings Bank. Included in the review of
individual loans are those that are impaired as provided in SFAS No. 114,
Accounting by Creditors for Impairment of a Loan. Any allowances for impaired
loans are determined by the present value of expected future cash flows
discounted at the loan's effective interest rate or fair value of the underlying
collateral. Mutual Savings Bank evaluates the collectibility of both principal
and interest when assessing the need for a loss accrual. Historical loss rates
are applied to other commercial loans not subject to specific reserve
allocations.
Homogenous smaller balance loans, such as consumer installment and residential
mortgage loans are not individually risk graded. Reserves are established for
each pool of loans based on the expected net charge-offs for one year. Loss
rates are based on the average net charge-off history by loan category.
Historical loss rates for commercial and consumer loans may be adjusted for
significant factors that, in management's judgment, reflect the impact of any
current conditions on loss recognition. Factors which management considers in
the analysis include the effects of the national and local economies, trends in
the nature and volume of loans (delinquencies, charge-offs and nonaccrual
loans), changes in mix, asset quality trends, risk management and loan
administration, changes in the internal lending policies and credit standards,
collection practices and examination results from bank regulatory agencies and
Mutual Savings Bank's internal loan review.
An unallocated reserve is maintained to recognize the imprecision in estimating
and measuring loss when evaluating reserves for individual loans or pools of
loans. Allowances on individual loans are reviewed quarterly and historical loss
rates are reviewed annually and adjusted as necessary based on changing borrower
and/or collateral conditions and actual collection and charge-off experience.
Mutual Savings Bank's primary market area for lending is Johnson County,
Indiana. When evaluating the adequacy of allowance, consideration is given to
this regional geographic concentration and the closely associated effect
changing economic conditions have on Mutual Savings Bank's customers.
Mortgage Servicing Rights
Mortgage servicing rights (MSRs) associated with loans originated and sold,
where servicing is retained, are capitalized and included in other intangible
assets in the consolidated balance sheet. The value of the capitalized servicing
rights represents the present value of the future servicing fees arising from
the right to service loans in the portfolio. Critical accounting policies for
MSRs relate to the initial valuation and subsequent impairment tests. The
methodology used to determine the valuation of MSRs requires the development and
use of a number of estimates,
9
including anticipated principal amortization and prepayments of that principal
balance. Events that may significantly affect the estimates used are changes in
interest rates, mortgage loan prepayment speeds and the payment performance of
the underlying loans. The carrying value of the MSRs is periodically reviewed
for impairment based on a determination of fair value. For purposes of measuring
impairment, the servicing rights are compared to a valuation prepared based on a
discounted cash flow methodology, utilizing current prepayment speeds and
discount rates. Impairment, if any, is recognized through a valuation allowance
and is recorded as amortization of intangible assets.
Comparison of Financial Condition at June 30, 2004 and December 31, 2003
Total assets increased $13.5 million or 12.73% to $120.1 million at June
30, 2004 from $106.6 million at December 31, 2003. The growth in total assets
was primarily due to an increase in our cash and cash equivalents by $14.3
million or 302.47%. The increase in cash and cash equivalents was a direct
result of the capital raised through the initial offering of Third Century
Bancorp stock which was completed on June 29, 2004. Third Century plans to
invest this excess cash either in loans to customers or in short-term
investments. Mutual Savings Bank's investment portfolio matured during the first
six months of 2004. In July 2004, Third Century and Mutual Savings Bank each
purchased a certificate of deposit for $100,000 from another depository
institution. In addition, Mutual Savings Bank invested $5 million in federal
agency notes maturing September 2004 through January 2005.
On May 24, 2004, Mutual Savings Bank purchased real estate adjoining its
Main Street Branch in Franklin, Indiana. The total cost basis of the real
estate, consisting of a .39 acre lot with a residence and unattached garage, was
$105,000. Mutual Savings Bank purchased the real estate for possible future
expansion of the parking facilities at the Main Street Branch and Mortgage
Center.
Total equity at June 30, 2004 increased to $23.1 million as compared to
$8.0 million at December 31, 2003. The change in equity primarily resulted from
the sale of common stock in Third Century Bancorp for net proceeds of $15.8
million. On June 30, 2004, Third Century loaned $1,322,500 to the Third Century
Bancorp Employee Stock Ownership Plan and Trust (the ESOP) and the ESOP
purchased 100,000 shares of Third Century common stock on the open market on
that date at an average price of $11.319 per share. During July 2004, Third
Century loaned the ESOP an additional $174,315 and the ESOP purchased an
additional 32,250 shares at an average price of $11.08 per share.
Comparison of Operating Results for the Three Months Ended June 30, 2004 and
2003
General. Net income for the quarter ended June 30, 2004 was $254,000
compared to net income of $172,000 for the quarter ended June 30, 2003. The
increase of $82,000 was primarily the result of gains recognized on the
capitalization of servicing rights of mortgages of $85,000, which is included in
the net gains on loan sales.
Interest Income. Interest income for the quarters ended June 30, 2004 and
2003 totaled $1.5 million when compared to interest income for the quarter ended
June 30, 2003. The change between these reporting periods was a decrease of
$53,000, which consisted primarily of a decrease in loan interest income by
$52,000. Investment income decreased $16,000 during the quarter but was offset
by increases of $3,000 in dividends received on Federal Home Loan Bank Stock and
$12,000 in interest on the interest-bearing deposits. Average interest-bearing
assets for the quarter ended June 30, 2004 was $104 million, which represented a
increase of $7.1 million or 7.41%, from the quarter ended June 30, 2003, while
the yield on those assets declined from 6.30% at June 30, 2003 to 5.67% at June
30, 2004. The average yield on loans declined by 63 basis points while the
average balances on loans increased $5.8 million to $95.0 million at June 30,
2004.
10
Interest Expense. Interest expense for the quarter ended June 30, 2004 was
$461,000 compared to $500,000 for the quarter ended June 30, 2003, a decrease or
$39,000 or 7.80%. Average interest-bearing liabilities increased to $93,119 from
$89,138, with the average interest rate declining by 26 basis points from 2.24%
at the quarter ended June 30, 2003 to 1.98% at the quarter ended June 30, 2004.
Net Interest Income. Net interest income of $1.0 million for the quarter
ended June 30, 2004 reflects a decrease of $14,000 or 1.36% from the net
interest income for the quarter ended June 30, 2003.
Provision for Loan Losses. Mutual Savings Bank's provision for loan losses
for the quarter ended June 30, 2004 totaled $12,000, primarily due to an
increase in non-performing loans, while no provision was made during the quarter
ended June 30, 2003. In evaluating the adequacy of loan loss allowances,
management considers factors such as delinquency trends, portfolio composition,
past loss experience and other factors such as general economic conditions.
During the past year, Mutual Savings Bank's level of nonperforming assets
increased from $70,000 at June 30, 2003, to $325,000 at June 30, 2004 and the
percentage of nonperforming assets to total assets increased from 0.06% to 0.27%
for the same respective time periods. The increase in nonperforming assets was
due to two commercial real estate properties representing an aggregate total of
$279,000 and a home equity line of credit for $21,000. Since June 30, 2004,
Mutual Savings Bank received a deed-in-lieu on one of the commercial real estate
properties for $202,000 and the second commercial real estate property for
$76,000 was paid current by the customer. The $325,000 of nonperforming assets
at June 30, 2004 represented a decrease of $104,000 from the $429,000 of
nonperforming assets at December 31, 2003. At June 30, 2004, the allowance for
loan losses to nonperforming loans was 309.54% as compared to 1507.14% at June
30, 2003. For the quarter ended June 30, 2004, Mutual Savings Bank charged off
loans net of recoveries of $38,000, which represents an increase of $29,000 from
the quarter ended June 30, 2003.
Other Income. Other income for the quarter ended June 30, 2004 was $293,000
compared to $176,000 for the quarter ended June 30, 2003, an increase of
$117,000 or 66.48%. The increase in other income was primarily the result of the
$64,000 increase in net gains on loan sales as a result of Mutual Savings Bank
recording servicing rights on loans sold.
During the first quarter of 2004, Mutual Savings Bank, through its Asset
Liability Committee, made the decision to sell all newly originated fixed-rate
loans secured by 1-4 family real estate which are eligible for sale to the
Federal Home Loan Mortgage Corporation ("Freddie Mac"). Those loans originated
with maturities of 15 years and longer which did not qualify for sale to
"Freddie Mac" were to be placed into adjustable rate mortgage products offered
by Mutual Savings Bank. Mutual Savings Bank was not in compliance with its
interest rate policy at December 31, 2003 or March 31, 2004. Mutual Savings Bank
aggressively sold such loans originated and booked in 2003 during the first
quarter of 2004 due to Mutual Saving Bank's efforts to reduce its interest rate
risk exposure to within tolerable rate limits established by its interest rate
policy. The favorable interest rate environment in the first quarter resulted in
higher fee income associated with the sale of these loans.
Looking ahead, Mutual Savings Bank intends to continue to sell all newly
originated fixed-rate loans secured by 1-4 family real estate with maturities of
15 years or longer. In addition, Mutual Savings Bank intends to continue to
review its existing portfolio for opportunities to sell previously originated
fixed-rate loans secured by 1-4 family real estate. Management recognizes that
the rate of sale of such loans will diminish if an expected rise in interest
rates makes such sales less attractive. Mutual Savings Bank expects to return to
being in compliance with its interest rate policy.
Other Expense. Other expense for the quarter ended June 30, 2004 was
$904,000 compared to $924,000 for the same period last year, a decrease of
$20,000 or 2.16%. Salaries and employee benefits increased during this period by
$23,000 which was offset by the $41,000,
11
or 100%, decrease of service bureau conversion expense. Mutual Savings Bank
completed its conversion of service bureaus in October 2003.
Income Taxes. Mutual Savings Bank recognized income tax expense of $137,000
for the quarter ended June 30, 2004, as compared to $108,000 for the quarter
ended June 30, 2003, which represents a decrease in the effective tax rate from
38.57% to 35.04%.
Comparison of Operating Results for the Six Months Ended June 30. 2004 and 2003
General. Net income for the six months ended June 30, 2004 was $372,000
compared to net income of $334,000 for the six months ended June 30, 2003. The
increase of $38,000 was primarily the result of gains recognized on the
capitalization of servicing rights of mortgages for $85,000, which is included
in the net gains on loan sales. This increase was offset by the maturity of
Mutual Savings Bank's investment portfolio in 2004 which resulted in a decrease
of $45,000 in investment income.
Interest Income. Interest income for the six months ended June 30, 2004 was
at $3.0 million as it was for the six months ended June 30, 2003. The change
between these reporting periods was a decrease of $47,000, which consisted
primarily of a decrease in investment income by $45,000. The reduction in
investment income was due to the maturity of Mutual Savings Bank's investment
portfolio in the six months ended June 30, 2004. Average interest-bearing assets
for the six months ended June 30, 2004 was $102 million which represented a
increase of $7.4 million, or 7.83%, from the six months ended June 30, 2003,
while the yield on those assets declined from 6.30% at June 30, 2003 to 5.75% at
June 30, 2004. The average yield on loans declined by 75 basis points while the
average balances on loans increased $10.0 million to $95.3 million at June 30,
2004.
Interest Expense. Interest expense for the six months ended June 30, 2004
was $927,000 compared to $993,000 for the six months ended June 30, 2003, a
decrease or $66,000 or 6.65%. Average interest-bearing liabilities increased to
$93,395 from $87,581, with the average interest rate declining by 28 basis
points from 2.27% at the six months ended June 30, 2003 to 1.99% at the six
months ended June 30, 2004.
Net Interest Income. Net interest income of $2.0 million for the six months
ended June 30, 2004 reflects an increase of $19,000 or 0.95% from the net
interest income for the six months ended June 30, 2003.
Provision for Loan Losses. Mutual Savings Bank's provision for loan losses
for the six months ended June 30, 2004 totaled $24,000 while no provision was
made during the six months ended June 30, 2003. This increase was primarily due
to an increase in non-performing loans. In evaluating the adequacy of loan loss
allowances, management considers factors such as delinquency trends, portfolio
composition, past loss experience and other factors such as general economic
conditions. During the past year, Mutual Savings Bank's level of nonperforming
assets increased from $70,000 at June 30, 2003, to $325,000 at June 30, 2004 and
the percentage of nonperforming assets to total assets increased from 0.06% to
0.27% for the same respective time periods. The increase in nonperforming assets
was due to two commercial real estate properties representing an aggregate total
of $279,000 and a home equity line of credit for $21,000. Since June 30, 2004,
Mutual Savings Bank received a deed-in-lieu on one of the commercial real estate
properties for $202,000 and the second commercial real estate property for
$76,000 was paid current by the customer. The $325,000 of nonperforming assets
at June 30, 2004 represented a decrease of $104,000 from the $429,000 of
nonperforming assets as of December 31, 2003. At June 30, 2004, the allowance
for loan losses to nonperforming loans was 309.54% as compared to 1507.14% at
June 30, 2003. For the six months ended June 30, 2004, Mutual Savings Bank
charged off loans net of recoveries of $72,000, which represents an increase of
$49,000 from the quarter ended June 30, 2003.
Other Income. Other income for the six months ended June 30, 2004 was
$494,000 compared to $344,000 for the quarter ended June 30, 2003, an increase
of $150,000 or 43.60%.
12
The increase in other income was primarily the result of the $109,000 increase
in net gains on loan sales as a result of Mutual Savings Bank capitalizing
servicing assets on loans sold.
During the first quarter of 2004, Mutual Savings Bank, through its Asset
Liability Committee, made the decision to sell all newly originated fixed-rate
loans secured by 1-4 family real estate which are eligible for sale to the
Federal Home Loan Mortgage Corporation ("Freddie Mac"). Those loans originated
with maturities of 15 years and longer which did not qualify for sale to
"Freddie Mac" were to be placed into adjustable rate mortgage products offered
by Mutual Savings Bank. Mutual Savings Bank was not in compliance with its
interest rate policy at December 31, 2003, and March 31, 2004. Mutual Savings
Bank aggressively sold such loans originated and booked in 2003 during the first
quarter of 2004 due to Mutual Savings Bank's efforts to reduce its interest rate
risk exposure to within tolerable rate limits established by its interest rate
policy. The favorable interest rate environment in the first quarter resulted in
higher fee income associated with the sale of these loans.
Looking ahead, Mutual Savings Bank intends to continue to sell all newly
originated fixed-rate loans secured by 1-4 family real estate with maturities of
15 years or longer. In addition, Mutual Savings Bank intends to continue to
review its existing portfolio for opportunities to sell previously originated
fixed-rate loans secured by 1-4 family real estate. Management recognizes that
the rate of sale of such loans will diminish if an expected rise in interest
rates making such sales less attractive. Mutual Savings Bank plans to return to
being within its established interest rate risk limits.
Other Expense. Other expense for the six months ended June 30, 2004 was
$1.9 million compared to $1.8 million for the same period last year, a decrease
of $69,000 or 3.81%. During this period, salaries and employee benefits and net
occupancy and equipment expenses increased by $100,000 and $22,000,
respectively, which was offset by the $56,000, or 100%, decrease of service
bureau conversion expense. Mutual Savings Bank completed its conversion of
service bureaus in October 2003.
Income Taxes. Mutual Savings Bank recognized income tax expense of $243,000
for the six months ended June 30, 2004, as compared to $205,000 for the six
months ended June 30, 2003, which represents an increase in the effective tax
rate from 38.03% to 39.51%.
Other
The Securities and Exchange Commission maintains a Web site that contains
reports, proxy information statements, and other information regarding
registrants that file electronically with the Commission, including Third
Century. The address is http://www.sec.gov.
Item 3. 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 Third Century's disclosure controls and procedures (as defined
in Sections 13a-15(e) and 15d-15(e) of regulations promulgated under the
Securities Exchange Act of 1934, as amended), as of the end of the most recent
fiscal quarter covered by this quarterly report (the "Evaluation Date"), have
concluded that as of the Evaluation Date, Third Century's disclosure controls
and procedures were adequate and are designed to ensure that material
information relating to Third Century would be made known to such officers by
others within Third Century on a timely basis.
B. Changes in internal controls. There were no significant changes in Third
Century's internal control or financial reporting identified in connection with
Third Century's evaluation of controls that occurred during Third Century's last
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, Third Century's internal control over financial reporting.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Third Century, from time to time, is a party to routine litigation, which arises
in the normal course of business, such as claims to enforce liens, condemnation
proceedings on properties in which Mutual Savings Bank holds security interests,
claims involving the making and servicing of real property loans, and other
issues incident to the business of Third Century. There were no lawsuits pending
or known to be contemplated against Third Century at June 30, 2004 that would
have a material effect on Third Century's operations or income.
Item 2. Changes in Securities and Small Business Issuer Purchases of Equity
Securities
The Registration Statement filed by Third Century pursuant to the Securities Act
of 1933 was declared effective by the Securities and Exchange Commission on May
13, 2004 (SEC File No. 333-113691). The offering of Third Century Bancorp's
common stock, without par value (the Common Stock), commenced on May 13, 2004
and terminated at 12:00 noon, Franklin time, on June 14, 2004. Third Century
sold all of the 1,635,125 shares of Common Stock registered pursuant to the
Registration Statement at $10.00 per share. The ESOP purchased 100,000 shares of
the Common Stock with the proceeds of a loan it received from Third Century
Bancorp. Keefe, Bruyette & Woods acted as Third Century Bancorp's exclusive
agent in marketing the Common Stock on a best efforts basis.
The following expenses were paid from the gross proceeds received in connection
with the issuance and distribution of the Common Stock:
Underwriting commissions $ 213,000
Underwriting expenses 44,000
Other expenses 452,000
------------
Total Expenses $ 709,000
============
As of June 29, 2004, Third Century Bancorp received net proceeds of $15,822,000
after deducting the expenses indicated above. As described in the prospectus,
Third Century Bancorp used $7,911,000 of the net proceeds to purchase all of the
capital stock of Mutual Savings Bank, used $1,323,000 as a loan to the ESOP for
purchase of stock on the open market, and retained $6,588,000 of the net
proceeds. Third Century deposited the remainder of the funds that it retained in
accounts with Mutual Savings Bank. In July 2004, Third Century used these funds
to loan Mutual Savings Bank an additional $359,000 to purchase additional shares
of stock available on the open market for the ESOP.
As of June 29, 2004, Mutual Savings Bank received net proceeds of $7,911,000 and
the loan was made to the ESOP in the amount of $1,323,000. Of this amount,
$7,911,000 was deposited in an overnight account with the FHLB of Indianapolis
to be used for working capital and the loan proceeds were used to purchase the
stock for the ESOP on the open market in the amount of $192,000, with the
remaining $191,000 purchased in July 2004. In July 2004, an additional loan was
made to the ESOP in the amount of $359,000 to purchase additional shares of
stock available on the open market.
The payments described above reflect actual payments, and not reasonable
estimates, of amounts paid by Third Century and Mutual Savings Bank. Neither
Third Century nor Mutual Savings Bank paid any of the expenses indicated above,
either directly or indirectly, to any of their respective directors, officers or
their associates, or to any person owning 10% or more of any class of its
securities, or to any affiliate. Third Century Bancorp's and Mutual Savings
Bank's use of the proceeds from the offering of the Common Stock described above
does not represent a material change in the use of proceeds described in the
prospectus.
14
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to Vote of Security Holders.
None
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) The exhibits filed as part of this Form 10-QSB are listed in the
Exhibit Index, which is incorporated by reference.
(b) No reports on Form 8-K were filed during the quarter ended June
30, 2004.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Issuer has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THIRD CENTURY BANCORP
Date: August 13, 2004 By: /s/ Robert D. Heuchan
---------------------------------------
Robert D Heuchan
President and Chief Executive Officer
Date: August 13, 2004 By: /s/ Debra K. Harlow
----------------------------------------
Debra K. Harlow
Chief Financial Officer
15
Exhibit Index
--------------
Exhibit No. Description Location
31.1 Rule 13a-14(a) Certification of Robert D. Heuchan, President Attached
and Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Debra K. Harlow, Executive Attached
Vice President and Chief Financial Officer
32.1 Section 1350 Certification of Robert D. Heuchan Attached
32.2 Section 1350 Certification of Debra K. Harlow Attached
16