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 SEPTEMBER 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: October 31, 2004 - 1,653,125 common
shares
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
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 5
Consolidated Condensed Statements of Cash Flows 6
Notes to Unaudited Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operation 8
Item 3. Controls and Procedures 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 13
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 13
SIGNATURES 14
EXHIBIT INDEX E-1
EXHIBITS
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THIRD CENTURY BANCORP
Consolidated Condensed Balance Sheets
September 30, December 31,
2004 2003
(Unaudited)
(in thousands)
Assets
Cash and due from banks $ 4,278 $ 780
Interest-bearing demand deposits 10,558 3,959
--------------------------------
Cash and cash equivalents 14,836 4,739
Interest-bearing time deposits 200 0
Held to maturity securities 5,692 689
Loans, net of allowance for loan
losses of $1,024 and $1,055 96,583 96,955
Premises and equipment 2,105 2,082
Federal Home Loan Bank stock 1,009 975
Interest receivable 502 463
Other assets 764 658
--------------------------------
Total assets $ 121,691 $ 106,561
--------------------------------
Liabilities
Deposits
Demand $ 8,044 $ 6,989
Savings, NOW and money market 37,879 35,779
Time 35,424 35,940
--------------------------------
Total deposits 81,347 78,708
Federal Home Loan Bank Advances 17,000 19,500
Other liabilities 591 313
--------------------------------
Total liabilities 98,938 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 15,741 -
Retained earnings 8,479 8,040
Unearned ESOP (1,467) -
--------------------------------
Total stockholders' equity 22,753 8,040
--------------------------------
Total liabilities and stockholders' equity $ 121,691 $ 106,561
================================
See notes to consolidated condensed financial statements.
3
THIRD CENTURY BANCORP
Consolidated Condensed Statements of Income
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
(in thousands)
----------------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------------
Interest income
Loans receivable $ 4,333 $ 4,408 $ 1,437 $ 1,497
Investment securities 22 60 18 10
Federal Home Loan Bank stock 37 26 11 8
Interest-bearing deposits 79 29 47 5
----------------------------------------------------------
Total interest income 4,471 4,523 1,513 1,520
----------------------------------------------------------
Interest expense
Deposits 865 1,047 291 319
Federal Home Loan Bank advances 530 427 176 162
----------------------------------------------------------
Total interest expense 1,395 1,474 467 481
----------------------------------------------------------
Net interest income 3,076 3,049 1,046 1,039
Provision for loan losses 36 - 12 -
----------------------------------------------------------
Net interest income after provision for loan losses 3,040 3,049 1,034 1,039
----------------------------------------------------------
Other income
Service charges on deposit accounts 164 141 56 50
Other service charges and fees 153 168 49 49
Net gains on loan sales 174 56 36 27
Other income 186 163 49 64
----------------------------------------------------------
Total other income 677 528 190 190
----------------------------------------------------------
Other expenses
Salaries and employee benefits 1,688 1,553 590 555
Net occupancy and equipment expenses 331 304 110 105
Data processing fees 303 277 103 90
Service bureau conversion expense - 89 - 33
Other expenses 555 565 196 196
----------------------------------------------------------
Total other expenses 2,877 2,788 999 979
----------------------------------------------------------
Income before income tax 840 789 225 250
Income tax expense 335 308 91 103
----------------------------------------------------------
Net income $ 505 $ 481 $ 134 $ 147
==========================================================
Weighted average common shares 1,522
Earnings per share .09
See notes to consolidated condensed financial statements.
4
THIRD CENTURY BANCORP
Consolidated Condensed Statement of Stockholders' Equity
(Unaudited)
(Dollar amounts in thousands)
Common Stock
Shares Retained Unearned
Outstanding Amount Earnings ESOP Total
-----------------------------------------------------------------
Balances, January 1, 2004 - - 8,040 - 8,040
Net and comprehensive income - - 505 - 505
Cash dividends declared but
not paid - - (66) - (66)
Proceeds from stock issued in
conversion, net of costs 1,653,125 15,741 - - 15,741
Contribution to ESOP - - - (1,467) (1,467)
---------- ------- ------- ------- -------
Balances, September 30, 2004 $1,653,125 $15,741 $ 8,479 $(1,467) $22,753
========== ======= ======= ======= =======
See notes to consolidated condensed financial statements.
5
THIRD CENTURY BANCORP
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30
------------------------------
2004 2003
------------------------------
(in thousands)
Operating Activities
Net income $505 $481
Adjustments to reconcile net income to net cash provided by operating
activities
Provision for loan losses 36 12
Depreciation 137 127
Investment securities (accretion) amortization, net (11) 99
Gain on sale of loans (174) (27)
Loans originated for sale in the secondary market (6,646) (3,436)
Proceeds from sale of loans in the secondary market 6,820 3,463
FHLB stock dividend (34)
Net change in
Interest receivable (39) (27)
Other assets (106) 189
Other liabilities 212 308
---------------------------
Net cash provided by operating activities 700 1,189
---------------------------
Investing Activities
Purchases of FHLB stock -- (350)
Purchases of interest-bearing time deposits (200) --
Purchases of securities held to maturity (6,977) (3,196)
Proceeds from maturities of securities held to maturity 1985 7,661
Net changes in loans 336 (16,621)
Purchases of premises and equipment (160) (79)
---------------------------
Net cash used by investing activities (5,016) (12,585)
---------------------------
Financing Activities
Net change in
Demand and savings deposits 3,155 (234)
Certificate of deposits (516) 814
Net proceeds from stock conversion 15,741 0
Purchase of ESOP shares (1,467) 0
Proceeds from FHLB advances 1,500 9,000
Payments on FHLB advances (4,000) (1,500)
---------------------------
Net cash provided by financing activities 14,413 8,080
---------------------------
Net Change in Cash and Equivalents 10,097 (3,316)
Cash and Cash Equivalents, Beginning of Period 4,739 7,186
---------------------------
Cash and Cash Equivalents, End of Period $14,836 $3,870
===========================
Additional Cash Flows Information
Interest paid $1,401 $1,493
Income tax paid 258 316
See notes to consolidated condensed 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
accounting principles generally accepted in the United States of America.
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 nine- and
three-month periods ended September 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
Earnings per share is computed based upon the weighted average common shares
outstanding during the period subsequent to Mutual Savings Bank's conversion to
a stock savings bank on June 29th 2004. Net income per share for the periods
prior to the conversion is not meaningful. Unearned ESOP shares are not
considered outstanding for the earnings per share calculation and Third Century
has no potentially dilutive shares. The factors used in the earnings per share
computation for the three months ending September 30, 2004 were as follows:
Three Months Ended
September 30, 2004
Basic:
Net income $ 134
======
Weighted average common shares 1,522
======
Basic earnings per common share $ .09
Item 2. Management's Discussion and Analysis or Plan of Operation
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:
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.
8
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, 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.
9
Comparison of Financial Condition at September 30, 2004 and December 31, 2003
Total assets increased $15.1 million or 14.20% to $121.7 million at September
30, 2004 from $106.6 million at December 31, 2003. The growth in total assets
was due to an increase in our cash and cash equivalents by $10.1 million, or
213.06%, and securities held to maturity by $5.2 million, or 755.15%. The
increase in both categories 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 Bancorp infused the majority of this capital into Mutual
Savings Bank. Mutual Savings Bank invested $5.6 million of this excess cash in
federal agency securities and $200,000 in certificates of deposit during the
third quarter of 2004. The federal agency notes will mature over the next six
months and the certificates of deposit will mature in fifteen months. Mutual
Savings Bank plans to continue investing its excess cash in either loans to
customers or short-term investments.
Total equity at September 30, 2004 increased to $22.8 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 $15.7
million. The book value per share as of September 2004 was $13.76 based on
1,653,125 shares outstanding.
Third Century has loaned the ESOP $1,497,000 and the ESOP has purchased 132,250
shares at an average price of $11.32. Mutual Savings Bank started to release
shares of the ESOP during the third quarter of 2004. The total shares released
were 2,676 at an average price of $11.32 per share for total ESOP expense of
$30,292. In addition, the Board of Third Century Bancorp declared a $66,125 cash
dividend to the shareholders of record as of September 22, 2004 payable on
October 5, 2004.
Comparison of Operating Results for the Three Months Ended September 30, 2004
and 2003
General. Net income for the quarter ended September 30, 2004 was $134,000
compared to net income of $147,000 for the quarter ended September 30, 2003. The
decrease of $13,000 was primarily the result of increased salaries and employee
benefits. This category increased $35,000 from $555,000 for the quarter ended
September 30, 2003 to $590,000 for the quarter ended September 30, 2004, or
6.31%. In July, Third Century started to record the monthly release of shares
from its ESOP trust, which resulted in expense of $30,292 for the quarter ended
September 30, 2004.
Interest Income. Interest income for the quarters ended September 30, 2004 and
2003 totaled $1.5 million when compared to interest income for the quarter ended
September 30, 2003. The change between these reporting periods was a decrease of
$7,000, which consisted primarily of a decrease in loan interest income by
$60,000. Investment income increased by $8,000, dividend income on Federal Home
Loan Bank stock increased $3,000, and interest income on interest-bearing
deposits increased $42,000 during the quarter. Average interest-bearing assets
for the quarter ended September 30, 2004 was $113 million, which represented an
increase of $14.7 million or 14.94%, from the quarter ended September 30, 2003,
while the yield on those assets declined from 6.16% at September 30, 2003 to
5.34% at September 30, 2004. The average yield on loans declined by 39 basis
points while the average balances on loans increased $2.1 million to $96.1
million at September 30, 2004.
Interest Expense. Interest expense for the quarter ended September 30, 2004 was
$467,000 compared to $481,000 for the quarter ended September 30, 2003, a
decrease of $14,000 or 2.91%. Average interest-bearing liabilities increased to
$90,248 from $89,792, with the average interest rate declining by 7 basis points
from 2.14% at the quarter ended September 30, 2003 to 2.07% at the quarter ended
September 30, 2004.
Net Interest Income. Net interest income of $1.0 million for the quarter ended
September 30, 2004 reflects an increase of $7,000 or 0.67% from the net interest
income for the quarter ended September 30, 2003.
10
Provision for Loan Losses. Mutual Savings Bank's allocation to its provision for
loan losses for the quarter ended September 30, 2004 totaled $12,000 while no
provision was made during the quarter ended September 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 decreased from $70,000 at September
30, 2003, to $25,000 at September 30, 2004 and the percentage of nonperforming
assets to total assets decreased from 0.07% to 0.02% for the same respective
time periods. At September 30, 2004, the allowance for loan losses to
nonperforming loans was 4096.00% as compared to 1220.00% at September 30, 2003.
For the quarter ended September 30, 2004, Mutual Savings Bank had net of
recoveries of $4,500 compared to net charge off of $7,799 for September 30,
2003.
Other Income. Other income was $190,000 for the quarters ended September 30,
2004 and September 30, 2003, which represented no change between the reporting
periods.
Other Expense. Other expense for the quarter ended September 30, 2004 was
$999,000 compared to $979,000 for the same period last year, an increase of
$20,000 or 2.04%. Salaries and employee benefits increased during this period by
$35,000, or 6.31%, which was offset by the decrease in service bureau conversion
expense of $33,000, or 100%. Mutual Savings Bank completed its conversion of
service bureaus in October 2003.
Income Taxes. Mutual Savings Bank recognized income tax expense of $91,000 for
the quarter ended September 30, 2004, as compared to $103,000 for the quarter
ended September 30, 2003, which represents a decrease in the effective tax rate
from 41.20% to 40.44%.
Comparison of Operating Results for the Nine Months Ended September 30, 2004 and
2003
General. Net income for the nine months ended September 30, 2004 was $505,000
compared to net income of $481,000 for the nine months ended September 30, 2003.
The increase of $24,000 was primarily the result of gains recognized on the
capitalization of servicing rights of mortgages for $118,000, which is included
in the net gains on loan sales. An increase of $89,000 in total other expense
offset the increase in net gains on loan sales.
Interest Income. Interest income for the nine months ended September 30, 2004
was at $4.5 million as it was for the nine months ended September 30, 2003. The
change between these reporting periods was a decrease of $52,000, which
consisted of a decrease in loan interest income by $75,000 and investment income
by $38,000. The reduction in investment income was due to the maturity of Mutual
Savings Bank's investments yielding an average rate of 1.83% at September 30,
2003 versus the reinvestment of those funds at an average rate of 1.55% at
September 30, 2004. Average interest-bearing assets for the nine months ended
September 30, 2004 was $106 million which represented an increase of $9.9
million, or 10.27%, from the nine months ended September 30, 2003, while the
yield on those assets declined from 6.26% at September 30, 2003 to 5.61% at
September 30, 2004. The average yield on loans declined by 62 basis points while
the average balances on loans increased $7.3 million to $95.6 million at
September 30, 2004.
Interest Expense. Interest expense for the nine months ended September 30, 2004
was $1.4 million compared to $1.5 million for the nine months ended September
30, 2003, a decrease of $79,000 or 5.36%. Average interest-bearing liabilities
increased to $91.9 million from $88.3 million, with the average interest rate
declining by 20 basis points from 2.23% at the nine months ended September 30,
2003 to 2.02% at the nine months ended September 30, 2004.
Net Interest Income. Net interest income of $3.0 million for the nine months
ended September 30, 2004 reflects an increase of $27,000 or 0.89% from the net
interest income for the nine months ended September 30, 2003.
11
Provision for Loan Losses. Mutual Savings Bank's provision for loan losses for
the nine months ended September 30, 2004 totaled $36,000 while no provision was
made during the nine months ended September 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 decreased from $70,000 at September 30, 2003, to $25,000
at September 30, 2004 and the percentage of nonperforming assets to total assets
decreased from 0.07% to 0.02% for the same respective time periods. At September
30, 2004, the allowance for loan losses to nonperforming loans was 4096.00% as
compared to 1220.00% at September 30, 2003. For the nine months ended September
30, 2004, Mutual Savings Bank charged off loans net of recoveries of $67,227
which represents an increase of $37,808 from the nine months ended September 30,
2003.
Other Income. Other income for the nine months ended September 30, 2004 was
$677,000 compared to $528,000 for the nine months ended September 30, 2003, an
increase of $149,000 or 28.22%. The increase in other income was primarily the
result of the $118,000 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 is now in compliance with its interest rate policy. 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.
At December 31, 2003, Mutual Savings Bank's asset liability model indicated its
net portfolio value would decrease by 2.69% of assets in the event of an
immediate 300 basis point increase in interest rates and decrease 0.31% in the
event of an immediate 75 basis point decrease in interest rates. The efforts
described in the above paragraph improved these measurements at March 31, 2004
and June 30, 2004.
At March 31, 2004, the asset liability model indicated the net portfolio value
would decrease by 2.16% of assets in the event of an immediate 300 basis point
increase in interest rates while at June 30, 2004 the net portfolio value would
decrease by 1.31%. In an immediate 75 basis point decrease in interest rates,
the net portfolio value would decrease at March 31, 2004 by 0.35% and would
increase by 0.32% at June 30, 2004. Mutual Savings Bank reduced its interest
rate risk exposure to within its tolerable rate limit of a decrease of 2.00% of
assets in both the rising rate and declining rate cases as of June 30, 2004.
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, the Board of Directors approved an increase in
the tolerable rate limit for interest rate risk to a decrease of 2.50% of assets
in the event of an immediate 300 basis point increase or an immediate 75 basis
point decrease in interest rates. The adjustment to the tolerable rate limit
became effective August 18, 2004.
Other Expense. Other expense for the nine months ended September 30, 2004 was
$2.9 million compared to $2.8 million for the same period last year, an increase
of $89,000 or 3.19%. During this period, salaries and employee benefits, net
occupancy and equipment expenses, and data processing fees increased by
$135,000, $27,000 and $26,000, respectively, which was offset by the $89,000, 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 $335,000 for
the nine months ended September 30, 2004, as compared to $308,000 for the nine
months ended September 30, 2003, which represents an increase in the effective
tax rate from 39.04% to 39.88%.
12
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 over 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.
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 September 30, 2004 that
would have a material effect on Third Century's operations or income.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
On and effective November 11, 2004, the Third Century Board of
Directors amended Third Century's Code of By-laws to change the time
of the Annual Meeting of Shareholders specified in Section 2 of
Article III of the By-laws from 1:30 P.M. to 9:00 A.M.
Item 6. Exhibits
The exhibits filed as part of this Form 10-QSB are listed in the
Exhibit Index, which is incorporated by reference.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THIRD CENTURY BANCORP
Date: November 11, 2004 By: /s/ Robert D. Heuchan
--------------------------------------
Robert D. Heuchan
President and Chief Executive Officer
Date: November 11, 2004 By: /s/ Debra K. Harlow
--------------------------------------
Debra K. Harlow
Chief Financial Officer
14
Exhibit Index
Exhibit
No. Description Location
3.1 Amended and Restated Code of By-Laws Attached
31.1 Rule 13a-14(a) Certification of Robert D. Heuchan,
President and Chief Executive Officer Attached
31.2 Rule 13a-14(a) Certification of Debra K. Harlow,
Vice President and Chief Financial Officer Attached
32.1 Section 1350 Certification of Robert D. Heuchan Attached
32.2 Section 1350 Certification of Debra K. Harlow Attached
E-1