U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the quarterly period ended September 30, 2004
Commission File Number: 0-25505
[LOGO](SM)
NCRIC Group, Inc.
Delaware 52-2134774
- ------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1115 30th Street, NW, Washington, D.C. 20007
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
202-969-1866
------------
(Issuer's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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 filing
requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer as
defined in Rule 12b-2 of the Exchange Act.
Yes No X
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: As of November 1, 2004,
there were 6,877,170 shares of NCRIC Group, Inc. common stock outstanding.
1
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
- --------------------------------------------------------------------------------
September 30, 2004 December 31, 2003
ASSETS (unaudited)
INVESTMENTS:
Securities available for sale, at fair value:
Bonds and U.S.Treasury Notes (Amortized cost $174,070 and $161,876) $ 174,965 $ 162,744
Equity securities (Book value $18,558 and $10,269) 19,875 11,613
--------- ---------
Total securities available for sale 194,840 174,357
OTHER ASSETS:
Cash and cash equivalents 15,214 9,978
Reinsurance recoverable 51,839 48,100
Goodwill, net 7,296 7,296
Premiums and accounts receivable, net 7,330 9,333
Deferred income taxes 5,471 5,307
Other assets 8,502 8,175
--------- ---------
TOTAL ASSETS $ 290,492 $ 262,546
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Losses and loss adjustment expenses:
Losses $ 96,979 $ 87,778
Loss adjustment expenses 44,161 38,213
--------- ---------
Total losses and loss adjustment expenses 141,140 125,991
Other liabilities:
Retrospective premiums accrued under
reinsurance treaties 419 1,809
Unearned premiums 45,439 34,553
Advance premium 2,201 3,110
Reinsurance premium payable 456 1,538
Bank debt -- 289
Trust Preferred Securities 15,000 15,000
Other liabilities 6,346 2,277
--------- ---------
TOTAL LIABILITIES 211,001 184,567
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock $0.01 par value - 12,000,000 shares authorized; 6,877,170
shares issued and outstanding (net of 56,134 treasury shares) at
September 30, 2004; 6,898,865 shares issued and outstanding
(net of 33,339 treasury shares) at December 31, 2003 70 70
Preferred stock $0.01 par value - 1,000,000 shares authorized, 0 shares issued -- --
Additional paid in capital 49,047 48,962
Unallocated common stock held by the ESOP (2,513) (2,616)
Common stock held by the stock award plan (1,289) (1,594)
Accumulated other comprehensive income 1,460 1,461
Retained earnings 33,228 32,046
Treasury stock, at cost (512) (350)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 79,491 77,979
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 290,492 $ 262,546
========= =========
See notes to condensed consolidated financial statements.
2
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
2004 2003 2004 2003
REVENUES:
Net premiums earned $ 16,918 $ 12,472 $ 48,648 $ 34,883
Net investment income 1,800 1,657 5,378 4,368
Net realized investment (losses) gains (72) 498 344 1,852
Practice management and related income 1,004 1,112 3,319 3,764
Other income 209 370 635 1,083
-------- -------- -------- --------
Total revenues 19,859 16,109 58,324 45,950
-------- -------- -------- --------
EXPENSES:
Losses and loss adjustment expenses 13,374 11,145 40,585 31,083
Underwriting expenses 3,086 2,538 10,025 7,243
Practice management expenses 1,244 1,234 3,723 3,926
Interest expense 216 202 623 607
Other expenses 463 519 2,144 1,356
-------- -------- -------- --------
Total expenses 18,383 15,638 57,100 44,215
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 1,476 471 1,224 1,735
INCOME TAX PROVISION 379 101 42 309
-------- -------- -------- --------
NET INCOME $ 1,097 $ 370 $ 1,182 $ 1,426
======== ======== ======== ========
OTHER COMPREHENSIVE INCOME (LOSS) 2,641 (1,662) (1) (1,446)
-------- -------- -------- --------
COMPREHENSIVE INCOME (LOSS) $ 3,738 $ (1,292) $ 1,181 $ (20)
======== ======== ======== ========
Net income per common share:
Basic:
Average shares outstanding 6,349 6,328 6,349 6,554
-------- -------- -------- --------
Earnings per Share $ 0.17 $ 0.06 $ 0.19 $ 0.22
======== ======== ======== ========
Diluted:
Weighted average shares outstanding 6,349 6,328 6,349 6,554
Dilutive effect of stock options 294 311 281 202
-------- -------- -------- --------
Weighted average shares outstanding - diluted 6,643 6,639 6,630 6,756
-------- -------- -------- --------
Earnings per Share $ 0.17 $ 0.06 $ 0.18 $ 0.21
======== ======== ======== ========
See notes to condensed consolidated financial statements.
3
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED (IN THOUSANDS)
- --------------------------------------------------------------------------------
Nine Months Ended September 30,
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,182 $ 1,426
Adjustments to reconcile net income
to net cash flows from operating activities:
Net realized investment gains (344) (1,852)
Amortization and depreciation 1,539 1,042
Deferred income taxes (164) (141)
Stock released for coverage of benefit plans 493 368
Changes in assets and liabilities:
Reinsurance recoverable (3,739) (2,283)
Premiums and accounts receivables 2,003 (6,849)
Other assets 133 (1,005)
Losses and loss adjustment expenses 15,149 12,713
Retrospective premiums accrued under
reinsurance treaties (1,390) 224
Unearned premiums 10,886 14,427
Advanced premium (909) (2,204)
Reinsurance premium payable (1,082) (3,478)
Other liabilities 4,069 3,138
-------- ---------
Net cash flows provided by operating activities 27,826 15,526
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (79,222) (163,077)
Sales, maturities and redemptions of investments 58,015 115,128
Purchases of property and equipment (932) (284)
-------- ---------
Net cash flows used in investing activities (22,139) (48,233)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from public stock offering -- 35,784
Purchase of Treasury Stock (162) (53)
Repayment of long-term debt (289) (527)
-------- ---------
Net cash flows (used in) provided by financing activities (451) 35,204
-------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 5,236 2,497
-------- ---------
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 9,978 10,550
-------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 15,214 $ 13,047
======== =========
SUPPLEMENTARY INFORMATION:
Cash (received) paid for income taxes $ (1,566) $ 1,200
======== =========
Cash paid for interest $ 624 $ 646
======== =========
See notes to condensed consolidated financial statements.
4
NCRIC GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
for the three and nine-month periods ended September 30, 2004 - unaudited
1. Basis of Preparation
The accompanying unaudited condensed consolidated financial statements
were prepared in accordance with instructions to Form 10-Q and therefore
do not include all disclosures necessary for a complete presentation under
accounting principles generally accepted in the United States of America.
In the opinion of management, all adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation have
been included.
Operating results for the three and nine-month periods ended September 30,
2004 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2004. These condensed consolidated
financial statements and notes should be read in conjunction with the
financial statements and notes included in the audited consolidated
financial statements of NCRIC Group, Inc. (NCRIC Group) for the year ended
December 31, 2003, which were filed with the Securities and Exchange
Commission on Form 10-K.
2. Reportable Segment Information
NCRIC Group has one reportable segment: Insurance. The insurance segment
provides medical professional liability and other insurance. The
reportable segment is a strategic business unit that offers products and
services and is therefore managed separately. NCRIC Group evaluates
performance based on profit or loss before income taxes. In previous
years, NCRIC Group reported a second segment, Practice Management
Services. As noted in the Form 10-K for the year ended December 31, 2003,
effective beginning in 2004, NCRIC Group no longer reports this business
as a separate segment. The Insurance segment revenue has grown
significantly over the past several years while the practice management
revenue has not experienced the same growth. As a result, the practice
management revenue constitutes less than 10% of consolidated revenues and,
therefore, no longer meets the GAAP criteria for segment reporting. The
2003 data below has been reclassified to reflect this change in reportable
segments. Selected financial data is presented for the business segment at
or for the three-month and nine-month periods ended September 30, 2004 and
2003 (in thousands):
For the Three Months Ended At or For the Nine Months
September 30, Ended September 30,
-------------------------- --------------------------
2004 2003 2004 2003
-------- -------- -------- --------
Insurance
Revenues from external customers $ 17,109 $ 12,767 $ 49,228 $ 35,744
Net investment income 1,702 1,559 5,078 4,225
Net realized investment (losses) gains (71) 505 346 1,845
Depreciation and amortization 511 469 1,399 950
Segment profit before taxes 1,932 1,025 3,002 3,186
Segment assets 273,354 245,682
Segment liabilities 194,404 162,899
Expenditures for segment assets 655 76 874 175
5
The following are reconciliations of reportable segment assets,
liabilities, revenues, net investment income, and profit before taxes to
NCRIC Group's consolidated totals (in thousands):
September 30,
----------------------
2004 2003
-------- --------
Assets:
Total assets for reportable segment $273,354 $245,682
Other unallocated amounts 17,138 17,125
-------- --------
Consolidated total $290,492 $262,807
======== ========
Liabilities:
Total liabilities for reportable segment $194,404 $162,899
Other liabilities 16,597 16,274
-------- --------
Consolidated total $211,001 $179,163
======== ========
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
2004 2003 2004 2003
-------- -------- -------- --------
Revenues from external customers:
Total revenues for reportable segment $ 17,109 $ 12,767 $ 49,228 $ 35,744
Other revenues 1,022 1,187 3,374 3,986
-------- -------- -------- --------
Consolidated total $ 18,131 $ 13,954 $ 52,602 $ 39,730
======== ======== ======== ========
Net investment income:
Total investment income for reportable
segment $ 1,702 $ 1,559 $ 5,078 $ 4,225
Other investment income 98 98 300 143
-------- -------- -------- --------
Consolidated total $ 1,800 $ 1,657 $ 5,378 $ 4,368
======== ======== ======== ========
Profit before taxes:
Total profit for reportable segment $ 1,932 $ 1,025 $ 3,002 $ 3,186
Other expenses, net (456) (554) (1,778) (1,451)
-------- -------- -------- --------
Consolidated total $ 1,476 $ 471 $ 1,224 $ 1,735
======== ======== ======== ========
6
3. Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands except per share data):
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
2004 2003 2004 2003
------ ------ ------ ------
Net income $1,097 $ 370 $1,182 $1,426
====== ====== ====== ======
Weighted average common
shares outstanding - basic 6,349 6,328 6,349 6,554
Dilutive effect of stock options
and awards 294 311 281 202
------ ------ ------ ------
Weighted average common
shares outstanding - diluted 6,643 6,639 6,630 6,756
====== ====== ====== ======
Net income per common share:
Basic $ 0.17 $ 0.06 $ 0.19 $ 0.22
====== ====== ====== ======
Diluted $ 0.17 $ 0.06 $ 0.18 $ 0.21
====== ====== ====== ======
Earnings per share is calculated by dividing the net income by the
weighted average shares outstanding.
4. Litigation
On February 13, 2004, a District of Columbia Superior Court jury returned
a verdict in favor of Columbia Hospital for Women Medical Center, Inc.
(CHW) in the premium collection litigation between NCRIC, Inc. and CHW.
The verdict came in a civil action stemming from NCRIC, Inc.'s efforts to
collect payment for nearly $3 million in premiums that NCRIC alleges it is
owed by CHW under a contract with CHW that expired in 2000. The jury ruled
against the claim by NCRIC, Inc. and returned a verdict of $18.2 million
in favor of CHW counterclaims.
The verdict was entered as a judgment on February 20, 2004. On March 5,
2004, NCRIC filed post-trial motions for judgment as a matter of law and,
in the alternative, for a new trial. As a result of these post-trial
motions, the judgment is not final, and jurisdiction with respect to the
verdict remains with the trial judge. No decision has yet been rendered on
the post-trial motions. In connection with the filing of post-trial
motions, NCRIC secured a $19.5 million appellate bond and associated
letter of credit. The amount of the bond represents the verdict plus a
projection of post-trial interest. No amounts have been drawn upon the
letter of credit as of November 1, 2004. After the post-trial motions have
been ruled upon by the judge, any judgment will be entered as final, but
subject to appeal. No liability has been accrued in these financial
statements for any possible loss arising from this litigation because the
judgment is not yet final and remains with the trial judge, and NCRIC
believes that it has meritorious defenses and that it is not probable that
the preliminary judgment will prevail, nor is any potential final outcome
reasonably estimable at this time. Legal expenses to be incurred for this
litigation in 2004 are estimated to be approximately $750,000. The
expenses associated with the $19.5 million appellate bond and associated
letter of credit are estimated to be approximately $300,000.
7
Expenses incurred during the first nine months of 2004 for the trial
portion of the litigation were $525,000, reported as a component of
underwriting expenses, and for post-trial costs were $553,000, reported as
a component of other expenses. NCRIC Group, Inc. has indemnified NCRIC,
Inc. for post-trial costs expected to be incurred in 2004 and for any
potential final judgment up to $5.5 million, on an after-tax basis.
5. New Accounting Guidance
During 2004, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus with respect to guidance to be used in
determining whether an investment within the scope of EITF Issue No. 03-1,
The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments, is other than temporarily impaired. The guidance was
to be applied in other-than-temporary impairment evaluations made in
reporting periods beginning after June 15, 2004, however, in October the
implementation date was deferred. As this accounting guidance develops,
NCRIC Group will continue to review it to assess any potential impact to
its fixed income portfolio and its asset management policy.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The following analysis of the consolidated results of operations and
financial condition of NCRIC Group should be read in conjunction with the
condensed consolidated financial statements and related notes included in this
Form 10-Q. References to "NCRIC" mean NCRIC Group and its subsidiaries.
General
The financial statements and data presented in this Form 10-Q have been
prepared in accordance with accounting principles generally accepted in the
United States of America, GAAP, unless otherwise noted. GAAP differs from
statutory accounting practices used by regulatory authorities in their oversight
responsibilities of insurance companies.
There have been no material changes to our accounting policies during the
nine months ended September 30, 2004. Following is a condensed summary of key
financial concepts and of those accounting policies which we believe to be the
most critical. That is, these are most important to the portrayal of our
financial condition and results of operations and they require management's most
complex judgments, including the need to make estimates about insurance losses
and other matters that are inherently uncertain.
Premium income. Gross premiums written represent the amounts billed to
policyholders. Gross premiums written are reduced by premiums ceded to
reinsurers in determining net premiums written. Net premiums written are
adjusted by any amount which has been billed but not yet earned during the
period in arriving at earned premiums. Extended reporting endorsements premium
is earned in the same period it is written.
For several large groups of policyholders, we have insurance programs
where a portion of the premiums are retrospectively determined based on losses
during the period. Under all of the current programs, the full premium level is
determined and billed at the inception of the policy term. The premium level
could potentially be reduced and a premium refund made if the program loss
experience is favorable.
Reserves for losses and loss adjustment expenses. We write one line of business,
medical professional liability. Losses and LAE reserves are estimates of future
payments for reported claims and related expenses of adjudicating claims with
respect to insured events that have occurred in the past. The
8
change in these reserves from period to period is reflected as an increase or
decrease to our losses and LAE expense incurred.
Medical professional liability losses and LAE reserves are established
based on an estimate of these future payments as reflected in our past
experience with similar cases and historical trends involving claim payment
patterns. Reserving for medical professional liability claims is a complex and
uncertain process, requiring the use of informed estimates and judgments.
Although we intend to estimate conservatively our future payments relating to
losses incurred, there can be no assurance that currently established reserves
will prove adequate in light of subsequent actual experience. Losses and LAE
expenses as stated in the statement of operations are reported net of
reinsurance recoveries.
Reinsurance. We manage our exposure to individual claim losses, annual aggregate
losses, and LAE through our reinsurance program. Reinsurance allows us to obtain
indemnification against a specified portion of losses associated with insurance
policies we have underwritten by entering into a reinsurance agreement with
other insurance enterprises or reinsurers. We pay or cede part of our
policyholder premium to reinsurers. The reinsurers in return agree to reimburse
us for a specified portion of any claims covered under the reinsurance contract.
While reinsurance arrangements are designed to limit losses from large exposures
and to permit recovery of a portion of direct losses, reinsurance does not
relieve us of liability to our insureds. We monitor the creditworthiness of
reinsurers on an ongoing basis. We also routinely evaluate for collectibility
amounts recoverable from reinsurers. No allowance for uncollectible reinsurance
recoverable has been determined to be necessary.
Investment portfolio. Our investment portfolio is composed principally of fixed
maturity securities classified as available-for-sale. All securities with gross
unrealized losses at the balance sheet date are evaluated for evidence of
other-than-temporary impairment on a quarterly basis. We write down to fair
value any security with an impairment that is deemed to be other-than-temporary
in the period the determination is made. The assessment of whether such
impairment has occurred is based on management's case-by-case evaluation of the
underlying reasons for the decline in fair value. The evaluation for
other-than-temporary impairments is a quantitative and qualitative process
involving judgments which is subject to risks and uncertainties. The risks and
uncertainties include changes in general economic conditions, the issuer's
financial condition and the effects of changes in interest rates.
Goodwill. Our goodwill asset, $7.3 million as of September 30, 2004, resulted
from the 1999 acquisition of three businesses which now operate as divisions of
NCRIC MSO, Inc., a subsidiary of NCRIC Group. Our goodwill impairment testing
under Statement of Financial Standards No.142, Goodwill and Other Intangible
Assets, concludes that the goodwill asset was not impaired as of September 30,
2004. This impairment test utilizes a discounted cash flow analysis and
therefore is dependent upon the use of estimates and informed judgments as to
future performance of the underlying businesses as well as market conditions.
The result of the current analysis indicates the value of the business is not
significantly in excess of the threshold for indication of impairment. If future
circumstances require use of more negative assumptions than used in the current
analysis, the goodwill asset would be determined to be impaired.
New accounting guidance. In July of 2004, the Emerging Issues Task Force of the
Financial Accounting Standards Board reached a consensus with respect to
guidance to be used in determining whether an investment within the scope of
EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments, is other than temporarily impaired. The
guidance was to be applied in other-than-temporary impairment evaluations made
in reporting periods beginning after June 15, 2004. However, in October the
implementation date was deferred. As this accounting guidance develops, we
will continue to review it to assess any potential impact to our fixed
income portfolio and our asset management policy.
9
Overview
Results for the first nine months of 2004 were driven by a few key
factors: earned premium growth, moderation of claims frequency and litigation
expenses. Earned premiums grew due to the rate level increases, new business
written in the past year, and extended reporting endorsements. Approximately 88%
of policies eligible for renewal did renew during the nine-month period of 2004.
As a result of non-renewals initiated by NCRIC, both from the annual
underwriting process and from West Virginia, combined with attrition, the
overall number of insurance policies in force went down during the nine-month
period. As we have reported previously, in the first quarter we began
non-renewing policies in the West Virginia market at the end of each policy
term. After the approval of a rate increase effective September 1, we again
began to renew business in West Virginia.
Claims frequency, as measured by the number of claims reported, declined
in the first nine months of 2004 compared to the first nine months of 2003 and
in comparison to the 2003 quarterly average. While the severity of claims
continues to rise, lower frequency has a direct impact on financial results.
Claims severity increases impact both claims reported in the current
calendar year and claims originally reported in prior years. In the first half
of 2004 we incurred an increase in the severity of losses, principally from the
2001 report year claims in Virginia and the 2000 report year claims in the
District of Columbia. Based on third quarter development of losses and
additional claims analysis, no change in the level of ultimate losses for prior
years claims was incurred in the third quarter.
Book value per share as of September 30, 2004 stood at $11.56 compared to
$11.30 at December 31, 2003, increasing primarily as a result of net income in
the nine-month period.
Consolidated net income
Three months ended September 30, 2004 compared to three months ended September
30, 2003
Net income of $1.1 million for the three months ended September 30, 2004
compares to $370,000 for the three months ended September 30, 2003. Net realized
investment losses, after tax, for the third quarter of 2004 totaled $48,000
compared to net realized investment gains of $329,000, after tax, for the third
quarter of 2003. Excluding net realized investment gains, third quarter 2004
revenue was 28% ahead of the third quarter of 2003. The increased revenue was
partially offset by losses and underwriting expenses associated with the higher
level of business.
Nine months ended September 30, 2004 compared to nine months ended September 30,
2003
Net income totaled $1.2 million for the nine months ended September 30,
2004 compared to $1.4 million for the nine months ended September 30, 2003. Net
realized investment gains, after tax, for the first nine months of 2004 totaled
$227,000 compared to net realized investment gains, after tax, of $1.2 million
for the first nine months of 2003. Excluding net realized investment gains and
losses, revenue for the first nine months of 2004 was 31% ahead of the first
nine months of 2003. The second quarter losses incurred for development of
claims reported in prior years and expense incurred as a result of the
fraudulent act of a former sales agent were the drivers behind the reduced
results.
Segment results
The results of our insurance segment for the three months and nine months
ended September 30, 2004 were primarily driven by the recurring elements of
increases in premium revenue and incurred losses. Premium revenue growth
resulted from premium rate increases, expansion of business, primarily in
Delaware, over the past year, and an increase in extended reporting
endorsements. Incurred losses
10
increased due to the adverse development of losses on prior year claims as well
as due to the expanded base of policyholders. In the first nine months of 2004,
we incurred expenses of $626,000 related to the fraudulent act of a former sales
agent, as discussed in the Expenses section.
Net premiums earned
Three months ended September 30, 2004 compared to three months ended September
30, 2003
Net premiums earned increased by $4.4 million, 35%, to $16.9 million from
$12.5 million for the three months ended September 30, 2004 and 2003,
respectively. The increase is driven by increases in premium rates, higher
premiums for extended reporting endorsements, and the expansion of business in
force as a result of the growth from new premiums written.
Gross premiums written of $24.3 million for the three months ended
September 30, 2004 increased by $3.7 million or 18% compared to the three months
ended September 30, 2003, as the result the premium rate increases effective
January 1, 2004 combined with net new business written. The extended reporting
endorsement premium written during the third quarter of 2004 totaled $1.8
million, or $1.4 million above the level of the third quarter of 2003. Written
premiums for policies in West Virginia were down by $902,000 in the third
quarter of 2004 compared to the same period of 2003 due to our decision in early
2004 to not renew West Virginia policies at the end of their terms. As a result
of the rate increase approved by West Virginia effective September 1, 2004, we
began renewing business for 2004 policy effective dates falling September 1 and
later. The following chart shows new premium written for the third quarter (in
thousands):
Three Months Ended
September 30,
----------------------------
2004 2003
------ ------
Direct $ 226 $ 209
Agent 1,054 3,289
Nine months ended September 30, 2004 compared to nine months ended September 30,
2003
Net premiums earned increased by 39% to $48.6 million from $34.9 million
for the nine months ended September 30, 2004 and 2003, respectively. The
increase is primarily reflective of 1) the increases in premium rates effective
with 2004 and 2003 renewals, which average 27%, 2) the growth in business in
force resulting from the new premiums written over the past year, and 3) an
increase in premium earned for extended reporting endorsements issued. Extended
reporting endorsements premium is earned in the same period as it is written.
Gross premiums written of $70.5 million for the nine months ended
September 30, 2004 increased by $11.3 million or 19% over the nine months ended
September 30, 2003, due to the premium rate increases and extended reporting
endorsement premiums combined with net new business written, which is new
business net of lost business. Extended reporting endorsements totaled $5.1
million in the first nine months of 2004 compared to $2.5 million for the same
period of 2003. The following chart shows new business written through the third
quarter (in thousands):
Nine Months Ended
September 30,
----------------------------
2004 2003
------ ------
Direct $ 678 $ 536
Agent 2,034 7,277
The overall level of new business produced in the first nine months of 2004 is
lower than for the first nine months of 2003, as planned. In 2003 our business
in Delaware expanded to place us in the top
11
market share position, therefore, the opportunity for growth in Delaware is
limited in 2004. The other territory identified for growth is Virginia. We
continue to write new business in Virginia, however, our product is priced at
the high end of the market, which has the result of constraining growth. We
believe our price level is required by the loss characteristics of the Virginia
market. During the second quarter of 2004 we saw the A.M. Best rating reduced
for our lowest priced Virginia competitor. We continue to maintain that pricing
integrity is critical to long-term viability.
The distribution of premiums written shows notable growth in NCRIC's
market areas outside of the District of Columbia. NCRIC continues to maintain
strict underwriting standards as it expands its business. The following chart
illustrates the components of gross premium written by state for the periods
ended September 30, 2004 and 2003 (in thousands):
Nine Months Ended September 30,
----------------------------------------------------
2004 2003
-------------------- ---------------------
District of Columbia $24,783 35% $22,685 38%
Virginia 22,989 33% 17,585 30%
Maryland 10,117 14% 7,952 13%
Delaware 9,118 13% 5,853 10%
West Virginia 3,536 5% 5,082 9%
------- ----- ------- -----
$70,543 100% $59,157 100%
======= ===== ======= =====
Premium collection litigation. During 2000, it was determined that one of
our hospital-sponsored retrospective programs would not be renewed. In
accordance with the terms of the contract, we billed the hospital sponsor,
Columbia Hospital for Women Medical Center, Inc. (CHW), based on the actual
accumulated loss experience of the terminated program. Because the original 2000
bill was not paid when due, we initiated legal proceedings to collect. As of
September 30, 2004 the amount due to NCRIC for this program was $2.9 million. No
amount of net receivable was accrued due to the pending litigation and
questionable collectability.
On February 13, 2004 a District of Columbia Superior Court jury ruled
against NCRIC's claim for premiums due and returned a verdict in favor of CHW in
counterclaims to the premium collection litigation initiated by NCRIC. The jury
awarded $18.2 million in damages to CHW.
NCRIC filed post-trial motions on March 5, 2004. CHW filed a reply to
NCRIC's motions on March 26, 2004, and NCRIC filed renewed post-trial motions on
April 5, 2004. There have been no further developments since then. Since we
believe the verdict against NCRIC was wrong and that we will ultimately prevail,
no liability has been accrued in the financial statements for any possible loss
arising from this litigation. Legal and other expenses incurred for this
litigation, for both the trial and post-trial motions, for the nine months ended
September 30, 2004 totaled $867,000. The expenses associated with the $19.5
million appellate bond and the collateral letter of credit for the three and
nine months ended September 30, 2004 totaled $50,000 and $211,000, respectively.
Net investment income
Three months ended September 30, 2004 compared to three months ended September
30, 2003
Net investment income increased by $143,000 for the three months ended
September 30, 2004 compared to the third quarter of 2003 due to an increase in
invested funds partially offset by a decrease in yields. Due to the uncertainty
associated with the EITF 03-01 pronouncement, rather than investing positive
operating cash flow in August and September, we increased our balance of cash
and cash equivalents. As a result, net investment income in the third quarter
was lower than it might otherwise have been. The average effective yield was
approximately 3.69% for the three months ended September
12
30, 2004 and 4.07% for the three months ended September 30, 2003. The tax
equivalent yield was approximately 4.11% for the third quarter of 2004 and 4.38%
for the third quarter of 2003. The decrease in investment yields reflects the
addition of an equity component to the portfolio in the third and fourth
quarters of 2003.
Nine months ended September 30, 2004 compared to nine months ended September 30,
2003
Net investment income increased by $1.0 million for the nine months ended
September 30, 2004 compared to the first nine months of the prior year due to an
increase in invested funds partially offset by a decrease in yields. Average
invested assets were higher in the first nine months of 2004 by $44.6 million
compared to the same period of 2003. The average effective yield was
approximately 3.74% for the nine months ended September 30, 2004 and 3.96% for
the nine months ended September 30, 2003. The tax equivalent yield was
approximately 4.16% for the first nine months of 2004 and 4.42% for the first
nine months of 2003. The decrease in investment yields primarily reflects the
addition of an equity component to the portfolio in the last half of 2003.
Net realized investment gains and losses
Three months ended September 30, 2004 compared to three months ended September
30, 2003
Net realized losses of $48,000, before tax, in the third quarter of 2004
resulted from both fixed maturity and equity security trades made in the course
of routine portfolio management. In addition, a realized loss of $24,000, before
tax, was recognized for an other-than-temporary impairment on a fixed income
security. The circumstance that gave rise to the impairment charge was the
August surprise announcement by that entity of a corporate action. The third
quarter of 2003 included net realized gains of $498,000, before tax, resulting
from the full deployment of the proceeds from the public offering as well as
from normal investment activity.
Nine months ended September 30, 2004 compared to nine months ended September 30,
2003
Net realized gains of $368,000, before tax, in the first nine months of
2004 resulted from security trades made in the course of normal portfolio
management, partially offset by recognition of an other-than-temporary
impairment of $24,000, before tax, on a fixed income security. The first nine
months of 2003 included net realized gains of $1.9 million, before tax,
resulting from portfolio restructuring done by our new investment portfolio
manager, partially offset by the recognition of an other-than-temporary
impairment of $135,000, before tax, on an investment in common stock. The
circumstance giving rise to the other-than-temporary impairment charge was a
sharp decline in the value of the stock in 2003 which we did not expect to be
temporary based on available financial information of the issuer.
Practice management and related income
Revenue for practice management and related services is comprised of fees
for the services for the following categories of services: practice management,
accounting, tax and personal financial planning, retirement plan accounting and
administration, and other services.
Three months ended September 30, 2004 compared to three months ended September
30, 2003
Practice management and related revenue of $1.0 million for the three
months ended September 30, 2004 is lower by $108,000 compared to the three
months ended September 30, 2003. The decrease is attributable to a continuing
decline in the utilization of our consulting and related financial services,
partially offset by an increase in revenue from retirement and other employee
benefit plan services.
13
Nine months ended September 30, 2004 compared to nine months ended September 30,
2003
Practice management and related revenue of $3.3 million for the nine
months ended September 30, 2004 is down from $3.8 million for the nine months
ended September 30, 2003. The decrease is attributable to the reasons discussed
above.
Loss and loss adjustment expenses and combined ratio results
The expense for incurred losses and LAE net of reinsurance is summarized
as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
2004 2003 2004 2003
------- ------- ------- --------
Incurred loss and LAE related to:
Current year - losses $13,374 $10,945 $39,067 $ 31,185
Prior years - development -- 200 1,518 (102)
------- ------- ------- --------
Total incurred for the period $13,374 $11,145 $40,585 $ 31,083
======= ======= ======= ========
Following is a summary of the ratios of losses and underwriting expenses
compared to net premiums earned:
Nine Months Ended
September 30,
-----------------------------
2004 2003
------- -------
Loss and LAE ratio 83.4% 89.1%
Underwriting expense ratio 20.6% 20.8%
Combined ratio 104.0% 109.9%
Three months ended September 30, 2004 compared to three months ended September
30, 2003
Total incurred loss and LAE expense of $13.4 million for the third quarter
of 2004 increased by $2.3 million from the $11.1 million incurred for the third
quarter of 2003. The increase in current year losses for the third quarter of
2004 reflects 1) the expanded level of exposure as a result of expanding
business combined with 2) a rise in the cost of resolving claims and 3) reserves
on extended reporting endorsements. The frequency of claims reported in the
third quarter of 2004 was lower than in the third quarter of 2003, whereas the
severity of current losses incurred is greater in recognition of the increased
loss trends reported in the year-end reserve valuation.
Nine months ended September 30, 2004 compared to nine months ended September 30,
2003
Total incurred loss and LAE expense of $40.6 million for the first nine
months of 2004 increased by $9.5 million from the $31.1 million incurred for the
first nine months of 2003. The 2004 increase in current year losses is driven by
the same factors discussed for the third quarter. Adverse development of losses
reported in prior years is recognized for the 2001 report year and reflects
experience on claims closed during the quarter in addition to the continuing
upward pressure of severity of losses. Prior years development results from the
re-estimation and settlement of individual losses not covered by reinsurance.
The combined ratio of 104.0% for the nine months ended September 30, 2004
compared to 109.9% for the first nine months of 2003 reflects the higher level
of earned premiums in relation to the increase in loss and loss adjustment
expenses, the increase in loss severity, and the stable level of core
underwriting expenses. Additionally, expenses stemming from a fraudulent act of
a former sales agent, as discussed in the following Expenses section, added 1.3
points to the 2004 combined ratio and 1.0
14
points to the 2003 combined ratio in the Underwriting expenses component.
Expenses
Three months ended September 30, 2004 compared to three months ended September
30, 2003
Underwriting expenses of $3.1 million for the three months ended September
30, 2004 compare to $2.5 million for the three months ended September 30, 2003.
The increase in expenses results from increases in commissions, premium taxes,
and administrative costs related to the increased level of business,
particularly agent-produced business. In addition, in the third quarter of 2004
we incurred an expense of $31,000 as a result of a fraudulent act of a former
sales agent, as discussed below.
Interest expense in 2004 is on the Trust Preferred Securities issued in
December 2002. This debt carries interest at 400 basis points over three-month
LIBOR. The effective annual rate at September 30, 2004 is 5.81% which compares
to the rate of 5.14% as of September 30, 2003.
Other expenses include amounts for subsidiary and holding company
operations, which are not directly related to the issuance of medical
professional liability insurance or practice management operations. Other
expenses of $463,000 for the three months ended September 30, 2004 compare to
$519,000 for the three months ended September 30, 2003. Other expenses for the
three months ended September 30, 2004 include $50,000 for post-trial costs
associated with the CHW premium collection litigation.
Nine months ended September 30, 2004 compared to nine months ended September 30,
2003
Underwriting expenses increased $2.8 million to $10.0 million for the nine
months ended September 30, 2004 from $7.2 million for the nine months ended
September 30, 2003. The increase in expenses results from increases in
commissions, premium taxes, and administrative costs related to the increased
level of business, particularly agent-produced business. Additionally, in the
first nine months of 2004 we incurred $525,000 in legal fees related to the
trial portion of the premium collection litigation. In the first quarter of
2003, we incurred an expense of $364,000 as a result of a fraudulent act of a
former sales agent. In the first nine of months of 2004 we incurred additional
expenses of $626,000 from this same act. We believe that no significant
additional costs will be incurred in this matter.
Practice management and related expenses totaled $3.7 million for the nine
months ended September 30, 2004 and $3.9 million for the nine months ended
September 30, 2003. Expenses decreased primarily due to adjustments in staffing
to alleviate excess capacity stemming from the decrease in utilization of
services.
Interest expense in 2004 is on the Trust Preferred Securities issued in
December 2002. This debt carries interest at 400 basis points over three-month
LIBOR. The effective annual rate at September 30, 2004 is 5.81% compared to
5.14% as of September 30, 2003.
Other expenses include amounts for subsidiary and holding company
operations, which are not directly related to the issuance of medical
professional liability insurance or practice management operations. Other
expenses of $2.1 million for the nine months ended September 30, 2004 compare to
$1.4 million for the nine months ended September 30, 2003. Other expenses for
the nine months ended September 30, 2004 include $553,000 for post-trial costs
associated with the CHW premium collection litigation.
Federal income taxes
The effective tax rate for NCRIC at 3% for the nine months ended September
30, 2004, compared to
15
18% for the nine months ended September 30, 2003, is lower than the statutory
tax rate principally because of the relatively high benefit of income from
tax-exempt securities and the dividends received deduction in relation to
pre-tax book income.
Financial condition, liquidity and capital resources
Liquidity. The primary sources of liquidity are insurance premiums, net
investment income, practice management and financial services fees, recoveries
from reinsurers and proceeds from the maturity or sale of invested assets. Funds
are used to pay claims, LAE, operating expenses, reinsurance premiums and taxes,
and to purchase investments.
For the nine months ended September 30, 2004, we had cash flows from
operations of $27.8 million compared to $15.5 million for the corresponding
period of 2003. The $12.3 million of increased cash flow results primarily from
higher net premium receipts combined with an acceleration of the timing of
receipt of premium due to implementation of premium financing with a third party
premium finance company. This increased cash flow from premiums was partially
offset by higher payments for claims and LAE. Because of the long-term nature of
both the payments of claims and the settlement of swing-rated reinsurance
premiums due to the reinsurers, cash from operations for a medical professional
liability insurer like NCRIC can vary substantially from period to period.
Financial condition and capital resources. Cash flow from operations and
the proceeds of maturing investments have primarily been invested in corporate
and tax-exempt securities. Additionally, in 2004, $6.7 million was invested in
high-yield bonds through a mutual fund vehicle. As of September 30, 2004, the
carrying value of the securities portfolio was $194.8 million. The portfolio was
invested as follows:
At September 30, At December 31,
2004 2003
---- ----
U. S. Government and agencies ................ 17% 17%
Asset and mortgage-backed securities ......... 25% 31%
Tax-exempt securities ........................ 23% 21%
Corporate bonds .............................. 25% 24%
High yield bond fund ......................... 3% --
Equity securities ............................ 7% 7%
At September 30, 2004, over 71% of the fixed income securities portfolio
was invested in U.S. Government and agency securities or had a rating of AAA or
AA. For regulatory purposes, 87% of the fixed income securities portfolio was
rated "Class 1", which is the highest quality rated group as classified by the
NAIC. The accumulated other comprehensive income totaled $1.5 million at
September 30, 2004, essentially unchanged from the level at December 31, 2003.
At September 30, 2004, gross unrealized investment gains totaled $3.6 million
and gross unrealized investment losses totaled $1.4 million, with no
concentration of unrealized loss in any security or industry.
NCRIC has committed $135,000 for the upgrade of its policy database
system.
During 2001, NCRIC MSO, Inc. borrowed $1,971,000 from SunTrust Bank to
finance the contingent purchase payments from the 1999 acquisition of three
companies. The term of the loan was three years at a floating rate of LIBOR plus
one and one-half percent. The loan was paid off in May of 2004. Interest is
reported as a component of practice management and related expenses.
In December, 2002, NCRIC Group issued Trust Preferred Securities in the
amount of $15 million in a pooled transaction to unrelated investors. This debt
has a maturity of 30 years, and bears interest at an annual rate equal to
three-month LIBOR plus 4.0%, payable quarterly beginning March 4, 2003. Interest
16
is adjusted on a quarterly basis provided that prior to December 4, 2007, this
interest rate shall not exceed 12.50%. The debt is callable by NCRIC at par
beginning December 4, 2007. The effective annual rate at September 30, 2004 is
5.81% which compares to the rate of 5.14% as of September 30, 2003.
Stock Options
On July 7, 2004, the vesting of the 384,322 outstanding stock options
granted in 2003 was accelerated to that date. The options were originally
scheduled to vest during the period from August, 2004 to August, 2008. On the
accelerated vesting date, the per share market value of NCRIC stock of $10.00
was less than the strike price of the options, which ranges from $10.86 to
$11.00 per share.
Effects of inflation
The primary effect of inflation is in estimating reserves for unpaid
losses and LAE for medical professional liability claims in which there is a
long period between reporting and settlement. The rate of inflation for
malpractice claim settlements can substantially exceed the general rate of
inflation. The actual effect of inflation on our results cannot be conclusively
known until claims are ultimately settled. Based on actual results to date, we
believe that losses and LAE reserve levels and our ratemaking process adequately
incorporate the effects of inflation.
Forward-Looking Information
Certain statements made in this document are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Such forward-looking statements may be
identified by reference to a future period or periods, or by the use of
forward-looking terminology, such as "may," "will," "believe," "expect,"
"estimate," "anticipate," "continue," or similar terms or variations on those
terms, or the negative of those terms. These forward-looking statements are
subject to significant risks, assumptions and uncertainties, including, among
other things, the following important factors that could affect the actual
outcome of future events:
o general economic conditions, either nationally or in our market area, that
are worse than expected;
o inflation and changes in the interest rate environment and performance of
financial markets;
o adverse changes in the securities markets;
o changes in laws or government regulations affecting medical professional
liability insurance and practice management and financial services;
o NCRIC, Inc.'s concentration in a single line of business;
o impact of managed healthcare;
o uncertainties inherent in the estimate of loss and loss adjustment expense
reserves and reinsurance;
o price competition;
o changes to our ratings assigned by A.M. Best;
o the cost and availability of reinsurance;
o our ability to successfully integrate acquired entities;
o changes in accounting policies and practices, as may be adopted by our
regulatory agencies and the Financial Accounting Standards Board; and
o changes in our organization, compensation and benefit plans.
We wish to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and wish to
advise readers that the factors listed above could affect our financial
performance and could cause actual results for future period to differ
materially from any opinions or statements expressed with respect to future
periods in any current statements.
17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our investment portfolio is exposed to various market risks, including
interest rate and equity price risk. Market risk is the potential for financial
losses due to the decrease in the value or price of an asset resulting from
broad movements in prices. At September 30, 2004, fixed maturity securities
comprise 90% of total investments at market value. Equity securities, consisting
primarily of common stock, account for the remainder of the investment
portfolio. U.S. Government and tax-exempt bonds represent 43% of the fixed
maturity securities. The investment in a mutual fund containing high-yield
securities is also classified with equity securities. We have classified our
investments as available for sale.
Because of the high percentage of fixed maturity securities, interest rate
risk represents the highest exposure we have on our investment portfolio. In
general, the market value of our fixed maturity portfolio increases or decreases
in an inverse relationship with fluctuation in interest rates. During periods of
rising interest rates, the fair value of our investment portfolio will generally
decline resulting in decreases in our stockholders' equity. Conversely, during
periods of falling interest rates, the fair value of our investment portfolio
will generally increase resulting in increases in our stockholders' equity. In
addition, our net investment income increases or decreases in a direct
relationship with interest rate changes on monies reinvested from maturing
securities and investments of positive cash flow from operating activities.
The value of our investment portfolio as compared to amortized cost is as
follows (in thousands):
Unrealized gain Unrealized gain
at September 30, 2004 at December 31, 2003
--------------------- --------------------
Fixed maturity securities $ 895 $ 868
Equity securities 1,316 1,344
------ ------
Net $2,211 $2,212
====== ======
Generally, the longer the duration of a fixed maturity security, the more
sensitive the asset is to market interest rate fluctuations. To control the
adverse effects of the changes in interest rates, our investment portfolio of
fixed maturity securities consists primarily of intermediate-term,
investment-grade securities. Our investment policy also provides that all
security purchases be limited to rated securities or unrated securities approved
by management on the recommendation of our investment advisor. Approximately 64%
of the fixed maturity portfolio is Treasury or Agency related or rated AAA, the
highest rating for a security. Management of NCRIC, along with NCRIC's external
investment managers, seeks to maximize after-tax yields while minimizing
portfolio credit risk.
One common measure of the interest sensitivity of fixed maturity
securities is effective duration. Effective duration utilizes maturities,
yields, and call terms to calculate an average age of expected cash flows. The
following table shows the estimated fair value of NCRIC's fixed maturity
portfolio based on fluctuations in the market interest rates.
Projected Market Value
Yield Change (bp) Market Yield (in thousands)
----------------- ------------ --------------
-300 0.82% $201,208
-200 1.82% 193,293
-100 2.82% 185,378
Current Yield** 3.82% 174,965
100 4.82% 169,548
200 5.82% 161,633
300 6.82% 153,718
** Current yield is as of September 30, 2004.
18
Item 4. Controls and Procedures
The Chief Executive Officer and Chief Financial Officer have concluded,
based on their evaluation as of September 30, 2004, that the disclosure controls
and procedures (as defined in Securities Exchange Act Rules 13a-14(c) and
15d-14(c)) are effective to ensure that information required to be disclosed in
the reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms. There have been no
significant changes in our internal control over financial reporting that
occurred during our most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
See Note 4 to the Condensed Consolidated Financial Statements included in
Part I, Item 1 of this Form 10-Q for information on pending litigation.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) None
(b) None
(c)
- -------------------------------------------------------------------------------------------------------------------
Total Number Total Number of Shares Maximum Number of Shares
of Shares Average Price Paid Purchased as Part of that May Yet be Purchased
Purchased Per Share Publicly Announced Plan Under the Plan
--------- --------- ----------------------- --------------
- -------------------------------------------------------------------------------------------------------------------
July 1 - July 31 0 0 0 0
- -------------------------------------------------------------------------------------------------------------------
Aug. 1 - Aug. 31 0 0 0 0
- -------------------------------------------------------------------------------------------------------------------
Sept. 1 - Sept. 30 10,000(1) $8.99 10,000 274,000
12,795(2) $8.97 -- --
- -------------------------------------------------------------------------------------------------------------------
(1) The Plan to repurchase up to 5% or approximately 284,000 shares of the
outstanding public float, or common stock held by non-affiliates, was announced
on December 31, 2003. The purchases were authorized to be made during the next
12 months from the announcement as, in the opinion of management, market
conditions warrant.
(2) These shares were authorized to be repurchased to cover payroll taxes on the
regular vesting of stock awards granted under the 1999 Stock Awards Plan and the
2003 Stock Awards Plan.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
19
(b) Filings on Form 8-K during the quarter ending September 30, 2004:
1) On August 12, 2004 the Company filed a Form 8-K pursuant to Item 12
which included a press release dated August 10, 2004 relating to
earnings for the quarter ended June 30, 2004.
2) On September 2, 2004 the Company filed a Form 8-K pursuant to Item 7
relating to the West Virginia Insurance Commission's approval of
NCRIC's rate filing.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NCRIC Group, Inc.
November 9, 2004 /s/ R. Ray Pate, Jr.
--------------------------------------------
R. Ray Pate, Jr.,
President and Chief Executive Officer
(Duly Authorized Officer)
November 9, 2004 /s/ Rebecca B. Crunk
--------------------------------------------
Rebecca B. Crunk,
Sr. Vice President and Chief Financial Officer
(Principal Financial Officer)
20