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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 0-6233
1st SOURCE CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 35-1068133
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 North Michigan Street, South Bend, Indiana 46601
(Address of principal executive offices) (Zip Code)
(574)235-2702
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report.)
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 preceding 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 X No ______
Number of shares of common stock outstanding as of
July 22, 2004 - 20,644,326 shares
1
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Consolidated statements of financial condition --
June 30, 2004, and December 31, 2003 3
Consolidated statements of income --
three months and six months ended June 30, 2004 and 2003 4
Consolidated statements of cash flows --
three months and six months ended June 30, 2004 and 2003 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
1ST SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited - Dollars in thousands)
June 30, December 31,
2004 2003
------------------------------
ASSETS
Cash and due from banks $ 82,131 $ 109,787
Federal funds sold and
interest bearing deposits with other banks 1,169 1,355
Investment securities, available-for-sale
(amortized cost of $791,019 and $759,945
at June 30, 2004 and December 31, 2003, respectively) 782,525 763,763
Trading account securities 4,516 -
Mortgages held for sale 66,296 60,215
Loans, net of unearned discount:
Commercial and agricultural loans 426,933 402,905
Auto, light truck and environmental equipment 269,583 269,490
Medium and heavy duty truck 229,867 221,562
Aircraft financing 445,340 489,155
Construction equipment financing 213,609 219,562
Loans secured by real estate 551,058 533,749
Consumer loans 94,039 94,577
------------------------------
Total loans 2,230,429 2,231,000
Reserve for loan losses (70,045) (70,045)
------------------------------
Net loans 2,160,384 2,160,955
Equipment owned under operating leases
(net of accumulated depreciation) 56,186 70,305
Net premises and equipment 37,490 38,431
Accrued income and other assets 124,552 125,342
------------------------------
Total assets $3,315,249 $3,330,153
==============================
LIABILITIES
Deposits:
Noninterest bearing $ 384,302 $ 396,026
Interest bearing 2,000,561 2,091,189
------------------------------
Total deposits 2,384,863 2,487,215
Federal funds purchased and securities
sold under agreements to repurchase 411,812 276,040
Other short-term borrowings 71,760 114,814
Long-term debt and mandatorily redeemable securities 22,901 22,802
Subordinated notes 56,444 56,444
Accrued expenses and other liabilities 52,533 58,147
------------------------------
Total liabilities 3,000,313 3,015,462
SHAREHOLDERS' EQUITY
Preferred stock; no par value - -
Common stock; no par value 7,578 7,578
Capital surplus 214,001 214,001
Retained earnings 110,199 100,534
Cost of common stock in treasury (11,603) (9,777)
Accumulated other comprehensive (loss)/income (5,239) 2,355
------------------------------
Total shareholders' equity 314,936 314,691
------------------------------
Total liabilities and shareholders' equity $3,315,249 $3,330,153
==============================
The accompanying notes are a part of the consolidated financial statements.
3
1ST SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------- ----------------------------------
2004 2003 2004 2003
----------------------------------- ----------------------------------
Interest income:
Loans $ 31,904 $ 36,103 $ 64,358 $ 72,713
Investment securities, taxable 4,106 4,710 8,395 9,244
Investment securities, tax-exempt 1,258 1,445 2,575 2,880
Other 46 295 111 445
----------------------------------- ----------------------------------
Total interest income 37,314 42,553 75,439 85,282
Interest expense:
Deposits 9,597 13,187 19,420 26,958
Short-term borrowings 1,283 1,498 2,540 2,762
Subordinated notes 962 941 1,923 1,881
Long-term debt and
mandatorily redeemable securities 138 187 460 385
----------------------------------- ----------------------------------
Total interest expense 11,980 15,813 24,343 31,986
----------------------------------- ----------------------------------
Net interest income 25,334 26,740 51,096 53,296
Provision for loan losses 482 4,901 583 10,451
----------------------------------- ----------------------------------
Net interest income after
provision for loan losses 24,852 21,839 50,513 42,845
Noninterest income:
Trust fees 3,140 2,736 6,230 5,376
Service charges on deposit accounts 4,115 3,922 7,821 7,646
Mortgage banking income 6,187 5,176 5,345 9,342
Equipment rental income 4,927 6,455 10,751 13,226
Other income 1,890 3,904 4,383 6,922
Investment securities and
other investment losses (38) (275) (290) (555)
----------------------------------- ----------------------------------
Total noninterest income 20,221 21,918 34,240 41,957
----------------------------------- ----------------------------------
Noninterest expense:
Salaries and employee benefits 15,866 18,290 31,620 35,537
Net occupancy expense 1,725 1,785 3,558 3,649
Furniture and equipment expense 2,697 2,677 5,281 5,318
Depreciation - leased equipment 3,883 5,050 8,419 10,408
Supplies and communication 1,451 1,558 2,883 3,069
Loan collection and repossession expense 821 3,695 1,876 5,566
Other expense 5,502 4,220 10,650 8,530
----------------------------------- ----------------------------------
Total noninterest expense 31,945 37,275 64,287 72,077
----------------------------------- ----------------------------------
Income before income taxes 13,128 6,482 20,466 12,725
Income taxes 4,410 1,792 6,669 3,575
----------------------------------- ----------------------------------
Net income $ 8,718 $ 4,690 $ 13,797 $ 9,150
=================================== ==================================
Other comprehensive (loss)/income, net of tax:
Change in unrealized appreciation (depreciation) of
available-for-sale securities (9,503) 881 (7,594) 685
----------------------------------- ----------------------------------
Total comprehensive (loss)/income $ (785) $ 5,571 $ 6,203 $ 9,835
=================================== ==================================
Per common share:
Basic net income per common share $ 0.42 $ 0.22 $ 0.67 $ 0.43
=================================== ==================================
Diluted net income per common share $ 0.42 $ 0.22 $ 0.66 $ 0.43
=================================== ==================================
Dividends $ 0.100 $ 0.090 $ 0.200 $ 0.180
=================================== ==================================
Basic weighted average common shares outstanding 20,700,516 21,071,946 20,713,775 21,036,329
=================================== ==================================
Diluted weighted average common shares outstanding 20,969,669 21,407,824 20,993,471 21,368,940
=================================== ==================================
The accompanying notes are a part of the consolidated financial statements.
4
1ST SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - Dollars in thousands)
Six Months Ended June 30,
------------------------
2004 2003
------------------------
Operating activities:
Net income $ 13,797 $ 9,150
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 583 10,451
Depreciation of premises and equipment 10,912 13,053
Amortization of investment security premiums
and accretion of discounts, net 2,965 2,696
Amortization of mortgage servicing rights 3,832 3,846
Mortgage servicing asset impairment charges (553) 5,415
Deferred income taxes 513 (1,677)
Realized investment securities losses 290 555
Change in mortgages held for sale (6,081) 20,916
Change in trading account securities (4,516) 43
Decrease in interest receivable 1,034 1,333
Decrease in interest payable (64) (376)
Change in other assets (3,523) (173)
Change in other liabilities (1,346) 2,068
Other 294 2,245
----------- ---------
Net cash from operating activities 18,137 69,545
Investing activities:
Proceeds from sales and
maturities of investment securities 126,466 70,119
Purchases of investment securities (160,794) (109,886)
Net change in short-term investments 186 20,530
Loans sold or participated to others 0 49,403
Net change in loans (12) 24,785
Net change in equipment owned under operating leases 5,700 3,350
Purchases of premises and equipment (1,562) (994)
----------- ---------
Net cash used/from investing activities (30,016) 57,307
Financing activities:
Net change in demand deposits, NOW
accounts and savings accounts (110,530) (33,292)
Net change in certificates of deposit 8,178 (35,869)
Net change in short-term borrowings 92,720 (52,385)
Proceeds from issuance of long-term debt 415 694
Payments on long-term debt (166) (319)
Acquisition of treasury stock (2,207) (370)
Cash dividends (4,187) (3,783)
----------- ---------
Net cash used in financing activities (15,777) (125,324)
Net change in cash and cash equivalents (27,656) 1,528
Cash and cash equivalents, beginning of year 109,787 120,894
----------- ---------
Cash and cash equivalents, end of period $ 82,131 $ 122,422
=========== =========
The accompanying notes are a part of the consolidated financial statements.
5
1ST SOURCE CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements reflect all
adjustments (all of which are normal and recurring in nature) which are, in the
opinion of management, necessary for a fair presentation of the consolidated
financial position, the results of operations, and cash flows for the periods
presented. These unaudited consolidated financial statements have been prepared
according to the rules and regulations of the Securities and Exchange Commission
(SEC) and, therefore, certain information and footnote disclosures normally
included in financial statements prepared in accordance with U. S. generally
accepted accounting principles have been omitted. The Notes to the Consolidated
Financial Statements appearing in 1st Source Corporation's (1st Source) Annual
Report on Form 10-K (2003 Annual Report), which include descriptions of
significant accounting policies, should be read in conjunction with these
interim financial statements. The balance sheet at December 31, 2003, has been
derived from the audited financial statements at that date but does not include
all of the information and footnotes required by U. S. generally accepted
accounting principles for complete financial statements. Certain amounts in the
prior period consolidated financial statements have been reclassified to conform
with the current year presentation.
1st Source accounts for its stock-based compensation plans under the
recognition and measurement principles provided in Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. Stock-based employee compensation expense for the Executive
Incentive Plan and the Restricted Stock Award Plan is recognized in net income.
For the stock option plans, the stock option agreement, and the Employee Stock
Purchase Plan, no compensation expense is recognized in net income as all
options granted under these plans had an exercise price equal to the market
value of the underlying common stock on the date of grant.
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," as amended by SFAS No.148, requires pro forma
disclosures of net income and earnings per share for companies not adopting its
fair value accounting method for stock-based employee compensation. The pro
forma disclosures presented in Note 5 - Stock-Based Compensation use the fair
value method of SFAS No. 123 to measure compensation expense for stock-based
employee compensation plans.
Note 2. Recent Accounting Pronouncements
APPLICATION OF ACCOUNTING PRINCIPLES TO LOAN COMMITMENTS: SEC Staff
Accounting Bulletin (SAB) No. 105, "Application of Accounting Principles to Loan
Commitments," summarizes the views of the staff of the SEC regarding the
application of generally accepted accounting principles to loan commitments
accounted for as derivative instruments. SAB No. 105 provides that the fair
value of recorded loan commitments that are accounted for as derivatives under
Financial Accounting Standards Board (FASB)Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities," should not incorporate the
expected future cash flows related to the associated servicing of the future
loan. In addition, SAB No. 105 requires registrants to disclose their accounting
policy for loan commitments. The provisions of SAB No. 105 must be applied to
loan commitments accounted for as derivatives that are entered into after March
31, 2004. The adoption of this accounting standard did not have a material
impact on 1st Source's financial statements.
ACCOUNTING FOR STOCK-BASED COMPENSATION: On March 31, 2004, FASB issued the
Exposure Draft, Share-Based Payment, which is a proposed amendment to FASB
Statement No. 123, "Accounting for Stock-Based Compensation." In this draft, the
6
FASB formally proposed to require companies to recognize the fair value of stock
options and other stock-based compensation to employees for future reporting
periods in the income statement based on their fair values. The final standard
is expected in late 2004 that would be effective for public companies (and
certain nonpublic companies) that currently use the fair value method, rather
than minimum value method, for recognition or disclosure purposes for fiscal
years beginning after December 15, 2004. 1st Source is in the process of
evaluating the impact of the exposure draft.
Note 3. Reserve for Loan Losses
The reserve for loan losses is maintained at a level believed to be
adequate by management to absorb probable losses inherent in the loan portfolio.
The determination of the reserve requires significant judgment reflecting
management's best estimate of probable loan losses related to specifically
identified loans as well as probable losses in the remainder of the various loan
portfolios. The methodology for assessing the appropriateness of the reserve
consists of several key elements, which include: specific reserves for
identified special attention loans (substandard loans and leases and internal
watch list credits), percentage allocations for special attention loans without
specific reserves, formula reserves for each business lending division
portfolio, including a higher percentage reserve allocation for special
attention loans without a specific reserve, and reserves for pooled homogenous
loans. Management's evaluation is based upon a continuing review of these
portfolios, estimates of future customer performance, collateral values and
dispositions and consideration of current economic trends, all of which are
subject to judgment and will change.
Note 4. Financial Instruments with Off-Balance-Sheet Risk
To meet the financing needs of its customers, 1st Source and its
subsidiaries are parties to financial instruments with off-balance-sheet risk in
the normal course of business. These off-balance-sheet financial instruments
include commitments to originate, purchase and sell loans and standby letters of
credit. The instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
statements of financial condition. 1st Source's exposure to credit loss in the
event of nonperformance by the other party to the financial instruments for loan
commitments and standby letters of credit is represented by the dollar amount of
those instruments. 1st Source uses the same credit policies and collateral
requirements in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
Trustcorp Mortgage Company and 1st Source Bank (Bank), subsidiaries of 1st
Source, grant mortgage loan commitments to borrowers, subject to normal loan
underwriting standards. The interest rate risk associated with these loan
commitments is managed by entering into contracts for future deliveries of
loans. Loan commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved and collateral obtained in issuing letters of credit is essentially the
same as that involved in extending loan commitments to customers.
As of June 30, 2004, and December 31, 2003, 1st Source had commitments
outstanding to originate and purchase mortgage loans aggregating $179.11 million
and $143.92 million, respectively. Outstanding commitments to sell mortgage
7
loans aggregated $106.28 million at June 30, 2004, and $99.53 million at
December 31, 2003. Standby letters of credit totaled $98.39 million and $101.26
million at June 30, 2004, and December 31, 2003, respectively. Standby letters
of credit have terms ranging from six months to one year.
Note 5. Stock-Based Compensation
The following pro forma information presents net income and earnings per
share for the three and six month periods ended June 30, 2004, and 2003 as if
the fair value method of SFAS No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, had been used to measure compensation
cost for stock-based compensation plans. For the purposes of these pro forma
disclosures, the estimated fair value of stock options and restricted stock
awards is amortized to expense over the related vesting periods.
3 Months ended 6 Months ended
June 30 June 30
------------------------------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income, as reported (000's) $ 8,718 $ 4,690 $13,797 $ 9,150
Add: Stock-based employee compensation expense
included in reported net income, net of related
tax effects 313 310 736 310
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects
(467) (442) (918) (479)
-------- -------- -------- --------
Pro forma net income $ 8,564 $ 4,558 $13,615 $ 8,981
========= ========= ======== ========
Earnings per share:
Basic--as reported $0.42 $0.22 $0.67 $0.43
===== ===== ===== =====
Basic--pro forma $0.42 $0.22 $0.66 $0.43
===== ===== ===== =====
Diluted--as reported $0.42 $0.22 $0.66 $0.43
===== ===== ===== =====
Diluted--pro forma $0.41 $0.21 $0.65 $0.42
===== ===== ===== =====
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for historical information contained herein, the matters discussed
in this document express "forward-looking statements." Generally, the words
"believe," "expect," "intend," "estimate," "anticipate," "project," "will" and
similar expressions indicate forward-looking statements. Those statements,
including statements, projections, estimates or assumptions concerning future
events or performance, and other statements that are other than statements of
historical fact, are subject to material risks and uncertainties. 1st Source
cautions readers not to place undue reliance on any forward-looking statements,
which speak only as of the date made. 1st Source may make other written or oral
forward-looking statements from time to time. Readers are advised that various
important factors could cause 1st Source's actual results or circumstances for
future periods to differ materially from those anticipated or projected in such
forward-looking statements. Such factors include, but are not limited to,
changes in law, regulations or U. S. generally accepted accounting principles;
1st Source's competitive position within its markets served; increasing
consolidation within the banking industry; unforeseen changes in interest rates;
unforeseen changes in loan prepayment assumptions; unforeseen downturns in or
major events affecting the local, regional or national economies or the
industries in which 1st Source has credit concentrations; and other matters
8
discussed in 1st Source's filings with the SEC, including its Annual Report on
Form 10-K for 2003, which filings are available from the SEC. 1st Source
undertakes no obligation to publicly update or revise any forward-looking
statements.
The following management's discussion and analysis is presented to provide
information concerning the financial condition of 1st Source as of June 30,
2004, as compared to December 31, 2003, and the results of operations for the
three and six months ended June 30, 2004, and 2003. This discussion and analysis
should be read in conjunction with 1st Source's consolidated financial
statements and the financial and statistical data appearing elsewhere in this
report and 1st Source's 2003 Annual Report.
FINANCIAL CONDITION
1st Source's assets at June 30, 2004, were $3.32 billion, down 0.45% from
December 31, 2003. Total loans remained stable and total deposits decreased
4.12% over the comparable figures at the end of 2003.
Nonperforming assets at June 30, 2004, were $27.90 million compared to
$36.83 million at December 31, 2003, a decrease of 24.25%. Nonperforming assets
decreased due to a decrease in construction equipment and aircraft non-accrual
loans and repossessed assets. At June 30, 2004, nonperforming assets were 1.22%
of net loans and leases compared to 1.59% at December 31, 2003.
Accrued income and other assets were as follows:
(Dollars in Thousands)
June 30, December 31,
2004 2003
------------ ------------
Accrued income and other assets:
Bank owned life insurance cash surrender value $ 33,001 $ 27,376
Accrued interest receivable 12,507 13,541
Mortgage servicing assets 23,587 24,324
Other real estate 2,767 4,625
Repossessions 3,222 6,229
Intangible assets 24,903 25,740
All other assets 24,565 23,507
------------ ------------
Total accrued income and other assets $ 124,552 $ 125,342
============ ============
CAPITAL
As of June 30, 2004, total shareholders' equity was $314.94 million, up
0.08% from the $314.69 million at December 31, 2003. In addition to net income
of $13.80 million, other significant changes in shareholders' equity during the
first six months of 2004 included $2.21 million in treasury stock purchases, and
$4.19 million of dividends paid. The accumulated other comprehensive income
component of shareholders' equity totaled ($5.24) million at June 30, 2004,
compared to $2.36 million at December 31, 2003. The decrease in accumulated
other comprehensive income was a result of changes in unrealized gain or loss on
securities in the available-for-sale portfolio. The 1st Source equity-to-assets
ratio was 9.50% as of June 30, 2004, compared to 9.45% at December 31, 2003.
Book value per common share rose to $15.26 at June 30, 2004, up from $15.19 at
December 31, 2003.
1st Source declared and paid dividends per common share of $0.10 during
the second quarter of 2004. The trailing four quarter dividend payout ratio was
34.21%. The dividend payout is continually reviewed by management and the Board
of Directors.
9
The banking regulators have established guidelines for leverage capital
requirements, expressed in terms of Tier 1 or core capital as a percentage of
average assets, to measure the soundness of a financial institution. These
guidelines require all banks to maintain a minimum leverage capital ratio of
4.00% for adequately capitalized banks and 5.00% for well-capitalized banks. 1st
Source's leverage capital ratio was 10.83% at June 30, 2004.
The Federal Reserve Board has established risk-based capital guidelines
for U.S. banking organizations. The guidelines establish a conceptual framework
calling for risk weights to be assigned to on and off-balance sheet items in
arriving at risk-adjusted total assets, with the resulting ratio compared to a
minimum standard to determine whether a bank has adequate capital. The minimum
standard risk-based capital ratios effective in 2004 are 4.00% for adequately
capitalized banks and 6.00% for well-capitalized banks for Tier 1 risk-based
capital and 8.00% and 10.00%, respectively, for total risk-based capital. 1st
Source's Tier 1 risk-based capital ratio on June 30, 2004, was 13.07% and the
total risk-based capital ratio was 14.35%.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The Bank's liquidity is monitored and closely managed by the
Asset/Liability Committee (ALCO), whose members are comprised of the Bank's
senior management. Asset and liability management includes the management of
interest rate sensitivity and the maintenance of an adequate liquidity position.
The purpose of interest rate sensitivity management is to stabilize net interest
income during periods of changing interest rates.
Liquidity management is the process by which the Bank ensures that adequate
liquid funds are available to meet financial commitments on a timely basis.
Financial institutions must maintain liquidity to meet day-to-day requirements
of depositors and borrowers, take advantage of market opportunities and provide
a cushion against unforeseen needs.
Liquidity of the Bank is derived primarily from core deposits, principal
payments received on loans, the sale and maturity of investment securities, net
cash provided by operating activities, and access to other funding sources. The
most stable source of liability funded liquidity is deposit growth and retention
of the core deposit base. The principal sources of asset funded liquidity are
available-for-sale investment securities, cash and due from banks, federal funds
sold, securities purchased under agreements to resell and loans and interest
bearing deposits with other banks maturing within one year. Additionally,
liquidity is provided by bank lines of credit, repurchase agreements and the
ability to borrow from the Federal Reserve Bank and Federal Home Loan Bank.
Close attention is given to various interest rate sensitivity gaps and
interest rate spreads. Maturities of rate sensitive assets are relative to the
maturities of rate sensitive liabilities and interest rate forecasts. At June
30, 2004, the consolidated statement of financial condition was rate sensitive
by $83.2 million more liabilities than assets scheduled to reprice within one
year or approximately 0.95%.
RESULTS OF OPERATIONS
Net income for the three and six month periods ended June 30, 2004, was
$8.72 million and $13.80 million respectively, compared to $4.69 million and
$9.15 million for the same periods in 2003. Diluted net income per common share
was $0.42 and $0.66 respectively, for the three and six month periods ended June
30, 2004, compared to $0.22 and $0.43 for the same periods in 2003. Return on
average common shareholders' equity was 8.73% for the six months ended June 30,
2004, compared to 5.88% in 2003. The return on total average assets was 0.85%
for the six months ended June 30, 2004, compared to 0.56% in 2003.
10
The increase in net income for the six months ended June 30, 2004, over the
first six months of 2003, was primarily the result of a $9.87 million decrease
in the provision for loan losses and a $7.79 million decrease in noninterest
expense offset by a $2.20 million decrease in net interest income and a $7.72
million decrease in noninterest income. Details of the changes in the various
components of net income are further discussed below.
NET INTEREST INCOME
The taxable equivalent net interest income for the three months ended June
30, 2004, was $26.02 million, a decrease of 5.41% over the same period in 2003.
The net interest margin on a fully taxable equivalent basis was 3.45% for the
three months ended June 30, 2004, compared to 3.66% for the three months ended
June 30, 2003. The taxable equivalent net interest income for the six month
period ended June 30, 2004, was $52.49 million, a decrease of 4.24% over 2003,
resulting in a net yield of 3.49%, compared to 3.69% for the same period in
2003. The impact on net interest margin on a fully taxable equivalent basis due
to the recognition of fees on loans over the life of the loans was a reduction
of eleven basis points for the six months ended June 30, 2004.
Total average earning assets increased 0.56% and 0.93%, respectively, for
the three and six month periods ended June 30, 2004, over the comparative
periods in 2003. Average loan outstandings increased 3.74% and 2.97% for the
three and six month periods, compared to the same periods in 2003, due primarily
to increased loan outstandings in commercial loans secured by aircraft as a
result of the fourth quarter 2003 purchase of the securitized aircraft loan
portfolio, which was offset by continued runoff in other areas of this loan
category and in the construction equipment portfolio. Total average investment
securities increased 10.11% and 11.48% for the three and six month periods over
one year ago due to an increase in United States agency, municipal and
mortgage-backed securities. For the six month period, average mortgages held for
sale decreased 44.67%, as demand for mortgage loans was lower in 2004 due to the
increased mortgage rate environment. Other investments, which include federal
funds sold, time deposits with other banks and trading account securities,
decreased for the three and six month periods over 2003 as excess funds were
used to purchase loans from the securitization facility. The taxable equivalent
yields on total average earning assets were 5.04% and 5.77% for the three month
periods ended June 30, 2004 and 2003, respectively, and 5.11% and 5.84% for the
six month periods ended June 30, 2004 and 2003, respectively.
Average interest bearing deposits decreased 7.20% and 6.73% for the three
and six month periods, respectively, over the same periods in 2003. The rate on
average interest-bearing deposits was 1.89% and 2.41% for the three month
periods ended June 30, 2004 and 2003, and 1.91% and 2.48% for the six month
periods ended June 30, 2004 and 2003, respectively, due to a decrease in public
funds and brokered deposits. These higher cost deposits were not pursued due to
lower funding needs. The rates on average interest-bearing funds were 1.94% and
2.54% for the three months ended June 30, 2004 and 2003, respectively. For the
six months ended June 30, 2004 and 2003, the rates on average interest bearing
funds were 1.96% and 2.57%, respectively.
The following table sets forth consolidated information regarding average
balances and rates.
11
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
(Dollars in thousands)
Three months ended June 30,
2004 2003
-------------------------------------- -----------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------------------------------------- -----------------------------------------
ASSETS:
Investment securities:
Taxable $ 569,776 $ 4,106 2.90% $ 504,209 $ 4,710 3.75%
Tax exempt (1) 168,124 1,870 4.47% 165,963 2,136 5.16%
Mortgages held for sale 77,051 1,072 5.60% 137,651 2,141 6.24%
Net loans (2 & 3) 2,191,348 30,901 5.67% 2,112,247 34,035 6.46%
Other investments 23,945 46 0.77% 93,379 295 1.27%
-------------------------------------- -----------------------------------------
Total earning assets 3,030,244 37,995 5.04% 3,013,449 43,317 5.77%
Cash and due from banks 78,131 91,161
Reserve for loan losses (70,077) (62,976)
Other assets 219,497 257,936
---------------- ----------------
Total $ 3,257,795 $ 3,299,570
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing deposits $ 2,038,843 $ 9,597 1.89% $ 2,196,936 $13,187 2.41%
Short-term borrowings 371,522 1,283 1.39% 231,971 1,498 2.59%
Subordinated notes 56,444 962 6.85% 54,750 941 6.89%
Long-term debt and
mandatorily redeemable securities 23,091 138 2.40% 17,305 187 4.33%
-------------------------------------- -----------------------------------------
Total interest bearing liabilities 2,489,900 11,980 1.94% 2,500,962 15,813 2.54%
Noninterest bearing deposits 393,282 428,384
Other liabilities 56,808 54,291
Shareholders' equity 317,805 315,933
---------------- ----------------
Total $ 3,257,795 $ 3,299,570
================ ================
----------- -------------
Net interest income $26,015 $27,504
=========== =============
Net yield on earning assets on a taxable
equivalent basis ----------- ------------
3.45% 3.66%
=========== ============
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
(Dollars in thousands)
Six months ended June 30,
2004 2003
----------------------------------------- ------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
---------------------------------------- ------------------------------------
ASSETS:
Investment securities:
Taxable $ 569,705 $ 8,395 2.96% $ 498,345 $ 9,244 3.74%
Tax exempt (1) 169,647 3,827 4.54% 164,870 4,250 5.20%
Mortgages held for sale 72,747 1,979 5.47% 131,480 3,844 5.90%
Net loans (2 & 3) 2,195,194 62,521 5.73% 2,131,930 69,019 6.53%
Other investments 15,894 111 1.40% 68,600 445 1.31%
------------------------------------- ----------------------------------------
Total earning assets 3,023,187 76,833 5.11% 2,995,225 86,802 5.84%
Cash and due from banks 77,703 88,583
Reserve for loan losses (70,109) (62,038)
Other assets 223,396 265,026
---------------- -------------
Total $ 3,254,177 $ 3,286,796
================ =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing deposits $ 2,046,342 $19,420 1.91% $ 2,194,050 $ 26,958 2.48%
Short-term borrowings 376,108 2,540 1.36% 242,411 2,762 2.30%
Subordinated notes 56,444 1,923 6.85% 54,750 1,881 6.93%
Long-term debt and
mandatorily redeemable securities 23,076 460 4.01% 17,400 385 4.46%
------------------------------------- ----------------------------------------
Total interest bearing liabilities 2,501,970 24,343 1.96% 2,508,611 31,986 2.57%
Noninterest bearing deposits 376,617 410,223
Other liabilities 57,902 54,075
Shareholders' equity 317,688 313,887
---------------- -------------
Total $ 3,254,177 $ 3,286,796
================ =============
------------ --------------
Net interest income $52,490 $ 54,816
============ ==============
Net yield on earning assets on a taxable
equivalent basis --------- ---------
3.49% 3.69%
========= =========
(1) Interest income includes the effects of taxable equivalent adjustments,
using a 35% rate. Tax equivalent adjustments for the three month period were
$612 in 2004 and $691 in 2003 and for the six month period were $1,252 in 2004
and $1,370 in 2003.
(2) Loan income includes fees on loans for the three month period of $503
in 2004 and $1,378 in 2003 and for the six month period of $1,329 in 2004 and
$2,574 in 2003. Loan income also includes the effects of taxable equivalent
adjustments, using 35% rate for 2004 and 2003. The tax equivalent adjustments
for the three month period were $69 in 2004 and $73 in 2003 and for the six
month period were $142 in 2004 and $150 in 2003.
(3) For purposes of this computation, nonaccruing loans are included in the
daily average loan amounts outstanding.
12
PROVISION AND RESERVE FOR LOAN LOSSES
The provision for loan losses for the three month periods ended June 30,
2004 and 2003 was $0.48 million and $4.90 million, respectively, and $0.58
million and $10.45 million for the six month periods ended June 30, 2004 and
2003, respectively. Net charge-offs of $0.48 million were recorded for the
second quarter 2004, compared to $3.55 million for the same quarter a year ago.
Year-to-date net charge-offs of $0.58 million have been recorded in 2004,
compared to net charge-offs of $6.48 million through June 2003.
In the second quarter 2004, 1st Source continued to experience moderate
improvement in credit quality. Loan delinquencies were 0.64% on June 30, 2004,
as compared to 1.51% on June 30, 2003, and 1.04% at the end of 2003. Second
quarter 2004 net charge-offs decreased as compared to second quarter 2003. The
reserve for loan losses as a percentage of loans outstanding at the end of the
period was 3.14% as compared to 3.01% one year ago and 3.14% at December 31,
2003. A summary of loan loss experience during the three and six month periods
ended June 30, 2004 and 2003, is provided below.
Summary of Reserve for Loan Losses
-------------------------------------------------------------------------
(Dollars in Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------------------------------------
2004 2003 2004 2003
----------------- ----------------- -------------- --------------
Reserve for loan losses - beginning balance $ 70,045 $ 61,843 $ 70,045 $ 59,218
Charge-offs (2,854) (4,453) (4,427) (8,123)
Recoveries 2,372 903 3,844 1,648
----------------- ----------------- -------------- --------------
Net charge-offs (482) (3,550) (583) (6,475)
Provision for loan losses 482 4,901 583 10,451
----------------- ----------------- -------------- --------------
Reserve for loan losses - ending balance $ 70,045 $ 63,194 $ 70,045 $ 63,194
================= ================= ============== ==============
Loans outstanding at end of period $ 2,230,429 $ 2,098,788 $ 2,230,429 $ 2,098,788
Average loans outstanding during period 2,191,348 2,112,247 2,195,194 2,131,930
Reserve for loan losses as a percentage of
loans outstanding at end of period 3.14% 3.01% 3.14% 3.01%
Ratio of net charge-offs during period to
average loans outstanding 0.09% 0.67% 0.05% 0.61%
NONPERFORMING ASSETS
Nonperforming assets were as follows:
(Dollars in thousands)
June 30, December 31, June 30,
2004 2003 2003
--------- ------------- ---------
Loans past due 90 days or more $ 164 $ 212 $ 289
Nonaccrual and restructured loans 22,210 27,085 41,930
Other real estate 2,184 3,010 3,213
Repossessions 3,222 6,263 12,583
Equipment owned under operating leases 118 257 168
--------- ------------- ---------
Total nonperforming assets $ 27,898 $ 36,827 $ 58,183
========= ============= =========
13
Nonperforming assets totaled $27.90 million at June 30, 2004, decreasing
24.25% from $36.83 million at December 31, 2003 and decreasing 52.05% from
$58.18 million at June 30, 2003. The decrease during the second quarter 2004 was
primarily related to a decrease in aircraft and construction equipment
nonaccrual loans and liquidation of repossessions. Nonperforming assets as a
percentage of total loans and leases improved to 1.22% at June 30, 2004, from
1.59% at December 31, 2003 and 2.65% at June 30, 2003.
As of June 30, 2004, the Bank had a $4.00 million standby letter of credit
outstanding which supported bond indebtedness of a customer. Due to the current
financial condition of the customer, if this standby letter of credit is funded,
the Bank likely will foreclose on the real estate securing the customer's
reimbursement obligation. This likely will result in an increase in other real
estate for approximately the same amount as the funding.
Repossessions continue to consist primarily of aircraft and aircraft parts,
$2.62 million of the $3.22 million as of June 30, 2004. These aircraft and
related equipment have primarily come from defaulted loans to air cargo
operators and aircraft dealers. There are also automobiles, light trucks,
construction equipment and environmental equipment in repossessed assets at June
30, 2004. At the time of repossession, the recorded amount of the loan is
written down, if necessary, to the estimated value of the equipment or vehicle
by a charge to the reserve for loan losses, unless the equipment is in the
process of immediate sale. Any subsequent write-downs are included in
noninterest expense.
Repossessed assets are valued by the loan and credit officers of the Bank
or, in certain circumstances, an independent third party. The estimated value
generally is determined on an orderly liquidation basis and is based on a
variety of available sources. These sources typically include vehicle and
equipment dealers, valuation guides and other third parties, including
appraisers. A number of variables can lead to a decrease in value after the
asset is repossessed. These include deterioration in the market value, discovery
of new or additional information about the asset, and validity or invalidity of
other liens against the asset. Valuation adjustments and net losses upon
disposition of repossessions for the three month period ended June 30, 2004,
totaled $0.24 million as compared to the valuation adjustments and net losses
for the three month period ended June 30, 2003, of $2.50 million, respectively,
and $0.38 million and $2.72 million for the six month periods ended June 30,
2004 and 2003, respectively.
Supplemental Loan Information as of June 30, 2004
(Dollars in thousands) Other real estate Year-to-date
Loan and net credit losses/
outstandings Nonaccrual repossessions recoveries
-------------- ------------- ----------------- ----------------
Commercial and agricultural loans $ 426,933 $ 2,191 $ - $ (200)
Auto, light truck, and environmental equipment 269,583 3,256 169 317
Medium & heavy duty truck 229,867 1,007 - 348
Aircraft financing 445,340 10,764 2,622 52
Construction equipment financing 213,609 3,278 381 4
Loans secured by real estate 551,058 1,422 2,184 114
Consumer loans 94,039 292 50 328
-------------- ------------- ----------------- ----------------
Total $2,230,429 $ 22,210 $ 5,406 $ 963
============== ============= ================= ================
14
For financial statements purposes, nonaccrual loans are included in loan
outstandings, whereas repossessions and other real estate are included in other
assets. Net credit losses include net charge-offs on loans and valuation
adjustments and gains and losses on disposition of repossessions and defaulted
operating leases.
NONINTEREST INCOME
Noninterest income for the three month periods ended June 30, 2004 and 2003
was $20.22 million and $21.92 million, respectively, and $34.24 million and
$41.96 million for the six month periods ended June 30, 2004 and 2003,
respectively. The predominant factor behind the decrease in 2004 was a reduction
in mortgage banking income.
(Dollars in Thousands) Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ----------------------
2004 2003 2004 2003
Noninterest income:
Trust fees $ 3,140 $ 2,736 $ 6,230 $ 5,376
Service charges on deposit accounts 4,115 3,922 7,821 7,646
Mortgage banking income 6,187 5,176 5,345 9,342
Insurance commissions 763 616 1,725 1,428
Equipment rental income 4,927 6,455 10,751 13,226
Securitization income - 922 - 1,597
Other income 1,127 2,366 2,658 3,897
Investment securities and other investment losses (38) (275) (290) (555)
----------- ----------- ---------- -----------
Total noninterest income $ 20,221 $ 21,918 $ 34,240 $ 41,957
=========== =========== ========== ===========
Mortgage banking income fluctuations were due to changes in origination
volumes, gains on sales of loans in the secondary market, and mortgage servicing
rights valuation impairment/recoveries. For the three months ended June 30,
2004, mortgage banking income increased over the same period in 2003 due to
mortgage servicing rights impairment recovery of $3.78 million in the second
quarter of 2004 versus $3.64 million of mortgage servicing rights impairment for
the same period in 2003. For the six months ended June 30, 2004, mortgage
servicing rights impairment recovery was $0.55 million versus $5.42 million of
impairment for the same period in 2003. Additionally, impairment of $0.50 was
determined to be unrecoverable and was recorded as a direct write-down to the
carrying value of the asset. For both the three and six month periods ending
June 30, 2004, mortgage banking income was negatively impacted by reduced
origination volumes and decreased gains on sales of loans into the secondary
market versus the same periods in 2003.
Trust fees, insurance commissions and service charges on deposit accounts
increased in both the three and six month periods ended June 30, 2004 over the
same periods in 2003. Trust fees increased due to growth in assets under
management and improvement in the equity markets. Insurance commissions
increased due to growth in commercial lines and higher premiums, while an
increase in income from consumer overdraft fees caused service charges on
deposit accounts to rise.
Equipment rental income decreased for both the three and six month periods
ended June 30, 2004, over the same periods in 2003 due to the decrease in the
operating lease portfolio, while securitization income was eliminated in 2004 as
1st Source no longer has loans securitized. Other income decreased due to
decreased trading security income.
15
NONINTEREST EXPENSE
Noninterest expense for the three month periods ended June 30, 2004 and
2003 was $31.95 million and $37.28 million, respectively, and $64.29 million and
$72.08 million for the six month periods ended June 30, 2004 and 2003,
respectively. The decrease in noninterest expense in 2004 was primarily due to
decreased salaries and employee benefits, decreased loan collection and
repossession expense, offset by increased professional fees.
(Dollars in Thousands) Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2004 2003 2004 2003
Noninterest expense:
Salaries and employee benefits $ 15,866 $ 18,290 $ 31,620 $ 35,537
Net occupancy expense 1,725 1,785 3,558 3,649
Furniture and equipment expense 2,697 2,677 5,281 5,318
Depreciation - leased equipment 3,883 5,050 8,419 10,408
Professional fees 2,405 669 3,966 1,289
Supplies and communication 1,451 1,558 2,883 3,069
Business development and marketing expense 1,023 854 1,655 1,563
Intangible asset amortization 657 647 1,315 1,441
Loan collection and repossession expense 821 3,695 1,876 5,566
Other 1,417 2,050 3,714 4,237
----------- ----------- ---------- -----------
Total noninterest expense $ 31,945 $ 37,275 $ 64,287 $ 72,077
=========== =========== ========== ===========
Salaries and employee benefits decreased on a year-over-year basis caused
primarily by the capitalization of $2.87 million in salaries and benefits in
connection with the deferral of loan origination costs in 2004. Decreased
mortgage commissions also contributed to the decrease in salaries and employee
benefits. These decreases were partially offset by higher executive incentive
accruals and increased group insurance costs.
Second quarter and year-to-date net occupancy expense, furniture and
equipment expense, supplies and communication, and business development and
marketing expense and intangible asset amortization, all remained comparable to
2003 levels. Leased equipment depreciation decreased due to the decrease in the
operating lease portfolio. Loan collection and repossession expense decreased as
valuation adjustments and other expenses related to repossessed assets
decreased. Professional fees increased due to increased legal fees relating, in
part, to the lawsuit described in the 2003 Form 10-K Item 3, Legal Proceedings.
Other expenses decreased primarily due to gains on the disposition of leased
equipment.
INCOME TAXES
1st Source recognized income tax expense for the three and six months ended
June 30, 2004, of $4.41 million and $6.67 million, for effective rates of 33.59%
and 32.59%, compared to $1.79 million and $3.58 million, for effective rates of
27.65% and 28.09%, for the three and six months ended June 30, 2003. The
effective income tax rate rose as a result of the increase in pretax income.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risks faced by 1st Source
since December 31, 2003. For information regarding 1st Source's market risk,
refer to 1st Source's Annual Report on Form 10-K for the year ended December 31,
2003.
16
ITEM 4.
CONTROLS AND PROCEDURES
1st Source carried out an evaluation, under the supervision and with the
participation of 1st Source's management, including 1st Source's Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of 1st Source's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, at June 30, 2004, 1st
Source's disclosure controls and procedures are effective in accumulating and
communicating to management (including such officers) the information relating
to 1st Source (including its consolidated subsidiaries) required to be included
in 1st Source's periodic SEC filings.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
1st Source reported in its Form 10-K filed February 19, 2004, on an
adversary proceeding filed against the Bank by Airmotive, Inc., by and through
the Official Unsecured Creditor's Committee of Airmotive, Inc. Discovery remains
ongoing in this proceeding and management expects that discovery will conclude
later in 2004 and that a trial of the proceeding will be scheduled sometime
during 2005.
ITEM 2. Changes in Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
(a) (b) (c) (d)
Total number of Maximum number (or approximate
Total number Average shares purchased dollar value) of shares
of shares price paid per as part of publicly announced that may yet be purchased under
Period purchased share plans or programs (1) the plans or programs
- -----------------------------------------------------------------------------------------------------------------------------------
April 01 - 30, 2004 0 0 0 855,785
May 01 - 31, 2004 103,733 21.54 103,733 752,052
June 01 - 30, 2004 0 0 0 752,052
(1) 1st Source maintains a stock repurchase plan that was authorized by the
Board of Directors on October 23, 2001. Under the terms of the plan, 1st Source
may repurchase up to 1,038,990 shares of its common stock when favorable
conditions exist on the open market or through private transactions at various
prices from time to time. Since the inception of the plan, 1st Source has
repurchased a total of 286,938 shares.
ITEM 3. Defaults Upon Senior Securities.
None
ITEM 4. Submission of Matters to a Vote of Security Holders.
The following actions were taken by the shareholders of 1st Source at the
annual shareholders' meeting held April 28, 2004:
1. Election of Directors
The directors named below were elected to the board of directors for terms
expiring in April 2006, as follows:
17
Nominee Votes For Votes Withheld
- ------- --------- --------------
Terry L. Gerber 20,143,683 184,824
Craig A. Kapson 20,142,927 186,256
John T. Phair 20,143,683 180,020
Mark D. Schwabero 20,140,108 160,057
The directors named below were re-elected to the board of directors for terms
expiring in April 2007, as follows:
Nominee Votes For Votes Withheld
- ------- --------- --------------
David C. Bowers 20,140,108 186,047
Daniel B. Fitzpatrick 20,140,094 206,504
Wellington D. Jones III 20,143,377 163,035
Dane A. Miller 20,143,671 178,984
Toby S. Wilt 20,143,683 184,274
In addition, the following directors continued in office after the 2004
annual meeting:
Terms Expiring in April 2005: Terms Expiring in April 2006:
Lawrence E. Hiler William P. Johnson
Rex Martin
Christopher J. Murphy III
Timothy K. Ozark
2. Reapproval of 1998 Performance Compensation Plan Material Terms
Reapproval of material items of the 1998 Performance Compensation Plan in
accordance with Section 162(m) of the Internal Revenue Code of 1986, as amended,
was approved, as follows:
Votes in Favor Votes Against Abstentions
- -------------- ------------- -----------
19,828,355 311,645 178,291
ITEM 5. Other Information.
None
ITEM 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed with this report:
1. Exhibit 31.1 Certification of Chief Executive Officer required by Rule
13a-14(a).
2. Exhibit 31.2 Certification of Chief Financial Officer required by Rule
13a-14(a).
3. Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350 of Chief
Executive Officer.
4. Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350 of Chief
Financial Officer.
18
(b) Reports on Form 8-K.
A report on Form 8-K, dated April 27, 2004, was filed under report item
number 7 and 12, concerning 1st Source's results of operations for the
first quarter ended March 31, 2004.
A report on Form 8-K, dated April 28, 2004, was filed under report item
number 5 and 7, concerning the election of new members to the 1st Source
Board.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
1st Source Corporation
DATE July 29, 2004 /s/Christopher J. Murphy III
------------- ------------------------------------
Christopher J. Murphy III
Chairman of the Board, President and CEO
DATE July 29, 2004 /s/Larry E. Lentych
------------- -------------------------------------
Larry E. Lentych
Treasurer and Chief Financial Officer
Principal Accounting Officer
19