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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: March 31, 2003
Commission File Number: 0-17007
Republic First Bancorp, Inc.
(Exact name of business issuer as specified in its charter)
Pennsylvania 23-2486815
------------ ----------
(State or other jurisdiction of IRS Employer Identification
incorporation or organization) Number
1608 Walnut Street, Philadelphia, Pennsylvania 19103
----------------------------------------------------
(Address of principal executive offices) (Zip code)
215-735-4422
------------
(Registrant's telephone number, including area code)
N/A
------------
(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
filing requirements for the past 90 days.
YES X NO ____
-------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the Issuer's classes
of common stock, as of the latest practicable date.
6,619,981 shares of Issuer's Common Stock, par value
$0.01 per share, issued and outstanding as of April 30, 2003
Page 1 of 35
Exhibit index appears on page 32
1
TABLE OF CONTENTS
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Page
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Part I: Financial Information
Item 1: Financial Statements (unaudited) 3
Item 2: Management's Discussion and Analysis of Financial Condition and 12
Results of Operations
Item 3: Quantitative and Qualitative Information about Market Risk 30
Item 4: Controls and Procedures 30
Part II: Other Information
Item 1: Legal Proceedings 31
Item 2: Changes in Securities and Use of Proceeds 31
Item 3: Defaults Upon Senior Securities 31
Item 4: Submission of Matters to a Vote of Security Holders 31
Item 5: Other Information 31
Item 6: Exhibits, Reports on Form 8-K and Certifications 32
2
PART I - FINANCIAL INFORMATION
------------------------------
Item 1: Financial Statements
--------------------
Page Number
-----------
(1) Consolidated Balance Sheets as of March 31, 2003, (unaudited) and December 31, 2002... 4
(2) Consolidated Statements of Income for the three months ended
March 31, 2003, and 2002(unaudited)................................................... 5
(3) Consolidated Statements of Cash Flows for the three months ended
March 31, 2003, and 2002(unaudited)................................................... 6
(4) Notes to Consolidated Financial Statements............................................ 7
3
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
as of March 31, 2003 and December 31, 2002
dollars in thousands, except share data
ASSETS: March 31, 2003 December 31, 2002
--------------------- ------------------------
(unaudited)
Cash and due from banks $ 16,284 $ 18,114
Interest bearing deposits with banks 3,567 3,570
Federal funds sold and interest-bearing deposits with banks 117,196 51,126
--------------------- ------------------------
Total cash and cash equivalents 137,047 72,810
Other interest-earning restricted cash 4,265 4,228
Investment securities available for sale, at fair value 63,662 87,291
Investment securities held to maturity at amortized cost
(Fair value of $11,277 and $9,297, respectively) 11,249 9,270
Loans receivable (net of allowance for loan losses of
$7,538 and $6,642, respectively) 457,545 457,047
Premises and equipment, net 4,942 5,000
Other real estate owned 1,015 1,015
Accrued interest receivable 3,506 3,777
Other assets 10,103 7,254
--------------------- ------------------------
Total Assets $ 693,334 $ 647,692
===================== ========================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Demand - non-interest-bearing $ 70,304 $ 59,194
Demand - interest-bearing 61,638 54,653
Money market and savings 144,020 119,213
Time under $100,000 132,373 139,356
Time $100,000 or more 92,177 83,886
--------------------- ------------------------
Total Deposits 500,512 456,302
FHLB Advances 125,000 125,000
Accrued interest payable 3,798 3,596
Other liabilities 5,177 5,518
Corporation-obligated-mandatorily redeemable capital
securities of subsidiary trust holding solely junior
obligations of the corporation 6,000 6,000
--------------------- ------------------------
Total Liabilities 640,487 596,416
--------------------- ------------------------
Shareholders' Equity:
Common stock par value $0.01 per share, 20,000,000 shares
authorized; shares issued 6,619,981 as of
March 31, 2003 and 6,405,592 as of December 31, 2002 66 64
Additional paid in capital 32,935 32,305
Retained earnings 20,053 18,760
Treasury stock at cost (175,172 shares) (1,541) (1,541)
Accumulated other comprehensive income 1,334 1,688
--------------------- ------------------------
Total Shareholders' Equity 52,847 51,276
--------------------- ------------------------
Total Liabilities and Shareholders' Equity $ 693,334 $ 647,692
===================== ========================
(See notes to consolidated financial statements)
4
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
For the Three Months Ended March 31,
dollars in thousands, except per share data
(unaudited)
Quarter to Date
March 31
2003 2002
---- ----
Interest income:
Interest and fees on loans $12,333 $9,533
Interest and dividend income on federal
funds sold and other interest-earning balances 228 169
Interest and dividends on investment securities 998 1,746
--------------------- ------------
Total interest income 13,559 11,448
--------------------- ------------
Interest expense:
Demand interest-bearing 119 121
Money market and savings 432 346
Time under $100,000 1,216 1,745
Time $100,000 or more 652 1,017
Other borrowed funds 2,041 2,220
--------------------- ------------
Total interest expense 4,460 5,449
--------------------- ------------
Net interest income 9,099 5,999
Provision for loan losses 3,411 1,280
--------------------- ------------
Net interest income after provision
for loan losses 5,688 4,719
--------------------- ------------
Non-interest income:
Loan advisory and servicing fees 186 245
Service fees on deposit accounts 320 284
Tax refund products 372 384
Other income 17 21
--------------------- ------------
895 934
--------------------- ------------
Non-interest expenses:
Salaries and benefits 2,478 2,240
Occupancy 386 347
Depreciation 294 244
Legal 240 344
Advertising 73 161
Other expenses 1,135 968
--------------------- ------------
4,606 4,304
--------------------- ------------
Income before income taxes 1,977 1,349
Provision for income taxes 684 461
--------------------- ------------
Net income $1,293 $888
===================== ============
Net income per share:
Basic $0.21 $0.14
===================== ============
--------------------- ------------
Diluted $0.20 $0.14
===================== ============
(See notes to consolidated financial statements)
5
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended March 31,
Dollars in thousands
(unaudited)
2003 2002
------------- -------------
Cash flows from operating activities:
Net income $ 1,293 $ 888
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 3,411 1,280
Depreciation 294 244
Amortization of discounts on investment securities 108 200
Increase in other assets (2,361) (1,540)
Decrease in accrued expenses
and other liabilities (139) (17)
------------- -------------
Net cash provided by operating activities 2,606 1,055
------------- -------------
Cash flows from investing activities:
Purchase of securities:
Held to maturity (2,254) (956)
Available for sale (1,520) (900)
Proceeds from principal receipts, calls and maturities of securities:
Held to maturity 275 2,999
Available for sale 24,470 10,353
Net (increase) decrease in loans (3,909) 3,041
(Increase) decrease in other interest-earning restricted cash (37) 984
Premises and equipment expenditures (236) (70)
------------- -------------
Net cash provided by investing activities 16,789 15,451
------------- -------------
Cash flows from financing activities:
Net proceeds from exercise of stock options 632 -
Net increase in demand, money market and savings deposits 42,902 19,692
Repayment of long-term borrowings - (12,500)
Net increase in time deposits 1,308 20,967
------------- -------------
Net cash provided by financing activities 44,842 28,159
------------- -------------
Increase in cash and cash equivalents 64,237 44,665
Cash and cash equivalents, beginning of period 72,810 41,420
------------- -------------
Cash and cash equivalents, end of period $ 137,047 $ 86,085
============= =============
Supplemental disclosure:
Interest paid $ 4,258 $ 5,542
============= =============
Taxes paid $ 950 $ 1,950
============= =============
(See notes to consolidated financial statements)
6
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Organization
Republic First Bancorp, Inc. is a two-bank holding company organized and
incorporated under the laws of the Commonwealth of Pennsylvania. Its
wholly-owned subsidiary, Republic First Bank (the "Bank"), offers a variety of
banking services to individuals and businesses throughout the Greater
Philadelphia and South Jersey area through its offices and branches in
Philadelphia and Montgomery Counties.
During 1999, the Company opened First Bank of Delaware ("FBD"), a Delaware
State chartered Bank, located at Brandywine Commons II, Concord Pike and Rocky
Run Parkway in Brandywine, New Castle County Delaware. FBD opened for business
on June 1, 1999 and offers many of the same services and financial products as
Republic First Bank, but additionally offers short-term consumer loans and other
loan products not offered by Republic First Bank.
The Company and the Banks encounter vigorous competition for market share
in the companies they serve from bank holding companies, other community banks,
thrift institutions and other non-bank financial organizations, such as mutual
fund companies, insurance companies and brokerage companies.
The Company and the Banks are subject to regulations of certain state and
federal agencies. These regulatory agencies periodically examine the Company and
its subsidiaries for adherence to laws and regulations. As a consequence, the
cost of doing business may be affected.
Note 2: Summary of Significant Accounting Policies:
Basis of Presentation:
The consolidated financial statements of the Company include the accounts
of Republic First Bancorp, Inc. and its wholly-owned subsidiaries, Republic
First Bank and First Bank of Delaware, (together, the "Banks"). Such statements
have been presented in accordance with accounting principles generally accepted
in the United States of America or applicable to the banking industry. All
significant inter-company accounts and transactions have been eliminated in the
consolidated financial statements.
Risks and Uncertainties and Certain Significant Estimates:
The earnings of the Company depend on the earnings of the Banks. The Banks
are dependent primarily upon the level of net interest income, which is the
difference between interest earned on its interest-earning assets, such as loans
and investments, and the interest paid on its interest-bearing liabilities, such
as deposits and borrowings. Accordingly, the operations of the Banks are subject
to risks and uncertainties surrounding their exposure to change in the interest
rate environment.
Prepayments on residential real estate mortgage and other fixed rate loans
and mortgage-backed securities vary significantly and may cause significant
fluctuations in interest margins.
Short-term consumer loans were first offered through FBD in 2001. At March
31, 2003, there were approximately $9.9 million of short-term consumer loans
outstanding, which were originated in Texas, California, Georgia, Arizona, Ohio
and North Carolina through a small number of marketers. These loans
7
generally have principal amounts of $1,000 or less and terms of approximately
two weeks. Legislation eliminating, or limiting interest rates upon short-term
consumer loans has from time to time been proposed, primarily as a result of fee
levels which approximate 17% per $100 borrowed, for two week terms. If such
proposals cease, a larger number of competitors may begin offering the product,
and increased competition could result in lower fees. Further, FBD uses a small
number of marketers under contracts which can be terminated upon short notice,
under various circumstances. Additionally, there has been an increase in
consumer activist complaints regarding this product citing the high fees.
After a hiatus, FBD began offering two tax refund products in 2001 with
Liberty Tax Service. Liberty Tax Service is a nationwide professional tax
service provider which prepares and electronically files federal and state
income tax returns ("Tax Refund Products"). Tax Refund Products consist of
accelerated check refunds ("ACRs"), and refund anticipation loans ("RALs").
There can be no assurances that revenues will continue to grow or be maintained
at current levels in future periods.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America require management
to make significant estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Significant estimates are made by management in determining the allowance
for loan losses, carrying values of other real estate owned and income taxes.
Consideration is given to a variety of factors in establishing these estimates.
In estimating the allowance for loan losses, management considers current
economic conditions, diversification of the loan portfolio, delinquency
statistics, results of internal loan reviews, borrowers' perceived financial and
managerial strengths, the adequacy of underlying collateral, if collateral
dependent, or present value of future cash flows and other relevant factors.
Since the allowance for loan losses and carrying value of other real estate
owned are dependent, to a great extent, on the general economy and other
conditions that may be beyond the Banks' control, it is at least reasonably
possible that the estimates of the allowance for loan losses and the carrying
values of other real estate owned could differ materially in the near term.
Stock Based Compensation:
The company accounts for stock options under the provisions of SFAS No.
123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, which
contains a fair valued-based method for valuing stock-based compensation that
entities may use, which measures compensation cost at the grant date based on
the fair value of the award. Compensation is then recognized over the service
period, which is usually the vesting period. Alternatively, SFAS No. 123 permits
entities to continue accounting for employee stock options and similar equity
instruments under Accounting Principles Board (APB) Opinion 25, Accounting for
Stock Issued to Employees. Entities that continue to account for stock options
using APB Opinion 25 are required to make pro forma disclosures of net income
and earnings per share, as if the fair value-based method of accounting defined
in SFAS No. 123 had been applied.
At March 31, 2003, the Company had a stock-based employee compensation
plan. The Company accounts for that plan under the recognition and measurement
principles of APB No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Stock-based employee compensation costs are not reflected in
net income, as all options granted under the plan had an exercise price equal to
the market vale of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share if
the company had applied the fair value recognition provisions of SFAS No. 123,
to stock-based employee compensation ( in thousands, except per share amounts).
8
Stock Based Compensation
--------------------------------------
(Dollars in thousands)
--------------------------------------
Three months ended March 31,
2003 2002
-------------------------------------
Net income as reported.............................. $1,293 $888
Less: Stock based compensation costs determined under fair value
based method for all awards.......................... (102) (281)
-------------------------------------
Net income, pro-forma............................... $1,191 $607
-------------------------------------
Earnings per common share- basic: As reported $0.21 $0.14
=====================================
Pro-forma $0.19 $0.10
-------------------------------------
Earnings per common share- diluted: As reported $0.20 $0.14
-------------------------------------
Pro-forma $0.18 $0.09
=====================================
The Company granted 56,667 and 93,167 options during the three months ended
March 31, 2003 and 2002, respectively. The proforma compensation expense is
based upon the fair value of the option at grant date. The fair value of each
option is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions used for grants in 2003
and 2002, respectively; dividend yields of 0% for both periods, expected
volatility of 31% for 2003 and 35% for 2002, risk-free interest rates of 4.0%
and 4.7%, respectively and an expected life of 5.0 years for for both periods.
Note 3: Legal Proceedings
The Company and the Banks are from time to time parties (plaintiff or
defendant) to lawsuits in the normal course of business. While any litigation
involves an element of uncertainty, management, after reviewing pending actions
with legal counsel, is of the opinion that the liabilities of the Company and
the Banks, if any, resulting from such actions will not have a material effect
on the financial condition or results of operations of the Company and the
Banks.
Note 4: Segment Reporting
The Company's reportable segments represent strategic businesses that offer
different products and services. The segments are managed separately because
each segment has unique operating characteristics, management requirements and
marketing strategies.
Republic First Bancorp has four reportable segments: two community banking
segments; tax refund products; and short-term consumer loans. The community
banking segments are primarily comprised of the results of operations and
financial condition of the Banks. Tax refund products are comprised of
accelerated check refunds ("ACRs") and refund anticipation loans ("RALs")
offered through FBD on a national basis to customers of Liberty Tax Services, an
unaffiliated national tax preparation firm. Short-term consumer loans are loans
made to customers offered through the FBD, with principal amounts of $1,000 or
less and terms of approximately two weeks. These loans typically are made in
states that are outside of the Company's normal market area through a small
number of marketers and involve rates and fees significantly different from
other loan products offered by either of the Banks.
The Company evaluates the performance of the community banking segments
based upon net income, return on equity and return on average assets. Tax refund
products and short-term consumer loans are evaluated based
9
upon net income. Tax refund products and short-term consumer loans are provided
to satisfy consumer demands while diversifying the Company's earnings stream.
Segment information for the three months ended March 31, 2003 and 2002, is
as follows:
As of and for the three months ended
March 31, 2003
(dollars in thousands) Short-term
Republic First First Bank of Tax Refund Consumer
Bank Delaware Products loans Total
------------------ ------------- ----------------- ------------- ---------------
Net interest income $ 4,033 $ 364 $ 1,154 $ 3,548 $ 9,099
Provision for loan losses 60 31 1,018 2,302 3,411
Non-interest income 432 91 372 - 895
Non-interest expenses 3,496 289 259 562 4,606
Net income $ 600 $ 89 $ 162 $ 442 $ 1,293
================== ============= ================= ============= =================
Selected Balance Sheet Accounts:
Total assets $ 633,583 $ 41,969 $ 5,000 $12,782 $ 693,334
Total loans 422,557 29,660 2,926 9,940 465,083
Total deposits 462,456 30,056 5,000 - 500,512
March 31, 2002
(dollars in thousands) Short-term
Republic First First Bank of Tax Refund Consumer
Bank Delaware Products loans Total
------------------ ------------- ----------------- ------------- ---------------
Net interest income
$ 4,449 $ 274 (38) $ 1,314 $ 5,999
Provision for loan losses 750 10 - 520 1,280
Non-interest income 429 121 384 - 934
Non-interest expenses 3,491 382 167 264 4,304
Net income (loss) $ 437 $ 3 $ 115 $ 333 $ 888
================== ============= ================= ============= =================
Selected Balance Sheet Accounts:
Total assets $ 608,414 $ 52,320 $ 8,671 $11,442 $ 680,847
Total loans 424,436 22,442 3,671 9,018 459,567
Total deposits 445,689 - 8,250 - 487,876
10
Note 5: Earnings Per Share:
Earnings per share ("EPS") consists of two separate components; basic EPS
and diluted EPS. Basic EPS is computed by dividing net income by the weighted
average number of common shares outstanding for each period presented. Diluted
EPS is calculated by dividing net income by the weighted average number of
common shares outstanding plus dilutive common stock equivalents ("CSEs"). CSEs
consist of dilutive stock options granted through the Company's stock option
plan. The following table is a reconciliation of the numerator and denominator
used in calculating basic and diluted EPS. CSEs which are anti-dilutive are not
included in the following calculation. At March 31, 2003, and 2002,
respectively, there were 23,890 and 76,340 of stock options, that were not
included in the calculation of EPS because the option price is greater than the
average market price for the period. These CSEs, however, may become dilutive in
the future.
The following table is a comparison of EPS for the three months ended March
31, 2003, and 2002.
Year to Date
2003 2002
Net Income
$1,293,000 $888,000
Per Per
Shares Share Shares Share
------ ----- ------ -----
Weighted average shares
For period 6,240,331 6,182,954
Basic EPS $0.21 $0.14
Add common stock equivalents
representing dilutive stock options 234,660 254,969
Effect on basic ------- -------
EPS of dilutive CSEs (0.01) -
------- -----
Equals total weighted average
shares and CSEs (diluted) 6,474,991 6,424,923
========= =========
Diluted EPS $0.20 $0.14
------- =====
Note 6: Comprehensive Income
The following table displays net income and the components of other
comprehensive income to arrive at total comprehensive income. For the Company,
the only components of other comprehensive income are those related to the
unrealized gains (losses) on available for sale investment securities.
(dollar amounts in thousands) Three months ended
March 31,
----------------------------------
2003 2002
------------- -------------
Net income $ 1,293 $ 888
Other comprehensive income, net of tax:
Unrealized (losses) on investment
securities:
Unrealized holding losses during the period (354) (512)
------------- -------------
Comprehensive income $ 939 $ 376
============= =============
11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of the significant
changes in the Company's results of operations, financial condition and capital
resources presented in the accompanying consolidated financial statements of
Republic First Bancorp, Inc. This discussion should be read in conjunction with
the accompanying notes to the consolidated financial statements.
Certain statements in this document may be considered to be
"forward-looking statements" as that term is defined in the U.S. Private
Securities Litigation Reform Act of 1995, such as statements that include the
words "may", "believes", "expect", "estimate", "project", anticipate", "should",
"intend", "probability", "risk", "target", "objective" and similar expressions
or variations on such expressions. The forward-looking statements contained
herein are subject to certain risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. For example, risks and uncertainties can arise with changes in:
general economic conditions, including their impact on capital expenditures; new
service and product offerings by competitors and price pressures; and similar
items. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. The Company undertakes no obligation to publicly revise or update
these forward-looking statements to reflect events or circumstances that arise
after the date hereof. Readers should carefully review the risk factors
described in other documents the Company files from time to time with the
Securities and Exchange Commission, including the Company's Annual Report on
Form 10-K for the year ended December 31, 2002, Quarterly Reports on Form 10-Q,
filed by the Company in 2002 and 2001, and any Current Reports on Form 8-K filed
by the Company, as well as other filings.
Financial Condition:
March 31, 2003, Compared to December 31, 2002
Total assets increased $45.6 million to $693.3 million at March 31, 2003,
versus $647.7 million at December 31, 2002. This net increase reflected higher
federal funds and commercial loans, partially offset by historically high
prepayments in residential mortgages and mortgage-backed securities.
Loans:
The loan portfolio, which represents the Company's largest asset, is its
most significant source of interest income. The Company's lending strategy is to
focus on small and medium sized businesses and professionals that seek highly
personalized banking services. Total loans increased $1.4 million, to $465.1
million at March 31, 2003, versus $463.7 million at December 31, 2002. The
slight increase reflected $9.5 million growth in commercial loans and a $7.8
million increase in consumer loans which partially offset a $15.8 million
decline in residential mortgage loans resulting primarily from historically high
prepayments. The loan portfolio consists of secured and unsecured commercial
loans including commercial real estate, construction loans, residential
mortgages, automobile loans, home improvement loans, short-term consumer loans
beginning in 2001 and home equity loans and lines of credit and overdraft lines
of credit and others. The Banks' commercial loans typically range between
$250,000 and $3,000,000 but customers may borrow significantly larger amounts up
to the Banks' combined legal lending limit of $9.0 million at March 31, 2003.
Individual customers may have several loans often secured by different
collateral. Such relationships in excess of $5.8 million at March 31, 2003,
amounted to $13.0 million. The $5.8 million threshold approximates 10% of total
capital and reserves and reflects an additional internal monitoring guideline.
At March 31, 2003, the Company had $9.9 million in short-term consumer loans
outstanding versus $5.0 million at December 31, 2002. The increase reflected
additional
12
business in several new states. These loans were first offered in the second
quarter of 2001. These loans have principal amounts of less than $1,000, and
terms of approximately two weeks and were originated in North Carolina, Georgia,
Texas, Arizona, Ohio and California through a small number of marketers.
Investment Securities:
Investment securities available-for-sale are investments which may be sold
in response to changing market and interest rate conditions and for liquidity
and other purposes. The Company's investment securities available-for-sale
consist primarily of U.S Government debt securities, U.S. Government agency
issued mortgage-backed securities, and debt securities which include corporate
bonds and corporate trust preferred securities. Available-for-sale securities
totaled $63.7 million at March 31, 2003, a decrease of $23.6 million or 27.1%,
from year-end 2002. This decrease resulted primarily from historically high
principal repayments on mortgage-backed securities, which were used to reduce
borrowings and temporarily increase liquidity. At March 31, 2003, and December
31, 2002, the portfolio had net unrealized gains of $2.0 million and $2.6
million, respectively.
Investment securities held-to-maturity are investments for which there is
the intent and ability to hold the investment to maturity. These investments are
carried at amortized cost. The held-to-maturity portfolio consists primarily of
Federal Home Loan Bank ("FHLB") securities. At March 31, 2003, securities held
to maturity totaled $11.2 million, an increase of $2.0 million, or 21.3% from
$9.3 million at year-end 2002. The increase reflected additional purchases of
FHLB securities. At both dates, respective carrying values approximated market
values.
Cash and Due From Banks:
Cash and due from banks, interest bearing deposits and federal funds sold
are all liquid funds. The aggregate amount in these three categories increased
by $64.2 million, to $137.0 million at March 31, 2003, from $72.8 million at
December 31, 2002, as prepayments in the residential mortgage portfolio and
mortgage-backed securities and growth in deposits were temporarily invested in
federal funds.
Other Interest-Earning Restricted Cash:
Other interest-earning restricted cash represents funds provided to fund an
offsite ATM network for which the Company is compensated. At March 31, 2003, the
balance was $4.3 million versus $4.2 million at December 31, 2002.
Fixed Assets:
Bank premises and equipment, net of accumulated depreciation, decreased
$58,000 to $4.9 million at March 31, 2003, from $5.0 million at December 31,
2002. The decrease reflected depreciation of equipment.
Other Real Estate Owned:
The $1.0 million balance of other real estate owned represents two
properties. The first is a hotel property acquired in the fourth quarter of
2001, which was originally recorded at a value of $1.9 million. That property
was written down to $500,000 in the third quarter of 2002. The other property is
a building, which was acquired in the fourth quarter of 2002 and is carried at
an estimated realizable value of $515,000. Appraisals for both properties
support their carrying values at March 31, 2003.
13
Deposits:
Deposits, which include non-interest and interest-bearing demand deposits,
money market, savings and time deposits, are the Banks' major source of funding.
Deposits are generally solicited from the Company's market area through the
offering of a variety of products to attract and retain customers, with a
primary focus on multi-product relationships.
Total deposits increased by $44.2 million, or 9.7% to $500.5 million at
March 31, 2003, from $456.3 million at December 31, 2002. Average core
non-public deposits increased 18%, or $37.7 million more than the prior year to
$242.6 million in the first quarter of 2003. Deposit growth benefited from the
Company's business development efforts and bank consolidations in the
Philadelphia market which continue to leave some customers underserved. Time
deposits increased $1.3 million to $224.6 million at March 31, 2003, versus
$223.2 million at the prior year-end.
FHLB Borrowings:
FHLB borrowings are used to supplement deposit generation. FHLB borrowings
totaled $125.0 million at both March 31, 2003 and December 31, 2002. The
Company's borrowings primarily mature in the fourth quarter of 2004 and first
quarter of 2005.
Shareholders' Equity:
Total shareholders' equity increased $1.5 million to $52.8 million at March
31, 2003, versus $51.3 million at December 31, 2002. This increase was primarily
the result of year-to-date 2003 net income of $1.3 million.
14
Three Months Ended March 31, 2003 Compared to March 31, 2002
- ------------------------------------------------------------
Results of Operations:
Overview
The Company's net income increased $405,000, or 45.6% to $1.3 million or
$0.20 per diluted share for the three months ended March 31, 2003, compared to
$888,000, or $0.14 per diluted share for the prior year comparable period. The
45.6% improvement in earnings reflected a significant increase in net interest
income. Net interest income increased $3.1 million or 52% compared to the prior
year period. Interest margins were significantly impacted by prepayments of the
residential real estate and mortgage-backed securities portfolios, but the Banks
continued reductions in deposit rates and increase in short-term loan fees more
than offset the impact of those prepayments. Of the approximately $3.4 million
increase in net interest income from the short-term loan and tax refund
products, approximately $2.8 million was offset by increased loan loss
provisions. Average core non-public deposits increased 18% in the first quarter
of 2003 compared to the prior year comparable period. The increases in net
interest income resulted in an 185 basis point increase in net interest margin
to 5.71% at March 31, 2003 versus 3.86% at March 31, 2002. The provision for
loan losses increased $2.1 million between those periods reflecting higher
charge-offs principally in the short-term loan and tax refund programs.
Increased revenues from those two programs more than offset these provisions. In
those periods, operating expenses increased 7.0%. The increased net income
resulted in a return on average assets and average equity of .76% and 9.94%
respectively, compared to .54% and 7.57% respectively for the same period in
2002.
Current Developments
The Company recently received a letter from the Federal Reserve Bank of
Philadelphia (the "Reserve Bank") regarding the results of a safety and
soundness review and ongoing compliance monitoring of the payday lending
programs engaged in by our subsidiaries, First Bank of Delaware and Republic
First Bank. First Bank of Delaware operates these loan programs and contracts
with third parties to provide certain services for it as part of the program.
Republic First Bank purchases loans from First Bank of Delaware. As a result of
the preliminary findings, the Reserve Bank has requested that the Company and
its subsidiaries voluntarily cease payday lending through third party companies
and that First Bank of Delaware cease selling loans to Republic First Bank. We
have had discussions with the staffs of the Reserve Bank and the Federal Reserve
Board about whether and on what terms it would permit continued participation in
the programs, about alternatives to permit First Bank of Delaware to continue to
operate the programs and the guidelines to be utilized by the Reserve Bank for
banks to operate such programs in a safe and sound manner. Any agreement of the
Company and/or its subsidiaries to cease making such loans, or any agreement to
curtail operation of these programs, or any enforcement action by the Reserve
Bank to require the Company or its subsidiaries to cease making such loans,
would have a material adverse effect on the earnings of the Company.
Analysis of Net Interest Income
Historically, the Company's earnings have depended significantly upon the
Banks' net interest income, which is the difference between interest earned on
interest-earning assets and interest paid on interest-bearing liabilities. Net
interest income is impacted by changes in the mix of the volume and rates of
interest-earning assets and interest-bearing liabilities.
15
For the three months ended For the three months ended
March 31, 2003 March 31, 2002
------------------------------------------------- --------------------------------------------------
Interest-earning assets:
Interest Interest
(Dollars in thousands) Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------------------ ------------- ------------- ------------------- ------------ -------------
Federal funds sold
and other interest-
earning assets 74,879 228 1.24% 38,757 169 1.77%
Securities 85,091 998 4.69% 120,356 1,746 5.80%
Loans receivable 484,907 12,333 10.31% 466,892 9,533 8.27%
------------------ ------------- ------------- ------------------- ------------ -------------
Total interest-earning assets 644,877 13,559 8.51% 626,005 11,448 7.39%
Other assets 33,829 35,815
------------------ -------------------
Total assets $ 678,706 $ 661,820
================== ===================
Interest-bearing liabilities:
Demand-non interest
bearing $ 76,651 $ 61,124
Demand interest-bearing 58,024 119 0.81% 47,774 121 1.03%
Money market & savings 122,887 432 1.39% 95,938 346 1.46%
Time deposits 225,353 1,868 3.29% 252,926 2,762 4.43%
------------------ ------------- ------------- ------------------- ------------ -------------
Total deposits 482,915 2,419 1.99% 457,762 3,229 2.86%
Total interest-bearing
deposits 406,264 2,419 2.41% 396,638 3,229 3.30%
------------------ ------------- ------------- ------------------- ------------ -------------
Other borrowings 134,850 2,041 6.14% 146,326 2,220 6.15%
------------------ ------------- ------------- ------------------- ------------ -------------
Total interest-bearing
liabilities $ 541,114 $ 4,460 3.34% 542,964 5,449 4.07%
================== ============= ============= =================== ------------ -------------
Total deposits and
other borrowings 617,765 4,460 2.93% 604,088 5,449 3.66%
------------------ ------------- ------------- ------------------- ------------ -------------
Noninterest-bearing
liabilites 8,895 10,295
Shareholders' equity 52,046 47,437
------------------ -------------------
Total liabilities and
shareholders' equity $ 678,706 $ 661,820
================== ===================
Net interest income $ 9,099 $ 5,999
============= ============
Net interest spread 5.58% 3.73%
============= =============
Net interest margin 5.71% 3.86%
============= =============
Net interest margin
not including
short-term loan and
tax refund products 2.76% 2.99%
============= =============
16
The rate volume table below presents an analysis of the impact on interest
income and expense resulting from changes in average volumes and rates during
the period. Changes due to rate and volume variances have been allocated to
rate.
Rate/Volume Table
Three months ended March 31,
2003 versus 2002
(dollars in thousands)
Due to change in:
Volume Rate Total
------------------- ------------- -------------------
Federal funds sold $ 110 $ (51) $ 59
Securities (414) (334) (748)
Loans 458 2,342 2,800
- -----------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 154 1,957 2,111
Interest expense of
deposits
Interest-bearing demand deposits (21) 23 2
Money market and savings (95) 9 (86)
Time deposits 229 665 894
- -----------------------------------------------------------------------------------------------------------------------
Total deposit interest expense 113 697 810
Other borrowings 174 5 179
- -----------------------------------------------------------------------------------------------------------------------
Total interest expense
287 702 989
- -----------------------------------------------------------------------------------------------------------------------
Net interest income $ 441 $ 2,659 $ 3,100
- -----------------------------------------------------------------------------------------------------------------------
The Company's net interest margin increased 185 basis points to 5.71% for
the three months ended March 31, 2003, versus the prior year comparable period.
The improvement reflected increased revenue from the short-term loan and tax
refund products, the 18% increase in average lower costing core non-public
deposits (demand, money market and savings accounts), and the repricing of
certificates of deposit and other deposits in the lower interest rate
environment which more than offset the impact of prepayments in the
mortgage-backed security and residential mortgage portfolios. Fees on short-term
consumer loans and tax refund anticipation loans contributed $4.7 million to net
interest income in 2003 and 295 basis points to the margin versus $1.3 million
and 87 basis points for the prior year comparable period. Excluding the impact
of those products, margins decreased to 2.76% in the first quarter of 2003 from
2.99% in the prior year comparable period. That decrease resulted from the
impact of the historically high residential mortgage and mortgage-backed
security prepayments. While management could replace significant amounts of such
prepayments, it has deferred security purchases in light of the lower interest
rate environment. A total of $125.0 million of Federal Home loan Bank ("FHLB")
advances which carry an average interest rate of 6.20% mature beginning the
third quarter of 2004 through the first quarter of 2005. These advances would be
repriceable to a significantly lower rate in the current interest rate
environment. The average yield on interest-earning assets improved 112 basis
points to 8.51% for the three months ended March 31, 2003, from 7.39% for the
prior year comparable period due primarily to increased fees from short-term
loan and tax refund products. Overall, the average rate paid on interest-bearing
liabilities decreased 73 basis points to 3.34% for the three months ended March
31, 2003, from 4.07% in the prior year comparable period, as the Company
repriced its deposits to the lower rate environment.
17
The Company's net interest income increased $3.1 million, or 51.7%, to $9.1
million for the three months ended March 31, 2003, from $6.0 million for the
prior year comparable period. As shown in the Rate Volume table above, the
increase in net interest income was due to the positive effect of rate changes
of approximately $2.7 million reflecting deposits repricing to lower rates and
the positive impact of higher short-term loan and refund anticipation loan fees.
The positive impact of volume changes reflected increases in average commercial
and construction loans of 5.2% and a reduction in average other borrowings of
7.8%. Average interest-earning assets increased $18.9 million, to $644.9 million
for the three months ended March 31, 2003, from $626.0 million for the prior
year comparable period.
The Company's total interest income increased $2.1 million, or 18.4%, to
$13.6 million for the three months ended March 31, 2003, from $11.5 million for
the prior year comparable period. Interest and fees on loans increased $2.8
million to $12.3 million for the three months ended March 31, 2003, from $9.5
million for the prior year comparable period. Notwithstanding prepayments in the
residential mortgage portfolios, an increase in average commercial loans and the
short-term loan and tax refund product increases quantified above, primarily
comprised the increase in interest and loan income. The increases in fees for
short-term loans was the principal factor in the increase in yield on loans 204
basis points to 10.31%. Interest and dividend income on investment securities
decreased $748,000 to $1.0 million for the three months ended March 31, 2003,
from $1.7 million for the prior year comparable period. This decline was due
principally to the $35.3 million, or 29.3%, decrease in average investment
securities outstanding to $85.1 million at March 31, 2003 from $120.4 million
for the prior year period. In addition, the average rate earned on investment
securities declined 111 basis points to 4.69% as higher coupon investments
prepaid more rapidly than lower coupons and the rates earned on variable rate
securities declined due to the lower interest rate environment. Interest income
on federal funds sold and other interest-earning assets increased $59,000 as
average fed funds sold outstanding increased $36.1 million to $74.9 million as
proceeds from securities paydowns had to be invested in federal funds sold. This
increase in average offset the lower yields earned on these balances due to the
lower interest rate environment.
The Company's total interest expense decreased $989,000, or 18.1%, to $4.5
million for the three months ended March 31, 2003, from $5.4 million for the
prior year comparable period, due to the lower rate environment as the Company
repriced deposits, particularly certificates of deposit and was able to lower
rates on other non-public core deposits. Interest-bearing liabilities averaged
$541.1 million for the three months ended March 31, 2003, versus $543.0 million
for the prior year comparable period, however, the mix was more favorable in the
first quarter of 2003. Average interest-bearing lower cost non-public core
deposits increased $37.7 million, while higher cost time deposits and other
borrowings declined $27.6 million and $11.5 million, respectively. Both factors
contributed to the reduction in interest expense. The average rate paid on
interest-bearing liabilities decreased 73 basis points to 3.34% for the three
months ended March 31, 2003, due primarily to the decrease in average rates paid
on deposit products resulting from the lower interest rate environment.
Interest expense on time deposits (certificates of deposit) decreased
$894,000, or 32.4%, to $1.9 million at March 31, 2003, from $2.8 million for the
prior year comparable period. This decline reflected the lower interest rate
environment as the average rate declined 114 basis points to 3.29%. In addition,
average certificates of deposit outstanding decreased $27.6 million, or 10.9%,
to $225.4 million, for the first quarter ended March 31, 2003, from $252.9
million in the prior year comparable period, as higher cost time deposits
matured and were not replaced due to the growth in non-public core deposits.
Interest expense on other borrowings, primarily FHLB advances, decreased
$179,000 or 8.1% to $2.0 million for the for the three months ended March 31,
2003, compared to $2.2 million for the prior year comparable period. This
decrease resulted from a $11.5 million, or 7.8% decline in average other
borrowings to $134.8 million at March 31, 2003, versus $146.3 million for the
prior year comparable period. The decline in average other borrowings reflected
increased deposit generation and securities maturities and prepayments which
were used to pay down term borrowings. The Company issued $6.0 million of trust
preferred securities in
18
November 2001, the expense for which is included in other borrowings expense.
Such expenses were $93,000 for the three months ended March 31, 2003.
Provision for Loan Losses
The provision for loan losses is charged to operations in an amount
necessary to bring the total allowance for loan losses to a level that reflects
the known and estimated inherent losses in the portfolio. The provision for loan
losses increased $2.1 million to $3.4 million for the three months ended March
31, 2003, from $1.3 million for the prior year comparable period. This increase
reflected approximately $2.8 million of additional provisions for the short-term
loan and tax refund anticipation loans which were more than offset by related
revenues.
Non-Interest Income
Total non-interest income decreased $39,000, or 4.2% to $895,000 for the
three months ended March 31, 2003, versus $934,000 for the prior year comparable
period due primarily to lower loan advisory fees.
Non-Interest Expenses
Total non-interest expenses increased $302,000, or 7.0% to $4.6 million for
the three months ended March 31, 2003, from $4.3 million for the prior year
comparable period. Salaries and employee benefits increased $238,000 or 10.6%,
to $2.5 million for the three months ended March 31, 2003, from $2.2 million for
the prior year comparable period. The increase reflected operational support for
the tax refund and short-term consumer loan products, business development
efforts and normal merit increases.
Occupancy expense increased $39,000 to $386,000 for the three months ended
March 31, 2003, versus $347,000 for the prior year comparable period due
primarily to increased rent and repairs and maintenance expense.
Depreciation expense increased $50,000, or 20.5% to $294,000 for the three
months ended March 31, 2003, versus $244,000 for the prior year comparable
period reflecting higher depreciation on computer equipment purchases required
for various loan and deposit applications and for the tax refund anticipation
loan product.
Legal fees decreased $104,000 to $240,000 for the three months ended March
31, 2003, from $344,000 for the prior year comparable period. This decrease
reflected lower legal expenses related to loan collections.
Advertising expense declined $88,000 to $73,000 as the Company reduced the
number of advertisements during the year.
Other operating expenses increased $167,000, or 17.3% to $1.1 million for
the for the three months ended March 31, 2003, from $968,000 for the prior year
comparable period. The increase reflected higher data processing costs related
to support for the short-term loan products and higher insurance costs.
Provision for Income Taxes
The provision for income taxes increased $223,000, or 48.4%, to $684,000
for the three months ended March 31, 2003, from $461,000 for the prior year
comparable period. This increase was primarily the result of the increase in
pre-tax income. The effective tax rate was 34.6% for the three months ended
March 31, 2003, versus 34.2% for the prior year comparable period.
19
Risks and Uncertainties and Certain Significant Estimates
The earnings of the Company depend on the earnings of the Banks. The Banks
are dependent primarily upon the level of net interest income, which is the
difference between interest earned on its interest-earning assets, such as loans
and investments, and the interest paid on its interest-bearing liabilities, such
as deposits and borrowings. Accordingly, the operations of the Banks are subject
to risks and uncertainties surrounding their exposure to change in the interest
rate environment.
Prepayments on residential real estate mortgages and other fixed rate loans
and mortgage-backed securities may cause significant fluctuations in interest
margins.
Short-term consumer loans were first offered through FBD in 2001. At March
31, 2003, there were approximately $9.9 million of short-term consumer loans
outstanding, which were originated in Texas, California, Georgia, Arizona, Ohio
and North Carolina through a small number of marketers. These loans generally
have principal amounts of $1,000 or less and terms of approximately two weeks.
Legislation eliminating, or limiting interest rates upon short-term consumer
loans has from time to time been proposed, primarily as a result of fee levels
which approximate 17% per $100 borrowed, for two week terms. If such proposals
cease, a larger number of competitors may begin offering the product, and
increased competition could result in lower fees. Further, FBD uses a small
number of marketers under contracts which can be terminated upon short notice,
under various circumstances. Additionally, there has been an increase in
consumer activist complaints regarding this product, citing the high fees.
After a hiatus, FBD began offering two tax refund products in 2001 with
Liberty Tax Service. Liberty Tax Service is a nationwide professional tax
service provider which prepares and electronically files federal and state
income tax returns ("Tax Refund Products"). Tax Refund Products consist of
accelerated check refunds ("ACRs"), and refund anticipation loans ("RALs").
There can be no assurances that revenues will continue to grow or be maintained
at current levels in future periods.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America require management
to make significant estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Significant estimates are made by management in determining the allowance
for loan losses, carrying values of other real estate owned, and income taxes.
Consideration is given to a variety of factors in establishing these estimates.
In estimating the allowance for loan losses, management considers current
economic conditions, diversification of the loan portfolio, delinquency
statistics, results of internal loan reviews, borrowers' perceived financial and
managerial strengths, the adequacy of underlying collateral, if collateral
dependent, or present value of future cash flows and other relevant factors.
Since the allowance for loan losses and carrying value of real estate owned are
dependent, to a great extent, on the general economy and other conditions that
may be beyond the Banks' control, it is at least reasonably possible that the
estimates of the allowance for loan losses and the carrying values of the real
estate owned could differ materially in the near term.
The Company and its subsidiaries are subject to federal and state
regulations governing virtually all aspects of their activities, including but
not limited to, lines of business, liquidity, investments, the payment of
dividends, and others. Such regulations and the cost of adherence to such
regulations can have a significant impact on earnings and financial condition.
20
Commitments, Contingencies and Concentrations
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit totaling $58.7 million at March 31, 2003. These instruments
involve to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the financial statements.
Credit risk is defined as the possibility of sustaining a loss due to the
failure of the other parties to a financial instrument to perform in accordance
with the terms of the contract. The maximum exposure to credit loss under
commitments to extend credit and standby letters of credit is represented by the
contractual amount of these instruments. The Company uses the same underwriting
standards and policies in making credit commitments as it does for
on-balance-sheet instruments.
Financial instruments whose contract amounts represent potential credit
risk are commitments to extend credit of approximately $52.3 million and $52.3
million and standby letters of credit of approximately $6.4 million and $7.2
million at March 31, 2003, and December 31, 2002, respectively.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and many require the 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. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained upon extension of credit is based on management's credit evaluation of
the customer. Collateral held varies but may include real estate, marketable
securities, pledged deposits, equipment and accounts receivable.
Standby letters of credit are conditional commitments that guarantee the
performance of a customer to a third party. The credit risk and collateral
policy involved in issuing letters of credit is essentially the same as that
involved in extending loan commitments. The amount of collateral obtained is
based on management's credit evaluation of the customer. Collateral held varies
but may include real estate, marketable securities, pledged deposits, equipment
and accounts receivable.
At March 31, 2003, the Company had no foreign loans and no loan
concentrations exceeding 10% of total loans except for credits extended to real
estate operators and lessors in the aggregate amount of $139.0 million, which
represented 29.9% of gross loans receivable at March 31, 2003. Various types of
real estate are included in this category, including industrial, retail shopping
centers, office space, residential multi-family and others. Loan concentrations
are considered to exist when there is amounts loaned to a multiple number of
borrowers engaged in similar activities that management believes would cause
them to be similarly impacted by economic or other conditions.
21
Regulatory Matters
The following table presents the Company's capital regulatory ratios at
March 31, 2003, and December 31, 2002:
Actual For Capital To be well
Adequacy purposes capitalized under FRB
capital guidelines
Amount Ratio Amount Ratio Amount Ratio
------------- ------------ ------------- ----------- ----------- -----------
Dollars in thousands
At March 31, 2003
Total risk based capital
Republic First Bank $54,941 13.43% $32,731 8.00% $40,914 10.00%
First Bank of Delaware 6,652 21.46% 2,480 8.00% 3,100 10.00%
Republic First Bancorp, 62,710 14.46% 34,695 8.00% - N/A
Inc.
Tier one risk based capital
Republic First Bank 49,805 12.17% 16,366 4.00% 24,548 6.00%
First Bank of Delaware 6,262 20.20% 1,240 4.00% 1,860 6.00%
Republic First Bancorp, 57,263 13.20% 17,348 4.00% - N/A
Inc.
Tier one leveraged capital
Republic First Bank 49,805 8.06% 30,884 5.00% 30,884 5.00%
First Bank of Delaware 6,262 10.11% 3,097 5.00% 3,097 5.00%
Republic First Bancorp, 57,263 8.46% 33,844 5.00% - N/A
Inc.
Actual For Capital To be well
Adequacy purposes capitalized under FRB
capital guidelines
Amount Ratio Amount Ratio Amount Ratio
------------- ----------- ----------- ---------- ----------- ----------
At December 31, 2002
Total risk based capital
Republic First Bank $52,400 13.39% $31,308 8.00% $39,135 10.00%
First Bank of Delaware 6,144 22.59% 2,176 8.00% 2,720 10.00%
Republic First Bancorp, Inc. 60,581 14.49% 33,447 8.00% - N/A
Tier one risk based capital
Republic First Bank 47,493 12.14% 15,654 4.00% 23,481 6.00%
First Bank of Delaware 5,801 21.33% 1,088 4.00% 1,632 6.00%
Republic First Bancorp, Inc. 55,337 13.24% 16,724 4.00% - N/A
Tier one leveraged capital
Republic First Bank 47,493 7.82% 30,377 5.00% 30,377 5.00%
First Bank of Delaware 5,801 13.94% 2,081 5.00% 2,081 5.00%
Republic First Bancorp, Inc. 55,337 8.56% 32,231 5.00% - N/A
Dividend Policy
The Company has not paid any cash dividends on its Common Stock and does
not currently plan to pay cash dividends to shareholders in the next year.
22
Liquidity
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 needs can be met by
either reducing assets or increasing liabilities. The most liquid assets consist
of cash, amounts due from banks and federal funds sold.
Regulatory authorities require the Banks to maintain certain liquidity
ratios such that the Banks maintain available funds, or can obtain available
funds at reasonable rates, in order to satisfy commitments to borrowers and the
demands of depositors. In response to these requirements, the Banks have each
formed Asset/Liability Committees ("ALCOs"), comprised of selected members of
the Banks' boards of directors and senior management, which monitor such ratios.
The purpose of the Committees are in part, to monitor the Banks' liquidity and
adherence to the ratios in addition to managing the relative interest rate risk
to the Banks'. The ALCOs meet at least quarterly.
The Company's most liquid assets totaled $137.0 million at March 31, 2003,
compared to $72.8 million at December 31, 2002, due to an increase in federal
funds sold. Loan maturities and repayments are a primary source of asset
liquidity. At March 31, 2003, the Bank estimated that in excess of $50.0 million
of loans would mature or be repaid in the six month period that will end
September 30, 2003. Additionally, the majority of its securities are available
to satisfy liquidity requirements through pledges to the Federal Home Loan Bank
System ("FHLB") to access the Banks' line of credit.
Funding requirements have historically been satisfied primarily by
generating core deposits and certificates of deposit with competitive rates,
buying federal funds and utilizing the facilities of FHLB. At March 31, 2003,
the Bank had $121.3 million in unused lines of credit available under
arrangements with FHLB and correspondent banks compared to $109.0 million at
December 31, 2002. These lines of credit enable the Bank to purchase funds for
short or long-term needs at rates often lower than other sources and require
pledging of securities or loan collateral.
At March 31, 2003, the Company had aggregate outstanding commitments
(including unused lines of credit and letters of credit) of $58.7 million.
Certificates of deposit scheduled to mature in one year totaled $150.9 million
at March 31, 2003, and no borrowings were scheduled to mature within that
period. The Company anticipates that it will have sufficient funds available to
meet its current commitments. The Bank has $125.0 million in other borrowings
that are callable by the FHLB, whereupon they would likely be replaced by
borrowings at then current rates. In addition, the Company can use overnight
borrowings or other term borrowings to replace these borrowed funds.
The Banks target and actual liquidity levels are determined by comparisons
of the estimated repayment and marketability of the Banks interest-earning
assets with projected future outflows of deposits and other liabilities. The
Bank has established a line of credit from a correspondent to assist in managing
the Banks' liquidity position. That line of credit totaled $10.0 million at
March 31, 2003. As noted previously, the Bank has established a line of credit
with the Federal Home Loan Bank of Pittsburgh with a maximum borrowing capacity
of approximately $236.0 million. As of March 31, 2003, and December 31, 2002,
the Company had borrowed $125.0 million, respectively, under these lines of
credit. Securities also represent a primary source of liquidity for the Banks.
Accordingly, investment decisions generally reflect liquidity over other
considerations.
The Company's primary short-term funding sources are certificates of
deposit and its securities portfolio. The circumstances that are reasonably
likely to affect those sources are as follows. The Banks have historically been
able to generate certificates of deposit by matching Philadelphia market rates
or paying a premium rate of 25 to 50 basis points over those market rates. It is
anticipated that this source of liquidity will continue to be available;
however, its incremental cost may vary depending on market conditions. The
Company's securities portfolio is also available for liquidity, usually as
collateral for FHLB advances. Because of the FHLB's AAA
23
rating, it is unlikely those advances would not be available. But even if they
are not, numerous investment companies would likely provide repurchase
agreements up to the amount of the market value of the securities.
The Banks' ALCOs are responsible for managing the liquidity position and
interest sensitivity of the Banks. Those committees' primary objective is to
maximize net interest income while configuring the Banks' interest-sensitive
assets and liabilities to manage interest rate risk and provide adequate
liquidity.
Investment Securities Portfolio
At March 31, 2003, the Company had identified certain investment securities
that are being held for indefinite periods of time, including securities that
will be used as part of the Company's asset/liability management strategy and
that may be sold in response to changes in interest rates, prepayments and
similar factors. These securities are classified as available for sale and are
intended to increase the flexibility of the Company's asset/liability
management. Available for sale securities consist of US Government Agency
securities and other investments. The book and market values of securities
available for sale were $61.6 million and $63.7 million as of March 31, 2003,
respectively. The net unrealized gain on securities available for sale as of
that date was $2.0 million.
Loan Portfolio
The Company's loan portfolio consists of secured and unsecured commercial
loans including commercial real estate loans, loans secured by one-to-four
family residential property, commercial construction and residential
construction loans as well as residential mortgages, home equity loans,
short-term consumer and other consumer loans. Commercial loans are primarily
term loans made to small to medium-sized businesses and professionals for
working capital, asset acquisition and other purposes. The Banks commercial
loans typically range between $250,000 and $3,000,000 but customers may borrow
significantly larger amounts up to the Banks combined legal lending limit of
$9.0 million at March 31, 2003. Individual customers may have several loans
often secured by different collateral. Such relationships in excess of $5.8
million (an internal monitoring guideline which approximates 10% of capital and
reserves) at March 31, 2003, amounted to $13.0 million.
Total loans increased $1.4 million, to $465.1 million at March 31, 2003,
from $463.7 million at December 31, 2002. Commercial loans increased $9.4
million and consumer loans increased $7.8 million. This offset a decline in the
residential real estate mortgage portfolio of $15.8 million which reflected
historically high prepayments in the residential real estate mortgage portfolio
resulting from the lower rate environment.
The following table sets forth the Company's gross loans by major
categories for the periods indicated:
24
(dollars in thousands) As of March 31, 2003 As of December 31, 2002
-------------------------------------------------------------------------------
Balance % of Total Balance % of Total
-------------------------------------------------------------------------------
Commercial:
Real estate secured $ 334,106 71.8 $ 329,570 71.1
Non real estate secured 57,328 12.3 54,163 11.7
Unsecured 10,257 2.2 8,513 1.8
-------------------------------------------------------------------------------
401,691 86.3 392,246 84.6
Residential real estate 35,442 7.7 51,265 11.1
Consumer, short-term & other 27,950 6.0 20,178 4.3
-------------------------------------------------------------------------------
Total loans 465,083 100.0% 463,689 100.0%
Less allowance for loan losses (7,538) (6,642)
---------------- ------------------
Net loans $ 457,545 $ 457,047
================ ==================
Credit Quality
The Banks' written lending policies require specified underwriting, loan
documentation and credit analysis standards to be met prior to funding, with
independent credit department approval for the majority of new loan balances. A
committee of the Board of Directors oversees the loan approval process to
monitor that proper standards are maintained, while approving the majority of
commercial loans.
Loans, including impaired loans, are generally classified as non-accrual if
they are past due as to maturity or payment of interest or principal for a
period of more than 90 days, unless such loans are well-secured and in the
process of collection. Loans that are on a current payment status or past due
less than 90 days may also be classified as non-accrual if repayment in full of
principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due are reasonably assured of repayment within an
acceptable period of time, and there is a sustained period of repayment
performance by the borrower, in accordance with the contractual terms.
While a loan is classified as non-accrual or as an impaired loan and the
future collectibility of the recorded loan balance is doubtful, collections of
interest and principal are generally applied as a reduction to principal
outstanding. When the future collectibility of the recorded loan balance is
expected, interest income may be recognized on a cash basis. In the case where a
non-accrual loan had been partially charged off, recognition of interest on a
cash basis is limited to that which would have been recognized on the recorded
loan balance at the contractual interest rate. Cash interest receipts in excess
of that amount are recorded as recoveries to the allowance for loan losses until
prior charge-offs have been fully recovered.
25
The following summary shows information concerning loan delinquency and
other non-performing assets at the dates indicated.
March 31, December 31, 2002
2003
---------------------------------------------
(dollars in thousands)
Loans accruing, but past due 90 days or more $4,254 $4,051
Non-accrual loans 2,960 2,972
---------------------------------------------
Total non-performing loans (1) 7,214 7,023
Other real estate owned 1,015 1,015
---------------------------------------------
Total non-performing assets (2) $8,229 $8,038
=============================================
Non-performing loans as a percentage of total
loans net of unearned
Income 1.55% 1.51%
Non-performing assets as a percentage of total
assets 1.19% 1.24%
(1) Non-performing loans are comprised of (i) loans that are on a nonaccrual
basis; (ii) accruing loans that are 90 days or more past due and (iii)
restructured loans.
(2) Non-performing assets are composed of non-performing loans and other real
estate owned (assets acquired in foreclosure).
Problem loans consist of loans that are included in performing loans, but
for which potential credit problems of the borrowers have caused management to
have serious doubts as to the ability of such borrowers to continue to comply
with present repayment terms. At March 31, 2003, all identified problem loans
are included in the preceding table or are classified as substandard or
doubtful, with a specific reserve allocation in the allowance for loan losses
(see "Allowance For Loan Losses"). Management believes that the appraisals and
other estimates of the value of the collateral pledged against the non-accrual
loans generally exceed the amount of its outstanding balances.
The recorded investment in loans which are impaired totaled $3.0 million at
both March 31, 2003, and December 31, 2002, respectively, and the amount of such
valuation allowances were $750,000 and $665,000, respectively. There were no
commitments to extend credit to any borrowers with impaired loans as of the end
of the periods presented herein.
At March 31, 2003, and December 31, 2002, internally classified accruing
substandard loans totaled approximately $13.6 million and $12.9 million
respectively; and doubtful loans totaled approximately $520,000 and $493,000
respectively. There were no loans classified as loss at those dates.
The Bank had delinquent loans as follows: (i) 30 to 59 days past due, at
March 31, 2003 and December 31, 2002, in the aggregate principal amount of $2.5
million and $1.2 million respectively; and (ii) 60 to 89 days past due, at March
31, 2003 and December 31, 2002, in the aggregate principal amount of $1.5
million and $2.6 million, respectively.
26
At March 31, 2003, the Company had no foreign loans and no loan
concentrations exceeding 10% of total loans except for credits extended to real
estate operators and lessors in the aggregate amount of $139.0 million, which
represented 29.9% of gross loans receivable at March 31, 2003. Various types of
real estate are included in this category, including industrial, retail shopping
centers, office space, residential multi-family and others. Loan concentrations
are considered to exist when multiple number of borrowers are engaged in similar
activities that management believes would cause them to be similarly impacted by
economic or other conditions.
Other Real Estate Owned:
At the beginning of 2002, the company had one other real estate owned
property with a carrying value of $1.9 million. That property was subsequently
written down to a carrying value of $500,000 in the third quarter of 2002. In
the fourth quarter of 2002, the Company charged off $2.2 million of a $2.7
million loan to one borrower, which had been placed on non-accrual status in the
second quarter. In both cases the Banks is pursuing recoveries, but the amount
and timing of any such recoveries can not be predicted. After the $2.2 million
charge-off, the remainder of the balance totaling $515,000 was transferred to
other real estate owned. The $500,000 and $515,000 comprise the balance of other
real estate owned at March 31, 2003, and December 31, 2002.
At March 31, 2003, the Company had no credit exposure to "highly leveraged
transactions" as defined by the Federal Reserve Bank.
27
Allowance for Loan Losses
An analysis of the Company's allowance for loan losses for the three months
ended March 31, 2003, and 2002, and the twelve months ended December 31, 2002 is
as follows:
For the three For the twelve months For the three months
months ended ended ended
(dollars in thousands) March 31, 2003 December 31, 2002 March 31, 2002
---------------------- ----------------------- -----------------------
Balance at beginning of period............ $ 6,642 $ 5,431 $ 5,431
Charge-offs:
Commercial and construction............. 1 2,542 -
Short-term and tax refund loans.......... 2,757 1,670 565
Consumer............... - 3 3
---------------------- ----------------- ---------------
Total charge-offs 2,758 4,215 568
---------------------- ----------------- ---------------
Recoveries:
Commercial and construction............. 20 123 6
Short-term and tax refund loans.......... 223 - -
Consumer................................. - - -
---------------------- ----------------- ---------------
Total recoveries..................... 243 123 6
---------------------- ----------------- ---------------
Net charge-offs..................... 2,515 4,092 562
---------------------- ----------------- ---------------
Provision for loan losses.................. 3,411 5,303 1,280
---------------------- ----------------- ---------------
Balance at end of period................ $ 7,538 $ 6,642 $ 6,149
====================== ================= ===============
Average loans outstanding (1)....... $484,907 $468,239 $466,892
====================== ================= ===============
As a percent of average loans (1):
Net charge-offs (annualized)............ 2.08% 0.87% 0.48%
Provision for loan losses............... 0.70% 1.13% 0.27%
Allowance for loan losses............... 1.55% 1.42% 1.32%
Allowance for loan losses to:
Total loans, net of unearned income at
period end........................... 1.62% 1.43% 1.32%
Total non-performing loans at period
end.................................. 104.49% 94.57% 118.37%
(1) Includes nonaccruing loans.
The increase in net charge-offs reflects the increased volume in short-term
loan and tax refund loans and was more than offset with revenue increases.
Excluding these loans, net charge-offs to average loans were 0% for the first
quarter 2003, 0.52% for the year ended December 31, 2002 and 0% for the first
quarter 2002.
Management makes at least a quarterly determination as to an appropriate
provision from earnings to maintain an allowance for loan losses that is
management's best estimate of known and inherent losses. The Company's Board of
Directors periodically reviews the status of all non-accrual and impaired loans
and loans classified by the Banks' regulators or internal loan review officer,
who reviews both the loan portfolio and overall adequacy of the allowance for
loan losses. The Board of Directors also considers specific loans, pools of
similar loans, historical charge-off activity, economic conditions and other
relevant factors in reviewing the adequacy of the loan loss reserve. Any
additions deemed necessary to the allowance for loan losses are charged to
operating expenses.
28
The Company has an existing loan review program, which monitors the loan
portfolio on an ongoing basis. Loan review is conducted by a loan review officer
who reports quarterly, directly to the Board of Directors.
Estimating the appropriate level of the allowance for loan losses at any
given date is difficult, particularly in a continually changing economy. In
Management's opinion, the allowance for loan losses was appropriate at March 31,
2003. However, there can be no assurance that, if asset quality deteriorates in
future periods, additions to the allowance for loan losses will not be required.
The Banks' management is unable to determine in what loan category future
charge-offs and recoveries may occur. The following schedule sets forth the
allocation of the allowance for loan losses among various categories. The
allocation is based upon historical experience. The entire allowance for loan
losses is available to absorb loan losses in any loan category:
At March 31, 2003 At December 31, 2002
----------------- --------------------
Percent of Loans Percent of Loans
Amount In Each Category Amount In Each Category
(in 000's) To Loans (in 000's) to Loans
---------- -------- ---------- --------
Allocation of allowance for loan losses:
Commercial $5,995 86.3% $5,695 84.6%
Residential real estate 142 7.7% 205 11.1%
Short-term and tax refund loans 524 2.8% 97 1.1%
Consumer and other 106 3.2% 104 3.2%
Unallocated 771 -% 541 -%
-----------------------------------------------------------------------
Total $7,538 100.00% $6,642 100.00%
================== ===============
The majority of the Company's loan portfolio represents loans made for
commercial purposes, while significant amounts of residential property may serve
as collateral for such loans. The Company attempts to evaluate larger loans
individually, on the basis of its loan review process, which scrutinizes loans
on a selective basis and other available information. Even if all commercial
purpose loans could be reviewed, there is no assurance that information on
potential problems would be available. The Company's portfolios of loans made
for purposes of financing residential mortgages and consumer loans are evaluated
in groups. At March 31, 2003, loans made for commercial and construction,
residential mortgage and consumer purposes, respectively, amounted to $401.7
million, $35.4 million and $28.0 million.
Effects of Inflation
The majority of assets and liabilities of a financial institution are
monetary in nature. Therefore, a financial institution differs greatly from most
commercial and industrial companies that have significant investments in fixed
assets or inventories. Management believes that the most significant impact of
inflation on financial results is the Company's need and ability to react to
changes in interest rates. As discussed previously, management attempts to
maintain an essentially balanced position between rate sensitive assets and
liabilities
29
over a one year time horizon in order to protect net interest income from being
affected by wide interest rate fluctuations.
ITEM 3: QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
Interest Rate Risk Management
There has been no material change in the Company's assessment of its
sensitivity to market risk since its presentation in the 2002 Annual Report on
Form 10-K filed with the SEC.
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures.
The management of the Company, including the Chief Executive Officer and
the Chief Financial Officer, have conducted an evaluation of the effectiveness
of the Company's disclosure controls and procedures pursuant to Rule 13a-14
under the Securities Exchange Act of 1934 as of a date (the "Evaluation Date")
within 90 days prior to the filing date of this report. Based on that
evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that, as of the Evaluation Date, the Company's disclosure controls and
procedures were effective in ensuring that all material information relating to
the Company, including our consolidated subsidiaries, required to be filed in
this quarterly report has been made known to them in a timely manner.
(b) Changes in internal controls.
There have been no significant changes made in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the Evaluation Date.
30
Part II Other Information
Item 1: Legal Proceedings
-----------------
The Company and the Banks are from time to time parties (plaintiff or
defendant) to lawsuits that are in the normal course of business. While any
litigation involves an element of uncertainty, management, after reviewing
pending actions with legal counsel, is of the opinion that the liability of the
Company and the Banks, if any, resulting from such actions will not have a
material adverse effect on the financial condition or results of operations of
the Company and the Banks.
Item 2: Changes in Securities and Use of Proceeds
-----------------------------------------
None
Item 3: Defaults upon Senior Securities
-------------------------------
None
Item 4: Submission of Matters to a Vote of Security Holders
----------------------------------------------------
The annual meeting of shareholders of Republic First Bancorp, Inc., to
take action upon the re-election of one director and the election of
one new director of the Company was held on the 22nd day of April, 2003
at 4:00 p.m., at the Union League of Philadelphia Broad and Sansom
Streets, Philadelphia, PA. 19103, after written notice of said meeting,
according to law, was mailed to each shareholder of record entitled to
receive notice of said meeting, 32 days prior thereto. As of the record
date for said meeting of shareholders, the number of shares then issued
and outstanding was 6,412,091 shares of common stock, of which
6,412,091 shares were entitled to vote. A total of 5,783,135 shares
were voted. No nominee received less than 94.0% of the voted shares.
Therefore, pursuant to such approval, the following director was
re-elected to the Company.
Harris Wildstein
The following new director was elected to the Company:
Robert Coleman
A proposal was also put forth to amend the Corporation's Amended and
Restated Stock Option Plan and Restricted Stock Plan to increase the
number of shares issued under the Plan by 10% to a total of 1,540,000.
A majority of the votes (71.6%) approved the plan. Therefore, pursuant
to such approval, the number of shares issuable under the plan is now
1,540,000.
Item 5: Other Information
-----------------
Our chief executive officer and chief financial officer have furnished to
the SEC the certification with respect to this Report that is required by
Section 906 of the Sarbanes-Oxley Act of 2002.
31
Item 6: Exhibits and Reports on Form 8-K
--------------------------------
The following Exhibits are filed as part of this report. (Exhibit numbers
correspond to the exhibits required by Item 601 of Regulation S-K for an annual
report on Form 10-K)
Exhibit No.
10 Material Contracts.- None
21 Subsidiaries of the Company Republic First Bank (the "Bank"), a
wholly-owned subsidiary, commenced operations on November 3, 1988.
The Bank is a commercial bank chartered pursuant to the laws of the
Commonwealth of Pennsylvania. First Bank of Delaware ("FBD"), which
also is a wholly-owned subsidiary of the Company, commenced
operations on September 1, 1999. FBD is a commercial bank chartered
pursuant to the laws of the State of Delaware. The Bank and FBD are
both members of the Federal Reserve System and their primary
federal regulators are the Federal Reserve Board of Governors.
99 Certifications under Section 906 of the Sarbanes-Oxley Act
All other schedules and exhibits are omitted because they are not
applicable or because the required information is set out in the financial
statements or the notes hereto.
**Incorporated by reference in the Company's Form 10-K, filed March 13,
2003.
Reports on Form 8-K and 8-KA
Press release dated April 17, 2003.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Issuer has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Republic First Bancorp, Inc.
Harry D. Madonna
----------------
President and Chief Executive Officer
Paul Frenkiel
-------------
Executive Vice President and Chief Financial
Officer
Dated: May 15, 2003
33
Certifications under Section 302 of the Sarbanes-Oxley Act:
I, Harry D. Madonna, President and Chief Executive Officer of the Company,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Republic First Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to date of their evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
DATE: May 15, 2003
/s/ Harry D. Madonna, President and Chief Executive Officer
34
I, Paul Frenkiel, Chief Financial Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Republic First Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to date of their evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
DATE: May 15, 2003
/s/ Paul Frenkiel, Executive Vice President and Chief Financial Officer
35