10-Q 1 a2055139z10-q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Six Months Ended June 30, 2001. Commission File Number 0-8597 ----------------------------- THE REPUBLIC CORPORATION ------------------------ TEXAS 74-0911766 ------ ---------- (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5340 WESLAYAN - P.O. BOX 270462, HOUSTON, TX 77277 -------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 713-993-9200 Indicate by check mark whether the registrant (1) has filed all reports required 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 report(s), and (2) has been subject to such filing requirements for the past 90 days. YES /X/. NO / /. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of June 30, 2001 Common Stock, $1.00 par value Shares 356,844 Outstanding at June 30, 2001, (including 23,119 shares held as treasury shares) THE REPUBLIC CORPORATION Index to Quarterly Report on Form 10-Q

REPUBLIC CORPORATION AND SUBSIDIARY Balance Sheet

The accompanying note is an integral part of these financial statements. (1) REPUBLIC CORPORATION AND SUBSIDIARY Statement of Income

The accompanying note is an integral part of these financial statements. (2) REPUBLIC CORPORATION AND SUBSIDIARY Statement of Cash Flows

The accompanying note is an integral part of these financial statements. (3) REPUBLIC CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2001 Note 1 -- BASIS OF PREPARATION AND PRESENTATION The consolidated financial statements included herein have been prepared by The Republic Corporation, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and include all adjustments which are, in the opinion of management, necessary for a fair presentation. The condensed consolidated financial statements include the accounts of the company and its subsidiaries. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Republic Corporation believes that the disclosures are adequate to make the information presented not misleading; however, it is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto which are on Form 10-K for the fiscal year ended December 31, 2000. The financial data for the interim periods may not necessarily be indicative of results to be expected for the year. Securities that will be 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, are classified as Available-for-Sale and accounted for at fair value. (4) MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAL CONDITION ASSET QUALITY Total problem loans continue at a level in excess of 1% of the bank's loan portfolio, largely a result of the bank's practice of placing chronic, 30 day past due credits on non-accrual. These accounts are typically placed back on accrual status if payments are made on time for at least one quarter. The restructured loan total continues to be dominated by one commercial loan that has experienced difficulty for a number of years. TABLE 1 PROBLEM ASSETS

TABLE 2 LOAN CONCENTRATIONS

(5) SOURCES AND USES OF FUNDS Economic activity was slower in the bank's market areas during the first half of 2001 when compared with the year-ago period. Deposit growth for the current period was a negative $857m , compared with a positive $11,146m figure for the first half of 2000. Likewise, loan growth for the first half of 2001 was $3,684 compared with $11,291 during the year-ago period. The other, significant event that occurred during the current period was the placement of the remaining proceeds of $15,000m in matured securities (approx. $5,256m) into fed funds sold. (Please see Statement of Cash Flows, P-3) LIQUIDITY At mid-year, 2001 the bank's total of cash and due from banks, readily marketable securities and federal funds sold stood at approximately 29% of total liabilities. This compares with approximately 32% at year-end, 2000. The decline is largely a result of the flow of cash assets into the loan portfolio during the first six months of 2001 (Please see Balance Sheet, P-1) INTEREST RATE SENSITIVITY MANAGEMENT In the ordinary course of business, the company is exposed to the risk of loss from changes in interest rates. The majority of this risk has to do with timing differences related to the repricing of assets and liabilities. The company, through its ALCO committee, analyzes and compares these repricing differences and basis point spreads so as to effectively monitor and adjust the inevitable earnings impact of rate change. The objective, over time, is to minimize this earnings impact in all interest rate environments and not to attempt to anticipate or time the market. The primary tools to accomplish this are absolute pricing level decisions on both sides of the balance sheet, so as to address the imbedded "basis risk", as well as overt adjustment to the timing of repricing events, so as to address "term risk", as a matter of policy. The modeling used internally consists of 100 basis point and 200 basis point earnings impact estimates. The instruments that the company typically adjusts in this regard are loans, securities held to maturity, federal funds sold and deposit liabilities. The abundance of interest-bearing, liability accounts depicted in the Repricing Schedule on page 7 as repricing within 12 months would tend to lead to a conclusion that bank earnings would expand in a declining interest rate environment such as that which has been experienced thus far in 2001. The actual, historical effect of such rate changes in this market, however, is demonstrably non-linear and the earnings impact of that change in this instance is more likely to be zero to slightly negative. The company does not invest in derivative financial instruments such as futures, forwards, swaps, options and other financial instruments with similar characteristics and there is negligible direct risk of adverse impacts resulting from changes in foreign currency exchange rates, commodity prices or prices of equity securities. (Please see Repricing Schedule, P-7 and Investment Securities, P-8) (6) INTEREST RATE SENSITIVITY MANAGEMENT Table 3 - REPRICING SCHEDULE 6-30-01

* Does not include $945m in nonaccruing loans or overdrawn demand deposits of $22m ** Does not include $24m in Federal Reserve Bank stock (7) INVESTMENT SECURITIES TABLE 4

(1) Securities which the Bank has the ability and intent to hold to maturity. These securities are stated at cost, adjusted for amortization of premiums and accretion of discounts, computed by the interest method. Because securities are purchased for investment purposes and quoted market values fluctuate during the investment period, gains and losses are recognized upon disposition or at such time as management determines that a permanent impairment of value has occurred. Cost of securities sold is determined on the specific identification method. (2) Securities that the bank may sell in response to changes in market conditions or in the balance sheet objectives of the bank. Securities in this category will be reported at fair market value. Unrealized gains or losses (net of tax) will be reported as a separate item in the shareholder's equity section of the balance sheet. Adjustments will be recorded at least quarterly. (8) CAPITALIZATION: All capital ratios increased during the first half of 2001, a result of retained earnings growth that far exceeded asset growth performance. (Please see Table 5, P-9) Table 5 - CAPITAL

RESULTS OF OPERATIONS NET INTEREST INCOME Net interest income was up from prior year levels in both the three and six month periods, a result of both increased interest revenue and decreased interest expense. The increase in loan interest revenue was largely volume driven, where the decrease in interest expense was both volume and rate driven. When annualized and expressed as a percentage of period-end, interest bearing assets, net interest income was 4.28%, compared with 3.59% for the prior year period. (Please see Balance Sheet, P-1 and Statement of Income, P-2) OTHER INCOME AND EXPENSE The provision for loan losses for the first half of 2001 was markedly lower than in the prior year period, primarily due to a $111m charge-off experienced in the year-ago period. Non-interest income in the current period was up significantly from the prior year period, primarily due to a non-recurring late charge of approximately $74m realized in June of 2001. Savings in expenditures related to legal fees and advertising were more than offset by increased expenses for outsourced computer and item processing services. (Please see Statement of Income, P-2) (9) PART II OTHER INFORMATION Item 1. LEGAL PROCEEDINGS not applicable Item 2. CHANGES IN SECURITIES not applicable Item 3. DEFAULTS UPON SENIOR SECURITIES not applicable Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS not applicable Item 5. OTHER INFORMATION not applicable Item 6. EXHIBITS AND REPORTS ON FORM 8-K a). Exhibits none b). No reports on Form 8-K have been filed during the quarter for which this report was filed. (10) 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. THE REPUBLIC CORPORATION Date: July 20, 2001 /s/ J. Ed Eisemann, IV -------------------------- Chairman of the Board Date: July 20, 2001 /s/ Catherine G. Eisemann -------------------------- Director (11)

REPUBLIC CORP /TX/ 10-Q