10-Q 1 a2062434z10-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 Nine Months Ended September 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 NONE ---- 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 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 September 30, 2001 COMMON STOCK, $1.00 PAR VALUE Shares 356,844 ----------------------------- ------- Outstanding at Sept. 30, 2001, (excluding 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 September 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 in the same range as in recent time periods and is reflective of credits past due 30 days or more, or loans troubled in some other manner to the extent that management has deemed non-accrual status appropriate. If the payments on a problem loan remain current for at least one quarter or there is confirmation that identified, structural weaknesses have been effectively mitigated, the loan will be considered for accrual status. The restructured total consists of one loan receiving non-standard terms due to business difficulty. Foreclosed real estate and repossessed autos have increased over year-end 2000 levels and is partially reflective of some deterioration in the local economy.

5 SOURCES AND USES OF FUNDS Because of a robust, rate driven increase in deposits during the third quarter of 2001, year-to-date cash flow matched year-ago levels ($12,152,702 vs $11,594,751). Unlike the year-ago period, however, was the modest ($2,557,143) level of loan growth in the year-to-date, 2001 period compared with $14,397,257 in the corresponding 2000 period. An economic slowdown in the bank's market is, in the opinion of management, the cause for the slow loan growth and the concurrent increase ($13,829,359) in cash and cash equivalents. (Please see Statement of Cash Flows, P-3) LIQUIDITY The total of cash and due from banks, readily marketable securities and federal funds sold stood at approximately 35% of total liabilities at September 30, 2001, compared with 32% at December 31, 2000. The increase was a result of a modest growth in loans during 2001 coupled with a robust growth in liquid assets during the same period. (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 with 3 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 se Repricing Schedule, P-7 and Investment Securities, P-8) 6 INTEREST RATE SENSITIVITY MANAGEMENT

* Does not include overdrawn demand deposits of $93m ** 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 lease quarterly. 8 CAPITALIZATION: The risks based capital ratios increased noticeably during the first nine months of 2001, principally due to the disproportionately large growth in low-risk, money market assets versus higher risk, loan assets. The growth in Tier 1 leverage was much smaller as retained earnings growth only managed to keep pace with asset growth during the nine month period. (Please see table 5, P-9)

*Estimate RESULTS OF OPERATIONS NET INTEREST INCOME Total interest income for the nine months ended September 30, 2001 was only slightly higher than in the corresponding period in 2000 and slightly lower in the three month period ended on the same date. This is reflective of the almost unprecedented decline in market interest rates during 2001 and the effect of same on revenue streams by virtue of repricing. The interest expense incurred on deposits was lower in the current three and nine month periods for the same reason and resulted in improved net interest income in both periods for 2001. (Please see Balance Sheet, P-1 and Statement of Income, P-2) OTHER INCOME AND EXPENSE The provision for loan loss expense in the first nine months of 2001 was lower than the 2000 period due to a large ($111M) charge-off taken in the latter period. The third quarter of 2001, however, had a higher provision than the 2000 period, a result of deteriorating economic conditions in the 2001 time frame. Year-to-date, non-interest income was comparable to the year-ago period but the three month experience was demonstrably lower due to the reversal of an incorrect late charge on a large agricultural credit.. With the exception of FDIC insurance premiums, advertising costs and legal fees, all non-interest expense categories were materially higher in the year-to-date 2001 period in comparison with the same period in 2000. Growth phenomena, coupled with enhanced (expensive) operating systems caused these increases. (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: October 12, 2001 /S/ J. Ed Eisemann, IV -------------------------- Chairman of the Board Date: October 12, 2001 /S/ Catherine G. Eisemann -------------------------- Director 11

REPUBLIC CORP /TX/ 10-Q