10-Q 1 a2092899z10-q.txt 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, 2002. 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, 2002 COMMON STOCK, $1.00 PAR VALUE Shares 356,844 ----------------------------- -------- Outstanding at Sept. 30, 2002, (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, 2002 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, 2001. 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 Loans placed on non-accrual are up significantly from the year-end, 2001 level, a result of past due status and associated economic difficulties related to two low six figure loans together with a larger number of smaller credits. Presently, approximately 37% of the total is contractually past due 30 days or more, the remainder paying as agreed or past due to a lesser extent. Most typically, the bank collects interest on a cash basis when payments are received on non-accrual loans and they are only placed back on accrual status when the outlook has materially improved and payments have been made as agreed for at least two quarters. The restructured total consists of 11 smaller consumer loans which presently have modified terms necessitated by financial difficulty. (Please see Table 1, PROBLEM ASSETS) Slowing loan demand and an accelerating refinancing trend have caused a year-to-date reduction in total loans of $3,485m. During the same time frame, commercial real estate loans fell $6,263m, 1-4 family home loans increased $2,022m, commercial and industrial loans increased $1,138m and installment loans fell $610m. (Please see Table 2, LOAN CONCENTRATIONS) TABLE 1 PROBLEM ASSETS

TABLE 2 LOAN CONCENTRATIONS

5 SOURCES AND USES OF FUNDS 2002 has been characterized by a significant accumulation of cash and cash equivalents. The combined effect of money generated from operations, maturing investments, loan payoffs, and increasing deposits resulted in an increase of $19,544,245 in cash and cash equivalents. This compares with an increase of $13,829,359 in the prior year period. (Please see Statement of Cash Flows, P-3) LIQUIDITY The accumulation of cash equivalents has caused a direct and significant increase in the bank's ability to respond to withdrawal and loan requests. At September 30, 2002, the bank's holdings of cash and due from banks, readily marketable securities and federal funds sold totaled approximately 44% of total liabilities. This contrasts with 38% at year-end, 2001, and 35% at the end of the year-ago 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 400 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. Based on current repricing structure, it is anticipated that the company has sufficient tools in place to minimize or eliminate any adverse earning impact caused by interest rate change. 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 of prices of equity securities. (Please see Repricing Schedule, P-7 and Investment Securities, P-8) 6 INTEREST RATE SENSITIVITY MANAGEMENT Table 3 - REPRICING SCHEDULE 9-30-02

* Does not include overdrawn demand deposits of $13 thousand or $103 thousand in overdraft loans ** Does not include $24 thousand 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 decline in high risk assets, i.e. payoffs of loans other than home loans, together with the placement of those funds and all funds from deposit growth into lower risk assets, i.e. Federal Funds sold and home loans, has caused a material increase in risk-based capital ratios. The increase in the Tier 1 leverage ratio was more modest and was a result of retained earnings growth keeping pace with average asset growth. (Please see Table 5, CAPITAL) TABLE 5 - CAPITAL

RESULTS OF OPERATIONS NET INTEREST INCOME Net interest income in both of the current three and nine month periods are comparable with the 2001 periods. Continual downward adjustments to funding cost has been and will likely continue to be the primary near term method of adapting to downward loan repricing and investment maturities. This will, at best, result in a continuation of the current level of performance. A significantly better level of performance awaits either a more attractive yield curve in the money markets or a material increase in loan demand. (Please see Statement of Income, P-2) OTHER INCOME AND EXPENSE The bank's year-to-date performance in 2002 continues to show the negative effect of a $140m higher year- to-date provision for loan losses. This is a by-product of higher levels of nonperforming loans, a slower economy compared with 2001 and conservative classification criteria within the bank. Year-to-date net losses for 2002 stand at $189m, compared with $171m in the 2001 period. Fee increases that began to have an effect in the third quarter of 2002 will offset the effect of lower 2002 transaction volume, which had held back fee based revenue growth in the first half. Efficiencies realized in the third quarter of 2002 are helping to bring year-to-date expenses more in line with 2001 levels. Lower transaction volume, a phenomenon tied to a slowing economy, is also partially responsible for the modest increase in expenses over 2001 levels. (Please see Statement of Income, P-2) Management is not aware of any regulatory recommendations or other trends, events or uncertainties that would have or would reasonably be likely to have a material effect on liquidity, capital resources or operations of the company. Estimates and forward-looking statements are included in this discussion and as such are subject to certain risks, uncertainties and assumptions. These statements are based on current financial and economic data and management's expectations for the future. Actual results could differ materially from management's current expectations. Factors that could cause material differences in actual operating results include, but are not limited to, loan demand, the ability of the customer to repay loans, consumer saving habits, employment cost and interest rate changes. 9 CERTIFICATION I have reviewed this report, and based upon my knowledge, the report does not contain any untrue statement of a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading. Based on my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition and results of operations of The Republic Corporation and it's subsidiary, The First National Bank in Trinidad, as of September 30, 2002 and for the periods presented in the report. I am responsible for establishing and maintaining disclosure controls and procedures for the Republic Corporation and it's subsidiary, The First National Bank in Trinidad. I have designed these controls and procedures to ensure that material information is made known to me, particularly during the period in which this report is being prepared. I have evaluated the effectiveness these disclosure controls and procedures as of a date within 90 days preceding the date of this report. I have presented in the report my conclusions about their effectiveness based upon my evaluation as of that date. I have disclosed to the company auditor and the audit committee of the board of directors all significant deficiencies in the design or operation of internal controls which could adversely affect the company's ability to record, process, summarize and report financial data and have identified for the company's auditors any material weaknesses in internal controls and any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal controls. I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ J. Ed Eisemann, IV Chairman of the Board, Director, September 30, 2002 ---------------------- Chief Executive Officer, ------------------ Financial and Accounting Officer Date 10 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. 11 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 18, 2002 /s/ J. Ed Eisemann, IV -------------------------- Chairman of the Board Date: October 18, 2002 /s/ Catherine G. Eisemann -------------------------- Director 12

REPUBLIC CORP /TX/ 10-Q