-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WAgAHxQcv+goKBajGXDtz/JI6u1ct842ZvKbOYq0DkB5pr7v3y/MxEDLEeqhOkNb gkJph6zlmEUXsiltLAsL/A== 0000932384-03-000195.txt : 20030701 0000932384-03-000195.hdr.sgml : 20030701 20030701154256 ACCESSION NUMBER: 0000932384-03-000195 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030701 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REPUBLIC CORP /TX/ CENTRAL INDEX KEY: 0000202995 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 740911766 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-08597 FILM NUMBER: 03768017 BUSINESS ADDRESS: STREET 1: 5340 WESLAYAN STREET 2: PO BOX 270462 CITY: HOUSTON STATE: TX ZIP: 77277 BUSINESS PHONE: 7136229727 MAIL ADDRESS: STREET 1: 5340 WESLAYAN P O BOX 270462 STREET 2: 5340 WESLAYAN P O BOX 270462 CITY: HOUSTON STATE: TX ZIP: 77277 10-K/A 1 a510805.txt 12-31-02 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A Amendment No. 1 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2002 Commission File Number 0-8597 THE REPUBLIC CORPORATION (Exact name of registrant as specified in its charter) TEXAS 74-0911766 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5340 Weslayan, P.O. Box 270462 Houston, Texas 77277 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (713) 993-9200 Securities registered pursuant to section 12(b) of the Act: Title of Each Class Name of Each Exchange On Which Registered ----------------------------------------------------------------------------- None None Securities registered pursuant to Section 12(g) of the Act: 750,000 shares Common Stock, par value $1.00 per share, of which 356,844 are outstanding, including 23,119 held in treasury. (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, anD will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes |_| No |X| State the aggregate market value for the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter. $624,115 as of June 30, 2002 DOCUMENTS INCORPORATED BY REFERENCE NONE THE REPUBLIC CORPORATION FORM 10-K/A EXPLANATORY NOTE We are filing this Amendment No. 1 to The Republic Corporation's Annual Report on Form 10-K, filed on March 21, 2003, to restate in their entirety Items 1, 6, 7, 8, 14 and 15 in order to restate our financial statements for the years ended December 31, 2002, 2001 and 2000 and make the corresponding adjustments throughout the Form 10-K. Other minor typographical changes have been made to Item 1 and Item 7 and certain corrections were made to the title of one of our officers in Items 10 and 11. For completeness purposes, the full Form 10-K is filed herein; however, no other portions of the original Form 10-K have been amended. As previously disclosed, on March 28, 2003, Dixon, Waller & Co., Inc. ("Dixon Waller") declined to stand for re-election as our independent auditor. The reports of Dixon Waller on our financial statements for the fiscal years ended December 31, 2002 and 2001 did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. Effective March 31, 2003, we engaged BKD, LLP as our new independent auditor. The restatement of our financial statements relates to deferred income taxes which had not been properly recorded in prior periods. See Note 2 to the Consolidated Financial Statements and the discussions below for further information. We plan to file as soon as reasonably practicable amendments to our Form 10-Ks for the fiscal years ended December 31, 2001 and 2000 and amendments to the Form 10-Qs filed in these fiscal years to restate the financial statements included in these reports to reflect the correct treatment of deferred income taxes and make related adjustments necessary as a result of such corrected treatment. This amendment does not reflect events occurring after the filing of the original Annual Report on Form 10-K filed on March 21, 2003, or modify or update the disclosures presented in the original Form 10-K, except to reflect the revisions described above and in Note 2 to the Consolidated Financial Statements. THE REPUBLIC CORPORATION FORM 10-K/A INDEX PAGE IMPORTANT TERMS..............................................................1 PART I.......................................................................1 ITEM 1. Business...................................................1 ITEM 2. Properties................................................12 ITEM 3. Legal Proceedings.........................................12 ITEM 4. Submission of Matters to a Vote of Securities Holders.....12 PART II.....................................................................12 ITEM 5. Market for The Republic Corporation's Stock...............12 ITEM 6. Selected Financial Data...................................13 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................14 ITEM 7A Quantitative and Qualitative Disclosures About Market Risk......................................................20 ITEM 8. Financial Statements (Restated) and Supplementary Data....21 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................42 PART III....................................................................43 ITEM 10. Directors and Executive Officers of The Republic Corporation...............................................43 ITEM 11. Executive Compensation....................................44 ITEM 12. Security Ownership of Certain Beneficial Owners and Management................................................45 ITEM 13. Certain Relationships and Related Transactions............45 ITEM 14. Controls and Procedures...................................46 PART IV.....................................................................47 ITEM 15. Exhibits, Financial Statement, Schedules, and Reports on Form 8-K...............................................47 SIGNATURES..................................................................49 CERTIFICATIONS..............................................................50 SUPPLEMENTAL INFORMATION....................................................50 i IMPORTANT TERMS "Registrant" - The Republic Corporation, a Texas Corporation whose sole purpose is the holding and managing of The First National Bank in Trinidad. "Bank" - The First National Bank in Trinidad is a commercial bank located in Trinidad, Colorado and Walsenburg, Colorado, also referred to as the "Subsidiary Bank". "FRB" - The Board of Governors of the Federal Reserve System, the Agency which has responsibility for administering the Bank Holding Company Act of 1956, as amended. PART I ITEM 1. Business. THE REPUBLIC CORPORATION GENERAL. On January 11, 1955, the Registrant was chartered under the laws of the State of Texas as Columbia General Investment Corporation, conducting business in mortgage banking until 1963. In 1960, Columbia General Investment Corporation acquired The Republic Corporation. Shortly thereafter, the name Columbia General Investment Corporation was changed to The Republic Corporation. Also in 1960, the Registrant acquired 75% of the outstanding stock of the First National Bank in Trinidad, Colorado. In 1961, an additional 23% of the stock was purchased, and since then, only qualifying shares for directors and officers of the Bank have been held by other than the Registrant. Since discontinuing mortgage banking operations in 1963, the Registrant has carried on no significant operations other than as an advisor to the Bank. In this advisory position, the Registrant coordinates general policies and activities, and assumes primary responsibility for all major decisions of the Bank. SUPERVISION AND REGULATION. The Registrant is a registered bank holding company under the Bank Holding Company Act of 1956 (the "Act"), and is subject to the supervision of, and regulation by, the Board of Governors of the Federal Reserve System (the "Board"). Under the Act, a bank holding company may engage in banking, managing or controlling banks, furnishing or performing services for banks it controls, and conducting activities that the Board has determined to be closely related to banking. The Registrant must obtain approval of the Board before acquiring control of a bank or acquiring more than 5 percent of the outstanding voting shares of a company engaged in a "bank-related" business. Under the Act and state laws, the Registrant is subject to certain restrictions as to states in which the Registrant can acquire a bank. National banks are subject to the supervision of, and are examined by the Comptroller of the Currency. State banks are subject to the supervision of the regulatory authorities of the states in which they are located. The subsidiary bank of the Registrant is a member of the Federal Deposit Insurance Corporation, and as such is subject to examination thereby. In private, the primary federal regulator makes regular examinations of the subsidiary bank subject to its regulatory review or participates in joint examinations with other federal regulators. Areas subject to regulation by federal and state authorities include the allowance for credit losses, investments, loans, mergers, issuance of securities, payment of dividends, establishment of branches and other aspects of operations. BUSINESS. The Registrant is a holding company whose sole business purpose is to hold the stock of the Bank. The operation of the Bank is described as follows: 1 FIRST NATIONAL BANK IN TRINIDAD SUBSIDIARY BANK BUSINESS. OPERATION OF THE SUBSIDIARY BANK. The Board of Directors and officers of the subsidiary bank are responsible for its operation. However, the Republic Corporation, as the controlling stockholder, coordinates the establishment of goals, objectives and policies for the entire organization, assists the subsidiary bank in the attainment of these objectives and monitors adherence to established policies. The company also monitors adherence to lending and accounting policies, budgetary goals and long-range plans. The bank provides the following services: COMMERCIAL BANKING SERVICES. The Bank provides a broad range of financial services to a diversified group of commercial, industrial and financial customers in Southern Colorado. Services provided to commercial customers include short and medium term loans, revolving credit arrangements, trade financing, energy related financing, real estate construction lending, capital equipment financing and letters of credit. CONSUMER SERVICES. The Bank provides a diverse range of personal services to individuals including savings and time deposit accounts, installment lending, debit cards, checking accounts, N.O.W. accounts, mortgage loans, safe deposit facilities, IRA services, money market deposit accounts, and automatic teller facilities. EMPLOYEES. The Bank had 75 full time equivalent employees on December 31, 2002. 2 COMPETITION. The Bank's primary market area is Trinidad, Colorado, Walsenburg, Colorado, Raton, New Mexico and the surrounding communities. In this market are two other bank charters, five branch offices, and a savings and loan association. The deposits of the Bank are larger than those of the savings and loan and larger than those of each of the other bank offices. The Bank competes with these institutions in obtaining new deposits, making loans, and providing additional banking services. The principal methods of competition in the industry are price (i.e. interest rates and fees) and service. Inasmuch as rate and fee structures at all local competitors are somewhat similarly constrained by net interest income objectives, competitive pressure and the restraint that must necessarily be exercised in smaller communities of modest means, the primary arena for competition is service. Community banks are uniquely able to provide the type of personal service that is typically of greatest value in smaller, less populated markets such as Las Animas, Huerfano and Colfax Counties. The ability of the bank to successfully market this type of service delivery, along with a reasonable selection of more modern and less personal means of access, will determine its ultimate competitive success. MONETARY POLICY. The earnings and growth of the banking industry and of the Bank are affected not only by general economic conditions, but also by the credit policies of monetary authorities, particularly the Federal Reserve System. An important function of the Federal Reserve System is to regulate the national supply of bank credit in order to combat recession and curb inflationary pressures. Among the instruments of monetary policy used by the Federal Reserve System to implement these objectives are open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth of bank loans, investments and deposits and may also affect interest rates charged on loans or paid for deposits. The monetary policies of the Federal Reserve System have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. Because of changing conditions in the national and international economy and in the money markets, and as a result of actions by monetary and fiscal authorities, including the Federal Reserve System, interest rates, credits and availability and deposit levels may change due to circumstances beyond the control of The Republic Corporation or the Bank. STATISTICAL DATA. The following sets forth certain statistical data regarding the Republic Corporation. I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY: INTEREST RATES AND DIFFERENTIAL BALANCE SHEET ANALYSIS. The following three tables present the consolidated monthly average balance sheet, taxable equivalent interest revenue, interest expense, and average yields and rates. 3 Interest income on non-taxable investment securities has been adjusted to reflect the tax benefit of tax exempt income at a marginal rate of 38% for each year presented. Non-accruing loans are included for purposes of the analysis of interest earnings on loans.
TABLE #1 Year Ended December 31, 2002 Average Interest Yield/ (Dollars in Thousands) Balance Rev./Exp. Rate ----------- ---------- ------- ASSETS Investment securities: Taxable....................... $ 26,292 $ 1,168 4.4% Tax exempt.................... 2,295 189 8.2% Loans .......................... 110,688 9,237 8.3% Less: Reserve for loan loss .. (1,751) Funds sold...................... 36,194 590 1.6% ---------- --------- Total Earnings Assets......... 173,718 $11,184 6.4% ---------- ========= Cash and due from banks......... 5,649 Other assets.................... 5,862 ---------- TOTAL ASSETS.................. $185,229 ========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing demand and money market deposits................. $ 53,229 $ 785 1.5% Savings deposits-Other.......... 9,590 134 1.4% Time deposits...................... 82,733 2,946 3.6% ---------- --------- TOTAL INTEREST BEARING LIABILITIES................... 145,552 3,865 2.7% ---------- --------- NET INTEREST REVENUE............... $ 7,319 3.7% ========= NET INTEREST REVENUE TO EARNING ASSETS 4.2% Demand deposits (non-interest bearing)........................ $ 21,622 Other liabilities............... 1,467 Stockholders' Equity 16,588 ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $185,229 ==========
4
TABLE #2 (Monthly) Year Ended December 31, 2001 Average Interest Yield/ (Dollars in Thousands) Balance Rev./Exp. Rate ----------- ---------- ---------- ASSETS Investment securities: Taxable...................... $ 25,550 $ 1,518 5.9% Tax exempt................... 2,295 189 8.2% Loans .......................... 116,050 10,541 9.1% Less: Reserve for loan loss.. (1,607) Funds sold...................... 16,879 610 3.6% ---------- --------- Total Earning Assets......... 159,167 $12,858 8.1% ---------- ========= Cash and due from banks......... 5,269 Other assets.................... 5,887 ---------- TOTAL ASSETS $170,323 ========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing demand and money market deposits................. $ 46,317 $ 1,403 3.0% Savings deposits - Other ...... 9,005 216 2.4% Time deposits................... 76,097 4,108 5.4% ---------- --------- TOTAL INTEREST BEARING LIABILITIES.................. 131,419 5,727 4.4% ---------- --------- NET INTEREST REVENUE............... $ 7,131 3.7% ========= NET INTEREST REVENUE TO EARNING ASSETS 4.5% Demand deposits (non-interest bearing)........................ $ 21,906 Other liabilities............... 1,619 Stockholders' equity............ 15,379 ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $170,323 ==========
5
TABLE #3 (Monthly) Year Ended December 31, 2000 Average Interest Yield/ (Dollars in Thousands) Balance Rev./Exp. Rate ----------- ---------- ------- ASSETS Investment securities: Taxable...................... $ 27,087 $ 1,765 6.5% Tax exempt................... 73 6 8.2% Loans .......................... 108,445 9,615 8.9% Less: Reserve for loan loss.. (1,441) Funds sold...................... 21,752 1,356 6.2% ---------- --------- Total Earning Assets......... 155,916 $12,742 8.2% ---------- ========= Cash and due from banks......... 4,940 Other assets.................... 4,850 ---------- TOTAL ASSETS................. $165,706 ========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing demand and money market deposits................. $ 45,091 $ 1,925 4.3% Savings deposits - Other ...... 9,037 291 3.2% Time deposits................... 74,905 4,331 5.8% ---------- --------- TOTAL INTEREST BEARING LIABILITIES.................. 129,033 6,547 5.1% ---------- --------- NET INTEREST REVENUE............... $ 6,195 3.1% ========= NET INTEREST REVENUE TO EARNING ASSETS 4.0% Demand deposits (non-interest bearing)........................ $ 21,487 Other liabilities............... 1,582 Stockholders' equity............ 13,604 ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $165,706 ==========
6 The following table presents statistical information regarding the components of net interest income of the Registrant and an analysis of the changes in net interest income due to changes in volume and rates. Analysis of Changes in Components of Net Interest Income (Dollars in thousands)
TABLE #4 2002 vs 2001 2001 vs 2000 ------------------------------ ------------------------------ Yield/ Yield/ Volume Rate Total Volume Rate Total -------- --------- --------- -------- -------- -------- Increase (decrease) in interest income on: Loans .................. $(444) $ (860) $(1,304) $ 690 $ 236 $ 926 Investment securities... 31 (381) (350) 40 (173) (133) Federal funds sold...... 106 (125) (19) (122) (624) (746) -------- --------- --------- -------- -------- -------- (307) (1,366) (1,673) 608 (561) 47 -------- --------- --------- -------- -------- -------- Increase (decrease) in interest expense on: Demand deposits, MMDA... 53 (646) (593) 33 (555) (522) Savings................. 3 (110) (107) (1) (74) (75) Time deposits........... 195 (1,357) (1,162) 64 (287) (223) -------- --------- --------- -------- -------- -------- 251 (2,113) (1,862) 96 (916) (820) -------- --------- --------- -------- -------- -------- Net interest income..... $(558) $ 747 $ 189 $ 512 $ 355 $ 867 ======== ========= ========= ======== ======== ========
The volume/rate variance was allocated to rate based on the percentage increase or decrease in relation to the total previous year rates with the remainder allocated to volume. 7 II. INVESTMENT PORTFOLIO The following table shows the classification of investment securities with fixed maturities held at December 31, in each of the past three years (including investments available for sale):
TABLE #5 December 31 (Dollars in thousands) 2002 2001 2000 - -------------------------------------------------------------------------------- U.S. Treasury Securities................ $ - $ - $ - Government Sponsored Agencies........... 20,175 30,344 29,666 US States and Political Subdivisions.... 2,295 2,295 2,295 Other bonds, notes and securities....... 24 24 24 --------- --------- --------- TOTAL.............................. $ 22,494 $ 32,663 $ 31,985 ========= ========= =========
The following is a table which shows the maturity distribution of investment securities and the average taxable equivalent yield by each range. Dollars presented are in thousands.
TABLE #6 U.S. U.S. States Government Federal Treasury and Political Sponsored Reserve Securities Subdivisions Agencies Bank Stock --------------- ---------------- ----------------- --------------- Amount/Yield Amount/Yield Amount/Yield Amount/Yield --------------- ---------------- ----------------- --------------- Within one year....... $ - -% $ - -% $10,085 4.2% $ - -% After one year through five years......... - -% - -% 10,090 3.4% - -% After five years through ten years.......... - -% 653 7.8% - -% - -% After ten years....... - -% 1,642 8.4% - -% 24 7.5% ----- ------ ------- ------ -------- ------- ------ ------ TOTAL.............. $ - -% $2,295 8.2% $20,175 4.6% $ 24 7.5% ===== ====== ======= ====== ======== ======= ====== ======
III. LOAN PORTFOLIO Domestic loans by category are listed below (dollars in thousands):
TABLE #7 December 31, December 31, 2002 2001 ------------ ------------ Commercial..................... $ 9,676 $ 7,424 Agricultural ................. 1,244 1,754 Real Estate - Construction..... 3,672 3,262 Real Estate - Mortgage......... 83,928 89,617 Installment loans to Individuals.................... 10,840 11,233 ---------- ---------- TOTAL..................... $ 109,360 $ 113,290 ========== ==========
There were no foreign loans at December 31, 2002 or December 31, 2001. 8 Commercial, agricultural and real estate - construction loans at December 31, 2002 are presented by maturity as follows (dollars in thousands):
TABLE #8 Due After One Year Due Due in Through After One Year Five Five or Less Years Years ---------- ---------- --------- Commercial: Fixed rates ........... $ 2,193 $ 45 $ - Adjustable rates....... 3,825 3,559 54 Agricultural: Fixed rates............ 1 178 351 Adjustable rates....... 555 148 11 Real Estate - Construction: Fixed rates............ 157 27 2,913 Adjustable rates....... 206 369 -
Within the loan portfolio are loans which are considered non-performing. Included in the table below are past due loans which are defined as past due (1) single payment notes - these are considered past due 15 days or more after maturity; (2) single payment loans, with interest payable at stated intervals, and demand notes - these are considered past due when an interest payment is due and unpaid for 15 days; (3) consumer, mortgage, or term business installment loans - these loans are past due in whole after one installment is due and unpaid for 30 days or one month. When an installment payment is past due, the entire unpaid balance is past due; (4) overdrafts are considered past due when not paid in 15 days. Such loans remain in past due status until all past due payments are made.
TABLE #9 December 31 (Dollars in thousands) 2002 2001 - --------------------------------------------------------------------- Non-accrual loans.............................. $2,304 $ 1,007 Loans which are contractually past due 90 days or more as to interest or principal, but have not been put on a non-accrual basis (See discussion below)................ - - Loans restructured to provide concessions to the borrower in order to maximize the recovery possibility of the bank .............. $ 256 $ 81
There was no interest foregone on restructured loans in 2001. Recognized income was $6 thousand. Interest recognized in 2002 was $23 thousand with foregone interest of $3 thousand. Past due and renegotiated loans as described above are defined as non-performing loans for purposes of this discussion. Non-accrual loans are defined as loans on which, in the opinion of management, the collection of interest has become uncertain. Management places loans on non-accrual status when loans become past due sixty days or sooner if, in their judgment, the ability of the borrower to service the debt has become impaired. 9 Interest is not taken into income unless received in cash or until such time as the borrower demonstrates the ability to pay interest and principal. Placing a loan on non-accrual status for the purpose of income recognition is not by itself a reliable indicator of potential loss of principal. Other factors, such as the value of the collateral securing the loan and the financial condition of the borrower, serve as more reliable indicators of potential loss. Management has no information that would indicate that any loans on hand at December 31, 2002 that are not currently included as non-performing loans have possible credit problems that would cause serious doubts as to their ability to comply with the current repayment terms or contain uncertainties which would have a material impact on future operations or financial position. IV. SUMMARY OF LOAN LOSS EXPERIENCE The table below presents selected information analyzing the allowance for loan losses (dollars in thousands):
TABLE #10 2002 2001 --------- -------- Balance - Beginning of year $ 1,612 $ 1,579 -------- --------- Charge-offs: Commercial............................. 18 70 Agricultural........................... - - Real Estate - Construction............. - - Real Estate - Mortgage................. - 12 Installment loans to Individuals....... 363 226 -------- --------- $ 381 $ 308 -------- --------- Recoveries: Commercial............................. $ 24 $ 20 Agricultural........................... - - Real Estate - Construction............. - - Real Estate - Mortgage................. - 7 Installment loans to individuals....... 87 32 -------- --------- $ 111 $ 59 -------- --------- Net Charge-offs (recoveries)............. $ 270 $ 249 -------- --------- Provision - Charged to operations........ $ 358 $ 282 -------- --------- Balance - End of Year.................... $ 1,700 $ 1,612 ======== ========= Average loan balance outstanding......... $110,688 $ 116,050 ======== ========= Percentage of net charge offs to average loans outstanding........................ .2% .2% ========= =========
The provision for 2001 was lower than in 2000 as non-accrual loans and restructured loans were lower. No loan growth was experienced in 2001. In 2002, the provision was higher than 2001 due to higher non-accrual loans. 10 The allocation of the allowance is as follows (dollars in thousands):
TABLE #11 December 31, 2002 December 31, 2001 ------------------------- ------------------------ Percent of Percent of Loans in Loans in Each Each Category Category to Total to Total Amount Loans Amount Loans ---------- ------------- --------- ------------ Commercial................ $ 10 8.9% $ 9 6.6% Agricultural.............. 1 1.1% - 1.5% Real Estate- Construction.......... - 3.4% - 2.9% Real Estate-Mortgage...... 481 76.7% 329 79.1% Installment Loans......... 193 9.9% 161 9.9% Unallocated............... 1,015 N/A 1,113 N/A --------- ---------- -------- --------- $1,700 100% $1,612 100% ========= ========== ======== =========
The large, unallocated allowance for loan losses is being maintained in recognition of several risk factors inherent in the bank's loan portfolio. Foremost among these is the large concentration of loans of all types secured by real property. While the vast majority of these loans are performing and not in need of an allocated allowance, there has been significant growth in this area in the last decade and a noticeable increase in appraised values has occurred. Should interest rates rebound from the current, historic lows, the probability exists that real estate activity, and property values, will be negatively affected. Also, as seen in Table 10, on Page 10, recent loan losses have been highly concentrated in the installment loan area. Until more stringent underwriting controls instituted by management can have effect, it is deemed prudent by management to maintain reserves in excess of the specific allocation. At the time of this writing, estimated charge-offs for the coming year are not expected to exceed $250,000 and will likely be concentrated in the installment area. V. DEPOSITS The average amount of deposits and the average rates paid are presented in the balance sheet analysis shown previously. At December 31, 2002, there existed outstanding time certificates of deposit in amounts of $100,000 or more of $24,251,094. The deposits by time remaining until maturity were (dollars in thousands):
TABLE #12 3 months or less $ 9,640 Over 3 through 6 months 7,507 Over 6 through 12 months 5,118 Over 12 months 1,986 --------- $24,251 =========
As required by the Monetary Control Act of 1980, the reserve balance held against deposits at December 31, 2002 was $2,458,000. 11 VI. RETURN ON EQUITY AND ASSETS The following table shows the return on average assets, return on average equity, dividend payout ratio, and ratio of average equity to average assets for the periods indicated.
TABLE #13 For the year ended December 31 2002 2001 2000 - ----------------------------------------------------- ------- ------- ------- Return on Assets (Net income divided by average total assets)................................... .7% .7% .7% Return on Equity (Net income divided by average equity)......................................... 7.7% 8.2% 9.0% Dividend Payout Ratio (Dividends declared per share divided by net income per share).......... 0% 0% 0% Equity to Assets Ratio (Average equity divided by average total assets............................ 9.0% 9.0% 8.2%
ITEM 2. Properties. The subsidiary Bank owns a building and annex at 100 East Main Street, and the motor-bank facility, 122 East First Street, in which the banking operations are carried on in Trinidad, Colorado. Approximately one-third (1/3) of the building is utilized by the bank. The remaining space is leased to other businesses. Additionally, a bank building in Walsenburg, Colorado was acquired in 1992. Banking operations at this location began in October of 1993. In 1996, two automatic teller locations were added. One is in Trinidad and the other is in La Veta, Colorado. A facility with banking operations and automated tellers was located in a Trinidad retail superstore and became operational in 1998. Also, an office space in Raton, New Mexico was leased and remodeled in 1999 for the purpose of conducting loan and deposit production activities. A ground lease near by the Raton facility was obtained and upon it was constructed a drive-thru automatic teller machine and automated night depository. A property adjacent to the 100 E Main Street building was acquired for future expansion in 2001. Properties held as other real estate owned consist of real property that has been acquired by the Bank through foreclosure on real estate pledged as collateral on loans made by the Bank. ITEM 3. Legal Proceedings. Not applicable. ITEM 4. Submission of Matters to a Vote of Securities Holders. Not applicable. PART II ITEM 5. Market for The Republic Corporation's Stock. (a) The Articles of Incorporation do not restrict the marketability of the Republic Corporation stock. However, due to the limited number of shares outstanding, it is not anticipated that an active market for the shares will develop. Shares may be purchased by The Republic Corporation, but there is no assurance that the Corporation will do so. (b) There were approximately 1,750 shareholders as of the date of this annual report. Holders of Republic Corporation shares are entitled to their pro-rata share of any dividends paid on the shares. However, because the Corporation has no income other than distributions received on its equity in The First National Bank in Trinidad, Colorado, its ability to pay dividends depends upon its receipt of Bank distributions. Decisions as to the declaration and payment of dividends, subject to the availability of funds for this purpose, rest exclusively with The Republic Corporation Board of Directors. 12 (c) No dividends have been declared in 2002 or 2001 and management has no intention to declare dividends in the immediate future. ITEM 6. Selected Financial Data. The following table presents certain key financial information.
TABLE #14 Selected Financial Data Year Ended December 31 (Dollars in thousands) 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------- Interest Income................... $11,112 $12,786 $12,739 $10,328 $ 9,683 Interest expense.................. 3,865 5,727 6,547 5,147 4,571 -------- --------- -------- -------- -------- Net Interest Income............. 7,247 7,059 6,192 5,181 5,112 Provision for Loan Losses......... 358 282 314 238 241 -------- --------- -------- -------- -------- Net Interest Income after Provision for Loan Losses........................ 6,889 6,777 5,878 4,943 4,871 Non-Interest Income............... 906 853 825 636 597 Non-Interest Expense: Personnel Expenses.............. 2,605 2,514 2,295 2,277 1,872 Other Expenses.................. 3,187 3,167 2,505 2,315 2,035 -------- --------- -------- -------- -------- Income Before Income Taxes........ 2,003 1,949 1,903 987 1,561 Applicable Income Taxes........... 678 651 653 317 529 -------- --------- -------- -------- -------- Income before Reduction for Minority Interest or Security Gains or Losses.......................... 1,325 1,298 1,250 670 1,032 Less Minority Interest............ 42 39 29 16 24 -------- --------- -------- -------- -------- Net Income........................ $ 1,283 $ 1,259 $ 1,221 $ 654 $ 1,008 ======== ========= ======== ======== ======== Net Income per Common Share (2)... $ 3.85 $ 3.77 $ 3.66 $ 1.96 $ 3.02 ======== ========= ======== ======== ======== Dividends Declared per Common Share (2)....................... $ 0 $ 0 $ 0 $ 0 $ 0 ======== ========= ======== ========= ========
(2) Net income per common share and dividends declared per common share are in actual dollars, not thousands.
Selected Year End Balances: (Dollars in thousands) 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------- Loans...................... $109,360 $113,290 $113,978 $ 98,532 $ 94,569 Total Assets............... 181,944 178,617 165,735 155,996 131,608 Long-Term Debt............. 0 0 0 0 0
13 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. FINANCIAL CONDITION ASSET QUALITY
TABLE #15 December 31 (dollars in thousands) 2002 2001 2000 1999 1998 - -------------------------------------------------------------------------------------- Nonaccrual Loans............... $2,304 $1,008 $1,076 $ 837 $ 351 Past-Due Loans*................ - - 149 - - Restructured Loans............. 256 81 781 1,022 714 -------- -------- -------- -------- -------- Total Problem Loans ......... 2,560 1,089 2,006 1,859 1,065 Foreclosed Assets Real Estate ................. 351 255 38 43 48 In-Substance Foreclosures - - - - - Other........................ - - 17 23 28 -------- -------- -------- -------- -------- Total Problem Assets........ $2,911 $1,344 $2,061 $1,925 $1,141 Total Problem Loans as a Percentage of Total Loans.... 2.3% 1.0% 1.8% 1.9% 1.1% Total Problem Assets as a Percentage of Total Loans and Foreclosed Assets....................... 2.7% 1.2% 1.8% 2.0% 1.2% Reserve Coverage Ratio**....... 66.4% 148.0% 78.7% 74.2% 115.8%
* Past due loans which are still accruing interest but are contractually ninety or more days delinquent as to principal or interest payments. Approximately $110m of the amount shown in 2000 is also included in the restructured total for the same year. ** Allowance for loan losses divided by problem loans 14
TABLE #16 INTEREST RATE SENSITIVITY December 31, 2002 (dollars in thousands) - ------------------------------------------------------------------------ 3 Mo 3-12 1-3 Over Or Less Months Years 3 Years -------- --------- -------- -------- Rate Sensitive Assets (Assets that can be repriced within x months/years) Loans*......................... $14,118 $ 28,674 $ 12,070 $ 54,477 Federal Funds Sold............. 40,750 - - - Taxable Securities**........... - 10,000 10,000 - Municipal Bonds................ - - - 2,295 ------ ------ ------ ------ Total....................... 54,868 38,674 22,070 56,772 ====== ====== ====== ====== Rate Sensitive Liabilities (Liabilities that can be repriced within x months/years) Time Certificates of Deposit 31,410 42,264 8,624 - NOW Accounts .................. 1,827 - - - Super NOW Accounts............. 32,769 - - - Savings Accounts......... 9,988 - - - MMDA Accounts............ 16,048 - - - ------ ------ ------ ------ Total................. 92,042 42,264 8,624 - ====== ====== ====== ====== Interest Rate Sensitivity Gap...................... (37,174) (3,590) 13,446 56,772 Cumulative Interest Rate Sensitivity Gap.......... (37,174) (40,764) (27,318) 29,454
* Does not include $21 thousand in overdrafts. ** Does not include $24 thousand in Federal Reserve Bank Stock. 15 INVESTMENT SECURITIES
TABLE #17 AND FOOTNOTES 1-2 Carrying Unrealized Unrealized Market Value Gains Losses Value ------------ ------------ ------------ ------------ DECEMBER 31, 2002 (1) Held-to-Maturity: U.S. Treasury Securities...... $ - $ - $ - $ - Other......................... 22,470,121 722,733 - 23,192,854 (2) Available-for-Sale Securities Carried at Fair Value: U.S. Treasury Securities...... - - - - Other......................... 24,000 - - 24,000 ----------- ----------- ----------- ----------- 22,494,121 722,733 - 23,216,854 ----------- ----------- ----------- ----------- DECEMBER 31, 2001 (1) Held-to-Maturity: U.S. Treasury Securities...... - - - - Other......................... 32,639,115 397,400 - 33,036,515 (2) Available-for-Sale Securities Carried at Fair Value: U.S. Treasury Securities...... - - - - Other......................... 24,000 - - 24,000 ----------- ----------- ----------- ----------- 32,663,115 397,400 - 33,060,515 ----------- ----------- ----------- ----------- DECEMBER 31, 2000 (1) Held-to-Maturity: U.S. Treasury Securities...... - - - - Other......................... 31,961,129 270,094 - 32,231,223 (2) Available-for-Sale Securities Carried at Fair Value: U.S. Treasury Securities...... - - - - Other......................... 24,000 - - 24,000 ----------- ----------- ----------- ----------- $31,985,129 $ 270,094 $ - $32,255,223 ----------- ----------- ----------- -----------
(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 had 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 the fair market value. Unrealized gains or losses (net of tax) will be reported as a separate item in the shareholders' equity section of the balance sheet. Adjustments will be recorded at least quarterly. 16 ASSET QUALITY Loans placed on non-accrual are up significantly from the year-end, 2001 level, a result primarily of growth in loans with either current or previous past due status. As of December 31, 2002, approximately 25% of the total, non-accrual figure depicted in Table 15 was current on payments, 32% between 1 and 30 days past due, 19% between 30 and 60 days past due, 23% between 60 and 90 days past due and 1% over 90 days past due. Normally, the bank collects interest on a cash basis when payments are made on non-accrual loans and they are usually returned to accrual status following two or more quarters of timely payments. Continuing concern on the part of management regarding future payment prospects will, in some cases, cause a paying loan to remain on non-accrual beyond this time frame. The bank normally places past due loans on non-accrual no later than 60 days past due, with collection activity commencing at 30 days. (Please see Table 15, P-14) Loan losses incurred in 2002 were concentrated in the consumer installment loan area, with net installment charge-offs representing approximately 102% of total, net charge-offs. This is being addressed through the use of second opinion approval on loans of this type. Total net charge-offs for 2002 were up from 2001 levels, both in dollar level ($270 m vs. $240 m) and when expressed as a percentage of average loans outstanding (.24% vs .21%). For this reason, the bank increased the allowance for loan losses account from $1,612 m at year-end, 2001 to $1,700 m at year-end, 2002. Provision expense increased to $358 m in 2002, compared with $282 m in 2001. (Please see Table 10, P-10) The restructured loan total at year-end, 2002 was $256 m, up from $81 m at year-end, 2001. The 2002 figure consisted of 17 credit relationships which were granted modified payments or a lower interest rate due to adverse financial circumstances. This category will remain under upward pressure until economic circumstances improve nationally and in the bank's markets. (Please see Table 15, P-14) The bank experienced negative loan growth of $3,930 m in 2002, a result primarily of an unprecedented pay-down rate on commercial real estate loans. This was tied to increased competition for loans of this type in the bank's markets. Commercial real estate loans declined $7,728 m, or approximately 27%, in 2002. During the same time frame, the bank was able to grow its 1-4 family residential loans by $1,793 m, or approximately 3%. This occurred in spite of unprecedented refinancing, tied to historically low offering rates throughout the year. Real estate loans of all types were approximately 80% of total loans at year-end, 2002, compared with 82% at year-end, 2001. Of the 2002 real estate loan total, approximately 70% was secured by 1-4 family residences, 24% by commercial real estate and .5% by agricultural property. This compares with a year-end, 2001 distribution of 65%, 31% and .5%, respectively. (Please see Table 7, P-8) The economic uncertainty that prevails in the national economy as a result of war worries and concern over further acts of terrorism has also served to dampen the local retail and service sectors. This has occurred in spite of the continuing, positive influence from coal bed methane gas production in Las Animas County, Colorado and to a lesser extent, Colfax County, New Mexico. The severe drought experienced in 2002 has also put a strain on the agriculture and tourism sectors throughout the bank's market and the entire region as well. Finally, the decline in state revenue, primarily in Colorado, has begun to filter down to county and municipal governmental entities, precipitating cutbacks in spending and hiring in those sectors. In the face of all of these negative influences, the housing sector continues to thrive, largely as a result of the enticement of low interest rates and the preference of new arrivals to these communities for the aesthetic qualities of living in an uncluttered and historically interesting portion of the front range of the Rocky Mountains. 17 SOURCES AND USES OF FUNDS The pattern for flow of funds differed markedly in 2002 from the preceding two years. Deposit growth in the current year was only $2,131 m, compared with $11,976 m in 2001 and $8,149 m in 2000. Also, net cash activity in loans for 2002 was a negative $3,532 m, compared with a negative $210 m in 2001 and a positive $15,568 m in 2000. In the two prior years, the bank reinvested all of the proceeds from maturing investments. In the current year, the entire $10,000 m received from matured investments was, along with paid down loan proceeds and deposit gains, placed into cash equivalents. The latter grew $17,816 m in 2002 and $12,102 m in 2001, compared to a decline of $14,065 m in 2000. Causal factors at play in the past three years would include waning demand and increased competition for loans, declining offering rates on deposits and increasing concern on the part of management regarding the possibility of an eventual increase in market interest rates. (Please see Statement of Cash Flows, P 25-26) LIQUIDITY The negative loan growth, coupled with the placement of all deposit growth into liquid asset accounts, has raised the percentage of total liabilities held in cash and due from banks, readily marketable securities and federal funds sold to approximately 42% in 2002, up from approximately 38% in 2001. Current, taxable securities holdings consist of four Federal Home Loan Bank Debentures in par amounts of $5,000,000.00 each. These mature in July and November of 2003 and June and November of 2004. All of these securities were needed to satisfy the year-end, 2002 pledging requirements of the State of Colorado and the Federal Reserve Bank. Management is of the opinion that current liquidity sources in the bank are more than adequate to address the current, anticipated loan demand and withdrawal activity in 2003. (Please see Balance Sheet, P-23 and Note 2, P30-31) MARKET RISK In the ordinary course of business, the bank 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 bank, 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 bank typically adjusts in this regard are loans, securities held to maturity, federal funds sold and deposit liabilities. Based on the current repricing structure, it is anticipated that the bank has sufficient tools in place to minimize or eliminate any adverse earning impact caused by interest rate change. The bank 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 Table 16, P-15 and Table 17, P-16) CAPITAL The bank ended 2002 with estimated Tier 1 and total, risk-based capital ratios of 17.43% and 18.68%, respectively, up from 15.30% and 16.56% in 2001. This is a result of the reduction in 2002 of assets with high risk ratings, i.e. commercial real estate loans, and the concurrent growth in assets with lower risk ratings, i.e. federal funds sold and residential loans. It is also true that the rate of growth in Tier 1 leverage capital in 2002, 8.79%, well exceeded the rate of asset growth, 1.86%. The Tier 1 leverage ratio ended 2002 at an estimated 9.09%, compared with 8.65% at year-end, 2001. (Please see Note 9) 18 RESULTS OF OPERATIONS NET INTEREST INCOME The bank was able to match the net interest income figure achieved in 2001 in the current period by aggressively reducing funding costs, an approach that could have played a role in the modest deposit growth during the same period. The bank has also increased its ability to preserve and possibly grow its net interest income in a rising interest rate environment, an approach that may prove beneficial should the Federal Reserve reverse course on monetary policy. (Please see Table 14, P-13, Tables 1 & 2 P 4-5, Table 4, P-7 and Table 16, P-15) OTHER INCOME AND EXPENSE The bank was able to grow fee income over 2001 levels, in spite of reduced operating and transaction volumes. The primary avenue for this to occur was revised fee calculation structures, and in some cases, higher fees. The bank was also able to accomplish these changes without changing its relative position as a low cost provider in this market. (Please see Statement of Income, P-24) Non-interest expenses grew in a much more modest fashion in 2002, compared with 2001. This category grew approximately 2% in 2002, compared with 18% in 2001. The primary reason for this was the fact that the bank had already absorbed most of the one-time costs associated with a computer conversion and other operations upgrades prior to 2002. It is also true that the bank was better able in 2002 to control the effects of rising health care and other employee benefit and compensation costs. (Please see Statement of Income, P-24) 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. Factors that could cause material differences in actual operating results include, but are not limited to, loan demand, the ability of customers to repay loans, consumer saving habits, employment cost and interest rate changes. 19 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk. Information required by this item is included in ITEM 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. 20 ITEM 8. Financial Statements (Restated) and Supplementary Data. Index to Financial Statements of The Republic Corporation and Subsidiary PAGE Accountant's Report................................... 22 Balance Sheets as of December 31, 2002 and 2001 (Restated).................................... 23 Statements of Income for the three years ended December 31, 2002 (Restated)....................... 24 Statements of Cash Flows for the three years ended December 31, 2002 (Restated)....................... 25-26 Statements of Changes in Stockholders' Equity for the three years ended December 31, 2002 (Restated)......................................... 27 Notes to Financial Statements......................... 28-41 21 INDEPENDENT AUDITOR'S REPORT The Board of Directors The Republic Corporation We have audited the consolidated balance sheets of The Republic Corporation as of December 31, 2002 and 2001, and the related consolidated statements of income and stockholders' equity and cash flows for each of the three years in the period ending December 31, 2002. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Republic Corporation at December 31, 2002 and 2001, and the results of its operations and its cash flows, for each of the three years in the period ending December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 2 to the financial statements, the Corporation has restated the 1999 beginning retained earnings balance, the consolidated balance sheets as of December 31, 2002 and 2001 and the related consolidated statements of income and changes in stockholders' equity and cash flows for each of the three years in the period ending December 31, 2002 to record deferred tax assets and related deferred income taxes that were previously unrecorded. Dixon, Waller & Co., Inc. Trinidad, Colorado January 31, 2003 Original date of report, except as to Note 2 and Note 6, which is as of May 30, 2003. 22
REPUBLIC CORPORATION AND SUBSIDIARY Balance Sheets (Restated) (Restated) December 31 2002 2001 - --------------------------------------------------------------------------------- Assets Cash and Due from Banks (Demand).............. $ 5,781,622 $ 6,740,872 Investment Securities: Held to Maturity Market Value at 12-31-02 - 23,192,854 Market Value at 12-31-01 - 33,036,515.... 22,470,121 32,639,115 Available for Sale......................... 24,000 24,000 ------------ ------------ 28,275,743 39,403,987 ------------ ------------ Loans......................................... 109,359,880 113,289,960 Plus: Uncollected Earned Interest......... 624,047 815,911 Less: Allowance or Losses................. (1,700,060) (1,612,000) ------------ ------------ Net Loans and Other Receivables.......... 108,283,867 112,493,871 ------------ ------------ Federal Funds Sold............................ 40,750,000 21,975,000 Property, Equipment and Vehicles (Net)........ 3,033,582 3,175,287 Other Real Estate............................. 350,977 254,732 Deferred income taxes......................... 488,418 473,970 Goodwill...................................... 436,079 436,079 Other Assets.................................. 324,857 403,645 ------------ ------------ Total Assets............................... $181,943,523 $178,616,571 ============ ============ Liabilities and Stockholders' Equity Deposits (Domestic): Demand (Noninterest Bearing)............... 21,052,697 21,085,881 Savings, Time and Demand (Interest Bearing)................................. 142,722,417 140,557,986 ------------ ------------ 163,775,114 161,643,867 ------------ ------------ Accounts Payable and Accrued Interest Payable....................................... 834,228 1,002,190 Accrued Taxes Payable......................... 60,247 57,357 ------------ ------------ Total Liabilities.......................... 164,669,589 162,703,414 ------------ ------------ Minority Interest in Consolidated Subsidiary.................................... 497,123 419,519 ------------ ------------ Stockholders' Equity Common Stock (Par Value $1; 750,000 Shares Authorized, 356,844 Shares Issued Including Stock Held in Treasury at 12/31/02 and 12/31/01)................ 356,844 356,844 Additional Paid-In Capital................. 234,931 234,931 Less Cost of Treasury Stock (23,119 Shares at 12/31/02 and 12/31/01)................... (91,303) (91,303) ------------ ------------ Total Contributed Capital................ 500,472 500,472 ------------ ------------ Retained Earnings............................. 16,276,339 14,993,166 ------------ ------------ Stockholders' Equity....................... 16,776,811 15,493,638 ------------ ------------ Total Liabilities and Stockholders' Equity................................ $181,943,523 $178,616,571 ============ ============
The accompanying notes are an integral part of these financial statements. 23
REPUBLIC CORPORATION AND SUBSIDIARY Statements of Income (Restated) (Restated) (Restated) Year Ended December 31 2002 2001 2000 - -------------------------------------------------------------------------------------------- Interest Income: Interest and Fees on Loans............ $9,236,703 $10,541,196 $9,614,879 Interest on Federal Funds Sold........ 590,566 610,031 1,355,545 Interest and Dividends on Investments: Securities of U.S. Treasury and Government Sponsored Agencies ..... 1,168,225 1,518,374 1,764,632 Obligations of States, Political Subdivisions and other Obligations Secured By the Government......................... 116,843 116,966 3,577 ----------- ------------ ----------- Total Interest on Investments...... 1,285,068 1,635,340 1,768,209 ----------- ------------ ----------- Total Interest Income.......... 11,112,337 12,786,567 12,738,633 ----------- ------------ ----------- Interest Expense: Interest on Deposits.................. 3,864,618 5,727,105 6,546,851 ----------- ------------ ----------- Total Interest Expense............. 3,864,618 5,727,105 6,546,851 ----------- ------------ ----------- Net Interest Income................ 7,247,719 7,059,462 6,191,782 Provision for Loan Losses................. 357,834 282,263 314,410 ----------- ------------ ----------- Net Interest Income after Provision for Loan Losses.......... 6,889,885 6,777,199 5,877,372 Other Income: Service Charges on Deposit Accounts... 228,463 203,475 227,240 Other Service Charges, Commissions and Fees........................... 490,170 482,318 414,443 Gain on Sale - Other Real Estate...... 2,963 - 2,728 Other Income.......................... 184,263 167,422 180,878 ----------- ------------ ----------- Total Other Income............. 905,859 853,215 825,289 ----------- ------------ ----------- Other Expenses: Salaries and Wages.................... 2,245,844 2,145,417 1,959,087 Payroll Taxes......................... 167,752 163,540 149,568 Employee Benefits..................... 359,865 368,526 336,014 Occupancy Expenses.................... 359,978 314,616 260,940 Equipment Expense..................... 135,140 180,050 150,987 Depreciation.......................... 358,986 332,232 346,162 Printing and Supplies................. 178,802 233,814 155,935 Computer Service Center............... 564,506 494,599 240,598 FDIC Assessment....................... 34,988 27,679 29,408 Professional Services................. 159,880 145,256 179,240 Advertising........................... 224,558 207,005 215,294 Other Operating Expenses.............. 1,002,244 1,068,789 776,404 ----------- ------------ ----------- Total Other Expenses........... 5,792,543 5,681,523 4,799,637 ----------- ------------ ----------- Income Before Income Taxes..... 2,003,201 1,948,891 1,903,024 ----------- ------------ ----------- Less Applicable Income Taxes (Current).... 677,896 650,956 652,721 ----------- ------------ ----------- Income Before Reduction for Minority Interest................. 1,325,305 1,297,935 1,250,303 Less Minority Interest in Income......... (42,132) (38,651) (29,288) ----------- ------------ ----------- Net Income............................ $1,283,173 $ 1,259,284 $1,221,015 =========== ============ =========== Earnings per Share.................... $ 3.85 $ 3.77 $ 3.66 =========== ============ ===========
The accompanying notes are an integral part of these financial statements. 24
REPUBLIC CORPORATION AND SUBSIDIARY Statements of Cash Flows (Restated) (Restated) (Restated) December 31 2002 2001 2000 - --------------------------------------------------------------------------------------- Cash Flows and Operating Activities: Net Income (Loss)..................... $ 1,283,173 $ 1,259,284 $ 1,221,015 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation...................... 358,986 332,232 346,162 Provision for Loan Losses......... 357,834 282,263 314,410 Amortization (Accretion) of Discounts and Premiums......... 168,994 (247,894) (1,159,025) Other Real Estate Gains/Net....... (2,963) - (2,728) Deferred Income Taxes............. (14,448) (14,881) (69,266) Loss on Sales of Subsidiary Stock............................ 32,153 57,639 - (Decrease) Increase in Interest Payable............... (167,962) (457,337) 340,262 (Increase) Decrease in Interest Receivable............ 191,864 87,531 (156,023) (Increase) Decrease in Other Assets................... 78,788 (137,284) (7,195) Increase (Decrease) in Other Liabilities.............. 43,341 35,473 29,088 ----------- ----------- ------------ Total Adjustments.......... 1,046,587 (62,258) (364,315) ----------- ----------- ------------ Net Cash Provided By (Used In) Operating Activities.................. 2,329,760 1,197,026 856,700 ----------- ----------- ------------ Cash Flows from Investing Activities: Proceeds from Sale of Subsidiary Stock.................... 5,000 10,000 - Proceeds from Sales of Investment Securities............... - - - Proceeds from Maturities of Investment Securities............. 10,000,000 20,000,000 40,050,000 Purchase of Investment Securities..... - (20,430,092) (47,212,721) Loans Made to Customers-Net Cash Activity....................... 3,532,333 210,192 (15,568,281) Capital Expenditures ................. (217,281) (873,645) (354,759) Proceeds from Sale of Other Real Estate................... 34,691 12,274 15,578 ----------- ----------- ------------ Net Cash Provided by (Used In) Investing Activities........ 13,354,743 (1,071,271) (23,070,183) ----------- ----------- ------------ Cash Flows from Financing Activities: Net Increase in Demand Deposits, NOW Accounts, Savings Accounts and Certificates of Deposit............... 2,131,247 11,976,438 8,148,710 Purchase of Treasury Stock ........... - - - ----------- ----------- ------------ Net Cash Provided by (Used In) Financing Activities........ 2,131,247 11,976,438 8,148,710 ----------- ----------- ------------ Net Increase (Decrease) in Cash and Cash Equivalents ................. 17,815,750 12,102,193 (14,064,773)
(Continued) The accompanying notes are an integral part of these financial statements. 25
REPUBLIC CORPORATION AND SUBSIDIARY Statements of Cash Flows (Restated) (Restated) (Restated) December 31 2002 2001 2000 - --------------------------------------------------------------------------------------- Cash and Cash Equivalents at Beginning of Year: Cash and Due from Banks..... $ 6,740,872 $ 5,813,679 $ 8,178,452 Federal Funds Sold.......... 21,975,000 10,800,000 22,500,000 ----------- ----------- ------------ Cash and Cash Equivalents at Beginning of Year........ 28,715,872 16,613,679 30,678,452 ----------- ----------- ------------ Cash and Cash Equivalents at End of Year: Cash and Due from Banks..... 5,781,622 6,740,872 5,813,679 Federal Funds Sold.......... 40,750,000 21,975,000 10,800,000 ----------- ----------- ------------ Cash and Cash Equivalents at End of Year ............. $46,531,622 $28,715,872 $ 16,613,679 =========== =========== ============ Supplemental Disclosures of Cash Flow Information Cash Paid for Interest...... $ 4,032,580 $ 6,184,442 $ 6,206,589 =========== =========== ============ Cash Paid for Income Tax ... $ 720,503 $ 667,579 $ 648,952 =========== =========== ============
The accompanying notes are an integral part of these financial statements. 26
REPUBLIC CORPORATION AND SUBSIDIARY Statements of Changes in Stockholders' Equity For Three Additional Con- (Restated) (Restated) Years Ended Capital Paid in Treasury tributed Retained Total December 31, Stock Capital Stock Capital Earnings Equity - ------------------------------------------------------------------------------------------------ Balance at 12-31-99, as previously reported $ 356,844 $ 234,931 $(91,303) $ 500,472 $12,131,815 $12,632,287 Adjustment applicable to prior years - - - - 381,052 381,052 ---------- ---------- --------- ---------- ------------ ------------ Balance at 12-31-99, as restated $ 356,844 $ 234,931 $(91,303) $ 500,472 $12,512,867 $13,013,339 Net Income - - - - 1,221,015 1,221,015 ---------- ---------- --------- ---------- ------------ ------------ Balance at 12-31-00 $ 356,844 $ 234,931 $(91,303) $ 500,472 $13,733,882 $14,234,354 Net Income - - - - 1,259,284 1,259,284 ---------- ---------- --------- ---------- ------------ ------------ Balance at 12-31-01 $ 356,844 $ 234,931 $(91,303) $ 500,472 $14,993,166 $15,493,638 Net Income - - - - 1,283,173 1,283,173 ---------- ---------- --------- ---------- ------------ ------------ Balance at 12-31-02 $ 356,844 $ 234,931 $(91,303) $ 500,472 $16,276,339 $16,776,811 ========== ========== ========= ========== ============ ============
The accompanying notes are an integral part of these financial statements. 27 THE REPUBLIC CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include The Republic Corporation, (Company) and its majority-owned subsidiary, The First National Bank in Trinidad (Bank). All major items of income and expense are recorded on the accrual basis of accounting, and all significant intercompany accounts and transactions have been eliminated. INVESTMENT SECURITIES. The investment securities are classified and accounted for as follows: Held to Maturity - investment debt securities for 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. Available for sale - securities not classified as securities to be held to maturity. Unrealized holding gains or losses, net of tax, are reported as a separate component of shareholders' equity until realized. LOANS. Interest on all loans is credited to interest income as earned on the principal amount outstanding. Loans to individuals for household, family and other consumer expenditures are principally written at the amount disbursed, and interest income is accrued on the outstanding principal balance. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and the valuation of foreclosed real estate. In connection with the determination of the estimated losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties. While management uses available information to recognize losses on loans and foreclosed real estate, further reductions in the carrying amounts of loans and foreclosed assets may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans and foreclosed real estate. Such agencies may require the Company to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans and foreclosed real estate may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated. 28 THE REPUBLIC CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements INCOME RECOGNITION ON IMPAIRED LOANS. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are applied as a reduction of the loan principal balance. Interest income on other impaired loans is recognized only to the extent of interest payments received. ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established through charges to earnings in the form of provisions for loan losses. Loan losses or recoveries are charged or credited directly to the allowance. In general, the amount charged to earnings each year by the Bank is based on management's judgment which takes into consideration a number of factors, including (1) loss experience in relation to outstanding loans and the existing level of the valuation allowance, (2) a continuing review of problem loans and overall portfolio quality, (3) regular examinations and appraisals of loan portfolios conducted by Federal supervisory authorities, and (4) current and expected economic conditions. GOODWILL. The excess of the purchase cost over the net assets of the Bank purchased represents goodwill. APB 17, which addressed the amortization of intangible assets such as goodwill, was not to be applied retroactively to assets acquired before November 1, 1970. Since the acquisition of the Bank was made prior to November 1, 1970, the goodwill acquired was not amortized. The adoption of SFAS 142 required that goodwill be evaluated for other-than-temporary impairment. Goodwill is not considered impaired and is recorded at full value. LONG-LIVED ASSETS. The undiscounted future net cash flows of the Company are expected to be greater than the net book value of long-lived assets (including goodwill) so that recoverability is not determined to be impaired. PROPERTY AND EQUIPMENT. Bank property and equipment are stated at cost less accumulated depreciation. The building and improvements are depreciated on the straight-line, declining balance, ACRS and MACRS methods over estimated useful lives of 30 years. There is not a material difference between the expense recognized using the ACRS and MACRS methods and the expense that would be recognized using a method acceptable under generally accepted accounting principles. Automobiles are depreciated primarily on the straight-line basis over estimated useful lives of 3-4 years. Other equipment is depreciated on the straight-line, ACRS and MACRS methods over estimated useful lives of 5-10 years. The accounting policy is to charge maintenance, repairs, minor renewals and betterments of property and equipment to expense in the year incurred. Major expenditures for renewals and betterments are capitalized and depreciated or amortized over their estimated useful lives. On disposal or retirement, the related cost and accumulated depreciation are eliminated from the accounts and gain or loss on the transaction is reflected in the statement of income. 29 THE REPUBLIC CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements FORECLOSED REAL ESTATE. Foreclosed real estate includes formally foreclosed properties. At the time of foreclosure, foreclosed real estate is recorded at the lower of the carrying amount or fair value less cost to sell, which becomes the property's new basis. LOAN ORIGINATION FEES AND COSTS. Loan origination fees are of an immaterial nature and are recognized as income upon receipt. INCOME TAXES. The Company files a consolidated federal income tax return with the Bank. Deferred tax assets and liabilities are recognized for the tax effects of differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized. EMPLOYEE BENEFIT PLANS. The Bank makes payments into a 401K employee benefit plan. All employees of the bank are covered, with the Bank paying a discretionary percentage of the employee's earnings to the plan. An employee can contribute an additional percentage of his/her earnings if so desired. The plan is overseen by a board of trustees composed of Bank officers. EARNINGS PER SHARE COMPUTATIONS. Earnings per share computations are based on the weighted average number of common shares outstanding during each year. EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS. In June 1998, the Financial Accounting Standards Board issued statement No. 133 "Accounting for Derivatives and Hedging Activities" (SFAS No.133) which was subsequently amended by SFAS No. 138 "Accounting for Certain Derivatives and Certain Hedging Activities". The standards were effective for adoption on or before January 1, 2001 (SFAS No. 137 deferred the original effective date in SFAS No. 138). The adoption of these statements did not have an impact on the Company's results of operations or financial position as the Company does not trade in derivative financial instruments. 2. Restatement Of Prior Years' Financial Statements In prior years, the Company did not record deferred income taxes. During 2002, the Company retroactively changed its accounting method to record these deferred income taxes. This change decreased income taxes by $14,448, $14,881 and $ 69,266 and increased net income after the effect to minority interest by $14,015, $14,435 and $67,645, for the years ended December 31, 2002, 2001, and 2000 respectively. An adjustment of $381,052 applicable to 1999 and prior periods has been included in the restated 1999 beginning retained earnings balance. 30 THE REPUBLIC CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements 3. Investment Securities, including investments held for sale. A schedule of securities is as follows:
December 31, 2002 December 31, 2001 --------------------------------------------- ------------------------------------------- Par Book Market Par Book Market Value Value Value Value Value Value ------------- -------------- -------------- ------------- ------------- -------------- Government Securities $ 20,000,000 $ 20,175,250 $ 20,682,150 $ 30,000,000 $ 30,344,040 $ 30,687,644 Obligations of States and Political Sub-Divisions 2,295,000 2,294,871 2,510,704 2,295,000 2,295,075 2,348,871 Other $ 24,000 24,000 24,000 $ 24,000 24,000 24,000 ------------- ------------- ------------- -------------- $ 22,494,121 $ 23,216,854 $ 32,663,115 $ 33,060,515 ============= ============= ============= ==============
The approximate amortized cost of investment securities pledged by the Bank to secure public funds on deposit amounted to $22,215,755 at December 31, 2002 and $32,389,314 at December 31, 2001. Additionally, $254,366 was pledged to the Federal Reserve Bank in order to secure treasury, tax and loan remittances at December 31, 2002. Net gains on the sale of securities were as follows:
2002 2001 -------- -------- GAINS U.S. Government Securities - - U.S. State and Political Subdivisions - - -------- -------- LOSSES U.S. Government Securities - - U.S. States and Political Subdivisions - - -------- -------- NET GAINS ON SALE OF SECURITIES - - ======== ========
Unrealized gains and losses in the securities portfolio were as follows:
Carrying Unrealized Unrealized Market Value Gain Loss Value ---------- -------- --------- ---------- DECEMBER 31, 2002 U.S. Treasury Securities... $ - $ - $ - $ - U.S. States and Political Subdivisions............... 2,294,871 215,833 - 2,510,704 Government Sponsored Agencies................... 20,175,250 506,900 - 20,682,150 Other...................... 24,000 - - 24,000 ---------- -------- --------- ---------- $22,494,121 $ 722,733 $ - $23,216,854 ========== ======== ======== ========== DECEMBER 31, 2001 U.S. Treasury Securities... $ - $ - $ - - U.S. States and Political Subdivisions............... 2,295,075 53,796 - $ 2,348,871 Government Sponsored Agencies................... 30,344,040 343,604 - 30,687,644 Other...................... 24,000 - - 24,000 ---------- -------- -------- ---------- $32,663,115 $ 397,400 $ - $33,060,515 ========== ======== ======== ==========
31 THE REPUBLIC CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements 4. Loans and Other Receivables Loans and other receivables are summarized as follows:
December 31, ----------------------------- Type 2002 2001 ---- -------------- ----------- Real Estate........................ $ 87,600,350 $ 92,878,842 Commercial and Industrial.......... 9,676,356 7,423,759 Agriculture........................ 1,243,638 1,753,651 Loans to Individuals for Household, Family and Other Consumer Goods.......... 10,837,664 11,218,675 Other.............................. 1,872 15,033 ----------- ----------- TOTAL ........................ $109,359,880 $113,289,960 =========== ===========
The changes in the allowance for loan losses are as follows:
December 31, ----------------------------------- 2002 2001 2000 -------- --------- --------- Balance at Beginning of Year.... $ 1,612,000 $ 1,578,694 $ 1,379,000 Provision Charged to Operating Expenses........ 357,834 282,263 314,410 Loans Charged Off ........... 380,504 308,149 274,204 Recoveries on Loans Previously Charged Off ... 110,730 59,192 159,488 ---------- ---------- ---------- Balance at End of Year.......... $ 1,700,060 $ 1,612,000 $ 1,578,694 ========== ========== ==========
At December 31, 2002 and 2001, the total recorded investment in impaired loans, all of which had allowances determined in accordance with SFAS No. 114 and No. 118, amounted to approximately $2,560,000 and $1,088,000 respectively. The average recorded investment in impaired loans amounted to approximately $1,706,000 and $1,213,000 for the years ended December 31, 2002 and 2001, respectively. The allowance for loan losses related to impaired loans amounted to approximately $1,200 and $1,500 at December 31, 2002 and 2001, respectively. Interest income on impaired loans of $24,343 and $5,956 was recognized for cash payments received in 2002 and 2001 respectively. 5. Property and Equipment. Property and equipment are summarized as follows:
December 31, ----------------------------------- 2002 2001 2000 --------- --------- --------- Land............................ $ 134,750 $ 134,750 $ 134,750 Buildings....................... 3,752,745 3,700,383 3,164,931 Furniture and Equipment......... 2,900,937 2,736,018 2,397,825 -------- --------- --------- 6,788,432 6,571,151 5,697,506 Less Accumulated Depreciation... 3,754,850 3,395,864 3,063,632 -------- --------- --------- Net.......................... $ 3,033,582 $3,175,287 $ 2,633,874 ========== ========== ==========
Depreciation expense for 2002, 2001 and 2000 was $358,986, $332,232 and $346,162, respectively. 32 THE REPUBLIC CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements 6. Income Taxes. The provision (credit) for income taxes includes these components:
2002 2001 2000 -------------------------------------- Taxes currently payable....... $ 692,344 $ 665,837 $ 721,987 Deferred income taxes......... (14,448) (14,881) (69,266) ---------- --------- --------- Income tax expense........ $ 677,896 $ 650,956 $ 652,721 ========== ========= =========
A reconciliation of income tax expense at the statutory rate to the Company's actual income tax expense is shown below:
2002 2001 2000 ------------------------------------- Computed at the statutory rate (34%)................. $ 681,088 $ 662,623 $ 647,023 Increase (decrease) resulting from Tax exempt interest........ (41,000) (40,000) (2,000) Nondeductible expenses..... 12,019 19,597 - State income taxes......... 36,000 11,000 12,000 Other...................... (10,211) (2,264) (4,302) ---------- --------- --------- Actual tax expense...... $ 677,896 $ 650,956 $ 652,721 ========== ========= =========
The tax effects of temporary differences related to deferred taxes shown on the balance sheets were:
2002 2001 ----------------------- Deferred tax assets Allowance for loan losses................ $ 546,215 $ 513,633 Deferred tax liabilities Depreciation............................. (23,757) (5,623) Reserve for Contingencies................ (34,040) (34,040) --------- ----------- Net deferred tax asset before valuation allowance................... $ 488,418 $ $473,970 ========= ===========
33 THE REPUBLIC CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements 7. Service Commitments. Computer and data processing services are provided to the Bank by an outside service center. Expenses incurred for such services during 2002, 2001 and 2000 were $564,506, $494,599 and $240,598, respectively. 8. Other Real Estate. Other real estate consists of properties acquired through foreclosure and loans that are classified as in-substance foreclosed for which the underlying collateral is real estate. During 2000, other real estate was sold at a gain of $2,728. Sales of other real estate in 2001 resulted in no gain or loss. For 2002, sales of other real estate resulted in a gain of $2,963. 9. Certificates of Deposit. The Bank had time certificates of deposit in amounts of $100,000 or more amounting to $24,251,094 and $22,888,052 at December 31, 2002 and 2001, respectively. Interest expense for the years ended December 31, 2002, 2001 and 2000 on this type of deposit was $773,848, $972,324, and $1,262,692, respectively. The deposits by time remaining until maturity were (dollars in thousands). 3 Months or Less $ 9,640 3 to 6 Months 7,507 6 to 12 Months 5,118 Over 12 Months 1,986 ------- 24,251 ======= 10. Regulatory Matters. The Bank, as a National Bank, is subject to the dividend restrictions set forth by the Comptroller of the Currency. Under such restrictions, the Bank may not, without the prior approval of the Comptroller of the Currency, declare dividends in excess of the sum of the current year's earnings (as defined) plus the retained earnings (as defined) from the prior two years. The dividends, as of December 31, 2002, that the Bank could declare, without the approval of the Comptroller of the Currency, amounted to approximately $3,800,000. The Bank is also required to maintain minimum amounts of capital to total "risk weighted" assets, as defined by the banking regulators. As of December 31, 2002, Banks are required to have minimum Tier 1 and Total capital ratios of 4.00% and 8.00%, respectively. The Bank's estimated ratios at December 31, 2002 were 17.43% and 18.68%, respectively. The Bank's estimated Tier 1 leverage ratio at December 31, 2002 was 9.09%. The minimum required leverage ratio for the Bank at December 31, 2002, was 3.00%. 34 THE REPUBLIC CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements 11. Supplemental Cash Flow Information In 2002 and 2001, the Bank recorded amounts of other real estate acquired through foreclosure of $257,398 and $328,416. Of total sales of other real estate during 2002 and 2001, $129,425 and $99,125 of the purchase price was financed by the Bank, taking the other real estate as security. Loans charged off due to foreclosure transactions in 2002, 2001 and 2000 amounted to $257,398, $328,416 and $37,716. These noncash transactions have been excluded from the consolidated statement of cash flows. 12. Financial Position and Results of Operations - Republic Corporation. The financial position and results of operations of The Republic Corporation (parent only) are as follows:
THE REPUBLIC CORPORATION Balance Sheets (Restated) (Restated) December 31 2002 2001 - --------------------------------------------------------------------------------- Assets Cash in Bank.................................. $ 74,494 $ 62,076 Investment in Subsidiary - Equity Method 16,622,406 15,351,646 Receivable - Due from Subsidiary.............. 23,307 23,312 Other Assets.................................. 56,604 56,604 ----------- ---------- Total Assets............................... 16,776,811 15,493,638 =========== =========== Liabilities................................... - - ----------- ---------- Stockholders' Equity Common Stock, par Value $1.00; Authorized 750,000 Shares, Issued 356,844 Shares Including Stock Held in Treasury of 23,119 and 23,119 for 2002 and 2001, respectively............................... 356,844 356,844 Additional Paid in Capital.................... 234,931 234,931 Less Cost of Treasury Stock (23,119 Shares at 12-31-02, 23,119 Shares at 12-31-01) (91,303) (91,303) ----------- ----------- Total Contributed Capital ............. 500,472 500,472 ----------- ----------- Retained Earnings............................. 16,276,339 14,993,166 ----------- ----------- Total Stockholders' Equity................. 16,776,811 15,493,638 ----------- ----------- Total Liabilities and Stockholders' Equity....................... $ 16,766,811 $ 15,493,638 =========== ==========
35 THE REPUBLIC CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements (Note 12 Continued)
THE REPUBLIC CORPORATION Statements of Income (Restated) (Restated) (Restated) Year Ended December 31 2002 2001 2000 - ------------------------------------------------------------------------------- Income Investment Income in Subsidiary Dividends Received from Subsidiary Bank............... $ 54,320 $ 54,460 $ 54,740 Other Income.................. - - - ---------- ---------- ---------- Total Income.................. 54,320 54,460 54,740 ---------- ---------- ---------- Expenses Salaries and Employee Benefits...... 51,073 51,073 54,814 Loss on Sale of Subsidiary Stock.................. 32,153 57,639 - Depreciation........................ - - - Examination and Legal Fees.......... 8,275 8,100 7,700 Miscellaneous....................... - 2,194 - Office.............................. 6,709 6,384 6,643 Taxes............................... 4,156 4,140 4,544 Travel.............................. - - - ---------- ---------- ---------- Total Expenses................... 102,366 129,530 73,701 ---------- ---------- ---------- Income (Loss) Before Equity in Undistributed Net Income of Income of Subsidiary........... (48,046) (75,070) (18,961) Less Applicable Income (Taxes) Benefit......... 23,307 23,312 25,100 ---------- ---------- ---------- (24,739) (51,758) 6,139 Equity in Undistributed Net Income (Loss) of Subsidiary............. 1,307,912 1,311,042 1,214,876 ---------- ---------- ---------- Net Income (Loss)................ $1,283,173 $1,259,284 $1,221,015 ========== ========== ========== Earnings Per Share Weighted Average Number of Shares Outstanding............ 333,725 333,725 333,725 ========== ========== ========== Net Income (Loss) per Common Share $ 3.85 $ 3.77 $ 3.66 ========== ========== ==========
36 THE REPUBLIC CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements (Note 12 Continued)
THE REPUBLIC CORPORATION Statements of Cash Flows (Restated) (Restated) (Restated) Year Ended December 31 2002 2001 2000 - --------------------------------------------------------------------------------- Cash Flows From Operating Activities: Net Income............................... $ 1,283,173 $ 1,259,284 $ 1,221,015 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Loss on Sale of Subsidiary Stock...... 32,153 57,639 - Depreciation.......................... - - - Dividends Received - Subsidiary....... (54,320) (54,460) (54,740) (Increase) in Investment in Subsidiary-Held on the Equity Method..................... (1,307,913) (1,311,042) (1,214,876) (Increase) Decrease in Receivable from Subsidiary-Income Tax Benefit....................... 5 1,788 (1,200) Increase (Decrease) in Current Liabilities............... - - - ----------- ----------- ----------- Net Cash (Used In) Operating Activities..................... (46,902) (46,791) (49,801) ----------- ----------- ----------- Cash Flows From Investing Activities- Sale of Subsidiary Stock.............. 5,000 10,000 - Dividends Received.................... 54,320 54,460 54,740 ----------- ----------- ----------- 59,320 64,460 54,740 ----------- ----------- ----------- Cash Flows From Financing Activities- Purchase of Treasury Stock............ - - - ----------- ----------- ----------- Net Increase (Decrease) in Cash....... 12,418 17,669 4,939 Cash - Beginning of Year................. 62,076 44,407 39,468 ----------- ----------- ----------- Cash - End of Year....................... $ 74,494 $ 62,076 $ 44,407 =========== =========== =========== Supplemental Disclosures of Cash Flow Information: Cash Paid for Interest................ - - - =========== =========== =========== Cash Paid for Income Taxes............ - - - =========== =========== ===========
37 THE REPUBLIC CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements (Note 12 Continued)
THE REPUBLIC CORPORATION Statement of Changes in Stockholders' Equity Additional Total (Restated) For the Three Capital Paid in Treasury Contributed Retained Years Ended Stock Capital Stock Capital Earnings - ------------------------------------------------------------------------------------------------- Balance at December 31, 1999............ $ 356,844 $ 234,931 $ (91,303) $ 500,472 $ 12,512,867* Net Income............. - - - - 1,221,015 Additions to Treasury Stock...... - - - - - -------- -------- -------- -------- ---------- Balance at December 31, 2000............ $ 356,844 $ 234,931 $ (91,303) $ 500,472 $ 13,733,882* Net Income............. - - - - 1,259,284 Additions to Treasury Stock...... - - - - - -------- -------- -------- -------- ---------- Balance at December 31, 2001............ $ 356,844 $ 234,931 $ (91,303) $ 500,472 $ 14,993,166* Net Income............. - - - - 1,283,173 Additions to Treasury Stock...... - - - - - -------- -------- -------- -------- ---------- Balance at December 31, 2002............ $ 356,844 $ 234,931 $ (91,303) $ 500,472 $ 16,276,339* ======== ======== ======== ======== ===========
* On December 31, 1999, 2000, 2001 and 2002 the portion of retained earnings resulting from Republic Corporation's equity in the undistributed income of its subsidiary was $11,675,288, $12,890,164, $14,137,567 and $15,410,464 respectively. 38 THE REPUBLIC CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements 13. Contingent Liabilities and Commitments. The consolidated financial statements do not reflect various commitments and contingent liabilities which arise in the normal course of business and which involve elements of credit risk, interest rate risk and liquidity risk. These commitments and contingent liabilities are commitments to extend credit and standby letters of credit. A summary of the Bank's commitments and contingent liabilities at December 31, 2002, is as follows: Commitments to extend credit $ 5,658,000 Standby letters of credit $ 371,000 Commitments to extend credit and standby letters of credit all include exposure to some credit loss in the event of nonperformance of the customer. The Bank's credit policies and procedures for credit commitments and financial guarantees are the same as those for extensions of credit that are recorded on the consolidated statements of condition. Because these instruments have fixed maturity dates, and because many of them expire without being drawn upon, they do not generally present any significant liquidity risk to the Bank. 14. Disclosures about the Fair Value of Financial Instruments The following disclosures of the estimated fair value of financial instruments are made in accordance with the requirements of SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. The estimated fair value amounts have been determined by the Bank using available market information and valuation methodologies. The fair value estimates presented are not necessarily indicative of the amounts the company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material impact on the estimated fair value amounts. SFAS No. 107 excludes certain financial instruments and all non-financial instruments including intangible assets from its disclosure requirements. Therefore, the aggregate fair value amounts presented herein are not indicative of the underlying value of the Bank. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which is it practicable to estimate that value: o CASH AND DUE FROM BANKS The current carrying amount is a reasonable estimate of fair value. o FEDERAL FUNDS SOLD The current carrying amount is a reasonable estimate of fair value. o INVESTMENT SECURITIES An estimate of the fair value for investment securities is made utilizing quoted market prices for publicly traded securities, where available. A third-party pricing service that specializes in "matrix pricing" and modeling techniques provides estimated fair values for securities not actively traded. 39 14. (Continued) o LOANS The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Due to the small amount of nonaccrual loans at December 31, 2002, these loans do not significantly impact the fair value of loans. o DEPOSITS The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. o COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the customers. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The estimated fair value of letters of credit is based on the fees currently charged for similar agreements. The instruments were determined to have no positive or negative market value adjustments and are not listed in the following table. The estimated fair value of the Company's financial instruments is as follows:
December 31, 2002 ----------------------- Carrying Fair Amount Value ------- ------- (In Thousands) Financial assets: Cash and Due From Banks............... $ 5,782 $ 5,782 Held-to-Maturity Securities........... 22,470 23,193 Other Securities...................... 24 24 Federal Funds Sold.................... 40,750 40,750 Loans, Net of Allowance............... 107,660 109,971 Financial Liabilities: Deposits.............................. 163,775 164,090
40 14. (Continued) The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2002. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of the financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented. 15. Selected Quarterly Financial Data (in thousands except per share data)
2002 2001 --------------------------------- ----------------------------- Fourth Third Second First Fourth Third Second First ------ ------ ------ ------ ----- ----- ------ ------ Net Interest $1,967 $1,780 $1,735 $1,766 $1,916 $1,783 $1,700 $1,660 Income Provision for 46 70 40 202 109 87 38 48 Loan Losses Non-Interest 153 254 288 211 133 173 337 210 Income Operating 1,581 1,355 1,473 1,384 1,642 1,411 1,337 1,292 Expense Net Income 370 391 336 186 221 310 415 313 Earnings per $ 1.11 $ 1.17 $ 1.01 $ .56 $ .66 $ .93 $ 1.24 $ .94 Share
41 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. 42 PART III ITEM 10. Directors and Executive Officers of The Republic Corporation. The Republic Corporation's Board of Directors consists of Catherine G. Eisemann, J.E. Eisemann, IV and Roger Dean Eisemann. All directors and officers are U.S. citizens. Catherine G. Eisemann is the mother of J.E. and Roger Dean Eisemann.
TERM OF PRINCIPAL OCCUPATIONS FOR THE NAME AND TITLE AGE OFFICE LAST FIVE YEARS - -------------- --- -------- ------------------------------- Catherine G. Eisemann 76 39 Years Catherine G. Eisemann has been a Director of The Republic Corporation for 39 years. Mrs. Eisemann was elected President of The Republic Corporation and began serving December 11, 1981. J.E. Eisemann, IV 55 26 Years J.E. Eisemann, IV has served as a Director on The Republic Corporation Board for 26 years. Mr. Eisemann has been the Vice-President and Director of the Subsidiary Bank for approximately 25 years. Mr. Eisemann has served as the Chief Executive Officer and Chief Financial Officer of The Republic Corporation and Chairman of the Board of the Subsidiary Bank for approximately 21 years. Roger Dean Eisemann 48 20 Years Roger Dean Eisemann was elected Secretary and began serving as a director of The Republic Corporation in July, 1982.
J.E. Eisemann, III was the President and Chairman of the Board of The Republic Corporation for 25 years. Mr. Eisemann passed away during 1981. 43 ITEM 11. Executive Compensation.
EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE Annual Compensation Restricted Stock LTIP All Other Name & Principal ------------------------------ Stock Options/ Payouts Compen- Position Year Salary Bonus Awards SARs ($) sation - ---------------- ---------- ----------- --------- -------- ------- ------- -------- J.E. Eisemann, IV 2002 $85,773(1) $3,735(2) -0- -0- -0- -0- Chief Executive 2001 83,573(1) 5,438(2) -0- -0- -0 - -0- Officer and 2000 80,073(1) 3,450(2) -0- -0- -0 - -0- Chief Financial Officer of the Company, Chairman of the Board & Vice President of the Subsidiary Bank Catherine Eisemann 2002 $30,000 -0- -0- -0- -0- -0- President of the 2001 30,000 -0- -0- -0- -0- -0- Company 2000 30,000 -0- -0- -0- -0- -0-
(1) Includes amounts deferred under Section 401(K) of the Internal Revenue Code. Amounts deferred by Mr. Eisemann were $10,066 in 2000, $10,422 in 2001 and $11,205 in 2002. (2) Includes amounts deferred under Section 401(K) of the Internal Revenue Code. Amounts deferred by Mr. Eisemann were $434 in 2000, $0 in 2001 and $560 in 2002. STOCK OPTIONS/SAR GRANTS IN 2002-NONE AGGREGATED STOCK OPTIONS/SAR EXERCISES IN 2002 AND OPTIONS/SAR VALUES AS OF DECEMBER 31 2002 - NONE LONG-TERM INCENTIVE PLANS - AWARDS IN 2002 - NONE COMPENSATION OF DIRECTORS Director fees are not paid to directors of the Company. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS - NONE REPORT ON REPRICING OF OPTIONS/SARS - NONE 44 ITEM 12. Security Ownership of Certain Beneficial Owners and Management. (a) Security ownership of certain beneficial owners and management. The following schedule reflects security ownership of persons who are (1) the beneficial owners of more than 5% of any class of voting securities of The Republic Corporation, (2) each of the Company's directors, and (3) all directors and executive officers of the Company as a group. Amount and Nature of Percent Name of Title of Beneficial of Person Class Ownership(1) Class --------- ------------- ------------ -------- Catherine G. Eisemann Common Stock 193,702 58.0424 3350 McCue, #904 Houston, Texas 77056 Mr. J.E. Eisemann IV Common Stock 8,700 2.6069 1103 Victoria Square Trinidad, Colorado 81082 Mr. R. Dean Eisemann Common Stock 6,500 1.9477 3738 Ella Lee Lane Houston, Texas 77027 All directors and executive officers as a group Common Stock 208,902(2) 62.5970 (1) Beneficial ownership in accordance with Securities and Exchange Commission rules, which generally attribute beneficial ownership to persons who possess sale or shared voting and for investment power with respect to those securities. (2) Shares of The Republic Corporation have not been pledged by the officers or directors of the corporation. All of the above named directors own 100 shares each of the subsidiary bank stock as directors' qualifying shares. (b) Changes in control. The Republic Corporation has the option of repurchasing its own stock, thus increasing the ownership percentages of the remaining shareholders. ITEM 13. Certain Relationships and Related Transactions. There have been no transactions with management or other related parties that would require disclosure under current Securities and Exchange Commission regulations. Additionally, no business relationships that would require disclosure exist. No directors were indebted to The Republic Corporation or the subsidiary bank during 2002. 45 ITEM 14. Controls and Procedures. (A) Evaluation of disclosure controls and procedures Our Chief Executive and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date within 90 days of the filing date of this Amendment No. 1 to this Annual Report on Form 10-K (the "Evaluation Date"), has concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and effective to ensure that material information relating to us would be made known to him by others within our company, particularly during the period in which this Amendment No. 1 to this Annual Report on Form 10-K was being prepared. (B) Changes in internal controls. There were no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date of the most recent evaluation, nor any significant deficiencies or material weaknesses in such internal controls requiring corrective actions. As a result, no corrective actions were taken. 46 PART IV ITEM 15. Exhibits, Financial Statement, Schedules, and Reports on Form 8-K. (a) 1. The following financial statements and financial statement schedules are included in Part II of this report: Consolidated statements of the parent and subsidiary bank: PAGE Accountant's Report................................. 22 Balance Sheets as of December 31, 2002 and 2001 (Restated).................... 23 Statements of Income - Years Ended December 31, 2002, 2001 and 2000 (Restated) .... 24 Statement of Cash Flows - Years ended December 31, 2002, 2001 and 2000 (Restated).................. 25-26 Statement of Changes in Stockholders' Equity-years ended December 31, 2002, 2001 and 2000 (Restated).................. 27 Notes to Financial Statements....................... 28-41 2. All other schedules are omitted because they are not applicable, are not required, or because the required information is included in the consolidated financial statements or notes thereto. 47 3. List of Exhibits. Exhibit No. ------- 3 The Republic Corporation, Articles of Incorporation and By-Laws* 22(a) Subsidiary of the Registrant.* The First National Bank in Trinidad, Colorado. Incorporated in Colorado 99.1 Certification of Chief Executive and Chief Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of Sarbanes-Oxley Act of 2002) * This document was filed as an exhibit to Registration Statement Form 10 (which was filed with the Securities and Exchange Commission under The Securities Exchange Act of 1934) dated August 23, 1977. (b) Reports on Form 8-K There were no reports on Form 8-K for the three months ended December 31, 2002. 48 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Republic Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REPUBLIC CORPORATION /S/ J.E. Eisemann, IV June 30, 2003 - ----------------------------------- Chairman of the ------------- J.E. Eisemann, IV` Board, Director, Date Chief Executive Officer, Chief Financial and Accounting Officer Pursuant to the requirements of the Securities Exchanges Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature Title Date - ----------- ------ ---------- /S/ J.E. Eisemann, IV June 30, 2003 - ----------------------------------- Chairman of the ------------- J.E. Eisemann, IV` Board, Director, Date Chief Executive Officer, Chief Financial and Accounting Officer /S/ Catherine G. Eisemann June 30, 2003 - ---------------------------------- President of the ------------- Catherine G. Eisemann Board and a Director /S/ Roger Dean Eisemann June 30, 2003 - ---------------------------------- Secretary and ------------- Roger Dean Eisemann Director 49 CERTIFICATIONS I, J. Ed Eisemann, IV, certify that: 1. I have reviewed this annual report on Form 10-K/A of The Republic Corporation; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and 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 me by others within those entities, particularly during the period in which this annual 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 annual report (the "Evaluation Date"); and c) presented in this annual report my conclusions about the effectiveness of the disclosure controls and procedures based on my evaluation as of the Evaluation Date; 5. I have disclosed, based on my most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): 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. I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of my most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 30, 2003 /s/ J. Ed Eisemann, IV ---------------- --------------------------------- J. Ed Eisemann, IV Chairman of the Board, Director, Chief Executive Officer, Chief Financial and Accounting Officer A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN PROVIDED TO THE REPUBLIC CORPORATION AND WILL BE RETAINED BY THE REPUBLIC CORPORATION AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. SUPPLEMENTAL INFORMATION The Republic Corporation will send the shareholders an annual report and proxy materials subsequent to the filing of this report. 50 EXHIBIT INDEX 99.1 Certificate of Chief Executive and Chief Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) EX-99 3 a512237.txt EX99.1, CERTIFICATION EXHIBIT 99.1 I, J. Ed Eisemann IV, Chief Executive and Chief Financial Officer of The Republic Corporation (the "Registrant"), do hereby certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley act of 2002, with respect to this Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002 of the Registrant (the "Report"), that to the best of my knowledge: (1)The Report fully complies with the requirement of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of the Registrant. This certification is made solely for purposes of 18 U.S.C. Section 1350 and not for any other purpose. /s/ J. Ed Eisemann, IV June 30, 2003 - ----------------------- Chief Executive and ----------------- J. Ed Eisemann, IV Chief Financial Officer Date -----END PRIVACY-ENHANCED MESSAGE-----