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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Six Months Ended June 30, 2002. Commission File Number 0-8597
THE REPUBLIC CORPORATION
TEXAS 74-0911766
- ------ ----------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5340 WESLAYAN - P.O. BOX 270462, HOUSTON, TX 77277
- ---------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 713-993-9200
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such report(s), and (2) has been subject to such filing requirements for
the past 90 days.
YES X. NO .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of June 30, 2002
COMMON STOCK, $1.00 PAR VALUE Shares 356,844
Outstanding at June 30,
2002, (including 23,119
shares held as treasury
shares)
THE REPUBLIC CORPORATION
Index to Quarterly Report on Form 10-Q
PAGE
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets
December 31, 2001, and June 30, 2002. 1
Consolidated Statements of Income for the three months
and six months ended June 30, 2001 and 2002. 2
Consolidated Statements of Cash Flows for the six months
ended June 30, 2001 and 2002. 3
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis 5-9
Part II. Other Information 10
Signatures 11
REPUBLIC CORPORATION AND SUBSIDIARY
Balance Sheet
June 30 December 31
2002 2001
------------- -------------
Assets
Cash and due from banks (demand) .................................... $ 5,730,283 $ 6,740,872
Investment securities:
Held-to-maturity
Market value at 6-30-02 28,046,793
----------
Market value at 12-31-01 33,036,515 ................... 27,557,937 32,639,115
----------
Available-for-sale
Market value at 6-30-02 24,000
----------
Market value at 12-31-01 24,000 ................... 24,000 24,000
---------- ------------- -------------
$ 33,312,220 $ 39,403,987
------------- -------------
Loans ............................................................... 110,682,357 113,289,960
Plus: Uncollected earned interest ............................ 883,870 815,911
Less: Allowance for losses ................................... (1,763,000) (1,612,000)
------------- -------------
Net loans and other receivables .............................. 109,803,227 112,493,871
------------- -------------
Federal funds sold .................................................. 35,550,000 21,975,000
Property, equipment and vehicles (net) .............................. 3,112,065 3,175,287
Other real estate ................................................... 252,079 254,732
Goodwill ............................................................ 436,079 436,079
Other assets ........................................................ 534,206 403,645
------------- -------------
Total assets ................................................. $ 182,999,876 $ 178,142,601
------------- -------------
Liabilities and Stockholders' Equity
Deposits (Domestic):
Demand (non-interest bearing) ................................ $ 20,740,342 $ 21,085,881
Savings, time and demand (Interest-bearing) .................. 144,873,064 140,557,986
------------- -------------
$ 165,613,406 $ 161,643,867
Accounts payable and accrued interest payable ....................... 978,408 1,002,190
Accrued taxes payable ............................................... 391,495 57,357
------------- -------------
Total liabilities ............................................ $ 166,983,309 $ 162,703,414
------------- -------------
Minority Interest in Consolidated Subsidiary ........................ 463,768 408,681
------------- -------------
Stockholders'Equity
Common stock (par value $1; 750,000 shares
authorized, 356,844 shares issued including
stock held in treasury) ...................................... 356,844 356,844
Additional paid-in capital .......................................... 234,931 234,931
Less cost of treasury stock (23,119 shares at 6-30-02 and
23,119 at 12-31-01) .......................................... (91,303) (91,303)
------------- -------------
Total contributed capital ............................. 500,472 500,472
------------- -------------
Retained earnings ................................................... 15,052,327 14,530,034
------------- -------------
Net Unrealized Gain (Loss) on Securities
Available-for-Sale (Net of Taxes) ............................ -0- -0-
Stockholders'equity ................................... 15,030,506 15,030,506
------------- -------------
Total liabilities and stockholders equity .................... $ 182,999,876 $ 178,142,601
============= =============
The accompanying note is an integral part of these financial statements.
1
REPUBLIC CORPORATION AND SUBSIDIARY
Statement of Income
Three Months Ended Six Months Ended
----------------------------- -----------------------------
June 30 June 30 June 30 June 30
2002 2001 2002 2001
----------- ----------- ----------- -----------
Interest Income
Interest and fees on loans ....................... $ 2,267,411 $ 2,618,164 $ 4,608,469 $ 5,211,931
----------- ----------- ----------- -----------
Interest on funds sold and securities
purchased under agreement to resell ......... 153,104 170,059 258,196 275,741
Interest and dividends on investments
Securities of U.S. Government and
government agencies .................... 302,442 294,604 660,638 813,757
Obligations of states, political
subdivisions and other obligations
secured by the government .............. 28,410 58,517 57,621 58,517
----------- ----------- ----------- -----------
Total interest on investments ............... 483,956 523,180 976,455 1,148,015
----------- ----------- ----------- -----------
Total interest income ....................... $ 2,751,367 $ 3,141,344 $ 5,584,924 $ 6,359,946
----------- ----------- ----------- -----------
Interest expense:
Interest on deposits ............................. 1,016,853 1,441,706 2,084,212 3,000,148
----------- ----------- ----------- -----------
Total Interest expense ...................... 1,016,853 1,441,706 2,084,212 3,000,148
----------- ----------- ----------- -----------
Net interest income .............................. 1,734,514 1,699,638 3,500,712 3,359,798
Provision for loan losses ............................. (40,313) (37,891) (242,174) (85,532)
----------- ----------- ----------- -----------
Net interest income after provision for
loan losses ................................. $ 1,694,201 $ 1,661,747 $ 3,258,538 $ 3,274,266
----------- ----------- ----------- -----------
Other income:
Service charges on deposit accounts .............. 48,917 55,393 87,659 110,564
Other service charges, commission and fees ....... 128,537 228,932 220,825 369,682
Gain on sale of securities ....................... -0- -0- -0- -0-
Net income - other real estate .............. 2,999 -0- 2,999 -0-
Other income ..................................... 107,994 52,520 187,510 65,579
----------- ----------- ----------- -----------
Total other income .......................... $ 288,447 $ 336,845 $ 498,993 $ 545,825
----------- ----------- ----------- -----------
Other expenses:
Salaries and wages ............................... 530,088 482,937 1,055,820 954,270
Employee benefits ................................ 119,475 115,227 279,973 252,812
Net occupancy expenses ........................... 181,903 154,553 248,339 222,128
Furniture and equipment expenses ................. 17,832 38,765 47,438 75,180
Depreciation ..................................... 88,425 72,481 172,572 143,585
Computer service center .......................... 148,449 104,556 284,956 215,111
FDIC-assessment .................................. (45) 6,666 14,079 20,992
Professional services ............................ 28,327 46,945 100,528 98,645
Advertising ...................................... 51,058 39,350 98,281 59,691
Other operating expenses ......................... 307,328 275,231 555,292 587,052
----------- ----------- ----------- -----------
Total other expenses ........................ $ 1,472,840 $ 1,336,711 $ 2,857,278 $ 2,629,466
----------- ----------- ----------- -----------
Income before income taxes .................. 509,808 661,881 900,253 1,190,625
Less applicable income taxes (Current) ........... 161,000 234,000 360,050 439,000
----------- ----------- ----------- -----------
Income before reduction for minority interest 348,808 427,881 540,203 751,625
Less minority interest income (loss) ............. 12,488 12,570 17,910 23,241
----------- ----------- ----------- -----------
Net income .................................. $ 336,320 $ 415,311 $ 522,293 $ 728,384
----------- ----------- ----------- -----------
Earnings per share .......................... $ 1.01 $ 1.24 $ 1.57 $ 2.18
----------- ----------- ----------- -----------
The accompanying note is an integral part of these financial statements.
2
REPUBLIC CORPORATION AND SUBSIDIARY
Statement of Cash Flows
Six Months Ended
June 30 June 30
2002 2001
------------ ------------
Cash flows and operating activities:
Net income (loss) .................................................. $ 522,293 $ 728,384
------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .......................................... 172,572 143,585
Provision for loan losses ............................. 242,174 85,532
Amortization (accretion) of discounts and
Premium .......................................... 81,178 (440,172)
Other real estate gains/net ........................... (2,999) -0-
Investment Securities gains/net ....................... -0- -0-
Loss on sale of subsidiary stock ...................... 31,377 -0-
Re-appraisal - other real estate ...................... -0- -0-
(Decrease) increase in interest payable ............... (23,782) (199,228)
(Increase) decrease in interest receivable ............ (67,959) (160,801)
(Increase) decrease in other assets ................... (130,561) (273,592)
Increase (decrease) in other liabilities .............. 352,848 498,497
------------ ------------
Total adjustments ......................................................... $ 654,848 $ (346,179)
------------ ------------
Net cash provided by (used in) operating activities ....................... $ 1,177,141 $ 382,205
------------ ------------
Cash flows from investing activities
Proceeds from sales of subsidiary stock ............................ 5,000 20,000
Purchase of subsidiary stock ....................................... -0- (10,000)
Proceeds from maturities of investment securities .................. 5,000,000 15,000,000
Purchase of investment securities .................................. -0- (5,000,000)
Net (increase) decrease in loans made to customers ................. 2,426,081 (3,683,678)
Capital expenditure ................................................ (109,350) (595,058)
Proceeds from sale of other real estate ............................ 96,000 -0-
------------ ------------
Net cash provided by (used in) investing activities ....................... $ 7,417,731 $ 5,731,264
------------ ------------
Cash flows from financing activities
Net increase (decrease) in demand deposits, NOW
account, savings accounts and certificates of deposit .............. 3,969,539 (856,672)
Purchase of treasury stock ................................................ -0- -0-
------------ ------------
Net cash provided by (used in) financing .................................. $ 3,969,539 $ (856,672)
------------ ------------
Net increase (decrease) in cash and cash equivalents ...................... $ 12,564,411 $ 5,256,797
------------ ------------
Cash and cash equivalents at beginning of year:
Cash and due from banks ............................................ 6,740,872 5,813,679
Federal funds sold ................................................. 21,975,000 10,800,000
------------ ------------
Cash and cash equivalents at beginning of year ............................ $ 28,715,872 $ 16,613,679
------------ ------------
Cash and cash equivalents at June 30, 2002
Cash and due from banks ............................................ 5,730,283 4,645,476
Federal funds sold ................................................. 35,550,000 17,225,000
------------ ------------
Cash and cash equivalents at June 30, 2000 ................................ $ 41,280,283 $ 21,870,476
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest ............................................. 1,016,123 3,199,376
Cash paid for income tax ........................................... 384,384 427,000
The accompanying note is an integral part of these financial statements.
3
REPUBLIC CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 2002
Note 1 -- BASIS OF PREPARATION AND PRESENTATION
The consolidated financial statements included herein have been prepared by
The Republic Corporation, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission and include all adjustments which are,
in the opinion of management, necessary for a fair presentation. The condensed
consolidated financial statements include the accounts of the company and its
subsidiaries. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The Republic Corporation believes that the disclosures are adequate
to make the information presented not misleading; however, it is suggested that
these financial statements be read in conjunction with the financial statements
and the notes thereto which are on Form 10-K for the fiscal year ended December
31, 2001. The financial data for the interim periods may not necessarily be
indicative of results to be expected for the year.
Securities that will be held for indefinite periods of time, including
securities that will be used as part of the Company's asset/liability management
strategy and that may be sold in response to changes in interest rates,
prepayments, and similar factors, are classified as Available-for-Sale and
accounted for at fair value.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
ASSET QUALITY
Non-accrual loans, following a first quarter dip, continued to climb,
primarily a result of delayed contract payments to a commercial borrower and the
resulting past due status of this and a small number of other commercial
credits. Restructured loans are higher due to renegotiated monthly payments on a
small number of five figure consumer home loans and one five figure commercial
loan. (Please see Table 1, PROBLEM ASSETS)
During the first half of 2002, a period during which total loans
outstanding declined $2,608m, the bank experienced an increase in loans secured
by 1-4 family residences of $1,525m and a decrease in commercial real estate
loans of $4,163m. During the same period, commercial and industrial loans
increased $851m and consumer installment loans decreased $589m. (Please see
Table 2 LOAN CONCENTRATIONS)
TABLE 1 PROBLEM ASSETS
(dollars in thousands) JUNE 30 DECEMBER 31
------- -------------------------------
2002 2001 2000 1999
------- ------ ------ ------
Nonaccrual loans $1,244 $1,008 $1,076 $ 837
Past-due loans (over 90 days) -0- -0- 149 -0-
Restructured loans 199 81 781 1,022
------ ------ ------ ------
Total problem loans $1,443 $1,089 $2,006 $1,859
Foreclosed assets
Real estate 252 255 38 43
In-substance foreclosures -0- -0- -0- -0-
Other 8 -0- 17 23
------ ------ ------ ------
Total Problem Assets $1,703 $1,344 $2,061 $1,925
Total problem loans as
a percentage of total loans 1.3% 1.0% 1.8% 1.9%
Total problem assets as a
percentage of total loans
and foreclosed assets 1.5% 1.2% 1.8% 2.0%
TABLE 2 LOAN CONCENTRATIONS
(dollars in thousands) JUNE 30 DECEMBER 31
-------- ----------------------
2002 2001 2000
-------- -------- --------
Commercial $ 8,275 $ 7,424 $ 7,361
Agricultural 1,407 1,754 3,029
Real Estate-Construction 3,161 3,262 8,122
Real Estate-Mortgage 87,195 89,617 84,256
Installment loans to Individuals 10,644 11,233 11,210
-------- -------- --------
Totals $110,682 $113,290 $113,978
5
SOURCES AND USES OF FUNDS
The first half of 2002 was characterized by deposit growth of $3,970m and a
decline in loans outstanding of $2,608m. This, coupled with proceeds from a
matured government agency security of $5,000m, caused a $12,564m increase in
cash and cash equivalents. This is arguably in part a result of more competitive
offering rates on the bank's deposit offerings than is the case with regard to
offering rates on commercial real estate loans. (Please see Statement of Cash
Flows, P-3)
LIQUIDITY
The accumulation of liquidity over the past 12 months leveled off in the
second quarter of 2002. At June 30, 2002, the bank's holdings of cash and due
from banks, readily marketable securities and federal funds sold totaled
approximately 41% of total liabilities, compared with 38% at year-end 2001 and
29% at mid-year 2001. (Please see Balance Sheet, P-1)
INTEREST RATE SENSITIVITY MANAGEMENT
In the ordinary course of business, the company is exposed to the risk of
loss from changes in interest rates. The majority of this risk has to do with
timing differences related to the repricing of assets and liabilities. The
company, through its ALCO committee, analyzes and compares these repricing
differences and basis point spreads so as to effectively monitor and adjust the
inevitable earnings impact of rate change. The objective, over time, is to
minimize this earnings impact in all interest rate environments and not to
attempt to anticipate or time the market. The primary tools to accomplish this
are absolute pricing level decisions on both sides of the balance sheet, so as
to address the imbedded "basis risk", as well as overt adjustment to the timing
of repricing events, so as to address "term risk", as a matter of policy. The
modeling used internally consists of 100 basis point and 400 basis point
earnings impact estimates. The instruments that the company typically adjusts in
this regard are loans, securities held to maturity, federal funds sold and
deposit liabilities. Based on the current repricing structure, it is anticipated
that the company has sufficient tools in place to minimize or eliminate any
adverse earning impact caused by interest rate change. The company does not
invest in derivative financial instruments such as futures, forwards, swaps,
options and other financial instruments with similar characteristics and there
is negligible direct risk of adverse impacts resulting from changes in foreign
currency exchange rates, commodity prices or prices of equity securities.
(Please see Repricing Schedule, P-7 and Investment Securities, P-8)
6
INTEREST RATE SENSITIVITY MANAGEMENT
Table 3 - REPRICING SCHEDULE
6-30-02
(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 days)
Loans * 15,877 31,579 17,978 44,955
Federal Funds Sold 35,550 -0- -0- -0-
Taxable Securities ** -0- 5,000 20,000 -0-
Municipal Bonds -0- -0- -0- 2,295
TOTAL 51,427 36,579 37,978 47,250
RATE SENSITIVE LIABILITIES
(Liabilities that can be
repriced within X days)
Time Certificates of Deposit 35,541 42,860 3,758 -0-
NOW Accounts 1,978 -0- -0- -0-
Super NOW Accounts 36,370 -0- -0- -0-
Savings Accounts 9,880 -0- -0- -0-
MMDA Accounts 15,166 -0- -0- -0-
TOTAL 98,935 42,860 3,758 -0-
Interest Rate Sensitivity Gap (47,508) (6,281) 34,220 47,250
Cumulative Interest Rate
Sensitivity Gap (47,508) (53,789) (19,569) 27,681
* Does not include overdrawn demand deposits of $17 thousand
** Does not include $24 thousand in Federal Reserve Bank stock
7
INVESTMENT SECURITIES
TABLE 4
CARRYING UNREALIZED UNREALIZED MARKET
(dollars in thousands) VALUE GAINS LOSSES VALUE
------------ ------------ ---------- -----------
JUNE 30, 2002
(1) Held-to-Maturity:
U.S. Treasury Securities -- -- -- --
Other 27,557,937 488,856 -- 28,046,793
(2) Available-for-Sale Securities
Carried at Fair Value:
U.S. Treasury Securities -- -- -- --
Other 24,000 -- -- 24,000
------------ ------------ ---------- -----------
27,581,937 488,856 -- 28,070,793
------------ ------------ ---------- -----------
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 has occurred. Cost of securities sold is determined on
the specific identification method.
(2) Securities that the bank may sell in response to changes in market
conditions or in the balance sheet objectives of the bank. Securities in this
category will be reported at fair market value. Unrealized gains or losses
(net of tax) will be reported as a separate item in the shareholder's equity
section of the balance sheet. Adjustments will be recorded at least quarterly.
8
CAPITALIZATION:
The decline in total loans, together with the shift away from commercial
real estate and the increase in outstanding home loans, has caused a significant
increase in both risk-based capital ratios during the first half of 2002. The
increase in the leverage ratio during the same period was more modest and was a
by-product of the percentage growth in retained earnings exceeding the
percentage growth in assets. (Please see Table 5 CAPITAL)
Table 5 - CAPITAL
*JUNE 30 DECEMBER
2002 2001
-------- --------
Tier 1 risk-based capital
(minimum is 4%) 15.71% 14.67%
Tier 1 + Tier 2 risk based capital
(minimum is 8%) 16.97% 15.93%
Tier 1 leverage (minimum is 3%) 8.47% 8.30%
*ESTIMATE
RESULTS OF OPERATIONS
NET INTEREST INCOME
All interest income and expense accounts for the first half of 2002 are
lower than the corresponding figures for the prior year period, a result of
declines in market interest rates to 40 year lows. The bank generated
approximately $141m more in net interest income during the current six month
period, an effect that is tapering due to the continued repricing in the loan
portfolio. (Please see Balance Sheet, P-1 and Statement of Income, P-2)
OTHER INCOME AND EXPENSE
Bank results thus far in 2002 continue to be significantly influenced by
the approximately $157m larger provision for loan losses compared with the first
half of 2001. The larger provision was made in response to a slower economy and
a conservative application of loan classification criteria to the bank's
portfolio. Net losses taken thus far are approximately $91m and this total
consists almost entirely of consumer installment loans.
Non-interest income is lower in the current period due to the effect of
lower transaction volume in the lending area on fee income.
Higher costs for third party computing and item processing, advertising and
marketing costs and salaries and employee benefits accounted for most of the
increases in total, non interest expense in the first half of 2002. (Please see
Statement of Income, P-2)
9
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
not applicable
Item 2. CHANGES IN SECURITIES
not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
not applicable
Item 5. OTHER INFORMATION
not applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a). Exhibits
none
b). No reports on Form 8-K have been filed during the quarter for which
this report was filed.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE REPUBLIC CORPORATION
Date: July 18, 2002 /s/ J. Ed Eisemann, IV
--------------------------
Chairman of the Board
Date: July 18, 2002 /s/ Catherine G. Eisemann
--------------------------
Director
11