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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 Commission file number 0-8597 THE REPUBLIC CORPORATION  TEXAS
    
    74-0911766(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)5340 Weslayan, P.O. Box 270462Houston, Texas
    
    77277(Address of principal executive offices)
    
    (Zip Code)
 Issuer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 registeredNone
    
    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 issuer (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 o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of the issuers knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [x] State the issuers revenues for its most recent fiscal year $10,705,937 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.
 $1,720,920 as of June 30, 2003 DOCUMENTS INCORPORATED BY REFERENCE
NONE




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THE REPUBLIC CORPORATION
FORM 10-KSB
INDEX PAGEPART IITEM 1.
    
    BUSINESS
    
    
    
    1ITEM 2.
    
    PROPERTIES
    
    
    
    21ITEM 3.
    
    LEGAL PROCEEDINGS
    
    
    
    22ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    
    22PART IIITEM 5.
    
    MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
    
    
    
    22ITEM 6.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
    
    
    
    22ITEM 7.
    
    FINANCIAL STATEMENTS
    
    
    
    34ITEM 8.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    
    60ITEM 8A.
    
    CONTROLS AND PROCEDURES
    
    
    
    60PART IIIITEM 9.
    
    DIRECTORS AND EXECUTIVE OFFICERS
    
    
    
    61ITEM 10.
    
    EXECUTIVE COMPENSATION
    
    
    
    62ITEM 11.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
    
    
    
    63ITEM 12.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    
    63ITEM 13.
    
    EXHIBITS AND REPORTS ON FORM 8-K
    
    
    
    64ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    
    64SIGNATURES
    
    
    
    
    
    66CERTIFICATIONSCertification of CEO and CFO - Section 302Certification of CEO and CFO - Section 906
 1




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PART I 
 ITEM 1. BUSINESS OVERVIEW The Republic Corporation was chartered in Texas on January 11, 1955 as Columbia
General Investment Corporation, to conduct business in mortgage banking.
Columbia General Investment Corporation acquired The Republic Corporation in
1960 and shortly thereafter changed its name to The Republic Corporation (the
Company). Also in 1960, the Company acquired 75% of the outstanding stock of
The First National Bank in Trinidad, Colorado (the Bank). In 1961, an
additional 23% of the Bank stock was purchased by the Company, and since then
only qualifying shares for directors of the Bank have been held by other than
the Company. Since discontinuing mortgage banking operations in 1963, the
Company has carried on no significant operations other than as an advisor to
the Bank. Since its inception, the Bank has placed great emphasis on a strong capital
position, liquidity, asset quality through conservative loan underwriting and
investment practices and personal attention to customer needs. In delivering
banking services to its geographic market, Las Animas County, Colorado,
Huerfano County, Colorado and Colfax County, New Mexico, the Bank has
strategically placed traditional, full service bank facilities as well as a
non-traditional in-store bank facility, a loan production/deposit production
facility and free standing drive-up ATM facilities. See Item 2-Properties.
Additionally, the Bank has created and offers high tech products to its
customers such as; iBank, a transactional internet banking product, Bankline, a
telephone banking product and a VISA CheckCard debit card. The Companys strategy for growth (see Growth Strategy) is primarily based on
the establishment and progressive improvement of access portals, whether they
be traditional bank facilities or the non traditional, such as internet
banking. This entails a combination of person-to-person, or high touch
delivery of banking services and non personto-person, or high tech,
delivery. Management is of the opinion that both approaches have value, that a
growing percentage of the Companys customer base expects this range of
delivery and that an independent community bank can be effective in providing
this in the marketplace. See Managements Discussion and Analysis of Financial Condition and Results of
Operations-Safe Harbor Statement under the Private Securities Litigation Reform
Act of 1995 OPERATING STRATEGY The Companys strategy as an independent, one-bank holding company has been
carried out through operations of the Bank, including its branches. The Bank,
under the direction of the Company, emphasizes local relationship banking from
small and medium sized businesses and individuals. The Banks operating
strategies include:  
    
    Personal Attention and Effective Delivery  
    
    Maintaining Asset Quality  
    
    Asset/Liability Management Personal Attention and Effective Delivery.The Banks strategy is one of
providing customers with the personal attention that has been an enduring
characteristic throughout its history, coupled with effective 1




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delivery of banking services via conveniently placed full service branches, ATM
facilities and free, transactional internet banking. The latter is not viewed
by management as a departure from the concept of personal service but rather a
necessary means of access made more effective by personal service. The Banks advertising is targeted at each of the communities it serves and
includes a quarterly, full color newsletter, which includes articles on area
businesses and on banking topics and bank products. This newsletter is mailed
to each address in the three county market and is posted on the Banks website. Maintaining Asset Quality.The Banks lending policy and strategy are rooted in
conservative underwriting standards and the avoidance of lending outside of the
Banks market. This philosophy of lending has generally resulted in low ratios
of nonperforming assets to total assets and controllable loan losses. See
Nonperforming Assets. The Banks investment policy and practices are also conservative, with strict
guidelines regarding credit risk. See Held-to-Maturity Securities. Asset/Liability Management.The long term strategy of the Bank in this area is
the avoidance of undue interest rate risk. Exposure to interest rate risk
arises from volatile interest rates and changes in the Banks balance sheet
mix. The Banks policy is to control the exposure of its earnings to changing
interest rates through the maintenance of a mix of assets and liabilities that
generate a net interest margin that is least affected by interest rate changes.
See Item 6-Managements Discussion and Analysis of Financial Condition and
Results of Operations-Asset/Liability Management. GROWTH STRATEGY The Company has focused on growth as an independent entity and adopted an
internal growth strategy through establishing full-service branches, a loan
production/deposit production office and free-standing ATM facilities
throughout its three county market area. The Banks main office and two
existing full service branches are structured to provide complete banking
services in each location and each branch is headed by a President or branch
manager with responsibility and authority to service the banking and lending
needs of local businesses and consumers. The loan production/deposit production
office is headed by an office manger with similar responsibility and authority
to serve the non-transactional needs of local businesses and consumers,
including account opening and loan negotiation and closing. The marketing for
each of the outlying locations is semi-autonomous from the Banks main office
and management has encouraged each location to foster its own geographic
identity in order to complement the Banks philosophy of being responsive to
local customer input rather than the customer being asked to conform to a
centralized entity without having the opportunity to give input. Free-standing,
drive-up ATM facilities have also been established in each of the counties the
Bank serves, providing 24 hour cash withdrawal, deposit and account inquiry and
transfer capability. See Item 2-Properties. The Bank has additionally
committed to an effective delivery of banking services over the internet, a
product that is fully operational and is marketed as another branch for those
customers who opt to bank in this manner. The primary growth strategy for the Company will be the introduction of new
products and facilities in our markets so as to attract a growing share of bank
product usage by those who reside or do business locally. To accommodate the
Companys anticipated growth from the new residents in the community, or from
existing residents who formerly did their banking elsewhere, management intends
to continue to recruit and develop additional high-quality personnel and
enhance its internal management systems. Management believes that such
personnel and systems are necessary if the Company is to continue its growth
strategy without compromising its customer-oriented approach to banking and its
commitment to 2




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maximize asset quality. There can be no assurance, however, that the Company
will achieve its growth objectives. ECONOMIC ENVIRONMENT IN MARKET AREAS SERVED The Companys principal market for loans and deposits is the three county rural
area comprised of Las Animas, and Huerfano Counties, in Colorado and Colfax
County, New Mexico. These markets depend primarily on tourism and continued
coal-bed methane gas development, an activity that has grown in significance
over the past decade. The latter has served to prop up the local economy during
the post September 11, 2001 downturn but has also partially re-established the
areas former dependence upon the energy sector. The development of light
industry is also marginally successful thus far and capable of expansion,
limited only by the scarcity of water resources and a limited skilled labor
pool. Going forward, it is managements expectation that the economic conditions in
the Companys market will continue to keep pace with the ongoing slow recovery
nationally and, to the extent that natural gas prices remain elevated, will
continue to be supported by gas development locally. This set of circumstances
has yielded a negative loan and deposit growth experience for the Company in
the recent past and it is our anticipation that this will persist. LENDING ACTIVITIES General.The Bank provides a range of commercial and retail lending services
including, but not limited to, commercial business loans, commercial and
residential real estate construction loans, commercial and residential real
estate mortgage loans, consumer loans, agriculture loans, revolving lines of
credit and letters of credit. Currently, the primary focus of the Bank is on
residential real estate mortgage and construction loans, largely in response to
the recent upsurge in refinancing and housing starts tied to historically low
interest rates, and commercial business lending to small area businesses. The
Bank places a strong emphasis on asset quality and maintains conservative
underwriting standards. The Bank monitors the concentration of its commercial
loan portfolio in an effort to avoid over-allocating its funds available for
lending to any industry sector. Loan Portfolio Composition.The following table sets forth the composition of
the Companys loan portfolio by type of loan, aggregate dollar amount and
percentage of total loans at the dates indicated. LOAN PORTFOLIO MIX December 31,
    
    December 31,2003
    
    2002(Dollars in thousands)
    
    Amount
    
    %
    
    Amount
    
    %Real estate mortgage
    
    $
    82,973
    
    
    
    79.7
    
    
    $
    83,928
    
    
    
    78.0Real estate construction
    
    
    6,915
    
    
    
    6.6
    
    
    
    3,672
    
    
    
    3.4Commercial and industrial
    
    
    6,716
    
    
    
    6.4
    
    
    
    9,676
    
    
    
    9.0Agriculture
    
    
    1,237
    
    
    
    1.2
    
    
    
    1,244
    
    
    
    1.2Consumer
    
    
    7,997
    
    
    
    7.7
    
    
    
    10,838
    
    
    
    10.0Other
    
    
    29
    
    
    
    0.0
    
    
    
    2
    
    
    
    0.0Total
    
    
    105,867
    
    
    
    101.6
    
    
    
    109,360
    
    
    
    101.6Less allowance for loan losses
    
    
    (1,700
    )
    
    
    1.6
    
    
    
    (1,700
    )
    
    
    1.6Loans receivable, net
    
    $
    104,167
    
    
    
    100.0
    
    
    $
    107,660
    
    
    
    100.0
 3




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Real Estate Mortgage Loans.Real estate loans are the Banks primary focus and
the strength of its lending activity. The Bank generally restricts its
residential mortgage loans to owner occupied homes located within the Banks
geographic market area. The Bank adheres to a maximum loan-to-value ratio of
80% on primary residences and 70% on second homes. These loans are typically
structured to mature 15 years from the day of making and are amortized for 30
years or less. The Bank requires documentation that supports a strong debt
servicing capability and an acceptable credit rating from qualifying
applicants. At December 31, 2003, the Bank held approximately $66,328,000, or
79.9%, of total loans secured by finished real property, in loans secured by
finished, single family residential property. The Bank generally restricts its commercial real estate lending activity to
local, owner-occupied properties or to local, investor properties that are
owned by customers with which the Bank has a satisfactory banking relationship.
Commercial real estate loans are generally underwritten with a maximum
loan-to-value ratio of 75% and are structured at a daily or annually variable
interest rate or a three or five-year fixed rate. The Bank requires personal
guarantees on these loans and requires qualifying applicants to have a strong
history and prospect of debt servicing capability and an acceptable credit
rating. At December 31, 2003, the Bank held approximately $15,935,000, or
19.2%, of total loans secured by finished real property, in loans secured by
finished commercial real estate. The primary risks of loans of this type are
the borrowers inability to pay and deterioration of the value of the
collateralized property. Management does not believe that the Banks existing
commercial real estate loan portfolio represents a material risk of loan
losses. Real Estate Construction Loans.The Bank originates single family residential
construction loans for owner occupants and typically combines the construction
and permanent financing into one contract. The Bank collects interest monthly
and charges a fee for conducting periodic construction inspections during the
construction phase, which is typically structured to be 6 months in duration. The Bank also originates single family residential construction loans to
builders who have demonstrated a favorable record of performance with the Bank
or within the Banks geographic market area on both a pre-sold and speculative
basis. The Bank typically restricts the latter to no more than one unsold
property at any given time and restricts the loan amount to no more than 75% of
the finished, appraised value. The Bank also finances construction of
commercial properties and typically combines the construction and permanent
financing into one contract. The Bank carefully monitors construction draws and
inspects each property frequently to insure the work is being completed as
specified. Construction inspections are performed by qualified independent
contractors. Commercial and Industrial Loans.The Bank provides a wide range of commercial
business loans, including lines of credit for working capital purposes and term
loans for the acquisition of equipment and other purposes. Collateral for these
loans generally includes inventory, equipment or deposit account balances.
Where warranted by the overall financial condition of the borrower, loans may
be made on an unsecured basis. The Bank requires personal guarantees and
adheres to a maximum loan to value of 70% on equipment and 50% on most types of
inventory. Secured loans of this type are typically structured for daily or
annually variable interest rates, with equipment financing occasionally
structured on three or five year fixed terms. The primary repayment risk on
loans of this type is failure of the business due to economic or financial
factors, or most typically, because of varying degrees of borrower
inexperience. Consumer Lending.The Bank provides a full range of consumer loans. The primary
risk of consumer lending relates to the personal circumstances of the borrower.
The Bank requires a documented repayment source that is adequate, seasoned and
sustainable and a satisfactory credit rating. In addition to collateral
loan-to-value limits set forth in the Banks loan policy, the Bank requires
junior loan officers to obtain a second opinion from a senior loan officer
prior to approval. 4




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Agriculture Loans.While not a significant source of business for the Bank,
the Bank occasionally finances livestock acquisition and operating expenses of
area ranching entities. All of the livestock loans are structured for annually
variable interest rates and either amortize for five to seven years or zero out
annually, depending upon the nature of the operation. Livestock inspections are
conducted regularly by an independent contractor for the Bank. Commitments and Contingent Liabilities.In the ordinary course of business, the
Bank enters into various types of transactions that include commitments to
extend credit as described in Note 14 of the Notes to Consolidated Financial
Statements. The Bank applies the same credit standards to these commitments as
it uses in all its lending activities and has included these commitments in its
lending risk evaluations. The Banks exposure to credit loss under commitments
to extend credit is represented by the amount of unsecured commitments. It is
managements policy not to commit to extend credit at or below market interest
rates, except where necessary in addressing troubled debt restructurings. Credit Authority and Loan Limits.All loans, credit lines and letters of
credit are subject to the same approval procedures and amount limitations.
These limitations apply to the total outstanding indebtedness of the borrower
to the Bank, including indebtedness of any guarantor. Each lender in the Bank
has a separate, discretionary lending authority up to limits based on loan or
aggregate loan amounts. The Banks Loan Committee must approve individual
requests in excess of $40,000 for secured loans; $10,000 for unsecured loans
and an aggregate of $100,000 with regard to loans made by the Banks President
or Senior Vice Presidents. The limits are $30,000, $10,000 and $80,000,
respectively, for vice presidents and $30,000, $5,000 and $80,000,
respectively, for loan officers. The Loan Committee consists of all senior and
junior management and all resident, outside directors able to attend weekly
meetings. Each committee meeting must be chaired by the Chairman of the Board
and voting members of the committee will constitute a quorum, however, one of
the voting members must be the Chairman of the Board, President or Senior Vice
President of the Bank. Under federal law, permissible loans to one borrower by the Bank are generally
limited to 15% of the Banks unimpaired capital, surplus, undivided profits and
loan loss reserve (approximately $2,950,000 at December 31, 2003). As a matter
of policy, the Bank utilizes a guidepost house limit on loans to any borrower
of 10% of the Banks unimpaired capital, surplus, undivided profits and loan
loss reserve (approximately $1,970,000 at December 31, 2003). This limit has
not ever been exceeded. The Bank does not have any participations bought or
sold in fiscal year 2003 and there were no foreign loans in the same period. Loan Policy.The Banks lending activities are guided by its Loan Policy. This
policy is reviewed annually by the Policy Committee, which is a subcommittee of
and is tasked by the Banks Audit Committee. Reports consisting of recommended
changes in the loan policy are submitted to the Banks Board of Directors for
approval. The Bank supplements its internal supervision and audit of its
lending operations with independent examinations performed by professional,
experienced loan reviewers and auditors. 5




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NONPERFORMING ASSETS The Companys nonperforming assets consist of non-accrual loans, past due
loans, restructured loans and foreclosed assets held for sale. The following
table sets forth information with respect to these assets at the dates
indicated. NONPERFORMING ASSETS December 31
    
    December 312003
    
    2002(Dollars in thousands)Non-accrual loans
    
    $
    881
    
    
    $
    2,304Loans which are contractually past due 90 days or more as to principal or
interest, but have not been put on a non-accrual basis
    
    
    
    
    
    
    Restructured loans
    
    
    
    
    
    
    256Total nonperforming loans
    
    $
    881
    
    
    $
    2,560Foreclosed assets:Real estate
    
    $
    624
    
    
    $
    351Other
    
    $
    20
    
    
    
    Total nonperforming assets
    
    $
    1,525
    
    
    $
    2,911Ratio of total nonperforming loans to total assets
    
    
    0.49
    %
    
    
    1.41
    %Ratio of total nonperforming loans to total loans
    
    
    0.83
    %
    
    
    2.34
    %Ratio of total nonperforming assets to total assets
    
    
    0.84
    %
    
    
    1.60
    %Ratio of allowance for loan losses to total nonperforming loans
    
    
    192.96
    %
    
    
    66.41
    %
 Non-accrual and Past Due Loans.The Companys financial statements are prepared
on the accrual basis of accounting, including the recognition of interest
income on its loan portfolio, unless a loan is placed on non-accrual status.
Loans are placed on non-accrual when they became past due 60 days or when there
are serious doubts about the collectibility of principal or interest. Amounts
received on non-accrual loans, generally are applied interest first and balance
to principal, so long as principal collection is reasonably assured. At
December 31, 2003, the Company had $881,000 of loans accounted for on a
non-accrual basis compared to $2,304,000 at December 31, 2002. Since all loans
which reach 60 days past due are placed on non-accural, there were no loans
past due 90 days or more and still accruing during 2003. Restructured loans.By definition, restructured loans are those for which
concessions, including the reduction of interest rates below a rate otherwise
available to that borrower or deferral of interest or principal, are granted
due to the borrowers weakened financial condition. Interest on restructured
loans is accrued at the restructured rates when it is anticipated that no loss
of original principal will occur. The Company had no restructured loans at
December 31, 2003 and $256,000 at December 31, 2002. Foreclosed Assets Held for Sale.Assets acquired by foreclosure or in
settlement of debt and held for sale are valued at no more than fair value as
of the date of foreclosure, less the anticipated cost of selling. 6




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Management periodically reevaluates the value of foreclosed assets held for
sale and adjusts the book value if necessary. Gains and losses on sales of
foreclosed assets are included in other income. The Bank had foreclosed real
estate of approximately $624,000 and a repossessed mobile home at $20,000 on
December 31, 2003, and approximately $351,000 in foreclosed real estate on
December 31, 2002. Impaired Loans.Impaired loans, which include non-accrual loans noted above and
potential problem loans, where known information about possible credit problems
causes management to doubt the ability of such borrowers to comply with
contractual repayment terms, total $1,486,000 and $2,560,000 at December 31,
2003 and 2002, respectively. No specific allocation of the allowance for loan
losses was made to impaired loans in 2003 and 2002. Interest of $111,585 and
$24,343 was recognized on average impaired loans of $1,570,000 and $1,706,000
in 2003 and 2002, respectively. ANALYSIS OF ALLOWANCE FOR LOAN LOSSES The allowance for loan losses represents managements recognition of the risks
of extending credit and its evaluation of the quality of the loan portfolio.
The allowance is maintained at a level considered adequate to provide for
anticipated loan losses based on managements assessment of various factors
affecting the loan portfolio, including a review of problem loans, business
conditions and loss experience, loan growth, or the absence thereof, and an
overall evaluation of the quality of the underlying collateral and holding and
disposal costs. The allowance is increased by provisions charged to operations
and reduced by loans charged off, net of recoveries. Allowances are provided
for individual loans where ultimate collection is considered questionable by
management after reviewing the current status of problem loans, including loans
that are contractually past due, and considering the net realizable value of
the security and of the loan guarantees, if applicable. Management believes that the Companys allowance for loan losses is adequate to
cover anticipated losses and is in accordance with generally accepted
accounting principles. It is possible that management will increase the
allowance for loan losses or that regulators, when reviewing the Banks loan
portfolio in the future, may require the Bank to increase such allowance,
either of which could adversely affect the Companys earnings. Further, there
can be no assurance that the Companys actual loan losses will not exceed its
allowance. 7




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The following table sets forth information regarding changes in the Companys
allowance for loan losses for the periods indicated. ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES 2003
    
    2002(Dollars in thousands)Balance at beginning of period
    
    $
    1,700
    
    
    $
    1,612Charge-offs:Commercial loans
    
    
    115
    
    
    
    18Real estate  -  construction loans
    
    
    0
    
    
    
    0Real estate  -  mortgage loans
    
    
    45
    
    
    
    0Consumer loans
    
    
    316
    
    
    
    363Total charge-offs
    
    
    476
    
    
    
    381Recoveries:Commercial loans
    
    
    75
    
    
    
    24Real estate  -  construction loans
    
    
    0
    
    
    
    0Real estate  -  mortgage loans
    
    
    7
    
    
    
    0Consumer loans
    
    
    120
    
    
    
    87Total recoveries
    
    
    202
    
    
    
    111Net charge-offs (recoveries)
    
    
    274
    
    
    
    270Provision for loan losses
    
    
    274
    
    
    
    358Balance at end of period
    
    $
    1,700
    
    
    $
    1,700Ratio of net charge-offs (recoveries)
to average loans
    
    
    0.25
    %
    
    
    0.24
    %Average loans outstanding during the period
    
    $
    108,127
    
    
    $
    110,688
 The following table sets forth the allowance for loan losses by loan category,
based upon managements assessment of the risk associated with such categories,
at the dates indicated and summarizes the percentage of gross loans in each
category to total gross loans. 8




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RESERVE FOR LOAN LOSS ALLOCATION December 31,
    
    December 31,2003
    
    2002Percentage
    
    
    
    
    
    Percentageof gross loans
    
    
    
    
    
    of gross loansAmount
    
    in each
    
    Amount
    
    in eachof
    
    category to
    
    of
    
    category to(Dollars in thousands)
    
    Allowance
    
    total loans .
    
    Allowance
    
    total loans .Real estate mortgage
    
    $
    231
    
    
    
    81.01
    %
    
    $
    481
    
    
    
    76.74
    %Real estate construction
    
    
    3
    
    
    
    3.90
    %
    
    
    0
    
    
    
    3.36
    %Commercial and industrial
    
    
    96
    
    
    
    6.34
    %
    
    
    10
    
    
    
    8.85
    %Agriculture
    
    
    0
    
    
    
    1.17
    %
    
    
    1
    
    
    
    1.14
    %Consumer and other
    
    
    56
    
    
    
    7.58
    %
    
    
    193
    
    
    
    9.91
    %Unallocated
    
    
    1,314
    
    
    
    0.00
    %
    
    
    1,015
    
    
    
    0.00
    %Total
    
    $
    1,700
    
    
    
    100.00
    %
    
    $
    1,700
    
    
    
    100.00
    %
 INVESTMENT ACTIVITIES The Bank maintains a securities portfolio comprised of U.S. Government
sponsored agency securities, municipal securities and other, miscellaneous
investment securities. The Banks investment policy also permits the Bank to
invest in U.S. Treasury Securities. The Company manages its investment
portfolio to (i) maximize safety and soundness, (ii) provide adequate
liquidity, (iii) maximize rate of return within the constraints of applicable
liquidity requirements (with liquidity taking precedence over return) and (iv)
complement asset/liability management policies. The Banks Asset and Liability
Committee, which is made up of the Banks Chairman of the Board and all
remaining senior and junior officers and resident, outside directors, oversees
the Banks investment portfolio with the assistance of the Banks Investment
Committee, which is made up of the Banks Chairman of the Board, the Banks
Vice President and two outside directors. In assessing the Banks exposure to
the possibility of any significant increase in market interest rates from the
present 45 year low, the Banks Asset and Liability Committee has opted at
present to keep the average maturities of most of the investment portfolio to
less than 2 years. This has caused average yields in the 2003 period to be
lower than would have been the case if these same funds had been placed in
instruments with longer maturities. The committee, therefore, has chosen to
trade some of the Banks current earnings in return for a heightened level of
preparedness for rising rates. The committee would not likely extend these
maturities until such time as market interest rates have moved to a level where
there is sufficient
room for interest rates to decline and there is a reasonable expectation that
they might indeed decline. See Item 6.  Managements Discussion and Analysis
of Financial Condition and Results of Operations  Asset/Liability Management. 9




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The table below provides the amortized cost and fair value of the Companys
investment securities at each of the dates indicated. INVESTMENT PORTFOLIO COST VS FAIR VALUE Year Ended December 31,2003
    
    2002
    
    2001Amortized
    
    
    
    
    
    Amortized
    
    
    
    
    
    AmortizedCost
    
    Fair Value
    
    Cost
    
    Fair Value
    
    Cost
    
    Fair Value(Dollars in thousands)Held to Maturity:U.S. Treasury securities
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    U.S. government agencies and corporations
    
    
    24,365
    
    
    
    24,485
    
    
    
    20,175
    
    
    
    20,682
    
    
    
    30,344
    
    
    
    30,688Obligations of states and political subdivisions
    
    
    2,295
    
    
    
    2,593
    
    
    
    2,295
    
    
    
    2,511
    
    
    
    2,295
    
    
    
    2,349Other bonds, notes and securities
    
    
    663
    
    
    
    663
    
    
    
    24
    
    
    
    24
    
    
    
    24
    
    
    
    24Total
    
    $
    27,323
    
    
    $
    27,741
    
    
    $
    22,494
    
    
    $
    23,217
    
    
    $
    32,663
    
    
    $
    33,061
 The following table provides the carrying values, maturities and weighted
average yields of the Companys investment portfolio on the dates indicated.
The yield is computed on a full tax equivalent basis to reflect the effect of
tax exempt income earned on municipal obligations in the investment securities
portfolio. A 37% tax rate was used. INVESTMENT PORTFOLIO MATURITIES AND YIELDS
December 31, 2003 Due after
    
    Due afterDue in
    
    one year
    
    five yearsone year
    
    through
    
    through
    
    Due afteror less
    
    five years
    
    ten years
    
    ten years
    
    Total(Dollars in thousands)U.S. treasury securities:Balance
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Weighted average yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %U.S. government agencies and corporationsBalance
    
    $
    10,030
    
    
    $
    14,335
    
    
    $
    
    
    
    $
    
    
    
    $
    24,365Weighted average yield
    
    
    3.46
    %
    
    
    1.70
    %
    
    
    0
    %
    
    
    0
    %
    
    
    2.42
    %Obligations of states and political subdivisionsBalance
    
    $
    
    
    
    $
    
    
    
    $
    652
    
    
    $
    1,643
    
    
    $
    2,295Weighted average yield
    
    
    0
    %
    
    
    0
    %
    
    
    7.25
    %
    
    
    7.89
    %
    
    
    7.71
    %Other bonds, notes and securitiesBalance
    
    $
    663
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    663Weighted average yield
    
    
    2.33
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    2
    %Total:Balance
    
    $
    10,693
    
    
    $
    14,335
    
    
    $
    652
    
    
    $
    1,643
    
    
    $
    27,323Weighted average yield
    
    
    3.39
    %
    
    
    1.70
    %
    
    
    7.25
    %
    
    
    7.89
    %
    
    
    2.87
    %
 The Bank also invests in tax-exempt securities in order to help control taxable
income and support community municipal funding needs. Interest paid on
tax-exempt securities is non-taxable for ordinary income tax purposes and
partially taxable for alternative minimum tax purposes. Management attempts to
balance its investments in tax-exempt securities in order to maximize the tax
benefits from these investments. 10




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SOURCE OF FUNDS General.The Banks primary source of funds has historically been customer
deposits. Scheduled loan repayments are a relatively stable source of funds,
while deposit inflows and unscheduled loan prepayments, which are influenced by
general interest rate levels, interest rates available on other investments,
competition, economic conditions and other factors, are not. Borrowings may be
used on a short-term basis to compensate for reductions in other sources of
funds (such as deposit inflows at less than projected levels). Borrowings may
also be used on a longer term basis to match the maturity or repricing
intervals of assets. In 2003, the Bank became a member of the Federal Home Loan
Bank of Topeka (the FHLB) through the acquisition of FHLB stock, which
totaled $638,800 on December 31, 2003. The minimum number of shares of FHLB
stock, which must be held in order to qualify for FHLB membership, is a
function of bank asset size and total borrowings from the FHLB, if any. The
FHLB currently provides the Bank with access to a collateralized credit line of
approximately $61,590,000, as well as a source to sell excess federal funds.
To date, the Bank has not taken advantage of its FHLB borrowing capability. In addition to the Banks FHLB borrowing privilege, the Bank has an unsecured
federal funds purchase line at Bankers Bank of the West in Denver, Colorado in
the amount of $8,090,000. This source has also remained untapped thus far. Deposit Activities.The Bank offers a variety of accounts for depositors
designed to attract both short-term and long-term deposits. These accounts
include certificates of deposit (CDs), savings accounts, money market deposit
accounts, checking and negotiable order of withdrawal (NOW) accounts and
individual retirement accounts. These accounts generally earn interest at rates
established by management based on competitive market factors and managements
desire to increase or decrease total deposits or certain types or maturities of
deposits. The Bank has never sought brokered deposits and does not currently
intend to do so in the future. CDs in the amount of $100,000 or more are considered to be a more volatile and
less dependable source of funding. The following table depicts the amount and
maturity of these accounts for the dates indicated. NON CORE DEPOSITS December 31(Dollars in thousands)
    
    2003
    
    2002CDs over $100,000 with remaining maturityLess than three months
    
    $
    9,674
    
    
    $
    9,640Three to six months
    
    
    6,265
    
    
    
    7,507Over six months to one year
    
    
    6,506
    
    
    
    5,118Over one year
    
    
    2,469
    
    
    
    1,986Total
    
    $
    24,914
    
    
    $
    24,251
 COMPETITION The Bank primarily competes with seven banks and one savings and loan, each
with full service banking facilities located in our 3-county market. The total
number of competing offices is presently fourteen, consisting of two main
office locations, each owned and operated by community banks affiliated with
the same group of tiered holding companies, one main office location owned and
operated by a mutually owned savings and loan, six full service branch
facilities owned and operated by community banks located in this market or in
the region and five full service branch facilities owned and operated by large 11




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##### Table of Contents



out of state, bank holding companies. The Bank also competes for loans,
deposits and other services with a number of small credit unions, mortgage
bankers, insurance agencies, stock brokers and a number of government
agencies. The principal methods of competition in the industry are price (i.e.
interest rates and fees), scope and type of services offered and quality of
service. Many of these competitors have substantially greater resources than
this Bank. In addition, by virtue of their larger capital bases, different
regulatory environment or affiliation with larger, multi-bank holding
companies, some of the banks or entities with which we compete have
substantially larger lending limits, more liberal underwriting criteria in the
near term or other service functions for their customers which we can not and
believe should not offer, or can offer only through correspondents. Management
is of the opinion that personal attention, coupled with attractive deposit
offering rates and loan terms and a funds management strategy that does not put
loan customers at extreme risk of rising interest rates, is the best, long term
competitive posture. Additionally, during the past several years, substantial
consolidation among financial institutions in Colorado and New Mexico has
occurred. Management believes that this consolidation has led to substantial
account disruption for small businesses and consumers who fall below the focus
threshold for larger banks and which have had their lending relationship at
such banks altered or severed. Management further believes that this may lead
customers in this market area to seek a relationship with smaller, service
oriented, yet technologically capable, institutions such as this Bank. EMPLOYEES At December 31, 2003, the Bank had approximately 75 total employees and the
Company had 3 employees. The Bank has placed a high priority on selective
hiring and technical and customer service training in order to staff the Bank
effectively. New hires are selected on the basis of both technical skills and
customer service capabilities. None of the Banks employees are covered by a
collective bargaining agreement with the Bank and management believes that its
relationship with its employees as a group is good. SUPERVISION AND REGULATION Bank holding companies and banks are extensively regulated under both federal
and state law. The information contained in this section summarizes portions of
the applicable laws and regulations relating to the supervision and regulation
of the Company and its subsidiary. These summaries do not purport to be
complete, and they are qualified in their entirety by reference to the
particular statutes and regulations described. Any change in applicable law or
regulation may have a material effect on the business and prospects of the
Company and its subsidiary. BANK HOLDING COMPANY REGULATION The Company is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended, and is registered as such with the Federal
Reserve Board. Under the current terms of that Act, activities of the Company,
and those of companies which it controls or in which it holds more than 5% of
the voting stock, are limited to banking or managing or controlling banks or
furnishing services to or performing services for its subsidiaries, or any
other activity which the Federal Reserve Board determines to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. In making such determinations, the Federal Reserve Board is required
to consider whether the performance of such activities by a bank holding
company or its subsidiaries can reasonably be expected to produce benefits to
the public such as greater convenience, increased competition or gains in
efficiency that outweigh the possible adverse effects, such as an undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices. 12




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##### Table of Contents



Bank holding companies, such as the Company, are required to file with the
Federal Reserve Board certain reports and information and are required to
obtain prior approval of the Board to engage in a new activity or to acquire
more than 5% of any class of voting stock of any company. Pursuant to the
Riegle-Neal Interstate Branching and Efficiency Act of 1994 (Riegle-Neal
Act), subject to approval by the Federal Reserve Board, bank holding companies
are authorized to acquire either control of or substantial assets of, a bank
located outside the bank holding companys home state. These acquisitions are
subject to limitations, which are mentioned in the discussion on Interstate
Banking which follows. The Riegle-Neal Act reaffirms the right of states to
segregate and tax separately incorporated subsidiaries of a bank or bank
holding company. The Riegle-Neal Act also affects interstate branching and
mergers. The Federal Reserve Board has authorized the acquisition and control by bank
holding companies of savings and loan associations and certain other savings
institutions without regard to geographic restrictions applicable to
acquisition of shares of a bank. The Federal Reserve Board is authorized to adopt regulations affecting various
aspects of bank holding companies. Pursuant to the general supervisory
authority of the Bank Holding Company Act and directives set forth in the
International Lending Supervision Act of 1983, the Federal Reserve Board has
adopted capital adequacy guidelines prescribing both risk-based capital and
leverage ratios. The enactment of the Gramm-Leach-Bliley Act of 1999 (the GLB Act) repeals
sections 20 and 32 of the Banking Act of 1933, allowing new opportunities to be
available for banks, other depository institutions, insurance companies and
securities firms to enter into combinations that permit a single financial
service organization to offer customers a more complete array of financial
products and services. To further this goal, the GLB Act amends section 4 of
the Act providing a new regulatory framework for regulation through the
financial holding company (FHC), which will have as its umbrella regulator
the Federal Reserve Board. Functional regulation of the FHCs separately
regulated subsidiaries will be conducted by their primary functional regulator.
Pursuant to the GLB Act, bank holding companies, subsidiary depository
institutions thereof and foreign banks electing to qualify as a FHC must be
well managed, well capitalized and at least rated satisfactory under the
Community Reinvestment Act in order for them to engage in new financial
activities. The GLB Act provides a federal right to privacy of non-public
personal information of individual customers. The GLB Act and Regulation S-P
became effective on November 13, 2000 with full compliance mandatory by July 1,
2001. In October 2001, the USA PATRIOT Act of 2001 and the International Money
Laundering Abatement and Anti-Terrorist Financing Act of 2001 were enacted.
These statutes contain law enforcement and regulatory provisions that require
the Bank to respond to requests for information or verify information provided
from time to time by the Office of the Comptroller of the Currency. REGULATORY CAPITAL REQUIREMENTS Risk-Based Capital Guidelines. The Federal Reserve Board established risk-based
capital guidelines for bank holding companies effective March 15, 1989. The
guidelines define Tier I Capital and Total Capital. Tier I Capital consists of
common and qualifying preferred shareholders equity and minority interests in
equity accounts of consolidated subsidiaries, less goodwill and 50% (and in
some cases up to 100%) of investment in unconsolidated subsidiaries. Total
Capital consists of Tier I Capital plus qualifying mandatory convertible debt,
perpetual debt, certain hybrid capital instruments, certain preferred stock not
qualifying as Tier I Capital, subordinated and other qualifying term debt up to
specified limits, and a portion of the allowance for credit losses, less
investments in unconsolidated subsidiaries and in other designated subsidiaries
or other associated companies at the discretion of the Federal Reserve Board,
certain intangible assets, a portion of limited-life capital instruments
approaching maturity and reciprocal 13




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##### Table of Contents



holdings of banking organizations capital instruments. The Tier I component
must constitute at least 50% of qualifying Total Capital. Risk based capital ratios are calculated with reference to risk-weighted
assets, which include both on-balance sheet and off-balance sheet exposures.
The risk-based capital framework contains four risk-weighted categories for
bank holding company assets0%, 20%, 50% and 100%. Zero percent risk-weighted
assets include, generally, cash and balances due from Federal Reserve Banks,
and obligations unconditionally guaranteed by the U.S. government or its
agencies. Twenty percent risk weighted assets include, generally, claims on
U.S. Banks and obligations guaranteed by U.S. government sponsored agencies as
well as general obligations of states or other political subdivisions of the
United States. Fifty percent risk-weighted assets include, generally, loans
fully secured by first liens on one-to-four family residential properties,
subject to certain conditions. All assets not included in the foregoing
categories are assigned to the 100% risk-weighted category, including loans to
commercial and other borrowers. As of year end 1992, the minimum required
ratio for qualifying Total Capital became 8%, of which at least 4% must consist
of Tier I Capital. At December 31, 2003, the Companys Tier I and Total Capital
ratios were 19.54% and 20.79%, respectively. The current risk-based capital ratio analysis establishes minimum supervisory
guidelines and standards. It does note evaluate all factors affecting an
organizations financial condition. Factors which are not evaluated include (i)
overall interest rate exposure; (ii) quality and level of earnings; (iii)
investment or loan portfolio concentrations; (iv) quality of loans and
investments; (v) the effectiveness of loan and investment policies; (vi)
certain risks arising from nontraditional activities; and (vii) managements
overall ability to monitor and control other financial and operating risks,
including the risks presented by concentrations of credit and nontraditional
activities. The capital adequacy assessment of federal bank regulators will,
however, continue to include analyses of the foregoing considerations and in
particular, the level and severity of problem and classified assets. Market
risk of a banking organizationrisk of loss stemming from movements in market
pricesis not evaluated under the current risk-based capital ratio analysis
(and is therefore analyzed by the bank regulators through a general assessment
of an organizations capital adequacy) unless trading activities constitute 10
percent or $1 billion or more of the assets of such organization. Such an
organization (unless exempted by the banking regulators) and certain other
banking organizations designated by the banking regulators must include in its
risk-based capital ratio analysis charges for, and hold capital against,
general market risk of all positions held in its trading account and of foreign
exchange and commodity positions wherever located, as well as against specific
risk of debt and equity positions located in its trading account. Currently,
the company and the Bank do not calculate a risk-based capital charge for their
market risk. Minimum Leverage Ratio.The Federal Reserve Board has adopted capital standards
and leverage capital guidelines that include a minimum leverage ratio of 3%
Tier I Capital to total assets (the leverage ratio). The leverage ratio is
used in tandem with a risk-based ratio of 8% that took effect at the end of
1992. The Federal Reserve Board has emphasized that the leverage ratio constitutes a
minimum requirement for well-run banking organizations having well-diversified
risk, including no undue interest rate exposure, excellent asset quality, high
liquidity, good earnings, and a composite rating of 1 under the Interagency
Bank Rating System. Banking organizations experiencing or anticipating
significant growth, as well as those organizations which do not exhibit the
characteristics of a strong, well-run banking organization described above,
will be required to maintain strong capital positions substantially above the
minimum supervisory levels without significant reliance on intangible assets.
Furthermore, the Federal Reserve Board has indicated that it will consider a
tangible Tier I Capital Leverage Ratio (deducting all intangibles) and other
indices of capital strength in evaluating proposals for expansion or new
activities. At December 31, 2003, the Companys Tangible Tier I Capital
Leverage Ratio was 9.95% 14




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##### Table of Contents



Other Issues and Developments Relating to Regulatory Capital.Pursuant to such
authority and directives set forth in the 1988 Basle Capital Accord, as
amended, the Comptroller of the Currency, the FDIC and the Federal Reserve
Board have issued regulations establishing the capital requirements for banks
under federal law. The regulations, which apply to the Bank, establish minimum
risk-based and leverage ratios which are substantially similar to those
applicable to the Company. As of December 31, 2003, the risk-based and leverage
ratio of the Bank exceeded the minimum requirements. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
requires the federal banking regulators to take prompt corrective action in
respect of banks that do not meet minimum capital requirements and imposes
certain restrictions upon banks which meet minimum capital requirements but are
not well capitalized for purposes of FDICIA. FDICIA established five capital
tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
Implementing regulations adopted by the federal banking agencies define the
corrective action by the federal banking agencies. A bank may be placed in a
capitalization category that is lower than is indicated by its capital position
if it receives an unsatisfactory examination rating with respect to certain
matters. Failure to meet capital guidelines could subject a bank to a variety
of restrictions and enforcement remedies. All insured banks are generally
prohibited from making any capital distributions and from paying management
fees to persons having control of the bank where such payments would cause the
bank to be undercapitalized. Holding companies of significantly
undercapitalized, critically undercapitalized and certain undercapitalized
banks may be required to obtain the approval of the Federal Reserve Board
before paying capital distributions to their shareholders. Moreover, a bank
that is not well capitalized is generally subject to various restrictions on
pass through insurance coverage for certain of its accounts and is generally
prohibited from accepting brokered deposits and offering interest rates on any
deposits significantly higher than the prevailing rate in its normal market
area or nationally (depending upon where the deposits are solicited). Such
banks and their holding companies are also required to obtain regulatory
approval prior to their retention of senior executive officers. At December 31,
2003, both the Bank and Company were well capitalized. Banks which are classified undercapitalized, significantly undercapitalized or
critically undercapitalized are required to submit capital restoration plans
satisfactory to their federal banking regulator and guaranteed within stated
limits by companies having control of such banks (i.e., to the extent of the
lesser of five percent of the institutions total assets at the time it became
undercapitalized or the amount necessary to bring the institution into
compliance with all applicable capital standards as of the time the institution
fails to comply with its capital restoration plan, until the institution is
adequately capitalized on average during each of four consecutive calendar
quarters), and are subject to regulatory monitoring and various restrictions on
their operations and activities, including those upon asset growth,
acquisitions, branching and entry into new lines of business and may be
required to divest themselves of or liquidate subsidiaries under certain
circumstances. Holding companies of such institutions may be required to
divest themselves of such institutions or divest themselves of or liquidate
nondepository affiliates under certain circumstances. Critically
undercapitalized institutions are also prohibited from making payments of
principal and interest on debt subordinated to the claims of general creditors
as well as to the mandatory appointment of conservator or receiver within 90
days of becoming critically undercapitalized unless periodic determinations are
made by the appropriate federal banking agency, with the concurrence of the
FDIC, that forbearance from such action would better protect the affected
deposit insurance fund. Unless appropriate findings and certifications are made
by the appropriate federal banking agency with the concurrence of the FDIC, a
critically undercapitalized institution must be placed in receivership if it
remains critically undercapitalized on average during the calendar quarter
beginning 270 days after the date it became critically undercapitalized. 15




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##### Table of Contents



Other Regulatory and Supervisor Issues.Pursuant to FDICIA, the federal banking
agencies have adopted regulations or guidelines prescribing standards for
safety and soundness of insured banks and in some instances their holding
companies, including standards relating to internal controls, information
systems, internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth, compensation, fees and benefits, asset
quality, earnings and stock valuation, as well as other operational and
managerial standards deemed appropriate by the agencies. Upon a determination
by a federal banking agency that an insured bank has failed to satisfy any such
standard, the bank will be required to file an acceptable plan to correct the
deficiency. If the bank fails to submit or implement an acceptable plan, the
federal banking agency may, and in some instances must, issue an order
requiring the institution to correct the deficiency, restrict its asset growth
or increase its ratio of tangible equity to assets, or imposing other operating
restrictions. FDICIA also contains provisions which, among other things, impose limitations
on deposit account balance determinations for the purpose of the calculation of
interest, and require the federal banking regulators to prescribe, implement or
modify standards for extensions of credit secured by liens on interests in real
estate or made for the purpose of financing construction of a building or other
improvements to real estate, loans to bank insiders, regulatory accounting and
reports, internal control reports, independent audits, exposure on interbank
liabilities, contractual arrangements under which institutions receive goods,
products or services, deposit account-related disclosures and advertising as
well as to impose restrictions on federal reserve discount window advances for
certain institutions and to require that insured depository institutions
generally be examined on-site by federal personnel at least once every 12
months. In connection with an institutional failure or FDIC rescue of a financial
institution, the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 (FIRREA) grants to the FDIC the right, in many situations, to charge
its actual or anticipated losses against commonly controlled depository
institution affiliates of the failed or rescued institution (although not
against a bank holding company itself). The Community Reinvestment Act (CRA) requires banks to help serve the credit
needs in their communities, including credit to low and moderate income
individuals and geographies. Should the Company or its subsidiaries fail to
adequately serve the community, there are penalties which might be imposed.
Corporate applications to expand branches, relocate, add subsidiaries and
affiliates and merge with or purchase other financial institutions could be
denied. Community groups are encouraged through the regulation to protest
applications for any bank subject to this regulation if they feel that the bank
is not serving the credit needs of the community in which it serves. The
Company and Bank have been deemed by regulators in the past to be outstanding
in serving their communities. Other, lesser ratings include satisfactory,
needs to improve and substantial non compliance. The nature of the banking and financial services industry, as well as banking
regulation, may be further affected by various legislative and regulatory
measures currently under consideration. It is impossible to predict whether or
in what form these proposals may be adopted in the future and, if adopted, what
the effect of their adoption will be on the Company and the Bank. There are many other regulations requiring detailed compliance procedures which
increase costs and require additional time commitments of employees. Regulators
and the Congress continue to put in place rules and laws to protect consumers,
which have a cumulative additional impact on the cost of doing business. At
this point, management cannot completely assess how earnings might be affected
by these consumer laws. 16




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##### Table of Contents



INTERSTATE BANKING Existing laws and various regulatory developments have allowed financial
institutions to conduct significant activities on an interstate basis for a
number of years. During recent years, a number of financial institutions have
expanded their out-of-state activities and various states and the Congress have
enacted legislation intended to allow certain interstate banking combinations. The Riegle-Neal Act dramatically affects interstate banking activities. As
discussed previously, the Riegle-Neal Act allows the Federal Reserve Board to
approve the acquisition by a bank holding company of control of substantial
assets of a bank located outside the bank holding companys home state. An
insured bank may apply to the appropriate federal agency for permission to
merge with an out-of-state bank and convert its offices into branches of the
resulting bank. States retain the option to prohibit out-of-state mergers if
they enacted a statute specifically barring such mergers before June 1, 1997,
and such law applies equally to all out-of-state banks. Interstate mergers authorized by the Riegle-Neal Act are subject to conditions
and requirements, the most significant of which include adequate capitalization
and management of the acquiring bank or bank holding company, existence of the
acquired bank for up to five years before purchase where required under state
law, existence of state laws that condition acquisitions on institutions making
assets available to a state-sponsored housing entity, and limitations on
control by the acquiring bank holding company of not more than 10% of the total
amount of deposits in insured depository institutions in the United States or
not more than 30% of the deposits in insured depository institutions within
that state. States may impose lower deposit concentration limits, so long as
those limits apply to all bank holding companies equally and Colorado has
imposed a 25% limit on such concentrations. Additional requirements placed on
mergers include conformity with state law branching requirements and compliance
with host state merger filing requirements to the extent that those
requirements do not discriminate against out-of-state banks or out-of-state
bank holding companies. The Riegle-Neal Act also permits banks to establish and operate a de novo
branch in any state that expressly permits all out-of-state banks to establish
de novo branches in such state, if the law applies equally to all banks. (A de
novo branch is a branch office of a national bank or state bank that is
originally established as a branch and does not become a branch as a result of
an acquisition, conversion, merger or consolidation.) Utilization of this
authority is conditioned upon satisfaction of most of the conditions applicable
to interstate mergers under the Riegle-Neal Act, including adequate
capitalization and management of the branching institution, satisfaction with
certain filing and notice requirements imposed under state law and receipt of
federal regulatory approvals. The States of Colorado and New Mexico currently
bar the establishment of de novo branches by out-of-state banks, however, the
Bank has successfully established a loan production office, a deposit
production office, and a remote service unit (ATM) in Raton, New Mexico, as
permitted by regulations of the Banks primary regulator, the Office of the
Comptroller of the Currency. THE BANK The Bank is a national bank and a Colorado banking corporation, the deposits of
which are insured by the Federal Deposit Insurance Corporation, and is subject
to supervision and regulation by the Comptroller of the Currency and the FDIC.
As a bank holding company, the Company is subject to supervision and
examination by the Board of Governors of the Federal Reserve System under the
Bank Holding Company Act of 1956, as amended. 17




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Dividends paid by the Bank provide substantially all of the cash flow of the
Company. As a national bank, the Bank is subject to the dividend restrictions
set forth by the Comptroller of the Currency. Under such restrictions, the Bank
may not, without prior approval of the Comptroller of the Currency, declare
dividends in excess of the sum of the current years earnings plus the retained
earnings from the prior two years. The dividends that the Bank could declare,
without the approval of the Comptroller of the Currency, amounted to
approximately $3,447,000 as of December 31, 2003. The dividend that was
declared and paid in 2003 was $84,000. DEPOSIT INSURANCE ASSESSMENTS The FDIC insures deposits of the Bank up to the prescribed limit per depositor
through the Bank Insurance Fund (BIF), and the amount of FDIC assessments paid
by each BIF member institution is based upon its relative risk of default as
measured by regulatory capital ratios and other factors. The BIF assessment
rate currently ranges from zero to 27 cents per $100 of domestic deposits. The
FDIC may increase or decrease the assessment rate and schedule on a semi-annual
basis. As of December 31, 2003, the Bank qualified for the lowest BIF
assessment rate. EFFECT ON ECONOMIC ENVIRONMENT The policies of regulatory authorities, including the monetary policy of the
Board of Governors of the Federal Reserve, have a significant effect on the
operating results of bank holding companies and their subsidiaries. Among the
means available to the Board of Governors to affect the money supply are open
market operations in U.S. Government securities, changes in the discount rate
on member bank borrowings, imposing or changing reserve requirements against
member bank deposits, and imposing or changing reserve requirements against
certain borrowings by banks and their affiliates. These means are used in
varying combinations to influence overall growth and distribution of bank
loans, investments and deposits, and their use may affect the interest rate
charged on loans or paid on deposits. The Board of Governors monetary policies have materially affected the
operating results of commercial banks in the past and are expected to continue
to do so in the future. The nature of future monetary policies and the effect
of such policies on the business and earnings of the Company and its subsidiary
cannot be predicted. RISK FACTORS RELATING TO THE COMPANY Impact of Interest Rates and General Economic Conditions.The Companys
profitability, like that of most similar financial institutions, depends
largely on the Banks net interest income, which is the difference between its
interest income on interest-earning assets, such as loans and investments, and
its interest expense on interest-bearing liabilities, such as deposits and
borrowings. Accordingly, the Companys results of operations and financial
condition are largely dependent on movements in market interest rates and its
ability to manage its assets in response to such movements. The difference
between the amount of the total interest-bearing assets and interest-bearing
liabilities which reprice within a given time period could have a negative
effect on the Banks net interest income depending on whether such difference
was positive or negative and whether interest rates are rising or falling. Increases in interest rates may reduce demand for loans and, thus, the amount
of loan and commitment fees earned by the Bank. In addition, fluctuations in
interest rates may also result in disintermediation, which is the flow of funds
away from depository institutions into direct investments which pay a higher
rate of return, and may affect the value of the Companys investment securities
and other interest earning assets. Because the Banks assets consist of some
loans with interest rates which change in accordance 18




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with changes in prevailing market rates, if interest rates rise sharply, some
of the Banks borrowers would be required to make higher interest payments on
their loans. Therefore, increases in interest rates may cause the Bank to
experience an increase in delinquent loans and defaults to the extent that
borrowers are unable to meet their increased debt servicing obligations. In
addition, the Bank has a substantial portfolio of fixed rate loans that may be
prepaid without significant penalty, so that customers might prepay or
refinance them in a period of declining interest rates. That would alter the
Banks asset liability gap position and ultimately reduce the rates earned on
those assets, as cash flow from loan repayments would be reinvested at lower
rates. Results of operations for financial institutions, including the Company, may be
materially and adversely affected by changes in prevailing economic conditions,
including declines in real estate values, rapid changes in interest rates and
the monetary and fiscal policies of the federal government. The profitability
of the Company depends in part on the spread between the interest rates earned
on assets and the interest rates paid on deposits and other interest-bearing
liabilities. Although management believes that the maturities of the Companys
assets are moderately balanced in relation to maturities of liabilities
(asset/liability management), asset/liability management involves estimates as
to how changes in the general level of interest rates will impact the yields
earned on assets and the rates paid on liabilities. A decrease in interest rate
spreads would have a negative effect on the net interest income and
profitability of the Company, and we cannot give any assurance that this spread
will not decrease. Although the Banks market area has received substantial
benefit from high natural gas prices and the resulting impact that has had on
coal bed methane gas development locally, there can be no assurance that this
development will sustain itself. Substantially all of the loans of the Company
are to businesses and individuals in this 3 county area, and any significant
decline in the economy of this market area could have an adverse impact on the
Company. We cannot give any assurances that positive trends or developments
discussed in this Annual Report on Form 10-KSB will continue or that negative
trends or developments will not have a material adverse effect on the Company.
See Item 6  Managements Discussion and Analysis of Financial Condition and
Results of Operations. Growth Risks.The Bank has pursued and intends to continue to pursue an
internal growth strategy, the success of which will depend primarily on
generating an increasing level of loans and deposits at acceptable risk levels
and terms without proportionate increases in noninterest expenses. The Bank has
grown by the establishment of new branches, and intends to consider new
branching opportunities in the future. See Item 1.  Growth Strategy. The
Company cannot give any assurance that it will be successful in continuing its
internal growth strategy. Also, the level of success of the Companys growth
strategy will depend on maintaining sufficient regulatory capital levels and on
continued favorable economic conditions in the Companys market area. Competitive Banking Environment.The banking business in the Banks market is
highly competitive. The Bank competes for loans and deposits with other local,
regional and national commercial banks, savings and loan associations, finance
companies, money market funds, brokerage houses, credit unions and nonfinancial
institutions, any of which have substantially greater financial resources than
the Bank. See Item 1.  Competition. Allowance for Loan Losses.Inability of borrowers to repay loans can erode
earnings and capital of banks. Like all banks, the Bank maintains an allowance
for loan losses to provide for loan defaults and nonperformance. The allowance
is based on prior experience with loan losses, as well as an evaluation of the
risks in the current portfolio, and is maintained at a level considered
adequate by management to absorb anticipated losses. The amount of future
losses is susceptible to changes in economic, operating and other conditions,
including changes in interest rates, that may be beyond managements control,
and such losses may exceed current estimates. At December 31, 2003, the Bank
had nonperforming loans of 19




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$881,000, or .83% of total loans, and an allowance for loan losses of
$1,700,000, 192.96% of nonperforming loans. We cannot give any assurance that
the Banks allowance for loan losses will be adequate to cover actual losses.
Future provisions for loan losses could materially and adversely affect results
of operations of the Bank. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Banks
allowance for loan losses. An increase in the Banks provision for loan losses
would negatively affect earnings. Lending RisksCredit Quality.A central focus of the Companys and the Banks
strategy is the continued development and growth of a diversified loan
portfolio, with emphasis on residential loans and commercial business lending
to small- and medium-sized businesses. Certain risks are inherent in the
lending function, including a borrowers inability to pay, insufficient
collateral coverage and changes in interest rates. Repayment risk on commercial
loans is significantly affected by changing economic conditions in a particular
geographical area, business or industry which could impair future operating
performance. Risks associated with general business loans include changes in
general economic conditions which may affect the borrowers ability to repay as
well as underlying collateral values. Installment and other consumer loans are
also subject to repayment risk. Dependence on Key Personnel.The Bank depends on the continued services of J.
Ed Eisemann, IV, Chairman of the Board and Chief Executive Officer, Ralph A.
Gagliardi, President, Virginia Cusimano, Senior Vice President and Branch
Manager and Mary Ann Ghella, Senior Vice President and Consumer Loan Officer.
The loss of the services of Mr. Eisemann, Mr. Gagliardi, Mrs. Cusimano or Mrs.
Ghella or of certain other key personnel, could adversely affect the Company.
Any growth or expansion into areas requiring additional expertise will place
increased demands upon Company resources. Such demands would require new
management personnel and the development of additional expertise by existing
management personnel. The failure to acquire such services or to develop such
expertise could have a material adverse effect on the Companys future growth. Control by Officers and Directors as a Group; Anti-takeover Effect.The
Companys officers and directors own beneficially approximately 65.6% of the
outstanding shares of Common Stock. As a result, they alone may elect by simple
majority the Board of Directors. This may impede the efforts of a third party
to acquire control of the Company or to change the Board of Directors of the
Company. Government Regulation and Recent Legislation.The Company and the Bank are
subject to extensive federal and state legislation, regulation and supervision
which is intended primarily to protect depositors and the Bank Insurance Fund,
rather than investors. Recently enacted, proposed and future legislation and
regulations designed to strengthen the banking industry have had and may in the
future have a significant impact on the banking industry and on the Company.
Although some of the legislative and regulatory changes may benefit the Company
and the Bank, others may increase their costs of doing business or otherwise
adversely affect the Company and the Bank and create competitive advantages for
potential non-bank competitors. We cannot make any assurance that any present or future changes in the laws or
regulations applicable to the Company or in their interpretation will not
adversely and materially affect the Company. Economic Conditions and Monetary Policies.Conditions beyond the Companys and
Banks control may have a significant impact on the Companys operations and
its net interest income from one period to another. Examples of such conditions
include:  
    
    prevailing economic conditions both nationally and in the Banks market;  
    
    the quality and level of credit demands by customers; 20




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
    
    fiscal and debt management policies of the federal government, including changes in tax laws;  
    
    the Federal Reserves monetary policy, including the percentage of
deposits that must be held in the form of non-earning cash reserves;  
    
    the introduction and growth of new investment instruments and
transaction accounts by non-bank financial competitors; and  
    
    changes in federal rules and regulations governing the payment of
interest on deposit accounts. Potential Liability for Undercapitalized Subsidiary Bank.Under federal law, a
bank holding company may be required to guarantee a capital plan filed by an
undercapitalized bank or thrift subsidiary with its primary regulator. If the
subsidiary defaults under the plan, the holding company may be required to
contribute to the capital of the subsidiary bank an amount equal to the lesser
of 5% of the banks assets at the time it became undercapitalized or the amount
necessary to bring the bank into compliance with applicable capital standards.
It is, therefore, possible that the Company could be required to contribute
capital to the Bank in the event that the Bank becomes undercapitalized. 
 ITEM 2. PROPERTIES The Bank owns the five story, 1892 vintage First National Bank main building,
located in Trinidad, Colorado and occupies the entire 6,500 square foot, first
floor and mezzanine. Approximately 14,000 square feet of the upper floors is
rentable to small business and professional tenants. In 1990, an additional
5,000 square feet was obtained through the purchase and remodel of an adjacent,
two story building of similar vintage. This building was annexed to the main
building and used for expansion of the Banks loan department. In 2001, a
similar sized building adjacent to the annex was acquired for future expansion.
The Bank also owns a 1,000 square foot detached facility and parking lot area
one block from the Banks main offices, which is used for drive-up and walk-in
customer services. This property was acquired in 1979 and remodeled and
expanded in 1998. In 1993, the Bank purchased a 1500 square foot, former savings and loan office
located in Walsenburg (Huerfano County), Colorado, from the Resolution Trust
Corporation. This office was remodeled and occupied as a branch facility and
has served as the Banks primary base of operations in Huerfano County. This
facility was again remodeled and expanded to 2,500 square feet in 2001. In 1995, the Bank purchased two small, vacant lots, one in Trinidad and the
other in La Veta, Colorado. Free-standing, drive-up ATM buildings were
installed on these lots, offering 24-hour ATM services. In 1998, the Bank leased for three, five-year renewable terms a 500 square foot
branch location in a Wal-mart superstore, located in Trinidad, Colorado. The
bank has operated a branch in this location since then and has exercised its
first renewal in 2003 and has two terms remaining. The current monthly rent on
this property is $2,605. Also in 1998, the Bank leased a 1000 square foot office space located in a
shopping center in Raton, New Mexico, remodeled the facility, and occupied it
as a loan production and deposit production office. The lease runs for five
years and is renewable for an additional five-year term. The current monthly
rent on this property is $675 and the Bank intends to renew this lease in 2004.
The Bank also leased in 1998 a 30 feet by 40 feet portion of the same shopping
center parking lot for construction of a drive up ATM and automated night drop.
This lease is for $100 per month and runs for 10 years. 21




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##### Table of Contents



The Company believes its existing bank facilities will be adequate to meet the
Companys and Banks needs for the foreseeable future. The Company believes
that the facilities are adequately covered by insurance. 
 ITEM 3. LEGAL PROCEEDINGS Periodically and in the ordinary course of business, various claims and
lawsuits are brought against the Company, such as claims to enforce liens,
condemnation proceedings on properties in which the Company holds security
interests, claims involving the making and servicing of real property loans and
other issues incident to the Companys business. In the opinion of the
Companys management, the ultimate liability, if any, resulting from any such
pending claims or lawsuits will not have a material adverse effect on the
financial position or results of operations of the Company. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 2003. 
 PART II 
 ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS COMMON STOCK It is not anticipated that an active market for the Companys shares will
develop and the Company did not repurchase any of its shares in 2003. There
were approximately 1,800 shareholders as of the date of this annual report. DIVIDEND POLICY The Companys policy is to retain its earnings to support the growth of its
business. The Board of Directors of the Company has not historically declared
cash dividends on its Common Stock, and has no current plan to do so. The
ability of the Company to pay cash dividends largely depends on the amount of
cash dividends paid to it by the Bank. Capital distributions, including
dividends, by the Bank are subject to restrictions tied to the Banks earnings.
See Item 1.  The Bank. 
 ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following commentary provides information about major components of the
operations and financial condition, liquidity and capital resources of The
Republic Corporation for the periods ended December 31, 2003, 2002 and 2001.
This discussion and analysis should be read in conjunction with the
accompanying audited financial statements and related notes for the same
periods. The Companys Consolidated Financial Statements show its financial
condition and information on a consolidated basis. The Bank is the only
operating unit of the Company. The differences between the Companys financial
condition and results of operations and those of the Bank have historically
consisted primarily of factors pertaining to holding company expenses and the
income tax effect of those expenses. 22




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GENERAL Our profitability, like that of similar financial institutions, is driven in
large part by circumstances in both the local and national economies, which in
turn affects the Companys net interest income and financial stability. Net
interest income is the difference between the Companys interest income on
interest-earning assets such as loans and investments, and its interest expense
on interest-bearing liabilities such as deposits and borrowings. The Companys
results of operations and financial condition are largely dependent on
movements in market interest rates and ability to manage assets and liabilities
in response to such movements. Results of operations for the Company, as with
other financial institutions, may be materially and adversely affected by
changes in prevailing economic conditions, including changes, and the rate of
change, in interest rates and the monetary and fiscal policies of the federal
government in particular. Management is responsible for structuring both the
timing of interest bearing asset repricings and the timing of interest bearing
liability repricings so that net interest income is ideally at a sufficient
level in the current time frame and adequately protected from significant
decline in the future. The often unforeseen magnitude and direction of interest
rate change can cause a negative earnings impact on the best conceived
asset/liability management structure and future results in this area are
therefore most appropriately described as probabilities. Another factor in the
local and national economies, not entirely unrelated to interest rates, is
credit risk and managements ability to appropriately manage this exposure.
Deterioration in either the national economy or in the Southern Colorado and
Northern New Mexico economies can cause declines in borrower repayment ability
and performance and dampen loan demand to an extent that earnings are
significantly impacted. The potential for increased loan charge-offs and loan
loss provisions in such environments must be taken into account in addition to
the possibility of lower net interest income. In the present economic
environment, the most significant potential changes for the Company would be a
reversal of federal monetary policy that would bring an end to the low interest
rates that now prevail as well as any significant decrease in employment levels
in Trinidad, Colorado, Walsenburg, Colorado, Raton, New Mexico and the
surrounding communities. Either of these events, which may occur in isolation
or in concert with one another, could cause a negative effect on net interest
income or increase our credit losses above current levels. There can be no
assurance going forward that these results will not occur. Lastly, the
effective management of technology is a growing factor in the banking industry
and plays a role in defining our results as a financial institution. Our
results are materially tied to such factors as technology cost, effective
delivery of banking services through the use of technology, and the management
of risks incidental to the use of technology, including operational risk,
reputation risk and information security risk. Specifically, these risks
include the potential loss, delay or unauthorized access to or alteration of
customer transaction data housed or conveyed via electronic means and the
possible negative, public reaction to such events in our markets. NET INTEREST INCOME Net interest income expressed on a fully tax equivalent basis for December 31,
2003, 2002 and 2001 remained substantially constant at $7,303,000, $7,319,000
and $7,131,000, respectively. This occurred in spite of unprecedented declines
in market interest rates, which had a profound effect on interest earning asset
yields and interest bearing liability costs. Net interest spread, the
difference between the average tax equivalent yield on interest-earning assets
and the average cost of interest-bearing liabilities also remained consistent
in these three periods at 3.78%, 3.72% and 3.64%, respectively. Margin refers
to tax equivalent net interest income divided by average interest-earning
assets and this measure also remained relatively constant in these three
periods at 4.26%, 4.17% and 4.44%, respectively. The following table sets forth for the periods indicated information with
regard to average balances of assets and liabilities, as well as the total
dollar amounts of interest income from interest-earning assets and interest
expense on interest-bearing liabilities, resultant yields or costs, net
interest income, net 23




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interest spread, net interest margin and the ratio of average interest-earning
assets to average interest-bearing liabilities. Net interest income is computed
on a full tax equivalent basis (FTE) to reflect the effect of tax exempt income
earned on municipal obligations in the investment securities portfolio. Full
tax equivalent interest income on tax exempt securities is the amount of income
that would have to be earned on taxable securities to yield the same after tax
return. A 37% tax rate was used. 24




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AVERAGE BALANCES AND YIELD OR COST
Years Ended December 31, 2003
    
    2002
    
    2001Interest
    
    Average
    
    
    
    
    
    Interest
    
    Average
    
    
    
    
    
    Interest
    
    AverageAverage
    
    Earned or
    
    yield or
    
    Average
    
    Earned or
    
    yield or
    
    Average
    
    Earned or
    
    yield orBalance (1)
    
    paid
    
    cost
    
    Balance (1)
    
    paid
    
    cost
    
    Balance (1)
    
    paid
    
    cost(Dollars in thousands)
    
    (Dollars in thousands)
    
    (Dollars in thousands)ASSETSLoans:Total loans
    
    $
    108,127
    
    
    $
    8,449
    
    
    
    7.81
    %
    
    $
    110,688
    
    
    $
    9,237
    
    
    
    8.35
    %
    
    $
    116,050
    
    
    $
    10,541
    
    
    
    9.08
    %Allowance for loan loss
    
    
    (1,718
    )
    
    
    
    
    
    
    
    
    
    
    (1,751
    )
    
    
    
    
    
    
    
    
    
    
    (1,607
    )Securities:Taxable
    
    
    21,689
    
    
    
    731
    
    
    
    3.37
    %
    
    
    26,292
    
    
    
    1,168
    
    
    
    4.44
    %
    
    
    25,550
    
    
    
    1,518
    
    
    
    5.94
    %Tax exempt on FTE basis
    
    
    2,295
    
    
    
    186
    
    
    
    8.09
    %
    
    
    2,295
    
    
    
    189
    
    
    
    8.24
    %
    
    
    2,295
    
    
    
    189
    
    
    
    8.24
    %Total securities
    
    
    23,984
    
    
    
    
    
    
    
    3.82
    %
    
    
    28,587
    
    
    
    1,357
    
    
    
    4.75
    %
    
    
    27,845
    
    
    
    1,707
    
    
    
    6.13
    %Federal funds sold
    
    
    39,186
    
    
    
    425
    
    
    
    1.08
    %
    
    
    36,194
    
    
    
    590
    
    
    
    1.63
    %
    
    
    16,879
    
    
    
    610
    
    
    
    3.61
    %Total interest-earning assets
    
    
    171,297
    
    
    
    9,791
    
    
    
    5.72
    %
    
    
    175,469
    
    
    
    11,184
    
    
    
    6.37
    %
    
    
    160,774
    
    
    
    12,858
    
    
    
    8.00
    %Noninterest-earning assets:Cash and due from banks
    
    
    5,405
    
    
    
    
    
    
    
    
    
    
    
    5,649
    
    
    
    
    
    
    
    
    
    
    
    5,269Other assets
    
    
    5,116
    
    
    
    
    
    
    
    
    
    
    
    5,862
    
    
    
    
    
    
    
    
    
    
    
    5,887Total noninterest-earning assets
    
    
    10,521
    
    
    
    
    
    
    
    
    
    
    
    11,511
    
    
    
    
    
    
    
    
    
    
    
    11,156Total assets
    
    
    180,100
    
    
    
    
    
    
    
    
    
    
    
    185,229
    
    
    
    
    
    
    
    
    
    
    
    170,323LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Interest-bearing demand and money
market deposits
    
    
    38,398
    
    
    
    405
    
    
    
    1.05
    %
    
    
    53,229
    
    
    
    785
    
    
    
    1.47
    %
    
    
    46,317
    
    
    
    1403
    
    
    
    3.03
    %Savings
deposits - Other
    
    
    9,726
    
    
    
    85
    
    
    
    0.87
    %
    
    
    9,590
    
    
    
    134
    
    
    
    1.40
    %
    
    
    9,005
    
    
    
    216
    
    
    
    2.40
    %Time deposits
    
    
    80,130
    
    
    
    1,998
    
    
    
    2.49
    %
    
    
    82,733
    
    
    
    2,946
    
    
    
    3.56
    %
    
    
    76,097
    
    
    
    4,108
    
    
    
    5.40
    %Total interest-bearing liabilities
    
    
    128,254
    
    
    
    2,488
    
    
    
    1.94
    %
    
    
    145,552
    
    
    
    3,865
    
    
    
    2.66
    %
    
    
    131,419
    
    
    
    5,727
    
    
    
    4.36
    %Noninterest-bearing demand accounts
    
    
    32,338
    
    
    
    
    
    
    
    
    
    
    
    21,622
    
    
    
    
    
    
    
    
    
    
    
    21,906Total deposits
    
    
    160,592
    
    
    
    
    
    
    
    
    
    
    
    167,174
    
    
    
    
    
    
    
    
    
    
    
    153,325Other noninterest-bearing liabilities
    
    
    2,128
    
    
    
    
    
    
    
    
    
    
    
    1,467
    
    
    
    
    
    
    
    
    
    
    
    1,619Total liabilities
    
    
    162,720
    
    
    
    
    
    
    
    
    
    
    
    168,641
    
    
    
    
    
    
    
    
    
    
    
    154,944Stockholders equity
    
    
    17,380
    
    
    
    
    
    
    
    
    
    
    
    16,588
    
    
    
    
    
    
    
    
    
    
    
    15,379Total liabilities and stockholders equity
    
    
    180,100
    
    
    
    
    
    
    
    
    
    
    
    185,229
    
    
    
    
    
    
    
    
    
    
    
    170,323Net interest income
    
    
    
    
    
    
    7,303
    
    
    
    
    
    
    
    
    
    
    
    7,319
    
    
    
    
    
    
    
    
    
    
    
    7,131Net interest spread (full tax equivalent basis)
    
    
    
    
    
    
    
    
    
    
    3.78
    %
    
    
    
    
    
    
    
    
    
    
    3.72
    %
    
    
    
    
    
    
    
    
    
    
    3.64
    %Net interest margin (full tax equivalent basis)
    
    
    
    
    
    
    
    
    
    
    4.26
    %
    
    
    
    
    
    
    
    
    
    
    4.17
    %
    
    
    
    
    
    
    
    
    
    
    4.44
    %Ratio of average interest-earning assets to
average total deposits and interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    133.56
    %
    
    
    
    
    
    
    
    
    
    
    120.55
    %
    
    
    
    
    
    
    
    
    
    
    122.34
    %Return on average assets
    
    
    
    
    
    
    
    
    
    
    0.69
    %
    
    
    
    
    
    
    
    
    
    
    0.69
    %
    
    
    
    
    
    
    
    
    
    
    0.74
    %Return on average equity
    
    
    
    
    
    
    
    
    
    
    7.19
    %
    
    
    
    
    
    
    
    
    
    
    7.73
    %
    
    
    
    
    
    
    
    
    
    
    8.19
    %Dividend payout ratio
    
    
    
    
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    
    
    
    
    0.00
    %Ratio of average equity to average assets
    
    
    
    
    
    
    
    
    
    
    9.65
    %
    
    
    
    
    
    
    
    
    
    
    8.96
    %
    
    
    
    
    
    
    
    
    
    
    9.03
    %
 (1) Average balances are based on daily averages and include nonaccrual loans. Loan fees are included in interest income. 25




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##### Table of Contents



The following table illustrates the changes in the Companys net interest
income due to changes in volume and changes in interest rates on a full tax
equivalent basis. Volume refers to the average dollar level of interest-earning
assets and interest-bearing liabilities. Changes attributable to the combined
effect of volume and interest rate have been allocated proportionately to the
change due to volume and the change due to interest rate. ANALYSIS OF CHANGES IN COMPONENTS OF NET INTEREST INCOME Year Ended December 31, 2003
    
    Year Ended December 31, 2002vs.
    
    vs.Year Ended December 31, 2002
    
    Year Ended December 31, 2001Increase (Decrease)
    
    Increase (Decrease)in Net Interest Income
    
    in Net Interest IncomeDue to Changes in: (1)
    
    Due to Changes in: (1)(Dollars in Thousands)
    
    Volume
    
    Rate
    
    Total
    
    Volume
    
    Rate
    
    TotalInterest-Earning AssetsLoans
    
    $
    (214
    )
    
    $
    (574
    )
    
    $
    (788
    )
    
    $
    (444
    )
    
    $
    (860
    )
    
    $
    (1,304
    )Investment securities
    
    
    (219
    )
    
    
    (222
    )
    
    
    (440
    )
    
    
    31
    
    
    
    (381
    )
    
    
    (350
    )Federal funds sold
    
    
    49
    
    
    
    (214
    )
    
    
    (165
    )
    
    
    106
    
    
    
    (125
    )
    
    
    (19
    )Total interest-earning assets
    
    
    (383
    )
    
    
    (1,010
    )
    
    
    (1,393
    )
    
    
    (307
    )
    
    
    (1,366
    )
    
    
    (1,673
    )Interest-Bearing LiabilitiesDeposits:Demand and money market deposits
    
    
    (219
    )
    
    
    (161
    )
    
    
    (380
    )
    
    
    53
    
    
    
    (646
    )
    
    
    (593
    )Savings deposits
    
    
    2
    
    
    
    (51
    )
    
    
    (49
    )
    
    
    3
    
    
    
    (110
    )
    
    
    (107
    )Time deposits
    
    
    (93
    )
    
    
    (855
    )
    
    
    (948
    )
    
    
    195
    
    
    
    (1,357
    )
    
    
    (1,162
    )Total interest-bearing liabilities
    
    
    (310
    )
    
    
    (1,067
    )
    
    
    (1,377
    )
    
    
    251
    
    
    
    (2,113
    )
    
    
    (1,862
    )Total increase in net interest income
    
    $
    (74
    )
    
    $
    58
    
    
    $
    (16
    )
    
    $
    (558
    )
    
    $
    747
    
    
    $
    189
 (1) This table is calculated on a full tax-equivalent basis. MARKET RISK MANAGEMENT Market risk arises from changes in interest rates. The Bank has risk management
policies to monitor and limit exposure to market risk as discussed below. See
Asset/Liability Management. Disclosures about the fair value of financial
instruments, which reflect changes in market prices and rates, can be found in
Note 13 of the Notes to Consolidated Financial Statements. ASSET/LIABILITY MANAGEMENT The Companys results of operations depend substantially on its net interest
income. Like most financial institutions, the Companys interest income and
cost of funds are affected by general economic conditions and by competition in
the marketplace. The function of asset/liability management is to manage the risk/return
relationship between capital adequacy, market risk, liquidity and interest rate
risk. To manage these needs of the Bank with regard to proper management of its
asset/liability program, the Companys management has projected the Banks
needs into the future, taking into consideration cyclical and non-cyclical,
historical trends regarding loan demand, deposit flows and interest rate
change. The Banks Asset and Liability Committee is responsible for
establishing procedures that enable the Bank to achieve its goals while
adhering to prudent banking practices and existing loan and investment
policies. 26




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##### Table of Contents



The excess of the Banks interest-earning assets over its existing and
anticipated loan balances has generally been placed in federal funds sold and
invested in securities when suitable lending opportunities have not been
sufficient to use such excess funds. The primary objectives in the overall
management of these funds are safety, liquidity, interest-rate risk, pledging
for public deposits and yield. All of the securities held by the Company are designated as held to maturity.
While this practice typically serves to impair the Companys liquidity
flexibility in managing these assets, approximately 89% of the book value of
these securities as of December 31, 2003 matures within two years. In the ordinary course of business, we are 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. Under the
auspices of the Banks Asset and Liability Committee, we analyze and compare
these repricing differences and basis point spreads so as to effectively
monitor and adjust the inevitable earnings impact of rate changes. 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. In our modeling, we attempt to
anticipate the effect on net interest income with a 100 and 400 basis point
shift up or down in interest rates. The instruments that we typically adjust in
the modeling process are loans, securities held to maturity, federal funds sold
and deposit liabilities. This model is periodically altered to reflect both
managements ability and intention to make these adjustments and therefore
represents an effort to combine mathematical prediction with behavioral
probability. Although we believe that we have sufficient tools in place to
mitigate the adverse earnings impact caused by interest rate changes, the
effect of these changes in any given period may be to negatively impact
reported income and interest earned on loans and securities held by the
Company. We do not currently invest in derivative financial instruments such as
futures, swaps, options, and other financial instruments with similar
characteristics and there is currently negligible direct risk of adverse
impacts resulting from changes in foreign currency exchange rates, commodity
prices or prices of equity securities. The following table sets forth the estimated maturity or repricing and the
resulting interest rate gap, of the Banks interest-earning assets and
interest-bearing liabilities at December 31, 2003. The amounts in the table are
derived from internal data from the Bank and could be significantly affected by
external factors such as changes in prepayment assumptions, early withdrawals
of deposits and competition. 27




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##### Table of Contents



INTEREST RATE SENSITIVITY
ESTIMATED MATURITY OR REPRICING
December 31, 2003 Less Than
    
    Three
    
    One YearThree
    
    Months to
    
    to Five
    
    Over Five(Dollars in thousands)
    
    Months
    
    One Year
    
    Years
    
    Years
    
    TotalInterest-earning assets:Loans
    
    $
    10,409
    
    
    $
    17,508
    
    
    $
    19,014
    
    
    $
    58,055
    
    
    $
    104,986Taxable securities
    
    
    
    
    
    
    10,030
    
    
    
    14,335
    
    
    
    
    
    
    
    24,365Tax exempt securities (Municipal Bonds)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,295
    
    
    
    2,295Federal funds sold
    
    
    38,225
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,225Total interest-earning assets
    
    $
    48,634
    
    
    $
    27,538
    
    
    $
    33,349
    
    
    $
    60,350
    
    
    $
    169,871Interest-bearing liabilities:Time certificates of deposit
    
    $
    29,782
    
    
    $
    44,360
    
    
    $
    7,721
    
    
    $
    
    
    
    $
    81,863Interest-bearing demand deposits
    
    
    33,346
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,346Money market deposits
    
    
    14,306
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,306Savings deposits
    
    
    9,649
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,649Total interest-bearing liabilities
    
    $
    87,083
    
    
    $
    44,360
    
    
    $
    7,721
    
    
    $
    0
    
    
    $
    139,164Interest rate gap
    
    ($
    38,449
    )
    
    ($
    16,822
    )
    
    $
    25,628
    
    
    $
    60,350Cumulative interest rate gap
    
    
    (38,449
    )
    
    
    (55,271
    )
    
    
    (29,643
    )
    
    
    30,707
    
    
    
    30,707
 The following table presents at the date indicated (i) the aggregate loans by
maturity in each major category of the Companys loan portfolio and (ii) the
aggregate amounts of variable and fixed rate loans that mature after one year.
Actual maturities may differ from the contractual maturities shown below as a
result of renewals and prepayments. ESTIMATED LOAN REPRICING
December 31, 2003 Less Than
    
    One Year to
    
    Over Five(Dollars in thousands)
    
    One Year
    
    Five Years
    
    Years
    
    TotalReal estate construction
    
    $
    6,915
    
    
    $
    
    
    
    $
    
    
    
    $
    6,915Commercial and industrial
    
    
    3,190
    
    
    
    3,357
    
    
    
    169
    
    
    
    6,716Agriculture
    
    
    1,036
    
    
    
    164
    
    
    
    37
    
    
    
    1,237Total
    
    $
    11,141
    
    
    $
    3,521
    
    
    $
    206
    
    
    $
    14,868Fixed rate loans
    
    
    
    
    
    $
    964
    
    
    $
    206Floating rate loans
    
    
    
    
    
    
    2,557
    
    
    
    0Total
    
    
    
    
    
    $
    3,521
    
    
    $
    206
 28




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##### Table of Contents



RESULTS OF OPERATIONS Years ended December 31, 2003 and 2002 Overview. Net income declined $34,413 in 2003 to $1,248,760 from $1,283,173 in
2002. This represents a decline of approximately 2.7% and is primarily
attributable to a $214,341 increase in noninterest expense, partially offset by
a $83,804 decline in the provision for loan losses, a $69,213 increase in
noninterest income and a reduction in income tax provision of $30,631. Interest Income. Interest income decreased $1,381,472 to $9,730,865 in 2003
from $11,112,337 in 2002, representing a decline of approximately 12.4%.
Interest and fee income on loans declined $787,249, interest income on
securities fell $428,264 and interest income on federal funds sold fell
$165,959. The decline with respect to loan interest and fees was due to a
$2,561,000 decline in average loan balances and a decline in average loan yield
to 7.81% from 8.35%. The decline with respect to securities interest was due to
a $4,603,000 decline in average holdings and a decline in average securities
yield to 3.82% from 4.75%. The decline with respect to federal funds sold
interest was due to a decline in average federal funds sold yield to 1.08% from
1.63%, in spite of an increase in average balance of $2,992,000. Contractual
repricings, increased commercial loan competition, a brisk level of residential
refinancing and declining market interest rates caused the volume and rate
driven decline in loan interest and fee income. Declining investment in
securities holdings and lower yielding replacements for matured securities
caused the volume and rate driven decline in securities income. Further easing
of monetary policy caused the rate driven decline in federal funds sold
interest income. Interest Expense. Interest expense decreased $1,376,871 to $2,487,747 for 2003
from $3,864,618 in 2002, representing a decline of approximately 35.6%. All of
this interest expense was tied to interest bearing deposits and the decline was
due to a $17,298,000 lower average level of deposits of this type and a decline
from 2.66% to 1.94% in the average cost of these funds. Net Interest Income. Net interest income decreased $4,601 to $7,243,118 for
2003 from $7,247,719 in 2002, a decline of .06%. While these results are close
to being identical, it is noteworthy to consider the magnitude and cause of
decline in both interest income and expense. Of the $1,381,472 decline in the
total interest income, approximately 73% was caused by the collapse in market
interest rates, the remainder being attributable to declining volume. Of the
$1,376,871 decline in total interest expense, approximately 77% was caused by
the collapse in rates, the remainder by declining balances. The magnitude of
these rate-driven phenomena is unprecedented and is a clear byproduct of the
policy of extreme monetary ease practiced by the Federal Reserve for the past
three years. Noninterest Income. Noninterest income increased $69,213 to $975,072 for 2003
from $905,859 for 2002. This was a result of growth in deposit and
miscellaneous fee income of $137,831, offset in part by a decline in various
other income categories aggregating $68,618. Noninterest Expense. Noninterest expense increased $214,341 to $6,006,884 for
2003 from $5,792,543 for 2002. The components of this increase include a
$72,377 increase in salaries and employee benefits, a $68,144 increase in data
processing costs, a $39,669 increase in professional fees, a $25,463 increase
in equipment expense, a $15,593 increase in marketing expense, a $6,051
increase in net occupancy expense, and increases in various other expense
categories aggregating 29




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##### Table of Contents



$47,084. These increases were partially offset by a $26,707 decline in
depreciation expense, a $23,052 decline in printing and office supplies and a
$10,281 decline in FDIC insurance. Years ended December 31, 2002 and 2001 Overview. Net income increased 23,889 in 2002 to $1,283,173 from $1,259,284 in
2001. This represents an increase of approximately 1.9% and is attributable to
a $188,257 increase in net interest income and a $52,644 increase in
noninterest income, partially offset by a $111,020 increase in noninterest
expense and a $75,571 increase in the provision for loan losses. Interest Income. Interest income decreased $1,674,230 to $11,112,337 in 2002
from $12,786,567 in 2001, representing a decline of approximately 13.1%.
Interest income on loans declined $1,304,493, interest income on securities
fell $350,272 and interest income on federal funds sold fell $19,465. The
decline with respect to loan interest was due to a $5,362,000 decline in
average loan balances and a decline in average loan yield to 8.35% from 9.08%.
The decline with respect to securities interest was due to a decline in average
securities yield to 4.75% from 6.13%, partially offset by an increase in
average securities holdings of $742,000. The decline with respect to federal
funds sold interest was due to a decline in average federal funds sold yield to
1.63% from 3.61%, which was not quite offset by an increase in average balance
of $19,315,000. Contractual repricings, increased commercial loan competition,
a brisk level of residential refinancings and declining market interest rates
caused the volume and rate driven decline in loan interest income. Lower
yielding replacements for matured securities caused the largely rate driven
decline in securities interest income, in spite of the slightly higher average
holdings. Further easing of monetary policy caused the rate driven decline in
federal funds sold interest income, in spite of the material increase in
average holdings. Interest Expense. Interest expense decreased $1,862,487 to $3,864,618 for 2002
from $5,727,105 in 2001, representing a decline of approximately 32.5%. All of
this interest expense was tied to interest bearing deposits and the decline was
due to a decline from 4.36% to 2.66% in average cost on these funds, offset
partly by a $14,133,000 increase in the average level of deposits of this type. Net Interest Income. Net interest income increased $188,257 to $7,247,719 for
2002 from $7,059,462 in 2001, an increase of 2.67%. Of this increase, the
predominate cause was a disproportionately greater decline in interest rate
driven reductions in deposit funding cost in comparison with interest rate
driven declines in interest revenue. Approximately 75% of the effect of this
rate driven increase in net interest income was negated by volume driven
reductions in interest revenue and volume driven increases in deposit funding
cost. Approximately 82% of the decline in total interest income was caused by
the steep decline in market interest rates. The decline in total interest
expense was entirely a result of these market rate declines. The fact that
interest rate change played such a dominant role in the reductions in interest
income and expense is a clear reflection of the monetary ease that began early
in 2001. Noninterest Income. Noninterest income increased $52,644 to $905,859 for 2002
from $853,215 for 2001. This was caused by an increase of $32,840 in deposit
and miscellaneous fee income and an aggregate increase of $19,804 in other
income categories. Noninterest Expense. Noninterest expense increased $111,020 to $5,792,543 for
2002 from $5,681,523 for 2001. The components of this increase include a
$95,978 increase in salaries and employee benefits, a $69,907 increase in data
processing costs, a $45,362 increase in occupancy 30




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##### Table of Contents



expense, a $26,754 increase in depreciation expense, a $17,553 increase in
marketing expense, a $14,624 increase in professional fees and a $7,309
increase in FDIC deposit insurance premiums.
These increases were partially offset by a $55,012, decline in printing and
office supplies, a $44,910 decline in equipment expense and declines in various
other expense categories aggregating $66,545. PROVISION FOR LOAN LOSSES The Companys provisions for loan losses in the years ended December 31, 2003,
2002 and 2001 were $274,030, $357,834 and $282,263, respectively. These
provisions have resulted in a level allowance for loan losses in 2003 of
$1,700,000 and a growth in the allowance for loan losses in 2002 by $88,060
from a year-end 2001 level of $1,612,000. INCOME TAXES The Companys income tax expense for the years ended December 31, 2003, 2002
and 2001 was $647,265, $677,896 and $650,956, respectively. LIQUIDITY AND SOURCES OF FUNDS The primary liquidity source for the Bank continues to be traditional core
deposits. Total deposits for December 31, 2003, 2002 and 2001 were
$162,103,396, $163,775,114 and $161,643,867, respectively. The core component
of these totals represented 75.87%, 76.65% and 77.85% of the year-end assets of
the Bank. While management is of the opinion that this represents the most
stable source of funding for a community bank, growth of deposits, most
particularly core growth, can be difficult in some environments, and indeed has
been during the reporting periods due to the decline in interest rates to
historically low levels, coupled with the effects of a flat economy in the
Banks geographic markets. Other sources of funding that, as yet, remain
untapped include an unsecured federal funds purchase line of $8,090,000
established at Bankers Bank of the West in Denver, Colorado. Also, the Bank
has joined the Federal Home Loan Bank of Topeka and currently has the ability
to obtain secured advances of approximately $61,590,000. These borrowing
sources serve as backup funding should traditional deposits prove to be
inadequate to support the Banks liquidity needs and both are subject to
periodic testing to confirm availability. While all funding must initially emanate from the liability side of the Banks
balance sheet, near term liquidity needs are usually addressed either through
asset reduction or asset reallocation. Due to the nature of its balance sheet
and funding strategy, the Bank typically responds to loan growth or deposit
withdrawal activity by liquidating an appropriate portion of its holdings of
federal funds sold. At December 31, 2003, 2002, and 2001, the Bank held
$38,225,000, $40,750,000 and $21,975,000, respectively, in federal funds sold.
An additional funding source from the asset side of the balance sheet can be
from loan repayments. At December 31, 2003, 2002 and 2001, net loans were
$104,167,354, $107,659, 820 and $111,677,960, respectively. This decline in
total loans resulted in the creation of deployable, liquid assets of
approximately $3,492,000 and $4,018,000 in 2003 and 2002, respectively. Funds
from loan reductions such as these are not as dependable as money market assets
but can be used to meet liquidity needs when available. Maturities of
investment securities represent the last significant asset source. The net
change in par value of investment securities held to maturity during 2003 was
an increase of $4,000,000, compared to a decrease of $10,000,000 in 2002 and an
increase of $430,092 in 2001. Due to the ongoing necessity to pledge a
substantial portion of these securities holdings to the 31




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##### Table of Contents



Colorado Division of Banking in order to collateralize the uninsured portion of
public deposits
held, the use of maturing instruments of this type for any material purpose
other than to respond to requests for withdrawal of public deposits is minimal. CAPITAL RESOURCES Total stockholders equity in the Company increased to $18,025,571 at December
31, 2003 from $16,776,811 at December 31, 2002. This increase was entirely the
result of a $1,248,760 increase in retained earnings relating to 2003 net
income. At December 31, 2003, stockholders equity was 9.9% of total assets,
compared to 9.2% of total assets at December 31, 2002. Management presently
intends to retain future earnings, if any, to support growth. Accordingly, the
Company does not intend to pay cash dividends on its common stock in the
foreseeable future. Federal Reserve Board, Office of the Comptroller of the Currency and FDIC
guidelines call for a 4% Tier I capital to risk-weighted assets ratio, an 8%
total capital to risk-weighted assets ratio and a 4% Tier I leverage ratio in
order for these indices to be considered adequate. They must be 6%, 10% and
5%, respectively, in order for the Company or Bank to be considered well
capitalized. The actual ratios for the Company were 19.54%, 20.79% and 9.95%,
respectively, on December 31, 2003 and 17.43%, 18.69% and 9.12%, respectively,
on December 31, 2002. The capital ratios for the Bank only were 19.39%, 20.64%
and 9.85%, respectively, on December 31, 2003 and 17.09%, 18.34% and 9.01%,
respectively, on December 31, 2002. The following table sets forth the
Companys and the Banks capital and capital ratios at December 31, 2003. REGULATORY CAPITAL December 31, 2003(Dollars in thousands)CompanyTier I Capital
    
    $
    18,125Total Capital
    
    
    19,291Risk-Weighted Assets
    
    
    92,778Tier I Capital to Risk-Weighted Assets
    
    
    19.54
    %Total Capital to Risk-Weighted Assets
    
    
    20.79
    %Leverage Ratio
    
    
    9.95
    %BankTier I Capital
    
    $
    17,975Total Capital
    
    
    19,141Risk-Weighted Assets
    
    
    92,722Tier I Capital to Risk-Weighted Assets
    
    
    19.39
    %Total Capital to Risk-Weighted Assets
    
    
    20.64
    %Leverage Ratio
    
    
    9.85
    %
 Bank management is anticipating 2004 capital expenditures of approximately
$200,000 in connection with routine equipment replacements and facilities
upgrades. The Bank intends to use a portion of its anticipated 2004 income to
finance these expenditures. Management expects that the current capital levels, together with internally
generated funds, will be sufficient to support the Companys operations for the
foreseeable future. 32




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##### Table of Contents



EFFECTS OF INFLATION AND CHANGING PRICES The primary impact of inflation on the Companys operations is increased
operating costs. Unlike most industrial companies, virtually all of the assets
and liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institutions performance than the effects of general levels of inflation.
Although interest rates do not necessarily move in the same direction or to the
same extent as the prices of goods and services, increases in inflation
generally have resulted in increased interest rates. The effects of inflation,
however, can magnify the growth of assets in the banking industry. If
inflation were significant, then this would require that equity capital
increase at a faster rate than would otherwise be necessary. OFF-BALANCE SHEET ARRANGEMENTS At December 31, 2003, the Company did not have any off-balance sheet
arrangements with entities unconsolidated with the Company. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Statements which are not historical facts contained in this document are
forward-looking statements that involve risks and uncertainties that could
cause actual results to differ from projected results. Factors that could cause
actual results to differ materially include, among others: general economic
conditions, economic conditions in Southern Colorado and Northern New Mexico
area, the monetary policy of the Federal Reserve Board, changes in interest
rates, inflation, instability in the financial markets relating to terrorist
activities and the response thereto, competition in the banking business,
changes in state and federal regulatory regimes applicable to our operations,
loan demand, the ability of customers to repay loans, consumer saving habits,
employment costs, technology costs, and other risk factors contained herein and
detailed elsewhere in the Companys filings with the Securities and Exchange
Commission. Forward-looking statements in this document can be identified by the use of
forward-looking terminology such as may, will, anticipate, believe,
estimate, or continue, or the negative thereof or other variations thereon
or comparable terminology and include statements relating to, among other
things, our ability to minimize the adverse impact of interest rate changes and
the effect of the economy on the level of non-accruing loans. The statements in
risk-factors and other statements and disclaimers in this Annual Report on
Form 10-KSB constitute cautionary statements identifying important factors,
including certain risks and uncertainties, with respect to such forward-looking
statements that could cause actual results to differ materially from those
reflected in such forward-looking statements. 33




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##### Table of Contents



ITEM 7. FINANCIAL STATEMENTS THE REPUBLIC CORPORATION
DECEMBER 31, 2003, 2002 AND 2001
TABLE OF CONTENTS PAGEIndependent
Accountants Reports
    
    
    35Consolidated Financial StatementsBalance Sheets
    
    
    37Statements of Income
    
    
    39Statements of Stockholders Equity
    
    
    41Statements of Cash Flows
    
    
    42Notes to Financial Statements
    
    
    44
 34




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##### Table of Contents



Independent Accountants Report Board of Directors and Stockholders
The Republic Corporation
Houston, Texas We have audited the accompanying balance sheet of The Republic Corporation as
of December 31, 2003, and the related statements of income, stockholders equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audit. The financial
statements of The Republic Corporation as of December 31, 2002, and for each of
the two years then ended, were audited by other accountants whose report dated
May 30, 2003 expressed an unqualified opinion on those statements. We conducted our audit 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 audit provides a
reasonable basis for our opinion. In our opinion, the 2003 financial statements referred to above present fairly,
in all material respects, the financial position of The Republic Corporation as
of December 31, 2003, and the results of its operations and its cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America. /s/ BKD, LLP Colorado Springs, Colorado
January 9, 2004 35




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##### Table of Contents



Independent Auditors Report The Board of Directors
The Republic Corporation We have audited the consolidated balance sheet of The Republic Corporation as
of December 31, 2002, and the related consolidated statements of income and
stockholders equity and cash flows for each of the two 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
audit provides 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 the results of its operations and its cash flows, for
each of the two years in the period ending December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America. /s/ Dixon, Waller & Co., Inc. Dixon, Waller & Co., Inc.
Trinidad, Colorado
May 30, 2003 36




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##### Table of Contents



The Republic Corporation
Consolidated Balance Sheets
December 31, 2003 and 2002 Assets 2003
    
    2002Cash and due from banks
    
    $
    6,447,762
    
    
    $
    5,781,622Federal funds sold
    
    
    38,225,000
    
    
    
    40,750,000Cash and cash equivalents
    
    
    44,672,762
    
    
    
    46,531,622Held-to-maturity securities
    
    
    26,659,336
    
    
    
    22,470,121Loans
    
    
    105,867,354
    
    
    
    109,359,880Less allowance for loan losses
    
    
    (1,700,000
    )
    
    
    (1,700,060
    )Net loans
    
    
    104,167,354
    
    
    
    107,659,820Premises and equipment (net of accumulated depreciation)
    
    
    2,870,061
    
    
    
    3,033,582Federal Reserve Bank and Federal Home Loan Bank, Topeka
Stock
    
    
    662,800
    
    
    
    24,000Foreclosed assets held for sale, net
    
    
    644,353
    
    
    
    350,977Interest receivable  loans
    
    
    570,330
    
    
    
    624,047Deferred income taxes
    
    
    459,847
    
    
    
    488,418Goodwill
    
    
    436,079
    
    
    
    436,079Other assets
    
    
    248,595
    
    
    
    324,857Total assets
    
    $
    181,391,517
    
    
    $
    181,943,523Liabilities and Stockholders EquityLiabilitiesDemand deposits
    
    $
    22,940,048
    
    
    $
    21,052,697Savings, NOW and money market deposits
    
    
    57,300,756
    
    
    
    60,424,819Time deposits
    
    
    81,862,592
    
    
    
    82,297,598Total deposits
    
    
    162,103,396
    
    
    
    163,775,114Interest payable and other liabilities
    
    
    724,177
    
    
    
    894,475Total liabilities
    
    
    162,827,573
    
    
    
    164,669,589Minority Interest in Consolidated Subsidiary
    
    
    538,373
    
    
    
    497,123Stockholders EquityCommon stock, $1.00 par value; authorized 750,000
shares; 356,844 shares issued December 31, 2003 and
2002
    
    
    356,844
    
    
    
    356,844Additional paid-in capital
    
    
    234,931
    
    
    
    234,931
 See Notes to Consolidated
Financial Statements 37




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##### Table of Contents



The Republic Corporation
Consolidated Balance Sheets
December 31, 2003 and 2002 2003
    
    2002Retained earnings
    
    
    17,525,099
    
    
    
    16,276,339Treasury stock, at cost; Common stock, 23,119 shares at
December 31, 2003 and 2002
    
    
    (91,303
    )
    
    
    (91,303
    )Total stockholders equity
    
    
    18,025,571
    
    
    
    16,776,811Total liabilities and stockholders equity
    
    $
    181,391,517
    
    
    $
    181,943,523
 See Notes to Consolidated
Financial Statements 38




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##### Table of Contents



The Republic Corporation
Consolidated Statements of Income
Years Ended December 31, 2003, 2002 and 2001 2003
    
    2002
    
    2001Interest and Dividend IncomeLoans, including fees
    
    $
    8,449,454
    
    
    $
    9,236,703
    
    
    $
    10,541,196Securities
U.S. Government agencies
    
    
    739,961
    
    
    
    1,168,225
    
    
    
    1,518,374State and political subdivisions
    
    
    116,843
    
    
    
    116,843
    
    
    
    116,966Federal funds sold
    
    
    424,607
    
    
    
    590,566
    
    
    
    610,031Total interest and dividend income
    
    
    9,730,865
    
    
    
    11,112,337
    
    
    
    12,786,567Interest ExpenseDeposits
    
    
    2,487,747
    
    
    
    3,864,618
    
    
    
    5,727,105Net Interest Income
    
    
    7,243,118
    
    
    
    7,247,719
    
    
    
    7,059,462Provision for Loan Losses
    
    
    274,030
    
    
    
    357,834
    
    
    
    282,263Net Interest Income After Provision for Loan
Losses
    
    
    6,969,088
    
    
    
    6,889,885
    
    
    
    6,777,199Noninterest IncomeService charges on deposit accounts
    
    
    242,401
    
    
    
    228,463
    
    
    
    203,475Other service charges and fees
    
    
    614,063
    
    
    
    490,170
    
    
    
    482,318Other
    
    
    118,608
    
    
    
    187,226
    
    
    
    167,422Total noninterest income
    
    
    975,072
    
    
    
    905,859
    
    
    
    853,215Noninterest ExpenseSalaries and employee benefits
    
    
    2,845,838
    
    
    
    2,773,461
    
    
    
    2,677,483Net occupancy expense
    
    
    366,029
    
    
    
    359,978
    
    
    
    314,616Equipment expense
    
    
    160,603
    
    
    
    135,140
    
    
    
    180,050Data processing fees
    
    
    632,650
    
    
    
    564,506
    
    
    
    494,599Professional fees
    
    
    199,549
    
    
    
    159,880
    
    
    
    145,256Marketing expense
    
    
    240,151
    
    
    
    224,558
    
    
    
    207,005Printing and office supplies
    
    
    155,750
    
    
    
    178,802
    
    
    
    233,814Deposit insurance premium
    
    
    24,707
    
    
    
    34,988
    
    
    
    27,679Depreciation
    
    
    332,279
    
    
    
    358,986
    
    
    
    332,232Other
    
    
    1,049,328
    
    
    
    1,002,244
    
    
    
    1,068,789Total noninterest expense
    
    
    6,006,884
    
    
    
    5,792,543
    
    
    
    5,681,523Income Before Income Taxes
    
    
    1,937,276
    
    
    
    2,003,201
    
    
    
    1,948,891Provision for Income Taxes
    
    
    647,265
    
    
    
    677,896
    
    
    
    650,956Income Before Minority Interest
    
    
    1,290,011
    
    
    
    1,325,305
    
    
    
    1,297,935
 See Notes to Consolidated
Financial Statements 39




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##### Table of Contents



The Republic Corporation


2003
    
    2002
    
    2001Minority Interest in Net Income of Subsidiary
    
    
    (41,251
    )
    
    
    (42,132
    )
    
    
    (38,651
    )Net Income
    
    $
    1,248,760
    
    
    $
    1,283,173
    
    
    $
    1,259,284Basic Earnings per Share
    
    $
    3.74
    
    
    $
    3.85
    
    
    $
    3.77


See Notes to Consolidated
Financial Statements

40



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##### Table of Contents



The Republic Corporation
Consolidated Statements of Stockholders Equity
Years Ended December 31, 2003, 2002 and 2001 AdditionalCommon
    
    Paid-In
    
    Treasury
    
    RetainedStock
    
    Capital
    
    Stock
    
    Earnings
    
    TotalBalance, December 31, 2000
    
    $
    356,844
    
    
    $
    234,931
    
    
    $
    (91,303
    )
    
    $
    13,733,882
    
    
    $
    14,234,354Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,259,284
    
    
    
    1,259,284Balance, December 31, 2001
    
    
    356,844
    
    
    
    234,931
    
    
    
    (91,303
    )
    
    
    14,993,166
    
    
    
    15,493,638Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,283,173
    
    
    
    1,283,173Balance, December 31, 2002
    
    
    356,844
    
    
    
    234,931
    
    
    
    (91,303
    )
    
    
    16,276,339
    
    
    
    16,776,811Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,248,760
    
    
    
    1,248,760Balance, December 31, 2003
    
    $
    356,844
    
    
    $
    234,931
    
    
    $
    (91,303
    )
    
    $
    17,525,099
    
    
    $
    18,025,571
 See Notes to Consolidated
Financial Statements 41




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##### Table of Contents



The Republic Corporation
Consolidated Statements of Cash Flows
Years Ended December 31, 2003, 2002 and 2001 2003
    
    2002
    
    2001Operating ActivitiesNet income
    
    $
    1,248,760
    
    
    $
    1,283,173
    
    
    $
    1,259,284Items not requiring (providing) cash
Depreciation
    
    
    332,279
    
    
    
    358,986
    
    
    
    332,232Provision for loan losses
    
    
    274,030
    
    
    
    357,834
    
    
    
    282,263Amortization (accretion) of premiums and
discounts on securities
    
    
    (189,215
    )
    
    
    168,994
    
    
    
    (247,894
    )Stock dividend
    
    
    (5,500
    )
    
    
    
    
    
    
    Other real estate gains, net
    
    
    (12,405
    )
    
    
    (2,963
    )
    
    
    Deferred income taxes
    
    
    28,571
    
    
    
    (14,448
    )
    
    
    (14,881
    )Loss on sale of subsidiary stock
    
    
    
    
    
    
    32,153
    
    
    
    57,639Changes inInterest receivable  loans
    
    
    53,717
    
    
    
    191,864
    
    
    
    87,531Other assets
    
    
    76,262
    
    
    
    78,788
    
    
    
    (137,284
    )Interest payable and other liabilities
    
    
    (129,048
    )
    
    
    (124,621
    )
    
    
    (421,864
    )Net cash provided by (used in)
operating activities
    
    
    1,677,451
    
    
    
    2,329,760
    
    
    
    1,197,026Investing ActivitiesPurchase of held-to-maturity securities
    
    
    (14,000,000
    )
    
    
    
    
    
    
    (20,430,092
    )Proceeds from maturities of held-to-maturity
securities
    
    
    10,000,000
    
    
    
    10,000,000
    
    
    
    20,000,000Proceeds from sale of subsidiary stock
    
    
    
    
    
    
    5,000
    
    
    
    10,000Net change in loans
    
    
    2,667,647
    
    
    
    3,532,333
    
    
    
    210,192Purchase of Federal Home Loan Bank, Topeka Stock
    
    
    (633,300
    )
    
    
    
    
    
    
    Purchase of premises and equipment
    
    
    (168,758
    )
    
    
    (217,281
    )
    
    
    (873,645
    )Proceeds from the sale of foreclosed assets
    
    
    269,818
    
    
    
    34,691
    
    
    
    12,274Net cash (used in) provided by
investing activities
    
    
    (1,864,593
    )
    
    
    13,354,743
    
    
    
    (1,071,271
    )Financing ActivitiesNet (decrease) increase in demand deposits, NOW
and savings accounts
    
    
    (1,236,712
    )
    
    
    1,330,291
    
    
    
    7,751,119Net (decrease) increase in certificates of deposit
    
    
    (435,006
    )
    
    
    800,956
    
    
    
    4,225,319Net cash (used in) provided by
financing activities
    
    
    (1,671,718
    )
    
    
    2,131,247
    
    
    
    11,976,438(Decrease) Increase in Cash and Cash Equivalents
    
    
    (1,858,860
    )
    
    
    17,815,750
    
    
    
    12,102,193Cash and Cash Equivalents, Beginning of Year
    
    
    46,531,622
    
    
    
    28,715,872
    
    
    
    16,613,679Cash and Cash Equivalents, End of Year
    
    $
    44,672,762
    
    
    $
    46,531,622
    
    
    $
    28,715,872
 See Notes to Consolidated
Financial Statements 42




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##### Table of Contents



The Republic Corporation


2003
    
    2002
    
    2001Supplemental Cash Flows InformationInterest paid
    
    $
    2,654,142
    
    
    $
    4,032,580
    
    
    $
    6,184,442Income taxes paid
    
    $
    632,079
    
    
    $
    720,503
    
    
    $
    667,579Real estate and repossessions acquired in
settlement of loans
    
    $
    620,547
    
    
    $
    257,398
    
    
    $
    328,416Sale and financing of foreclosed assets
    
    $
    69,758
    
    
    $
    129,425
    
    
    $
    99,125


See Notes to Consolidated
Financial Statements

43



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##### Table of Contents



The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001


Note 1: Nature of Operations and Summary of Significant Accounting Policies



| |  | Nature of Operations
| |  | --------------------



| |  |  | The Republic Corporation (the Company) is a bank holding company for The
First National Bank in Trinidad (the Bank) with 97% ownership. The Bank is
primarily engaged in providing a full range of banking services to
individual and corporate customers in Southeastern Colorado and
Northeastern New Mexico. The Bank is subject to competition from other
financial institutions. The Bank also is subject to the regulation of
certain federal and state agencies and undergoes periodic examinations by
those regulatory authorities.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Principles of Consolidation
| |  | ---------------------------



| |  |  | The consolidated financial statements include the accounts of the Company
and the Bank. All significant intercompany accounts and transactions have
been eliminated in consolidation.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Operating Segment
| |  | -----------------



| |  |  | The Company provides community banking services through its subsidiary
bank, including such products and services as loans; time deposits,
checking and savings accounts. These activities are reported as one
operating segment.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Use of Estimates
| |  | ----------------



| |  |  | The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 loan losses and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the
allowance for loan losses and the valuation of foreclosed assets held for
sale, management obtains independent appraisals for significant properties.                                                                                                                                                                                                                                                          
|
| |  |  | Management believes that the allowances for loan losses and the valuation
of foreclosed assets held for sale are adequate. While management uses
available information to recognize losses on loans and foreclosed assets
held for sale, changes in economic conditions may necessitate revision of
these estimates in future years. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the
Banks allowances for loan losses and valuation of foreclosed assets held
for sale. Such agencies may require the Bank to recognize additional
losses based on their judgments of information available to them at the
time of their examination.



| |  | Cash Equivalents
| |  | ----------------



| |  |  | The Company considers all liquid investments with original maturities of
three months or less to be cash equivalents. At December 31, 2003 and
2002, cash equivalents consisted of cash due from banks and federal funds
sold.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

44



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##### Table of Contents



The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001








| |  | Securities
| |  | ----------



| |  |  | Held-to-maturity securities, which include any security for which the
Company has the positive intent and ability to hold until maturity, are
carried at historical cost adjusted for amortization of premiums and
accretion of discounts.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Amortization of premiums and accretion of discounts are recorded as
interest income from securities. Realized gains and losses are recorded as
net security gains (losses). Gains and losses on sales of securities are
determined on the specific-identification method.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Federal Reserve and Federal Home Loan Bank Stock
| |  | ------------------------------------------------



| |  |  | The Company, as a member of the Federal Home Loan Bank (FHLB) and the
Federal Reserve Bank (FRB) systems, is required to maintain an investment
in capital stock of both the FHLB and FRB. The required investment in the
common stock is based on a predetermined formula. No ready market exists
for the FHLB stock, and it has no quoted market value. Such stock is
recorded at cost and reported together in the accompanying consolidated
balance sheets.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Loans
| |  | -----



| |  |  | Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-offs are reported at their
outstanding principal adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans. Interest income is reported on
the interest method. Net deferred loan fees and costs are immaterial and
are recognized as income upon receipt. Generally, loans are placed on
non-accrual status at sixty days past due and interest is considered a
loss, unless the loan is well-secured and in the process of collection.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Allowance for Loan Losses
| |  | -------------------------



| |  |  | The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to income. Loan
losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance. The allowance is managements best
estimate of probable losses which have been incurred as of the balance
sheet date based on managements evaluation of risk in the portfolio, local
economic conditions and historical loss experience.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The allowance for loan losses is evaluated on a regular basis by management
and is based upon managements periodic review of the collectibility of the
loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrowers ability to
repay, estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value and the
probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

45



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##### Table of Contents



The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001  significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the reasons for
the delay, the borrowers prior payment record and the amount of the
shortfall in relation to the principal and interest owed. Impairment is
measured on a loan-by-loan
basis for loans by either the present value of expected future cash flows
discounted at the loans effective interest rate, the loans obtainable
market price or the fair value of the collateral if the loan is collateral
dependent.  Premises and Equipment  Depreciable assets are stated at cost less accumulated depreciation.
Depreciation is charged to expense using the straight-line, declining
balance and other accelerated methods over the estimated useful lives of
the assets.  Foreclosed Assets Held for Sale  Assets acquired through, or in lieu of, loan foreclosure are held for sale
and are initially recorded at fair value at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are
periodically performed by management and the assets are carried at the
lower of carrying amount or fair value less cost to sell. Revenue and
expenses from operations are included in net income or expense from
foreclosed assets.  Goodwill  Goodwill is tested annually for impairment. If the implied fair value of
goodwill is lower than its carrying amount, a goodwill impairment is
indicated and goodwill is written down to its implied fair value.
Subsequent increases in goodwill value are not recognized in the financial
statements.  Income Taxes  Deferred tax liabilities and assets are recognized for the tax effect 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. The Company files consolidated income tax returns with its
subsidiary.  Treasury Stock  Treasury stock is stated at cost. Cost is determined by the first-in,
first-out method.  Earnings Per Share  Basic earnings per share is computed based on the weighted average number
of shares outstanding during each year. The Company has no outstanding
potentially dilutive securities. The computation of per share earnings is
as follows: 2003
    
    2002
    
    2001Net income
    
    $
    1,248,760
    
    
    $
    1,283,173
    
    
    $
    1,259,284Average common shares outstanding
    
    
    333,725
    
    
    
    333,725
    
    
    
    333,725Basic earnings per share
    
    $
    3.74
    
    
    $
    3.85
    
    
    $
    3.77
 46




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##### Table of Contents



The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001  Reclassifications  Certain reclassifications have been made to the 2002 and 2001 financial
statements to conform to the 2003 financial statement presentation. These
reclassifications had no effect on net income. Note 2: Restriction on Cash and Due From Banks  The Company is required to maintain reserve funds in cash and/or on deposit
with the Federal Reserve Bank. The reserve required at December 31, 2003
was $2,032,000. Note 3: Securities  The amortized cost and approximate fair value of held-to-maturity
securities are as follows: Gross
    
    GrossUnrealized
    
    Unrealized
    
    ApproximateAmortized Cost
    
    Gains
    
    Losses
    
    Fair ValueDecember 31, 2003U.S. Government agencies
    
    $
    24,364,670
    
    
    $
    120,140
    
    
    $
    
    
    
    $
    24,484,810State and political subdivisions
    
    
    2,294,666
    
    
    
    298,302
    
    
    
    
    
    
    
    2,592,968$
    26,659,336
    
    
    $
    418,442
    
    
    $
    0
    
    
    $
    27,077,778December 31, 2002U.S. Government agencies
    
    $
    20,175,250
    
    
    $
    506,900
    
    
    $
    
    
    
    $
    20,682,150States and political subdivisions
    
    
    2,294,871
    
    
    
    215,833
    
    
    
    
    
    
    
    2,510,704$
    22,470,121
    
    
    $
    722,733
    
    
    $
    0
    
    
    $
    23,192,854
  The amortized cost and approximate fair value of held-to-maturity
securities at December 31, 2003, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties. ApproximateAmortized Cost
    
    Fair ValueWithin one year
    
    $
    10,030,054
    
    
    $
    10,176,250One to five years
    
    
    14,334,616
    
    
    
    14,308,560Five to ten years
    
    
    652,304
    
    
    
    726,989After ten years
    
    
    1,642,362
    
    
    
    1,865,979Totals
    
    $
    26,659,336
    
    
    $
    27,077,778
  The carrying value of securities pledged as collateral, to secure public
deposits and for other purposes, was $26,659,336 at December 31, 2003, and
$22,470,121 at December 31, 2002. 47




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##### Table of Contents



The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001






Note 4: Loans and Allowance for Loan Losses



| |  |  | Categories of loans at December 31 include the following:
| |  |  | ---------------------------------------------------------

2003
    
    2002Real estate
    
    $
    89,887,726
    
    
    $
    87,600,350Commercial and industrial
    
    
    6,716,235
    
    
    
    9,676,356Agriculture
    
    
    1,237,316
    
    
    
    1,243,638Consumer
    
    
    7,996,893
    
    
    
    10,837,664Other
    
    
    29,184
    
    
    
    1,872Total loans
    
    
    105,867,354
    
    
    
    109,359,880Less
Allowance for loan losses
    
    
    1,700,000
    
    
    
    1,700,060Net loans
    
    $
    104,167,354
    
    
    $
    107,659,820




| |  |  | Activity in the allowance for loan losses was as follows:
| |  |  | ---------------------------------------------------------

2003
    
    2002
    
    2001Balance, beginning of year
    
    $
    1,700,060
    
    
    $
    1,612,000
    
    
    $
    1,578,694Provision charged to expense
    
    
    274,030
    
    
    
    357,834
    
    
    
    282,263Loans charged off
    
    
    (476,231
    )
    
    
    (380,504
    )
    
    
    (308,149
    )Recoveries on loans previously charged off
    
    
    202,141
    
    
    
    110,730
    
    
    
    59,192Balance, end of year
    
    $
    1,700,000
    
    
    $
    1,700,060
    
    
    $
    1,612,000




| |  |  | Impaired loans totaled approximately $1,486,000 and $2,560,000 at December
31, 2003 and 2002, respectively. An allowance for loan losses of $1,200
relates to impaired loans of $9,000, at December 31, 2002. At December 31,
2003 and 2002, impaired loans of $1,486,000 and $2,551,000, respectively,
had no specific related allowance for loan losses.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Interest of $111,585 and $24,343 was recognized on a cash basis on average
impaired loans of $1,570,000 and $1,706,000 for 2003 and 2002,
respectively.                                                                                                                                                                                                   
|
| |  |  | Non-accruing loans at December 31, 2003 and 2002 were $880,850 and
$2,304,484, respectively.                                                                                                                                                                                                                                                              

Note 5: Premises and Equipment



| |  |  | Major classifications of premises and equipment, stated at cost, are as
follows:
| |  |  | --------------------------------------------------------------------------------

2003
    
    2002Land
    
    $
    134,750
    
    
    $
    134,750Buildings
    
    
    3,772,490
    
    
    
    3,752,745Furniture and equipment
    
    
    3,044,396
    
    
    
    2,900,9376,951,636
    
    
    
    6,788,432Less accumulated depreciation
    
    
    4,081,575
    
    
    
    3,754,850


48



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##### Table of Contents



The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001 Note 6: Interest-Bearing Deposits  Interest-bearing time deposits in denominations of $100,000 or more were $
24,913,604 on December 31, 2003 and $ 24,251,094 on December 31, 2002.At December 31, 2003, the scheduled maturities of certificates of deposit
are as follows: (Dollars inThousands)2004
    
    $
    74,1422005
    
    
    7,720$
    81,862
 Note 7: Federal Home Loan Bank Advances  During 2003 the Bank in connection with their investment in Federal Home
Loan Bank of Topeka (FHLB) stock of 6,333 shares for $633,300 have an
agreement with FHLB to provide advances with a borrowing capacity based on
the amount of collateral pledged. As of December 31, 2003, the Banks
borrowing capacity is approximately $61,590,000. As of and during the year
ended 2003, no advances were outstanding. Interest rates will vary
depending on the date of advance, maturity and other terms at the time of
any advances. The Bank has pledged loans totaling $82,627,059 at December
31, 2003 under the agreement. The Bank received a stock dividend of $5,500
from FHLB during 2003 resulting in a total investment in FHLB stock of
$638,800 as of December 31, 2003. Note 8: Income Taxes  The provision for income taxes consists of the following: 2003
    
    2002
    
    2001Taxes currently payable
    
    $
    618,694
    
    
    $
    692,344
    
    
    $
    665,837Deferred income taxes
    
    
    28,571
    
    
    
    (14,448
    )
    
    
    (14,881
    )$
    647,265
    
    
    $
    677,896
    
    
    $
    650,956
  A reconciliation of income tax expense at the statutory rate to the
Companys actual income tax expense is shown below: 2003
    
    2002
    
    2001Computed at the statutory rate (34%)
    
    
    658,674
    
    
    $
    681,088
    
    
    $
    662,623Increase (decrease) resulting from:Tax-exempt interest
    
    
    (40,120
    )
    
    
    (41,000
    )
    
    
    (40,000
    )Nondeductible expenses
    
    
    225
    
    
    
    12,019
    
    
    
    19,597State income taxes
    
    
    33,250
    
    
    
    36,000
    
    
    
    11,000Other
    
    
    (4,764
    )
    
    
    (10,211
    )
    
    
    (2,264
    )Actual tax provision
    
    $
    647,265
    
    
    $
    677,896
    
    
    $
    650,956
 49




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##### Table of Contents



The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001  The tax effects of temporary differences related to deferred taxes shown on
the December 31, 2003 and 2002 consolidated balance sheets are as follows: 2003
    
    2002Deferred tax assetsAllowance for loan losses
    
    $
    546,193
    
    
    $
    546,215Deferred tax liabilitiesFHLB stock dividend
    
    
    (2,035
    )
    
    
    Accumulated depreciation
    
    
    (50,271
    )
    
    
    (23,757
    )Reserve for contingencies
    
    
    (34,040
    )
    
    
    (34,040
    )(86,346
    )
    
    
    (57,797
    )Net deferred tax asset
    
    $
    459,847
    
    
    $
    488,418
 Note 9: Regulatory Matters  The Company and the Bank are subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Companys financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Companys and Banks
assets, liabilities and certain off balance sheet items as calculated under
regulatory accounting practices. The capital amounts and classification
are also subject to qualitative judgements by the regulators about
components, risk weightings and other factors.Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios
(set forth in the table below). Management believes, as of December 31,
2003 and 2002 that the Company and the Bank meet all capital adequacy
requirements to which they are subject.As of December 31, 2003, the most recent notification from the OCC
categorized the Company and the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Company and the Bank must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in
the table. There are no conditions or events since that notification that
management believes have changed the Companys or the Banks category. 50




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##### Table of Contents



The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001  The Company and the Banks actual capital amounts and ratios are also
presented in the table. To Be WellCapitalizedUnder PromptFor Capital
    
    Corrective ActionActual
    
    Adequacy Purposes
    
    ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars inThousands)As of December 31, 2003Total Capital (to
Risk Weighted
Assets)Consolidated
    
    $
    19,291
    
    
    
    20.79
    %
    
    $
    7,422
    
    
    
    8
    %
    
    
    
    
    
    
    N/ABank Only
    
    $
    19,141
    
    
    
    20.64
    %
    
    $
    7,418
    
    
    
    8
    %
    
    $
    9,272
    
    
    
    10
    %Tier 1 Capital (to
Risk Weighted
Assets)Consolidated
    
    $
    18,125
    
    
    
    19.54
    %
    
    $
    3,711
    
    
    
    4
    %
    
    
    
    
    
    
    N/ABank Only
    
    $
    17,975
    
    
    
    19.39
    %
    
    $
    3,709
    
    
    
    4
    %
    
    $
    5,563
    
    
    
    6
    %Tier 1 Capital
(to Average Assets)Consolidated
    
    $
    18,125
    
    
    
    9.95
    %
    
    $
    7,363
    
    
    
    4
    %
    
    
    
    
    
    
    N/ABank Only
    
    $
    17,975
    
    
    
    9.85
    %
    
    $
    7,302
    
    
    
    4
    %
    
    $
    9,128
    
    
    
    5
    %As of December 31, 2002Total Capital (to
Risk Weighted
Assets)Consolidated
    
    $
    18,059
    
    
    
    18.69
    %
    
    $
    7,730
    
    
    
    8
    %
    
    
    
    
    
    
    N/ABank Only
    
    $
    17,909
    
    
    
    18.34
    %
    
    $
    7,812
    
    
    
    8
    %
    
    $
    9,765
    
    
    
    10
    %Tier 1 Capital (to
Risk Weighted
Assets)Consolidated
    
    $
    16,838
    
    
    
    17.43
    %
    
    $
    3,865
    
    
    
    4
    %
    
    
    
    
    
    
    N/ABank Only
    
    $
    16,683
    
    
    
    17.09
    %
    
    $
    3,906
    
    
    
    4
    %
    
    $
    5,859
    
    
    
    6
    %Tier 1 Capital
(to Average Assets)Consolidated
    
    $
    16,838
    
    
    
    9.12
    %
    
    $
    7,406
    
    
    
    4
    %
    
    
    
    
    
    
    N/ABank Only
    
    $
    16,683
    
    
    
    9.01
    %
    
    $
    7,407
    
    
    
    4
    %
    
    $
    9,258
    
    
    
    5
    %
  The Bank is subject to certain restrictions on the amounts of dividends
that it may declare without prior regulatory approval. At December 31,
2003, approximately $3,447,000 of retained earnings were available for
dividend declaration without prior regulatory approval. Note 10: Related Party Transactions  At December 31, 2003 and 2002, the Bank had loans outstanding to executive
officers, directors, significant shareholders and their affiliates (related
parties), in the amount of $1,357,823 and $1,243,692, respectively. During
the year ended December 31, 2003, the Bank paid a Director approximately
$4,600 for construction loan inspection services. 51




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The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001  Deposits from related parties held by the Bank at December 31, 2003 and
2002 totaled $1,973,393 and $1,642,764, respectively.In managements opinion, such loans and other extensions of credit and
deposits were made in the ordinary course of business and were made on
substantially the same terms (including interest rates and collateral) as
those prevailing at the time for comparable transactions with other
persons. Further, in managements opinion, these loans did not involve
more than normal risk of collectibility or present other unfavorable
features. Note 11: Employee Benefits  The Bank has a retirement savings 401(k) plan covering substantially all
employees who have six months of service and have attained the age of 21.
Employees may contribute up to 10% of their compensation with the Bank
matching 100% of the employees contribution up to 2.5% of their
compensation. In addition, the plan provides for discretionary
contributions as solely determined by the Employer. Employer contributions
charged to expense for 2003, 2002 and 2001 were $46,544, $42,994 and
$40,668, respectively. Note 12: Leases  The Company has several noncancellable operating leases, primarily for
office space and real estate at two branch locations and equipment that
expire over the next 6 years. These leases generally contain renewal
options for periods of 5 years. Rental expense for these leases was
$59,341, $57,974 and $57,649 for the years ended December 31, 2003, 2002
and 2001, respectively.Future minimum lease payments under operating leases are: OperatingLeases2004
    
    $
    65,2682005
    
    
    52,9172006
    
    
    52,1012007
    
    
    49,3902008
    
    
    31,517Thereafter
    
    
    400Total minimum lease payments
    
    $
    251,593
 52




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The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001 Note 13: Disclosures about Fair Value of Financial Instruments  The following table presents estimated fair values of the Companys
financial instruments. The fair values of certain of these instruments
were calculated by discounting expected cash flows, which method involves
significant judgments by management and uncertainties. Fair value is the
estimated amount at which financial assets or liabilities could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. Because no market exists for certain of these
financial instruments, and because management does not intend to sell these
financial instruments, the Company does not know whether the fair values
shown below represent values at which the respective financial instruments
could be sold individually or in the aggregate. 2003
    
    2002Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    Value(Dollars in Thousands)Financial assetsCash and cash equivalents
    
    $
    44,673
    
    
    $
    44,673
    
    
    $
    46,532
    
    
    $
    46,532Held-to-maturity securities
    
    
    26,659
    
    
    
    27,078
    
    
    
    22,470
    
    
    
    23,193Loans, net of allowance for loan losses
    
    
    104,167
    
    
    
    108,486
    
    
    
    107,660
    
    
    
    109,971Federal Reserve Bank and Federal Home
Loan Bank, Topeka Stock
    
    
    663
    
    
    
    663
    
    
    
    24
    
    
    
    24Interest receivable  loans
    
    
    570
    
    
    
    570
    
    
    
    624
    
    
    
    624Financial liabilitiesDeposits
    
    
    162,103
    
    
    
    162,140
    
    
    
    163,775
    
    
    
    164,090Interest payable
    
    
    662
    
    
    
    662
    
    
    
    834
    
    
    
    834Unrecognized financial instruments
(net of amortization)Commitments to extend credit
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Letters of credit
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Lines-of-credit
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
  The following methods and assumptions were used to estimate the fair value
of each class of financial instruments: Cash and Cash Equivalents, Federal Reserve and Federal Home Loan Bank Stock  For these short-term instruments, the carrying amount approximates fair
value. Securities  Fair values equal quoted market prices, if available. If quoted market
prices are not available, fair value is estimated based on quoted market
prices of similar securities. 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 53




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The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001  remaining maturities. Loans with similar characteristics were aggregated
for purposes of the calculations. The carrying amount of accrued interest
approximates its fair value. Deposits  The fair value of demand deposits, savings accounts, NOW accounts and
certain money market deposits is the amount payable on demand at the
reporting date i.e., their carrying amount. The fair value of fixed
maturity time deposits is estimated using a discounted cash flow
calculation that applies the rates currently offered for deposits of
similar remaining maturities. The carrying amount of accrued interest
payable approximates its fair value. Commitments to Extend Credit, Letters of Credit and Lines-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 counterparties.
For fixed rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair
value of letters of credit and lines-of-credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate or
otherwise settle the obligations with the counterparties at the reporting
date. Note 14: Commitments and Credit Risks Standby Letters of Credit  Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Financial
standby letters of credit are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond financing
and similar transactions. Performance standby letters of credit are issued
to guarantee performance of certain customers under non-financial
contractual obligations. The credit risk involved in issuing standby
letters of credit is essentially the same as that involved in extending
loans to customers.The Company had total outstanding standby letters of credit amounting to
$173,804 and $371,000, at December 31, 2003 and 2002, respectively, with
terms ranging from 22 days to 6 years. Lines-of-Credit  Lines-of-credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Lines-of-credit
generally have fixed expiration dates. Since a portion of the line may
expire without being drawn upon, the total unused lines do not necessarily
represent future cash requirements. Each customers creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained, if
deemed necessary, is based on managements credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, commercial real estate and
residential real estate. Management uses the same credit policies in
granting lines-of-credit as it does for on-balance-sheet instruments.  At December 31, 2003, the Bank had granted unused lines-of-credit to
borrowers aggregating approximately $3,967,000 and $2,495,000 for
commercial lines and open-end consumer lines, 54




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The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001  respectively. At December 31, 2002, unused lines-of-credit to borrowers
aggregated approximately $5,658,000. Other Credit Risks  Additionally, the Company periodically has excess funds, which are loaned
to other banks as federal funds sold. At December 31, 2003 and 2002,
federal funds sold totaling $38,225,000 and $40,750,000, respectively, were
loaned to various banks, as approved by the Board of Directors, with the
largest balance at any one bank being $3,000,000 at December 31, 2003 and
2002. Note 15: Significant Estimates and Concentrations  Accounting principles generally accepted in the United States of America
require disclosure of certain significant estimates and current
vulnerabilities due to certain concentrations. Estimates related to the
allowance for loan losses are reflected in the footnote regarding loans.
Current vulnerabilities due to certain concentrations of credit risk are
discussed in the footnote on commitments and credit risk. Note 16: Selected Quarterly Financial Data (Unaudited)  The following table presents the unaudited results of operations for the
past two years by quarter (in thousands except per share data). See
discussion on earnings per share in Note 1: Nature of Operations and
Summary of Significant Accounting Policies in the Companys Consolidated
Financial Statements. 2003
    
    2002Fourth
    
    Third
    
    Second
    
    First
    
    Fourth
    
    Third
    
    Second
    
    FirstQuarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    QuarterOperationsNet interest income
    
    $
    1,926
    
    
    $
    1,790
    
    
    $
    1,796
    
    
    $
    1,731
    
    
    $
    1,967
    
    
    $
    1,780
    
    
    $
    1,735
    
    
    $
    1,766Provision for loan losses
    
    
    62
    
    
    
    69
    
    
    
    54
    
    
    
    89
    
    
    
    46
    
    
    
    70
    
    
    
    40
    
    
    
    202Noninterest income
    
    
    111
    
    
    
    280
    
    
    
    307
    
    
    
    277
    
    
    
    153
    
    
    
    254
    
    
    
    288
    
    
    
    211Noninterest expense
    
    
    1,738
    
    
    
    1,707
    
    
    
    1,674
    
    
    
    1,576
    
    
    
    1,704
    
    
    
    1,573
    
    
    
    1,647
    
    
    
    1,589Net income
    
    $
    237
    
    
    $
    294
    
    
    $
    375
    
    
    $
    343
    
    
    $
    370
    
    
    $
    391
    
    
    $
    336
    
    
    $
    186Net Income per ShareDataBasic
    
    $
    .70
    
    
    $
    .88
    
    
    $
    1.12
    
    
    $
    1.04
    
    
    $
    1.11
    
    
    $
    1.17
    
    
    $
    1.01
    
    
    $
    .56Balance SheetTotal assets
    
    $
    181,392
    
    
    $
    181,283
    
    
    $
    178,187
    
    
    $
    179,765
    
    
    $
    181,944
    
    
    $
    189,977
    
    
    $
    183,474
    
    
    $
    184,324Total loans, net
    
    
    104,167
    
    
    
    105,216
    
    
    
    107,148
    
    
    
    107,589
    
    
    
    107,660
    
    
    
    108,059
    
    
    
    108,919
    
    
    
    109,088Shareholders equity
    
    
    18,026
    
    
    
    17,789
    
    
    
    17,494
    
    
    
    17,120
    
    
    
    16,777
    
    
    
    16,407
    
    
    
    16,016
    
    
    
    15,680
  The above unaudited financial information reflects all adjustments that
are, in the opinion of management, necessary to present a fair statement of
the results of operations for the interim periods presented. 55




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The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001 Note 17: Recently issued Accounting Pronouncements  The Financial Accounting Standards Board (FASB) has issued several new
accounting pronouncements that became effective in the current year ended
December 31, 2003.In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others.FIN 45 elaborates
on the disclosures to be made by a guarantor about its obligations under
certain guarantees that it has issued, and it requires the recognition of a
liability at fair value by a guarantor at the inception of a guarantee.
The initial recognition and measurement provisions of FIN 45 are effective
on a prospective basis for all guarantees issued or modified after December
31, 2002. The adoption of this standard did not have a material impact on
the consolidated financial statements.In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). FIN 46 provides guidance with respect
to the consolidation of certain variable interest entities (VIEs) whereby
a VIE must be consolidated by its primary beneficiary if the entity does
not effectively disperse risks among the parties involved. The primary
beneficiary is the one that absorbs a majority of the expected losses,
residual returns, or both as a result of holding variable interests. FIN
46 also requires disclosures for both the primary beneficiary of a VIE and
other parties with a significant variable interest in the entity. FIN 46
applies, in the first fiscal year or interim period ending after March 15,
2004, to VIEs in which an enterprise holds a variable interest it acquired
before February 1, 2003. The Company has not obtained an interest in a new
or existing VIE subsequent to January 31, 2003, and the adoption of FIN 46
is not expected to have a material impact on the consolidated financial
statements. 56




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The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001 Note 18: Condensed Financial Information (Parent Company Only) The Republic Corporation
Condensed Balance Sheets
December 31, 2003 and 2002 2003
    
    2002AssetsCash and cash equivalents
    
    $
    50,470
    
    
    $
    74,494Investments in subsidiary-equity method
    
    
    17,874,701
    
    
    
    16,622,406Due from subsidiary
    
    
    43,796
    
    
    
    23,307Other assets
    
    
    56,604
    
    
    
    56,604Total assets
    
    $
    18,025,571
    
    
    $
    16,776,811Liabilities
    
    $
    
    
    
    $
    Stockholders EquityCommon stock, par value $1.00; authorized 750,000
shares, issued 356,844 shares issued and outstanding
December 31, 2003 and 2002
    
    
    356,844
    
    
    
    356,844Additional paid-in capital
    
    
    234,931
    
    
    
    234,931Treasury stock, at cost; Common stock 23,119 shares
at December 31, 2003 and 2002
    
    
    (91,303
    )
    
    
    (91,303
    )Retained earnings
    
    
    17,525,099
    
    
    
    16,276,339Total stockholders equity
    
    
    18,025,571
    
    
    
    16,776,811Total liabilities and stockholders equity
    
    $
    18,025,571
    
    
    $
    16,776,811
 57




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The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001 The Republic Corporation
Condensed Statements of Income
Years Ended December 31, 2003, 2002 and 2001 2003
    
    2002
    
    2001IncomeDividends from subsidiary
    
    $
    81,480
    
    
    $
    54,320
    
    
    $
    54,460Expenses
    
    
    128,811
    
    
    
    102,366
    
    
    
    129,530Income (loss) before income
taxes and equity in
undistributed net income of
subsidiary
    
    
    (47,331
    )
    
    
    (48,046
    )
    
    
    (75,070
    )Credit for income taxes
    
    
    43,796
    
    
    
    23,307
    
    
    
    23,312Income (loss) before equity
in undistributed net income
of subsidiaries
    
    
    (3,535
    )
    
    
    (24,739
    )
    
    
    (51,758
    )Equity in undistributed net
income of subsidiaries
    
    
    1,252,295
    
    
    
    1,307,912
    
    
    
    1,311,042Net income
    
    $
    1,248,760
    
    
    $
    1,283,173
    
    
    $
    1,259,284
 58




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##### Table of Contents



The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001 The Republic Corporation
Condensed Statements of Cash Flows
Years Ended December 31, 2003, 2002 and 2001 2003
    
    2002
    
    2001Operating ActivitiesNet income
    
    $
    1,248,760
    
    
    $
    1,283,173
    
    
    $
    1,259,284Items not requiring (providing) cashLoss on sale of subsidiary stock
    
    
    
    
    
    
    32,153
    
    
    
    57,639Dividends received from subsidiary
    
    
    (81,480
    )
    
    
    (54,320
    )
    
    
    (54,460
    )Equity in undistributed income of subsidiaries
    
    
    (1,252,295
    )
    
    
    (1,307,913
    )
    
    
    (1,311,042
    )Changes inDue from subsidiary
    
    
    (20,489
    )
    
    
    5
    
    
    
    1,788Net cash used in operating activities
    
    
    (105,504
    )
    
    
    (46,902
    )
    
    
    (46,791
    )Financing ActivitiesSale of subsidiary stock
    
    
    
    
    
    
    5,000
    
    
    
    10,000Dividends received
    
    
    81,480
    
    
    
    54,320
    
    
    
    54,460Net cash provided by financing activities
    
    
    81,480
    
    
    
    59,320
    
    
    
    64,460(Decrease) Increase in Cash and
Cash Equivalents
    
    
    (24,024
    )
    
    
    12,418
    
    
    
    17,669Cash and Cash Equivalents,
Beginning of Year
    
    
    74,494
    
    
    
    62,076
    
    
    
    44,407Cash and Cash Equivalents,
End of Year
    
    $
    50,470
    
    
    $
    74,494
    
    
    $
    62,076
 59




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##### Table of Contents



ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE NONE 
 ITEM 8A. CONTROLS AND PROCEDURES  (A)
    
    Evaluation of disclosure controls and proceduresOur Chief Executive and Chief Financial Officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end of the period
covered by this Form 10-KSB Annual Report (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 Form 10-KSB
Annual Report 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. 60




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##### Table of Contents



PART III 
 ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS  The Republic Corporations Board of Directors consists of Catherine G.
Eisemann, J.E. Eisemann, IV, Roger Dean Eisemann, George M. Boyd and Dr.
John C. Davis. All directors and officers are U.S. citizens. Catherine
G. Eisemann is the mother of J.E. and Roger Dean Eisemann and the
mother-in-law of George M. Boyd. TERM OF
    
    PRINCIPAL OCCUPATIONS FORNAME AND TITLE
    
    AGE
    
    OFFICE
    
    THE LAST FIVE YEARSCatherine G. Eisemann
    
    
    77
    
    
    40 Years
    
    Catherine G. Eisemann has been a Director of The Republic Corporation for 40 years. Mrs.
Eisemann was elected President of The Republic Corporation and
began serving December 11, 1981.J.E. Eisemann, IV
    
    
    56
    
    
    27 Years
    
    J.E. Eisemann, IV has served as a Director on The Republic
Corporation Board for 27 years. Mr. Eisemann has been the
Vice-President and Director of the Subsidiary Bank for
approximately 26 years. Mr. Eisemann has served as the
Chairman of the Board of The Republic Corporation and Chairman
of the Board for the Subsidiary Bank for approximately 22
years.Roger Dean Eisemann
    
    
    49
    
    
    21 Years
    
    Roger Dean Eisemann was elected Secretary and began serving as director of The Republic
Corporation in July, 1982.George M. Boyd
    
    
    59
    
    
    Since March,
2004
    
    George M. Boyd was appointed to The
Republic Corporation Board on March 18, 2004. Mr. Boyd is the
Executive Vice President of The Bank of Texas in Austin, Texas
and has served in that position for the past five years.Dr. John C. Davis
    
    
    56
    
    
    Since February,
2004
    
    Dr. John C. Davis was appointed to The
Republic Corporation Board on February 27, 2004. Dr.
Davis is the owner/operator of the Rio Cucharas Veterinary
Clinic in Walsenburg, Colorado and has owned and operated this
business for the past 23 years. Dr. Davis has served as a
director on the Board of the subsidiary Bank for approximately
10 years.
 CODE OF ETHICS The Company is in the process of adopting a code of ethics applicable to
its principal executive and principal financial officer. 61




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FINANCIAL EXPERT Because the Company does not have a standing audit committee, it has not
designated an audit committee financial expert. 
 ITEM 10. EXECUTIVE COMPENSATION  EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE Annual CompensationName & Principal Position
    
    Year
    
    Salary
    
    Bonus
    .J.E. Eisemann, IV Chairman of the
    
    
    2003
    
    
    $
    90,767
    (1)
    
    $
    4,000
    (2)Board of the Company, Vice
    
    
    2002
    
    
    
    85,773
    (1)
    
    
    3,735
    (2)President of the Company,
    
    
    2001
    
    
    
    83,573
    (1)
    
    
    5,438
    (2)Chairman of the Board & Vice
President of the Subsidiary BankCatherine Eisemann President of the
    
    
    2003
    
    
    $
    30,000
    
    
    
    -0-Company
    
    
    2002
    
    
    
    30,000
    
    
    
    -0-2001
    
    
    
    30,000
    
    
    
    -0-
 Restricted
    
    StockStock
    
    Options/
    
    LTIP
    
    All OtherName & Principal Position
    
    Awards
    
    SARs(#)
    
    Payouts($)
    
    CompensationJ.E. Eisemann, IV
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-Chairman of the Board
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-of the Company, Vice
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-President of the
Company, Chairman of
the Board & Vice
President of the
Subsidiary BankCatherine Eisemann
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-President of the
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-Company
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
  (1) Includes amounts deferred under Section 401(K) of the Internal
Revenue Code. Amounts deferred by Mr. Eisemann were $10,422 in 2001,
$11,205 in 2002 and $12,567 in 2003.(2) Includes amounts deferred under Section 401(K) of the Internal
Revenue Code. Amounts deferred by Mr. Eisemann were $0 in 2001, $560 in
2002 and $600 in 2003. STOCK OPTIONS/SAR GRANTS IN 2003-NONE
AGGREGATED STOCK OPTIONS/SAR EXERCISES IN 2003 AND OPTIONS/SAR
VALUES AS OF DECEMBER 31 2003 - NONE
LONG-TERM INCENTIVE PLANS - AWARDS IN 2003 - 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 62




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ITEM 11. 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 andNature of
    
    PercentName of
    
    Title of
    
    Beneficial
    
    ofPerson
    
    Class
    
    Ownership
    
    ClassCatherine G. Eisemann
    
    Common Stock
    
    
    193,702
    
    
    
    58.04243350 McCue, #904
Houston, Texas 77056Mr. J.E. Eisemann IV
    
    Common Stock
    
    
    8,700
    
    
    
    2.60691103 Victoria Square
Trinidad, Colorado 81082Mr. R. Dean Eisemann
    
    Common Stock
    
    
    6,500
    
    
    
    1.94773738 Ella Lee Lane
Houston, Texas 77027Mr. George M. Boyd
    
    Common Stock
    
    
    8,700
    
    
    
    2.60691503 Canoe Brook Dr.
Austin, Texas 78746Dr. John C. Davis
    
    Common Stock
    
    
    1,395
    
    
    
    .4180631 Huajatolla Valley Estates Dr.
La Veta, CO 81055All directors and executive
officers as a group
    
    Common Stock
    
    
    218,997
    
    
    
    65.6220
 
 ITEM 12. 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. One director, Dr. John C. Davis, was indebted to the Bank in
an aggregate amount of $233,932 at December 31, 2003. These loans were granted
to Dr. Davis on the same terms as available to parties not involved as insiders
with the Bank or the Company and are being paid as agreed. 63




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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    List of Exhibits 3
    
    
    Articles of Incorporation and By-Laws *21
    
    
    Subsidiary of the Registrant*The First National Bank in Trinidad, Colorado.
Incorporated in Colorado.31.1
    
    
    Certification of Chief Executive and Chief
Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.2
    
    
    Certification of Chief Executive and Financial
Officer pursuant to 18 U.S.C. 1350 (Section 906 of the
Sarbanes-Oxley Act of 2002)
 *Filed as an exhibit to Registration Statement on Form 10 filed
with the Securities and Exchange Commission on August 23, 1977.  (b)
    
    Reports on Form 8-K No reports on Form 8-K have been filed in three months ended December 31,
2003. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 2003
    
    2002Dixon, Waller & Co. Inc. :
    
    Audit Fees
    
    $
    -0-
    
    
    $
    15,200Audit Related Fees
    
    
    -0-
    
    
    
    -0-Tax Fees
    
    
    4,500
    
    
    
    13,880All Other Fees
    
    
    -0-
    
    
    
    -0-BKD, LLP:
    
    Audit Fees
    
    $
    46,682
    
    
    $
    -0-Audit Related Fees
    
    
    -0-
    
    
    
    -0-Tax Fees
    
    
    -0-
    
    
    
    -0-All Other Fees
    
    
    -0-
    
    
    
    -0-
 Non-Audit Services.The Board of Directors of the Company did not hire either
Dixon, Waller & Inc. during their tenure as principal accountant, nor BKD, LLP
during their tenure as principal 64




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##### Table of Contents



accountant, to provide non-audit services. It is the policy of the Companys
Board to review and pre-approve all accountant engagements for both audit and
non-audit related services. 65




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##### Table of Contents



SIGNATURES In accordance with Section 13 or 15 (d) of the Exchange Act, the Small
Business Issuer caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. THE REPUBLIC CORPORATIONBy
    
    /s/ J. E. Eisemann, IVJ. E. Eisemann, IV
Chairman of the Board,
Director, Chief Executive
Officer, Chief Financial OfficerDate
    
    March 30, 2004
 In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Small Business Issuer and in the
capacities and on the dates indicated. By
    
    /s/ J. E. Eisemann, IVJ. E. Eisemann, IV
Chairman of the Board,
Director, Chief Executive
Officer, Chief Financial OfficerDate
    
    March 30, 2004By
    
    /s/ Catherine G. EisemannCatherine G.
EisemannPresident, DirectorDate
    
    March 30, 2004By
    
    /s/ Roger Dean EisemannRoger Dean Eisemann
Secretary, DirectorDate
    
    March 30, 2004ByGeorge M. BoydDirectorDate
    
    March 30, 2004ByDr. John C. DavisDirectorDate
    
    March 30, 2004
 66




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EXHIBIT INDEX 3
    
    The Republic Corporation, Articles of Incorporation and By-Laws*21
    
    Subsidiary of the Registrant*The First National Bank in Trinidad, Colorado.
Incorporated in Colorado.31.1
    
    Certification of Chief Executive and Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certificate of Chief Executive and Chief Financial Officer pursuant to 18
U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
 *Filed as an exhibit to Registration Statement on Form 10 filed with the
Securities and Exchange Commission on August 23, 1977.