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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, 2004 Commission file number 0-8597 THE REPUBLIC CORPORATION  TEXAS
(State or other jurisdiction of
incorporation or organization)
    
    74-0911766
(I.R.S. Employer
Identification No.)5340 Weslayan, P.O. Box 270462
Houston, Texas
(Address of principal executive offices)
    
    77277
(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 þ 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. o State the issuers revenues for its most recent fiscal year $9,955,429 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, 2004 DOCUMENTS INCORPORATED BY REFERENCE
NONE




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THE REPUBLIC CORPORATION
FORM 10-KSB
INDEX PAGEPART IITEM 1. BUSINESS
    
    1ITEM 2. PROPERTIES
    
    20ITEM 3. LEGAL PROCEEDINGS
    
    21ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    21PART IIITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
    
    21ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
    
    22ITEM 7. FINANCIAL STATEMENTS
    
    32ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    56ITEM 8A. CONTROLS AND PROCEDURES
    
    56PART IIIITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
    
    57ITEM 10. EXECUTIVE COMPENSATION
    
    58ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
    
    59ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    60ITEM 13. EXHIBITS
    
    60ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    61SIGNATURES
    
    62CERTIFICATIONSForm of Director's Qualifying Shares AgreementCode of EthicsCertification of CEO and CFO Pursuant to Section 302Certification of CEO and CFO Pursuant to Section 906




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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) and in 1961, an additional 23%.
Effective December 22, 2004, all remaining Bank stock, formerly held by Bank directors as
qualifying shares, was acquired by the Company, thus bringing the total to 100%. 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, iBank Pro, an
internet based cash management 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. 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, the effect of the economy on the level of non-accruing loans and the completion and the
effect of the proposed merger and going private transaction and Subchapter S election. The
statements in risk-factors and other statements and 1




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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. 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 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 2




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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 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 has also been marginally successful thus
far and is presently 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 slow deposit growth experience for the Company in the recent
past, and it is our anticipation that this will persist. Loan growth is expected to be
flat-to-negative until the current, record low interest rate environment reverts to a more normal
pattern of higher rates. 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. 3




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LOAN PORTFOLIO MIX December 31,
    
    
    December 31,2004
    
    
    2003(Dollars in thousands)
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Real estate mortgage
    
    $
    77,934
    
    
    
    81.1
    
    
    $
    82,973
    
    
    
    79.7Real estate construction
    
    
    7,174
    
    
    
    7.5
    
    
    
    6,915
    
    
    
    6.6Commercial and industrial
    
    
    4,545
    
    
    
    4.7
    
    
    
    6,716
    
    
    
    6.4Agriculture
    
    
    1,204
    
    
    
    1.2
    
    
    
    1,237
    
    
    
    1.2Consumer
    
    
    6,923
    
    
    
    7.2
    
    
    
    7,997
    
    
    
    7.7Other
    
    
    24
    
    
    
    0.0
    
    
    
    29
    
    
    
    0.0Total
    
    
    97,804
    
    
    
    101.7
    
    
    
    105,867
    
    
    
    101.6Less allowance for loan losses
    
    
    (1,662
    )
    
    
    1.7
    
    
    
    (1,700
    )
    
    
    1.6Loans receivable, net
    
    $
    96,142
    
    
    
    100.0
    
    
    $
    104,167
    
    
    
    100.0
 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, 2004, the Bank held approximately
$59,433,000, or 76.3% 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, 2004, the Bank held approximately $17,895,000, or
23.0% 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, made more acute by the necessity in
loans of this type for cash flow from the underlying property to be sufficient to service the
underlying debt. 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 loans on speculation
properties to no more than one unsold property per builder 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. 4




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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. The
Bank has set certain loan-to-value limits on secured loans, as provided in the Banks loan policy. 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 15 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 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 of the
Bank able to attend weekly meetings. Each Bank 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
$3,089,000 at December 31, 2004). 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 $2,059,000 at December 31, 2004). This limit has not ever been
exceeded. The Bank does not have any participations bought or sold in fiscal year 2004, 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 5




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operations with independent examinations performed by professional, experienced loan reviewers and
auditors. 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 31(Dollars in thousands)
    
    2004.
    
    
    2003.Non-accrual loans
    
    $
    1,102
    
    
    $
    881Loans 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 (accruing)
    
    $
    528
    
    
    $
    Total nonperforming loans
    
    $
    1,630
    
    
    $
    881Foreclosed assets:Real estate
    
    $
    334
    
    
    $
    624Other
    
    $
    15
    
    
    $
    20Total nonperforming assets
    
    $
    1,979
    
    
    $
    1,525Ratio of total nonperforming loans to total assets
    
    
    .86
    %
    
    
    0.49
    %Ratio of total nonperforming loans to total loans
    
    
    1.67
    %
    
    
    0.83
    %Ratio of total nonperforming assets to total assets
    
    
    1.05
    %
    
    
    0.84
    %Ratio of allowance for loan losses to total nonperforming loans
    
    
    101.96
    %
    
    
    192.96
    %
 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, 2004, the Company had
$1,102,000 of loans accounted for on a non-accrual basis compared to $881,000 at December 31, 2003.
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 2004. 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 $794,000 in restructured loans at December 31, 2004
and no restructured loans at December 31, 2003. Of the restructured loans at December 31, 2004,
$266,000 was on non-accrual. 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. 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 $334,000 and a
repossessed mobile home at $15,000 on December 31, 2004, and approximately $624,000 in foreclosed
real estate and a repossessed mobile home at $20,000 on December 31, 2003. 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 $1,164,000 and
$1,486,000 at December 31, 2004 and 2003, respectively. An allocation of $657,417 in reserves was
made to impaired 6




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loans in 2004. No specific allocation of the allowance for loan losses was made to impaired loans
in 2003. Interest of $60,413 and $111,585 was recognized on a cash basis on average impaired loans
of $1,097,288 and $1,570,000 in 2004 and 2003, 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 2004
    
    
    2003(Dollars in thousands)Balance at beginning of period
    
    $
    1,700
    
    
    $
    1,700Charge-offs:Commercial loans
    
    
    69
    
    
    
    115Real estate  construction loans
    
    
    0
    
    
    
    0Real estate  mortgage loans
    
    
    37
    
    
    
    45Consumer loans
    
    
    170
    
    
    
    316Total charge-offs
    
    
    276
    
    
    
    476Recoveries:Commercial loans
    
    
    26
    
    
    
    75Real estate  construction loans
    
    
    0
    
    
    
    0Real estate  mortgage loans
    
    
    0
    
    
    
    7Consumer loans
    
    
    61
    
    
    
    120Total recoveries
    
    
    87
    
    
    
    202Net charge-offs (recoveries)
    
    
    189
    
    
    
    274Provision for loan losses
    
    
    151
    
    
    
    274Balance at end of period
    
    $
    1,662
    
    
    $
    1,700Ratio of net charge-offs (recoveries)
to average loans
    
    
    0.18
    %
    
    
    0.25
    %Average loans outstanding during the period
    
    $
    102,407
    
    
    $
    108,127
 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 31,2004
    
    
    2003Percentage
    
    
    
    
    
    
    Percentageof gross loans
    
    
    
    
    
    
    of gross loansAmount
    
    
    in each
    
    
    Amount
    
    
    in eachof
    
    
    category to
    
    
    of
    
    
    category to(Dollars in thousands)
    
    Allowance
    
    
    total loans
    
    
    Allowance
    
    
    total loansReal estate mortgage
    
    $
    551
    
    
    
    79.68
    %
    
    $
    231
    
    
    
    78.38
    %Real estate construction
    
    
    126
    
    
    
    7.34
    %
    
    
    3
    
    
    
    6.53
    %Commercial and industrial
    
    
    181
    
    
    
    4.65
    %
    
    
    96
    
    
    
    6.34
    %Agriculture
    
    
    7
    
    
    
    1.23
    %
    
    
    0
    
    
    
    1.17
    %Consumer and other
    
    
    658
    
    
    
    7.10
    %
    
    
    56
    
    
    
    7.58
    %Unallocated
    
    
    139
    
    
    
    0.00
    %
    
    
    1,314
    
    
    
    0.00
    %Total
    
    $
    1,662
    
    
    
    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 2004 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 31,2004
    
    
    2003
    
    
    2002Amortized
    
    
    
    
    
    
    Amortized
    
    
    
    
    
    
    Amortized(Dollars in thousands)
    
    Cost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair ValueHeld to Maturity:U.S. Treasury securities
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    U.S. government agencies and corporations
    
    
    28,057
    
    
    
    27,899
    
    
    
    24,365
    
    
    
    24,485
    
    
    
    20,175
    
    
    
    20,682Obligations of states and political subdivisions
    
    
    2,294
    
    
    
    2,560
    
    
    
    2,295
    
    
    
    2,593
    
    
    
    2,295
    
    
    
    2,511Other bonds, notes and securities
    
    
    706
    
    
    
    706
    
    
    
    663
    
    
    
    663
    
    
    
    24
    
    
    
    24Total
    
    $
    31,057
    
    
    $
    31,165
    
    
    $
    27,323
    
    
    $
    27,741
    
    
    $
    22,494
    
    
    $
    23,217
 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, 2004 Due after
    
    
    Due afterDue in
    
    
    one year
    
    
    five yearsone year
    
    
    through
    
    
    through
    
    
    Due after(Dollars in thousands)
    
    or less
    
    
    five years
    
    
    ten years
    
    
    ten years
    
    
    TotalU.S. treasury securities:Balance
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Weighted average yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %U.S. government agencies and corporationsBalance
    
    $
    14,113
    
    
    $
    13,944
    
    
    $
    
    
    
    $
    
    
    
    $
    28,057Weighted average yield
    
    
    1.70
    %
    
    
    3.01
    %
    
    
    0
    %
    
    
    0
    %
    
    
    2.35
    %Obligations of states and political subdivisionsBalance
    
    $
    
    
    
    $
    77
    
    
    $
    919
    
    
    $
    1,298
    

    
    $
    2,294Weighted average yield
    
    
    0
    %
    
    
    6.98
    %
    
    
    7.41
    %
    
    
    7.97
    %
    
    
    7.71
    %Other bonds, notes and securitiesBalance
    
    $
    706
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    706Weighted average yield
    
    
    3.59
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    3.59
    %Total:Balance
    
    $
    14,819
    
    
    $
    14,021
    
    
    $
    919
    
    
    $
    1,298
    
    
    $
    31,057Weighted average yield
    
    
    1.79
    %
    
    
    3.03
    %
    
    
    7.41
    %
    
    
    7.97
    %
    
    
    2.77
    %
 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 $681,900
on December 31, 2004. 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 $56,210,000, 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 $9,130,000. 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)
    
    2004
    
    
    2003CDs over $100,000 with remaining maturityLess than three months
    
    $
    10,096
    
    
    $
    9,674Three to six months
    
    
    8,186
    
    
    
    6,265Over six months to one year
    
    
    6,019
    
    
    
    6,506Over one year
    
    
    3,043
    
    
    
    2,469Total
    
    $
    27,344
    
    
    $
    24,914
 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 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 11




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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 cannot and believe should not offer, or can offer only through correspondent banks that possess
sufficient asset size and product mix. 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, 2004, the Bank had approximately 73 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. 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- 12




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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s risk-based capital 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 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 13




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##### Table of Contents



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, 2004, the Companys Tier I and Total
Capital ratios were 20.86% and 22.12%, respectively. The current risk-based capital ratio analysis establishes minimum supervisory guidelines and
standards. It does not 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, 2004, the
Companys Tangible Tier I Capital Leverage Ratio was 9.85% 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, 2004, 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 14




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##### Table of Contents



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,
2004, 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. 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. 15




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##### Table of Contents



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 the Companys or Banks regulators 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 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. 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
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 16




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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. The financial impact of existing and proposed bank
regulation can have a material influence upon the Banks results both in terms of higher operating
costs and greater organizational complexity. 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 $3,583,000 as of December
31, 2004. The dividend that was declared and paid in 2004 was $100,000. 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, 2004, 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. 17




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The Board of Governors monetary policies have materially affected the operating results of
commercial banks, including this Bank, 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 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 this spread may 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, this development may not 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. The
positive trends and developments discussed in this Annual Report on Form 10-KSB may not continue
and negative trends or developments may 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 may not be successful in
continuing its internal 18




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##### Table of Contents



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.The 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 affected by
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, 2004,
the Bank had nonperforming loans of $1,630,000, or 1.67% of total loans, and an allowance for loan
losses of $1,662,000, 101.96% of nonperforming loans. The Banks allowance for loan losses may not
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 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 65.3% 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 19




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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. Present or future changes in the laws or regulations applicable to the Company or in their
interpretation may 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;
    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. 20




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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 has been renewed in 2004 for an additional
five-year term at a monthly rent of $775. 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. 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
2004. 
 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 2004. There were approximately 1,800 shareholders as of the
date of this annual report. DIVIDEND POLICY The Companys current 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 will not likely do so unless and until the proposed going private merger transaction and
Subchapter S election described in Managements Discussion and Analysis of Financial Condition and
Results of Operations and Note 19 to our Consolidated Financial Statements is effective. If and
when that occurs, the board of directors of the Company anticipates that the Company will make
quarterly distributions to shareholders to enable them to meet their personal tax obligations.
There can be no assurance, however, that the Company will have the financial ability to make such
distributions or, if it does, that the board of directors will authorize such distributions. 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. RECENT SALES OF UNREGISTERED SECURITIES In December 2004, we issued 1,000 shares of Common Stock, with an aggregate value of $20,000,
pursuant to Section 4(2) of the Securities Act of 1933, as amended, to four of our directors in
exchange for shares of the Bank held by such directors. 21




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##### Table of Contents



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, 2004, 2003 and 2002. 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. 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 on the Companys 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 ongoing event is elevation of
the target federal funds rate by the Federal Open Market Committee (FOMC) of the Federal Reserve.
This rate drives many short term market interest rates and has been increased by the FOMC in
successive, 25 basis point moves at each FOMC meeting, held at approximate 6-week intervals,
beginning in June of 2004. The increases totaled 1.25% at year-end, 2004 and management expects
this to continue at least until mid-2005 and possibly until the end of 2005. Thusfar, these
increases have not significantly influenced long term interest rates such as residential mortgage
rates but there is no assurance that further movement in this direction will not eventually
precipitate higher mortgage rates. Another potential economic event that could materially affect
the Companys results would be 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 22




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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. PROPOSED MERGER TRANSACTION On December 2, 2004, the Company entered into an Agreement and Plan of Merger with Republic Merger
Corp., under which one Company would survive in what is commonly referred to as a going private
transaction. The proposed merger would reduce the number of shareholders of record to fewer than
100, allowing us to qualify to elect to be taxed as a Subchapter S corporation for federal income
tax purposes and to terminate registration of our Common Stock under the Securities and Exchange
Act of 1934, thereby avoiding the significant costs and personnel time commitment required with
being a public company. We expect to submit the merger agreement to the Companys shareholders for
approval in 2005, and if approved, the merger would become effective in 2005. NET INTEREST INCOME Net interest income fell significantly in 2004 to $6,737,730 from the 2003 and 2002 levels of
$7,243,118 and $7,247,719, respectively. This was mirrored in the decline in net interest spread,
the difference between the average tax equivalent yield on interest-earning assets and the average
cost of interest-bearing liabilities, from pre-existing levels of 3.78% and 3.72% in 2003 and 2002,
respectively, to 3.49% in 2004. Margin refers to tax equivalent net interest income divided by
average interest-earning assets and this measure also reflected a current period decline to 3.78%
from 2003 and 2002 levels of 4.26% and 4.17%, respectively. Average Balances, Interest and Average Yields 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 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. The market interest rate declines occurring over the past three years are mirrored in the declining
average asset yields depicted in the following table. The declines also reveal themselves in the
average liability costs, however, the rate of decline varies over time and this explains the
somewhat similar net interest income in 2002 and 2003 and the significantly lower net interest
income in 2004. 23




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##### Table of Contents



Years Ended December 31,  2004
    
    
    
    
    
    
    
    
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    2002Interest
    
    
    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
    
    $
    102,407
    
    
    $
    7,608
    
    
    
    7.43
    %
    
    $
    108,127
    
    
    $
    8,449
    
    
    
    7.81
    %
    
    $
    110,688
    
    
    $
    9,237
    
    
    
    8.35
    %Allowance for loan loss
    
    
    (1,713
    )
    
    
    
    
    
    
    
    
    
    
    (1,718
    )
    
    
    
    
    
    
    
    
    
    
    (1,751
    )
    
    
    
    
    
    
    Securities:Taxable
    
    
    25,900
    
    
    
    622
    
    
    
    2.40
    %
    
    
    21,689
    
    
    
    731
    
    
    
    3.37
    %
    
    
    26,292
    
    
    
    1,168
    
    
    
    4.44
    %Tax exempt on FTE basis
    
    
    2,295
    
    
    
    185
    
    
    
    8.06
    %
    
    
    2,295
    
    
    
    186
    
    
    
    8.09
    %
    
    
    2,295
    
    
    
    189
    
    
    
    8.24
    %Total securities
    
    
    28,195
    
    
    
    807
    
    
    
    2.86
    %
    
    
    23,984
    
    
    
    917
    
    
    
    3.82
    %
    
    
    28,587
    
    
    
    1,357
    
    
    
    4.75
    %Federal funds sold
    
    
    48,688
    
    
    
    659
    
    
    
    1.35
    %
    
    
    39,186
    
    
    
    425
    
    
    
    1.08
    %
    
    
    36,194
    
    
    
    590
    
    
    
    1.63
    %Total interest-earning assets
    
    
    179,290
    
    
    
    9,074
    
    
    
    5.06
    %
    
    
    171,297
    
    
    
    9,791
    
    
    
    5.72
    %
    
    
    175,469
    
    
    
    11,184
    
    
    
    6.37
    %Noninterest-earning assets:Cash and due from banks
    
    
    5,387
    
    
    
    
    
    
    
    
    
    
    
    5,405
    
    
    
    
    
    
    
    
    
    
    
    5,649
    
    
    
    
    
    
    
    Other assets
    
    
    5,788
    
    
    
    
    
    
    
    
    
    
    
    5,116
    
    
    
    
    
    
    
    
    
    
    
    5,862
    
    
    
    
    
    
    
    Total noninterest-earning assets
    
    
    11,175
    
    
    
    
    
    
    
    
    
    
    
    10,521
    
    
    
    
    
    
    
    
    
    
    
    11,511
    
    
    
    
    
    
    
    Total assets
    
    
    188,752
    
    
    
    
    
    
    
    
    
    
    
    180,100
    
    
    
    
    
    
    
    
    
    
    
    185,229
    
    
    
    
    
    
    
    LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Interest-bearing demand and money
market deposits
    
    
    50,493
    
    
    
    285
    
    
    
    .56
    %
    
    
    38,398
    
    
    
    405
    
    
    
    1.05
    %
    
    
    53,229
    
    
    
    785
    
    
    
    1.47
    %Savings deposits  Other
    
    
    10,052
    
    
    
    75
    
    
    
    .075
    %
    
    
    9,726
    
    
    
    85
    
    
    
    0.87
    %
    
    
    9,590
    
    
    
    134
    
    
    
    1.40
    %Time deposits
    
    
    84,909
    
    
    
    1,932
    
    
    
    2.28
    %
    
    
    80,130
    
    
    
    1,998
    
    
    
    2.49
    %
    
    
    82,733
    
    
    
    2,946
    
    
    
    3.56
    %Total interest-bearing liabilities
    
    
    145,454
    
    
    
    2,292
    
    
    
    1.58
    %
    
    
    128,254
    
    
    
    2,488
    
    
    
    1.94
    %
    
    
    145,552
    
    
    
    3,865
    
    
    
    2.66
    %Noninterest-bearing demand accounts
    
    
    22,682
    
    
    
    
    
    
    
    
    
    
    
    32,338
    
    
    
    
    
    
    
    
    
    
    
    21,622Total deposits
    
    
    168,136
    
    
    
    
    
    
    
    
    
    
    
    160,592
    
    
    
    
    
    
    
    
    
    
    
    167,174Other noninterest-bearing liabilities
    
    
    1,886
    
    
    
    
    
    
    
    
    
    
    
    2,128
    
    
    
    
    
    
    
    
    
    
    
    1,467Total liabilities
    
    
    170,022
    
    
    
    
    
    
    
    
    
    
    
    162,720
    
    
    
    
    
    
    
    
    
    
    
    168,641Stockholders equity
    
    
    18,730
    
    
    
    
    
    
    
    
    
    
    
    17,380
    
    
    
    
    
    
    
    
    
    
    
    16,588Total liabilities and stockholders
equity
    
    
    188,752
    
    
    
    
    
    
    
    
    
    
    
    180,100
    
    
    
    
    
    
    
    
    
    
    
    185,229Net interest income
    
    
    
    
    
    
    6,782
    
    
    
    
    
    
    
    
    
    
    
    7,303
    
    
    
    
    
    
    
    
    
    
    
    7,319Net interest spread (full tax equivalent basis)
    
    
    
    
    
    
    
    
    
    
    3.49
    %
    
    
    
    
    
    
    
    
    
    
    3.78
    %
    
    
    
    
    
    
    
    
    
    
    3.72
    %Net interest margin (full tax equivalent basis)
    
    
    
    
    
    
    
    
    
    
    3.78
    %
    
    
    
    
    
    
    
    
    
    
    4.26
    %
    
    
    
    
    
    
    
    
    
    
    4.17
    %Ratio of average interest-earning assets to
average total deposits and interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    123.26
    %
    
    
    
    
    
    
    
    
    
    
    133.56
    %
    
    
    
    
    
    
    
    
    
    
    120.55
    %Return on average assets
    
    
    
    
    
    
    
    
    
    
    0.48
    %
    
    
    
    
    
    
    
    
    
    
    0.69
    %
    
    
    
    
    
    
    
    
    
    
    0.69
    %Return on average equity
    
    
    
    
    
    
    
    
    
    
    4.81
    %
    
    
    
    
    
    
    
    
    
    
    7.19
    %
    
    
    
    
    
    
    
    
    
    
    7.73
    %Dividend payout ratio
    
    
    
    
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    
    
    
    
    0.00
    %Ratio of average equity to average assets
    
    
    
    
    
    
    
    
    
    
    9.92
    %
    
    
    
    
    
    
    
    
    
    
    9.65
    %
    
    
    
    
    
    
    
    
    
    
    8.96
    %
   (1)
    
    Average balances are based on daily averages and include nonaccrual loans. Loan fees are included in interest income. 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. 24




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##### Table of Contents



ANALYSIS OF CHANGES IN COMPONENTS OF NET INTEREST INCOME Year Ended December 31, 2004
    
    
    Year Ended December 31, 2003vs.
    
    
    vs.Year Ended December 31, 2003
    
    
    Year Ended December 31, 2002Increase (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
    
    $
    (447
    )
    
    $
    (394
    )
    
    $
    (841
    )
    
    $
    (214
    )
    
    $
    (574
    )
    
    $
    (788
    )Investment securities
    
    
    161
    
    
    
    (270
    )
    
    
    (109
    )
    
    
    (218
    )
    
    
    (222
    )
    
    
    (440
    )Federal funds sold
    
    
    103
    
    
    
    131
    
    
    
    234
    
    
    
    49
    
    
    
    (214
    )
    
    
    (165
    )Total interest-earning assets
    
    
    (183
    )
    

    
    (533
    )
    
    
    (716
    )
    
    
    (383
    )
    
    
    (1,010
    )
    
    
    (1,393
    )Interest-Bearing LiabilitiesDeposits:Demand and money market deposits
    
    
    128
    
    
    
    (248
    )
    
    
    (120
    )
    
    
    (219
    )
    
    
    (161
    )
    
    
    (380
    )Savings deposits
    
    
    3
    
    
    
    (13
    )
    
    
    (10
    )
    
    
    2
    
    
    
    (51
    )
    
    
    (49
    )Time deposits
    
    
    119
    
    
    
    (185
    )
    
    
    (66
    )
    
    
    (93
    )
    
    
    (855
    )
    
    
    (948
    )Total interest-bearing liabilities
    
    
    250
    
    
    
    (446
    )
    
    
    (196
    )
    
    
    (310
    )
    
    
    (1,067
    )
    
    
    (1,377
    )Total increase in net interest income
    
    $
    (433
    )
    
    $
    (87
    )
    
    $
    (520
    )
    
    $
    (73
    )
    
    $
    57
    
    
    $
    (16
    )
   (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 14 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. 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 90% of the book value of these securities as of December 31, 2004 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 25




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##### Table of Contents



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, 2004.
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. INTEREST RATE SENSITIVITY
ESTIMATED MATURITY OR REPRICING
December 31, 2004 Less Than
    
    
    Three
    
    
    One YearThree
    
    
    Months to
    
    
    to Five
    
    
    Over Five(Dollars in thousands)
    
    Months
    
    
    One Year
    
    
    Years
    
    
    Years
    
    
    TotalInterest-earning assets:Loans
    
    $
    9,634
    
    
    $
    16,393
    
    
    $
    15,000
    
    
    $
    55,674
    
    
    $
    96,701Taxable securities
    
    
    
    
    
    
    14,113
    
    
    
    13,944
    
    
    
    
    
    
    
    28,057Tax exempt securities (Municipal Bonds)
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    2,217
    
    
    
    2,294Federal funds sold
    
    
    51,550
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51,550Total interest-earning assets
    
    $
    61,184
    
    
    $
    30,506
    
    
    $
    29,021
    
    
    $
    57,891
    
    
    $
    178,602Interest-bearing liabilities:Time certificates of deposit
    
    $
    29,269
    
    
    $
    43,785
    
    
    $
    12,258
    
    
    $
    
    
    
    $
    85,312Interest-bearing demand deposits
    
    
    32,814
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,814Money market deposits
    
    
    14,611
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,611Savings deposits
    
    
    11,029
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,029Total interest-bearing liabilities
    
    $
    87,723
    
    
    $
    43,785
    
    
    $
    12,258
    
    
    $
    0
    
    
    $
    143,766Interest rate gap
    
    
    ($26,539
    )
    
    
    ($13,279
    )
    
    $
    16,763
    
    
    $
    57,891Cumulative interest rate gap
    
    
    (26,539
    )
    
    
    (39,818
    )
    
    
    (23,055
    )
    
    
    34,836
    
    
    
    34,836
 26




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##### Table of Contents



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, 2004 Less Than
    
    
    One Year to
    
    
    Over Five(Dollars in thousands)
    
    One Year
    
    
    Five Years
    
    
    Years
    
    
    TotalReal estate construction
    
    $
    110
    
    
    $
    1,070
    
    
    $
    5,994
    
    
    $
    7,174Commercial and industrial
    
    
    802
    
    
    
    2,179
    
    
    
    1,564
    
    
    
    4,545Agriculture
    
    
    532
    
    
    
    460
    
    
    
    212
    
    
    
    1,204Total
    
    $
    1,444
    
    
    $
    3,709
    
    
    $
    7,770
    
    
    $
    12,923Fixed rate loans
    
    
    
    
    
    $
    2,097
    
    
    $
    4,417Floating rate loans
    
    
    
    
    
    
    1,612
    
    
    
    3,353Total
    
    
    
    
    
    $
    3,709
    
    
    $
    7,770
 RESULTS OF OPERATIONS Years ended December 31, 2004 and 2003 Overview.Net income declined $347,281 in 2004 to $901,479 from $1,248,760 in 2003. This
represents a decline of approximately 27.8% and is primarily attributable to a $505,388 decline in
net interest income, a $49,830 decline in noninterest income, and a $114,411 increase in
noninterest expense, partially offset by a $123,100 decline in the provision for loan losses and a
$189,733 reduction in the income tax provision. Interest Income.Interest income decreased $700,678 to $9,030,187 in 2004 from $9,730,865 in 2003,
representing a decline of approximately 7.2%. Interest and fee income on loans declined $841,403
and interest income on taxable securities fell $93,173, offset partially by a $233,898 increase in
interest on federal funds sold. The decline in loan interest and fees was a result of the
$5,720,000 decline in average loan balances outstanding and the decline in average loan yield from
7.81% to 7.43%. The decline with respect to taxable securities interest income was a result of the
decline in average yield from 3.37% to 2.40%, partially offset by the $4,211,000 increase in
average, taxable securities holdings. The increase in federal funds sold interest was due to a
$9,502,000 increase in average holdings and an increase in average yield from 1.08% to 1.35%.
Contractual repricings, increased competition for commercial loans, and continued market
rate-driven, residential mortgage refinancing activity caused the volume and rate driven decline in
loan interest and fee income. The effect of lower-yielding replacements for matured securities in
2004 caused the precipitous decline in average yield, a result which overwhelmed the opposite
effect of increased revenue due to an increase in average holdings. The deployment of funds
received from loan payoffs and deposit growth into federal funds sold caused significant,
volume-driven growth in revenue which was amplified by the effect of successive increases in the
target rate on federal funds sold, commencing mid-year. Interest Expense.Interest expense decreased $195,290 to $2,292,457 in 2004 from $2,487,747 in
2003, representing a decline of approximately 7.9%. Deposit rate declines, which occurred in the
first half and were partially reversed in the second half of 2004, outsized the effect of growth in
average interest bearing deposits of $17,200,000. 27




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##### Table of Contents



Net Interest Income.Net interest income decreased $505,388 to $6,737,730 for 2004 from $7,243,118
in 2003, a decline of approximately 7.0%. This collapse in net interest income was far more severe
than the .6% decline that was experienced in 2003, largely due to the more significant decline in
loan volume, coupled with a much more modest reduction in deposit costs. The latter was primarily
an end result of managements reluctance to drive deposit offering rates closer to the zero point
in a local market populated to a great extent by traditional savers and a national market driven to
45-year lows in interest rates. Noninterest Income.Noninterest income decreased $49,830 to $925,242 for 2004 from $975,072 for
2003. This was a result of reduced transaction volume which caused a $83,799 reduction in deposit
and miscellaneous fee income, offset in part by growth in various other income categories
aggregating $33,969. Noninterest Expense.Noninterest expense increased $114,411 to $6,121,295 for 2004 from $6,006,884
for 2003. The components of this increase include a $69,881 increase in salaries and employee
benefits, a $69,934 increase in professional fees and increases in various other expense categories
aggregating $76,085. These increases were partially offset by a $29,251 decline in data processing
expense, a $25,441 decline in occupancy expense, a $17,512 decline in depreciation expense, a
$13,442 decline in marketing expense, a $10,481 decline in equipment expense, a $4,733 decline in
printing and office supplies expense, and a $629 decline in deposit insurance premiums. 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 28




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##### Table of Contents



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 $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. PROVISION FOR LOAN LOSSES The Companys provisions for loan losses in the years ended December 31, 2004, 2003 and 2002 were
$150,930, $274,030 and $357,834, respectively, following net charge-offs of approximately $189,000,
$274,000 and $270,000 in the same years. These provisions have resulted in an ending allowance of

$1,662,000 in 2004, compared to $1,700,000 at the end of 2003 and 2002. INCOME TAXES The Companys income tax expense for the years ended December 31, 2004, 2003 and 2002 was $457,532,
$647,265 and $677,896, respectively. LIQUIDITY AND SOURCES OF FUNDS The primary liquidity source for the Bank continues to be traditional core deposits. Total deposits
for December 31, 2004, 2003 and 2002 were $168,779,937, $162,103,396 and $163,775,114,
respectively. The core component of these totals represented 75.01%, 75.87% and 76.65% 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 $9,130,000 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 $56,210,000. 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. The Company
intends to fund the proposed merger described in Note 19 to our Consolidated Financial Statements
through the issuance of up to $8 million in trust preferred securities. 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, 2004, 2003, and 2002, the Bank held $51,550,000, $38,225,000
and $40,750,000, 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, 2004, 2003 and 2002, net
loans were $96,141,512, $104,167,354 and $107,659,820, respectively. This decline in total loans
resulted in the creation of deployable, liquid assets of approximately $8,026,000 and $3,492,000 in
2004 and 2003, respectively. 29




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##### Table of Contents



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 2004 and 2003 was an increase of $4,000,000 in each year, compared to a decrease of
$10,000,000 in 2002. Due to the ongoing necessity to pledge a substantial portion of these
securities holdings to the 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 $19,434,158 at December 31, 2004 from
$18,025,571 at December 31, 2003. This increase was due to a $901,479 increase in retained earnings
relating to 2004 net income and also includes $507,108 of additional paid in capital due to the
exchange of Bank stock for Company stock in preparation for the requirements of Subchapter S of the
Internal Revenue Code of 1986. At December 31, 2004, stockholders equity was 10.28% of total
assets, compared to 9.92% of total assets at December 31, 2003. 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 unless and until the Subchapter S election described in Note 19
to our Consolidated Financial Statements is effective. Once that occurs, the board of directors of
the Company anticipates that the Company will make quarterly distributions to shareholders to
enable them to meet their personal tax obligations, however, there is no assurance that the Company
will have the financial ability to make such distributions or, if it does, that the board of
directors will authorize such distributions. 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 20.86%, 22.12% and 9.85%, respectively, on December 31, 2004 and
19.54%, 20.79% and 9.95%, respectively, on December 31, 2003. The capital ratios for the Bank only
were 20.81%, 22.06% and 9.80%, respectively, on December 31, 2004 and 19.39%, 20.64% and 9.85%,
respectively, on December 31, 2003. The following table sets forth the Companys and the Banks
capital and capital ratios at December 31, 2004: 30




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##### Table of Contents



REGULATORY CAPITAL (Dollars in thousands)
    
    December 31, 2004CompanyTier I Capital
    
    $
    18,998Total Capital
    
    
    20,143Risk-Weighted Assets
    
    
    91,056Average Assets
    
    
    192,870Tier I Capital to Risk-Weighted Assets
    
    
    20.86
    %Total Capital to Risk-Weighted Assets
    
    
    22.12
    %Leverage Ratio
    
    
    9.85
    %BankTier I Capital
    
    $
    18,932Total Capital
    
    
    20,075Risk-Weighted Assets
    
    
    90,995Average Assets
    
    
    193,205Tier I Capital to Risk-Weighted Assets
    
    
    20.81
    %Total Capital to Risk-Weighted Assets
    
    
    22.06
    %Leverage Ratio
    
    
    9.80
    %
 Bank management is anticipating 2005 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 2005 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. 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, 2004, the Company did not have any off-balance sheet arrangements with entities
unconsolidated with the Company. 31




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##### Table of Contents



ITEM 7. FINANCIAL STATEMENTS The Republic Corporation December 31, 2004, 2003 and 2002
 Table of Contents
 Contents Report of Independent Registered Public Accounting Firm
    
    
    33Consolidated Financial StatementsBalance Sheets
    
    
    34Statements of Income
    
    
    35Statements of Stockholders Equity
    
    
    36Statements of Cash Flows
    
    
    37Notes to Financial Statements
    
    
    38
  32




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##### Table of Contents



(BKD LLP LOGO) 
 Report of Independent Registered Public Accounting Firm Audit Committee
Board of Directors and Stockholders
The Republic Corporation
Houston, Texas We have audited the accompanying consolidated balance sheets of The Republic Corporation as of
December 31, 2004 and 2003, and the related consolidated statements of income, stockholders equity
and cash flows for the years 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 audits. The financial statements of The Republic Corporation for the year ended
December 31, 2002, were audited by other accountants whose report dated May 30, 2003, expressed an
unqualified opinion on those statements. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 2004 and 2003 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Republic Corporation as of December
31, 2004 and 2003, and the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of America. \s\ BKD, LLP Colorado Springs, Colorado
January 14, 2005 (BEYOND YOUR NUMBERS FOOTER) 33




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##### Table of Contents



The Republic Corporation 
 Consolidated Balance sheets
 December 31, 2004 and 2003
 2004
    
    
    2003AssetsCash and due from banks
    
    $
    5,348,112
    
    
    $
    6,447,762Federal funds sold
    
    
    51,550,000
    
    
    
    38,225,000Cash and cash equivalents
    
    
    56,898,112
    
    
    
    44,672,762Held-to-maturity securities
    
    
    30,350,949
    
    
    
    26,659,336Loans
    
    
    97,803,567
    
    
    
    105,867,354Less allowance for loan losses
    
    
    (1,662,055
    )
    
    
    (1,700,000
    )Net loans
    
    
    96,141,512
    
    
    
    104,167,354Premises and equipment (net of accumulated depreciation)
    
    
    2,850,714
    
    
    
    2,870,061Federal Reserve Bank and Federal Home Loan Bank, Topeka Stock
    
    
    705,900
    
    
    
    662,800Foreclosed assets held for sale, net
    
    
    349,495
    
    
    
    644,353Interest receivable  loans
    
    
    485,859
    
    
    
    570,330Deferred income taxes
    
    
    427,870
    
    
    
    459,847Goodwill
    
    
    436,079
    
    
    
    436,079Other assets
    
    
    402,305
    
    
    
    248,595Total assets
    
    $
    189,048,795
    
    
    $
    181,391,517Liabilities and Stockholders EquityLiabilitiesDemand deposits
    
    $
    25,013,934
    
    
    $
    22,940,048Savings, NOW and money market deposits
    
    
    58,454,096
    
    
    
    57,300,756Time deposits
    
    
    85,311,907
    
    
    
    81,862,592Total deposits
    
    
    168,779,937
    
    
    
    162,103,396Interest payable and other liabilities
    
    
    834,700
    
    
    
    724,177Total liabilities
    
    
    169,614,637
    
    
    
    162,827,573Minority Interest in Consolidated Subsidiary
    
    
    
    
    
    
    538,373Stockholders EquityCommon stock, $1.00 par value; authorized 750,000
shares; 356,844 shares issued December 31, 2004 and
2003
    
    
    356,844
    
    
    
    356,844Additional paid-in capital
    
    
    742,039
    
    
    
    234,931Retained earnings
    
    
    18,426,578
    
    
    
    17,525,099Treasury stock, at cost; 23,119 shares at
December 31, 2004 and 2003
    
    
    (91,303
    )
    
    
    (91,303
    )Total stockholders equity
    
    
    19,434,158
    
    
    
    18,025,571Total liabilities and stockholders equity
    
    $
    189,048,795
    
    
    $
    181,391,517
 See Notes to Consolidated Financial Statements 34




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##### Table of Contents



The Republic Corporation 
 Consolidated Statements of Income
 Years Ended December 31, 2004, 2003 and 2002
 2004
    
    
    2003
    
    
    2002Interest and Dividend IncomeLoans, including fees
    
    $
    7,608,051
    
    
    $
    8,449,454
    
    
    $
    9,236,703SecuritiesU.S. Government agencies
    
    
    646,788
    
    
    
    739,961
    
    
    
    1,168,225State and political subdivisions
    
    
    116,843
    
    
    
    116,843
    
    
    
    116,843Federal funds sold
    
    
    658,505
    
    
    
    424,607
    
    
    
    590,566Total interest and dividend income
    
    
    9,030,187
    
    
    
    9,730,865
    
    
    
    11,112,337Interest ExpenseDeposits
    
    
    2,292,457
    
    
    
    2,487,747
    
    
    
    3,864,618Net Interest Income
    
    
    6,737,730
    
    
    
    7,243,118
    
    
    
    7,247,719Provision for Loan Losses
    
    
    150,930
    
    
    
    274,030
    
    
    
    357,834Net Interest Income After Provision for Loan Losses
    
    
    6,586,800
    
    
    
    6,969,088
    
    
    
    6,889,885Noninterest IncomeService charges on deposit accounts
    
    
    221,443
    
    
    
    242,401
    
    
    
    228,463Other service charges and fees
    
    
    551,222
    
    
    
    614,063
    
    
    
    490,170Other
    
    
    152,577
    
    
    
    118,608
    
    
    
    187,226Total noninterest income
    
    
    925,242
    
    
    
    975,072
    
    
    
    905,859Noninterest ExpenseSalaries and employee benefits
    
    
    2,915,719

    
    
    
    2,845,838
    
    
    
    2,773,461Net occupancy expense
    
    
    340,588
    
    
    
    366,029
    
    
    
    359,978Equipment expense
    
    
    150,122
    
    
    
    160,603
    
    
    
    135,140Data processing fees
    
    
    603,399
    
    
    
    632,650
    
    
    
    564,506Professional fees
    
    
    269,483
    
    
    
    199,549
    
    
    
    159,880Marketing expense
    
    
    226,709
    
    
    
    240,151
    
    
    
    224,558Printing and office supplies
    
    
    151,017
    
    
    
    155,750
    
    
    
    178,802Deposit insurance premium
    
    
    24,078
    
    
    
    24,707
    
    
    
    34,988Depreciation
    
    
    314,767
    
    
    
    332,279
    
    
    
    358,986Other
    
    
    1,125,413
    
    
    
    1,049,328
    
    
    
    1,002,244Total noninterest expense
    
    
    6,121,295
    
    
    
    6,006,884
    
    
    
    5,792,543Income Before Income Taxes
    
    
    1,390,747
    
    
    
    1,937,276
    
    
    
    2,003,201Provision for Income Taxes
    
    
    457,532
    
    
    
    647,265
    
    
    
    677,896Income Before Minority Interest
    
    
    933,215
    
    
    
    1,290,011
    
    
    
    1,325,305Minority Interest in Net Income of Subsidiary
    
    
    (31,736
    )
    
    
    (41,251
    )
    
    
    (42,132
    )Net Income
    
    $
    901,479
    
    
    $
    1,248,760
    
    
    $
    1,283,173Basic Earnings per Share
    
    $
    2.70
    
    
    $
    3.74
    
    
    $
    3.85
 See Notes to Consolidated Financial Statements 35




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##### Table of Contents



The Republic Corporation 
 Consolidated Statements of Stockholders Equity
 Years Ended December 31, 2004, 2003 and 2002
 AdditionalCommon
    
    
    Paid-in
    
    
    Treasury
    
    
    RetainedStock
    
    
    Capital
    
    
    Stock
    
    
    Earnings
    
    
    TotalBalance, 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
    
    
    $
    18,025,571Redeemable stock
issued in exchange
for minority
interest in Bank
(See Note 9)
    
    
    
    
    
    
    507,108
    
    
    
    
    
    
    
    
    
    
    
    507,108Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    901,479
    
    
    
    901,479Balance, December 31, 2004
    
    $
    356,844
    
    
    $
    742,039
    
    
    $
    (91,303
    )
    
    $
    18,426,578
    
    
    $
    19,434,158
 See Notes to Consolidated Financial Statements 36




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##### Table of Contents



The Republic Corporation 
 Consolidated Statements of Cash Flows
 Years Ended December 31, 2004, 2003 and 2002
 2004
    
    
    2003
    
    
    2002Operating ActivitiesNet income
    
    $
    901,479
    
    
    $
    1,248,760
    
    
    $
    1,283,173Items not requiring (providing) cashDepreciation
    
    
    314,767
    
    
    
    332,279
    
    
    
    358,986Provision for loan losses
    
    
    150,930
    
    
    
    274,030
    
    
    
    357,834Amortization (accretion) of premiums and discounts on
securities
    
    
    239,997
    
    
    
    (189,215
    )
    
    
    168,994Stock dividend
    
    
    (24,100
    )
    
    
    (5,500
    )
    
    
    Loss on reappraised assets
    
    
    46,875
    
    
    
    
    
    
    
    Other real estate gains, net
    
    
    4,100
    
    
    
    (12,405
    )
    
    
    (2,963
    )Deferred income taxes
    
    
    31,977
    
    
    
    28,571
    
    
    
    (14,448
    )Loss on sale of subsidiary stock
    
    
    
    
    
    
    
    
    
    
    32,153Changes inInterest receivable  loans
    
    
    84,471
    
    
    
    53,717
    
    
    
    191,864Other assets
    
    
    (153,710
    )
    
    
    76,262
    
    
    
    78,788Interest payable and other liabilities
    
    
    79,258
    
    
    
    (129,048
    )
    
    
    (124,621
    )Net cash provided by operating activities
    
    
    1,676,044
    
    
    
    1,677,451
    
    
    
    2,329,760Investing ActivitiesPurchase of held-to-maturity securities
    
    
    (13,931,610
    )
    
    
    (14,000,000
    )
    
    
    Proceeds from maturities of held-to-maturity securities
    
    
    10,000,000
    
    
    
    10,000,000
    
    
    
    10,000,000Proceeds from sale of subsidiary stock
    
    
    
    
    
    
    
    
    
    
    5,000Net change in loans
    
    
    7,568,728
    
    
    
    2,667,647
    
    
    
    3,532,333Purchase of Federal Home Loan Bank, Topeka Stock
    
    
    (19,000
    )
    
    
    (633,300
    )
    
    
    Purchase of premises and equipment
    
    
    (295,420
    )
    
    
    (168,758
    )
    
    
    (217,281
    )Proceeds from the sale of foreclosed assets
    
    
    550,067
    
    
    
    269,818
    
    
    
    34,691Net cash provided by (used in) investing activities
    
    
    3,872,765
    
    
    
    (1,864,593
    )
    
    
    13,354,743Financing ActivitiesNet increase (decrease) in demand deposits, NOW and savings
accounts
    
    
    3,227,226
    
    
    
    (1,236,712
    )
    
    
    1,330,291Net increase (decrease) in certificates of deposit
    
    
    3,449,315
    
    
    
    (435,006
    )
    
    
    800,956Net cash provided by (used in) financing activities
    
    
    6,676,541
    
    
    
    (1,671,718
    )
    
    
    2,131,247Increase (Decrease) in Cash and Cash Equivalents
    
    
    12,225,350
    
    
    
    (1,858,860
    )
    
    
    17,815,750Cash and Cash Equivalents, Beginning of Year
    
    
    44,672,762
    
    
    
    46,531,622
    
    
    
    28,715,872Cash and Cash Equivalents, End of Year
    
    $
    56,898,112
    
    
    $
    44,672,762
    
    
    $
    46,531,622Supplemental Cash Flows InformationInterest paid
    
    $
    2,239,316
    
    
    $
    2,654,142
    
    
    $
    4,032,580Income taxes paid
    
    $
    404,914
    
    
    $
    632,079
    
    
    $
    720,503Real estate and repossessions acquired in settlement of loans
    
    $
    332,184
    
    
    $
    620,547
    
    
    $
    257,398Sale and financing of foreclosed assets
    
    $
    26,000
    
    
    $
    69,758
    
    
    $
    129,425
 See Notes to Consolidated Financial Statements 37




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##### Table of Contents



The Republic Corporation 
 Notes to Consolidated Financial Statements
 December 31, 2004, 2003 and 2002
 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 100% and 97% ownership as of December 31, 2004 and 2003,
respectively. 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 judgements of information
available to them at the time of their examination. 38




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##### Table of Contents



The Republic Corporation Notes to Consolidated Financial Statements
 December 31, 2004, 2003 and 2002
 Cash Equivalents The Company considers all liquid investments with original maturities of three months or less
to be cash equivalents. At December 31, 2004 and 2003, cash equivalents consisted of cash due
from banks and federal funds sold. 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. 39




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##### Table of Contents



The Republic Corporation Notes to Consolidated Financial Statements
 December 31, 2004, 2003 and 2002
 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 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. 40




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##### Table of Contents



The Republic Corporation Notes to Consolidated Financial Statements
 December 31, 2004, 2003 and 2002
 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: 2004
    
    
    2003
    
    
    2002Net income
    
    $
    901,479
    
    
    $
    1,248,760
    
    
    $
    1,283,173Average common shares outstanding
    
    
    333,725
    
    
    
    333,725
    
    
    
    333,725Basic earnings per share
    
    $
    2.70
    
    
    $
    3.74
    
    
    $
    3.85
 The total number of shares issued by the Company is 359,844 of which 23,119 are held in
treasury stock and 3,000 are directors qualifying shares subject to mandatory redemption
(See Note 9) by the Company with the remaining 333,725 shares considered outstanding for
purposes of the Companys calculation of earnings per share and other financial statement
disclosures. Reclassifications Certain reclassifications have been made to the 2003 and 2002 financial statements to conform
to the 2004 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, 2004 was $2,432,000. 41




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The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 Note 3: Securities The amortized cost and approximate fair value of held-to-maturity securities are as
follows: Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    

    ApproximateCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueDecember 31, 2004U.S. government agencies
    
    $
    28,056,488
    
    
    $
    
    
    
    $
    157,638
    
    
    $
    27,898,850State and political subdivisions
    
    
    2,294,461
    
    
    
    266,022
    
    
    
    
    
    
    
    2,560,483$
    30,350,949
    
    
    $
    266,022
    
    
    $
    157,638
    
    
    $
    30,459,333December 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
    
    
    $
    27,077,778
 The amortized cost and approximate fair value of held-to-maturity securities at December 31,
2004, 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. Amortized
    
    
    ApproximateCost
    
    
    Fair ValueWithin one year
    
    $
    14,112,792
    
    
    $
    14,012,600One to five years
    
    
    14,020,611
    
    
    
    13,970,026Five to ten years
    
    
    919,504
    
    
    
    1,016,228After ten years
    
    
    1,298,042
    
    
    
    1,460,479Totals
    
    $
    30,350,949
    
    
    $
    30,459,333
 The carrying value of securities pledged as collateral, to secure public deposits and for
other purposes, was $30,350,949 at December 31, 2004, and $26,659,336 at December 31, 2003. The fair value of certain investments in debt securities are less than their historical cost.
Total fair value of these investments at December 31, 2004, was $27,898,850, which is
approximately 90% of the Banks held-to-maturity investment portfolio. These declines
primarily resulted from recent increases in market interest rates. Based on evaluation of available evidence, including recent changes in market interest rates,
credit rating information and information obtained from regulatory filings, management
believes the declines in fair value for these securities are temporary. 42




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##### Table of Contents



The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 Should the impairment of any of these securities become other than temporary, the cost basis
of the investment will be reduced and the resulting loss recognized in net income in the
period the other-than-temporary impairment is identified. The following table shows our temporarily impaired investments gross unrealized losses and
fair value, aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position at December 31, 2004: Less than 12 Months
    
    
    12 Months or More
    
    
    TotalDescription of
    
    
    
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedSecurities
    
    Fair Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesU.S. government
agencies
    
    $
    27,898,850
    
    
    $
    157,638
    
    
    
    
    
    
    
    
    
    
    $
    27,898,850
    
    
    $
    157,638
 Note 4: Loans and Allowance for Loan Losses Categories of loans at December 31 include the following: 2004
    
    
    2003Real estate
    
    $
    85,107,968
    
    
    $
    89,887,726Commercial and industrial
    
    
    4,545,253
    
    
    
    6,716,235Agriculture
    
    
    1,204,108
    
    
    
    1,237,316Consumer
    
    
    6,922,751
    
    
    
    7,996,893Other
    
    
    23,487
    
    
    
    29,184Total loans
    
    
    97,803,567
    
    
    
    105,867,354LessAllowance for loan losses
    
    
    1,662,055
    
    
    
    1,700,000Net loans
    
    $
    96,141,512
    
    
    $
    104,167,354
 43




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##### Table of Contents



The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 Activity in the allowance for loan losses was as follows: 2004
    
    
    2003
    
    
    2002Balance, beginning of year
    
    $
    1,700,000
    
    
    $
    1,700,060
    
    
    $
    1,612,000Provision charged to expense
    
    
    150,930
    
    
    
    274,030
    
    
    
    357,834Loans charged off
    
    
    (275,798
    )
    
    
    (476,231
    )
    
    
    (380,504
    )Recoveries on loans previously charged off
    
    
    86,923
    
    
    
    202,141
    
    
    
    110,730Balance, end of year
    
    $
    1,662,055
    
    
    $
    1,700,000
    
    
    $
    1,700,060
 Impaired loans totaled approximately $1,164,000 and $1,486,000 at December 31, 2004 and 2003,
respectively. Specific related allowance for loan losses of $657,417 and $-0- were assigned to
impaired loans of $1,164,000 and $1,486,000 for December 31, 2004 and 2003, respectively. Interest of $60,413 and $111,585 was recognized on a cash basis on average impaired loans of
$1,097,288 and $1,570,000 for 2004 and 2003, respectively. Non-accruing loans at December 31, 2004 and 2003 were $1,101,700 and $880,850, respectively. Note 5: Premises and Equipment Major classifications of premises and equipment, stated at cost, are as follows: 2004
    
    
    2003Land
    
    $
    134,750
    
    
    $
    134,750Buildings
    
    
    3,803,890
    
    
    
    3,772,490Furniture and equipment
    
    
    3,274,780
    
    
    
    3,044,3967,213,420
    
    
    
    6,951,636Less accumulated depreciation
    
    
    4,362,706
    
    
    
    4,081,575Net premises and equipment
    
    $
    2,850,714
    
    
    $
    2,870,061
 Note 6: Interest-bearing Deposits Interest-bearing time deposits in denominations of $100,000 or more were $27,343,568 on
December 31, 2004 and $24,913,604 on December 31, 2003. At December 31, 2004, the scheduled maturities of certificates of deposit are as follows: (Dollars in Thousands)2005
    
    $
    72,8502006
    
    
    12,462$
    85,312
 44




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##### Table of Contents



The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 Note 7: Federal Home Loan Bank Advances The Bank in connection with their investment in Federal Home Loan Bank of Topeka (FHLB)
stock of 6,333 shares for $633,300 has an agreement with FHLB to provide advances with a
borrowing capacity based on the amount of collateral pledged. As of December 31, 2004, the
Banks borrowing capacity is approximately $56,209,990. As of and during the year ended 2004,
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
$76,833,430 at December 31, 2004 under the agreement. The Bank purchased stock totaling
$19,000 in 2004. The Bank also received a stock dividend of $24,100 and $5,500 from FHLB
during 2004 and 2003, respectively, resulting in a total investment in FHLB stock of $681,900
and $638,800 as of December 31, 2004 and 2003, respectively. Note 8: Income Taxes The provision for income taxes consists of the following: 2004
    
    
    2003
    
    
    2002Taxes currently payable
    
    $
    425,555
    
    
    $
    618,694
    
    
    $
    692,344Deferred income taxes
    
    
    31,977
    
    
    
    28,571
    
    
    
    (14,448
    )$
    457,532
    
    
    $
    647,265
    
    
    $
    677,896
 A reconciliation of income tax expense at the statutory rate to the Companys actual income
tax expense is shown below: 2004
    
    
    2003
    
    
    2002Computed at the statutory rate (34%)
    
    $
    472,854
    
    
    $
    658,674
    
    
    $
    681,088Increase (decrease) resulting from:Tax-exempt interest
    
    
    (39,727
    )
    
    
    (40,120
    )
    
    
    (41,000
    )Nondeductible expenses
    
    
    6,227
    
    
    
    225
    
    
    
    12,019State income taxes
    
    
    30,108
    
    
    
    33,250
    
    
    
    36,000Other
    
    
    (11,930
    )
    
    
    (4,764
    )
    
    
    (10,211
    )Actual tax provision
    
    $
    457,532
    
    
    $
    647,265
    
    
    $
    677,896
 45




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##### Table of Contents



The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 The tax effects of temporary differences related to deferred taxes shown on the December 31,
2004 and 2003 consolidated balance sheets are as follows: 2004
    
    
    2003Deferred tax assetsAllowance for loan losses
    
    $
    552,854
    
    
    $
    546,193Deferred tax liabilitiesForeclosed assets
    
    
    6,777
    
    
    
    FHLB stock dividend
    
    
    (10,952
    )
    
    
    (2,035
    )Accumulated depreciation
    
    
    (86,769
    )
    
    
    (50,271
    )Reserve for contingencies
    
    
    (34,040
    )
    
    
    (34,040
    )(124,984
    )
    
    
    (86,346
    )Net deferred tax asset
    
    $
    427,870
    
    
    $
    459,847
 Note 9: Mandatorily Redeemable, Non-transferable Common Stock Effective December 31, 2004, the Corporation entered into Qualifying Share Agreements
to exchange 100% of the minority interest of bank stock originally issued to Directors of the
Bank for mandatorily redeemable, non-transferable shares of the Corporations stock. The
shares are redeemable at an aggregate repurchase price of $60,000 upon termination of such
Directors service in the capacity of a qualified member of the Board of Directors of the
Bank or upon attempted disposition of qualifying shares, as defined in the agreement. In accordance with the provisions of Statement of Financial Accounting Standards No. 150
Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity,the mandatorily redeemable non-transferable shares are recorded as a liability in the
accompanying balance sheet at their fair value of $60,000. The remaining balance of the
minority interest in consolidated subsidiary upon the effective date of the exchange in the
amount of $507,108 has been reclassified as additional paid-in capital. Note 10: 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. 46




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##### Table of Contents



The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 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, 2004 and 2003, that the Company and the Bank meet all
capital adequacy requirements to which they are subject. As of December 31, 2004, 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. The Company and the Banks actual capital amounts and ratios are also presented in the table. To Be Well CapitalizedUnder PromptFor Capital
    
    
    Corrective ActionActual
    
    
    Adequacy Purposes
    
    
    ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(Dollars in Thousands)As of December 31, 2004Total Capital (to Risk
Weighted Assets)Consolidated
    
    $
    20,143
    
    
    
    22.12
    %
    
    $
    7,284
    
    
    
    8
    %
    
    
    
    
    
    
    N/ABank Only
    
    $
    20,075
    
    
    
    22.06
    %
    
    $
    7,280
    
    
    
    8
    %
    
    $
    9,100
    
    
    
    10
    %Tier 1 Capital
(to Risk Weighted
Assets)Consolidated
    
    $
    18,998
    
    
    
    20.86
    %
    
    $
    3,642
    
    
    
    4
    %
    
    
    
    
    
    
    N/ABank Only
    
    $
    18,932
    
    
    
    20.81
    %
    
    $
    3,640
    
    
    
    4
    %
    
    $
    5,460
    
    
    
    6
    %Tier 1 Capital
(to Average Assets)Consolidated
    
    $
    18,998
    
    
    
    9.85
    %
    
    $
    7,732
    
    
    
    4
    %
    
    
    
    
    
    
    N/ABank Only
    
    $
    18,932
    
    
    
    9.80
    %
    
    $
    7,728
    
    
    
    4
    %
    
    $
    9,660
    
    
    
    5
    %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
    %
 47




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##### Table of Contents



The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 The Bank is subject to certain restrictions on the amounts of dividends that it may
declare without prior regulatory approval. At December 31, 2004, approximately $3,583,000 of
retained earnings is available for dividend declaration without prior regulatory approval. Note 11: Related Party Transactions At December 31, 2004 and 2003, the Bank had loans outstanding to officers, directors,
significant shareholders and their affiliates (related parties) in the amount of $965,492 and
$1,430,504, respectively. During the years ended December 31, 2004 and 2003, the Bank paid a
Director approximately $2,400 and $4,600, respectively, for construction loan inspection
services. Deposits from related parties held by the Bank at December 31, 2004 and 2003 totaled
$1,632,570and $1,973,393, 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 12: 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 2004, 2003
and 2002 were $46,770, $46,544 and $42,994, respectively. Note 13: 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 six years. These
leases generally contain renewal options for periods of five years. Rental expense for these
leases were $74,748, $59,341 and $57,974 for the years ended December 31, 2004, 2003 and
2002, respectively. Future minimum lease payments under operating leases are: 2005
    
    $
    64,1392006
    
    
    63,3232007
    
    
    60,6122008
    
    
    39,7852009
    
    
    5,825Thereafter
    
    
    1,200Total minimum lease payments
    
    $
    234,884
 48




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##### Table of Contents



The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002 Note 14: 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 judgements 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. 2004
    
    
    2003Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    Value(Dollars in Thousands)Financial assetsCash and cash equivalents
    
    $
    56,898
    
    
    $
    56,898
    
    
    $
    44,673
    
    
    $
    44,673Held-to-maturity securities
    
    $
    30,351
    
    
    $
    30,459
    
    
    $
    26,659
    
    
    $
    27,078Loans, net of allowance for loan losses
    
    $
    96,142
    
    
    $
    98,576
    
    
    $
    104,167
    
    
    $
    108,486Federal Reserve Bank and Federal Home
Loan Bank, Topeka Stock
    
    $
    706
    
    
    $
    706
    
    
    $
    663
    
    
    $
    663Interest receivable  loans
    
    $
    486
    
    
    $
    486
    
    
    $
    570
    
    
    $
    570Financial liabilitiesDeposits
    
    $
    168,779
    
    
    $
    168,751
    
    
    $
    162,103
    
    
    $
    162,140Interest payable
    
    $
    725
    
    
    $
    725
    
    
    $
    724
    
    
    $
    724Unrecognized 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 remaining maturities. Loans with similar characteristics were aggregated for
purposes of the calculations. The carrying amount of accrued interest approximates its fair
value. 49




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##### Table of Contents



The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002 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 15: 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 $164,361 and
$173,804 at December 31, 2004 and 2003, 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. 50




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##### Table of Contents



The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002 At December 31, 2004, the Bank had granted unused lines-of-credit to borrowers aggregating
approximately $2,163,174 and $2,372,733 for commercial lines and open-end consumer lines,
respectively. 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, respectively. Other Credit Risks Additionally, the Company periodically has excess funds, which are loaned to other banks as
federal funds sold. At December 31, 2004 and 2003, federal funds sold totaling $51,550,000
and $38,225,000, respectively, were loaned to various banks, as approved by the Board of
Directors, with the largest balance at any one bank being $6,050,000 and $3,000,000 at
December 31, 2004 and 2003, respectively. Note 16: 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 and the footnote regarding the allowance. Current vulnerabilities
due to certain concentrations of credit risk are discussed in the footnote on commitments and
credit risk. Note 17: 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. 2004
    
    2003Fourth
    
    
    Third
    
    
    Second
    
    
    First
    
    
    Fourth
    
    
    Third
    
    
    Second
    
    
    FirstQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterOperationsNet interest income
    
    $
    1,690
    
    
    $
    1,688
    
    
    $
    1,667
    
    
    $
    1,693
    
    
    $
    1,786
    
    
    $
    1,831
    
    
    $
    1,856
    
    
    $
    1,770Provision for loan losses
    
    
    20
    
    
    
    21
    
    
    
    34
    
    
    
    76
    
    
    
    62
    
    
    
    69
    
    
    
    54
    
    
    
    89Noninterest income
    
    
    229
    
    
    
    236
    
    
    
    222
    
    
    
    238
    
    
    
    225
    
    
    
    246
    
    
    
    258
    
    
    
    246Noninterest expense
    
    
    1,690
    
    
    
    1,666
    
    
    
    1,656
    
    
    
    1,599
    
    
    
    1,712
    
    
    
    1,714
    
    
    
    1,685
    
    
    
    1,584Net income
    
    $
    209
    
    
    $
    237
    
    
    $
    199
    
    
    $
    256
    
    
    $
    237
    
    
    $
    294
    
    
    $
    375
    
    
    $
    343Net Income per Share DataBasic
    
    $
    .63
    
    
    $
    .71
    
    
    $
    .59
    
    
    $
    .77
    
    
    $
    .70
    
    
    $
    .88
    
    
    $
    1.12
    
    
    $
    1.04Balance SheetTotal assets
    
    $
    189,049
    
    
    $
    194,763
    
    
    $
    187,962
    
    
    $
    183,608
    
    
    $
    181,392
    
    
    $
    181,283
    
    
    $
    178,187
    
    
    $
    179,765Total loans, net
    
    $
    96,142
    
    
    $
    99,222
    
    
    $
    101,000
    
    
    $
    102,088
    
    
    $
    104,167
    
    
    $
    105,216
    
    
    $
    107,148
    
    
    $
    107,589Shareholders equity
    
    $
    19,434
    
    
    $
    18,718
    
    
    $
    18,481
    
    
    $
    18,281
    
    
    $
    18,026
    
    
    $
    17,789
    
    
    $
    17,494
    
    
    $
    17,120
 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. 51




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##### Table of Contents



The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002 Note 18: Condensed Financial Information (Parent Company Only) The Republic Corporation
Condensed Balance Sheets
December 31, 2004 and 2003 2004
    
    
    2003AssetsCash and cash equivalents
    
    $
    2,420
    
    
    $
    50,470Investments in subsidiary  equity method
    
    
    19,370,926
    
    
    
    17,874,701Due from subsidiary
    
    
    64,208
    
    
    
    43,796Other assets
    
    
    56,604
    
    
    
    56,604Total assets
    
    $
    19,494,158
    
    
    $
    18,025,571LiabilitiesHolding company obligation for mandatory redeemable,
non-transferable stock
    
    $
    60,000
    
    
    $
    Stockholders EquityCommon stock, par value $1.00; authorized 750,000
shares, issued 356,844 shares issued and outstanding
December 31, 2004 and 2003
    
    
    356,844
    
    
    
    356,844Additional paid-in capital
    
    
    742,039
    
    
    
    234,931Treasury stock, at cost; 23,119 shares at December
31, 2004 and 2003
    
    
    (91,303
    )
    
    
    (91,303
    )Retained earnings
    
    
    18,426,578
    
    
    
    17,525,099Total stockholders equity
    
    
    19,434,158
    
    
    
    18,025,571Total liabilities and stockholders equity
    
    $
    19,494,158
    
    
    $
    18,025,571
 52




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The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002 The Republic Corporation
Condensed Statements of Income
Years Ended December 31, 2004, 2003 and 2002 2004
    
    
    2003
    
    
    2002IncomeDividends from subsidiary
    
    $
    97,000
    
    
    $
    81,480
    
    
    $
    54,320Expenses
    
    
    188,845
    
    
    
    128,811
    
    
    
    102,366Income (Loss) Before Income
Taxes and Equity in
Undistributed Net Income of
Subsidiary
    
    
    (91,845
    )
    
    
    (47,331
    )
    
    
    (48,046
    )Credit for Income Taxes
    
    
    64,208
    
    
    
    43,796
    
    
    
    23,307Income (Loss) Before
Equity in Undistributed Net
Income of Subsidiaries
    
    
    (27,637
    )
    
    
    (3,535
    )
    
    
    (24,739
    )Equity in Undistributed Net
Income of Subsidiaries
    
    
    929,116
    
    
    
    1,252,295
    
    
    
    1,307,912Net Income
    
    $
    901,479
    
    
    $
    1,248,760
    
    
    $
    1,283,173
 53




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The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002 The Republic Corporation
Condensed Statements of Cash Flows
Years Ended December 31, 2004, 2003 and 2002 2004
    
    
    2003
    
    
    2002Operating ActivitiesNet income
    
    $
    901,479
    
    
    $
    1,248,760
    
    
    $
    1,283,173Items not requiring (providing) cashLoss on sale of subsidiary stock
    
    
    
    
    
    
    
    
    
    
    32,153Equity in undistributed income of subsidiaries
    
    
    (929,116
    )
    
    
    (1,252,295
    )
    
    
    (1,307,913
    )Changes inDue from subsidiary
    
    
    (20,413
    )
    
    
    (20,489
    )
    
    
    5Net cash used in operating activities
    
    
    (48,050
    )
    
    
    (24,024
    )
    
    
    7,418Financing ActivitiesSale of subsidiary stock
    
    
    
    
    
    
    
    
    
    
    5,000Net cash provided by financing activities
    
    
    
    
    
    
    
    
    
    
    5,000(Decrease) Increase in Cash and Cash Equivalents
    
    
    (48,050
    )
    
    
    (24,024
    )
    
    
    12,418Cash and Cash Equivalents, Beginning of Year
    
    
    50,470
    
    
    
    74,494
    
    
    
    62,076Cash and Cash Equivalents, End of Year
    
    $
    2,420
    
    
    $
    50,470
    
    
    $
    74,494
 54




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##### Table of Contents



The Republic Corporation
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002 Note 19: Proposed Going Private Transaction and Subchapter S Election On December 2, 2004, the Company and Republic Merger Corp., a wholly owned subsidiary of
Republic (Newco), entered into an Agreement and Plan of Merger pursuant to which Newco will
be merged with and into the Company. The purpose of the merger is to (i) enable the Company
to terminate the registration of its common stock under the Securities Exchange Act of 1934,
as amended (the Exchange Act), and cease filing the periodic reports required by the
Exchange Act and (ii) become eligible to be taxed for federal income tax purposes under
Subchapter S of the Internal Revenue Code of 1986, as amended (an S-Corporation). Under the
plan of merger, shareholders of the Company owning less than 250 shares and those
shareholders not qualified to become shareholders in an S-Corporation for Federal income tax
purposes or other criteria as set forth in the merger agreement will be paid cash of $58 per
share as a result of the merger. All other shareholders will retain their shares of Company
stock following the merger. The Company plans to fund the merger consideration by issuing up
to $8 million in trust preferred securities. The merger agreement will be submitted to the Companys shareholders for their approval, and
the Companys shareholders are advised to read the proxy statement regarding the transaction
upon receipt because it contains important information. A preliminary proxy statement was
filed with the Securities and Exchange Commission by the Company on December 2, 2004.
Investors and security holders may receive a free copy of the proxy statement and other
related documents filed by Republic at the Commissions website at http://www.sec.gov or from
Republic. 55




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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 procedures Our Chief Executive and Chief Financial Officer, after evaluating the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act Rules 13a-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. 56




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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, Jr. 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, Jr.. TERM OF
    
    PRINCIPAL OCCUPATIONS FORNAME AND TITLE
    
    AGE
    
    OFFICE
    
    THE LAST FIVE YEARSCatherine G. Eisemann
    
    78
    
    

    
    41 Years

    
    Catherine G. Eisemann has been a Director of the
Company for 41 years. Mrs. Eisemann
was elected President of the Company and
began serving December 11, 1981.J.E. Eisemann, IV
    
    57
    
    
    
    28 Years
    
    J.E. Eisemann, IV has served as a Director on
the Companys Board for 28 years. Mr.
Eisemann has been the Vice-President and
Director of the Bank for approximately 27
years. Mr. Eisemann has served as the
Chairman of the Board of the Company
and Chairman of the Board for the Bank for
approximately 23 years.Roger Dean Eisemann
    
    50
    
    
    
    22 Years
    
    Roger Dean Eisemann was elected Secretary
and began serving as director of the Company
in July, 1982George M. Boyd, Jr.
    
    60
    
    
    
    Since March,
2004
    
    George M. Boyd, Jr. was appointed to
the Company 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 six
years.Dr. John C. Davis
    
    57
    
    
    
    Since February,
2004
    
    Dr. John C. Davis was appointed to
Companys 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 24 years. Dr. Davis
has served as a director on the Board of the
Bank for approximately 11 years.
 CODE OF ETHICS The Company has adopted a code of ethics applicable to its directors, officers and employees
and those of its subsidiaries, to include the companys principal executive and principal
financial officer. FINANCIAL EXPERT Because the Company does not have a standing audit committee, it has not designated an audit
committee financial expert. 57




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COMPLIANCE WITH SECTION16(a)OF THE EXCHANGE ACT The Companys officers, directors and more than 10% shareholders are generally required to
file beneficial ownership reports under Section 16(a) of the Exchange Act, generally within
two days of the event triggering the requirement to file such a report. Ms. Catherine
Eisemann, Mr. J.E. Eisemann, IV, Mr. R. Dean Eisemann and Dr. John C. Davis each filed one
transaction on Form 4 late. Mr. George M. Boyd, Jr. and Dr. John C. Davis each filed a Form 3
late. Based solely on the review of section 16(a) reports filed by the directors and
executive officers, and upon representations from those persons, the Company is not aware of
any other delinquent filings. 
 ITEM 10. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE Annual CompensationName & Principal Position
    
    Year
    
    Salary
    
    
    BonusJ.E. Eisemann, IV Chairman of the
    
    2004
    
    $
    93,473
    (1)
    
    $2,472 (2)Board of the Company, Vice
    
    2003
    
    
    90,767
    (1)
    
    4,000 (2)President of the Company,
    
    2002
    
    
    85,773
    (1)
    
    3,735 (2)Chairman of the Board & VicePresident of the BankCatherine Eisemann President of the
    
    2004
    
    $
    30,000
    
    
    -0-Company
    
    2003
    
    
    30,000
    
    
    -0-2002
    
    
    30,000
    
    
    -0-
   (1)
    
    Includes amounts deferred under Section 401(K) of the Internal Revenue Code. Amounts
deferred by Mr. Eisemann were $11,205 in 2002, $12,567 in 2003 and $12,731 in 2004.(2)
    
    Includes amounts deferred under Section 401(K) of the Internal Revenue Code. Amounts
deferred by Mr. Eisemann were $560 in 2002, $600 in 2003 and $371 in 2004. STOCK OPTIONS/SAR GRANTS IN 2004-NONE
AGGREGATED STOCK OPTIONS/SAR EXERCISES IN 2004 AND OPTIONS/SAR
VALUES AS OF DECEMBER 31 2004  NONE
LONG-TERM INCENTIVE PLANS  AWARDS IN 2004  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 58




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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
    
    
    193,952
    (1)
    
    
    57.59953350 McCue, #904Houston, Texas 77056Mr. J.E. Eisemann IV
    
    Common Stock
    
    
    8,950
    (1)
    
    
    2.65801103 Victoria SquareTrinidad, Colorado 81082Mr. R. Dean Eisemann
    
    Common Stock
    
    
    6,750
    (1)
    
    
    2.00463738 Ella Lee LaneHouston, Texas 77027Mr. George M. Boyd, Jr.
    
    Common Stock
    
    
    8,700
    
    
    
    2.58371503 Canoe Brook Dr.Austin, Texas 78746Dr. John C. Davis
    
    Common Stock
    
    
    1,645
    (1)
    
    
    .4885631 Huajatolla Valley Estates Dr.La Veta, CO 81055All directors and executiveofficers as a group
    
    Common Stock
    
    
    219,997
    
    
    
    65.3343
   (1)
    
    Each of the named individuals owns 250 shares of the Companys common stock
subject to the Directors Qualifying Shares Agreement between the individual and the
Company, pursuant to which such shares will be repurchased by the Company for $5,000
upon such individual ceasing to be a director of the Bank. 59




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##### Table of Contents



ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In December 2004, we entered into Directors Qualifying Shares Agreements with four of the
Companys directors pursuant to which shares of the Bank held by each of them were exchanged for
250 shares of Common Stock of the Company. Under the terms of the agreements, each director agreed
to resell and the Company agreed to repurchase the Company shares acquired by such director for a
total of $5,000 in the aggregate upon the director ceasing to be a member of the Companys board or
upon the directors attempted disposition of the shares by transfer, sale, assignment or otherwise.
The directors have waived all dividends to be received with respect to the shares of Company Common
Stock acquired under the agreements.

One director, Dr. John C. Davis, was indebted to the Bank in an aggregate amount of $268,676 at
December 31, 2004. 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. 
 ITEM 13. EXHIBITS  (a)
    List of Exhibits 2.1
    
    
    Agreement and Plan of Merger by and among The Republic
Corporation and Republic Merger Corporation, dated December 2, 2004
(incorporated herein by reference from Appendix A to the Companys Rule 13e-3
Transaction Statement, filed with the Securities and Exchange Commission on
December 6, 2004).3
    
    
    Articles of Incorporation and By-Laws *10.1
    
    
    Form of Directors Qualifying Shares Agreement14.1
    
    
    Code of Ethics21
    
    
    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. 60




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##### Table of Contents



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 2004
    
    2003BKD, LLP:
    
    Audit Fees
    
    $
    68,658
    
    
    $
    44,685Audit 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 BKD, LLP during their tenure
as principal 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. 61




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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, IVChairman of the Board, Director,Chief Executive Officer, ChiefFinancial OfficerDate March 31, 2005
 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, IVChairman of the Board, Director,Chief Executive Officer, ChiefFinancial OfficerDate March 31, 2005By
    
    /s/ Catherine G. EisemannCatherine G. EisemannPresident, DirectorDate March 31, 2005By
    
    /s/ Roger Dean EisemannRoger Dean EisemannSecretary, DirectorDate March 31, 2005By
    
    /s/ George M. Boyd, Jr.George M. Boyd, Jr.DirectorDate March 31, 2005By
    
    /s/ Dr. John C. DavisDr. John C. DavisDirectorDate March 31, 2005
 62




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##### Table of Contents



EXHIBIT INDEX 2.1
    
    Agreement and Plan of Merger by and among The Republic Corporation and Republic Merger
Corporation, dated December 2, 2004 (incorporated herein by reference from Appendix A to the
Companys Rule 13e-3 Transaction Statement, filed with the Securities and Exchange Commission on
December 6, 2004).3
    
    Articles of Incorporation and By-Laws*10.1
    
    Form of Directors Qualifying Shares Agreement14.1
    
    Code of Ethics21
    
    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.