EX-13 3 0003.txt HCB BANCSHARES, INC. ANNUAL REPORT 2000 [HCB BANCSHARES' LETTERHEAD] To Our Shareholders: As HCB Bancshares, Inc. (HCBB) completes its third full fiscal year as a publicly held company, a review of our past illustrates why our expectations for the future are so likely to be realized. In 1996, HCBB was formed to help its subsidiary, HEARTLAND Community Bank, execute its Strategic Plan (Plan) for expansion, growth, and public recognition and acceptance as a hometown, community-based alternative to multi-billion-dollar regional banks. Little did we know how many Arkansas communities would be affected by the spread of the big regional banks. Our plan was simple: improve our information technology, hire good bankers, develop a full array of competitive banking products, then open new offices and grow. Our excellent customer service and our commitment to community service have been very well received as we have competed with the regional banks, and the future looks extremely bright. In 1996 we developed our Plan, opened a new office, and bought two offices. We added professional expertise in loan underwriting and training. In 1997, we completed new buildings for two of those offices. We took our company public. We installed a computer network, bringing all of our offices to a new, higher level of communication. We completed our search for a new provider of information technology, and began to work toward the change. We added professional expertise in human resources and bank operations. In 1998, we sold one of the offices we had bought. We completed our conversion to the new information technology, and added expertise in technology, commercial lending, bank operations, and accounting. We also fell victim to a breakdown in internal controls, which affected our ability to produce financial reports in which we had total confidence. In 1999, our stock was delisted by Nasdaq because of our failure to provide timely reports. We spent that year cleaning up our records, and reinstating and improving our internal controls. We added more expertise in accounting, and in November, the Nasdaq relisted our stock. In 2000, our earnings have slowly but steadily improved. We have added dramatically to our line of banking products, and we stand ready to continue our growth in both assets and profitability. In late 2000, we will open our full-service banking office in Bryant, Arkansas, where until now we have operated a loan production office. We have enjoyed excellent lending results in Bryant, and expect to see quick, steady and significant growth in deposits. We have weathered the storm, and our outlook toward the future is extremely good. We expect continued expansion, continued increases in market share, and continued growth in profitability. With the continued consolidation in our industry, our opportunities become greater, because of our focus on customer relationships, hometown banking, and community service. Our mission has been to ensure that Arkansas towns continue to have a local bank to help them meet their financial needs, and experience continues to tell us that our mission is sound, wanted, and well received. FINANCIAL HIGHLIGHTS
2000 1999 1998 1997 1996 Total Assets (millions) $ 291.1 $ 285.3 $ 250.9 $ 200.4 $ 171.2 Net Interest Income (millions) $ 6.7 $ 6.2 $ 6.1 $ 4.8 $ 3.5 Ratio of Interest Earning Assets To Interest-Bearing Liabilities 105.42% 111.55% 119.51% 108.76% 108.47%
/s/ Cameron D. McKeel Cameron D. McKeel President and Chief Executive Officer HCB BANCSHARES, INC. HCB Bancshares, Inc. ("Bancshares") was incorporated under the laws of the State of Oklahoma in December 1996 at the direction of the Board of Directors of HEARTLAND Community Bank (the "Bank") for the purpose of serving as a savings institution holding company of the Bank, upon the conversion of the Bank from mutual to stock form, which was completed on April 30, 1997 (the "Conversion"). The accompanying consolidated financial statements include the accounts of Bancshares and the Bank and are collectively referred to as the "Company". All significant intercompany balances and transactions have been eliminated in consolidation. Prior to the Conversion, Bancshares did not engage in any material operations. Bancshares has no significant assets other than the outstanding capital stock of the Bank, a portion of the net proceeds of the Conversion and notes receivable, one of which is from the Employee Stock Ownership Plan ("ESOP"). Bancshares' principal business is the business of the Bank. At June 30, 2000, the Company had total assets of $291.2 million, deposits of $144.9 million, and stockholders' equity of $28.2 million, or 9.7% of total assets. The Bank currently operates through five full service-banking offices located in Camden (2), Fordyce, Sheridan, and Monticello, Arkansas and a loan production office in Bryant, Arkansas. On February 16, 2000, the bank received approval from OTS to convert its loan production office in Bryant, Arkansas to a full service branch. Construction is in progress with an expected open date of October 30, 2000. As a federally chartered savings institution, the Bank is subject to extensive regulation by the OTS. The Bank's lending activities and other investments must comply with various federal regulatory requirements, and the OTS periodically examines the Bank for compliance. The Bank's deposits are insured up to the maximum limits by the Savings Association Insurance Fund ("SAIF") administered by the Federal Deposit Insurance Corporation ("FDIC"). The FDIC also has the authority to conduct special examinations. The Bank must file reports with OTS describing its activities and financial condition and is also subject to certain reserve requirements promulgated by the Federal Reserve Board. 3 MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS Bancshares common stock began trading on the Nasdaq National Market on May 7, 1997, under the symbol "HCBB." Effective February 2, 1999, the Bancshares common stock was delisted and ceased trading on the Nasdaq National Market. Bancshares common stock began trading on the OTC Bulletin Board effective September 16, 1999 and was listed on the Nasdaq Small-Cap Market effective November 22, 1999. At June 30, 2000, there were 2,046,580 shares of the common stock outstanding and approximately 781 stockholders of record. Following are the high and low bid prices, by fiscal quarter, as reported on the Nasdaq National Market from July 1, 1997 to February 2, 1999 and on the Nasdaq Small-Cap Market November 22, 1999 to June 30, 2000, and through the initial underwriting brokerage firm of Trident Securities (McDonald Investments) from February 3, 1999 to November 21, 1999, as well as the dividends paid during such quarters.
High Low Dividends Per Share ---- --- ------------------- Fiscal 2000 First Quarter 9.63 8.00 $ 0.06 Second Quarter 9.63 7.00 0.06 Third Quarter 8.00 5.75 0.06 Fourth Quarter 7.25 5.63 0.06 Fiscal 1999: First Quarter $ 15.25 $ 10.50 $ 0.06 Second Quarter 13.00 6.00 0.06 Third Quarter 10.75 9.00 0.06 Fourth Quarter 9.44 8.00 0.06
The stated high and low bid prices reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions. The payment of dividends on common stock is subject to determination and declaration by the Board of Directors of Bancshares. The payment of future dividends will be subject to the requirements of applicable law and the determination by the Board of Directors of Bancshares that the net income, capital and financial condition of Bancshares and the Bank, thrift industry trends and general economic conditions justify the payment of dividends, and there can be no assurance that dividends will continue to be paid in the future. Since Bancshares has no significant source of income other than dividends from the Bank, the payment of dividends by Bancshares can be dependent upon receipt of dividends from the Bank. Payment of cash dividends by the Bank is limited by certain federal regulations under which the Bank may not declare or pay a cash dividend on or repurchase any of its common stock if the effect thereof would cause its regulatory capital to be reduced below (1) the amount required for the liquidation account established in connection with the Bank's conversion to stock form or (2) the regulatory capital requirements imposed by the OTS. In certain circumstances earnings appropriated to bad debt reserves and deducted for federal income tax purposes may not be available to pay cash dividends without the payment of federal income taxes by the Bank on the amount of such earnings removed from the reserves for such purposes at the then current income tax rate. Federal regulations impose certain additional limitations on the payment of dividends and other capital distributions (including stock repurchases and cash mergers) by the Bank. Under OTS regulations, savings institutions must submit notice to the OTS prior to making a capital distribution if (a) they would not be well capitalized after the distribution, (b) the distribution would result in the retirement of any of the institution's common or preferred stock or debt counted as its regulatory capital, or (c) the institution is a subsidiary of a holding company. A savings institution must make application to the OTS to pay a capital distribution if (x) the institution would not be adequately capitalized following the distribution, (y) the institution's total distributions for the calendar year exceeds the institution's net income for the calendar year to date plus its net income (less 4 distributions) for the preceding two years, or (z) the distribution would otherwise violate applicable law or regulation or an agreement with or condition imposed by the OTS. 5 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
AT JUNE 30, ---------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ----------- Total assets.............................. $291,192,175 $285,396,885 $250,953,770 $ 200,498,516 $171,235,322 Loans receivable, net..................... 135,626,505 115,162,883 104,580,165 98,642,635 84,131,024 Allowance for loan losses................. 1,231,709 1,329,201 1,468,546 1,492,473 1,283,234 Cash and due from banks................... 3,211,802 3,560,884 1,531,363 1,057,943 422,509 Interest-earning savings deposits......... 236,846 1,693,330 5,073,035 18,273,882 16,869,373 Investment securities: Available for sale..................... 34,135,726 33,132,916 40,775,807 -- 5,279,625 Held to maturity....................... -- -- -- 17,260,383 -- Mortgage-backed securities: Available for sale.................... 98,407,339 113,986,773 58,697,109 18,361,987 12,155,199 Held to maturity...................... -- -- 27,503,257 36,493,086 45,212,891 Deposits.................................. 144,873,071 146,296,598 141,931,330 151,192,591 145,919,251 FHLB advances............................. 115,609,029 104,523,419 68,121,068 10,000,000 10,000,000 Note payable.............................. 160,000 240,000 320,000 400,000 -- Stockholders' equity...................... 28,240,550 32,117,560 37,678,924 37,430,852 14,228,436 Number of: Real estate loans outstanding.......... 2,915 2,425 3,037 2,093 1,993 Deposit accounts....................... 17,980 18,526 17,158 15,380 14,163 Offices open........................... 6 6 6 7 6
YEAR ENDED JUNE 30, ---------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ----------- Interest income........................... $ 19,808,899 $ 18,274,647 $15,027,677 $12,987,848 $10,333,181 Interest expense.......................... 13,099,656 12,093,603 8,942,149 8,195,782 6,766,598 ------------- ------------ ----------- ----------- ----------- Net interest income....................... 6,709,243 6,181,044 6,085,528 4,792,066 3,566,583 Provision for loan losses................. -- -- 24,000 221,671 42,483 ------------- ------------ ----------- ----------- ----------- Net interest income after provision for loan losses......................... 6,709,243 6,181,044 6,061,528 4,570,395 3,524,100 Noninterest income (loss)................. 1,039,622 1,018,654 710,856 305,067 (773,652) Noninterest expense....................... 7,304,110 6,847,715 6,407,976 5,765,870 2,350,658 ------------- ------------ ----------- ----------- ----------- Income (loss) before income taxes and cumulative effect of change in method of accounting for income taxes and investment securities................... 444,755 351,983 364,408 (890,408) 399,790 Provision (benefit) for income taxes...... (341,147) (63,658) (20,705) (280,935) 174,801 -------------- ------------- ------------ ----------- ----------- Income (loss) before cumulative effect of change in method of accounting for investment securities.................. 785,902 415,641 385,113 (609,473) 224,989 Cumulative effect of change in method of accounting for investment securities.... -- -- -- -- -- ------------- ------------ ----------- ----------- ----------- Net income (loss)......................... $ 785,902 $ 415,641 $ 385,113 $ (609,473)(1) $ 224,989 ============= =========== ========== ========== ========== Earnings per share: Basic................................... $ 0.40 $ 0.18 $ 0.16 $ (.25) $ -- Diluted................................. 0.40 0.18 0.16 (.25) -- Cash dividends declared................... 0.24 0.24 0.20 -- -- --------------- 1 Noninterest expense and, therefore, net loss, for the year ended June 30, 1997 were adversely affected by the imposition of a special deposit insurance assessment in the second quarter of fiscal 1997 in connection with the recapitalization of the SAIF. Absent such assessment, management estimates that noninterest expense would have been approximately $4,876,859 and that net loss would have been approximately $58,286.
6
YEAR ENDED JUNE 30, ---------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ----------- PERFORMANCE RATIOS: Return on assets (net income (loss) divided by average total assets) 1................... 0.27% 0.15% 0.18% (0.34)% 0.16% Return on average equity (net income (loss) divided by average equity) 1................. 2.76 1.14 1.02 (3.38) 1.53 Interest rate spread (combined weighted average interest rate earned less combined weighted average interest rate cost)......... 2.23 1.81 2.11 2.35 2.16 Net interest margin (net interest income divided by average interest-earning assets).. 2.49 2.34 2.96 2.76 2.58 Ratio of average interest-earning assets to average interest-bearing liabilities...... 105.42 111.55 119.51 108.76 108.47 Ratio of noninterest expense to average total assets................................. 2.55 2.48 3.00 3.18 1.64 ASSET QUALITY RATIOS: Nonperforming assets to total assets at end of period............................. 0.33 0.21 0.34 0.29 0.14 Nonperforming loans to total loans at end of period............................. 0.64 0.46 0.75 0.50 1.17 Allowance for loan losses to total loans at end of period....................... 0.85 1.08 1.33 1.46 1.47 Allowance for loan losses to nonperforming loans at end of period....................... 133.95 234.84 177.25 290.50 125.95 Provision for loan losses to total loans at end of period ............................ -- -- .02 0.22 0.05 Net charge-offs to average loans outstanding.... 0.08 0.13 .05 .01 0.02 Capital Ratios: Equity to total assets at end of period......... 9.70 11.25 15.01 18.92 8.31 Average equity to average assets................ 9.95 13.19 17.71 9.95 10.25 Dividend payout ratio 2 ........................ 64.50 142.58 137.36 -- -- -------------- 1 Before cumulative effect adjustment. Returns on assets and equity for the year ended June 30, 1997 were adversely affected by the imposition of a special deposit insurance assessment in the second quarter of fiscal 1997 in connection with the recapitalization of the SAIF. Absent such assessment, management estimates that return on assets would have been approximately .07% and that return on average equity would have been approximately .70%. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" under Item 7. 2 The fiscal year ended June 30, 1998, was the first full year that Bancshares was publicly traded. Dividend payout ratio is the total dividends declared divided by net income.
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS When used in this Annual Report, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area, and competition that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. GENERAL The Bank's principal business consists of attracting savings deposits from the general public and investing those funds in loans secured by first mortgages on existing owner-occupied single-family residences in the Bank's primary market area and, to a lesser but growing extent, commercial and multi-family real estate loans and consumer and commercial business loans. The Bank also maintains a substantial investment portfolio of mortgage-related securities, nontaxable municipal securities, and U.S. government and agency securities. The Bank's net income is dependent primarily on its net interest income, which is the difference between interest income earned on its loans, mortgage-backed securities and securities portfolio and interest paid on customers' savings deposits and other borrowings. The Bank's net income is also affected by the level of noninterest income, such as service charges on customers' deposit accounts, net gains or losses on the sale of loans and securities and other fees. In addition, net income is affected by the level of noninterest expense, which primarily consists of employee compensation expenses, occupancy expenses, and other expenses. The financial condition and results of operations of the Bank and the thrift and banking industries as a whole are significantly affected by prevailing economic conditions, competition and the monetary and fiscal policies of governmental agencies. Lending activities are influenced by demand for and supply of credit, competition among lenders and the level of interest rates in the Bank's market area. The Bank's deposit flows and costs of funds are influenced by prevailing market rates of interest, primarily on competing investments, as well as account maturities and the levels of personal income and savings in the Bank's market area. POST YEAR 2000 READINESS DISCUSSION The Company recognized the challenges of the year 2000 issue. In compliance with regulatory guidelines, a committee was assembled to review the effects the century change would have on the Company's systems and to assess the potential risks that it presented. A formal plan of action was developed to address the issue which was approved by the Board of Directors, and had the full support of senior management. An inventory of internal systems, both computer and non-computer related, was completed in this process. Relationships with third party vendors were also analyzed. Potential weaknesses were then documented and prioritized as to their effect on critical business functions. The Company was already in the process of selecting a new data-processing system to facilitate its business plan. Year 2000 compliance became an important issue in the selection process. A vendor with a year 2000 compliant system was selected and conversion was completed in the quarter ended December 1998. This system had undergone thorough testing prior to its installation. All the user departments were involved in review of the test results and in additional onsite testing. This testing process revealed no year 2000 related problems. Testing 8 also took place for external parties with which the Bank exchanges significant information. In addition, testing was performed on all other mission critical information systems. Seven vendors were identified as "mission critical". All seven indicated that they were year 2000 compliant. The Company's internal operating systems were tested, and those that failed were replaced. Replacement systems were then tested and passed. As a result of this process, all of the internal operating systems were determined to be year 2000 compliant. In addressing the year 2000 issue, the Bank used its current internal staffing with little reliance on outside resources. Major vendors provided compliant software at no additional expense to the Bank. Replacement of the main data-processing system cost approximately $650,000. Following the date rollover into the year 2000, important systems and equipment within the bank, vendors, and important support systems utilized by the bank were all operating normally. Also, the expected unusual demand for cash as 1999 ended did not materialize. Finally, the Bank's largest loan customers were contacted and they all reported normal operations. ASSET/LIABILITY MANAGEMENT Net interest income, the primary component of the Bank's net income, is determined by the difference or "spread" between the yield earned on the Bank's interest-earning assets and the rates paid on its interest-bearing liabilities and the relative amounts of such assets and liabilities. Key components of a successful asset/liability strategy are the monitoring and managing of interest rate sensitivity on both the interest-earning assets and interest-bearing liabilities. It has been the Bank's historical policy to mitigate the interest rate risk inherent in the historical savings institution business of originating long-term single-family mortgage loans funded by short-term savings deposits by maintaining substantial liquidity and capital levels to withstand unfavorable movements in market interest rates, by purchasing investment securities with adjustable-rates and/or short terms to maturity and by originating relatively shorter term consumer loans. In the future, however, it is anticipated that as the Bank sells more of its long term loan originations and originates for its portfolio more commercial and multi-family real estate loans and consumer and commercial business loans with relatively shorter terms to maturity or repricing, the Bank's interest rate risk exposure may decline somewhat. The matching of the Bank's assets and liabilities may be analyzed by examining the extent to which its assets and liabilities are interest rate sensitive and by monitoring both its interest rate sensitivity "gap" and the expected effects of interest rate changes on its net portfolio value. For the fiscal year ending June 30, 2000, the Bank initiated a modest growth strategy, which replaced investment securities with loans and utilized Federal Home Loan Bank borrowings to fund growth greater than deposit levels. Interest Rate Sensitivity Gap. An asset or liability is interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to positively affect net interest income. Similarly, during a period of falling interest rates, a negative gap would tend to positively affect net interest income while a positive gap would tend to adversely affect net interest income. At June 30, 2000, the Bank's total interest-bearing liabilities maturing or repricing within one year exceeded its total interest-earning assets maturing or repricing in the same period, and the Bank's cumulative one-year gap ratio totaled a negative 23.4%. In addition, the Bank's total interest-earning assets maturing or repricing within five years were slightly less than its total interest-bearing liabilities maturing or repricing in the same period, and the Bank's cumulative five-year gap ratio totaled a negative 8.7%. The Bank's gap measures indicate that net interest income would be exposed to increases in interest rates in the short term, but would be much less exposed to increases in interest rates over the longer term. 9 AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS AND RATES The following table sets forth information regarding the Company's average interest-earning assets and interest-bearing liabilities and reflects the average yield of interest-earning assets and the average cost of interest-bearing liabilities for the periods indicated. Average balances are derived from monthly balances. The table also presents information for the periods indicated with respect to the difference between the weighted average yield earned on interest-earning assets and the weighted average rate paid on interest-bearing liabilities, or "interest rate spread," which savings institutions have traditionally used as an indicator of profitability. Another indicator of an institution's net interest income is its "net yield on interest-earning assets," which is its net interest income divided by the average balance of interest-earning assets. Net interest income is affected by the interest rate spread and by the relative amounts of interest-earning assets and interest-bearing liabilities. The yield on non-taxable securities has not been adjusted to a tax equivalent basis. Yield on available for sale securities is based on amortized cost. Loans on a nonaccrual basis are included in the computation of the average balance of loans receivable. Loan fees deferred and accreted into income are included in interest earned. Whenever interest-earning assets equal or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income.
Year Ended June 30, -------------------------------------------------------------------------- 2000 1999 -------------------------------- ------------------------------------ Average Average Average Interest Yield/ Average Interest Yield/ Balance Earned/Paid Rate Balance Earned/Paid Rate ------- ----------- ------ ------- ----------- ------ Interest-earning assets: Loans receivable......................... $123,535,536 $10,491,741 8.49 $108,211,367 $ 8,984,708 8.30% Investment and mortgage-backed securities Taxable................................ 112,065,588 7,352,290 6.56 127,823,503 7,879,802 6.16 Nontaxable............................. 27,102,813 1,479,536 5.46 18,542,595 906,755 4.89 Other interest-earning assets............ 6,536,156 485,332 7.43 9,895,390 503,382 5.09 ------------- ----------- ---- ------------ ----------- ---- Total interest-earning assets ......... $269,240,093 19,808,899 7.36 $264,472,855 18,274,647 6.91 Non-interest-earning assets................ 16,659,326 11,984,411 ------------- ------------ Total assets........................... $285,899,419 $276,457,266 =========== =========== Interest-bearing liabilities: Deposits................................. $142,663,307 6,507,174 4.56 $141,719,606 6,620,808 4.67 FHLB advances............................ 112,554,831 6,579,482 5.85 95,124,165 5,453,795 5.73 Notes payable............................ 175,082 13,000 7.43 253,333 19,000 7.50 ------------- ----------- ---- ------------ ----------- ---- Total interest-bearing liabilities..... 255,393,220 13,099,656 5.13 237,097,104 12,093,603 5.10 Non-interest-bearing liabilities........... 2,046,766 2,903,969 ------------- ------------ Total liabilities...................... 257,439,986 240,001,073 Equity..................................... 28,459,433 36,456,193 ------------- ------------ Total liabilities and equity........... $285,899,419 $276,457,266 =========== =========== Net interest income........................ $ 6,709,243 $ 6,181,044 ========== ========== Net interest rate spread................... 2.23% 1.81% ==== ===== Net yield on interest-earning assets....... 2.49% 2.34% ==== ==== Ratio of average interest-earning assets to average interest-bearing liabilities.. 105.42% 111.55% ====== ====== Year Ended June 30, ----------------------------------- 1998 ----------------------------------- Average Average Interest Yield/ Balance Earned/Paid Rate ------- ----------- ------ Interest-earning assets: Loans receivable......................... $105,237,178 $ 8,766,232 8.33% Investment and mortgage-backed securities Taxable................................ 77,987,004 5,017,211 6.43 Nontaxable............................. 9,010,567 445,122 4.94 Other interest-earning assets............ 13,402,789 799,112 5.96 ------------ ------------ ---- Total interest-earning assets ......... $205,637,538 15,027,677 7.31 Non-interest-earning assets................ 7,874,964 ------------ Total assets........................... $213,512,502 ============ Interest-bearing liabilities: Deposits................................. $144,602,264 7,272,554 5.03 FHLB advances............................ 27,108,184 1,644,595 6.07 Notes payable............................ 352,142 25,000 7.10 ------------ ------------ ---- Total interest-bearing liabilities..... 172,062,590 8,942,149 5.20 Non-interest-bearing liabilities........... 3,645,847 ------------ Total liabilities...................... 175,708,437 Equity..................................... 37,804,065 ------------ Total liabilities and equity........... $213,512,502 ============ Net interest income........................ $ 6,085,528 ============ Net interest rate spread................... 2.11% ===== Net yield on interest-earning assets....... 2.96% ====== Ratio of average interest-earning assets to average interest-bearing liabilities.. 119.51% ======
10 RATE/VOLUME ANALYSIS The following table analyzes dollar amounts of changes in interest income expense for major components of interest-earning assets and interest-bearing liabilities. The table distinguishes between (i) changes attributable to volume (changes in volume multiplied by the prior period's rate), (ii) changes attributable to rate (changes in rate multiplied by the prior period's volume) and (iii) changes in rate/volume (changes in rate multiplied by changes in volume).
Year Ended June 30, ------------------------------------------------------------------------------------- 2000 vs. 1999 1999 vs. 1998 ---------------------------------------- ---------------------------------------- Increase (Decrease) Increase (Decrease) Due to Due to ---------------------------------------- ---------------------------------------- Rate/ Rate/ Volume Rate Volume Total Volume Rate Volume Total ------ ---- ------ ----- ------ ---- ------ ------ (In thousands) Interest income: Loans receivable ........ $ 1,272 $ 206 $ 29 $ 1,507 $ 248 $ (28) $ (2) $ 218 Investment securities and mortgage- backed securities ............ (553) 612 (14) 45 3,677 (214) (138) 3,325 Other interest-earning assets ............... (171) 231 (78) (18) (209) (117) 30 (296) ------------------------------------------------------------------------------------- Total interest-earning assets ............ 548 1,049 (63) 1,534 3,716 (359) (110) 3,247 ------- ------- ------- ------- ------- ------- ------- ------- Interest expense: Deposits ................ 44 (157) (1) (114) (145) (517) 10 (652) FHLB advances ........... 999 107 20 1,126 4,126 (90) (227) 3,809 Note payable ............ (6) -- -- (6) (7) 1 -- (6) ------------------------------------------------------------------------------------- Total interest-bearing liabilities ....... 1,037 (50) 19 1,006 3,974 (606) (217) 3,151 ------- ------- ------- ------- ------- ------- ------- ------- Change in net interest income .................. $ (489) $ 1,099 $ (82) $ 528 $ (258) $ 247 $ 107 $ 96 ======= ======= ======= ======= ======= ======= ======= =======
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2000 AND 1999 The Company had consolidated total assets of $291.2 million and $285.4 million at June 30, 2000 and 1999, respectively. During the twelve-month period ended June 30, 2000 the Company experienced an increase in its net consolidated loan portfolio from $115.2 million at June 30, 1999, to $135.6 million. During this same period, investments and mortgage-backed securities and other short-term interest-earning assets decreased from $148.8 million at June 30, 1999 to $132.8 million at June 30, 2000. Deposits decreased from $146.3 million at June 30,1999 to $144.9 million at June 30, 2000. This represents a one percent decrease in deposits. The outstanding balances of FHLB borrowings were $115.6 million and $104.5 million at June 30, 2000 and June 30, 1999, respectively. The need to increase FHLB borrowings was primarily due to loan demand and the decrease in deposits being greater than investment securities paydowns. Stockholders' equity amounted to $28.2 million at June 30, 2000, and $32.1 million at June 30, 1999. The changes in equity were primarily due to the purchase of treasury stock, the changes to unrealized gain (loss) on investment securities available for sale, and the Company's net income earned for the fiscal year ended June 30, 2000. At June 30, 2000, the Bank's regulatory capital exceeded all applicable regulatory capital requirements and meets the definition of "well" capitalized under the Prompt Corrective Action provisions. 11 COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2000 AND 1999 Net Income. Net income for the year ended June 30, 2000 was approximately $786,000 compared to net income of $416,000 for the year ended June 30, 1999. The changes resulted primarily from an increase in net interest income of $528,000, an increase in the tax benefit of $277,000, less an increase in non-interest expense of $457,000. Net Interest Income. Net interest income for the year ended June 30, 2000 was $6.7 million, or $528,000 more than net interest income for the year ended June 30, 1999. This improvement is primarily due to rate increases on interest earning assets, offset by volume increases on interest bearing liabilities. The total average interest earning assets increased $4.8 million, and the yield increased from 6.91% to 7.36% primarily due to a 19 basis point increase in the average yield on loans while total average loans increased $15.3 million. Total average interest bearing liabilities increased $18.3 million, and the cost increased slightly from 5.10% to 5.13%. Provision for Loan Losses. During the year ended June 30, 2000, the Bank's management continued its review of loan files. Based on these reviews, management did not make any provisions for loan losses in the year ended June 30, 2000. The allowance for loan losses of $1.2 million at June 30, 2000 represented 0.85% of gross outstanding loans. Nonperforming loans as of June 30, 2000 as a percent of total loans increased to 0.64% from 0.46% as of June 30, 1999. Management evaluates the carrying value of the loan portfolio periodically and provisions are made if necessary. While management uses the best information available to make evaluations, future provisions to the allowance may be necessary if conditions differ substantially from the assumptions used in making the evaluations. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize changes to the allowance based upon their judgments and the information available to them at the time of their examination. There were no significant changes in loan terms during the year, , nor were there significant changes in the estimation methodologies employed or assumptions utilized. Nonperforming loan and loss trends did not indicate a need to modify loss experience factors during the year. Noninterest Income. Noninterest income is comprised primarily of gains on the sales of loans and service charges on deposit accounts. Noninterest income for the year ended June 30, 2000 was approximately $1,040,000 compared to approximately $1,019,000 for the year ended June 30, 1999. This increase of approximately $21,000 is the result of gains on sales of loans and the growth of the Bank's checking and savings accounts, resulting in increased service charges, less a decrease in gains on sales of investment securities available for sale of $262,000. Noninterest Expense. The major components of noninterest expense are salaries and employee benefits paid to or on behalf of the Company's employees and directors, professional fees paid to consultants, attorneys, and accountants, occupancy expense for ownership and maintenance of the Company's buildings, furniture, and equipment, and data processing expenses. Total noninterest expense for the year ended June 30, 2000 was $7.3 million compared to $6.8 million for the year ended June 30, 1999. Significant components of the increase in non-interest expense are a $330,000 increase in salaries and benefits primarily resulting from increased staff, an increase of $93,000 in net occupancy expense, a $152,000 increase in other expenses, and a $30,000 decrease in professional fees. It is anticipated by management that future professional fees will continue to decline. In light of the substantial costs associated with the recent, pending and planned expansions of the Bank's activities, facilities and staff, including additional costs associated with adding staff, building or renovating branches, and introducing new deposit and loan products and services, it is expected that the Bank's noninterest expense levels may remain high relative to the historical levels for the Bank, as well as the prevailing levels for institutions that are not undertaking such expansions, for an indefinite period of time, as management implements the Bank's business strategy. Among the activities planned or in process are a full service branch in Bryant, Arkansas in place of the loan production office, and continued increased loan originations in the areas of multi-family residential, commercial business, and consumer loans. 12 Income Taxes. The effective income tax rates for the Company for the fiscal years ended June 30, 2000 and 1999 were (76.7)% and (18.1)%, respectively. The variance in the effective rate from the expected statutory rate is due primarily to tax exempt interest. COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1999 AND 1998 Net Income. Net income for the year ended June 30, 1999 was $416,000 compared to net income of $385,000 for the year ended June 30, 1998. The changes resulted primarily from an increase in net interest income of $96,000, an increase in non-interest income of $308,000, an increase in non-interest expense of $440,000, and an increase in the tax benefit of $43,000. Net Interest Income. Net interest income for the year ended June 30, 1999 was $6.2 million, or $96,000 more than net interest income for the year ended June 30, 1998. The total average interest earning assets increased $58.8 million, but the yield decreased from 7.31% to 6.91% primarily due to a 28 basis point decrease in the average yield on investments while total average investments increased $59.4 million. Also, of the $59.4 million increase in average investments, $9.5 million was in nontaxable securities at an average rate of 4.89%. Provision for Loan Losses. During the year ended June 30, 1999, the Bank's management continued its review of loan files. Based on these reviews, management did not make any provisions for loan losses in the year ended June 30, 1999, compared to $24,000 in the year ended June 30, 1998. The allowance for loan losses of $1.3 million at June 30, 1999 represented 1.08% of outstanding loans. Nonperforming loans as of June 30, 1999 as a percent of total loans decreased to .46% from .75% as of June 30, 1998. Management evaluates the carrying value of the loan portfolio periodically and the provision is adjusted if necessary. While management uses the best information available to make evaluations, future adjustments to the provision may be necessary if conditions differ substantially from the assumptions used in making the evaluations. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize changes to the allowance based upon their judgments and the information available to them at the time of their examination. During the year ended June 30, 1999, management continued to emphasize growth in land, multi-family, non-residential real estate loans and commercial loans. These loans generally are considered to have a greater inherent risk of loss due to the concentration with one or few borrowers and the dependence of the collateral's performance on a broad array of economic factors. As a result of these efforts, these types of loans increased from $51.2 million to $60.0 million, or 17.2%. As a result of this increased emphasis in areas of generally higher risk, the amount of the allowance allocated to these lending types has increased. There were no significant changes in concentrations or loan terms during the year, other than that mentioned in the preceding paragraph, nor were there significant changes in the estimation methodologies employed or assumptions utilized. Nonperforming loan and loss trends did not indicate a need to modify loss experience factors during the year. Noninterest Income. Noninterest income is comprised primarily of gains on the sales of investment securities, and service charges on deposit accounts. Noninterest income for the year ended June 30, 1999 was approximately $1,019,000 compared to approximately $711,000 for the year ended June 30, 1998. This increase of approximately $308,000 is the result of gains on sales of loans and investment securities and the growth of the Bank's checking and savings accounts, both in dollars and in numbers of accounts, resulting in increased service charges. Noninterest Expense. The major components of noninterest expense are salaries and employee benefits paid to or on behalf of the Company's employees and directors, occupancy expense for ownership and maintenance of the Company's buildings, furniture, and equipment, data processing expenses, and professional fees paid to consultants, attorneys, and accountants. Total noninterest expense for the year ended June 30, 1999 was $6.85 million compared to $6.41 million for the year ended June 30, 1998. Significant components of the increase in non-interest expense are the increase of $234,000 in salaries and benefits resulting from increased staff and the implementation of the Management Recognition Plan, an increase of $583,000 in professional fees, an increase of $176,000 in net occupancy expense, and 13 increase of $101,000 in data processing expense, while all other non-interest expenses decreased $654,000. It is anticipated by management that future professional fees will be significantly less than the year ended June 30, 1999. In light of the substantial costs associated with the recent, pending and planned expansions of the Bank's activities, facilities and staff, including additional costs associated with adding staff, building or renovating branches, and introducing new deposit and loan products and services, it is expected that the Bank's noninterest expense levels may remain high relative to the historical levels for the Bank, as well as the prevailing levels for institutions that are not undertaking such expansions, for an indefinite period of time, as management implements the Bank's business strategy. Among the activities planned are continued increased loan originations in the areas of multi-family residential, commercial business, and consumer loans. Income Taxes. The effective income tax rates for the Company for the fiscal years ended June 30, 1999 and 1998 were (18.1)% and (5.7)%, respectively. The variance in the effective rate from the expected statutory rate is due primarily to tax exempt interest. SOURCES OF CAPITAL AND LIQUIDITY The Company has no business other than that of the Bank. Bancshares' primary sources of liquidity are cash, dividends paid by the Bank and earnings on investments and loans. In addition, the Bank is subject to regulatory limitations with respect to the payment of dividends to Bancshares. The Bank has historically maintained substantial levels of capital. The assessment of capital adequacy is dependent on several factors including asset quality, earnings trends, liquidity and economic conditions. Maintenance of adequate capital levels is integral to provide stability to the Bank. The Bank seeks to maintain substantial levels of regulatory capital to give it maximum flexibility in the changing regulatory environment and to respond to changes in the market and economic conditions. The Bank's primary sources of funds are savings deposits, proceeds from principal and interest payments on loans and mortgage-backed securities, interest payments and maturities of investment securities, and earnings. While scheduled principal repayments on loans and mortgage-backed securities and interest payments on investment securities are a relatively predictable source of funds, deposit flows and loan and mortgage-backed prepayments are greatly influenced by general interest rates, economic conditions, competition and other factors. The Bank does not solicit savings deposits outside of its market area through brokers or other financial institutions. At June 30, 2000, the Bank had designated securities with a fair value of approximately $132.5 million as available for sale. In addition to internal sources of funding, the Bank as a member of the FHLB has substantial borrowing authority with the FHLB. The Bank's use of a particular source of funds is based on need, comparative total costs and availability. At June 30, 2000, the Bank had outstanding approximately $7.5 million in commitments to originate loans (including unfunded portions of construction loans) and $564,000 in unused lines of credit. At the same date, the total amount of certificates of deposit which were scheduled to mature in one year or less was $77.9 million. Management anticipates that the Bank will have adequate resources to meet its current commitments through internal funding sources described above. Historically, the Bank has been able to retain a significant amount of its savings deposits as they mature. Management is not aware of any current recommendations by its regulatory authorities, legislation, competition, trends in interest rate sensitivity, new accounting guidance or other material events and uncertainties that would have a material effect on the Bank's ability to meet its liquidity demands. 14 MARKET RISK Market risk reflects the risk of economic loss resulting from adverse changes in market prices and interest rates. The risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods. The Company's market risk arises primarily from interest rate risk inherent in lending and deposit-taking activities. The Company does not maintain a trading account for any class of financial instrument nor does it engage in hedging activities or purchase derivative instruments. Furthermore, the Company is not subject to foreign currency exchange rate risk or commodity price risk. The OTS currently requires savings institutions to measure and evaluate interest rate risk on a quarterly basis. A savings institution's interest rate risk is measured in terms of the sensitivity of its net portfolio value (NPV) to changes in interest rates. Net portfolio value is defined, generally, as the present value of expected cash inflows from existing assets and off-balance sheet contracts less the present value of expected cash outflows from existing liabilities and off-balance sheet contracts. The Bank presently monitors and evaluates the potential impact of interest rate changes upon the market value of the Bank's NPV on a quarterly basis. These computations estimate the effect on the Bank's NPV of sudden and sustained 100 Basis Points (BP) to 300 BP increases and decreases in market interest rates. The Bank's Board of Directors has adopted an interest rate risk policy which establishes maximum decreases in the Bank's estimated NPV of 20%, 35%, and 55% in the event of assumed immediate and sustained 100 BP to 300 BP, increases or decreases in market interest rates, respectively. In addition, in the event of the assumed immediate and sustained 100 BP, 200 BP, or 300 BP, increase or decrease in market interest rates, the board has set as minimum post shock NPV ratio of 6.00%, 6.50%, and 7.00% respectively. 15 The following tables present the Bank's projected change in NPV as of June 30, 2000 and 1999, as calculated by OTS, based on information provided to the OTS by the Bank. Based on such information, from June 30, 1999 to June 30, 2000, the Bank's interest rate risk has become more liability sensitive throughout the period.
2000 ---------------------------------------------------------------------------------------------------------------- CHANGE IN BP CHANGE IN NPV INTEREST RATES NET PORTFOLIO VALUE NPV AS A PERCENTAGE OF ESTIMATED IN BP ----------------------------------- RATIO MARKET VALUE OF ASSETS (RATE SHOCK) AMOUNT $ CHANGE % CHANGE ----- ---------------------- ------------ ------ -------- -------- +300 $19,349 $(14,482) (43)% 7.31 % (428) +200 23,842 (9,989) (30) 8.73 (286) +100 28,693 (5,138) (15) 10.17 (142) +0 33,831 11.59 -100 38,838 5,007 15 12.87 128 -200 42,604 8,773 26 13.71 212 -300 45,416 11,585 34 14.23 264 1999 ---------------------------------------------------------------------------------------------------------------- CHANGE IN BP CHANGE IN NPV INTEREST RATES NET PORTFOLIO VALUE NPV AS A PERCENTAGE OF ESTIMATED IN BP ----------------------------------- RATIO MARKET VALUE OF ASSETS (RATE SHOCK) AMOUNT $ CHANGE % CHANGE ----- ---------------------- ------------ ------ -------- -------- +300 $23,862 $(7,923) (25)% 9.27 % (207) +200 26,884 (4,901) (15) 10.15 (120) +100 29,710 (2,075) (7) 10.89 (45) +0 31,785 11.35 -100 32,126 341 1 11.23 (12) -200 31,055 (730) (2) 10.67 (68) -300 30,435 (1,350) (4) 10.25 (110)
At June 30, 2000, it was estimated that the Bank's NPV could decrease 15%, 30%, and 43% in the event of 100 BP, 200 BP, and 300 BP respective increases in market interest rates, and could increase 15%, 26%, and 34% in the event of equivalent decreases in market interest rates. These calculations indicate that the Bank's NPV could be adversely affected by significant increases in interest rates. The increase in interest-rate risk compared to June 30, 1999 is primarily due to replacing maturing FHLB advances with shorter-term FHLB advances. This strategy is coupled with anticipated deposit growth from the Bank's new full service branch in Bryant, Arkansas, and existing markets which will be used to fund loan growth and reduce these shorter-term FHLB borrowings. Management reviews the Bank's borrowing position, expected interest-rate movements, and current strategy at least monthly to determine whether to continue to roll maturing FHLB advances short term. Changes in interest rates also may affect the Bank's net interest income. In a declining rate environment, more borrowers would be expected to refinance fixed rate loans at lower rates. This would have the effect of cutting the Bank's yield on fixed rate assets at a time when its liability costs would decline more slowly. In a rising rate environment fewer borrowers would be expected to refinance while more depositors would be expected to liquidate their certificates of deposit and reinvest them in higher rate certificates of deposit. Depositors would tend to exhibit this behavior once rates had increased sufficiently to offset early withdrawal penalties. This would have the effect of maintaining the asset yield at a time when liability costs would tend to rise. The Bank's Board of Directors is responsible for reviewing the Bank's asset and liability policies. On at least a quarterly basis, the Board reviews interest rate risk and trends, as well as liquidity and capital ratios and requirements. The Bank's management is responsible for administering the policies and determinations of the Board of Directors with respect to the Bank's asset and liability goals and strategies. At June 30, 2000, the Bank's estimated changes in net interest income and NPV were within the targets established by the Board of Directors. 16 Computations of prospective effects of hypothetical interest rate changes, such as the above computations, are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Bank may undertake in response to changes in interest rates. 17 INDEPENDENT AUDITORS' REPORT The Board of Directors of HCB Bancshares, Inc. Camden, Arkansas We have audited the accompanying consolidated statements of financial condition of HCB Bancshares, Inc. and its subsidiary (the "Company") as of June 30, 2000 and 1999, and the related consolidated statements of income and comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2000. 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. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of HCB Bancshares, Inc. and its subsidiary at June 30, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche, LLP August 16, 2000 18 HCB BANCSHARES, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------------------------------------------- ASSETS 2000 1999 Cash and due from banks $ 3,211,802 $ 3,560,884 Interest bearing deposits with banks 137,846 975,330 -------------- -------------- Cash and cash equivalents 3,349,648 4,536,214 Other interest bearing deposits with banks 99,000 718,000 Investment securities: Available for sale, at fair value (amortized cost at June 30, 2000 and 1999, of $139,920,654 and $151,505,753, respectively) 132,543,065 147,119,689 Loans receivable, net of allowance at June 30, 2000 and 1999, of $1,231,709 and $1,329,201, respectively 135,626,505 115,162,883 Accrued interest receivable 1,852,887 1,717,823 Federal Home Loan Bank stock 6,223,500 5,379,100 Premises and equipment, net 6,552,484 6,500,704 Goodwill, net 281,250 356,250 Real estate held for sale 359,608 463,478 Other assets 4,304,228 3,442,744 ------------- ------------- TOTAL $ 291,192,175 $ 285,396,885 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposits $ 144,873,071 $ 146,296,598 Federal Home Loan Bank advances 115,609,029 104,523,419 Advance payments by borrowers for taxes and insurance 139,554 128,442 Accrued interest payable 917,415 815,197 Note payable 160,000 240,000 Other liabilities 1,252,556 1,275,669 -------------- -------------- Total liabilities 262,951,625 253,279,325 -------------- -------------- COMMITMENTS AND CONTINGENCIES (Notes 12 and 14) STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 10,000,000 shares authorized, 2,645,000 shares issued, 2,046,580 and 2,329,544 shares outstanding at June 30, 2000 and 1999, respectively 26,450 26,450 Additional paid-in capital 25,945,850 25,993,872 Unearned ESOP shares (1,269,600) (1,481,200) Unearned MRP shares (220,104) (390,056) Accumulated other comprehensive loss (4,401,668) (2,620,673) Retained earnings 14,110,667 13,831,694 -------------- -------------- 34,191,595 35,360,087 -------------- -------------- Treasury stock, at cost, 598,420 and 315,456 shares June 30, 2000 and 1999 respectively (5,951,045) (3,242,527) -------------- -------------- Total stockholders' equity 28,240,550 32,117,560 -------------- -------------- TOTAL $ 291,192,175 $ 285,396,885 ============== ==============
See notes to consolidated financial statements. 19 HCB BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME YEARS ENDED JUNE 30, 2000, 1999 AND 1998
2000 1999 1998 INTEREST INCOME: Interest and fees on loans $ 10,491,741 $ 8,984,708 $ 8,766,232 Investment securities: Taxable 7,352,290 7,879,802 5,017,211 Nontaxable 1,479,536 906,755 445,122 Other 485,332 503,382 799,112 ------------ ------------- ------------- Total interest income 19,808,899 18,274,647 15,027,677 INTEREST EXPENSE: Deposits 6,507,174 6,620,808 7,272,554 Federal Home Loan Bank advances 6,579,482 5,453,795 1,644,595 Note payable 13,000 19,000 25,000 ------------ ------------- ------------- Total interest expense 13,099,656 12,093,603 8,942,149 ------------ ------------- ------------- NET INTEREST INCOME 6,709,243 6,181,044 6,085,528 PROVISION FOR LOAN LOSSES -- -- 24,000 ------------ ------------- ------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,709,243 6,181,044 6,061,528 NONINTEREST INCOME: Service charges on deposit accounts 555,292 328,958 291,684 Gain on sales of investment securities available for sale -- 261,996 22,257 Other 484,330 427,700 396,915 ------------ ------------- ------------- Net noninterest income 1,039,622 1,018,654 710,856 ------------ ------------- ------------- NONINTEREST EXPENSES: Salaries and employee benefits 3,904,807 3,574,562 3,340,936 Net occupancy expense 900,948 808,255 632,190 Federal insurance premiums 79,692 88,035 91,448 Data processing 326,528 397,585 297,077 Professional fees 1,050,873 1,080,916 497,519 Loss on impaired investment security -- 9,000 150,356 Amortization of goodwill 75,000 75,000 123,133 Other 966,262 814,362 1,275,317 ------------ ------------- ------------- Total noninterest expenses 7,304,110 6,847,715 6,407,976 ------------ ------------- ------------- INCOME BEFORE INCOME TAXES 444,755 351,983 364,408 INCOME TAX BENEFIT (341,147) (63,658) (20,705) ------------ ------------- ------------- NET INCOME $ 785,902 $ 415,641 $ 385,113 ------------ ------------- ------------- (Continued)
20 HCB BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME YEARS ENDED JUNE 30, 2000, 1999 AND 1998
2000 1999 1998 OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX Unrealized holding gain (loss) on securities arising during period $ (1,780,995) $ (2,501,663) $ 101,950 Reclassification adjustment for gains included in net income -- (172,917) (14,690) ------------ ------------- ---------- Other comprehensive income (loss) (1,780,995) (2,674,580) 87,260 ------------ ------------- ---------- COMPREHENSIVE INCOME (LOSS) $ (995,093) $ (2,258,939) $ 472,373 ============ ============= ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,988,984 2,344,083 2,462,084 ============ ============ ========== EARNINGS PER SHARE: Basic $ 0.40 $ 0.18 $ 0.16 ==== ==== ==== Diluted $ 0.40 $ 0.18 $ 0.16 ==== ==== ==== DIVIDENDS PER SHARE $ 0.24 $ 0.24 $ 0.20 ==== ==== ==== (Concluded)
See notes to consolidated financial statements. 21 HCB BANCSHARES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 2000, 1999 AND 1998
------------------------------------------------------------------------------------------------------------------------------------ ADDITIONAL ACCUMULATED ISSUED ADDITIONAL UNEARNED UNEARNED OTHER COMMON STOCK PAID-IN ESOP MRP COMPREHENSIVE RETAINED SHARES AMOUNT CAPITAL SHARES SHARES INCOME EARNINGS BALANCE, JULY 1, 1997 2,645,000 26,450 25,775,523 (1,990,320) -- (33,353) 14,152,552 Net income 385,113 Common stock committed to be released for ESOP 85,707 297,520 Liability to purchase MRP shares $(846,400) MRP shares earned 267,872 Net change in unrealized gain (loss) on securities available for sale, net of tax 87,260 Dividends paid (529,000) --------- -------- ------------ ----------- ---------- ------------ ------------- BALANCE, JUNE 30, 1998 2,645,000 26,450 25,861,230 (1,692,800) (578,528) 53,907 14,008,665 Net income 415,641 Common stock committed to be released for ESOP 8,570 211,600 MRP shares earned 124,072 188,472 Net change in unrealized gain (loss) on securities available for sale, net of tax (2,674,580) Treasury stock purchased Dividends paid (592,612) --------- -------- ------------ ----------- ---------- ------------ ------------- BALANCE, JUNE 30, 1999 2,645,000 $ 26,450 $ 25,993,872 $(1,481,200) $ (390,056) $ (2,620,673) $ 13,831,694 Net income 785,902 Common stock committed to be released for ESOP (48,022) 211,600 MRP shares earned 169,952 Net change in unrealized gain (loss) on securities available for sale, net of tax (1,780,995) Treasury stock purchased Dividends paid (506,929) --------- -------- ----------- ----------- --------- ------------ ------------- BALANCE, JUNE 30, 2000 2,645,000 $ 26,450 $25,945,850 $(1,269,600) $(220,104) $ (4,401,668) $ 14,110,667 ========= ======== =========== =========== ========= ============ ============= -------------------------------------------------------------------------------- TREASURY TREASURY TOTAL STOCK STOCK STOCKHOLDERS' SHARES AMOUNT EQUITY BALANCE, JULY 1, 1997 -- -- 37,930,852 Net income 385,113 Common stock committed to be released for ESOP 383,227 Liability to purchase MRP shares (846,400) MRP shares earned 267,872 Net change in unrealized gain (loss) on securities available for sale, net of tax 87,260 Dividends paid (529,000) ------- ----------- ------------ BALANCE, JUNE 30, 1998 -- -- 37,678,924 Net income 415,641 Common stock committed to be released for ESOP 220,170 MRP shares earned 312,544 Net change in unrealized gain (loss) on securities available for sale, net of tax (2,674,580) Treasury stock purchased 315,456 $(3,242,527) (3,242,527) Dividends paid (592,612) ------- ----------- ----------- BALANCE, JUNE 30, 1999 315,456 $(3,242,527) $32,117,560 Net income 785,902 Common stock committed to be released for ESOP 163,578 MRP shares earned 169,952 Net change in unrealized gain (loss) on securities available for sale, net of tax (1,780,995) Treasury stock purchased 282,964 (2,708,518) (2,708,518) Dividends paid (506,929) ------- ----------- ----------- BALANCE, JUNE 30, 2000 598,420 $(5,951,045) $28,240,550 ======= =========== ===========
See notes to consolidated financial statements. 22 HCB BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2000, 1999 AND 1998
2000 1999 1998 OPERATING ACTIVITIES: Net income $ 785,902 $ 415,641 $ 385,113 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation 649,779 544,142 407,850 Amortization (accretion) of: Deferred loan origination fees (116,260) (2,729) (26,757) Goodwill 75,000 75,000 123,133 Premiums and discounts on loans, net (4,619) (510) (5,454) Premiums and discounts on investment securities, net 119,181 323,110 213,806 Provision for loan loss -- -- 24,000 Deferred income taxes (477,356) (311,921) 27,027 Net gain on sale of investment securities available for sale -- (261,996) (22,257) Loss on impaired investment security -- 9,000 150,356 Loss on disposal of assets, net -- 5,464 20,395 Originations of loans held for sale (9,239,668) (14,751,445) -- Proceeds from sales of loans 10,160,826 13,140,464 4,952,961 Stock compensation expense 333,530 408,642 695,271 Change in accrued interest receivable (135,064) 121,503 (533,374) Change in accrued interest payable 102,218 171,310 233,410 Change in other assets 826,402 (321,083) 245,682 Change in other liabilities (23,113) 72,750 503,764 ------------- ------------- ------------ Net cash provided (used) by operating activities 3,056,758 (362,658) 7,394,926 INVESTING ACTIVITIES: Purchases of investment securities available for sale (3,302,892) (94,991,103) (88,941,413) Purchases of other interest bearing deposits -- -- (2,782,000) Purchases of loans (82,547) -- (8,257,199) Purchases of Federal Home Loan Bank stock (844,400) (1,930,200) (2,202,400) Proceeds from sales of investment securities - available for sale -- 48,024,577 20,794,327 Loan originations, net of repayments (21,181,354) (8,968,498) (2,667,081) Principal payments on investment securities 14,768,810 22,279,177 13,087,527 Proceeds from maturities of other interest bearing deposits 619,000 2,064,000 -- Proceeds from sale of subsidiary -- -- 3,100,000 Investment in subsidiary sold -- -- (3,100,000) Proceeds from sales of real estate 103,870 (2,288) 71,132 Proceeds from sales of premises and equipment -- 14,426 605,641 Purchases of premises and equipment (701,559) (1,462,969) (1,680,464) ------------- ------------- ------------ Net cash used by investing activities (10,621,072) (34,972,878) (71,971,930) (Continued)
23 HCB BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2000, 1999 AND 1998
2000 1999 1998 FINANCING ACTIVITIES: Net increase (decrease) in deposits $ (1,423,527) $ 4,365,268 $ 141,326 Deposits assumed by others, net -- -- (8,541,747) Advances from Federal Home Loan Bank 281,234,000 124,128,000 76,607,000 Repayment of Federal Home Loan Bank advances (270,148,390) (87,725,649) (18,485,932) Net increase (decrease) in advance payments by borrowers for taxes and insurance 11,112 (80,800) 102 Purchase of treasury stock (2,708,518) (3,242,527) -- Purchase of shares for the management retention plan -- (722,328) -- Repayment of note payable (80,000) (80,000) (80,000) Dividends paid (506,929) (592,612) (529,000) Other -- -- (44,172) Net cash provided by financing activities 6,377,748 36,057,922 49,067,577 ----------- ----------- ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,186,566) 713,816 (15,509,427) CASH AND CASH EQUIVALENTS: Beginning of year 4,536,214 3,822,398 19,331,825 ----------- ----------- ------------ End of year $ 3,349,648 $ 4,536,214 $ 3,822,398 =========== =========== ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for: Interest $ 12,997,438 $ 11,922,293 $ 8,708,739 =========== =========== ============ Income taxes $ -- $ 95,000 $ 220,000 =========== =========== ============ (Concluded)
See notes to consolidated financial statements. 24 HCB BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2000, 1999 AND 1998 -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION - HCB Bancshares, Inc. ("Bancshares") was incorporated under the laws of the state of Oklahoma for the purpose of becoming the bank holding company of Heartland Community Bank and its subsidiary (the "Bank") in connection with the Bank's conversion from a federally chartered mutual savings bank to a federally chartered stock savings bank, pursuant to its Plan of Conversion ("Conversion"). On April 30, 1997, the Bank completed the Conversion and became a wholly owned subsidiary of Bancshares. Bancshares' business is primarily that of owning the Bank and participating in the Bank's activities. The Bank provides a broad line of financial products to individuals and small to medium-sized businesses through full service banking offices located in Camden, Fordyce, Sheridan, and Monticello, Arkansas, as well as a loan production office in Bryant, Arkansas. On February 16, 2000 the bank received approval from OTS to convert its loan production office in Bryant, Arkansas to a full service branch. Construction is in progress with an expected opening date of October 30, 2000. The accompanying consolidated financial statements include the accounts of Bancshares and the Bank and are collectively referred to as the "Company". All significant intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS - For purposes of presentation in the consolidated statements of cash flows, "cash and cash equivalents" includes cash on hand and amounts due from depository institutions, which includes interest-bearing amounts available upon demand. OTHER INTEREST BEARING DEPOSITS WITH BANKS - Other interest bearing deposits with banks represents certificates of deposit in other banks held by the Company not meeting the definition of a cash equivalent. INVESTMENT SECURITIES - The Company classifies investment securities into one of two categories: held to maturity or available for sale. The Company does not engage in trading activities. Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at cost, adjusted for the amortization of premiums and the accretion of discounts. Investment securities that the Company intends to hold for indefinite periods of time are classified as available for sale and are recorded at fair value. Unrealized holding gains and losses are excluded from earnings and reported net of tax as a separate component of stockholders' equity until realized. Investment securities in the available for sale portfolio may be used as part of the Company's asset and liability management practices and may be sold in response to changes in interest rate risk, prepayment risk or other economic factors. Premiums are amortized into interest income using the interest method to the earlier of maturity or call date. Discounts are accreted into interest income using the interest method over the period to maturity. The specific identification method of accounting is used to compute gains or losses on the sales of investment securities. 25 If the fair value of an investment security declines for reasons other than temporary market conditions, the carrying value of such a security is written down to fair value by a charge to operations. LOANS RECEIVABLE - Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are stated at unpaid principal balances adjusted for any charge-offs, the allowance for loan losses, deferred loan fees or costs, and unamortized premiums or discounts. Deferred loan fees or costs and premiums and discounts on loans are amortized or accreted to income using the level-yield method over the remaining period to contractual maturity. The accrual of interest on impaired loans is generally discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due or when the loan becomes ninety days past due, whichever occurs first. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments in excess of principal due are received, until such time that in management's opinion, the borrower will be able to meet payments as they become due. ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is a valuation allowance to provide for incurred but not yet realized losses. The Bank reviews its loans for impairment on a quarterly basis. Impairment is determined by assessing the probability that the borrower will not be able to fulfill the contractual terms of the agreement. If a loan is determined to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or by use of the observable market price of the loan or fair value of collateral if the loan is collateral dependent. Throughout the year management estimates the level of probable losses to determine whether the allowance for loan losses is appropriate considering the estimated losses existing in the portfolio. Based on these estimates, an amount is charged to the provision for loan losses and credited to the allowance for loan losses in order to adjust the allowance to a level determined by management to be appropriate relative to losses. The allowance for loan losses is increased by charges to income (provisions) and decreased by charge-offs, net of recoveries. Management's periodic evaluation of the appropriateness of the allowance is based on the Company's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral and current economic conditions. Homogeneous loans are those that are considered to have common characteristics that provide for evaluation on an aggregate or pool basis. The Company considers the characteristics of (1) one-to-four family residential first mortgage loans; (2) automobile loans and; (3) consumer and home improvement loans to permit consideration of the appropriateness of the allowance for losses of each group of loans on a pool basis. The primary methodology used to determine the appropriateness of the allowance for losses includes segregating certain specific, poorly performing loans based on their performance characteristics from the pools of loans as to type and then applying a loss factor to the remaining pool balance based on several factors including classification of the loans as to grade, past loss experience, inherent risks, economic conditions in the primary market areas and other factors which usually are beyond the control of the Company. Those segregated specific loans are evaluated using the present value of future cash flows, usually determined by estimating the fair value of the loan's collateral reduced by any cost of selling and discounted at the loan's effective interest rate if the estimated time to receipt of monies is more than three months. Non-homogeneous loans are those loans that can be included in a particular loan type, such as commercial loans and multi-family and commercial first mortgage loans, but which differ in other characteristics to the extent that valuation on a pool basis is not valid. After segregating specific, poorly performing loans and applying the methodology as noted in the preceding paragraph for such specific loans, the remaining loans are evaluated based on payment experience, known difficulties in the borrowers business or geographic area, loss experience, inherent risks and other factors usually beyond the control of the Company. These loans are then graded and a factor, based on experience, is applied to estimate the probable loss. Estimates of the probability of loan losses involve an exercise of judgment. While it is possible that in the near term the Company may sustain losses which are substantial in relation to the allowance for loan losses, it is the judgment of management that the allowance for loan losses reflected in the consolidated statements of financial condition is appropriate considering the estimated probable losses in the portfolio. 26 Real Estate Held for Sale - Real estate acquired in settlement of loans is initially recorded at estimated fair value less estimated costs to sell and is subsequently carried at the lower of carrying amount or fair value less estimated disposal costs. Management periodically performs valuations, and an allowance for losses is established by a charge to operations to the extent that the carrying value of a property exceeds its estimated fair value. Costs relating to the development and improvement of the property are capitalized, whereas those relating to holding the property are expensed. Real estate acquired for sale is carried of the lower of cost or fair value less costs to sell. PREMISES AND EQUIPMENT - Office premises and equipment are stated at cost less accumulated depreciation and amortization. The Company computes depreciation of premises and equipment using the straight-line method over the estimated useful lives of the individual assets which range from 5 to 50 years for buildings and improvements and from 3 to 10 years for furniture and equipment. GOODWILL AND LONG LIVED ASSETS - Goodwill is being amortized over six years using the straight-line method. Goodwill and other long lived assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. LOAN ORIGINATION FEES - Loan origination fees and certain direct loan origination costs are deferred and the net fee or cost is recognized as an adjustment to interest income using the level-yield method over the contractual life of the loans. When a loan is fully repaid or sold, the amount of unamortized fee or cost is recorded in income. INCOME TAXES - The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The Company considers the need for a valuation allowance if, based on available evidence, deferred tax assets are not expected to be realized. INTEREST RATE RISK - The Bank's asset base is exposed to risk including the risk resulting from changes in interest rates and changes in the timing of cash flows. The Bank monitors the effect of such risks by considering the mismatch of the maturities of its assets and liabilities in the current interest rate environment and the sensitivity of assets and liabilities to changes in interest rates. The Bank's management has considered the effect of significant increases and decreases in interest rates and believes such changes, if they occurred, would be manageable and would not affect the ability of the Bank to hold its assets as planned. However, the Bank is exposed to significant market risk in the event of significant and prolonged interest rate changes. EMPLOYEE STOCK OWNERSHIP PLAN - Compensation expense for the Employee Stock Ownership Plan ("ESOP") is determined based on the average fair value of shares committed to be released during the period and is recognized as the shares are committed to be released. For the purposes of earnings per share, ESOP shares are included in weighted-average common shares outstanding as the shares are committed to be released. MANAGEMENT RECOGNITION PLAN - Compensation for Management Recognition Plan shares granted is based on the fair value of the shares at the date of grant and is recognized ratably over the vesting period. EARNINGS PER SHARE - Earnings per share ("EPS") of common stock has been computed on the basis of the weighted-average number of shares of common stock outstanding, assuming the Company was a public company since July 1, 1996. Basic and diluted earnings per share were both calculated with 1,988,984, 2,344,083, 2,462,084, and 2,434,971 weighted-average common shares outstanding for the years ended June 30, 2000, 1999, 1998, and 1997, respectively. Weighted-average common shares outstanding was the same for basic and diluted in those years. Potential dilutive common shares include the Stock Option Plan shares and the Management Recognition Plan shares, all of which were granted May 1, 1998. These potential common shares had no dilutive effect for the year ended June 30, 2000. RECLASSIFICATIONS - Certain amounts in the 1999 and 1998 consolidated financial statements have been reclassified to conform to the classifications adopted for reporting in 2000. 27 2. INVESTMENT SECURITIES Investment securities consisted of the following at June 30:
2000 ------------------------------------------------------------------ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR AVAILABLE FOR SALE COST GAINS LOSSES VALUE U.S. Government and agencies $ 6,107,679 $ 226,776 $ 5,880,903 Municipal securities 30,459,285 1,977 2,260,064 28,201,198 Equity securities 63,100 9,475 53,625 Mortgage-backed securities 90,635,969 17,825 4,051,513 86,602,281 Collateralized mortgage obligations 12,654,621 2,558 852,121 11,805,058 ---------- ------- ---------- ---------- Total $ 139,920,654 $ 22,360 $ 7,399,949 $ 132,543,065 =========== ====== ========= =========== 1999 ------------------------------------------------------------------ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR AVAILABLE FOR SALE COST GAINS LOSSES VALUE U.S. Government and agencies $ 6,481,345 $ 113,220 $ 6,368,125 Municipal securities 27,617,353 $ 7,522 920,459 26,704,416 Equity securities 63,100 2,725 60,375 Mortgage-backed securities 104,464,913 81,356 2,905,687 101,640,582 Collateralized mortgage obligations 12,879,042 4,990 537,841 12,346,191 ---------- ----- ------- ---------- Total $ 151,505,753 $ 93,868 $ 4,479,932 $ 147,119,689 =========== ====== ========= =============
There were no significant gross realized gains on sales of available for sale securities for the year ended June 30, 2000, as compared to approximately $262,000 and $22,000 gross realized gains for the year ended June 30, 1999 and 1998, respectively. At June 30, 2000, municipal securities with a carrying value of approximately $1.3 million were pledged to collateralize public deposits. At June 30, 2000 and 1999, mortgage-backed securities with a carrying value of approximately $62.3 million and $ 66.6 million, respectively, were pledged as collateral for Federal Home Loan Bank advances. The scheduled maturities of available for sale debt securities at June 30, 2000 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Fair Cost Value Due in one year or less $ -- $ -- Due from one year to five years 4,117,672 3,997,504 Due from five years to ten years 3,138,394 2,968,488 Due after ten years 29,310,898 27,116,109 ------------ ------------ 36,566,964 34,082,101 Equity securities 63,100 53,625 Mortgage-backed securities 90,635,969 86,602,281 Collateralized mortgage obligations 12,654,621 11,805,058 ------------ ------------ Total $ 139,920,654 $ 132,543,065 ============ ============
28 3. LOANS RECEIVABLE Loans receivable consisted of the following at June 30:
2000 1999 First mortgage loans: One- to four- family residences $ 53,789,291 $ 50,417,714 Multi-family and commercial 56,765,619 42,922,554 Real estate construction loans 14,264,996 14,963,457 Less undisbursed loan funds (7,386,539) (6,150,810) ------------- -------------- Total first mortgage loans 117,433,367 102,152,915 ------------- -------------- Consumer and other loans: Commercial loans 8,769,131 5,367,611 Automobile 6,460,343 4,269,898 Consumer and home improvement loans 2,430,684 2,643,180 Loans collateralized by deposits 2,320,915 2,021,141 Less undisbursed loan funds (714,443) -- ------------- -------------- Total consumer and other loans 19,266,630 14,301,830 ------------- -------------- Allowance for loan losses (1,231,709) (1,329,201) Net deferred loan costs and discounts 158,217 37,339 ------------- -------------- Loans receivable, net $ 135,626,505 $ 115,162,883 ============= =============
The Company originates and maintains loans receivable which are substantially concentrated in its lending territory (primarily Southern Arkansas) but also originates commercial real estate loans in other areas of Arkansas and in contiguous states. The Company's policy calls for collateral or other forms of repayment assurance to be received from the borrower at the time of loan origination. Such collateral or other form of repayment assurance is subject to changes in economic value due to various factors beyond the control of the Company. The Company has made loans to its directors, officers, and their related business interests. The aggregate dollar amount of loans outstanding to directors, officers and their related business interests totaled approximately $808,000 and $631,000 at June 30, 2000 and 1999, respectively. Loans identified by management as impaired at June 30, 2000 and 1999 were not significant. The Company is not committed to lend additional funds to debtors whose loans have been modified. Certain loans are originated for sale. These loans are typically held for sale only a short time, and do not represent a material amount in the aggregate prior to their sale. Normally the short time between origination and sale does not provide for significant differences between cost and market values. 4. ACCRUED INTEREST RECEIVABLE Accrued interest receivable consisted of the following at June 30:
2000 1999 Investment securities $1,109,074 $1,059,051 Loans 743,813 658,772 ---------- ---------- Total $1,852,887 $1,717,823 ========== ==========
29 5. ALLOWANCES FOR LOAN AND REAL ESTATE LOSSES A summary of the activity in the allowances for loan and real estate losses is as follows for the years ended June 30:
2000 1999 1998 REAL REAL REAL LOANS ESTATE LOANS ESTATE LOANS ESTATE ----------------- ------------------ ----------------- Balance, beginning of year $ 1,329,201 $ -- $ 1,468,546 $ -- $ 1,492,473 $ 28,825 Provision -- -- -- -- 24,000 Charge-offs, net of recoveries (97,492) -- (139,345) -- (47,927) (28,825) ----------- ----- ----------- ----- ----------- -------- Balance, end of year $ 1,231,709 $ -- $ 1,329,201 $ -- $ 1,468,546 $ -- =========== ===== =========== ===== =========== ========
6. FEDERAL HOME LOAN BANK STOCK The Bank is a member of the Federal Home Loan Bank System. As a member of this system, it is required to maintain an investment in capital stock of the Federal Home Loan Bank ("FHLB") in an amount equal to the greater of 1% of its outstanding home loans or .3% of its total assets. No ready market exists for such stock and it has no quoted market value but may be redeemed at par. The carrying value of the stock is its cost. 7. PREMISES AND EQUIPMENT Premises and equipment consisted of the following at June 30:
2000 1999 Land and buildings $ 5,920,828 $ 5,433,038 Furniture and equipment 2,896,453 2,682,725 ----------- ----------- Total 8,817,281 8,115,763 Accumulated depreciation (2,264,797) (1,615,059) ----------- ----------- Premises and equipment, net $ 6,552,484 $ 6,500,704 =========== ===========
At June 30, 2000, the Bank had one full-service branch office under construction located in Bryant, Arkansas. This office will replace the loan production office currently being leased Bryant. The total cost is currently estimated to be $1,676,000 of which $538,687 had been disbursed as of June 30, 2000. The balance of the cost will be disbursed as work is completed. The new office is expected to be open on October 30, 2000. 8. DEPOSITS Deposits are summarized as follows at June 30:
2000 1999 Demand and NOW accounts, including noninterest-bearing deposits of $5,650,755 and $5,348,227 in 2000 and 1999, respectively $ 23,553,466 $ 12,411,932 Money market 9,360,191 17,619,341 Statement savings 7,530,432 7,971,447 Certificates of deposit 104,428,982 108,293,878 ----------- ----------- Total $ 144,873,071 $ 146,296,598 =========== ============
The aggregate amount of short-term jumbo certificates of deposit with a minimum denomination of $100,000 was approximately $11.6 million and $11.4 million at June 30, 2000 and 1999, respectively. 30 At June 30, 2000, scheduled maturities of certificates of deposit are as follows: Years ending June 30: 2001 $ 77,926,311 2002 23,743,127 2003 2,750,539 2004 9,005 ----------- Total $ 104,428,982 =========== Eligible deposits of the Bank are insured up to $100,000 by the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC"). 9. FEDERAL HOME LOAN BANK ADVANCES AND NOTE PAYABLE The Bank pledges as collateral for FHLB advances its FHLB stock and has entered into blanket collateral agreements with the FHLB whereby the Bank agrees to maintain, free of other encumbrances, qualifying single family first mortgage loans with unpaid principal balances, when discounted to 75% of such balances, of at least 100% of total outstanding advances. Additionally the Bank has pledged mortgage-backed securities with a carrying value of approximately $62.3 million at June 30, 2000, as additional collateral. Advances at June 30, 2000 and 1999, have maturity dates as follows:
2000 1999 WEIGHTED WEIGHTED AVERAGE AVERAGE RATE AMOUNT RATE AMOUNT Years ending June 30: 2000 -- -- 5.09 % $ 24,425,000 2001 6.46 % $ 35,045,000 6.00 7,625,000 2002 5.50 7,550,000 5.50 7,550,000 2003 5.70 12,047,991 5.66 11,555,000 2004 5.66 4,875,000 5.66 4,875,000 2005 5.73 7,000,000 5.73 7,000,000 Thereafter 6.06 49,091,038 5.87 41,493,419 ---- ---------- ---- ---------- Total 6.07 % $ 115,609,029 5.63 % $ 104,523,419 ==== =========== ==== ===========
The note payable of $160,000 at June 30, 2000, is due in annual installments of $80,000 plus interest through September 2001. The note bears interest at 7.50% and is collateralized by real estate held for sale and office premises with a combined carrying value at June 30, 2000, of approximately $1.6 million. 10. INCOME TAXES Income tax provisions (benefits) are summarized as follows:
Years Ended June 30, ------------------------------------------- 2000 1999 1998 Income tax provision (benefit): Current $ 136,209 $ 248,263 $ (47,732) Deferred (477,356) (311,921) 27,027 --------- --------- ------ Total $ (341,147) $ (63,658) $ (20,705) ======== ======== ========
31 The reasons for the differences between the statutory federal income tax rates and the effective tax rates are summarized as follows:
YEARS ENDED JUNE 30, ----------------------------------------------------------------------------------- 2000 1999 1998 Taxes at statutory rate $ 151,217 34.0 % $ 119,674 34.0 % $ 123,899 34.0 % Increase (decrease) resulting from: Tax exempt income (503,043) (113.11) (304,193) (86.42) (135,853) (37.30) Disallowed interest expense 67,735 15.23 44,561 12.66 Change in estimate 0 0.00 64,915 18.44 Goodwill 0 0.00 0 0.00 41,865 11.50 Compensation (77,301) (17.38) (14,389) (4.09) (68,347) (18.80) Other, net 20,245 4.56 25,774 7.32 17,731 4.90 -------- ------ -------- ------- -------- ------ Total $ (341,147) (76.70) % $ (63,658) (18.09) % $ (20,705) (5.70) % ========= ======= ======== ======= ======== ======
During the year ended December 31, 1996, new legislation was enacted which provides for the recapture into taxable income of certain amounts previously deducted as additions to the bad debt reserves for income tax purposes. The Bank changed its method of determining bad debt reserves for tax purposes following the year ended June 30, 1997. The amounts to be recaptured for income tax reporting purposes are considered by the Bank in the determination of the net deferred tax liability. The Company's deferred tax asset account was comprised of the following at June 30:
2000 1999 Deferred tax assets: Allowance for loan losses $ 275,866 $ 225,376 Unrealized loss on investments 2,975,921 1,764,294 Deferred compensation 306,236 269,052 Net operating losses 661,092 231,320 AMT credit carryover 278,496 142,658 Investment premiums and discount 18,360 -- Other 46,048 28,213 ----------- ----------- Total deferred tax assets 4,562,019 2,660,913 Deferred tax liabilities: Premises and equipment 222,683 120,617 Investment premiums and discount -- 8,162 Loan fees -- 23,111 FHLB dividends 290,462 140,522 Discount on loans purchased -- 8,610 ---------- ----------- Total deferred tax liabilities 513,145 301,022 ---------- ----------- Net deferred tax asset $ 4,048,874 $ 2,359,891 ========= =========
A deferred tax liability has not been recognized for the bad debt reserves of the Bank created in the tax years which began prior to December 31, 1987 (the base year). At June 30, 2000, the amount of these reserves totaled approximately $3,459,119 with an unrecognized deferred tax liability of $1,177,372. Such unrecognized deferred tax liability could be recognized in the future, in whole or in part, if (i) there is a change in federal tax law, (ii) the Bank fails to meet certain definitional tests and other conditions in the federal tax law, (iii) certain distributions are made with respect to the stock of the Bank, or (iv) the bad debt reserves are used for any purpose other than absorbing bad debt losses. The Company has a net operating loss carryforward of $1,944,389, which will begin expiring in 2019. The Company's AMT credit carryforward of $278,496 does not have an expiration date. 32 11. BENEFIT PLANS Employee Stock Ownership Plan - The Company has established an employee stock ownership plan ("ESOP") to benefit substantially all employees. The ESOP originally purchased 211,600 shares of common stock in the Conversion with proceeds received from a loan from Bancshares. Bancshares' note receivable, presented in the statements of stockholders' equity as unearned ESOP shares, is to be repaid in installments of $211,600 on June 30th each year through 2006. Interest is based upon the prime rate, which is to be adjusted and paid annually. The note may be prepaid without penalty. The ESOP is funded by contributions made by the Bank in amounts sufficient to retire the debt. Compensation expense of $163,578, $220,171, and $427,399 was recognized during the years ended June 30, 2000, 1999, and 1998, respectively. Shares no longer required to be held to collateralize the debt and earnings from the common stock held by the ESOP are allocated among participants on the basis of compensation in the year of allocation. Benefits become 100% vested after three years of credited service. Forfeitures of nonvested benefits will be reallocated among remaining participating employees in the same proportion as contributions. At June 30, 2000 and 1999, 21,160 and 21,160 shares, respectively, were committed to be released by the ESOP to participant accounts. At June 30, 2000, there were 84,640 shares allocated to participant accounts and 126,960 unallocated shares. The fair value of the unallocated shares amounted to approximately $777,630 at June 30, 2000. Participants with vested account balances leaving employment, generally, may elect to have their allocated shares distributed. In the case of a distribution of shares, which at the time of distribution are not readily tradable on an established securities market, the Company is required to issue a put option to the participant. Any excess of the total purchase price at which the participant may put the shares to the Company over the fair value of the shares at the date of the issuance of the option is recognized as expense to the Company with the fair value of the shares recorded as treasury stock. During the year ended June 30, 2000, put options were issued to two employees but without any material expense to the Company. During the year ended June 30, 1999, put options were issued to two employees resulting in an expense to the Company totaling approximately $20,000. STOCK OPTION PLAN - The Stock Option Plan ("SOP"), approved by the Company's stockholders during the year ended June 30, 1998, provides for a committee of the Company's Board of Directors to award incentive or non-incentive stock options, representing up to 317,400 shares of Company stock. Options granted to executive officers and directors vest 25% immediately and 25% on each of the three subsequent anniversary dates on the grant. Options granted to employees vest 20% immediately upon grant, with the balance vesting in equal amounts on the four subsequent anniversary dates of the grant. Options granted vest immediately in the event of retirement, disability, or death. Outstanding stock options can be exercised over a ten-year period from the date of grant. Under the SOP, options have been granted to directors and key employees to purchase common stock of the Company. The exercise price in each case equals the fair market value of the Company's stock at the date of grant. On October 29, 1998, the options committee of the Board of Directors lowered the option grant price on the existing 304,140 options granted to current employees and directors at that date to $9.125 per share, which was market value on that day. No new options were granted in the current year. 33 A summary of the status of the Company's stock option plan as of June 30, 2000, and changes during the years ending June 30, 2000 and 1999, is presented below:
WEIGHTED AVERAGE EXERCISE OPTIONS SHARES PRICE Outstanding at July 1, 1998 304,300 $ 16.00 Granted 20,100 9.35 Exercised -- -- Forfeited 9,104 9.22 ------- ---- Outstanding at June 30, 1999 315,296 9.14 Granted -- -- Exercised -- -- Forfeited 2,316 9.22 ------- ---- Outstanding at June 30, 2000 312,980 9.14 ------- ---- Options exercisable at June 30, 2000 (vested) 217,495 $ 9.13 ======= ====
Exercise prices for options outstanding at June 30, 2000, range from $9.125 to $9.375 per share. The weighted average remaining contractual life of such shares was 7.9 years at June 30, 2000. The Company applies the provisions of Accounting Principles Board Opinion No. 25 in accounting for its stock option plan, as allowed under SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation cost has been recognized for options granted to employees. Had compensation cost for these plans been determined based on the fair value at the grant dates or repricing date for awards under those plans consistent with the methods of SFAS No. 123, the Company's pro forma net income and pro forma earnings per share would have been as follows:
2000 AS REPORTED PRO FORMA Net income (in thousands) $ 786 $ 676 Earnings per share: Basic $ 0.40 $ 0.34 Diluted $ 0.40 $ 0.34 1999 AS REPORTED PRO FORMA Net income (in thousands) $ 416 $ 311 Earnings per share: Basic $ 0.18 $ 0.13 Diluted $ 0.18 $ 0.13
34 In determining the above pro forma disclosure, the fair value of options granted was estimated on the date of grant using the binomial option-pricing model with the following weighted average assumptions:
1999 1998 GRANTS GRANTS Volatility 54% 15% Life of options 7.5 years 7.5 years Risk-free interest rate 5.3% 5.7% Dividend rate 2.56% 2.63%
The weighted average fair value of options granted during the fiscal year ended June 30, 1999, was $2.25 per share. MANAGEMENT RECOGNITION PLAN - The Management Recognition Plan ("MRP"), approved by the Company's stockholders during the year ended June 30, 1998, provides for a committee of the Company's Board of Directors to award restricted stock to key officers as well as non-employee directors. The MRP authorizes the Company to grant up to 52,900 shares of Company stock, all of which were granted during 1998. Compensation expense is recognized based on the fair market value of the shares on the grant date of $16.00 over the vesting period. Under the original plan, shares granted to directors (37,024) vest 25% at the grant date and 25% each May 1 afterward. Shares granted to non-directors (15,876, of which 1,271 were forfeited as of June 30, 2000) vest 20% at the grant date and 20% each May 1 afterward. Shares granted will be deemed vested in the event of retirement, disability, or death. At June 30, 2000, all shares have been acquired that are necessary to meet the Plan's award requirements. The difference between the price at the date of grant and the actual purchase price was recorded as an adjustment to stockholders' equity. Approximately $170,000, $188,000 and $268,000 in compensation expense was recognized during the years ended June 30, 2000, 1999, and 1998, respectively. On May 17, 2000, all directors voluntarily elected to extend their vesting period three additional years to May 1, 2004. In addition, certain officers also voluntarily elected to adopt the three-year extension of their vesting period. DEFINED BENEFIT PLAN - The Bank had a qualified, noncontributory defined benefit retirement plan (the "Plan") covering all of its eligible employees. Employees were eligible when they had attained at least twenty-one years of age and six months of service with the Bank. The Board of Directors initially adopted a resolution on July 1, 1996, to terminate the Plan as of September 16, 1996, and to freeze benefit accruals as of July 31, 1996. The Company experienced delays in terminating the Plan and on June 18, 1998, a resolution was adopted to terminate the Plan as of September 1, 1998, with benefit accruals remaining frozen as of July 31, 1996. Settlement of the related pension obligation occurred on August 30, 1999. 35 All active participants became fully vested for their accrued benefits. The Plan provides that any excess assets will be allocated to participants. As such, based on the funded status of the Plan, no gain or loss occurred upon settlement. 1999 RECONCILIATION OF FUNDED STATUS: Actuarial present value of accumulated benefit obligations: Vested portion $ 450,170 Vested part of excess assets 98,310 Non-vested portion -- --------- Accumulated benefit obligation 548,480 Effect of estimated future pay growth -- --------- Projected benefit obligation 548,480 Plan assets at fair value 548,480 --------- FUNDED STATUS: Unrecognized net (gain) or loss -- Unrecognized prior service cost -- Unrecognized net transition obligation -- --------- (Accrued) prepaid pension cost -- ========= Determination of pension cost: Service cost -- Interest cost $ 33,564 Actual return on assets 10,923 Net amortization and deferral (44,487) --------- Net periodic pension cost -- ========= The weighted average interest rate used in determining the projected benefit obligation was 6.0% in 1999. The expected long-term rate of return on assets was 6.0% for 1999. OFFICERS' AND DIRECTORS RETIREMENT PLAN - During the year ended June 30, 1996, the Bank adopted a "non-qualified" retirement plan for its officers and directors in recognition of their years of service to the Bank. The plan is an annuity contract plan whereby funds are to be set aside annually in a grantor trust, with the Bank acting as trustee of the Trust. Distributions are scheduled to be paid upon completion of six to ten years of service to the Bank. No tax deduction for the Plan is claimed until funds are paid to the beneficiaries. Future funding is dependent on continued service to the Bank and therefore is expensed as the plan is funded each year. For the years ended June 30, 2000, 1999 and 1998, contributions to the plan totaled approximately $184,000, $162,000, and $154,000, respectively. 401(K) PLAN - Effective July 1, 1993, employees of the Bank may participate in a 401(k) savings plan, whereby the employees may elect to make contributions pursuant to a salary reduction agreement upon reaching age 21 and completing one year of service. At its discretion, the Bank may make matching contributions to the plan. Employer contributions vest 20% each year beginning in the third year of service and become 100% vested in seven years. The Bank made no matching contribution during the years ended June 30, 2000, 1999 or 1998. EMPLOYMENT AGREEMENTS - Certain executive officers of the Bank and the Company have employment agreements with three-year renewable terms. Such agreements provide for termination pay and other benefits under certain circumstances. Aggregate termination pay is approximately $1.1 million. 36 12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated statements of financial condition. The Company does not use financial instruments with off-balance sheet risk as part of its asset/liability management program or for trading purposes. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the credit applicant. Such collateral consists primarily of residential properties. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company had the following outstanding commitments at June 30, 2000: Undisbursed construction loans $4,778,701 Commitments to originate commercial/consumer loans 150,000 Commitments to originate mortgage loans 2,607,838 Unused lines of credit 564,443 ---------- Total $8,100,982 ========== The funding period for construction loans is generally less than nine months and commitments to originate mortgage loans are generally outstanding for 60 days or less. At June 30, 2000, interest rates on commitments are believed by management to approximate market rates. 13. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The estimated fair values of financial instruments are as follows: 37
JUNE 30, 2000 JUNE 30, 1999 ESTIMATED ESTIMATED CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE ASSETS: Cash and due from banks $ 3,211,802 $ 3,211,802 $ 3,560,884 $ 3,560,884 Interest bearing deposits with banks 137,846 137,846 975,330 975,330 Other interest bearing deposits with banks 99,000 99,000 718,000 718,000 Investment securities: Available for sale 132,543,065 132,543,065 147,119,689 147,119,689 Loans receivable, net 135,626,505 132,485,000 115,162,883 115,598,738 Accrued interest receivable 1,852,887 1,852,887 1,717,823 1,717,823 Federal Home Loan Bank stock 6,223,500 6,223,500 5,379,100 5,379,100 LIABILITIES Deposits: Demand, NOW, money market and regular savings 40,444,089 40,444,089 38,002,720 38,002,720 Certificates of deposit 104,428,982 104,225,000 108,293,878 107,991,000 Federal Home Loan Bank advances 115,609,029 111,141,000 104,523,419 101,550,000 Advance payments by borrowers for taxes and insurance 139,554 139,554 128,442 128,442 Accrued interest payable 917,415 917,415 815,197 815,197 Note payable 160,000 161,000 240,000 245,000
For cash and due from banks, interest bearing deposits with banks, other interest bearing deposits with banks, Federal Home Loan Bank stock and accrued interest receivable, the carrying value is a reasonable estimate of fair value primarily because of the short-term nature of instruments or, as to Federal Home Loan Bank stock, the ability to sell the stock back to the Federal Home Loan Bank at cost. The fair value of investment securities is based on quoted market prices, dealer quotes and prices obtained from independent pricing services. The fair value of loans receivable is estimated based on present values using risk-adjusted spreads to appropriate indexes to approximate current entry-value interest rates considering anticipated prepayment speeds, maturity and credit risks. The fair value of demand deposit accounts, NOW accounts, savings accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit, Federal Home Loan Bank advances, and note payable is estimated using the rates currently offered for deposits and borrowings of similar remaining maturities at the reporting date. For advance payments by borrowers for taxes and insurance and accrued interest payable the carrying value is a reasonable estimate of fair value, primarily because of the short-term nature of instruments. Commitments are generally made at prevailing interest rates at the time of funding and, therefore, there is no difference between the contract amount and fair value. The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2000 and 1999. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since the reporting date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein. 38 14. COMMITMENTS AND CONTINGENCIES In the ordinary course of business, the Company has various outstanding commitments and contingent liabilities that are not reflected in the accompanying consolidated financial statements. In addition, the Company is a defendant in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial statements of the Company. During the year ended June 30, 1998, a circuit court entered a judgment against the Bank in the amount of $78,000 for breach of contract regarding its alleged failure to provide a party the right to purchase real estate formerly used as a branch location. The Company appealed the judgment to the court of appeals and on November 4, 1999, the Company was informed that the appeal was successful and the lower court's decision was reversed. No accrual of this possible loss was made in the consolidated financial statements. In May, 1999, a shareholder filed a class action complaint against the Company and several current and former officers alleging that the defendants defrauded the plaintiff and other shareholder class members through various public statements and reports thereby artificially inflating the price of the Company's common stock and causing the plaintiff and other shareholder class members to purchase the Company's common stock at inflated prices. The Company and its counsel have reviewed the complaint and are contesting the allegations vigorously. Management is unable to determine the likelihood of an unfavorable outcome of the suit or the amount of any damages that the Company may have to pay, if any. The Company will incur costs through the payment of legal fees and the related costs of litigation. The extent of these costs is not determinable at this time. 15. RETAINED EARNINGS Upon the Conversion, the Company established a special liquidation account for the benefit of eligible account holders and the supplemental eligible account holders in an amount equal to the net worth of the Bank as of the date of its latest statement of financial condition contained in the final offering circular used in connection with the Conversion. The liquidation account will be maintained for the benefit of eligible account holders and supplemental eligible account holders who continue to maintain their accounts in the Bank after Conversion. In the event of a complete liquidation (and only in such event), each eligible and supplemental eligible account holder will be entitled to receive a liquidation distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held. The Bank may not declare or pay cash dividends on its shares of common stock if the effect thereof would cause the Bank's stockholders' equity to be reduced below applicable regulatory capital maintenance requirements for insured institutions or below the special liquidation account referred to above. This requirement effectively limits the dividend paying ability of the Company in that the Company must maintain an investment in equity of the Bank sufficient to enable the Bank to meet its requirements as noted above. Required capital amounts are shown in Note 16 to the consolidated financial statements. Liquidation account balances are not maintained because of the cost of maintenance and the remote likelihood of complete liquidation. Additionally, the Bank is limited to distributions it may make to Bancshares without OTS approval if the distribution would cause the total distributions to exceed the Bank's net income for the year to date plus the Bank's net income (less distributions) for the preceding two years. Bancshares may use assets other than its investment in the Bank as a source of dividends. 39 16. REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possible additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of tangible capital (as defined in the regulations) to tangible assets (as defined) and core capital (as defined) to adjusted total assets (as defined), and of total risk-based capital (as defined) to risk-weighted assets (as defined). As of June 30, 2000 and 1999, the most recent notification from the Office of Thrift Supervision categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum core (Tier I core), Tier I risk-based, and total risk-based ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category. The Bank's actual capital amounts (in thousands) and ratios are also presented in the tables:
TO BE CATEGORIZED AS WELL CAPITALIZED UNDER PROMPT FOR CAPITAL CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ----------------- ---------------- ------------------- AS OF JUNE 30, 2000: Tier I (Core) Capital to Adjusted Total Assets $ 29,437 10.02 % $ 11,756 4.00 % $ 14,695 5.00 % Total Risk-Based Capital to Risk-weighted Assets 30,669 21.79 % 11,262 8.00 % 14,077 10.00 % Tier I (Core) Capital to Risk-weighted Assets 29,437 20.91 % N/A N/A 8,446 6.00 % Tangible Capital to Tangible Assets 29,437 10.02 % 4,408 1.50 % N/A N/A AS OF JUNE 30, 1999: Tier I (Core) Capital to Adjusted Total Assets $ 30,063 10.50 % $ 11,448 4.00 % $ 14,310 5.00 % Total Risk-Based Capital to Risk-weighted Assets 31,285 25.44 % 9,840 8.00 % 12,300 10.00 % Tier I (Core) Capital to Risk-weighted Assets 30,063 24.44 % N/A N/A 7,380 6.00 % Tangible Capital to Tangible Assets 30,063 10.50 % 4,293 1.50 % N/A N/A
Regulations require the Bank to maintain an amount equal to 4% of deposits (net of loans collateralized by deposits) plus short-term borrowings in cash and U.S. Government and other approved securities. 40 17. PARENT COMPANY ONLY FINANCIAL INFORMATION The following condensed statements of financial condition as of June 30, 2000 and 1999, and condensed statements of income and cash flows for the years ended June 30, 2000 and 1999, for HCB Bancshares, Inc. should be read in conjunction with the consolidated financial statements and the notes herein. HCB BANCSHARES, INC. (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF FINANCIAL CONDITION JUNE 30, 2000 AND 1999
ASSETS 2000 1999 Deposit in Bank $ 1,168,897 $ 2,866,424 Investment in Bank 25,898,664 27,800,471 Loans receivable 700,000 2,413,019 Investment securities 53,625 60,375 Other assets 419,364 156,461 ------------ ------------- TOTAL ASSETS $ 28,240,550 $ 33,296,750 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Accrued expenses and other liabilities $ -- $ 1,179,190 Stockholders' equity 28,240,550 32,117,560 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 28,240,550 $ 33,296,750 ============ ============ CONDENSED STATEMENTS OF INCOME YEARS ENDED JUNE 30, 2000 AND 1999 41 HCB BANCSHARES, INC. (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2000 AND 1999
OPERATING ACTIVITIES: 2000 1999 Net income $ 785,902 $ 415,641 Adjustments to reconcile net income to net cash provided (used) by operating activities: Equity in undistributed earnings of Bank subsidiary (756,318) (231,228) Changes in operating assets and liabilities: Other assets 954,507 (143,649) Accrued expenses and other liabilities (1,179,190) 1,106,643 ------------- ------------- Net cash provided (used) by operating activities (195,099) 1,147,407 ------------- ------------- INVESTING ACTIVITIES: Purchase of investments (63,100) -- Purchase loan, net of repayments 1,713,019 (2,413,019) ------------- ------------- Net cash provided (used) by investing activities 1,713,019 (2,476,119) ------------- ------------- FINANCING ACTIVITIES: Dividends paid (506,929) (592,612) Purchase of treasury stock (2,708,518) (3,242,527) ------------- ------------- Net cash used by financing activities (3,215,447) (3,835,139) ------------- ------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (1,697,527) (5,163,851) CASH AND CASH EQUIVALENTS: Beginning of period 2,866,424 8,030,275 ------------- ------------- End of period $ 1,168,897 $ 2,866,424 ============= =============
42 18. OTHER COMPREHENSIVE INCOME The amount of income tax expense or benefit allocated to each component of comprehensive income, including reclassification adjustments, are shown below:
YEAR ENDED JUNE 30, 2000 ----------------------------------------------------- BEFORE TAX TAX BENEFIT NET-OF-TAX AMOUNT AMOUNT AMOUNT UNREALIZED LOSSES ON SECURITIES: Unrealized holding loss on securities arising during period $ (2,991,525) $ (1,210,530) $ (1,780,995) Less reclassification adjustment for (gains) losses included in net income -- -- -- Other comprehensive loss $ (2,991,525) $ (1,210,530) $ (1,780,995) ============ ============ ============ YEAR ENDED JUNE 30, 1999 ----------------------------------------------------- BEFORE TAX TAX BENEFIT NET-OF-TAX AMOUNT AMOUNT AMOUNT UNREALIZED LOSSES ON SECURITIES: Unrealized holding loss on securities arising during period $ (3,790,398) $ (1,288,735) $ (2,501,663) Less reclassification adjustment for gains included in net income (261,996) -- (172,917) ----------- ----------- ----------- Other comprehensive loss $ (4,052,394) $ (1,377,814) $ (2,674,580) =========== ============ =========== YEAR ENDED JUNE 30, 1998 ----------------------------------------------------- BEFORE TAX TAX EXPENSE NET-OF-TAX AMOUNT (BENEFIT) AMOUNT UNREALIZED GAINS (LOSSES) ON SECURITIES: Unrealized holding gain on securities arising during period $ 154,470 $ 52,520 $ 101,950 Less reclassification adjustment for gains included in net income (22,257) (7,567) (14,690) --------- --------- ---------- Other comprehensive income $ 132,213 $ 44,953 $ 87,260 ========= ========= ==========
43 19. QUARTERLY FINANCIAL DATA (UNAUDITED) The following tables represent summarized data for each of the four quarters in the years ended June 30, 2000 and June 30, 1999.
2000 (in thousands, except share data) ----------------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter Interest income $ 5,046 $ 4,953 $ 4,912 $ 4,898 Interest expense 3,419 3,325 3,228 3,128 ----- ----- ----- ----- Net interest income 1,627 1,628 1,684 1,770 Provision for loan losses -- -- -- -- Net interest income after provision for loan losses 1,627 1,628 1,684 1,770 Noninterest income 316 240 257 227 Noninterest expenses 1,716 1,784 1,850 1,954 ----- ----- ----- ----- Income (loss) before income taxes 227 84 91 43 Income tax provision (benefit) (205) (152) 15 1 ----- ----- ----- ----- Net income 432 236 76 42 Basic earnings per common share 0.22 0.12 0.04 0.02 Diluted earnings per common share 0.22 0.12 0.04 0.02 Cash dividends declared per common share 0.06 0.06 0.06 0.06 Average common shares and common stock equivalents outstanding 1,922,356 1,918,618 1,953,898 2,161,695 1999 (in thousands, except share data) ------------------------------------------------------------ Fourth Third Second First Quarter Quarter Quarter Quarter Interest income $ 4,474 $ 4,621 $ 4,655 $ 4,525 Interest expense 3,015 3,000 3,120 2,959 ----- ----- ----- ----- Net interest income 1,459 1,621 1,535 1,566 Provision for loan losses -- -- -- -- Net interest income after provision for loan losses 1,459 1,621 1,535 1,566 Noninterest income 196 214 308 301 Noninterest expenses 1,673 1,880 1,888 1,407 ----- ----- ----- ----- Income (loss) before income taxes (18) (45) (45) 460 Income tax provision (benefit) (93) (63) (58) 150 ----- ----- ----- ----- Net income 75 18 13 310 Basic earnings per common share 0.03 0.01 0.01 0.13 Diluted earnings per common share 0.03 0.01 0.01 0.13 Cash dividends declared per common share 0.06 0.06 0.06 0.06 Average common shares and common stock equivalents outstanding 2,220,650 2,326,208 2,388,538 2,459,585
44 CORPORATE INFORMATION DIRECTORS Vida H. Lampkin Chairman of the Board Cameron D. McKeel President and Chief Executive Officer Roy Wayne Moseley Self-employed Fordyce, Arkansas Bruce D. Murry Self-employed Camden, Arkansas Carl E. Parker, Jr. General Manager, Camden Monument Co. Camden, Arkansas Lula Sue Silliman Retired Camden, Arkansas Clifford Steelman Senior Human Resource Administrator, Atlantic Research Corporation Camden, Arkansas EXECUTIVE OFFICERS William C. Lyon Senior Vice President and Chief Lending Officer ANNUAL STOCKHOLDERS MEETING: November 16, 2000 - 10:00 a.m. Camden Country Club 1915 Washington Street SW Camden, Arkansas Record Date - October 5, 2000 MAIN OFFICE: 237 Jackson Street, S.W. Camden, Arkansas 45 BRANCH OFFICES: 22461 Interstate 30, Suite 1100A Bryant, Arkansas 1125 Fairview Road SW Camden, Arkansas 610 West 4th Street Fordyce, Arkansas 473 Highway 425 North Monticello, Arkansas 108 South Main Street Sheridan, Arkansas INDEPENDENT AUDITOR: Deloitte & Touche, LLP 111 Center Street, Suite 1800 Little Rock, Arkansas 72201 GENERAL COUNSEL: Robert S. Laney, Esquire P.O. Box 777 Camden, Arkansas 71711-0777 SECURITIES AND REGULATORY COUNSEL: Stradley Ronon Housley Kantarian & Bronstein, LLP. 1220 19th Street, N.W., Suite 700 Washington, D.C. 20036 STOCK REGISTRAR & TRANSFER AGENT Registrar and Transfer Company Cranford, New Jersey 07016-3572 46