10-Q 1 fm10q93001-1843.txt FORM 10-Q 9-30-01 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Mark One [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-22423 HCB BANCSHARES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) OKLAHOMA 62-1670792 -------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 237 Jackson Street, Camden, Arkansas 71701 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (870) 836-6841 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days: Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: 1,901,929 shares of common stock outstanding as of October 31, 2001. Page 1 CONTENTS PART I. FINANCIAL INFORMATION --------------------- Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Statements of Financial Condition at September 30, 2001 (unaudited) and June 30, 2001 Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months Ended September 30, 2001 and 2000 (unaudited) Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2001 and 2000 (unaudited) Notes to Condensed Consolidated Financial Statements (unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk PART II. OTHER INFORMATION ----------------- Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES Page 2 HCB BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION SEPTEMBER 30, 2001 (UNAUDITED) and JUNE 30, 2001 --------------------------------------------------------------------------------
SEPTEMBER 30, 2001 JUNE 30, ASSETS (UNAUDITED) 2001 --------------- -------- Cash and due from banks $ 3,476,243 $ 3,302,540 Interest-bearing deposits with banks 5,757,176 15,107,481 ------------ ------------ Cash and cash equivalents 9,233,419 18,410,021 Investment securities available for sale, at fair value 121,727,667 120,082,177 Loans receivable, net of allowance 135,556,190 131,651,421 Accrued interest receivable 1,899,098 2,017,188 Federal Home Loan Bank stock 4,718,100 4,735,800 Premises and equipment, net 7,459,262 7,564,681 Goodwill, net 187,500 206,250 Real estate held for sale 462,963 398,132 Other assets 1,597,509 2,532,980 ------------ ------------ TOTAL $ 282,841,708 $ 287,598,650 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposits $ 160,571,776 $ 161,285,179 Federal Home Loan Bank advances 88,169,780 91,915,694 Advance payments by borrowers for taxes and insurance 241,398 199,470 Accrued interest payable 902,310 972,900 Note payable -- 80,000 Other liabilities 1,136,793 1,211,073 ------------ ------------ Total liabilities 251,022,057 255,664,316 ------------ ------------ STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 10,000,000 shares authorized, 2,645,000 shares issued, 1,805,629 and 1,935,445 shares outstanding at September 30, 2001 and June 30, 2001, respectively 26,450 26,450 Additional paid-in capital 25,880,618 25,914,132 Unearned ESOP shares (1,005,100) (1,058,000) Unearned MRP shares (145,530) (155,601) Accumulated other comprehensive income (loss) 1,276,177 (59,600) Retained earnings 14,433,580 14,256,684 ------------ ------------ 40,466,195 38,924,065 Treasury stock, at cost, 839,371 and 709,555 shares at September 30, 2001, and June 30, 2001, respectively (8,646,544) (6,989,731) ------------- ------------- Total stockholders' equity 31,819,651 31,934,334 ------------ ------------ TOTAL $ 282,841,708 $ 287,598,650 ============ ============
See accompanying notes to condensed consolidated financial statements. Page 3 HCB BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (UNAUDITED) --------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED) 2000 ---- ---- INTEREST INCOME: Interest and fees on loans $ 2,803,304 $ 2,919,182 Investment securities: Taxable 1,373,940 1,677,174 Nontaxable 382,707 382,480 Other 140,790 113,822 ---------- ---------- Total interest income 4,700,741 5,092,658 ---------- ---------- INTEREST EXPENSE: Deposits 1,711,601 1,879,637 Federal Home Loan Bank advances 1,326,236 1,743,645 Note payable 1,000 2,500 ---------- ---------- Total interest expense 3,038,837 3,625,782 ---------- --------- NET INTEREST INCOME 1,661,904 1,466,876 PROVISION FOR LOAN LOSSES 60,000 116,000 ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,601,904 1,350,876 ---------- ---------- NONINTEREST INCOME: Service charges on deposit accounts 247,529 163,224 Other 127,197 160,285 ---------- ---------- Net noninterest income 374,726 323,509 ---------- ---------- NONINTEREST EXPENSE: Salaries and employee benefits 952,528 980,778 Net occupancy expense 276,859 232,020 Communication, postage, printing and office supplies 107,041 86,445 Advertising 56,142 56,850 Data processing 81,089 79,683 Professional fees 121,930 158,676 Amortization of goodwill 18,750 18,750 Other 101,008 92,087 ---------- ---------- Total noninterest expense 1,715,347 1,705,289 ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES 261,283 (30,904) INCOME TAX PROVISION (BENEFIT) (24,000) (107,000) ----------- ----------- NET INCOME $ 285,283 $ 76,096 ---------- ---------- (Continued)
Page 4 HCB BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (UNAUDITED) --------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED) 2000 ---- ---- OTHER COMPREHENSIVE INCOME, NET OF TAX: Unrealized holding gain on securities arising during period $ 1,335,777 $ 924,052 Reclassification adjustment for gains included in net income -- -- ----------- ----------- Other comprehensive income 1,335,777 924,052 ----------- ----------- COMPREHENSIVE INCOME $ 1,621,060 $ 1,000,148 =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,768,494 1,918,473 =========== =========== EARNINGS PER SHARE: Basic $ 0.16 $ 0.04 ==== ==== Diluted $ 0.15 $ 0.04 ==== ==== DIVIDENDS PER SHARE $ 0.06 $ 0.06 ==== ==== (Concluded)
See accompanying notes to condensed consolidated financial statements. Page 5 HCB BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (UNAUDITED) --------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED) 2000 ------ ------- OPERATING ACTIVITIES: Net income $ 285,283 $ 76,096 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation 192,616 165,606 Amortization (accretion) of: Deferred loan origination fees (3,396) (12,848) Goodwill 18,750 18,750 Premiums and discounts on loans, net (1,103) (1,146) Premiums and discounts on investment securities, net 19,050 29,507 Provision for loan losses 60,000 116,000 Deferred income taxes (24,000) (529,985) Originations of loans held for sale (6,208,096) (3,329,993) Proceeds from sales of loans 5,899,495 3,170,915 Stock compensation expense 29,457 52,630 Change in accrued interest receivable 118,090 29,495 Change in accrued interest payable (70,590) 22,052 Change in other assets 27,585 324,815 Change in other liabilities (74,280) (220,859) ----------- ----------- Net cash provided (used) by operating activities 268,861 (88,965) ---------- ----------- INVESTING ACTIVITIES: Purchases of investment securities - available for sale (4,827,871) -- Redemption (purchase) of Federal Home Loan Bank stock 17,700 (101,900) Purchases of premises and equipment (87,197) (711,376) Proceeds from maturity of interest bearing deposits -- 99,000 Loan originations, net of repayments (3,651,670) (3,522,196) Principal payments on investment securities 5,430,995 4,272,520 Net increase in real estate held for resale (64,831) -- ----------- ---------- Net cash (used) provided by investing activities (3,182,874) 36,048 ----------- ---------- (Continued)
Page 6 HCB BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED SEPTEMBER, 2001 AND 2000 (UNAUDITED) --------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED) 2000 ------ ------- FINANCING ACTIVITIES: Net increase (decrease) in deposits $ (713,403) $ 3,655,804 Advances from Federal Home Loan Bank 2,056,000 98,405,000 Repayment of Federal Home Loan Bank advances (5,801,914) (101,666,525) Net increase in advance payments by borrowers for taxes and insurance 41,928 40,209 Repayment of note payable (80,000) (80,000) Purchase of treasury stock (1,656,813) (32,500) Dividends paid (108,387) (122,495) ------------ ------------ Net cash (used) provided by financing activities (6,262,589) 199,493 ------------ ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (9,176,602) 146,576 CASH AND CASH EQUIVALENTS: Beginning of period 18,410,021 3,349,648 ------------ ------------ End of period $ 9,233,419 $ 3,496,224 ============ ============ See accompanying notes to condensed consolidated financial statements. (Concluded)
Page 7 HCB BANCSHARES, INC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION AND CONSOLIDATION HCB Bancshares, Inc. ("Bancshares"), incorporated under the laws of the State of Oklahoma, is a savings bank holding company that owns Heartland Community Bank and its subsidiary (the "Bank"). Bancshares' business is primarily that of owning the Bank, and participating in the Bank's activities. The accompanying condensed 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. The accompanying unaudited condensed consolidated financial statements were prepared in accordance with instructions for Form 10-Q. Accordingly, they do not include all of the information required by generally accepted accounting principles. The unaudited statements reflect all adjustments, which are, in the opinion of management, necessary for fair presentation of the financial condition and results of operations and cash flows of the Company. Those adjustments consist only of normal recurring adjustments. The condensed consolidated statement of income and comprehensive income for the three months ended September 30, 2001 is not necessarily indicative of the results that may be expected for the Company's fiscal year ending June 30, 2002. The unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended June 30, 2001, contained in the Company's Annual Report on Form 10-K for the year ended June 30, 2001. NOTE 2 - EARNINGS PER SHARE The weighted average number of common shares used to calculate earnings per share for the periods ended September 30, 2001 and 2000 were as follows:
Three months ended September 30, 2001 2000 ---- ---- Basic weighted - average shares 1,768,494 1,918,473 Effect of dilutive securities 74,935 0 ---------- ---------- Diluted weighted - average shares 1,843,429 1,918,473 ========== ==========
The Company has issued stock options that have the potential to be dilutive to its weighted average shares calculation, and were dilutive for the three-months ending September 30, 2001, but were anti-dilutive for the three-months ending September 30, 2000. In addition, the Company has issued MRP shares that have the potential to be dilutive to its weighted average shares calculation, but were anti-dilutive for these three-month periods. NOTE 3 - 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. NOTE 4 - SUBSEQUENT EVENTS DISCLOSURE Subsequent to September 30, 2001, the Company transferred 172,494 shares from its Stock Option Plan Trust to treasury shares. These shares were transferred at cost, or $1.90 million. The Stock Option Plan Trust has retained 110,000 shares which are included in treasury stock on the accompanying condensed consolidated statement of financial condition, are available for sale, and are managed by the trustees specifically for funding stock option benefits provided to key employees. In addition, from October 1, 2001 to October 31, 2001 the Company purchased 13,700 shares of its common stock at an average price of $12.41 and placed them in treasury shares. Page 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS When used in this Form 10-Q, 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 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 deposits from the general public and investing those funds in loans collateralized by first mortgages on existing owner-occupied single-family residences in the Bank's primary market area and loans collateralized by, to a lesser but growing extent, commercial and multi-family real estate, consumer loans 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 and its investment portfolio, and interest paid on customers' deposits and funds borrowed. 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, the level of noninterest expense, which normally will primarily consist of employee compensation expenses, occupancy expense, and other expenses, affects net income. 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. Demand for and supply of credit, competition among lenders and the level of interest rates in the Bank's market area influence lending activities. The Bank's deposit flows and costs of funds are influenced by prevailing market rates of interest on competing investments, as well as account maturities and the levels of personal income and savings in the Bank's market area. Page 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. 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 nontaxable securities has not been adjusted to a tax equivalent basis. The 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.
Quarter Ended September 30, ------------------------------------------------------------------------- 2001 2000 ---------------------------------- ---------------------------------- Average Average Average Interest Yield/ Average Interest Yield/ Balance Earned/Paid Rate Balance Earned/Paid Rate Interest-earning assets: Loans receivable......................... $ 133,640,481 $ 2,803,304 8.39% $ 137,116,255 $ 2,919,182 8.52% Investment and mortgage-backed securities Taxable............................... 88,802,737 1,373,940 6.19 102,805,285 1,677,174 6.53 Nontaxable............................ 30,492,675 382,707 5.02 28,404,468 382,480 5.39 Other interest-earning assets.......... 15,485,776 140,790 3.64 6,855,526 113,822 6.64 ----------- -------- ---- ---------- --------- ---- Total interest-earning assets......... 268,421,669 4,700,741 7.01 275,181,534 5,092,658 7.40 --------- --------- Noninterest-earning assets............... 16,057,234 16,106,401 ----------- ---------- Total assets.......................... $ 284,478,903 $ 291,287,935 =========== =========== Interest-bearing liabilities: Deposits............................... $ 159,616,652 1,711,601 4.29 $ 146,665,586 1,879,637 5.13 FHLB advances.......................... 90,066,400 1,326,236 5.89 113,697,654 1,743,645 6.13 Note payable........................... 58,261 1,000 6.87 138,261 2,500 7.23 ----------- --------- ---- ---------- --------- ---- Total interest-bearing liabilities.... 249,741,313 3,038,837 4.87 260,501,501 3,625,782 5.57 --------- --------- Noninterest-bearing liabilities.......... 2,086,662 1,816,629 ----------- ---------- Total liabilities..................... 251,827,975 262,318,129 Equity................................... 32,650,928 28,969,805 ----------- ---------- Total liabilities and equity.......... $ 284,478,903 $ 291,287,935 =========== =========== Net interest income...................... $ 1,661,904 $ 1,466,876 ========= ========= Net interest rate spread................. 2.14% 1.83% ==== ==== Net yield on interest-earning assets..... 2.48% 2.13% ==== ==== Ratio of average interest-earning assets to average interest-bearing liabilities 107.48% 105.64% ======= ======
Page 10 RATE/VOLUME ANALYSIS The following table analyzes dollar amounts of changes in interest income and interest 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).
Quarter Ended September 30, --------------------------- 2001 vs. 2000 ----------------------------------------------- Increase (Decrease) Due to ----------------------------------------------- Rate/ Volume Rate Volume Total ------ ---- ------ ----- (In thousands) ----------------------------------------------- Interest income: Loans receivable $ (74) $ (43) $ 1 $ (116) Investment and mortgage- backed securities (200) (113) 10 (303) Other interest-earning assets 143 (51) (65) 27 -------------------------------------------- Total interest-earning assets (131) (207) (54) (392) ----- ---- ---- ---- Interest expense: Deposits 166 (307) (27) (168) FHLB advances (362) (69) 14 (417) Note payable (1) -- (1) (2) ---------------------------------------------- Total interest-bearing liabilities (197) (376) (14) (587) ----- ---- ---- ---- Change in net interest income $ 66 $ 169 $ (40) $ 195 ===== ==== ==== ====
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2001 AND JUNE 30, 2001 The Company had consolidated total assets of $282.8 million and $287.6 million at September 30, 2001 and June 30, 2001, respectively. During the three-month period ended September 30, 2001 the Company experienced an increase in its consolidated loan portfolio from $131.7 million at June 30, 2001, to $135.6 million at September 30, 2001. During this same period, investments and mortgage-backed securities increased from $120.1 million at June 30, 2001 to $121.7 million at September 30, 2001. While investments and mortgage-backed securities increased $1.6 million for the three-month period ended September 30, 2001, there were $5.4 million in paydowns offset with purchases of $4.8 million and a $2.2 million increase in the market value of the securities. Deposits decreased from $161.3 million at June 30, 2001 to $160.6 million at September 30, 2001. Although the Bank's level of deposits has been sufficient to provide for adequate liquidity, the deposit market remains competitive. The outstanding balances of FHLB borrowings decreased from $91.9 million at June 30, 2001, to $88.2 million at September 30, 2001. The increase in loans and investment securities and decrease in deposits and FHLB borrowings were funded through a reduction in interest-bearing deposits with banks. Stockholders' equity amounted to $31.8 million at September 30, 2001, and $31.9 million at June 30, 2001. The changes in equity were primarily due to an increase in accumulated other comprehensive income offset by the purchase of treasury stock. At September 30, 2001, the Bank's regulatory capital exceeded all applicable regulatory capital requirements. Page 11 COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 Net Income. Net income for the three months ended September 30, 2001 was approximately $285,000 compared to net income of approximately $76,000 for the three months ended September 30, 2000. Explanations of primary changes to income and expense items follow. Interest Income. Interest income for the three months ended September 30, 2001 decreased approximately $392,000 compared to the three months ended September 30, 2000. The decrease in interest income was primarily due to decreases in volumes and rates of loans and investments and mortgage-backed securities. The overall yield on average interest-earning assets decreased from 7.40% for the three-months ended September 30, 2000, to 7.01% for the three-months ended September 30, 2001. Interest Expense. Interest expense for the three months ended September 30, 2001 decreased approximately $587,000 compared to the three months ended September 30, 2000. The decrease for the three-months ended September 30, 2001 was primarily due to decreases in rate of deposits and decreases in volume of FHLB borrowings, offset by increases in volume of deposits. The overall cost on average interest-bearing liabilities decreased from 5.57% for the three-months ended September 30, 2000, to 4.87% for the three-months ended September 30, 2001. As a result of the above changes, net interest income for the three months ended September 30, 2001 increased approximately $195,000 compared to the three months ended September 30, 2000. Please refer to the rate/volume analysis contained in this section. The overall net interest spread on average interest-earning assets increased 31 basis points, from 1.83% for the three-months ended September 30, 2000, to 2.14% for the three-months ended September 30, 2001. Provision for Loan Losses. The Bank made provisions for loan losses of $60,000 and $116,000 for the three months ended September 30, 2001 and September 30, 2000, respectively. This provision reflects management's most recent review as of September 30, 2001. The allowance for loan losses of $1.5 million represented 1.03 percent of gross outstanding loans at September 30, 2001, which compares to 0.99 percent at June 30, 2001. Nonperforming loans as of September 30, 2001, and June 30, 2001, as a percent of total loans, were 1.34% and 0.81% respectively. Management evaluates the carrying value of the loan portfolio periodically and the allowance is adjusted if necessary. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the evaluations. In particular, management recognizes that recent and planned changes in the amounts and types of lending by the Bank will result in further growth of the Bank's loan loss allowance and may justify further changes in the Bank's loan loss allowance policy in the future. 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. Noninterest Income. Noninterest income is comprised primarily of service charges on deposit accounts, and gains on the sales of loans. Noninterest income for the three months ended September 30, 2001, was approximately $375,000 compared to approximately $324,000 for the three months ended September 30, 2000. This increase of approximately $51,000 is primarily due to growth of the Bank's checking accounts resulting in increased service charges, and increases in the deposit account fee structure. In light of the increasingly competitive markets for deposits and loans, management has continued the shifting of the Bank's deposit taking and loan origination activities to reflect, among other things, the importance of offering valued customer services that generate additional fee income, and it is expected that management will continue this trend for the foreseeable future. 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, advertising, and professional fees paid to consultants, attorneys, and accountants. Total noninterest expense for both three month periods ended September 30, 2001 and 2000 was $1.70 million. The primary difference was a decrease in salary and benefits and professional fees, Page 12 offset by increases in occupancy expense due to opening a new full service branch in Bryant, Arkansas, and increases in communication, postage, printing, and office supplies expense. In light of the substantial costs associated with the recent, pending and planned expansions of the Bank's activities, facilities and staff, including the 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 real estate, commercial business and consumer loans. Income Taxes. The effective income tax rate for the Bank for the three months ended September 30, 2001 and 2000 was (9.2%) and (346.2%), respectively. Each rate includes both federal and Arkansas tax components. The variance in the effective rate from the expected statutory rate is due primarily to tax exempt interest. These negative rates are a result of net tax benefit, which increases net income. These benefits are due primarily to increases in net operating loss carryforwards for income tax reporting purposes. The corresponding deferred tax asset totals approximately $1.5 million as of September 30, 2001 and June 30, 2001, respectively. The recoverability of this asset is entirely contingent upon the production of taxable income for income tax reporting purposes. Management anticipates that the Company will produce such income in the near future based on management's current forecasts of earnings and management's tax planning strategy of selling certain available for sale tax exempt securities to generate taxable income. SOURCES OF CAPITAL AND LIQUIDITY The Company has no business other than that of the Bank and banking related activities. 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 needs 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, borrowed funds, 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 securities prepayments are greatly influenced by general interest rates, economic conditions, competition, and other factors. At September 30, 2001, and June 30, 2001, the Company had designated all securities 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 September 30, 2001, the Bank had $5.8 million in commitments to originate loans (including unfunded portions of construction loans), and approximately $1.1 million 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 $91.8 million. Management anticipates that the Bank will have adequate resources to meet its current commitments through internal funding sources described above. 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. Page 13 IMPACT OF INFLATION AND CHANGING PRICES The financial statements and related financial data presented herein have been prepared in accordance with instructions to Form 10-Q which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation. Unlike most industrial companies, virtually all of the Bank's assets and liabilities are monetary in nature. As a result, changes in interest rates generally have a more significant impact on a financial institution's performance than do changes in the rate of inflation. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For a discussion of the Company's asset and liability management policies as well as the potential impact of interest rate changes upon the market value of the Bank's portfolio equity, see "MARKET RISK" in the Company's Annual Report on Form 10-K for the year ended June 30, 2001. There has been no material change in the Company's asset and liability position since June 30, 2001. PART II. OTHER INFORMATION ----------------- Item 1. Legal Proceedings 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. Item 2. Changes in Securities None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K Exhibits: 3.2 Bylaws of HCB Bancshares, Inc., as amended. Reports on Form 8-K: The Company filed an 8-K on September 5, 2001, reporting that on August 29, 2001, its Board of Directors signed a standstill agreement with a large stockholder. The Company filed an 8-K on November 9, 2001, reporting that on November 2, 2001, the Company dismissed Deloitte & Touche, LLP as its independent auditors and on November 9, 2001, the Company engaged BKD, LLP as its successor independent audit firm. Page 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HCB BANCSHARES, INC. Registrant Date: November 13, 2001 By: /s/Cameron D. McKeel ------------------------ Cameron D. McKeel President and Chief Executive Officer (Duly Authorized Representative) Date: November 13, 2001 By: /s/Scott A. Swain ------------------------ Scott A. Swain Senior Vice President and Chief Financial Officer (Principal Financial Officer) Page 15