-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CUGaX4563fierqFJoQMCrx+PSpv6OdS1Q5kFJA0E3P4FZL4JwpQ9+tiVyWsbAL3p A848qQZ1bOk3yRIyHLqLFA== 0000904280-02-000224.txt : 20021021 0000904280-02-000224.hdr.sgml : 20021021 20021021111838 ACCESSION NUMBER: 0000904280-02-000224 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20021021 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HCB BANCSHARES INC CENTRAL INDEX KEY: 0001029740 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 621670792 STATE OF INCORPORATION: OK FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-22423 FILM NUMBER: 02793415 BUSINESS ADDRESS: STREET 1: HEARTLAND COMMUNITY BANK STREET 2: 237 JACKSON ST CITY: CAMDEN STATE: AR ZIP: 71701 BUSINESS PHONE: 8708366841 MAIL ADDRESS: STREET 1: HEARTLAND COMMUNITY BANK STREET 2: 237 JACKSON STREET CITY: CAMDEN STATE: AR ZIP: 71701 10-K/A 1 fm10ka2002-1843.txt AMENDMENT NO. 1 TO FORM 10-K 2002 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________________ FORM 10-K/A (Amendment No. 1) FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2002 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 Incorporation (I.R.S. Employer or Organization) Identification No.) 237 Jackson Street, Camden, Arkansas 71701-3941 - ------------------------------------------ --------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (870) 836-6841 -------------- Securities registered pursuant to Section (b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share -------------------------------------- (Title of Class) 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 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, as of a specified date within the past 60 days: $17,943,227 (1,192,241 shares at the last sale price on August 31, 2002 ($15.05 per share); for this purpose, directors, executive officers and 5% stockholders have been deemed to be affiliates). State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 1,503,436 shares of common stock as of August 31, 2002. DOCUMENTS INCORPORATED BY REFERENCE The following lists the documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated: 1. Portions of Annual Report to Stockholders for the Fiscal Year Ended June 30, 2002. (Parts II and IV) 2. Portions of Proxy Statement for the 2002 Annual Meeting of Stockholders. (Part III) EXPLANATORY NOTE: This Form 10-K/A is being filed to correct several inadvertent typographical errors in Exhibit 13 to the Annual Report on Form 10-K of HCB Bancshares, Inc. (the "Company") for the fiscal year ended June 30, 2002. This Form 10-K/A corrects typographical errors in the Consolidated Statements of Stockholders' Equity on page 24 of Exhibit 13 and on the column header of the Rate-Volume table appearing on page 12 of Exhibit 13. This Form 10-K/A also amends Item 12 to include information herewith rather than incorporating such information by reference to the Company's definitive proxy materials. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------ (a) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS The following table sets forth certain information with respect to the Company's equity compensation plans.
NUMBER OF SECURITIES REMAINING AVAILABLE FOR FUTURE ISSUANCE NUMBER OF SECURITIES TO BE ISSUED WEIGHTED-AVERAGE EXERCISE UNDER EQUITY COMPENSATION UPON EXERCISE OF OUTSTANDING PRICE OF OUTSTANDING PLANS (EXCLUDING SECURITIES PLAN CATEGORY OPTIONS, WARRANTS AND RIGHTS OPTIONS, WARRANTS AND RIGHTS REFLECTED IN COLUMN (A)) - ------------- -------------------------------- ---------------------------- ----------------------------- Equity compensation plans 218,550 $9.14 51,607 approved by security holders Equity compensation plans not 0 0 0 approved by security holders Total 218,550 $9.14 51,607
(b) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS Information required by this item is incorporated herein by reference to the section captioned "Voting Securities and Beneficial Ownership" in the Proxy Statement. (c) SECURITY OWNERSHIP CERTAIN BENEFICIAL OWNERS Information required by this item is incorporated herein by reference to the sections captioned "Voting Securities and Beneficial Ownership" in the Proxy Statement. (d) CHANGES IN CONTROL Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - ------------------------------------------------------------------------- (a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT ---------------------------------------------- (1) Financial Statements. The following consolidated financial statements are incorporated by reference from Item 8 hereof: Independent Auditors' Report Consolidated Statements of Financial Condition as of June 30, 2002 and 2001 1 Consolidated Statements of Income and Comprehensive Income for the years ended June 30, 2002, 2001 and 2000 Consolidated Statements of Stockholders' Equity for the years ended June 30, 2002, 2001 and 2000 Consolidated Statements of Cash Flows for the years ended June 30, 2002, 2001 and 2000 Notes to Consolidated Financial Statements for the years ended June 30, 2002, 2001 and 2000 (2) Financial Statement Schedules. All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because of the absence of conditions under which they are required or because the required information is included in the Consolidated Financial Statements and related Notes thereto. (3) Exhibits. The following is a list of exhibits filed as part of this Annual Report on Form 10-K and is also the Exhibit Index.
NO. DESCRIPTION --- ----------- 3.1 Articles of Incorporation of HCB Bancshares, Inc. * 3.2 Bylaws of HCB Bancshares, Inc. **** 4 Form of Common Stock Certificate of HCB Bancshares, Inc. * 10.1 Form of HCB Bancshares, Inc. 1997 Stock Option and Incentive Plan *+ 10.2 Form of HCB Bancshares, Inc. Management Recognition Plan and Trust Agreement *+ 10.3(a) Employment Agreements by and between Heartland Community Bank and Vida H. Lampkin and Cameron D. McKeel *+ 10.3(b) Employment Agreements by and between HCB Bancshares, Inc. and Vida H. Lampkin and Cameron D. McKeel **+ 10.4 Intentionally omitted. 10.5 Heartland Community Bank Directors' Retirement Plan, as amended*+ 10.6(a) Change-in-Control Protective Agreement between Heartland Community Bank and Scott A. Swain *****+ 10.6(b) Change-in-Control Protective Agreement between HCB Bancshares, Inc. and Scott A. Swain *****+ 10.7(a) Employment Agreement by and between Heartland Community Bank and Charles Black ******+ 10.7(b) Employment Agreement by and between HCB Bancshares, Inc. and Charles Black ******+ 10.8 Standstill Agreement dated August 29, 2001, by and among HCB Bancshares, Inc. and Stilwell Value Partners IV, L.P., Stilwell Associates, L.P., Stilwell Value LLC and Joseph Stilwell*** 13 Annual Report to Stockholders for the fiscal year ended June 30, 2002 2 21 Subsidiaries ****** 23.1 Consent of BKD, LLP ****** 23.2 Consent of Deloitte & Touche LLP ****** 99 Certification ________________ * Incorporated by reference to the Company's Registration Statement on Form SB-2 (File No. 333-19093). ** Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 2000 (File No. 0-22423) *** Incorporated by reference to the Company's Current Report on Form 8-K filed on September 5, 2001 (File No. 0-22423). **** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 (File No. 0-22423) ***** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2001 (File No. 0-22423) ****** Previously filed. + Management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K. On April 26, 2002, the Registrant filed a Current ------------------- Report on Form 8-K under item 5 to report the commencement of a stock repurchase program. (c) EXHIBITS. The exhibits required by Item 601 of Regulation S-K are -------- either filed as part of this Annual Report on Form 10-K or incorporated by reference herein. (d) FINANCIAL STATEMENTS AND SCHEDULES EXCLUDED FROM ANNUAL REPORT. There --------------------------------------------------------------- are no other financial statements and financial statement schedules which were excluded from the Annual Report to Stockholders pursuant to Rule 14a-3(b) which are required to be included herein. 3 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Date: October 18, 2002 By: /s/ Cameron D. McKeel --------------------------------------- Cameron D. McKeel President and Chief Executive Officer (Duly Authorized Representative) CERTIFICATION I, Cameron D. McKeel, President and Chief Executive Officer of HCB Bancshares, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of HCB Bancshares, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows on the registrant as of, and for, the periods presented in this annual report. Date: October 18, 2002 By: /s/ Cameron D. McKeel ---------------------------------- Cameron D. McKeel Chief Executive Officer (Principal Executive Officer) CERTIFICATION I, Scott A. Swain, Senior Vice President and Chief Financial Officer of HCB Bancshares, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of HCB Bancshares, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows on the registrant as of, and for, the periods presented in this annual report. Date: October 18, 2002 By: /s/ Scott A. Swain ------------------------------------------------- Scott A. Swain Senior Vice President and Chief Financial Officer (Principal Financial Officer) EX-13 3 exhibit13fm10ka2002-1843.txt EXHIBIT 13 TO AMENDMENT NO. 1 TO FORM 10-K HCB BANCSHARES, INC 2002 ANNUAL REPORT TO OUR SHAREHOLDERS: What an exciting year it's been! Your Company has reached several milestones this year, and the end is not in sight. For example, net interest income after provision for loan and investment losses reached an all-time high of $6,733,412. At the same time, non-interest income also set a new record high of $1,606,460, more than double the figure of only four years ago. Return on equity was the highest in seven years, and earnings per share were the highest in the history of the Company. But, there's more improvement to come. Our ratio of non-interest expense to average total assets is higher than we like, and we need to make improvement there. Our nonperforming assets also reached a new high, primarily due to the faltering economy, but fortunately, unusually high losses have not occurred. And non-interest income can still be improved. In short, we aren't satisfied. Satisfaction - what a variety of ways there are to achieve it. Sometimes satisfaction comes from mere improvement, such as a marginal student raising his grade from an F to a C. That's certainly a tremendous achievement, and yet there's more to be done. Earning that C is very, very satisfying, but it isn't over yet. Passing is far better than failing, and absolutely deserves favorable recognition, but shouldn't that C become a B? And shouldn't that B become an A? Isn't "excellence" more satisfying than "average"? Don't we want to be the best we can be? And how do we decide when our performance is satisfying enough? In our business, as in many others, it's never enough. We will always be disappointed at losing a customer, no matter how many "satisfied" customers we may have. We will always be thrilled by reaching new levels of success, but then we will set even higher goals in an effort to reach even higher levels of success. No matter how many objectives we meet, or how well we meet them, we will still strive for more. In short, as we review the criteria by which we measure our achievement, there is no such thing as "enough". We must not . . . ever! . . . be "satisfied". During this past fiscal year, your Company has achieved some impressive results. Net interest income has never been higher. Income from other sources (non-interest income) has never been higher. Earnings per share have never been higher. But . . . it is not enough. We want continued improvement. Increased net income. Tighter control of non-interest expense. New products providing new sources of non-interest income. Reductions in high-rate borrowings, partly through repayment and partly through replacement at lower rates. Continued repurchases of our stock. Negotiated reductions of non-performing assets. And, or course, increased return on equity. We want, and expect, to be your best investment. We want to exceed your expectations, and we want to do that year after year after year. We want the satisfaction of being a high-performance company. Even then, we won't be "satisfied"! /s/ Cameron D. McKeel President and Chief Executive Officer 2 TABLE OF CONTENTS HCB Bancshares, Inc......................................................... 3 Market for Common Stock and Related Stockholder Matters..................... 4 Selected Consolidated Financial and Other Data.............................. 5 Quarterly Financial Data.................................................... 7 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................. 8 Consolidated Financial Statement.............................................18 Consolidated Statements of Financial Condition............................ 20 Consolidated Statements of Income and Comprehensive Income................ 21 Consolidated Statements of Stockholders' Equity........................... 23 Consolidated Statements of Cash Flows..................................... 24 Notes to Consolidated Financial Statements................................ 26 Corporate Information....................................................... 44 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, 2002, the Company had total assets of $276.4 million, deposits of $165.0 million, and stockholders' equity of $26.7 million, or 9.7% of total assets. As of June 30, 2002, the Bank operated through six full service-banking offices located in Camden (2), Fordyce, Bryant, Sheridan, and Monticello, Arkansas. During July 2002 the Bank sold its Monticello branch and operated through five full service-banking offices. 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, 2002, there were 1,503,436 shares of the common stock outstanding. For the purpose of this disclosure, shares held in the Stock Option Trust are considered to be outstanding, however, for financial reporting purposes, such shares are reported as treasury shares. At June 30, 2002, there were 557 stockholders of record according to the Company's transfer agent listing. Following are the high and low bid prices, by fiscal quarter, as reported on the Nasdaq Small-Cap Market July 1, 2000 to June 30, 2002, as well as the dividends paid during such quarters.
High Low Dividends Per Share ------- ------ ------------------- Fiscal 2002 First Quarter $ 13.00 $ 11.90 $ 0.06 Second Quarter 12.95 12.00 0.07 Third Quarter 15.00 12.61 0.07 Fourth Quarter 16.70 14.27 0.08 Fiscal 2001 First Quarter $ 7.38 $ 6.00 $ 0.06 Second Quarter 9.25 7.19 0.06 Third Quarter 8.88 8.31 0.06 Fourth Quarter 13.20 8.94 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 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. 4 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
AT JUNE 30, ---------------------------------------------------------------------- 2002 2001 2000 1999 1998 ---------- ---------- ---------- ---------- ----------- Total assets.............................. $ 276,425,294 $287,598,650 $291,192,175 $285,396,885 $250,953,770 Loans receivable, net..................... 124,176,898 131,651,421 135,626,505 115,162,883 104,580,165 Allowance for loan losses................. 1,628,515 1,446,114 1,231,709 1,329,201 1,468,546 Cash and due from banks................... 3,492,257 3,302,540 3,211,802 3,560,884 1,531,363 Interest-earning savings deposits......... 14,404,572 15,107,481 236,846 1,693,330 5,073,035 Investment securities: Available for sale..................... 29,285,376 32,138,434 34,135,726 33,132,916 40,775,807 Held to maturity....................... -- -- -- -- -- Mortgage-backed securities: Available for sale.................... 88,913,188 87,943,743 98,407,339 113,986,773 58,697,109 Held to maturity...................... -- -- -- -- 27,503,257 Deposits.................................. 165,005,183 161,285,179 144,873,071 146,296,598 141,931,330 FHLB advances............................. 82,263,936 91,915,694 115,609,029 104,523,419 68,121,068 Note payable.............................. -- 80,000 160,000 240,000 320,000 Stockholders' equity...................... 26,736,288 31,934,334 28,240,550 32,117,560 37,678,924 Number of: Real estate loans outstanding.......... 1,517 1,730 1,820 1,709 2,829 Deposit accounts....................... 18,090 18,538 17,980 18,526 17,158 Offices open........................... 6 6 6 6 6
YEAR ENDED JUNE 30, ------------------------------------------------------------------- 2002 2001 2000 1999 1998 ---------- ---------- ---------- ---------- ----------- Interest income........................... $ 17,916,113 $ 20,078,400 $19,808,899 $18,274,647 $15,027,677 Interest expense.......................... 10,823,701 14,079,466 13,099,656 12,093,603 8,942,149 ------------- ------------ ----------- ----------- ----------- Net interest income....................... 7,092,412 5,998,934 6,709,243 6,181,044 6,085,528 Provision for loan and investment losses.. 359,000 296,000 -- -- 24,000 ------------- ------------ ----------- ----------- ----------- Net interest income after provision for loan and investment losses.......... 6,733,412 5,702,934 6,709,243 6,181,044 6,061,528 Noninterest income........................ 1,606,460 1,378,612 1,039,622 1,018,654 710,856 Noninterest expense....................... 7,113,145 6,929,118 7,304,110 6,847,715 6,407,976 ------------- ------------ ----------- ----------- ----------- Income before income taxes................ 1,226,727 152,428 444,755 351,983 364,408 Income tax provision (benefit)............ 61,027 (467,888) (341,147) (63,658) (20,705) ------------- ------------- ------------ ------------ ------------ Net income................................ $ 1,165,700 $ 620,316 $ 785,902 $ 415,641 $ 385,113 ============ =========== ========== ========== ========== Earnings per share: Basic................................... $ 0.71 $ 0.33 $ 0.40 $ 0.18 $ 0.16 Diluted................................. 0.68 0.33 0.40 0.18 0.16 Cash dividends declared................... 0.28 0.24 0.24 0.24 0.20
5
YEAR ENDED JUNE 30, --------------------------------------------------------------- 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- PERFORMANCE RATIOS: Return on assets (net income divided by average total assets) .................... 0.41% 0.21% 0.27% 0.15% 0.18% Return on average equity (net income divided by average equity) .................. 3.82 2.02 2.76 1.14 1.02 Interest rate spread (combined weighted average interest rate earned less combined weighted average interest rate cost)......... 2.25 1.72 2.12 1.81 2.11 Net interest margin (net interest income divided by average interest-earning assets).. 2.66 2.19 2.49 2.34 2.96 Ratio of average interest-earning assets to average interest-bearing liabilities...... 110.06 108.91 107.68 111.55 119.51 Ratio of noninterest expense to average total assets................................. 2.52 2.38 2.55 2.48 3.00 ASSET QUALITY RATIOS: Nonperforming assets to total assets at end of period............................. 0.92 0.48 0.33 0.21 0.34 Nonperforming loans to total loans at end of period............................. 1.44 0.81 0.64 0.46 0.75 Allowance for loan losses to total loans at end of period....................... 1.22 0.99 0.85 1.08 1.33 Allowance for loan losses to nonperforming loans at end of period....................... 84.91 121.48 133.95 234.84 177.25 Provision for loan losses to total loans at end of period ............................ 0.25 0.20 -- -- 0.02 Net charge-offs to average loans outstanding.... 0.11 0.06 0.08 0.13 0.05 CAPITAL RATIOS: Equity to total assets at end of period......... 9.67 11.10 9.70 11.25 15.01 Average equity to average assets................ 10.81 10.55 9.95 13.19 17.71 Dividend payout ratio (1)....................... 40.52 76.46 64.50 142.58 137.36 - -------------- (1) 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.
6 QUARTERLY FINANCIAL DATA The following tables represent summarized data for each of the four quarters in the years ended June 30, 2002 and June 30, 2001.
2002 (IN THOUSANDS, EXCEPT SHARE DATA) ----------------------------------------------------------- FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER Interest income $ 4,248 $ 4,458 $ 4,509 $ 4,701 Interest expense 2,430 2,559 2,796 3,039 ------ ----- ------ ----- Net interest income 1,818 1,899 1,713 1,662 Provision for loan and investment losses 140 60 99 60 ------ ----- ------ ----- Net interest income after provision for loan and investment losses 1,678 1,839 1,614 1,602 Noninterest income 401 402 429 375 Noninterest expenses 1,949 1,650 1,799 1,715 ------ ----- ------ ----- Income before income taxes 130 591 244 262 Income tax provision (benefit) (16) 110 (9) (24) ------ ----- ------ ----- Net income $ 146 $ 481 $ 253 $ 286 ====== ===== ====== ===== Basic earnings per common share $ 0.12 $ 0.28 $ 0.15 $ 0.16 Diluted earnings per common share 0.12 0.27 0.14 0.15 Cash dividends declared per common share 0.08 0.07 0.07 0.06 Weighted average common shares outstanding Basic 1,391,685 1,689,348 1,691,522 1,768,494 Diluted 1,489,017 1,774,003 1,762,565 1,843,429 2002 (IN THOUSANDS, EXCEPT SHARE DATA) ----------------------------------------------------------- FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER Interest income $ 4,858 $ 4,990 $ 5,137 $ 5,093 Interest expense 3,222 3,519 3,712 3,626 ------ ----- ------ ----- Net interest income 1,636 1,471 1,425 1,467 Provision for loan losses 60 60 60 116 ------ ----- ------ ----- Net interest income after provision for loan losses 1,576 1,411 1,365 1,351 Noninterest income 460 264 331 323 Noninterest expenses 1,801 1,693 1,730 1,705 ------ ----- ------ ----- Income (loss) before income taxes 235 (18) (34) (31) Income tax provision (benefit) (103) (124) (134) (107) ------ ----- ------ ----- Net income $ 338 $ $ 106 $ 100 $ 76 ====== ===== ====== ===== Basic earnings per common share $ 0.18 $ 0.06 $ 0.05 $ 0.04 Diluted earnings per common share 0.18 0.06 0.05 0.04 Cash dividends declared per common share 0.06 0.06 0.06 0.06 Weighted average common shares outstanding Basic 1,842,259 1,840,580 1,863,269 1,918,473 Diluted 1,842,259 1,840,580 1,863,269 1,918,473
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, 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' 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. 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 the Bank will sell more of its long term loan originations and originate 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 8 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, 2002, the Bank's strategy was to continue to use cash flows from investment securities and deposit growth to fund loans and reduce Federal Home Loan Bank borrowings. 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 sensitive 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, 2002, 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 26.0%. 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 12.7%. 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. 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 in the event of an 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 4.66%, 4.33%, and 4.00% respectively. The following tables present the Bank's projected change in NPV as of June 30, 2002 and June 30, 2001, as calculated by OTS, based on information provided to the OTS by the Bank. Based on such information, from June 30, 2001 to June 30, 2002, the Bank's interest rate risk has become slightly more liability sensitive over the period. 9
June 30, 2002 ----------------------------------------------------------------------------------------------- CHANGE IN NPV INTEREST RATES NET PORTFOLIO VALUE RATIO (1) BP CHANGE IN NPV RATIO IN BP ----------------------------------- --------- ------------------------ (RATE SHOCK) AMOUNT $ CHANGE % CHANGE ------------ ------ -------- -------- +300 $16,344 $(9,884) (38)% 6.33 % (298) +200 19,671 (6,556) (25) 7.40 (191) +100 22,968 (3,260) (12) 8.39 (92) +0 26,228 9.31 -100 28,115 1,888 7 9.73 43 June 30, 2002 ----------------------------------------------------------------------------------------------- CHANGE IN NPV INTEREST RATES NET PORTFOLIO VALUE RATIO (1) BP CHANGE IN NPV RATIO IN BP ----------------------------------- --------- ------------------------ (RATE SHOCK) AMOUNT $ CHANGE % CHANGE ------------ ------ -------- -------- +300 $24,498 $(10,785) (31)% 9.17 % (292) +200 28,096 (7,187) (20) 10.21 (188) +100 31,525 (3,758) (11) 11.13 (96) +0 35,283 12.09 -100 38,158 2,875 8 12.72 64 -200 39,912 4,629 13 12.98 89 -300 41,855 6,572 19 13.27 118 ___________ (1) NPV Ratio is defined as the NPV divided by the portfolio value of assets.
At June 30, 2002, it was estimated that the Bank's NPV could decrease 12%, 25%, and 38% in the event of 100 BP, 200 BP, and 300 BP respective increases in market interest rates, and could increase 7%, if market interest rates decreased by 100 BP. These calculations indicate that the Bank's NPV could be adversely affected by significant increases in interest rates. The Bank's interest-rate risk has increased moderately compared to June 30, 2001, primarily due to the Bank paying Bancshares $9.0 million in dividends during the period. 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, 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, 2002, the Bank's estimated changes in net interest income and NPV were within the targets established by the Board of Directors. 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. 10 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 daily 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 market value. 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, ----------------------------------------------------------------------------- 2002 2001 ---------------------------------- ------------------------------------ Average Average Average Interest Yield/ Average Interest Yield/ Balance Earned/Paid Rate Balance Earned/Paid Rate ------- ----------- ------- -------- ----------- ------ Interest-earning assets: Loans receivable......................... $131,434,245 $10,735,729 8.17% $136,107,616 $11,622,492 8.54% Investment and mortgage-backed securities Taxable................................ 91,762,885 5,418,567 5.90 99,455,695 6,401,378 6.44 Nontaxable............................. 26,709,166 1,344,478 5.03 29,246,420 1,529,550 5.23 FHLB stock............................... 4,680,945 148,101 3.16 6,138,292 355,715 5.80 FHLB DDA................................. 12,254,561 264,337 2.16 3,466,854 161,693 4.66 Other interest-earning assets.............. 153,854 4,901 3.19 115,486 7,572 6.56 ------------ ----------- ---- ------------ ----------- ---- Total interest-earning assets ......... 266,995,656 17,916,113 6.71 274,530,363 20,078,400 7.31 Noninterest-earning assets................. 15,411,663 16,144,665 ------------ ------------ Total assets........................... $282,407,319 $290,675,028 ============ ============ Interest-bearing liabilities: NOW, MMDA, statement savings............. $ 43,566,756 792,670 1.82 $ 39,540,714 1,543,181 3.90 Time deposits............................ 112,568,794 4,913,494 4.36 106,806,416 6,156,303 5.76 FHLB advances............................ 86,442,890 5,116,537 5.92 105,619,861 6,372,982 6.03 Note payable............................. 14,685 1,000 6.81 94,685 7,000 7.39 ------------ ----------- ---- ------------ ----------- ---- Total interest-bearing liabilities..... 242,593,125 10,823,701 4.46 252,061,676 14,079,466 5.59 Noninterest-bearing liabilities............ 9,290,121 7,948,247 ------------ ------------ Total liabilities...................... 251,883,246 260,009,923 Equity..................................... 30,524,073 30,665,105 ------------ ------------ Total liabilities and equity........... $282,407,319 $290,675,028 ============ ============ Net interest income........................ $ 7,092,412 $ 5,998,934 ========== =========== Net interest rate spread................... 2.25% 1.72% ==== ==== Net yield on interest-earning assets 2.66% 2.19% ==== ==== Ratio of average interest-earning assets to average interest-bearing liabilities 110.06% 108.91% ====== ====== Year Ended June 30, ------------------------------------- 2000 ------------------------------------- Average Average Interest Yield/ Balance Earned/Paid Rate -------- ----------- -------- Interest-earning assets: Loans receivable......................... $123,535,536 $10,491,741 8.49% Investment and mortgage-backed securities Taxable................................ 112,065,588 7,352,290 6.56 Nontaxable............................. 27,102,813 1,479,536 5.46 FHLB stock............................... 5,784,385 441,291 7.63 FHLB DDA................................. 543,475 28,729 5.29 Other interest-earning assets.............. 208,296 15,312 7.35 ------------ ----------- ---- Total interest-earning assets ......... 269,240,093 19,808,899 7.36 Noninterest-earning assets................. 16,659,326 ------------ Total assets........................... $285,899,419 ============ Interest-bearing liabilities: NOW, MMDA, statement savings............. $ 32,873,541 1,067,350 3.25 Time deposits............................ 104,443,704 5,439,824 5.21 FHLB advances............................ 112,554,831 6,579,482 5.85 Note payable............................. 175,082 13,000 7.43 ------------ ----------- ---- Total interest-bearing liabilities..... 250,047,158 13,099,656 5.24 Noninterest-bearing liabilities............ 7,392,828 ------------ Total liabilities...................... 257,439,986 Equity..................................... 28,459,433 ------------ Total liabilities and equity........... $285,899,419 ============ Net interest income........................ $ 6,709,243 =========== Net interest rate spread................... 2.12% ==== Net yield on interest-earning assets 2.49% ==== Ratio of average interest-earning assets to average interest-bearing liabilities 107.68% ======
11 RATE/VOLUME ANALYSIS The following table analyzes dollar amounts of changes in interest income and 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 -------------------------------------------------------------------------------------- 2002 vs. 2001 2001 vs 2000 --------------------------------------- ----------------------------------------- Increase (Decrease) Increase (Decrease) Due to Due to --------------------------------------- ----------------------------------------- Rate/ Rate/ Volume Rate Volume Total Volume Rate Volume Total ------ ---- ------ ----- ------ ---- ------ ----- (In thousands) Interest income: Loans receivable $ (399) $ (505) $ 17 $ (887) $ 1,068 $ 57 $ 6 $ 1,131 Investment and mortgage- backed securities Taxable (495) (529) 42 (982) (827) (139) 15 (951) Nontaxable (133) (57) 4 (186) 117 (62) (5) 50 FHLB stock (84) (162) 38 (208) 27 (106) (7) (86) FHLB DDA 410 (87) (220) 103 155 (3) (19) 133 Other interest-earning assets 3 (4) (1) (2) (7) (2) 2 (7) ------- ------- ------ ------- ------- ------- ------ ------- Total interest-earning assets (698) (1,344) (120) (2,162) 533 (255) (8) 270 ------- ------- ------ ------- ------- ------- ------ ------- Interest expense: NOW, MMDA, statement savings 157 (824) (84) (751) 216 216 44 476 Time deposits 332 (1,494) (81) (1,243) 123 580 13 716 FHLB advances (1,157) (121) 23 (1,255) (406) 212 (12) (206) Note payable (6) (1) 1 (6) (6) -- -- (6) ------- ------- ------ ------- ------- ------- ------ ------- Total interest-bearing liabilities (674) (2,440) (141) (3,255) (73) 1,008 45 980 ------- ------- ------ ------- ------- ------- ------ ------- Change in net interest income $ (24) $ 1,096 $ 21 $ 1,093 $ 606 $(1,263) $ (53) $ (710) ======= ======= ====== ======= ======= ======= ====== =======
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2002 AND 2001 The Company had consolidated total assets of $276.4 million and $287.6 million at June 30, 2002, and 2001, respectively. During the twelve-month period ended June 30, 2002 the Company experienced a decrease in its net consolidated loan portfolio from $131.7 million at June 30, 2001, to $124.2 million at June 30, 2002. During this same period, investments and mortgage-backed securities and other short-term interest-earning assets decreased slightly from $135.2 million at June 30, 2001 to $132.6 million at June 30, 2002. Deposits increased from $161.3 million at June 30, 2001, to $165.0 million at June 30, 2002. The outstanding balances of FHLB borrowings were $91.9 million and $82.3 million at June 30, 2001 and June 30, 2002, respectively. The decrease in FHLB borrowings was primarily due to slower loan demand combined with increases in deposits and investment securities paydowns. Stockholders' equity amounted to $26.7 million at June 30, 2002, and $31.9 million at June 30, 2001. The decreases in equity were primarily due to the to the purchase of treasury stock, offset by a reduction of the unrealized 12 loss on investment securities available for sale and the Company's net income earned for the fiscal year ended June 30, 2002. During the year ended June 30, 2002, the Company purchased 510,389 shares (net of options exercised) of its common stock at a cost of approximately $7.6 million, or $14.82 per share. At June 30, 2002, the Bank's regulatory capital exceeded all applicable regulatory capital requirements and meets the definition of "well" capitalized under the Prompt Corrective Action provisions. COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2002 AND 2001 Net Income. Net income for the year ended June 30, 2002, was approximately $1,166,000 compared to net income of $620,000 for the year ended June 30, 2001. The changes resulted primarily from an increase in net interest income of $1,093,000, an increase in noninterest income of $228,000, offset by an increase in the provision for loan and investment loss of $63,000, a decrease in the income tax benefit of $529,000, and a increase in noninterest expense of $184,000. Interest Income. Interest income for the year ended June 30, 2002, was $17.9 million, or $2.2 million less than interest income for the year ended June 30, 2001. The total average interest-earning assets decreased $7.5 million, while the yield decreased from 7.31% to 6.71%, due to rate and volume decreases on loans and investment securities. The average balance of loans receivable decreased $4.7 million, total loan interest income decreased $0.9 million, and the average yield on loans decreased 37 basis points. The average balance of investments and mortgage-backed securities receivable decreased $10.2 million, interest income decreased $1.2 million, and the average yield decreased 45 basis points. The average balance of other interest-earning assets (primarily FHLB DDA's and FHLB stock) increased $7.4 million, interest income decreased $108,000, and the average yield decreased 296 basis points. Interest Expense. Total average interest-bearing liabilities decreased $9.5 million, while the interest rate on such liabilities decreased from 5.59% to 4.46%. The average balance of interest-bearing deposits increased $9.8 million, deposit interest expense decreased $2.0 million, and the average cost decreased 161 basis points. The average balance of FHLB advances decreased $19.2 million, FHLB interest expense decreased $1.3 million, and the average cost decreased 11 basis points. Net Interest Income. Net interest income for the year ended June 30, 2002, was $7.1 million, or $1.1 million more than net interest income for the year ended June 30, 2001. The increase in net interest income from June 30, 2001 to 2002, was the result of an increase in our interest rate spread of 53 basis points. During the year ended June 30, 2002, the Federal Reserve dropped interest rates 5 times totaling 200 basis points, and the prime interest rate decreased 225 basis points from 7.00% on June 30, 2001 to 4.75% on June 30, 2002. These interest rate decreases caused a greater reduction in the average rates we paid on deposits and borrowed money than the average yield which we earned on loans, investments, and interest-bearing deposits. This trend reflects the liability sensitive nature of the Company which would, keeping all other things equal, typically show improved net interest income in a decreasing interest rate environment. Provision for Loan and Investment Losses. During the year ended June 30, 2002, the Bank's management continued its review of the appropriateness of the amount of the allowance for loan and investment losses. Based on these reviews, management made a $330,000 provision for loan losses and a $29,000 provision for investment losses for the year ended June 30, 2002. The allowance for loan losses of $1.6 million at June 30, 2002, represented 1.22% of gross outstanding loans which compares to 0.99% as of June 30, 2001. The provision was made in consideration of reviews of individual loans and the fact that nonperforming loans as of June 30, 2002 as a percent of total loans increased to 1.44% from 0.81% as of June 30, 2001. In addition, total classified assets as a percent of the Bank's tangible capital plus allowance for loan loss was 31.0% as of June 30, 2002, which compares to 8.1% as of June 30, 2001. Part of this increase is due to an increase in classified assets and part is due to the Bank paying Bancshares $9.0 million in dividends, thus reducing capital at the Bank. As of June 30, 2002, the Bank had $7.1 million in assets classified substandard or doubtful as compared to $2.5 million as of June 30, 2001. 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 13 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 substantially 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, 2002, was approximately $1,606,000 compared to approximately $1,378,000 for the year ended June 30, 2001. This increase of approximately $228,000 is the result of loan fee income, growth of the Bank's checking and savings accounts resulting in increased service charges, and increases in the deposit account fee structure. 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, 2002, was $7.1 million compared to $6.9 million for the year ended June 30, 2001. Significant components of the increase in noninterest expense are an $86,000 increase in salaries and employee benefits, a $52,000 increase in net occupancy expense, a $56,000 increase in data processing expense, a $146,000 increase in other expenses, offset with a $136,000 decrease in professional fees as a result of improved internal and accounting controls. 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. Income Taxes. The effective income tax rates for the Company for the fiscal years ended June 30, 2002 and 2001 were 5.0% and (307.0)%, respectively. The variance in the effective rate from the expected statutory rate is due primarily to tax exempt interest. The negative rate for fiscal year ended June 30, 2001, is a net tax benefit, and increases net income. The net tax benefit is primarily due to tax exempt income. The corresponding deferred tax asset totals approximately $1.7 million as of June 30, 2002, and $1.5 million as of June 30, 2001. 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 and interest-rate risk planning strategy of selling available for sale tax exempt securities and reinvesting the proceeds into taxable income producing securities. The strategy does not anticipate significant taxable gains on the sale of the tax-exempt securities, but rather a shift of nontaxable interest income to taxable interest income. See Note 10 to the Consolidated Financial Statements. COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2001 AND 2000 The Company had consolidated total assets of $287.6 million and $291.2 million at June 30, 2001 and 2000, respectively. During the twelve-month period ended June 30, 2001, the Company experienced a decrease in its net consolidated loan portfolio from $135.6 million at June 30, 2000, to $131.7 million at June 30, 2001. During this same period, investments and mortgage-backed securities and other short-term interest-earning assets increased from $132.8 million at June 30, 2000, to $135.2 million at June 30, 2001, due to increases in the bank's FHLB DDA account and increases in the market value of investment securities. Deposits increased from $144.9 million at June 30, 2000, to $161.3 million at June 30, 2001. This represents an 11.3 14 percent increase in deposits. The outstanding balances of FHLB borrowings were $91.9 million and $115.6 million at June 30, 2001 and June 30, 2000, respectively. The decrease in FHLB borrowings was primarily due to slower loan demand combined with increases in deposits and investment securities paydowns. Stockholders' equity amounted to $31.9 million at June 30, 2001, and $28.2 million at June 30, 2000. The changes in equity were primarily due to the reduction of the unrealized loss on investment securities available for sale and the Company's net income earned for the fiscal year ended June 30, 2001, net of the decrease due to the purchase of treasury stock. At June 30, 2001, the Bank's regulatory capital exceeded all applicable regulatory capital requirements and meets the definition of "well" capitalized under the Prompt Corrective Action provisions. COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2001 AND 2000 Net Income. Net income for the year ended June 30, 2001, was approximately $620,000 compared to net income of $786,000 for the year ended June 30, 2000. The changes resulted primarily from a decrease in net interest income of $710,000, an increase in the provision for loan loss of $296,000, offset by an increase in the income tax benefit of $127,000, an increase in noninterest income of $339,000, and a decrease in noninterest expense of $375,000. Interest Income. Interest income for the year ended June 30, 2001, was $20.1 million, or $0.3 million more than interest income for the year ended June 30, 2000. The total average interest-earning assets increased $5.3 million, while the yield decreased from 7.36% to 7.31%, primarily due to average yield decreases on investment securities and other interest-earning assets. The average balance of loans receivable increased $12.6 million, total loan interest income increased $1.1 million, and the average yield on loans increased 5 basis points. The average balance of investments and mortgage-backed securities receivable decreased $10.5 million, interest income decreased $0.9 million, and the average yield decreased 19 basis points. The average balance of other interest-earning assets (primarily FHLB DDA's and FHLB stock) increased $3.2 million, interest income increased $40,000, and the average yield decreased 203 basis points. Interest Expense. Total average interest-bearing liabilities increased $2.0 million, while the interest rate on such liabilities increased from 5.24% to 5.59%. The average balance of interest-bearing deposits increased $9.0 million, deposit interest expense increased $1.2 million, and the average cost increased 35 basis points. The average balance of FHLB advances decreased $6.9 million, FHLB interest expense decreased $0.2 million, and the average cost increased 18 basis points. Provision for Loan Losses. During the year ended June 30, 2001, the Bank's management continued its review of the appropriateness of the amount of the allowance for loan losses. Based on these reviews, management made a $296,000 provision for loan losses for the year ended June 30, 2001. The allowance for loan losses of $1.4 million at June 30, 2001, represented 0.99% of gross outstanding loans. The provision was made in consideration of reviews of individual loans and the fact that nonperforming loans as of June 30, 2001, as a percent of total loans increased to 0.81% from 0.64% as of June 30, 2000. 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 substantially 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, 2001, was approximately $1,379,000 15 compared to approximately $1,040,000 for the year ended June 30, 2000. This increase of approximately $339,000 is the result of loan fee income, growth of the Bank's checking and savings accounts resulting in increased service charges, and increases in the deposit account fee structure. 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, 2001, was $6.9 million compared to $7.3 million for the year ended June 30, 2000. Significant components of the decrease in noninterest expense are a $133,000 increase in occupancy expense primarily resulting from a new full service branch in Bryant, Arkansas, and a $426,000 decrease in professional fees as a result of improved internal and accounting controls. 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. Income Taxes. The effective income tax rates for the Company for the fiscal years ended June 30, 2001 and 2000, were (307.0)% and (76.7)%, respectively. 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 benefits, 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 and $1.1 million as of June 30, 2001 and June 30, 2000, 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. SUBSEQUENT EVENTS - BRANCH SALE On July 19, 2002, the bank sold its Monticello branch to Simmons First Bank of South Arkansas. The sale included approximately $8.3 million in loans, $1.5 million in fixed assets, $0.2 million in other assets, and $13.2 million in deposits. The Bank recognized a premium on the deposits of approximately $0.9 million and the difference was paid in cash to the buyer. The resulting after tax gain on the sale of the Monticello branch of approximately $440,000 translates into $0.29 in earnings per share. 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 customer 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 16 influenced by general interest rates, economic conditions, competition and other factors. The Bank does not solicit customer deposits outside of its market area through brokers or other financial institutions. At June 30, 2002, the Bank had designated securities with a fair value of approximately $118.2 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, 2002, the Bank had outstanding approximately $6.1 million in commitments to originate loans (including unfunded portions of construction loans) and $1.6 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 $86.8 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. 17 INDEPENDENT AUDITORS' REPORT To the Board of Directors of HCB Bancshares, Inc. Camden, Arkansas We have audited the accompanying consolidated statement of financial condition of HCB Bancshares, Inc. and its subsidiary (the "Company") as of June 30, 2001, and the related consolidated statements of income and comprehensive income, stockholders' equity, and cash flows for the years ended June 30, 2001 and 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 as of June 30, 2001, and the results of their operations and their cash flows for the years ended June 30, 2001 and 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP September 21, 2001 18 INDEPENDENT AUDITORS' REPORT The Board of Directors HCB Bancshares, Inc. Camden, Arkansas We have audited the accompanying consolidated statement of financial condition of HCB Bancshares, Inc. as of June 30, 2002, and the related consolidated statements of income and comprehensive income, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2002 consolidated financial statements referred to above present fairly, in all material respects, the financial position of HCB Bancshares, Inc. as of June 30, 2002, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /s/ BKD, LLP Little Rock, Arkansas August 1, 2002 19 HCB BANCSHARES, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION JUNE 30, 2002 AND 2001 - --------------------------------------------------------------------------------
ASSETS 2002 2001 Cash and due from banks $ 3,492,257 $ 3,302,540 Interest-bearing deposits with banks 14,404,572 15,107,481 ------------ ------------ Cash and cash equivalents 17,896,829 18,410,021 Investment securities: Available for sale, at fair value (amortized cost at June 30, 2002 and 2001, of $115,796,195 and $120,222,942, respectively) 118,198,564 120,082,177 Loans receivable, net of allowance at June 30, 2002 and 2001, of $1,628,515 and $1,446,114, respectively 124,176,898 131,651,421 Accrued interest receivable 1,721,612 2,017,188 Federal Home Loan Bank stock 4,709,900 4,735,800 Premises and equipment, net 7,112,211 7,564,681 Goodwill, net 131,250 206,250 Real estate held for sale 910,587 398,132 Other assets 1,567,443 2,532,980 ------------ ------------ TOTAL $ 276,425,294 $ 287,598,650 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposits $ 165,005,183 $ 161,285,179 Federal Home Loan Bank advances 82,263,936 91,915,694 Advance payments by borrowers for taxes and insurance 110,446 199,470 Accrued interest payable 740,008 972,900 Note payable -- 80,000 Other liabilities 1,569,433 1,211,073 ------------ ------------ Total liabilities 249,689,006 255,664,316 ------------ ----------- COMMITMENTS AND CONTINGENCIES (Notes 12 and 14) STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 10,000,000 shares authorized, 2,645,000 shares issued, 1,425,056 and 1,935,445 shares outstanding at June 30, 2002 and 2001, respectively 26,450 26,450 Additional paid-in capital 25,832,641 25,914,132 Unearned ESOP shares (846,400) (1,058,000) Unearned MRP shares (116,169) (155,601) Accumulated other comprehensive income (loss) 1,441,942 (59,600) Retained earnings 14,950,088 14,256,684 ------------ ------------ 41,288,552 38,924,065 ------------ ------------ Treasury stock, at cost, 1,219,944 and 709,555 shares at June 30, 2002 and 2001, respectively (14,552,264) (6,989,731) ------------- ------------- Total stockholders' equity 26,736,288 31,934,334 ------------ ------------ TOTAL $ 276,425,294 $ 287,598,650 ============ ===========
See notes to consolidated financial statements. 20 HCB BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME YEARS ENDED JUNE 30, 2002, 2001 AND 2000
2002 2001 2000 INTEREST INCOME: Interest and fees on loans $ 10,735,729 $ 11,622,492 $ 10,491,741 Investment securities: Taxable 5,418,567 6,401,378 7,352,290 Nontaxable 1,344,478 1,529,550 1,479,536 Other 417,339 524,980 485,332 ----------- ----------- ----------- Total interest income 17,916,113 20,078,400 19,808,899 INTEREST EXPENSE: Deposits 5,706,164 7,699,484 6,507,174 Federal Home Loan Bank advances 5,116,537 6,372,982 6,579,482 Note payable 1,000 7,000 13,000 ----------- ----------- ----------- Total interest expense 10,823,701 14,079,466 13,099,656 ----------- ----------- ---------- NET INTEREST INCOME 7,092,412 5,998,934 6,709,243 PROVISION FOR LOAN AND INVESTMENT LOSSES 359,000 296,000 -- ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN AND INVESTMENT LOSSES 6,733,412 5,702,934 6,709,243 ----------- ----------- ----------- NONINTEREST INCOME: Service charges on deposit accounts 984,089 765,532 555,292 Gain on sales of investment securities available for sale 1,518 -- -- Gain on sales of loans available for sale, net 381,733 223,906 276,841 Other 239,120 389,174 207,489 ----------- ----------- ----------- Net noninterest income 1,606,460 1,378,612 1,039,622 ----------- ----------- ----------- NONINTEREST EXPENSE: Salaries and employee benefits 3,961,413 3,875,094 3,904,807 Net occupancy expense 1,085,602 1,033,684 900,948 Federal insurance premiums 29,439 50,330 79,692 Data processing 368,176 312,551 326,528 Professional fees 489,360 624,622 1,050,873 Amortization of goodwill 75,000 75,000 75,000 Other 1,104,155 957,837 966,262 ----------- ----------- ----------- Total noninterest expenses 7,113,145 6,929,118 7,304,110 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 1,226,727 152,428 444,755 INCOME TAX PROVISION (BENEFIT) 61,027 (467,888) (341,147) ----------- ------------ ------------ NET INCOME $ 1,165,700 $ 620,316 $ 785,902 ----------- ----------- ----------- (Continued)
21 HCB BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME YEARS ENDED JUNE 30, 2002, 2001 AND 2000
2002 2001 2000 OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX Unrealized holding gain (loss) on securities arising during period $ 1,503,060 $ 4,342,068 $ (1,780,995) Reclassification adjustment for gains included in net income (1,518) -- -- ------------ ----------- ----------- Other comprehensive income (loss) 1,501,542 4,342,068 (1,780,995) ----------- ----------- ----------- COMPREHENSIVE INCOME (LOSS) $ 2,667,242 $ 4,962,384 $ (995,093) =========== =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING BASIC 1,635,669 1,866,387 1,988,984 =========== =========== =========== DILUTED 1,719,903 1,866,387 1,988,984 =========== =========== =========== EARNINGS PER SHARE: Basic $ 0.71 $ 0.33 $ 0.40 ==== ==== ==== Diluted $ 0.68 $ 0.33 $ 0.40 ==== ==== ==== DIVIDENDS PER SHARE $ 0.28 $ 0.24 $ 0.24 ==== ==== ==== (Concluded)
See notes to consolidated financial statements. 22 HCB BANCSHARES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 2002, 2001 AND 2000
- ----------------------------------------------------------------------------------------------------------------------------- ACCUMULATED ISSUED ADDITIONAL UNEARNED UNEARNED OTHER COMMON STOCK PAID-IN ESOP MRP COMPREHENSIVE RETAINED SHARES AMOUNT CAPITAL SHARES SHARES INCOME EARNINGS --------- -------- ------------ ------------ ----------- ---------- ------------- BALANCE, JULY 1, 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 Net income 620,316 Common stock committed to be released for ESOP (31,718) 211,600 MRP shares earned 64,503 Net change in unrealized gain (loss) on securities available for sale, net of tax 4,342,068 Treasury stock purchased Dividends paid (474,299) --------- -------- ------------ ------------ ----------- ---------- ------------- BALANCE, JUNE 30, 2001 2,645,000 $ 26,450 $ 25,914,132 $ (1,058,000) $ (155,601) $ (59,600) $ 14,256,684 Net income 1,165,700 Common stock committed to be released for ESOP 77,065 211,600 MRP shares earned 39,432 Net change in unrealized gain (loss) on securities available for sale, net of tax 1,501,542 Stock options exercised (158,556) Treasury stock purchased Dividends paid (472,296) --------- -------- ------------ ------------ ----------- ---------- ------------- BALANCE, JUNE 30, 2002 2,645,000 $ 26,450 $ 25,832,641 $ (846,400) $ (116,169) $1,441,942 $ 14,950,088 ========= ======== ============ ============ =========== ========== ============= TREASURY TREASURY TOTAL STOCK STOCK STOCKHOLDERS' SHARES AMOUNT EQUITY -------- ------------- ------------ BALANCE, JULY 1, 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 Net income 620,316 Common stock committed to be released for ESOP 179,882 MRP shares earned 64,503 Net change in unrealized gain (loss) on securities available for sale, net of tax 4,342,068 Treasury stock purchased 111,135 (1,038,686) (1,038,686) Dividends paid (474,299) -------- ------------- ------------ BALANCE, JUNE 30, 2001 709,555 $ (6,989,731) $ 31,934,334 Net income 1,165,700 Common stock committed to be released for ESOP 288,665 MRP shares earned 39,432 Net change in unrealized gain (loss) on securities available for sale, net of tax 1,501,542 Stock options exercised (50,473) 619,821 461,265 Treasury stock purchased 560,862 (8,182,354) (8,182,354) Dividends paid (472,296) --------- ------------- ------------ BALANCE, JUNE 30, 2002 1,219,944 $ (14,552,264) $ 26,736,288 ========= ============= ============
See notes to consolidated financial statements. 23 HCB BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2002, 2001 AND 2000
2002 2001 2000 OPERATING ACTIVITIES: Net income $ 1,165,700 $ 620,316 $ 785,902 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 743,412 730,212 649,779 Amortization (accretion) of: Deferred loan origination fees 117,153 116,232 (116,260) Goodwill 75,000 75,000 75,000 Premiums and discounts on loans, net (14,412) (4,487) (4,619) Premiums and discounts on investment securities, net 49,942 68,487 119,181 Provision for loan and investment loss 359,000 296,000 -- Deferred income taxes (269,037) (403,424) (477,356) Net gain on sale of investment securities available for sale (1,518) -- -- Origination of loans held for sale (26,675,718) (13,502,308) (9,239,668) Proceeds from sales of loans held for sale 27,117,741 12,732,692 10,160,826 Stock compensation expense 169,541 244,385 333,530 Change in accrued interest receivable 295,576 (164,301) (135,064) Change in accrued interest payable (232,892) 55,485 102,218 Change in other assets 192,983 (720,084) 826,402 Change in other liabilities 358,360 (41,483) (23,113) ------------ ------------ ------------ Net cash provided by operating activities 3,450,831 102,722 3,056,758 ------------ ------------ ------------ INVESTING ACTIVITIES: Purchases of investment securities available for sale (23,053,591) -- (3,302,892) Purchases of loans -- -- (82,547) Redemption (purchase) of Federal Home Loan Bank stock 25,900 1,487,700 (844,400) Proceeds from sales of investment securities - available for sale 4,995,347 -- -- Loan (originations), net of repayments 6,599,759 4,336,955 (21,181,354) Principal payments on investment securities 22,407,566 19,629,225 14,768,810 Proceeds from maturities of other interest-bearing deposits -- 99,000 619,000 Net (increase) decrease in real estate held for resale (512,455) (38,524) 103,870 Purchases of premises and equipment (290,942) (1,742,409) (701,559) ------------ ------------ ------------ Net cash provided (used) by investing activities 10,171,584 23,771,947 (10,621,072) ------------ ------------ ------------ (Continued)
24 HCB BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2002, 2001 AND 2000
2002 2001 2000 FINANCING ACTIVITIES: Net increase (decrease) in deposits $ 3,720,004 $ 16,412,108 $ (1,423,527) Advances from Federal Home Loan Bank 6,464,838 213,740,000 281,234,000 Repayment of Federal Home Loan Bank advances (16,116,596) (237,433,335) (270,148,390) Net increase (decrease) in advance payments by borrowers for taxes and insurance (89,024) 59,916 11,112 Purchase of treasury stock, net (7,562,533) (1,038,686) (2,708,518) Repayment of note payable (80,000) (80,000) (80,000) Dividends paid (472,296) (474,299) (506,929) ------------ ------------- ------------- Net cash provided (used) by financing activities (14,135,607) (8,814,296) 6,377,748 ------------ ------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (513,192) 15,060,373 (1,186,566) CASH AND CASH EQUIVALENTS: Beginning of year 18,410,021 3,349,648 4,536,214 ------------ ------------- ------------- End of year $ 17,896,829 $ 18,410,021 $ 3,349,648 ============ ============= ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for: Interest $ 11,056,593 $ 14,023,981 $ 12,997,438 ============ ============= ============= Income taxes paid (received) $ (94,698) $ 150,000 $ -- ============ ============= ============= (Concluded)
See notes to consolidated financial statements. 25 HCB BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2002, 2001 AND 2000 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION - HCB Bancshares, Inc. ("Bancshares"), a bank holding company, owns 100 percent of Heartland Community Bank and its subsidiary (collectively the "Bank"). 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 banking offices located in Camden, Fordyce, Sheridan, Bryant, and Monticello, Arkansas 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 accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of the deferred tax asset. 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. 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. 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. 26 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. 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. 27 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 INTANGIBLE ASSETS - Goodwill and other long-lived assets are tested periodically for impairment and written down to their fair value as necessary. 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 assets and liabilities 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 1,866,387, and 1,988,984 weighted-average common shares outstanding for the years ended June 30, 2001, and 2000, respectively. Weighted-average common shares outstanding was the same for basic and diluted in those years. For the year ended June 30, 2002, basic earnings per share was calculated using 1,635,669 shares and dilutive earnings per share was calculated using 1,719,903 shares. 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 years ended June 30, 2001, and 2000. However, for the year ended June 30, 2002, the Management Recognition Plan was antidilutive, but the Stock Option Plan was dilutive by 84,234 shares. STOCK PURCHASED FOR OPTION BENEFIT TRUST - As of June 30, 2002, the Company has a total of 78,380 shares of its common stock in its stock option plan trust. These shares are included in treasury stock on the accompanying 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. RECLASSIFICATIONS - Certain amounts in the 2001 and 2000 consolidated financial statements have been reclassified to conform to the classifications adopted for reporting in 2002. These reclassifications had no effect on net earnings. 28 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations". The statement discontinues the use of the pooling of interest method of accounting for business combinations and is effective for all business combinations initiated after June 30, 2001. Management has completed an evaluation of the effects of this statement and does not believe that it will have a material effect on the Company's consolidated financial statements. In July 2001, the Financial Accounting Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets". The statement will require discontinuing the amortization of goodwill and other intangible assets with indefinite useful lives. Instead, these assets will be tested periodically for impairment and written down to their fair value as necessary. This statement is effective for fiscal years beginning after December 15, 2001. The Company plans to adopt the provisions of this statement on July 1, 2002, and has determined that the effect on the Company's consolidated financial statements will not be material. 2. INVESTMENT SECURITIES Investment securities consisted of the following at June 30:
2002 -------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR AVAILABLE FOR SALE COST GAINS LOSSES VALUE U.S. Government and agencies $ 1,500,000 $ 30,945 $ 1,530,945 Municipal securities 25,520,671 323,090 $ 154,570 25,689,191 Equity securities 39,750 30,490 70,240 Other securities 2,000,000 5,000 1,995,000 Mortgage-backed securities 75,820,993 1,820,096 38,053 77,603,036 Collateralized mortgage obligations 10,914,781 395,371 11,310,152 ------------ ---------- -------- ------------ Total $115,796,195 $2,599,992 $197,623 $118,198,564 ============ ========== ======== ============ 2001 -------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR AVAILABLE FOR SALE COST GAINS LOSSES VALUE U.S. Government and agencies $ 1,854,215 $ 46,233 $ 1,900,448 Municipal securities 30,488,774 159,481 $451,069 30,197,186 Equity securities 39,750 1,050 40,800 Mortgage-backed securities 75,714,645 424,709 355,094 75,784,260 Collateralized mortgage obligations 12,125,558 54,622 20,697 12,159,483 ------------ -------- -------- ------------ Total $120,222,942 $686,095 $826,860 $120,082,177 ============ ======== ======== ============
For the year ended June 30, 2002, the Company realized $11,659 in gains and $10,141 in losses on sales of investment securities available for sale. There were no realized gains or losses on sales of available for sale securities for the years ended June 30, 2001 and 2000. While at June 30, 2002, no securities were pledged to collateralize public deposits, as of June 30, 2001, municipal securities with a carrying value of approximately $2.1 million were pledged as collateral for public deposits. At June 30, 2002 and 2001, mortgage-backed securities with a carrying value of approximately $16.7 million and $20.7 million, respectively, were pledged as collateral for Federal Home Loan Bank advances. 29 The scheduled maturities of available for sale securities at June 30, 2002, 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 $ 1,500,000 $ 1,530,945 Due from one year to five years -- -- Due from five years to ten years -- -- Due after ten years 27,520,671 27,684,191 ------------ ------------ 29,020,671 29,215,136 Equity securities 39,750 70,240 Mortgage-backed securities 75,820,993 77,603,036 Collateralized mortgage obligations 10,914,781 11,310,152 ------------ ------------ Total $115,796,195 $118,198,564 ============ ============
3. LOANS RECEIVABLE Loans receivable consisted of the following at June 30:
2002 2001 First mortgage loans: One- to four- family residences $ 41,724,098 $ 50,579,375 Multi-family and commercial 50,626,236 57,041,028 Real estate construction loans 12,449,965 16,008,775 Less undisbursed loan funds (5,945,029) (12,020,255) ------------ ------------ Total first mortgage loans 98,855,270 111,608,923 Consumer and other loans: Commercial loans 14,406,499 11,289,519 Automobile 6,836,399 6,779,218 Consumer and home improvement loans 4,807,218 2,073,650 Loans collateralized by deposits 2,469,033 2,488,948 Less undisbursed loan funds (1,718,669) (1,274,468) ------------ ------------ Total consumer and other loans 26,800,480 21,356,867 Allowance for loan losses (1,628,515) (1,446,114) Net deferred loan costs and discounts 149,663 131,745 ------------ ------------ Loans receivable, net $124,176,898 $131,651,421 ============ ============
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. At June 30, 2002, impaired loans totaled approximately $4,900,000. All impaired loans had designated reserves for possible loan losses. Reserves relative to impaired loans at June 30, 2002, was approximately $426,000. Approximately $173,000 in interest income was recognized on average impaired loans of approximately $2,200,000 for the year ended June 30, 2002. At June 30, 2001, loans identified by management as impaired were 30 not significant. Interest recognized on impaired loans on a cash basis during 2002 and 2001 was immaterial. The Company is not committed to lend additional funds to debtors whose loans have been modified. The subsidiary Bank had extensions of credit to executive officers, directors and to companies in which the Banks' directors were principal owners, in the amount of approximately $1.8 million as of June 30, 2002 and 2001. Balance, June 30, 2001 $1,833,111 New extensions of credit 119,100 Repayments (192,382) ---------- Balance, June 30, 2002 $1,759,829 ========== In management's opinion, such loans were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Further, in management's opinion, these extensions of credit did not involve more than the normal risk of collectability or present other unfavorable features. 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:
2002 2001 Investment securities $ 839,287 $ 931,985 Loans 882,325 1,085,203 ---------- ---------- Total $1,721,612 $2,017,188 ========== ==========
5. ALLOWANCE FOR LOAN LOSSES A summary of the activity in the allowance for loan losses is as follows for the years ended June 30:
2002 2001 2000 Balance, beginning of year $ 1,446,114 $ 1,231,709 $ 1,329,201 Provision 330,000 296,000 -- Charge-offs (234,382) (101,761) (99,798) Recoveries 86,783 20,166 2,306 ------------ ------------ ------------ Balance, end of year $ 1,628,515 $ 1,446,114 $ 1,231,709 ============ ============ ============
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 1/20 of its advances (borrowings) from the FHLB. 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. 31 7. PREMISES AND EQUIPMENT Premises and equipment consisted of the following at June 30:
2002 2001 Land and buildings $ 7,153,233 $ 7,154,882 Furniture and equipment 3,667,962 3,404,811 ------------ ------------ Total 10,821,195 10,559,693 Accumulated depreciation (3,708,984) (2,995,012) ------------ ------------ Premises and equipment, net $ 7,112,211 $ 7,564,681 ============ ============
8. DEPOSITS Deposits are summarized as follows at June 30:
2002 2001 Demand and NOW accounts, including noninterest-bearing deposits of $8,889,867 and $7,379,892 in 2002 and 2001, respectively $ 39,092,410 $ 38,055,320 Money market 5,911,715 5,733,865 Statement savings 8,010,973 6,903,036 Certificates of deposit 111,990,085 110,592,958 ------------ ------------ Total $165,005,183 $161,285,179 ============ ============
The aggregate amount of short-term jumbo certificates of deposit with a minimum denomination of $100,000 was approximately $19.3 million and $13.6 million at June 30, 2002 and 2001, respectively. At June 30, 2002, scheduled maturities of certificates of deposit are as follows: Years ending June 30: 2003 $ 86,819,911 2004 19,993,891 2005 5,092,669 Thereafter 83,614 ------------ Total $111,990,085 ============ 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 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 $16.7 million at June 30, 2002, as additional collateral. Advances at June 30, 2002 and 2001, have maturity dates as follows: 32
2002 2001 WEIGHTED WEIGHTED AVERAGE AVERAGE RATE AMOUNT RATE AMOUNT Years ending June 30: 2002 -- % $ -- 5.82% $ 8,050,000 2003 5.70 12,007,051 5.70 12,030,126 2004 5.65 9,875,000 5.65 9,875,000 2005 5.95 7,141,929 5.42 9,721,318 2006 5.92 4,859,326 5.92 4,889,509 2007 5.91 6,477,709 6.14 8,400,629 Thereafter 6.06 41,902,921 6.05 38,949,112 ---- ----------- ---- ----------- Total 5.93% $82,263,936 5.88% $91,915,694 ==== =========== ==== ===========
10. INCOME TAXES Income tax provisions (benefits) are summarized as follows:
YEARS ENDED JUNE 30, ----------------------------------------------- 2002 2001 2000 Income tax provision (benefit): Current $ 330,065 $ (64,464) $ 136,209 Deferred (269,038) (403,424) (477,356) --------- --------- --------- Total $ 61,027 $(467,888) $(341,147) ========= ========= =========
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, ----------------------------------------------------------------------------- 2002 2001 2000 Taxes at statutory rate $ 417,087 34.0% $ 51,826 34.0% $ 151,217 34.0% Increase (decrease) resulting from: Tax exempt income (457,123) (37.26) (520,047) (341.18) (503,043) (113.11) Disallowed interest expense 66,972 5.46 85,650 56.19 67,735 15.23 Change in estimate 0 0.00 (67,000) (43.95) 0 0.00 Compensation (38,289) (3.12) (19,825) (13.01) (77,301) (17.38) Other, net 72,380 5.89 1,508 0.99 20,245 4.56 --------- ---- --------- ------- --------- ------ Total $ 61,027 4.97% $(467,888) (306.96)% $(341,147) (76.70)% ========= ==== ========= ======= ========= ======
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:
2002 2001 Deferred tax assets: Allowance for loan losses $ 543,084 $ 326,016 Unrealized loss on available for sale investments -- 81,165 Deferred compensation 388,868 312,942 Net operating loss carryforward 801,281 1,147,149 AMT credit carryforward 445,313 278,496 Other 140,367 13,425 ----------- ---------- 33 Total deferred tax assets 2,318,913 2,159,193 ----------- ---------- Deferred tax liabilities: Premises and equipment 106,624 262,610 Unrealized gains on available for sale investments 960,427 -- Investment premiums and discount -- 10,432 Loan fees 1,200 1,553 FHLB dividends 465,675 327,057 ----------- ---------- Total deferred tax liabilities 1,533,926 601,652 ----------- ---------- Net deferred tax asset $ 784,987 $1,557,541 =========== ==========
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, 2002, the amount of these reserves totaled approximately $3,462,590 with an unrecognized deferred tax liability of $1,177,281. 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 $2,300,832, of which $625,146, $1,120,698, and $554,988 expire in 2019, 2020, and 2021, respectively. The Company's AMT credit carryforward of $445,313 does not have an expiration date. The portion of the net deferred tax asset resulting from net operating loss carryforward and AMT credit carryforward totals $1,246,594 as of June 30, 2002. The Company has approved a tax-planning strategy intended to provide for the realization of these carryforwards. The success of this strategy is contingent on several factors including (1) the sale of a sufficient amount of tax-exempt investment securities and corresponding reduction in tax-exempt income and increase in taxable income and (2) sufficient taxable earnings from operations or other sources to provide aggregate net taxable income and permit utilization of the carryforwards prior to their expirations. Should this strategy not result in a sufficient amount of net taxable income, the Company will determine the need for a valuation allowance for the portion of the net deferred tax asset resulting from the carryforwards. This tax strategy does not anticipate significant taxable gains on the sale of the tax exempt securities, but rather a shift of nontaxable interest income to taxable interest income. 11. BENEFIT PLANS EMPLOYEE STOCK OWNERSHIP PLAN - The Company has established an employee stock ownership plan ("ESOP") to benefit substantially all employees. The ESOP has a note payable to Bancshares, the proceeds from which were used to purchase shares of common stock of Bancshares. The 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 $288,665, $179,882, and $163,578 was recognized during the years ended June 30, 2002, 2001 and 2000, 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 both June 30, 2002 and 2001, 21,160 shares were committed to be released by the ESOP to participant accounts. At June 30, 2002, there were 126,960 shares allocated to participant accounts and 84,640 unallocated shares. The fair value of the unallocated shares amounted to approximately $1,265,368 (84,640 shares at $14.95 per share) at June 30, 2002. 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. The put option is priced using the fair market value as determined as of the most recent valuation date (prior to the exercise of such 34 right) by an independent appraiser. 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 years ended June 30, 2002, and June 30, 2001, no put options were issued. During the year ended June 30, 2000, put options were issued to two employees but without any material expense to the Company. 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 of the grant. Options granted to employee's 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 disability or death. Outstanding stock options can be exercised over a ten-year period from the date of grant. Vested options of terminated participants expire one year after the participant's termination date. 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. No new options were granted during the years ended June 30, 2002, 2001, or 2000. A summary of the status of the Company's stock option plan as of June 30, 2002, and changes during the years ending June 30, 2001 and 2000, is presented below:
WEIGHTED AVERAGE EXERCISE OPTIONS SHARES PRICE 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 Granted -- -- Exercised -- -- Forfeited 18,513 9.18 ------- ---- Outstanding at June 30, 2001 294,467 9.14 ------- ---- Granted -- -- Exercised 50,473 9.14 Forfeited 25,444 9.13 ------- ---- Outstanding at June 30, 2002 218,550 9.14 ------- ---- Options exercisable at June 30, 2002 (vested) 216,330 $ 9.13 ======= ====
Exercise prices for options outstanding at June 30, 2002, range from $9.125 to $9.375 per share. The weighted average remaining contractual life of such shares was 5.9 years at June 30, 2002. 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: 35
2002 AS REPORTED PRO FORMA Net income (in thousands) $ 1,166 $1,146 Earnings per share: Basic $ 0.71 $ 0.70 Diluted $ 0.68 $ 0.67 2001 AS REPORTED PRO FORMA Net income (in thousands) $ 620 $ 529 Earnings per share: Basic $ 0.33 $ 0.28 Diluted $ 0.33 $ 0.28 2000 AS REPORTED PRO FORMA Net income (in thousands) $ 786 $ 676 Earnings per share: Basic $ 0.40 $ 0.34 Diluted $ 0.40 $ 0.34
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, of which 1,322 were forfeited as of June 30, 2002) vest 25% at the grant date and 25% each May 1 afterward. Shares granted to non-directors (15,876, of which 1,908 were forfeited as of June 30, 2002) vest 20% at the grant date and 20% each May 1 afterward. Shares granted will be deemed vested in the event of disability, or death. At June 30, 2002, 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 $40,000, $65,000 and $170,000 in compensation expense was recognized during the years ended June 30, 2002, 2001, and 2000, 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. 36 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. 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. 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, 2002, 2001 and 2000, contributions to the plan totaled approximately $124,000, $181,000, and $184,000, 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, 2002, 2001 or 2000. EMPLOYMENT AGREEMENTS - Certain executive officers of the Bank and the Company have employment agreements with one to three year renewable terms. Such agreements provide for termination pay and other benefits under certain circumstances. As of June 30, 2002, aggregate termination pay is approximately $0.90 million. CHANGE-IN-CONTROL AGREEMENTS - As of June 30, 2002, certain officers of the Bank and the Company had change-in-control agreements with three-year renewable terms. Such agreements provide for benefits under circumstances of changes-in-control as defined in the agreements. The benefits provide for a range of 25% to 299% of the officers' compensation. As of June 30, 2002, the aggregate benefits total approximately $0.70 million. 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. 37 The Company had the following outstanding commitments at June 30, 2002: Undisbursed construction loans $4,614,879 Commitments to originate mortgage loans 1,330,150 Commitments to originate commercial loans 149,500 Unused lines of credit 1,569,169 ---------- Total $7,663,698 ========== 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, 2002, 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:
JUNE 30, 2002 JUNE 30, 2001 ESTIMATED ESTIMATED CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE ASSETS: Cash and due from banks $ 3,492,257 $ 3,492,257 $ 3,302,540 $ 3,302,540 Interest bearing deposits with banks 14,404,572 14,404,572 15,107,481 15,107,481 Investment securities: Available for sale 118,198,564 118,198,564 120,082,177 120,082,177 Loans receivable, net 124,176,898 127,424,573 131,651,421 133,015,674 Accrued interest receivable 1,721,612 1,721,612 2,017,188 2,017,188 Federal Home Loan Bank stock 4,709,900 4,709,900 4,735,800 4,735,800 LIABILITIES: Deposits: Demand, NOW, money market and statement savings 53,015,098 53,015,098 50,692,221 50,692,221 Certificates of deposit 111,990,085 112,396,949 110,592,958 111,361,694 Federal Home Loan Bank advances 82,263,936 86,780,344 91,915,694 92,800,235 Advance payments by borrowers for taxes and insurance 110,446 110,446 199,470 199,470 Accrued interest payable 740,008 740,008 972,900 972,900 Note payable -- -- 80,000 80,019
For cash and due from banks, 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 the rates currently offered for loans of similar remaining maturities at the reporting date. 38 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 are relatively short term. 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, 2002 and 2001. 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. 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. In May, 1999, a shareholder filed a putative 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 that had the supposed effect of artificially inflating the price the plaintiff and other putative class members paid to purchase the Company's common stock. The Company and the other defendants moved to dismiss the complaint. The federal district court granted the motion on March 31, 2001, but allowed plaintiffs 30 days from the date of the order to file an amended class action complaint. On August 28, 2001, the Company was informed by the federal district court that the case was dismissed with prejudice on August 27, 2001. 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 amount of 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, 2002 and 2001, 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, 2002: Tier I (Core) Capital to Adjusted Total Assets $ 21,396 7.88 % $ 10,861 4.00 % $ 13,576 5.00 % Total Risk-Based Capital to Risk-weighted Assets 23,025 17.06 % 10,798 8.00 % 13,497 10.00 % Tier I (Core) Capital to Risk-weighted Assets 21,396 15.85 % N/A N/A 8,098 6.00 % Tangible Capital to Tangible Assets 21,396 7.88 % 4,073 1.50 % N/A N/A AS OF JUNE 30, 2001: Tier I (Core) Capital to Adjusted Total Assets $ 29,132 10.20 % $ 11,420 4.00 % $ 14,274 5.00 % Total Risk-Based Capital to Risk-weighted Assets 30,578 22.17 % 11,032 8.00 % 13,790 10.00 % Tier I (Core) Capital to Risk-weighted Assets 29,132 21.12 % N/A N/A 8,274 6.00 % Tangible Capital to Tangible Assets 29,132 10.20 % 4,282 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, 2002 and 2001, and condensed statements of income and cash flows for the years ended June 30, 2002, 2001 and 2000, 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, 2002 AND 2001
ASSETS 2002 2001 Deposit in Bank $ 1,221,185 $ 515,975 Cash equivalents 175,817 134,522 ----------- ----------- Cash and cash equivalents 1,397,002 650,497 Investment in Bank 21,927,797 29,861,612 Loans receivable 1,060,298 700,000 Investment securities 70,240 40,800 Other assets 821,076 909,850 ----------- ----------- TOTAL ASSETS $25,276,413 $32,162,759 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Accrued expenses and other liabilities $ 143,058 $ 228,425 Stockholders' equity 25,133,354 31,934,334 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $25,276,413 $32,162,759 =========== ===========
CONDENSED STATEMENTS OF INCOME YEARS ENDED JUNE 30, 2002, 2001 AND 2000
INCOME: 2002 2001 2000 Dividend from Bank $ 9,000,000 $ 1,000,000 $ -- Interest and dividend income 205,248 230,421 346,007 ----------- ----------- ----------- Total income 9,205,248 1,230,421 346,007 EXPENSES: Operating expenses 48,944 191,509 301,181 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES AND DISTRIBUTIONS IN (EXCESS) LESS THAN BANK SUBSIDIARY INCOME 9,156,304 1,038,912 44,826 INCOME TAX PROVISION 59,849 13,000 15,242 ----------- ----------- ----------- INCOME BEFORE DISTRIBUTIONS IN (EXCESS) LESS THAN BANK SUBSIDIARY INCOME 9,096,455 1,025,912 29,584 DISTRIBUTIONS IN (EXCESS) LESS THAN BANK SUBSIDIARY INC (7,930,755) (405,596) 756,318 ----------- ----------- ----------- NET INCOME $ 1,165,700 $ 620,316 $ 785,902 =========== =========== ===========
41 HCB BANCSHARES, INC. (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2002, 2001 AND 2000
OPERATING ACTIVITIES: 2002 2001 2000 Net income $ 1,165,700 $ 620,316 $ 785,902 Adjustments to reconcile net income to net cash provided (used) by operating activities: Distributions in excess (less) than bank subsidiary income 7,930,755 405,596 (756,318) Changes in operating assets and liabilities: Other assets 239,824 (259,752) 954,507 Accrued expenses and other liabilities (194,647) 228,425 (1,179,190) ------------- ------------ ------------ Net cash provided (used) by operating activities 9,141,632 994,585 (195,099) ------------- ------------ ------------ INVESTING ACTIVITIES: Purchase loan, net of repayments (360,298) -- 1,713,019 ------------- ------------ ------------ Net cash provided (used) by investing activities (360,298) -- 1,713,019 ------------- ------------ ------------ FINANCING ACTIVITIES: Dividends paid (472,296) (474,299) (506,929) Purchase of treasury stock, net (7,562,533) (1,038,686) (2,708,518) ------------- ------------ ------------ Net cash used by financing activities (8,034,829) (1,512,985) (3,215,447) ------------- ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 746,505 (518,400) (1,697,527) CASH AND CASH EQUIVALENTS: Beginning of period 650,497 1,168,897 2,866,424 ------------- ------------ ------------ End of period $ 1,397,002 $ 650,497 $ 1,168,897 ============= ============ ============
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, 2002 ----------------------------------------------------- BEFORE TAX TAX EXPENSE NET-OF-TAX AMOUNT (BENEFIT) AMOUNT AMOUNT UNREALIZED GAINS ON SECURITIES: Unrealized holding gain on securities arising during period $ 2,544,652 $ (1,041,592) $ 1,503,060 Less reclassification adjustment for (gains) losses included in net income (1,518) -- (1,518) ------------- ------------ ----------- Other comprehensive income $ 2,543,134 $ (1,041,592) $ 1,501,542 ============= ============ =========== YEAR ENDED JUNE 30, 2001 ----------------------------------------------------- BEFORE TAX TAX EXPENSE NET-OF-TAX AMOUNT (BENEFIT) AMOUNT AMOUNT UNREALIZED GAINS ON SECURITIES: Unrealized holding gain on securities arising during period $ 7,236,824 $ 2,894,756 $ 4,342,068 Less reclassification adjustment for (gains) losses included in net income -- -- -- ------------- ----------- ----------- Other comprehensive income $ 7,236,824 $ 2,894,756 $ 4,342,068 ============= =========== =========== YEAR ENDED JUNE 30, 2000 ----------------------------------------------------- BEFORE TAX TAX EXPENSE NET-OF-TAX AMOUNT (BENEFIT) 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) ============ ============ ============
19. SUBSEQUENT EVENTS On July 19, 2002, the bank sold its Monticello branch to Simmons First Bank of South Arkansas. The sale included approximately $8.3 million in loans, $1.5 million in fixed assets, $0.2 million in other assets, and $13.2 million in deposits. The bank recognized a premium on the deposits of approximately $0.9 million and the difference was paid in cash to the buyer. The resulting after tax gain on the sale of the Monticello branch of approximately $440,000 translates into $0.29 in earnings per share. 43 CORPORATE INFORMATION DIRECTORS MAIN OFFICE: Vida H. Lampkin 237 Jackson Street, S.W. Chairman of the Board Camden, Arkansas Cameron D. McKeel BRANCH OFFICES: President and Chief Executive Officer 4937 Highway 5 North Bryant, Arkansas Bruce D. Murry Retired Owner, Bruce's 1125 Fairview Road SW Camden, Arkansas Camden, Arkansas Carl E. Parker, Jr. 610 West 4th Street General Manager, Camden Monument Co. Fordyce, Arkansas Camden, Arkansas 473 Highway 425 North Clifford Steelman Monticello, Arkansas Retired Human Resource Administrator, Camden, Arkansas 108 South Main Street Sheridan, Arkansas F. Michael Akin President, CEO - Akin Industries INDEPENDENT AUDITOR: Monticello, Arkansas BKD, LLP John G. Rich 400 West Capital Of Counsel, Eppenstein & Eppenstein Suite 2500, P.O. Box 3667 New York, New York Little Rock, AR 72203-3667 EXECUTIVE OFFICERS: GENERAL COUNSEL: Charles T. Black Robert S. Laney Senior Vice President and Chief P.O. Box 777 Lending Officer Camden, Arkansas 71711-0777 Paula J. Bergstrom Senior Vice President Administration SECURITIES AND REGULATORY and Secretary COUNSEL: Scott A. Swain Senior Vice President and Chief Stradley Ronon Stevens & Young, LLP Financial Officer 1220 19th Street, N.W., Suite 700 ANNUAL STOCKHOLDERS MEETING: Washington, D.C. 20036 November 21, 2002 - 10:00 a.m. STOCK REGISTRAR & TRANSFER Camden Country Club AGENT: 1915 Washington Street SW Camden, Arkansas 71701 Registrar and Transfer Company Record Date - October 7, 2002 Cranford, New Jersey 07016-3572 ANNUAL REPORT ON FORM 10-K: A copy of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2002, as filed with the Securities and Exchange Commission, will be furnished without charge to stockholders as of the record date for the 2002 Annual Meeting upon written request to: Corporate Secretary, HCB Bancshares, Inc., 237 Jackson Street, S.W, Camden, Arkansas 71701-3941. 44 EX-99 4 exhibit99fm10ka2002-1843.txt EXHIBIT 99 TO AMENDMENT NO. 1 TO FORM 10-K EXHIBIT 99 CERTIFICATION - ------------- To my knowledge, this Annual Report on Form 10-K for the year ended June 30, 2002, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in this Annual Report fairly presents, in all material respects, the financial condition and results of operations of HCB Bancshares, Inc. By: /s/ Cameron D. McKeel ----------------------------------- Name: Cameron D. McKeel Title:Chief Executive Officer By: /s/ Scott A. Swain ----------------------------------- Name: Scott A. Swain Title:Chief Financial Officer Date: October 18, 2002 -----END PRIVACY-ENHANCED MESSAGE-----