-----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, CWbJtCVIRuVf7f6iVoinPQGr9N822+wHmD0elSYzcZ2VUjQCXKzAMzJnfWtki6z5 tt1JA1JgPoXRiUkqoe5Z/g== 0000904280-03-000273.txt : 20031112 0000904280-03-000273.hdr.sgml : 20031111 20031112113216 ACCESSION NUMBER: 0000904280-03-000273 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031112 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22423 FILM NUMBER: 03991839 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-Q 1 f10q10-1843.txt QUARTERLY FILING FOR 9/30/03 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Mark One [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-22423 HCB BANCSHARES, INC. ---------------------------------------------------- (Exact name of registrant as specified in its charter) OKLAHOMA 62-1670792 - ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 237 Jackson Street, Camden, Arkansas 71701 - ------------------------------------ --------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (870) 836-6841 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days: Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: 1,450,230 shares of common stock outstanding as of October 31, 2003. CONTENTS PART I. FINANCIAL INFORMATION --------------------- Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Statements of Financial Condition at September 30, 2003 (unaudited) and June 30, 2003 Condensed Consolidated Statements of Income and Comprehensive (Loss) Income Three Months Ended September 30, 2003 and 2002 (unaudited) Condensed Consolidated Statements of Cash Flows Three Months Ended September 30, 2003 and 2002 (unaudited) Notes to Condensed Consolidated Financial Statements (unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk Item 4. Controls and Procedures PART II. OTHER INFORMATION ----------------- Item 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES Page 2
HCB BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION SEPTEMBER 30, 2003 (UNAUDITED) AND JUNE 30, 2003 - -------------------------------------------------------------------------------- SEPTEMBER 30, 2003 JUNE 30, ASSETS (UNAUDITED) 2003 ------------- -------- Cash and due from banks $ 3,200,467 $ 3,003,656 Interest-bearing deposits with banks 5,779,949 4,203,320 -------------- -------------- Cash and cash equivalents 8,980,416 7,206,976 Investment securities available for sale, at fair value 124,225,234 129,960,346 Loans receivable, net of allowance 96,730,290 100,779,545 Accrued interest receivable 1,208,796 1,456,372 Federal Home Loan Bank stock 3,397,700 4,704,100 Premises and equipment, net 5,050,024 5,113,645 Real estate held for sale 17,501 246,160 Other assets 2,488,077 1,557,639 -------------- -------------- TOTAL $ 242,098,038 $ 251,024,783 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposits $ 145,878,328 $ 151,956,504 Federal Home Loan Bank advances 67,264,240 69,068,534 Advance payments by borrowers for taxes and insurance 74,657 83,879 Accrued interest payable 517,014 563,620 Other liabilities 1,340,979 897,259 -------------- -------------- Total liabilities 215,075,218 222,569,796 -------------- -------------- STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 10,000,000 shares authorized, 2,645,000 shares issued, 1,447,013 and 1,457,982 shares outstanding at September 30, 2003 and June 30, 2003, respectively 26,450 26,450 Additional paid-in capital 25,823,812 25,781,908 Unearned ESOP shares (581,900) (634,800) Unearned MRP shares (75,409) (82,625) Accumulated other comprehensive income 887,275 2,221,285 Retained earnings 15,534,909 15,537,315 -------------- -------------- 41,615,137 42,849,533 Treasury stock, at cost, 1,197,987 and 1,187,018 shares at September 30, 2003, and June 30, 2003, respectively (14,592,317) (14,394,546) -------------- -------------- Total stockholders' equity 27,022,820 28,454,987 -------------- -------------- TOTAL $ 242,098,038 $ 251,024,783 ============== ==============
See accompanying notes to condensed consolidated financial statements. Page 3
HCB BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE (LOSS) INCOME THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED) - -------------------------------------------------------------------------------- THREE MONTHS ENDED SEPTEMBER 30, 2003 (UNAUDITED) 2002 ---- ---- INTEREST INCOME: Interest and fees on loans $ 1,815,606 $ 2,275,167 Investment securities: Taxable 1,021,882 1,293,521 Nontaxable 314,561 321,862 Other 33,228 80,992 -------------- ------------- Total interest income 3,185,277 3,971,542 -------------- ------------- INTEREST EXPENSE: Deposits 772,622 1,064,439 Federal Home Loan Bank advances 1,013,448 1,196,079 -------------- ------------- Total interest expense 1,786,070 2,260,518 -------------- ------------- NET INTEREST INCOME 1,399,207 1,711,024 PROVISION FOR LOAN LOSSES 120,000 90,000 -------------- ------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,279,207 1,621,024 -------------- ------------- NONINTEREST INCOME: Service charges on deposit accounts 225,091 234,716 Gain on sale of loans available for sale, net 184,153 94,198 Gain on sale of branch -- 742,942 Other 22,918 55,939 -------------- ------------- Total noninterest income 432,162 1,127,795 -------------- ------------- NONINTEREST EXPENSE: Salaries and employee benefits 912,516 985,805 Net occupancy expense 217,339 237,981 Communication, postage, printing and office supplies 92,332 91,677 Advertising 15,532 43,464 Data processing 107,492 98,587 Professional fees 212,835 148,580 Other 88,949 146,786 -------------- ------------- Total noninterest expense 1,646,995 1,752,880 -------------- ------------- INCOME BEFORE INCOME TAXES 64,374 995,939 INCOME TAX (BENEFIT) PROVISION (57,738) 270,842 -------------- ------------- NET INCOME $ 122,112 $ 725,097 -------------- ------------- (Continued)
Page 4
HCB BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE (LOSS) INCOME THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED) - ------------------------------------------------------------------------------- THREE MONTHS ENDED SEPTEMBER 30, 2003 (UNAUDITED) 2002 ---- ---- OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX: Unrealized holding (loss) gain on securities arising during period $ (1,334,010) $ 1,006,506 Reclassification adjustment for gains included in net income -- -- -------------- ------------- Other comprehensive (loss) income (1,334,010) 1,006,506 -------------- ------------- COMPREHENSIVE (LOSS) INCOME $ (1,211,898) $ 1,731,603 ============== ============= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING BASIC 1,393,140 1,343,943 ============== ============= DILUTED 1,462,106 1,427,939 ============== ============= EARNINGS PER SHARE: Basic $ 0.09 $ 0.54 ==== ==== Diluted $ 0.08 $ 0.51 ==== ==== DIVIDENDS PER SHARE $ 0.09 $ 0.08 ==== ==== (Concluded)
See accompanying notes to condensed consolidated financial statements. Page 5
HCB BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED) - -------------------------------------------------------------------------------- THREE MONTHS ENDED SEPTEMBER 30, 2003 (UNAUDITED) 2002 ---- ---- OPERATING ACTIVITIES: Net income $ 122,112 $ 725,097 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation 146,987 156,859 Amortization (accretion) of: Deferred loan origination fees 29,317 26,163 Premiums and discounts on loans, net (1,103) (958) Premiums and discounts on investment securities, net 203,957 54,026 Provision for loan losses 120,000 90,000 Gain on sale of branch -- (742,942) Deferred income taxes 6,517 270,842 Originations of loans held for sale (11,324,551) (7,143,961) Proceeds from sales of loans 12,370,427 5,400,812 Stock compensation expense 102,020 87,082 Change in accrued interest receivable 247,576 145,473 Change in accrued interest payable (46,606) (33,253) Change in other assets (109,225) (288,452) Change in other liabilities 443,720 (47,581) ------------ ------------- Net cash provided (used) by operating activities 2,311,148 (1,300,793) ------------ ------------- INVESTING ACTIVITIES: Purchases of investment securities - available for sale (12,987,317) (6,218,957) Redemption (purchase) of Federal Home Loan Bank stock 1,306,400 (400) Purchases of premises and equipment (83,366) (211,239) Net change due to branch sale -- (2,523,471) Loan repayments, net of originations 2,855,166 4,448,935 Principal payments on investment securities 16,356,731 5,934,096 Net increase (decrease) in real estate held for resale 228,659 (65,921) ------------ ------------- Net cash provided by investing activities 7,676,273 1,363,043 ------------ ------------- (Continued)
Page 6 HCB BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED SEPTEMBER, 2003 AND 2002 (UNAUDITED) - --------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 2003 (UNAUDITED) 2002 ---- ---- FINANCING ACTIVITIES: Net decrease in deposits $ (6,078,176) $ (1,614,241) Advances from Federal Home Loan Bank -- -- Repayment of Federal Home Loan Bank advances (1,804,294) (2,298,790) Net (decrease) increase in advance payments by borrowers for taxes and insurance (9,222) 10,693 Purchase of treasury stock (197,771) -- Dividends paid (124,518) (114,006) -------------- -------------- Net cash used by financing activities (8,213,981) (4,016,344) -------------- -------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,773,440 (3,954,094) CASH AND CASH EQUIVALENTS: Beginning of period 7,206,976 17,896,829 -------------- -------------- End of period $ 8,980,416 $ 13,942,735 ============== ============== See accompanying notes to condensed consolidated financial statements. (Concluded)
Page 7 HCB BANCSHARES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION AND CONSOLIDATION HCB Bancshares, Inc. ("Bancshares"), incorporated under the laws of the State of Oklahoma, is a savings bank holding company that owns HCB Investments, Inc. ("HCBI") and HEARTLAND Community Bank and its subsidiary (the "Bank"). Bancshares' business is primarily that of owning the Bank and participating in the Bank's activities. HCBI holds a $500,000 initial investment in EastPoint Technologies LLC, which is the company whose core processing software the Bank utilizes. The accompanying condensed consolidated financial statements include the accounts of Bancshares, HCBI and the Bank and are collectively referred to as the Company. All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements were prepared in accordance with instructions for Form 10-Q. Accordingly, they do not include all of the information required by generally accepted accounting principles. The unaudited statements reflect all adjustments, which are, in the opinion of management, necessary for fair presentation of the financial condition and results of operations and cash flows of the Company. Those adjustments consist only of normal recurring adjustments. The condensed consolidated statements of income and comprehensive income for the three months ended September 30, 2003, are not necessarily indicative of the results that may be expected for the Company's fiscal year ending June 30, 2004. The unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended June 30, 2003, contained in the Company's Annual Report on Form 10-K for the year ended June 30, 2003. NOTE 2 - EARNINGS PER SHARE The weighted average number of common shares used to calculate earnings per share for the periods ended September 30, 2003 and 2002, were as follows: Three months ended September 30, 2003 2002 ---- ---- Basic weighted average shares 1,393,140 1,343,943 Effect of dilutive securities 68,966 83,996 --------- --------- Diluted weighted average shares 1,462,106 1,427,939 ========= ========= The Company has issued stock options that have the potential to be dilutive to its weighted average shares calculation and were dilutive for the three months ending September 30, 2003 and 2002. In addition, the Company has issued MRP shares that have the potential to be dilutive to its weighted average shares calculation, but were anti-dilutive for these three month periods. NOTE 3 - COMMITMENTS AND CONTINGENCIES In the ordinary course of business, the Company has various outstanding commitments and contingent liabilities that are not reflected in the accompanying consolidated financial statements. In addition, the Company may be a defendant from time to time in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial statements of the Company. NOTE 4 - MONTICELLO 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 Bank recognized a net gain on this sale of approximately $743,000. Page 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS When used in this Form 10-Q, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to 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. SIGNIFICANT ACCOUNTING POLICIES The Company's significant accounting policies are set forth in Note 1 of the consolidated financial statements as of June 30, 2003, which was filed on Form 10-K. Of these significant accounting policies, the Company considers its policy regarding the allowance for loan losses to be its most critical accounting policy, because it requires management's most subjective and complex judgments. In addition, changes in economic conditions can have a significant impact on the allowance for loan losses and therefore the provision for loan losses and results of operations. The Company has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Company's assessments may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations and the discovery of information with respect to borrowers which is not known to management at the time of the issuance of the consolidated financial statements. 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. Page 9 ASSET QUALITY The following table sets forth information with respect to the Bank's nonperforming assets at the dates indicated.
September 30, June 30, 2003 2003 ------------- ------------- Loans accounted for on a nonaccrual basis: (1) Real estate: One-to-four family residential............ $ 876,986 $ 1,241,085 Other mortgage loans...................... 1,718,263 1,740,878 Consumer loans............................. 208,464 287,925 Commercial loans........................... 137,720 232,562 ------------ ------------ Total................................. $ 2,941,433 $ 3,502,450 ============ ============ Accruing loans which are contractually past due 90 days or more: Real estate: One-to-four family residential............ $ -- $ -- Other mortgage loans...................... -- -- Commercial loans........................... -- -- Consumer loans............................. -- -- ------------ ------------ Total................................. $ -- $ -- ============ ============ Total nonperforming loans............. $ 2,941,433 $ 3,502,450 ============ ============ Percentage of total loans.................... 2.79% 3.18% ==== ==== Other nonperforming assets (2)............... $ 60,630 $ 246,160 ============ ============ Loans modified in troubled debt restructurings $ 5,337,784 $ 5,355,927 ============ ============
- ------------------ (1) Designated nonaccrual loan payments received are applied first to contractual principal and interest income is recognized only when contractually current. (2) Other nonperforming assets includes foreclosed real estate. During the three months ended September 30, 2003, total nonperforming loans decreased $561,000 primarily due to decreases in one-to-four family residential nonperforming loans. During the three months ended September 30, 2003 and 2002, gross interest income of approximately $69,000 and $34,000, respectively, would have been recorded on loans accounted for on a nonaccrual basis if the loans had been current throughout the respective periods. Interest on such loans included in income during such respective periods was not material. Page 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 nontaxable securities has not been adjusted to a tax equivalent basis. The yield on available for sale securities is based on amortized cost. Loans on a nonaccrual basis are included in the computation of the average balance of loans receivable. Loan fees deferred and accreted into income are included in interest earned. Whenever interest-earning assets equal or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income.
Quarter Ended September 30, ------------------------------------------------------------------------- 2003 2002 ---------------------------------- -------------------------------------- Average Average Average Interest Yield/ Average Interest Yield/ Balance Earned/Paid Rate Balance Earned/Paid Rate Interest-earning assets: Loans receivable....................... $ 99,393,881 $ 1,815,606 7.31% $ 116,001,697 $ 2,275,167 7.85% Investment and mortgage-backed securities Taxable... ........................... 99,059,465 1,021,882 4.13 90,026,436 1,293,521 5.75 Nontaxable............................ 25,119,016 314,561 5.01 25,524,086 321,862 5.04 FHLB stock............................. 4,505,998 22,787 2.02 4,675,384 35,354 3.02 FHLB DDA............................... 4,648,383 9,718 0.84 10,986,527 45,033 1.64 Other interest-earning assets.......... 197,996 723 1.46 179,242 605 1.35 ------------- ----------- ---- ------------- ----------- ---- Total interest-earning assets......... 232,924,739 3,185,277 5.47 247,393,372 3,971,542 6.42 Noninterest-earning assets............... 13,456,455 ----------- 15,885,885 ----------- ------------- ------------- Total assets.......................... $ 246,381,194 $ 263,279,257 ============= ============= Interest-bearing liabilities: NOW, MMDA, statement savings........... $ 46,351,230 145,359 1.25 $ 41,289,431 152,721 1.48 Time deposits.......................... 93,484,475 627,263 2.68 104,293,869 911,718 3.50 FHLB advances.......................... 67,922,457 1,013,448 5.97 80,242,111 1,196,079 5.96 ------------- ----------- ---- ------------- ----------- ---- Total interest-bearing liabilities.... 207,758,162 1,786,070 3.44 225,825,411 2,260,518 4.00 ----------- ----------- Noninterest-bearing liabilities.......... 10,926,313 9,576,723 ------------- ------------- Total liabilities..................... 218,684,475 235,402,134 Equity................................... 27,696,719 27,877,123 ------------- ------------- Total liabilities and equity.......... $ 246,381,194 $ 263,279,257 ============= ============= Net interest income...................... $ 1,399,207 $ 1,711,024 =========== =========== Net interest rate spread................. 2.03% 2.42% ======= ======= Net yield on interest-earning assets..... 2.40% 2.77% ======= ======= Ratio of average interest-earning assets to average interest-bearing liabilities 112.11% 109.55% ======= =======
Page 11 RATE/VOLUME ANALYSIS The following table analyzes dollar amounts of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The table distinguishes between (i) changes attributable to volume (changes in volume multiplied by the prior period's rate) and (ii) changes attributable to rate (changes in rate multiplied by the prior period's volume).
2003 vs. 2002 -------------------------------------- Increase (Decrease) Due to -------------------------------------- Volume Rate Total ---------- -------- ------- (In thousands) Interest income: Loans receivable $ (326) $ (134) $ (460) Investment and mortgage-backed securities Taxable 130 (401) (271) Nontaxable (5) (2) (7) FHLB stock (1) (12) (13) FHLB DDA (26) (9) (35) Other interest-earning assets -- -- -- ------- -------- ------- Total interest-earning assets (228) (558) (786) ------- -------- ------- Interest expense: NOW, MMDA, statement savings 19 (26) (7) Time deposits (94) (190) (284) FHLB advances (184) 1 (183) ------- -------- ------- Total interest-bearing liabilities (259) (215) (474) ------- -------- ------- Change in net interest income $ 31 $ (343) $ (312) ======= ======== =======
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2003 AND JUNE 30, 2003 The Company had consolidated total assets of $242.1 million and $251.0 million at September 30, 2003, and June 30, 2003, respectively. During the three month period ended September 30, 2003, the Company experienced a decrease in its consolidated loan portfolio from $100.8 million at June 30, 2003, to $96.7 million at September 30, 2003. During this same period, interest-bearing deposits in banks, investments, and mortgage-backed securities decreased from $134.2 million at June 30, 2003, to $130.0 million at September 30, 2003. While investments and mortgage-backed securities decreased $4.2 million for the three month period ended September 30, 2003, there were $13.0 million in purchases, a $1.6 million increase in interest-bearing deposits with banks, offset with paydowns of $16.6 million and a $2.2 million decrease in the market value of the securities. The Bank continues to purchase securities to replace both loan prepayments and securities prepayments. The Bank's emphasis in purchasing securities has been mortgage-backed securities with short average lives and very little extension risk if interest rates rise significantly. To provide some liquidity if interest rates rise significantly, the Bank has purchased $4.6 million in noncallable agency securities in a six month ladder formation yielding 2.78% with a weighted average maturity of 3 years. Deposits decreased from $152.0 million at June 30, 2003, to $145.9 million at September 30, 2003. Although the Bank's level of deposits has been sufficient to provide for adequate liquidity, the deposit market remains competitive. The outstanding balances of FHLB borrowings decreased from $69.1 million at June 30, 2003, to $67.3 million at September 30, 2003. Page 12 Stockholders' equity amounted to $27.0 million at September 30, 2003, and $28.5 million at June 30, 2003. The changes in equity were primarily due to a decrease in accumulated other comprehensive income offset by net income for the period. At September 30, 2003, the Bank's regulatory capital exceeded all applicable regulatory capital requirements. COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 Net Income. Net income for the three months ended September 30, 2003, was approximately $122,000 compared to net income of $725,000 for the three months ended September 30, 2002. The changes resulted primarily from a decrease in net interest income of $312,000, a decrease in noninterest income of $696,000, an increase in the provision for loan loss of $30,000, offset by a decrease in noninterest expense of $106,000 and an increase in the income tax benefit of $329,000. The specific reasons for the above changes and the Monticello branch sale effect on noninterest income are discussed below. Interest Income. Interest income for the three months ended September 30, 2003, was approximately $3,185,000, or $786,000 less than interest income for the three months ended September 30, 2002. The total average interest-earning assets decreased $14.5 million, while the yield decreased from 6.42% to 5.47%. The primary contributing factors to the decrease in interest income were a $326,000 and $134,000 decrease due to volume and rate decreases, respectively in loans, a $401,000 decrease due to rate decreases on taxable investments and mortgage-backed securities, offset slightly by a $130,000 increase due to the volume of taxable investments and mortgage-backed securities. For the three months ended September 30, 2003, compared to the three months ended September 30, 2002, the average balance of loans receivable decreased $16.6 million, total loan interest income decreased $460,000 and the average yield on loans decreased 54 basis points. For the same comparative periods, the average balance of investments and mortgage-backed securities receivable increased $8.6 million, while interest income decreased $278,000 and the average yield decreased 129 basis points. Further, the average balance of other interest-earning assets (primarily FHLB DDA's and FHLB stock) decreased $6.5 million, interest income decreased $48,000 and the average yield decreased 63 basis points. Interest Expense. Total average interest-bearing liabilities decreased $18.1 million, while the average interest rate on such liabilities decreased from 4.00% to 3.44%. The average balance of interest-bearing deposits decreased $5.7 million, deposit interest expense decreased $291,000 and the average cost decreased 71 basis points. The average balance of FHLB advances decreased $12.3 million, FHLB interest expense decreased $183,000 and the average cost increased 1 basis point. Of the $474,000 decrease in interest expense, $75,000 was due to volume decreases in deposits, $216,000 was due to rate decreases on deposits and $184,000 was due to volume decreases on FHLB advances offset by a $1,000 increase due to average rate increases on FHLB advances. Net Interest Income. Net interest income for the three months ended September 30, 2003, was $1.4 million, or $312,000 less than net interest income for the three months ended September 30, 2002. The decrease in net interest income for the three months ended September 30, 2003, compared to the three months ended September 30, 2002, was the result of decreases in net rates. Although historically the Company has been liability sensitive, due to the extended length of time that interest rates have remained low, in recent months more of the Company's earning assets are repricing than its costing liabilities resulting in a reduction in its net interest spread. Specifically, due to high prepayments on the Company's taxable investments and mortgage-backed securities portfolio, these funds are reinvested at significantly lower rates. While the Company's deposits continue to cost less as renewing deposits are booked at lower current market offering rates, as of September 30, 2003, the Company has $67.3 million in FHLB advances which represented 31.6% of costing liabilities at that date. All of the Company's FHLB advances carry prepayment penalties. These advances generally are longer term and carry rates of interest that are higher than the interest rates on the Company's deposits. While the Company initially utilized FHLB advances to fund loans and purchase investment securities, thereby leveraging its equity and producing a positive interest rate spread, a significant portion of those assets have since repriced or paid off as Page 13 interest rates have decreased. The Company anticipated replacing maturing investment securities with loan growth and maturing FHLB advances with deposit growth. The anticipated loan growth has not occurred. As of September 30, 2003, the Company's FHLB advances were costing an average rate of 5.97% and had an average maturity of approximately 6 years. As a result, the higher interest rates on FHLB advances paid by the Company contribute to a lower interest rate spread than the Company might otherwise have if it were able to fund all its assets with deposits or lower rate borrowings. Moreover, interest rates on FHLB advances are fixed for longer periods of time than are the interest rates on deposits. As a result, in the event of a decrease in interest rates, the Company will be unable to reprice its FHLB advances without incurring a substantial prepayment penalty, which would result in a significant charge to income or a further reduction in the Company's interest rate spread. Conversely, in the event of increases in interest rates, the FHLB advances will not reprice and the prepayment penalty decreases eventually to zero. Provision for Loan Losses. During the three months ended September 30, 2003, 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 total of $120,000 in provision for loan losses for the three months ended September 30, 2003. The allowance for loan losses of $1.6 million at September 30, 2003, represented 1.50% of gross outstanding loans which compares to 1.46% as of June 30, 2003. The provision was made in consideration of reviews of individual loans and the fact that nonperforming loans as of September 30, 2003, as a percent of total loans decreased only slightly to 2.79% from 3.18% as of June 30, 2003. In addition, total classified assets as a percent of the Bank's tangible capital plus allowance for loan loss was 35.0% as of September 30, 2003, which compares to 39.8% as of June 30, 2003. As of September 30, 2003, the Bank had $8.7 million in assets classified substandard or doubtful as compared to $9.8 million as of June 30, 2003. 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 period, nor were there significant changes in the estimation methodologies employed or assumptions utilized. Nonperforming loan and loss trends indicated a need to slightly increase loss experience factors during the period for consumer auto and other consumer loans. The effect was an increase in estimated required allowance for loan losses of approximately $33,000, compared to the previous experience factors utilized. Noninterest Income. Noninterest income is typically comprised primarily of gains on the sales of loans and service charges on deposit accounts. However, for the three months ended September 30, 2002, the Company recognized a gain on the sale of its Monticello branch of approximately $743,000. Noninterest income for the three months ended September 30, 2003, was approximately $432,000 compared to approximately $1,128,000 for the three months ended September 30, 2002. This decrease of approximately $696,000 is primarily the result of the $743,000 gain on the sale of the Monticello branch. Also, as expected, service charge income on deposit accounts decreased slightly due to the sale of the Monticello branch. However, the Company experienced a $90,000 increase in gains on the sales of loans held for sale. It should be noted, that the increase in the net gain on sales of loans was primarily due to sustained low mortgage interest rates and if these rates were to rise substantially, this income would be expected to drop substantially. Noninterest Expense. The major components of noninterest expense are typically 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 three months ended September 30, 2003, decreased $106,000 compared to the three months ended September 30, 2002. Significant components of the decrease in noninterest expense were a $73,000 decrease in salaries and employee benefits, a $21,000 decrease in net occupancy expense, a $28,000 decrease in advertising, a $57,000 decrease in other expenses, offset by a $64,000 increase in professional fees and a $9,000 increase in data processing expense. Page 14 The $64,000 increase in professional fees relates primarily to consulting and legal fees associated with the Company's decision to review all available alternatives to maximize shareholder value with the help of a consulting firm. Excluding those fees, total professional fees would have decreased approximately $36,000 for the period. Income Taxes. The effective income tax rates for the Company for the three months ended September 30, 2003 and 2002 were (89.7)% and 27.2%, respectively. The variance in the effective rate from the expected statutory rate is due primarily to tax exempt interest. The negative rate for fiscal three months ended September 30, 2003, 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 $2.0 million as of September 30, 2003, and June 30, 2003. 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. SOURCES OF CAPITAL AND LIQUIDITY The Company has no business other than that of the Bank and banking related activities. Bancshares' primary sources of liquidity are cash, dividends paid by the Bank and earnings on investments and loans. In addition, the Bank is subject to regulatory limitations with respect to the payment of dividends to Bancshares. The Bank has historically maintained substantial levels of capital. The assessment of capital adequacy is dependent on several factors including asset quality, earnings trends, liquidity and economic conditions. Maintenance of adequate capital levels is integral to provide stability to the Bank. The Bank needs to maintain substantial levels of regulatory capital to give it maximum flexibility in the changing regulatory environment and to respond to changes in the market and economic conditions. The Bank's primary sources of funds are savings deposits, borrowed funds, proceeds from principal and interest payments on loans and mortgage-backed securities, interest payments and maturities of investment securities and earnings. While scheduled principal repayments on loans and mortgage-backed securities and interest payments on investment securities are a relatively predictable source of funds, deposit flows and loan and mortgage-backed securities prepayments are greatly influenced by general interest rates, economic conditions, competition and other factors. At September 30, 2003 and June 30, 2003, the Company had designated all securities as available for sale. In addition to internal sources of funding, the Bank as a member of the FHLB, has substantial borrowing authority with the FHLB. The Bank's use of a particular source of funds is based on need, comparative total costs and availability. At September 30, 2003, the Bank had $5.4 million in commitments to originate loans (including unfunded portions of construction loans) and approximately $1.7 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 $75.6 million. Management anticipates that the Bank will have adequate resources to meet its current commitments through internal funding sources described above. Management is not aware of any current recommendations by its regulatory authorities, legislation, competition, trends in interest rate sensitivity, new accounting guidance or other material events and uncertainties that would have a material effect on the Bank's ability to meet its liquidity demands. IMPACT OF INFLATION AND CHANGING PRICES The financial statements and related financial data presented herein have been prepared in accordance with instructions to Form 10-Q which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation. Unlike most industrial companies, virtually all of the Bank's assets and liabilities are monetary in nature. As a result, changes in interest rates generally have a more significant impact on a financial institution's performance than do changes in the rate of inflation. Page 15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For a discussion of the Company's asset and liability management policies as well as the potential impact of interest rate changes upon the market value of the Bank's portfolio equity, see "MARKET RISK" in the Company's Annual Report on Form 10-K for the year ended June 30, 2003. There has been no material change in the Company's asset and liability position since June 30, 2003. ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this report, management of the Company carried out an evaluation, under the supervision and with the participation of the Company's principal executive officer and principal financial officer, of the effectiveness of the Company's disclosure controls and procedures. Based on this evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. In addition, there have been no changes in the Company's internal control over financial reporting (to the extent that elements of internal control over financial reporting are subsumed within disclosure controls and procedures) identified in connection with the evaluation described in the above paragraph that occurred during the Company's last fiscal quarter, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II. OTHER INFORMATION ----------------- Item 1. Legal Proceedings In the ordinary course of business, the Company has various outstanding commitments and contingent liabilities that are not reflected in the accompanying consolidated financial statements. In addition, the Company may be a defendant in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial statements of the Company. Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K Exhibits: 31.1 Rule 13a-14(a) Certification of Chief Executive Officer 31.2 Rule 13a-14(a) Certification of Chief Financial Officer 32 18 U.S.C. Section 1350 Certification Reports on Form 8-K: On August 13, 2003, the Registrant filed a Current Report on Form 8-K under items 7 and 12 to report that the Company had issued a press release announcing its unaudited financial results for the quarter and fiscal year ended June 30, 2003. Page 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HCB BANCSHARES, INC. Registrant Date: November 5, 2003 By: /s/Charles T. Black --------------------------------- Charles T. Black President and Chief Executive Officer (Duly Authorized Representative) Date: November 5, 2003 By: /s/Scott A. Swain --------------------------------- Scott A. Swain Senior Vice President and Chief Financial Officer (Principal Financial Officer) Page 17 EX-31 3 e3110q-1843.txt EXHIBIT 31.1 CERTIFICATION CERTIFICATION I, Charles T. Black, President and Chief Executive Officer of HCB Bancshares, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of HCB Bancshares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 5, 2003 By: /s/ Charles T. Black -------------------------------------------- Name: Charles T. Black Title: President and Chief Executive Officer EX-31 4 ex31210q-1843.txt EXHIBIT 31.2 CERTIFICATION Exhibit 31.2 CERTIFICATION I, Scott A. Swain, Senior Vice President and Chief Financial Officer of HCB Bancshares, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of HCB Bancshares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 5, 2003 By: /s/ Scott A. Swain ---------------------------------------- Name: Scott A. Swain Title: Senior Vice President and Chief Financial Officer EX-32 5 e3210q-1843.txt CERTIFICATIONS Exhibit 32 CERTIFICATION PURSUANT TO 18. U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned executive officers of the Registrant hereby certify that this Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. By: /s/Charles T. Black --------------------------------- Charles T. Black President and Chief Executive Officer (Duly Authorized Representative) By: /s/Scott A. Swain --------------------------------- Scott A. Swain Senior Vice President and Chief Financial Officer (Principal Financial Officer) Date: November 5, 2003 -----END PRIVACY-ENHANCED MESSAGE-----