FORM 10-Q
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, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-22423
HCB BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
OKLAHOMA 62-1670792
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
237 Jackson Street, Camden, Arkansas 71701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (870) 836-6841
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days:
Yes [X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: 1,497,196 shares of common stock
outstanding as of October 31, 2002.
Page 1
CONTENTS
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Financial Condition at
September 30, 2002 (unaudited) and June 30, 2002
Condensed Consolidated Statements of Income and Comprehensive
Income Three Months Ended September 30, 2002 and 2001
(unaudited)
Condensed Consolidated Statements of Cash Flows Three Months
Ended September 30, 2002 and 2001 (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
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, 2002 (UNAUDITED) and JUNE 30, 2002
- ----------------------------------------------------------------------------------------------------------------
SEPTEMBER 30,
2002 JUNE 30,
ASSETS (UNAUDITED) 2002
--------------- --------
Cash and due from banks $ 2,969,305 $ 3,492,257
Interest-bearing deposits with banks 10,973,430 14,404,572
------------ ------------
Cash and cash equivalents 13,942,735 17,896,829
Investment securities available for sale, at fair value 119,994,699 118,198,564
Loans receivable, net of allowance 113,127,749 124,176,898
Accrued interest receivable 1,525,861 1,721,612
Federal Home Loan Bank stock 4,710,300 4,709,900
Premises and equipment, net 5,928,135 7,112,211
Goodwill, net -- 131,250
Real estate held for sale 662,319 910,587
Other assets 1,012,357 1,567,443
------------ ------------
TOTAL $260,904,155 $276,425,294
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $150,199,483 $165,005,183
Federal Home Loan Bank advances 79,965,146 82,263,936
Advance payments by borrowers for
taxes and insurance 121,139 110,446
Accrued interest payable 672,067 740,008
Other liabilities 1,505,353 1,569,433
------------ ------------
Total liabilities 232,463,188 249,689,006
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 10,000,000 shares authorized, 2,645,000
shares issued, 1,425,056 and 1,425,056 shares outstanding at
September 30, 2002 and June 30, 2002, respectively 26,450 26,450
Additional paid-in capital 25,858,029 25,832,641
Unearned ESOP shares (793,500) (846,400)
Unearned MRP shares (107,375) (116,169)
Accumulated other comprehensive income 2,448,448 1,441,942
Retained earnings 15,561,179 14,950,088
------------ ------------
42,993,231 41,288,552
Treasury stock, at cost, 1,219,944 and 1,219,944 shares at
September 30, 2002, and June 30, 2002, respectively (14,552,264) (14,552,264)
------------- -------------
Total stockholders' equity 28,440,967 26,736,288
------------ ------------
TOTAL $260,904,155 $276,425,294
============ ============
See accompanying notes to condensed consolidated financial statements.
Page 3
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (UNAUDITED)
- ------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
2002 (UNAUDITED) 2001
---- ----
INTEREST INCOME:
Interest and fees on loans $2,275,167 $2,803,304
Investment securities:
Taxable 1,293,521 1,373,940
Nontaxable 321,862 382,707
Other 80,992 140,790
---------- ----------
Total interest income 3,971,542 4,700,741
---------- ----------
INTEREST EXPENSE:
Deposits 1,064,439 1,711,601
Federal Home Loan Bank advances 1,196,079 1,326,236
Note payable -- 1,000
---------- ----------
Total interest expense 2,260,518 3,038,837
---------- ---------
NET INTEREST INCOME 1,711,024 1,661,904
PROVISION FOR LOAN AND INVESTMENT
LOSSES 90,000 60,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND INVESTMENT LOSSES 1,621,024 1,601,904
---------- ----------
NONINTEREST INCOME:
Service charges on deposit accounts 234,716 247,529
Gain on sale of branch 742,942 --
Other 150,137 127,197
---------- ----------
Net noninterest income 1,127,795 374,726
---------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits 985,805 952,528
Net occupancy expense 237,981 276,859
Communication, postage, printing and office supplies 91,677 107,041
Advertising 43,464 56,142
Data processing 98,587 81,089
Professional fees 148,580 121,930
Amortization of goodwill -- 18,750
Other 146,786 101,008
---------- ----------
Total noninterest expense 1,752,880 1,715,347
---------- ----------
INCOME BEFORE INCOME TAXES 995,939 261,283
INCOME TAX PROVISION (BENEFIT) 270,842 (24,000)
---------- -----------
NET INCOME $ 725,097 $ 285,283
---------- ----------
(Continued)
Page 4
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (UNAUDITED)
- -----------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
2002 (UNAUDITED) 2001
---- ----
OTHER COMPREHENSIVE INCOME,
NET OF TAX:
Unrealized holding gain on securities arising
during period $ 1,006,506 $ 1,335,777
Reclassification adjustment for gains
included in net income -- --
----------- -----------
Other comprehensive income 1,006,506 1,335,777
----------- -----------
COMPREHENSIVE INCOME $ 1,731,603 $ 1,621,060
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
BASIC 1,343,943 1,768,494
=========== ===========
DILUTED 1,427,939 1,843,429
=========== ===========
EARNINGS PER SHARE:
Basic $ 0.54 $ 0.16
====== ======
Diluted $ 0.51 $ 0.15
====== ======
DIVIDENDS PER SHARE $ 0.08 $ 0.06
====== ======
(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, 2002 AND 2001 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
2002 (UNAUDITED) 2001
------ -------
OPERATING ACTIVITIES:
Net income $ 725,097 $ 285,283
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 156,859 192,616
Amortization (accretion) of:
Deferred loan origination fees 26,163 (3,396)
Goodwill -- 18,750
Premiums and discounts on loans, net (958) (1,103)
Premiums and discounts on investment securities, net 54,026 19,050
Provision for loan losses 90,000 60,000
Gain on sale of branch (742,942) --
Deferred income taxes 270,842 (24,000)
Originations of loans held for sale (7,143,961) (6,208,096)
Proceeds from sales of loans 5,400,812 5,899,495
Stock compensation expense 87,082 29,457
Change in accrued interest receivable 145,473 118,090
Change in accrued interest payable (33,253) (70,590)
Change in other assets (288,452) 27,585
Change in other liabilities (47,581) (74,280)
------------ ------------
Net cash provided (used) by operating activities (1,300,793) 268,861
------------ -----------
INVESTING ACTIVITIES:
Purchases of investment securities - available for sale (6,218,957) (4,827,871)
Redemption (purchase) of Federal Home Loan Bank stock (400) 17,700
Purchases of premises and equipment (211,239) (87,197)
Net change due to branch sale (2,523,471) --
Loan originations, net of repayments 4,448,935 (3,651,670)
Principal payments on investment securities 5,934,096 5,430,995
Net increase in real estate held for resale (65,921) (64,831)
------------ ------------
Net cash provided (used) by investing activities 1,363,043 (3,182,874)
----------- ------------
(Continued)
Page 6
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER, 2002 AND 2001 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
2002 (UNAUDITED) 2001
------ -------
FINANCING ACTIVITIES:
Net decrease in deposits $ (1,614,241) $ (713,403)
Advances from Federal Home Loan Bank -- 2,056,000
Repayment of Federal Home Loan Bank advances (2,298,790) (5,801,914)
Net increase in advance payments by borrowers
for taxes and insurance 10,693 41,928
Repayment of note payable -- (80,000)
Purchase of treasury stock -- (1,656,813)
Dividends paid (114,006) (108,387)
------------- -------------
Net cash used by financing activities (4,016,344) (6,262,589)
------------- -------------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (3,954,094) (9,176,602)
CASH AND CASH EQUIVALENTS:
Beginning of period 17,896,829 18,410,021
------------ ------------
End of period $ 13,942,735 $ 9,233,419
============ ============
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, 2002, are not necessarily indicative of the results that may
be expected for the Company's fiscal year ending June 30, 2003. 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, 2002, contained in the Company's Annual Report on
Form 10-K for the year ended June 30, 2002.
NOTE 2 - EARNINGS PER SHARE
The weighted average number of common shares used to calculate earnings per
share for the periods ended September 30, 2002 and 2001, were as follows:
Three months ended
September 30,
2002 2001
---- ----
Basic weighted - average shares 1,343,943 1,768,494
Effect of dilutive securities 83,996 74,935
---------- ----------
Diluted weighted - average shares 1,427,939 1,843,429
========== ==========
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, 2002 and 2001. 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.
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.
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
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,
-------------------------------------------------------------------------
2002 2001
----------------------------------- ----------------------------------
Average Average
Average Interest Yield/ Average Interest Yield/
Balance Earned/Paid Rate Balance Earned/Paid Rate
------- ----------- ------- ------- ----------- -------
Interest-earning assets:
Loans receivable......................... $116,001,697 $2,275,167 7.85% $133,640,481 $2,803,304 8.39%
Investment and mortgage-backed
securities
Taxable............................... 90,026,436 1,293,521 5.75 88,801,112 1,373,940 6.19
Nontaxable............................ 25,524,086 321,862 5.04 30,492,676 382,707 5.02
FHLB stock............................. 4,675,384 35,354 3.02 4,693,588 95,245 8.12
FHLB DDA............................... 10,986,527 45,033 1.64 10,647,850 43,175 1.62
Other interest-earning assets.......... 179,242 605 1.35 144,337 2,370 6.57
----------- --------- ---- ----------- --------- ----
Total interest-earning assets......... 247,393,372 3,971,542 6.42 268,420,044 4,700,741 7.01
--------- ---------
Noninterest-earning assets............... 15,885,885 16,058,237
----------- -----------
Total assets.......................... $263,279,257 $284,478,281
=========== ===========
Interest-bearing liabilities:
NOW, MMDA, statement savings........... $ 41,289,431 152,721 1.48 $ 42,609,454 303,069 2.85
Time deposits.......................... 104,293,869 911,718 3.50 110,326,785 1,408,532 5.11
FHLB advances.......................... 80,242,111 1,196,079 5.96 90,066,400 1,326,236 5.89
Note payable........................... -- -- -- 58,261 1,000 6.87
----------- --------- ---- ----------- --------- ----
Total interest-bearing liabilities.... 225,825,411 2,260,518 4.00 243,060,900 3,038,837 5.00
--------- ---------
Noninterest-bearing liabilities.......... 9,576,723 8,766,453
----------- -----------
Total liabilities..................... 235,402,134 251,827,353
Equity................................... 27,877,123 32,650,928
----------- -----------
Total liabilities and equity.......... $263,279,257 $284,478,281
=========== ===========
Net interest income...................... $1,711,024 $1,661,904
========= =========
Net interest rate spread................. 2.42% 2.01%
==== ====
Net yield on interest-earning assets..... 2.77% 2.48%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 109.55% 110.43%
======= ======
Page 10
RATE/VOLUME ANALYSIS
The following table analyzes dollar amounts of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period's
rate), (ii) changes attributable to rate (changes in rate multiplied by the
prior period's volume) and (iii) changes in rate/volume (changes in rate
multiplied by changes in volume).
2002 vs. 2001
---------------------------------------------
Increase (Decrease)
Due to
---------------------------------------------
Rate/
Volume Rate Volume Total
------ ---- ------ -----
(In thousands)
Interest income:
Loans receivable $ (370) $ (182) $ 24 $(528)
Investment and mortgage-backed securities
Taxable 19 (98) (1) (80)
Nontaxable (62) 2 (1) (61)
FHLB stock -- (60) -- (60)
FHLB DDA 1 -- 1 2
Other interest-earning assets 1 (2) (1) (2)
----- ----- ---- ----
Total interest-earning assets (411) (340) 22 (729)
----- ----- ---- ----
Interest expense:
NOW, MMDA, statement savings (9) (145) 4 (150)
Time deposits (77) (444) 24 (497)
FHLB advances (145) 16 (1) (130)
Note payable (1) -- -- (1)
----- ----- ---- ----
Total interest-bearing liabilities (232) (573) 27 (778)
----- ----- ---- ----
Change in net interest income $ (179) $ 233 $ (5) $ 49
===== ===== ==== ====
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2002 AND JUNE 30, 2002
The Company had consolidated total assets of $260.9 million and $276.4
million at September 30, 2002, and June 30, 2002, respectively. During the three
month period ended September 30, 2002, the Company experienced a decrease in its
consolidated loan portfolio from $124.2 million at June 30, 2002, to $113.1
million at September 30, 2002. Of the $11.1 million decrease, $8.3 million is
due to the sale of loans in the Monticello branch sale.
During this same period, investments and mortgage-backed securities
increased from $118.2 million at June 30, 2002, to $120.0 million at September
30, 2002. While investments and mortgage-backed securities increased $1.8
million for the three month period ended September 30, 2002, there were $5.9
million in paydowns offset with purchases of $6.2 million and a $1.5 million
increase in the market value of the securities.
Deposits decreased from $165.0 million at June 30, 2002, to $150.2 million
at September 30, 2002. Of the $14.8 million decrease, $13.2 million is due to
the sale of deposits in the Monticello branch sale. 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 $82.3 million at June 30, 2002, to $80.0 million at September 30,
2002.
Stockholders' equity amounted to $28.4 million at September 30, 2002, and
$26.7 million at June 30, 2002. The changes in equity were primarily due to an
increase in accumulated other comprehensive income and net income for the
period. At September 30, 2002, the Bank's regulatory capital exceeded all
applicable regulatory capital requirements.
Page 11
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2002 AND 2001
Net Income. Net income for the three months ended September 30, 2002, was
approximately $725,000 compared to net income of $285,000 for the three months
ended September 30, 2001. The changes resulted primarily from an increase in net
interest income of $49,000, an increase in noninterest income of $753,000 offset
by an increase in the provision for loan and investment loss of $30,000, a
decrease in the income tax benefit of $295,000 and a increase in noninterest
expense of $37,000. The specific reasons for the above changes and the
Monticello branch sale effect on net income are discussed below.
Interest Income. Interest income for the three months ended September 30,
2002, was approximately $3,972,000, or $729,000 less than interest income for
the three months ended September 30, 2001. The total average interest-earning
assets decreased $21.0 million, while the yield decreased from 7.01% to 6.42%.
Of the $729,000 decrease in interest income, $370,000 was due to volume
decreases in loans, $182,000 was due to rate decreases on loans, $98,000 was due
to rate decreases on taxable investment and mortgage-backed securities, $62,000
was due to volume decreases on nontaxable investments and mortgage-backed
securities, $60,000 was due to rate decreases on FHLB stock, offset by an
increase in the volume of taxable investments and mortgage-backed securities.
For the three months ended September 30, 2002, compared to the three months
ended September 30, 2001, the average balance of loans receivable decreased
$17.6 million, total loan interest income decreased $528,000 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
decreased $3.7 million, interest income decreased $141,000 and the average yield
decreased 30 basis points. Further, the average balance of other
interest-earning assets (primarily FHLB DDA's and FHLB stock) increased $0.3
million, interest income decreased $60,000 and the average yield decreased 159
basis points.
On July 19, 2002, the Bank sold its Monticello branch that included
approximately $8.3 million in loans at a rate of approximately 8.10 percent.
This transaction had the effect of reducing average loans outstanding by
approximately $6.5 million during the three months ended September 30, 2002, and
reducing interest income by approximately $133,000 for the same period.
Interest Expense. Total average interest-bearing liabilities decreased
$17.2 million, while the average interest rate on such liabilities decreased
from 5.00% to 4.00%. The average balance of interest-bearing deposits decreased
$7.4 million, deposit interest expense decreased $647,000 and the average cost
decreased 155 basis points. The average balance of FHLB advances decreased $9.8
million, FHLB interest expense decreased $130,000 and the average cost increased
7 basis points.
Of the $778,000 decrease in interest expense, $86,000 was due to volume
decreases in deposits, $589,000 was due to rate decreases on deposits, $145,000
was due to volume decreases on FHLB advances, offset by a $16,000 increase due
to rate increases on FHLB advances and the difference is an increase due to both
rate and volumes on deposits.
On July 19, 2002, the Bank sold its Monticello branch that included
approximately $13.2 million in deposits at a rate of approximately 2.90 percent.
This transaction had the effect of reducing average deposits outstanding by
approximately $10.4 million during the three months ended September 30, 2002,
and reducing interest expense by approximately $75,000 for the same period.
Net Interest Income. Net interest income for the three months ended
September 30, 2002, was $1.7 million, or $49,000 more than net interest income
for the three months ended September 30, 2001. The increase in net interest
income for the three months ended September 30, 2002, compared to the three
months ended September 30, 2001, was the result of an increase in our interest
rate spread of 41 basis points. 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.
Page 12
Provision for Loan and Investment Losses. During the three months ended
September 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 total of $90,000 in provision for loan
losses for the three months ended September 30, 2002. The allowance for loan
losses of $1.6 million at September 30, 2002, represented 1.38% of gross
outstanding loans which compares to 1.22% as of June 30, 2002. The provision was
made in consideration of reviews of individual loans and the fact that
nonperforming loans as of September 30, 2002, as a percent of total loans
increased to 1.51% from 1.44% as of June 30, 2002. In addition, total classified
assets as a percent of the Bank's tangible capital plus allowance for loan loss
was 35.9% as of September 30, 2002, which compares to 31.0% as of June 30, 2002.
As of September 30, 2002, the Bank had $8.7 million in assets classified
substandard or doubtful as compared to $7.1 million as of June 30, 2002.
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 did not indicate a need
to substantially modify loss experience factors during the period.
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, 2002, was approximately $1,128,000
compared to approximately $375,000 for the three months ended September 30,
2001. This increase of approximately $753,000 is primarily the result of the
$743,000 gain on the sale of the Monticello branch.
Based on the average for the six months ended June 30, 2002, it is
estimated that the sale of the Monticello branch will result in approximately a
$49,000 decrease in noninterest income per quarter, primarily consisting of
service charges on deposit accounts.
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 three months ended September 30, 2002, was $1.75
million compared to $1.72 million for the three months ended September 30, 2001.
Significant components of the increase in noninterest expense were a $33,000
increase in salaries and employee benefits, a $17,000 increase in data
processing expense, a $27,000 increase in professional fees, a $46,000 increase
in other expenses, offset by a $39,000 decrease in net occupancy expense, a
$15,000 decrease in communication, postage, printing and office supplies, a
$19,000 decrease in amortization of goodwill and a $13,000 decrease in
advertising.
Based on the average for the six months ended June 30, 2002, it is
estimated that the sale of the Monticello branch will result in approximately a
$93,000 decrease in noninterest expense per quarter, primarily as a result of
decreased salaries and employee benefits, occupancy expense and data processing
expense.
Income Taxes. The effective income tax rates for the Company for the three
months ended September 30, 2002 and 2001 were 27.2% and (9.2)%, 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, 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 September 30, 2002, and $1.7 million as of June 30, 2002. The
recoverability of this asset is entirely contingent upon the production of
taxable income for income tax reporting purposes. Management
Page 13
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, 2002 and June 30, 2002, 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, 2002, the Bank had $4.5 million in commitments to
originate loans (including unfunded portions of construction loans) and
approximately $1.1 million in unused lines of credit. At the same date, the
total amount of certificates of deposit which were scheduled to mature in one
year or less was $84.7 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.
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, 2002. There has been no material change
in the Company's asset and liability position since June 30, 2002.
Page 14
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
reviewed and evaluated the effectiveness of the Company's disclosure controls
and procedures (as defined in 15 C. F. R. ' 240.13a-14(c) and 15 C. F. R.
'240.15-14(c)) as of a date within ninety days prior to the filing of this
quarterly report. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that the Company's current disclosure
controls and procedures are effective.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect those controls subsequent to the
date of evaluation.
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
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
3.2 Bylaws of HCB Bancshares, Inc. as amended
99 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Reports on Form 8-K:
On July 31, 2002, the Registrant filed a Current Report on Form 8-K under
item 5 to report the completed sale of its Monticello, Arkansas branch office to
Simmons First Bank of South Arkansas.
On August 26, 2002, the Registrant filed a Current Report on Form 8-K under
item 5 to report the commencement of a stock repurchase program to acquire up to
75,171 shares of its common stock, representing approximately 5% of the
outstanding common stock.
Page 15
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 8, 2002 By: /s/Cameron D. McKeel
--------------------------------
Cameron D. McKeel
President and Chief
Executive Officer
(Duly Authorized Representative)
Date: November 8, 2002 By: /s/Scott A. Swain
--------------------------------
Scott A. Swain
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Page 16
CERTIFICATION
I, Cameron D. McKeel, 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 8, 2002
By: /s/ Cameron D. McKeel
---------------------------------------------
Name: Cameron D. McKeel
Title: President, and Chief Executive Officer
Page 17
CERTIFICATION
I, Scott A. Swain, 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 8, 2002
By: /s/ Scott A. Swain
--------------------------------------
Name: Scott A. Swain
Title: Senior Vice President, and
Chief Financial Officer
Page 18