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