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 December 31, 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, SW, 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 January 31, 2004.
CONTENTS
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Financial Condition at
December 31, 2003 (unaudited) and June 30, 2003
Condensed Consolidated Statements of Income and
Comprehensive Income (Loss) Three Months and Six Months
Ended December 31, 2003 and 2002 (unaudited)
Condensed Consolidated Statements of Cash Flows Six Months
Ended December 31, 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
DECEMBER 31, 2003 (UNAUDITED) and JUNE 30, 2003
- --------------------------------------------------------------------------------
December 31,
2003 June 30,
ASSETS (unaudited) 2003
--------------- --------
Cash and due from banks $ 2,819,419 $ 3,003,656
Interest-bearing deposits with banks 2,632,045 4,203,320
------------ ------------
Cash and cash equivalents 5,451,464 7,206,976
Investment securities available for sale, at fair value 122,439,446 129,960,346
Loans receivable, net of allowance 92,746,792 100,779,545
Accrued interest receivable 1,339,683 1,456,372
Federal Home Loan Bank stock 3,399,300 4,704,100
Premises and equipment, net 4,917,512 5,113,645
Real estate held for sale 115,652 246,160
Other assets 2,047,720 1,557,639
------------ ------------
TOTAL $ 232,457,569 $ 251,024,783
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 139,838,489 $ 151,956,504
Federal Home Loan Bank advances 62,956,832 69,068,534
Advance payments by borrowers for
taxes and insurance 13,940 83,879
Accrued interest payable 472,538 563,620
Other liabilities 1,474,922 897,259
------------ ------------
Total liabilities 204,756,721 222,569,796
------------ ------------
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 December 31, 2003 and June 30, 2003, respectively 26,450 26,450
Additional paid-in capital 25,874,152 25,781,908
Unearned ESOP shares (529,000) (634,800)
Unearned MRP shares (68,193) (82,625)
Accumulated other comprehensive income 1,364,531 2,221,285
Retained earnings 15,625,225 15,537,315
------------ ------------
42,293,165 42,849,533
Treasury stock, at cost, 1,197,987 and 1,187,018 shares at
December 31, 2003, and June 30, 2003, respectively (14,592,317) (14,394,546)
------------ ------------
Total stockholders' equity 27,700,848 28,454,987
------------ ------------
TOTAL $ 232,457,569 $ 251,024,783
============ ============
See accompanying notes to condensed consolidated financial statements.
Page 3
HCB BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME (LOSS) THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 2003
AND 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
December 31, (unaudited) December 31, (unaudited)
INTEREST INCOME: 2003 2002 2003 2002
---- ---- ---- ----
Interest and fees on loans $ 1,627,821 $ 2,093,179 $ 3,443,427 $ 4,368,346
Investment securities:
Taxable 1,105,565 1,245,780 2,127,447 2,539,301
Nontaxable 313,002 318,580 627,563 640,442
Other 25,199 55,814 58,427 136,806
---------- ---------- ---------- ----------
Total interest income 3,071,587 3,713,353 6,256,864 7,684,895
---------- ---------- ---------- ---------
INTEREST EXPENSE:
Deposits 670,432 963,242 1,443,054 2,027,681
Federal Home Loan Bank advances 982,921 1,167,684 1,996,369 2,363,763
---------- ---------- ---------- ----------
Total interest expense 1,653,353 2,130,926 3,439,423 4,391,444
---------- ---------- ---------- ----------
NET INTEREST INCOME 1,418,234 1,582,427 2,817,441 3,293,451
PROVISION FOR LOAN AND INVESTMENT
LOSSES 120,000 203,000 240,000 293,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND INVESTMENT LOSSES 1,298,234 1,379,427 2,577,441 3,000,451
---------- ---------- ---------- ----------
NONINTEREST INCOME:
Service charges on deposit accounts 234,056 226,133 459,147 460,849
Gain on sale of loans available for sale, net 44,957 128,528 213,951 213,469
Gain on sale of investment securities 8,701 -- 8,701 --
Gain on sale of branch -- -- -- 742,942
Other 142,012 48,805 180,089 114,001
---------- ---------- ---------- ----------
Total noninterest income 429,726 403,466 861,888 1,531,261
---------- ---------- ---------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits 858,081 949,534 1,770,597 1,935,339
Net occupancy expense 189,979 219,182 407,318 457,163
Communication, postage, printing and office
supplies 90,551 96,606 182,883 188,283
Advertising 22,469 45,729 38,001 89,193
Data processing 105,841 88,639 213,333 187,226
Professional fees 150,794 128,703 363,629 277,283
Other 95,910 135,562 184,859 282,348
---------- ---------- ---------- ----------
Total noninterest expense 1,513,625 1,663,955 3,160,620 3,416,835
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 214,335 118,938 278,709 1,114,877
INCOME TAX PROVISION (BENEFIT) (499) (66,606) (58,237) 204,236
---------- ---------- ---------- ----------
NET INCOME $ 214,834 $ 185,544 $ 336,946 $ 910,641
---------- ---------- ---------- ----------
(Continued)
Page 4
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
December 31, (unaudited) December 31, (unaudited)
2003 2002 2003 2002
---- ---- ---- ----
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:
Unrealized holding gain (loss) on securities
arising during period $ 485,957 $ (191,095) $ (848,053) $ 815,411
Reclassification adjustment for gains
included in net income (8,701) -- (8,701) --
---------- ----------- ---------- ----------
Other comprehensive income (loss) 477,256 (191,095) (856,754) 815,411
---------- ----------- ---------- ----------
COMPREHENSIVE INCOME (LOSS) $ 692,090 $ (5,551) $ (519,808) $ 1,726,052
========== =========== =========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
BASIC 1,359,424 1,356,781 1,359,819 1,350,362
========== ========== ========== ==========
DILUTED 1,434,782 1,445,945 1,431,761 1,431,835
========== ========== ========== ==========
EARNINGS PER SHARE:
Basic $ 0.16 $ 0.14 $ 0.25 $ 0.67
==== ==== ==== ====
Diluted $ 0.15 $ 0.13 $ 0.24 $ 0.64
==== ==== ==== ====
DIVIDENDS PER SHARE $ 0.09 $ 0.09 $ 0.18 $ 0.17
==== ==== ==== ====
(Concluded)
See accompanying notes to condensed consolidated financial statements.
Page 5
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
Six Months Ended December 31,
2003 (Unaudited) 2002
---- ----
OPERATING ACTIVITIES:
Net income $ 336,946 $ 910,641
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 279,499 300,823
Amortization (accretion) of:
Deferred loan origination fees 37,803 (45,436)
Premiums and discounts on loans, net (2,206) (2,206)
Premiums and discounts on investment securities, net 306,515 194,253
Net gain on sale of investment securities (8,701) --
Provision for loan losses 240,000 293,000
Gain on sale of branch -- (742,942)
Deferred income taxes 58,237 (204,236)
Originations of loans held for sale (14,016,362) (16,316,580)
Proceeds from sales of loans 15,452,555 13,751,322
Stock compensation expense 212,476 114,316
Change in accrued interest receivable 116,689 237,617
Change in accrued interest payable (91,082) (75,818)
Change in other assets (16,719) 100,041
Change in other liabilities 577,663 (296,464)
----------- ----------
Net cash provided (used) by operating activities 3,483,313 (1,781,669)
----------- ----------
INVESTING ACTIVITIES:
Purchases of investment securities - available for sale (21,805,188) (21,531,849)
Proceeds from sales of investment securities 3,381,157 --
Redemption of Federal Home Loan Bank stock 1,304,800 2,500
Purchases of premises and equipment (83,366) (182,164)
Net change due to branch sale -- (2,523,471)
Loan repayments, net of originations 6,320,964 9,695,054
Principal payments on investment securities 24,258,763 18,485,773
Net decrease in real estate held for resale 130,508 21,045
----------- -----------
Net cash provided by investing activities 13,507,638 3,966,888
----------- -----------
(Continued)
Page 6
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
Six Months Ended December 31,
2003 (Unaudited) 2002
---- ----
FINANCING ACTIVITIES:
Net decrease in deposits $ (12,118,015) $ (2,597,994)
Advances from Federal Home Loan Bank 1,000,000 --
Repayment of Federal Home Loan Bank advances (7,111,702) (7,600,327)
Net decrease in advance payments by borrowers
for taxes and insurance (69,939) (6,850)
Purchase of treasury stock (197,771) --
Payment for treasury stock options exercised -- 115,438
Dividends paid (249,036) (243,255)
------------ ------------
Net cash used by financing activities (18,746,463) (10,332,988)
------------ ------------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (1,755,512) (8,147,769)
CASH AND CASH EQUIVALENTS:
Beginning of period 7,206,976 17,896,829
------------ ------------
End of period $ 5,451,464 $ 9,749,060
============ ============
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 (loss) for the three
months and six months ended December 31, 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 three and six month periods ended December 31, 2003 and 2002, were
as follows:
Three months ended Six months ended
December 31, December 31,
2003 2002 2003 2002
---- ---- ---- ----
Basic weighted average shares 1,359,424 1,356,781 1,359,819 1,350,362
Effect of dilutive securities 75,358 89,164 71,942 81,473
---------- ---------- ---------- ----------
Diluted weighted average shares 1,434,782 1,445,945 1,431,761 1,431,835
========== ========== ========== ==========
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 and
six month periods ending December 31, 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 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
NOTE 5 - ACQUISITION AGREEMENT
On January 14, 2004, the Company announced that it had entered into an
Agreement of Acquisition (the "Agreement"), dated as of January 13, 2004 with
Rock Bancshares, Inc. ("RBI"), pursuant to which all of the issued and
outstanding stock of the Company will be acquired by RBI (the "Share
Acquisition"). Pursuant to the Share Acquisition, RBI will acquire all of the
issued and outstanding shares of common stock of HCB at a purchase price of
$18.63 per share, subject to an adjustment to $18.62 per share if the
acquisition is consummated on or prior to July 31, 2004 and $18.61 if
consummated on or prior to June 30, 2004. In each case the per share stock price
is also subject to a price adjustment by an amount based on the amount by which
HCB's stockholder's equity on the last date of the calendar month preceding the
closing is less than $26,500,000, excluding certain transaction costs and other
related expenses. Holders of options to acquire shares of HCB common stock will
receive a cash payment equal to the share acquisition price less the exercise
price applicable to such option. In addition, RBI has made a cash deposit of
$750,000 that will be applied to the purchase price and would be forfeited by
RBI under certain circumstances, including the failure to obtain regulatory
approval by August 31, 2004.
Consummation of the Share Acquisition is subject to a number of customary
conditions, including, but not limited to: (i) the adoption and approval of the
Agreement by the shareholders of the Company; and (ii) the receipt of all
requisite regulatory approvals.
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
Page 9
market area, commercial and multi-family real estate loans and consumer and
commercial business loans. The Bank also maintains a substantial investment
portfolio of mortgage-related securities, nontaxable municipal securities and
U.S. government and agency securities.
The Bank's net income is dependent primarily on its net interest income,
which is the difference between interest income earned on its loans,
mortgage-backed securities and securities portfolio and interest paid on
customers' deposits and other borrowings. The Bank's net income is also affected
by the level of noninterest income, such as service charges on customers'
deposit accounts, net gains or losses on the sale of loans and securities and
other fees. In addition, net income is affected by the level of noninterest
expense, which primarily consists of employee compensation expenses, occupancy
expenses and other expenses.
The financial condition and results of operations of the Bank and the
thrift and banking industries as a whole are significantly affected by
prevailing economic conditions, competition and the monetary and fiscal policies
of governmental agencies. Lending activities are influenced by demand for and
supply of credit, competition among lenders and the level of interest rates in
the Bank's market area. The Bank's deposit flows and costs of funds are
influenced by prevailing market rates of interest, primarily on competing
investments, as well as account maturities and the levels of personal income and
savings in the Bank's market area.
ASSET QUALITY
The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated.
December 31, June 30,
2003 2003
----------- -----------
Loans accounted for on a nonaccrual basis: (1)
Real estate:
One-to-four family residential............ $ 922,697 $ 1,241,085
Other mortgage loans...................... 2,647,281 1,740,878
Consumer loans............................. 214,795 287,925
Commercial loans........................... 247,571 232,562
---------- ----------
Total................................. $ 4,032,344 $ 3,502,450
========== ==========
Accruing loans which are contractually past due
90 days or more:
Real estate:
One-to-four family residential............ $ 10,135 $ --
Other mortgage loans...................... 1,049,521 --
Commercial loans........................... -- --
Consumer loans............................. -- --
---------- ----------
Total................................. $ 1,059,656 $ --
========== ==========
Total nonperforming loans............. $ 5,092,000 $ 3,502,450
========== ==========
Percentage of total loans.................... 5.14% 3.18%
==== ====
Other nonperforming assets (2)............... $ 115,652 $ 246,160
========== ==========
Loans modified in troubled debt restructurings (3) $ 5,288,442 $ 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.
(3) Loans modified in troubled debt restructurings include $823,854
reported in Other mortgage loans accounted for on a nonaccrual basis
and $1,049,521 in accruing Other mortgage loans which are contractually
past due 90 days or more.
Page 10
During the six months ended December 31, 2003, total nonperforming loans
increased $1,589,550 primarily due to one borrower with four other mortgage
loans totaling $1.9 million which were 91 days past due on that date, offset by
decreases in one-to-four family residential nonperforming loans. Of the $1.9
million loans to one borrower which were 91 days past due at December 31, 2003,
$1.05 million was still accruing due to an anticipated sale of the collateral
and payoff of the loan in January 2004. This anticipated sale has been delayed
and although the sale is still expected, subsequent to December 31, 2003, the
$1.05 million has been placed in nonaccrual status and approximately $39,000 in
interest income was reversed.
During the three months ended December 31, 2003 and 2002, gross interest
income of approximately $88,000 and $49,000, 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 11
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 December 31,
-------------------------------------------------------------------------
2003 2002
---------------------------------- ----------------------------------
Average Average
Average Interest Yield/ Average Interest Yield/
Balance Earned/Paid Rate Balance Earned/Paid Rate
Interest-earning assets:
Loans receivable....................... $ 93,696,160 $ 1,627,821 6.95% $ 111,200,080 $ 2,093,179 7.53%
Investment and mortgage-backed securities
Taxable............................... 98,645,008 1,105,565 4.48 94,397,277 1,245,780 5.28
Nontaxable............................ 25,045,723 313,002 5.00 25,390,510 318,580 5.02
FHLB stock............................. 3,380,422 17,041 2.02 4,675,352 32,407 2.77
FHLB DDA............................... 3,460,940 7,512 0.87 6,427,468 22,541 1.40
Other interest-earning assets.......... 198,994 646 1.30 187,662 866 1.85
----------- --------- ---- ----------- --------- ----
Total interest-earning assets......... 224,427,247 3,071,587 5.47 242,278,349 3,713,353 6.13
--------- ---------
Noninterest-earning assets............... 12,783,210 15,163,206
----------- -----------
Total assets.......................... $ 237,210,457 $ 257,441,555
=========== ===========
Interest-bearing liabilities:
NOW, MMDA, statement savings........... $ 46,490,707 146,913 1.26 $ 40,738,430 139,870 1.37
Time deposits.......................... 86,337,335 523,519 2.43 100,561,510 823,372 3.28
FHLB advances.......................... 65,887,849 982,921 5.97 78,352,380 1,167,684 5.96
----------- -------- ---- ----------- --------- ----
Total interest-bearing liabilities.... 198,715,891 1,653,353 3.33 219,652,320 2,130,926 3.88
--------- ---------
Noninterest-bearing liabilities.......... 10,976,816 9,347,375
----------- -----------
Total liabilities..................... 209,692,707 228,999,695
Equity................................... 27,517,750 28,441,860
----------- -----------
Total liabilities and equity.......... $ 237,210,457 $ 257,441,555
=========== ===========
Net interest income...................... $ 1,418,234 $ 1,582,427
========= =========
Net interest rate spread................. 2.14% 2.25%
==== ====
Net yield on interest-earning assets..... 2.53% 2.61%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 112.94% 110.30%
======= ======
Page 12
Six Months Ended December 31,
-------------------------------------------------------------------------
2003 2002
---------------------------------- ----------------------------------
Average Average
Average Interest Yield/ Average Interest Yield/
Balance Earned/Paid Rate Balance Earned/Paid Rate
Interest-earning assets:
Loans receivable....................... $ 96,571,768 $ 3,443,427 7.13% $ 113,247,235 $ 4,368,346 7.71%
Investment and mortgage-backed securities
Taxable............................... 99,071,297 2,127,447 4.29 92,524,326 2,539,301 5.49
Nontaxable............................ 25,082,373 627,563 5.00 25,457,302 640,442 5.03
FHLB stock............................. 3,943,210 39,828 2.02 4,675,368 67,761 2.90
FHLB DDA............................... 3,780,895 17,230 0.91 8,391,699 67,575 1.61
Other interest-earning assets.......... 198,477 1,369 1.38 184,816 1,470 1.59
----------- --------- ---- ----------- --------- ----
Total interest-earning assets......... 228,648,020 6,256,864 5.47 244,480,746 7,684,895 6.29
--------- ---------
Noninterest-earning assets............... 13,131,007 15,544,720
----------- -----------
Total assets.......................... $ 241,779,027 $ 260,025,466
=========== ===========
Interest-bearing liabilities:
NOW, MMDA, statement savings........... $ 46,429,341 292,272 1.26 $ 40,539,554 292,591 1.44
Time deposits.......................... 89,910,905 1,150,782 2.56 102,427,690 1,735,090 3.39
FHLB advances.......................... 66,864,392 1,996,369 5.97 79,297,245 2,363,763 5.96
----------- --------- ---- ----------- --------- ----
Total interest-bearing liabilities.... 203,204,638 3,439,423 3.39 222,264,489 4,391,444 3.95
--------- ---------
Noninterest-bearing liabilities.......... 10,948,795 9,602,620
----------- -----------
Total liabilities..................... 214,153,433 231,867,109
Equity................................... 27,625,594 28,158,357
----------- -----------
Total liabilities and equity.......... $ 241,779,027 $ 260,025,466
=========== ===========
Net interest income...................... $ 2,817,441 $ 3,293,451
========= =========
Net interest rate spread................. 2.08% 2.34%
==== ====
Net yield on interest-earning assets..... 2.46% 2.69%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 112.52% 110.00%
======= ======
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).
Page 13
Three Months Ended December 31 Six Months Ended December 31
------------------------------------- --------------------------------------
2003 vs. 2002 2003 vs. 2002
------------------------------------- --------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands) (In thousands)
Interest income:
Loans receivable $ (329) $ (136) $ (465) $ (643) $ (282) $ (925)
Investment and
mortgage-backed securities
Taxable 55 (196) (141) 180 (592) (412)
Nontaxable (4) (2) (6) (10) (3) (13)
FHLB stock (9) (6) (15) (11) (17) (28)
FHLB DDA (10) (5) (15) (37) (13) (50)
Other interest-earning assets -- -- -- -- -- --
---- ---- ----- ---- ---- -------
Total interest-earning assets (297) (345) (642) (521) (907) (1,428)
---- ---- ----- ---- ---- -------
Interest expense:
NOW, MMDA, statement savings 20 (13) 7 43 (43) --
Time deposits (116) (184) (300) (212) (372) (584)
FHLB advances (186) 1 (185) (371) 3 (368)
---- ---- ----- ---- ---- -------
Total interest-bearing
liabilities (282) (196) (478) (540) (412) (952)
---- ---- ----- ---- ---- -------
Change in net interest income $ (15) $ (149) $ (164) $ 19 $ (495) $ (476)
==== ==== ===== ==== ==== =======
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2003 AND JUNE 30, 2003
The Company had consolidated total assets of $232.5 million and $251.0
million at December 31, 2003, and June 30, 2003, respectively. During the six
month period ended December 31, 2003, the Company experienced an $8.1 million
decrease in its consolidated loan portfolio from $100.8 million at June 30,
2003, to $92.7 million at December 31, 2003. The Bank expects its total loan
portfolio to continue to shrink if interest rates remain low and competition for
quality loans remains high.
During this same period, interest-bearing deposits in banks, investments,
and mortgage-backed securities decreased from $134.2 million at June 30, 2003,
to $125.1 million at December 31, 2003. While interest-bearing deposits in
banks, investments, and mortgage-backed securities decreased $9.1 million for
the six month period ended December 31, 2003, there were $21.8 million in
purchases, offset with a $1.6 million decrease in interest-bearing deposits with
banks, paydowns and net amortizations of premiums and discounts of $24.5
million, sales of $3.4 million, and a $1.4 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 $139.8 million
at December 31, 2003. Although the Bank's level of deposits has generally been
sufficient to provide for adequate liquidity, the deposit market remains
competitive and the Bank has lost some larger certificates of deposit due to
rate shopping. The outstanding balances of FHLB borrowings decreased from $69.1
million at June 30, 2003, to $63.0 million at December 31, 2003. The Bank
continues to pay off FHLB borrowings as they mature, however, during the
quarter, the Bank did borrow and pay back $1.0 million in short term borrowings
for short term cash needs.
Stockholders' equity amounted to $27.7 million at December 31, 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 December 31, 2003, the Bank's regulatory capital exceeded all
applicable regulatory capital requirements.
Page 14
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED DECEMBER
31, 2003 AND 2002
Net Income. Net income for the three months ended December 31, 2003, was
approximately $215,000 compared to net income of $186,000 for the three months
ended December 31, 2002. The changes resulted primarily from a decrease in net
interest income of $164,000, a decrease in the income tax benefit of $66,000,
offset by an increase in noninterest income of $26,000, a decrease in the
provision for loan loss of $83,000, and a decrease in noninterest expense of
$150,000. The specific reasons for the above changes are discussed below.
Net income for the six months ended December 31, 2003, was approximately
$337,000 compared to net income of $911,000 for the six months ended December
31, 2002. The changes resulted primarily from a decrease in net interest income
of $476,000, a decrease in noninterest income of $669,000, offset by a decrease
in the provision for loan loss of $53,000, an increase in the income tax benefit
of $262,000, and a decrease in noninterest expense of $256,000. The specific
reasons for the above changes and are discussed below.
Interest Income. Interest income for the three months ended December 31,
2003, was approximately $3,072,000, or $642,000 less than interest income for
the three months ended December 31, 2002. The total average interest-earning
assets decreased $17.9 million, while the yield decreased from 6.13% to 5.47%.
The primary contributing factors to the decrease in interest income were a
$329,000 and $136,000 decrease due to volume and rate decreases, respectively in
loans, a $196,000 decrease due to rate decreases on taxable investments and
mortgage-backed securities, offset slightly by a $55,000 increase due to the
volume of taxable investments and mortgage-backed securities.
For the three months ended December 31, 2003, compared to the three months
ended December 31, 2002, the average balance of loans receivable decreased $17.5
million, total loan interest income decreased $465,000 and the average yield on
loans decreased 58 basis points. For the same comparative periods, the average
balance of taxable investments and mortgage-backed securities receivable
increased $4.2 million, while interest income decreased $141,000 and the average
yield decreased 80 basis points. The average balance of nontaxable investments
decreased $0.3 million, while interest income decreased $6,000 and the average
yield decreased 2 basis points. Further, the average balance of other
interest-earning assets (primarily FHLB DDA's and FHLB stock) decreased $4.3
million, interest income decreased $30,000 and the average yield decreased 55
basis points.
Interest income for the six months ended December 31, 2003, was
approximately $6,257,000, or $1,428,000 less than interest income for the six
months ended December 31, 2002. The total average interest-earning assets
decreased $15.8 million, while the yield decreased from 6.29% to 5.47%. Of the
$1,428,000 decrease in interest income, $643,000 and $282,000 was due to volume
and rate decreases, respectively in loans, $592,000 was due to rate decreases on
taxable investment and mortgage-backed securities, $10,000 was due to volume
decreases on nontaxable investments, $11,000 and $17,000 was due to volume and
rate decreases, respectively on FHLB stock, $37,000 and $13,000 was due to
volume and rate decreases, respectively on FHLB DDA, offset by a $180,000
increase in the volume of taxable investments and mortgage-backed securities.
For the six months ended December 31, 2003, compared to the six months
ended December 31, 2002, the average balance of loans receivable decreased $16.7
million, total loan interest income decreased $925,000 and the average yield on
loans decreased 58 basis points. For the same comparative periods, the average
balance of taxable investments and mortgage-backed securities receivable
increased $6.5 million, while interest income decreased $412,000 and the average
yield decreased 120 basis points. The average balance of nontaxable investments
decreased $0.4 million, while interest income decreased $13,000 and the average
yield decreased 3 basis points. Further, the average balance of other
interest-earning assets (primarily FHLB DDA's and FHLB stock) decreased $5.3
million, interest income decreased $78,000 and the average yield decreased 59
basis points.
The above described declines in interest income and average yields can be
expected to continue as long as interest rates remain low and loans continue to
decline. When the Bank is able to grow its loan portfolio instead of increasing
its investment in lower yielding investment and mortgage-backed securities the
Bank should experience an increase in both its interest income and yield on
earning assets.
Page 15
Interest Expense. For the three months ended December 31, 2003, compared to
the three months ended December 31, 2002, the average balance of
interest-bearing liabilities decreased $20.9 million, total interest expense
decreased $478,000 and the average cost decreased 55 basis points. The average
balance of NOW, MMDA, and statement savings accounts increased $5.8 million,
interest expense increased $7,000 and the average cost decreased 11 basis
points. The average balance of time deposits decreased $14.2 million, interest
expense decreased $300,000 and the average cost decreased 85 basis points. The
average balance of FHLB advances decreased $12.5 million, FHLB interest expense
decreased $185,000 and the average cost increased 1 basis point.
Of the $478,000 decrease in interest expense, $13,000 was due to rate
decreases in NOW, MMDA and statement savings accounts offset by a $20,000
increase due to higher volumes of same, $116,000 and $184,000 was due to volume
and rate decreases in time deposits, respectively, and $186,000 was due to
volume decreases on FHLB advances offset by a $1,000 increase due to average
rate increases on FHLB advances.
For the six months ended December 31, 2003, compared to the six months
ended December 31, 2002, the average balance of interest-bearing liabilities
decreased $19.1 million, total interest expense decreased $952,000 and the
average cost decreased 56 basis points. The average balance of NOW, MMDA, and
statement savings accounts increased $5.9 million, interest expense remained the
same and the average cost decreased 18 basis points. The average balance of time
deposits decreased $12.5 million, interest expense decreased $584,000 and the
average cost decreased 83 basis points. The average balance of FHLB advances
decreased $12.4 million, FHLB interest expense decreased $368,000 and the
average cost increased 1 basis point.
Of the $952,000 decrease in interest expense, $212,000 and $372,000 was due
to volume and rate decreases in time deposits, respectively, and $371,000 was
due to volume decreases on FHLB advances offset by a $3,000 increase due to
average rate increases on FHLB advances. The increase in volume of NOW, MMDA,
and statement savings accounts was offset by the decrease in rate.
Net Interest Income. Net interest income for the three months ended
December 31, 2003, was $1.4 million, or $164,000 less than net interest income
for the three months ended December 31, 2002. Of the $164,000 decrease in net
interest income for the three months ended December 31, 2003, compared to the
three months ended December 31, 2002, $149,000 was due to 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 loan portfolio, 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 December 31, 2003, the
Company had $63.0 million in FHLB advances which represented 32.6% 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
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 December 31, 2003,
the Company's FHLB advances were costing a weighted average rate of 5.99% and
had a weighted 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.
Page 16
Provision for Loan Losses. During the three months ended December 31, 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
December 31, 2003. The allowance for loan losses of $1.6 million at December 31,
2003, represented 1.61% 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 December 31, 2003, as a
percent of total loans increased to 5.14% 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 34.8% as of December 31, 2003, which compares
to 39.8% as of June 30, 2003. As of December 31, 2003, the Bank had $8.8 million
in assets classified substandard or doubtful as compared to $9.8 million as of
June 30, 2003. Although total nonperforming loans increased from $3.5 million as
of June 30, 2003, to $5.1 million as of December 31, 2003, total classified
assets decreased $1.0 million. This was primarily due to the loans which caused
the increase in nonperforming loans being classified substandard in both
periods.
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 change 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. Noninterest
income for the three months ended December 31, 2003, was approximately $430,000
compared to approximately $403,000 for the three months ended December 31, 2002.
This increase of approximately $27,000 is the result of an $8,000 increase in
service charges on deposit accounts, a $9,000 net gain on the sale of investment
securities, a $93,000 increase in other noninterest income (consisting of a
$30,000 one time recovery of expensed software costs and a one time loan
prepayment fee of $63,000), offset by a $84,000 decrease in net gains on the
sale of loans available for sale.
Noninterest income for the six months ended December 31, 2003, was
approximately $862,000 compared to approximately $1,531,000 for the six months
ended December 31, 2002. This decrease of approximately $669,000 is the result
of a gain on the sale of its Monticello branch of approximately $743,000 for the
six months ended December 31, 2002, offset by a $9,000 net gain on the sale of
investment securities and $66,000 increase in other noninterest income for the
six months ended December 31, 2003 (consisting primarily of a $30,000 one time
recovery of expensed software costs, a one time loan prepayment fee of $63,000
offset by a $33,000 decrease in late charge and credit life commissions).
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 December 31, 2003, decreased
$150,000 compared to the three months ended December 31, 2002. Significant
components of the decrease in noninterest expense were a $91,000 decrease in
salaries and employee benefits, a $29,000 decrease in net occupancy expense, a
$23,000 decrease in advertising, a $40,000 decrease in other expenses, offset by
a $22,000 increase in professional fees and a $17,000 increase in data
processing expense.
Total noninterest expense for the six months ended December 31, 2003,
decreased $256,000 compared to the six months ended December 31, 2002.
Significant components of the decrease in noninterest expense were a $165,000
decrease in salaries and employee benefits, a $50,000 decrease in net occupancy
expense, a $51,000 decrease in advertising, a $97,000 decrease in other
expenses, offset by an $86,000 increase in professional fees and a $26,000
increase in data processing expense.
Page 17
The $86,000 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.
Income Taxes. The effective income tax rates for the Company for the three
months ended December 31, 2003 and 2002 were (0.2)% and (56.0)%, respectively.
The effective income tax rates for the Company for the six months ended December
31, 2003 and 2002 were (20.9)% and 18.3%, respectively. The variance in the
effective rate from the expected statutory rate is due primarily to tax exempt
interest.
The negative rates for three months ended December 31, 2003 and December
31, 2002, and the six months ended December 31, 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
December 31, 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 December 31, 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 December 31, 2003, the Bank had $4.2 million in commitments to originate
loans (including unfunded portions of construction loans) and approximately $1.2
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
$65.6 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 18
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 USC Section 1350 Certification
Page 19
REPORTS ON FORM 8-K:
On November 5, 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 ended September 30,
2003.
On December 15, 2003, the Registrant filed a Current Report on Form 8-K
under items 5 and 7 to report that the Company had issued a press release
announcing that it had received an indication of interest letter from an
investor group to engage in a business combination with the Company whereby the
Company's stockholders would receive $18.63 per share in cash. The proposed
business combination would be subject to, among other things, the negotiation of
a definitive merger agreement, regulatory approval and the approval of the
Company's stockholders.
Page 20
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: February 10, 2003 By: /s/Charles T. Black
------------------------
Charles T. Black
President and Chief
Executive Officer
(Duly Authorized Representative)
Date: February 10, 2003 By: /s/Scott A. Swain
------------------------
Scott A. Swain
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Page 21