SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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, 2001.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-22423
HCB BANCSHARES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
OKLAHOMA 62-1670792
- -------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
237 Jackson Street, Camden, Arkansas 71701
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (870) 836-6841
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days:
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: 1,901,929 shares of common stock
outstanding as of October 31, 2001.
Page 1
CONTENTS
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Financial Condition
at September 30, 2001 (unaudited) and June 30, 2001
Condensed Consolidated Statements of Income and Comprehensive
Income for the Three Months Ended September 30, 2001 and
2000 (unaudited)
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 2001 and 2000 (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
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Page 2
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 2001 (UNAUDITED) and JUNE 30, 2001
- --------------------------------------------------------------------------------
SEPTEMBER 30,
2001 JUNE 30,
ASSETS (UNAUDITED) 2001
--------------- --------
Cash and due from banks $ 3,476,243 $ 3,302,540
Interest-bearing deposits with banks 5,757,176 15,107,481
------------ ------------
Cash and cash equivalents 9,233,419 18,410,021
Investment securities available for sale, at fair value 121,727,667 120,082,177
Loans receivable, net of allowance 135,556,190 131,651,421
Accrued interest receivable 1,899,098 2,017,188
Federal Home Loan Bank stock 4,718,100 4,735,800
Premises and equipment, net 7,459,262 7,564,681
Goodwill, net 187,500 206,250
Real estate held for sale 462,963 398,132
Other assets 1,597,509 2,532,980
------------ ------------
TOTAL $ 282,841,708 $ 287,598,650
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 160,571,776 $ 161,285,179
Federal Home Loan Bank advances 88,169,780 91,915,694
Advance payments by borrowers for
taxes and insurance 241,398 199,470
Accrued interest payable 902,310 972,900
Note payable -- 80,000
Other liabilities 1,136,793 1,211,073
------------ ------------
Total liabilities 251,022,057 255,664,316
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 10,000,000 shares authorized,
2,645,000 shares issued, 1,805,629 and 1,935,445 shares
outstanding at September 30, 2001 and June 30, 2001, respectively 26,450 26,450
Additional paid-in capital 25,880,618 25,914,132
Unearned ESOP shares (1,005,100) (1,058,000)
Unearned MRP shares (145,530) (155,601)
Accumulated other comprehensive income (loss) 1,276,177 (59,600)
Retained earnings 14,433,580 14,256,684
------------ ------------
40,466,195 38,924,065
Treasury stock, at cost, 839,371 and 709,555 shares at
September 30, 2001, and June 30, 2001, respectively (8,646,544) (6,989,731)
------------- -------------
Total stockholders' equity 31,819,651 31,934,334
------------ ------------
TOTAL $ 282,841,708 $ 287,598,650
============ ============
See accompanying notes to condensed consolidated financial statements.
Page 3
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
2001 (UNAUDITED) 2000
---- ----
INTEREST INCOME:
Interest and fees on loans $ 2,803,304 $ 2,919,182
Investment securities:
Taxable 1,373,940 1,677,174
Nontaxable 382,707 382,480
Other 140,790 113,822
---------- ----------
Total interest income 4,700,741 5,092,658
---------- ----------
INTEREST EXPENSE:
Deposits 1,711,601 1,879,637
Federal Home Loan Bank advances 1,326,236 1,743,645
Note payable 1,000 2,500
---------- ----------
Total interest expense 3,038,837 3,625,782
---------- ---------
NET INTEREST INCOME 1,661,904 1,466,876
PROVISION FOR LOAN LOSSES 60,000 116,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,601,904 1,350,876
---------- ----------
NONINTEREST INCOME:
Service charges on deposit accounts 247,529 163,224
Other 127,197 160,285
---------- ----------
Net noninterest income 374,726 323,509
---------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits 952,528 980,778
Net occupancy expense 276,859 232,020
Communication, postage, printing and office supplies 107,041 86,445
Advertising 56,142 56,850
Data processing 81,089 79,683
Professional fees 121,930 158,676
Amortization of goodwill 18,750 18,750
Other 101,008 92,087
---------- ----------
Total noninterest expense 1,715,347 1,705,289
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 261,283 (30,904)
INCOME TAX PROVISION (BENEFIT) (24,000) (107,000)
----------- -----------
NET INCOME $ 285,283 $ 76,096
---------- ----------
(Continued)
Page 4
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
2001 (UNAUDITED) 2000
---- ----
OTHER COMPREHENSIVE INCOME,
NET OF TAX:
Unrealized holding gain on securities arising
during period $ 1,335,777 $ 924,052
Reclassification adjustment for gains
included in net income -- --
----------- -----------
Other comprehensive income 1,335,777 924,052
----------- -----------
COMPREHENSIVE INCOME $ 1,621,060 $ 1,000,148
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 1,768,494 1,918,473
=========== ===========
EARNINGS PER SHARE:
Basic $ 0.16 $ 0.04
==== ====
Diluted $ 0.15 $ 0.04
==== ====
DIVIDENDS PER SHARE $ 0.06 $ 0.06
==== ====
(Concluded)
See accompanying notes to condensed consolidated financial statements.
Page 5
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
2001 (UNAUDITED) 2000
------ -------
OPERATING ACTIVITIES:
Net income $ 285,283 $ 76,096
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 192,616 165,606
Amortization (accretion) of:
Deferred loan origination fees (3,396) (12,848)
Goodwill 18,750 18,750
Premiums and discounts on loans, net (1,103) (1,146)
Premiums and discounts on investment securities, net 19,050 29,507
Provision for loan losses 60,000 116,000
Deferred income taxes (24,000) (529,985)
Originations of loans held for sale (6,208,096) (3,329,993)
Proceeds from sales of loans 5,899,495 3,170,915
Stock compensation expense 29,457 52,630
Change in accrued interest receivable 118,090 29,495
Change in accrued interest payable (70,590) 22,052
Change in other assets 27,585 324,815
Change in other liabilities (74,280) (220,859)
----------- -----------
Net cash provided (used) by operating activities 268,861 (88,965)
---------- -----------
INVESTING ACTIVITIES:
Purchases of investment securities - available for sale (4,827,871) --
Redemption (purchase) of Federal Home Loan Bank stock 17,700 (101,900)
Purchases of premises and equipment (87,197) (711,376)
Proceeds from maturity of interest bearing deposits -- 99,000
Loan originations, net of repayments (3,651,670) (3,522,196)
Principal payments on investment securities 5,430,995 4,272,520
Net increase in real estate held for resale (64,831) --
----------- ----------
Net cash (used) provided by investing activities (3,182,874) 36,048
----------- ----------
(Continued)
Page 6
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER, 2001 AND 2000 (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
2001 (UNAUDITED) 2000
------ -------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits $ (713,403) $ 3,655,804
Advances from Federal Home Loan Bank 2,056,000 98,405,000
Repayment of Federal Home Loan Bank advances (5,801,914) (101,666,525)
Net increase in advance payments by borrowers
for taxes and insurance 41,928 40,209
Repayment of note payable (80,000) (80,000)
Purchase of treasury stock (1,656,813) (32,500)
Dividends paid (108,387) (122,495)
------------ ------------
Net cash (used) provided by financing activities (6,262,589) 199,493
------------ ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (9,176,602) 146,576
CASH AND CASH EQUIVALENTS:
Beginning of period 18,410,021 3,349,648
------------ ------------
End of period $ 9,233,419 $ 3,496,224
============ ============
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 Heartland
Community Bank and its subsidiary (the "Bank"). Bancshares' business is
primarily that of owning the Bank, and participating in the Bank's activities.
The accompanying condensed consolidated financial statements include the
accounts of Bancshares and the Bank and are collectively referred to as the
Company. All significant intercompany balances and transactions have been
eliminated in consolidation.
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 statement of income and comprehensive income for the three months
ended September 30, 2001 is not necessarily indicative of the results that may
be expected for the Company's fiscal year ending June 30, 2002. 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, 2001, contained in the Company's Annual Report on
Form 10-K for the year ended June 30, 2001.
NOTE 2 - EARNINGS PER SHARE
The weighted average number of common shares used to calculate
earnings per share for the periods ended September 30, 2001 and 2000 were as
follows:
Three months ended
September 30,
2001 2000
---- ----
Basic weighted - average shares 1,768,494 1,918,473
Effect of dilutive securities 74,935 0
---------- ----------
Diluted weighted - average shares 1,843,429 1,918,473
========== ==========
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, 2001, but were anti-dilutive for the
three-months ending September 30, 2000. 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 is a
defendant in certain claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
the ultimate disposition of these matters is not expected to have a material
adverse effect on the consolidated financial statements of the Company.
NOTE 4 - SUBSEQUENT EVENTS DISCLOSURE
Subsequent to September 30, 2001, the Company transferred 172,494
shares from its Stock Option Plan Trust to treasury shares. These shares were
transferred at cost, or $1.90 million. The Stock Option Plan Trust has retained
110,000 shares which are included in treasury stock on the accompanying
condensed consolidated statement of financial condition, are available for sale,
and are managed by the trustees specifically for funding stock option benefits
provided to key employees. In addition, from October 1, 2001 to October 31, 2001
the Company purchased 13,700 shares of its common stock at an average price of
$12.41 and placed them in treasury shares.
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 risks and uncertainties including
changes in economic conditions in the Company's market area, changes in policies
by regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area, and competition that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
GENERAL
The Bank's principal business consists of attracting deposits from the
general public and investing those funds in loans collateralized by first
mortgages on existing owner-occupied single-family residences in the Bank's
primary market area and loans collateralized by, to a lesser but growing extent,
commercial and multi-family real estate, consumer loans 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 and
its investment portfolio, and interest paid on customers' deposits and funds
borrowed. 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, the
level of noninterest expense, which normally will primarily consist of employee
compensation expenses, occupancy expense, and other expenses, affects net
income.
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. Demand for and supply of credit, competition among
lenders and the level of interest rates in the Bank's market area influence
lending activities. The Bank's deposit flows and costs of funds are influenced
by prevailing market rates of interest on competing investments, as well as
account maturities and the levels of personal income and savings in the Bank's
market area.
Page 9
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS AND RATES
The following table sets forth information regarding the Company's
average interest-earning assets and interest-bearing liabilities and reflects
the average yield of interest-earning assets and the average cost of
interest-bearing liabilities for the periods indicated. 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,
-------------------------------------------------------------------------
2001 2000
---------------------------------- ----------------------------------
Average Average
Average Interest Yield/ Average Interest Yield/
Balance Earned/Paid Rate Balance Earned/Paid Rate
Interest-earning assets:
Loans receivable......................... $ 133,640,481 $ 2,803,304 8.39% $ 137,116,255 $ 2,919,182 8.52%
Investment and mortgage-backed
securities
Taxable............................... 88,802,737 1,373,940 6.19 102,805,285 1,677,174 6.53
Nontaxable............................ 30,492,675 382,707 5.02 28,404,468 382,480 5.39
Other interest-earning assets.......... 15,485,776 140,790 3.64 6,855,526 113,822 6.64
----------- -------- ---- ---------- --------- ----
Total interest-earning assets......... 268,421,669 4,700,741 7.01 275,181,534 5,092,658 7.40
--------- ---------
Noninterest-earning assets............... 16,057,234 16,106,401
----------- ----------
Total assets.......................... $ 284,478,903 $ 291,287,935
=========== ===========
Interest-bearing liabilities:
Deposits............................... $ 159,616,652 1,711,601 4.29 $ 146,665,586 1,879,637 5.13
FHLB advances.......................... 90,066,400 1,326,236 5.89 113,697,654 1,743,645 6.13
Note payable........................... 58,261 1,000 6.87 138,261 2,500 7.23
----------- --------- ---- ---------- --------- ----
Total interest-bearing liabilities.... 249,741,313 3,038,837 4.87 260,501,501 3,625,782 5.57
--------- ---------
Noninterest-bearing liabilities.......... 2,086,662 1,816,629
----------- ----------
Total liabilities..................... 251,827,975 262,318,129
Equity................................... 32,650,928 28,969,805
----------- ----------
Total liabilities and equity.......... $ 284,478,903 $ 291,287,935
=========== ===========
Net interest income...................... $ 1,661,904 $ 1,466,876
========= =========
Net interest rate spread................. 2.14% 1.83%
==== ====
Net yield on interest-earning assets..... 2.48% 2.13%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 107.48% 105.64%
======= ======
Page 10
RATE/VOLUME ANALYSIS
The following table analyzes dollar amounts of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period's
rate), (ii) changes attributable to rate (changes in rate multiplied by the
prior period's volume) and (iii) changes in rate/volume (changes in rate
multiplied by changes in volume).
Quarter Ended September 30,
---------------------------
2001 vs. 2000
-----------------------------------------------
Increase (Decrease) Due to
-----------------------------------------------
Rate/
Volume Rate Volume Total
------ ---- ------ -----
(In thousands)
-----------------------------------------------
Interest income:
Loans receivable $ (74) $ (43) $ 1 $ (116)
Investment and mortgage-
backed securities (200) (113) 10 (303)
Other interest-earning
assets 143 (51) (65) 27
--------------------------------------------
Total interest-earning
assets (131) (207) (54) (392)
----- ---- ---- ----
Interest expense:
Deposits 166 (307) (27) (168)
FHLB advances (362) (69) 14 (417)
Note payable (1) -- (1) (2)
----------------------------------------------
Total interest-bearing
liabilities (197) (376) (14) (587)
----- ---- ---- ----
Change in net interest
income $ 66 $ 169 $ (40) $ 195
===== ==== ==== ====
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2001 AND JUNE 30, 2001
The Company had consolidated total assets of $282.8 million and $287.6
million at September 30, 2001 and June 30, 2001, respectively. During the
three-month period ended September 30, 2001 the Company experienced an increase
in its consolidated loan portfolio from $131.7 million at June 30, 2001, to
$135.6 million at September 30, 2001. During this same period, investments and
mortgage-backed securities increased from $120.1 million at June 30, 2001 to
$121.7 million at September 30, 2001. While investments and mortgage-backed
securities increased $1.6 million for the three-month period ended September 30,
2001, there were $5.4 million in paydowns offset with purchases of $4.8 million
and a $2.2 million increase in the market value of the securities.
Deposits decreased from $161.3 million at June 30, 2001 to $160.6
million at September 30, 2001. 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 $91.9
million at June 30, 2001, to $88.2 million at September 30, 2001. The increase
in loans and investment securities and decrease in deposits and FHLB borrowings
were funded through a reduction in interest-bearing deposits with banks.
Stockholders' equity amounted to $31.8 million at September 30, 2001,
and $31.9 million at June 30, 2001. The changes in equity were primarily due to
an increase in accumulated other comprehensive income offset by the purchase of
treasury stock. At September 30, 2001, the Bank's regulatory capital exceeded
all applicable regulatory capital requirements.
Page 11
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2001 AND 2000
Net Income. Net income for the three months ended September 30, 2001
was approximately $285,000 compared to net income of approximately $76,000 for
the three months ended September 30, 2000. Explanations of primary changes to
income and expense items follow.
Interest Income. Interest income for the three months ended September
30, 2001 decreased approximately $392,000 compared to the three months ended
September 30, 2000. The decrease in interest income was primarily due to
decreases in volumes and rates of loans and investments and mortgage-backed
securities. The overall yield on average interest-earning assets decreased from
7.40% for the three-months ended September 30, 2000, to 7.01% for the
three-months ended September 30, 2001.
Interest Expense. Interest expense for the three months ended
September 30, 2001 decreased approximately $587,000 compared to the three months
ended September 30, 2000. The decrease for the three-months ended September 30,
2001 was primarily due to decreases in rate of deposits and decreases in volume
of FHLB borrowings, offset by increases in volume of deposits. The overall cost
on average interest-bearing liabilities decreased from 5.57% for the
three-months ended September 30, 2000, to 4.87% for the three-months ended
September 30, 2001.
As a result of the above changes, net interest income for the three
months ended September 30, 2001 increased approximately $195,000 compared to the
three months ended September 30, 2000. Please refer to the rate/volume analysis
contained in this section. The overall net interest spread on average
interest-earning assets increased 31 basis points, from 1.83% for the
three-months ended September 30, 2000, to 2.14% for the three-months ended
September 30, 2001.
Provision for Loan Losses. The Bank made provisions for loan losses of
$60,000 and $116,000 for the three months ended September 30, 2001 and September
30, 2000, respectively. This provision reflects management's most recent review
as of September 30, 2001. The allowance for loan losses of $1.5 million
represented 1.03 percent of gross outstanding loans at September 30, 2001, which
compares to 0.99 percent at June 30, 2001. Nonperforming loans as of September
30, 2001, and June 30, 2001, as a percent of total loans, were 1.34% and 0.81%
respectively.
Management evaluates the carrying value of the loan portfolio
periodically and the allowance is adjusted if necessary. While management uses
the best information available to make evaluations, future adjustments to the
allowance may be necessary if conditions differ substantially from the
assumptions used in making the evaluations. In particular, management recognizes
that recent and planned changes in the amounts and types of lending by the Bank
will result in further growth of the Bank's loan loss allowance and may justify
further changes in the Bank's loan loss allowance policy in the future. 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.
Noninterest Income. Noninterest income is comprised primarily of
service charges on deposit accounts, and gains on the sales of loans.
Noninterest income for the three months ended September 30, 2001, was
approximately $375,000 compared to approximately $324,000 for the three months
ended September 30, 2000. This increase of approximately $51,000 is primarily
due to growth of the Bank's checking accounts resulting in increased service
charges, and increases in the deposit account fee structure.
In light of the increasingly competitive markets for deposits and
loans, management has continued the shifting of the Bank's deposit taking and
loan origination activities to reflect, among other things, the importance of
offering valued customer services that generate additional fee income, and it is
expected that management will continue this trend for the foreseeable future.
Noninterest Expense. The major components of noninterest expense are
salaries and employee benefits paid to or on behalf of the Company's employees
and directors, occupancy expense for ownership and maintenance of the Company's
buildings, furniture, and equipment, data processing expenses, advertising, and
professional fees paid to consultants, attorneys, and accountants. Total
noninterest expense for both three month periods ended September 30, 2001 and
2000 was $1.70 million. The primary difference was a decrease in salary and
benefits and professional fees,
Page 12
offset by increases in occupancy expense due to opening a new full service
branch in Bryant, Arkansas, and increases in communication, postage, printing,
and office supplies expense.
In light of the substantial costs associated with the recent, pending
and planned expansions of the Bank's activities, facilities and staff, including
the additional costs associated with adding staff, building or renovating
branches, and introducing new deposit and loan products and services, it is
expected that the Bank's noninterest expense levels may remain high relative to
the historical levels for the Bank, as well as the prevailing levels for
institutions that are not undertaking such expansions, for an indefinite period
of time, as management implements the Bank's business strategy. Among the
activities planned are continued increased loan originations in the areas of
multi-family residential, commercial real estate, commercial business and
consumer loans.
Income Taxes. The effective income tax rate for the Bank for the three
months ended September 30, 2001 and 2000 was (9.2%) and (346.2%), respectively.
Each rate includes both federal and Arkansas tax components. The variance in the
effective rate from the expected statutory rate is due primarily to tax exempt
interest.
These negative rates are a result of net tax benefit, which increases
net income. These benefits are due primarily to increases in net operating loss
carryforwards for income tax reporting purposes. The corresponding deferred tax
asset totals approximately $1.5 million as of September 30, 2001 and June 30,
2001, respectively. The recoverability of this asset is entirely contingent upon
the production of taxable income for income tax reporting purposes. Management
anticipates that the Company will produce such income in the near future based
on management's current forecasts of earnings and management's tax planning
strategy of selling certain available for sale tax exempt securities to generate
taxable income.
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, 2001, and June 30, 2001, 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, 2001, the Bank had $5.8 million in commitments to
originate loans (including unfunded portions of construction loans), and
approximately $1.1 million in unused lines of credit. At the same date, the
total amount of certificates of deposit which were scheduled to mature in one
year or less was $91.8 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.
Page 13
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data presented herein
have been prepared in accordance with instructions to Form 10-Q which require
the measurement of financial position and operating results in terms of
historical dollars, without considering changes in relative purchasing power
over time due to inflation.
Unlike most industrial companies, virtually all of the Bank's assets
and liabilities are monetary in nature. As a result, changes in interest rates
generally have a more significant impact on a financial institution's
performance than do changes in the rate of inflation.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the Company's asset and liability management
policies as well as the potential impact of interest rate changes upon the
market value of the Bank's portfolio equity, see "MARKET RISK" in the Company's
Annual Report on Form 10-K for the year ended June 30, 2001. There has been no
material change in the Company's asset and liability position since June 30,
2001.
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 is a
defendant in certain claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
the ultimate disposition of these matters is not expected to have a material
adverse effect on the consolidated financial statements of the Company.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
3.2 Bylaws of HCB Bancshares, Inc., as amended.
Reports on Form 8-K:
The Company filed an 8-K on September 5, 2001, reporting that on
August 29, 2001, its Board of Directors signed a standstill agreement with a
large stockholder.
The Company filed an 8-K on November 9, 2001, reporting that on
November 2, 2001, the Company dismissed Deloitte & Touche, LLP as its
independent auditors and on November 9, 2001, the Company engaged BKD, LLP as
its successor independent audit firm.
Page 14
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 13, 2001 By: /s/Cameron D. McKeel
------------------------
Cameron D. McKeel
President and Chief
Executive Officer
(Duly Authorized Representative)
Date: November 13, 2001 By: /s/Scott A. Swain
------------------------
Scott A. Swain
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Page 15