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 March 31, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-22423
HCB BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
OKLAHOMA 62-1670792
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
237 Jackson Street, Camden, Arkansas 71701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (870) 836-6841
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days:
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: 1,536,364 shares of common stock
outstanding as of April 30, 2002.
Page 1
CONTENTS
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Financial Condition
at March 31, 2002 (unaudited) and June 30, 2001
Condensed Consolidated Statements of Income and Comprehensive
Income for the Three Months and Nine Months Ended March 31,
2002 and 2001 (unaudited)
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended March 31, 2002 and 2001 (unaudited)
Notes to Condensed Consolidated Financial Statements
(unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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
2
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 2002 (UNAUDITED) AND JUNE 30, 2001
- --------------------------------------------------------------------------------
MARCH 31,
2002 JUNE 30,
ASSETS (UNAUDITED) 2001
------------- -------------
Cash and due from banks $ 2,896,074 $ 3,302,540
Interest-bearing deposits with banks 16,377,294 15,107,481
------------ ------------
Cash and cash equivalents 19,273,368 18,410,021
Investment securities available for sale, at fair value 117,617,749 120,082,177
Loans receivable, net of allowance 127,532,099 131,651,421
Accrued interest receivable 1,698,691 2,017,188
Federal Home Loan Bank stock 4,709,500 4,735,800
Premises and equipment, net 7,264,111 7,564,681
Goodwill, net 150,000 206,250
Real estate held for sale 982,667 398,132
Other assets 2,756,437 2,532,980
------------ ------------
TOTAL $ 281,984,622 $ 287,598,650
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 165,331,082 $ 161,285,179
Federal Home Loan Bank advances 84,041,570 91,915,694
Advance payments by borrowers for
taxes and insurance 172,190 199,470
Accrued interest payable 763,371 972,900
Note payable -- 80,000
Other liabilities 1,237,816 1,211,073
------------ ------------
Total liabilities 251,546,029 255,664,316
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 10,000,000 shares authorized,
2,645,000 shares issued, 1,783,369 and 1,935,445 shares
outstanding at March 31, 2002 and June 30, 2001, respectively 26,450 26,450
Additional paid-in capital 25,900,095 25,914,132
Unearned ESOP shares (899,300) (1,058,000)
Unearned MRP shares (125,388) (155,601)
Accumulated other comprehensive income (loss) (456,914) (59,600)
Retained earnings 14,918,565 14,256,684
------------ ------------
39,363,508 38,924,065
Treasury stock, at cost, 861,631 and 709,555 shares at
March 31, 2002, and June 30, 2001, respectively (8,924,915) (6,989,731)
------------ ------------
Total stockholders' equity 30,438,593 31,934,334
------------ ------------
TOTAL $ 281,984,622 $ 287,598,650
============ ============
See accompanying notes to condensed consolidated financial statements.
3
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2002 AND 2001 (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, (UNAUDITED) MARCH 31, (UNAUDITED)
2002 2001 2002 2001
---- ---- ---- ----
INTEREST INCOME:
Interest and fees on loans $ 2,666,241 $ 2,875,621 $ 8,204,278 $ 8,786,240
Investment securities:
Taxable 1,377,742 1,596,357 4,109,784 4,921,531
Nontaxable 320,050 382,595 1,024,504 1,147,255
Other 93,810 135,481 329,428 364,884
--------- ---------- ----------- -----------
Total interest income 4,457,843 4,990,054 13,667,994 15,219,910
--------- ---------- ----------- -----------
INTEREST EXPENSE:
Deposits 1,303,511 1,975,819 4,512,039 5,863,230
Federal Home Loan Bank advances 1,255,381 1,541,681 3,881,067 4,988,088
Note payable -- 1,500 1,000 5,500
--------- ---------- ----------- -----------
Total interest expense 2,558,892 3,519,000 8,394,106 10,856,818
--------- ---------- ----------- -----------
NET INTEREST INCOME 1,898,951 1,471,054 5,273,888 4,363,092
PROVISION FOR LOAN AND INVESTMENT
LOSSES 60,000 60,000 219,000 236,000
--------- ---------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND INVESTMENT LOSSES 1,838,951 1,411,054 5,054,888 4,127,092
--------- ---------- ----------- -----------
NONINTEREST INCOME:
Service charges on deposit accounts 200,922 172,477 721,125 509,986
Gain on sales of investment securities
available for sale -- -- 1,518 --
Other 201,235 91,580 483,449 408,709
--------- ---------- ----------- -----------
Total noninterest income 402,157 264,057 1,206,092 918,695
--------- ---------- ----------- -----------
NONINTEREST EXPENSE:
Salaries and employee benefits 982,712 976,443 2,923,537 2,920,313
Net occupancy expense 268,136 271,649 804,493 760,333
Communication, postage, printing and office supplies 95,794 115,225 310,056 309,650
Advertising 53,255 39,995 207,538 172,960
Data processing 91,113 84,931 257,893 227,692
Professional fees 70,548 123,570 322,595 411,357
Amortization of goodwill 18,750 18,750 56,250 56,250
Other 69,759 62,225 281,963 269,843
--------- ---------- ----------- -----------
Total noninterest expense 1,650,067 1,692,788 5,164,325 5,128,398
--------- ---------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 591,041 (17,677) 1,096,655 (82,611)
INCOME TAX PROVISION (BENEFIT) 110,000 (124,000) 77,000 (365,000)
--------- ----------- ----------- -----------
NET INCOME $ 481,041 $ 106,323 $ 1,019,655 $ 282,389
--------- ---------- ----------- -----------
(Continued)
4
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2002 AND 2001 (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, (UNAUDITED) MARCH 31, (UNAUDITED)
2002 2001 2002 2001
---- ---- ---- ----
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:
Unrealized holding gain (loss) on securities arising
during period (530,163) 1,707,055 (397,314) 4,834,212
Reclassification adjustment for gains
included in net income -- -- (1,518) --
--------- ---------- --------- ----------
Other comprehensive income (loss) (530,163) 1,707,055 (398,832) 4,834,212
--------- ---------- --------- ----------
COMPREHENSIVE INCOME (LOSS) $ (49,122) $ 1,813,378 $ 620,823 $ 5,116,601
========= ========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 1,774,003 1,840,580 1,798,198 1,874,391
========= ========== ========= ==========
EARNINGS PER SHARE:
Basic $ 0.28 $ 0.06 $ 0.59 $ 0.15
==== ==== ==== ====
Diluted $ 0.27 $ 0.06 $ 0.57 $ 0.15
==== ==== ==== ====
DIVIDENDS PER SHARE $ 0.07 $ 0.06 $ 0.20 $ 0.18
==== ==== ==== ====
(Concluded)
See accompanying notes to condensed consolidated financial statements.
5
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2002 AND 2001 (UNAUDITED)
- --------------------------------------------------------------------------------
NINE MONTHS ENDED MARCH 31,
2002 (UNAUDITED) 2001
---------- -----------
OPERATING ACTIVITIES:
Net income $ 1,019,655 $ 282,389
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 558,964 537,269
Deferred income taxes 77,000 (365,000)
Amortization (accretion) of:
Deferred loan origination fees (11,554) (79,057)
Goodwill 56,250 56,250
Premiums and discounts on loans, net (13,609) (3,384)
Premiums and discounts on investment securities, net 65,385 56,814
Net gain on sale of investment securities (1,518) --
Stock compensation expense 174,876 174,806
Provision for loan and investment losses 219,000 236,000
Originations of loans held for sale (21,380,008) (7,661,482)
Proceeds from sales of loans 21,152,797 7,387,007
Change in accrued interest receivable 318,497 (187,391)
Change in accrued interest payable (209,529) 81,669
Change in other assets (76,628) (196,562)
Change in other liabilities 26,743 (145,491)
----------- ------------
Net cash provided by operating activities 1,976,321 173,837
----------- -----------
INVESTING ACTIVITIES:
Purchases of investment securities - AFS (23,053,591) --
Proceeds from sales of investment securities - AFS 4,995,348 --
Redemption (purchase) of Federal Home Loan Bank stock 26,300 (294,700)
Purchases of premises and equipment (258,394) (1,611,637)
Proceeds from maturity of interest bearing deposits -- 99,000
Loan originations, net of repayments 4,181,696 3,022,344
Principal payments on investment securities - AFS 19,808,661 10,459,726
Change in real estate held for sale (584,535) (54,479)
----------- ------------
Net cash provided by investing activities 5,115,485 11,620,254
----------- -----------
(Continued)
6
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2002 AND 2001 (UNAUDITED)
- --------------------------------------------------------------------------------
NINE MONTHS ENDED MARCH 31,
2002 (UNAUDITED) 2001
---------- -----------
FINANCING ACTIVITIES:
Net increase in deposits 4,045,903 13,770,459
Advances from Federal Home Loan Bank 2,056,000 213,740,000
Repayment of Federal Home Loan Bank advances (9,930,124) (232,681,652)
Net increase in advance payments by borrowers
for taxes and insurance (27,280) 134,438
Repayment of note payable (80,000) (80,000)
Purchase of treasury stock (1,935,184) (851,996)
Dividends paid (357,774) (357,291)
------------ -------------
Net cash used by financing activities (6,228,459) (6,326,042)
------------ -------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 863,347 5,468,049
CASH AND CASH EQUIVALENTS:
Beginning of period 18,410,021 3,349,648
----------- ------------
End of period $ 19,273,368 $ 8,817,697
=========== ============
(Concluded)
See accompanying notes to condensed consolidated financial statements.
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"), HEARTLAND Community Bank and its subsidiary (the "Bank").
Bancshares' business is primarily that of owning the Bank, and participating in
the Bank's activities. HCBI holds a $500,000 initial investment in EastPoint
Technologies LLC, which is the company whose core processing software the Bank
utilizes. The accompanying condensed consolidated financial statements include
the accounts of Bancshares, HCBI, and the Bank and are collectively referred to
as the Company. All significant intercompany balances and transactions have been
eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements were
prepared in accordance with instructions for Form 10-Q. Accordingly, they do not
include all of the information required by generally accepted accounting
principles. The unaudited statements reflect all adjustments, which are, in the
opinion of management, necessary for fair presentation of the financial
condition and results of operations and cash flows of the Company. Those
adjustments consist only of normal recurring adjustments. The condensed
consolidated statements of income and comprehensive income for the three and
nine months ended March 31, 2002 are 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 three and nine month periods ended March 31, 2002 and 2001 were as
follows:
Three months ended Nine months ended
March 31, March 31,
2002 2001 2002 2001
---- ---- ---- ----
Basic weighted - average shares 1,689,348 1,840,580 1,716,691 1,874,391
Effect of dilutive securities 84,655 0 81,507 0
---------- ---------- ---------- ----------
Diluted weighted - average shares 1,774,003 1,840,580 1,798,198 1,874,391
========== ========== ========== ==========
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 and nine months ending March 31, 2002, but were anti-dilutive for the
three months and nine months ending March 31, 2001. In addition, the Company has
issued MRP shares that have the potential to be dilutive to its weighted average
share 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 - STOCK BUYBACK PROGRAM INITIATED THROUGH A MODIFIED DUTCH AUCTION
On January 31, 2002, the Company announced a tender offer to purchase up to
377,866 shares of its common stock at a price not greater than $14.75 nor less
than $12.75 per Share, net to the seller in cash without interest which was
originally scheduled to remain open through March 1, 2002. The Company filed an
Amendment 1 to the tender offer documents clarifying certain information on
February 19, 2002. The Company filed an Amendment 2 to the tender offer
documents on February 26, 2002, which extended the offer to March 29, 2002. The
Company filed an Amendment 3 to the tender offer documents on March 15, 2002,
which extended the offer to April 5, 2002, and mailed additional material
related to the offer to shareholders.
8
Amendment 3 included a press release regarding the Company's agreement to
sell its Monticello branch office to Simmons First Bank of South Arkansas along
with new financial pro forma information including the sale of the Monticello
office. On April 11, 2002, the company completed its modified dutch auction and
purchased 306,765 shares of its common stock at $14.75.
NOTE 5 - PENDING BRANCH SALE
On March 7, 2002, the Company announced that its bank subsidiary, HEARTLAND
Community Bank had entered into a definitive Branch Purchase and Assumption
Agreement with Simmons First Bank of South Arkansas ("SFB"), a subsidiary of
Simmons First National Corporation. Pursuant to such agreement, the Bank will
sell its Monticello, Arkansas branch office to SFB. The sale will involve
approximately $9.0 million in loans and $13.0 million in total deposits. The
transaction is subject to regulatory approval from the Office of Thrift
Supervision, Federal Deposit Insurance Corporation and the Arkansas State Bank
Department and is expected to close during the third quarter of 2002.
NOTE 6 - SUBSEQUENT EVENTS
On April 26, 2002, the Company filed Form 8-K announcing that it is
commencing a stock repurchase program to acquire up to 79,218 shares of HCB
Bancshares' common stock, which represents approximately 5% of the outstanding
common stock. The program will be dependent upon market conditions and there is
no guarantee as to the exact number of shares to be repurchased by HCB
Bancshares. The repurchase program is expected to be completed within six months
and will generally be effected through open market purchases. On April 26, 2002,
the company purchased 46,200 shares of its common stock at an average price of
$16.37 as part of this current repurchase program.
9
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.
STOCK BUYBACK PROGRAM INITIATED THROUGH A MODIFIED DUTCH AUCTION
On January 31, 2002, the Company announced a tender offer to purchase up to
377,866 shares of its common stock at a price not greater than $14.75 nor less
than $12.75 per Share, net to the seller in cash without interest which was
originally scheduled to remain open through March 1, 2002. The Company filed an
Amendment 1 to the tender offer documents clarifying certain information on
February 19, 2002. The Company filed an Amendment 2 to the tender offer
documents on February 26, 2002, which extended the offer to March 29, 2002. The
Company filed an Amendment 3 to the tender offer documents on March 15, 2002,
which extended the offer to April 5, 2002, and mailed additional material
related to the offer to shareholders.
Amendment 3 included a press release regarding the Company's agreement to
sell its Monticello branch office to Simmons First Bank of South Arkansas along
with new financial pro forma information including the sale of the Monticello
office. On April 11, 2002, the company completed its modified dutch auction and
purchased 306,765 shares of its common stock at $14.75.
10
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS AND RATES
The following table sets forth information regarding the Company's average
interest-earning assets and interest-bearing liabilities and reflects the
average yield of interest-earning assets and the average cost of
interest-bearing liabilities for the periods indicated. 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 market value. Loans on a nonaccrual
status 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.
Three Months Ended March 31,
-------------------------------------------------------------------------
2002 2001
---------------------------------- ----------------------------------
Average Average
Average Interest Yield/ Average Interest Yield/
Balance Earned/Paid Rate Balance Earned/Paid Rate
Interest-earning assets:
Loans receivable....................... $ 129,498,738 $ 2,666,241 8.24% $ 139,193,570 $ 2,875,621 8.26%
Investment and mortgage-backed
securities
Taxable............................... 93,287,666 1,377,742 5.91 100,677,460 1,596,357 6.34
Nontaxable............................ 25,342,289 320,050 5.05 28,624,315 382,595 5.35
Other interest-earning assets.......... 20,027,298 93,810 1.87 7,125,798 135,481 7.61
----------- --------- ---- ----------- --------- ----
Total interest-earning assets......... 268,155,991 4,457,843 6.65 275,621,143 4,990,054 7.24
--------- ---------
Noninterest-earning assets............... 15,601,494 16,565,886
----------- -----------
Total assets.......................... $ 283,757,485 $ 292,187,029
=========== ===========
Interest-bearing liabilities:
Deposits............................... $ 165,818,546 1,303,511 3.14 $ 149,794,156 1,975,819 5.28
FHLB advances.......................... 84,803,040 1,255,381 5.92 111,023,170 1,541,681 5.55
Note payable........................... 0 0 0.00 80,000 1,500 7.50
----------- --------- ---- ----------- --------- ----
Total interest-bearing liabilities.... 250,621,586 2,558,892 4.08 260,897,326 3,519,000 5.40
--------- ---------
Noninterest-bearing liabilities.......... 1,898,895 1,985,375
----------- -----------
Total liabilities..................... 252,520,481 262,882,701
Equity................................... 31,237,004 29,304,328
----------- -----------
Total liabilities and equity.......... $ 283,757,485 $ 292,187,029
=========== ===========
Net interest income...................... $ 1,898,951 $ 1,471,054
========= =========
Net interest rate spread................. 2.57% 1.84%
==== ====
Net yield on interest-earning assets..... 2.83% 2.13%
==== ====
Ratio of average interest-earning
assets to average interest-bearing
liabilities............................ 107.00% 105.64%
====== ======
11
Nine Months Ended March 31,
-------------------------------------------------------------------------
2002 2001
---------------------------------- ----------------------------------
Average Average
Average Interest Yield/ Average Interest Yield/
Balance Earned/Paid Rate Balance Earned/Paid Rate
Interest-earning assets:
Loans receivable....................... $ 132,877,503 $ 8,204,278 8.23% $ 138,154,913 $ 8,786,240 8.48%
Investment and mortgage-backed
securities
Taxable............................... 91,694,463 4,109,784 5.98 101,125,588 4,921,531 6.49
Nontaxable............................ 27,230,374 1,024,504 5.02 28,994,964 1,147,255 5.28
Other interest-earning assets.......... 16,966,510 329,428 2.59 7,954,363 364,884 6.12
----------- ---------- ---- ----------- ---------- ----
Total interest-earning assets......... 268,768,850 13,667,994 6.78 276,229,828 15,219,910 7.35
---------- ----------
Noninterest-earning assets............... 15,427,929 15,418,700
----------- -----------
Total assets.......................... $ 284,196,779 $ 291,648,528
=========== ===========
Interest-bearing liabilities:
Deposits............................... $ 162,994,161 4,512,039 3.69 $ 150,006,235 5,863,230 5.21
FHLB advances.......................... 87,466,988 3,881,067 5.92 109,440,469 4,988,088 6.08
Note payable........................... 19,562 1,000 6.82 99,562 5,500 7.37
----------- ---------- ---- ---------- ---------- ----
Total interest-bearing liabilities.... 250,480,711 8,394,106 4.47 259,546,266 10,856,818 5.58
---------- ----------
Noninterest-bearing liabilities.......... 1,962,432 1,995,887
----------- -----------
Total liabilities..................... 252,443,143 261,542,153
Equity................................... 31,753,636 30,106,375
----------- -----------
Total liabilities and equity.......... $ 284,196,779 $ 291,648,528
=========== ===========
Net interest income...................... $ 5,273,888 $ 4,363,092
========= ==========
Net interest rate spread................. 2.31% 1.77%
==== ====
Net yield on interest-earning assets..... 2.62% 2.11%
==== ====
Ratio of average interest-earning
assets to average interest-bearing
liabilities............................ 107.30% 106.43%
====== ======
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).
12
Three Months Ended March 31, Nine Months Ended March 31,
-------------------------------------------- ----------------------------------------
2002 vs. 2001 2002 vs. 2001
-------------------------------------------- ----------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------------------------- ----------------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
------ ---- ------ ----- ------ ---- ------ -----
(In thousands) (In thousands)
-------------------------------------------- ----------------------------------------
Interest income:
Loans receivable $ (200) $ (10) $ 1 $ (209) $ (336) $ (256) $ 10 $ (582)
Investment securities (161) (131) 11 (281) (529) (445) 40 (934)
Other interest-earning
assets 245 (102) (185) (42) 413 (210) (239) (36)
-------------------------------------------- ----------------------------------------
Total interest-earning
assets (116) (243) (173) (532) (452) (911) (189) (1,552)
---- ---- ---- ---- ----- ----- ----- -------
Interest expense:
Deposits 211 (798) (85) (672) 508 (1,711) (148) (1,351)
FHLB advances (364) 102 (24) (286) (1,002) (132) 27 (1,107)
Note payable (2) (2) 2 (2) (4) -- (1) (5)
-------------------------------------- ---------------------------------------
Total interest-bearing
liabilities (155) (698) (107) (960) (498) (1,843) (122) (2,463)
---- ---- ---- ---- ----- ----- ----- ------
Change in net interest
income $ 39 $ 455 $ (66) $ 428 $ 46 $ 932 $ (67) $ 911
==== ==== ==== ==== ===== ===== ===== =====
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2002 AND JUNE 30, 2001
The Company had consolidated total assets of $282.0 million and $287.6
million at March 31, 2002 and June 30, 2001, respectively. During the nine month
period ended March 31, 2002 the Company experienced a decrease in its
consolidated loan portfolio from $131.7 million at June 30, 2001, to $127.5
million at March 31, 2002. During this same period, investments and
mortgage-backed securities decreased from $120.1 million at June 30, 2001 to
$117.6 million at March 31, 2002.
While investments and mortgage-backed securities decreased $2.5 million for
the nine month period ended March 31, 2002, there were $19.8 million in
paydowns, $5.1 million in sales of municipal securities, a $0.6 million decrease
in the market value of the securities, offset with purchases of $23.0 million.
The $23.0 million in purchases were primarily six years and less average
expected life mortgage backed securities.
Deposits increased from $161.3 million at June 30, 2001 to $165.3 million
at March 31, 2002. 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 $84.0 million at March 31, 2002.
Stockholders' equity amounted to $30.4 million at March 31, 2002, and $31.9
million at June 30, 2001. The changes in equity were primarily due to net income
offset by the purchase of treasury stock. At March 31, 2002, the Bank's
regulatory capital exceeded all applicable regulatory capital requirements.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED MARCH
31, 2002 AND 2001
Net Income. Net income for the three months ended March 31, 2002 was
approximately $481,000 compared to net income of approximately $106,000 for the
three months ended March 31, 2001. Net income for the nine months ended March
31, 2002 was approximately $1,020,000 compared to net income of approximately
$282,000 for the nine months ended March 31, 2001. Explanations of primary
changes to income and expense items follow.
Interest Income. Interest income for the three months ended March 31, 2002
decreased approximately $532,000 compared to the three months ended March 31,
2001. Interest income for the nine months ended March 31, 2002 decreased
approximately $1,552,000 compared to the nine months ended March 31, 2001. The
decreases in interest income were due to decreases in both volume and rates on
loans and investments, offset by higher volumes of other interest-earning
assets, primarily FHLB deposits.
13
The yield on earning assets decreased 59 and 57 basis points for the three
and nine months ended March 31, 2002 compared to the three and nine months ended
March 31, 2001. The decrease in both periods was primarily due to lower yields
on investments and mortgage backed securities, followed by loans receivable,
then other interest-earning assets. If interest rates continue to be low, this
trend can be expected to continue as interest-earning assets reprice at lower
market rates.
Interest Expense. Interest expense for the three months ended March 31,
2002 decreased approximately $960,000 compared to the three months ended March
31, 2001. Interest expense for the nine months ended March 31, 2002 decreased
approximately $2,463,000 compared to the nine months ended March 31, 2001. The
decrease was primarily due to rate decreases in deposits, volume decreases in
FHLB advances, offset by volume increases in deposits.
The cost of interest-bearing liabilities decreased 132 and 111 basis points
for the three and nine months ended March 31, 2002 compared to the three and
nine months ended March 31, 2001. The decrease in both periods was primarily due
to lower costs of deposits, lower volumes of FHLB advances, offset by higher
volumes of deposits. If interest rates continue to be low, this trend can be
expected to continue as interest-bearing liabilities reprice at lower market
rates.
As a result of the above changes, net interest income for the three months
ended March 31, 2002 increased approximately $428,000 compared to the three
months ended March 31, 2001, and net interest income for the nine months ended
March 31, 2002 increased approximately $911,000 compared to the nine months
ended March 31, 2001. The Company's net interest spread increased 73 and 54
basis points for the three and nine months ended March 31, 2002 compared to the
three and nine months ended March 31, 2001.
Provision for Loan and Investment Losses. The Bank made provisions for loan
losses of $60,000 and $190,000 for the three and nine months ended March 31,
2002, respectively. This provision reflects management's most recent review as
of March 31, 2002. The allowance for loan losses of $1.5 million represented
1.09 percent of total gross outstanding loans at March 31, 2002, which compares
to 0.99 percent at June 30, 2001. Nonperforming loans as of March 31, 2002, and
June 30, 2001, as a percent of total gross outstanding loans, were 1.14% and
0.81% respectively.
In addition, the Bank made a net provision for investment loss of $29,000
for the quarter ended December 31, 2001, increasing the Bank's allowance for
investment loss to $83,000 on two securities. As of March 31, 2002, the
deterioration affected the credit support and not the principal or interest of
the securities. However, if current trends continue, the credit support could be
depleted and the securities principal and interest will be affected.
Management evaluates the carrying value of the loan and investment
portfolios 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 March 31, 2002, was approximately $402,000 compared
to approximately $264,000 for the three months ended March 31, 2001. Noninterest
income for the nine months ended March 31, 2002, was approximately $1,206,000
compared to approximately $919,000 for the nine months ended March 31, 2001. The
increase for the three and nine month periods 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.
14
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 the three months ended March 31, 2002 was $1.65 million
compared to $1.69 million for the three months ended March 31, 2001. Total
noninterest expense for the nine months ended March 31, 2002 was $5.16 million
compared to $5.13 million for the nine months ended March 31, 2001.
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 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 emphasis on 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 Company for the three
months ended March 31, 2002 and 2001 was 18.6% and (701.5%), respectively. The
effective income tax rate for the Company for the nine months ended March 31,
2002 and 2001 was 7.0% and (441.8%), 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.
The tax benefits discussed above for the three and nine month periods ended
March 31, 2001, are due primarily to increases in net operating loss
carryforwards for income tax reporting purposes. The corresponding deferred tax
asset totals approximately $1.4 million as of March 31, 2002 compared to $1.5
million as of June 30, 2001. 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 and interest-rate risk planning strategy of selling available
for sale tax exempt securities and reinvesting the proceeds into taxable income
producing securities. The strategy does not anticipate significant taxable gains
on the sale of the tax exempt securities, but rather a shift of nontaxable
interest income to taxable interest 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 at Bancshares 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 March 31, 2002, 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 March 31, 2002, the Bank had $5.2 million in commitments to originate
loans (including unfunded portions of construction loans), and approximately
$1.4 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
$92.4 million. Management anticipates that the Bank will have adequate resources
to meet its current commitments through internal funding sources described
above.
15
Management is not aware of any current recommendations by its
regulatory authorities, legislation, competition, trends in interest rate
sensitivity, new accounting guidance or other material events and uncertainties
that would have a material effect on the Bank's ability to meet its liquidity
demands.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data presented herein
have been prepared in accordance with instructions to Form 10-Q which require
the measurement of financial position and operating results in terms of
historical dollars, without considering changes in relative purchasing power
over time due to inflation.
Unlike most industrial companies, virtually all of the Bank's assets
and liabilities are monetary in nature. As a result, changes in interest rates
generally have a more significant impact on a financial institution's
performance than do changes in the rate of inflation.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the Company's asset and liability management
policies as well as the potential impact of interest rate changes upon the
market value of the Bank's portfolio equity, see "MARKET RISK" in the Company's
Annual Report on Form 10-K for the year ended June 30, 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 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.
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:
None
Reports on Form 8-K:
FORM 8-K filed March 15, 2002, Item 5.
Announced that the Company's bank subsidiary, HEARTLAND Community
Bank (the "Bank"), had entered into a definitive Branch Purchase and
Assumption Agreement with Simmons First Bank of South Arkansas
("SFB"), a subsidiary of Simmons First National Corporation. Pursuant
to such agreement, the Bank will sell its Monticello, Arkansas branch
office to SFB. The sale will involve approximately $9.0 million in
loans and $13.0 million in total deposits. The transaction is subject
to regulatory approval from the Office of Thrift Supervision, Federal
Deposit Insurance Corporation and the Arkansas State Bank Department
and is expected to close during the third quarter of 2002.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HCB BANCSHARES, INC.
Registrant
Date: May 1, 2002 By: /s/Cameron D. McKeel
------------------------
Cameron D. McKeel
President and Chief
Executive Officer
(Duly Authorized Representative)
Date: May 1, 2002 By: /s/Scott A. Swain
------------------------
Scott A. Swain
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
17