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, 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: 1,889,329 shares of common stock
outstanding as of January 24, 2002.
Page 1
CONTENTS
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Financial Condition at
December 31, 2001 (unaudited) and June 30, 2001
Condensed Consolidated Statements of Income and Comprehensive
Income for the Three Months and Six Months Ended December
31, 2001 and 2000 (unaudited)
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended December 31, 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
DECEMBER 31, 2001 (UNAUDITED) and JUNE 30, 2001
--------------------------------------------------------------------------------
DECEMBER 31,
2001 JUNE 30,
ASSETS (UNAUDITED) 2001
--------------- --------
Cash and due from banks $ 4,025,758 $ 3,302,540
Interest-bearing deposits with banks 13,053,437 15,107,481
------------ ------------
Cash and cash equivalents 17,079,195 18,410,021
Investment securities available for sale, at fair value 116,546,816 120,082,177
Loans receivable, net of allowance 133,078,155 131,651,421
Accrued interest receivable 1,927,612 2,017,188
Federal Home Loan Bank stock 4,710,300 4,735,800
Premises and equipment, net 7,391,321 7,564,681
Goodwill, net 168,750 206,250
Real estate held for sale 954,328 398,132
Other assets 2,415,820 2,532,980
------------ ------------
TOTAL $ 284,272,297 $ 287,598,650
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 165,248,425 $ 161,285,179
Federal Home Loan Bank advances 86,380,595 91,915,694
Advance payments by borrowers for
taxes and insurance 157,589 199,470
Accrued interest payable 828,506 972,900
Note payable -- 80,000
Other liabilities 1,165,182 1,211,073
------------ ------------
Total liabilities 253,780,297 255,664,316
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 10,000,000 shares authorized,
2,645,000 shares issued, 1,779,329 and 1,935,445 shares
outstanding at December 31, 2001 and June 30, 2001, respectively 26,450 26,450
Additional paid-in capital 25,894,146 25,914,132
Unearned ESOP shares (952,200) (1,058,000)
Unearned MRP shares (135,459) (155,601)
Accumulated other comprehensive income (loss) 73,249 (59,600)
Retained earnings 14,562,360 14,256,684
------------ ------------
39,468,546 38,924,065
Treasury stock, at cost, 865,671 and 709,555 shares at
December 31, 2001, and June 30, 2001, respectively (8,976,546) (6,989,731)
------------- -------------
Total stockholders' equity 30,492,000 31,934,334
------------ ------------
TOTAL $ 284,272,297 $ 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 AND SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000 (UNAUDITED)
--------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, (UNAUDITED) DECEMBER 31, (UNAUDITED)
2001 2000 2001 2000
---- ---- ---- ----
INTEREST INCOME:
Interest and fees on loans $ 2,734,733 $ 2,991,438 $ 5,538,037 $ 5,910,620
Investment securities:
Taxable 1,358,102 1,648,001 2,732,042 3,325,174
Nontaxable 321,747 382,180 704,454 764,660
Other 94,828 115,579 235,618 229,402
--------- ---------- --------- -----------
Total interest income 4,509,410 5,137,198 9,210,151 10,229,856
--------- ---------- --------- -----------
INTEREST EXPENSE:
Deposits 1,496,927 2,007,773 3,208,528 3,887,410
Federal Home Loan Bank advances 1,299,450 1,702,763 2,625,686 3,446,408
Note payable -- 1,500 1,000 4,000
--------- ---------- --------- ----------
Total interest expense 2,796,377 3,712,036 5,835,214 7,337,818
--------- ---------- --------- ----------
NET INTEREST INCOME 1,713,033 1,425,162 3,374,937 2,892,038
PROVISION FOR LOAN AND INVESTMENT
LOSSES 99,000 60,000 159,000 176,000
--------- ---------- --------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND INVESTMENT LOSSES 1,614,033 1,365,162 3,215,937 2,716,038
--------- --------- --------- ---------
NONINTEREST INCOME:
Service charges on deposit accounts 272,674 174,286 520,203 337,510
Gain on sales of investment securities
available for sale 1,518 -- 1,518 --
Other 155,017 156,843 282,214 317,128
--------- ---------- --------- ----------
Net noninterest income 429,209 331,129 803,935 654,638
--------- ---------- --------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits 988,297 963,092 1,940,825 1,943,869
Net occupancy expense 259,498 256,664 536,357 488,684
Communication, postage, printing and office supplies 107,221 107,980 214,262 194,425
Advertising 98,141 76,115 154,283 132,965
Data processing 85,691 63,078 166,780 142,761
Professional fees 130,117 129,112 252,047 287,787
Amortization of goodwill 18,750 18,750 37,500 37,500
Other 111,196 115,531 212,204 207,620
--------- ---------- --------- ----------
Total noninterest expense 1,798,911 1,730,322 3,514,258 3,435,611
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 244,331 (34,031) 505,614 (64,935)
INCOME TAX PROVISION (BENEFIT) (9,000) (134,000) (33,000) (241,000)
---------- ----------- ---------- -----------
NET INCOME $ 253,331 $ 99,969 $ 538,614 $ 176,065
--------- --------- --------- ----------
(Continued)
Page 4
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000 (UNAUDITED)
--------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, (UNAUDITED) DECEMBER 31, (UNAUDITED)
2001 2000 2001 2000
---- ---- ---- ----
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:
Unrealized holding gain (loss) on securities arising
during period (1,202,928) 2,203,105 132,849 3,127,157
Reclassification adjustment for gains
included in net income (1,518) -- (1,518) --
---------- ---------- ---------- ----------
Other comprehensive income (loss) (1,204,446) 2,203,105 131,331 3,127,157
----------- ---------- --------- ----------
COMPREHENSIVE INCOME (LOSS) $ (951,115) $ 2,303,074 $ 669,945 $ 3,303,222
========== ========== ========= ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 1,691,522 1,863,269 1,730,008 1,890,871
========= ========== ========= ==========
EARNINGS PER SHARE:
Basic $ 0.15 $ 0.05 $ 0.31 $ 0.09
==== ==== ==== ====
Diluted $ 0.14 $ 0.05 $ 0.30 $ 0.09
==== ==== ==== ====
DIVIDENDS PER SHARE $ 0.07 $ 0.06 $ 0.13 $ 0.12
==== ==== ==== ====
(Concluded)
See accompanying notes to condensed consolidated financial statements.
Page 5
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000 (UNAUDITED)
--------------------------------------------------------------------------------
Six Months Ended December 31,
2001 (Unaudited) 2000
---------- -----------
OPERATING ACTIVITIES:
Net income $ 538,614 $ 176,065
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 378,512 345,443
Deferred income taxes (33,000) (310,000)
Amortization (accretion) of:
Deferred loan origination fees (52,588) (38,272)
Goodwill 37,500 37,500
Premiums and discounts on loans, net (8,658) (2,280)
Premiums and discounts on investment securities, net 49,323 38,246
Net gain on sale of investment securities (1,518) --
Stock compensation expense 105,956 113,080
Provision for loan and investment losses 159,000 176,000
Originations of loans held for sale (15,253,558) (4,703,934)
Proceeds from sales of loans 12,888,924 5,163,107
Change in accrued interest receivable 89,576 (224,997)
Change in accrued interest payable (144,394) 73,013
Change in other assets 20,401 130,253
Change in other liabilities (45,892) (115,433)
----------- ----------
Net cash provided (used) by operating activities (1,271,802) 857,791
----------- ----------
INVESTING ACTIVITIES:
Purchases of investment securities - available for sale (12,959,370) --
Proceeds from sales of investment securities 4,995,348 --
Redemption (purchase) of Federal Home Loan Bank stock 25,500 (205,800)
Purchases of premises and equipment (205,152) (1,466,731)
Proceeds from maturity of interest bearing deposits -- 99,000
Loan originations, net of repayments 869,146 (3,649,067)
Principal payments on investment securities 11,685,186 7,450,104
Change in real estate held for sale (556,196) (39,398)
---------- ----------
Net cash provided by investing activities 3,854,462 2,188,108
----------- ----------
(Continued)
Page 6
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000 (UNAUDITED)
--------------------------------------------------------------------------------
Six Months Ended December 31,
2001 (Unaudited) 2000
---------- -----------
FINANCING ACTIVITIES:
Net increase in deposits 3,963,247 7,021,771
Advances from Federal Home Loan Bank 2,056,000 198,735,000
Repayment of Federal Home Loan Bank advances (7,591,099) (207,023,416)
Net increase in advance payments by borrowers
for taxes and insurance (41,881) 77,141
Repayment of note payable (80,000) (80,000)
Purchase of treasury stock (1,986,815) (751,862)
Dividends paid (232,938) (240,208)
------------ -------------
Net cash used by financing activities (3,913,486) (2,261,574)
------------ -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,330,826) 784,325
CASH AND CASH EQUIVALENTS:
Beginning of period 18,410,021 3,349,648
----------- ------------
End of period $ 17,079,195 $ 4,133,973
=========== ============
(Concluded)
See accompanying notes to condensed consolidated financial statements.
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"), 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 Inc., 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 statement of income and comprehensive income for the three and six
months ended December 31, 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 three and six month periods ended December 31, 2001 and 2000 were
as follows:
Three months ended Six months ended
December 31, December 31,
2001 2000 2001 2000
---- ---- ---- ----
Basic weighted - average shares 1,691,522 1,863,269 1,730,008 1,890,871
Effect of dilutive securities 71,043 0 72,978 0
---------- ---------- ---------- ----------
Diluted weighted - average shares 1,762,565 1,863,269 1,802,986 1,890,871
========== ========== ========== ==========
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 six months ending December 31, 2001, but were anti-dilutive for the
three months and six months ending December 31, 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 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 - SUBSEQUENT EVENTS
Subsequent to December 31, 2001, and after Management had completed the
Bank's classification of assets and allowance for loan loss review, the Bank
received quarterly cash flow and financial statements on a borrower, which
indicated a cash flow concern in the last quarter of the calendar year. As of
December 31, 2001, the Bank had two loans totaling approximately $2.7 million
outstanding to this borrower secured by nonresidential real estate property
which were 46 days past due. While Management will continue to monitor this
borrower closely, the cash flow problem is perceived as temporary due to recent
terrorist attacks against the United States and subsequent travel restrictions
imposed by companies and limited travel by individuals.
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.
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.
Page 9
Three Months Ended December 31,
-------------------------------------------------------------------------
2001 2000
---------------------------------- ----------------------------------
Average Average
Average Interest Yield/ Average Interest Yield/
Balance Earned/Paid Rate Balance Earned/Paid Rate
Interest-earning assets:
Loans receivable......................... $ 135,418,541 $ 2,734,733 8.08% $ 139,193,570 $ 2,991,438 8.60%
Investment and mortgage-backed
securities
Taxable............................... 91,845,539 1,358,102 5.91 100,687,022 1,648,001 6.55
Nontaxable............................ 25,855,743 321,747 4.98 28,624,315 382,180 5.34
Other interest-earning assets.......... 16,158,149 94,828 2.35 7,114,049 115,579 6.50
----------- --------- ---- ----------- --------- ----
Total interest-earning assets......... 269,277,972 4,509,410 6.70 275,618,956 5,137,198 7.45
--------- ---------
Noninterest-earning assets............... 15,015,123 16,557,223
----------- -----------
Total assets.......................... $ 284,293,095 $ 292,176,179
=========== ===========
Interest-bearing liabilities:
Deposits............................... $ 162,747,913 1,496,927 3.68 $ 149,246,775 2,007,773 5.38
FHLB advances.......................... 87,473,612 1,299,450 5.94 111,023,170 1,702,763 6.13
Note payable........................... 0 0 0.00 80,000 1,500 7.50
----------- --------- ---- ----------- --------- ----
Total interest-bearing liabilities.... 250,221,525 2,796,377 4.47 260,349,945 3,712,036 5.70
--------- ---------
Noninterest-bearing liabilities.......... 1,941,869 2,057,539
----------- -----------
Total liabilities..................... 252,163,394 262,407,484
Equity................................... 32,129,701 29,768,695
----------- -----------
Total liabilities and equity.......... $ 284,293,095 $ 292,176,179
=========== ===========
Net interest income...................... $ 1,713,033 $ 1,425,162
========= =========
Net interest rate spread................. 2.23% 1.75%
==== ====
Net yield on interest-earning assets..... 2.54% 2.07%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 107.62% 105.86%
====== ======
Page 10
Six Months Ended December 31,
-------------------------------------------------------------------------
2001 2000
---------------------------------- ----------------------------------
Average Average
Average Interest Yield/ Average Interest Yield/
Balance Earned/Paid Rate Balance Earned/Paid Rate
Interest-earning assets:
Loans receivable......................... $ 134,529,754 $ 5,538,037 8.23% $ 138,149,299 $ 5,910,620 8.56%
Investment and mortgage-backed
securities
Taxable............................... 90,694,855 2,732,042 6.02 101,722,854 3,325,174 6.54
Nontaxable............................ 28,150,572 704,454 5.00 28,518,670 764,660 5.36
Other interest-earning assets.......... 15,689,251 235,618 3.00 7,019,769 229,402 6.54
----------- --------- ---- ----------- ----------- ----
Total interest-earning assets......... 269,064,432 9,210,151 6.84 275,410,592 10,229,856 7.43
--------- -----------
Noninterest-earning assets............... 15,323,695 16,345,986
----------- -----------
Total assets.......................... $ 284,388,127 $ 291,756,578
=========== ===========
Interest-bearing liabilities:
Deposits............................... $ 161,500,354 3,208,528 3.97 $ 148,042,688 3,887,410 5.25
FHLB advances.......................... 88,770,006 2,625,686 5.92 112,360,357 3,446,408 6.13
Note payable........................... 29,130 1,000 6.87 109,131 4,000 7.33
----------- --------- ---- ----------- ----------- ----
Total interest-bearing liabilities.... 250,299,490 5,835,214 4.66 260,512,176 7,337,818 5.63
--------- -----------
Noninterest-bearing liabilities.......... 1,993,041 1,900,222
----------- -----------
Total liabilities..................... 252,292,531 262,412,398
Equity................................... 32,095,596 29,344,180
----------- ----------
Total liabilities and equity.......... $ 284,388,127 $ 291,756,578
=========== ===========
Net interest income...................... $ 3,374,937 $ 2,892,038
========= ==========
Net interest rate spread................. 2.18% 1.80%
==== ====
Net yield on interest-earning assets..... 2.51% 2.10%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 107.50% 105.72%
====== ======
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).
Page 11
Three Months Ended December 31, Six Months Ended December 31,
------------------------------------- ---------------------------------------
2001 vs. 2000 2001 vs. 2000
------------------------------------- ----------------------------------------
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 $ (80) $ (180) $ 3 $ (257) $ (153) $ (224) $ 4 $ (373)
Investment securities (181) (185) 16 (350) (370) (312) 29 (653)
Other interest-earning
assets 147 (74) (94) (21) 284 (124) (154) 6
------------------------------------- ---------------------------------------
Total interest-earning
assets (114) (439) (75) (628) (239) (660) (121) (1,020)
---- ---- ---- ---- ----- ----- ----- -------
Interest expense:
Deposits 181 (635) (57) (511) 352 (946) (85) (679)
FHLB advances (362) (53) 12 (403) (726) (123) 28 (821)
Note payable (2) (2) 2 (2) (3) -- -- (3)
------------------------------------- ---------------------------------------
Total interest-bearing
liabilities (183) (690) (43) (916) (377) (1,069) (57) (1,503)
---- ---- ---- ---- ----- ----- ----- ------
Change in net interest
income $ 69 $ 251 $ (32) $ 288 $ 138 $ 409 $ (64) $ 483
==== ==== ==== ==== ===== ===== ===== =====
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2001 AND JUNE 30, 2001
The Company had consolidated total assets of $284.3 million and $287.6
million at December 31, 2001 and June 30, 2001, respectively. During the six
month period ended December 31, 2001 the Company experienced an increase in its
consolidated loan portfolio from $131.7 million at June 30, 2001, to $133.1
million at December 31, 2001. During this same period, investments and
mortgage-backed securities decreased from $120.1 million at June 30, 2001 to
$116.5 million at December 31, 2001. While investments and mortgage-backed
securities decreased $3.6 million for the six month period ended December 31,
2001, there were $11.8 million in paydowns, $5.1 million in sales of municipal
securities, offset with purchases of $13.0 million and a $0.3 million increase
in the market value of the securities.
Deposits increased from $161.3 million at June 30, 2001 to $165.2 million
at December 31, 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 $86.4 million at December 31, 2001.
Stockholders' equity amounted to $30.5 million at December 31, 2001, 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 December 31, 2001, the
Bank's regulatory capital exceeded all applicable regulatory capital
requirements.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED DECEMBER
31, 2001 AND 2000
Net Income. Net income for the three months ended December 31, 2001 was
approximately $253,000 compared to net income of approximately $100,000 for the
three months ended December 31, 2000. Net income for the six months ended
December 31, 2001 was approximately $539,000 compared to net income of
approximately $176,000 for the six months ended December 31, 2000. Explanations
of primary changes to income and expense items follow.
Interest Income. Interest income for the three months ended December 31,
2001 decreased approximately $628,000 compared to the three months ended
December 31, 2000. Interest income for the six months ended December 31, 2001
decreased approximately $1,020,000 compared to the six months ended December 31,
2000. 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.
Page 12
The yield on earning assets decreased 75 and 59 basis points for the three
and six months ended December 31, 2001 compared to the three and six months
ended December 31, 2000. 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 December 31,
2001 decreased approximately $916,000 compared to the three months ended
December 31, 2000. Interest expense for the six months ended December 31, 2001
decreased approximately $1,503,000 compared to the six months ended December 31,
2000. The decrease was primarily due to rate decreases in both deposits and FHLB
advances, volume decreases in FHLB advances, offset by volume increases in
deposits.
The cost of interest-bearing liabilities decreased 123 and 97 basis points
for the three and six months ended December 31, 2001 compared to the three and
six months ended December 31, 2000. The decrease in both periods was primarily
due to lower costs of deposits, lower costs and 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 December 31, 2001 increased approximately $288,000 compared to the three
months ended December 31, 2000, and net interest income for the six months ended
December 31, 2001 increased approximately $483,000 compared to the six months
ended December 31, 2000. The Company's net interest spread increased 48 and 38
basis points for the three and six months ended December 31, 2001 compared to
the three and six months ended December 31, 2000.
Provision for Loan and Investment Losses. The Bank made provisions for loan
losses of $70,000 and $130,000 for the three and six months ended December 31,
2001, respectively. This provision reflects management's most recent review as
of December 31, 2001. The allowance for loan losses of $1.5 million represented
1.02 percent of total gross outstanding loans at December 31, 2001, which
compares to 0.99 percent at June 30, 2001. Nonperforming loans as of December
31, 2001, and June 30, 2001, as a percent of total gross outstanding loans, were
2.21% and 0.81% respectively. The increase was largely due to two loans to one
borrower totaling $1.8 million, or 1.23% of total gross outstanding loans which
were over 90 days past due as of December 31, 2001. These loans were transferred
to nonaccrual as of December 31, 2001, which had the effect of reducing interest
income for the three and six months ended December 31, 2001, by approximately
$67,000. Management is monitoring the loans closely and while management feels
the collection of both principal and interest on the loans is highly likely, the
timing of such payment is not certain.
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 December 31, 2001, 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 December 31, 2001, was approximately $429,000
compared to approximately $331,000 for the three months ended December 31, 2000.
Noninterest income for the six months ended December 31, 2001, was approximately
$804,000 compared to approximately $655,000 for the six months ended December
31, 2000. The increase for the three and six 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.
Page 13
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 the three months ended December 31, 2001 was $1.80
million compared to $1.73 million for the three months ended December 31, 2000.
Total noninterest expense for the six months ended December 31, 2001 was $3.51
million compared to $3.44 million for the six months ended December 31, 2000.
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 Company for the three
months ended December 31, 2001 and 2000 was (3.7%) and (393.8%), respectively.
The effective income tax rate for the Company for the six months ended December
31, 2001 and 2000 was (6.5%) and (371.1%), 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 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
December 31, 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 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 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, 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.
Page 14
At December 31, 2001, the Bank had $6.5 million in commitments to
originate loans (including unfunded portions of construction loans), and
approximately $2.4 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 $95.6 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.
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
The Company's Annual Meeting of Stockholders was held on November 15,
2001. 1,672,458 shares of the Company's common stock were represented at the
Annual Meeting in person or by proxy.
Stockholders voted in favor of the election of two nominees for
director. The voting results for each nominee were as follows:
Votes in Favor
Nominee of Election Votes Withheld
--------------------- -------------- --------------
Vida H. Lampkin 1,664,208 8,250
Clifford O. Steelman 1,660,508 11,950
There were no broker nonvotes on the matter.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
None
Reports on Form 8-K:
None
Page 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HCB BANCSHARES, INC.
Registrant
Date: January 24, 2002 By: /s/Cameron D. McKeel
------------------------
Cameron D. McKeel
President and Chief
Executive Officer
(Duly Authorized Representative)
Date: January 24, 2002 By: /s/Scott A. Swain
------------------------
Scott A. Swain
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Page 16