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, 2004.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-22423
HCB BANCSHARES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
OKLAHOMA 62-1670792
-------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
237 Jackson Street, Camden, Arkansas 71701
-------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (870) 836-6841
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days:
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: 1,431,470 shares of common stock
outstanding as of April 30, 2004.
CONTENTS
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Financial Condition at March
31, 2004 (unaudited) and June 30, 2003
Condensed Consolidated Statements of Income and Comprehensive
Income (Loss) Three Months and Nine Months Ended March 31, 2004
and 2003 (unaudited)
Condensed Consolidated Statements of Cash Flows Nine Months Ended
March 31, 2004 and 2003 (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity 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
MARCH 31, 2004 (UNAUDITED) and JUNE 30, 2003
--------------------------------------------------------------------------------
MARCH 31,
2004 JUNE 30,
ASSETS (UNAUDITED) 2003
--------------- --------
Cash and due from banks $ 3,050,909 $ 3,003,656
Interest-bearing deposits with banks 4,485,224 4,203,320
Fed funds sold 100,000 --
------------ ------------
Cash and cash equivalents 7,636,133 7,206,976
Investment securities available for sale, at fair value 118,625,241 129,960,346
Loans receivable, net of allowance 87,543,824 100,779,545
Accrued interest receivable 1,046,660 1,456,372
Federal Home Loan Bank stock 3,394,900 4,704,100
Premises and equipment, net 4,831,565 5,113,645
Real estate held for sale 181,501 246,160
Other assets 1,857,331 1,557,639
------------ ------------
TOTAL $ 225,117,155 $ 251,024,783
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 136,786,180 $ 151,956,504
Federal Home Loan Bank advances 59,021,193 69,068,534
Advance payments by borrowers for
taxes and insurance 24,806 83,879
Accrued interest payable 441,866 563,620
Other liabilities 678,698 897,259
------------ ------------
Total liabilities 196,952,743 222,569,796
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 10,000,000 shares authorized,
2,645,000 shares issued, 1,428,253 and 1,457,982 shares
outstanding at March 31, 2004 and June 30, 2003, respectively 26,450 26,450
Additional paid-in capital 25,938,851 25,781,908
Unearned ESOP shares (476,100) (634,800)
Unearned MRP shares -- (82,625)
Accumulated other comprehensive income 2,079,080 2,221,285
Retained earnings 15,526,128 15,537,315
------------ ------------
43,094,409 42,849,533
Treasury stock, at cost, 1,216,747 and 1,187,018 shares at
March 31, 2004, and June 30, 2003, respectively (14,929,997) (14,394,546)
------------- -------------
Total stockholders' equity 28,164,412 28,454,987
------------ ------------
TOTAL $ 225,117,155 $ 251,024,783
============ ============
See accompanying notes to condensed consolidated financial statements.
Page 3
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2004 AND 2003 (UNAUDITED)
--------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, (UNAUDITED) MARCH 31, (UNAUDITED)
INTEREST INCOME: 2004 2003 2004 2003
---- ---- ---- ----
Interest and fees on loans $ 1,507,866 $ 1,886,434 $ 4,951,293 $ 6,254,780
Investment securities:
Taxable 1,069,258 1,092,553 3,196,705 3,631,854
Nontaxable 313,488 314,538 941,051 954,980
Other 19,192 54,819 77,619 191,625
---------- ---------- ---------- -----------
Total interest income 2,909,804 3,348,344 9,166,668 11,033,239
---------- ---------- ---------- -----------
INTEREST EXPENSE:
Deposits 581,536 890,628 2,024,590 2,918,309
Federal Home Loan Bank advances 902,332 1,054,607 2,898,701 3,418,370
---------- ---------- ---------- -----------
Total interest expense 1,483,868 1,945,235 4,923,291 6,336,679
---------- ---------- ---------- -----------
NET INTEREST INCOME 1,425,936 1,403,109 4,243,377 4,696,560
PROVISION FOR LOAN AND INVESTMENT
LOSSES 120,000 120,000 360,000 413,000
---------- ---------- ---------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND INVESTMENT LOSSES 1,305,936 1,283,109 3,883,377 4,283,560
---------- ---------- ---------- -----------
NONINTEREST INCOME:
Service charges on deposit accounts 176,665 186,609 635,812 647,458
Gain on sale of loans available for sale, net 44,983 135,658 258,934 349,127
Gain on sale of investment securities 8,701 -- 8,701 --
Gain on sale of branch -- -- -- 742,942
Other 71,728 63,638 260,518 177,639
---------- ---------- ---------- -----------
Total noninterest income 302,077 385,905 1,163,965 1,917,166
---------- ---------- ---------- -----------
NONINTEREST EXPENSE:
Salaries and employee benefits 910,357 927,696 2,680,954 2,863,035
Net occupancy expense 146,347 212,945 553,665 670,108
Communication, postage, printing and office
supplies 99,176 74,870 282,059 263,153
Advertising 19,660 34,863 57,661 124,056
Data processing 103,423 95,570 316,756 282,796
Professional fees 261,953 48,385 625,582 325,668
Write down of land held for investment -- 407,149 -- 466,955
Other 88,085 80,215 272,944 302,757
---------- ---------- ---------- -----------
Total noninterest expense 1,629,001 1,881,693 4,789,621 5,298,528
---------- ---------- ---------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (20,988) (212,679) 257,721 902,198
INCOME TAX (BENEFIT) PROVISION (46,409) (195,760) (104,646) 8,476
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 25,421 $ (16,919) $ 362,367 $ 893,722
---------- ----------- ---------- -----------
(Continued)
Page 4
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2004 AND 2003 (UNAUDITED)
--------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, (unaudited) March 31, (unaudited)
2004 2003 2004 2003
---- ---- ---- ----
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:
Unrealized holding gain (loss) on securities
arising during period $ 723,250 $ (625,364) $ (133,504) $ 190,047
Reclassification adjustment for gains
included in net income (8,701) -- (8,701) --
------------ ------------- ------------ ------------
Other comprehensive income (loss) 714,549 (625,364) (142,205) 190,047
------------ -------------- ------------- ------------
COMPREHENSIVE INCOME (LOSS) $ 739,970 $ (642,283) $ 220,162 $ 1,083,769
============ ============= ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
BASIC 1,362,652 1,366,342 1,361,357 1,355,649
========== ========== ========== ==========
DILUTED 1,433,327 1,456,922 1,432,865 1,443,193
========== ========== ========== ==========
EARNINGS PER SHARE:
Basic $ 0.02 $(0.01) $ 0.27 $ 0.66
==== ===== ==== ====
Diluted $ 0.02 $(0.01) $ 0.25 $ 0.62
==== ===== ==== ====
DIVIDENDS PER SHARE $ 0.09 $ 0.09 $ 0.27 $ 0.26
==== ==== ==== ====
(Concluded)
See accompanying notes to condensed consolidated financial statements.
Page 5
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2004 AND 2003 (UNAUDITED)
--------------------------------------------------------------------------------
NINE MONTHS ENDED MARCH 31,
2004 (UNAUDITED) 2003
---- ----
OPERATING ACTIVITIES:
Net income $ 362,367 $ 893,722
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 365,446 446,355
Amortization (accretion) of:
Deferred loan origination fees 31,560 (84,450)
Premiums and discounts on loans, net (2,706) (3,309)
Premiums and discounts on investment securities, net 369,752 372,590
Net gain on sale of investment securities (8,701) --
Provision for loan losses 360,000 413,000
Gain on sale of branch -- (742,942)
Deferred income taxes 157,176 (8,476)
Originations of loans held for sale (18,312,072) (22,929,085)
Proceeds from sales of loans 20,168,685 21,773,766
Stock compensation expense 398,268 147,817
Change in accrued interest receivable 409,712 313,231
Change in accrued interest payable (121,754) (129,308)
Write down of land held for investment -- 466,955
Change in other assets (368,632) (539,491)
Change in other liabilities (218,561) (685,712)
----------- ----------
Net cash provided (used) by operating activities 3,590,540 (295,337)
----------- ----------
INVESTING ACTIVITIES:
Purchases of investment securities - available for sale (21,805,188) (38,282,859)
Proceeds from sales of investment securities 3,386,113 --
Redemption of Federal Home Loan Bank stock 1,309,200 6,100
Purchases of premises and equipment (83,366) (232,946)
Net change due to branch sale -- (2,523,471)
Loan repayments, net of originations 10,990,255 12,232,649
Principal payments on investment securities 29,162,687 32,371,659
Net decrease (increase) in real estate held for resale 64,659 (147,129)
----------- ------------
Net cash provided by investing activities 23,024,360 3,424,003
----------- -----------
(Continued)
Page 6
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2004 AND 2003 (UNAUDITED)
--------------------------------------------------------------------------------
NINE MONTHS ENDED MARCH 31,
2004 (UNAUDITED) 2003
---- ----
FINANCING ACTIVITIES:
Net (decrease) increase in deposits $ (15,170,324) $ 1,470,911
Advances from Federal Home Loan Bank 6,800,000 --
Repayment of Federal Home Loan Bank advances (16,847,341) (12,394,107)
Net (decrease) increase in advance payments by
borrowers for taxes and insurance (59,073) 36,892
Purchase of treasury stock (535,451) --
Payment for treasury stock options exercised -- 209,763
Dividends paid (373,554) (350,513)
------------ ------------
Net cash used by financing activities (26,185,743) (11,027,054)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 429,157 (7,898,388)
CASH AND CASH EQUIVALENTS:
Beginning of period 7,206,976 17,896,829
------------ ------------
End of period $ 7,636,133 $ 9,998,441
============ ============
See accompanying notes to condensed consolidated financial statements.
(Concluded)
Page 7
HCB BANCSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND CONSOLIDATION
HCB Bancshares, Inc. ("Bancshares"), incorporated under the laws of the
State of Oklahoma, is a savings bank holding company that owns HCB Investments,
Inc. ("HCBI") and HEARTLAND Community Bank (the "Bank") and the Bank's
subsidiary HCB Properties, Inc. (HCBP). 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. HCBP primarily holds one
parcel of land for future expansion by the Bank. 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 accounting principles generally
accepted in the United States of America. The unaudited statements reflect all
adjustments, which are, in the opinion of management, necessary for fair
presentation of the financial condition and results of operations and cash flows
of the Company. Those adjustments consist only of normal recurring adjustments.
The condensed consolidated statements of income and comprehensive income for the
three months and nine months ended March 31, 2004, are not necessarily
indicative of the results that may be expected for the Company's fiscal year
ending June 30, 2004. The unaudited condensed consolidated financial statements
and notes thereto should be read in conjunction with the audited consolidated
financial statements and notes thereto for the year ended June 30, 2003,
contained in the Company's Annual Report on Form 10-K for the year ended June
30, 2003.
NOTE 2 - EARNINGS PER SHARE
The weighted average number of common shares used to calculate earnings per
share for the three and nine month periods ended March 31, 2004 and 2003, were
as follows:
Three months ended Nine months ended
March 31, March 31,
2004 2003 2004 2003
---- ---- ---- ----
Basic weighted average shares 1,362,652 1,366,342 1,361,357 1,355,649
Effect of dilutive securities 70,675 90,580 71,508 87,544
---------- ---------- ---------- ----------
Diluted weighted average shares 1,433,327 1,456,922 1,432,865 1,443,193
========== ========== ========== ==========
The Company has issued stock options that have the potential to be dilutive
to its weighted average shares calculation and were dilutive for the three and
nine month periods ending March 31, 2004 and 2003. In addition, the Company has
issued MRP shares that had the potential to be dilutive to its weighted average
shares calculation, but due to the Acquisition Agreement (Note 5), were 100
percent vested as of March 31, 2004, and were also anti-dilutive for these
periods.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Company may be
a defendant from time to time in certain claims and legal actions arising in the
ordinary course of business. In the opinion of management, after consultation
with legal counsel, the ultimate disposition of these matters is not expected to
have a material adverse effect on the consolidated financial statements of the
Company.
NOTE 4 - MONTICELLO BRANCH SALE
On July 19, 2002, the Bank sold its Monticello branch to Simmons First Bank
of South Arkansas. The sale included approximately $8.3 million in loans, $1.5
million in fixed assets, $0.2 million in other assets and $13.2 million in
deposits. The Bank recognized a premium on the deposits of approximately $0.9
million and the difference was paid in cash to the buyer. The Bank recognized a
net gain on this sale of approximately $743,000.
Page 8
NOTE 5 - ACQUISITION AGREEMENT
On January 14, 2004, the Company announced that it had entered into an
Agreement of Acquisition (the "Agreement"), dated as of January 13, 2004 with
Rock Bancshares, Inc. ("RBI"), pursuant to which all of the issued and
outstanding stock of the Company will be acquired by RBI (the "Share
Acquisition"). Pursuant to the Share Acquisition, RBI will acquire all of the
issued and outstanding shares of common stock of HCB at a purchase price of
$18.63 per share, subject to an adjustment to $18.62 per share if the
acquisition is consummated on or prior to July 31, 2004 and $18.61 if
consummated on or prior to June 30, 2004. In each case the per share stock price
is also subject to a price adjustment by an amount based on the amount by which
HCB's stockholder's equity on the last date of the calendar month preceding the
closing is less than $26,500,000, excluding certain transaction costs and other
related expenses. Holders of options to acquire shares of HCB common stock will
receive a cash payment equal to the share acquisition price less the exercise
price applicable to such option. In addition, RBI has made a cash deposit of
$750,000 that will be applied to the purchase price and would be forfeited by
RBI under certain circumstances, including the failure to obtain regulatory
approval by August 31, 2004.
Consummation of the Share Acquisition is subject to a number of customary
conditions, including, but not limited to: (i) the adoption and approval of the
Agreement by the shareholders of the Company; and (ii) the receipt of all
requisite regulatory approvals.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
When used in this Form 10-Q, the words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties including changes in
economic conditions in the Company's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area and competition that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are set forth in Note 1 of
the consolidated financial statements as of June 30, 2003, which was filed on
Form 10-K. Of these significant accounting policies, the Company considers its
policy regarding the allowance for loan losses to be its most critical
accounting policy, because it requires management's most subjective and complex
judgments. In addition, changes in economic conditions can have a significant
impact on the allowance for loan losses and therefore the provision for loan
losses and results of operations. The Company has developed appropriate policies
and procedures for assessing the adequacy of the allowance for loan losses,
recognizing that this process requires a number of assumptions and estimates
with respect to its loan portfolio. The Company's assessments may be impacted in
future periods by changes in economic conditions, the impact of regulatory
examinations and the discovery of information with respect to borrowers which is
not known to management at the time of the issuance of the consolidated
financial statements.
GENERAL
The Bank's principal business consists of attracting savings deposits from
the general public and investing those funds in loans secured by first mortgages
on existing owner-occupied single-family residences in the Bank's primary
Page 9
market area, commercial and multi-family real estate loans and consumer and
commercial business loans. The Bank also maintains a substantial investment
portfolio of mortgage-related securities, nontaxable municipal securities and
U.S. government and agency securities.
The Bank's net income is dependent primarily on its net interest income,
which is the difference between interest income earned on its loans,
mortgage-backed securities and securities portfolio and interest paid on
customers' deposits and other borrowings. The Bank's net income is also affected
by the level of noninterest income, such as service charges on customers'
deposit accounts, net gains or losses on the sale of loans and securities and
other fees. In addition, net income is affected by the level of noninterest
expense, which primarily consists of employee compensation expenses, occupancy
expenses and other expenses.
The financial condition and results of operations of the Bank and the
thrift and banking industries as a whole are significantly affected by
prevailing economic conditions, competition and the monetary and fiscal policies
of governmental agencies. Lending activities are influenced by demand for and
supply of credit, competition among lenders and the level of interest rates in
the Bank's market area. The Bank's deposit flows and costs of funds are
influenced by prevailing market rates of interest, primarily on competing
investments, as well as account maturities and the levels of personal income and
savings in the Bank's market area.
ASSET QUALITY
The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated.
March 31, June 30,
2004 2003
----------- -----------
Loans accounted for on a nonaccrual basis: (1)
Real estate:
One-to-four family residential............ $ 769,620 $ 1,241,085
Other mortgage loans...................... 3,300,982 1,740,878
Consumer loans............................. 176,809 287,925
Commercial loans........................... 203,969 232,562
---------- ----------
Total................................. $ 4,451,380 $ 3,502,450
========== ==========
Accruing loans which are contractually past due
90 days or more:
Real estate:
One-to-four family residential............ $ -- $ --
Other mortgage loans...................... -- --
Commercial loans........................... -- --
Consumer loans............................. -- --
---------- ----------
Total................................. $ -- $ --
========== ==========
Total nonperforming loans............. $ 4,451,380 $ 3,502,450
========== ==========
Percentage of total loans.................... 4.67% 3.18%
==== ====
Other nonperforming assets (2)............... $ 181,501 $ 246,160
========== ==========
Loans modified in troubled debt restructurings (3) $ 5,261,435 $ 5,355,927
========== ==========
-----------------
(1) Designated nonaccrual loan payments received are applied first to
contractual principal and interest income is recognized only when
contractually current.
(2) Other nonperforming assets includes foreclosed real estate.
(3) Loans modified in troubled debt restructurings include $1,873,374 reported
in Other mortgage loans accounted for on a nonaccrual basis.
Page 10
During the nine months ended March 31, 2004, total nonperforming loans
increased $948,930 primarily due to one borrower with four other mortgage loans
totaling $1.9 million, offset by decreases in one-to-four family residential,
consumer, and commercial nonperforming loans.
During the three months ended March 31, 2004 and 2003, gross interest
income of approximately $99,000 and $96,000, respectively, would have been
recorded on loans accounted for on a nonaccrual basis if the loans had been
current throughout the respective periods. Interest on such loans included in
income during such respective periods was not material.
Page 11
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS AND RATES
The following table sets forth information regarding the Company's average
interest-earning assets and interest-bearing liabilities and reflects the
average yield of interest-earning assets and the average cost of
interest-bearing liabilities for the periods indicated. Average balances are
derived from daily balances. The table also presents information for the periods
indicated with respect to the difference between the weighted average yield
earned on interest-earning assets and the weighted average rate paid on
interest-bearing liabilities, or "interest rate spread," which savings
institutions have traditionally used as an indicator of profitability. Another
indicator of an institution's net interest income is its "net yield on
interest-earning assets," which is its net interest income divided by the
average balance of interest-earning assets. Net interest income is affected by
the interest rate spread and by the relative amounts of interest-earning assets
and interest-bearing liabilities. The yield on nontaxable securities has not
been adjusted to a tax equivalent basis. The yield on available for sale
securities is based on amortized cost. Loans on a nonaccrual basis are included
in the computation of the average balance of loans receivable. Loan fees
deferred and accreted into income are included in interest earned. Whenever
interest-earning assets equal or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income.
Quarter Ended March 31,
2004 2003
---------------------------------- ----------------------------------
Average Average
Average Interest Yield/ Average Interest Yield/
Balance Earned/Paid Rate Balance Earned/Paid Rate
------- ----------- ------- ----------- ----------- -------
Interest-earning assets:
Loans receivable....................... $ 89,280,299 $ 1,507,866 6.76% $ 103,852,289 $ 1,886,434 7.27%
Investment and mortgage-backed
securities taxable.................... 93,359,485 1,069,258 4.58 92,496,295 1,092,553 4.72
Nontaxable............................ 24,735,253 313,488 5.07 25,106,459 314,538 5.01
FHLB stock............................. 3,382,625 12,650 1.50 4,675,680 28,823 2.47
FHLB DDA............................... 2,562,810 5,755 0.90 9,088,186 25,331 1.11
Other interest-earning assets.......... 199,971 787 1.57 187,662 665 1.42
----------- --------- ---- ------------- --------- ----
Total interest-earning assets......... 213,520,443 2,909,804 5.45 235,406,571 3,348,344 5.69
--------- ---------
Noninterest-earning assets............... 13,588,563 15,182,548
----------- -------------
Total assets.......................... $ 227,109,006 $ 250,589,119
=========== =============
Interest-bearing liabilities:
NOW, MMDA, statement savings........... $ 46,870,986 146,389 1.25 $ 42,272,589 136,758 1.29
Time deposits.......................... 80,537,795 435,147 2.16 99,698,640 753,870 3.02
FHLB advances.......................... 60,474,505 902,332 5.97 70,932,317 1,054,607 5.95
----------- -------- ---- ------------- --------- ----
Total interest-bearing liabilities.... 187,883,286 1,483,868 3.16 212,903,546 1,945,235 3.65
--------- ---------
Noninterest-bearing liabilities.......... 11,191,137 8,994,018
----------- -------------
Total liabilities..................... 199,074,423 221,897,564
Equity................................... 28,034,583 28,691,555
----------- -------------
Total liabilities and equity.......... $ 227,109,006 $ 250,589,119
=========== =============
Net interest income...................... $ 1,425,936 $ 1,403,109
========= =========
Net interest rate spread................. 2.29% 2.04%
==== ====
Net yield on interest-earning assets..... 2.67% 2.38%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 113.65% 110.57%
======= ======
Page 12
Nine Months Ended March 31,
-------------------------------------------------------------------------
2004 2003
---------------------------------- ----------------------------------
Average Average
Average Interest Yield/ Average Interest Yield/
Balance Earned/Paid Rate Balance Earned/Paid Rate
------- ----------- ------- ------- ----------- -------
Interest-earning assets:
Loans receivable....................... $ 94,169,134 $ 4,951,293 7.01% $ 110,162,769 $ 6,254,780 7.57%
Investment and mortgage-backed
securities
Taxable............................... 97,180,916 3,196,705 4.39 92,549,186 3,631,854 5.23
Nontaxable............................ 24,967,521 941,051 5.03 25,342,079 954,980 5.02
FHLB stock............................. 3,757,707 52,478 1.86 4,675,470 96,584 2.75
FHLB DDA............................... 3,383,286 22,985 0.91 8,585,029 92,906 1.44
Other interest-earning assets.......... 198,969 2,156 1.44 184,816 2,135 1.54
----------- -------- ---- ------------- ---------- ----
Total interest-earning assets......... 223,657,533 9,166,668 5.46 241,499,349 11,033,239 6.09
--------- ----------
Noninterest-earning assets............... 13,275,621 15,425,808
----------- -------------
Total assets.......................... $ 236,933,154 $ 256,925,157
=========== =============
Interest-bearing liabilities:
NOW, MMDA, statement savings........... $ 46,587,868 438,661 1.26 $ 41,077,773 429,349 1.39
Time deposits.......................... 86,809,258 1,585,929 2.44 101,531,286 2,488,960 3.27
FHLB advances.......................... 64,749,920 2,898,701 5.97 76,549,641 3,418,370 5.95
----------- --------- ---- ------------- ---------- ----
Total interest-bearing liabilities.... 198,147,046 4,923,291 3.31 219,158,700 6,336,679 3.85
--------- ----------
Noninterest-bearing liabilities.......... 11,017,744 9,423,685
----------- -------------
Total liabilities..................... 209,164,790 228,582,385
Equity................................... 27,768,364 28,342,772
----------- -------------
Total liabilities and equity.......... $ 236,933,154 $ 256,925,157
=========== =============
Net interest income...................... $ 4,243,377 $4,696,560
========= =========
Net interest rate spread................. 2.15% 2.24%
==== ====
Net yield on interest-earning assets..... 2.53% 2.59%
==== ====
Ratio of average interest-earning assets
to average interest-bearing
liabilities............................ 112.87% 110.19%
======= ======
RATE/VOLUME ANALYSIS
The following table analyzes dollar amounts of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period's rate)
and (ii) changes attributable to rate (changes in rate multiplied by the prior
period's volume).
Page 13
Three Months Ended March 31 Nine Months Ended March 31
------------------------------------- --------------------------------------
2004 vs. 2003 2004 vs. 2003
------------------------------------- --------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands) (In thousands)
Interest income:
Loans receivable $ (265) $ (114) $ (379) $ (909) $ (395) $ (1,304)
Investment and
mortgage-backed securities
Taxable 10 (33) (23) 182 (617) (435)
Nontaxable (5) 4 (1) (14) -- (14)
FHLB stock (8) (8) (16) (19) (25) (44)
FHLB DDA (18) (1) (19) (56) (14) (70)
Other interest-earning assets -- -- -- -- -- --
---- ---- ----- ---- ------ -------
Total interest-earning assets (286) (152) (438) (816) (1,051) (1,867)
---- ---- ----- ---- ------ -------
Interest expense:
NOW, MMDA, statement savings 15 (5) 10 58 (48) 10
Time deposits (145) (174) (319) (361) (542) (903)
FHLB advances (155) 3 (152) (527) 7 (520)
----- ---- ----- ---- ---- -------
Total interest-bearing
liabilities (285) (176) (461) (830) (583) (1,413)
----- ---- ----- ---- ---- -------
Change in net interest income $ (1) $ 24 $ 23 $ 14 $ (468) $ (454)
===== ==== ===== ==== ==== =======
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2004 AND JUNE 30, 2003
The Company had consolidated total assets of $225.1 million and $251.0
million at March 31, 2004 and June 30, 2003, respectively. During the nine month
period ended March 31, 2004, the Company experienced a $13.2 million decrease in
its consolidated loan portfolio from $100.8 million at June 30, 2003, to $87.6
million at March 31, 2004. The Bank expects its total loan portfolio to continue
to shrink if interest rates remain low and competition for quality loans remains
high.
During this same period, interest-bearing deposits in banks, investments,
and mortgage-backed securities decreased from $134.2 million at June 30, 2003,
to $123.2 million at March 31, 2004. While interest-bearing deposits in banks,
investments, and mortgage-backed securities decreased $11.0 million for the nine
month period ended March 31, 2004, there were $21.8 million in purchases, a $0.4
million increase in interest-bearing deposits with banks, offset with paydowns
and net amortizations of premiums and discounts of $29.6 million, sales of $3.4
million, and a $0.2 million decrease in the market value of the securities. For
the quarter ended March 31, 2004, the Bank did not purchase any investment
securities or mortgage-backed securities.
Deposits decreased from $152.0 million at June 30, 2003, to $136.8 million
at March 31, 2004. Although the Bank's level of deposits has generally been
sufficient to provide for adequate liquidity, the deposit market remains
competitive and the Bank has lost some larger certificates of deposit due to
rate shopping. The outstanding balances of FHLB borrowings decreased from $69.1
million at June 30, 2003, to $59.0 million at March 31, 2004. The Bank continues
to pay off FHLB borrowings as they mature, however, during the quarter, the Bank
did borrow and pay back $5.8 million in short term borrowings for short term
cash needs.
Stockholders' equity amounted to $28.2 million at March 31, 2004, and $28.5
million at June 30, 2003. The changes in equity were primarily due to a decrease
in accumulated other comprehensive income and treasury stock purchases, offset
by net income for the period. At March 31, 2004, the Bank's regulatory capital
exceeded all applicable regulatory capital requirements.
Page 14
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED MARCH
31, 2004 AND 2003
Net Income. Net income for the three months ended March 31, 2004, was
approximately $25,000 compared to a net loss of $17,000 for the three months
ended March 31, 2003. The changes resulted primarily from an increase in net
interest income of $23,000 and a decrease in noninterest expense of $253,000,
offset by a decrease in the income tax benefit of $149,000, and a decrease in
noninterest income of $84,000. The specific reasons for the above changes are
discussed below.
Net income for the nine months ended March 31, 2004, was approximately
$362,000 compared to net income of $894,000 for the nine months ended March 31,
2003. The changes resulted primarily from a decrease in net interest income of
$454,000, a decrease in noninterest income of $753,000, offset by a decrease in
the provision for loan loss of $53,000, an increase in the income tax benefit of
$113,000, and a decrease in noninterest expense of $509,000. The specific
reasons for the above changes are discussed below.
Interest Income. Interest income for the three months ended March 31, 2004,
was approximately $2,910,000, or $438,000 less than interest income for the
three months ended March 31, 2003. The total average interest-earning assets
decreased $21.9 million, while the yield decreased from 5.69% to 5.45%. The
primary contributing factors to the decrease in interest income were a $265,000
and $114,000 decrease due to volume and rate decreases, respectively in loans.
For the three months ended March 31, 2004, compared to the three months
ended March 31, 2003, the average balance of loans receivable decreased $14.6
million, total loan interest income decreased $379,000 and the average yield on
loans decreased 51 basis points. For the same comparative periods, the average
balance of taxable investments and mortgage-backed securities receivable
increased $0.9 million, while interest income decreased $23,000 and the average
yield decreased 14 basis points. The average balance of nontaxable investments
decreased $0.4 million, while interest income decreased $1,000 and the average
yield increased 6 basis points. Further, the average balance of other
interest-earning assets (primarily FHLB DDA's and FHLB stock) decreased $7.8
million, interest income decreased $35,000 and the average yield decreased 32
basis points.
Interest income for the nine months ended March 31, 2004, was approximately
$9,167,000, or $1,867,000 less than interest income for the nine months ended
March 31, 2003. The total average interest-earning assets decreased $17.8
million, while the yield decreased from 6.09% to 5.46%. Of the $1,867,000
decrease in interest income, $909,000 and $395,000 was due to volume and rate
decreases, respectively in loans, $617,000 was due to rate decreases on taxable
investment and mortgage-backed securities, $14,000 was due to volume decreases
on nontaxable investments, $19,000 and $25,000 was due to volume and rate
decreases, respectively on FHLB stock, $56,000 and $14,000 was due to volume and
rate decreases, respectively on FHLB DDA, offset by a $182,000 increase in the
volume of taxable investments and mortgage-backed securities.
For the nine months ended March 31, 2004, compared to the nine months ended
March 31, 2003, the average balance of loans receivable decreased $16.0 million,
total loan interest income decreased $1,304,000 and the average yield on loans
decreased 56 basis points. For the same comparative periods, the average balance
of taxable investments and mortgage-backed securities receivable increased $4.6
million, while interest income decreased $435,000 and the average yield
decreased 84 basis points. The average balance of nontaxable investments
decreased $0.4 million, while interest income decreased $14,000 and the average
yield increased 1 basis point. Further, the average balance of other
interest-earning assets (primarily FHLB DDA's and FHLB stock) decreased $6.1
million, interest income decreased $114,000 and the average yield decreased 49
basis points.
The above described declines in interest income and average yields can be
expected to continue as long as interest rates remain low and loans continue to
decline. When the Bank is able to grow its loan portfolio instead of investing
in lower yielding investments and mortgage-backed securities the Bank should
experience an increase in both its interest income and yield on earning assets.
Interest Expense. For the three months ended March 31, 2004, compared to
the three months ended March 31, 2003, the average balance of interest-bearing
liabilities decreased $25.0 million, total interest expense decreased $461,000
and the average cost decreased 49 basis points. The average balance of NOW,
MMDA, and statement savings
Page 15
accounts increased $4.6 million, interest expense increased $10,000 and the
average cost decreased 4 basis points. The average balance of time deposits
decreased $19.2 million, interest expense decreased $319,000 and the average
cost decreased 86 basis points. The average balance of FHLB advances decreased
$10.5 million, FHLB interest expense decreased $152,000 and the average cost
increased 2 basis points.
Of the $461,000 decrease in interest expense, $5,000 was due to rate
decreases in NOW, MMDA and statement savings accounts offset by a $15,000
increase due to higher volumes of same, $145,000 and $174,000 was due to volume
and rate decreases in time deposits, respectively, and $155,000 was due to
volume decreases on FHLB advances offset by a $3,000 increase due to average
rate increases on FHLB advances.
For the nine months ended March 31, 2004, compared to the nine months ended
March 31, 2003, the average balance of interest-bearing liabilities decreased
$21.0 million, total interest expense decreased $1,413,000 and the average cost
decreased 54 basis points. The average balance of NOW, MMDA, and statement
savings accounts increased $5.5 million, interest expense increased $10,000 and
the average cost decreased 13 basis points. The average balance of time deposits
decreased $14.7 million, interest expense decreased $903,000 and the average
cost decreased 83 basis points. The average balance of FHLB advances decreased
$11.8 million, FHLB interest expense decreased $520,000 and the average cost
increased 2 basis points.
Of the $1,413,000 decrease in interest expense, $48,000 was due to rate
decreases in NOW, MMDA and statement savings accounts offset by a $58,000
increase due to higher volumes of same, $361,000 and $542,000 was due to volume
and rate decreases in time deposits, respectively, and $527,000 was due to
volume decreases on FHLB advances offset by a $7,000 increase due to average
rate increases on FHLB advances.
Net Interest Income. Net interest income for the three months ended March
31, 2004, was $1.4 million, or $23,000 more than net interest income for the
three months ended March 31, 2003. Of the $23,000 increase in net interest
income for the three months ended March 31, 2004, compared to the three months
ended March 31, 2003, $24,000 was due to decreases in net rates offset by a
$1,000 decrease due to net volume.
While the Company's deposits continue to cost less as renewing deposits are
booked at lower current market offering rates, as of March 31, 2004, the Company
had $59.0 million in FHLB advances which represented 31.7 percent of costing
liabilities at that date. All of the Company's FHLB advances carry prepayment
penalties. These advances generally are longer term and carry rates of interest
that are higher than the interest rates on the Company's deposits. While the
Company initially utilized FHLB advances to fund loans and purchase investment
securities, thereby leveraging its equity and producing a positive interest rate
spread, a significant portion of those assets have since repriced or paid off as
interest rates have decreased. The Company anticipated replacing maturing
investment securities with loan growth and maturing FHLB advances with deposit
growth. The anticipated loan growth has not occurred. As of March 31, 2004, the
Company's FHLB advances were costing a weighted average rate of 6.08% and had a
weighted average maturity of approximately 6 years.
As a result, the higher interest rates on FHLB advances paid by the Company
contribute to a lower interest rate spread than the Company might otherwise have
if it were able to fund all its assets with deposits or lower rate borrowings.
Moreover, interest rates on FHLB advances are fixed for longer periods of time
than are the interest rates on deposits. As a result, in the event of a decrease
in interest rates, the Company will be unable to reprice its FHLB advances
without incurring a substantial prepayment penalty, which would result in a
significant charge to income or a reduction in the Company's interest rate
spread. Conversely, in the event of increases in interest rates, the FHLB
advances will not reprice and the prepayment penalty decreases eventually to
zero.
Provision for Loan Losses. During the three months ended March 31, 2004,
the Bank's management continued its review of the appropriateness of the amount
of the allowance for loan losses. Based on these reviews, management made a
total of $120,000 in provision for loan losses for the three months ended March
31, 2004. The allowance for loan losses of $1.6 million at March 31, 2004,
represented 1.73% of gross outstanding loans which compares to 1.46% as of June
30, 2003. The provision was made in consideration of reviews of individual loans
and the fact that nonperforming loans as of March 31, 2004, as a percent of
total loans increased to 4.67% from 3.18% as of June 30, 2003. In addition,
total classified assets as a percent of the Bank's tangible capital plus
allowance for loan loss was 32.7% as of March 31, 2004, which compares to 39.8%
as of June 30, 2003. As of March 31, 2004, the Bank
Page 16
had $8.3 million in assets classified substandard or doubtful as compared to
$9.8 million as of June 30, 2003. Although total nonperforming loans increased
from $3.5 million as of June 30, 2003, to $4.45 million as of March 31, 2004,
total classified assets decreased $1.5 million. This was primarily due to the
loans which caused the increase in nonperforming loans being classified
substandard in both periods.
Management evaluates the carrying value of the loan portfolio periodically
and provisions are made, if necessary. While management uses the best
information available to make evaluations, future provisions to the allowance
may be necessary if conditions differ substantially from the assumptions used in
making the evaluations. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Bank's allowance for
loan losses. Such agencies may require the Bank to recognize changes to the
allowance based upon their judgments and the information available to them at
the time of their examination.
There were no significant changes in loan terms during the period, nor were
there significant changes in the estimation methodologies employed or
assumptions utilized. Nonperforming loans, classified asset levels, and loss
trends indicated a need to change loss experience factors during the period.
Loss experience factors were slightly increased for automobile loans, and other
consumer loans, and recreational vehicle loans were separated out from other
consumer loans and an individual loss experience factor was established for
these types of loans. While some loss experience factors were slightly
increased, in management's opinion, the Bank's level of allowance for loan loss
was adequate. However, for the quarter ending June 30, 2004, the monthly
provision for loan loss will be reduced from $40,000 per month to $10,000 per
month due to significant decreases in the loan portfolio since June 30, 2003,
and the reduction in estimated losses going forward.
Noninterest Income. Noninterest income is typically comprised primarily of
gains on the sales of loans and service charges on deposit accounts. Noninterest
income for the three months ended March 31, 2004, was approximately $302,000
compared to approximately $386,000 for the three months ended March 31, 2003.
This decrease of approximately $84,000 is the result of a $9,000 net gain on the
sale of investment securities, an $8,000 increase in other noninterest income
(primarily net gains on sales of foreclosed real estate and repossessed
property), offset by a $12,000 decrease in service charges on deposit accounts
(primarily NSF fees), and a $91,000 decrease in net gains on the sale of loans
available for sale.
Noninterest income for the nine months ended March 31, 2004, was
approximately $1,164,000 compared to approximately $1,917,000 for the nine
months ended March 31, 2003. This decrease of approximately $753,000 is the
result of a $10,000 decrease in service charges on deposit accounts (primarily
NSF fees), a $90,000 decrease in net gains on the sale of loans available for
sale, a gain on the sale of its Monticello branch of approximately $743,000 for
the nine months ended March 31, 2003, offset by a $9,000 net gain on the sale of
investment securities, and an $83,000 increase in other noninterest income for
the nine months ended March 31, 2004 (consisting primarily of a $30,000 one time
recovery of expensed software costs, a $21,000 net gain on sales of foreclosed
real estate and repossessed property, one time loan prepayment fees of $64,000
offset by a $37,000 decrease in late charge and credit life commissions).
Noninterest Expense. The major components of noninterest expense are
typically salaries and employee benefits paid to or on behalf of the Company's
employees and directors, professional fees paid to consultants, attorneys, and
accountants, occupancy expense for ownership and maintenance of the Company's
buildings, furniture and equipment and data processing expenses. Total
noninterest expense for the three months ended March 31, 2004, decreased
$253,000 compared to the three months ended March 31, 2003. Significant
components of the decrease in noninterest expense were a $17,000 decrease in
salaries and employee benefits, a $67,000 decrease in net occupancy expense, a
$15,000 decrease in advertising, a $407,000 decrease in write down of loan held
for investment, offset by an $8,000 increase in other expenses, a $24,000
increase in communication, postage, printing, and office supplies, a $214,000
increase in professional fees and a $8,000 increase in data processing expense.
Total noninterest expense for the nine months ended March 31, 2004,
decreased $509,000 compared to the nine months ended March 31, 2003. Significant
components of the decrease in noninterest expense were a $182,000 decrease in
salaries and employee benefits, a $116,000 decrease in net occupancy expense, a
$66,000 decrease in advertising, a $30,000 decrease in other expenses, a
$467,000 decrease in write down of loan held for investment, offset by a
$300,000 increase in professional fees, a $19,000 increase in communication,
postage, printing, and office supplies, and a $34,000 increase in data
processing expense.
Page 17
The $300,000 increase in professional fees relates primarily to consulting
and legal fees associated with the Company's decision to review all available
alternatives to maximize shareholder value with the help of a consulting firm
and the signing of an Acquisition Agreement on January 13, 2004 with RBI
Bancshares, Inc. (see Note 5 - Acquisition Agreement).
Income Taxes. The effective income tax rates for the Company for the three
months ended March 31, 2004 and 2003 were (221.1)% and (92.0)%, respectively.
The effective income tax rates for the Company for the nine months ended March
31, 2004 and 2003 were (40.6)% and 0.9%, respectively. The variance in the
effective rate from the expected statutory rate is due primarily to tax exempt
interest.
The negative rates for three months ended March 31, 2004 and March 31,
2003, and the nine months ended March 31, 2004, is a net tax benefit and
increases net income. The net tax benefit is primarily due to tax exempt income.
The corresponding deferred tax asset totals approximately $2.1 million as of
March 31, 2004, and $2.0 million as of June 30, 2003. The recoverability of this
asset is entirely contingent upon the production of taxable income for income
tax reporting purposes. Management anticipates that the Company will produce
such income in the near future based on management's current forecasts of
earnings.
SOURCES OF CAPITAL AND LIQUIDITY
The Company has no business other than that of the Bank and banking related
activities. Bancshares' primary sources of liquidity are cash, dividends paid by
the Bank and earnings on investments and loans. In addition, the Bank is subject
to regulatory limitations with respect to the payment of dividends to
Bancshares.
The Bank has historically maintained substantial levels of capital. The
assessment of capital adequacy is dependent on several factors including asset
quality, earnings trends, liquidity and economic conditions. Maintenance of
adequate capital levels is integral to provide stability to the Bank. The Bank
needs to maintain substantial levels of regulatory capital to give it maximum
flexibility in the changing regulatory environment and to respond to changes in
the market and economic conditions.
The Bank's primary sources of funds are savings deposits, borrowed funds,
proceeds from principal and interest payments on loans and mortgage-backed
securities, interest payments and maturities of investment securities and
earnings. While scheduled principal repayments on loans and mortgage-backed
securities and interest payments on investment securities are a relatively
predictable source of funds, deposit flows and loan and mortgage-backed
securities prepayments are greatly influenced by general interest rates,
economic conditions, competition and other factors.
At March 31, 2004 and June 30, 2003, the Company had designated all
securities as available for sale. In addition to internal sources of funding,
the Bank as a member of the FHLB has substantial borrowing authority with the
FHLB. The Bank's use of a particular source of funds is based on need,
comparative total costs and availability.
At March 31, 2004, the Bank had $4.9 million in commitments to originate
loans (including unfunded portions of construction loans) and approximately $1.3
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
$66.5 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
Page 18
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, 2003. There has been no material change
in the Company's asset and liability position since June 30, 2003.
Item 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management of the
Company carried out an evaluation, under the supervision and with the
participation of the Company's principal executive officer and principal
financial officer, of the effectiveness of the Company's disclosure controls and
procedures. Based on this evaluation, the Company's principal executive officer
and principal financial officer concluded that the Company's disclosure controls
and procedures are effective in ensuring that information required to be
disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms.
In addition, there have been no changes in the Company's internal control
over financial reporting (to the extent that elements of internal control over
financial reporting are subsumed within disclosure controls and procedures)
identified in connection with the evaluation described in the above paragraph
that occurred during the Company's last fiscal quarter, that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Company may be
a defendant in certain claims and legal actions arising in the ordinary course
of business. In the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters is not expected to have a
material adverse effect on the consolidated financial statements of the Company.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
The following table sets forth information regarding the Company's
repurchases of its Common Stock during the quarter ended March 31, 2004.
Page 19
(c)
Total Number
of Shares (d)
Purchased Maximum
(a) as Part of Number of Shares
Total (b) Publicly that May Yet Be
Number of Average Announced Plans Purchased Under
Shares Price Paid or the Plans or
Period Purchased per Share Programs Programs
------ --------- ---------- --------------- ----------------
January 2004
Beginning date: January 1 None None None None
Ending date: January 31
February 2004
Beginning date: February 1 None None None None
Ending date: February 29
March 2004
Beginning date: March 1 18,760 (1) $18.00 None None
Ending date: March 31
Total 18,760 $18.00 None None
(1) These shares were purchased from the Company's Directors' Retirement
Grantor Trust to enable the Company to fund Director retirement
payments as per the respective agreements.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32 18 USC Section 1350 Certification
Page 20
REPORTS ON FORM 8-K:
On January 16, 2004, the Registrant filed a Current Report on Form 8-K
under items 5 and 7 to report that the Company had issued a press release on
January 14, 2004, announcing it had entered into an Agreement of Acquisition
(the "Agreement"), dated as of January 13, 2004 with Rock Bancshares, Inc.
("RBI"), pursuant to which all of the issued and outstanding stock of the
Company will be acquired by RBI (the "Share Acquisition"). Pursuant to the Share
Acquisition, RBI will acquire all of the issued and outstanding shares of common
stock of HCB at a purchase price of $18.63 per share, subject to an adjustment
to $18.62 per share if the acquisition is consummated on or prior to July 31,
2004 and $18.61 if consummated on or prior to June 30, 2004. In each case the
per share stock price is also subject to a price adjustment by an amount based
on the amount by which the Company's stockholder's equity on the last date of
the calendar month preceding the closing is less than $26,500,000, excluding
certain transaction costs and other related expenses. Holders of options to
acquire shares of the Company's common stock will receive a cash payment equal
to the share acquisition price less the exercise price applicable to such
option. In addition, RBI has made a cash deposit of $750,000 that will be
applied to the purchase price and would be forfeited by RBI under certain
circumstances, including the failure to obtain regulatory approval by August 31,
2004. Consummation of the Share Acquisition is subject to a number of customary
conditions, including, but not limited to: (i) the adoption and approval of the
Agreement by the shareholders of the Company; and (ii) the receipt of all
requisite regulatory approvals.
Page 21
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 12, 2004 By: /s/Charles T. Black
------------------------
Charles T. Black
President and Chief
Executive Officer
(Duly Authorized Representative)
Date: May 12, 2004 By: /s/Scott A. Swain
------------------------
Scott A. Swain
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Page 22