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, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: No. 0-22423
HCB Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Oklahoma 62-1670792
(State of 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 of 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 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock as of the latest practicable
date: 2,052,631 shares of common stock issued and outstanding as
of January 31, 2000.
CONTENTS
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Financial
Condition at December 31, 1999 (unaudited) and
June 30, 1999
Condensed Consolidated Statements of Income and
Comprehensive Income for the Three and Six Months
Ended December 31, 1999 and 1998 (unaudited)
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended December 31, 1999 and 1998
(unaudited)
Notes to Condensed Consolidated Financial
Statements (unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about
Market Risk
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
-2-
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 (UNAUDITED) AND JUNE 30, 1999
- ----------------------------------------------------------------
DECEMBER 31,
1999 JUNE 30,
ASSETS (UNAUDITED) 1999
------------- ------------
Cash and due from banks $ 3,226,227 $ 3,560,884
Interest-bearing deposits with banks 1,177,061 975,330
------------ ------------
Cash and cash equivalents 4,403,288 4,536,214
Other interest bearing deposits with banks 99,000 718,000
Investment securities available for sale, at
fair value 138,695,394 147,119,689
Loans receivable, net of allowance 123,640,872 115,162,883
Accrued interest receivable 1,787,574 1,717,823
Federal Home Loan Bank stock 5,939,800 5,379,100
Premises and equipment, net 6,412,593 6,500,704
Goodwill, net 318,750 356,250
Real estate held for sale 347,824 463,478
Other assets 4,854,284 3,442,744
------------ ------------
TOTAL $286,499,379 $285,396,885
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $139,799,548 $146,296,598
Federal Home Loan Bank advances 117,040,406 104,523,419
Advance payments by borrowers for
taxes and insurance 213,345 128,442
Accrued interest payable 912,367 815,197
Note payable 160,000 240,000
Other liabilities 1,271,226 1,275,669
------------ ------------
Total liabilities 259,396,892 253,279,325
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 10,000,000 shares
authorized, 2,645,000 shares issued, 2,052,631
and 2,329,544 shares outstanding at December
31, 1999 and June 30, 1999, respectively 26,450 26,450
Additional paid-in capital 25,984,420 25,993,872
Unearned ESOP shares (1,375,400) (1,481,200)
Unearned MRP shares (295,039) (390,056)
Accumulated other comprehensive income (loss) (4,999,174) (2,620,673)
Retained earnings 13,668,015 13,831,694
------------ ------------
33,009,272 35,360,087
------------ ------------
Treasury stock, at cost, 592,369 and 315,456 shares
at December 31, 1999, and June 30, 1999,
respectively (5,906,785) (3,242,527)
------------ ------------
Total stockholders' equity 27,102,487 32,117,560
------------ ------------
TOTAL $286,499,379 $285,396,885
============ ============
See accompanying notes to condensed consolidated financial
statements.
-3-
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME
THREE AND SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
- ----------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
---- ---- ---- ----
INTEREST INCOME:
Interest and fees on loans $ 2,595,819 $ 2,218,325 $ 5,130,573 $ 4,464,997
Investment securities:
Taxable 1,851,388 2,090,425 3,777,198 3,980,306
Nontaxable 375,901 216,074 715,109 461,179
Other 88,927 130,830 179,785 273,829
----------- ----------- ----------- -----------
Total interest income 4,912,035 4,655,654 9,802,665 9,180,311
INTEREST EXPENSE:
Deposits 1,576,060 1,682,063 3,197,111 3,409,119
Federal Home Loan Bank advances 1,649,318 1,433,716 3,151,796 2,660,115
Note payable 2,500 4,500 7,000 10,000
----------- ----------- ----------- -----------
Total interest expense 3,227,878 3,120,279 6,355,907 6,079,234
NET INTEREST INCOME 1,684,157 1,535,375 3,446,758 3,101,077
PROVISION FOR LOAN LOSSES -- -- -- --
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,684,157 1,535,375 3,446,758 3,101,077
NONINTEREST INCOME:
Service charges on deposit accounts 154,277 93,425 275,005 173,648
Gain on sales of investment securities
available for sale -- 113,900 -- 233,642
Other 103,073 100,986 216,506 202,016
----------- ----------- ----------- -----------
Net noninterest income 257,350 308,311 491,511 609,306
----------- ----------- ----------- -----------
NONINTEREST EXPENSE:
Salaries and employee benefits 985,194 935,765 1,941,210 1,803,195
Net occupancy expense 217,975 196,150 438,268 352,778
Communication, postage, printing
and office supplies 112,090 110,006 203,318 190,035
Advertising 109,361 31,103 173,556 59,383
Data processing 82,103 147,017 164,575 227,904
Professional fees 255,396 359,096 681,671 488,935
Amortization of goodwill 18,750 18,750 37,500 37,500
Other 69,310 91,212 163,961 135,697
----------- ----------- ----------- -----------
Total noninterest expense 1,850,179 1,889,099 3,804,059 3,295,427
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 91,328 (45,413) 134,210 414,956
INCOME TAX PROVISION (BENEFIT) 15,101 (58,068) 16,000 92,117
----------- ----------- ----------- -----------
NET INCOME $ 76,227 $ 12,655 $ 118,210 $ 322,839
----------- ----------- ----------- -----------
-4-
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME
THREE AND SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
- ----------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
---- ---- ---- ----
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:
Unrealized holding gain (loss) on
securities arising during period (1,190,992) (341,820) (2,378,501) 403,964
Reclassification adjustment for gains
included in net income -- (113,900) -- (233,642)
----------- ----------- ----------- ----------
Other comprehensive income (loss) (1,190,992) (455,720) (2,378,501) 170,322
----------- ----------- ----------- ----------
COMPREHENSIVE INCOME (LOSS) $(1,114,765) $ (443,065) $(2,260,291) $ 493,161
=========== =========== =========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 1,953,898 2,388,538 2,057,797 2,424,061
=========== =========== =========== ==========
EARNINGS PER SHARE:
Basic $ 0.04 $ 0.01 $ 0.06 $ 0.13
=========== =========== =========== ==========
Diluted $ 0.04 $ 0.01 $ 0.06 $ 0.13
=========== =========== =========== ==========
DIVIDENDS PER SHARE $ 0.06 $ 0.06 $ 0.12 $ 0.12
=========== =========== =========== ==========
(Concluded)
See accompanying notes to condensed consolidated financial
statements.
-5-
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998 (UNAUDITED)
- ----------------------------------------------------------------
Six Months Ended
December 31,
1999 1998
---- ----
OPERATING ACTIVITIES:
Net income $ 118,210 $ 322,839
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 315,557 236,001
Amortization (accretion) of:
Deferred loan origination fees (102,760) (4,343)
Goodwill 37,500 37,500
Premiums and discounts on loans, net (2,493) 1,649
Premiums and discounts on investment
securities, net 71,819 168,051
Net gain on sale of investment securities
available for sale -- (233,642)
Loss on disposal of other assets, net -- 19,905
Originations of loans held for sale (5,175,685) (6,022,144)
Proceeds from sales of loans 6,460,303 4,367,696
Stock compensation expense 191,365 218,765
Change in accrued interest receivable (69,751) (13,763)
Change in accrued interest payable 97,170 124,954
Change in other assets 190,712 (186,400)
Change in other liabilities (4,445) (237,184)
----------- -----------
Net cash provided (used) by
operating activities 2,127,502 (1,200,116)
INVESTING ACTIVITIES:
Purchases of investment securities
available for sale (3,302,892) (64,390,400)
Purchases of Federal Home Loan Bank stock (560,700) (1,789,800)
Purchases of premises and equipment (227,446) (462,052)
Proceeds from sales or maturity of investment
securities -- 30,592,669
Proceeds from maturity of interest bearing
deposits 619,000 1,032,000
Loan originations, net of repayments (9,657,351) (2,076,565)
Principal payments on investment securities 7,674,614 14,199,619
Proceeds from sale of land held for resale 115,654 134,707
----------- -----------
Net cash used by investing activities (5,339,121) (22,759,822)
(Continued)
-6-
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998 (UNAUDITED)
- ----------------------------------------------------------------
Six Months Ended
December 31,
1999 1998
---- ----
FINANCING ACTIVITIES:
Net increase (decrease) in deposits $ (6,497,050) $ 234,380
Advances from Federal Home Loan Bank 149,384,000 73,250,000
Repayment of Federal Home Loan Bank advances (136,867,013) (43,397,184)
Net increase in advance payments by borrowers
for taxes and insurance 84,903 32,452
Repayment of note payable (80,000) (80,000)
Common stock acquired for stock option benefit
plan trust (615,753) (1,629,874)
Stock purchased for MRP -- (722,328)
Purchase of treasury stock (2,048,505) (58,750)
Dividends paid (281,889) (317,400)
------------- ------------
Net cash provided by financing
activities 3,078,693 27,311,296
------------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (132,926) 3,351,358
CASH AND CASH EQUIVALENTS:
Beginning of period 4,536,214 3,822,398
------------- ------------
End of period $ 4,403,288 $ 7,173,756
============= ============
See accompanying notes to condensed consolidated financial
statements.
-7-
HCB BANCSHARES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND CONSOLIDATION
HCB Bancshares, Inc. ("Bancshares"), incorporated under
the laws of the state of Oklahoma, is a bank holding company
that owns Heartland Community Bank and its subsidiary (the
"Bank"). Bancshares' business is primarily that of owning the
Bank, and participating in the Bank's activities. The
accompanying condensed consolidated financial statements include
the accounts of Bancshares and the Bank and are collectively
referred to as the Company. All significant intercompany
balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated
financial statements were prepared in accordance with
instructions for Form 10-Q. Accordingly, they do not include
all of the information required by generally accepted accounting
principles. The unaudited statements reflect all adjustments,
which are, in the opinion of management, necessary for fair
presentation of the financial condition and results of
operations. The statement of income and comprehensive income
for the three and six months ended December 31, 1999 is not
necessarily indicative of the results that may be expected for
the Company's fiscal year ending June 30, 2000. 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, 1999, contained in the Company's Annual Report on Form 10-K
for the year ended June 30, 1999.
NOTE 2 EARNINGS PER SHARE
The weighted average number of common shares used to
calculate earnings per share for the periods ended December 31,
1999 and 1998 were as follows:
Three months ended Six months ended
December 31, December 31,
1999 1998 1999 1998
---- ---- ---- ----
Basic weighted - average shares 1,953,898 2,388,538 2,057,797 2,424,061
Effect of dilutive securities 0 0 0 0
--------- --------- --------- ---------
Diluted weighted - average shares 1,953,898 2,388,538 2,057,797 2,424,061
========= ========= ========= =========
The Company has issued stock options and MRP shares that
have the potential to be dilutive to its weighted average shares
calculation. However, as of December 31, 1999 their effect is
either antidilutive or not significant enough to change the
earnings per share disclosed.
NOTE 3 DECLARATION OF DIVIDENDS
At their meeting on August 19, 1999, the Board of Directors
declared a $.06 per share cash dividend on the common stock of
the Company. The cash dividend was paid on September 30, 1999
to the stockholders of record at the close of business on
September 15, 1999. At their meeting on November 18, 1999, the
Board of Directors declared a $.06 per share cash dividend on
the common stock of the Company. The cash dividend was paid on
December 30, 1999 to the stockholders of record at the close of
business on December 15, 1999.
NOTE 4 STOCK PURCHASED FOR OPTION BENEFIT TRUST
During the quarter ended December 31, 1999, the Company
purchased 64,138 shares and placed them in its stock option plan
trust. These shares are classified as treasury stock on the
accompanying condensed consolidated statement of financial
condition, are available for sale, and are managed by the
trustees specifically for funding stock option benefits provided
to key employees. The total number of stock option shares
granted as of December 31, 1999
-8-
was 315,264 at an average of $9.14 per share of which 146,074
were vested. This compares to the total number of stock option
shares granted as of June 30, 1999 of 315,168 at an average of
$9.14 per share of which 146,106 were vested.
NOTE 5 COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has various
outstanding commitments and contingent liabilities that are not
reflected in the accompanying consolidated financial statements.
In addition, the Company is a defendant in certain claims and
legal actions arising in the ordinary course of business. In
the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters is not
expected to have a material adverse effect on the consolidated
financial statements of the Company.
In May, 1999, a shareholder filed a class action complaint
against the Company and several current and former officers
alleging that the defendants defrauded the plaintiff and other
shareholder class members through various public statements and
reports thereby artificially inflating the price of the
Company's common stock and causing the plaintiff and other
shareholder class members to purchase the Company's common stock
at inflated prices.
The Company and its counsel have reviewed the complaint
and intend to contest the allegations vigorously. Management is
unable to determine the likelihood of an unfavorable outcome of
the suit or the amount of any damages that the Company may have
to pay, if any. The Company will incur costs through the
payment of legal fees and the related costs of litigation. The
extent of these costs is not determinable at this time.
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
When used in this Form 10-Q, the words or phrases "will
likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project" or similar expressions are
intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995.
Such statements are subject to risks and uncertainties including
changes in economic conditions in the Company's market area,
changes in policies by regulatory agencies, fluctuations in
interest rates, demand for loans in the Company's market area,
and competition that could cause actual results to differ
materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers
not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. The Company
wishes to advise readers that the factors listed above could
affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially
from any opinions or statements expressed with respect to future
periods in any current statements.
The Company does not undertake, and specifically disclaims
any obligation, to publicly release the result of any revisions
which may be made to any forward-looking statements to reflect
events or circumstances after the date of such statements or to
reflect the occurrence of anticipated or unanticipated events.
GENERAL
The Bank's principal business consists of attracting
deposits from the general public and investing those funds in
loans collateralized by first mortgages on existing
owner-occupied single-family residences in the Bank's primary
market area and loans collateralized by, to a lesser but growing
extent, commercial and multi-family real estate, consumer loans
and commercial business loans. The Bank also maintains a
substantial investment portfolio of mortgage-related securities,
municipals, and U.S. government and agency securities and
borrows funds as necessary and prudent, to fund its principal
business.
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.
YEAR 2000 READINESS DISCLOSURE
The Company realized the challenges of the year 2000 issue.
In compliance with regulatory guidelines, a committee was
assembled to review the effects the century change would have on
the Company's systems and to assess the potential risks that it
presents. A formal plan of action was developed to address this
issue. This plan was approved by the Board of Directors, and
had the full support of senior management. An inventory of
internal systems, both computer and non-computer related, was
completed in this process. Relationships with third party
vendors were also analyzed. Potential weaknesses were then
documented and prioritized as to their effect on critical
business functions. The Company was already in the process of
selecting a new data-processing system to facilitate its
business plan. Year 2000 compliance became an important issue
in the selection process. A vendor with a year 2000 compliant
system was selected and conversion was completed in the quarter
ended December 1998. This system had undergone thorough testing
prior to its installation. All the user departments were
involved in review of the test results and in additional onsite
testing. This testing process revealed no year 2000 related
problems. Testing also took place for
-10-
external parties with which the Bank exchanges significant
information. In addition, testing was performed on all other
mission critical information systems.
Seven vendors were identified as "mission critical". All
seven indicated that they were year 2000 compliant. The
Company's internal operating systems were tested, and those that
failed were replaced. Replacement systems were then tested and
passed. As a result of this process, all of the internal
operating systems were determined to be year 2000 compliant.
In addressing the year 2000 issue, the Bank used its current
internal staffing with little reliance on outside resources.
Major vendors provided compliant software at no additional
expense to the Bank. Replacement of the main data-processing
system cost approximately $650,000.
Following the date rollover into the year 2000, important
systems and equipment within the bank, vendors, and important
support systems utilized by the bank were all operating
normally. Also, the expected unusual demand for cash as 1999
ended, did not materialize. Finally, the Bank's largest loan
customers were contacted and they all reported normal
operations.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1999 AND JUNE
30, 1999
The Company had consolidated total assets of $286.5 million
and $285.4 million at December 31, 1999 and June 30, 1999,
respectively. During the six-month period ended December 31,
1999 the Company experienced an increase in its consolidated
loan portfolio from $115.2 million at June 30, 1999, to $123.6
million. During this same period, investments and
mortgage-backed securities and other short-term interest-earning
assets decreased from $148.8 million at June 30, 1999 to $140.0
million at December 31, 1999. It is noted that $4.0 million of
the $8.8 million decrease in investment securities was
attributed to a decrease in the market value of the securities.
However, the Company continues its strategy of replacing
securities with loans as opportunities present themselves.
Deposits decreased from $146.3 million at June 30, 1999 to
$139.8 million at December 31, 1999. 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 increased from $104.5
million at June 30, 1999, to $117.0 million at December 31,
1999, to replace the decrease in deposits and fund loan growth.
Stockholders' equity amounted to $27.1 million at December
31, 1999, and $32.1 million at June 30, 1999. The changes in
equity were primarily due to the increased unrealized loss on
investment securities available for sale, dividends paid, and
the purchase of treasury stock. At December 31, 1999, 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, 1999 AND 1998
Net Income. Net income for the three months ended December
31, 1999 was approximately $76,000 compared to net income of
approximately $13,000 for the three months ended December 31,
1998. Net income for the six months ended December 31, 1999 was
approximately $118,000 compared to net income of approximately
$323,000 for the six months ended December 31, 1998.
Explanations of primary changes to income and expense items
follow.
Interest Income. Interest income for the three months ended
December 31, 1999 increased approximately $256,000, or 5.5
percent compared to the three months ended December 31, 1998.
Interest income for the six months ended December 31, 1999
increased approximately $622,000, or 6.8 percent compared to the
six months ended December 31, 1998. The increases were
primarily due to increases in the average balances of both loans
and investment securities.
Interest Expense. Interest expense for the three months
ended December 31, 1999 increased approximately $108,000, or 3.5
percent compared to the three months ended December 31, 1998.
Interest expense for the six months ended December 31, 1999
increased approximately $277,000, or 4.6 percent compared to the
six months ended December 31, 1998. The increase was primarily
due to an increase in the average balance of FHLB advances,
which was slightly offset by a decrease in the average balance
of deposits.
-11-
As a result of the above changes, net interest income for
the three months ended December 31, 1999 increased approximately
$149,000, or 9.7 percent compared to the three months ended
December 31, 1998, and net interest income for the six months
ended December 31, 1999 increased approximately $346,000, or
11.2 percent compared to the six months ended December 31, 1998.
Provision for Loan Losses. The allowance for loan losses of
$1.3 million represented 0.99 percent of outstanding loans at
December 31, 1999, which compares to 1.08 percent at June 30,
1999. Nonperforming loans as of December 31, 1999, and June 30,
1999, as a percent of total loans, were 0.59% and 0.46%
respectively.
Management evaluates the carrying value of the loan
portfolio periodically and the allowance is adjusted if
necessary. While management uses the best information available
to make evaluations, future adjustments to the allowance may be
necessary if conditions differ substantially from the
assumptions used in making the evaluations. In particular,
management recognizes that recent and planned changes in the
amounts and types of lending by the Bank will result in further
growth of the Bank's loan loss allowance and may justify further
changes in the Bank's loan loss allowance policy in the future.
In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank
to recognize changes to the allowance based upon their judgments
and the information available to them at the time of their
examination.
Noninterest Income. Noninterest income is comprised
primarily of service charges on deposit accounts, and gains on
the sales of loans and investment securities. Noninterest
income for the three months ended December 31, 1999, was
approximately $257,000 compared to approximately $308,000 for
the three months ended December 31, 1998. Noninterest income
for the six months ended December 31, 1999, was approximately
$492,000 compared to approximately $609,000 for the six months
ended December 31, 1998. The decrease for the three and
six-month periods is due primarily to decreases in gains on
sales of investments, which were somewhat offset by increases in
fees earned on checking and savings accounts, and net gain on
sales of loans.
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, 1999 was $1.85 million compared to $1.89
million for the three months ended December 31, 1998. While the
total expense remained relatively the same, differences include
increases in compensation expense, occupancy expense, and
advertising, and decreases in data processing and professional
fees. Total noninterest expense for the six months ended
December 31, 1999 was $3.80 million compared to $3.30 million
for the three months ended December 31, 1998. The increases are
primarily attributed to increases in compensation expense,
occupancy expense, professional fees, and advertising, and
decreases in data processing.
In the quarter ending December 31, 1999, management reviewed
its allowance for loss on investment securities and determined
there was excess due to paydowns. The result was a $39,681
reversal of previously recorded allowance for investment loss.
This amount is included in other noninterest expense.
In light of the substantial costs associated with the
recent, pending and planned expansions of the Bank's activities,
facilities and staff, including the additional costs associated
with adding staff, building or renovating branches, and
introducing new deposit and loan products and services, it is
expected that the Bank's noninterest expense levels may remain
high relative to the historical levels for the Bank, as well as
the prevailing levels for institutions that are not undertaking
such expansions, for an indefinite period of time, as management
implements the Bank's business strategy. Among the activities
planned are continued increased loan originations in the areas
of multi-family residential, commercial real estate, commercial
business and consumer loans.
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Income Taxes. The effective income tax rate for the Bank
for the three months ended December 31, 1999 and 1998 was 16.5%
and (127.9%), respectively. The effective income tax rate for
the Bank for the six months ended December 31, 1999 and 1998 was
11.9% and 22.2%, respectively. Each rate includes both federal
and Arkansas tax components. The variance in the effective rate
from the expected statutory rate is due primarily to tax exempt
interest.
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 prepayments are greatly influenced by
general interest rates, economic conditions, competition, and
other factors.
The Company has also designated all of its securities as
available for sale. At December 31, 1999, and June 30, 1999,
the Company had designated securities with a fair value of
approximately $138.7 million and $147.1 million, as available
for sale, respectively. In addition to internal sources of
funding, the Bank as a member of the FHLB has substantial
borrowing authority with the FHLB. The Bank's use of a
particular source of funds is based on need, comparative total
costs, and availability.
At December 31, 1999, the Bank had $7.9 million in
commitments to originate loans (including unfunded portions of
construction loans), and approximately $169,000 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 $83.6 million. Management anticipates that the Bank will
have adequate resources to meet its current commitments through
internal funding sources described above.
For the six months ended December 31, 1999, total deposits
decreased approximately $6.5 million, or 4.4 percent.
Approximately $5.3 million of the decrease was in certificates
of deposits and the remaining $1.2 million due to a decrease in
transaction accounts. The primary cause of the decreases is
intense competition in some of the Bank's markets. Management
has been aware of the situation and has initiated new
certificate of deposit special rate products, and new
competitive transaction account plans to help retain existing
customers and attract new customers. Management will continue
to monitor the progress of the new products, and develop new
products and services.
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.
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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, 1999. There has been no
material change in the Company's asset and liability position,
or the market value of the Bank's portfolio equity since June
30, 1999.
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
In the ordinary course of business, the Company has various
outstanding commitments and contingent liabilities that are not
reflected in the accompanying consolidated financial statements.
In addition, the Company is a defendant in certain claims and
legal actions arising in the ordinary course of business. In
the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters is not
expected to have a material adverse effect on the consolidated
financial statements of the Company.
In May, 1999, a shareholder filed a class action complaint
against the Company and several current and former officers
alleging that the defendants defrauded the plaintiff and other
shareholder class members through various public statements and
reports thereby artificially inflating the price of the
Company's common stock and causing the plaintiff and other
shareholder class members to purchase the Company's common stock
at inflated prices.
The Company and its counsel have reviewed the complaint
and intend to contest the allegations vigorously. Management is
unable to determine the likelihood of an unfavorable outcome of
the suit or the amount of damages that the Company may have to
pay, if any. The Company will incur costs through the payment
of legal fees and the related costs of litigation. The extent
of these costs is not determinable at this time.
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
December 16, 1999. 2,028,677 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 three
nominees for director. The voting results for each nominee were
as follows:
Nominee Votes in Favor
of Election Votes Withheld
Cameron D McKeel 1,941,948 86,729
Bruce D. Murry 1,928,348 100,329
Lula Sue Silliman 1,927,223 101,454
There were 213,309 broker nonvotes on the matter.
Item 5. Other Information
None
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Item 6. Exhibits and Reports on Form 8-K
Exhibits:
Exhibit 27 Financial Data Schedule
Reports on Form 8-K:
The Company filed an 8-K on December 29, 1999, reporting
that on December 16, 1999, its Board of Directors elected
Cameron McKeel to the position of President and Chief Executive
Officer of the Company and its subsidiary, HEARTLAND Community
Bank. Vida H. Lampkin will continue to serve as Chairman of the
Board of the Company and the Bank.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HCB BANCSHARES, INC.
Registrant
Date: February 7, 2000 By: /s/ Cameron D. McKeel
--------------------------------
Cameron D. McKeel
President and Chief Executive
Officer
(Duly Authorized Representative)
Date: February 7, 2000 By: /s/ Scott A. Swain
--------------------------------
Scott A. Swain
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
15