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, 2000.
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 March 31, 2000.
CONTENTS
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Financial
Condition at March 31, 2000 (unaudited) and June
30, 1999
Condensed Consolidated Statements of Income and
Comprehensive Income for the Three Months and
Nine Months Ended March 31, 2000 and 1999
(unaudited)
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended March 31, 2000 and 1999
(unaudited)
Notes to Condensed Consolidated Financial
Statements (unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about
Market Risk
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security
Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Page 2
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 2000 (UNAUDITED) AND JUNE 30, 1999
- ----------------------------------------------------------------
MARCH 31,
2000 JUNE 30,
ASSETS (UNAUDITED) 1999
------------- ------------
Cash and due from banks $ 3,373,476 $ 3,560,884
Interest-bearing deposits with banks 719,857 975,330
------------ ------------
Cash and cash equivalents 4,093,333 4,536,214
Other interest bearing deposits with banks 99,000 718,000
Investment securities available for sale, at
fair value 135,760,997 147,119,689
Loans receivable, net of allowance 127,150,241 115,162,883
Accrued interest receivable 1,687,394 1,717,823
Federal Home Loan Bank stock 6,030,500 5,379,100
Premises and equipment, net 6,351,828 6,500,704
Goodwill, net 300,000 356,250
Real estate held for sale 463,520 463,478
Other assets 4,781,051 3,442,744
------------ ------------
TOTAL $286,717,864 $285,396,885
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $141,940,348 $146,296,598
Federal Home Loan Bank advances 114,476,487 104,523,419
Advance payments by borrowers for
taxes and insurance 445,976 128,442
Accrued interest payable 918,098 815,197
Note payable 160,000 240,000
Other liabilities 1,377,815 1,275,669
------------ ------------
Total liabilities 259,318,724 253,279,325
------------ ------------
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 March 31,
2000 and June 30, 1999, respectively 26,450 26,450
Additional paid-in capital 25,966,514 25,993,872
Unearned ESOP shares (1,322,500) (1,481,200)
Unearned MRP shares (247,971) (390,056)
Accumulated other comprehensive income (loss) (4,884,989) (2,620,673)
Retained earnings 13,768,421 13,831,694
------------ ------------
33,305,925 35,360,087
Treasury stock, at cost, 592,369 and 315,456
shares at March 31, 2000, and June 30, 1999,
respectively (5,906,785) (3,242,527)
------------ ------------
Total stockholders' equity 27,399,140 32,117,560
------------ ------------
TOTAL $286,717,864 $285,396,885
============ ============
See accompanying notes to condensed consolidated financial
statements.
Page 3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME
THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
- ----------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, March 31,
2000 1999 2000 1999
---- ---- ---- ----
INTEREST INCOME:
Interest and fees on loans $ 2,638,727 $ 2,321,845 $ 7,769,299 $ 6,786,842
Investment securities:
Taxable 1,831,359 2,018,613 5,608,558 5,998,919
Nontaxable 382,364 167,026 1,097,473 628,205
Other 101,087 114,181 280,872 388,010
----------- ----------- ----------- ------------
Total interest income 4,953,537 4,621,665 14,756,202 13,801,976
INTEREST EXPENSE:
Deposits 1,624,821 1,611,221 4,821,932 5,020,340
Federal Home Loan Bank advances 1,697,568 1,384,517 4,849,364 4,044,632
Note payable 3,000 4,500 10,000 14,500
----------- ----------- ----------- ------------
Total interest expense 3,325,389 3,000,238 9,681,296 9,079,472
NET INTEREST INCOME 1,628,148 1,621,427 5,074,906 4,722,504
----------- ----------- ----------- ------------
PROVISION FOR LOAN LOSSES -- -- -- --
----------- ----------- ----------- ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,628,148 1,621,427 5,074,906 4,722,504
NONINTEREST INCOME:
Service charges on deposit
accounts 121,957 74,645 396,961 248,293
Gain on sales of investment
securities available for sale -- 20,372 -- 254,015
Other 117,806 119,192 334,313 321,205
----------- ----------- ----------- ------------
Net noninterest income 239,763 214,209 731,274 823,513
----------- ----------- ----------- ------------
NONINTEREST EXPENSE:
Salaries and employee benefits 984,695 958,436 2,925,905 2,761,630
Net occupancy expense 226,139 218,129 664,408 570,907
Communication, postage, printing
and office supplies 94,247 110,798 297,564 300,832
Advertising 53,551 84,752 227,107 144,135
Data processing 84,537 68,828 249,113 296,732
Professional fees 194,182 353,716 875,853 842,651
Amortization of goodwill 18,750 18,750 56,250 56,250
Other 128,216 67,142 292,176 202,840
----------- ----------- ----------- ------------
Total noninterest expense 1,784,317 1,880,551 5,588,376 5,175,977
----------- ----------- ----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES 83,594 (44,915) 217,804 370,040
INCOME TAX PROVISION (BENEFIT) (152,500) (62,631) (136,500) 29,486
----------- ----------- ----------- ------------
NET INCOME $ 236,094 $ 17,716 $ 354,304 $ 340,554
----------- ----------- ----------- ------------
(Continued)
Page 4
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME
THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
- ----------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, March 31,
2000 1999 2000 1999
---- ---- ---- ----
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:
Unrealized holding gain (loss) on
securities arising during period 114,185 (614,638) (2,264,316) (210,674)
Reclassification adjustment for gains
included in net income -- (20,372) -- (254,015)
---------- ---------- ----------- ----------
Other comprehensive income (loss) 114,185 (635,010) (2,264,316) (464,689)
---------- ---------- ----------- ----------
COMPREHENSIVE INCOME (LOSS) $ 350,279 $ (617,294) $(1,910,012) $ (124,135)
========== ========== =========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 1,918,618 2,326,208 2,011,760 2,392,284
========== ========== =========== ==========
EARNINGS PER SHARE:
Basic $ 0.12 $ 0.01 $ 0.18 $ 0.14
==== ==== ==== ====
Diluted $ 0.12 $ 0.01 $ 0.18 $ 0.14
==== ==== ==== ====
DIVIDENDS PER SHARE $ 0.06 $ 0.06 $ 0.18 $ 0.18
==== ==== ==== ====
(Concluded)
See accompanying notes to condensed consolidated financial
statements.
Page 5
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
- ---------------------------------------------------------------
Nine Months Ended March 31,
2000 1999
-------- --------
OPERATING ACTIVITIES:
Net income $ 354,306 $ 340,554
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 482,849 385,469
Amortization (accretion) of:
Deferred loan origination fees (135,656) (4,127)
Goodwill 56,250 56,250
Premiums and discounts on loans, net (3,465) 555
Premiums and discounts on investment
securities, net 88,637 268,798
Net gain on sale of investment securities
available for sale -- (254,015)
Loss on disposal of other assets, net -- 72,002
Originations of loans held for sale (7,430,403) (9,747,285)
Proceeds from sales of loans 8,016,770 8,743,540
Stock compensation expense 273,427 312,641
Change in accrued interest receivable 30,429 154,776
Change in accrued interest payable 102,901 132,832
Change in other assets 194,398 (442,376)
Change in other liabilities 102,147 (476,534)
------------ ------------
Net cash provided (used) by
operating activities 2,132,590 (456,920)
INVESTING ACTIVITIES:
Purchases of investment securities - available
for sale (3,302,892) (74,479,112)
Purchases of Federal Home Loan Bank stock (651,400) (1,860,800)
Purchases of premises and equipment (333,973) (1,004,691)
Proceeds from sales or maturity of investment
securities -- 38,850,638
Proceeds from maturity of interest bearing deposits 619,000 1,548,000
Loan originations, net of repayments (12,434,604) (6,442,317)
Principal payments on investment securities 10,775,883 19,931,594
Proceeds from sale of land held for resale -- 134,707
------------ ------------
Net cash used by investing activities (5,327,986) (23,321,981)
(Continued)
Page 6
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
Nine Months Ended March 31,
2000 1999
------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits $ (4,356,250) $ 1,989,039
Advances from Federal Home Loan Bank 211,499,000 89,038,000
Repayment of Federal Home Loan Bank advances (201,545,932) (58,698,076)
Net increase in advance payments by borrowers
for taxes and insurance 317,534 101,388
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) (1,251,719)
Dividends paid (417,579) (476,100)
------------- ------------
Net cash provided by financing
activities 2,752,515 28,270,330
------------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (442,881) 4,491,429
CASH AND CASH EQUIVALENTS:
Beginning of period 4,536,214 3,822,398
------------- ------------
End of period $ 4,093,333 $ 8,313,827
============= ============
See accompanying notes to condensed consolidated financial
statements.
Page 7
HCB BANCSHARES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION AND CONSOLIDATION
HCB Bancshares, Inc. ("Bancshares"), incorporated under the
laws of the state of Oklahoma, is a 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 nine months ended March 31, 2000 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 March 31,
2000 and 1999 were as follows:
Three months ended Nine months ended
March 31, March 31,
2000 1999 2000 1999
---- ---- ---- ----
Basic weighted-average shares 1,918,618 2,326,208 2,011,760 2,392,284
Effect of dilutive securities 0 5,191 0 0
--------- --------- --------- ---------
Diluted weighted-average
shares 1,918,618 2,331,339 2,011,760 2,392,284
========= ========= ========= =========
The Company has issued stock options and MRP shares that
have the potential to be dilutive to its weighted average shares
calculation
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. At their meeting on February 17,
2000, the Board of Directors declared a $.06 per share cash
dividend on the common stock of the Company. The cash dividend
was paid on March 29, 2000 to the stockholders of record at the
close of business on March 15, 2000.
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
Page 8
option benefits provided to key employees. The total number of
stock option shares granted as of March 31, 2000 was 313,044 at
an average of $9.14 per share of which 143,854 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.
Page 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.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2000 AND JUNE 30,
1999
The Company had consolidated total assets of $286.7 million
and $285.4 million at March 31, 2000 and June 30, 1999,
respectively. During the nine-month period ended March 31, 2000
the Company experienced an increase in its consolidated loan
portfolio from $115.2 million at June 30, 1999, to $127.2
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 $136.6
million at March 31, 2000. Of the $12.2 million decrease in
investment securities $3.8 million was attributed to a decrease
in the market value of the securities. The Company continues
its strategy of replacing securities with loans as opportunities
present themselves.
Deposits have decreased from $146.3 million at June 30, 1999
to $141.9 million at March 31, 2000. However, during the three
months ended March 31, 2000, deposits increased $2.1 million.
The recent increase in deposits is attributed to new certificate
of deposit products, new checking account products and cross
selling efforts. Although the
Page 10
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 $114.5 million at March 31, 2000,
to replace the decrease in deposits and fund loan growth.
However, during the three months ended March 31, 2000, FHLB
borrowings decreased $2.6 million reflecting the increase in
deposits for the quarter.
Stockholders' equity amounted to $27.4 million at March 31,
2000, 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 March 31, 2000, the Bank's
regulatory capital exceeded all applicable regulatory capital
requirements.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND
NINE-MONTHS ENDED MARCH 31, 2000 AND 1999
Net Income. Net income for the three months ended March 31,
2000 was approximately $236,000 compared to net income of
approximately $18,000 for the three months ended March 31, 1999.
Net income for the nine months ended March 31, 2000 was
approximately $354,000 compared to net income of approximately
$341,000 for the nine months ended March 31, 1999. Explanations
of primary changes to income and expense items follow.
Interest Income. Interest income for the three months ended
March 31, 2000 increased approximately $332,000, or 7.2 percent
compared to the three months ended March 31, 1999. Interest
income for the nine months ended March 31, 2000 increased
approximately $954,000, or 6.9 percent compared to the nine
months ended March 31, 1999. The increases were approximately
75 percent due to increases in the average balances of both
loans and investment securities and 25 percent due to increases
in average rates.
Interest Expense. Interest expense for the three months
ended March 31, 2000 increased approximately $325,000, or 10.8
percent compared to the three months ended March 31, 1999.
Interest expense for the nine months ended March 31, 2000
increased approximately $602,000, or 6.6 percent compared to the
nine months ended March 31, 1999. The increase was
approximately 90 percent due to an increase in the average
balance of FHLB advances, which was slightly offset by a
decrease in the average balance of deposits, and 10 percent due
to rising interest costs.
As a result of the above changes, net interest income for
the three months ended March 31, 2000 increased approximately
$7,000 compared to the three months ended March 31, 1999, and
net interest income for the nine months ended March 31, 2000
increased approximately $352,000, or 7.5 percent compared to the
nine months ended March 31, 1999.
Provision for Loan Losses. The allowance for loan losses of
$1.3 million represented 0.95 percent of outstanding loans at
March 31, 2000, which compares to 1.08 percent at June 30, 1999.
Nonperforming loans as of March 31, 2000, and June 30, 1999, as
a percent of total loans, were 0.52% 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 March 31, 2000, was
approximately $240,000 compared to approximately $214,000 for
the three months ended March 31, 1999. The increase for the
three months ended March 31, 2000 is primarily attributed to an
increase in service fees on deposits slightly offset by the lack
of gains on sales of investment securities. Noninterest income
for the nine months ended March 31, 2000, was approximately
$731,000 compared to approximately $824,000
for the nine months ended March
Page 11
31, 1999. The decrease for the nine-month period 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 March 31, 2000 was $1.8 million compared to $1.9 million
for the three months ended March 31, 1999. While the total
expense decreased slightly, differences include increases in
compensation expense, occupancy expense, other expense, and data
processing, and decreases in advertising and professional fees.
Total noninterest expense for the nine months ended March 31,
2000 was $5.6 million compared to $5.2 million for the nine
months ended March 31, 1999. The increases are primarily
attributed to increases in compensation expense, occupancy
expense, and advertising, and decreases in data processing.
In light of the substantial costs associated with the
recent, pending and planned expansions of the Bank's activities,
facilities and staff, including the additional costs associated
with adding staff, building or renovating branches, and
introducing new deposit and loan products and services, it is
expected that the Bank's noninterest expense levels may remain
high relative to the historical levels for the Bank, as well as
the prevailing levels for institutions that are not undertaking
such expansions, for an indefinite period of time, as management
implements the Bank's business strategy. Among the activities
planned are continued increased loan originations in the areas
of multi-family residential, commercial real estate, commercial
business and consumer loans.
Income Taxes. The effective income tax rate for the Bank
for the three months ended March 31, 2000 and 1999 was (182.4%)
and (139.4%), respectively. The effective income tax rate for
the Bank for the nine months ended March 31, 2000 and 1999 was
(62.7%) and 8.0%, 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 March 31, 2000, and June 30, 1999, the
Company had designated securities with a fair value of
approximately $135.8 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.
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At March 31, 2000, the Bank had $8.9 million in commitments
to originate loans (including unfunded portions of construction
loans), and approximately $335,000 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 $85.8
million. Management anticipates that the Bank will have
adequate resources to meet its current commitments through
internal funding sources described above.
For the nine months ended March 31, 2000, total deposits
decreased approximately $4.4 million, or 3.0 percent.
Certificates of deposits decreased approximately $4.7 million
while transaction accounts had a net increase of approximately
$0.3 million. The primary cause of the certificate of deposit
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.
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.
Page 13
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
Exhibit 27 Financial Data Schedule
Reports on Form 8-K:
None
Page 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
HCB BANCSHARES, INC.
Registrant
Date: May 11, 2000 By: /s/ Cameron D. McKeel
--------------------------------
Cameron D. McKeel
President and Chief Executive
Officer
(Duly Authorized Representative)
Date: May 11, 2000 By: /s/ Scott A. Swain
--------------------------------
Scott A. Swain
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
page 15