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, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-22423
HCB BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
OKLAHOMA 62-1670792
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
237 Jackson Street, Camden, Arkansas 71701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (870) 836-6841
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days:
Yes [X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: 1,956,880 shares of common stock
outstanding as of January 31, 2001.
Page 1
CONTENTS
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Financial Condition at
December 31, 2000 (unaudited) and June 30, 2000
Condensed Consolidated Statements of Income and
Comprehensive Income for the Three Months and Six
Months Ended December 31, 2000 and 1999 (unaudited)
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended December 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
DECEMBER 31, 2000 (UNAUDITED) AND JUNE 30, 2000
- --------------------------------------------------------------------------------
DECEMBER 31,
2000 JUNE 30,
ASSETS (UNAUDITED) 2000
-------------- --------
Cash and due from banks $ 2,959,780 $ 3,211,802
Interest-bearing deposits with banks 1,174,193 137,846
------------- ----------
Cash and cash equivalents 4,133,973 3,349,648
Other interest bearing deposits with banks -- 99,000
Investment securities available for sale, at fair value 130,266,686 132,543,065
Loans receivable, net of allowance 138,680,951 135,626,505
Accrued interest receivable 2,077,884 1,852,887
Federal Home Loan Bank stock 6,429,300 6,223,500
Premises and equipment, net 7,673,772 6,552,484
Goodwill, net 243,750 281,250
Real estate held for sale 399,006 359,608
Other assets 2,399,161 4,304,228
----------- -----------
TOTAL $ 292,304,483 $ 291,192,175
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 151,894,842 $ 144,873,071
Federal Home Loan Bank advances 107,320,613 115,609,029
Advance payments by borrowers for
taxes and insurance 216,695 139,554
Accrued interest payable 990,428 917,415
Note payable 80,000 160,000
Other liabilities 1,137,123 1,252,556
----------- -----------
Total liabilities 261,639,701 262,951,625
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 10,000,000 shares authorized,
2,645,000 shares issued, 1,961,880 and 2,046,580 shares
outstanding at December 31, 2000 and June 30, 2000, respectively 26,450 26,450
Additional paid-in capital 25,917,233 25,945,850
Unearned ESOP shares (1,163,800) (1,269,600)
Unearned MRP shares (184,207) (220,104)
Accumulated other comprehensive income (loss) (1,274,511) (4,401,668)
Retained earnings 14,046,524 14,110,667
----------- -----------
37,367,689 34,191,595
Treasury stock, at cost, 683,120 and 598,420 shares at
December 31, 2000, and June 30, 2000, respectively (6,702,907) (5,951,045)
----------- -----------
Total stockholders' equity 30,664,782 28,240,550
----------- -----------
TOTAL $ 292,304,483 $ 291,192,175
=========== ===========
See accompanying notes to condensed consolidated financial statements.
Page 3
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, (UNAUDITED) DECEMBER 31, (UNAUDITED)
2000 1999 2000 1999
---- ---- ---- ----
INTEREST INCOME:
Interest and fees on loans $ 2,991,438 $ 2,595,819 $ 5,910,620 $ 5,130,573
Investment securities:
Taxable 1,648,001 1,851,388 3,325,174 3,777,198
Nontaxable 382,180 375,901 764,660 715,109
Other 115,579 88,927 229,402 179,785
----------- ----------- ----------- -----------
Total interest income 5,137,198 4,912,035 10,229,856 9,802,665
INTEREST EXPENSE:
Deposits 2,007,773 1,576,060 3,887,410 3,197,111
Federal Home Loan Bank advances 1,702,763 1,649,318 3,446,408 3,151,796
Note payable 1,500 2,500 4,000 7,000
----------- ----------- ----------- -----------
Total interest expense 3,712,036 3,227,878 7,337,818 6,355,907
NET INTEREST INCOME 1,425,162 1,684,157 2,892,038 3,446,758
----------- ----------- ----------- -----------
PROVISION FOR LOAN LOSSES 60,000 -- 176,000 --
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,365,162 1,684,157 2,716,038 3,446,758
NONINTEREST INCOME:
Service charges on deposit accounts 174,286 154,277 337,510 275,005
Gain on sales of investment securities
available for sale -- -- -- --
Other 156,843 103,073 317,128 216,506
----------- ----------- ----------- -----------
Net noninterest income 331,129 257,350 654,638 491,511
----------- ----------- ----------- -----------
NONINTEREST EXPENSE:
Salaries and employee benefits 963,092 985,194 1,943,869 1,941,210
Net occupancy expense 256,664 217,975 488,684 438,268
Communication, postage, printing and office supplies 107,980 112,090 194,425 203,318
Advertising 76,115 109,361 132,965 173,556
Data processing 63,078 82,103 142,761 164,575
Professional fees 129,112 255,396 287,787 681,671
Amortization of goodwill 18,750 18,750 37,500 37,500
Other 115,531 69,310 207,620 163,961
----------- ----------- ----------- -----------
Total noninterest expense 1,730,322 1,850,179 3,435,611 3,804,059
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (34,031) 91,328 (64,935) 134,210
INCOME TAX PROVISION (BENEFIT) (134,000) 15,101 (241,000) 16,000
----------- ----------- ----------- -----------
NET INCOME $ 99,969 $ 76,227 $ 176,065 $ 118,210
----------- ----------- ----------- -----------
(Continued)
Page 4
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, (UNAUDITED) DECEMBER 31, (UNAUDITED)
2000 1999 2000 1999
---- ---- ---- ----
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:
Unrealized holding gain (loss) on securities arising
during period 2,203,105 (1,190,992) 3,127,157 (2,378,501)
Reclassification adjustment for gains
included in net income -- -- -- --
----------- ----------- ----------- -----------
Other comprehensive income (loss) 2,203,105 (1,190,992) 3,127,157 (2,378,501)
----------- ----------- ----------- -----------
COMPREHENSIVE INCOME (LOSS) $ 2,303,074 $(1,114,765) $ 3,303,222 $(2,260,291)
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 1,863,269 1,953,898 1,890,871 2,057,797
=========== =========== =========== ===========
EARNINGS PER SHARE:
Basic $ 0.05 $ 0.04 $ 0.09 $ 0.06
==== ==== ==== ====
Diluted $ 0.05 $ 0.04 $ 0.09 $ 0.06
==== ==== ==== ====
DIVIDENDS PER SHARE $ 0.06 $ 0.06 $ 0.12 $ 0.12
==== ==== ==== ====
(Concluded)
See accompanying notes to condensed consolidated financial statements.
Page 5
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
SIX MONTHS ENDED DECEMBER 31,
2000 (UNAUDITED) 1999
---- ------
OPERATING ACTIVITIES:
Net income $ 176,065 $ 118,210
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 345,443 315,557
Deferred income taxes (310,000) (162,886)
Amortization (accretion) of:
Deferred loan origination fees (38,272) (102,760)
Goodwill 37,500 37,500
Premiums and discounts on loans, net (2,280) (2,493)
Premiums and discounts on investment securities, net 38,246 71,819
Stock compensation expense 113,080 191,365
Provision for loan losses 176,000 --
Originations of loans held for sale (4,703,934) (5,175,685)
Proceeds from sales of loans 5,163,107 6,460,303
Change in accrued interest receivable (224,997) (69,751)
Change in accrued interest payable 73,013 97,170
Change in other assets 130,253 353,598
Change in other liabilities (115,433) (4,445)
---------- -----------
Net cash provided by operating activities 857,791 2,127,502
INVESTING ACTIVITIES:
Purchases of investment securities - available for sale -- (3,302,892)
Purchases of Federal Home Loan Bank stock (205,800) (560,700)
Purchases of premises and equipment (1,466,731) (227,446)
Proceeds from maturity of interest bearing deposits 99,000 619,000
Loan originations, net of repayments (3,649,067) (9,657,351)
Principal payments on investment securities 7,450,104 7,674,614
Change in real estate held for sale (39,398) 115,654
---------- -----------
Net cash provided (used) by investing activities 2,188,108 (5,339,121)
(Continued)
Page 6
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
SIX MONTHS ENDED DECEMBER 31,
-
2000 (UNAUDITED) 1999
---- ----
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 7,021,771 $ (6,497,050)
Advances from Federal Home Loan Bank 198,735,000 149,384,000
Repayment of Federal Home Loan Bank advances (207,023,416) (136,867,013)
Net increase in advance payments by borrowers
for taxes and insurance 77,141 84,903
Repayment of note payable (80,000) (80,000)
Common stock acquired for stock option benefit plan trust -- (615,753)
Purchase of treasury stock (751,862) (2,048,505)
Dividends paid (240,208) (281,889)
------------ ------------
Net cash provided (used) by financing activities (2,261,574) 3,078,693
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 784,325 (132,926)
CASH AND CASH EQUIVALENTS:
Beginning of period 3,349,648 4,536,214
------------ ------------
End of period $ 4,133,973 $ 4,403,288
============ ============
See accompanying notes to condensed consolidated financial statements.
Page 7
HCB BANCSHARES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND CONSOLIDATION
HCB Bancshares, Inc. ("Bancshares"), incorporated under the laws of the
state of Oklahoma, is a savings bank holding company that owns 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 of the Company. The condensed consolidated
statement of income and comprehensive income for the three and six months ended
December 31, 2000 is not necessarily indicative of the results that may be
expected for the Company's fiscal year ending June 30, 2001. 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, 2000, contained in the Company's Annual Report on
Form 10-K for the year ended June 30, 2000.
NOTE 2 - EARNINGS PER SHARE
The weighted average number of common shares used to calculate earnings per
share for the periods ended December 31, 2000 and 1999 were as follows:
Three months ended Six months ended
December 31, December 31,
2000 1999 2000 1999
---- ---- ---- ----
Basic weighted - average shares 1,863,269 1,953,898 1,890,871 2,057,797
Effect of dilutive securities 0 0 0 0
--------- --------- --------- ---------
Diluted weighted - average shares 1,863,269 1,953,898 1,890,871 2,057,797
========= ========= ========= =========
The Company has issued stock options and MRP shares that have the potential
to be dilutive to its weighted average shares calculation, but are anti-dilutive
for these three and six-month periods.
NOTE 3 - STOCK PURCHASED FOR OPTION BENEFIT TRUST
As of December 31, 2000, the Company has purchased a total of 208,844
shares of stock and placed them in its stock option plan trust. These shares are
included in 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, 2000 was 296,372
at an average exercise price of $9.14 per share of which 217,495 were vested.
This compares to the total number of stock option shares granted as of June 30,
2000, of 312,980 at an average exercise price of $9.14 per share of which
217,495 were vested.
NOTE 4 - 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.
Page 8
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 are contesting
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 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
When used in this Form 10-Q, the words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to risks and uncertainties including changes in economic
conditions in the Company's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Company's
market area, and competition that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
GENERAL
The Bank's principal business consists of attracting deposits from the
general public and investing those funds in loans collateralized by first
mortgages on existing owner-occupied single-family residences in the Bank's
primary market area and loans collateralized by, to a lesser but growing extent,
commercial and multi-family real estate, consumer loans and commercial business
loans. The Bank also maintains a substantial investment portfolio of
mortgage-related securities, nontaxable municipal securities, and U.S.
government and agency securities.
The Bank's net income is dependent primarily on its net interest income,
which is the difference between interest income earned on its loans and its
investment portfolio, and interest paid on customers' deposits and funds
borrowed. The Bank's net income is also affected by the level of noninterest
income, such as service charges on customers' deposit accounts, net gains or
losses on the sale of loans and securities and other fees. In addition, the
level of noninterest expense, which normally will primarily consist of employee
compensation expenses, occupancy expense, and other expenses, affects net
income.
The financial condition and results of operations of the Bank, and the
thrift and banking industries as a whole, are significantly affected by
prevailing economic conditions, competition and the monetary and fiscal policies
of governmental agencies. Demand for and supply of credit, competition among
lenders and the level of interest rates in the Bank's market area influence
lending activities. The Bank's deposit flows and costs of funds are influenced
by prevailing market rates of interest on competing investments, as well as
account maturities and the levels of personal income and savings in the Bank's
market area.
RATE/VOLUME ANALYSIS
The following table analyzes dollar amounts of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period's
rate), (ii) changes attributable to rate (changes in rate multiplied by the
prior period's volume) and (iii) changes in rate/volume (changes in rate
multiplied by changes in volume).
Page 10
Three-Months Ended December 31, Six-Months Ended December 31,
--------------------------------- ---------------------------------------
2000 vs. 1999 2000 vs. 1999
--------------------------------- ---------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
--------------------------------- ---------------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
------ ---- ------ ----- ------ ---- ------ -----
(In thousands) (In thousands)
--------------------------------- ---------------------------------------
Interest income:
Loans receivable $ 329 $ 59 $ 8 $ 396 $ 730 $ 43 $ 7 $ 780
Investment securities (297) 115 (15) (197) (600) 223 (25) (403)
Other interest-earning
assets 13 11 2 26 17 30 3 50
------ ------- ------ ------- ------ ------- ------- ------
Total interest-earning
assets 45 185 (5) 225 147 295 (15) 427
------ ------- ------ ------- ------ ------- ------- ------
Interest expense:
Deposits 86 328 18 432 90 584 16 690
FHLB advances (44) 100 (3) 53 69 221 5 295
Note payable (1) 1 (1) (1) (3) 0 0 (3)
------ ------- ------ ------- ------ ------- ------- ------
Total interest-bearing
liabilities 41 429 14 484 156 805 21 982
------ ------- ------ ------- ------ ------- ------- ------
Change in net interest
income $ 4 $ (244) $ (19) $ (259) $ (9) $ (510) $ (36) $ (555)
====== ======= ====== ======= ====== ======= ======= ======
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2000 AND JUNE 30, 2000
The Company had consolidated total assets of $292.3 million and $291.2
million at December 31, 2000 and June 30, 2000, respectively. During the
six-month period ended December 31, 2000 the Company experienced an increase in
its consolidated loan portfolio from $135.6 million at June 30, 2000, to $138.7
million at December 31, 2000. During this same period, investments and
mortgage-backed securities decreased from $132.5 million at June 30, 2000 to
$130.3 million at December 31, 2000. While total investments decreased $2.2
million for the six-month period ended December 31, 2000, there were $7.4
million in paydowns offset with a $5.2 million increase in the market value of
the securities. The Company continues its strategy of replacing securities with
loans as opportunities present themselves.
Deposits have increased from $144.9 million at June 30, 2000 to $151.9
million at December 31, 2000. The recent increase in deposits is attributed to a
new full service branch located in Bryant, Arkansas, new certificate of deposit
special rate products, new checking account products and continued cross-selling
efforts. Although the Bank's level of deposits has been sufficient to provide
for adequate liquidity, the deposit market remains competitive. The outstanding
balances of FHLB borrowings decreased from $115.6 million at June 30, 2000, to
$107.3 million at December 31, 2000.
Stockholders' equity amounted to $30.7 million at December 31, 2000, and
$28.2 million at June 30, 2000. The changes in equity were primarily due to a
decrease in accumulated other comprehensive loss, dividends paid, and the
purchase of treasury stock. At December 31, 2000, 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, 2000 AND 1999
Net Income. Net income for the three months ended December 31, 2000 was
approximately $100,000 compared to net income of approximately $76,000 for the
three months ended December 31, 1999. Net income for the six months ended
December 31, 2000 was approximately $176,000 compared to net income of
approximately $118,000 for the six months ended December 31, 1999. Explanations
of primary changes to income and expense items follow.
Interest Income. Interest income for the three months ended December 31,
2000 increased approximately $225,000 compared to the three months ended
December 31, 1999. Interest income for the six months ended
Page 11
December 31, 2000 increased approximately $427,000 compared to the six months
ended December 31, 1999. The increases in interest income were due to increases
in both volume and rates on loans, and increases in rates on investments offset
by lower balances of investment securities.
Interest Expense. Interest expense for the three months ended December 31,
2000 increased approximately $484,000 compared to the three months ended
December 31, 1999. Interest expense for the six months ended December 31, 2000
increased approximately $982,000 compared to the six months ended December 31,
1999. The increase was primarily due to rate increases in both FHLB advances and
deposits.
As a result of the above changes, net interest income for the three months
ended December 31, 2000 decreased approximately $259,000 compared to the three
months ended December 31, 1999, and net interest income for the six months ended
December 31, 2000 decreased approximately $555,000 compared to the six months
ended December 31, 1999.
Provision for Loan Losses. The Bank made provisions for loan losses of
$60,000 and $176,000 for the three and six months ended December 31, 2000,
respectively. This provision reflects management's most recent review as of
December 31, 2000. The allowance for loan losses of $1.4 million represented
0.95 percent of gross outstanding loans at December 31, 2000, which compares to
0.85 percent at June 30, 2000. Nonperforming loans as of December 31, 2000, and
June 30, 2000, as a percent of total loans, were 0.66% and 0.64% 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. Noninterest income
for the three months ended December 31, 2000, was approximately $331,000
compared to approximately $257,000 for the three months ended December 31, 1999.
Noninterest income for the six months ended December 31, 2000, was approximately
$655,000 compared to approximately $492,000 for the six months ended December
31, 1999. The increase for the three and six-month periods is due primarily to
increases in fees earned on checking and savings accounts, and loan fees earned.
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, 2000 was $1.73
million compared to $1.85 million for the three months ended December 31, 1999.
The primary difference was a large decrease in professional fees. Total
noninterest expense for the six months ended December 31, 2000 was $3.44 million
compared to $3.80 million for the three months ended December 31, 1999. The
decrease is primarily attributed to a decrease in professional fees.
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
Page 12
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 December 31, 2000 and 1999 was (393.8%) and 16.5%, respectively.
The effective income tax rate for the Bank for the six months ended December 31,
2000 and 1999 was (371.1%) and 11.9%, 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, 2000, and June 30, 2000, the Company had designated
securities with a fair value of approximately $130.3 million and $132.5 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, 2000, the Bank had $5.3 million in commitments to originate
loans (including unfunded portions of construction loans), and approximately
$726,000 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
$91.3 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, 2000, total deposits increased
approximately $7.0 million, or 9.7 percent annualized. Approximately $1.6
million of the increase was in certificates of deposits and the remaining $5.4
million due to an increase in transaction accounts. Management 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.
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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, 2000. 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, 2000.
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 are
contesting 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 November 16,
2000. 1,878,285 shares of the Company's common stock were represented at the
Annual Meeting in person or by proxy.
Stockholders voted in favor of the election of two nominees for
director. The voting results for each nominee were as follows:
Votes in Favor
Nominee of Election Votes Withheld
Carl E. Parker, Jr. 1,791,335 86,950
Ned Ray Purtle 1,825,735 52,550
There were 31,433 broker nonvotes on the matter.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
3.2 Bylaws of HCB Bancshares, Inc., as amended.
10.6(a) Change-in-Control Protective Agreement between Heartland
Community Bank and Scott A. Swain +
10.6(b) Change-in-Control Protective Agreement between HCB
Bancshares, Inc. and Scott A. Swain +
+ Management contract or compensatory plan or arrangement.
Page 14
Reports on Form 8-K:
None
Page 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HCB BANCSHARES, INC.
Registrant
Date: February 9, 2001 By: /s/ Cameron D. McKeel
----------------------
Cameron D. McKeel
President and Chief
Executive Officer
(Duly Authorized Representative)
Date: February 9, 2001 By: /s/ Scott A. Swain
--------------------
Scott A. Swain
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
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