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, 2001.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-22423
HCB BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
OKLAHOMA 62-1670792
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
237 Jackson Street, Camden, Arkansas 71701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (870) 836-6841
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days:
Yes [X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: 2,158,989 shares of common stock
outstanding as of April 30, 2001.
Page 1
CONTENTS
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Financial Condition at
March 31, 2001 (unaudited) and June 30, 2000
Condensed Consolidated Statements of Income and Comprehensive
Income for the Three Months and Nine Months Ended March
31, 2001 and 2000 (unaudited)
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended March 31, 2001 and 2000 (unaudited)
Notes to Condensed Consolidated Financial Statements
(unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Page 2
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 2001 (UNAUDITED) and JUNE 30, 2000
- -------------------------------------------------------------------------------------------------------------------
MARCH 31,
2001 JUNE 30,
ASSETS (UNAUDITED) 2000
------------- ----------
Cash and due from banks $ 3,928,570 $ 3,211,802
Interest-bearing deposits with banks 4,889,127 137,846
----------- -----------
Cash and cash equivalents 8,817,697 3,349,648
Other interest bearing deposits with banks -- 99,000
Investment securities available for sale, at fair value 130,084,608 132,543,065
Loans receivable, net of allowance 132,725,077 135,626,505
Accrued interest receivable 2,040,278 1,852,887
Federal Home Loan Bank stock 6,518,200 6,223,500
Premises and equipment, net 7,626,852 6,552,484
Goodwill, net 225,000 281,250
Real estate held for sale 414,087 359,608
Other assets 1,641,919 4,304,228
----------- -----------
TOTAL $ 290,093,718 $ 291,192,175
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 158,643,530 $ 144,873,071
Federal Home Loan Bank advances 96,667,377 115,609,029
Advance payments by borrowers for
taxes and insurance 273,992 139,554
Accrued interest payable 999,084 917,415
Note payable 80,000 160,000
Other liabilities 1,107,065 1,252,556
----------- -----------
Total liabilities 257,771,048 262,951,625
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 10,000,000 shares authorized, 2,645,000 shares
issued, 1,950,145 and 2,046,580 shares
outstanding at March 31, 2001 and June 30, 2000, respectively 26,450 26,450
Additional paid-in capital 25,909,640 25,945,850
Unearned ESOP shares (1,110,900) (1,269,600)
Unearned MRP shares (167,788) (220,104)
Accumulated other comprehensive income (loss) 432,544 (4,401,668)
Retained earnings 14,035,765 14,110,667
----------- -----------
39,125,711 34,191,595
Treasury stock, at cost, 694,855 and 598,420 shares at
March 31, 2001, and June 30, 2000, respectively (6,803,041) (5,951,045)
----------- -----------
Total stockholders' equity 32,322,670 28,240,550
----------- -----------
TOTAL $ 290,093,718 $ 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 NINE MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2001 2000 2001 2000
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
INTEREST INCOME:
Interest and fees on loans $ 2,875,621 $ 2,638,727 $ 8,786,240 $ 7,769,299
Investment securities:
Taxable 1,596,357 1,831,359 4,921,531 5,608,558
Nontaxable 382,595 382,364 1,147,255 1,097,473
Other 135,481 101,087 364,884 280,872
----------- ------------ ----------- -----------
Total interest income 4,990,054 4,953,537 15,219,910 14,756,202
INTEREST EXPENSE:
Deposits 1,975,819 1,624,821 5,863,230 4,821,932
Federal Home Loan Bank advances 1,541,681 1,697,568 4,988,088 4,849,364
Note payable 1,500 3,000 5,500 10,000
----------- ------------ ----------- -----------
Total interest expense 3,519,000 3,325,389 10,856,818 9,681,296
NET INTEREST INCOME 1,471,054 1,628,148 4,363,092 5,074,906
----------- ------------ ----------- -----------
PROVISION FOR LOAN LOSSES 60,000 -- 236,000 --
----------- ------------ ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,411,054 1,628,148 4,127,092 5,074,906
NONINTEREST INCOME:
Service charges on deposit accounts 172,477 121,957 509,986 396,961
Other 91,580 117,806 408,709 334,313
----------- ------------ ----------- -----------
Net noninterest income 264,057 239,763 918,695 731,274
----------- ------------ ----------- -----------
NONINTEREST EXPENSE:
Salaries and employee benefits 976,443 984,695 2,920,313 2,925,905
Net occupancy expense 271,649 226,139 760,333 664,408
Communication, postage, printing and office supplies 115,225 94,247 309,650 297,564
Advertising 39,995 53,551 172,960 227,107
Data processing 84,931 84,537 227,692 249,113
Professional fees 123,570 194,182 411,357 875,853
Amortization of goodwill 18,750 18,750 56,250 56,250
Other 62,225 128,216 269,843 292,176
----------- ------------ ----------- -----------
Total noninterest expense 1,692,788 1,784,317 5,128,398 5,588,376
----------- ------------ ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (17,677) 83,594 (82,611) 217,804
INCOME TAX BENEFIT (124,000) (152,500) (365,000) (136,500)
----------- ------------ ----------- -----------
NET INCOME $ 106,323 $ 236,094 $ 282,389 $ 354,304
----------- ------------ ----------- -----------
(Continued)
Page 4
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2001 2000 2001 2000
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED)
OTHER COMPREHENSIVE INCOME (LOSS),
(unaudited)
NET OF TAX:
Unrealized holding gain (loss) on securities arising
during period 1,707,055 114,185 4,834,212 (2,264,316)
Reclassification adjustment for gains
included in net income -- -- -- --
--------- ------- --------- ----------
Other comprehensive income (loss) 1,707,055 114,185 4,834,212 (2,264,316)
--------- ------- --------- ----------
COMPREHENSIVE INCOME (LOSS) $ 1,813,378 $ 350,279 $ 5,116,601 $(1,910,012)
========= ======= ========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 1,840,580 1,918,618 1,874,391 2,011,760
========= ========= ========= =========
EARNINGS PER SHARE:
Basic $ 0.06 $ 0.12 $ 0.15 $ 0.18
==== ==== ==== ====
Diluted $ 0.06 $ 0.12 $ 0.15 $ 0.18
==== ==== ==== ====
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, 2001 AND 2000 (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED MARCH 31,
2001 2000
---- ------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES:
Net income $ 282,389 $ 354,306
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 537,269 482,849
Deferred income taxes (365,000) (136,500)
Amortization (accretion) of:
Deferred loan origination fees (79,057) (135,656)
Goodwill 56,250 56,250
Premiums and discounts on loans, net (3,384) (3,465)
Premiums and discounts on investment securities, net 56,814 88,637
Stock compensation expense 174,806 273,427
Provision for loan losses 236,000 --
Originations of loans held for sale (7,661,482) (7,430,403)
Proceeds from sales of loans 7,387,007 8,016,770
Change in accrued interest receivable (187,391) 30,429
Change in accrued interest payable 81,669 102,901
Change in other assets (196,562) 330,898
Change in other liabilities (145,491) 102,147
------------ -----------
Net cash provided by operating activities 173,837 2,132,590
INVESTING ACTIVITIES:
Purchases of investment securities - available for sale -- (3,302,892)
Purchases of Federal Home Loan Bank stock (294,700) (651,400)
Purchases of premises and equipment (1,611,637) (333,973)
Proceeds from maturity of interest bearing deposits 99,000 619,000
Loan originations, net of repayments 3,022,344 (12,434,604)
Principal payments on investment securities 10,459,726 10,775,883
Change in real estate held for sale (54,479) --
------------ -----------
Net cash provided (used) by investing activities 11,620,254 (5,327,986)
(Continued)
Page 6
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED MARCH 31,
2001 2000
---- ----
(UNAUDITED) (UNAUDITED)
FINANCING ACTIVITIES:
Net increase (decrease) in deposits $ 13,770,459 $ (4,356,250)
Advances from Federal Home Loan Bank 213,740,000 211,499,000
Repayment of Federal Home Loan Bank advances (232,681,652) (201,545,932)
Net increase in advance payments by borrowers
for taxes and insurance 134,438 317,534
Repayment of note payable (80,000) (80,000)
Common stock acquired for stock option benefit plan trust -- (615,753)
Purchase of treasury stock (851,996) (2,048,505)
Dividends paid (357,291) (417,579)
------------ ------------
Net cash provided (used) by financing activities (6,326,042) 2,752,515
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 5,468,049 (442,881)
CASH AND CASH EQUIVALENTS:
Beginning of period 3,349,648 4,536,214
------------ ------------
End of period $ 8,817,697 $ 4,093,333
============ ============
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 nine months ended
March 31, 2001 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 March 31, 2001 and 2000 were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2001 2000 2001 2000
---- ---- ---- ----
Basic weighted - average shares 1,840,580 1,918,618 1,874,391 2,011,760
Effect of dilutive securities 0 0 0 0
--------- --------- --------- ---------
Diluted weighted - average shares 1,840,580 1,918,618 1,874,391 2,011,760
========= ========= ========= =========
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 nine-month periods.
NOTE 3 - STOCK PURCHASED FOR OPTION BENEFIT TRUST
As of March 31, 2001, 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 March 31, 2001 was 295,102 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 putative 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 that had the supposed effect of artificially
inflating the price the plaintiff and other putative class members paid to
purchase the Company's common stock.
The Company and the other defendants moved to dismiss the complaint. The
federal district court granted the motion on March 30, 2001, but allowed
plaintiffs 30 days from the date of the order to file an amended class action
complaint. As of May 14, 2001, plaintiffs had not filed an amended complaint.
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 March 31, Nine-Months Ended March 31,
-------------------------------- --------------------------------------
2001 vs. 2000 2001 vs. 2000
-------------------------------- --------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------------- --------------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
------ ---- ------ ----- ------ ---- ------ -----
(In thousands) (In thousands)
-------------------------------- --------------------------------------
Interest income:
Loans receivable $ 279 $ (38) $ (4) $ 237 $ 992 $ 22 $ 3 $ 1,017
Investment securities (124) (118) 7 (235) (557) (84) 4 (637)
Other interest-earning
assets 7 26 2 35 63 18 3 84
--------------------------------- --------------------------------------
Total interest-earning
assets 162 (130) 5 37 498 (44) 10 464
--------------------------------- --------------------------------------
Interest expense:
Deposits 108 228 15 351 256 745 40 1,041
FHLB advances (61) (98) 3 (156) (98) 242 (5) 139
Note payable (1) 0 0 (1) (4) 0 0 (4)
------ ------ ----- ------ ------ ------- ----- -------
Total interest-bearing
liabilities 46 130 18 194 154 987 35 1,176
------ ------ ----- ------ ------ ------- ----- -------
Change in net interest
income $ 116 $ (260) $ (13) $ (157) $ 344 $(1,031) $ (25) $ (712)
====== ====== ===== ====== ====== ======= ===== =======
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2001 AND JUNE 30, 2000
The Company had consolidated total assets of $290.1 million and $291.2
million at March 31, 2001 and June 30, 2000, respectively. During the nine-month
period ended March 31, 2001 the Company experienced a decrease in its
consolidated loan portfolio from $135.6 million at June 30, 2000, to $132.7
million at March 31, 2001. During this same period, investments and
mortgage-backed securities decreased from $132.5 million at June 30, 2000 to
$130.1 million at March 31, 2001. While total investments decreased $2.4 million
for the nine-month period ended March 31, 2001, there were $10.4 million in
paydowns offset with an $8.0 million increase in the market value of the
securities.
The decrease in the consolidated loan portfolio is a recent event. In the
three months ended March 31, 2001, consolidated loans decreased $5.96 million,
primarily due to payoffs of large commercial real estate loans. Competition for
these large loans remains strong, however, the Company remains competitive and
further significant reductions are not expected.
Deposits have increased from $144.9 million at June 30, 2000 to $158.6
million at March 31, 2001. Some of the recent increase in deposits is attributed
to a new full service branch located in Bryant, Arkansas, as well as, 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 $96.7 million at March 31, 2001, reflecting the
increase in deposits and decrease in loans and investments.
Stockholders' equity amounted to $32.3 million at March 31, 2001, and $28.2
million at June 30, 2000. The changes in equity were primarily due to an
increase in accumulated other comprehensive income net of dividends paid and the
purchase of treasury stock. At March 31, 2001, 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, 2001 AND 2000
Net Income. Net income for the three months ended March 31, 2001 was
approximately $106,000 compared to net income of approximately $236,000 for the
three months ended March 31, 2000. Net income for the nine months
Page 11
ended March 31, 2001 was approximately $282,000 compared to net income of
approximately $354,000 for the nine months ended March 31, 2000. Explanations of
primary changes to income and expense items follow.
Interest Income. Interest income for the three months ended March 31, 2001
increased approximately $37,000 compared to the three months ended March 31,
2000. Interest income for the nine months ended March 31, 2001 increased
approximately $464,000 compared to the nine months ended March 31, 2000. The
increases in interest income were primarily due to increases in volumes of loans
and offset by lower rates and volumes of investment securities.
Interest Expense. Interest expense for the three months ended March 31,
2001 increased approximately $194,000 compared to the three months ended March
31, 2000. Interest expense for the nine months ended March 31, 2001 increased
approximately $1,176,000 compared to the nine months ended March 31, 2000. The
increase for the three months ended March 31, 2001 was primarily due to
increases in both rate and volume of deposits, offset by decreases in both rate
and volume of FHLB advances. The increase for the nine months ended March 31,
2001 was primarily due to increases in deposit rates and volumes, and an
increase in FHLB rates. The increase in deposit rates over the two periods
exhibit the increase in market rates over the same period. More recently,
however, these rates have decreased significantly and as a result, the Company's
cost of deposits has decreased from 5.38% for the three months ended December
31, 2000, to 5.21% for the three months ended March 31, 2001.
As a result of the above changes, net interest income for the three months
ended March 31, 2001 decreased approximately $157,000 compared to the three
months ended March 31, 2000, and net interest income for the nine months ended
March 31, 2001 decreased approximately $712,000 compared to the nine months
ended March 31, 2000.
Provision for Loan Losses. The Bank made provisions for loan losses of
$60,000 and $236,000 for the three and nine months ended March 31, 2001,
respectively. This provision reflects management's most recent review as of
March 31, 2001. The allowance for loan losses of $1.4 million represented 1.03
percent of gross outstanding loans at March 31, 2001, which compares to 0.85
percent at June 30, 2000. Nonperforming loans as of March 31, 2001, and June 30,
2000, as a percent of total loans, were 0.75% 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 March 31, 2001, was approximately $264,000 compared
to approximately $240,000 for the three months ended March 31, 2000. Noninterest
income for the nine months ended March 31, 2001, was approximately $919,000
compared to approximately $731,000 for the nine months ended March 31, 2000. The
increase for the three-month period is due primarily to increases in fees earned
on checking and savings accounts, and insurance commissions on policies
associated with loan products. The increase for the nine-month period is due
primarily to increases in fees earned on checking and savings accounts,
insurance commissions on policies associated with loan products, and other loan
fee income.
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
Page 12
consultants, attorneys, and accountants. Total noninterest expense for the three
months ended March 31, 2001 was $1.70 million compared to $1.80 million for the
three months ended March 31, 2000. The primary difference was a decrease in
professional fees and other expense, offset by increases in occupancy expense
due to opening a new full service branch in Bryant, Arkansas. Total noninterest
expense for the nine months ended March 31, 2001 was $5.10 million compared to
$5.60 million for the nine months ended March 31, 2000. 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 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, 2001 and 2000 was (701.5%) and (182.4%), respectively.
The effective income tax rate for the Bank for the nine months ended March 31,
2001 and 2000 was (441.8%) and (62.7%), 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.
These negative rates are a result of net tax benefit, which increases
net income. These benefits are due primarily to increases in net operating loss
carryforwards for income tax reporting purposes. The corresponding deferred tax
asset totals approximately $1.5 million and $1.1 million as of March 31, 2001
and June 30, 2000, respectively. The recoverability of this asset is entirely
contingent upon the production of taxable income for income tax reporting
purposes. Management anticipates that the Company will produce such income in
the near future based on management's current forecasts of earnings.
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.
At March 31, 2001, and June 30, 2000, the Company had designated all
securities as available for sale. In addition to internal sources of funding,
the Bank as a member of the FHLB has substantial borrowing authority with the
FHLB. The Bank's use of a particular source of funds is based on need,
comparative total costs, and availability.
At March 31, 2001, the Bank had $4.0 million in commitments to originate
loans (including unfunded portions of construction loans), and approximately
$928,000 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
$94.5 million. Management anticipates that the Bank will have adequate resources
to meet its current commitments through internal funding sources described
above.
Page 13
For the nine months ended March 31, 2001, total deposits increased
approximately $13.8 million, or 12.7 percent annualized. Approximately $4.5
million of the increase was in certificates of deposits and the remaining $9.3
million due to an increase in transaction accounts. Management has initiated new
certificate of deposit special rate products, and continued to offer 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, 2000. There has been no material change
in the Company's asset and liability position 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 putative 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 that had the supposed effect of
artificially inflating the price the plaintiff and other putative class members
paid to purchase the Company's common stock.
The Company and the other defendants moved to dismiss the complaint.
The federal district court granted the motion on March 30, 2001, but allowed
plaintiffs 30 days from the date of the order to file an amended class action
complaint. As of May 14, 2001, plaintiffs had not filed an amended complaint.
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
Page 14
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
3.2 Bylaws of HCB Bancshares, Inc., as amended.
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: May 14, 2001 By: /s/ Cameron D. McKeel
----------------------
Cameron D. McKeel
President and Chief
Executive Officer
(Duly Authorized Representative)
Date: May 14, 2001 By: /s/ Scott A. Swain
-------------------
Scott A. Swain
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Page 16