Form 10-Q/A
(Amendment No. 1)
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, 1998.
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: 2,323,101 shares.
CONTENTS
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Statements of Financial Condition
March 31, 1998 (Unaudited) and June 30, 1997
Consolidated Statements of Operations
(Unaudited) Three Months and Nine Months Ended
March 31, 1998 and 1997
Consolidated Statements of Cash Flows
(Unaudited) Nine Months Ended March 31, 1998
and 1997
Consolidated Statements of Comprehensive Income
(Loss) Three Months and Nine Months Ended March
31, 1998 and 1997
Notes to Consolidated Financial Statements
(Unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
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
HCB BANCSHARES, INC. AND SUBSIDIARIES
-------------------------------------
Consolidated Statements of Financial Condition
March 31, 1998 and June 30, 1997
Assets
------
March 31, June 30,
1998 1997
(Unaudited)
----------- -----------
Cash on hand $ 1,355,778 $ 1,182,210
Interest-bearing deposits 6,071,051 18,273,882
Investment securities
available for sale 32,342,554 16,155,755
Mortgage-backed securities
Available for sale 35,496,381 20,090,406
Held to maturity (estimated
market value of $30,464,365
and $36,194,353, respectively) 29,649,003 35,869,295
Stock in Federal Home Loan Bank 2,099,800 1,246,500
Loans receivable (net of allowance
of $1,484,603 and $1,492,473,
respectively) 106,300,518 98,642,635
Accrued interest receivable 1,672,534 1,339,455
Foreclosed assets 33,501 36,179
Land held for resale 130,000 130,000
Premises and equipment 3,387,354 2,778,006
Goodwill -- 1,415,223
Core deposit intangible 450,000 --
Prepaid expenses and other assets 2,644,437 3,206,232
----------- -----------
$221,632,911 200,365,778
=========== ===========
See accompanying notes to condensed consolidated financial
statements.
HCB BANCSHARES, INC. AND SUBSIDIARIES
-------------------------------------
Consolidated Statements of Financial Condition
March 31, 1998 and June 30, 1997
Liabilities and Stockholders' Equity
------------------------------------
March 31, June 30,
1998 1997
(Unaudited)
----------- -----------
Liabilities:
Deposits $140,998,609 151,208,763
Advances from borrowers for
taxes, insurance and other 355,497 209,140
Borrowings from Federal Home
Loan Bank of Dallas:
Short-term advances 3,394,800 --
Long-term advances 36,652,638 10,000,000
Other borrowings 320,000 400,000
Accrued interest payable 350,071 410,477
Accrued expenses and other
liabilities 1,340,658 397,885
----------- -----------
Total liabilities 183,412,273 162,626,265
----------- -----------
Stockholders' equity
Common stock, $.01 par value;
authorized 10,000,000 shares;
issued and outstanding,
2,645,000 shares 26,450 26,450
Additional paid-in capital 25,476,777 25,770,666
Note receivable from ESOP (2,116,000) (2,116,000)
Retained earnings 14,769,727 14,091,750
Accumulated other comprehensive
income, net:
Unrealized gain (loss) on
available for sale securities 63,683 (33,353)
----------- -----------
Total stockholders' equity 38,220,637 37,739,513
----------- -----------
$221,632,911 200,365,778
=========== ===========
See accompanying notes to condensed consolidated financial
statements.
HCB BANCSHARES, INC. AND SUBSIDIARIES
-------------------------------------
Consolidated Statements of Operations For the
Three Months and Nine Months Ended March 31, 1998 and 1997
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Interest income
Loans $ 2,190,676 $ 2,004,727 $ 6,500,006 $ 5,874,307
Investment securities 385,369 208,093 1,033,804 600,658
Mortgage-backed and related
securities 1,060,075 825,943 2,805,911 2,663,225
Other interest income 224,618 106,632 797,737 369,858
----------- ----------- ----------- -----------
Total interest income 3,860,738 3,145,395 11,137,458 9,508,048
----------- ----------- ----------- -----------
Interest expense
Deposits 1,804,034 1,872,763 5,515,164 5,630,757
Borrowings from FHLB 446,336 152,962 799,614 482,889
Other interest 6,000 10,000 19,000 24,000
----------- ----------- ----------- -----------
Total interest expense 2,256,370 2,035,725 6,333,778 6,133,646
----------- ----------- ----------- -----------
Net interest income 1,604,368 1,109,670 4,803,680 3,374,402
Provision for loan losses -- 24,820 24,000 168,144
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 1,604,368 1,084,850 4,779,680 3,206,258
----------- ----------- ----------- -----------
Noninterest income
Service fees on deposits 75,564 44,471 202,585 133,562
Other service fees and
commissions 9,506 6,184 26,236 10,116
Gains (losses) on sales of
investment securities and
mortgage-backed and related
securities available for sale -- (22,525) 3,765 (21,215)
Gains(losses) on sales of loans
held for sale 9,611 3,745 32,776 3,745
Gains on sales of foreclosed
assets, net -- 5,720 12,437 8,220
Other income, net 141,755 33,943 297,437 168,687
----------- ----------- ----------- -----------
Total noninterest income 236,436 71,538 575,236 302,815
----------- ----------- ----------- -----------
Noninterest expense
Compensation, payroll taxes and
fringe benefits 741,788 506,808 2,224,370 1,533,412
Rent and other occupancy expense 116,599 95,307 393,095 291,061
See accompanying notes to consolidated financial statements.
HCB BANCSHARES, INC. AND SUBSIDIARIES
-------------------------------------
Consolidated Statements of Operations For the
Three Months and Nine Months Ended March 31, 1998 and 1997
(Unaudited)
(Continued)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Communication, postage, printing
and office supplies $ 104,372 $ 64,466 $ 321,374 $ 228,394
Deposit and other insurance premiums 55,522 17,384 136,537 1,095,391
Marketing expense 32,178 33,460 112,480 161,492
Expenses of officers, directors and
employees, including directors fees 40,557 48,186 163,907 129,216
Data processing expense 107,185 83,400 292,443 245,130
Amortization of goodwill 23,291 40,018 104,383 120,055
Professional fees 109,660 138,887 306,356 347,225
Foreclosed property expense 758 14,992 2,882 19,248
Other expenses 259,986 (137,627) 310,060 19,028
----------- ----------- ----------- -----------
Total noninterest expense 1,591,896 905,281 4,367,887 4,189,652
----------- ----------- ----------- -----------
Income (loss) before income tax
expense (benefit) 248,908 251,107 987,029 (680,579)
Income tax expense(benefit) 34,348 129,950 309,052 (261,900)
----------- ----------- ----------- -----------
Net income(loss) $ 214,560 121,157 677,977 (418,679)
=========== =========== =========== ===========
Earnings per common share $ 0.08 N/A $ 0.26 $ N/A
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
HCB BANCSHARES, INC. AND SUBSIDIARIES
-------------------------------------
Consolidated Statements of Comprehensive Income (Loss) For
the Three Months and Nine Months Ended March 31, 1998 and 1997
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
Net income (loss) $214,560 121,157 677,977 (418,679)
Comprehensive income (loss):
Unrealized holding gain (loss)
on available for sale securities (129,958) 137,762 103,197 (158,311)
-------- -------- -------- --------
Comprehensive income (loss) before
income tax expense (benefit) 84,602 258,919 781,174 (576,990)
Income tax expense (benefit) 44,186 46,839 39,514 (53,826)
-------- -------- -------- --------
Net comprehensive income (loss) $ 40,416 212,080 741,660 (523,164)
======== ======== ======== ========
Comprehensive income (loss)
per common share $ 0.02 N/A $ 0.28 N/A
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
HCB BANCSHARES, INC. AND SUBSIDIARIES
-------------------------------------
Consolidated Statements of Cash Flows
For the Nine Months Ended March 31, 1998 and 1997
(Unaudited)
Nine Months Ended
March 31,
1998 1997
--------- ---------
Cash flows from operating activities:
Net income(loss) $ 677,977 (418,679)
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation 187,835 122,211
Amortization (accretion) of
Deferred loan origination fees (1,734) 36,092
Goodwill 104,383 120,055
Premiums and discounts on loans (463) (2,572)
Premiums and discounts on investment securities
and mortgage-backed and related securities 146,620 115,519
Deferred income taxes -- (57,986)
Provision for loan losses 24,000 168,143
Provision for loss on foreclosed assets -- 15,247
(Gain) loss on disposition of other assets (12,437) (8,220)
Net (gain) loss on sale of assets held for sale
or available for sale (36,541) 17,470
Increase(decrease) in accrued interest receivable (333,079) (92,766)
Decrease in other assets 561,795 (276,560)
Decrease in accrued interest payable (60,406) (15,142)
Increase (decrease) in other liabilities 942,773 (107,149)
Increase(decrease) in prepaid income taxes -- (214,364)
---------- ----------
Net cash provided (used) by operating
activities 2,200,723 (598,701)
---------- ----------
Cash flows from investing activities:
Net change in loans (7,650,013) (11,415,022)
Purchase of loans -- (2,254,560)
Proceeds from sales of loans 1,982,469 1,425,419
Proceeds from sale of investment
securities available for sale -- 2,576,477
Purchases of investment securities
available for sale (51,614,998) (23,060,510)
Principal payments on investment securities
and mortgage-backed and related securities 26,215,666 18,082,993
Purchase of stock in FHLB (853,300) --
Purchases of property and equipment (984,010) (1,856,118)
Proceeds from sale of foreclosed assets 121,044 --
Proceeds from sale of subsidiary 3,100,000 --
Investment in subsidiary sold (3,100,000) --
See accompanying notes to consolidated financial statements
HCB BANCSHARES, INC. AND SUBSIDIARIES
-------------------------------------
Consolidated Statements of Cash Flows
For the Nine Months Ended March 31, 1998 and 1997
(Unaudited)
(Continued)
Nine Months Ended
March 31,
1998 1997
---------- ----------
Proceeds from sale of other assets 1,525 3,215
Purchase of branch assets (9,944,624) --
Purchase of core deposit intangible (450,000) --
Dividends paid (264,500) --
---------- ----------
Net cash used by investing activities (43,440,741) (16,498,106)
---------- ----------
Cash flows from financing activities:
Net increase (decrease) in deposits (862,137) 8,866,424
Increase (decrease) in advance payments from
borrowers for property taxes and insurance 146,357 274,105
Net borrowings from FHLB 30,047,438 --
Increase (decrease) in other borrowings (80,000) 400,000
Cost of issuance of common stock (40,903) --
---------- ----------
Net cash provided by financing activities 29,210,755 9,540,529
---------- ----------
Net increase(decrease) in cash (12,029,263) (7,556,278)
Cash and due from banks, beginning of period 19,456,092 17,291,882
---------- ----------
Cash and due from banks, end of period $ 7,426,829 9,735,604
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 5,051,774 4,807,394
========== ==========
See accompanying notes to consolidated financial statements.
HCB BANCSHARES, INC AND SUBSIDIARIES
------------------------------------
Notes to Consolidated (Unaudited) Financial Statements
Note 1 HCB Bancshares, Inc.
HCB Bancshares, Inc. (the "Company") was incorporated under the
laws of the state of Oklahoma for the purpose of becoming the
bank holding company of Heartland Community Bank and its
subsidiaries (the "Bank"), in connection with the Bank's
conversion from a federally chartered mutual savings bank to a
federally chartered stock savings bank, pursuant to its Plan of
Conversion. On April 30, 1997, the Bank completed the
Conversion and became a wholly owned subsidiary of the Company.
The Company has no other operations and conducts no business of
its own other than owning the Bank, investing its portion of the
net proceeds received in the Conversion, and lending funds to
the Employee Stock Ownership Plan which was formed in connection
with the Conversion.
Note 2 Basis of Consolidation
The accompanying condensed consolidated financial statements
were prepared by the Company in accordance with instructions for
Form 10-Q without audit. To the extent that information and
footnotes required by generally accepted accounting principles
for complete financial statements are contained in the audited
financial statements included in the Company's 1997 Annual
Report to Stockholders, attached as an exhibit to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30,
1997, such information and footnotes have not been duplicated
herein. All material intercompany balances and transactions
have been eliminated in the consolidation. The unaudited
statements reflect all adjustments, consisting of normal
recurring accruals, which are in the opinion of management,
necessary for fair presentation of the results of operations,
changes in equity and cash flows for the three months and nine
months periods ended March 31, 1998 and 1997. The statements of
operations for the three-month and nine-month periods ended
March 31, 1998, are not necessarily indicative of the results
which may be expected for the entire year.
Note 3 Stockholders' Equity and Stock Conversion
The Bank converted from a federally chartered mutual savings
bank to a federally chartered stock savings bank pursuant to its
Plan of Conversion, which was approved by the Bank's members on
April 25, 1997. The conversion was effective on April 30, 1997
and resulted in the issuance of 2,645,000 shares of common stock
(par value $.01) at $10.00 per share for the gross sale price of
$26,450,000. Costs related to the conversion (primarily to
underwriters' commissions, printing and professional fees)
approximated $750,000 and were deducted from the proceeds to
arrive at net proceeds of $25,700,000. The Company also
established an Employee Stock Ownership Plan and Trust which
purchased 211,600 shares of common stock of the Company at the
issuance price of $10 per share with funds borrowed from the
Company.
Note 3 Sale of Subsidiary
On November 19, 1997, the Bank entered into an agreement to sell
all of the shares of stock of Heritage Banc Holding, Inc., a
subsidiary of the Bank and the parent of HEARTLAND Community
Bank, FSB ("FSB"), subject to approval of the transaction by the
OTS. Approval of the transaction was granted in February, 1998.
The transaction was completed on February 23, 1998. Pursuant
to the terms of the agreement, the Bank of the Ozarks, Inc.
acquired the deposits, premises and equipment of the Little
Rock, Arkansas office of FSB in addition to its holding
company's charter and stock, and, in a series of transactions,
the Bank retained the loans and certain other assets and certain
liabilities of FSB's Little Rock, AR office and all assets and
liabilities of FSB's Monticello, AR office and Bryant, AR loan
production office.
Note 4 Adoption of Statement of Financial Accounting Standard
No. 130
The Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income," on January 1, 1998.
The standard establishes standards for reporting and displaying
comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general purpose financial
statements. Prior period financial statements presented have
been reclassified for comparative purposes.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
-------------------------------------------------
GENERAL
The Bank's principal business consists of attracting
deposits from the general public and investing those funds in
(i) loans secured by first mortgages on existing owner-occupied
single-family residences in the Bank's primary market area and,
(ii) to a lesser but growing extent, commercial and multi-family
real estate loans and consumer and commercial business loans.
The Bank also maintains a substantial investment portfolio of
mortgage-related securities and U.S. government and agency
securities.
The Bank's net income is dependent primarily on its net
interest income, which is the difference between interest income
earned on its loans, mortgage-backed securities and securities
portfolio and interest paid on customers' deposits. 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 securities and other fees. In
addition, net income is affected by the level of noninterest
expense, which primarily consists of employee compensation
expenses, deposit insurance premiums and other expenses.
The financial condition and results of operations of the
Bank and the thrift and banking industries as a whole are
significantly affected by prevailing economic conditions,
competition and the monetary and fiscal policies of governmental
agencies. Lending activities are influenced by demand for and
supply of credit, competition among lenders and the level of
interest rates in the Bank's market area. The Bank's deposit
flows and costs of funds are influenced by prevailing market
rates of interest, primarily on competing investments, as well
as account maturities and the levels of personal income and
savings in the Bank's market area.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1998 AND JUNE 30,
1997
The Company had total assets of $221.7 million and $200.4
million at March 31, 1998 and June 30, 1997, respectively.
During the nine month period ended March 31, 1998 the Bank
experienced an increase in its loan portfolio from $98.6 million
at June 30, 1997, to $106.3 million. This increase is due to
the positive results realized from the implementation of the
Bank's long term business plan for growth in its targeted
markets of commercial, consumer and multi-family lending along
with natural growth. During this same period, investment and
mortgage-backed securities and other short-term interest-earning
assets fluctuated between $90.4 million at June 30, 1997 and
$103.6 million at March 31, 1998. Investment securities and
other short-term interest-earning deposits tend to vary in
conjunction with variations in savings activity. Additionally,
the Bank expended approximately $984,000 to purchase computer
and network equipment, furnishings and make improvements to
existing facilities during the nine-month period ended March 31,
1998, to consummate management's planned growth projections.
Deposits decreased from $151.2 million at June 30, 1997 to
$141.0 million at March 31, 1998. This decrease in deposits of
$10.2 million resulted from increased competition in the Bank's
main market area of Camden, Arkansas and the sale of $9.4
million in deposits at the Little Rock, Arkansas office ("FSB")
sold to the Bank of the Ozarks effective February 23, 1998.
The Bank's level of deposits has been sufficient to fund its
loan demand and provide for adequate liquidity. During the
nine-month period ended March 31, 1998 and the year ended June
30, 1997, the Bank utilized a credit line with the Federal Home
Loan Bank of Dallas ("FHLB") to obtain advances to implement its
plan of pursuing a more aggressive investing program. The
outstanding balances of FHLB advances were $40.0 million and
$10.0 million at March 31, 1998 and June 30, 1997, respectively.
These advances were utilized to reduce interest rate risk by
better matching rates and maturities of existing
interest-earning assets and interest-bearing liabilities.
Equity amounted to $38.2 million at March 31, 1998, and to
$37.7 million at June 30, 1997, respectively. The changes in
equity were due primarily to the Bank's net income earned for
such periods. At June 30, 1997, the Bank's regulatory capital
substantially exceeded all applicable regulatory capital
requirements. Regulatory capital levels at March 31, 1998 were
not substantially different from those at June 30, 1997.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS AND
NINE MONTHS ENDED MARCH 31, 1998 AND 1997
Net Income (Loss). Net income for the three months ended
March 31, 1998 was $214,560 compared to $112,074 for the three
months ended March 31, 1997. The changes were attributable to
increases in the volume of interest-earning assets when compared
to the previous year, combined with a decrease in interest
expense and noninterest expenses as a result of the sale of the
Little Rock branch of FSB. Income tax expense for the three
months ended March 31, 1998 was $34,348, compared to $129,950
for the three months ended March 31, 1997.
Net income for the nine months ended March 31, 1998 was
$678,000 compared to a loss of $418,700 for the nine months
ended March 31, 1997. The changes were attributable to a
non-recurring one time, special deposit insurance assessment of
$889,000 and professional fees of $306,900, incurred in the
nine months ended March 31, 1997, an increase in net interest
income of $1.5 million and an increase in noninterest income of
$272,400 for the nine months ended March 31, 1998, as compared
to the nine months ended March 31, 1997. Income tax expense for
the nine months ended March 31, 1998 was a tax expense of
$309,000 compared to a tax benefit of $261,900 for the nine
months ended March 31, 1997.
Net Interest Income. Net interest income for the three
months ended March 31, 1998 was $1.6 million, an increase of
$$500,000, or 44.6% when compared to net interest income of $1.1
million for the three months ended March 31, 1997. This
increase of $715,000 was attributable to an increase in total
interest-earning assets during the three months ended March 31,
1998 combined with an increase of $220,000 in total interest
expense. The slight increase of $69,000 in interest expense on
deposits was the result of an increase in the average rate paid
on interest-bearing liabilities. The remaining increase in
interest expense was the result of increased utilization of a
line of credit with the FHLB to further the Company's long range
plans for growth and expansion.
Net interest income for the nine months ended March 31,
1998 was $4.8 million, an increase of 42.4% when compared to net
interest income of $3.4 million for the nine months ended March
31, 1997. This increase was attributable to an increase in
total interest income of $1.6 million combined with an slight
increase in total interest expense of $200,000. The net
interest margin for the nine months ended March 31, 1998 was
2.22% compared to 2.41% for the nine months ended March 31,
1997. The increase in net interest income and decrease in net
interest margin was due to an increase in the average volume of
interest-earning assets combined with a decrease in average
deposit liabilities and an increase in the average rate paid on
interest bearing liabilities. The average volume of
interest-earning assets increased from $170.3 million for the
nine months ended March 31, 1997 to $192.2 million for the nine
months ended March 31, 1998, which had the effect of increasing
interest income by approximately $411,000. Average
interest-earning assets increased , in part, when comparing the
nine months ended March 31, 1997 to the nine months ended March
31, 1997 because of the increased purchases of investment
securities and the increase in the balance of loans receivable.
The average rate paid on interest-bearing liabilities increased
during the nine months ended March 31, 1998 from 5.10% to
5.22%. The increase in the average rate on interest-bearing
liabilities had the effect of increasing total interest expense
between the nine months ended March 31, 1997 and the nine months
ended March 31, 1997 by approximately $214,000.
For the nine months ended March 31, 1998, the average yield
on interest-earning assets was 7.46%, compared to 7.51% for the
nine months ended March 31, 1997, which had the effect of
decreasing total interest income by $24,000. The average volume
of interest-bearing liabilities increased by 5.72%, reflecting
the change in deposits and the utilization of liquidity in the
implementation of the Company's long term business plan for
growth in its targeted markets. when comparing March 31, 1998 to
March 31, 1997. This volume increase attributed to an increase
in total interest expense of approximately $25,000.
The average yield on interest-earning assets remained
relatively unchanged between the two periods, which is
indicative of the fact that the Bank's interest-earning assets
are not highly sensitive to the increases in market interest
rates which occurred between the two periods. For the nine
months ended March 31, 1998, the average yield on
interest-earning assets was 2.81% compared to 2.71% for the nine
months ended March 31, 1997.
Provision for Loan Losses. During the year ended June 30,
1997, the Bank's management initiated an extensive internal loan
review of all loan files both of the parent and subsidiary. The
review resulted in the adoption of more conservative loan loss
allowance standards than had been used in the past. This new
policy on allowance for loan losses was deemed prudent in
establishing credit underwriting standards for future expected
lending areas, such as commercial real estate, business and
consumer loans, which inherently have more risk. Management
made a provision for loan losses in the nine months ended March
31, 1998 of $24,000, compared to a provision for loan loss of
approximately $168,100 in the nine months ended March 31, 1997.
The allowance for loan losses, after this provision, of $1.5
million, represented 1.38 % of outstanding loans at March 31,
1998. Nonperforming loans as of March 31, 1998 were 1.12% of
total loans and below 1.0% at March 31, 1997.
Management evaluates the carrying value of the loan
portfolio periodically and the allowance is adjusted
accordingly. 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 insurance commissions from sales of credit life
insurance, banking service charges, loan origination and
commitment fees earned and sales of investment and
mortgage-backed securities. Noninterest income for the three
months ended March 31, 1998 was $236,400, compared to $71,500
for the three months ended March 31, 1997. This represents an
increase of $164,900. This increase is due primarily to
increases in loan fees earned as the Bank pursues its long term
goals of expanding its loan portfolio, and increases in service
fees on deposits.
Noninterest income for the nine months ended March 31,
1998, was $575,000, compared to $302,000 for the nine months
ended March 31, 1997. This represents an increase of $273,000.
This increase is due primarily to increases in loan fees earned
as a result of more aggressive lending activities and new fee
earning banking services offered by the Bank to its deposit
customers. In light of the increasingly competitive markets for
deposits and loans, management has recently shifted 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 compensation and benefits paid to the Bank's
employees and directors, occupancy expense for ownership and
maintenance of the Bank's building and furniture and equipment,
professional fees related to the sale of FSB and the
recruitment of additional managerial staff, and insurance
premiums paid to the FDIC for insurance of deposits. Total
noninterest expense for the three months ended March 31, 1998
was $1.6 million compared to $900,000 for the three months ended
March 31, 1997. Compensation expense, including director and
officer retirement plans and other benefits accounted for
$235,000 of the total increase in noninterest expenses of
$687,000. Other expenses, including total expenses of $130,000
related to the sale of FSB and the conversion of customer
accounts in the Monticello branch, were $260,000, compared to a
decrease of $138,000 for the three months ended March 31, 1997,
which resulted from the reclassification of expenses related to
the conversion of the Bank from a mutual to a stock association
and the formation of the holding company.
Total noninterest expense for the nine months ended March
31, 1998 was $4.4 million, compared to $4.1 million for the nine
months ended March 31, 1997. The largest component of
noninterest expense for the nine months ended March 31, 1998 was
compensation expense, including director and officer retirement
plans and other benefits, which totaled $2.2 million, compared
to $1.5 million for the nine months ended March 31, 1997. This
increase was attributable to increases in salary expense due to
an increase in personnel for future growth, accrual of
contributions to an Employee Stock Ownership Plan established in
conjunction with the conversion of the Bank to a stock
association, and increased directors fees due to additional time
incurred by the Board in evaluating and working on various
strategic plans for the Bank. Professional fees associated with
the sale of FSB amounted to $136,000; other costs associated
with the sale, including additional data processing costs and
costs to convert customer information totaled $53,000.
Professional fees were incurred in the nine months ended March
31, 1998 and 1997 for personnel placement services to attract
key personnel for hire and marketing consultants were approached
for market strategies and implementation. During the nine
months ended March 31, 1997, amounts were also incurred to
facilitate the name change of the Bank to HEARTLAND Community
Bank. These expense categories decreased $55,000 during the
nine months ended March 31, 1998 compared with the same period
in 1997. Overall, noninterest expense increased for the nine
month period ended March 31, 1998, compared to the nine-month
period ended March 31, 1997, by $1.1 million, exclusive of the
FDIC one time, special assessment of $889,000 recognized by the
Bank in the nine months ended March 31, 1997. 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, introducing new deposit
and loan products and services and implementing the planned
stock benefit plans after the Conversion, it is expected that
the Bank's noninterest expense levels may remain somewhat 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 increased loan originations in the areas of
multi-family residential, commercial real estate, commercial
business and consumer loans. Customer products introduced in
the current quarter include ATM and debit cards and an expanded
deposit account mix. In addition, two new branch facilities
were constructed and completed in the quarter ended September
30, 1997. Other existing facilities will be renovated to
attract and serve an increased customer base.
During the years in which thrifts as an industry suffered
many publicized and non-publicized "bailouts" by the SAIF, and
its predecessor, the Federal Savings and Loan Insurance
Corporation, the deposit insurance fund for the thrift industry
was severely depleted. After several years of debate Congress
with the assistance of the FDIC, which administers the SAIF,
consummated a plan of action to replenish the SAIF to a level of
coverage required by statute (the designated reserve ratio of
1.25% of insured deposits) for the remaining covered deposits.
The plan of remedy included a one time assessment to each thrift
institution based on capital levels and deposits, among other
factors. This one time assessment was recognized by the Bank in
the three months ended March 31, 1997, in the amount of $889,000
and was expensed in the same period. This assessment was paid
November 27, 1997. The effective deposit insurance rate prior
to the assessment was .23% compared to a rate of .065% after the
assessment.
Income Taxes. The effective income tax rate for the
Bank for the nine months ended March 31, 1998 and 1997 was 38.3%
which includes federal and Arkansas tax components. A tax
benefit of $261,900 for 1997 and an expense of $309,100 for 1998
were recognized, resulting in an increase of $571,000.
SOURCES OF CAPITAL AND LIQUIDITY
The Bank is required to maintain minimum levels of liquid
assets as defined by the OTS regulations. This requirement
which may be varied at the discretion of the OTS depending on
economic conditions and deposit outflows, is based upon a
percentage of deposits and short term borrowings. Current OTS
regulations require that a savings association maintain liquid
assets of not less than 5% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year
or less, of which short-term liquid assets must consist of not
less than 1%. At March 31, 1998, the Bank's liquidity, as
measured for regulatory purposes, was 14.32%, or $15.2 million
in excess of the minimum OTS liquidity requirement of 5%.
Management of the Bank seeks to maintain a relatively high level
of liquidity in order to retain flexibility in terms of
investment opportunities and deposit pricing and in order to
meet funding needs of loan commitments. Historically, the Bank
has been able to meet its liquidity demands through internal
sources of funding supplemented from time to time by advances
from the FHLB.
The Bank's primary sources of funds are deposits, 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 Bank
does not solicit deposits outside of its market area through
brokers or other financial institutions.
The Bank has also designated certain securities as
available for sale in order to meet liquidity demands. At March
31, 1998, the Bank had designated securities with a fair value
of approximately $67.8 million 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.
Another source of liquidity is the net proceeds of the
Conversion. Following the completion of the Conversion,
effective April 30, 1997, the Bank received over half of the net
proceeds of the Conversion. These funds are expected
to be used by the Bank for its business activities, including
investment in interest-earning assets.
For additional information about cash flows from the Bank's
operating, investing and financing activities see the
consolidated financial statements presented elsewhere herein.
At March 31, 1998, the Bank had outstanding $6.2 million in
commitments to originate loans (including unfunded portions of
construction loans) and $135,000 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 $59.0 million.
Management anticipates that the Bank will have adequate
resources to meet its current commitments through internal
funding sources described above. Historically, the Bank has
been able to retain a significant amount of its deposits as they
mature.
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.
As the year 2000 approaches, an important business issue
has emerged regarding how existing application software programs
and operating systems can accommodate this date value. Many
computer programs that can only distinguish the final two digits
of the year entered (a common programming practice in earlier
years) are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest or delinquency based on
the wrong date or are expected to be unable to compute payment,
interest or delinquency. Rapid and accurate data processing is
essential to the operations of the Company.
All of the material computer programs of the Company that
could be affected by this problem are provided by major third
party vendors. Currently, the Company is in the process of
replacing/upgrading all computer systems and programs, as well
as most equipment, in order to provide cost-effective and
efficient delivery of services to its customers, information to
management, and to provide additional capacity for processing
information and transactions due to acquisitions. The third
party vendors of the Company have advised the Company that all
such computer systems and programs will be year 2000 compliant.
However, if the third party vendors are unable to resolve year
2000 issues in time, the Company would likely experience
significant data processing delays, mistakes or failures. These
delays, mistakes or failures could have a significant adverse
impact on the financial condition and results of operations of
the Company.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
The tabular and narrative information set forth in this
report and in the registrant's most recent annual report on form
10-K discloses detailed quantitative and qualitative information
about market risks and their effects on the registrant,
particularly with respect to changes in market interest rates on
interest-earning assets and interest-bearing liabilities.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
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.
SIGNATURES
In accordance with the requirements of the Exchange Act,
the registrant caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
HCB BANCSHARES, INC.
Registrant
Date: July 7, 1998 /s/ Vida H. Lampkin
Vida H. Lampkin
Chairman, President and
Chief Executive Officer
(Duly Authorized Representative)
Date: July 7, 1998 /s/ J. Marcie Ainsworth
J. Marcie Ainsworth
Chief Financial Officer