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 September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: No. 0-22423
HCB Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Oklahoma 62-1670792
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
237 Jackson Street, Camden, Arkansas 71701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(870)836-6841
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 of 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[ ] 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: 2,401,881 shares of common stock issued and outstanding as
of June 30, 1999.
CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Financial
Condition at September 30, 1998 (unaudited)
and June 30, 1998
Condensed Consolidated Statements of Income
and Comprehensive Income for the Three
Months Ended September 30, 1998 and 1997
(unaudited)
Condensed Consolidated Statements of Cash
Flows for the Three Months Ended September
30, 1998 and 1997 (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
1
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1998 (UNAUDITED) and JUNE 30, 1998
- ----------------------------------------------------------------
September 30, June 30,
ASSETS 1998 1998
------------ --------
Cash and due from banks $ 3,591,317 $ 1,531,363
Interest-bearing deposits with banks 1,871,067 2,291,035
------------ ------------
Cash and cash equivalents 5,462,384 3,822,398
Other interest bearing deposits with banks 2,266,000 2,782,000
Investment securities:
Available for sale, at fair value 121,580,240 99,472,916
Held to maturity, at amortized cost 25,424,636 27,503,257
Loans receivable, net of allowance 103,791,564 104,580,165
Accrued interest receivable 1,759,767 1,839,326
Federal Home Loan Bank stock 4,679,500 3,448,900
Premises and equipment 5,723,612 5,601,767
Goodwill, net 412,500 431,250
Real estate held for sale 549,097 461,190
Other assets 544,180 1,010,601
------------ ------------
TOTAL $272,193,480 $250,953,770
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $139,921,008 $141,931,330
Federal Home Loan Bank advances 92,326,711 68,121,068
Liability to purchase shares for management
retention plan 846,400
Advance payments by borrowers for
taxes and insurance 176,918 209,242
Accrued interest payable 724,080 643,887
Note payable 240,000 320,000
Other liabilities 949,277 1,202,919
------------ ------------
Total liabilities 234,337,994 213,274,846
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 10,000,000 shares
authorized, 2,645,000 issued, 2,572,631 and
2,645,000 shares outstanding at September 30,
1998 and June 30, 1998, respectively 26,450 26,450
Additional paid-in capital 26,000,960 25,861,230
Unearned ESOP shares (1,639,900) (1,692,800)
Unearned MRP shares (530,192) (578,528)
Treasury stock, at cost, 72,369 shares (841,925)
Accumulated other comprehensive income:
Unrealized gain on investment securities
available for sale, net of tax 679,948 53,907
Retained earnings 14,160,145 14,008,665
------------ ------------
Total stockholders' equity 37,855,486 37,678,924
------------ ------------
TOTAL $272,193,480 $250,953,770
============ ============
See accompanying notes to condensed consolidated financial
statements.
2
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
- ----------------------------------------------------------------
Three Months Ended 30,
1998 1997
-------- --------
INTEREST INCOME:
Interest and fees on loans $ 2,246,672 $ 2,113,234
Interest and dividends on investments:
Investment securities 556,540 335,963
Mortgage backed securities 1,578,446 888,394
Other interest income 142,999 287,458
----------- -----------
Total interest income 4,524,657 3,625,049
INTEREST EXPENSE:
Deposits 1,727,056 1,868,470
Federal Home Loan Bank advances 1,226,399 156,362
Note payable 5,500 7,000
----------- -----------
Total interest expense 2,958,955 2,031,832
----------- -----------
NET INTEREST INCOME 1,565,702 1,593,217
PROVISION FOR LOAN LOSSES 0 19,549
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,565,702 1,573,668
NONINTEREST INCOME:
Service charges on deposit accounts 80,223 55,352
Gain on sales of investment securities
available for sale 119,743 15,107
Other 101,028 83,413
----------- -----------
Net noninterest income 300,994 153,872
NONINTEREST EXPENSE:
Salaries and employee benefits 813,568 706,577
Net occupancy expense 156,627 155,228
Communication, postage, printing and
office supplies 80,029 38,390
Deposit and other insurance premiums 18,021 39,810
Advertising 28,280 36,492
Data processing 80,887 81,485
Expenses of officers, directors and
employees, including Directors' fees 53,861 56,115
Professional fees 129,839 56,731
Amortization of goodwill 18,750 31,184
Other 26,467 24,981
----------- -----------
Total noninterest expense 1,406,329 1,226,993
INCOME BEFORE INCOME TAXES 460,367 500,547
INCOME TAX PROVISION 150,185 172,418
----------- -----------
NET INCOME $ 310,182 $ 328,129
----------- -----------
(Continued)
3
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
________________________________________________________________
Three Months Ended 30,
1998 1997
-------- --------
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized holding gains on securities
arising during period 745,784 190,970
Less reclassification adjustment for
gains included in net income (119,743) (15,107)
----------- -----------
Other comprehensive income 626,041 175,863
COMPREHENSIVE INCOME $ 936,223 $ 503,992
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 2,459,585 2,450,756
=========== ===========
EARNINGS PER SHARE:
Basic $ 0.13 $ 0.13
Diluted $ 0.13 $ 0.13
DIVIDENDS PER SHARE $ 0.06 $ 0.05
See accompanying notes to condensed consolidated financial
statements.
4
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
________________________________________________________________
Three Months Ended 30,
1998 1997
-------- --------
OPERATING ACTIVITIES:
Net income $ 310,182 $ 328,129
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 95,968 75,329
Amortization (accretion) of:
Deferred loan origination fees (6,111) 15,633
Goodwill 18,750 31,184
Premiums and discounts on loans, net (444) (1,635)
Premiums and discounts on investment
securities, net 79,181 17,268
Provision for loan loss 19,549
Net gain on sale of investment securities
available for sale (119,743) (15,107)
Gain on disposal of other assets, net (1,871) (315)
Stock compensation expense 116,895 40,453
Change in accrued interest receivable 79,559 18,041
Change in accrued interest payable 80,193 (51,554)
Change in other assets 468,287 (862,305)
Change in other liabilities (253,642) 1,792,288
----------- -----------
Net cash provided by operating
activities 867,205 1,406,958
INVESTING ACTIVITIES:
Purchases of investment securities --
available for sale (34,493,032) (11,038,886)
Purchases of Federal Home Loan Bank stock (1,230,600) (4,200)
Purchases of premises and equipment (217,813) (933,929)
Proceeds from sales of loans 2,066,467 758,286
Proceeds from sales or maturity of
investment securities 7,590,592
Proceeds from maturity of interest bearing
deposits 516,000
Loan originations, net of repayments (1,213,070) (4,367,916)
Principal payments on investment securities 7,378,193 13,549,197
Proceeds from sales of foreclosed assets 16,000 12,351
----------- -----------
Net cash used by investing
activities (19,587,263) (2,025,097)
(Continued)
5
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
________________________________________________________________
Three Months Ended 30,
1998 1997
-------- --------
FINANCING ACTIVITIES:
Net decrease in deposits $(2,010,322) $(2,737,870)
Advances from Federal Home Loan Bank 52,500,000
Repayment of Federal Home Loan Bank
advances (28,294,357)
Net decrease in advance payments by
borrowers for taxes and insurance (32,324) 67,304
Repayment of note payable (80,000) (80,000)
Common stock acquired for stock option
benefit plan trust (841,925)
Stock purchased for MRP (722,328)
Dividends paid (158,700)
----------- -----------
Net cash provided (used) by
financing activities 20,360,044 (2,750,566)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,639,986 (3,368,705)
CASH AND CASH EQUIVALENTS:
Beginning of period 3,822,398 19,331,825
----------- -----------
End of period $ 5,462,384 $15,963,120
=========== ===========
See accompanying notes to condensed consolidated financial
statements.
6
HCB BANCSHARES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION AND CONSOLIDATION
HCB Bancshares, Inc. ("Bancshares") 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
subsidiary (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 Bancshares.
Bancshares 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.
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 results of operations. The statement of
operations for the three months ended September 30, 1998 is not
necessarily indicative of the results that may be expected for
the year ending June 30, 1999. 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, 1998,
contained in the Company's Annual Report on Form 10-K for the
Year Ended June 30, 1998.
NOTE 2 -- RECENTLY ADOPTED ACCOUNTING STANDARDS
The Company early-adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities as of October 1,
1998. This statement establishes accounting and reporting
standards for derivative instruments, including certain
derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value.
Concurrent with this adoption, investment securities with an
amortized cost of $27,503,257 and $25,424,636 and a market value
of $27,476,304 and $25,428,154 at June 30, 1998 and September
30, 1998, respectively, and categorized in the statements of
financial condition as held to maturity were transferred to
available for sale. This transfer from the held to maturity
category at the date of the initial adoption of SFAS No. 133
does not call into question the Company's intent to hold other
debt securities to maturity in the future. In addition, the
adoption of SFAS No. 133 had no other effect on the Bank other
than the reclassification of held to maturity securities to
available for sale.
In June 1997, FASB issued SFAS No. 130, Reporting
Comprehensive Income, which became effective for fiscal years
beginning after December 15, 1997, with reclassification of
earlier periods. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its
components. The Company adopted SFAS No. 130 in the quarter
ended September 30, 1998. Because the adoption of SFAS No. 130
requires only additional disclosures, it will not have a
material effect on the Company's consolidated financial
statements.
Note 3 Earnings per Share
The weighted average number of common shares used to
calculate earnings per share for the quarters ended September
30, 1998 and 1997 were as follows:
1998 1997
------ ------
Basic weighted -- average shares 2,459,585 2,450,756
Effect of dilutive securities 0 0
Diluted weighted average shares 2,459,585 2,450,756
7
NOTE 4 DECLARATION OF DIVIDENDS
At their meeting on August 20, 1998, the Board of Directors
declared a $.06 per share cash dividend on the common stock of
the Company. The cash dividend was paid on September 25, 1998
to the stockholders of record at the close of business on
September 10, 1998.
NOTE 5 STOCK PURCHASED FOR OPTION BENEFIT TRUST
During the months of August and September of 1998, the
Company purchased 72,369 shares of its common stock for its
stock option plan trust. These shares are classified as
treasury stock on the accompanying condensed consolidated
statement of financial condition, are available for sale and are
managed by the trustees specifically for funding stock option
benefits provided to key employees. The total number of stock
option shares granted as of September 30, 1998 was 306,172 at
$16 per share of which 72,369 were vested.
NOTE 6 SUBSEQUENT EVENT DISCLOSURE
In May, 1999, a shareholder filed a class action complaint
against the Company and several current and former officers
alleging that the defendants defrauded the plaintiff and other
shareholder class members through various public statements and
reports thereby artificially inflating the price of the
Company's common stock and causing the plaintiff and other
shareholder class members to purchase the Company's common stock
at inflated prices.
The Company and its counsel have reviewed the complaint and
intend to contest the allegations vigorously. Management is
unable to determine the likelihood of an unfavorable outcome of
the suit or the amount of any damages that the Company may have
to pay, if any. The Company will incur costs through the
payment of legal fees and the related costs of litigation. The
extent of these costs is not determinable at this time.
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.
8
GENERAL
The Bank's principal business consists of attracting
deposits from the general public and investing those funds in
loans collateralized by first mortgages on existing
owner-occupied single-family residences in the Bank's primary
market area and, loans collateralized by, to a lesser but
growing extent, commercial and multi-family real estate,
consumer loans and commercial business loans. The Bank also
maintains a substantial investment portfolio of mortgage-related
securities, municipals, and U.S. government and agency
securities.
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 securities and other fees. In addition,
net income is affected by the level of noninterest expense,
which primarily consists of employee compensation expenses, net
occupancy expense, professional fees, 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. Demand for and supply of credit, competition among
lenders and the level of interest rates in the Bank's market
area influence lending activities. The Bank's deposit flows and
costs of funds are influenced by prevailing market rates of
interest on competing investments, as well as account maturities
and the levels of personal income and savings in the Bank's
market area.
YEAR 2000 READINESS DISCLOSURE
The Company realizes the challenges of the year 2000 issue.
In compliance with regulatory guidelines, a committee was
assembled to review the effects the century change would have on
the Company's systems and to assess the potential risks that it
presents. A formal plan of action was developed to address this
issue. This plan was approved by the Board of Directors, and
has the full support of senior management. An inventory of
internal systems, both computer and non-computer related, was
completed in this process. Relationships with third party
vendors were also analyzed. Potential weaknesses were then
documented and prioritized as to their effect on critical
business functions. The Company was already in the process of
selecting a new data-processing system to facilitate its
business plan. Year 2000 compliance became an important issue
in the selection process. A vendor with a year 2000 compliant
system was selected and conversion was completed in the quarter
ended December 1998. This system had undergone thorough testing
prior to its installation. All the user departments were
involved in review of the test results and in additional onsite
testing. This testing process revealed no year 2000 related
problems. Testing also took place for external parties with
which the Bank exchanges significant information. In addition,
testing was performed on all other mission critical information
systems. It is believed that this thorough process has
increased the likelihood of uninterrupted operation of the Bank.
Seven vendors have been identified as "mission critical".
All seven have indicated that they are presently year 2000
compliant. The Company's internal operating systems have been
tested, and those which failed have been replaced. Replacement
systems have been tested and passed. As a result of this
process, all of the internal operating systems have been
determined to be year 2000 compliant.
9
In addressing the year 2000 issue, the Bank has used its
current internal staffing with little reliance on outside
resources. Major vendors have provided compliant software at no
additional expense to the Bank. Replacement of the main data-
processing system has cost approximately $650,000.
Rapid and accurate data processing is essential to Company
operations. System failures could have an adverse impact on the
Company. In the unlikely event that some year 2000 issues
remain undetected, management, through its ongoing year 2000
process, will mobilize all internal and external resources
available to correct any systems which are critical to the
Bank's operations. Contingency plans have been developed to
address potential problem areas. Management expects as a result
of its efforts that any impact of the year 2000 upon its
operations will be minimal.
Because the Company has not historically engaged in typical
commercial lending, less than 40 non-real estate commercial
borrowers are deemed to be potentially vulnerable to year 2000
problems. The Company has contacted these customers by mail,
and by telephone requesting information as to their
preparedness. They have responded, but the overall level of
planning was not high.
The Company's most reasonably likely worst-case year 2000
scenario foreseeable at this time would involve failures by
suppliers of electricity and telephone service. Those suppliers
have provided increased assurance of continuity of service, and
the United States Senate Special Committee on the Year 2000
Technology Problem has stated its belief that there is currently
less than a 10 percent chance that the power grid will fail.
The Committee indicated that while isolated outages may occur,
they will not be widespread or long lived.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND JUNE
30, 1998
The Company had consolidated total assets of $272 million
and $251 million at September 30, 1998 and June 30, 1998,
respectively. During the three-month period ended September 30,
1998 the Bank experienced a slight decrease in its loan
portfolio from $104.6 million at June 30, 1998, to $103.8
million. The Bank's ability to expand its lending base and the
size of its loan portfolio continues to be constrained by the
lack of strong loan demand and competition. During this same
period, investments and mortgage-backed securities and other
short-term interest-earning assets increased from $132.0 million
at June 30, 1998 to $151.1 million at September 30, 1998. Due
to the lack of strong loan demand, investment securities were
purchased in order to increase net income and to facilitate
improvements in the Bank's interest rate risk management
program. Included in the investment portfolio as of September
30, 1998, are approximately $18.6 million in municipal
bond securities which carry an average coupon rate of 4.84
percent, and an estimated after tax equivalent yield of 6.88
percent.
Deposits decreased from $141.9 million at June 30, 1998 to
$139.9 million at September 30, 1998. This represents a 1.4
percent decrease in deposits. Although the Bank's level of
deposits has been sufficient to fund its loan demand and provide
for adequate liquidity, the deposit market is also competitive.
To fund this decrease during the three-month period ended
September 30, 1998, the Bank utilized its ability to borrow from
the FHLB of Dallas. Additionally, the Bank borrowed from the
FHLB to fund increases in its investment portfolio. The
outstanding balances of FHLB borrowings were $92.3 million and
$68.1 million at September 30, 1998 and June 30, 1998,
respectively. The result of the borrowings was to reduce
interest rate risk by better matching rate indexes and
maturities of interest-earning assets to interest-
bearing liabilities, and maximize potential interest income
while maintaining capital ratios well in excess of required
minimums.
10
Stockholders' equity amounted to $37.9 million at September
30, 1998, and $37.7 million at June 30, 1998. The changes in
equity were primarily due to the Company's net income earned for
the three-month period ended September 30, 1998, the purchase of
stock for stock benefit plans, and the changes to unrealized
gain on investment securities available for sale. The Company
also fulfilled its obligation to purchase stock for the
management recognition plan and bought shares for potential use
for its stock option plan. At September 30, 1998, the Bank's
regulatory capital substantially exceeded all applicable
regulatory capital requirements.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
Net Income. Net income for the three months ended
September 30, 1998 was $310,182 compared to $328,129 for the
three months ended September 30, 1997. Explanations of primary
changes to income and expense follow.
Interest Income. Interest income for the three months
ended September 30, 1998 increased $899,608, compared to the
three months ended September 30, 1997. The increase was
primarily due to an increase in the average balance of
investment securities.
Interest Expense. Interest expense for the three months
ended September 30, 1998 increased $927,123 compared to the
three months ended September 30, 1997. The increase was
primarily due to an increase in the average balance of FHLB
advances.
Provision for Loan Losses. The allowance for loan losses of
$1.5 million, represented 1.39 percent of outstanding loans at
September 30, 1998, which compares to 1.38 percent at June 30,
1998. Loans past due 90 days or more as of September 30, 1998
and June 30, 1998, as a percent of total loans, were 0.60% and
0.75% respectively.
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 service charges on deposit accounts, gains on the
sales of investment securities, rental of safe deposit boxes,
and sales of credit life insurance. Noninterest income for the
three months ended September 30, 1998, was $300,994, compared to
$153,872 for the three months ended September 30, 1997. This
increase is due primarily to increases in gains on sales of
investments and mortgage backed securities, 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 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.
11
Noninterest Expense. The major components of noninterest
expense are salaries and employee benefits paid to or on behalf
of the Bank's employees and directors, occupancy expense for
ownership and maintenance of the Bank's buildings, furniture,
and equipment, data processing expenses, and professional fees
paid to consultants, attorneys, and accountants. Total
noninterest expense for the three months ended September 30,
1998 was $1.4 million, compared to $1.2 million for the three
months ended September 30, 1997. The increase was largely due
to compensation expense, communication expense, and increases 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 September 30, 1998 and 1997 was 32.6%
and 34.4%, respectively, which includes federal and Arkansas
state tax components.
SOURCES OF CAPITAL AND LIQUIDITY
The Company has no business other than that of the Bank.
Bancshares' primary sources of liquidity are cash, dividends
paid by the Bank, and earnings on investments. 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,
proceeds from principal 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 savings deposits outside of its market area through
brokers or other financial institutions.
At September 30, 1998, the Bank had designated securities
with a fair value of approximately $121.6 million as available
for sale. Subsequent to September 30, 1998, the Bank added the
remaining $25.4 in investment securities previously classified
as held to maturity, to available for sale, with a fair value of
approximately $25.4 million. 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 September 30, 1998, the Bank had outstanding $4.9
million in commitments to originate loans (including unfunded
portions of construction loans) and $9.1 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
$53.3 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.
12
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
does 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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Company's Annual
Report on Form 10-K for the Year Ended June 30, 1998. 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, 1998.
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
See Note 6, Subsequent Event Disclosure, to Condensed
Consolidated Financial Statements (Unaudited).
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
13
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 19, 1999 By: /s/ Vida H. Lampkins
--------------------------------
Vida H. Lampkin
Chairman, President and
Chief Executive Officer
Date: July 19, 1999 By: /s/ Scott A. Swain
--------------------------------
Scott A. Swain
Vice President and
Chief Financial Officer