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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: No. 0-22423
HCB Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Oklahoma 62-1670792
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
237 Jackson Street, Camden, Arkansas 71701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(870)836-6841
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 of 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock as of the latest practicable
date: 2,054,431 shares of common stock issued and outstanding as
of October 31, 1999.
CONTENTS
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Financial
Condition at September 30, 1999 (unaudited) and
June 30, 1999
Condensed Consolidated Statements of Income and
Comprehensive Income for the Three Months Ended
September 30, 1999 and 1998 (unaudited)
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended September 30, 1999 and 1998
(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
-2-
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1999 (UNAUDITED) AND JUNE 30, 1999
- ----------------------------------------------------------------
September 30,
1999 June 30,
ASSETS (unaudited) 1999
------------- ------------
Cash and due from banks $ 3,111,558 $ 3,560,884
Interest-bearing deposits with banks 463,493 975,330
------------ ------------
Cash and cash equivalents 3,575,051 4,536,214
Other interest bearing deposits with banks 99,000 718,000
Investment securities available for sale, at
fair value 142,188,773 147,119,689
Loans receivable, net of allowance 119,884,635 115,162,883
Accrued interest receivable 1,713,407 1,717,823
Federal Home Loan Bank stock 5,465,600 5,379,100
Premises and equipment, net 6,540,227 6,500,704
Goodwill, net 337,500 356,250
Real estate held for sale 337,329 463,478
Other assets 3,877,397 3,442,744
------------ ------------
TOTAL $284,018,919 $285,396,885
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $143,696,272 $146,296,598
Federal Home Loan Bank advances 107,280,603 104,523,419
Advance payments by borrowers for
taxes and insurance 164,988 128,442
Accrued interest payable 830,116 815,197
Note payable 160,000 240,000
Other liabilities 1,372,972 1,275,669
------------ ------------
Total liabilities 253,504,951 253,279,325
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 10,000,000 shares
authorized, 2,645,000 shares issued, 2,286,985
and 2,329,544 shares outstanding at September
30, 1999 and June 30, 1999, respectively 26,450 26,450
Additional paid-in capital 25,991,333 25,993,872
Unearned ESOP shares (1,428,300) (1,481,200)
Unearned MRP shares (342,107) (390,056)
Accumulated other comprehensive income (3,808,182) (2,620,673)
Retained earnings 13,727,477 13,831,694
------------ ------------
34,166,671 35,360,087
------------ ------------
Treasury stock, at cost, 358,015 and 315,456 shares
at September 30, 1999, and June 30, 1999,
respectively (3,652,703) (3,242,527)
------------ ------------
Total stockholders' equity 30,513,968 32,117,560
------------ ------------
TOTAL $284,018,919 $285,396,885
============ ============
See accompanying notes to condensed consolidated financial
statements.
-3-
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
- ----------------------------------------------------------------
Three Months Ended
September 30,
1999 1998
---- ----
INTEREST INCOME:
Interest and fees on loans $ 2,542,121 $ 2,246,672
Investment securities:
Taxable 1,925,810 1,889,881
Nontaxable 339,208 245,105
Other 90,858 142,999
----------- -----------
Total interest income 4,897,997 4,524,657
INTEREST EXPENSE:
Deposits 1,621,051 1,727,056
Federal Home Loan Bank advances 1,502,478 1,226,399
Note payable 4,500 5,500
----------- -----------
Total interest expense 3,128,029 2,958,955
----------- -----------
NET INTEREST INCOME 1,769,968 1,565,702
PROVISION FOR LOAN LOSSES -- --
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,769,968 1,565,702
NONINTEREST INCOME:
Service charges on deposit accounts 120,728 80,223
Gain on sales of investment securities
available for sale -- 119,743
Other 106,066 101,028
----------- -----------
Net noninterest income 226,794 300,994
----------- -----------
NONINTEREST EXPENSE:
Salaries and employee benefits 956,016 867,429
Net occupancy expense 220,293 156,627
Communication, postage, printing and office
supplies 91,228 80,029
Advertising 64,195 28,280
Data processing 82,472 80,887
Professional fees 426,275 129,839
Amortization of goodwill 18,750 18,750
Other 94,651 44,488
----------- -----------
Total noninterest expense 1,953,880 1,406,329
----------- -----------
INCOME BEFORE INCOME TAXES 42,882 460,367
INCOME TAX PROVISION 899 150,185
----------- -----------
NET INCOME $ 41,983 $ 310,182
----------- -----------
(Continued)
-4-
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
- ----------------------------------------------------------------
Three Months Ended
September 30,
1999 1998
---- ----
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:
Unrealized holding gain (loss) on securities
arsing during period (1,187,509) 745,784
Reclassification adjustment for gains
included in net income -- (119,743)
----------- ----------
Other comprehensive income (loss) (1,187,509) 626,041
----------- ----------
COMPREHENSIVE INCOME (LOSS) $(1,145,526) $ 936,223
=========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 2,161,695 2,459,585
=========== ==========
EARNINGS PER SHARE:
Basic $ 0.02 $ 0.13
=========== ==========
Diluted $ 0.02 $ 0.13
=========== ==========
DIVIDENDS PER SHARE $ 0.06 $ 0.06
=========== ==========
(Concluded)
See accompanying notes to condensed consolidated financial statements.
-5-
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
- ----------------------------------------------------------------
Three Months Ended
September 30,
1999 1998
---- ----
OPERATING ACTIVITIES:
Net income $ 41,983 $ 310,182
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 156,436 95,968
Amortization (accretion) of:
Deferred loan origination fees (62,201) (6,111)
Goodwill 18,750 18,750
Premiums and discounts on loans, net (1,339) (444)
Premiums and discounts on investment
securities, net 38,388 79,181
Net gain on sale of investment securities
available for sale -- (119,743)
Gain on disposal of other assets, net -- (1,871)
Originations of loans held for sale (2,839,090) (2,124,708)
Proceeds from sales of loans 3,327,336 2,066,467
Stock compensation expense 98,310 116,895
Change in accrued interest receivable 4,416 79,559
Change in accrued interest payable 14,919 80,193
Change in other assets 365,300 468,287
Change in other liabilities 97,303 (253,642)
----------- ------------
Net cash provided by operating
activities 1,260,511 808,963
INVESTING ACTIVITIES:
Purchases of investment securities -
available for sale (1,152,893) (34,493,032)
Purchases of Federal Home Loan Bank stock (86,500) (1,230,600)
Purchases of premises and equipment (195,959) (217,813)
Proceeds from sales or maturity of investment
securities -- 7,590,592
Proceeds from maturity of interest bearing
deposits 619,000 516,000
Loan originations, net of repayments (5,146,458) 853,397
Principal payments on investment securities 4,057,959 7,436,435
Proceeds from sales of real estate 126,149 16,000
----------- ------------
Net cash used by investing activities (1,778,702) (19,529,021)
(Continued)
-6-
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
- ----------------------------------------------------------------
Three Months Ended
September 30,
1999 1998
---- ----
FINANCING ACTIVITIES:
Net decrease in deposits $ (2,600,326) $ (2,010,322)
Advances from Federal Home Loan Bank 48,810,000 52,500,000
Repayment of Federal Home Loan Bank advances (46,052,816) (28,294,357)
Net increase (decrease) in advance payments
by borrowers for taxes and insurance 36,546 (32,324)
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)
Purchase of treasury stock (410,176) --
Dividends paid (146,200) (158,700)
------------ ------------
Net cash provided (used) by financing
activities (442,972) 20,360,044
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (961,163) 1,639,986
CASH AND CASH EQUIVALENTS:
Beginning of period 4,536,214 3,822,398
------------ ------------
End of period $ 3,575,051 $ 5,462,384
============ ============
See accompanying notes to condensed consolidated financial
statements.
-7-
HCB BANCSHARES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND CONSOLIDATION
HCB Bancshares, Inc. ("Bancshares"), incorporated under the
laws of the state of Oklahoma, is a bank holding company that
owns Heartland Community Bank and its subsidiary (the "Bank").
Bancshares' business is primarily that of owning the Bank, and
participating in the Bank's activities. The accompanying
condensed consolidated financial statements include the accounts
of Bancshares and the Bank and are collectively referred to as
the Company. All significant intercompany balances and
transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial
statements were prepared in accordance with instructions for
Form 10-Q. Accordingly, they do not include all of the
information required by generally accepted accounting
principles. The unaudited statements reflect all adjustments,
which are, in the opinion of management, necessary for fair
presentation of the financial condition and results of
operations. The statement of income and comprehensive income
for the three months ended September 30, 1999 is not necessarily
indicative of the results that may be expected for the Company's
fiscal year ending June 30, 2000. The unaudited condensed
consolidated financial statements and notes thereto should be
read in conjunction with the audited consolidated financial
statements and notes thereto for the year ended June 30, 1999,
contained in the Company's Annual Report on Form 10-K for the
year ended June 30, 1999.
NOTE 2 - EARNINGS PER SHARE
The weighted average number of common shares used to
calculate earnings per share for the quarters ended September
30, 1999 and 1998 were as follows:
1999 1998
-------- ---------
Basic weighted - average shares 2,161,695 2,459,585
Effect of dilutive securities 0 0
Diluted weighted - average shares 2,161,695 2,459,585
NOTE 3 - DECLARATION OF DIVIDENDS
At their meeting on August 19, 1999, the Board of Directors
declared a $.06 per share cash dividend on the common stock of
the Company. The cash dividend was paid on September 30, 1999
to the stockholders of record at the close of business on
September 15, 1999.
NOTE 4 - STOCK PURCHASED FOR OPTION BENEFIT TRUST
During the fiscal year ended June 30, 1999, the Company
purchased 144,706 shares and placed them in its stock option
plan trust. These shares are classified as treasury stock on
the accompanying condensed consolidated statement of financial
condition, are available for sale and are managed by the
trustees specifically for funding stock option benefits provided
to key employees. The total number of stock option shares
granted as of September 30, 1999 was 315,264 at an average of
$9.14 per share of which 146,074 were vested. This compares to
the total number of stock option shares granted as of June 30,
1999 of 315,168 at an average of $9.14 per share of which
146,106 were vested.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has various
outstanding commitments and contingent liabilities that are not
reflected in the accompanying consolidated financial statements.
In addition, the Company is a defendant in certain claims and
legal actions arising in the ordinary course of business. In
the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters is not
expected to have a material adverse effect on the consolidated
financial statements of the Company.
-8-
During the year ended June 30, 1998, a circuit court entered
a judgment against the Bank in the amount of $78,000 for breach
of contract regarding its alleged failure to provide a party the
right to purchase real estate formerly used as a branch
location. The Company appealed the judgment to the court of
appeals and on November 4, 1999, the Company was informed that
the appeal was successful and the lower court's decision was
reversed. No accrual of this possible loss had been made in the
consolidated financial statements.
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.
NOTE 6 - SUBSEQUENT EVENTS
During the month of October 1999, the Company purchased
170,216 shares for treasury stock at an average price of $9.625
per share. In addition, the Company purchased 62,338 shares at
an average price of $9.625 per share, and placed them in its
stock option plan trust.
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
When used in this Form 10-Q, the words or phrases "will
likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project" or similar expressions are
intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995.
Such statements are subject to risks and uncertainties including
changes in economic conditions in the Company's market area,
changes in policies by regulatory agencies, fluctuations in
interest rates, demand for loans in the Company's market area,
and competition that could cause actual results to differ
materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers
not to place undue reliance on any such forward-looking
statements, which speak only as of the date made.
The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could
cause the Company's actual results for future periods to differ
materially from any opinions or statements expressed with
respect to future periods in any current statements.
The Company does not undertake, and specifically disclaims
any obligation, to publicly release the result of any revisions
which may be made to any forward-looking statements to reflect
events or circumstances after the date of such statements or to
reflect the occurrence of anticipated or unanticipated events.
GENERAL
The Bank's principal business consists of attracting
deposits from the general public and investing those funds in
loans collateralized by first mortgages on existing
owner-occupied single-family residences in the Bank's primary
market area and loans collateralized by, to a lesser but growing
extent, commercial and multi-family real estate, consumer loans
and commercial business loans. The Bank also maintains a
substantial investment portfolio of mortgage-related securities,
municipals, and U.S. government and agency securities.
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.
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
-10-
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 that 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.
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 JUNE 30, 1999 AND SEPTEMBER
30, 1999
The Company had consolidated total assets of $284.0 million
and $285.4 million at September 30, 1999 and June 30, 1999,
respectively. During the three-month period ended September 30,
1999 the Company experienced an increase in its consolidated
loan portfolio from $115.2 million at June 30, 1999, to $119.9
million. During this same period, investments and
mortgage-backed securities and other short-term interest-earning
assets decreased from $148.8 million at June 30, 1999 to $142.8
million at September 30, 1999. The Company continues its
strategy of replacing securities with loans as opportunities
present themselves.
Deposits decreased slightly from $146.3 million at June 30,
1999 to $143.7 million at September 30, 1999. Although the
Bank's level of deposits has been sufficient to fund its loan
demand and provide for adequate liquidity, the deposit market
remains competitive. The outstanding balances of FHLB
borrowings increased slightly to replace the decrease in
deposits from $104.5 million at June 30, 1999, to $107.3 million
at September 30, 1999.
Stockholders' equity amounted to $30.5 million at September
30, 1999, and $32.1 million at June 30, 1999. The changes in
equity were primarily due to the increased unrealized loss on
investment securities available for sale, dividends paid, and
the purchase of treasury stock. At September 30, 1999, the
Bank's regulatory capital exceeded all applicable regulatory
capital requirements.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE-MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998
Net Income. Net income for the three months ended September
30, 1999 was approximately $42,000 compared to net income of
approximately $310,000 for the three months ended September 30,
1998. Explanations of primary changes to income and expense
items follow.
-11-
Interest Income. Interest income for the three months ended
September 30, 1999 increased approximately $373,000, or 8.25
percent compared to the three months ended September 30, 1998.
The increases were primarily due to increases in the average
balance of both loans and investment securities.
Interest Expense. Interest expense for the three months
ended September 30, 1999 increased approximately $169,000, or
5.71 percent compared to the three months ended September 30,
1998. The increase was primarily due to an increase in the
average balance of FHLB advances, which was slightly offset by a
decrease in the average balance of deposits.
As a result of the above changes, net interest income for
the three months ended September 30, 1999 increased
approximately $204,000, or 13.05 percent compared to the three
months ended September 30, 1998.
Provision for Loan Losses. The allowance for loan losses of
$1.3 million represented 1.03 percent of outstanding loans at
September 30, 1999, which compares to 1.08 percent at June 30,
1999. Nonperforming loans as of September 30, 1999, and June
30, 1999, as a percent of total loans, were 0.68% and 0.46%
respectively.
Management evaluates the carrying value of the loan
portfolio periodically and the allowance is adjusted if
necessary. While management uses the best information available
to make evaluations, future adjustments to the allowance may be
necessary if conditions differ substantially from the
assumptions used in making the evaluations. In particular,
management recognizes that recent and planned changes in the
amounts and types of lending by the Bank will result in further
growth of the Bank's loan loss allowance and may justify further
changes in the Bank's loan loss allowance policy in the future.
In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank
to recognize changes to the allowance based upon their judgments
and the information available to them at the time of their
examination.
Noninterest Income. Noninterest income is comprised
primarily of service charges on deposit accounts, and gains on
the sales of loans and investment securities. Noninterest
income for the three months ended September 30, 1999, was
approximately $227,000 compared to approximately $301,000 for
the three months ended September 30, 1998. This decrease for
the three-month period is due primarily to decreases in gains on
sales of investments, which were slightly offset by increases in
fees earned on checking and savings accounts, and net gain on
sales of loans. In light of the increasingly competitive
markets for deposits and loans, management has continued the
shifting of the Bank's deposit taking and loan origination
activities to reflect, among other things, the importance of
offering valued customer services that generate additional fee
income, and it is expected that management will continue this
trend for the foreseeable future.
Noninterest Expense. The major components of noninterest
expense are salaries and employee benefits paid to or on behalf
of the Company's employees and directors, occupancy expense for
ownership and maintenance of the Company's buildings, furniture,
and equipment, data processing expenses, and professional fees
paid to consultants, attorneys, and accountants. Total
noninterest expense for the three months ended September 30,
1999 was $1.95 million compared to $1.41 million for the three
months ended September 30, 1998. The increase was largely due
to increases in compensation expense, occupancy expense, and
professional fees. Management anticipates that future
professional fees will be significantly less than the three
months ended September 30, 1999.
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, 1999 and 1998 was 2.1%
and 32.6%, 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.
-12-
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,
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 savings deposits outside of its market area
through brokers or other financial institutions.
The Company has also designated all of its securities, as
available for sale in order to meet liquidity needs. At
September 30, 1999, and June 30, 1999, the Company had
designated securities with a fair value of approximately $142.2
million and $147.1 million, as available for sale, respectively.
In addition to internal sources of funding, the Bank as a member
of the FHLB has substantial borrowing authority with the FHLB.
The Bank's use of a particular source of funds is based on need,
comparative total costs, and availability.
At September 30, 1999, the Bank had outstanding $10.5
million in commitments to originate loans (including unfunded
portions of construction loans), and approximately $318,000 in
unused lines of credit. At the same date, the total amount of
certificates of deposit which were scheduled to mature in one
year or less was $85.6 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.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data
presented herein have been prepared in accordance with
instructions to Form 10-Q which require the measurement of
financial position and operating results in terms of historical
dollars, without considering changes in relative purchasing
power over time due to inflation.
Unlike most industrial companies, virtually all of the
Bank's assets and liabilities are monetary in nature. As a
result, changes in interest rates generally have a more
significant impact on a financial institution's performance than
do changes in the rate of inflation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
For a discussion of the Company's asset and liability
management policies as well as the potential impact of interest
rate changes upon the market value of the Bank's portfolio
equity, see "MARKET RISK" in the Company's Annual Report on Form
10-K for the year ended June 30, 1999. There has been no
material change in the Company's asset and liability position,
or the market value of the Bank's portfolio equity since June
30, 1999.
-13-
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
During the year ended June 30, 1998, a circuit court entered
a judgment against the Bank in the amount of $78,000 for breach
of contract regarding its alleged failure to provide a party the
right to purchase real estate formerly used as a branch
location. The Company appealed the judgment to the court of
appeals and on November 4, 1999, the Company was informed that
the appeal was successful and the lower court's decision was
reversed. No accrual of this possible loss had been made in the
consolidated financial statements.
In May, 1999, a shareholder filed a class action complaint
against the Company and several current and former officers
alleging that the defendants defrauded the plaintiff and other
shareholder class members through various public statements and
reports thereby artificially inflating the price of the
Company's common stock and causing the plaintiff and other
shareholder class members to purchase the Company's common stock
at inflated prices.
The Company and its counsel have reviewed the complaint
and intend to contest the allegations vigorously. Management is
unable to determine the likelihood of an unfavorable outcome of
the suit or the amount of damages that the Company may have to
pay, if any. The Company will incur costs through the payment
of legal fees and the related costs of litigation. The extent
of these costs is not determinable at this time. There has been
no change in the information available on this complaint since
June 30, 1999.
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
-14-
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: November 12, 1999 By: /s/ Vida H. Lampkins
--------------------------------
Vida H. Lampkin
Chairman, President and
Chief Executive Officer
(Duly Authorized Representative)
Date: November 12, 1999 By: /s/ Scott A. Swain
--------------------------------
Scott A. Swain
Vice President and
Chief Financial Officer
(Principal Financial Officer)
15