<PAGE>
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FORM 10-Q
(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 December 31, 1997
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: 2,645,000 shares.
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CONTENTS
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Statements of Financial Condition
December 31, 1997 (Unaudited) and June 30,
1997
Consolidated Statements of Operations
(Unaudited) Three Months and Six Months Ended
December 31, 1997 and 1996
Consolidated Statements of Cash Flows
(Unaudited) Six Months Ended December 31,
1997 and 1996
Notes to Consolidated Financial Statements
(Unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
SIGNATURES
<PAGE>
<PAGE>
HCB BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 1997 and June 30, 1997
(Unaudited)
ASSETS
------
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ -----------
<S> <C> <C>
Cash on hand $ 1,254,749 1,182,210
Interest-bearing deposits 13,275,222 18,273,882
Investment securities available for sale 18,058,109 16,155,755
Mortgage-backed securities
Available for sale 24,862,402 20,090,406
Held to maturity (estimated market value of 31,870,684 35,869,295
$39,028,601 and $36,194,353, respectively)
Stock in Federal Home Loan Bank 1,269,500 1,246,500
Loans receivable (net of allowance of $1,502,149 104,515,970 98,642,635
and $1,492,473, respectively)
Accrued interest receivable 1,476,726 1,339,455
Foreclosed assets 7,063 36,179
Land held for sale 130,000 130,000
Premises and equipment 3,896,170 2,778,006
Goodwill 1,334,131 1,415,223
Prepaid expenses and other assets 2,993,710 3,206,232
------------ -----------
$204,944,436 200,365,778
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial
statements.
<PAGE>
<PAGE>
HCB BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 1997 and June 30, 1997
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ -----------
<S> <C> <C>
Liabilities
Deposits $148,457,790 151,208,763
Advances from borrowers for
taxes, insurance and other 254,272 209,140
Borrowings from Federal Home Loan Bank 16,109,072 10,000,000
Accrued interest payable 353,096 410,477
Accrued expenses and other liabilities 1,551,973 797,885
------------ ------------
Total liabilities 166,726,203 162,626,265
------------ ------------
Stockholders' equity
Common stock, $.01 par value; authorized
10,000,000 share; issued and
outstanding 2,645,000 shares 2,645 2,645
Additional paid-in capital 25,751,381 25,794,471
Note receivable from ESOP (2,116,000) (2,116,000)
Retained earnings 14,436,327 14,091,750
Unrealized gain(loss) on securities
available for sale, net 143,880 (33,353)
------------ ------------
Total stockholders' equity 38,218,233 37,739,513
------------ ------------
$204,944,436 200,365,778
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial
statements.
<PAGE>
<PAGE>
HCB BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
For the Three Months and Six Months Ended
December 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------- -------------------
1997 1996 1997 1996
------- -------- ------- -------
<S> <C> <C> <C> <C>
Interest income
Loans $2,143,096 2,033,513 4,309,330 3,869,580
Investment securities 312,472 277,711 648,435 392,565
Mortgage-backed securities 857,442 894,843 1,745,836 1,837,282
Other interest income 285,661 66,643 573,116 263,226
---------- --------- --------- ---------
Total interest income 3,598,671 3,272,710 7,276,720 6,362,653
---------- --------- --------- ---------
Interest expense
Deposits 1,842,660 1,862,530 3,711,130 3,757,994
Borrowings from FHLB 196,916 173,991 353,278 329,926
Other interest 6,000 8,027 13,000 10,000
---------- --------- --------- ---------
Total interest expense 2,045,576 2,044,548 4,077,408 4,097,920
---------- --------- --------- ---------
Net interest income 1,553,095 1,228,162 3,199,312 2,264,733
Provision for loan losses 4,451 15,927 24,000 143,324
---------- --------- --------- ---------
Net interest income after
provision for loan losses 1,548,644 1,212,235 3,175,312 2,121,409
---------- --------- --------- ---------
Noninterest income
Service fees on deposits 71,669 59,547 127,021 89,091
Other service fees and
commissions 6,571 2,132 16,730 3,932
Gains on sales of assets
available for sale or held
for sale 11,823 1,310 26,930 1,310
Gain(loss) on foreclosed assets,
net 11,086 4,856 12,437 2,500
Loan fees earned 43,966 41,569 94,618 66,927
Other income, net 39,813 40,119 61,064 58,434
---------- --------- --------- ---------
Total noninterest income 184,928 149,533 338,800 222,194
---------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<PAGE>
HCB BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
For the Three Months and Six Months Ended
December 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------- -------------------
1997 1996 1997 1996
------- -------- ------- -------
<S> <C> <C> <C> <C>
Noninterest expense
Compensation, payroll taxes and
fringe benefits 753,005 553,423 1,482,582 1,026,604
Occupancy and equipment 138,228 101,838 276,496 195,754
Communication, postage, printing
and office supplies 114,612 80,514 217,002 163,928
Deposit and other insurance
premiums 41,205 95,211 81,015 1,078,007
Advertising 43,810 89,124 80,302 128,032
Expenses of officers, directors
and employees, including
directors' fees 67,325 58,663 123,350 81,030
Data processing expense 103,773 101,703 185,258 161,730
Professional fees 135,965 90,331 196,696 208,338
Other expenses 65,215 180,694 133,290 231,866
---------- --------- --------- ---------
Total noninterest expense 1,463,048 1,351,501 2,775,991 3,275,289
---------- --------- --------- ---------
Income (loss) before income tax
expense (benefit) 270,524 10,267 738,121 (931,686)
Income tax expense(benefit) 99,286 (31,176) 274,704 (391,850)
---------- --------- --------- ---------
Net income(loss) $ 171,238 41,443 463,417 (539,836)
========== ========= ========= =========
Earnings per common share $ 0.07 N/A $ 0.18 N/A
========== ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<PAGE>
HCB BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Three Months and Six Months Ended
December 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------- -------------------
1997 1996 1997 1996
------- -------- ------- -------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income(loss) $171,198 41,443 463,417 (539,836)
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation 71,782 46,905 147,111 90,007
Amortization (accretion) of
Deferred loan origination fees (5,824) 18,993 9,809 18,993
Goodwill 49,908 40,019 81,092 80,037
Premiums and discounts on loans (1,634) (531) (3,269) (531)
Premiums and discounts on
mortgage-backed securities and
investment securities 81,704 47,217 98,972 86,636
Deferred income taxes -- (35,414) -- (35,414)
Provision for loan losses 4,451 15,927 24,000 143,324
Provision for loss on foreclosed
assets -- 15,247 -- 15,247
(Gain) loss on disposition of
other assets (13,647) 6,236 (13,962) 3,118
Net (gain) loss on sale of assets held
for sale or available for sale (26,930) -- (26,930) --
Increase in accrued interest
receivable (127,815) (59,077) (137,271) (175,127)
Decrease in other assets 1,353,987 304,001 212,522 1,499
Decrease in accrued interest payable (5,827) (26,703) (57,381) (3,825)
Increase (decrease) in other
liabilities (1,139,771) (966,070) 754,088 (241,255)
Increase in prepaid income taxes -- (400,734) -- (400,734)
---------- ---------- ---------- ----------
Net cash provided (used) by
operating activities 411,582 (952,541) 1,552,198 (957,861)
Cash flows from investing activities:
Net change in loans ( 7,318,951)(6,844,198) (8,120,718) (12,176,436)
Purchase of loans -- (1,304,560) -- (1,304,560)
Proceeds from sales of loans 1,364,067 1,410,336 2,122,353 1,410,336
Purchases of investment securities
available for sale (10,779,062)(5,013,700)(21,817,948) (17,208,700)
Principal payments on investment
securities and mortgage-backed
and related securities 9,153,299 11,814,337 19,335,497 15,246,037
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<PAGE>
HCB BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Three Months and Six Months Ended
December 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------- ---------------------
1997 1996 1997 1996
------- -------- ------- ---------
<S> <C> <C> <C> <C>
Purchase of stock in FHLB (18,800) -- (23,000) --
Purchases of property and equipment (294,815) (269,367) (1,228,744) (1,455,316)
Proceeds from sale of foreclosed assets 108,693 -- 121,044 --
Proceeds from sale of other assets 1,525 -- 1,525 3,215
Dividends paid (132,250) -- (132,250) --
---------- ---------- ---------- -----------
Net cash used by investing
activities (7,916,294) (207,152) (9,742,241)(15,485,424)
---------- ---------- ---------- -----------
Cash flows from financing activities:
Net increase (decrease) in deposits 3,069 4,093,207 (2,750,973) 5,346,700
Increase (decrease) in advance payments
from borrowers for property taxes
and insurance (40,578) (42,144) 26,726 --
Net borrowings from FHLB 6,109,072 -- 6,109,072 --
Increase (decrease) in other borrowings -- -- (80,000) 400,000
Cost of issuance of common stock -- -- (40,903) --
---------- ---------- ---------- -----------
Net cash provided by
Financing activities 6,071,563 4,051,063 3,263,922 5,746,700
Net increase(decrease) in cash (1,433,149) 2,891,370 (4,926,121)(10,696,585)
Cash and due from banks,
beginning of period 15,963,120 3,703,927 19,456,092 17,291,882
----------- ---------- ---------- -----------
Cash and due from banks,
end of period $14,529,971 6,595,297 14,529,971 6,595,297
=========== ========== ========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest $ 2,037,659 2,087,330 4,134,789 4,101,745
=========== ========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<PAGE>
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 unaudited consolidated financial statements
were prepared in accordance with instructions for Form 10-QSB.
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 Bank's audit report for the 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 six
months periods ended December 31, 1997 and 1996. The statements
of operations for the three-month and six-month periods ended
December 31, 1997, 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 net 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 4 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.,
parent of HEARTLAND Community Bank, FSB ("FSB"), subject to
approval of the transaction by the OTS. Pursuant
to the terms of the agreement, the Bank will acquire the loans
and certain other assets and liabilities of the Little Rock,
Arkansas branch of FSB and all assets and liabilities of the
Monticello, Arkansas branch and the Bryant, Arkansas loan
production offices of FSB. Approval of the transaction was
granted in February, 1998 with an anticipated closing date of
February 20, 1998.
<PAGE>
<PAGE>
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 DECEMBER 31, 1997 AND JUNE
30, 1997
The Company had total assets of $204.9 million and $200.4
million at December 31, 1997 and June 30, 1997, respectively.
During the six month period ended December 31, 1997 the Bank
experienced an increase in its loan portfolio from $98.6 million
at June 30, 1997, to $104.5 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
$88.1 million at December 31, 1997. Investment securities and
other short-term interest-earning deposits tend to vary in
conjunction with variations in savings activity. Additionally,
the Bank expended approximately $1.2 million to purchase
computer and network equipment, furnishings and make
improvements to existing facilities during the six-month period
ended December 31, 1997, to consummate management's planned
growth projections.
Deposits decreased from $151.2 million at June 30, 1997
to $148.5 million at December 31, 1997. This decrease in
deposits of $2.7 million resulted from increased competition
in the Bank's main market area of Camden, Arkansas and the
announcement of the proposed sale of the deposits at the Little
Rock branch. The Bank's level of deposits has been sufficient
to fund its loan demand and provide for adequate liquidity.
During the six-month period ended December 31, 1997 and the year
ended June 30, 1997, the Bank utilized a credit line with the
FHLB of Dallas to obtain advances. The outstanding balances of
FHLB advances were $16.1 million and $10.0 million at December
31, 1997 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 December 31, 1997, and
to $37.7 million at June 30, 1997, respectively. The changes in
equity were due solely 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 December 31, 1997
were not substantially different from those at June 30, 1997.
<PAGE>
<PAGE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED
DECEMBER 31, 1997 AND 1996
Net Income (Loss). Net income for the three months ended
December 31, 1997 was $463,000 compared to a loss of $540,000
for the six months ended December 31, 1996. The changes were
attributable to a non-recurring one time, special deposit
insurance assessment of $889,000 and professional fees of
$148,000, incurred in the six months ended December 31, 1996,
an increase in net interest income of $900,000 and an increase
in noninterest income of $117,000 for the six months ended
December 31, 1997, as compared to the six months ended December
31, 1996. Income tax expense for the six months ended December
31, 1997 was a tax expense of $275,000 compared to a tax benefit
of $392,000 for the six months ended December 31, 1996.
Net Interest Income. Net interest income for the six
months ended December 31, 1997 was $3.2 million, an increase of
41.27% when compared to net interest income of $2.3 million for
the six months ended December 31, 1996. This increase was
attributable to an increase in total interest income of $914,000
and a decrease in total interest expense of $21,000. The net
interest margin for the six months ended December 31, 1997 was
3.25% compared to 2.66% for the six months ended December 31,
1996. This increase in net interest income and net interest
margin is due to an increase in the average volume of interest-
earning assets, combined with an increase in the average rate
paid on interest-earning assets. One cause for the increase in
average interest-earning assets when comparing the
six months ended December 31, 1997 to the six months ended
December 31, 1996 was the acquisition of the subsidiary,
Heritage Bank, FSB in May of 1996. The average volume of
interest-earning assets increased from $167.9 million for the
six months ended December 31, 1996 to $193.5 million for the six
months ended December 31, 1997 which had the effect of
increasing total interest income by $827,000. The average
rate paid on interest-bearing liabilities increased during the
six months ended December 31, 1997 to 5.22% from 5.17% for the
six months ended December 31, 1996. The increase in the average
rate on interest-bearing liabilities had the effect of
increasing total interest expense between the six months ended
December 31, 1996 and the six months ended December 31, 1997 by
approximately $60,000.
For the six months ended December 31, 1997, the average
yield on interest-earning assets was 7.52%, compared to 7.48%
for the six months ended December 31, 1996, which had the effect
of increasing total interest income by $120,000. The average
volume of interest-bearing liabilities decreased by 3.16%,
reflecting the change in deposits and the utilization of
liquidity in the implementation of the Bank's long term business
plan for growth in its targeted markets. when comparing December
31, 1997 to December 31, 1996. This volume decrease attributed
to an decrease in total interest expense of $81,000.
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 six months ended
December 31, 1997 of $24,000, compared to a provision for loan
loss of approximately $143,300 in the six months ended December
31, 1996. The allowance for loan losses, after this
provision, of $1.5 million, represented 1.47 % of outstanding
loans at December 31, 1997. Nonperforming loans as of December
31, 1997 and 1996, as a percent of total loans, remained below
1.0%.
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.
<PAGE>
<PAGE>
Non-interest 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 six months ended
December 31, 1997, was $338,800, compared to $222,200 for the
six months ended December 31, 1996. This represents an increase
of $116,600. 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,
and insurance premiums paid to the FDIC for insurance of
deposits. Total noninterest expense for the six months ended
December 31, 1997 was $2.8 million, compared to $3.2 million for
the six months ended December 31, 1996. The decrease was
largely due to a one time, special assessment by the FDIC to the
Bank to replenish the SAIF depleted by prior years losses in the
thrift industry. 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 December 31, 1996, in the
amount of $889,000 and was expensed in the same period. This
assessment was paid November 27, 1996. The effective deposit
insurance rate prior to the assessment was .23% compared to a
rate of .065% after the assessment. The second largest
component of noninterest expense for the six months ended
December 31, 1997 was compensation expense, including director
and officer retirement plans and other benefits, which totaled
$1.5 million, compared to $1.0 million for the six months ended
December 31, 1996. 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. During the six month
ended December 31, 1996, amounts were incurred to facilitate the
name change of the Bank to HEARTLAND Community Bank. In
addition, fees were incurred for personnel placement services to
attract key personnel for hire, a computer consultant was
engaged to evaluate operating systems and further growth needs,
and marketing consultants were approached for market strategies
and implementation. These expense categories decreased $60,000
during the six months ended December 31, 1997 compared with the
same period in 1996. Overall, noninterest expense increased for
the six month period ended December 31, 1997, compared to the
six month-period ended December 31, 1996, by approximately
$390,000, exclusive of the FDIC one time, special assessment.
Included in noninterest expenses for the six months ended
December 31, 1997 was a charge for the amortization of goodwill
of $81,000, which resulted from the acquisition of the
subsidiary bank during the year ended June 30, 1996. The
amortization will be $162,200 per year over a ten year period,
subsequent to June 30, 1997, and is not expected to have a
material effect on the future earnings of the Bank.
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 to be introduced 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.
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Income Taxes. The effective income tax rate for the Bank
for the three months ended December 31, 1997 and 1996 was 38.3%
which includes federal and Arkansas tax components. A tax
benefit of $392,000 for 1996 and an expense of $275,000 for 1997
was recognized, resulting in an increase of $667,000.
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 December 31, 1997, the Bank's liquidity, as
measured for regulatory purposes, was 20.1%, or $25.4 million in
excess of the minimum OTS liquidity requirement of 5%, and 10.0%
or $13.3 million in excess of the OTS short term liquidity
requirement of 1%. 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 of Dallas.
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
December 31, 1997, the Bank had designated securities with a
fair value of approximately $42.9 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 December 31, 1997, the Bank had outstanding $6.8
million in commitments to originate loans (including unfunded
portions of construction loans) and $35,000 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
$59.2 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.
<PAGE>
YEAR 2000 COMPLIANCE
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 Corporation.
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.
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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: April __, 1998 By: /s/ Vida H. Lampkin
----------------------------------
Vida H. Lampkin
Chairman, President and
Chief Executive Officer
Date: April __, 1998 By: /s/ J. Marcie Ainsworth
----------------------------------
J. Marcie Ainsworth
Vice President and
Chief Financial Officer
