<PAGE>
<PAGE>
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 December 31, 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: 2,322,044 shares of common stock issued and outstanding as
of July 31, 1999.
<PAGE>
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CONTENTS
PART 1. FINANCIAL INFORMATION
---------------------
Item 1. Condensed Consolidated Financial Statements
-------------------------------------------
Condensed Consolidated Statements of Financial
Condition at December 31, 1998 (unaudited) and June
30, 1998
Condensed Consolidated Statements of Income and
Comprehensive Income for the Three Months and Six
Months Ended December 31, 1998 and 1997 (unaudited)
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended December 31, 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
2
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HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 (UNAUDITED) AND JUNE 30, 1998
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1998 1998
------------ --------
<S> <C> <C>
Cash and due from banks $ 2,869,831 $ 1,531,363
Interest-bearing deposits with banks 4,303,925 2,291,035
------------ ------------
Cash and cash equivalents 7,173,756 3,822,398
Other interest bearing deposits with banks 1,750,000 2,782,000
Investment securities:
Available for sale, at fair value 146,801,198 99,472,916
Held to maturity, at amortized cost 27,503,257
Loans receivable, net of allowance 108,183,076 104,580,165
Accrued interest receivable 1,853,089 1,839,326
Federal Home Loan Bank stock 5,238,700 3,448,900
Premises and equipment, net 5,815,502 5,601,767
Goodwill, net 393,750 431,250
Real estate held for sale 445,190 461,190
Other assets 1,210,501 1,010,601
------------ ------------
TOTAL $278,864,762 $250,953,770
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $142,165,710 $141,931,330
Federal Home Loan Bank advances 97,973,884 68,121,068
Liability to purchase shares for
management retention plan 846,400
Advance payments by borrowers for taxes and insurance 241,694 209,242
Accrued interest payable 768,841 643,887
Note payable 240,000 320,000
Other liabilities 965,735 1,202,919
------------ ------------
Total liabilities 242,355,864 213,274,846
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 10,000,000
shares authorized, 2,645,000 issued,
2,495,294 and 2,645,000 shares outstanding at 26,450 26,450
December 31, 1998 and June 30, 1998, respectively
Additional paid-in capital 26,001,595 25,861,230
Unearned ESOP shares (1,587,000) (1,692,800)
Unearned MRP shares (481,856) (578,528)
Treasury stock, at cost, 149,706 shares (1,688,624)
Accumulated other comprehensive income:
Unrealized gain on investment securities
available for sale, net of tax 224,229 53,907
Retained earnings 14,014,104 14,008,665
------------ ------------
Total stockholders' equity 36,508,898 37,678,924
------------ ------------
TOTAL $278,864,762 $250,953,770
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME FOR THE THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31,
1998 AND 1997
(UNAUDITED)
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
----------------- -----------------
1998 1997 1998 1997
-------- -------- ------- -------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $2,218,325 $2,091,096 $4,464,997 $4,204,330
Interest and dividends on investments:
Investment securities 478,345 312,472 1,034,885 648,435
Mortgage backed securities 1,828,154 857,442 3,406,600 1,745,836
Other interest income 130,830 285,661 273,829 573,119
---------- ---------- ---------- ----------
Total interest income 4,655,654 3,546,671 9,180,311 7,171,720
INTEREST EXPENSE:
Deposits 1,682,063 1,842,660 3,409,119 3,711,130
Federal Home Loan Bank advances 1,433,716 196,916 2,660,115 353,278
Note payable 4,500 6,000 10,000 13,000
---------- ---------- ---------- ----------
Total interest expense 3,120,279 2,045,576 6,079,234 4,077,408
NET INTEREST INCOME 1,535,375 1,501,095 3,101,077 3,094,312
---------- ---------- ---------- ----------
PROVISION FOR LOAN LOSSES 4,451 24,000
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,535,375 1,496,644 3,101,077 3,070,312
NONINTEREST INCOME:
Service charges on deposit accounts 93,425 71,669 173,648 127,021
Gain on sales of investment securities 113,900 11,823 233,642 26,930
Other 100,986 101,436 202,016 184,849
---------- ---------- ---------- ----------
Net noninterest income 308,311 184,928 609,306 338,800
NONINTEREST EXPENSE:
Salaries and employee benefits 872,289 730,005 1,685,858 1,436,582
Net occupancy expense 196,150 155,228 352,778 310,456
Communication, postage, printing and
office supplies 110,006 114,612 190,035 153,002
Deposit and other insurance premiums 41,691 41,205 59,712 81,015
Advertising 31,103 43,810 59,383 80,302
Data processing 147,017 103,773 227,904 185,258
Expenses of officers, directors, and employees,
including Directors' fees 63,476 67,325 117,337 123,440
Professional fees 359,096 135,965 488,935 192,696
Amortization of goodwill 18,750 37,500
Other 49,521 75,215 75,985 131,380
---------- ---------- ---------- ----------
Total noninterest expense 1,889,099 1,467,138 3,295,427 2,694,131
INCOME (LOSS) BEFORE INCOME TAXES (45,413) 214,434 414,956 714,981
INCOME TAX PROVISION (BENEFIT) (58,068) 73,286 92,117 245,704
NET INCOME $ 12,655 $ 141,148 $ 322,839 $ 469,277
</TABLE>
(Continued)
4
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HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
----------------- -----------------
1998 1997 1998 1997
-------- -------- ------- -------
<S> <C> <C> <C> <C>
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:
Unrealized holding gain (loss) on securities
arising during period (341,820) 187,686 403,964 204,163
Less reclassification adjustment for gains included
in net income (113,900) (11,823) (233,642) (26,930)
-------- ---------- ---------- -------
Other comprehensive income (loss) (455,720) 175,863 170,322 177,233
COMPREHENSIVE INCOME (LOSS) $ (443,065) $ 317,011 $ 493,161 $ 646,510
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 2,388,538 2,458,365 2,424,061 2,454,646
EARNINGS PER SHARE:
Basic $ 0.01 $ 0.06 $ 0.13 $ 0.19
Diluted $ 0.01 $ 0.06 $ 0.13 $ 0.19
DIVIDENDS PER SHARE $ 0.06 $ 0.05 $ 0.12 $ 0.05
</TABLE>
See accompanying notes to condensed consolidated financial
statements.
5
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HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED)
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended December 31,
---------------------------------
1998 1997
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 322,839 $ 469,277
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 236,001 147,111
Amortization (accretion) of:
Deferred loan origination fees (4,343) 9,809
Goodwill 37,500 81,092
Premiums and discounts on loans, net 1,649 (3,269)
Premiums and discounts on investment securities,
net 168,051 98,972
Provision for loan loss 24,000
Net gain on sale of investment securities
available for sale (233,642) (26,930)
Gain on disposal of other assets, net 19,905 (13,962)
Stock compensation expense 218,765 80,906
Change in accrued interest receivable (13,763) (170,774)
Change in accrued interest payable 124,954 (57,381)
Change in other assets (199,900) (1,210,408)
Change in other liabilities (237,184) 826,607
------------ ------------
Net cash provided by operating activities 440,832 255,050
INVESTING ACTIVITIES:
Purchases of investment securities -- available for
sale (64,390,400) (21,817,948)
Purchases of Federal Home Loan Bank stock (1,789,800) (23,000)
Purchases of premises and equipment (462,052) (1,228,744)
Proceeds from sales of loans 4,367,696 2,122,353
Proceeds from sales or maturity of investment
securities 30,592,669
Proceeds from maturity of interest bearing deposits 1,032,000
Loan originations, net of repayments (8,098,709) (8,005,364)
Principal payments on investment securities 14,199,619 20,584,483
Proceeds from sale of premises and equipment 13,500
Proceeds from sales of foreclosed assets 134,707 122,569
------------ ------------
Net cash used by investing activities (24,400,770) (8,245,651)
</TABLE>
(Continued)
6
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<PAGE>
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED)
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended December 31,
---------------------------------
1998 1997
------------ -----------
<S> <C> <C>
FINANCING ACTIVITIES:
Net increase (decrease) in deposits $ 234,380 $(2,734,801)
Advances from Federal Home Loan Bank 73,250,000 6,109,072
Repayment of Federal Home Loan Bank advances (43,397,184)
Net decrease in advance payments by borrowers
for taxes and insurance 32,452 26,726
Repayment of note payable (80,000) (80,000)
Common stock acquired for stock option benefit
plan trust (1,629,874)
Stock purchased for MRP (722,328)
Purchase of treasury stock (58,750)
Dividends paid (317,400) (132,250)
------------ ------------
Net cash provided by financing activities 27,311,296 3,188,747
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 3,351,358 (4,801,854)
CASH AND CASH EQUIVALENTS:
Beginning of period 3,822,398 19,331,825
------------ ------------
End of period $ 7,173,756 $ 14,529,971
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial
statements.
7
<PAGE>
<PAGE>
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 six months ended December 31, 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,
8
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<PAGE>
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 are as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
---------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic weighted average shares 2,388,538 2,458,365 2,424,061 2,454,646
Effect of dilutive securities 0 0 0 0
--------- --------- --------- ---------
Diluted weighted average shares 2,388,538 2,458,365 2,424,061 2,454,646
</TABLE>
9
<PAGE>
<PAGE>
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. Additionally, at their meeting on November
19, 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 December 30, 1998 to the stockholders of record at
the close of business on December 15, 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. During the months of November and
December of 1998, the Company purchased an additional 72,337
shares 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 December 31, 1998
was 306,172 at $9.125 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 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
10
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<PAGE>
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
11
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<PAGE>
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 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
12
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<PAGE>
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
13
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<PAGE>
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 DECEMBER 31, 1998 AND JUNE
30, 1998
The Company had consolidated total assets of $279 million
and $251 million at December 31, 1998 and June 30, 1998,
respectively. During the six-month period ended December 31,
1998 the Bank experienced an increase in its loan portfolio from
$104.6 million at June 30, 1998, to $108.2 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 $152.9
million at December 31, 1998. Due to the lack of strong loan
demand, investment securities were purchased primarily with the
proceeds of FHLB advances in order to increase net income and to
facilitate improvements in the Bank's interest rate risk
management program.
Deposits increased slightly from $141.9 million at June 30,
1998 to $142.2 million at December 31, 1998. This represents a
.2 percent increase 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.
The Bank borrowed from the FHLB to fund increases in its
investment portfolio. The outstanding balances of FHLB
borrowings were $98.0 million and $68.1 million at December 31,
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.
Stockholders' equity amounted to $36.5 million at December
31, 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 six-month period ended December 31, 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 December 31, 1998, the Bank's
regulatory capital exceeded all applicable regulatory capital
requirements.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX-MONTHS
ENDED DECEMBER 31, 1998 AND 1997
Net Income. Net income for the three months ended December
31, 1998 was $12,655 compared to $141,148 for the three months
ended December 31, 1997. Net income for the six months ended
December 31, 1998 was $322,839 compared to $469,277 for the six
months ended December 31, 1997. Explanations of primary changes
to income and expense follow.
Interest Income. Interest income for the three months
14
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<PAGE>
ended December 31, 1998 increased $1,108,983, compared to the
three months ended December 31, 1997. Interest income for the
six months ended December 31, 1998 increased $2,008,591 compared
to the six months ended December 31, 1997. The increases were
primarily due to an increase in the average balance of
investment securities.
Interest Expense. Interest expense for the three months
ended December 31, 1998 increased $1,074,703 compared to the
three months ended December 31, 1997. Interest expense for the
six months ended December 31, 1998 increased $2,001,826 compared
to the six months ended December 31, 1997. The increases were
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 1.32 percent of outstanding loans at
December 31, 1998, which compares to 1.38 percent at June 30,
1998. Loans past due 90 days or more as of December 31, 1998
and June 30, 1998, as a percent of total loans, were 1.21% 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
15
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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, and servicing release fees.
Noninterest income for the three months ended December 31, 1998,
was $308,311, compared to $184,928 for the three months ended
December 31, 1997. Noninterest income for the six months ended
December 31, 1998, was $609,306 compared to $338,800 for the six
months ended December 31, 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.
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 December 31, 1998
was $1.9 million, compared to $1.5 million for the three months
ended December 31, 1997. Total noninterest expense for the six
months ended December 31, 1998 was $3.3 million compared to $2.7
million for the six months ended December 31, 1997. The
increase was largely due to increases in compensation expense,
communication expense, and 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 December 31, 1998 and 1997 was
(127.9)% and 34.2%, respectively. The effective income tax rate
for the six months ended December 31, 1998 and 1997 was 22.2%
and 34.4%, 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.
16
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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 December 31, 1998, the Bank had designated all of its
securities, with an amortized cost of $146,421,840 and a market
value of $146,801,198, as available for sale. In addition to
internal sources of funding, the Bank as a member of the FHLB
has substantial borrowing authority with the FHLB. The Bank's
use of a particular source of funds is based on need,
comparative total costs and availability.
At December 31, 1998, the Bank had outstanding $9.5 million
in commitments to originate loans (including unfunded portions
of construction loans) and $ .4 million 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
$61.9 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.
17
<PAGE>
<PAGE>
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 June 30,
1998 10-K. 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
18
<PAGE>
<PAGE>
Reports on Form 8-K
The Company filed an 8-K on October 8, 1998 reporting
under Item 4 a change in its Certifying Accountant.
The Company filed an 8-K on November 24, 1998 reporting
under Item 5 that it had received notice from the Nasdaq that
Nasdaq had scheduled a hearing for December 18, 1998 regarding
the possible removal of the Company's common stock from listing
on the Nasdaq National Market as a result of the Registrant's
failure to file on a timely basis its Annual Report on Form 10-K
for the year ended June 30, 1998.
19
<PAGE>
<PAGE>
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: August 17, 1999 By: /s/ Vida H. Lampkins
--------------------------------
Vida H. Lampkin
Chairman, President and
Chief Executive Officer
Date: August 17, 1999 By: /s/ Scott A. Swain
--------------------------------
Scott A. Swain
Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 2,869,831
<INT-BEARING-DEPOSITS> 6,053,925
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 146,801,198
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<ALLOWANCE> (1,450,518)
<TOTAL-ASSETS> 278,864,762
<DEPOSITS> 142,165,710
<SHORT-TERM> 15,250,000
<LIABILITIES-OTHER> 1,976,270
<LONG-TERM> 82,963,884
<COMMON> 26,450
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<OTHER-SE> 36,482,448
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<EXPENSE-OTHER> 3,295,427
<INCOME-PRETAX> 414,956
<INCOME-PRE-EXTRAORDINARY> 322,839
<EXTRAORDINARY> 0
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<NET-INCOME> 322,839
<EPS-BASIC> 0.13
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<YIELD-ACTUAL> 7.41
<LOANS-NON> 556,000
<LOANS-PAST> 1,327,813
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