<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 March 31, 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.
[ ] 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>
<PAGE>
CONTENTS
PART 1. FINANCIAL INFORMATION
---------------------
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Financial
Condition at March 31, 1999 (unaudited) and June
30, 1998
Condensed Consolidated Statements of Income and
Comprehensive Income for the Three Months and Nine
Months Ended March 31, 1999 and 1998 (unaudited)
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended March 31, 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
<PAGE>
<PAGE>
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1999 (UNAUDITED) AND JUNE 30, 1998
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, June 30,
ASSETS 1999 1998
------------ --------
<S> <C> <C>
Cash and due from banks $ 2,847,640 $ 1,531,363
Interest-bearing deposits with banks 5,466,187 2,291,035
------------ ------------
Cash and cash equivalents 8,313,827 3,822,398
Other interest bearing deposits with banks 1,234,000 2,782,000
Investment securities:
Available for sale, at fair value 142,184,581 99,472,916
Held to maturity, at amortized cost 27,503,257
Loans receivable, net of allowance 111,794,819 104,580,165
Accrued interest receivable 1,684,550 1,839,326
Federal Home Loan Bank stock 5,309,700 3,448,900
Premises and equipment, net 6,207,489 5,601,767
Goodwill, net 375,000 431,250
Real estate held for sale 505,746 461,190
Other assets 1,459,192 1,010,601
------------ ------------
TOTAL $279,068,904 $250,953,770
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $143,920,368 $141,931,330
Federal Home Loan Bank advances 98,460,992 68,121,068
Liability to purchase shares for management
retention plan 846,400
Advance payments by borrowers for
taxes and insurance 310,630 209,242
Accrued interest payable 776,719 643,887
Note payable 240,000 320,000
Other liabilities 726,385 1,202,919
------------ ------------
Total liabilities 244,435,094 213,274,846
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 10,000,000 shares
authorized, 2,645,000 issued, 2,368,044 and
2,645,000 shares outstanding at March 31, 1999
and June 30, 1998, respectively 26,450 26,450
Additional paid-in capital 25,997,839 25,861,230
Unearned ESOP shares (1,534,100) (1,692,800)
Unearned MRP shares (437,124) (578,528)
Treasury stock, at cost, 276,956 shares (2,881,593)
Accumulated other comprehensive income:
Unrealized gain (loss) on investment securities
available for sale, net of tax (410,782) 53,907
Retained earnings 13,873,120 14,008,665
------------ ------------
Total stockholders' equity 34,633,810 37,678,924
------------ ------------
TOTAL $279,068,904 $250,953,770
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
<PAGE>
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1999
AND 1998 (UNAUDITED)
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
----------------- -------------------
1999 1998 1999 1998
-------- -------- ------- -------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $2,321,845 $2,138,676 $ 6,786,842 $ 6,343,006
Interest and dividends on investments:
Investment securities 427,732 385,369 1,462,617 1,033,804
Mortgage backed securities 1,757,907 1,060,075 5,164,507 2,805,911
Other interest income 114,181 224,618 388,010 797,737
---------- ---------- ----------- -----------
Total interest 4,621,665 3,808,738 13,801,976 10,980,458
INTEREST EXPENSE:
Deposits 1,611,221 1,804,034 5,020,340 5,515,164
Federal Home Loan Bank advances 1,384,517 446,336 4,044,632 799,614
Note payable 4,500 6,000 14,500 19,000
---------- ---------- ----------- -----------
Total interest expense 3,000,238 2,256,370 9,079,472 6,333,778
NET INTEREST INCOME 1,621,427 1,552,368 4,722,504 4,646,680
PROVISION FOR LOAN LOSSES 24,000
---------- ---------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,621,427 1,552,368 4,722,504 4,622,680
---------- ---------- ----------- -----------
NONINTEREST INCOME:
Service charges on deposit accounts 74,645 75,564 248,293 202,585
Gain on sales of investment securities 20,372 254,015 3,765
Other 119,192 160,872 321,205 368,886
---------- ---------- ----------- -----------
Net noninterest income 214,209 236,436 823,513 575,236
NONINTEREST EXPENSE:
Salaries and employee benefits 890,671 717,788 2,576,528 2,154,370
Net occupancy expense 218,129 133,599 570,907 444,055
Communication, postage, printing and
office supplies 110,798 104,372 300,832 257,374
Deposit and other insurance premiums 25,028 55,522 84,740 136,537
Advertising 84,752 32,178 144,135 112,480
Data processing 68,828 107,185 296,732 292,443
Expenses of officers, directors, and employees,
including Directors' fees 67,765 40,557 185,102 163,997
Professional fees 353,716 109,660 842,651 302,356
Amortization of goodwill 18,750 23,291 56,250 104,383
Other 42,114 461,744 118,100 512,032
---------- ---------- ----------- -----------
Total noninterest expense 1,880,551 1,785,896 5,175,977 4,480,027
INCOME (LOSS) BEFORE INCOME TAXES (44,915) 2,908 370,040 717,889
INCOME TAX PROVISION (BENEFIT) (62,631) (19,348) 29,486 226,356
---------- ---------- ----------- -----------
NET INCOME $ 17,716 $ 22,256 $ 340,554 $ 491,533
</TABLE>
(Continued)
4
<PAGE>
<PAGE>
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1999
AND 1998 (UNAUDITED)
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
----------------- ------------------
1999 1998 1999 1998
-------- -------- ------- -------
<S> <C> <C> <C> <C>
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:
Unrealized holding gain (loss) on securities
arising during period (614,638) (80,197) (210,674) 100,801
Less reclassification adjustment for
(gains) losses included in net income (20,372) 0 (254,015) (3,765)
---------- ---------- ----------- ----------
Other comprehensive income (loss) (635,010) (80,197) (464,689) 97,036
COMPREHENSIVE INCOME (LOSS) $ (617,294) $ (57,941) $ (124,135) $ 588,569
========== ========== =========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 2,326,208 2,465,803 2,392,284 2,458,365
EARNINGS (LOSS) PER SHARE:
Basic $ 0.01 $ 0.01 $ 0.14 $ 0.20
Diluted $ 0.01 $ 0.01 $ 0.14 $ 0.20
DIVIDENDS PER SHARE $ 0.06 $ 0.05 $ 0.18 $ 0.11
</TABLE>
See accompanying notes to condensed consolidated financial
statements.
5
<PAGE>
<PAGE>
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended March 31,
---------------------------------
1999 1998
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $340,554 $ 491,533
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 385,469 187,835
Amortization (accretion) of:
Deferred loan origination fees (4,127) (1,734)
Goodwill 56,250 104,383
Premiums and discounts on loans, net 555 (463)
Premiums and discounts on investment
securities, net 268,798 145,251
Provision for loan loss 24,000
Net gain on sale of investment securities
available for sale (254,015) (36,541)
(Gain) loss on disposal of other assets, net 63,002 (12,437)
Stock compensation expense 312,641
Change in accrued interest receivable 154,776 (366,582)
Change in accrued interest payable 132,832 (60,406)
Change in other assets (448,591) (991,135)
Change in other liabilities (476,534) 1,177,507
------------ ------------
Net cash provided by operating
activities 531,610 661,211
INVESTING ACTIVITIES:
Purchases of investment securities - available
for sale (74,479,112) (50,604,901)
Purchases of Federal Home Loan Bank stock (1,860,800) (853,300)
Purchases of premises and equipment (1,002,976) (984,010)
Proceeds from sales of loans 8,743,540 1,982,469
Proceeds from sales or maturity of investment
securities 38,850,638
Proceeds from maturity of interest bearing
deposits 1,548,000
Loan originations, net of repayments (16,189,602) (7,650,013)
Proceeds from sale of subsidiary 3,100,000 3,100,000
Investment in subsidiary sold (3,100,000) (3,100,000)
Principal payments on investment securities 19,931,594 26,215,666
Purchase of core deposit intangible (450,000)
Proceeds from sale of premises and equipment 13,500
Proceeds from sale of other assets 1,525
Proceeds from sales of foreclosed assets 134,707 121,044
------------ ------------
Net cash used by investing activities (24,310,511) (32,221,520)
</TABLE>
(Continued)
6
<PAGE>
<PAGE>
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended March 31,
---------------------------------
1999 1998
------------ -----------
<S> <C> <C>
FINANCING ACTIVITIES:
Net increase (decrease) in deposits $ 1,989,038 $(10,193,982)
Advances from Federal Home Loan Bank 89,038,000 30,103,870
Repayment of Federal Home Loan Bank advances (58,698,076) (56,432)
Net increase in advance payments by borrowers
for taxes and insurance 101,389 146,357
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 (1,251,719)
Dividends paid (476,100) (264,500)
------------ ------------
Net cash provided by financing
activities 28,270,330 19,655,313
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 4,491,429 (11,904,996)
CASH AND CASH EQUIVALENTS:
Beginning of period 3,822,398 19,331,825
------------ ------------
End of period $ 8,313,827 $ 7,426,829
============ ============
</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 nine months ended March 31, 1999 is not
necessarily indicative of the results that may be expected for
the year ending June 30, 1999. The unaudited condensed
consolidated financial statements and notes thereto should be
read in conjunction with the audited consolidated financial
statements and notes thereto for the year ended June 30,
1998, contained in the Company's Annual Report on Form 10-K for
the year ended June 30, 1998.
NOTE 2 -- RECENTLY ADOPTED ACCOUNTING STANDARDS
The Company early-adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities as of October 1,
1998. This statement establishes accounting and reporting
standards for derivative instruments, including certain
derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value.
Concurrent with this adoption, investment securities with an
amortized cost of $27,503,257 and $25,424,636 and a market value
of $27,476,304 and $25,428,154 at June 30, 1998 and September
30, 1998, respectively, and categorized in the statements of
financial condition as held to maturity were transferred to
available for sale. This transfer from the held to maturity
category at the date of the initial adoption of SFAS No.
133 does not call into question the Company's intent to hold
other debt securities to maturity in the future. In addition,
the adoption of SFAS No. 133 had no other effect on the Bank
other than the reclassification of held to maturity securities
to available for sale.
In June 1997, FASB issued SFAS No. 130, Reporting
Comprehensive Income, which became effective for fiscal years
beginning after December 15, 1997, with reclassification of
earlier periods. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its
components. The Company adopted SFAS No. 130 in the quarter
ended September 30, 1998. Because the adoption of SFAS No. 130
requires only additional disclosures, it will not have a
material effect on the Company's consolidated financial
statements.
8
<PAGE>
<PAGE>
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 Nine months ended
March 31, March 31,
-------------------- --------------------
1999 1998 1999 1998
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic weighted -- average shares 2,326,208 2,465,803 2,392,284 2,458,365
Effect of dilutive securities 5,191 0 0 0
--------- --------- --------- ---------
Diluted weighted -- average shares 2,331,399 2,465,803 2,392,284 2,458,365
========= ========= ========= =========
</TABLE>
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. 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. Additionally, at their meeting
on February 23, 1999, the Board of Directors declared a $ .06
per share dividend on the common stock of the Company. The cash
dividend was paid on March 30, 1999 to the stockholders of
record at the close of business on March 16, 1999.
NOTE 5 -- STOCK PURCHASED FOR OPTION BENEFIT TRUST
During the nine months ended in March 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 March 31, 1999 was 311,772 at $9.125 per share and
3,620 at $9.375 per share of which 146,106 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.
9
<PAGE>
<PAGE>
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 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.
10
<PAGE>
<PAGE>
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
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.
11
<PAGE>
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND MARCH
30, 1999
The Company had consolidated total assets of $279 million
and $251 million at March 31, 1999 and June 30, 1998,
respectively. During the nine-month period ended March 31, 1999
the Bank experienced an increase in its loan portfolio from
$104.6 million at June 30, 1998, to $111.8 million. The Bank's
ability to expand its lending base and the size of its loan
portfolio continues to be constrained by the lack of strong loan
demand and competition. During this same period, investments and
mortgage-backed securities and other short-term interest-earning
assets increased from $132.0 million at June 30, 1998 to $148.9
million at March 31, 1999. 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 $143.9 million at March 31, 1999. This represents a 1.4
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.
Additionally, the Bank borrowed from the FHLB to fund increases
in its investment portfolio. The outstanding balances of FHLB
borrowings were $98.5 million and $68.1 million at March 31,
1999 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 $34.6 million at March 31,
1999, and $37.7 million at June 30, 1998. The changes in equity
were primarily due to the purchase of stock for stock option
plans, the changes to unrealized gain (loss) on investment
securities available for sale, and the Company's net income
earned for the nine-month period ended March 31, 1999. The
Company also fulfilled its obligation to purchase stock for the
management recognition plan. At March 31, 1999, the Bank's
regulatory capital exceeded all applicable regulatory capital
requirements.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND NINE-
MONTHS ENDED MARCH 31, 1999 AND 1998
Net Income. Net income for the three months ended March 31,
1999 was $17,716 compared to $22,256 for the three months ended
March 31, 1998. Net income for the nine months ended March 31,
1999 was $340,554 compared to $491,533 for the nine months ended
March 31, 1998. Explanations of primary changes to income and
expense follow.
Interest Income. Interest income for the three months ended
March 31, 1999 increased $812,927 compared to the three months
ended March 31, 1998. Interest income for the nine months ended
March 31, 1999 increased $ 2,821,518 compared to the nine months
ended March 31, 1998. The increases were primarily due to an
increase in the average balance of investment securities.
Interest Expense. Interest expense for the three months
ended March 31, 1999 increased $743,868 compared to the three
months ended March 31, 1998. Interest expense for the nine
months ended March 31, 1999 increased $2,745,694 compared to the
nine months ended March 31, 1998. The increases were primarily
due to an increase in the average balance of FHLB advances.
12
<PAGE>
<PAGE>
Provision for Loan Losses. The allowance for loan losses of
$1.4 million represented 1.26 percent of outstanding loans at
March 31, 1999, which compares to 1.38 percent at June 30, 1998.
Loans past due 90 days or more as of March 31, 1999 and June 30,
1998, as a percent of total loans, were 0.99% and 0.75%
respectively.
Management evaluates the carrying value of the loan
portfolio periodically and the allowance is adjusted
accordingly. While management uses the best information
available to make evaluations, future adjustments to the
allowance may be necessary if conditions differ substantially
from the assumptions used in making the evaluations. In
particular, management recognizes that recent and planned
changes in the amounts and types of lending by the Bank
will result in further growth of the Bank's loan loss allowance
and may justify further changes in the Bank's loan loss
allowance policy in the future. In addition, various regulatory
agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such
agencies may require the Bank to recognize changes to the
allowance based upon their judgments and the information
available to them at the time of their examination.
Noninterest Income. Noninterest income is comprised
primarily of service charges on deposit accounts, gains on the
sales of investment securities, and servicing release fees.
Noninterest income for the three months ended March 31, 1999,
was $214,209 compared to $236,436 for the three months ended
March 31, 1998. Noninterest income for the nine months ended
March 31, 1999, was $823,513 compared to $575,236 for the nine
months ended March 31, 1998. This increase for the nine-month
periods 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 March 31, 1999
was $1.9 million compared to $1.8 million for the three months
ended March 31, 1998. Total noninterest expense for the nine
months ended March 31, 1999 was $5.2 million compared to $4.5
million for the nine months ended March 31, 1998. The increase
was largely due to increases in compensation expense, occupancy
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.
13
<PAGE>
<PAGE>
Income Taxes. The effective income tax rate for the Bank
for the three months ended March 31, 1999 and 1998 was (139.4)%
and (665.3)%, respectively. The effective income tax rate for
the Bank for the nine months ended March 31, 1999 and 1998 was
7.97% and 31.5%, 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.
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 March 31, 1999, the Bank had designated all of its
securities, with an amortized cost of $142,872,129 and a market
value of $142,184,581, 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 March 31, 1999, the Bank had outstanding $4.4 million in
commitments to originate loans (including unfunded portions of
construction loans) and $ 1.0 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 $ 64.6
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.
14
<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
Market risk reflects the risk of economic loss resulting
from adverse changes in market prices and interest rates. The
risk of loss can be reflected in diminished current market
values and/or reduced potential net interest income in future
periods. The Company's market risk arises primarily from
interest rate risk inherent in lending and deposit-taking
activities. The Company does not maintain a trading account for
any class of financial instrument nor does it engage in hedging
activities. Furthermore, the Company is not subject to foreign
currency exchange rate risk or commodity price risk.
The Company measures interest rate risk by computing
estimated changes in the net portfolio value (NPV) of cash flows
from assets, liabilities and off-balance sheet items in the
event of a range of assumed changes in market interest rates.
These computations estimate the effect on the Bank's NPV of
sudden and sustained 100 Basis Points (BP) to 300 BP increases
and decreases in market interest rates. The Bank's Board of
Directors has adopted an interest rate risk policy which
establishes maximum decreases in the Bank's estimated NPV of
25%, 45%, and 65% in the event of assumed immediate and
sustained 100 BP to 300 BP increases or decreases in market
interest rates, respectively.
The following table sets forth as of March 31, 1999, the
Office of Thrift Supervision's (OTS) estimate of the projected
changes in NPV in the event of 100, 200, and 300, BP
instantaneous and permanent increases and decreases in market
interest rates. Dollar amounts are expressed in thousands.
<TABLE>
<CAPTION>
BP Change Estimated Net Portfolio Value NPV as % of PV of Assets
in Rates $ Amount $ Change % Change NPV Ratio BP Change
<S> <C> <C> <C> <C> <C>
+300 23,862 (7,923) (25)% 9.27 % (207) BP
+200 26,884 (4,901) (15)% 10.15 % (120) BP
+100 29,710 (2,075) (7)% 10.89 % (45) BP
NC 31,785 11.35 %
-100 32,126 341 1% 11.23 % (12) BP
-200 31,055 (730) (2)% 10.67 % (68) BP
-300 30,435 (1,350) (4)% 10.25 % (110) BP
</TABLE>
Computations of prospective effects of hypothetical
interest rate changes are calculated by the OTS from data
provided by the Bank and are based on numerous assumptions,
including relative levels of market interest rates, loan
repayments and deposit run-offs, and should not be relied upon
as indicative of actual results. Further, the computations do
not contemplate any actions the Bank may undertake in response
to changes in interest rates. Management cannot predict future
interest rates or their effect on the Bank's NPV in the future.
Certain shortcomings are inherent in the method of analysis
presented in the computation of NPV. For example, although
certain assets and liabilities may have similar maturities or
periods to repricing, they may react in differing degrees to
changes in market interest rates. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels
could deviate significantly from those assumed in the table.
Finally, the ability of many borrowers to service their
adjustable-rate debt may decrease in the event of an interest
rate increase.
15
<PAGE>
<PAGE>
The Bank's Board of Directors is responsible for reviewing
the asset and liability policies. The Board meets quarterly to
review interest rate risk and trends, as well as liquidity and
capital ratios and requirements. The Bank's management is
responsible for administering the policies and determinations of
the Board of Directors with respect to the Bank's asset and
liability goals and strategies. Management expects that the
Bank's asset and liability policies and strategies will continue
as described above so long as competitive and regulatory
conditions in the financial institution industry and market
interest rates continue as they have in recent years.
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
See Note 6, Subsequent Event Disclosure, to Condensed
Consolidated Financial Statements (Unaudited).
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
Exhibit 27 Financial Data Schedule
Reports on Form 8-K
The company filed an 8-K on February 24, 1999 reporting
under Item 5 that it had been informed by Nasdaq on
February 2, 1999, that effective at the close of
business on February 2, 1999 the Registrant's common
stock was delisted from the Nasdaq stock market.
16
<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 19, 1999 By: /s/ Vida H. Lampkins
--------------------------------
Vida H. Lampkin
Chairman, President and
Chief Executive Officer
Date: August 19, 1999 By: /s/ Scott A. Swain
--------------------------------
Scott A. Swain
Vice President and
Chief Financial Officer
17
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,847,640
<INT-BEARING-DEPOSITS> 6,700,187
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 142,184,581
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 113,224,986
<ALLOWANCE> (1,430,167)
<TOTAL-ASSETS> 279,068,904
<DEPOSITS> 143,920,368
<SHORT-TERM> 14,750,000
<LIABILITIES-OTHER> 1,813,734
<LONG-TERM> 83,950,992
<COMMON> 26,450
0
0
<OTHER-SE> 34,607,360
<TOTAL-LIABILITIES-AND-EQUITY> 279,068,904
<INTEREST-LOAN> 6,786,842
<INTEREST-INVEST> 6,627,124
<INTEREST-OTHER> 388,010
<INTEREST-TOTAL> 13,801,976
<INTEREST-DEPOSIT> 5,020,340
<INTEREST-EXPENSE> 9,079,472
<INTEREST-INCOME-NET> 4,722,504
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 254,015
<EXPENSE-OTHER> 6,175,977
<INCOME-PRETAX> 370,040
<INCOME-PRE-EXTRAORDINARY> 370,040
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 340,554
<EPS-BASIC> 0.14
<EPS-DILUTED> 0.14
<YIELD-ACTUAL> 7.46
<LOANS-NON> 466,000
<LOANS-PAST> 1,117,726
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,078,000
<ALLOWANCE-OPEN> 1,468,546
<CHARGE-OFFS> (42,690)
<RECOVERIES> 4,311
<ALLOWANCE-CLOSE> 1,430,167
<ALLOWANCE-DOMESTIC> 1,430,167
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
