FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-22423
HCB BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
OKLAHOMA 62-1670792
(State or 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 or 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 ninety 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: 1,961,880 shares of common stock
outstanding as of October 31, 2000.
page 1
<PAGE>
CONTENTS
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Financial Condition
at September 30, 2000 (unaudited) and June 30, 2000
Condensed Consolidated Statements of Income and Comprehensive
Income for the Three Months Ended September 30, 2000 and
1999 (unaudited)
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 2000 and 1999 (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
Page 2
<PAGE>
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 2000 (UNAUDITED) and JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000 JUNE 30,
ASSETS (UNAUDITED) 2000
-------------- --------
<S> <C> <C>
Cash and due from banks $ 3,068,334 $ 3,211,802
Interest-bearing deposits with banks 427,890 137,846
----------- ----------
Cash and cash equivalents 3,496,224 3,349,648
Other interest bearing deposits with banks -- 99,000
Investment securities available for sale, at fair value 129,781,126 132,543,065
Loans receivable, net of allowance 139,205,773 135,626,505
Accrued interest receivable 1,823,392 1,852,887
Federal Home Loan Bank stock 6,325,400 6,223,500
Premises and equipment, net 7,098,254 6,552,484
Goodwill, net 262,500 281,250
Real estate held for sale 379,608 359,608
Other assets 3,873,362 4,304,228
------------- -------------
TOTAL $ 292,245,639 $ 291,192,175
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $148,528,875 $144,873,071
Federal Home Loan Bank advances 112,347,504 115,609,029
Advance payments by borrowers for
taxes and insurance 179,763 139,554
Accrued interest payable 939,467 917,415
Note payable 80,000 160,000
Other liabilities 1,031,697 1,252,556
------------- -------------
Total liabilities 263,107,306 262,951,625
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 10,000,000 shares authorized,
2,645,000 shares issued, 2,041,580 and 2,046,580 shares
outstanding at September 30, 2000 and June 30, 2000, respectively 26,450 26,450
Additional paid-in capital 25,927,313 25,945,850
Unearned ESOP shares (1,216,700) (1,269,600)
Unearned MRP shares (201,837) (220,104)
Accumulated other comprehensive income (loss) (3,477,616) (4,401,668)
Retained earnings 14,064,268 14,110,667
------------- -------------
35,121,878 34,191,595
Treasury stock, at cost, 603,420 and 598,420 shares at
September 30, 2000, and June 30, 2000, respectively (5,983,545) (5,951,045)
------------- -------------
Total stockholders' equity 29,138,333 28,240,550
------------- -------------
TOTAL $292,245,639 $291,192,175
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 3
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, (UNAUDITED)
2000 1999
---- ----
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 2,919,182 $ 2,542,121
Investment securities:
Taxable 1,677,174 1,925,810
Nontaxable 382,480 339,208
Other 113,822 90,858
----------- ----------
Total interest income 5,092,658 4,897,997
INTEREST EXPENSE:
Deposits 1,879,637 1,621,051
Federal Home Loan Bank advances 1,743,645 1,502,478
Note payable 2,500 4,500
----------- ----------
Total interest expense 3,625,782 3,128,029
----------- ----------
NET INTEREST INCOME 1,466,876 1,769,968
PROVISION FOR LOAN LOSSES 116,000 --
----------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,350,876 1,769,968
NONINTEREST INCOME:
Service charges on deposit accounts 163,224 120,728
Other 160,285 106,066
----------- ----------
Net noninterest income 323,509 226,794
----------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits 980,778 956,016
Net occupancy expense 232,020 220,293
Communication, postage, printing and office supplies 86,445 91,228
Advertising 56,850 64,195
Data processing 79,683 82,472
Professional fees 158,676 426,275
Amortization of goodwill 18,750 18,750
Other 92,087 94,651
----------- ----------
Total noninterest expense 1,705,289 1,953,880
----------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (30,904) 42,882
INCOME TAX PROVISION (BENEFIT) (107,000) 899
----------- ----------
NET INCOME $ 76,096 $ 41,983
----------- ----------
(Continued)
</TABLE>
Page 4
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, (UNAUDITED)
2000 1999
---- ----
<S> <C> <C>
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:
Unrealized holding gain (loss) on securities arising
during period 924,052 (1,187,509)
Reclassification adjustment for gains
included in net income -- --
--------- ----------
Other comprehensive income (loss) 924,052 (1,187,509)
--------- ----------
COMPREHENSIVE INCOME (LOSS) $ 1,000,148 $ (1,145,526)
========= ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 1,918,473 2,161,695
========= =========
EARNINGS PER SHARE:
Basic $ 0.04 $ 0.02
==== ====
Diluted $ 0.04 $ 0.02
==== ====
DIVIDENDS PER SHARE $ 0.06 $ 0.06
==== ====
(Concluded)
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 5
<PAGE>
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended September 30,
2000 (Unaudited) 1999
----- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 76,096 $ 41,983
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 165,606 156,436
Amortization (accretion) of:
Deferred loan origination fees (12,848) (62,201)
Goodwill 18,750 18,750
Premiums and discounts on loans, net (1,146) (1,339)
Premiums and discounts on investment securities, net 29,507 38,388
Provision for loan losses 116,000 --
Deferred income taxes (529,985) 799,953
Originations of loans held for sale (3,329,993) (2,839,090)
Proceeds from sales of loans 3,170,915 3,327,336
Stock compensation expense 52,630 98,310
Change in accrued interest receivable 29,495 4,416
Change in accrued interest payable 22,052 14,919
Change in other assets 324,815 (434,653)
Change in other liabilities (220,859) 97,303
----------- -------------
Net cash provided (used) by operating activities (88,965) 1,260,511
INVESTING ACTIVITIES:
Purchases of investment securities - available for sale -- (1,152,893)
Purchases of Federal Home Loan Bank stock (101,900) (86,500)
Purchases of premises and equipment (711,376) (195,959)
Proceeds from maturity of interest bearing deposits 99,000 619,000
Loan originations, net of repayments (3,522,196) (5,146,458)
Principal payments on investment securities 4,272,520 4,057,959
Proceeds from sale of land held for resale -- 126,149
----------- -------------
Net cash provided (used) by investing activities 36,048 (1,778,702)
(Continued)
</TABLE>
Page 6
<PAGE>
HCB BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER, 2000 AND 1999 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended September 30,
2000 (Unaudited) 1999
------- --------
<S> <C> <C>
FINANCING ACTIVITIES:
Net increase (decrease) in deposits $ 3,655,804 $ (2,600,326)
Advances from Federal Home Loan Bank 98,405,000 48,810,000
Repayment of Federal Home Loan Bank advances (101,666,525) (46,052,816)
Net increase in advance payments by borrowers
for taxes and insurance 40,209 36,546
Repayment of note payable (80,000) (80,000)
Purchase of treasury stock (32,500) (410,176)
Dividends paid (122,495) (146,200)
------------- -------------
Net cash provided by financing activities 199,493 (442,972)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 146,576 (961,163)
CASH AND CASH EQUIVALENTS:
Beginning of period 3,349,648 4,536,214
------------- -------------
End of period $ 3,496,224 $ 3,575,051
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 7
<PAGE>
HCB BANCSHARES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND CONSOLIDATION
HCB Bancshares, Inc. ("Bancshares"), incorporated under the laws of the
state of Oklahoma, is a bank holding company that owns Heartland Community Bank
and its subsidiary (the "Bank"). Bancshares' business is primarily that of
owning the Bank, and participating in the Bank's activities. The accompanying
condensed consolidated financial statements include the accounts of Bancshares
and the Bank and are collectively referred to as the Company. All significant
intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements
were prepared in accordance with instructions for Form 10-Q. Accordingly, they
do not include all of the information required by generally accepted accounting
principles. The unaudited statements reflect all adjustments, which are, in the
opinion of management, necessary for fair presentation of the financial
condition and results of operations of the Company. The condensed consolidated
statement of income and comprehensive income for the three months ended
September 30, 2000 is not necessarily indicative of the results that may be
expected for the Company's fiscal year ending June 30, 2001. 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, 2000, contained in the Company's Annual Report on
Form 10-K for the year ended June 30, 2000.
NOTE 2 - EARNINGS PER SHARE
The weighted average number of common shares used to calculate earnings
per share for the periods ended September 30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
Three months ended
September 30,
2000 1999
<S> <C> <C>
Basic weighted - average shares 1,918,473 2,161,695
Effect of dilutive securities 0 0
--------- ---------
Diluted weighted - average shares 1,918,473 2,161,695
========= =========
</TABLE>
The Company has issued stock options and MRP shares that have the
potential to be dilutive to its weighted average shares calculation, but are
anti-dilutive for these three-month periods.
NOTE 3 - DECLARATION OF DIVIDENDS
At their meeting on August 24, 2000, the Board of Directors declared a
$.06 per share cash dividend on the common stock of the Company. The cash
dividend was paid on September 30, 2000 to the stockholders of record at the
close of business on September 15, 2000.
NOTE 4 - STOCK PURCHASED FOR OPTION BENEFIT TRUST
As of September 30, 2000, the Company has purchased a total of 208,844
shares of stock and placed them in its stock option plan trust. These shares are
classified as treasury stock on the accompanying condensed consolidated
statement of financial condition, are available for sale, and are managed by the
trustees specifically for funding stock option benefits provided to key
employees. The total number of stock option shares granted as of September 30,
2000 was 308,540 at an average of $9.14 per share of which 217,495 were vested.
This compares to the total number of stock option shares granted as of June 30,
2000, of 312,980 at an average of $9.14 per share of which 217,495 were vested.
Page 8
<PAGE>
NOTE 5 - COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Company is a
defendant in certain claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
the ultimate disposition of these matters is not expected to have a material
adverse effect on the consolidated financial statements of the Company.
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 are
contesting the allegations vigorously. Management is unable to determine the
likelihood of an unfavorable outcome of the suit or the amount of any damages
that the Company may have to pay, if any. The Company will incur costs through
the payment of legal fees and the related costs of litigation. The extent of
these costs is not determinable at this time.
NOTE 6 - SUBSEQUENT EVENTS DISCLOSURE
On October 18, 2000, International Paper announced the closing of the
Camden paper mill to be complete by March 31, 2001. The mill employs
approximately 580 employees. On October 25, 2000, Burlington Industries
announced the closing of its Monticello operation before the end of the year
2000. The plant employs approximately 740 employees. Efforts have begun in both
communities to enlist the assistance of Federal, State and local governments to
identify other companies for relocation to the respective communities, thereby,
preserving all or some of the jobs lost by the closings.
The Camden branch of the Bank has approximately $86.0 million in
deposits, $31.9 million in one-to-four family mortgage loans, and $4.0 million
in consumer loans. The Monticello branch has approximately $13.8 million in
deposits, $5.4 million in one-to-four family mortgage loans, and $4.6 million in
consumer loans. It is unknown at this time how these closings will affect
repayments of Bank loans by borrowers or the Bank's retention of deposits, if at
all.
In addition, during the month of October 2000, the Company purchased
79,700 shares for treasury stock at an average price of $9.03 per share.
Page 9
<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, nontaxable municipal 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 and
its investment portfolio, and interest paid on customers' deposits and funds
borrowed. The Bank's net income is also affected by the level of noninterest
income, such as service charges on customers' deposit accounts, net gains or
losses on the sale of loans and securities and other fees. In addition, the
level of noninterest expense, which normally will primarily consist of employee
compensation expenses, occupancy expense, and other expenses, affects net
income.
The financial condition and results of operations of the Bank, and the
thrift and banking industries as a whole, are significantly affected by
prevailing economic conditions, competition and the monetary and fiscal policies
of governmental agencies. Demand for and supply of credit, competition among
lenders and the level of interest rates in the Bank's market area influence
lending activities. The Bank's deposit flows and costs of funds are influenced
by prevailing market rates of interest on competing investments, as well as
account maturities and the levels of personal income and savings in the Bank's
market area.
RATE/VOLUME ANALYSIS
The following table analyzes dollar amounts of changes in interest
income expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period's
rate), (ii) changes attributable to rate (changes in rate multiplied by the
prior period's volume) and (iii) changes in rate/volume (changes in rate
multiplied by changes in volume).
Page 10
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended September 30,
--------------------------------------------
2000 vs. 1999
--------------------------------------------
Increase (Decrease) Due to
---------------------------------------------
Rate/
Volume Rate Volume Total
------ ---- ------- -----
(In thousands)
---------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable $ 393 $ (13) $ (3) $ 377
Investment securities and
mortgage- backed
securities (302) 107 (10) (205)
Other interest-earning
assets 3 20 -- 23
------ ------- ------- -------
Total interest-earning
assets 94 114 (13) 195
------ ------- ------- -------
Interest expense:
Deposits 14 242 3 259
FHLB advances 112 121 8 241
Note payable (2) (1) 1 (2)
------ ------- ------- -------
Total interest-bearing
liabilities 124 362 12 498
------ ------- ------- -------
Change in net interest
income $ (30) $ (248) $ (25) $ (303)
====== ======= ======= =======
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2000 AND JUNE 30, 2000
The Company had consolidated total assets of $292.2 million and $291.2
million at September 30, 2000 and June 30, 2000, respectively. During the
three-month period ended September 30, 2000 the Company experienced an increase
in its consolidated loan portfolio from $135.6 million at June 30, 2000, to
$139.2 million. During this same period, investments and mortgage-backed
securities decreased from $132.5 million at June 30, 2000 to $129.8 million at
September 30, 2000. While total investments decreased $2.76 million, there were
$4.30 million in paydowns and a $1.54 million increase in the market value of
the securities. The Company continues its strategy of replacing securities with
loans as opportunities present themselves.
Deposits have increased from $144.9 million at June 30, 2000 to $148.5
million at September 30, 2000. The recent increase in deposits is attributed to
new certificate of deposit special rate products, new checking account products
and continued cross selling efforts. Although the Bank's level of deposits has
been sufficient to provide for adequate liquidity, the deposit market remains
competitive. The outstanding balances of FHLB borrowings decreased from $115.6
million at June 30, 2000, to $112.3 million at September 30, 2000.
Stockholders' equity amounted to $29.1 million at September 30, 2000,
and $28.2 million at June 30, 2000. The changes in equity were primarily due to
a decrease in accumulated comprehensive loss, dividends paid, and the purchase
of treasury stock. At September 30, 2000, the Bank's regulatory capital exceeded
all applicable regulatory capital requirements.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE ENDED SEPTEMBER 30, 2000 AND
1999
Net Income. Net income for the three months ended September 30, 2000
was approximately $76,000 compared to net income of approximately $42,000 for
the three months ended September 30, 1999. Explanations of primary changes to
income and expense items follow.
Interest Income. Interest income for the three months ended September
30, 2000 increased approximately $195,000, or 4.0 percent compared to the three
months ended September 30, 1999. The increase is attributable to
Page 11
<PAGE>
increases in loan volumes and the average rate on investment securities offset
by decreases in average balances on investment securities.
Interest Expense. Interest expense for the three months ended September
30, 2000 increased approximately $498,000, or 15.9 percent compared to the three
months ended September 30, 1999. The increase was due to increases in rates paid
on deposits and FHLB advances, and an increase in the average balance of FHLB
advances.
As a result of the above changes, net interest income for the three
months ended September 30, 2000 decreased approximately $303,000 compared to the
three months ended September 30, 1999. For details, see Rate/Volume Analysis
beginning on page ten.
Provision for Loan Losses. The Bank made provisions for loan losses of
$116,000 for the three months ended September 30, 2000. This provision is
primarily the result of management's most recent review as of September 30,
2000. The allowance for loan losses of $1.3 million represented 0.90 percent of
gross outstanding loans at September 30, 2000, which compares to 0.85 percent at
June 30, 2000. Nonperforming loans as of September 30, 2000, and June 30, 2000,
as a percent of total loans, were 0.57% and 0.64% respectively.
Management evaluates the carrying value of the loan portfolio
periodically and the allowance is adjusted if necessary. While management uses
the best information available to make evaluations, future adjustments to the
allowance may be necessary if conditions differ substantially from the
assumptions used in making the evaluations. In particular, management recognizes
that recent and planned changes in the amounts and types of lending by the Bank
will result in further growth of the Bank's loan loss allowance and may justify
further changes in the Bank's loan loss allowance policy in the future. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses. Such agencies
may require the Bank to recognize changes to the allowance based upon their
judgments and the information available to them at the time of their
examination. Furthermore, as the effect of the plant closings discussed in the
Notes to Condensed Consolidated Financial Statements section become better
understood by management, additional allowances may or may not become necessary.
Noninterest Income. Noninterest income is comprised primarily of
service charges on deposit accounts, and gains on the sales of loans.
Noninterest income for the three months ended September 30, 2000, was
approximately $324,000 compared to approximately $227,000 for the three months
ended September 30, 1999. The increase for the three months ended September 30,
2000 is attributed to increases in both service fees on deposits and gains on
sales of loans.
In light of the increasingly competitive markets for deposits and
loans, management has continued the shifting of the Bank's deposit taking and
loan origination activities to reflect, among other things, the importance of
offering valued customer services that generate additional fee income, and it is
expected that management will continue this trend for the foreseeable future.
Noninterest Expense. The major components of noninterest expense are
salaries and employee benefits paid to or on behalf of the Company's employees
and directors, occupancy expense for ownership and maintenance of the Company's
buildings, furniture, and equipment, data processing expenses, advertising, and
professional fees paid to consultants, attorneys, and accountants. Total
noninterest expense for the three months ended September 30, 2000 was $1.71
million compared to $1.95 million for the three months ended September 30, 1999.
While the total expense decreased, primary differences include increases in
compensation expense and occupancy expense, offset by decreases in
communication, advertising 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.
Page 12
<PAGE>
Income Taxes. The effective income tax rate for the Company for the
three months ended September 30, 2000 and 1999 was (346.2%) and 2.1%,
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 and banking
related activities. Bancshares' primary sources of liquidity are cash, dividends
paid by the Bank, and earnings on investments and loans. In addition, the Bank
is subject to regulatory limitations with respect to the payment of dividends to
Bancshares.
The Bank has historically maintained substantial levels of capital. The
assessment of capital adequacy is dependent on several factors including asset
quality, earnings trends, liquidity and economic conditions. Maintenance of
adequate capital levels is integral to provide stability to the Bank. The Bank
needs to maintain substantial levels of regulatory capital to give it maximum
flexibility in the changing regulatory environment and to respond to changes in
the market and economic conditions.
The Bank's primary sources of funds are savings deposits, borrowed
funds, 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.
At September 30, 2000, and June 30, 2000, the Company had designated
securities with a fair value of approximately $129.8 million and $132.5 million,
as available for sale, respectively. In addition to internal sources of funding,
the Bank as a member of the FHLB has substantial borrowing authority with the
FHLB. The Bank's use of a particular source of funds is based on need,
comparative total costs, and availability.
At September 30, 2000, the Bank had $6.6 million in commitments to
originate loans (including unfunded portions of construction loans), and
approximately $843,000 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 $89.6 million. Management anticipates that the Bank will have adequate
resources to meet its current commitments through internal funding sources
described above.
For the three months ended September 30, 2000, total deposits increased
approximately $3.7 million, or 2.5 percent. Certificates of deposits increased
approximately $0.9 million while transaction accounts had a net increase of
approximately $2.8 million. Management has continued initiating new certificate
of deposit special rate products, and new competitive transaction account plans
to help retain existing customers and attract new customers. Management will
continue to monitor the progress of the existing products, and develop new
products and services. Furthermore, the plant closings discussed in the Notes to
Condensed Consolidated Financial Statements section may or may not have an
effect on deposit levels.
Management is not aware of any current recommendations by its
regulatory authorities, legislation, competition, trends in interest rate
sensitivity, new accounting guidance or other material events and uncertainties
that would have a material effect on the Bank's ability to meet its liquidity
demands.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data presented herein
have been prepared in accordance with instructions to Form 10-Q which require
the measurement of financial position and operating results in terms of
historical dollars, without considering changes in relative purchasing power
over time due to inflation.
Unlike most industrial companies, virtually all of the Bank's assets
and liabilities are monetary in nature. As a result, changes in interest rates
generally have a more significant impact on a financial institution's
performance than do changes in the rate of inflation.
Page 13
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the Company's asset and liability management
policies as well as the potential impact of interest rate changes upon the
market value of the Bank's portfolio equity, see "MARKET RISK" in the Company's
Annual Report on Form 10-K for the year ended June 30, 2000. 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, 2000.
Page 14
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Company is a
defendant in certain claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
the ultimate disposition of these matters is not expected to have a material
adverse effect on the consolidated financial statements of the Company.
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 are
contesting 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. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
Exhibit 27 Financial Data Schedule
Reports on Form 8-K:
None
Page 15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HCB BANCSHARES, INC.
Registrant
Date: November 11, 2000 By: /s/ Cameron D. McKeel
--------------------------------
Cameron D. McKeel
President and Chief
Executive Officer
(Duly Authorized Representative)
Date: November 11, 2000 By: /s/ Scott A. Swain
---------------------------------
Scott A. Swain
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Page 16
