-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AEhh9vMm9A10F1JL9mnLv1KsAsLQILZf5PpoPA8BUm7G2IA8u/pNQWgXRe0tlkMx rPHSDzv1fHBbVnsPnrM16Q== 0000904280-98-000202.txt : 19980518 0000904280-98-000202.hdr.sgml : 19980518 ACCESSION NUMBER: 0000904280-98-000202 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HCB BANCSHARES INC CENTRAL INDEX KEY: 0001029740 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 621670792 STATE OF INCORPORATION: OK FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22423 FILM NUMBER: 98626011 BUSINESS ADDRESS: STREET 1: HEARTLAND COMMUNITY BANK STREET 2: 237 JACKSON ST CITY: CAMDEN STATE: AK ZIP: 71701 BUSINESS PHONE: 5018366841 MAIL ADDRESS: STREET 1: HEARTLAND COMMUNITY BANK STREET 2: 237 JACKSON STREET CITY: CAMDEN STATE: AK ZIP: 71701 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Mark One [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 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. [X] Yes [ ] No Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: 2,645,000 shares. ----------------- CONTENTS PART I. FINANCIAL INFORMATION --------------------- Item 1. Financial Statements Consolidated Statements of Financial Condition March 31, 1998 (Unaudited) and June 30, 1997 Consolidated Statements of Operations (Unaudited) Three Months and Nine Months Ended March 31, 1998 and 1997 Consolidated Statements of Cash Flows (Unaudited) Three Months and Nine Months Ended March 31, 1998 and 1997 Consolidated Statements of Comprehensive Income (Loss) Three Months and Nine Months Ended March 31, 1998 and 1997 Notes to 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 and Use of Proceeds 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 HCB BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Financial Condition March 31, 1998 and June 30, 1997 (Unaudited) ASSETS ------
March 31, June 30, 1998 1997 ------------ ----------- Cash on hand $ 1,352,778 1,182,210 Interest-bearing deposits 6,071,051 18,273,882 Investment securities available for sale 32,342,554 16,155,755 Mortgage-backed securities Available for sale 35,496,381 20,090,406 Held to maturity (estimated market value of 29,649,003 35,869,295 $30,464,365 and $36,194,353, respectively) Stock in Federal Home Loan Bank 2,099,800 1,246,500 Loans receivable (net of allowance of $1,484,603 106,288,482 98,642,635 and $1,492,473, respectively) Accrued interest receivable 1,370,064 1,339,455 Foreclosed assets 33,501 36,179 Land held for resale 130,000 130,000 Premises and equipment 3,387,354 2,778,006 Goodwill 0 1,415,223 Core deposit intangible 450,000 0 Prepaid expenses and other assets 3,049,170 3,206,232 ------------ ----------- $221,720,138 200,365,778 ============ ===========
See accompanying notes to condensed consolidated financial statements. HCB BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Financial Condition March 31, 1998 and June 30, 1997 (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, June 30, 1998 1997 ------------ ----------- Liabilities Deposits $141,017,148 151,208,763 Advances from borrowers for Taxes, insurance and other 355,337 209,140 Borrowings from Federal Home Loan Bank 40,047,438 10,000,000 Accrued interest payable 294,498 410,477 Accrued expenses and other liabilities 1,719,929 797,885 ------------ ------------ Total liabilities 183,434,350 162,626,265 ------------ ------------ Stockholders' equity Common stock, $.01 par value; authorized 10,000,000 share; issued and outstanding 2,645,000 shares 2,645 2,645 Additional paid-in capital 25,494,132 25,794,471 Note receivable from ESOP (2,116,000) (2,116,000) Retained earnings 14,841,328 14,091,750 Accumulated other comprehensive income 63,683 (33,353) ------------ ------------ Total stockholders' equity 38,285,788 37,739,513 ------------ ------------ $221,720,138 200,365,778 ============ ============
See accompanying notes to condensed consolidated financial statements. HCB BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Operations For the Three Months and Nine Months Ended March 31, 1998 and 1997 (Unaudited)
Three Months Ended Nine Months Ended March 31, March 31, ------------------- ------------------- 1998 1997 1998 1997 ------- -------- ------- ------- Interest income Loans $ 936,540 2,043,707 5,245,870 5,913,287 Investment securities 317,915 231,595 966,350 624,160 Mortgage-backed securities 1,021,289 857,210 2,767,125 2,694,492 Other interest income 163,475 100,781 736,594 364,007 ---------- --------- --------- --------- Total interest income 2,439,219 3,233,293 9,715,939 9,595,946 ---------- --------- --------- --------- Interest expense Deposits 1,048,382 1,872,763 4,759,512 5,630,757 Borrowings from FHLB 444,028 152,963 797,306 482,889 Other interest 4,000 10,000 17,000 20,000 ---------- --------- --------- --------- Total interest expense 1,496,410 2,035,726 5,573,818 6,133,646 ---------- --------- --------- --------- Net interest income 942,809 1,197,567 4,142,121 3,462,300 Provision for loan losses (4,000) 24,820 20,000 168,144 ---------- --------- --------- --------- Net interest income after provision for loan losses 946,809 1,172,747 4,122,121 3,294,156 ---------- --------- --------- --------- Noninterest income Service fees on deposits 8,442 64,858 152,193 153,949 Gains (losses) on sales of assets available for sale or held for sale 5,848 (22,525) 32,778 (21,215) Other income, net (28,951) (45,093) 139,168 86,700 ---------- --------- --------- --------- Total noninterest income (14,661) (2,760) 324,139 219,434 ---------- --------- --------- --------- Noninterest expense Compensation, payroll taxes and fringe benefits 299,972 583,764 1,782,554 1,610,368 Occupancy and equipment 20,750 95,307 297,246 291,061
See accompanying notes to consolidated financial statements. HCB BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Operations For the Three Months and Nine Months Ended March 31, 1998 and 1997 (Unaudited)
Three Months Ended Nine Months Ended March 31, March 31, ------------------- ------------------- 1998 1997 1998 1997 ------- -------- ------- ------- Deposit insurance premiums 10,150 5,9923 68,037 1,060,711 Data processing expense 19,628 143,146 204,886 272,336 Other expenses 188,241 90,671 962,009 959,693 ---------- --------- --------- --------- Total noninterest expense 538,741 918,880 3,314,732 4,194,169 ---------- --------- --------- --------- Income (loss) before income tax expense (benefit) 393,407 251,107 1,131,528 (680,579) Income tax expense(benefit) 111,566 129,950 386,270 (261,900) ---------- --------- --------- --------- Net income(loss) $ 281,841 121,157 745,258 (418,679) ========== ========= ========= ========= Earnings per common share $ 0.11 N/A $ 0.28 N/A ========== ========= ========= =========
See accompanying notes to consolidated financial statements. HCB BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Three Months and Nine Months Ended March 31, 1998 and 1997 (Unaudited)
Three Months Ended Nine Months Ended March 31, March 31, ------------------- ------------------- 1998 1997 1998 1997 ------- -------- ------- ------- Cash flows from operating activities Net income(loss) $281,841 121,157 745,258 (418,679) Adjustments to reconcile net income to cash provided by operating activities: Depreciation 23,810 32,204 170,921 122,211 Amortization (accretion) of Deferred loan origination fees (1,559) 36,092 8,250 36,092 Goodwill (81,092) 40,018 -- 120,055 Premiums and discounts on loans 2,806 (2,041) (463) (2,572) Premiums and discounts on mortgage-backed securities and investment securities 45,090 28,883 144,062 115,519 Deferred income taxes -- (22,572) -- (57,986) Provision for loan losses (4,000) 24,819 20,000 168,143 Provision for loss on foreclosed assets -- -- -- 15,247 (Gain) loss on disposition of other assets 3,107 -- (10,855) 3,118 Net (gain) loss on sale of assets held for sale or available for sale (5,848) -- (32,778) -- Increase in accrued interest receivable 106,662 82,361 (30,609) (92,766) Decrease in other assets (55,460) (278,059) 157,062 (294,498) Decrease in accrued interest payable (237,117) (11,317) (294,498) (15,142) Increase (decrease) in other liabilities 167,956 134,106 922,044 (107,149) Increase in prepaid income taxes -- (186,370) -- (214,364) ---------- ---------- ---------- ---------- Net cash provided (used) by operating activities 246,196 374,243 1,798,394 (583,618) ---------- ---------- ---------- ---------- Cash flows from investing activities: Net change in loans 523,644 761,414 (7,637,977) (11,415,022) Purchase of loans -- (950,000) -- (2,254,560) Proceeds from sales of loans 1,789,989 -- 3,912,342 1,410,336 Proceeds from sale of investment securities available for sale -- 2,576,477 -- 2,576,477 Purchases of investment securities available for sale (29,797,050)(5,851,810)(51,614,998) (23,060,510) Principal payments on investment securities and mortgage-backed and related securities 6,880,169 2,836,956 26,215,666 18,082,993
See accompanying notes to consolidated financial statements HCB BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Three Months and Nine Months Ended March 31, 1998 and 1997 (Unaudited)
Three Months Ended Nine Months Ended March 31, March 31, ------------------- --------------------- 1998 1997 1998 1997 ------- ------- ------- --------- Purchase of stock in FHLB (830,800) -- (853,000) -- Purchases of property and equipment (1,357,128) (400,802) (2,585,872) (1,856,118) Proceeds from sale of foreclosed assets 108,693 -- 121,044 -- Proceeds from sale of subsidiary 3,100,000 -- 3,100,000 -- Investment in subsidiary sold (3,100,000) -- (3,100,000) -- Proceeds from sale of other assets -- -- 1,525 3,215 Purchase of branch assets (9,944,624) -- (9,944,624) -- Purchase of core deposit intangible (450,000) -- (450,000) -- Dividends paid (132,250) -- (264,500) -- ----------- ---------- ----------- ----------- Net cash used by investing activities (33,383,247) (1,027,765) (43,166,391)(16,513,189) ----------- ---------- ----------- ----------- Cash flows from financing activities: Net increase (decrease) in deposits 1,907,375 3,519,724 (843,598) 8,866,424 Increase (decrease) in advance payments from borrowers for property taxes and insurance 119,471 274,105 146,197 274,105 Net borrowings from FHLB 23,938,366 -- 30,047,438 -- Increase (decrease) in other borrowings -- -- (80,000) 400,000 Cost of issuance of common stock -- -- (40,903) -- ----------- ---------- ----------- ----------- Net cash provided by Financing activities 25,965,212 3,793,829 29,270,037 9,540,529 ----------- ---------- ----------- ----------- Net increase(decrease) in cash (7,106,142) 3,140,307 (12,032,263) (7,556,278) Cash and due from banks, beginning of period 14,529,971 6,595,297 19,456,092 17,291,882 ----------- ---------- ---------- ----------- Cash and due from banks, end of period $ 7,423,829 9,735,604 7,423,829 9,735,604 =========== ========== ========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 916,985 2,027,043 5,051,774 4,807,394 =========== ========== ========== ===========
See accompanying notes to consolidated financial statements. HCB BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Loss) For the Three Months and Nine Months Ended March 31, 1998 and 1997 (Unaudited)
Three Months Ended Nine Months Ended March 31, March 31, ------------------- ------------------- 1998 1997 1998 1997 ------- -------- ------- ------- Net income (loss) $ 281,841 121,157 745,258 (418,679) Comprehensive income: Unrealized holding gain (loss) on available for sale securities (129,958) 137,762 103,197 (158,311) --------- ------- ------- -------- Comprehensive income (loss) before tax expense (benefit) 151,883 258,919 848,455 (576,990) Income tax expense (benefit) 44,186 46,839 39,514 (53,826) --------- ------- ------- -------- Net comprehensive income (loss) $ 107,697 212,080 808,941 (523,164) ========= ======= ======= ========
See accompanying notes to consolidated financial statements. HCB BANCSHARES, INC AND SUBSIDIARIES Notes to Consolidated (Unaudited) Financial Statements Note 1 - HCB Bancshares, Inc. HCB Bancshares, Inc. (the "Company") was incorporated under the laws of the state of Oklahoma for the purpose of becoming the bank holding company of Heartland Community Bank and its subsidiaries (the "Bank"), in connection with the Bank's conversion from a federally chartered mutual savings bank to a federally chartered stock savings bank, pursuant to its Plan of Conversion. On April 30, 1997, the Bank completed the conversion and became a wholly owned subsidiary of the Company. The Company has no other operations and conducts no business of its own other than owning the Bank, investing its portion of the net proceeds received in the Conversion, and lending funds to the Employee Stock Ownership Plan which was formed in connection with the Conversion. Note 2 Basis of Consolidation The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-QSB. To the extent that information and footnotes required by generally accepted accounting principles for complete financial statements are contained in the audited financial statements included in the Bank's audit report for the year ended June 30, 1997, such information and footnotes have not been duplicated herein. All material intercompany balances and transactions have been eliminated in the consolidation. The unaudited statements reflect all adjustments, consisting of normal recurring accruals, which are in the opinion of management, necessary for fair presentation of the results of operations, changes in equity and cash flows for the three months and nine months periods ended March 31, 1998 and 1997. The statements of operations for the three-month and nine-month periods ended March 31, 1998, are not necessarily indicative of the results which may be expected for the entire year. Note 3 Stockholders' Equity and Stock Conversion The Bank converted from a federally chartered mutual savings bank to a federally chartered stock savings bank pursuant to its Plan of Conversion, which was approved by the Bank's members on April 25, 1997. The conversion was effective on April 30, 1997 and resulted in the issuance of 2,645,000 shares of common stock (par value $.01) at $10.00 per share for the gross sale price of $26,450,000. Costs related to the conversion (primarily to underwriters' commissions, printing and professional fees) approximated $750,000 and were deducted from the net proceeds to arrive at net proceeds of $25,700,000. The Company also established an Employee Stock Ownership Plan and Trust which purchased 211,600 shares of common stock of the Company at the issuance price of $10 per share with funds borrowed from the Company. Note 3 Sale of Subsidiary On November 19, 1997, the Bank entered into an agreement to sell all of the shares of stock of Heritage Banc Holding, Inc., parent of HEARTLAND Community Bank, FSB ("FSB"), subject to approval of the transaction by the OTS. Approval of the transaction was granted in February, 1998 and the transaction was completed on February 23, 1998. Pursuant to the terms of the agreement, the Bank acquired the loans and certain other assets and liabilities of the Little Rock, AR branch of FSB and all assets and liabilities of the Monticello, AR branch and the Bryant, AR loan production office of FSB immediately after the sale of the holding company. Note 4 Adoption of Statement of Financial Accounting Standard No. 130 The Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," on January 1, 1998. The standard establishes standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. Prior period financial statements presented have been reclassified for comparative purposes. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------- GENERAL The Bank's principal business consists of attracting deposits from the general public and investing those funds in (i) loans secured by first mortgages on existing owner-occupied single-family residences in the Bank's primary market area and, (ii) to a lesser but growing extent, commercial and multi-family real estate loans and consumer and commercial business loans. The Bank also maintains a substantial investment portfolio of mortgage-related securities and U.S. government and agency securities. The Bank's net income is dependent primarily on its net interest income, which is the difference between interest income earned on its loans, mortgage-backed securities and securities portfolio and interest paid on customers' deposits. The Bank's net income is also affected by the level of noninterest income, such as service charges on customers' deposit accounts, net gains or losses on the sale of securities and other fees. In addition, net income is affected by the level of noninterest expense, which primarily consists of employee compensation expenses, deposit insurance premiums and other expenses. The financial condition and results of operations of the Bank and the thrift and banking industries as a whole are significantly affected by prevailing economic conditions, competition and the monetary and fiscal policies of governmental agencies. Lending activities are influenced by demand for and supply of credit, competition among lenders and the level of interest rates in the Bank's market area. The Bank's deposit flows and costs of funds are influenced by prevailing market rates of interest, primarily on competing investments, as well as account maturities and the levels of personal income and savings in the Bank's market area. COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1998 AND JUNE 30, 1997 The Company had total assets of $221.7 million and $200.4 million at March 31, 1998 and June 30, 1997, respectively. During the nine month period ended March 31, 1998 the Bank experienced an increase in its loan portfolio from $98.6 million at June 30, 1997, to $106.3 million. This increase is due to the positive results realized from the implementation of the Bank's long term business plan for growth in its targeted markets of commercial, consumer and multi-family lending along with natural growth. During this same period, investment and mortgage-backed securities and other short-term interest-earning assets fluctuated between $90.4 million at June 30, 1997 and $103.6 million at March 31, 1998. Investment securities and other short-term interest-earning deposits tend to vary in conjunction with variations in savings activity. Additionally, the Bank expended approximately $2.6 million to purchase computer and network equipment, furnishings and make improvements to existing facilities during the nine-month period ended March 31, 1998, to consummate management's planned growth projections. Deposits decreased from $151.2 million at June 30, 1997 to $141.0 million at March 31, 1998. This decrease in deposits of $10.2 million resulted from increased competition in the Bank's main market area of Camden, Arkansas and the sale of $9.4 million in deposits at the Little Rock, Arkansas branch sold to the Bank of the Ozarks. The Bank's level of deposits has been sufficient to fund its loan demand and provide for adequate liquidity. During the nine-month period ended March 31, 1998 and the year ended June 30, 1997, the Bank utilized a credit line with the FHLB of Dallas to obtain advances to implement its plan of pursuing a more aggressive investing program. The outstanding balances of FHLB advances were $40.0 million and $10.0 million at March 31, 1998 and June 30, 1997, respectively. These advances were utilized to reduce interest rate risk by better matching rates and maturities of existing interest- earning assets and interest-bearing liabilities. Equity amounted to $38.3 million at March 31, 1998, and to $37.7 million at June 30, 1997, respectively. The changes in equity were due solely to the Bank's net income earned for such periods. At June 30, 1997, the Bank's regulatory capital substantially exceeded all applicable regulatory capital requirements. Regulatory capital levels at March 31, 1998 were not substantially different from those at June 30, 1997. COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997 Net Income (Loss). Net income for the nine months ended March 31, 1998 was $745,300 compared to a loss of $418,700 for the nine months ended March 31, 1997. The changes were attributable to a non-recurring one time, special deposit insurance assessment of $889,000 and professional fees of $306,900, incurred in the nine months ended March 31, 1997, an increase in net interest income of $827,900 and an increase in noninterest income of $104,700 for the nine months ended March 31, 1998, as compared to the nine months ended March 31, 1997. Income tax expense for the nine months ended March 31, 1998 was a tax expense of $386,300 compared to a tax benefit of $261,900 for the nine months ended March 31, 1997. Net Interest Income. Net interest income for the nine months ended March 31, 1997 was $4.1 million, an increase of 19.6% when compared to net interest income of $3.4 million for the nine months ended March 31, 1997. This increase was attributable to an increase in total interest income of $120,000 and a decrease in total interest expense of $559,800. The net interest margin for the nine months ended March 31, 1998 was 2.22% compared to 2.41% for the nine months ended March 31, 1997. The increase in net interest income and decrease in net interest margin was due to an increase in the average volume of interest-earning assets combined with a decrease in average volume of deposit liabilities and an increase in the average rate paid on interest bearing liabilities. The average volume of interest-earning assets increased from $170.3 million for the nine months ended March 31, 1997 to $192.2 million for the nine months ended March 31, 1998, which had the effect of increasing interest income by approximately $411,000. Average interest-earning assets increased , in part, when comparing the nine months ended March 31, 1997 to the nine months ended March 31, 1998 as a result of the increased purchases of investment securities and the increase in the average volume of loans receivable. The average rate paid on interest-bearing liabilities increased during the nine months ended March 31, 1998 from 5.10% after the nine month period ended March 31, 1997, to 5.22%. The increase in the average rate on interest-bearing liabilities had the effect of increasing total interest expense between the nine months ended March 31, 1997 and the nine months ended March 31, 1997 by approximately $214,000. For the nine months ended March 31, 1998, the average yield on interest-earning assets was 7.46%, compared to 7.51% for the nine months ended March 31, 1997, which had the effect of decreasing total interest income by $24,000. The average volume of interest-bearing liabilities increased by 5.72%, reflecting the change in deposits and the utilization of liquidity in the implementation of the Bank's long term business plan for growth in its targeted markets. when comparing March 31, 1998 to March 31, 1997. This volume increase attributed to a increase in total interest expense of approximately $25,000. The average yield on interest-earning assets remained relatively unchanged between the two periods, which is indicative of the fact that the Bank's interest-earning assets are not highly sensitive to the increases in market interest rates which occurred between the two periods. For the nine months ended March 31, 1998, the average yield on interest- earning assets was 2.81% compared to 2.71% for the nine months ended March 31, 1997. Provision for Loan Losses. During the year ended June 30, 1997, the Bank's management initiated an extensive internal loan review of all loan files both of the parent and subsidiary. The review resulted in the adoption of more conservative loan loss allowance standards than had been used in the past. This new policy on allowance for loan losses was deemed prudent in establishing credit underwriting standards for future expected lending areas, such as commercial real estate, business and consumer loans, which inherently have more risk. Management made a provision for loan losses in the nine months ended March 31, 1998 of $20,000, compared to a provision for loan loss of approximately $168,100 in the nine months ended March 31, 1997. The allowance for loan losses, after this provision, of $1.5 million, represented 1.38 % of outstanding loans at March 31, 1998. Nonperforming loans as of March 31, 1998 were 1.12% of total loans and below 1.0% at March 31, 1997. 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 insurance commissions from sales of credit life insurance, banking service charges, loan origination and commitment fees earned and gains on sales of loans originated for the secondary market. Noninterest income for the nine months ended March 31, 1998, was $324,100, compared to $222,200 for the nine months ended March 31, 1997. This represents an increase of $101,900. This increase is due primarily to increases in loan fees earned as a result of more aggressive lending activities and new fee earning banking services offered by the Bank to its deposit customers. In light of the increasingly competitive markets for deposits and loans, management has recently shifted the Bank's deposit taking and loan origination activities to reflect, among other things, the importance of offering valued customer services that generate additional fee income, and it is expected that management will continue this trend for the foreseeable future. Noninterest Expense. The major components of noninterest expense are compensation and benefits paid to the Bank's employees and directors, occupancy expense for ownership and maintenance of the Bank's building and furniture and equipment, and insurance premiums paid to the FDIC for insurance of deposits. Total noninterest expense for the nine months ended March 31, 1998 was $3.3 million, compared to $4.1 million for the nine months ended March 31, 1997. The decrease was largely due to a one time, special assessment by the FDIC to the Bank to replenish the SAIF depleted by prior years losses in the thrift industry. During the years in which thrifts as an industry suffered many publicized and non-publicized "bailouts" by the SAIF, and its predecessor, the Federal Savings and Loan Insurance Corporation, the deposit insurance fund for the thrift industry was severely depleted. After several years of debate Congress with the assistance of the FDIC, which administers the SAIF, consummated a plan of action to replenish the SAIF to a level of coverage required by statute (the designated reserve ratio of 1.25% of insured deposits) for the remaining covered deposits. The plan of remedy included a one time assessment to each thrift institution based on capital levels and deposits, among other factors. This one time assessment was recognized by the Bank in the three months ended March 31, 1997, in the amount of $889,000 and was expensed in the same period. This assessment was paid November 27, 1997. The effective deposit insurance rate prior to the assessment was .23% compared to a rate of .065% after the assessment. The second largest component of noninterest expense for the nine months ended March 31, 1998 was compensation expense, including director and officer retirement plans and other benefits, which totaled $1.8 million, compared to $1.6 million for the nine months ended March 31, 1997. This increase was attributable to increases in salary expense due to an increase in personnel for future growth, accrual of contributions to an Employee Stock Ownership Plan established in conjunction with the conversion of the Bank to a stock association, and increased directors fees due to additional time incurred by the Board in evaluating and working on various strategic plans for the Bank. During the nine months ended March 31, 1997, amounts were incurred to facilitate the name change of the Bank to HEARTLAND Community Bank. In addition, fees were incurred for personnel placement services to attract key personnel for hire, a computer consultant was engaged to evaluate operating systems and further growth needs, and marketing consultants were approached for market strategies and implementation. These expense categories decreased $29,000 during the nine months ended March 31, 1998 compared with the same period in 1997. Overall, noninterest expense increased for the nine month period ended March 31, 1998, compared to the nine month period ended March 31, 1997, by approximately $10,000, exclusive of the FDIC one time, special assessment. In light of the substantial costs associated with the recent, pending and planned expansions of the Bank's activities, facilities and staff, including the additional costs associated with adding staff, building or renovating branches, introducing new deposit and loan products and services and implementing the planned stock benefit plans after the Conversion, it is expected that the Bank's noninterest expense levels may remain somewhat high relative to the historical levels for the Bank, as well as the prevailing levels for institutions that are not undertaking such expansions, for an indefinite period of time, as management implements the Bank's business strategy. Among the activities planned are increased loan originations in the areas of multi- family residential, commercial real estate, commercial business and consumer loans. Customer products introduced in the current quarter include ATM and debit cards and an expanded deposit account mix. In addition, two new branch facilities were constructed and completed in the quarter ended September 30, 1997. Other existing facilities will be renovated to attract and serve an increased customer base. Income Taxes. The effective income tax rate for the Bank for the nine months ended March 31, 1998 and 1997 was 38.3% which includes federal and Arkansas tax components. A tax benefit of $261,900 for 1997 and an expense of $386,300 for 1998 were recognized, resulting in an increase of $648,200. SOURCES OF CAPITAL AND LIQUIDITY The Bank is required to maintain minimum levels of liquid assets as defined by the OTS regulations. This requirement which may be varied at the discretion of the OTS depending on economic conditions and deposit outflows, is based upon a percentage of deposits and short term borrowings. Current OTS regulations require that a savings association maintain liquid assets of not less than 5% of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less, of which short-term liquid assets must consist of not less than 1%. At March 31, 1998, the Bank's liquidity, as measured for regulatory purposes, was 14.32%, or $15.2 million in excess of the minimum OTS liquidity requirement of 5%. Management of the Bank seeks to maintain a relatively high level of liquidity in order to retain flexibility in terms of investment opportunities and deposit pricing and in order to meet funding needs of loan commitments. Historically, the Bank has been able to meet its liquidity demands through internal sources of funding supplemented from time to time by advances from the FHLB of Dallas. The Bank's primary sources of funds are deposits, proceeds from principal and interest payments on loans and mortgage-backed securities, interest payments and maturities of investment securities, and earnings. While scheduled principal repayments on loans and mortgage-backed securities and interest payments on investment securities are a relatively predictable source of funds, deposit flows and loan and mortgage-backed prepayments are greatly influenced by general interest rates, economic conditions, competition and other factors. The Bank does not solicit deposits outside of its market area through brokers or other financial institutions. The Bank has also designated certain securities as available for sale in order to meet liquidity demands. At March 31, 1998, the Bank had designated securities with a fair value of approximately $67.8 million as available for sale. In addition to internal sources of funding, the Bank as a member of the FHLB has substantial borrowing authority with the FHLB. The Bank's use of a particular source of funds is based on need, comparative total costs and availability. Another source of liquidity is the net proceeds of the Conversion. Following the completion of the Conversion, effective April 30, 1997, the Bank received over half of the net proceeds of the Conversion. These funds are expected to be used by the Bank for its business activities, including investment in interest-earning assets. For additional information about cash flows from the Bank's operating, investing and financing activities see the consolidated financial statements presented elsewhere herein. At March 31, 1998, the Bank had outstanding $6.2 million in commitments to originate loans (including unfunded portions of construction loans) and $135,000 in unused lines of credit. At the same date, the total amount of certificates of deposit which were scheduled to mature in one year or less was $59.0 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. As the year 2000 approaches, an important business issue has emerged regarding how existing application software programs and operating systems can accommodate this date value. Many computer programs that can only distinguish the final two digits of the year entered ( a common programming practice in earlier years) are expected to read entries for the year 2000 as the year 1900 and compute payment, interest or delinquency based on the wrong date or are expected to be unable to compute payment, interest or delinquency. Rapid and accurate data processing is essential to the operations of the Company. All of the material computer programs of the Company that could be affected by this problem are provided by major third party vendors. Currently, the Company is in the process of replacing/upgrading all computer systems and programs, as well as most equipment, in order to provide cost-effective and efficient delivery of services to its customers, information to management, and to provide additional capacity for processing information and transactions due to acquisitions. The third party vendors of the Company have advised the Company that all such computer systems and programs will be year 2000 compliant. However, if the third party vendors are unable to resolve year 2000 issues in time, the Company would likely experience significant data processing delays, mistakes or failures. These delays, mistakes or failures could have a significant adverse impact on the financial condition and results of operations of the Company. Item 3. Quantitative and Qualitative Disclosures about Market Risk The tabular and narrative information set forth in this report and in the registrant's most recent Annual Report on form 10-K discloses detailed quantitative and qualitative information about market risks and their effects on the registrant, particularly with respect to changes in market interest rates on interest-earning assets and interest-bearing liabilities. PART II. OTHER INFORMATION ----------------- Item 1. Legal Proceedings None Item 2. Changes in Securities and Use of Proceeds 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 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: May 15, 1998 By: /s/ Vida H. Lampkin ---------------------------------- Vida H. Lampkin Chairman, President and Chief Executive Officer (Duly Authorized Representative) Date: May 15,1998 By: /s/ J. Marcie Ainsworth ---------------------------------- J. Marcie Ainsworth Chief Financial Officer EX-27 2 - ARTICLE 9 FIN. DATA SCHEDULE FOR 3RD QTR 10-Q
9 9-MOS JUN-30-1998 MAR-31-1998 1,352,778 6,071,051 0 0 0 29,649,003 67,838,935 106,288,482 1,492,473 221,720,148 141,017,148 0 1,719,929 40,047,438 2,645 0 0 38,285,788 221,720,138 5,245,870 3,733,475 736,594 9,715,939 4,759,512 5,573,818 4,142,121 20,000 32,778 3,314,732 1,131,528 1,131,528 0 0 745,258 .28 .28 0 0 0 0 0 0 0 0 0 0 0 0
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