-----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, LcXCXOsFFaJzIdSgllHdj0cChAtM712g2wAgL72oDd37QywMEzKNjS2+jHUN6M7b rVRvyBuEOQ7h1VfNBXGaQA== 0000904280-99-000221.txt : 19990719 0000904280-99-000221.hdr.sgml : 19990719 ACCESSION NUMBER: 0000904280-99-000221 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19990716 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/A SEC ACT: SEC FILE NUMBER: 000-22423 FILM NUMBER: 99665767 BUSINESS ADDRESS: STREET 1: HEARTLAND COMMUNITY BANK STREET 2: 237 JACKSON ST CITY: CAMDEN STATE: AR ZIP: 71701 BUSINESS PHONE: 8708366841 MAIL ADDRESS: STREET 1: HEARTLAND COMMUNITY BANK STREET 2: 237 JACKSON STREET CITY: CAMDEN STATE: AR ZIP: 71701 10-Q/A 1 FORM 10-Q/A (Amendment No. 2) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Mark One [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: No. 0-22423 HCB Bancshares, Inc. (Exact name of registrant as specified in its charter) Oklahoma 62-1670792 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 237 Jackson Street, Camden, Arkansas 71701 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code:(870)836-6841 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ ] 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: 2,645,000 shares. ----------------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements HCB BANCSHARES, INC. SUBSIDIARIES Condensed Consolidated Statements of Financial Condition December 31, 1997 and June 30, 1997 (Unaudited)
December 31, June 30, 1997 1997 ASSETS: ------------ ----------- Cash on hand $ 1,254,749 1,057,943 Interest-bearing deposits 13,275,222 18,273,882 Investment securities available for sale 18,058,109 17,260,383 Mortgage-backed securities Available for sale 24,862,402 18,361,987 Held to maturity (estimated market value of 31,870,684 36,493,086 $39,028,601 and $36,194,353, respectively) Stock in Federal Home Loan Bank 1,269,500 1,246,500 Loans receivable (net of allowance of $1,502,149 104,515,970 98,642,635 and $1,492,473, respectively) Accrued interest receivable 1,476,726 1,305,952 Foreclosed assets 7,063 36,179 Premises and equipment 4,026,170 4,621,444 Goodwill 1,334,131 1,415,223 Prepaid expenses and other assets 2,993,710 1,783,302 ------------ ----------- Total assets $204,944,436 200,498,516 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits $148,457,790 151,192,591 Advances from borrowers for taxes, insurance and other 254,272 209,140 Borrowings from Federal Home Loan Bank 16,109,072 10,000,000 Accrued interest payable 353,096 410,477 Accrued expenses and other liabilities 1,582,063 755,456 ------------ ------------ Total liabilities 166,756,293 162,567,664 ------------ ------------ Stockholders' equity Common stock, $.01 par value; authorized 10,000,000 share; issued and outstanding 2,645,000 shares 26,450 26,450 Additional paid-in capital 25,727,576 25,775,523 Note receivable from ESOP (1,884,520) (1,990,320) Retained earnings 14,174,757 14,152,552 Unrealized gain(loss) on securities available for sale, net 143,880 (33,353) ------------ ----------- Total stockholders' equity 38,188,143 37,930,852 ------------ ----------- $204,944,436 200,498,516 ============ ===========
See accompanying notes to condensed consolidated financial statements. HCB BANCSHARES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations For the Three Months and Six Months Ended December 31, 1997 and 1996 (Unaudited)
Three Months Ended Six Months Ended December 31, December 31, -------------------- ------------------- 1997 1996 1997 1996 ------- -------- ------- ------- Interest income Loans $2,091,096 2,033,513 4,204,330 3,869,580 Investment securities 312,472 277,711 648,435 392,565 Mortgage-backed securities 857,442 894,843 1,745,836 1,837,282 Other interest income 285,661 66,643 573,119 263,226 ---------- --------- --------- --------- Total interest income 3,546,671 3,272,710 7,171,720 6,362,653 ---------- --------- --------- --------- Interest expense Deposits 1,842,660 1,862,530 3,711,130 3,757,994 Borrowings from FHLB 196,916 173,991 353,278 329,926 Other interest 6,000 8,027 13,000 10,000 ---------- --------- --------- --------- Total interest expense 2,045,576 2,044,548 4,077,408 4,097,920 ---------- --------- --------- --------- Net interest income 1,501,095 1,228,162 3,094,312 2,264,733 Provision for loan losses 4,451 15,927 24,000 143,324 ---------- --------- --------- --------- Net interest income after provision for loan losses 1,496,644 1,212,235 3,070,312 2,121,409 ---------- --------- --------- --------- Noninterest income Service fees on deposits 71,669 59,547 127,021 89,091 Other service fees and commissions 6,571 2,132 16,730 3,932 Gains on sales of assets available for sale or held for sale 11,823 1,310 26,930 1,310 Gain on foreclosed assets, net 11,086 4,856 12,437 2,500 Loan fees earned 43,966 41,569 94,618 66,927 Other income, net 39,813 40,119 61,064 58,434 ---------- --------- --------- --------- Total noninterest income 184,928 149,533 338,800 222,194 ---------- --------- --------- ---------
See accompanying notes to condensed consolidated financial statements. HCB BANCSHARES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations For the Three Months and Six Months Ended December 31, 1997 and 1996 (Unaudited)
Three Months Ended Six Months Ended December 31, December 31, -------------------- ------------------- 1997 1996 1997 1996 ------- -------- ------- ------- Noninterest expense Compensation, payroll taxes and fringe benefits $ 730,005 553,423 1,436,582 1,026,604 Occupancy and equipment 155,228 101,838 310,456 195,754 Communication, postage, printing and office supplies 114,612 80,514 153,002 163,928 Deposit and other insurance premiums 41,205 95,211 81,015 1,078,007 Advertising 43,810 89,124 80,302 128,032 Expenses of officers, directors and employees, including directors' fees 67,325 58,663 123,440 81,030 Data processing expense 103,773 101,703 185,258 161,730 Professional fees 135,965 90,331 192,696 208,338 Other expenses 75,215 180,694 131,380 231,866 ---------- --------- --------- --------- Total noninterest expense 1,467,138 1,351,501 2,694,131 3,275,289 ---------- --------- --------- --------- Income (loss) before income tax expense (benefit) 214,434 10,267 714,981 (931,686) Income tax expense(benefit) 73,286 (31,176) 245,704 (391,850) --------- --------- --------- --------- Net income(loss) $ 141,148 41,443 469,277 (539,836) ========= ========= ========= ========= Earnings per common share $ 0.06 N/A $ 0.19 N/A ========= ========== ========= =========
See accompanying notes to condensed consolidated financial statements. HCB BANCSHARES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows For the Three Months and Six Months Ended December 31, 1997 and 1996 (Unaudited)
Three Months Ended Six Months Ended December 31, December 31, ------------------- ------------------- 1997 1996 1997 1996 ------- -------- ------- ------- Cash flows from operating activities Net income(loss) $141,148 41,443 469,277 (539,836) Adjustments to reconcile net income to cash provided by operating activities: Depreciation 71,782 46,905 147,111 90,007 Amortization (accretion) of Deferred loan origination fees (5,824) 18,993 9,809 18,993 Goodwill 49,908 40,019 81,092 80,037 Premiums and discounts on loans (1,634) (531) (3,269) (531) Premiums and discounts on mortgage-backed securities and investment securities 81,704 47,217 98,972 86,636 Deferred income taxes -- (35,414) -- (35,414) Provision for loan losses 4,451 15,927 24,000 143,324 Provision for loss on foreclosed assets -- 15,247 -- 15,247 Stock compensation expense 40,453 -- 80,906 -- (Gain) loss on disposition of other assets (13,647) 6,236 (13,962) 3,118 Net (gain) loss on sale of assets held for sale or available for sale (26,930) -- (26,930) -- Increase in accrued interest receivable (188,815) (59,077) (170,774) (175,127) Change in other assets 348,103 304,001 (1,210,408) 1,499 Decrease in accrued interest payable (5,827) (26,703) (57,381) (3,825) Increase (decrease) in other liabilities (965,681) (966,070) 826,607 (241,255) Increase in prepaid income taxes -- (400,734) -- (400,734) ---------- ---------- ---------- ---------- Net cash provided (used) by operating activities (1,167,015) (952,541) 255,050 (957,861) Cash flows from investing activities: Net change in loans ( 3,632,225)(6,844,198) (8,005,364) (12,176,436) Purchase of loans -- (1,304,560) -- (1,304,560) Proceeds from sales of loans 1,364,067 1,410,336 2,122,353 1,410,336 Purchases of investment securities available for sale (10,779,062)(5,013,700)(21,817,948) (17,208,700) Principal payments on investment securities and mortgage-backed and related securities 7,045,170 11,814,337 20,584,483 15,246,037
See accompanying notes to condensed consolidated financial statements HCB BANCSHARES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows For the Three Months and Six Months Ended December 31, 1997 and 1996 (Unaudited)
Three Months Ended Six Months Ended December 31, December 31, ------------------- ------------------- 1997 1996 1997 1996 ------- -------- ------- ------- Purchase of stock in FHLB $(18,800) -- (23,000) -- Purchases of property and equipment (294,815) (269,367) (1,228,744) (1,455,316) Proceeds from sale of foreclosed assets 108,693 -- 121,044 -- Proceeds from sale of other assets 1,525 -- 1,525 3,215 Dividends paid (132,250) -- (132,250) -- ---------- ---------- ---------- ----------- Net cash used by investing activities (6,337,697) (207,152) (8,377,901)(15,485,424) ---------- ---------- ---------- ----------- Cash flows from financing activities: Net increase (decrease) in deposits 3,069 4,093,207 (2,734,801) 5,346,700 Increase (decrease) in advance payments by borrowers for taxes and insurance (40,578) (42,144) 26,726 -- Net borrowings from FHLB 6,109,072 -- 6,109,072 -- Increase (decrease) in other borrowings -- -- (80,000) 400,000 ---------- ---------- ---------- ----------- Net cash provided by Financing activities 6,071,563 4,051,063 3,320,997 5,746,700 Net increase(decrease) in cash 1,433,149) 2,891,370 (4,801,854)(10,696,585) Cash and due from banks, beginning of period 15,963,120 3,703,927 19,331,825 17,291,882 ----------- ---------- ---------- ----------- Cash and due from banks, end of period $14,529,971 6,595,297 14,529,971 6,595,297 =========== ========== ========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 2,037,659 2,087,330 4,134,789 4,101,745 =========== ========== ========== ===========
See accompanying notes to condensed consolidated financial statements. HCB BANCSHARES, INC AND SUBSIDIARIES Notes to Condensed 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-Q. To the extent that information and footnotes required by generally accepted accounting principles for complete financial statements are contained in the audited financial statements included in the Bank's audit report for the year ended June 30, 1997, such information and footnotes have not been duplicated herein. All material intercompany balances and transactions have been eliminated in the consolidation. The unaudited statements reflect all adjustments, consisting of normal recurring accruals, which are in the opinion of management, necessary for fair presentation of the results of operations, changes in equity and cash flows for the three months and six months periods ended December 31, 1997 and 1996. The statements of operations for the three-month and six-month periods ended December 31, 1997, are not necessarily indicative of the results which may be expected for the entire year. Note 3 - Stockholders' Equity and Stock Conversion The Bank converted from a federally chartered mutual savings bank to a federally chartered stock savings bank pursuant to its Plan of Conversion, which was approved by the Bank's members on April 25, 1997. The conversion was effective on April 30, 1997 and resulted in the issuance of 2,645,000 shares of common stock (par value $.01) at $10.00 per share for the gross sale price of $26,450,000. Costs related to the conversion (primarily to underwriters' commissions, printing and professional fees) approximated $750,000 and were deducted from the net proceeds to arrive at net proceeds of $25,700,000. The Company also established an Employee Stock Ownership Plan and Trust which purchased 211,600 shares of common stock of the Company at the issuance price of $10 per share with funds borrowed from the Company. Note 4 - Sale of Subsidiary On November 19, 1997, the Bank entered into an agreement to sell all of the shares of stock of Heritage Banc Holding, Inc., parent of HEARTLAND Community Bank, FSB ("FSB"), subject to approval of the transaction by the OTS. Pursuant to the terms of the agreement, the Bank will acquire the loans and certain other assets and liabilities of the Little Rock, Arkansas branch of FSB and all assets and liabilities of the Monticello, Arkansas branch and the Bryant, Arkansas loan production offices of FSB. Approval of the transaction was granted in February, 1998 with an anticipated closing date of February 20, 1998. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - ---------------------------------------------------------------- GENERAL The Bank's principal business consists of attracting deposits from the general public and investing those funds in (i) loans secured by first mortgages on existing owner-occupied single-family residences in the Bank's primary market area and, (ii) to a lesser but growing extent, commercial and multi-family real estate loans and consumer and commercial business loans. The Bank also maintains a substantial investment portfolio of mortgage-related securities and U.S. government and agency securities. The Bank's net income is dependent primarily on its net interest income, which is the difference between interest income earned on its loans, mortgage-backed securities and securities portfolio and interest paid on customers' deposits. The Bank's net income is also affected by the level of noninterest income, such as service charges on customers' deposit accounts, net gains or losses on the sale of securities and other fees. In addition, net income is affected by the level of noninterest expense, which primarily consists of employee compensation expenses, deposit insurance premiums and other expenses. The financial condition and results of operations of the Bank and the thrift and banking industries as a whole are significantly affected by prevailing economic conditions, competition and the monetary and fiscal policies of governmental agencies. Lending activities are influenced by demand for and supply of credit, competition among lenders and the level of interest rates in the Bank's market area. The Bank's deposit flows and costs of funds are influenced by prevailing market rates of interest, primarily on competing investments, as well as account maturities and the levels of personal income and savings in the Bank's market area. COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND JUNE 30, 1997 The Company had total assets of $204.9 million and $200.5 million at December 31, 1997 and June 30, 1997, respectively. During the six-month period ended December 31, 1997, the Bank experienced an increase in its loan portfolio from $98.6 million at June 30, 1997, to $104.5 million. This increase is due to the positive results realized from the implementation of the Bank's long-term business plan for growth in its targeted markets of commercial, consumer and multi-family lending along with natural growth. During this same period, investment and mortgage-backed securities and other short-term interest-earning assets fluctuated between $90.4 million at June 30, 1997 and $88.1 million at December 31, 1997. Investment securities and other short-term interest-earning deposits tend to vary in conjunction with variations in savings activity. Additionally, the Bank expended approximately $1.2 million to purchase computer and network equipment, furnishings and make improvements to existing facilities during the six-month period ended December 31, 1997, to consummate management's planned growth projections. Deposits decreased from $151.2 million at June 30, 1997 to $148.5 million at December 31, 1997. This decrease in deposits of $2.7 million resulted from increased competition in the Bank's main market area of Camden, Arkansas and the announcement of the proposed sale of the deposits at the Little Rock branch. The Bank's level of deposits has been sufficient to fund its loan demand and provide for adequate liquidity. During the six-month period ended December 31, 1997 and the year ended June 30, 1997, the Bank utilized a credit line with the FHLB of Dallas to obtain advances. The outstanding balances of FHLB advances were $16.1 million and $10.0 million at December 31, 1997 and June 30, 1997, respectively. These advances were utilized to reduce interest rate risk by better matching rates and maturities of existing interest-earning assets and interest-bearing liabilities. Equity amounted to $38.2 million at December 31, 1997, and $37.9 million at June 30, 1997. The changes in equity were due primarily to the Bank's net income earned, and changes in unrealized gain on securities available for sale for such periods. At June 30, 1997, the Bank's regulatory capital substantially exceeded all applicable regulatory capital require- ments. Regulatory capital levels at December 31, 1997 were not substantially different from those at June 30, 1997. COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996 Net Income (Loss). Net income for the six months ended December 31, 1997 was $469,000 compared to a loss of $540,000 for the six months ended December 31, 1996. The changes were attributable to a non-recurring one-time, special deposit in- surance assessment of $889,000 and professional fees of $148,000, incurred in the six months ended December 31, 1996, an increase in net interest income of $830,000 and an increase in noninterest income of $117,000 for the six months ended December 31, 1997, as compared to the six months ended December 31, 1996. Income tax expense for the six months ended December 31, 1997 was a tax expense of $246,000 compared to a tax benefit of $392,000 for the six months ended December 31, 1996. Net Interest Income. Net interest income for the six months ended December 31, 1997 was $3.1 million, an increase of 36.6% when compared to net interest income of $2.3 million for the six months ended December 31, 1996. This increase was attributable to an increase in total interest income of $809,000 and a decrease in total interest expense of $21,000. The net interest margin for the six months ended December 31, 1997 was 3.14% compared to 2.66% for the six months ended December 31, 1996. This increase in net interest income and net interest margin is due to an increase in the average volume of interest- earning assets, combined with an increase in the average rate paid on interest-earning assets. One cause for the increase in average interest-earning assets when comparing the six months ended December 31, 1997 to the six months ended December 31, 1996 was the acquisition of the subsidiary, Heritage Bank, FSB in May of 1996. The average volume of interest-earning assets increased from $167.9 million for the six months ended December 31, 1996 to $193.5 million for the six months ended December 31, 1997 which had the effect of increasing total interest income by $827,000. The average rate paid on interest-bearing liabilities increased during the six months ended December 31, 1997 to 5.22% from 5.17% for the six months ended December 31, 1996. The increase in the average rate on interest-bearing liabilities had the effect of increasing total interest expense between the six months ended December 31, 1996 and the six months ended December 31, 1997 by approximately $60,000. For the six months ended December 31, 1997, the average yield on interest-earning assets was 7.52%, compared to 7.48% for the six months ended December 31, 1996, which had the effect of increasing total interest income by $120,000. The average volume of interest-bearing liabilities decreased by 3.16%, re- flecting the change in deposits and the utilization of liquidity in the implementation of the Bank's long-term business plan for growth in its targeted markets when comparing December 31, 1997 to December 31, 1996. This volume decrease attributed to an decrease in total interest expense of $81,000. Provision for Loan Losses. During the year ended June 30, 1997, the Bank's management initiated an extensive internal loan review of all loan files both of the parent and subsidiary. The review resulted in the adoption of more conservative loan loss allowance standards than had been used in the past. This new policy on allowance for loan losses was deemed prudent in establishing credit underwriting standards for future expected lending areas, such as commercial real estate, business and con- sumer loans, which inherently have more risk. Management made a provision for loan losses in the six months ended December 31, 1997 of $24,000, compared to a provision for loan loss of approximately $143,300 in the six months ended December 31, 1996. The allowance for loan losses, after this provision, of $1.5 million, represented 1.47 % of outstanding loans at December 31, 1997. Nonperforming loans as of December 31, 1997 and 1996, as a percent of total loans, remained below 1.0%. Management evaluates the carrying value of the loan portfolio periodically and the allowance is adjusted accordingly. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the evaluations. In particular, management recognizes that recent and planned changes in the amounts and types of lending by the Bank will result in further growth of the Bank's loan loss allowance and may justify further changes in the Bank's loan loss allowance policy in the future. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize changes to the allowance based upon their judgments and the information available to them at the time of their examination. Non-interest Income. Noninterest income is comprised primarily of insurance commissions from sales of credit life insurance, banking service charges, loan origination and commitment fees earned and sales of investment and mortgage- backed securities. Noninterest income for the six months ended December 31, 1997, was $338,800, compared to $222,200 for the six months ended December 31, 1996. This represents an increase of $116,600. This increase is due primarily to increases in loan fees earned as a result of more aggressive lending activities and new fee earning banking services offered by the Bank to its deposit customers. In light of the increasingly competitive markets for deposits and loans, management has recently shifted the Bank's deposit taking and loan origination activities to reflect, among other things, the importance of offering valued customer services that generate additional fee income, and it is expected that management will continue this trend for the foreseeable future. Noninterest Expense. The major components of noninterest expense are compensation and benefits paid to the Bank's employees and directors, occupancy expense for ownership and maintenance of the Bank's building and furniture and equipment, and insurance premiums paid to the FDIC for insurance of deposits. Total noninterest expense for the six months ended December 31, 1997 was $2.7 million, compared to $3.3 million for the six months ended December 31, 1996. The decrease was largely due to a one-time, special assessment by the FDIC to the Bank to replenish the SAIF depleted by prior years losses in the thrift industry. During the years in which thrifts as an industry suffered many publicized and non-publicized "bailouts" by the SAIF, and its predecessor, the Federal Savings and Loan Insurance Corporation, the deposit insurance fund for the thrift industry was severely depleted. After several years of debate Congress with the assistance of the FDIC, which administers the SAIF, consummated a plan of action to replenish the SAIF to a level of coverage required by statute (the designated reserve ratio of 1.25% of insured deposits) for the remaining covered deposits. The plan of remedy included a one-time assessment to each thrift institution based on capital levels and deposits, among other factors. This one-time assessment was recognized by the Bank in the three months ended December 31, 1996, in the amount of $889,000 and was expensed in the same period. This assessment was paid November 27, 1996. The effective deposit insurance rate prior to the assessment was .23% compared to a rate of .065% after the assessment. The second largest component of noninterest expense for the six months ended December 31, 1997 was compensation expense, including director and officer retirement plans and other benefits, which totaled $1.4 million, compared to $1.0 million for the six months ended December 31, 1996. This increase was attributable to increases in salary expense due to an increase in personnel for future growth, accrual of contributions to an Employee Stock Ownership Plan established in conjunction with the conversion of the Bank to a stock association, and increased directors fees due to additional time incurred by the Board in evaluating and working on various strategic plans for the Bank. During the six months ended December 31, 1996, amounts were incurred to facilitate the name change of the Bank to HEARTLAND Community Bank. In addition, fees were incurred for personnel placement services to attract key personnel for hire, a computer consultant was engaged to evaluate operating systems and further growth needs, and marketing consultants were approached for market strategies and implementation. These expense categories decreased $60,000 during the six months ended December 31, 1997 compared with the same period in 1996. Overall, noninterest expense increased for the six month period ended December 31, 1997, compared to the six month-period ended December 31, 1996, by approximately $307,000, exclusive of the FDIC one time, special assessment. Included in noninterest expenses for the six months ended December 31, 1997 was a charge for the amortization of goodwill of $81,000, which resulted from the acquisition of the subsidiary bank during the year ended June 30, 1996. The amortization will be $162,200 per year over a ten year period, subsequent to June 30, 1997, and is not expected to have a material effect on the future earnings of the Bank. In light of the substantial costs associated with the recent, pending and planned expansions of the Bank's activities, facilities and staff, including the additional costs associated with adding staff, building or renovating branches, introducing new deposit and loan products and services and implementing the planned stock benefit plans after the Conversion, it is expected that the Bank's noninterest expense levels may remain somewhat high relative to the historical levels for the Bank, as well as the prevailing levels for institutions that are not undertaking such expansions, for an indefinite period of time, as management implements the Bank's business strategy. Among the activities planned are increased loan originations in the areas of multi- family residential, commercial real estate, commercial business and consumer loans. Customer products to be introduced include ATM and debit cards and an expanded deposit account mix. In addition, two new branch facilities were constructed and completed in the quarter ended September 30, 1997. Other existing facilities will be renovated to attract and serve an increased customer base. Income Taxes. The effective income tax rate for the Bank for the six months ended December 31, 1997 and 1996 was approximately 34.4% which includes federal and Arkansas tax components. A taxbenefit of $392,000 for 1996 and an expense of $246,000 for 1997 was recognized, resulting in an increase of $638,000. SOURCES OF CAPITAL AND LIQUIDITY The Bank is required to maintain minimum levels of liquid assets as defined by the OTS regulations. This requirement which may be varied at the discretion of the OTS depending on economic conditions and deposit outflows, is based upon a percentage of deposits and short-term borrowings. Current OTS regulations require that a savings association maintain liquid assets of not less than 5% of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less, of which short-term liquid assets must consist of not less than 1%. At December 31, 1997, the Bank's liquidity, as measured for regulatory purposes, was 20.1%, or $25.4 million in excess of the minimum OTS liquidity requirement of 5%, and 10.0% or $13.3 million in excess of the OTS short-term liquidity requirement of 1%. Management of the Bank seeks to maintain a relatively high level of liquidity in order to retain flexibility in terms of investment opportunities and deposit pricing and in order to meet funding needs of loan commitments. Historically, the Bank has been able to meet its liquidity demands through internal sources of funding supplemented from time to time by advances from the FHLB of Dallas. The Bank's primary sources of funds are deposits, proceeds from principal and interest payments on loans and mortgage-backed securities, interest payments and maturities of investment securities, and earnings. While scheduled principal repayments on loans and mortgage-backed securities and interest payments on investment securities are a relatively predictable source of funds, deposit flows and loan and mortgage-backed prepayments are greatly influenced by general interest rates, economic conditions, competition and other factors. The Bank does not solicit deposits outside of its market area through brokers or other financial institutions. The Bank has also designated certain securities as available for sale in order to meet liquidity demands. At December 31, 1997, the Bank had designated securities with a fair value of approximately $42.9 million as available for sale. In addition to internal sources of funding, the Bank as a member of the FHLB has substantial borrowing authority with the FHLB. The Bank's use of a particular source of funds is based on need, comparative total costs and availability. Another source of liquidity is the net proceeds of the Conversion. Following the completion of the Conversion, effective April 30, 1997, the Bank received over half of the net proceeds of the Conversion. These funds are expected to be used by the Bank for its business activities, including investment in interest-earning assets. For additional information about cash flows from the Bank's operating, investing and financing activities see the consolidated financial statements presented elsewhere herein. At December 31, 1997, the Bank had outstanding $6.8 million in commitments to originate loans (including unfunded portions of construction loans) and $35,000 in unused lines of credit. At the same date, the total amount of certificates of deposit which were scheduled to mature in one year or less was $59.2 million. Management anticipates that the Bank will have adequate resources to meet its current commitments through internal funding sources described above. Historically, the Bank has been able to retain a significant amount of its deposits as they mature. Management is not aware of any current recommendations by its regulatory authorities, legislation, competition, trends in interest rate sensitivity, new accounting guidance or other material events and uncertainties that would have a material effect on the Bank's ability to meet its liquidity demands. YEAR 2000 COMPLIANCE As the year 2000 approaches, an important business issue has emerged regarding how existing application software programs and operating systems can accommodate this date value. Many computer programs that can only distinguish the final two digits of the year entered (a common programming practice in earlier years) are expected to read entries for the year 2000 as the year 1900 and compute payment, interest or delinquency based on the wrong date or are expected to be unable to compute payment, interest or delinquency. Rapid and accurate data processing is essential to the operations of the 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. 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: July 16, 1999 By: /s/ Vida H. Lampkin ---------------------------------- Vida H. Lampkin Chairman, President and Chief Executive Officer EX-27 2 - ARTICLE 9 FIN. DATA SCHEDULE FOR 2ND QTR 10-Q
9 6-MOS JUN-30-1998 DEC-31-1997 1,254,749 13,275,222 0 0 42,920,511 31,870,684 39,028,601 106,018,119 1,502,149 204,944,436 148,457,790 0 2,189,431 16,109,072 26,450 0 0 38,161,693 204,944,436 4,204,330 2,394,271 573,119 7,171,720 3,711,130 4,077,408 3,094,312 24,000 26,930 2,694,131 714,981 714,981 0 0 469,277 0.19 0.19 7.52 309,000 105,000 0 2,288,000 1,497,696 19,547 0 1,502,149 1,502,149 0 0
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