UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
[ x ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to __________
Commission file number: 333-73385
HCNB Bancorp, Inc.
(Exact name of small business issuer as specified in its charter)
Maryland 52-2083046
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1776 East Jefferson Street, Rockville, MD 20852
(Address of principal executive offices)
301-468-8848
(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the last 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date: As of April 30, 2000, 700,213 shares of
the small business issuer's common stock, par value of $.01 per share, were
issued and outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [ x ]
<PAGE>
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Report of Independent Public Accountants...........................1
Consolidated Balance Sheets........................................2
Consolidated Statements of Operations..............................3
Consolidated Statements of Cash Flows..............................4
Notes to Consolidated Financial Statements.....................5 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................9 - 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................11
Item 2. Changes in Securities and Use of Proceeds.........................11
Item 3. Defaults Upon Senior Securities...................................11
Item 4. Submission of Matters to a Vote of Security Holders...............11
Item 5. Other Information.................................................11
Item 6. Exhibits and Reports on Form 8-K..................................11
SIGNATURES ..................................................................12
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of HCNB Bancorp, Inc.
Rockville, Maryland
We have reviewed the unaudited consolidated balance sheet of HCNB
Bancorp, Inc. and subsidiary as of March 31, 2000, and the related unaudited
consolidated statements of operations and cash flows for the three month periods
ended March 31, 2000 and 1999. All information included in these financial
statements is the representation of the management of HCNB Bancorp, Inc.
A review consists principally of inquiries of company personnel and
analytical procedures applied to financial data. It is substantially less in
scope than an examination in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications
that should be made to the accompanying financial statements in order for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted audit
standards the consolidated balance sheet as of December 31, 1999, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the year then ended (not presented herein). In our report dated
January 13, 2000, we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the accompanying
balance sheet as of December 31, 1999, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
/s/ Jameson & Associates, P.A.
Baltimore, Maryland
April 19, 2000
1
<PAGE>
HCNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
2000 1999
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
On-hand and due from banks $ 204,843 $ 562,648
Federal funds sold 1,999,101 1,777,648
Investment securities, held to maturity 5,266,764 4,000,000
Loans receivable 1,503,262 24,800
Investment in Federal Reserve Board stock, at cost 180,000 180,000
Accrued interest receivable 35,305 33,141
Property and equipment, net 454,623 449,530
Other assets, net 75,519 74,293
---------- ----------
Total assets $9,719,417 $7,102,060
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest-bearing $ 264,504 $ 81,190
Interest-bearing 3,410,529 783,146
Accounts payable and accrued expenses 145,310 131,136
---------- ----------
Total liabilities 3,820,343 995,472
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, par value $0.01 per share, 1,000,000 shares
authorized, 0 shares issued and outstanding - -
Common stock, par value $0.01 per share, 9,000,000 shares
authorized, 700,213 shares issued and outstanding 7,002 7,002
Additional paid-in capital 6,995,128 6,995,128
Accumulated deficit (1,103,056) (895,542)
---------- ----------
Total stockholders' equity 5,899,074 6,106,588
---------- ----------
Total liabilities and stockholders' equity $9,719,417 $7,102,060
========== ==========
</TABLE>
See independent accountants' review report.
The accompanying notes are an integral part of this consolidated balance sheet
2
<PAGE>
HCNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
INTEREST INCOME
Interest income on loans $ 20,249 $ -
Interest income on investment securities 97,095 415
---------- ----------
Total interest income 117,344 415
---------- ----------
INTEREST EXPENSE
On deposits 21,946 -
Other - -
---------- ----------
21,946 -
---------- ----------
Net interest income 95,398 415
PROVISION FOR LOAN LOSSES 18,858 -
---------- ----------
Net interest income after provision for loan losses 76,540 415
SERVICE FEES AND CHARGES 2,591 -
---------- ----------
Net interest income after service fees and charges 79,131 415
---------- ----------
OTHER OPERATING EXPENSES
Salaries and benefits 132,198 -
Depreciation and amortization 11,353 -
Occupancy expense, data processing and supplies 50,058 -
Marketing 12,270 -
Professional fees 61,356 92,587
Regulatory expense - 17,600
Other operating expenses 19,410 133,383
---------- ----------
Total other operating expenses 286,645 243,570
---------- ----------
Loss before provision for income taxes (207,514) (243,155)
PROVISION FOR INCOME TAXES - -
---------- ----------
Net loss $ (207,514) $ (243,155)
========== ==========
NET LOSS PER SHARE - BOTH BASIC AND DILUTIVE
NET LOSS PER SHARE $ .297 -
WEIGHTED AVERAGE SHARES OUTSTANDING 700,213 -
</TABLE>
See independent accountants' review report.
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE>
HCNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (207,514) $ (243,155)
Adjustments to reconcile net loss to net cash from operating activities
Provision for loan losses 18,858 -
Depreciation and amortization 11,353 -
Effect of change in
Accrued interest receivable (2,164) -
Other assets (1,226) -
Accounts payable and accrued expenses 14,174 141,540
---------- ----------
Net cash from operating activities (166,519) (101,615)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities (1,266,764) -
Loan principal disbursements (1,497,320) -
Purchase of property and equipment (16,446) -
---------- ----------
Net cash from investing activities (2,780,530) -
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in savings deposits, 2,810,697 -
Advance (repayments) of related party advances - 120,000
---------- ----------
Net cash from financing activities 2,810,697 120,000
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (136,352) 18,385
CASH AND CASH EQUIVALENTS, beginning of period 2,340,296 8,341
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $2,203,944 $ 26,726
========== ==========
Interest paid $ 18,960 $ -
Income taxes paid $ - $ -
</TABLE>
See independent accountants' review report.
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE>
HCNB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
AND DECEMBER 31, 1999
1. ORGANIZATION
HCNB, Bancorp, Inc. (the Company) was incorporated under the laws of the State
of Maryland on February 24, 1998, primarily to hold all the outstanding shares
of capital stock of a national bank.
Effective, October 1999, the Company completed an initial public offering (the
Offering) in which it sold 700,213 shares of common stock for $10 per share.
During 1999, the Company received proceeds from the Offering of $7,002,130.
On December 14, 1999, the Bank received authority from the Federal Deposit
Insurance Corporation (FDIC) and Office of the Comptroller of the Currency
(O.C.C.) to begin banking operations.
The Company's primary operations are conducted by the Bank, which operates one
branch in Rockville, Maryland. The Bank is principally engaged in the business
of investing in commercial and consumer loans and attracting deposits.
As the Bank is a start-up operation, there can be no assurance that the Bank can
attract sufficient depositors or issue sufficient quality loans to operate at a
profit. The Bank is subject to certain risks inherent in making loans and
accepting deposits.
In addition to these risks, the Company is currently operating at a loss. Growth
of operations will be necessary for the Company to be able to cover overhead and
other operational costs.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the activity of HCNB
Bancorp, Inc. and its wholly-owned subsidiary, Harbor Capital National Bank. All
intercompany transactions have been eliminated in consolidation.
The accompanying consolidated financial statements for March 31, 2000 and the
three month periods ending March 31, 2000 and 1999 have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
make the information presented not misleading.
These consolidated financial statements should be read in conjunction with the
financial statements and notes thereto for the year ended December 31, 1999,
included in the Company's Annual Report to Stockholders on Form 10-KSB, filed
with the Securities and Exchange Commission. The balance sheet as of December
31, 1999 has been derived from the audited financial statements at that date.
The unaudited consolidated financial statements included herein reflect all
adjustments (which include only normal, recurring adjustments) which are, in the
opinion of management, necessary to state fairly the financial position of the
Company as of March 31, 2000 and the results of its operations for the three
month period ended March 31, 2000, and cash flows for the three month period
ended March 31, 2000. The results of interim periods are not necessarily
indicative of the results expected for the full fiscal year.
Cash and Cash Equivalents
Cash and cash equivalents include interest-bearing deposits in other banks with
original maturities of less than three months and Federal funds sold. Generally,
Federal funds are purchased and sold for one-day periods.
5
<PAGE>
HCNB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Federal Reserve Board Stock
Federal Reserve Bank stock is carried at cost.
Investment Securities
Debt securities that the Bank has the positive intent and ability to hold to
maturity are classified as held-to-maturity and recorded at amortized cost. Debt
not classified as held-to-maturity and equity securities with readily
determinable fair values are classified as trading securities if bought and held
principally for the purpose of selling them in the near term. Trading securities
are reported at fair value, with unrealized gains and losses included in
earnings. Investments not classified as held-to-maturity or trading are
considered available-for-sale and are reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component of
stockholders' equity, net of tax effects. A fair value is determined based on
bid prices published in financial newspapers or bid quotations received from
securities dealers. For purposes of computing realized gains or losses on the
sales of investments, cost is determined by using the specific identification
method. Gains and losses on sales of securities are recognized at the time of
sale. Premiums and discounts on investment and mortgage-backed securities are
amortized over the term of the security using methods that approximate the
interest method.
Loans Receivable and Allowance for Loan Losses
Loans receivable are stated at the amount of unpaid principal, reduced by an
allowance for loan losses and deferred loan fees. Interest on loans is
calculated using the simple-interest method on principal amounts outstanding
each month.
The allowance for losses on loans is determined based on management's review of
the loan portfolio and analysis of the borrowers' ability to repay, past
collection experience, risk characteristics of individual loans or groups of
similar loans and underlying collateral, current and prospective economic
conditions and status of nonperforming loans. Loans are charged off when
considered, in the opinion of management, uncollectible.
Interest on potential problem loans is not accrued when, in the opinion of
management, full collection of principal or interest is in doubt, or payment of
principal or interest has become 90 days past due. Such interest is considered
in management's determination of the allowance for loan losses. Any interest
received in excess of the amount previously accrued on such loans is recorded in
income in the period of recovery.
Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by
Creditors for Impairment of a Loan" (SFAS No. 114) addresses the accounting by
creditors for impairment of certain loans. It is generally applicable to all
loans, except large groups of smaller balance homogeneous loans. It also applies
to loans that are restructured in a troubled debt restructuring involving a
modification of terms, with limited exceptions.
A loan is considered impaired when, based on current information and events, it
is probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. SFAS No. 114 requires that
impaired loans be measured based on the present value of expected future cash
flows discounted at the loans' effective interest rate, or at the loans'
observable market price or the fair value of the collateral if the loan is
collateral dependent. If the measure of the impaired loan is less than the
recorded investment in the loan, an impairment is recognized through a valuation
allowance.
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of the respective assets. Leasehold improvements are
depreciated over 40 years. Furniture and equipment are depreciated over 7 years.
Software is depreciated over 5 years.
6
<PAGE>
HCNB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Organizational Costs
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5 (the
"SOP") regarding financial reporting on the costs of start-up activities. Under
the SOP, organizational costs are considered start-up costs and, commencing with
fiscal years beginning after December 15, 1998, entities are required to expense
such costs as they are incurred. As a result of the SOP, the Company was
required to write off its organizational costs.
Comprehensive Income
During 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"), which is effective for fiscal years beginning after
December 15, 1997. This statement establishes standards for reporting and
display of comprehensive income and its components. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. The
Company adopted this standard effective January 1, 1999. The Company does not
have any adjustment for comprehensive income for 1999. Comprehensive income is
the same as income reported in the accompanying statement of operations.
Segments of an Enterprise
During 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which is effective for
fiscal years beginning after December 15, 1997. SFAS No. 131 introduces a new
model for segment reporting, called the "management approach". The management
approach is based on the way the chief operating decision maker organizes
segments within a company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography,
legal structure, management structure -- any manner in which management
desegregates a company. The management approach replaces the notion of industry
and geographic segments in current FASB standards. The Bank has only one
reportable segment and, accordingly, no additional disclosure pursuant to SFAS
No. 131 is necessary.
Derivatives
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 established accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999 and cannot
be applied retroactively. The Bank adopted SFAS No. 133 effective January 1,
2000. The Bank anticipates that the adoption of SFAS No. 133 will not have a
material effect on its financial condition or results of operations.
Loan Origination Fees
Material loan origination fees, net of certain direct loan origination costs,
are deferred and recognized as an adjustment to interest income over the life of
the loans.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
7
<PAGE>
HCNB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. RELATED PARTY TRANSACTIONS
The insider founding stockholders that made advances to the development stage
company are to be paid interest in the amount of $14,508. This liability was
accrued at March 31, 2000.
The officers and directors have deposits in the Bank approximating $236,400 at
March 31, 2000.
The officers and directors have loans due to the Bank approximating $706,700 at
March 31, 2000.
4. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents and accounts payable approximates
the carrying amount. For investment securities, fair value is determined using
quoted market prices.
Fair value of loans receivable is estimated by discounting future cash flows,
taking into consideration future loan losses, using current rates at which
similar loans would be made to borrowers with similar credit ratings for the
same remaining maturities. For commitments to extend credit, the carrying amount
is a reasonable estimate of fair value.
With respect to deposits, fair value of savings deposits, money market accounts
and NOW accounts is the amount payable on demand at the reporting date. Fair
value of fixed maturity term accounts and individual retirement accounts is
estimated using rates currently offered for accounts of similar remaining
maturities. Management estimates that the fair value of deposits approximates
the carrying amount as of March 31, 2000.
5. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weighting and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios set forth in the table
below of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of March 31, 2000, that the Bank
meets all capital adequacy requirements to which it is subject.
Due to the Bank's recent formation, as of December 14, 1999, the Bank has not
been categorized by the Office of the Comptroller of the Currency (O.C.C.) under
the regulatory framework for prompt corrective action. To be categorized as
well-capitalized, the Bank must maintain minimum total risk-based, Tier I
Risk-based, Tier 1 leverage ratios as set forth in the table. There are no
conditions or events that management believes would prevent the Bank from being
categorized as well-capitalized.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This discussion and analysis provides an overview of the financial condition and
results of operations of HCNB Bancorp, Inc. ("Company") and Harbor Capital
National Bank ("Bank") as of March 31, 2000 and for the three months ended March
31, 2000. Comparative discussion of the results of operations for the three
months ended March 31, 1999 and March 31, 2000 is not provided, as the Company
had no operations other than organizational activity in the first quarter of
1999, and as such, comparisons do not provide accurate or meaningful information
regarding the Company's financial position or results of operations.
Some of the information in this discussion and analysis includes "forward
looking statements". These statements use words such as "may", "will", "expect",
"anticipate", "plan", "estimate" or similar words, and they discuss our future
expectations, projections of financial results or strategies that are subject to
risks and uncertainties. When you read a forward-looking statement, you should
keep in mind the risk factors set forth in our Annual Report to Stockholders on
Form 10-KSB for the year ended December 31, 1999. Our actual results and the
actual outcome of our expectations and strategies could be different from what
have been described in this report because of these risks and uncertainties.
General
HCNB Bancorp, Inc. was incorporated under the laws of the State of Maryland on
February 24, 1998, to serve as a bank holding company for a newly formed
commercial bank, Harbor Capital National Bank. The Bank received its charter
from the Office of the Comptroller of the Currency on December 14, 1999 and
commenced operations that day from its some location at 1776 East Jefferson
Street, Rockville, Maryland. The Bank is a member of the Federal Reserve System
and its deposits are insured by the Federal Deposit Insurance Corporation.
The Company completed its initial offering of its shares of common stock ($.01
par value) in October, 1999. In the initial offering, 700,213 shares were sold
at a price of $10.00 per share; total proceeds from the offering were
$7,002,130. After offering expenses, the net proceeds to the Company were
$6,828,075. The Bank was initially capitalized by the Company in an amount of
$6,000,000.
Financial Condition
As of March 31, 2000, assets were $9,719,417. This represents a growth of
$2,617,357 or 36.85% since December 31, 1999. This growth was attributable to
demand for banking services that had been building during the extended
organization period. Deposits at March 31, 2000 were $3,675,033. Management
believes that the timing of the Bank opening during the holiday season and in
the winter season had the effect of slowing growth in deposit activity.
Management has set the interest rates paid on deposits to be competitive in the
market and will increase marketing activities during the second quarter of 2000.
The Bank has no brokered funds.
As of March 31, 2000, loans (net of an allowance for loan losses) totaled
$1,503,262. In the first full quarter of operations, the loan portfolio was
composed mostly of commercial loans. Of the total portfolio at March 31, 2000,
$706,700 were loans to insiders. Most were commercial loans to companies
affiliated with directors. All insider loans were made on the same terms,
including interest rates, maturities and collateral requirements as those
prevailing at the time for comparable transactions with non-affiliated persons
and did not involve more than the normal risk of collectibility or present other
unfavorable features. Funds not extended in loans are held in the investment
portfolio. At March 31, 2000, the Bank had investments totaling $7,445,865. Most
investments were held in overnight or short term instruments, thereby allowing
the Bank to benefit from the rising interest rate environment.
Total capital at March 31, 2000 was $5,899,074. This amount far exceeds the
Bank's regulatory requirements and management believes this capital will be
adequate to fund the Company's and Bank's operations for the next twelve month
period.
Results of Operations
On a consolidated basis, the Company recorded a net loss of $207,514 for the
three month period ending March 31, 2000. Of this amount, $196,480 was the loss
associated with Bank operations.
Operating results for the year ending December 31, 2000 are projected to reflect
losses. This mostly is the result of expected overhead expenses. No major
capital expenditures are expected in the year 2000 and no major expansion
activities are planned. While staff levels are projected to increase by 3
persons, this is not considered significant due to the start-up nature of the
Bank.
9
<PAGE>
Net Interest Income
Net interest income is the difference between income on assets and the cost of
funds supporting those assets. Earning assets are composed primarily of loans
and investments; interest bearing deposits make up the cost of funds.
Non-interest bearing deposits and capital are also funding sources. Changes in
the volume and mix of earning assets and funding sources along with changes in
associated interest rates determine changes in net interest income.
The net interest income for the three month period ended March 31, 2000 was
$95,398; $97,095 was income realized from investments, $20,249 was income from
the loan portfolio and $21,946 was the cost of deposits.
Growth in the loan portfolio will result in greater contributions to interest
income, because the yields on loans are normally 3% to 5% higher than yields on
investment securities. At March 31, 2000, the weighted average yield on the loan
portfolio was 10.14%; the weighted average yield on the investment portfolio was
5.90%.
The Bank is located in a competitive environment and the rates of interest paid
on its deposits are somewhat driven by those paid by other depository
institutions. Management has taken a position to be competitive within the
market, normally placing the Bank in the highest quartile of those depository
institutions competing with it for deposits. At March 31, 2000, the Bank's
weighted average cost of deposits was 3.82%. It is anticipated that both the
volume of deposits and the cost will increase during the next twelve month
period. Management believes the volume will increase based upon increased
marketing activity and the cost will increase due to a rising interest rate
environment.
Allowance and Provision for Credit Losses
The provision for credit losses represents an expense to fund the allowance for
credit losses. These funds are set aside in anticipation of potential of credit
losses in the current loan portfolio. The amount allocated is based on many
factors which are considered in management's assessment of the loan portfolio.
These factors include economic conditions and trends, the value and adequacy of
collateral, the volume and mix of the loan portfolio, the performance of the
portfolio, internal loan processes and capital adequacy of the Bank.
Based upon management's analysis of the loan portfolio as of March 31, 2000,
management allocated $18,858 as its provision for credit losses. The amount was
computed based upon an allocation of 1.25% of commercial loans, 1.50% of
consumer loans, 1.00% of real estate loans and 1.375% for personal lines of
credit.
Non-Interest Income
Non-interest income is primarily deposit account service charges and fees for
ancillary services such as ATM access and safe deposit rentals. For the three
month period ended March 31, 2000, the Bank realized non-interest income in the
amount of $2,591. These fees are volume driven, based mostly on the deposit
customer base and should increase as the customer base increases.
The Bank expects to introduce an internet banking program during the second
quarter of 2000. Initial expenses relating to the start of the program are
minimal due to concessions made by the service provider. Monthly expenses will
be based on both a fixed program charge and activity charges, and are estimated
to be $1,000 to $1,200 per month. Included with the internet banking program
will be a bill payment service. Management anticipates that costs associated
with this component service will be borne by the customer.
Non-Interest Expense
Non-interest expense was $286,645 for the three month period ended March 31,
2000. The largest component of this amount was salaries and employee benefits
which was $132,198.
Liquidity and Capital Resources
Stockholders' equity at March 31, 2000 was $5,899,074. No cash dividends have
been declared by the Company since its inception.
Banking regulatory authorities have implemented strict capital guidelines
directly related to the credit risk associated with an institution's assets.
Banks and bank holding companies are required to maintain capital levels based
on their "risk adjusted" assets so that categories of assets with higher
"defined" credit risks will require more capital support that assets with lower
risks. The Bank has exceeded its capital adequacy requirements to date.
The Bank's liquidity is provided by its cash and cash equivalents, which are its
cash on hand and on deposit with other financial institutions and its federal
funds sold. The levels of such assets are dependent upon the Bank's operating,
financing and investment activities at any given time. Variations in levels of
cash and cash equivalents are influenced by deposit flows, and loan activity.
10
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable
(b) Not applicable
(c) Not applicable
(d) Not applicable
Item 3 Defaults Upon Senior Securities
Not Applicable
Item 4 Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5 Other Information
None
Item 6 Exhibits
(a) Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended
March 31, 2000.
11
<PAGE>
Signatures
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HCNB Bancorp, Inc.
(Registrant)
Date May 11, 2000 /s/ Michael J. Burke
------------ --------------------------------------------
Michael J. Burke, Chairman/President
(Principal Executive Officer)
Date May 11, 2000 /s/ Li-Min Lee
------------ --------------------------------------------
Li-Min Lee, Treasurer
(Principal Accounting and Financial Officer)
12
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001078676
<NAME> HCNB BANCORP INC
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 204,853
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,999,101
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 180,000
<INVESTMENTS-CARRYING> 5,266,764
<INVESTMENTS-MARKET> 0
<LOANS> 1,522,120
<ALLOWANCE> 18,858
<TOTAL-ASSETS> 9,719,417
<DEPOSITS> 3,675,033
<SHORT-TERM> 0
<LIABILITIES-OTHER> 145,310
<LONG-TERM> 0
0
0
<COMMON> 7,002
<OTHER-SE> 5,892,072
<TOTAL-LIABILITIES-AND-EQUITY> 9,719,417
<INTEREST-LOAN> 20,249
<INTEREST-INVEST> 97,095
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 117,344
<INTEREST-DEPOSIT> 21,946
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 95,398
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 286,645
<INCOME-PRETAX> (207,514)
<INCOME-PRE-EXTRAORDINARY> (207,514)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (207,514)
<EPS-BASIC> (.297)
<EPS-DILUTED> (.297)
<YIELD-ACTUAL> 6.20
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 18,858
<ALLOWANCE-DOMESTIC> 18,858
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
