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 September 30, 2000
[x] 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 of incorporation or (IRS Employer
organization) Identification No.)
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 October 31, 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>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HCNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
(unaudited) (audited)
ASSETS
Cash and cash equivalents:
<S> <C> <C>
On-hand and due from banks $ 384,656 $ 562,648
Federal Funds sold 2,649,522 1,777,648
Investment securities, held to maturity 1,600,576 4,000,000
Loans receivable (net of allowance for credit
losses of $90,705 and $00, and deferred loan fees
of $17,400 and $00) 7,712,478 24,800
Investment in Federal Reserve Board stock, at cost 180,000 180,000
Accrued interest receivable 87,874 33,141
Property and equipment, net 442,059 449,530
Other assets, net 86,746 74,293
------------ ------------
Total assets $ 13,143,911 $ 7,102,060
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Non-interest bearing $ 601,622 $ 81,190
Interest bearing 6,749,391 783,146
Accounts payable and accrued expenses 210,753 131,136
------------ ------------
Total liabilities 7,561,766 995,472
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 (1,419,985) (895,542)
------------ ------------
Total stockholders' equity 5,582,145 6,106,588
Total liabilities and stockholders' equity $ 13,143,911 $ 7,102,060
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
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<TABLE>
<CAPTION>
HCNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE AND THREE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
(unaudited)
Nine months ended September 30, Three months ended September 30,
2000 1999 2000 1999
--------- --------- --------- ---------
INTEREST INCOME
<S> <C> <C> <C> <C>
Interest income on loans $ 276,495 $ -- $ 173,371 $ --
Interest income on investment securities 314,667 1,509 98,789 354
--------- --------- --------- ---------
Total interest income 591,162 1,509 272,160 354
INTEREST EXPENSE
On deposits 147,879 -- 74,956 --
Other -- -- -- --
--------- --------- --------- ---------
Total interest expense 147,879 -- 74,956 --
--------- --------- --------- ---------
Net interest income 443,283 1,509 197,204 354
PROVISION FOR LOAN LOSSES 90,705 -- 34,551 --
--------- --------- --------- ---------
Net interest income after
provision for loan losses 352,578 1,509 162,653 354
SERVICE FEES AND CHARGES 13,368 -- 6,657 --
--------- --------- --------- ---------
Net interest income after service
fees and charges 365,946 1,509 169,310 354
OTHER OPERATING EXPENSES
Salaries and benefits 429,907 220,768 141,043 102,951
Depreciation and amortization 32,025 -- 8,694 --
Occupancy expense and supplies 153,191 41,387 48,091 18,730
Marketing 30,034 -- 4,840 --
Professional fees 153,352 176,202 45,521 16,953
Regulatory expense -- 16,895 -- 2,735
Other operating expenses 91,880 133,303 29,845 69,656
--------- --------- --------- ---------
Total other operating expenses 890,389 588,555 278,034 211,025
--------- --------- --------- ---------
Loss before provision for
Income taxes (524,443) (587,046) (108,724) (210,671)
--------- --------- --------- ---------
PROVISION FOR INCOME TAXES -- -- -- --
--------- --------- --------- ---------
Net Loss $(524,443) $(587,046) $(108,724) $(210,671)
--------- --------- --------- ---------
NET LOSS PER SHARE -
BOTH BASIC AND DILUTED ($.749) ($.156)
WEIGHTED AVERAGE SHARES
OUTSTANDING 700,213 700,213
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
HCNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
(unaudited)
<S> <C> <C>
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (524,443) $ (587,046)
Adjustments to reconcile net loss to net cash from operating activities
Provision for loan losses 90,705 --
Depreciation and amortization 32,025 --
Effect of change in:
Accrued interest receivable (54,733) --
Other assets (12,453) --
Accounts payable and accrued expenses 79,617 464,736
----------- -----------
Net cash from operating activities (389,282) (122,310)
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of investment securities 2,399,424 --
Loan principal disbursements (7,778,383) --
Purchase of property and equipment (24,554) (356,577)
----------- -----------
Net cash from investing activities (5,403,513) (356,577)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in savings deposits 6,486,677 --
Repayments of related party advances -- 471,600
----------- -----------
Net cash from financing activities 6,486,677 471,600
INCREASE IN CASH AND CASH EQUIVALENTS 693,882 (7,287)
CASH AND CASH EQUIVALENTS, beginning of period 2,340,296 8,341
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 3,034,178 $ 1,054
----------- -----------
Interest paid $ 131,935 $ --
Income taxes paid $ -- $ --
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
HCNB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 of 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, Harbor Capital National Bank (the Bank) received authority
from the Office of the Comptroller of the Currency and the Federal Deposit
Insurance Corporation to begin banking operations.
From February 24, 1998 until December 14, 1999, the Company was considered a
development stage enterprise.
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 attracting deposits and investing in commercial and consumer loans. 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 in
operations will be necessary for the Company to be able to cover overhead and
other operational costs.
2. 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 September 30, 2000 and
for the three and nine month periods ended September 30, 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 September 30, 2000 and the results of its operations for the three
and nine month periods ended September 30, 2000 and the cash flows for the nine
month period ended September 30, 2000. The results of interim periods are not
necessarily indicative of the results expected for the full fiscal year.
3. RELATED PARTY TRANSACTIONS
The officers and directors of the Company and the Bank have deposits in the Bank
approximating $1,018,600 at September 30, 2000.
4
<PAGE>
The officers and directors of the Company and the Bank have loans due to the
Bank approximating $163,400 at September 30, 2000. All loans made to officers
and directors are made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
unaffiliated third parties and do not involve more than the normal risk of
repayment or present other unfavorable features.
4. 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. Management believes, as
of September 30, 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 (OCC) 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, and Tier I leverage ratios. There are no conditions or events that
management believes would prevent the Bank from being categorized as
well-capitalized.
5. INCOME TAXES
The Company uses the liability method of accounting for income taxes as required
by SFAS No. 119, "Accounting for Income Taxes". Under the liability method,
deferred-tax assets and liabilities are determined based on differences between
the financial statement carrying amounts and the tax basis of existing assets
and liabilities (i.e., temporary differences) and are measured at the enacted
rates that will be in effect when the differences reverse. Deferred income taxes
will be recognized when it is deemed more likely than not that the benefits of
such deferred income taxes will be realized; accordingly, no deferred income
taxes or income tax benefits have been recorded by the Company.
5
<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 September 30, 2000 and for the three and nine month
periods ended September 30, 2000. Comparative discussion of the results of
operations for the three and nine months ended September 30, 1999 and September
30, 2000 is not provided, as the Company had no operations other than
organizational activity in the first nine months 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 sole 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 September 30, 2000, assets were $13,143,911. This represents a growth of
$6,041,851 or 85% since December 31, 1999. Deposits at September 30, 2000 were
$7,351,013. This growth was mostly attributable to demand for banking services
that had been building during the extended organization period and officer
calling activities. 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 in the first quarter, but deposit activity has
increased in the second and third quarters. Management has set the interest
rates paid on deposits to be competitive in the market and will continue to
increase marketing activities during the fourth quarter of 2000. The Bank has no
brokered funds.
As of September 30, 2000, loans (net of an allowance for loan losses and
deferred loan fees) totaled $7,712,478, the majority of which were commercial
and commercial real estate loans. Funds not extended in loans are held in the
investment portfolio. At September 30, 2000, the Bank had investments totaling
$4,250,098. All investments, other than the Federal Reserve Bank stock held by
the Bank and a $100,000 certificate of deposit, were held in overnight or short
term government agency securities. Since December 31, 1999, the Bank has
invested mostly in federal funds sold due to the prevailing interest rate
environment.
Total capital at September 30, 2000 was $5,582,145. Management believes this
capital will be adequate to fund the Company's and Bank's operations for the
next twelve month period.
6
<PAGE>
Results of Operations
On a consolidated basis, the Company recorded a net loss of $108,724 for the
three month period ended September 30, 2000 and a net loss of $524,443 for the
nine month period ended September 30, 2000. Of the net loss for the nine month
period, $483,154 was the loss associated with Bank operations.
Operating results for the year ending December 31, 2000 are projected to reflect
losses as loan and deposit growth initially will not produce net interest income
sufficient to cover operating expenses. Management continues to consider branch
expansion into the District of Columbia. No formal action has been taken and all
activities are at this point exploratory. Costs associated with the development
of a branch location, if expansion should occur this year, could impact the
Bank's operating results in 2000.
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 and nine month periods ended September 30,
2000 was $197,204 and $443,283. For the nine month period, $276,495 was income
from lending activities; $314,667 was income from security investments; and the
Bank's cost of deposits was $147,879.
Growth in the loan portfolio resulted in greater contributions to interest
income in the third quarter, because the yields on loans are normally 3% to 5%
higher than yields on investment securities. At September 30, 2000, the weighted
average yield on the loan portfolio was 10.23%; the weighted average yield on
the investment portfolio was 6.53%.
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 upper one-half of those depository
institutions competing with it for deposits, however the Bank has chosen not to
aggressively compete for jumbo certificates of deposits which are highly rate
sensitive. At September 30, 2000, the Bank's weighted average cost of deposits
was 4.30%. It is anticipated that both the volume of deposits and the interest
expense will increase during the next twelve month period based upon increased
marketing activities.
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 September 30, 2000,
management allocated to the provision for credit losses an additional amount of
$34,511 for the third quarter. On September 30, 2000, the provision for credit
losses totaled $90,705. The amount was computed based loan portfolio balances of
September 28, 2000 and upon an allocation computation 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 September 30, 2000, the Bank realized non-interest income in
the amount of $6,657. This compares to $2,591 realized in the first quarter of
2000 and a non-interest income earned in the second quarter of $4,120. These
fees are volume driven, based mostly on the deposit customer base and should
increase as the customer base increases. The Bank has seen increased use of its
automated teller machine especially by consumers holding debit/ATM cards issued
by other financial institutions.
7
<PAGE>
The Bank continues to prepare for the full implementation of its internet
banking program. Initial expenses relating to the start of the program were
minimal due to concessions made by the service provider. Monthly expenses are
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 is a
bill payment service. Management anticipates that costs associated with this
service will be partially borne by the customer.
Non-Interest Expense
Non-interest expense for the three and nine month periods ended September 30,
2000 were $278,024 and $890,389. The largest portion of these operating expenses
were salaries and employee benefits. For the nine month period ended September
30, 2000, $461,932 was salary and employee benefits expenses. This represents
52% of all other operating expenses.
Liquidity and Capital Resources
Stockholders' equity at September 30, 2000 was $5,582,145. 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 mostly influenced by deposit flows and loan
activity.
8
<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
None
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
September 30, 2000.
9
<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 November 6, 2000 /s/ Michael J. Burke
------------------------ ------------------------------------
Michael J. Burke, Chairman/President
(Principal Executive Officer)
Date November 6, 2000 /s/ Li-Min Lee
------------------------ ------------------------------------
Li-Min Lee, Treasurer
(Principal Accounting and
Financial Officer)
10
