UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[xx] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1999
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXHANGE ACT
OF 1934
For the transition period from ____________________ to ___________
Commission file number 333-73385
HCNB Bancorp, Inc.
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(Name of small business issuer in its charter)
Maryland 52-2083046
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(State of other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1776 East Jefferson Street, Rockville, MD 20852
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(Address of principal executive offices) Zip Code
Issuer's telephone number (301) 468-8848
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Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange on which
Title of each class registered
None None
Securities registered under Section 12(g) of the Exchange Act:
None
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 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. [xx] Yes [ ] No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [xx]
The issuer's revenues for its most recent fiscal year. $119,666
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The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold as of February 29, 2000 was $5,282,190. The initial public offering price
was used to compute this value as there is no active trading market for the
common stock and it is not possible to identify precisely the market value
thereof.
As of February 29, 2000, 700,213 shares of the small business issuer's common
stock were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
TABLE OF CONTENTS
Part I
Item l Description of Business 1
Item 2 Description of Property 9
Item 3 Legal Proceedings 9
Item 4 Submission of Matters to a Vote of Security Holders 10
Part II
Item 5 Market for Common Equity and Related Stockholder Matters 10
Item 6 Management's Discussion and Analysis or Plan of Operations 11
Item 7 Financial Statements 15
Item 8 Changes in and Disagreements with Accountants or Accounting
and Financial Disclosure 30
Part III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 30
Item 10 Executive Compensation 34
Item 11 Security Ownership of Certain Beneficial Owners and Management 34
Item 12 Certain Relationships and Related Transactions 37
Item 13 Exhibits, Lists and Reports on Form 8-K 38
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PART I
Item l DESCRIPTION OF BUSINESS
Organization. HCNB Bancorp, Inc. (the "Company") was incorporated under the laws
of the State of Maryland on February 24, 1998, to serve as a bank holding
company for a newly formed commercial bank. Harbor Capital National Bank (the
"Bank") received its charter from the Office of the Comptroller of the Currency
on December 14, 1999 and commenced operations that day from its sole location at
1776 East Jefferson Street, Rockville, Maryland. The Bank is a member of the
Federal Reserve System and its deposits are insured by the Federal Deposit
Insurance Corporation.
The Company completed its initial offering of its shares of common stock ($.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.
Products and Services. The sole function of the Company, at this time, is to
hold all of the common stock in its subsidiary, Harbor Capital National Bank.
Harbor Capital National Bank is a community bank providing commercial products
and services to its business and professional clients as well as consumer
banking products and services to individuals.
The Bank offers a full range of deposit products that are typically available
from most banking institutions. These products include business and personal
checking accounts and savings/money market deposit accounts. The Bank offers
certificates of deposit with various rate structures and maturities. All
accounts currently offered are insured by the Federal Deposit Insurance
Corporation, subject to the aggregation limits set by the FDIC.
As of December 31, 1999, the Bank had total deposits of $1,064,336. This deposit
base represented 50 accounts.
The Bank also offers a diverse line of credit facilities to both commercial
clients and individuals. While the primary target for loan development
activities is small to mid-size businesses, the Bank fully realizes the need to
be a credit source for individuals.
The Bank offers many forms of loans to businesses, including lines of credit,
revolving credit, term loans, account receivable financing, and asset-based
financing. These loans may be made on a secured or unsecured basis, based in
part on the credit worthiness of the borrower and the type of loan. Commercial
loans secured by real estate, for the purposes of land development, construction
and permanent financing, are solicited by the Bank.
Credit facilities that are offered to the individual consumer include lines of
credit, installment loans, demand loans and mortgage loans, though the Bank will
generally not offer a loan term greater than five years, unless the repricing
option is five years or shorter.
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Ancillary products and services that the Bank provides include safe deposit
boxes, night depository services, ATM access, funds transfer services both
domestic and foreign, travelers checks/money orders, and retirements products
(IRA's).
Markets. The Bank's primary service area is Montgomery County, Maryland.
Montgomery County comprises 495 square miles and is located in Central Maryland.
It is a suburb of Washington, DC and is located in the Washington-Baltimore
market region. The Bank's secondary market area will be the Washington, DC
region, particularly Washington, DC; Prince George's, Howard and Frederick
counties in Maryland; and, Arlington, Loudoun and Fairfax counties in Virginia.
The primary service area should provide the deposit base for the Bank and most
credit extension should be made within the extended market area, however, based
upon the competitive environment, it will be necessary to consider loan requests
from outside of the defined market areas.
The Bank has targeted the market segment of the Asian-American community. The
Asian-American community in Montgomery County is substantial in both size and
growth patterns. The provisions of banking products and services to the
Asian-American community is the driving force for the organization of the Bank
and should provide an excellent source of business.
Delivery. The Bank provides banking products and services from its sole location
at 1776 East Jefferson Street, Rockville, Maryland. The Bank is a member of the
HONOR ATM network and the CIRRUS interchange network, whereby bank customers can
access their deposits from around the world, and the Bank has announced the
development of a internet banking program.
An agreement between the Bank and an internet banking provider, Netzee, was
signed in December, 1999. Availability to the Bank's customer base is planned
for late March, 2000 or early in the second quarter of 2000.
Competition. The Bank operates in a highly competitive environment. The wealth
and sophistication of the Bank's market area makes it attractive for companies
providing financial services. At June 30, 1999, there were 33 banking
institutions with offices in Montgomery County. These institutions had 279
banking locations. In addition to the traditional competitors, management
believes that non-traditional financial services companies and new internet
banks provide additional competitive challenges. The Bank hopes to differentiate
itself because of its market niche of the Asian-American community and its
commitment to quality customer service.
Competition for demand/checking deposits is mostly related to convenience of
location. The Bank's location makes it convenient for both small to mid-size
businesses and individuals. The Bank's location is adjacent to one of the most
highly developed commercial areas in the county, the Route 355 corridor. Small
retail businesses mix with larger national chains. The shopping center in which
the Bank is located has about forty retail stores, with several being major
merchandisers. Convenient to the Bank's location is also high density housing,
most occupied by senior citizens. The Washington Jewish Home complex is well
within walking distance to the Bank.
Competition for time deposits is mostly controlled by interest rates. The Bank
intends to position itself to be competitive within the local market.
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Competition for loans is based upon availability of funds, interest rates, fee
pricing and time requirements. While insuring that credit quality is maintained,
the Bank is and expects to continue to be competitive in the terms of its loan
types. The competitive advantage for a small locally-managed financial
institution is the ability to have decision makers actively involved in the loan
transaction from the early stages and to be able to make a decision is a timely
manner.
Due to the short time that the Bank has been opened, it is not possible to tell
how well the Bank competes in the market.
Major Vendors. As a small start-up institution, the Bank has relied on several
outside service organizations to support its operational needs. Foremost is the
Bank's data processing service bureau, Fiserv of Atlanta, Georgia. Item
processing/imaging services are provided by Central Maryland Service Center of
Ellicott City, Maryland. Unisys Corporation has provided data processing
equipment and network installation and support.
Customer Dependencies. Bank activities to date have not revealed any dependence
on one or a few major customers. Dependence within the loan portfolio is mostly
controlled by regulatory limitations. Dependence within the deposit portfolio
will be monitored as a part of the Bank's risk management activities. The Bank
does not have or plan to accept brokered deposits.
Supervision and Regulation. The Bank received its charter to conduct business
from the Office of the Comptroller of the currency; has received insurance of
accounts from the Federal Deposit Insurance Corporation; and, has been accepted
for membership in the Federal Reserve system. The Company has been approved by
the Federal Reserve System to be a bank holding company.
The Company and the Bank are subject to extensive regulation under state and
federal banking laws and regulations. These laws impose specific requirements
and restrictions on virtually all aspects of operations, and generally are
intended to protect depositors, not stockholders. The following discussion is
only a summary and you should refer to particular statutory and regulatory
provisions for more detailed information. Any change in applicable laws or
regulations may have a material effect on our business and prospects. Beginning
with the enactment of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 and most recently with the enactment of the
Gramm-Leach-Bliley Act of 1999, numerous additional regulatory requirements have
been placed on the banking industry. We cannot predict the nature or the extent
of the effect on our business and earnings that fiscal or monetary policies,
economic conditions, or new federal or state legislation may have in the future.
HCNB Bancorp. The Company is a bank holding company registered under
the Bank Holding Company Act of 1956, as amended, and is subject to supervision
by the Board of Governors of the Federal Reserve System. As a bank holding
company, the Company is required to file with the Federal Reserve Board an
annual report and such other additional information as the Federal Reserve Board
may require by statute. The Federal Reserve Board may also make examinations of
the Company and each of its subsidiaries.
The Federal Reserve Board must approve, among other things, the acquisition by a
proposed bank holding company of control of more than five percent (5%) of the
voting shares, or substantially all the assets, of any bank or the merger or
consolidation by a bank holding company with another bank
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holding company. A bank holding company may acquire control of substantially all
the assets of any bank located in a state other than the home state of the bank
holding company, except where the bank has not been in existence for the minimum
period of time required by state law. If the bank has been in existence for the
required time period, the Federal Reserve Board may approve the acquisition.
With certain limited exceptions, a bank holding company is prohibited from
acquiring control of any voting shares of any company which is not a bank or
bank holding company and from engaging directly or indirectly in any activity
other than banking or managing or controlling banks or furnishing services for
its authorized subsidiaries. A bank holding company may, however, engage in
activities which the Federal Reserve Board has determined by order or regulation
to be so closely related to banking or managing or controlling banks, as to be
"properly incident thereto." In making such a determination, the Federal Reserve
Board is required to consider whether the performance of such activities can
reasonably be expected to produce benefits to the public, such as convenience,
increased competition or gains in efficiency, which outweigh possible adverse
effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices. The Federal
Reserve Board is also empowered to differentiate between activities commenced de
novo and activities commenced by the acquisition, in whole or in part, of a
going concern. Some of the activities that the Federal Reserve Board has
determined by regulation to be closely related to banking include making or
servicing loans, performing certain data processing services, acting as a
fiduciary or investment or financial advisor, and making investments in
corporations or projects designed primarily to promote community welfare.
Subsidiary banks of a bank holding company are subject to certain restrictions
imposed by statute on any extensions of credit to the bank holding company or
any of its subsidiaries, or investments in their stock or other securities, and
on taking such stock or securities as collateral for loans to any borrower.
Further, a holding company and any subsidiary bank are prohibited from engaging
in certain tie-in arrangements in connection with the extension of credit. A
subsidiary bank may not extend credit, lease or sell property or furnish any
services, or fix or vary the consideration for any of the foregoing on the
condition that: (i) the customer obtain or provide some additional credit,
property or services from or to such bank other than a loan, discount, deposit
or trust service; (ii) the customer obtain or provide some additional credit,
property or service from or to the Company or any other subsidiary of the
Company, or (iii) the customer not obtain some other credit, property or service
from competitors, except for reasonable requirements to assure the soundness of
credit extended.
In accordance with Federal Reserve Board policy, the Company is expected to act
as a source of financial strength to the Bank and to commit resources to support
the Bank in circumstances in which the Company might not otherwise do so. The
Federal Reserve Board may require a bank holding company to terminate any
activity or relinquish control of a nonbank subsidiary (other than a nonbank
subsidiary of a bank) upon the Federal Reserve's determination that such
activity or control constitutes a serious risk to the financial soundness or
stability of any subsidiary depository institution of the bank holding company.
Further, federal bank regulatory authorities have additional discretion to
require a bank holding company to divest itself of any bank or nonbank
subsidiary if the agency determines that divestiture may aid the depository
institution's financial condition.
As a Maryland incorporated bank holding company, the Company is also subject to
certain limitations and restrictions under applicable Maryland corporate law and
the Maryland Financial Institutions Code.
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On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley
Act ("GLBA"). Effective March 11, 2000, pursuant to authority granted under the
GLBA, a bank holding company may elect to become a financial holding company and
thereby engage in a broader range of financial and other activities than are
permissible for traditional bank holding companies. In order to qualify for the
election, all of the depository institution subsidiaries of the bank holding
company must be well capitalized and well managed, as defined by regulation, and
all of its insured depository institution subsidiaries have achieved a rating of
"satisfactory" or better with respect to meeting community credit needs.
Pursuant to the GLBA, financial holding companies will be permitted to engage in
activities that are "financial in nature" or incidental or complementary
thereto, as determined by the Federal Reserve Board. The GLBA identifies several
activities as "financial in nature," including, among others, insurance
underwriting and agency, investment advisory services, merchant banking and
underwriting, and dealing or making a market insecurities. Being designated a
financial holding company will allow insurance companies, securities brokers and
other types of financial companies to affiliate with and or acquire depository
institutions. These financial holding companies' resources are substantially
greater than those of the Company or the Bank and may now compete directly with
the Company and the Bank in their lines of business.
Harbor Capital National Bank. The Bank, as a national banking
association whose accounts are insured by the Bank Insurance Fund of the FDIC up
to the maximum legal limits, is subject to regulation, supervision and regular
examinations by the OCC. The Bank is a member of the Federal Reserve System,
and, as such, is subject to certain regulations issued by the Federal Reserve
Board. The Bank is also subject to applicable banking provisions of Maryland
law, insofar as they do not conflict with or are not preempted by federal law.
The regulations of these various agencies govern most aspects of The Bank's
business, including setting required reserves against deposits, loans,
investments, mergers and acquisitions, borrowing, dividends and location and
number of branch offices.
Competition among commercial banks, savings and loan associations, and credit
unions has increased following enactment of legislation which greatly expanded
the ability of banks and bank holding companies to engage in interstate banking
or acquisition activities. Banks in the Washington, D.C./Maryland/Virginia area
can, subject to limited restrictions, acquire or merge with a bank in another of
the jurisdictions, and can branch de novo in any of the jurisdictions.
Under the GLBA, subject to limitations on investment, a national bank that is
well capitalized and well managed, as defined by regulation, and has a
satisfactory or better community reinvestment rating, may engage through a
financial subsidiary of the bank in activities that are financial in nature or
incidental thereto. Existing authority of the Office of the Comptroller of the
Currency and the FDIC to review subsidiary activities are preserved. No decision
has, at this time, been made with respect to the establishment of new financial
subsidiaries of either the Bank or the Company.
Branching and Interstate Banking. Beginning on June 1, 1997, the
federal banking agencies were authorized to approve interstate bank merger
transactions without regard to whether such transaction is prohibited by the law
of any state, unless the home state of one of the banks has opted out of the
interstate bank merger provisions of the Riegle-Neal Interstate Banking and
Branching Efficiency
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Act of 1994. Interstate acquisitions of branches will be permitted only if the
law of the state in which the branch is located permits such acquisitions.
The Riegle-Neal Act authorizes the OCC and FDIC to approve interstate branching
de novo by national and state banks, but only in states which specifically allow
for such branching. The District of Columbia, Maryland and Virginia have all
enacted laws which permit interstate acquisitions of banks and bank branches and
permit out-of-state banks to establish de novo branches.
Capital Adequacy Guidelines. The Federal Reserve Board, the OCC and the
FDIC have all adopted risk based capital adequacy guidelines by which they
assess the adequacy of capital in examining and supervising banks and bank
holding companies and in analyzing bank regulatory applications. Risk- based
capital requirements, determine the adequacy of capital based on the risk
inherent in various classes of assets and off-balance sheet items.
Since December 31, 1992, national banks have been expected to meet a minimum,
ratio of total qualifying capital (the sum of core capital (Tier 1) and
supplementary capital (Tier 2)) to risk weighted assets of 8%. At least half of
this amount (4%) should be in the form of core capital. These requirements apply
to Harbor Capital Bank and will apply to HCNB Bancorp once its total assets
equal $150,000,000 or more, it engages in certain highly leveraged activities or
it has publicly held debt securities.
Tier I Capital for national banks generally consists of the sum of common
stockholders' equity and perpetual preferred stock (subject in the case of the
latter to limitations on the kind and amount of such stock which may be included
as Tier 1 Capital), less goodwill, without adjustment in accordance with SFAS
115. Tier 2 Capital consists of the following: hybrid capital instruments;
perpetual preferred stock which is not otherwise eligible to be included as Tier
I Capital; term subordinated debt and intermediate-term preferred stock; and,
subject to limitations, general allowances for loan losses. Assets are adjusted
under the risk-based guidelines to take into account different risk
characteristics, with the categories ranging from 0% (requiring no risk-based
capital) for assets such as cash, to 100% for the bulk of assets which are
typically held by a bank holding company, including certain multifamily
residential and commercial real estate loans, commercial business loans and
consumer loans. Residential first mortgage loans on one to four family
residential real estate and certain seasoned multi-family residential real
estate loans, which are not 90 days or more past-due or non-performing and which
have been made in accordance with prudent underwriting standards, are assigned a
50% level in the risk-weighting system, as are certain privately-issued
mortgage-backed securities representing indirect ownership of such loans.
Off-balance sheet items also are adjusted to take into account certain risk
characteristics.
In addition to the risk based capital requirements, the OCC has established a
minimum 3% Leverage Capital Ratio (Tier 1 Capital to total adjusted assets)
requirement for the most highly-rated national banks, with an additional cushion
of at least 100 to 200 basis points for all other national banks, which
effectively increases the minimum Leverage Capital Ratio for such other banks to
4%-5% or more. Under the OCC's regulations, highest-rated banks are those that
the OCC determines are not anticipating or experiencing significant growth and
have well diversified risk, including no undue interest rate risk exposure,
excellent asset quality, high liquidity, good earnings and, in general, those
which are considered a strong banking organization. A national bank that has
less than the minimum Leverage Capital Ratio requirement must submit to the
applicable district office for review and approval a reasonable plan describing
the means and timing by which the bank will achieve its minimum
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Leverage Capital Ratio requirement. A national bank which fails to file such
plan is deemed to be operating in an unsafe and unsound manner, and could be
subject to a cease-and-desist order.
The OCC's regulations also provide that any insured depository institution with
a Leverage Capital Ratio that is less than 2% is deemed to be operating in an
unsafe or unsound condition and is subject to potential termination of deposit
insurance. However, such an institution will not be subject to an enforcement
proceeding solely on account of its capital ratios, if it has entered into and
is in compliance with a written agreement with the OCC to increase its Leverage
Capital Ratio to such level as the OCC deems appropriate and to take such other
action as may be necessary for the institution to be operated in a safe and
sound manner. The capital regulations also provide, among other things, for the
issuance by the OCC or its designee(s) of a capital directive, which is a final
order issued to a bank that fails to maintain minimum capital or to restore its
capital to the minimum capital requirement within a specified time period. Such
directive is enforceable in the same manner as a final cease-and-desist order.
Prompt Corrective Action. Each federal banking agency is required to
implement a system of prompt corrective action for institutions which it
regulates. Under applicable regulations, a bank will be deemed to be: (i) "well
capitalized" if it has a Total Risk Based Capital Ratio of 10% or more, a Tier 1
Risk Based Capital Ratio of 6% or more, a Leverage Capital Ratio of 5% or more
and is not subject to any written capital order or directive; (ii) "adequately
capitalized" if it has a Total Risk Based Capital Tier Ratio of 8% or more, a
Tier 1 Risk Based Capital Ratio of 4% or more and a Tier I Leverage Capital
Ratio of 4% or more (3% under certain circumstances); (iii) "undercapitalized"
if it has a Total Risk Based Capital Ratio that is less than 8%, a Tier 1 Risk
Based Capital Ratio that is less than 4% or a Leverage Capital Ratio that is
less than 4% (3.3% under certain circumstances); (iv) "significantly
undercapitalized" if it has a Total Risk Based Capital Ratio that is less than
6%, a Tier 1 Risk Based Capital Ratio that is less than 3% or a Leverage Capital
Ratio that is less than 3% or a Leverage Capital Ratio that is less than 3%; and
(v) "critically undercapitalized" if it has a ratio of tangible equity to total
assets that is equal to or less than 2%.
An institution generally must file a written capital restoration plan which
meets specified requirements with an appropriate federal banking agency within
45 days of the date the institution receives notice or is deemed to have notice
that it is undercapitalized, significantly undercapitalized or critically
undercapitalized. A federal banking agency must provide the institution with
written notice of approval or disapproval within 60 days after receiving a
capital restoration plan, subject to extensions by the applicable agency. An
institution which is required to submit a capital restoration plan must
concurrently submit a performance guaranty by each company that controls the
institution.
A "critically undercapitalized institution" is to be placed in conservatorship
or receivership within 90 days unless the FDIC formally determines that
forbearance from such action would better protect the deposit insurance fund.
Unless the appropriate federal banking regulatory agency makes specific further
findings and certifies that the institution is viable and is not expected to
fail, an institution that remains critically undercapitalized on average during
the fourth calendar quarter after the date it becomes critically
undercapitalized must be placed in receivership.
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Immediately upon becoming undercapitalized, an institution becomes subject to
statutory provisions which (i) restrict payment of capital distributions and
management fees; (ii) require that the appropriate federal banking agency
monitor the condition of the institution and its efforts to restore its capital;
(iii) require submission of a capital restoration plan; (iv) restrict the growth
of the institution's assets; and (v) require prior approval of certain expansion
proposals. The appropriate federal banking agency for an undercapitalized
institution also may take any number of discretionary supervisory actions if the
agency determines that any of these actions is necessary to resolve the problems
of the institution at the least possible long-term cost to the deposit insurance
fund, subject in certain cases to specified procedures. These discretionary
supervisory actions include: requiring the institution to raise additional
capital; restricting transactions with affiliates; requiring divestiture of the
institution or the sale of the institution to a willing purchaser; and any other
supervisory action that the agency deems appropriate. These and additional
mandatory and permissive supervisory actions may be taken with respect to
significantly undercapitalized and critically undercapitalized institutions.
Regulatory Enforcement Authority. The Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA") included substantial
enhancement to the enforcement powers available to federal banking regulators.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions against banking organizations and
institution-affiliated parties, as defined in FIRREA. In general, these
enforcement actions may be initiated for violations of laws and regulations and
unsafe or unsound practices. Other actions or inactions may provide the basis
for enforcement action, including misleading or untimely reports filed with
regulatory authorities. FIRREA significantly increased the amount of and grounds
for civil money penalties and requires, except under certain circumstances,
public disclosure of final enforcement actions by the federal banking agencies.
Transactions with Affiliates and Insiders. The Bank is subject to the
provisions of Section 23A of the Federal Reserve Act, which place limits on the
amount of loans or extensions of credit to, investments in or certain other
transactions with affiliates, and on the amount of advances to third parties
collateralized by the securities or obligations of affiliates. Section 23A
limits the aggregate amount of transactions with any individual affiliate to ten
percent (10%) of the capital and surplus of the Bank and also limits the
aggregate amount of transactions with all affiliates to twenty percent (20%) of
capital and surplus. Loans and certain other extensions of credit to affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A, and the purchase of low quality assets from affiliates is generally
prohibited.
The Bank is also subject to the provisions of Section 23B of the Federal Reserve
Act which, among other things, prohibit an institution from engaging in certain
transactions with certain affiliates unless the transactions are on terms
substantially the same, or at least as favorable to such institution or its
subsidiaries, as those prevailing at the time for comparable transactions with
non- affiliated companies. In the absence of comparable transactions, such
transactions may only occur under terms and circumstances, including credit
standards, that in good faith would be offered to or would apply to
non-affiliated companies.
The Bank is subject to certain restrictions on extensions of credit to executive
officers, directors, certain principal stockholders and their related interests.
Such extensions of credit (i) must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
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comparable transactions with third parties and (ii) must not involve more than
the normal risk of repayment or present other unfavorable features.
Community Reinvestment Act. The Community Reinvestment Act ("CRA")
requires that, in connection with examinations of financial institutions within
their respective jurisdictions, the Federal Reserve Board, the FDIC, the OCC or
the Office of Thrift Supervision shall evaluate the record of the financial
institution in meeting the credit needs of their local communities, including
low and moderate income neighborhoods, consistent with the safe and sound
operation of those institutions. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
These factors are considered in evaluating mergers, acquisitions and
applications to open a branch or facility. The CRA also requires all
institutions to make public disclosure of their CRA ratings.
Employees. As of December 31, 1999, the Company had no employees other than its
officers; the Bank had a total of twelve employees, nine of whom were employed
full time.
Item 2 DESCRIPTION OF PROPERTY
The Company entered into a lease agreement with Federal Realty Investment Trust
on December 23, 1998 for the premises to be used as the Company's and Bank's
initial location. This location is 1776 East Jefferson Street, Rockville,
Maryland. It is Suite 119 of the Federal Plaza Shopping Center. The leased space
comprises approximately 4,153 square feet and included a remote drive in
facility located in the shopping center's parking lot. The drive in facility has
three drive through lanes.
The initial term of the lease is two years and the Company has one eight year
option. The initial term of the lease will expire on February 28, 2001.
The lease expense commitment is as follows:
Year 1 $87,213.00
Year 2 90,244.69
Year 3 93,442.50
Year 4 96,681.84
Year 5 100,087.30
Year 6 104,074.18
Year 7 108,227.18
Year 8 112,587.83
Year 9 117,073.07
Year 10 121,765.96
In addition to the lease expense, the Company is responsible for the tax
liability on the lease space and a common area maintenance assessment.
Item 3 LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company or Bank is a party.
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Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters that were submitted to a vote of the security holders
during the fourth quarter of 1999.
Part II
Item 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market for Common Stock; Dividends. The Company's common stock is not traded on
any organized exchange or on the Nasdaq National Market or the Nasdaq Small Cap
Market. There is no active market for the Company's stock and there are no
assurances that one will develop in the foreseeable future. Since the closing of
the initial stock offering there have been several private trades. The bid and
asked price has been the same as the initial stock price of $10.00 per share.
At February, 29, 2000, there were 175 holders of record of the Company's common
stock.
It is anticipated that the Bank will incur losses during its initial phase of
operations, therefore, it is not anticipated that any dividend will be paid by
the Bank or the Company for, at least, two years. Even if the Bank and Company
have earnings in an amount sufficient to pay dividends, the Board of Directors
may decide to retain earnings for the purpose of funding the growth of the
Company and Bank.
There were no sales of unregistered shares of the Company in 1999.
Use of Proceeds of Initial Public Offering. The following tables reflect the
offering expenses, net offering proceeds and use of proceeds of the Company's
initial public offering:
<TABLE>
<CAPTION>
Offering Expenses
- -----------------
2/24/98-9/30/99 10/1/99-12/31/99 Total
--------------- ---------------- -----
<S> <C> <C> <C>
Underwriters' discounts & commissions 0 0 0
Finder's fees 0 0 0
Expenses paid to or for underwriters 0 0 0
Other expenses
Legal & other professional 83,107 29,451 112,558
Regulatory fees 34,915 0 34,915
Printing 25,082 0 25,082
Other 1,500 0 1,500
Total other expenses 144,604 29,451 174,055
Total expenses 144,604 29,451 174,055
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Net Offering Proceeds
- ---------------------
<S> <C> <C> <C>
Offering proceeds 7,002,130
Offering expenses 174,055
Net offering proceeds 6,828,075
Use of Proceeds
- ---------------
Investment in subsidiary 0 6,000,000 6,000,000
Interest expense 0 54,744 54,744
Operating expenses
Legal & other professional 202,475 47,379 249,854
Compensation & benefits 220,768 139,575 360,343
Rent 41,387 37,004 78,391
Other expenses 108,260 (10,439) 97,821
Total operating expenses 572,890 268,263 841,153
</TABLE>
Item 6 PLAN OF OPERATION
The Company's main function is to serve as the holding company of the Bank. The
Bank was initially capitalized by the Company at $6,000,000. Of this amount, the
Bank used funds for capital expenditures totaling approximately $450,000. This
includes $178,000 for leasehold improvements, $169,000 for data processing
equipment and installation services, $79,000 for furniture, fixtures and
equipment and $25,000 for software. The Bank's operating losses for the year
ended December 31, 1999 were approximately $106,000.
The Bank has developed a growth plan for the next twelve months relating to
deposits and loans. At December 31, 2000, deposits are projected at $18,000,000
and total loans are projected at $12,000,000. The deposit mix includes
non-interest bearing demand deposit accounts, interest bearing checking
accounts, savings and money market deposit accounts and certificates of deposit.
The anticipated deposit mix is:
Non-interest bearing DDA 20%
Interest bearing checking 5
Savings & MMDA 22
Certificates of deposit 53
The projected loan portfolio mix is:
Commercial loans 42%
Consumer loans 8
Real Estate loans 50
11
<PAGE>
Management expects that deposit and loan growth will be realized as a result of
aggressive business development activities by both officers, staff and
directors. The Bank's geographic location is good and the convenience of the
location will be a deciding factor for many potential customers. This is
especially true for senior citizens living in high density housing near the
banking location.
The Bank will provide banking services from its banking location. The Bank is
also affiliated with the HONOR and CIRRUS automated teller machine networks,
whereby the Bank's customers may access their funds from any ATM affiliated with
these networks. Practically speaking, these networks provide access throughout
the United States and around the world.
The Bank has entered into an agreement with Netzee to provide internet banking
services to the Bank and its customers. It is anticipated that this service will
be available to the Bank's customers late in the first quarter of 2000 or early
in the second quarter. Using this service, customers, both individual consumers
and businesses, will be able to open accounts, inquire into account activities,
transfer funds, and generally communicate with Bank staff. A bill payment
feature will also be provided.
Operating results for the year ending December 31, 2000 are projected to reflect
losses. This mostly is the result of overhead burden. 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. Management
expects that the initial capitalization and the funds provided by the Bank's
deposit growth will be adequate to fund the operations of the Bank for the
twelve month period.
Some of the information in this Plan of Operations section and elsewhere in this
annual report 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 described
below and any other information contained in this annual report which identifies
a risk or uncertainty. 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.
We have no operating history upon which to evaluate our future success, and we
do not expect to be profitable initially. HCNB Bancorp and Harbor Capital
National Bank are newly organized, and neither has any prior operating history.
The Company's profitability will depend on the results of operations of our
principal asset, Harbor Capital National Bank. We expect that the Bank will
incur operating losses during its initial years of operation, and may not
achieve profitability, if at all, for at least two years. If we decide to open
new branch offices, that decision may further delay profitability because of the
increased expenses of expansion and because the branches may not enhance our
results of operations as anticipated.
Our lending strategy involves risks resulting from our choice of loan portfolio.
We expect that the Bank's loan portfolio will be made up largely of commercial
business and real estate loans. The Bank will offer mortgage loans for owner
occupied residential properties. Commercial real estate, commercial business,
construction and consumer loans generally carry a higher degree of credit risk
than residential mortgage loans.
12
<PAGE>
Future provisions for loan losses could adversely affect our results of
operations. The Bank will maintain an allowance for loan losses to provide for
loan defaults and nonperformance. The allowance is based on, among other things,
prior experience with loan losses and an evaluation of the risks in the current
portfolio. Because the Bank is a new bank with no prior loan experience, future
adjustments may be necessary if economic, operating and other conditions differ
substantially from the assumptions used in making the initial allowance
determinations. In addition, we anticipate that the Bank's provisions for loan
losses will increase in the future as it expands its lending activities. Also,
regulatory agencies may require the Bank to add to the allowance based on their
judgements when they conduct examinations of the Bank.
We cannot guarantee that our expansion strategies will be successful. We intend
to expand our business in the future by opening branches and/or considering
other opportunities when they arise. If we are not able to expand our business
successfully, our competitive position and our results of operations will
suffer. At this time, we have not identified any new branch locations or other
opportunities. Our success in expanding our business will depend on, among other
things, our ability to obtain regulatory approvals, our access to capital, our
ability to manage growth and our ability to attract and train qualified
employees. We cannot guarantee that we will be able to do any of these things.
Government regulation might negatively impact our operating results. HCNB
Bancorp and Harbor Capital National Bank will operate in a highly regulated
environment and will be subject to examination, supervision and comprehensive
regulation by several federal and state regulatory agencies. Banking
regulations, designed primarily for the safety of depositors, may limit the
growth of the Bank and the return to investors by restricting activities such as
the payment of dividends, mergers with or acquisitions by other institutions,
investments, loans and interest rates, interest rates paid on deposits and the
creation of branch offices. Laws and regulations could change at any time, and
changes could adversely affect our ability to operate profitably. See
"Supervision and Regulation" for more information about applicable banking
regulations.
The Bank will face substantial competition which could adversely affect our
growth and operating results. The Bank will operate in a competitive market for
financial services and will face intense competition both in making loans and in
attracting deposits. Many of these financial institutions have been in business
for many years, are significantly larger, have established customer bases and
greater financial resources and lending limits than the Bank and are able to
offer certain services that the Bank is not able to offer.
The Bank's ability to compete may suffer if it cannot take advantage of
technological changes. The market for financial services, including banking
services and consumer finance services, is increasingly affected by advances in
technology, including developments in telecommunications, data processing,
computers, automation, Internet-based banking, telephone banking, debit cards
and so-called "smart cards". Our ability to compete successfully may depend on
the extent to which the Bank can take advantage of technological changes.
The Company's profitability will depend, to some degree, on economic policies
and factors beyond its control. The operating income of the Bank will depend to
a great extent on "rate differentials", the difference between the interest
yields the Bank receives on its loans, securities and other interest-
13
<PAGE>
bearing assets and the interest rates it pays on its interest-bearing deposits
and other liabilities. These rates are highly sensitive to many factors beyond
the control of the Bank, including general economic conditions, the competitive
environment and the policies of various governmental and regulatory agencies.
14
<PAGE>
Item 7 FINANCIAL STATEMENTS
HCNB BANCORP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Page
Report of Independent Public Accountants 16
Financial statements
Consolidated Balance Sheets 17
Consolidated Statements of Operations 18
Consolidated Statements of Stockholders' Equity 19
Consolidated Statements of Cash Flows 20
Notes to Consolidated Financial Statements 21-29
15
<PAGE>
[Jameson & Associates, P.A. LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of HCNB Bancorp, Inc.
Rockville, Maryland
We have audited the accompanying consolidated balance sheet of HCNB Bancorp,
Inc. and subsidiary as of December 31, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year ended December 31, 1999 and the period from February 24, 1998
(inception) to December 31, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HCNB Bancorp, Inc.
and subsidiary as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for the year ended December 31, 1999 and the
period from February 24, 1998 (inception) to December 31, 1998 in conformity
with generally accepted accounting principles.
/s/ Jameson & Associates, P.A.
Baltimore, Maryland
January 13, 2000
16
<PAGE>
HCNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
On-hand and due from banks $ 562,648 $ 8,341
Federal funds sold 1,777,648 --
Investment securities, available for sale 4,000,000 --
Loans receivable 24,800 --
Investment in Federal Reserve Board
stock, at cost 180,000 --
Accrued interest receivable 33,141 --
Property and equipment, net 449,530 --
Other assets, net 74,293 39,422
----------- -----------
Total assets $ 7,102,060 $ 47,763
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest-bearing $ 81,190 $ --
Interest-bearing 783,146 --
Accounts payable and accrued expenses 131,136 176,702
----------- -----------
Total liabilities 995,472 176,702
----------- -----------
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 --
Additional paid-in capital 6,995,128 --
Accumulated deficit (895,542) (128,939)
----------- -----------
Total stockholders' equity 6,106,588 (128,939)
----------- -----------
Total liabilities and stockholders'
equity $ 7,102,060 $ 47,763
=========== ===========
</TABLE>
The accompanying notes are an integral part
of this consolidated balance sheet
17
<PAGE>
HCNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
AND FOR THE PERIOD FROM FEBRUARY 24, 1998 (INCEPTION)
TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
INTEREST INCOME
Interest income on loans $ 46 $ --
Interest income on investment securities 119,176 --
--------- ---------
Total interest income 119,222 --
--------- ---------
INTEREST EXPENSE
On deposits 703 --
Other 54,041 --
--------- ---------
54,744 --
--------- ---------
Net interest income 64,478 --
PROVISION FOR LOAN LOSSES -- --
--------- ---------
Net interest income after provision
for loan losses 64,478 --
SERVICE FEES AND CHARGES 444 --
--------- ---------
Net interest income after services
fees and charges 64,922 --
--------- ---------
OTHER OPERATING EXPENSES
Salaries and benefits 360,343 --
Depreciation and amortization 1,728 --
Occupancy expense, data processing and
supplies 149,875 --
Marketing 19,183 --
Professional fees 253,032 109,380
Regulatory expense 22,475 17,600
Other operating expenses 24,889 1,959
--------- ---------
Total other operating expenses 831,525 128,939
--------- ---------
Loss before provision for income taxes (766,603) (128,939)
PROVISION FOR INCOME TAXES -- --
--------- ---------
Net loss $(766,603) $(128,939)
========= =========
NET LOSS PER SHARE - BOTH BASIC AND DILUTIVE
NET LOSS PER SHARE $ 1.09 --
WEIGHTED AVERAGE SHARES OUTSTANDING 700,213 --
</TABLE>
The accompanying notes are an integral part
of these consolidated statements.
18
<PAGE>
HCNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999
AND FOR THE PERIOD FROM FEBRUARY 24, 1998 (INCEPTION)
TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-in Accumulated
Stock Stock Capital Deficit
---- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE, February 24, 1998 $ -- $ -- $ -- $ --
Net loss -- -- -- (128,939)
---- ---------- ---------- ----------
BALANCE, December 31, 1998 -- -- -- (128,939)
Net proceeds from issuance
of common stock -- 7,002 6,995,128 --
Net loss -- -- -- (766,603)
---- ---------- ---------- ----------
BALANCE, December 31, 1999 $ -- $ 7,002 $6,995,128 $ (895,542)
==== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated statements.
19
<PAGE>
HCNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
AND FOR THE PERIOD FROM FEBRUARY 24, 1998 (INCEPTION)
TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (766,603) $ (128,939)
Adjustments to reconcile net loss to
net cash from operating activities
Provision for loan losses -- --
Depreciation and amortization 1,728 --
Effect of change in
Accrued interest receivable (33,141) --
Other assets (34,871) --
Accounts payable and accrued expenses 74,434 56,702
----------- -----------
Net cash from operating activities (758,453) (72,237)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities (4,000,000) --
Purchase of Federal Reserve Board stock (180,000) --
Refundable deposit -- (19,422)
Loan principal disbursements (24,800) --
Purchase of property and equipment (451,258) --
----------- -----------
Net cash from investing activities (4,656,058) (19,422)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in savings deposits, 864,336 --
Proceeds from common stock offering 7,002,130 --
Advance (repayments) of related party
advances (120,000) 100,000
----------- -----------
Net cash from financing activities 7,746,466 100,000
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 2,331,955 8,341
CASH AND CASH EQUIVALENTS, beginning
of period 8,341 --
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 2,340,296 $ 8,341
=========== ===========
Interest paid $ 38,909 $ --
Income taxes paid $ -- $ --
</TABLE>
The accompanying notes are an integral part
of these consolidated statements.
20
<PAGE>
HCNB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 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, September 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 net 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 Comtroller of the Currency
(O.C.C.) to begin banking operations.
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 have been prepared in
accordance with generally accepted accounting principles and conform to general
practices within the banking industry. 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.
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.
21
<PAGE>
HCNB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
(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.
22
<PAGE>
HCNB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
(CONTINUED)
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.
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.
23
<PAGE>
HCNB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
(CONTINUED)
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 will adopt 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.
24
<PAGE>
HCNB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
(CONTINUED)
Loan Origination Fees
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.
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
As of December 31, 1999, investment securities available for sale consist of the
following:
Cost Market
FNMA - repurchase agreement,
variable interest rate, due May 1, 2014 $4,000,000 $4,000,000
========== ==========
4. LOANS RECEIVABLE
As of December 31, 1999, loans receivable consist of:
Unsecured consumer loans $24,800
Less allowance for loan losses --
-------
Loans receivable, net $24,800
=======
Outstanding loan commitments, which primarily represent undisbursed proceeds on
personal lines of credit, were $7,200 as of December 31, 1999.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31, 1999:
Leasehold improvements $178,152
Furniture and equipment 273,106
--------
451,258
Less accumulated depreciation 1,728
--------
Property and equipment, net $449,530
========
Depreciation expense for the year ended December 31, 1999 was $1,728.
25
<PAGE>
HCNB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
(CONTINUED)
6. DEPOSITS
As of December 31, 1999, deposits consisted of:
Weighted
Average Rate at
December 31, 1999 Amount Percent
----------------- ------ -------
Checking accounts - $ 81,190 9.4%
NOW accounts 1.75% 182,661 21.1%
Money market accounts 3.60% 220,107 25.5%
Certificates of deposit 4.99% 379,178 43.9%
Savings 2.25% 1,200 .1%
-------- ------
$864,336 100.0%
======== ======
A schedule of maturities of deposits as of December 31, 1999 is as follows:
No contractual maturity $485,158
Maturity within one year 377,678
Maturity in one to five years 1,500
--------
$864,336
========
The aggregate amount of deposits, each with a minimum denomination of $100,000
or more, was approximately $365,328 as of December 31, 1999.
7. INCOME TAXES
The reconciliation of the federal statutory to the actual income tax rate is as
follows:
1999 1998
-------- ------
Statutory federal income tax rate (35%) $268,300 $ 45,100
State income tax benefit, net of federal
income tax effect 38,300 6,400
Valuation allowances (306,600) (51,500)
-------- --------
Total $ -- $ --
======== ========
The Company has recorded a 100% valuation allowance against its deferred tax
asset as the Company is a start-up operation and it is more likely than not that
the deferred tax asset will not be realized.
26
<PAGE>
HCNB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
(CONTINUED)
The tax effect of temporary differences between the financial reporting basis
and income tax basis of assets and liabilities relates to the following as of
December 31, 1999:
Deferred tax assets:
Allowance for loan losses $ --
Net operating loss carryforwards 358,100
--------
Total gross deferred tax assets 358,100
Less: Valuation allowance (358,100)
--------
Net deferred tax asset $ --
========
8. 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 December 31, 1999.
The officers and directors have deposits in the Company approximating $420,000
at December 31, 1999.
9. 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. Management estimates that the fair value
of loans receivable is approximately $24,800 at December 31, 1999.
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 December 31, 1999.
27
<PAGE>
HCNB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
(CONTINUED)
10. 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 December 31, 1999, 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. The table below shows the regulatory capital as
of December 31, 1999.
28
<PAGE>
HCNB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
(CONTINUED)
For Capital Adequacy
Actual Purposes
------------------- ----------------
Amount Ratio Amount Ratio
------ ----- ------ -----
Total Capital
(to risk-weighted
assets) $5,894,000 340.69% $ 138,000 8.0%
Tier I Capital
(to risk-weighted
assets) $5,894,000 340.69% $ 69,000 4.0%
Tier I Capital
(to ending assets) $5,894,000 84.15% $ 210,000 3.0%
To Be Well-Capitalized Under
Prompt Corrective Action Provisions
-----------------------------------
Amount Ratio
------ -----
Total Capital
(to risk-weighted
assets) $ 173,000 10.0%
Tier I Capital
(to risk-weighted
assets) $ 104,000 6.0%
Tier I Capital
(to ending assets) $ 350,000 5.0%
10. LEASE
The Company entered into a lease agreement on December 23, 1998 to lease banking
facilities and offices in Rockville, Maryland. The lease is for a two year
period with an option to renew for 8 years. Rent expense was $87,213 for the
year ended December 31, 1999.
The rental commitment is as follows:
December 31, 2000 $90,245
29
<PAGE>
Item 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants.
Part III
Item 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and officers. The current Board has seven (7) directors. All of the
Company's current directors were organizers of the Company and Bank and were
duly elected or appointed to the Board and will continue to serve as directors
until their successors are elected and qualified.
Set forth below is a listing of all directors and executive officers of the
Company and/or the Bank. Except as expressly indicated, each person has been
engaged in his principal occupation for, at least, five years.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Michael J. Burke 50 Chairman/President, HCNB Bancorp;
Chairman, Harbor Capital National Bank
Chi Ping Chow 38 Director, HCNB Bancorp;
Director/Vice President, Harbor Capital National Bank
Michael L. Derr 49 Secretary, HCNB Bancorp;
Senior Vice President/Secretary, Harbor Capital National Bank
Harvey S. Fenster 61 Director, HCNB Bancorp;
Director, Harbor Capital National Bank
Wayne A. Harrison 50 Director, HCNB Bancorp
Director, Harbor Capital National Bank
Li-min Lee 41 Director/Treasurer, HCNB Bancorp
Director/Treasurer-Cashier, Harbor Capital National Bank
William J. Olsen 49 Director/Vice President, HCNB Bancorp
Director/President, Harbor Capital National Bank
Robert K. Wang 45 Director, HCNB Bancorp
Vice Chairman, Harbor Capital National Bank
</TABLE>
30
<PAGE>
Michael J. Burke serves as Chairman of the Board of directors and President of
HCNB Bancorp, and is Chairman of the Board of directors of Harbor Capital
National Bank. Mr. Burke is a certified public accountant and has been the
president since 1996 and a principal since 1971 of Yorke, Burke and Lee, CPA's
P.A. Mr. Burke has been the president of East West Communications, Inc. since
1989, and the president of Metro Billing Corporation since 1993. Mr. Burke
served as president of Quads Trust Company from 1995 to 1996, and was a director
from 1991 to 1996, and as the chief financial officer of The Parvus Company, an
international security firm, from 1986 to 1999.
Chi Ping Penny Chow is Vice President and Business Development Officer of Harbor
Capital National Bank. She is a director of HCNB Bancorp, and is a director of
Harbor Capital National Bank. From 1996, until joining the organizing efforts of
Harbor Capital National Bank, Ms. Chow was the treasurer of the Development Bank
of Singapore. Ms. Chow was a senior loan processor at Fidelity Mortgage
Services, Inc. from 1992 to 1994, when she was promoted to the position of
manager, which she held from 1994 to 1996.
Michael L. Derr is the Senior Vice President and Chief Operating Officer of
Harbor Capital National Bank. He is secretary of HCNB Bancorp. Prior to joining
the organizing efforts of Harbor Capital National Bank, Mr. Derr was president
of MLD Consulting, Inc., a bank consulting company, which he founded in 1998.
Mr. Derr previously served as assistant vice president and vice president of
operations at The Bank of Glen Burnie from 1989 to 1998. From 1972 to 1989, Mr.
Derr held various positions, including vice president of operations, at Citizen
Savings Bank, FSB.
Harvey S. Fenster is a director of HCNB Bancorp and of Harbor Capital National
Bank. Dr. Fenster has practiced as an orthodontist since 1964, specializing in
orthodontics and dentofacial orthopedics. Dr. Fenster was an organizer, director
and vice chairman of the board of Kennedy Bank & Trust Company from 1970 to
1982. In addition, Dr. Fenster has been a director of East West Communications,
Inc. since 1985.
Wayne A. Harrison is a director of HCNB Bancorp and of Harbor Capital National
Bank. Since 1983, Mr. Harrison has been the president of H.T. Harrison & Sons,
Inc., a family owned roofing and building contractor which has been doing
business in the Washington, D.C. metropolitan area for over 50 years. Mr.
Harrison has served as a director and secretary of East West Communications,
Inc. since 1995.
Li-min Lee is Treasurer of HCNB Bancorp. She is a director of HCNB Bancorp and
of Harbor Capital National Bank. She is also the Treasurer/Cashier of the Bank.
Ms. Lee is currently a certified public accountant and a principal of Yorke,
Burke and Lee, CPA's PA, where she has served as the vice president since 1985.
Ms. Lee has served as vice president for Com-Tech International, Inc. since 1996
and as vice president of Crossover International, LLC since 1996.
William J. Olsen is the President and Chief Executive Officer of Harbor Capital
National Bank, and Vice President of HCNB Bancorp. He is also a director of HCNB
Bancorp and of Harbor Capital National Bank. Mr. Olsen, also the Bank's Chief
Lending Officer, is a credit trained commercial banker with more than 26 years
of experience acquired at money center, regional and community banks. His client
base has included professionals as well as small to middle market businesses,
and his primary responsibilities were to build full service banking
relationships. He moved to the Baltimore-Washington
31
<PAGE>
metropolitan area in 1993 and most recently served as a vice president at
Crestar Bank, managing the Maryland region's Professional & Executive and
Not-for-Profit new business efforts.
Robert K. Wang is a member of the board of directors of HCNB Bancorp and Vice
Chairman of the Board of Harbor Capital National Bank. Mr. Wang is currently the
chairman and president of Comtech Micro Systems, Inc., which he founded in 1986.
Comtech Micro Systems, Inc. specializes in the manufacture and distribution of
micro computers and related products. The company also is an authorized
distributor for major brand personal computers and related products.
Each director and officer has served in their respective positions since the
formation of the Company and Bank.
There are no family relationships among directors and executive officers.
Nominees for election to Board of Directors of the Bank. The following persons
have been nominated to serve as additional directors of Harbor Capital National
Bank. Before being considered further for election, each nominee must be
approved by the Office of the Comptroller of the Currency, the Federal Deposit
Insurance Corporation and the Federal Reserve Board.
Name Age Position
- ---- --- --------
Craig S. Cohen 28 Director nominee,
Harbor Capital National Bank
James M. Davin 54 Director nominee,
Harbor Capital National Bank
Edward R. Kuan 41 Director nominee,
Harbor Capital National Bank
George H. Lowe, Jr. 38 Director nominee,
Harbor Capital National Bank
Stephen E. McGregor 50 Director nominee,
Harbor Capital National Bank
Marc L. Meisel 28 Director nominee,
Harbor Capital National Bank
James F. Whalen 38 Director nominee,
Harbor Capital National Bank
Craig S. Cohen is currently the Vice President of Leasing for Ronald Cohen
Investments, a real estate investment company located in Bethesda, Maryland. He
has held that position since 1993. Mr. Cohen is also a stockholder, officer
and/or partner in several other real estate holding companies.
32
<PAGE>
James M. Davin is the President of Davin Capital Corporation, a private
investment company, and the General Partner of Davin Capital, L.P., a private
investment partnership. He has held these positions since 1994. Previous to
these positions, Mr. Davin held several senior level positons in investment
banking companies, including First Boston Corporation, Drexel Burnham Lambert,
and Lehman Brothers. Mr. Davin served as Chairman and Vice Chairman of the Board
of Governors of the National Association of Securities Dealers in 1987 and as a
board member from 1985 until 1988.
Edward R. Kuan is President of Belle Terre Development and Construction Company,
a real estate development firms, and of Monticello Homes Inc., a home building
company. Both are headquartered in Rockville, Maryland. Mr, Kuan is a licensed
building contractor.
George H. Lowe Jr. is the President and Chief Executive Officer of G. Lowe &
Associates, Ltd., a firm involved in government relations and financial
consulting. Mr. Lowe is also the CEO of Potomac RiverJet, Inc. and the General
Partner of Strategic Investment Holding, LLC, an investment firm. Previous to
these positions, Mr. Lowe was a commercial banking officer with First American
Bank and Maryland National Bank.
Stephen E. McGregor is currently self employed as a financial services advisor.
From 1997 until 1999, Mr. McGregor was the Executive Vice President and Chief
Financial Officer of Key Energy Group, Inc. and from 1995 to 1997 he was a
Senior Financial Advisor of James D. Wolfensohn, Inc., a New York investment
banking firms. Mr. McGregor is an attorney and has had extensive experience at
the federal government level having served in both the Executive and Legislative
branches.
Marc L. Meisel is the Chief Operating Officer of Worldwide Parking, Inc., an
international company headquartered in Rockville, Maryland. He has held this
position since 1993.
James F. Whalen is President and Owner of Investment Properties, Inc., a real
estate development company doing business in the Baltimore-Washington area
Section 16(a) Beneficial Ownership Reporting Compliance
No reports were filed under Section 16(a) of Securities Exchange Act of 1934.
The Company is not subject to the provisions of Section 16.
33
<PAGE>
Item 10 EXECUTIVE COMPENSATION
For the year ended December 31, 1999, no compensation was paid by the Company to
any person serving as a director or officer.
The following table sets forth the compensation for Mr. Olsen, Chief Executive
Officer of the Bank. Mr. Burke, Chief Executive Officer of the Company, received
no compensation.
Name & Principal Position Year Salary Bonus Other
- ------------------------- ---- ------ ----- -----
William J. Olsen 1999 $90,269(1) $10,000 0
President/CEO, Harbor Capital
National Bank
(1) Of this salary amount, $9,500 was paid as an automobile allowance.
No other executive officer of the Bank had compensation in excess of $100,000
for the fiscal year ended December 31, 1999.
HCNB Bancorp entered into a written employment agreement with Mr. Olsen. Under
the Agreement, Mr. Olsen served as Vice President of HCNB Bancorp at an annual
base salary of $100,000, subject to annual review. The agreement terminated with
the opening of Harbor Capital National Bank and the execution of an employment
agreement with the Bank.
Under the Agreement with Harbor Capital National Bank, Mr. Olsen serves as
President of Harbor Capital National Bank at an annual base salary of $100,000,
subject to annual review, and an initial term of three years, automatically
renewable for one year terms unless written notice is provided by either party
90 days before expiration of a term. However, either Harbor Capital National
Bank or Mr. Olsen may terminate his employment at any time upon 30 days' prior
written notice, and Mr. Olsen may be terminated for cause at any time without
prior notice. Harbor Capital National Bank also provides Mr. Olsen with a
monthly automobile allowance and benefits available to other employees.
Item 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following set forth information regarding stock ownership of management and
holders of 5% or more of the Company's common stock as of February 29, 2000.
34
<PAGE>
Amount & Nature
Name & Address Of Beneficial Percent
Title of Class Of Beneficial Owner Ownership of Class
- -------------- ------------------- ------------- --------
Common Stock Sy-Pien Chow 66,950 9.56%
706 Ivy League Lane (1)
Rockville, MD 20850
Common Stock Warren Trepp 69,300 9.90
590 Lakeshore Boulevard (2)
Incline Village, NV 89450
Common Stock Edward R. Kuan 50,000 7.14
11047 Cedarwood Drive Individual
Rockville, MD 20852
Common Stock Carmelo Montalbano 50,107 7.16
5044 Millwood Lane, NW (3)
Washington, DC 20016
Common Stock Michael J. Burke 20,020 2.86
21216 Christman Hill Terrace (4)
Boyds, MD 20841
Common Stock Chi Ping Chow 17,700 2.53
706 Ivy League Lane Individual
Rockville, MD 20852 (5)
Common Stock Michael L. Derr 1,000 0.14
242 Mill Church Road IRA
Arnold, MD 21012
Common Stock Harvey S. Fenster 10,100 1.44
6316 Lenox Road (6)
Bethesda, MD 20817
Common Stock Wayne A. Harrison 21,094 3.01
12709 High Meadow Road Individual
North Potomac, MD 20878
Common Stock Li-Min Lee 41,480 5.92
5 Maplecrest Court (7)
Potomac, MD 20854
35
<PAGE>
Common Stock William J. Olsen 500 0.07
8501 High Timber Court (8)
Ellicott City, MD 21043
Common Stock Robert K. Wang 59,300 8.47
9300 Inglewood Court (9)
Potomac, MD 20854
Officers and Directors 171,194 24.45%
As a group (8 persons)
(1) Total includes 17,700 shares held by daughter, Chi Ping Chow, and 5,000
shares held by daughter Chih Ching Chow in trust. All other shares are held
individually.
(2) Stock is held in two separate trusts, 34,650 shares in each, in which Mr.
Trepp is the sole trustee.
(3) Total includes 19,107 shares held in Mr. Montalbano's SEP IRA. All other
shares are held individually.
(4) Total includes 16,500 shares held individually; 4,020 shares held in Mr.
Burke's IRA; and, 5,000 shares held in a trust in which Mr. Burke is a
trustee.
(5) In addition to the shares held individually, 44,250 shares are held by Ms.
Chow's father, Sy-Pien Chow and 5,000 shares are held by her sister, Chih
Ching Chow, in trust.
(6) Total includes 100 shares held individually and 10,000 held by Dr.
Fenster's pension plan.
(7) Total includes 3,650 shares held individually; 3,080 shares held in Ms.
Lee's IRA; and 34,750 shares held jointly with others. In addition, 5,250
shares are owned by Ms. Lee's husband, Dar-Ning Kung, in his IRA and 520
shares are held by her son, Albert Kung.
(8) Total includes 200 shares held individually and 300 shares held jointly.
(9) Total includes 7,300 shares held individually and 52,000 shares held in a
trust with Mr. Wang as sole trustee. In addition, Mr. Wang's sister,
Jennifer Wang, holds 10,000 shares individually.
36
<PAGE>
In addition to the directors and executive officers noted above, there are
currently seven nominees for election to the Board of Directors of the Bank.
Their ownership interests in the Company are as follows:
Common Stock Craig S. Cohen 5,834 0.83
6500 Rock Spring Dr. #302 Individual
Bethesda, MD 20817
Common Stock James M. Davin 0 0.00
630 Fifth Avenue, #1965
New York, NY 10111
Common Stock Edward R. Kuan 50,000 7.14
11047 Cedarwood Drive Individual
Rockville, MD 20852
Common Stock George H. Lowe, Jr. 500 0.07
1211 Connecticut Ave., NW Individual
Suite 805 (10)
Washington, DC 20036
Common Stock Stephen E. McGregor 0 0.00
2329 Tilden Place, NW
Washington, DC 20008
Common Stock Marc L. Meisel 17,500 2.50
6000 Executive Blvd., 7th Floor Individual
Rockville, MD 20852
Common Stock James F. Whalen 10,000 1.43
807I Rockville Pike Individual
Rockville, MD 20852 (11)
(10) In addition, 4,500 shares are held by Strategic Investment Holdings, LLC,
of which Mr.Lowe is the President.
(11) In addition, 1,500 shares are held by I.P. Associates, LLC, of which Mr.
Whalen is the President; 2,500 shares are held by his father, C.M. Whalen;
and 2,500 shares are held in a trust where is father is the sole trustee.
Item 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank has had, and expects to have in the future, banking transactions in the
ordinary course of business with the Company's and Bank's directors, officers
and employees and their associates. In the past, all such transactions have been
on the same terms, including interest rates, maturities and collateral
requirements as those prevailing at the time for comparable transactions with
non-affiliated
37
<PAGE>
persons and did not involve more than the normal risk of collectibility or
present other unfavorable features.
During the organization of the Company and the Bank, the organizing directors
made advances to the Company in the aggregate amount of $555,000 which were
repaid as subscriptions for common stock in the offering. These advances were
made under a founders loan agreement whereby the organizers would receive an
interest payment at the rate of 5.00% per annum. This amount was carried as
interest payable and booked as an expense as of December 31, 1999.
In addition, one organizing director made an advance to the Company in the
amount of $20,000 which was repaid from the proceeds of the offering. No
interest was paid on this loan. Certain organizing directors also guaranteed a
bank line of credit to the Company in an aggregate amount of $150,000. All
advances from this line were repaid from the offering proceeds.
Item 13 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Description of Exhibits
3(i) Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 of the Registration Statement on Form
SB-2, File No. 333-73385)
3(ii) Bylaws of the Company (incorporated by reference to Exhibit
3.2 of the Registration Statement on Form SB-2, File No.
333-73385)
10.1 Employment Agreement between William J. Olsen and the Bank
(incorporated by reference to Exhibit 10.3 of the Registration
Statement on Form SB-2, File No. 333-73385)
10.2 Employment Agreement between Michael L. Derr and the Bank
(incorporated by reference to Exhibit 10.4 of the Registration
Statement on Form SB-2, File No. 333-73385)
10.3 Lease Agreement between HCNB Bancorp, Inc. and Federal Realty
Investment Trust (incorporated by reference to Exhibit 10.5 of
the Registration Statement on Form SB-2, File No. 333-73385).
21 Subsidiaries of the Registrant (incorporated by reference to
Exhibit 21.1 of the Registration Statement on Form BS-2, File
No. 333-73385).
27 Financial Data Schedule
(b) No reports on Form 8-K were filed by the Company during the fourth quarter
of the year ended December 31, 1999.
38
<PAGE>
Signatures
In accordance with Section 13 or 15(d) of the Securities Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HCNB Bancorp, Inc.
------------------
(Registrant)
By: /s/ Michael J. Burke
---------------------------------
Michael J. Burke.
Chairman of the Board/President
Date: March 27, 2000
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in
capacities and on the dates indicated.
Signature Title Date
/s/ Michael J. Burke Chairman of the Board/President March 27, 2000
- ----------------------- (Principal Executive Officer)
Michael J. Burke
/s/ Chi Ping Chow Director March 27, 2000
- -----------------------
Chi Ping Chow
/s/ Harvey S. Fenster Director March 27, 2000
- -----------------------
Harvey S. Fenster
/s/ Wayne A. Harrison Director March 27, 2000
- -----------------------
Wayne A. Harrison
/s/ Li-Min Lee Director/Treasurer March 27, 2000
- -----------------------
Li-Min Lee
/s/ William J. Olsen Director/Vice President March 27, 2000
- ----------------------- (Principal Financial Officer
William J. Olsen and Principal Accounting
Officer)
/s/ Robert K. Wang Director March 27, 2000
- -----------------------
Robert K. Wang
39
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE EXCHANGE ACT BY NON-REPORTING
ISSUERS
HCNB Bancorp, Inc. has not sent and will not send to its security holders an
annual report other than this Annual Report on Form 10-KSB. HCNB Bancorp, Inc.
intends to provide proxy materials to its security holders on or about April 28,
2000. A copy of such materials have been furnished to the Securities and
Exchange Commission for its information, and HCNB Bancorp, Inc. understands that
such materials will not be considered to be filed or subject to the liabilities
of Section 18 of the Exchange Act.
40
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001078676
<NAME> HCNB BANCORP INC
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 562,648
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,777,648
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,000,000
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 24,800
<ALLOWANCE> 0
<TOTAL-ASSETS> 7,102,060
<DEPOSITS> 864,336
<SHORT-TERM> 0
<LIABILITIES-OTHER> 131,136
<LONG-TERM> 0
0
0
<COMMON> 7,002
<OTHER-SE> 6,099,586
<TOTAL-LIABILITIES-AND-EQUITY> 7,102,060
<INTEREST-LOAN> 46
<INTEREST-INVEST> 119,176
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 119,222
<INTEREST-DEPOSIT> 703
<INTEREST-EXPENSE> 54,041
<INTEREST-INCOME-NET> 64,922
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 831,525
<INCOME-PRETAX> (766,603)
<INCOME-PRE-EXTRAORDINARY> (766,603)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (766,603)
<EPS-BASIC> (1.09)
<EPS-DILUTED> (1.09)
<YIELD-ACTUAL> 4.11
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
