SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------------
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of The Securities Exchange Act of 1934
For Quarter Ended SEPTEMBER 30, 1998 Commission File Number 33-43386
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HARDWICK HOLDING COMPANY
------------------------
(Exact name of registrant as specified in its charter)
GEORGIA 58-1408388
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Hardwick Square, P. O. Box 1367, Dalton, GA. 30722-1367
- ------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (706) 217-3950
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
-- --
Number of shares of common stock outstanding
at November 12, 1998
4,183,996 Shares
----------------
<PAGE>
HARDWICK HOLDING COMPANY AND SUBSIDIARIES
INDEX
Page No.
PART I- FINANCIAL INFORMATION
Consolidated Statements of Financial
Position at September 30, 1998 and
December 31, 1997 3
Consolidated Statements of Income
for the Three Months Ended September 30,
1998 and 1997 4
Consolidated Statements of Income
for the Nine Months Ended September 30,
1998 and 1997 5
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30,
1998 and 1997 6-7
Notes to Unaudited Consolidated Financial Statements 8-10
Management's Discussion and Analysis of
Financial Position and Results of Operations 11-19
PART II- OTHER INFORMATION 20
SIGNATURES 21
2
<PAGE>
HARDWICK HOLDING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
1998 1997
------------ ------------
ASSETS (unaudited)
-----------
<S> <C> <C>
Cash and due from banks $ 18,836 $ 25,533
Federal funds sold 15,469 12,982
--------- ---------
Total cash and cash equivalents 34,305 38,515
Investment securities, available-for-sale 136,545 119,431
Loans, net 301,262 310,159
Premises and equipment, net 14,573 14,079
Assets under capital lease, net 271 418
Accrued interest receivable 4,356 3,988
Excess of cost over fair value of
subsidiaries acquired, net of amortization 4,123 4,556
Other assets 1,834 1,746
--------- ---------
Total assets $ 497,269 $ 492,892
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits-
Noninterest-bearing $ 89,195 $ 86,904
Interest-bearing 334,413 322,881
--------- ---------
Total deposits 423,608 409,785
Securities sold under agreements to repurchase 4,515 19,339
Other borrowed funds 8,175 8,231
Capital lease obligation 317 472
Other liabilities 5,172 4,462
--------- ---------
Total liabilities 441,787 442,289
--------- ---------
Commitments and contingencies (Notes 2 and 4)
Stockholders' equity-
Common stock, $.50 par value, 10,000,000 shares authorized,
4,183,996 and 4,021,496 shares issued; 4,117,996 and
3,970,496 shares outstanding at September 30, 1998 and
December 31, 1997, respectively 2,162 2,081
Additional paid-in capital 23,008 20,935
Retained earnings 32,646 30,381
Other comprehensive income-Unrealized gains on investment
securities available-for-sale, net of tax (Note 3) 1,313 590
Less treasury stock, at cost, 139,645 at September 30, 1998
and December 31, 1997 (2,564) (2,564)
Less deferred compensation from restricted stock plan (1,083) (820)
--------- ---------
Total stockholders' equity 55,482 50,603
--------- ---------
Total liabilities and stockholders' equity $ 497,269 $ 492,892
========= =========
(See notes to consolidated financial statements.)
</TABLE>
3
<PAGE>
HARDWICK HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three Months Ended
--------------------------
September 30, September 30,
1998 1997
--------------------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 7,234 $ 7,149
Interest on investment securities-
Taxable 1,701 1,517
Nontaxable 305 244
Interest on federal funds sold and bank deposits 232 179
-------- --------
Total interest income 9,472 9,089
-------- --------
INTEREST EXPENSE:
Interest on deposits 3,838 3,665
Interest on securities sold under agreements to repurchase 59 74
Interest on other borrowed funds 118 9
Interest on note payable and capital lease obligations 4 39
-------- --------
Total interest expense 4,019 3,787
-------- --------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN
LOAN LOSSES 5,453 5,302
PROVISION FOR LOAN LOSSES 125 25
-------- --------
NET INTEREST INCOME 5,328 5,277
-------- --------
NONINTEREST INCOME:
Service charges on deposit accounts 639 677
Securities gains, net 143 42
Other noninterest income 481 436
-------- --------
Total noninterest income 1,263 1,155
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NONINTEREST EXPENSE:
Salaries and employee benefits 2,057 2,182
Net occupancy expense 821 790
Other noninterest expense 1,716 1,545
-------- --------
Total noninterest expense 4,594 4,517
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INCOME BEFORE PROVISION FOR INCOME TAXES 1,997 1,915
PROVISION FOR INCOME TAXES 642 702
-------- --------
NET INCOME $ 1,355 $ 1,213
======== ========
BASIC NET INCOME PER SHARE $ 0.34 $ 0.30
======== ========
DILUTIVE NET INCOME PER SHARE $ 0.34 $ 0.30
======== ========
</TABLE>
(See notes to consolidated financial statements.)
4<PAGE>
<TABLE>
<CAPTION>
HARDWICK HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
For the Nine Months Ended
September 30, September 30,
1998 1997
-------------------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 21,734 $ 20,327
Interest on investment securities-
Taxable 4,798 4,337
Nontaxable 876 843
Interest on federal funds sold and deposits 573 489
--------- ---------
Total interest income 27,981 25,996
INTEREST EXPENSE:
Interest on deposits 11,421 10,475
Interest on securities sold under agreements to
repurchase 158 179
Interest on other borrowed funds 343 21
Interest on note payable and capital lease 22 79
--------- ---------
Total interest expense 11,944 10,754
NET INTEREST INCOME BEFORE PROVISION FOR LOAN
LOAN LOSSES 16,037 15,242
PROVISION FOR LOAN LOSSES 425 400
--------- ---------
NET INTEREST INCOME 15,612 14,842
--------- ---------
NONINTEREST INCOME:
Service charges on deposit accounts 1,933 2,003
Securities gains, net 161 62
Other noninterest income 1,626 3,610
--------- ---------
Total noninterest income 3,720 5,675
NONINTEREST EXPENSE:
Salaries and employee benefits 6,490 6,493
Net occupancy expense 2,440 2,399
Other noninterest expense 4,806 4,693
--------- ---------
Total noninterest expense 13,736 13,585
--------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES 5,596 6,932
PROVISION FOR INCOME TAXES 1,805 2,241
--------- ---------
NET INCOME $ 3,791 $ 4,691
========= =========
BASIC NET INCOME PER SHARE $ 0.95 $ 1.18
========= =========
DILUTIVE NET INCOME PER SHARE $ 0.94 $ 1.16
========= =========
</TABLE>
(See notes to consolidated financial statements.)
5
<PAGE>
HARDWICK HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the Nine Months
Ended
September 30,
1998 1997
--------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,791 $ 4,691
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses 425 400
Provision for depreciation and amortization 1,758 1,815
Gain on disposition of other real estate (10) 0
Loss on disposition of premises and equipment 0 182
(Accretion) amortization of investment security discounts and premiums (32) 81
Deferred income tax benefit (155) (171)
Securities gains, net (161) (62)
Increase in accrued interest receivable (368) (305)
Decrease (increase) in other assets 895 (134)
Increase in other liabilities 681 968
--------- ---------
Net cash provided by operating activities 6,824 7,465
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities available-for-sale 12,612 15,674
Proceeds from sales of investment securities available-for-sale 10,366 28,110
Purchases of investment securities available-for-sale (40,059) (45,179)
Net cash flows from loans originated and principal collected on loans 8,472 (26,888)
Proceeds from disposal of premises and equipment 0 57
Proceeds form disposal of other real estate 65 12
Purchases of premises and equipment (1,551) (600)
--------- ---------
Net cash used in investing activities (10,095) (28,814)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, NOW accounts, and savings accounts 9,920 (15,332)
Net cash flows from sales and maturities of certificates of deposit 3,903 22,917
Net (decrease) increase in federal funds purchased and securities sold
under agreement to repurchase (14,880) 1,341
(Decrease) increase in other borrowed funds (56) 2,944
Proceeds from note payable to bank 0 2,100
Payments on capital lease obligations (155) (147)
Proceeds from issuance of common stock due to exercise of stock options 1,770 0
Purchase of treasury stock, at cost 0 (275)
Payments of cash dividends (1,496) (965)
---------- ----------
Net cash (used) provided by financing activities $ (939) $ 12,583
---------- ----------
6
<PAGE>
HARDWICK HOLDING COMPANY
& SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)
(Unaudited)
(In Thousands)
For the Nine Months
Ended
September 30,
--------------------------
1998 1997
--------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (4,210) $ (8,766)
CASH AND CASH EQUIVALENTS, beginning of period 38,515 33,797
---------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 34,305 $ 25,031
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 11,534 $ 9,882
========== =========
Cash paid during the period for income taxes $ 1,895 $ 3,501
========== =========
Noncash transactions during the period ended:
Increase in deferred compensation from issue of restricted stock $ 300 $ 720
========== =========
Increase in deferred compensation form issue of phantom stock $ 84 $ 0
========== =========
</TABLE>
(See notes to consolidated financial statements.)
7
<PAGE>
HARDWICK HOLDING COMPANY AND SUBSIDIARIES
-----------------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Hardwick Holding Company (HHC) and its wholly owned
subsidiaries, Hardwick Bank and Trust Company (HBT) and First National Bank
of Northwest Georgia (FNBNWG), collectively referred to as the "Company".
All significant intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at 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,
although, in the opinion of management, such differences would not be
significant.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary for fair statement of the consolidated
financial position and the results of operations of the Company for the
interim periods. The results of operations for the nine-month period ended
September 30, 1998 are not necessarily indicative of the results, which may
be expected for the entire year.
(2) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a participant in financial instruments with off-balance sheet
risk. These instruments are entered into in the normal course of business
to meet the financing needs of its customers and to reduce the Company's own
exposure to fluctuations in interest rates. These financial instruments
include commitments to extend credit and standby letters of credit. These
instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the consolidated balance
sheets. The contract amounts of these instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
counterparties to the financial instruments for commitments to extend credit
and standby letters of credit is represented by the contractual amount of
these instruments. The Company uses the same credit and collateral policies
in making commitments and conditional obligations as it does for on-balance
sheet instruments.
8
<PAGE>
HBT and FNBNWG grant various types of loans and financial instruments to
customers within their respective market areas (primarily Northwest
Georgia). Although the Company has a diversified loan portfolio, a
significant portion of the Company's loans originates from customers that
are directly or indirectly related to the carpet industry. Notably,
approximately 40% of the work force in the Company's market area are
employed by companies directly related to the carpet industry. Adverse
economic trends in the carpet industry could impair these customers'
ability to repay their obligations and unfavorably affect the results of
operations of the Company.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. Total commitments to
extend credit at September 30, 1998, were approximately $74,731,000. HBT
and FNBNWG evaluate each customer's creditworthiness on a case-by-case
basis. The amount of collateral, if deemed necessary by HBT and FNBNWG, is
based on management's credit evaluation of the customers. Collateral held
varies but may include accounts receivable, inventory, property, plant and
equipment, residential real estate, and income-producing commercial
properties.
Standby letters of credit are conditional commitments issued by HBT and
FNBNWG to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. The collateral varies but may include accounts receivable,
inventory, property, plant and equipment and residential real estate for
those commitments for which collateral is deemed necessary. The Company had
irrevocable standby letters of credit of approximately $3,464,000
outstanding at September 30, 1998.
(3) RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 130, "Reporting Comprehensive Income"; and SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information" effective January 1, 1998. Comprehensive income for the Company
includes net income and the unrealized gains (losses) on investment
securities available-for-sale. Comprehensive net income for the nine-month
period ended September 30, 1998 was $4,694,000 consisting of net income of
$3,971,000 and the change in unrealized gains (losses) on investment
securities available-for-sale of $723,000. Included in net income were net
gains realized on the sales of investment securities available-for-sale of
approximately $161,000. The cumulative unrealized gains and losses were
approximately $1,313,000 net of tax of approximately $676,000 at September
30, 1998. The Company has only one segment of business. The adoption by the
9
<PAGE>
Company did not have a significant effect on the Company's financial
condition or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Statement establishes 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. The Statement requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate,
and assess the effectiveness of transactions that receive hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). Statement 133 cannot be applied retroactively. Statement 133
must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997 (and, at the company's
election, before January 1, 1998).
We have not yet quantified the impacts of adopting Statement 133 on our
financial statements and have not determined the timing of or method of our
adoption of Statement 133. However, the Statement could increase volatility
in earnings and other comprehensive income.
(4) CONTINGENCIES
The Company is involved in litigation and other legal proceedings arising in
the course of its normal business activities. Although the ultimate outcome
of these matters cannot be determined at this time, it is the opinion of
management that, when resolved, none of these matters will have a
significant effect on the Company's financial condition or results of
operations.
(5) EARNINGS PER SHARE
Earnings per share are calculated on the basis of basic and dilutive
weighted average number of shares outstanding. The basic weighted average
number of shares outstanding was 3,972,284 and 3,974,473 for the nine month
period ending September 30 1998 and 1997,respectively. The dilutive
weighted average number of shares outstanding was 4,050,168 and 4,039,181
for the nine month period ending September 30, 1998 and 1997, respectively.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
POSITION AND RESULTS OF OPERATIONS
FINANCIAL POSITION
Total assets increased by approximately $4,377,000 from approximately
$492,892,000 at December 31, 1997, to approximately $497,269,000 at
September 30, 1998. The principal fluctuations were in federal funds sold,
investment securities available-for-sale, net loans, and cash and due from
banks. Federal funds sold increased approximately $2,487,000 from
approximately $12,982,000 at December 31, 1997 to approximately $15,469,000
at September 30, 1998, an increase of 19.2%. Investment securities
available-for- sale increased approximately $17,114,000 from approximately
$119,431,000 at December 31, 1997 to approximately $136,545,000 at September
30, 1998, an increase of 14.3%. The increases were partially offset by a
decrease in loans of approximately $8,897,000 from approximately
$310,159,000 at December 31, 1997 to approximately $301,262, 000 at
September 30, 1998, a decrease of 2.9%. Cash and due from banks also
decreased by approximately $6,697,000 or 26.2% from approximately
$25,533,000 at December 31, 1997 to approximately $18,836,000 at September
30, 1998. HHC's cash and cash equivalents reflected a net increase of
approximately $4,210,000 or 10.9% for the nine-month period ended September
30, 1998.
Savings and other interest-bearing deposit accounts increased approximately
$11,532,000 or 3.6% during the nine-months ended September 30, 1998, to
approximately $334,413,000. It is management's opinion that HHC maintains
competitive deposit rates while exercising prudent strategies in competing
with local institutions. Average rates paid on deposits for the current
period were approximately 4.56% compared with approximately 4.45% for the
same period in the preceding year.
At September 30, 1998, HHC's financial position continued to reflect strong
equity and liquidity, with an equity to assets ratio of 11.2%. At September
30, 1998, 62% of HHC's loans were in real estate loans (including mortgage
and construction loans), 19% in commercial loans (including agricultural
loans), 9% in consumer loans (including credit cards) and other loans were
10%. HHC's loan to deposit ratio was 73% at September 30, 1998, and 48% of
all deposits were invested in time certificates of deposit.
In the event of higher than anticipated requirements related to loan
commitments or deposit withdrawals, HHC's bank subsidiaries maintain federal
funds lines with regional banks. Also, the bank subsidiaries of the Company
have become members of the Federal Home Loan Bank and have credit lines with
it. At September 30, 1998 approximately $8,175,000 was outstanding under
the Federal Home Loan Bank lines of credit.
11
<PAGE>
The following table represents the changes in consolidated stockholders'
equity for the nine months ended September 30, 1998:
Balance, December 31, 1997 $ 50,603,000
Net income 3,791,000
Change in unrealized gains (losses) on securities
available-for-sale, net of tax 723,000
Amortization of deferred compensation-restricted stock plan 121,000
Issuance of common stock due to exercise of stock options 1,770,000
Dividends declared (1,526,000)
-----------
Balance, September 30, 1998 $ 55,482,000
===========
RESULTS OF OPERATIONS
- ---------------------
For the three months ended September 30, 1998 and 1997:
NET INTEREST INCOME
Net interest income after provision for loan losses for the three month
period ended September 30, 1998 was approximately $5,328,000 which was
approximately $51,000 or .1% greater than the $5,277,000 for the same period
the year before. The net interest income for the current period contained
loan loss provisions of approximately $125,000 compared with approximately
$25,000 for the same period in the previous year. Total interest income
increased by approximately $383,000 or 4.2% while total interest expense
increased approximately $232,000 or 6.1% for the three month period ended
September 30, 1998, as compared to the three months ended in the previous
year.
Yields on interest-bearing assets averaged 8.3%, relatively unchanged from
the same period the year before. Total average interest-bearing assets
increased by approximately $38,036,000 or 9.1% for the current period when
compared with the three-months ended September 30, 1997. Average loans for
the three months ended September 30, 1998, increased approximately
$14,669,000 or 5.1% more than the average loans for the three months ended
September 30, 1997. The average yield on loans for the three months ended
September 30, 1998 was 9.6%, which reflects an increase of approximately 20
basis points when compared with the three months ended September 30, 1997.
There were approximately $983,000 in nonaccrual loans at September 30, 1998
and accruing loans contractually past due ninety days or more were
approximately $1,245,000 at September 30, 1998. This compares to
approximately $323,000 in nonaccrual and approximately $504,000 in loans
past due ninety days or more and still accruing at December 31, 1997.
12
<PAGE>
Interest accruals on nonaccrual loans are recorded only when they are fully
current with respect to interest and principal and when, in the judgment of
management, the loans are estimated to be fully collectible as to both
principal and interest. Interest income on nonaccrual loans, which would
have been reported on an accrual basis, amounted to approximately $22,000
during the three month period ended September 30, 1998. Nonaccrual loan
interest collected and reported in the three month period ended September
30, 1998, was approximately $4,000.
Rates paid on interest-bearing liabilities averaged 4.6% for the three
months ended September 30, 1998, relatively unchanged from the three months
ended September 30, 1997. Rates paid in the current three month period on
average have increased approximately 10 basis points from rates paid on
average for the year ended December 31, 1997. Management's liability
pricing strategies include competitive deposit rates with increased
awareness of cash flow needs within the balance sheet. Management
anticipates rates to decrease slightly during the remainder of the year.
NONINTEREST INCOME
Total other noninterest income increased approximately $108,000 for the
three months ended September 30, 1998, as compared with the three months
ended September 30, 1997. The increase is primarily due to an increase net
gains on sales of investment securities available-for-sale of approximately
$101,000 and in other miscellaneous noninterest income of approximately
$45,000, while being partially offset by a decrease of approximately $38,000
in service charges on deposit accounts.
NONINTEREST EXPENSE
Total noninterest expense increased by approximately $77,000, or 1.7% for
the three months ended September 30, 1998, as compared to the same period
ended in the preceding year. The increase is due principally to increases
of approximately $31,000 in net occupancy expense and other noninterest
expense of approximately $171,000 while being partially offset by a decrease
in salary and employee benefits of approximately $125,000.
INCOME TAX PROVISION
The effective tax rates reported for the three months ended September 30,
1998 and 1997 were 32.1% and 36.7%, respectively. Tax exempt interest
earned on loans and investment securities held available-for-sale has
increased approximately $44,000 for the three months ended September 30,
1998, from approximately $309,000 for the three months ended September 30,
1997 to approximately $353,000 for the three months ended September 30,
1998.
13
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
For the nine months ended September 30, 1998 and 1997:
NET INTEREST INCOME
Net interest income after provision for loan losses for the nine month
period ended September 30, 1998 was approximately $15,612,000 which was
approximately $770,000 or 5.2% greater than the $14,842,000 for the same
period the year before. Total interest income increased by approximately
$1,985,000 or 7.6% while total interest expense increased approximately
$1,190,000 or 11.1% for the nine month period ended September 30, 1998, as
compared to the nine-months ended in the previous year. There were
approximately $425,000 in provisions for loan losses for the current period
as compared with approximately $400,000 in the nine month period ended
September 30, 1997.
Yields on interest-bearing assets averaged 8.4% for the current period,
relatively unchanged from the same period the year before. Total average
interest-bearing assets increased by approximately $15,283,000 or 3.6% for
the current period when compared with the nine months ended September 30,
1997. Average loans for the nine months ended September 30, 1998 increased
approximately $3,639,000 or 1.2% more than the average loans for the nine
months ended September 30, 1997. The average yield on loans for the nine
months ended September 30, 1998 was 9.6%, relatively unchanged from the nine
months ended September 30, 1997. Interest accruals on nonaccrual loans
are recorded only when they are fully current with respect to interest and
principal and when, in the judgment of management, the loans are estimated
to be fully collectible as to both principal and interest.
Interest income on nonaccrual loans, which would have been reported on an
accrual basis, amounted to approximately $47,000 during the nine month
period ended September 30, 1998. Nonaccrual loan interest collected and
reported in the nine month period ended September 30, 1998 was
approximately $38,000.
Rates paid on interest-bearing liabilities averaged 4.6% for the nine months
ended September 30, 1998 compared with 4.5% for the nine months ended
September 30, 1997. Rates paid in the current nine month period on average
were approximately 10 basis points more than the rates paid on average for
the year ended December 31, 1997. Management's liability pricing strategies
include competitive deposit rates with increased awareness of cash flow
needs within the balance sheet. Management anticipates rates to decrease
slightly during the remainder of the year.
NONINTEREST INCOME
Total noninterest income decreased approximately $1,955,000 for the nine
months ended September 30, 1998, as compared with the nine-months ended
September 30, 1997. The decrease is primarily due to a settlement of
litigation with a vendor of approximately $2,125,000 which was included in
14
<PAGE>
other noninterest income during the nine-month period ended September 30,
1997. Service charges on deposits decreased by approximately $70,000. The
decreases were partially offset by a change in net gains from sales and
calls of investment securities held available-for-sale of approximately
$99,000 and increases in other miscellaneous noninterest income items of
approximately $141,000.
NONINTEREST EXPENSE
Total noninterest expense increased by approximately $151,000 or 1.1% for
the nine months ended September 30, 1998, as compared to the same period
ended in the preceding year. The increase is due principally to increases
in net occupancy and equipment expense of approximately $41,000 and
approximately $113,000 in miscellaneous noninterest expense, while being
offset partially by a decrease in salary and employee benefits of
approximately $3,000.
INCOME TAX PROVISION
The effective tax rate reported for the nine months ended September 30, 1998
and 1997 was 32.3%. Total tax benefits afforded the consolidated results by
the parent holding company; HHC, have decreased approximately $126,000 from
approximately $243,000 for the nine months ended September 30, 1997 to
approximately $117,000 for the nine months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Liquidity is achieved through the continual maturing of interest-earning
assets, as well as by investing in short term marketable securities.
Liquidity is also available through deposit growth, borrowing capacity, loan
sales and repayments of principal on loans and securities.
High levels of liquidity are normally obtained at a net interest cost due to
lower yields on short term, liquid-earning assets and higher interest
expense usually associated with the extension of deposit maturities. The
trade-off of the level of desired liquidity versus its cost is evaluated in
determining the appropriate amount of liquidity at any one time.
For the nine months ended September 30, 1998, cash and cash equivalents
decreased approximately $4,210,000 or 10.9% from December 31, 1997.
Operating activities provided cash and cash equivalents of approximately
$6,824,000, while investing activities and financing activities used cash
and cash equivalents of approximately $10,095,000 and $939,000,
respectively. Net income of approximately $3,791,000, provision for loan
losses of approximately $425,000, depreciation and amortization not
requiring the use of cash of approximately $1,758,000, a decrease in other
assets of approximately $895,000 and an increase in other liabilities of
approximately $681,000 were the principal sources of net cash provided from
operating activities, while being partially offset principally by an
15
<PAGE>
increase in accrued interest receivable of approximately $368,000, net
securities gains of approximately $161,000 and deferred tax benefit of
approximately $155,000.
The cash and cash equivalents used by investing activities were principally
due to purchases of investment securities available-for-sale of
approximately $40,059,000 and purchases of premises and equipment of
approximately $1,551,000. The uses of cash and cash equivalents were
partially offset by sales of investment securities available-for-sale of
approximately $10,366,000, maturities of investment securities
available-for-sale of approximately $12,612,000 and net cash flows from
loans originated and principal collected on loans of approximately
$8,472,000.
The cash and cash equivalents used by financing activities were due
principally to decreases in federal funds purchased and securities sold
under agreement to repurchase of approximately $14,880,000, payments on
capital lease obligations of approximately $155,000 and payments of cash
dividends of approximately $1,496,000. The cash and cash equivalents used
were partially offset by net cash flows from sales and maturities of
certificates of deposit of approximately $3,903,000, a net increase in NOW
accounts, demand deposits and savings accounts of approximately $9,920,000,
and proceeds from issuance of common stock due to the exercise of stock
options of approximately $1,770,000.
YEAR 2000
- ---------
IMPACT OF THE YEAR 2000 ISSUES
- ------------------------------
Generally, the year 2000 risk involves computer programs and computer
hardware that are not able to perform without interruption into the year
2000. The arrival of the year 2000 poses a unique worldwide challenge to the
ability of all systems to correctly recognize such a date change; computer
applications that rely on the date field could fail or create erroneous
results. Such erroneous results could affect interest, payment or due dates
or could cause the temporary inability to process transactions, send
invoices or engage in similar normal business activities. If it is not
adequately addressed by HHC or its suppliers and borrowers, the year 2000
issue could result in a material adverse impact on HHC's financial condition
and results of operations.
HHC'S STATE OF READINESS
- ------------------------
HHC has been assessing its Year 2000 readiness since 1996. HHC has
formed a committee charged with the task of identifying and remediating date
recognition problems in both IT and non-IT systems. Guided by requirements
of and examination by banking regulators, the committee has developed a
comprehensive plan to assess HHC's Year 2000 readiness with respect to both
IT and non-IT systems. HHC's inventory of such systems is complete and HHC
believes its IT and non-IT systems are Year 2000 compliant and has not found
any mission critical system to be deficient.
16
<PAGE>
HHC has completed the remediation or replacement of its systems.
Testing has occurred in 1998, and further testing will occur during 1999.
HHC believes that it has identified all major internal business and
operational functions that will be impacted by the year 2000 date change.
COST ASSOCIATED WITH YEAR 2000 ISSUES
- -------------------------------------
HHC does not anticipate that the year 2000 related costs will be
material to its financial condition or results of operations. HHC has
estimated that its total costs for the evaluation, remediation and testing
of its IT and non-IT systems in connection with the year 2000 Issue will be
approximately $861,000 and approximately $542,000 has been incurred to date.
All of the expected expenditures are present in HHC's 1998 and 1999 internal
budgets.
RISK OF THIRD-PARTY YEAR 2000 ISSUES
- ------------------------------------
The impact of year 2000 non-compliance by outside parties with whom
HHC transacts business cannot be accurately gauged. HHC has surveyed its
major business partners to ascertain their Year 2000 readiness. Although all
are not Year 2000 compliant at this date, HHC has received certain
assurances that such third parties will be ready for the Year 2000 date
change by the end of 1999. HHC and its major third party partners, except
for the Federal Reserve check clearing services division, have completed
testing and reviewing all critical year 2000 date issues in their systems.
The Federal Reserve has stated that their systems will be compliant by the
end of 1999. If the Federal Reserve does not complete remediation of their
system in time, HHC has an alternate check clearing partner that has
completed all Year 2000 certification tests.
CUSTOMER AWARENESS AND BORROWER RISK ASSESSMENT
- -----------------------------------------------
HHC has aggressively worked to educate its depositors and borrowers
regarding the Year 2000 Issues. HHC hosted community seminars, developed
statement stuffers, and placed detailed brochures about the Year 2000 issues
in all its branch lobby locations. Risk Assessments on Borrowers has been
completed and HHC has initiated a Year 2000 assessment procedure during loan
review and approval for all new and renewed loans.
HHC CONTINGENCY PLANS
- ---------------------
HHC has created its contingency committee and assigned responsibility
for development of all its business operational contingency plans. All
mission critical business functions will have their contingency plans
completed by the end of November 1998 and tested with final revisions by the
end of December 1998. HHC believes that any mission critical system could be
recovered and operating within six days.
17
<PAGE>
MARKET RISK MANAGEMENT
- ----------------------
There have been no material changes in market risk for the Company for
the nine months ended September 30, 1998 when compared with December 31,
1997.
CAPITAL RESOURCES
- -----------------
HHC and its subsidiary banks are subject to a minimum Tier 1 capital
to risk- weighted assets ratio of 4% and a total capital (Tier 1 plus Tier
2) to risk- weighted assets ratio of 8%. The Federal Reserve Board
("Board") has also established an additional capital adequacy guideline
referred to as the Tier 1 leverage ratio that measures the ratio of Tier 1
Capital to average quarterly assets. The most highly rated bank holding
companies will be required to maintain a minimum Tier 1 leverage ratio of
3%. The required ratio will be based on the Board's assessment of the
individual bank holding company's asset quality, earnings performance,
interest-rate risk and liquidity. Bank holding companies experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels without
significant reliance on intangible assets.
The following tables represent HHC's regulatory capital position at
September 30, 1998:
Risk Based Capital Ratios: Amount Ratio
----------- ---------
Tier 1 Capital $ 47,266 12.47%
Tier 1 Capital minimum requirement $ 15,166 4.00%
---------- ------
Excess $ 32,100 8.47%
========== ======
Total Capital $ 52,036 13.72%
Total Capital minimum requirement $ 30,332 8.00%
========== ======
Excess $ 21,704 5.72%
========== ======
Risk adjusted assets net of goodwill and
excess loan loss allowance $ 379,150
Leverage Ratio:
Tier 1 Capital to adjusted total assets $ 47,266 9.64%
("Leverage Ratio")
Minimum leverage requirement $ 14,711 3.00%
---------- ------
Excess $ 32,555 6.64%
========== ======
Average total assets, net of goodwill (f1) $ 490,358
(f1) Average total assets, net of goodwill for the nine-months ended
September 30, 1998.
18
<PAGE>
HHC is a legal entity separate and distinct from the Banks. Most of the
revenues of HHC result from dividends paid to it by the Banks. There are
statutory and regulatory requirements applicable to the payment of dividends
by the subsidiary banks as well as by HHC to its shareholders. HHC paid
cash dividends of $486,000 or $.12 per share on January 19, 1998, which had
been declared at December 31, 1997. HHC paid $484,000, or $.12 per share of
common stock on April 19, 1998 which had been declared at March 31, 1998 and
HHC paid $526,000 or $.13 per share of common stock on July 19, 1998, which
had been declared on June 30, 1998. HHC declared $544,000 or $.13 per
share of common stock on September 30, 1998, which was subsequently paid on
October 19, 1998.
19
<PAGE>
HARDWICK HOLDING COMPANY AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
HHC is not aware of any material pending legal proceedings to which HHC or
any of its subsidiaries is a party or to which any of their property is
subject.
ITEM 2. CHANGES IN SECURITIES -None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES -None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS-
None
ITEM 5. OTHER INFORMATION -None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit 27-Financial Data Schedule (for SEC use only).
(b) Form 8-K -None.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
CORPORATION HARDWICK HOLDING COMPANY
- ----------- ------------------------
Date: November 12, 1998 By:/s/Michael Robinson
- ----------------------- -------------------------
Michael Robinson
Executive Vice President,
Chief Financial Officer
(Principal Financial Officer
and Duly Authorized Officer)
21
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