<PAGE>
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 JUNE 30, 1998 Commission File Number 33- 43386
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
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 August 12, 1998
4,036,496 Shares
----------------<PAGE>
HARDWICK HOLDING COMPANY AND SUBSIDIARIES
INDEX
Page No.
PART I- FINANCIAL INFORMATION
Consolidated Statements of Financial
Position at June 30, 1998 and
December 31, 1997 3
Consolidated Statements of Income
for the Three Months Ended June 30,
1998 and 1997 4
Consolidated Statements of Income
for the Six Months Ended June 30,
1998 and 1997 5
Consolidated Statements of Cash Flows
for the Six Months Ended June 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 11-18
PART II- OTHER INFORMATION 19
SIGNATURES 20
2
<PAGE>
HARDWICK HOLDING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
Assets 1998 1997
---------- -------------
(unaudited)
<S> <C> <C>
Cash and due from banks $ 26,467 $ 25,533
Federal funds sold 18,470 12,982
---------- ----------
Total cash and cash equivalents 44,937 38,515
Investment securities, available-for-sale 132,839 119,431
Loans, net 301,021 310,159
Premises and equipment, net 14,211 14,079
Assets under capital lease, net 320 418
Accrued interest receivable 4,571 3,988
Excess of cost over fair value of
subsidiaries acquired, net of amortization 4,267 4,556
Other assets 1,746
---------- ----------
Total assets $ 504,205 $ 492,892
========== ==========
Liabilities and Stockholders' Equity
Deposits-
Noninterest-bearing $ 93,489 $ 86,904
Interest-bearing 340,666 322,881
Total deposits 434,155 409,785
Securities sold under agreements to repurchase 4,540 19,339
Other borrowed funds 8,194 8,231
Capital lease obligation 369 472
Other liabilities 4,679 4,462
---------- ----------
Total liabilities 451,937 442,289
---------- ----------
Commitments and contingencies (Notes 2 and 4)
Stockholders' equity-
Common stock, $.50 par value, 10,000,000 shares authorized,
4,176,141 and 4,161,141 shares issued; 4,036,496 and 4,021,496 shares
outstanding at June 30,1998 and December 31,1997, respectively 2,088 2,081
Additional paid-in capital 21,228 20,935
Retained earnings 31,825 30,381
Other comprehensive income-Unrealized gains on investment securities
available-for-sale, net of tax (Note 3)
Less treasury stock, at cost, 139,645 at June 30, 1998 and December 31,
1997, respectively
Less deferred compensation from restricted stock plan (1,044) (820)
---------- ----------
Total stockholders' equity 52,268 50,603
---------- ----------
Total liabilities and stockholders' equity $ 504,205 $ 492,892
========== ==========
</TABLE>
(See notes to consolidated financial statements.)
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
--------------------------
June 30, June 30,
1998 1997
--------------------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 7,209 $ 6,706
Interest on investment securities-
Taxable 1,618 1,514
Nontaxable 293 295
Interest on fed funds sold and bank deposits 201 152
-------- --------
Total interest income 9,321 8,667
-------- --------
INTEREST EXPENSE:
Interest on deposits 3,829 3,496
Interest on securities sold under agreements to repurchase 43 49
Interest on other borrowed funds 113 11
Interest on note payable and capital lease obligations 9 29
-------- --------
Total interest expense 3,994 3,585
-------- --------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN
LOAN LOSSES 5,327 5,082
PROVISION FOR LOAN LOSSES 150 (125)
-------- --------
NET INTEREST INCOME 5,177 5,207
-------- --------
NONINTEREST INCOME:
Service charges on deposit accounts 646 676
Securities gains, net 10 (9)
Other noninterest income 472 435
-------- --------
Total noninterest income 1,128 1,102
-------- --------
NONINTEREST EXPENSE:
Salaries and employee benefits 2,218 2,146
Net occupancy expense 829 811
Other noninterest expense 1,553 1,524
-------- --------
Total noninterest expense 4,600 4,481
-------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,705 1,828
PROVISION FOR INCOME TAXES 549 618
-------- --------
NET INCOME $ 1,156 $ 1,210
======== ========
BASIC NET INCOME PER SHARE $ 0.29 $ 0.31
======== ========
DILUTIVE NET INCOME PER SHARE $ 0.29 $ 0.30
======== =========
</TABLE>
(See notes to consolidated financial statements.)
4<PAGE>
HARDWICK HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Six Months
Ended
June 30, June 30,
1998 1997
--------------------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 14,500 $ 13,178
Interest on investment securities-
Taxable 3,097 2,820
Nontaxable 571 599
Interest on fed funds sold and deposits in banks 341 310
---------- ----------
Total interest income 18,509 16,907
INTEREST EXPENSE:
Interest on deposits 7,583 6,810
Interest on securities sold under agreements to repurchase 99 105
Interest on other borrowed funds 225 12
Interest on note payable and capital lease obligations 18 40
---------- ----------
Total interest expense 7,925 6,967
NET INTEREST INCOME BEFORE PROVISION FOR LOAN
LOAN LOSSES 10,584 9,940
PROVISION FOR LOAN LOSSES 300 375
---------- ----------
NET INTEREST INCOME 10,284 9,565
---------- ----------
NONINTEREST INCOME:
Service charges on deposit accounts 1,294 1,326
Securities gains, net 18 20
Other noninterest income 1,145 3,174
---------- ----------
Total noninterest income 2,457 4,520
NONINTEREST EXPENSE:
Salaries and employee benefits 4,433 4,311
Net occupancy expense 1,619 1,609
Other noninterest expense 3,090 3,148
---------- ----------
Total noninterest expense 9,142 9,068
---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 3,599 5,017
PROVISION FOR INCOME TAXES 1,163 1,539
---------- ----------
NET INCOME $ 2,436 $ 3,478
========== ==========
BASIC NET INCOME PER SHARE $ 0.61 $ 0.88
========== ===========
DILUTIVE NET INCOME PER SHARE $ 0.60 $ 0.86
========= ==========
</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 Six Months
June 30,
1998 1997
------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,436 $ 3,478
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses 300 375
Provision for depreciation and amortization 1,192 1,270
Loss on disposition of premises and equipment 0 191
Accretion of investment security discounts (33) (52)
Deferred income tax benefit (99) (179)
Securities gains, net (18) (20)
Increase in accrued interest receivable (583) (265)
Decrease (increase) in other assets 90 (406)
Increase in other liabilities 274 461
--------- ---------
Net cash provided by operating activities 3,559 4,853
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities available-for-sale 6,920 9,688
Proceeds from sales of investment securities available-for-sale 8,115 17,511
Purchases of investment securities available-for-sale (28,611) (28,770)
Net cash flows from loans originated and principal collected on loans 8,838 (11,557)
Proceeds from disposal of premises and equipment 0 14
Purchases of premises and equipment (860) (342)
--------- ---------
Net cash used in investing activities (5,598) (13,456)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, NOW accounts, and savings accounts 20,349 (7,627)
Net cash flows from sales and maturities of certificates of deposit 4,021 18,008
Net (decrease) increase in fed funds purchased and securities sold
under agreement to repurchase (14,799) 683
Decrease in other borrowed funds (37) (37)
Proceeds from note payable to bank 0 900
Payments on note payable to bank and capital lease obligations (103) (98)
Purchase of treasury stock, at cost 0 (275)
Payments of cash dividends (970) (482)
--------- ---------
Net cash provided by financing activities $ 8,461 $ 11,072
--------- ---------
</TABLE>
6<PAGE>
HARDWICK HOLDING COMPANY
& SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
-------------------------
1998 1997
-------------------------
<S> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 6,422 $ 2,469
CASH AND CASH EQUIVALENTS, beginning of period 38,515 33,797
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 44,937 $ 36,266
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for Interest $ 7,519 $ 6,059
========= =========
Cash paid during the period for income taxes $ 1,315 $ 1,662
========= =========
Noncash transactions during the period ended:
Increase in deferred compensation from issue of restricted stock $ 300 $ 720
========= =========
</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 effect 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 six-month period ended June 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 counterparty to the financial instrument
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.
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
8
<PAGE>
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 result
unfavorably on 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 June 30, 1998, were approximately $87,268,000. HBT and
FNBNWG evaluate each customer's creditworthiness on a case-by-
case basis. The amount of collateral obtained, if deemed
necessary by HBT and FNBNWG, upon extension of credit 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 $2,543,000 outstanding at June 30, 1998.
(3) RECENT ACCOUNTING PRONOUNCEMENTS
The Registrant adopted SFAS No. 130, "Reporting Comprehensive
Income"; and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" effective as of January 1,
1998. Comprehensive income for the Registrant includes net income
and the unrealized gains (losses) on investment securities
available-for-sale. Comprehensive net income for the six-month
period ended June 30, 1998 was $2,581,000 consisting of net
income of $2,436,000 and the $145,000 change in the unrealized
gains (losses) on investment securities available-for-sale.
Attributing to comprehensive income in net income were net gains
realized on the sales of investment securities available-for-sale
of approximately $18,000. The cumulative unrealized gains and
losses are approximately $735,000 net of tax of approximately
$379,000. The Registrant has only one segment of business. The
adoption by the 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
9
<PAGE>
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
none of these matters, when resolved will have a significant
effect on the Company's financial condition or results of
operations.
(5) EARNINGS PER SHARE
Earnings per share is calculated on the basis of basic and
dilutive weighted average number of shares outstanding, which was
3,970,496 and 4,046,534, and 3,977,154 and 4,040,397 for the six-
month period ended June 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 $11,313,000 from
approximately $492,892,000 at December 31, 1997, to approximately
$504,205,000 at June 30, 1998. The principal fluctuations were
in federal funds sold, investment securities available-for-sale
and net loans. Federal funds sold increased approximately
$5,488,000 from approximately $12,982,000 at December 31, 1997 to
approximately $18,470,000 at June 30, 1998, an increase of 42.3%.
Investment securities available-for-sale increased approximately
$13,408,000 from approximately $119,431,000 at December 31, 1997
to approximately $132,839,000 at June 30, 1998, an increase of
11.2%. The increase was offset by a decrease in loans of
approximately $9,138,000 from approximately $310,159,000 at
December 31, 1997 to approximately $301,021,000 at June 30, 1998,
a decrease of 3.0%. Cash and due from banks also increased by
approximately $934,000 or 3.7% from approximately $25,533,000 at
December 31, 1997 to approximately $26,467,000 at June 30, 1998.
HHC's cash and cash equivalents reflected a net increase of
approximately $6,422,000 or 16.7% for the six-month period ended
June 30, 1998.
Savings and other interest-bearing deposit accounts increased
approximately $17,785,000 or 5.5% during the six-months ended
June 30, 1998, to approximately $340,666,000. 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 4.54% compared with approximately 4.38%
for the same period in the preceding year.
At June 30, 1998, HHC's financial position continued to reflect
strong equity and liquidity, with an equity to assets ratio of
10.4%. At June 30, 1998, 62% of HHC's loans were in real estate
loans (including mortgage and construction loans), 19% in
commercial loans (including agricultural loans), 10% in consumer
loans (including credit cards) and other loans were 9%. HHC's
loan to deposit ratio was 69% at June 30, 1998, and 47% 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 to draw from. At June 30,
1998 approximately $8,194,000 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 six-months ended June 30, 1998:
<TABLE>
<CAPTION>
<S> <C>
Balance, December 31, 1997 $ 50,603,000
Net income 2,436,000
Change in unrealized gains (losses) on securities available-for-sale,
net of tax 145,000
Amortization of deferred compensation-restricted stock plan 77,000
Dividends declared (993,000)
------------
Balance, June 30, 1998 $ 52,268,000
============
</TABLE>
RESULTS OF OPERATIONS
- ---------------------
For the three-months ended June 30, 1998 and 1997:
Net Interest Income
- -------------------
Net interest income after provision for loan losses for the
three-month period ended June 30, 1998 was approximately
$5,327,000 which was approximately $245,000 or 4.8% greater than
the $5,082,000 for the same period the year before. The net
interest income for the current period contained loan loss
provisions of approximately $150,000 compared with a reversal in
loan loss provisions of approximately $125,000 for the same
period in the previous year. Total interest income increased by
approximately $654,000 or 7.6% while total interest expense
increased approximately $409,000 or 11.4% for the three month
period ended June 30, 1998, as compared to the comparable three-
months ended in the previous year.
Yields on interest-bearing assets averaged 8.4%, relatively
unchanged from the same period the year before. Total average
interest-bearing assets increased by approximately $51,788,000 or
13.0% for the current period when compared with the three-months
ended June 30, 1997. Average loans for the three-months ended
June 30, 1998, increased approximately $32,823,000 or 12.1% more
than the average loans for the three-months ended June 30, 1997.
The average yield on loans for the three-months ended June 30,
1998 was 9.5%, relatively unchanged from the three-months ended
June 30, 1997.
There were approximately $1,095,000 in nonaccrual loans at June
30, 1998 and accruing loans contractually past due ninety days or
more were approximately $1,075,000 at June 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.
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 $21,000 during the
12<PAGE>
three-month period ended June 30, 1998. Nonaccrual loan interest
collected and reported in the three-month period ended June 30,
1998, was approximately $30,000.
Rates paid on interest-bearing liabilities averaged 4.6% for the
three-months ended June 30, 1998, compared with 4.4% for the
three-months ended June 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 increase slightly during the remainder of the year.
Noninterest Income
------------------
Total other noninterest income increased approximately $26,000 for
the three-months ended June 30, 1998, as compared with the three-
months ended June 30, 1997. The increase is primarily due to an
increase in other miscellaneous noninterest income of approximately
$37,000, while being partially offset by a decrease of approximately
$30,000 in service charges on deposit accounts.
Noninterest Expense
-------------------
Total noninterest expense increased by approximately $119,000, or
2.7% for the three-months ended June 30, 1998, as compared to the
same period ended in the preceding year. The increase is due
principally to increases of approximately $72,000 in salary and
employee benefits, approximately $18,000 in net occupancy expense
and other expense of approximately $29,000.
INCOME TAX PROVISION
The effective tax rates reported for the three-months ended June 30,
1998 and 1997 were 32.1% and 33.8%, respectively. Total tax-exempt
interest income on loans and investment securities available-for-
sale decreased by approximately $10,000 during the three-month
period ended June 30, 1998.
13
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
For the six-months ended June 30, 1998 and 1997:
Net Interest Income
- -------------------
Net interest income after provision for loan losses for the six-
month period ended June 30, 1998 was approximately $10,284,000 which
was approximately $719,000 or 7.5% greater than the $9,565,000 for
the same period the year before. Total interest income increased by
approximately $1,602,000 or 9.5% while total interest expense
increased approximately $958,000 or 13.8% for the six-month period
ended June 30, 1998 as compared to the six-months ended in the
previous year. There was approximately $300,000 in provisions for
loan losses for the current period as compared with approximately
$375,000 in the six-month period ended June 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
$39,296,000 or 9.8% for the current period when compared with the
six-months ended June 30, 1997. Average loans for the six-months
ended June 30, 1998 increased approximately $30,234,000 or 11.0%
more than the average loans for the six-months ended June 30, 1997.
The average yield on loans for the six-months ended June 30, 1998
was 9.5%, which decreased approximately 10 basis points from the
six-months ended June 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 $21,000 during the six-month period
ended June 30, 1998. Nonaccrual loan interest collected and
reported in the six-month period ended June 30, 1998, was
approximately $34,000.
Rates paid on interest-bearing liabilities averaged 4.6% for the
six-months ended June 30, 1998 compared with 4.4% for the six-months
ended June 30, 1997. Rates paid in the current six-month period on
average are 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 increase slightly during the
remainder of the year.
Noninterest Income
- ------------------
Total noninterest income decreased approximately $2,063,000 for the
six-months ended June 30, 1998, as compared with the six-months
ended June 30, 1997. The decrease is primarily due to a settlement
of litigation with a vendor of approximately $2,125,000 which was
included in other noninterest income during the six-month period
ended June 30, 1997. Service charges on deposits decreased by
approximately $32,000 and there was a change in net gains from sales
and calls of investment securities held available-for-sale of
14<PAGE>
approximately $2,000. These decreases were partially offset by
increases in other miscellaneous noninterest income items of
approximately $98,000.
Noninterest Expense
-------------------
Total noninterest expense increased by approximately $74,000 or 0.8%
for the six- months ended June 30, 1998, as compared to the same
period ended in the preceding year. The increase is due principally
to increases of approximately $122,000 in salary and employee
benefits, approximately $10,000 in net occupancy and equipment
expense, while being partially offset by decreases in other
miscellaneous noninterest expense items of approximately $58,000.
INCOME TAX PROVISION
The effective tax rates reported for the six-months ended June 30,
1998 and 1997 were 32.3% and 30.6%, respectively. Tax exempt
interest earned on loans and investment securities available-for-
sale, decreased by approximately $21,000 and $28,000, respectively
for the six months ended June 30, 1998, when compared with the same
period the year before.
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 six-months ended June 30, 1998, cash and cash equivalents
increased approximately $6,422,000 or 16.7% from December 31, 1997.
Operating and financing activities provided cash and cash
equivalents of approximately $3,559,000 and $8,461,000 respectively,
while investing activities used cash and cash equivalents of
approximately $5,598,000. Net income of approximately $2,436,000,
provision for loan losses of approximately $300,000 and depreciation
and amortization not requiring the use of cash of approximately
$1,192,000, were the principal sources of cash and cash equivalents
from operating activities, while being partially offset principally
by an increase in accrued interest receivable of approximately
$583,000.
Funds provided by financing activities was due principally to
proceeds from net cash flows from sales and maturities of
certificates of deposit of approximately $20,349,000 and a net
15<PAGE>
increase in NOW accounts, demand deposits and savings accounts of
approximately $4,021,000. The use of cash from financing
activities was due to a decrease in fed funds sold and repurchase
agreements of approximately $14,799,000, payment of cash dividends
of approximately $970,000, a decrease in other borrowed funds of
approximately $37,000 and payments on capital lease obligations of
approximately $103,000.
The cash and cash equivalents used by investing activities were
principally due to purchases of investment securities available-for-
sale of approximately $28,611,000 and purchases of premises and
equipment of approximately $860,000. The uses of cash and cash
equivalents were partially offset by sales of investment securities
available-for-sale of approximately $8,115,000, maturities of
investment securities available-for-sale of approximately $6,920,000
and net cash flows from loans originated and principal collected on
loans of approximately $8,838,000.
YEAR 2000
- ---------
The "year 2000 issue" arises from the widespread use of
computer programs that rely on two-digit codes to perform
computations or decision-making functions. Many of these programs
may fail due to an inability to properly interpret date codes
beginning January 1, 2000. For example, such programs may
misinterpret "00" as the year 1900 rather than 2000. In addition,
some equipment, being controlled by microprocessor chips, may not
deal appropriately with the year "00". The Registrant has developed
a plan that will assure the Registrant of being ready to process in
the year 2000. The plan involves costs such as purchasing both
hardware and software and will entail the use of both internal and
external personnel. Modifications and upgrades will be performed on
the majority of the Registrant's existing systems. The cost of
assuring readiness to process in the year 2000 will be approximately
$1,000,000 to $2,000,000; however, unexpected costs may arise as the
Registrant implements its plan of action. These costs will be
expensed as incurred. The Registrant's mainframe processing is
outsourced to a vendor which is one of the largest bank processing
companies in the United States. The Registrant is in regular
communication with this vendor as both companies prepare for
processing in year 2000.
There is no assurance that the Registrant's customers and
vendors will be ready to process in the year 2000. The inability of
the Registrant's significant customers or vendors to process in the
year 2000 could have a material effect on the financial condition
and results of operations of the Registrant for the year 2000 and
years thereafter.
16<PAGE>
Market Risk Management
- ----------------------
There have been no material changes in market risk for the
Registrant for the six months ended June 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
June 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 $ 47,266 9.64%
assets ("Leverage Ratio")
Minimum leverage requirement $ 14,711 3.00%
Excess $ 32,555 6.64%
Average total assets, net of $ 490,358
goodwill <F1>
[FN]
<F1> Average total assets, net of goodwill for the three-months
ended June 30, 1998.
</FN>
17<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, that 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 declared
$526,000 or $.13 per share of common stock at June 30, 1998 which
was paid on July 19, 1998.
18
<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- (a)
Hardwick Holding Company 1998 Annual Meeting of Stockholders was
held on April 20, 1998.
(b) The following slate of directors was elected to serve the
current year term:
Thomas H. Bond Leon M. Ham III
James M. Boring, Jr. David J. Lance
Kenneth E. Boring Marshall R. Mauldin
W. R. Broaddus Norman McCoy
Robert M. Chandler Michael Robinson
Richard R. Cheatham
(c) No matters, other than the election of the above slate of
directors, were voted on at the annual meeting. A tabulation of
votes concerning the election of the above slate of directors is as
follows:
Shares voted by proxy in favor 424,328
Shares voted in person in favor 3,256,242
Shares voted in person against 0
Shares voted by proxy against 0
Shares abstained from voting 0
---------
Total shares represented 3,680,570
---------
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.
19<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: August 10, 1998 By: /s/Michael Robinson
Michael Robinson
Executive Vice President,
Chief Financial Officer
(Principal Financial Officer
and Duly Authorized Officer)
20
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