SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
/x/ Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1997
Commission File Number 33-43386
/ / Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Hardwick Holding Company
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(Exact name of registrant as specified in its charter)
Georgia 58-1408388
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(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
One Hardwick Square, P. O. Box 1367, Dalton, Georgia 30722-1367
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (706) 217-3950
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) filed all
reports to be filed by Section 13 or 15(d) of the Securities
Exchange 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 / /
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Not applicable. Registrant is not required to be
registered under the Securities Exchange Act of 1934.
Aggregate market value of the voting stock held by non-
affiliates (which for purposes hereof are all holders other than
executive officers and directors) of the Registrant as of March
15, 1998; $19,948,060 based on 997,403 shares outstanding at
$20.00 per share (the last sale price known to the Registrant of
the Common Stock, for which there is no established public
trading market).
At March 15, 1998, there were issued 4,176,141 shares of
Common Stock, par value $0.50 per share, of which 4,036,496 were
outstanding.<PAGE>
ITEM 1. BUSINESS.
GENERAL
Hardwick Holding Company ("Hardwick or Registrant or
Company") is a two bank holding company headquartered in Dalton,
Georgia. Full service banking and trust businesses are presently
conducted by its banking subsidiaries, Hardwick Bank & Trust
Company ("Hardwick Bank") and First National Bank of Northwest
Georgia ("Northwest Bank") (collectively referred to as the
"Banks"). Hardwick serves Whitfield, Gordon, Bartow and
surrounding counties in Northwest Georgia. Northwest Bank
operates under the trade names "Calhoun First National Bank" in
Gordon County and "Peoples First National Bank" in Bartow County.
Through its bank subsidiaries, Hardwick provides such customary
types of banking services as checking accounts, savings accounts,
time deposits, safe deposit facilities and fund transfers.
Hardwick also finances commercial transactions, makes secured and
unsecured loans to individuals and provides other financial
services. Unless the context otherwise requires, the term
"Hardwick", "Company" or "Registrant," whenever used herein,
means Hardwick Holding Company, Hardwick Bank & Trust Company and
First National Bank of Northwest Georgia, collectively. The
principal executive offices of Hardwick are located at One
Hardwick Square, Dalton, Georgia 30720 and its telephone number
at that address is (706) 217-3950.
MARKET
The Banks conduct banking activities primarily in Whitfield,
Gordon, Bartow and surrounding counties in Northwest Georgia.
Over 40% of the workforce in Hardwick's market area is employed
by companies in the carpet industry. Another significant portion
of Hardwick's customers are employed by industries directly or
indirectly related to the carpet industry. Other major employers
in the area include Anheuser-Bush, Inc., ConAgra Broiler Co. and
Outboard Marine Corporation.
DEPOSITS
The Banks offer a full range of depository accounts and
services to both consumers and businesses. At December 31, 1997,
Hardwick's deposit base, totaled approximately $410 million,
including approximately $87 million in noninterest-bearing
transaction accounts (21% of total deposits). Interest-bearing
transaction accounts were approximately $122 million (30% of
total deposits) which includes approximately $31 million in money
market accounts, approximately $28 million in savings deposits
and approximately $63 million in NOW accounts. Also included in
total deposits was approximately $139 million in time deposits in
amounts of less than $100,000 (34% of total deposits ) and
approximately $62 million in time deposits of $100,000 or more
(15% of total deposits).
2<PAGE>
LOANS
The Banks make both secured and unsecured loans to
individuals, firms, corporations and governmental entities, and
offer both consumer and commercial loans including various types
of credit for the Banks' customers. The Banks also make direct
installment loans to consumers on both a secured and unsecured
basis. At December 31, 1997, real estate, (including mortgage
construction loans), commercial (including agricultural loans)
consumer and other loans represented approximately 61%, 19%, 11%
and 9% respectively, of Hardwick's total loan portfolio. The
real estate loans made by the Banks included real estate
construction, acquisition and development loans, as well as loans
for other purposes which are secured by real estate.
LENDING POLICY
The current lending policy of the Banks is to offer
consumer, real estate and commercial credit services to
individuals and entities that meet the Banks' credit standards.
The Banks provide each lending officer with written guidelines
for lending activities. Lending authority is delegated by the
Board of Directors of the Banks to loan officers, each of whom
are limited in the amount of secured and unsecured loans which he
can make to a single borrower or related group of borrowers.
The Board of Directors of Hardwick is responsible for
approving and monitoring the Banks' loan policy. The procedures
to be followed are the responsibility of the Board of Directors
and management of each of the Banks. All extensions of credit
over $1,000,000 require approval by the Executive Loan Committee
of the Board of Directors.
LOAN REVIEW AND NONPERFORMING ASSETS
Loan review and nonperforming assets review are the specific
responsibility of the full time loan review officer at each bank.
The loan review officer's responsibility is to assign a rating to
loans as they are made and to add to the troubled loans or watch
list of each bank as applicable. The loan review officer has the
responsibility of initially reviewing all credits of $200,000 or
more at the Banks. The loan review officer has the responsibility
of reviewing with the Executive Loan Committee of the Board of
Directors at least annually those credit concentrations over $500,000.
The loan review officers have the responsibility of reviewing with
the full Board of each bank on a quarterly basis the reserve for
possible loan losses and advising the Board as to the adequacy
of the reserve level based on both present and historical
account information.
ASSET/LIABILITY MANAGEMENT
The Board of Directors of Hardwick is charged with
establishing policies to manage the assets and liabilities of the
Banks. The task of the Board of Directors of each Bank is to
manage asset growth, net interest margin, liquidity and capital.
This is accomplished by planning funds availability for increases
in loan demand and decreases in deposit liabilities. The
Executive Committee of the Boards of Directors of the Banks
regularly monitor changes in interest rates, which is necessary
to control interest rate risk. The asset/liability management
responsibilities include the maximization of earnings, while
3<PAGE>
assuring liquidity for funding requirements and effectively
controlling interest rate risk.
INVESTMENT PORTFOLIO
The Banks' investment portfolio policy is to maximize income
consistent with liquidity, asset quality and regulatory
constraints. Individual transaction and portfolio composition
performance are reviewed and approved by the Executive Committee
of the Board of each Bank.
EMPLOYEES
Hardwick employs 218 persons on a full-time basis and 28
persons on a part-time basis. Hardwick is not a party to any
collective bargaining agreement, and it believes that its
employee relations are good.
COMPETITION
The banking business is highly competitive. Hardwick
competes with seventeen (17) other financial institutions in
Bartow, Gordon, Whitfield and surrounding counties in the
Northwest Georgia area. The Banks also compete with other
financial service organizations, including finance companies,
credit unions and certain governmental agencies. To the extent
that banks must maintain noninterest-earning reserves against
deposits, they may be at a competitive disadvantage when compared
with other financial service organizations that are not required
to maintain reserves against substantially equivalent sources of
funds. Increased competition from investment bankers and brokers
and other financial service organizations may have a significant
impact on the competitive environment in which the Banks operate.
SUPERVISION AND REGULATION
Hardwick is a registered bank holding company subject to
regulation by the Board of Governors of the Federal Reserve
System ("The Federal Reserve") under the Bank Holding Company Act
of 1956, as amended (the "Act"). As a bank holding company,
Hardwick is required to file with the Federal Reserve an annual
report of its operations at the end of each fiscal year and such
additional information as the Federal Reserve may require
pursuant to the Act. The Federal Reserve may also make
examinations of Hardwick.
The Act requires every bank holding company to obtain prior
approval of the Federal Reserve (i) before it may acquire direct
or indirect ownership or control of more than five percent (5%)
of the voting shares of any bank that is not already controlled;
(ii) before it or any of its subsidiaries, other than a bank, may
acquire all or substantially all of the assets of a bank; and
(iii) before it may merge or consolidate with any other bank
holding company. In addition, a bank holding company is
generally prohibited from engaging in non-banking activities or
acquiring direct or indirect control of voting shares of any
company engaged in such activities. This prohibition does not
apply to activities found by the Federal Reserve, by order or
regulation, to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. Some of
4<PAGE>
the activities that the Federal Reserve has determined by
regulation or order to be closely related to banking are: making
or servicing loans and certain types of leases; performing
certain data processing services; acting as fiduciary or
investment or financial advisors; providing full service
brokerage under certain conditions; underwriting bank eligible
securities; underwriting debt and equity securities on a limited
basis through separately capitalized subsidiaries; and making
investments in corporations or projects designed primarily to
promote community welfare.
The laws of Georgia require annual registration with the
Department of Banking and Finance (the "DBF") by all Georgia bank
holding companies. Such registration includes information with
respect to the financial condition, operations, management and
intercompany relationships of a bank holding company and its
subsidiaries and related matters. The DBF may also require such
other information as is necessary to keep itself informed as to
whether the provisions of Georgia law and the regulations and
orders issued thereunder by the DBF have been complied with, and
the DBF may make examinations of each bank holding company and
each bank subsidiary thereof other than a national bank.
Northwest Bank is a national bank chartered under the
National Bank Act, and is subject to the supervision of, and is
regularly examined by the Office of Comptroller of the Currency
(the "OCC"). The OCC regulates or monitors all areas of the
Northwest Bank's operations and activities, including reserves,
loans, mergers, issuance of securities, payments of dividends,
interest rates and establishment of branches. Northwest Bank is a
member of the Federal Reserve System and is subject to the
regulation of the Federal Reserve Board.
Hardwick Bank, as a state bank, is subject to the
supervision of , and is regulated by, the FDIC and the DBF. Both
the FDIC and DBF must grant prior approval of any merger,
consolidation or other corporate reorganization involving state
chartered banks.
The Banks are insured by the Federal Deposit Insurance
Corporation (the "FDIC"). The major functions of the FDIC with
respect to insured banks include paying depositors to the extent
provided by law if an insured bank is closed without adequate
provision having been made to pay claims of depositors, acting as
a receiver of state banks placed in receivership when appointed
receiver by state authorities and preventing the development or
continuance of unsound and unsafe banking practices. The FDIC
also has the authority to recommend to the appropriate federal
agency supervising an insured bank that the agency take informal
action against such institution and to act to implement the
enforcement action itself if the agency fails to follow the
FDIC's recommendation. The FDIC also has the authority to
examine all insured banks.
Hardwick is an "affiliate" of the Banks under the Federal
Reserve Act, which imposes certain restrictions on (i) loans by
the Banks to Hardwick, (ii) investments in the stock or
securities of Hardwick by the Banks, (iii) the Banks' taking the
stock or securities of an "affiliate" as collateral for loans by
the Banks to a borrower and (iv) the purchase of assets from
Hardwick by the Banks. Further, a bank holding company and its
5<PAGE>
subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services.
The Federal Reserve and the OCC have implemented risk-based
rules for assessing bank and bank holding company capital
adequacy. These regulations establish minimum capital standards
in relation to assets and off-balance sheet exposures, as
adjusted for credit risk. Banks and bank holding companies are
required to have (1) a minimum standard of total capital (as
defined) to risk rated assets of eight percent (8%); (2) minimum
Tier One Capital (as defined) to risk rated assets of four
percent (4%); and (3) a minimum stockholders' equity to risk
rated assets of four percent (4%). In addition, the Federal
Reserve has established a minimum three percent (3%) leverage
ratio of Tier One Capital to total quarterly average assets for
the most highly rated banks. "Tier One Capital" generally
consists of common equity, minority interests in equity accounts
of consolidated subsidiaries and certain perpetual preferred
stock less certain intangibles. The Federal Reserve and the OCC
will require a bank holding company to maintain a leverage ratio
greater than three percent (3%) if it is experiencing or
anticipating significant growth or is operating with less than
well diversified risks in the opinion of the Federal Reserve or
the OCC. The Federal Reserve and the OCC use the leverage ratios
in tandem with the risk-based ratio to assess capital adequacy of
banks and bank holding companies, as applicable.
In addition, effective December 19, 1992, Section 38 to the
Federal Deposit Insurance Act implemented the prompt corrective
action provisions that Congress enacted as a part of the Federal
Deposit Insurance Corporation Improvement Act of 1991 ( the "1991
Act"). The "prompt corrective action" provisions set forth five
regulatory zones in which all banks are placed largely based on
their capital positions. Regulators are permitted to take
increasingly harsh action as a bank's financial condition
declines. Regulators are also empowered to place in receivership
or require the sale of a bank to another depository institution
when a bank's capital leverage ratio reaches two percent. Better
capitalized institutions are generally subject to less onerous
regulation and supervision than banks with lessor amounts of
capital.
The FDIC and the OCC have adopted regulations implementing
the prompt corrective action provisions of the 1991 Act, which
place financial institutions in the following five categories
based upon capitalization ratios: (1) a "well capitalized "
institution has a total risk-based capital ratio of at least 10%,
a Tier One risk-based ratio of at least 6% and a leverage ratio
of at least 5%; (2) and "adequately capitalized" institution has
a total risk-based capital ratio of at least 8%, a Tier One risk-
based ratio of at least 4% and a leverage ratio of at least 4%;
(3) an "undercapitalized" institution has a total risk-based
capital ratio of under 8%, a Tier One risk-based ratio of under
4% and a leverage ratio of under 4%; (4) a "significantly
undercapitalized" institution has a total risk-based capital
ratio of under 6%, a Tier One risk-based ratio of under 3% or a
leverage ratio of under 3%; and (5) a "critically
undercapitalized" institution has a leverage ratio of 2% or less.
Institutions in any of the three undercapitalized categories
would be prohibited from declaring dividends or making capital
distributions. The FDIC and OCC regulations also establish
6<PAGE>
procedures for "downgrading" an institution to a lower capital
category based on supervisory factors other than capital. Under
the FDIC and OCC regulations, both of the Banks were "well
capitalized" institutions, at December 31, 1997.
Set forth below are pertinent capital ratios for Hardwick,
Hardwick Bank and Northwest Bank as of December 31, 1997:
<TABLE>
<CAPTION>
Hardwick Northwest
Minimum Capital Requirements Hardwick Bank Bank
---------------------------- -------- -------- ---------
<S> <C> <C>
Tier 1 Capital to Risk-based 12.02% 11.00% <F1> 10.49% <F1>
Assets: 4.00%
Total Capital to Risk-based 13.28% 12.26% <F2> 11.76% <F2>
Assets: 8.00%
Leverage Ratio ( Tier 1 Capital to
Total Quarterly Average Assets): 3.00% 9.56% 8.99% <F3> 8.06% <F3>
________________________
<FN>
<F1> Minimum for "Well Capitalized" Banks = 6%
<F2> Minimum for "Well Capitalized" Banks = 10%
<F3> Minimum for "Well-Capitalized" Banks = 5%
</FN>
</TABLE>
PAYMENT OF DIVIDENDS
The Registrant is a legal entity separate and distinct from
the Banks. Most of the revenues of the Registrant 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 the Registrant to its
shareholders.
Hardwick Bank is a state chartered bank which is regulated
by the DBF and the FDIC. Under the regulations of the DBF,
dividends may be declared out of the retained earnings of a state
bank without first obtaining the written permission of the DBF
only if the bank meets all of the following requirements:
(a) Total classified assets as of the most recent
examination of the bank do not exceed 80% of equity capital
(as defined by regulation);
(b) The aggregate amount of dividends declared or
anticipated to be declared in the calendar year does not
exceed 50% of the net profits after taxes but before
dividends for the previous calendar year; and
(c) The ratio of equity capital to adjusted assets shall
not be less than 6%.
Northwest Bank, as a National Banking Association, is
required by federal law to obtain the prior approval of the OCC
for payments of dividends if the total of all dividends declared
by the Board of Directors of such bank in any year will exceed
the total of (1) such bank's net profits (as defined and
7<PAGE>
interpreted by regulation) for that year, plus (2) the retained
net profits (as defined and interpreted by regulation) of the
preceding two years, less any required transfers to surplus.
The payment of dividends by the Registrant and the Banks may
also be affected or limited by other factors, such as the
requirement to maintain adequate capital above regulatory
guidelines. In addition, if in the opinion of the applicable
regulatory authority, a bank under its jurisdiction is engaged in
or is about to engage in an unsafe or unsound practice (which,
depending upon the financial condition of the bank, could include
the payment of dividends), such authority may require, after
notice and hearing, that such bank cease and desist from such
practice. The OCC and the FDIC have issued policy statements
that provide that bank holding companies and insured banks should
generally only pay dividends out of current operating earnings.
During 1997, Hardwick Bank requested and received permission
from DBF, to pay a special one-time dividend of $2,500,000 to
Hardwick. The purpose of the dividend was to pay off debt under
an existing line of credit and to purchase treasury stock.
At December 31, 1997, retained earnings available from the
Banks to pay dividends totaled approximately $4.2 million. For
1997, Hardwick's cash dividend declared to stockholders was 32%
of net income.
MONETARY POLICY
The results of operations of Hardwick are affected by credit
policies of monetary authorities, particularly the Board of
Governors of the Federal Reserve System. The instruments of
monetary policy employed by the Federal Reserve include open
market operations in U. S. government securities, changes in the
discount rate on bank borrowings, and changes in reserve
requirements against bank deposits. In view of changing
conditions in the national economy and in the money markets, as
well as the effect of action by monetary and fiscal authorities,
including the Federal Reserve, no prediction can be made as to
possible future changes in interest rates, deposit levels and
loan demand on the business and earnings of Hardwick.
RECENT LEGISLATION
On April 19, 1995, the four federal bank regulatory agencies
adopted revisions to the regulations promulgated pursuant to the
Community Reinvestment Act (the "CRA"), which are intended to set
distinct assessment standards for financial institutions. The
revised regulation contains three evaluation tests: (i) a
lending test, which compares an institution's market share of
loans in low and moderate-income areas to its market share of
loans in its entire service area and the percentage of a bank's
outstanding loans to low- and moderate-income areas or
individuals, (ii) a services test, which evaluates the provisions
of services that promote the availability of credit to low- and
moderate-income areas, and (iii) an investment test, which
evaluates an institution's record of investments in organizations
designed to foster community development, small- and minority-
owned businesses and affordable housing lending, including state
and local government housing or revenue bonds. The regulations
are designed to reduce some paperwork requirements of the current
regulations and provide regulators, institutions and community
groups with a more objective and predictable manner with which to
8<PAGE>
evaluate the CRA performance of financial institutions. The rule
became effective on January 1, 1996, at which time evaluation
under streamlined procedures began for institutions with assets
of less than $250 million that are owned by a holding company
with total assets of less than $1 billion. It is not expected
that these regulations will have any appreciable impact upon
Hardwick and the Banks.
Congress and various federal agencies (including, in
addition to the bank regulatory agencies, HUD, the Federal Trade
Commission, and the Department of Justice) (collectively the
"Federal Agencies") responsible for implementing the nations fair
lending laws have been increasingly concerned that prospective
home buyers and other borrowers are experiencing discrimination
in their efforts to obtain loans. In recent years, the
Department of Justice has filed suit against financial
institutions, which it determined had discriminated, seeking
fines and restitution for borrowers who allegedly suffered from
discriminatory practices. Most, if not all, of these suits have
been settled (some for substantial sums) without a full
adjudication on the merits.
On March 8, 1994 the Federal Agencies, in an effort to
clarify what constitutes lending discrimination and specify the
factors the agencies will consider in determining if lending
discrimination exists, announced a joint policy statement
detailing specific discriminatory practices prohibited under the
Equal Credit Opportunity Act and the Fair Housing Act. In the
policy statement, three methods of proving lending discrimination
were identified: (1) overt evidence of discrimination, when a
lender blatantly discriminates on a prohibited basis, (2)
evidence of disparate treatment, when a lender treats applicants
differently based on a prohibited factor even where there is no
showing that the treatment was motivated by prejudice or a
conscious intention to discriminate against a person, and (3)
evidence of disparate impact, when a lender applies a practice
uniformly to all applicants, but the practice has a
discriminatory effect, even where such practices are neutral on
their face and are applied equally, unless the practice can be
justified on the basis of business necessity.
On September 23, 1994, President Clinton signed the Reigle
Community Development and Regulatory Improvement Act of 1994 (the
"Regulatory Improvement Act"). The Regulatory Improvement Act
contains funding for community development projects through banks
and community development financial institutions and also
numerous regulatory relief provisions designed to eliminate
certain duplicative regulations and paperwork requirements.
On September 29, 1994, President Clinton signed the Reigle-
Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Federal Interstate Bill") which amended federal law to permit
bank holding companies to acquire existing banks in any state
effective September 29, 1995, and any interstate bank holding
company is permitted to merge its various bank subsidiaries into
a single bank with interstate branches after May 31, 1997.
States have the authority to authorize interstate branching prior
to June 1, 1997, or alternatively, to opt out of interstate
branching prior to that date. The Georgia Financial Institutions
Code was amended in 1994 to permit the acquisition of a Georgia
bank or bank holding company by out-of-state bank holding
companies beginning July 1, 1995. On September 29, 1995, the
9<PAGE>
interstate banking provisions of the Georgia Code were superseded
by the Federal Interstate Bill.
In 1996, the Georgia legislature adopted a bill (the
"Georgia Intrastate Bill") to permit, effective July 1, 1996, any
bank located in Georgia or group of affiliated banks under one
holding company to establish new or additional branch banks in up
to three additional counties any where within the State of
Georgia where the bank does not currently have operations. After
July 1, 1998, all restrictions on state-wide branching will be
removed. Prior to adoption of the Georgia Intrastate Bill,
Georgia only permitted branching of banks within a county, via
merger or consolidation with an existing bank or in certain other
limited circumstances.
FDIC INSURANCE ASSESSMENTS
The Banks are subject to FDIC deposit insurance assessments
for the Bank Insurance Fund ("BIF"). In the first six months of
1995, the Banks were assessed $.23 per $100 of deposits based
upon a risk-based system whereby banks are assessed on a sliding
scale depending upon their placement in nine separate supervisory
categories, from $.23 per $100 for the healthiest banks (those
with the highest capital, best management and best overall
condition) to as much as $.31 per $100 of deposits for the less-
healthy institutions, for an average $.25 per $100 of deposits.
On August 8, 1995, the FDIC lowered the BIF premium for healthy
banks 83% from $.23 per $100 in deposits to $.04 per $100 in
deposits, while retaining the $.31 level for the riskiest banks.
The average assessment rate was therefore reduced from $.232 to
$.044 per $100 of deposits. The new rate took effect on
September 29, 1995. On September 15, 1995, the FDIC refunded
$218,000 to the Banks for premium overpayments in the second and
third quarter of 1995. On November 14, 1995, the FDIC again
lowered the BIF premium for healthy banks from $.04 per $100 of
deposits to zero for the highest rated institutions (92% of the
industry). As a result, the Banks paid only the legally required
annual minimum payment of $2,000 per year for insurance beginning
in January 1996. Had the current rates been in effect for all of
1995 and 1994, the annual FDIC insurance premiums paid by the
Banks would have been reduced by $405,000 and $812,000,
respectively.
On September 29, 1996, the Economic Growth and Regulatory
Paperwork Reduction Act of 1996 was enacted ("The 1996 Act").
This Act's chief accomplishment was to provide for the
recapitalization of the Savings Association Insurance
Fund("SAIF") by levying a one-time special assessment on SAIF
deposits to bring the fund to a reserve ratio equal to $.25 per
$100 of insured deposits and to provide that beginning in 1997,
BIF assessments would be used to help pay off the $780 million in
annual interest payments on the $8 billion Financing Corporation
("FICO") bonds issued in the late 1980s as part of the government
rescue of the thrift industry. The law provides that BIF
assessments for FICO bond payments must be set at a rate equal to
20% of the SAIF rates for such assessments in 1997, 1998 and
1999. After 1999, all FDIC insured institutions will pay the
same assessment rates. For 1997, the assessment for the FICO
bond payments were $.0132 per $100 of deposits for BIF deposits
and $.0648 per $100 of deposits for SAIF deposits. The premium
for the first six months of 1998, for deposit insurance
10<PAGE>
assessments will range from zero to $.27 per $100 of deposits
with 94% of banks paying nothing for deposit insurance. One of
the provisions of the 1996 Act was to eliminate the minimum
$2,000 per year charge for deposit insurance. The banks paid
approximately $48,000 in FICO bond assessments for the year ended
December 31, 1997 and no deposit insurance premiums.
ITEM 2. PROPERTIES.
Hardwick Bank's main office is owned by the Bank and is
located at Hardwick Square in Dalton, Georgia, and consists of
approximately 60,000 square feet of usable office space.
Hardwick Bank has four branch offices, all of which are owned by
it, and one free-standing automated teller machine, which is on
leased premises. The Cleveland Road branch is located at 1440
Cleveland Highway, Dalton, Georgia, and contains approximately
3,700 square feet of office space and one automated teller
machine. The East Side branch is located at 2500 E. Walnut
Avenue, Dalton, Georgia, and contains approximately 4,000 square
feet of office space. The East Side office has an automated
teller machine on the premises. The Westcott branch is located
at 905 Thornton Avenue, Dalton, Georgia, and contains
approximately 4,200 square feet of office space. The Westcott
branch also has an automated teller machine on the premises. The
Tunnel Hill Branch is located at 3617 Chattanooga Road, Tunnel
Hill, Georgia, and contains approximately 3,700 square feet of
office space as well as an automated teller machine. Hardwick
Bank's free-standing automated teller machine is located at 1807
West Walnut Avenue, Dalton, Georgia on leased premises in the
Dalton Shopping Center. The lease is scheduled to expire in
October, 1998.
Northwest Bank's main banking office is owned by the Bank
and is located at 215 North Wall Street, Calhoun, Georgia and
contains approximately 18,500 square feet of office space. An
automated teller machine is located on the premises of the main
office. Additional facilities at the main office include a
drive-in teller facility, a personnel center, an operations
center and a storage building totaling approximately 16,000
square feet. Northwest Bank has three branch offices. One
branch is located at Highway 53, Calhoun, Georgia and contains
approximately 4,000 square feet of space and has an automated
teller machine on the premises. Northwest Bank has two branch
offices in Bartow County, the main branch is located at 314 E.
Main Street in Cartersville, Georgia with approximately 18,000
square feet of office space as well as a 1,400 square foot drive-
in banking facility and an automated teller machine. The other
Cartersville branch is located at U. S. HWY 41 and has
approximately 3,200 square feet of office space as well as an
automated teller machine. None of the properties of the Company
or its subsidiaries are subject to encumbrances. The Registrant
is not aware of any material pending legal proceedings to which
the Registrant or any of its subsidiaries is a party or to which
any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of
the Registrant during the fourth quarter of its fiscal year.
11<PAGE>
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
STOCK
There is no established public trading market for the
Registrant's common stock.
The Registrant purchased 13,733 shares of the Registrant's
stock in thirteen transactions during 1997, at $20.00 per share.
To the Registrant's knowledge these were the only trades during
1997.
The Registrant purchased 67,249 shares of the Registrant's
stock in sixteen transactions during 1996, ranging from 50 shares
to 55,033 shares, in which 1,570 shares were purchased at $17.50
per share, and 65,679 shares were purchased at $20.00 per share.
To the Registrant's knowledge these were the only trades during
1996.
On December 5, 1996 Hardwick Holding Company made an offer
to purchase for cash from its shareholders up to 25,575 shares of
its common stock at a purchase price of $20.00 per share (the
"Tender Offer"). Under the terms of the Tender Offer,
shareholders who elected to tender their shares of Common Stock
were required to tender all shares of Common Stock owned by them;
provided, however, that the Company would not purchase more than
100 shares of Common Stock from any one shareholder. The purpose
of the Tender Offer was to encourage a sufficient number of the
Company's shareholders to tender all of their shares to cause the
number of shareholders of record to fall below 300, thus
permitting the Company to suspend its filings under the
Securities Exchange Act of 1934, as amended. Approximately 110
of the Company's 344 shareholders of record as of December 5,
1996 held fewer than 100 shares each. Due to lack of interest in
the Tender Offer, the Registrant terminated it effective February
19, 1997. As a result, the primary goal of the Tender Offer was
not met.
The Registrant purchased 15,050 shares of the Registrant's
stock in sixteen transactions during 1995, ranging from 60 shares
to 3,000 shares, with a price range of $16.00 to $17.00 per
share. To the Registrant's knowledge these were the only trades
during 1995.
There have been no shares of treasury stock purchased by the
Registrant during 1998. There were 334 holders of record of the
Registrant's common stock as of December 31, 1997 and at March
15, 1998.
DIVIDENDS
The Registrant paid quarterly cash dividends of $0.06 per
share on January 19, 1997 and April 19,1997 which had been
declared as of December 31, 1996 and March 31, 1998,
respectively. The Registrant paid cash dividends of $0.12 per
share on July 19, 1997 and October 19, 1997 which had been
declared as of June 30, 1997 and September 30, 1997,
respectively. On November 20, 1997, the Registrant declared the
dividend for the first quarter of 1998 at $0.12 per share for
shareholders of record as of December 31, 1997, which was paid on
January 19, 1998. Total cash dividends declared for 1997 were
12<PAGE>
$0.42 per share. The Registrant intends to pay quarterly cash
dividends in 1998. However, the amount and frequency of
dividends will be determined by the Registrant's Board of
Directors with the consideration of the earnings, capital
requirements and the financial condition of the Registrant, and
no assurances can be given that dividends will be declared in the
future.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET
Total assets $ 492,892 452,061 444,817 427,892 425,631
Loans, net $ 310,159 271,470 239,189 227,844 212,030
Investment securities $ 119,431 120,166 135,306 140,894 154,425
Federal funds sold $ 12,982 7,000 11,000 2,500 5,800
Deposits $ 409,785 393,940 389,951 360,515 365,566
FHLB Advances $ 8,231 306 381 0 0
Note payable $ 0 0 250 750 0
Stockholders' equity $ 50,603 46,977 46,830 43,380 42,345
OPERATING DATA
Interest income $ 35,196 32,273 31,526 28,413 29,334
Interest expense $ 14,663 13,169 13,062 10,173 11,081
Net interest income $ 20,533 19,104 18,464 18,240 18,253
Provision for loan losses $ 800 396 0 (600) 1,350
Net interest income after
provision for loan losses $ 19,733 18,708 18,464 18,840 16,903
Noninterest income $ 6,822 4,082 4,074 4,197 3,865
Noninterest expense $ 18,564 17,540 18,311 17,934 17,249
Income tax expense $ 2,765 1,680 1,004 1,352 850
Cumulative effect of change in
accounting principle $ 0 0 0 0 583
Net income $ 5,226 3,570 3,223 3,751 3,252
Basic net income per share 1.32 .89 .79 .91 .79<F1>
Dilutive net income per share $ 1.29 .87 .79 .88 .77<F1>
Dividends paid per share $ .36 .44 .22 .20 .18
SELECTED FINANCIAL RATIOS
AND OTHER DATA
Return on average assets 1.13% 0.82% 0.75% 0.88% 0.75%
Return on average equity 10.55% 7.66% 7.14% 8.68% 7.90%
Noninterest expense to average assets 4.02% 4.04% 4.28% 4.19% 3.99%
Equity to assets 10.27% 10.39% 10.53% 10.14% 9.95%
<FN>
<F1> Basic net income per share before cumulative effect of
change in accounting principle was $.65.
</FN> 13<PAGE>
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
RESULTS OF OPERATIONS
NET INCOME
Hardwick reported net income of $5,226,000 for 1997 compared
with net income in 1996 of $3,570,000. The increase in net income
is due primarily to an increase in net interest income, an
increase in service charges on deposit accounts and a settlement
with a vendor. Net interest income of the Registrant increased
approximately $1,429,000 or 7.5% over 1996 net interest income.
Service charges on deposit accounts increased approximately
$384,000 or 16.5% compared with service charges on deposit
accounts for 1996. The service charge increases are due to both
the increase in volume of deposit accounts and the activity
within the accounts themselves. The Registrant received a
settlement from a vendor during 1997 of approximately $2,125,000
net of fees. Noninterest expense increased by approximately
$1,024,000 or 5.84% more than noninterest expense for 1996. The
increase in noninterest expense was principally due to an
increase in salary and employee benefits, FDIC fees and other
noninterest expense.
During 1997, the Registrant recorded an $800,000 provision
for loan losses as compared to approximately $396,000 in 1996.
The provision was a result of an increase in net chargeoffs of
approximately $362,000 which represents .21% of average net loans
outstanding for 1997 as compared with .09% for 1996. The
majority of the chargeoffs came from consumer loans as a result
of an increase in bankruptcies last year throughout the
Registrant's market area. Approximately 40% of the workforce in
the Registrant's market area are employed in the tufted carpet
industry. In recent years the larger, vertically integrated
manufacturers, have increased their market share, thereby
negatively effecting the smaller independent tufters and dyeing
and finishing operators, which make up a significant part of the
Registrant's business. Any down turns in the carpet industry
could have a negative effect on the results of operations of the
Registrant.
Loan loss reserves as a percent of loans (net of unearned
income and fees) were 2.20%, 2.44% and 2.69% at December 31,
1997, 1996 and 1995, respectively. Loan loss reserves at
December 31, 1997, 1996 and 1995 were 6.9, 6.5 and 8.4,
respectively, times nonperforming assets.
At December 31, 1997 nonperforming assets were approximately
$1,018,000. Of the total nonperforming assets, approximately
$323,000 is carried as nonaccrual loans, approximately $504,000
is in loans 90 days past due and still accruing, and
approximately $191,000 is carried in other real estate owned.
Hardwick's net income of $3,570,000 for 1996 compared with
net income in 1995 of $3,223,000. The increase in net income was
due primarily to an increase in net interest income and a
decrease in noninterest expense. Net interest income of the
Registrant increased approximately $640,000 or 3.47% over 1995
14<PAGE>
net interest income. Noninterest expense decreased by
approximately $771,000 or 4.21% less than noninterest expense for
1995. The decrease in noninterest expense was due to a decrease
in salary and employee benefits of approximately $656,000, a
7.29% decrease compared with 1995 salary and employee benefits.
Net occupancy expense decreased by approximately $182,000 or
5.08% compared with 1995 net occupancy expense. All other
noninterest expense increased approximately $67,000 which was
primarily due to an increase in data processing and credit card
expense partially offset by a decrease in FDIC insurance
premiums. Data processing expense increased by approximately
$204,000 and credit card expense increased approximately
$112,000. FDIC insurance premiums were approximately $4,000 for
1996 as compared with $407,000 for 1995, a decrease of
approximately 99%.
NET INTEREST INCOME (TAXABLE EQUIVALENT BASIS)
In 1997 Hardwick's net interest income was $21,023,000 on
average earning assets of $414,950,000, an increase of
approximately $1,000,000 compared with the net interest income of
$20,023,000 on average earning assets of $385,067,000 in the
prior year. The net interest margin for 1997 was 5.1% compared
with 5.2% for 1996, reflecting a decrease of approximately 10
basis points.
Net interest income in 1996 of $20,023,000 was up 3.78%, or
approximately $730,000, over the $19,293,000 reported in 1995.
The net interest margin increased approximately 10 basis points
from 5.1% in 1995 to 5.2% in 1996.
NET YIELD ON EARNING ASSETS
Hardwick's net interest income is influenced by changes in
interest rates as well as volume. Average earning assets
increased approximately 7.76% during 1997 or approximately
$29,883,000. The average yield on interest earning assets
remained relatively unchanged at 8.6%.
During 1997, average interest-bearing liabilities increased
approximately 8.13% or approximately $24,399,000 primarily due to
increases in time deposits, repurchase agreements, borrowings
from the Federal Home Loan Bank and note payable to bank, while
being partially offset by decreases in transaction accounts,
savings deposits and capital lease obligations. The average cost
of interest-bearing liabilities increased 10 basis points from
4.4% in 1996 to 4.5% in 1997. Average noninterest bearing
deposits have increased by approximately $212,000 or .3% from
1996 to 1997.
During 1996, average interest-bearing liabilities decreased
approximately .04% or approximately $108,000 primarily due to
decreases in borrowings from the Federal Home Loan Bank, note
payable to bank, capital lease obligations, repurchase
agreements, savings deposits and interest bearing transaction
accounts while being partially offset by increases in time
deposits . The average cost of interest-bearing liabilities
increased 10 basis points from 4.3% in 1995 to 4.4% in 1996.
Average noninterest bearing deposits increased by approximately
$3,506,000 or 4.4% from 1995 to 1996.
15<PAGE>
NONINTEREST INCOME
Noninterest income increased approximately $2,740,000 or
67.1% during 1997, due primarily to an increase in service
charges on deposit accounts of approximately $384,000, an
increase in net gains realized on the sale of investment
securities of approximately $63,000, an increase in trust income
of approximately $48,000, a settlement with a vendor of
approximately $2,125,000, credit life commissions of
approximately $27,000 and net changes in other miscellaneous
income items of approximately $93,000.
Noninterest income increased approximately $8,000 or .2%
during 1996, due primarily to an increase in trust income of
approximately $42,000, credit life commissions of approximately
$27,000 and other miscellaneous income of approximately $35,000
which was partially offset by a decrease in service charges on
deposit accounts of approximately $93,000 and a decrease in net
gains realized on the sale of investment securities of
approximately $2,000.
NONINTEREST EXPENSE
Noninterest expense for 1997 was $18,564,000 compared to
$17,540,000 for 1996, an increase of 5.84% or approximately
$1,024,000 more than noninterest expense for 1996. The increase
in noninterest expense was principally due to an increase in
salary and employee benefits, FDIC fees, data processing cost and
other noninterest expense. Salary and employee benefits
increased approximately $658,000, a 7.89% increase compared with
1996 salary and employee benefits. Of the $658,000 increase in
salary and employee benefits, the Company incurred approximately
$210,000 for an employee personal computer program which enabled
employees to purchase personal computers for home use that would
enhance the training for technology purposes on the job site.
FDIC fees increased approximately $44,000 and data processing
cost increased approximately $145,000 while professional fees
decreased approximately $26,000, and office supplies and printing
decreased approximately $10,000 when compared with 1996. Other
noninterest expense increased approximately $453,000 principally
due to a charge off of goodwill at the Cartersville Branch of
Northwest Bank of approximately $183,000; a charge to earnings
for disposition of fixed assets of approximately $193,000, and an
increase credit card fees and expense of approximately $68,000,
and increases in other noninterest expenses of approximately
$9,000. Net occupancy expense decreased by approximately
$240,000 or 7.05% compared with 1996 net occupancy expense. The
net occupancy decrease was due to a reduction in repairs and
maintenance of approximately $128,000, depreciation of
approximately $15,000, utilities of approximately $28,000 and net
decreases in other noninterest expense items of approximately
$69,000.
During 1996, noninterest expense decreased by approximately
$771,000 or 4.2% compared with noninterest expense for 1995. The
decrease was principally due to a decrease in salary and employee
benefits of approximately $656,000, a 7.29% decrease compared
with 1995 salary and employee benefits, and a decrease in net
occupancy expense of approximately $182,000 or 5.08% compared
with 1995 net occupancy expense. All other noninterest expense
decreased approximately $67,000 which was primarily due to an
increase in data processing and credit card expense while being
16<PAGE>
partially offset by a decrease in FDIC insurance premiums. Data
processing expense increased by approximately $204,000 and credit
card expense increased approximately $112,000. FDIC insurance
premiums were approximately $4,000 for 1996 as compared with
$407,000 for 1995, a decrease of approximately 99%.
Net occupancy and equipment costs for 1996 were $3,402,000
compared to $3,584,000 in 1995, a decrease of approximately
$182,000 or 5.1%. The decreases in net occupancy costs reflect
savings on maintenance and repairs of having relatively new
systems hardware and related equipment. Net noninterest expense
(defined as noninterest expense less noninterest income, as a
percentage of average assets) was 2.5%, 3.1% and 3.3% for 1997,
1996 and 1995, respectively.
INCOME TAXES
Hardwick recorded an income tax provision of $2,765,000,
$1,680,000, and $1,004,000, respectively, for 1997, 1996, 1995.
The provision as a percentage of income before taxes reflects
effective rates of 34.6%, 32.0%, and 23.8%, respectively, for the
years 1997, 1996, and 1995. Note 7 to Hardwick's consolidated
financial statements presents additional information.
INVESTMENT SECURITIES AVAILABLE-FOR-SALE
Investment securities available-for-sale decreased
approximately $735,000 during 1997 from $120,166,000, at December
31, 1996, to $119,431,000, at December 31, 1997. At December 31,
1997 there was a net unrealized gain net of taxes of
approximately $590,000, on securities available-for-sale compared
with a net unrealized gain net of taxes of approximately
$324,000, at December 31, 1996. As securities matured, their
proceeds were used to fund loans and provide liquidity.
Management anticipates that the majority of future investment
portfolio purchases will continue to be made in taxable
investment securities, concentrating on fixed and variable rate
securities that complement rate sensitivity and liquidity
considerations; however, concerted efforts will be made to
increase the level of tax exempt investment securities to
complement efforts of reducing the effective tax rate of the
Registrant.
LOANS
Net loans, the largest category of earning assets at
December 31, 1997, increased by approximately $38,689,000 or
14.3% when compared with net loans at December 31, 1996.
Average net loans represented 68.8% of total average earning
assets during 1997 while net loans at December 31, 1997
represented 62.9% of total assets.
During 1996, average loans increased approximately
$18,058,000, or 7.6%, from 1995, and represented 66.2% of average
interest earning assets and 58.8% of average total assets.
At December 31, 1997, approximately 61.0% of Hardwick's loan
portfolio was collateralized by real estate. The Boards of
Directors of the Banks have given direction to the lending
personnel to obtain, when possible, real estate as the primary
collateral rather than blanket liens on accounts receivable,
inventories, furniture and fixtures, and equipment. Extensions
of credit are made based upon the ability of the customer to
17<PAGE>
repay from cash flows and not from the ultimate sale of the
underlying collateral. The value of real estate as the
underlying collateral is dependent upon the economic conditions
within Hardwick's market area. Hardwick places a strong emphasis
on obtaining real estate as primary collateral when making
commercial loans rather than accepting accounts receivable,
inventories and furniture and fixtures as primary collateral.
Commercial loans secured by real estate, particularly if
collateral dependent, are subject to certain inherent risks.
Commercial real estate may be substantially illiquid, and
commercial real estate values are difficult to ascertain and are
subject to wide fluctuations depending upon economic conditions.
Certain risks are inherent within the different categories
of loans. Commercial, financial and agricultural loans of the
Registrant are concentrated in loans to the tufted carpet
industry and the businesses that are associated with supplying
that industry. The underlying collateral for these concentrated
credits may lose value in a short period of time should there be
a downturn in the local economy. The maximum loan to value
ratios, as prescribed by Bank policy, are as follows: accounts
receivable 80%, inventory 50%, rolling stock 85%, general purpose
equipment and machinery 80%, specialized equipment and machinery
70%, listed stocks on the major exchanges 70%; margined and non-
margined stocks from 50% to 70% subject to Federal Reserve
Regulation U requirements, mutual funds 50%, U. S. government
obligations 90%, U. S. government agencies and state and
political subdivisions 80%, cash surrender value of life
insurance policies 95%, Hardwick savings deposits 100% and other
federally insured savings deposits 90%.
Commercial real estate loans most often are collateralized
by the underlying properties which give rise to the credit
request. The values of the underlying properties are subject to
economic conditions and availability of space, be it
manufacturing, warehousing or office spaces, and these properties
traditionally hold their value while being used for their
designed purpose. Multipurpose properties traditionally hold
value more than those properties which are acquired and
constructed for specified industries. The Registrant's
subsidiary banks extend credit with both multipurpose and single
purpose properties as collateral. The loan to value ratio range
for new construction loans is from 70% to 80% of the appraised
value or cost whichever is less.
Consumer credit extended by Hardwick has the inherent risk
of a downturn in the carpet industry which may affect the
customers' ability to pay as a result of job layoffs and cut
backs in hours available to work. Consumer loans are made by the
Registrant's subsidiary banks on a secured and unsecured basis.
Underlying collateral for consumer loans is made with a loan to
value ratio from 70% to 85%. When stocks, U. S. treasuries and
government agency securities, mutual funds and financial
institution instruments are pledged as collateral, the same loan
to value ratios apply as discussed above in the commercial,
financial and agricultural category.
NONPERFORMING ASSETS
Nonperforming assets, which include nonaccrual loans, loans
ninety (90) days past due and still accruing, restructured loans,
and potential problem loans, as well as other real estate,
totaled approximately $1,018,000 at December 31,1997, down
18<PAGE>
approximately $31,000 from 1996, a decrease of approximately
2.9%. Nonperforming loans decreased by approximately $222,000 or
21.2% during 1997. There was approximately $191,000 in other
real estate at December 31, 1997, up 100% compared to December
31, 1996. Management believes that the nonperforming assets have
been properly identified and that the necessary reserves to cover
potential losses are in place.
Management believes that the loan loss provision taken in
1997 was appropriate given the increase in net chargeoffs for the
year of approximately $362,000, or 156% from 1996. The provision
is based on management's regular evaluation of current economic
conditions, changes in the character and size of the loan
portfolio, underlying collateral values securing loans, and other
factors which deserve recognition in estimating credit losses.
The loan loss provision during 1997 was approximately $800,000
and approximately $396,000 in 1996. There was no loan loss
provision during 1995.
The ratio of nonperforming assets to total loans and other
real estate was .32% and .38% at December 31,1997 and 1996,
respectively.
At December 31,1997, the reserve for possible loan losses
was $6,984,000 or 2.2% of net outstanding loans, as compared to
$6,778,000 or 2.4% of net outstanding loans at December 31, 1996.
Management believes the reserve for possible loan losses is
adequate to provide for credit risks inherent in the portfolio
and continues to review the impact of prevailing and expected
economic and business conditions in order to maintain a reserve
considered adequate in relation to loans outstanding.
While management uses available information to recognize
losses on loans, future unexpected additions to the reserve may
become necessary based on changes in economic conditions.
Additionally, regulatory agencies, as part of their normal
examination process, periodically review the Banks' reserves for
possible loan losses. Such agencies may require the Banks to
recognize additions to the reserve based on their judgment and
evaluation of information available to them at the time of their
examination.
DEPOSITS
Hardwick's average interest bearing deposits increased
approximately $21,017,000 or 7.1% during 1997 compared with 1996.
Average time deposits increased $21,685,000 or 12.6% during 1997.
Time deposits in denominations of $100,000 or more represented
15.0% of total deposits at December 31,1997 compared to 13.2% at
December 31,1996. Hardwick's large denomination time deposits
are from customers within its local market area which provides
Hardwick with a greater degree of stability than is typically
associated with this source of funds.
The average balance of interest-bearing deposit accounts
other than time deposits, which include NOW, money market and
savings deposits, decreased by .5% in 1997 from 1996, principally
due to the movement into time deposits with higher yields.
Average noninterest bearing demand deposit accounts increased
approximately $212,000 due to an overall increase in average
deposits. The relatively high increase in time deposits is
representative of the willingness of depositors to place their
investments for longer periods of time which reflects their
19<PAGE>
expectations of interest rates staying the same or possibly
decreasing.
Hardwick's average interest bearing deposits increased
approximately $13,882,000 or 4.9% during 1996 compared with 1995.
Average time deposits increased $19,656,000 or 12.9% during 1996.
Time deposits in denominations of $100,000 or more represented
13.2% of total deposits at December 31,1996 compared to 14.1% at
December 31,1995.
CAPITAL RESOURCES
Hardwick 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 are required to maintain a minimum Tier 1 Leverage
Ratio of 3%. The required ratio is 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 are expected to maintain a strong capital position
of one or two hundred basis points above the minimum capital
levels without significant reliance on intangible assets.
The following tables represent Hardwick's regulatory capital
position at December 31,1997.
</TABLE>
<TABLE>
<CAPTION>
Risk-Based Capital Ratios
-------------------------
as of December 31, 1997
-----------------------
Amount Ratio
------ (Dollars in thousands) -----
<S> <C> <C>
Tier 1 Capital $ 45,457 12.02%
Tier 1 Capital minimum requirement 15,122 4.00%
Excess 30,335 8.02%
Total Capital 50,211 13.28%
Total Capital minimum requirement 30,244 8.00%
Excess 19,967 5.28%
Risk adjusted assets net of goodwill
and excess allowance $ 378,056
Leverage Ratio
----------------------
as of December 31,1997
----------------------
Amount Ratio
------ (Dollars in Thousands) -----
Tier 1 Capital to adjusted total assets
(Leverage Ratio) $ 45,457 9.56%
Minimum leverage requirement 14,269 3.00%
Excess 31,188 6.56%
Average quarterly total assets, net of
goodwill <F1> $ 475,619
<FN>
<F1> Average total assets, net of goodwill for the quarter ended
December 31, 1997.
</FN>
</TABLE>
20<PAGE>
LIQUIDITY
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 given time.
At December 31,1997, cash equivalents increased
approximately $4,718,000 from December 31, 1996. Operating and
financing activities provided cash of approximately $8,356,000
and approximately $35,505,000, respectively, while investing
activities used cash of approximately $39,143,000. Operating
activities provided cash principally from net income of
approximately $5,226,000, depreciation and amortization of
approximately $2,789,000, provision for loan losses of
approximately $800,000, a loss on disposition of fixed assets of
approximately $193,000 and the decrease in other assets of
approximately $79,000, while being offset by deferred tax
benefits of approximately $272,000, net securities gains of
approximately $71,000, an increase in accrued interest receivable
of approximately $123,000 and a decrease in other liabilities of
approximately $265,000. Financing activities provided
approximately $1,337,000 from a net increase in demand, NOW and
savings deposits, approximately $14,508,000, due to the sales of
certificates of deposits greater than the maturing of time
deposits, a net increase in securities sold under agreements to
repurchase of approximately $16,012,000 and proceeds from FHLB
advances of approximately $7,925,000. Additionally, financing
activities principally used cash from a net decrease in federal
funds purchased of approximately $2,600,000, while paying
approximately $196,000 on capital lease obligations, purchase of
treasury stock of approximately $275,000 and payment of cash
dividends of approximately $1,206,000.
Significant investing activities using cash included
purchases of investment securities available-for-sale of
approximately $61,404,000, and loans originated greater than
principal collected by approximately $39,489,000. Investing
activities providing cash included proceeds from maturities of
investment securities available-for-sale of approximately
$18,245,000, and sales of investment securities available-for-
sale of approximately $44,211,000. Purchases of premises and
equipment used cash of approximately $761,000, while disposal of
premises and equipment provided cash of approximately $55,000.
INTEREST RATE SENSITIVITY
The interest rate sensitivity of Hardwick's assets and
liabilities provides an indication of the extent to which
Hardwick's net interest income may be affected by interest rate
movements. An indicator of the rate sensitivity structure of a
financial institution's balance sheet is the difference between
its interest rate sensitive assets and interest rate sensitive
liabilities which is referred to as the "gap". The table below
presents Hardwick's gap position at December 31, 1997, (dollars
in thousands):
21<PAGE>
<TABLE>
<CAPTION>
One Year
Within Through Over
One Year Five Years Five Years Total
-------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Interest sensitive assets $ 141,041 203,107 105,821 449,969
Interest sensitive liabilities 303,049 47,874 - 350,923
---------- -------- --------- --------
Periodic Interest sensitivity gap $ (162,008) 155,233 105,821 99,046
========== ======== ========= ========
Cumulative net earning assets $ (162,008) (6,775) 99,046 99,046
========== ======== ========= ========
Cumulative ratio of earning assets
to interest-bearing liabilities 46.5% 98.1% 128.2% 128.2%
========== ======== ========= ========
At December 31,1997, Hardwick continues to be liability
sensitive on a short-term basis and asset sensitive on a long-
term basis. Liability sensitivity generally indicates that an
increase in interest rates would result in lower net interest
income and that a decrease in interest rates would result in
higher net interest income than would result if interest rates
remained constant. Conversely, asset sensitivity indicates that
rate increases would result in higher net interest income and
that decreases in interest rates would result in lower net
interest income.
However, since interest rates and yields do not adjust at
the same velocity, the interest rate sensitivity gap is only a
general indicator of the potential effects of interest rate
changes on net interest income. Management believes that
Hardwick's asset and liability mix is sufficiently balanced and
can be changed over time through the purchase and sale of
investment securities with varying maturity ranges, along with
the pricing of loans and deposits so that the effect of interest
rate movements in either direction is not significant over time.
For a more detailed gap analysis chart see "Analysis of Interest
Rate Sensitivity".
BANK PREMISES AND EQUIPMENT
During 1997, Hardwick's capital expenditures approximated
$761,000. Included was approximately $186,000 for buildings and
improvements, $417,000 for furniture, fixtures and office
equipment, which was principally additions to the retail platform
system, furniture and fixtures, wide area network hardware and
software and approximately $158,000 for automobiles. The
Registrant is projecting approximately $2,115,000 in capital
expenditures in 1998, comprising of approximately $1,070,000 in
building improvements, approximately $985,000 in office and
computer equipment and approximately $60,000 in automobiles.
INFLATION
Inflation affects the growth in total assets in the banking
industry and causes a need to increase equity capital at higher
than normal rates to meet capital adequacy requirements. The
22<PAGE>
Registrant copes with the effects of inflation through the
management of its interest rate sensitivity gap position, by
periodically reviewing and adjusting its pricing of services to
consider current costs, and through managing its level of net
income relative to its dividend payout policy.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 130, "Reporting Comprehensive Income".
This statement establishes standards for reporting the components
of comprehensive income and requires that all items that are
required to be recognized under accounting standards as
components of comprehensive income be included in a financial
statement that is displayed with the same prominence as other
financial statement information. Comprehensive income includes
net income as well as certain items that are reported directly
within a separate component of stockholders' equity and bypass
net income. The provisions of this statement are effective
beginning with 1998 interim reporting. These disclosure
requirements will have no impact on financial position or results
of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." The
provisions of this statement require disclosure of financial and
descriptive information about an enterprise's operating segments
in annual and interim financial reports issued to stockholder's.
This statement is effective for fiscal years beginning after
December 15, 1997 and for interim periods beginning after
December 15, 1998. The disclosure requirements will not have a
significant impact on the disclosures included in the annual or
interim period financial statements.
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 one 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.
23<PAGE>
SELECTED STATISTICAL INFORMATION
AVERAGE BALANCE SHEETS, INTEREST RATES
AND INTEREST DIFFERENTIALS
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
(Dollars in thousands)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans, net <F1> $ 285,444 255,043 236,985
Taxable investment securities 95,098 91,785 102,837
Non-taxable investment securities 21,576 29,389 27,989
Federal funds sold and deposits in banks 12,832 8,850 9,476
--------- -------- --------
Total interest-earning assets 414,950 385,067 377,287
Cash and due from banks 22,168 22,394 22,626
Premises and equipment 14,574 15,869 17,198
Other assets 10,492 10,749 11,080
--------- -------- --------
Total assets $ 462,184 434,079 428,191
========= ======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Transaction accounts <F2> $ 93,698 93,810 99,200
Savings deposits 29,144 29,700 30,084
Time deposits 193,825 172,140 152,484
Federal funds purchased and securities
sold under agreements to repurchase 4,442 3,024 14,069
FHLB advances 2,130 346 2,785
Note payable 808 440 656
Capital lease obligation 569 757 1,047
--------- -------- --------
Total interest-bearing liabilities 324,616 300,217 300,325
Noninterest-bearing demand deposits 83,956 83,744 80,238
Other liabilities 4,093 3,485 2,496
--------- -------- --------
Total liabilities 412,665 387,446 383,059
Stockholders' equity 49,519 46,633 45,132
--------- -------- --------
Total liabilities and
stockholders' equity $ 462,184 434,079 428,191
========= ======== ========
<FN>
<F1> Average loans are shown net of unearned discounts and
deferred loans fees and the reserve for possible loan losses.
Nonperforming loans, including nonaccrual loans, are
included, but not material.
<F2> Includes money market deposit accounts.
</FN>
</TABLE>
24
<PAGE>
AVERAGE BALANCE SHEETS, INTEREST RATES
AND INTEREST DIFFERENTIALS (continued)
<TABLE>
<CAPTION>
(Dollars in thousands) Years ended December 31,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest earned on:
Loans, net <F1><F2> $ 27,671 25,131 23,927
Taxable investment securities 5,820 5,273 5,649
Nontaxable investment securities <F1> 1,502 2,328 2,214
Federal funds sold and bank deposits 693 460 565
------- ------- -------
Total interest income 35,686 33,192 32,355
------- ------- -------
Interest paid on:
Transaction accounts <F3> 2,312 2,383 2,621
Savings deposits 740 757 853
Time deposits 11,180 9,780 8,577
Federal funds purchased and
securities sold under agreements to
repurchase 205 131 707
FHLB advances 126 28 182
Note payable 55 27 48
Capital lease obligation 45 63 74
------- ------- -------
Total interest expense 14,663 13,169 13,062
------- ------- -------
Net interest income $ 21,023 20,023 19,293
======= ======= =======
Average percentage earned on:
Loans, net <F1><F2> 9.7% 9.9% 10.1%
Taxable investment securities 6.1% 5.7% 5.5%
Nontaxable investment securities <F1> 7.0% 7.9% 7.9%
Federal funds sold 5.4% 5.2% 6.0%
Total interest income 8.6% 8.6% 8.6%
Average percentage paid on:
Transaction accounts <F3> 2.5% 2.5% 2.6%
Savings deposits 2.5% 2.5% 2.8%
Time deposits 5.8% 5.7% 5.6%
Federal funds purchased and
securities sold under agreements
to repurchase 4.6% 4.3% 5.0%
FHLB advances 5.9% 8.1% 6.5%
Note payable 6.8% 6.1% 7.3%
Capital lease obligation 7.9% 8.3% 7.0%
Total interest expense 4.5% 4.4% 4.3%
Net interest margin 5.1% 5.2% 5.1%
<FN>
<F1> Reflects taxable equivalent adjustments using a tax rate of 34% in
adjusting interest on nontaxable loans and securities to a fully
taxable basis.
<F2> Interest income includes loan fees as follows (in thousands):
1997-$1,320: 1996-$1,340; 1995-$1,290.
<F3> Includes money market accounts.
</FN>
</TABLE>
25<PAGE>
AVERAGE BALANCE SHEETS, INTEREST RATES,
AND INTEREST DIFFERENTIALS (continued)
<TABLE>
<CAPTION>
Due to
Increase Changes in
(Dollars in thousands) 1997 1996 (Decrease) Volume Rate <F1>
---- ---- ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
Interest earned on:
Loans, net <F2> $ 27,671 25,131 2,540 3,010 (470)
Taxable investment securities 5,820 5,273 547 189 358
Nontaxable investment securities <F2> 1,502 2,328 (826) (617) (209)
Federal funds sold 693 460 233 207 26
------- ------- ------ ------ -----
Total interest income 35,686 33,192 2,494 2,789 (295)
------- ------- ------ ------ -----
Interest paid on:
Transaction accounts <F3> 2,312 2,383 (71) (3) (68)
Savings deposits 740 757 (17) (14) (3)
Time deposits 11,180 9,780 1,400 1,236 164
Federal funds purchased and
securities sold under
agreements to repurchase 205 131 74 61 13
Other borrowed funds 126 28 98 145 (47)
Note payable to bank 55 27 28 22 6
Capital lease obligation 45 63 (18) (16) (2)
------- ------- ------ ------ -----
Total interest expense 14,663 13,169 1,494 1,431 63
------- ------- ------ ------ -----
Net interest income $ 21,023 20,023 1,000 1,358 (358)
======= ======= ====== ====== =====
<FN>
<F1> The change in interest due to both rate and volume has
been allocated to the rate component.
<F2> Reflects taxable equivalent adjustments using a tax rate of 34%
in adjusting interest on non-taxable loans and securities to a
fully taxable basis.
<F3> Includes money market deposit accounts.
</FN>
</TABLE>
26<PAGE>
<TABLE>
<CAPTION>
Due to
Increase Changes in
(Dollars in thousands) 1996 1995 (Decrease) Volume Rate <F1>
---- ---- --------- ------ ----------
<S> <C> <C> <C> <C> <C>
Interest earned on:
Loans, net <F2> $ 25,131 23,927 1,204 1,824 (620)
Taxable investment securities 5,273 5,649 (376) (608) 232
Nontaxable investment securities <F2> 2,328 2,214 114 111 3
Federal funds sold 460 565 (105) (38) (67)
------- ------- ------- ------ -----
Total interest income 33,192 32,355 837 1,289 (452)
------- ------- ------- ------ -----
Interest paid on:
Transaction accounts <F3> 2,383 2,621 (238) (140) (98)
Savings deposits 757 853 (96) (11) (85)
Time deposits 9,780 8,577 1,203 1,101 102
Federal funds purchased and
securities sold under
agreements to repurchase 131 707 (576) (552) (24)
Other borrowed funds 28 182 (154) (159) 5
Note payable to bank 27 48 (21) (16) (5)
Capital lease obligation 63 74 (11) (20) 9
------- ------- ------- ------ -----
Total interest expense 13,169 13,062 107 203 (96)
------- ------- ------- ------ -----
Net interest income $ 20,023 19,293 730 1,086 (356)
======= ======= ======= ====== =====
<FN>
<F1> The change in interest due to both rate and volume has been
allocated to the rate component.
<F2> Reflects taxable equivalent adjustments using a tax rate of 34%
in adjusting interest on non-taxable loans and securities to a
fully taxable basis.
<F3> Includes money market deposit accounts.
</FN>
</TABLE>
27<PAGE>
INVESTMENT PORTFOLIO
The amortized cost and approximate fair value of investment
securities available-for-sale for the indicated years are
presented below (in thousands):
<TABLE>
<CAPTION>
December 31, 1997
-----------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
US treasury & government agencies $ 72,776 274 (179) 72,871
Mortgage backed and other debt and equity securities 23,345 66 (87) 23,324
State and Municipal 22,416 826 (6) 23,236
------- ----- ---- -------
Total investment securities $118,537 1,166 (272) 119,431
======= ===== ==== =======
</TABLE>
<TABLE>
<CAPTION>
December 31,1996 December 31, 1995
---------------- -----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- ------
<S> <C> <C> <C> <C>
US treasury & government agencies $ 75,682 75,162 88,397 88,138
Mortgage backed and other debt and equity securities 18,645 18,505 15,759 15,665
State and Municipal 25,347 26,499 30,393 31,403
------- ------- ------- -------
Total investment securities $119,674 120,166 134,549 135,206
======= ======= ======= =======
</TABLE>
The following table shows the contractual maturities of
investment securities, based on their estimated fair value, at
December 31, 1997 ( in thousands) and the weighted average yields
of securities. Maturities of mortgage backed securities have been
determined based on the contractual maturity of their underlying
mortgage pools. The yields on state and municipal securities are
computed on a taxable equivalent basis using the statutory federal
income tax rate of 34%.
28
<PAGE>
<TABLE>
<CAPTION>
Mortgage
U.S. Backs
Treasury & & Other State
Government Debt and
Agencies Securities Municipal Total
---------- ---------- --------- -----
<S> <S> <C> <C> <C> <C>
Within one year -amount 15,207 908 2,370 18,485
-yield 5.32% 4.99% 4.84%
After one year but within five years -amount 48,091 4,567 5,480 58,138
-yield 5.94% 5.92% 5.60%
After five but within 10 years -amount 8,574 6,154 13,082 27,810
-yield 7.03% 6.53% 5.80%
After 10 Years -amount 999 10,841 2,304 14,144
-yield 6.60% 6.56% 5.99%
</TABLE>
LOAN PORTFOLIO
Types of Loans
The amount of loans outstanding for the indicated years are shown in
the following table according to types of loans
<TABLE>
<CAPTION>
( Dollars in thousands):
December 31,
------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Real estate loans $ 193,424 161,489 137,244 139,254 133,662
Commercial loans 60,929 53,836 53,989 51,149 45,113
Consumer loans 35,122 39,102 40,595 34,856 33,768
Other loans 28,081 24,214 14,362 9,805 7,280
-------- -------- -------- -------- --------
Total loans 317,556 278,641 246,190 235,064 219,823
Less: Unearned discounts and deferred
loan fees (413) (393) (387) (654) (1,125)
Reserve for loan losses (6,984) (6,778) (6,614) (6,566) (6,668)
-------- -------- -------- -------- --------
Net loans $ 310,159 271,470 239,189 227,844 212,030
======== ======== ======== ======== ========
</TABLE>
29<PAGE>
ANALYSIS OF INTEREST RATE SENSITIVITY
The following table includes a listing of earning assets and
interest bearing liabilities and the distribution according to the
earliest repricing opportunity or remaining maturity at December 31,
1997. Also, included are the related periodic and cumulative gaps for each
period.
<TABLE>
<CAPTION>
One
Year Over
Within Through Five Years
One Five and Non-Rate
Year Years Sensitive Total
------ ------- ------------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Total loans $ 109,574 144,969 63,013 317,556
Taxable investment securities 16,115 52,658 27,422 96,195
Nontaxable investment securities 2,370 5,480 15,386 23,236
Federal funds sold 12,982 - - 12,982
-------- -------- -------- -------
Total earning assets 141,041 203,107 105,821 449,969
-------- -------- -------- -------
INTEREST-BEARING LIABILITIES:
Transaction accounts (a) 93,963 - - 93,963
Savings deposits 28,355 - - 28,355
Time deposits 161,184 39,379 - 200,563
Federal funds purchased and securities sold under
agreements to repurchase 19,339 - - 19,339
FHLB advances - 8,231 - 8,231
Capital lease obligations 208 264 - 472
-------- -------- -------- -------
Total interest-bearing liabilities 303,049 47,874 - 350,923
Noninterest-bearing funds - - 86,904 86,904
-------- -------- -------- -------
Total interest-bearing and noninterest-bearing funds 303,049 47,874 86,904 437,827
-------- -------- -------- -------
GAP SUMMARY
Periodic net earning assets $ (162,008) 155,233 18,917 12,142
========= ======== ======== =======
Ratio of earning assets to interest-bearing liabilities
and noninterest-bearing funds 46.5% 424.3% 121.8% 102.8%
Cumulative net earning assets $ (162,008) (6,775) 12,142 12,142
========= ======== ======== =======
Cumulative ratio of earning assets to interest-
bearing liabilities and noninterest-bearing
funds 46.5% 98.1% 102.8% 102.8%
========= ======== ======== =======
<FN>
<F1> Includes NOW and money market accounts.
</FN>
</TABLE>
The rate sensitivity analysis table is designed to
demonstrate Hardwick's sensitivity to changes in interest rates
by setting forth in comparative form the repricing maturities of
Hardwick's assets and liabilities for the period shown. A ratio
30<PAGE>
of greater than 100% of earning assets to interest bearing liabilities
(more interest earning assets repricing in a given period than interest
bearing liabilities) indicates that an increase in interest rates would
generally result in a increase in net income for Hardwick and a decrease
in interest rates will result in a decrease in net income. Conversely, a
ratio less than 100% of earning assets to interest bearing liabilities
(less interest earning assets repricing in a given period than interest
bearing liabilities) indicates that a decrease in rates would
generally result in an increase in net income and an increase in interest
rates would result in a decrease in net income. However, shifts in
the structure of interest sensitive assets and liabilities are made
by management in response to interest rate movements.
RISK ELEMENTS IN THE LOAN PORTFOLIO
The following table represents information concerning
outstanding balances of nonperforming loans at December 31, 1997,
1996, 1995, 1994 and 1993. Nonperforming loans comprise: (a) loans
on which recognition of interest income has been discontinued
("nonaccrual loans"); (b) loans contractually past due 90 days or
more as to interest or principal payments which are still accruing
interest ("past-due loans"); and (c) loans, the terms of which have
been renegotiated to provide for an extension of the original
payment period and/or a reduction or deferral of interest or
principal because of a deterioration in the financial position of
the borrower ("restructured loans"):
<TABLE>
<CAPTION>
Nonaccrual Past-Due Restructured
Loans Loans Loans Total
---------- -------- ------------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
December 31, 1997 $ 323 504 - 827
December 31, 1996 $ 449 551 49 1,049
December 31, 1995 $ 507 201 52 760
December 31, 1994 $ 1,401 16 55 1,472
December 31, 1993 $ 590 289 - 879
</TABLE>
The components of nonperforming loan categories at December 31,1997
are presented below (in thousands)
<TABLE>
<CAPTION>
Nonaccrual Past-Due Restructured
Loans Loans Loans Total
---------- -------- ------------ -----
<S> <C> <C> <C> <C>
Real estate loans $ 323 250 - 573
Commercial loans - 222 - 222
Consumer loans - 32 - 32
------ ----- ----- -----
Total $ 323 504 - 827
====== ===== ===== =====
</TABLE>
31<PAGE>
Loans on which the accrual of interest has been
discontinued are designated as nonaccrual when doubt exists as to
the full, timely collection of interest or principal. Income on
such loans is then recognized only to the extent that cash is
received in excess of required principal payments and if the
future collection of principal is probable. Interest earned not
yet collected at the date of placement into nonaccrual is
reversed from earnings in the period in which the nonaccrual
status is established. The decrease in nonaccrual loans from the
level at December 31, 1996, has been dispersed principally over
the real estate and commercial loan categories. Interest
accruals are recorded on such loans 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, $108,000; $123,000, and
$81,000, in 1997, 1996, and 1995, respectively, which was
included in earnings only when collected. Nonaccrual loan
interest collected and reported in earnings was approximately
$28,000, $153,000 and $115,000 for 1997, 1996 and 1995,
respectively.
OTHER REAL ESTATE
Set forth below is a schedule of other real estate at
December 31, 1997, 1996, 1995, 1994 and 1993, respectively:
(Dollars in thousands)
<TABLE>
<CAPTION>
Loans Transferred To Premises Transferred To
Other Other Real Estate Other Real Estate
Real Estate During the Period During the Period
Date Balance Ended Ended
---- ----------- ------------------- -----------------------
<S> <C> <C> <C>
December 31, 1997 $ 191 0 191
December 31, 1996 $ 0 0 0
December 31, 1995 $ 25 $ 90 0
December 31, 1994 $ 15 $ 68 0
December 31, 1993 $ 238 $ 432 0
</TABLE>
Other real estate includes properties acquired through
foreclosure or acceptance of deeds in lieu of foreclosure and
properties transferred from premises and equipment no longer used
in banking activities. These properties are recorded on the date
acquired at the lower of the loan balance or fair market value
less estimated costs to dispose. After classifying these
properties as other real estate, any resulting loss is charged to
expense in the consolidated statement of income during the period
in which the disposition occurred.
Of the $432,000, in loans transferred to other real
estate in 1993, $170,000 was from real estate rental and
development. $152,000, was from consumer loans and $110,000 was
from non-carpet related business loans. $786,000 in other real
estate was sold in which $246,000 was transferred to loans by
financing the sale. The sale met minimum down payment and
projected cash flow requirements. $59,000 in net gains were
32<PAGE>
recognized during 1993. Additional write downs of $89,000 were
recorded during 1993 with no material amount in any one loan
category. One credit in the amount of $607,000 included as
insubstance foreclosure at December 31, 1992, was paid off with
no loss on the transaction and another credit carried as
insubstance foreclosure at December 31, 1992 in the amount of
$183,000, was transferred into nonaccrual loans as a result of
the stream of income and payment abilities established during the
last year and a half in which no income was recognized on that
credit until the payment of principal and interest was received.
Of the $68,000 in loans transferred to other real estate
in 1994, there were four properties which were personal residence
mortgages. Nine different properties were sold during the year
for approximately $265,000, in which there was a net gain of
approximately $8,000. Additional writedowns of approximately
$34,000 were made during 1994 involving three separate
properties, two of which were personal residences and one
property was unimproved commercial real estate.
Other real estate at December 31, 1995, of
approximately $25,000 was up $10,000 over the $15,000 from
December 31, 1994. During 1995, approximately $90,000 was
transferred from loans to other real estate. The transfer
included two properties, one valued at approximately $10,000 and
the other valued at approximately $80,000. The $10,000 property
was a residence and the $80,000 was undeveloped land. During the
year the undeveloped land was sold for $85,000 resulting in a
gain of approximately $5,000. The balance of other real estate
was made up of two personal residences of $10,000 and $15,000.
During 1996 the two properties were sold for the carrying values
resulting in no gain or loss for the Company. There was no
balance in other real estate at December 31, 1996.
Other assets of approximately $191,000, were
reclassified as other real estate during 1997. The other assets
had been banking premises in previous years and transferred to
other assets during 1996 and subsequently written down by
approximately $20,000, to its estimated net realizable value.
The carrying value of other real estate approximates the market
value. No material effect on earnings is expected from the
disposition of the other real estate.
33
<PAGE>
SUMMARY OF LOAN EXPERIENCE
<TABLE>
<CAPTION> Year Ended December 31,
-----------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average amount of net loans outstanding $ 285,444 255,043 236,985 218,140 223,650
======== ======== ======== ======== ========
Amount of reserve for possible loan losses
at beginning of period $ 6,778 6,614 6,566 6,668 5,236
-------- -------- -------- -------- --------
Amount of loans charged off during period:
Real estate loans 102 157 171 111 572
Commercial loans 528 540 466 139 719
Consumer loans 525 202 569 271 544
Other loans - - - - -
-------- -------- -------- -------- --------
Total loans charged off 1,155 899 1,206 521 1,835
-------- -------- -------- -------- --------
Amount of recoveries during period:
Real estate loans 108 58 117 279 817
Commercial loans 256 409 767 296 426
Consumer loans 197 200 370 444 674
Other loans - - - - -
-------- -------- -------- -------- --------
Total loans recovered 667 561 1,254 1,019 1,917
-------- -------- -------- -------- --------
Net loans (recovered) charged off during period 594 232 (48) (498) (82)
-------- -------- -------- -------- --------
Additions to reserve for possible loan losses
charged to operations 800 396 - (600) 1,350
-------- -------- -------- -------- --------
Amount of reserve for possible loan losses
at end of period $ 6,984 6,778 6,614 6,566 6,668
======== ======== ======== ======== ========
Ratio of net (recoveries) charge-offs during
period to average net loans outstanding
for the period .21% .09% (.02%) (0.23%) (0.04)%
======== ======== ======== ======== ========
Ratio of reserve for possible loan losses
at period end to:
Total loans outstanding at period end 2.20% 2.44% 2.69% 2.80% 3.05%
======== ======== ======== ======== ========
Nonperforming assets at period end <F1> 686.05% 646.14% 842.55% 441.56% 596.96%
======== ======== ======== ======== ========
<FN>
<F1> Nonperforming assets included nonperforming loans and other real estate
</FN>
</TABLE>
34<PAGE>
ALLOCATION OF RESERVE FOR POSSIBLE LOAN LOSSES
The reserve is based upon management's analysis of the
portfolio under current and expected economic conditions. This
analysis includes a study of loss experience, a loan-by-loan
review each month of all loans $50,000 or more at Northwest Bank,
a review of delinquencies and an estimate of the possibility of
loss in view of the risk characteristics of the portfolio. The
loan-by-loan review for Hardwick Bank covers all consumer purpose
loans over $5,000 unsecured, all commercial loan concentrations
over $200,000 unsecured or secured. Hardwick has strict loan
underwriting standards which are carried out by lending personnel
and monitored by a loan review officer who has no loan
origination responsibilities. The purpose of the loan review
function is to determine the adequacy of the allowance and
related provision for loan losses to be reported by Hardwick.
The review process described above places emphasis on
nonperforming and past-due loans and is designed to identify
potential charges to the reserve for possible loan losses as well
as to determine the adequacy of the reserve.
The allocation of the loan loss reserve is arrived at by
using the problem loan list at each of Hardwick's subsidiary
banks, by assigning ratings to the problem loan list as OAEM,
"other assets especially mentioned", Substandard and Doubtful.
The ratings are identical to the ratings used by bank regulatory
authorities for credits which are classified during their
examinations. Generally, the values assigned to those ratings
are: 2%, 10% and 50%, respectively, times the balance of the
credit. Each of the loans on the problem loan list is
categorized by classification and the sum of the classification,
i.e., Real estate, Commercial; Consumer and Other loans is added
to determine the amount of the loan loss reserve allocated to
each classification. The remainder of the loan loss reserve not
allocated is for the coverage of loan losses which have not been
either specifically identified by management, by the regulatory
examination process, and relate to downturns in the economy and
concentrations of credit in specific industries. The allocation
of the loan loss reserve is reviewed and approved by the Board of
Directors of each bank on a quarterly basis. With the current
procedures in place, management believes that the allocation has
been reasonably applied to the respective loan categories:
35<PAGE>
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996 December 31, 1995
----------------- ----------------- -----------------
% of % of % of
Loans in Loans in Loans in
Amount Category Amount Category Amount Category
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans $ 2,370 49% 1,043 21% 1,453 56%
Commercial loans 1,036 21% 2,241 46% 2,304 22%
Consumer loans 1,309 27% 1,641 33% 993 16%
Other loans 124 3% - - 186 6%
Unallocated 2,145 N/A 1,853 N/A 1,678 N/A
------ ----- ----- ------ ------ ----
Total $ 6,984 100% 6,778 100% 6,614 100%
====== ==== ===== ====== ====== ====
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
----------------- -----------------
% of % of
Loans in Loans in
Amount Category Amount Category
------ -------- ------ --------
<S> <C> <C> <C> <C>
Real estate loans $ 1,675 59% 1,860 62%
Commercial loans 1,561 22% 1,420 22%
Consumer loans 800 14% 1,433 14%
Other loans 104 5% 235 2%
Unallocated 2,426 N/A 1,720 N/A
------ ----- ----- ------
Total $ 6,566 100% 6,668 100%
====== ===== ===== ======
</TABLE>
36<PAGE>
LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
<TABLE>
<CAPTION>
(Dollars in thousands)
Over one
One year year through Over
Loan Category <F1> <F2> <F3> or less five years five years Total
- --------------------------- -------- ------------ ---------- -----
<S> <C> <C> <C> <C>
Real estate $ 48,995 91,493 52,936 193,424
Commercial 33,077 21,202 6,650 60,929
Consumer and other loans 27,502 32,274 3,427 63,203
-------- -------- ------- --------
Total $ 109,574 144,969 63,013 317,556
======== ======== ======= ========
<S> <C>
Loans due after one year:
Having predetermined interest rates $ 147,962
Having floating interest rates 60,020
--------
Total $ 207,982
========
<FN>
<F1> Scheduled repayments are reported in the maturity category in
which the payment is due.
<F2> Demand loans having no stated schedule of repayments and no
stated maturity as well as overdrafts are included in the due
in one year or less category.
<F3> Determination of maturities is based on contract terms. The
Registrant's subsidiary banks have loans which from time to time
are rolled over, the approval of which is generally made at the
original approval date of the credit. If handled as a change in
terms, the credit is subject to the same review and approval
process as a new credit. Maturities are revised when a loan is
rolled over.
</FN>
</TABLE>
37<PAGE>
DEPOSITS
The average amounts of deposits for the years indicated are presented below:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Noninterest-bearing demand deposits $ 83,956 83,744 80,238
-------- -------- --------
Interest-bearing demand and
money market deposits 93,698 93,810 99,200
Savings deposits 29,144 29,700 30,084
Time deposits 193,825 172,140 152,484
-------- -------- --------
Total interest-bearing deposits 316,667 295,650 281,768
-------- -------- --------
Total average deposits $ 400,623 379,394 362,006
======== ======== ========
</TABLE>
MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
The maturity of time deposits of $100,000 or more as of December 31,
1997 are presented below (in thousands):
3 months or less $ 17,280
Over 3 months through 6 months 22,925
Over 6 months through 12 months 13,538
Over 12 months 7,776
--------
Total Outstanding $ 61,519
========
RETURN ON EQUITY AND ASSETS
Certain financial ratios are presented below:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Return on average assets 1.13% 0.82% 0.75%
====== ===== =====
Return on average equity 10.55% 7.66% 7.14%
====== ===== =====
Dividend payout ratio 32.34% 56.27% 27.86%
====== ====== ======
Average equity to average assets 10.71% 10.74% 10.54%
====== ====== ======
</TABLE>
38<PAGE>
ITEM 7 (a): MARKET RISK MANAGEMENT
In January 1997, the Securities and Exchange Commission
adopted new rules that require quantitative and qualitative
disclosures of market risk for financial instruments. The
quantitative market risk disclosures must be classified between
financial instruments entered into for trading purposes and all
other financial instruments. As of December 31, 1997, the
Company holds no financial instruments for trading purposes.
Through the normal course its business activities, the
Company is exposed to interest rate risk. Fluctuations in
interest rates may result in changes in the fair values of the
Company's financial instruments, cash flows, and net interest
income. The Company's asset liability management process is
designed to manage its exposure to interest rate risk in order to
optimize the Company's financial position, liquidity, and net
interest income, while maintaining a relatively neutral position
to interest rate changes. The Company structures the mix, rates,
and maturities of its financial instruments in order to maintain
an acceptable level of interest rate risk. The Company uses a
simulation modeling process to evaluate and measure its interest
rate sensitivity. The simulations incorporate assumptions about
balance sheet changes, such as loan and deposit growth and
pricing, changes in funding mix, and asset and liability
repricing and maturity characteristics. Simulations are run
under various interest rate scenarios to determine the impact on
the Company's financial position, liquidity, and earnings. From
these scenarios, interest rate risk is quantified and appropriate
strategies are developed and implemented. Senior management
regularly reviews the overall interest rate risk position and
asset liability management strategies.
On December 31, 1997, the interest rate risk position of the
Company was relatively neutral as the impact of an instantaneous
increase or decrease in interest rates of 100 basis points would
have caused net interest income to change in a converse direction
of the interest rate change by approximately $197,000 or .97%.
This variance is compared to projected net interest income if
rates remain stable. These simulated computations should not be
relied upon as indicative of actual future results. Furthermore,
the computations do not contemplate certain actions that
management could undertake in response to future changes in
interest rates.
The Analysis of Interest Rate Sensitivity Table (Gap
Analysis) represents a snapshot of the balance sheet structure of
the Company as of year-end, but it does not reflect the
complexities of the interest sensitivity of the Company as
reflected in the simulation modeling process.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and the report of independent
public accountants identified in Item 14(a) are included in this
report beginning at page F-1.
39<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
During the Registrant's two most recent fiscal years, the
Registrant did not change accountants and had no disagreement
with its accountants on any matters of accounting principle or
practices or financial statement disclosure.
40<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The directors and executive officers of the Registrant,
their respective ages, directorships in any publicly owned
companies, positions held by each with the Registrant, their
principal occupations and the number of shares of the
Registrant's common stock owned beneficially by each director and
executive officer as of March 15,1998 are as follows. Except as
otherwise indicated, each director and executive officer has been
or was engaged in his present or last principal employment, in
the same or a similar position for more than five years. Unless
otherwise stated, percentages of shares beneficially owned are
based on 4,036,496 shares outstanding on March 15, 1998.
Number of Shares Owned
Name (Age) and Business Background (Percent of Class)
- ---------------------------------- ----------------------
Kenneth E. Boring (73) 1,660,000 (41.1%) <F1>
Chairman and Chief Executive Officer
of Hardwick since March 1981;
Hardwick Bank since May 1984 and,
since 1986, Chairman of
Northwest Bank; Partner in Boring
and Boring, which is engaged in
real estate investment; Partner in
Boring, Boring, and Minor, which
is engaged in real estate
investment; Vice President and co-owner
of Dalton Aircraft, Inc., an
aircraft rental and service firm.
James M. Boring, Jr. (76) 1,292,032 (32.0%) <F2>
President and Director of Hardwick
since March 1981; Director of
Hardwick Bank since February 1977;
Director of Northwest Bank since
Boring, which is engaged in real
estate investment; Partner in Boring,
Boring and Minor, which is engaged
in real estate investment;
President and co-owner of Dalton
Aircraft, Inc., an aircraft rental and
service firm.
Thomas H. Bond (68) 1,000 *
Director of Hardwick since April
1988; Director of Northwest Bank since
January 1988; retired banker.
Wayne R. Broaddus (65) 5,307* <F3>
Director of Hardwick since December 1994;
President & CEO of Associated Aggregates
International, Inc.
41<PAGE>
Robert M. Chandler (49) 37,434 * <F4>
Director of Hardwick from February
1985 through March 1988
Director of Hardwick Bank since December
1985; Vice President, Queen Carpet Corp.
(Patcraft Division), a manufacturer of
carpet.
Richard R. Cheatham (54) 1,595,300 (39.5%) <F5>
Director of Hardwick since February
1995; Vice Chairman of Hardwick since
April 1995; Partner, Kilpatrick Stockton LLP,
Attorneys at Law.
David J. Lance (43) 48,725 (1.2%) <F6>
Director of Hardwick since April
1988; President, Director of Northwest
Bank since October 1980; Chief
Executive Officer of Northwest Bank
since May 1984.
Norman D. McCoy (57) 5,860 *
Director of Hardwick since March
1981; President and Chief Executive
Officer of Dalton Supply Co.,
Inc., a wholesale distributor of
industrial supplies.
Marshall R. Mauldin (52) 54,530 (1.4%) <F7>
Director of Hardwick since March
1981; President, Chief Executive
Officer and Director of Hardwick
Bank since January 1990; Director
and Executive Vice President of
Executive Vice President and
Director of Northwest Bank from July
1986 through December 1989.
Michael Robinson (48) 45,850 (1.1%)<F8>
Executive Vice President of Hardwick
since 1990; Secretary, Treasurer and
Director of Hardwick since
Bank since 1986 and Director of
Hardwick Bank since 1988;
Vice President of Hardwick Bank from
1981 through 1989.
Stanley A. Crawford (53) 12,500 * <F9>
Executive Vice President of Hardwick
Bank since
September 1992; Previously City
President of NationsBank
Dalton, Ga.
42<PAGE>
Leon M. Ham, III (69) 15,000*
Director of Hardwick since April
1996; Director of Hardwick
Bank since February 1981; and
President and CEO of Carteret
Corporation, a textile sales
company dealing in yarns and fibers.
All Executive Officers and Directors as a Group 3,178,738 (78.7%)
(12 Persons)
______________________________
* Represents less than one percent of class.
[FN]
<F1> Includes 670,000 shares owned directly; 15,000 shares owned
through an Individual Retirement Account ("IRA"); 881,700
shares owned by a family trust of which Mr. Boring serves as
Trustee and has sole voting power; 28,100 shares owned by Mr.
Boring as custodian for his daughters and 65,200 shares owned by
his wife.
<F2> Includes 1,236,275 shares owned directly; 3,257 shares owned
through an IRA and 52,500 shares owned by his wife.
<F3> Includes 5,307 shares owned through an IRA.
<F4> Includes 21,841 shares owned directly; 800 shares owned
through an IRA; 4,341 shares owned by his wife; 660
shares owned by his wife through an IRA; and 9,792
shares owned as custodian for his son and daughter.
<F5> Includes 1,594,800 shares included in the beneficial
ownership of Kenneth E. Boring, which may be voted by proxy
pursuant to a revocable proxy from Kenneth E. Boring; 250 shares
owned through an IRA and 250 shares owned by his wife through
an IRA.
<F6> Includes 250 shares owned directly; 1,900 shares owned
through an IRA; and 825 shares owned by his wife, 23,750
shares vested under incentive stock options and 22,000 shares
under a restrictive stock award agreement.
<F7> Includes 8,360 shares owned directly and 420 shares owned
through an IRA, 23,750 shares vested under incentive stock
options and 22,000 shares under a restrictive stock award
agreement.
<F8> Includes 100 shares owned directly; 23,750 shares vested
under incentive stock options and 22,000 shares under a
restrictive stock award agreement.
<F9> Includes 12,500 shares vested under incentive stock options.
</FN>
___________________________
Directors are elected at each annual meeting of shareholders and
hold office until the next annual meeting and until their
successors are elected and qualified. The executive officers are
elected by the Board of Directors and serve at the will of the
Board. There are no family relationships among executive
officers and directors except for James M. Boring, Jr. and
Kenneth E. Boring, who are brothers.
43<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
COMPENSATION
There is shown below information concerning the annual and
long term compensation for services in all capacities to the
Corporation for the fiscal years ended December 31, 1997, 1996,
and 1995, of those persons who were at December 31,1997, (1) the
Chief Executive Officer, and (2) the four other most highly
compensated officers of Hardwick and its subsidiaries whose total
salary and bonuses during 1997, exceeded $100,000 (the "Named
Officers").
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
Name & Principal Position ---------------------------------------------------- All Other
- ------------------------- Year Salary Bonus Other Compensation
---- ------ ----- ----- ------------
<S> <C> <C> <C> <C> <C>
Kenneth E. Boring 1997 $ 120,000 $ 25,200 $ 35,025 $ 9,842
Chairman of the Board and Chief 1996 120,000 20,400 29,424 10,094
Executive Officer, Hardwick 1995 120,000 24,000 22,349 8,414
James M. Boring, Jr. 1997 $ 90,000 $ 18,900 $ 23,150 $ 7,385
President, Hardwick 1996 90,000 13,500 24,688 7,714
1995 100,000 20,000 15,409 7,014
Marshall R. Mauldin 1997 $ 120,000 $ 25,200 $ 22,339 $ 9,842
President & CEO, Hardwick Bank 1996 120,000 20,400 18,146 10,094
1995 120,000 24,000 15,947 8,414
David J. Lance 1997 $ 120,000 $ 25,200 $ 25,237 $ 9,836
President & CEO, Northwest Bank 1996 120,000 20,400 22,852 10,088
1995 120,000 24,000 17,327 8,414
Michael Robinson 1997 $ 120,000 $ 25,200 $ 28,503 $ 10,004
Executive Vice President and 1996 120,000 20,400 23,249 10,256
CFO, Hardwick 1995 120,000 24,000 18,188 8,414
Stanley A. Crawford 1997 $ 93,000 $ 21,390 $ 20,799 $ 7,696
Executive Vice President 1996 93,000 17,670 20,267 7,695
Hardwick Bank 1995 93,000 16,740 16,899 6,524
</TABLE>
44<PAGE>
OPTIONS, EXERCISES AND FISCAL YEAR-END VALUES
Shown below is information with respect to unexercised
options to purchase the Registrant's Common Stock granted to the
Named Officers under the Company's Incentive Stock Option Plan
and held by them at December 31, 1997. There were 6,250 grants
each issued in December 1994, to David J. Lance, Marshall R.
Mauldin and Michael Robinson which vest 20% each year over a
five year period including 1994 and are exercisable five years
after they vest. None of the Named Officers exercised any stock
options during 1997.
<TABLE>
<CAPTION>
No. Of Shares Underlying Value of Unexercised
Unexercised Options Held at In-the Money Options at
December 31, 1997 December 31, 1997
----------------------------- -------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Kenneth E. Boring None None None None
James M. Boring, Jr. None None None None
Stanley A. Crawford 12,500 None $ 100,000 None
Marshall R. Mauldin 23,750 1,250 $ 168,750 $ 4,688
David J. Lance 23,750 1,250 $ 168,750 $ 4,688
Michael Robinson 23,750 1,250 $ 168,750 $ 4,688
</TABLE>
Of the named officers, Marshall R. Mauldin, David J. Lance
and Michael Robinson each have 18,750 grants under the 1988 plan
at a grant price of $12.00 and received the 6,250 grants in
December 1994 under the 1993 plan at a grant price of $16.25.
Stanley A. Crawford has 12,500 grants under the 1988 plan at a
grant price of $12.00.
During 1994, the Company approved a restricted stock award
agreement covering Marshall R. Mauldin, David J. Lance and
Michael Robinson. The provisions include awards of up to 40,000
shares each in stock of the Registrant over a ten year period
based upon financial performance of the Registrant. The awards
began in 1996 and as of March 15, 1998, the award of 22,000
shares each has been made to each of the named officers. The
named officers will have voting rights and receive the payment of
shareholder dividends on each share, however each certificate
awarded is restricted from transfer for a period of ten years.
The plan provides that in the event there is a change in control
of ownership of the Registrant, the named officers covered under
the restricted stock award agreement would be entitled to an
amount equal to 2.99 times the compensation paid for the
preceding calendar year less the market value of the shares
covered by awards then in existence, at which time the
restrictive legend would be terminated.
The vested shares in the plans as discussed above and the
awards granted as of March 15, 1998, have been included in the
ownership section above for the purposes of stock percentage
ownership by directors and executive officers.
DIRECTOR COMPENSATION
During 1997, each non-employee director of Hardwick was paid
$800 for regular and $400 for committee meetings attended for
their services as directors.
45<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table provides the number of shares and
percentage of outstanding shares of the Registrants' common stock
which were owned at March 15,1998, by each person known to the
Registrant to own beneficially more than 5% of the Registrant's
common stock. Percentages of shares beneficially owned are based
on 4,036,496 shares outstanding at March 15, 1998. For
information concerning beneficial ownership of the Registrant's
common stock by directors and management, see Item 10 above.
<TABLE>
<CAPTION>
Name and Address of Number of Percent of
Beneficial Owner Shares Owned Class
------------------ ----------- ----------
<S> <C> <C>
Kenneth E. Boring 1,660,000 41.1% <F1>
314 N. Selvidge Street
Dalton, Ga. 30720
James M. Boring, Jr. 1,292,032 32.0% <F2>
314 N. Selvidge Street
Dalton, Ga. 30720
Boring Family Trust 881,700 21.8% <F3>
314 N. Selvidge Street
Dalton, Ga. 30720
Richard R. Cheatham 1,595,300 39.5% <F4>
1100 Peachtree Street, Suite 2800
Atlanta, Georgia 30309
______________________________________
<FN>
<F1> Includes 670,000 shares owned directly; 15,000 shares owned
through an Individual Retirement Account (IRA); 881,700 shares
owned by a family trust which Mr. Boring serves as trustee and
has sole voting power; and 28,100 shares owned by Mr. Boring as
custodian for his daughters and 65,200 shares owned by his wife.
<F2> Includes 1,236,275 shares owned directly; 3,257 shares owned
through an IRA; and 52,500 shares owned by Mr. Boring's wife.
<F3> Included in the beneficial ownership of Kenneth E. Boring.
See footnote (1) above.
<F4> Includes 1,594,800 shares included in the beneficial
ownership of Kenneth E. Boring, which may be voted by proxy
pursuant to a revocable proxy from Kenneth E. Boring; 250 shares
owned through an IRA and 250 shares owned by his wife through an
IRA. See footnote (1) above.
</FN>
</TABLE>
46<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Registrant and it subsidiary banks have had, and expect
to have in the future, banking transactions in the ordinary
course of business with directors and officers of the Registrant
and their associates, including corporations in which such
officers or directors are shareholders, directors and/or
officers, on the same terms (including interest rates and
collateral) as those prevailing at the time for comparable
transactions with other persons. Such transactions have not
involved more than the normal risk of collectibility or presented
unfavorable features. Loans to executive officers and directors
and related parties represented 19.0% of total shareholders
equity of Hardwick at December 31, 1997. See note 12 under notes
to consolidated financial statements of the Company.
ITEM 14. EXHIBITS FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) 1. Financial Statements.
---------------------
The following financial statements and notes thereto of the
Registrant are incorporated by reference into Item 8 of this
report;
Report of Independent Public Accountants
Consolidated Balance Sheets- December 31, 1997 and 1996.
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
-----------------------------
No financial statement schedules are required to be filed as
part of this Report on Form 10-K;
47<PAGE>
3. Exhibits.
---------
The following exhibits are required to be filed with the
Report by Item 601 of Regulation S-K;
3.1 Articles of Incorporation of the Registrant, as Amended
(included as Exhibit 3.1 to Registrant's Registration
Statement on Form S-4, Commission File No. 33-43386,
previously filed with the Commission and incorporated
herein by reference).
3.2 Amended and restated bylaws of the Registrant (included
as Exhibit 3.2 to Registrant's Registration Statement
on Form S-4, Commission File No. 33-43386, previously filed
with the commission and incorporated herein by reference).
4.1 See exhibits 3.1 and 3.2 for provisions of Articles of
Incorporation and Bylaws, as amended, which define the
rights of the holders of common stock of the Registrant.
10.1 Incentive Stock Option Plan of the Registrant as
adopted March 16, 1988 (included as Exhibit 10.3 to the
Registrant's Registration Statement on Form S-4, Commission
File No. 33-43386, previously filed with the Commission
and incorporated herein by reference).
10.2 Incentive Stock Option Plan of the Registrant as
adopted July 14, 1993 (included as Exhibit 10.2 to the
Registrant's Form 10-K for December 31, 1994, previously
filed with the Commission and incorporated herein by
reference).
10.3 Restricted Stock Award Agreement as adopted December 14,
1994 (included as Exhibit 10.3 to the Registrant's Form
10-K for December 31, 1994, previously filed with the
Commission and incorporated herein by reference).
21 List of subsidiaries of Registrant.
24.0 A Power of Attorney is set forth on the signature pages to
this Form 10-K.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
None
(c) The Registrant submits herewith as exhibits to this report
on Form 10-K the exhibits required by Item 601 of Regulation
S-K, subject to Rule 12b-32 under the Securities Exchange Act of
1934.
(d) All financial statement schedules are omitted because the
data is either not applicable or the required information is
provided in the consolidated financial statements or related
notes thereto.
48<PAGE>
HARDWICK HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AS OF
DECEMBER 31, 1997, 1996, AND 1995
TOGETHER WITH
AUDITORS' REPORT
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent
Public Accountants F-1
Consolidated Balance Sheets
December 31, 1997 and 1996 F-2
Consolidated Statements of Income for the
Years ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Stockholders'
Equity for the Years ended December 31, 1997, 1996 and F-5
1995
Consolidated Statements of Cash Flows for the
Years ended December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-8
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Hardwick Holding Company:
We have audited the accompanying consolidated balance sheets of HARDWICK
HOLDING COMPANY (a Georgia corporation) AND SUBSIDIARIES as of
December 31, 1997 and 1996 and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these 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
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Hardwick
Holding Company and subsidiaries as of December 31, 1997 and 1996 and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Atlanta, Georgia
February 20, 1998
F-1
<PAGE>
HARDWICK HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
ASSETS
1997 1996
--------- ---------
<S> <C> <C>
CASH AND DUE FROM BANKS $ 25,533 $ 26,797
FEDERAL FUNDS SOLD 12,982 7,000
--------- ---------
Total cash and cash equivalents 38,515 33,797
INVESTMENT SECURITIES, available for sale 119,431 120,166
LOANS, net 310,159 271,470
PREMISES AND EQUIPMENT, net 14,497 15,728
ACCRUED INTEREST RECEIVABLE 3,988 3,865
EXCESS OF COST OVER FAIR VALUE OF
SUBSIDIARIES ACQUIRED, net 4,556 5,346
OTHER ASSETS 1,746 1,689
--------- ---------
Total assets $492,892 $452,061
========= =========
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
DEPOSITS:
Noninterest-bearing $ 86,904 $ 85,567
Interest-bearing 322,881 308,373
--------- ---------
Total deposits 409,785 393,940
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
19,339 3,327
FEDERAL FUNDS PURCHASED 0 2,600
CAPITAL LEASE OBLIGATION 472 668
FEDERAL HOME LOAN BANK ADVANCES 8,231 306
OTHER LIABILITIES 4,462 4,243
--------- ---------
Total liabilities 442,289 405,084
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 4, 6, 11,
13, AND 14)
STOCKHOLDERS' EQUITY:
Common stock, $.50 par value; 10,000,000
shares authorized, 4,161,141 and 4,125,141
shares issued, 4,021,496 and 3,999,229
shares outstanding at December 31, 1997
and 1996, respectively
2,081 2,063
Additional paid-in capital 20,935 20,233
Retained earnings 30,381 26,845
Unrealized gain on securities available
for sale, net of taxes 590 324
Treasury stock, at cost, 139,645 and
125,912 shares at December 31, 1997
and 1996, respectively (2,564) (2,289)
Deferred compensation (820) (199)
--------- ---------
Total stockholders' equity 50,603 46,977
--------- ---------
Total liabilities and stockholders' equity $492,892 $452,061
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3<PAGE>
HARDWICK HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(In Thousands, Except Net Income Per Share Data)
<TABLE>
<CAPTION>
1997 1996 1995
======= ======= =======
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $27,578 $24,972 $23,744
Interest on investment securities:
Taxable 5,820 5,273 5,649
Nontaxable 1,105 1,568 1,568
Interest on federal funds sold 685 460 565
Other 8 0 0
------- ------- -------
Total interest income 35,196 32,273 31,526
------- ------- -------
INTEREST EXPENSE:
Interest on deposits 14,232 12,920 12,051
Interest on federal funds purchased and
securities sold under agreements to
repurchase 205 131 707
Interest on other borrowings 226 118 304
------- ------- -------
Total interest expense 14,663 13,169 13,062
------- ------- -------
NET INTEREST INCOME 20,533 19,104 18,464
PROVISION FOR LOAN LOSSES 800 396 0
NET INTEREST INCOME AFTER PROVISION ------- ------- -------
FOR LOAN LOSSES 19,733 18,708 18,464
------- ------- -------
NONINTEREST INCOME:
Service charges on deposit accounts 2,711 2,327 2,420
Securities gains, net 71 8 10
Trust department income 430 382 340
Other noninterest income 3,610 1,365 1,304
------- ------- -------
Total noninterest income 6,822 4,082 4,074
------- ------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits 9,000 8,342 8,998
Net occupancy expense 3,162 3,402 3,584
Data processing expense 1,160 1,015 811
Professional fees 578 604 548
FDIC insurance premiums 48 4 407
Office supplies and printing 449 459 542
Other noninterest expense 4,167 3,714 3,421
------- ------- -------
Total noninterest expense 18,564 17,540 18,311
------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES 7,991 5,250 4,227
PROVISION FOR INCOME TAXES 2,765 1,680 1,004
------- ------- -------
NET INCOME $ 5,226 $ 3,570 $ 3,223
======= ======= =======
NET INCOME PER SHARE:
Basic $1.32 $0.89 $0.79
======= ======= =======
Diluted $1.29 $0.87 $0.79
======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 3,973 4,017 4,059
======= ======= =======
Diluted 4,047 4,085 4,103
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
HARDWICK HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Unrealized Gain
Additional (Loss) on Securities
Common Paid-In Retained Available for Sale, Treasury Deferred
Stock Capital Earnings Net of Taxes Stock Compensation Total
====== ========= ========= ==================== ======== ============ =======
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $2,063 $20,251 $22,959 $ (859) $(1,034) $ 0 $43,380
Net income 0 0 3,223 0 0 0 3,223
Cash dividends, $.22 per share 0 0 (898) 0 0 0 (898)
Purchase of 15,050 shares of
treasury stock 0 0 0 0 (251) 0 (251)
Exercise of stock options 0 (22) 0 0 97 0 75
Issuance of treasury stock as
restricted stock 0 4 0 0 240 (244) 0
Amortization of compensation
element of restricted stock 0 0 0 0 0 21 21
Change in unrealized gain (loss)
on securities due to
reclassification of securities
from held to maturity to
available for sale, net of taxes 0 0 0 577 0 0 577
Change in unrealized gain (loss)
on securities available for sale,
net of taxes 0 0 0 703 0 0 703
------ ------- ------- ------ ------- ----- -------
BALANCE, DECEMBER 31, 1995 2,063 20,233 25,284 421 (948) (223) 46,830
Net income 0 0 3,570 0 0 0 3,570
Cash dividends, $.50 per share 0 0 (2,009) 0 0 0 (2,009)
Purchase of 67,249 shares of
treasury stock 0 0 0 0 (1,341) 0 (1,341)
Amortization of compensation
element of restricted stock 0 0 0 0 0 24 24
Change in unrealized gain (loss)
on securities available for
sale, net of taxes 0 0 0 (97) 0 0 (97)
------ ------- ------- ------ ------- ----- -------
BALANCE, DECEMBER 31, 1996 2,063 20,233 26,845 324 (2,289) (199) 46,977
Net income 0 0 5,226 0 0 0 5,226
Cash dividends, $.42 per share 0 0 (1,690) 0 0 0 (1,690)
Issuance of 36,000 shares of
restricted common stock 18 702 0 0 0 (720) 0
Amortization of compensation
element of restricted stock 0 0 0 0 0 99 99
Purchase of 13,733 shares of
treasury stock 0 0 0 0 (275) 0 (275)
Change in unrealized gain (loss)
on securities available for
sale, net of taxes 0 0 0 266 0 0 266
------ ------- ------- ------ ------- ----- -------
BALANCE, DECEMBER 31, 1997 $2,081 $20,935 $30,381 $ 590 $(2,564) $(820) $50,603
====== ======= ======= ====== ======= ===== =======
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
F-5<PAGE>
HARDWICK HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(In Thousands)
<TABLE>
<CAPTION> 1997 1996 1995
======== ======== ========
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,226 $ 3,570 $ 3,223
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 800 396 0
Provision for depreciation and amortization 2,534 2,476 2,686
Amortization of deferred compensation 99 24 21
Gain on sale of other real estate, net 0 0 (5)
Loss (gain) on disposal of premises and equipment 193 (9) 91
Premium amortization (discount accretion) of
investment securities, net 156 174 (65)
Deferred income tax (benefit) provision (272) (66) 364
Securities gains, net (71) (8) (10)
(Increase) decrease in accrued interest receivable (123) (191) 270
Decrease (increase) in other assets 79 (60) (17)
(Decrease) increase in other liabilities (265) 977 948
-------- -------- --------
Net cash provided by operating activities 8,356 7,283 7,506
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities
held to maturity 0 0 20,952
Proceeds from maturities of investment securities
available for sale 18,245 16,150 5,840
Proceeds from sales of investment securities
available for sale 44,211 34,448 13,610
Purchases of investment securities held to maturity 0 0 (2,401)
Purchases of investment securities available for sale (61,404) (35,889) (30,501)
Net cash flows from loans originated and principal
collected on loans (39,489) (32,677) (11,435)
Purchases of premises and equipment (761) (606) (1,653)
Proceeds from disposal of premises and equipment 55 42 0
Proceeds from disposal of other real estate 0 5 85
-------- -------- --------
Net cash used in investing activities (39,143) (18,527) (5,503)
-------- -------- --------
</TABLE>
F-6<PAGE>
<TABLE>
<CAPTION> 1997 1996 1995
======== ======== ========
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, NOW
accounts, and savings accounts $ 1,337 $ (1,540) $ (3,238)
Net cash flows from sales of certificates of deposit 14,508 5,529 32,674
Net (decrease) increase in federal funds purchased (2,600) 2,600 0
Net increase (decrease) in securities sold under
agreements to repurchase 16,012 (209) (16,980)
Proceeds from (repayments of) FHLB advances 7,925 (75) 381
Payments on note payable 0 (250) (500)
Principal payments on capital lease obligation (196) (176) (216)
Cash dividends on common stock (1,206) (1,768) (898)
Purchase of treasury stock (275) (1,341) (251)
Proceeds from exercise of stock options 0 0 75
-------- -------- --------
Net cash provided by financing activities 35,505 2,770 11,047
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 4,718 (8,474) 13,050
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 33,797 42,271 29,221
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $38,515 $33,797 $42,271
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $14,262 $12,843 $12,232
======== ======== ========
Income taxes $ 3,011 $ 1,020 $ 1,080
======== ======== ========
Noncash transactions during the year for:
Transfer from premises and equipment to
other assets $ 0 $ 211 $ 0
======== ======== ========
Transfer from loans to other assets $ 0 $ 0 $ 90
======== ======== ========
Transfer of investment securities held to
maturity to available for sale $ 0 $ 0 $88,818
======== ======== ========
Purchase of assets under capital lease $ 0 $ 0 $ 980
======== ======== ========
Dividends declared but not paid $ 484 $ 241 $ 0
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
F-7<PAGE>
HARDWICK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include
the accounts of Hardwick Holding Company ("HHC") and its
wholly owned subsidiaries, Hardwick Bank and Trust Company
("HBT"), First National Bank of Northwest Georgia ("FNB"),
and Pentz Street Corporation (formerly known as Hardwick
Service Corporation), collectively referred to as the
"Company." All significant intercompany balances and
transactions have been eliminated.
NATURE OF OPERATIONS
The Company operates nine locations in suburban communities
in northwest Georgia. The Company's primary business is
providing loan and deposit services to customers who are
predominately small and middle-market businesses and
individuals.
USE OF ESTIMATES
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.
INVESTMENT SECURITIES
Investment securities are classified as available for sale
and are carried at estimated fair value with unrealized
gains and losses, net of any tax effect added to or deducted
from total stockholders' equity.
Premiums and discounts related to securities are amortized
or accreted over the life of the related Security as an
adjustment to the yield using the effective interest method
and prepayment assumptions. Dividends and interest income
are recognized when earned.
Gains or losses on disposition of securities are determined
using the specific identification method and are recognized
on the settlement date. The financial statement impact of
settlement date accounting versus trade date accounting is
immaterial.
F-8<PAGE>
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks,
and federal funds sold.
LONG-LIVED ASSETS
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated
depreciation. For financial reporting purposes, depreciation
is computed using the straight-line method. The Company uses
the following depreciable lives:
Premises and improvements 20 to 40 years
Automobiles, computer equipment,
and office machines 3 to 6 years
Furniture and fixtures 10 years
Certain leases are capitalized as assets for financial
reporting purposes. Assets under capital lease are
depreciated over the life of the related lease using the
straight-line method.
Renewals and betterments are capitalized and depreciated over
their estimated useful lives. Repairs, maintenance, and
minor improvements are charged to net occupancy expense as
incurred. When property is replaced or otherwise disposed
of, the cost of such assets and related accumulated
depreciation are removed from the respective accounts. Gains
or losses on disposition, if any, are recorded in the
accompanying consolidated statements of income.
EXCESS OF COST OVER FAIR VALUE OF SUBSIDIARIES ACQUIRED
("GOODWILL")
Goodwill is being amortized over various periods from 15 to
40 years. The charge to other noninterest expense for the
amortization of the goodwill for the years ended December 31,
1997, 1996, and 1995 was $790,000, $615,000, and $625,000,
respectively. At December 31, 1997 and 1996, accumulated
amortization of the goodwill was $6,331,000 and $5,541,000,
respectively.
The Company periodically evaluates the carrying value of long-lived
assets to be held and used, including goodwill, when events or changes
in circumstances warrant such a review. The carrying value of a
long-lived assets is considered impaired when the projected
undiscounted future cash flow from such asset is less than its
carrying value. No material impairments existed at December 31, 1997
or 1996, and accordingly, no losses were recognized.
LOANS AND RESERVE FOR LOAN LOSSES
Loans are recorded net of unearned discount, deferred loan fees, and
reserve for loan losses. Interest income and unearned discount are
recognized over the term of the loan on a level-yield basis. Fees
associated with the loan origination are deferred, net of direct
incremental loan origination costs, and amortized to interest income
over the contractual life of the loan using the interest method or the
straight-line method, if not materially different.
F-9<PAGE>
Interest income on all classifications of loans is accrued based on
the outstanding principal amounts, except for those classified as
nonaccrual loans. The accrual of interest is discontinued when a loan
becomes contractually delinquent for 90 days or when other factors
indicate that collectibility is doubtful. Cash receipts on nonaccrual
loans are applied to reduce principal balances or are recorded as
interest income, depending on management's assessment of the ultimate
collectibility of the loan.
The reserve for loan losses is established through a provision for
loan losses charged to expense. The reserve represents an amount
which, in management's judgment, will be adequate to absorb losses on
existing loans that may become uncollectible. Management's judgment
in determining the adequacy of the reserve is based on evaluations of
the collectibility of loans. These evaluations take into
consideration such factors as the balance of impaired loans (which are
defined as all nonaccrual loans, except residential mortgages and
groups of small homogenous loans), changes in the nature and volume of
the loan portfolio, current economic conditions that may affect the
borrower's ability to pay, and review of specific problem loans.
Periodic revisions are made to the reserve when circumstances which
necessitate such revisions become known.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company enters into sales of securities under agreements to
repurchase. The securities collateralizing these agreements are
controlled by the counterparty for the term of the agreement. During
fiscal years 1997, 1996 and 1995, the maximum balance outstanding at
anytime was $19,339,000, $5,189,000, and $35,412,000, respectively,
and the average balance outstanding was $3,896,000, $1,816,000, and
$12,549,000, respectively.
FEDERAL FUNDS PURCHASED
The Company periodically purchases federal funds from the Federal
Reserve Bank to meet its daily reserve requirement. During fiscal
years 1997 and 1996, the maximum balance outstanding at anytime was
$7,100,000 and $7,200,000, respectively, and the average balance
outstanding was $244,000 and $224,000, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not hold or engage in transactions using "off balance
sheet" derivative financial instruments.
EARNINGS PER SHARE OF COMMON STOCK
In February 1997, the Financial Accounting Standards Board issued
Statement of Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS"). SFAS No. 128 simplifies the
standards for computing earnings per share as compared to APB Opinion
No. 15. SFAS 128 replaces the presentation of primary EPS with a
presentation of basic EPS and requires dual presentation of basic and
diluted EPS on the face of the statement of earnings for all entities
with complex capital structures. The SFAS 128 requires a
reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS
computation. SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997, and retroactive
application is required for all periods presented.
F-10<PAGE>
The numerator utilized in the calculation of earnings per share was
the same for both basic and diluted earning per share.
Basic and diluted weighted average shares outstanding for the years
ended December 31, 1997, 1996, and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Basic weighted average shares outstanding
3,973 4,017 4,059
Incentive stock options 64 63 42
Restricted shares of common stock 10 5 2
------ ------ ------
Diluted weighted average shares outstanding
4,047 4,085 4,103
====== ====== ======
</TABLE>
SETTLEMENT WITH VENDOR
During the year ended December 31, 1997, the Company
received a settlement from a former vendor of approximately
$2,125,000. The settlement is included in other noninterest
income in the consolidated statements of income.
RECLASSIFICATIONS
Certain reclassifications have been made in the 1996 and
1995 financial statements to conform with the 1997
presentation.
2. INVESTMENT SECURITIES
The amortized cost, estimated fair value, and gross
unrealized gains and losses in the Company's investment
securities at December 31, 1997 and 1996 are as follows (in
thousands):
F-11<PAGE>
<TABLE>
<CAPTION>
1997
----------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
========== ========== =========== ==========
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
government agencies $ 72,776 $ 274 $(179) $ 72,871
Obligations of states and political
subdivisions 22,416 826 (6) 23,236
Mortgage-backed securities 21,442 66 (87) 21,421
Other debt and equity securities
1,903 0 0 1,903
--------- ------- ------ ---------
$118,537 $1,166 $(272) $119,431
========= ======= ====== =========
1996
---------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
========== ========== ============ ==========
U.S. Treasury and other U.S.
government agencies $ 75,682 $ 58 $(578) $ 75,162
Obligations of states and political
subdivisions 25,347 1,179 (27) 26,499
Mortgage-backed securities 16,956 32 (172) 16,816
Other debt and equity securities
1,689 0 0 1,689
--------- ------- ------ ---------
$119,674 $1,269 $(777) $120,166
========= ======= ====== =========
</TABLE>
The amortized cost and estimated fair value of debt
securities at December 31, 1997 by date of contractual
maturity are shown below (in thousands). Expected
maturities may differ from contractual maturities
because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
F-12<PAGE>
Estimated
Amortized Fair
Cost Value
=========== ==========
Due in one year or less $ 17,602 $ 17,577
Due one year to five years 53,395 53,571
Due five years to ten years 20,996 21,656
Due after ten years 3,199 3,303
--------- ---------
95,192 96,107
Mortgage-backed securities 21,442 21,421
Other debt and equity securities 1,903 1,903
--------- ---------
$118,537 $119,431
========= =========
Mortgage-backed securities mature monthly through the year 2027.
Proceeds from sales of investments in debt securities during 1997,
1996, and 1995 were $44,211,000, $34,448,000, and $13,610,000,
respectively. Gross gains of approximately $254,000, $106,000, and
$23,000 and gross losses of approximately $183,000, $98,000, and
$13,000 were realized on such sales in 1997, 1996, and 1995,
respectively.
Securities with a carrying value of $73,706,000 and $66,796,000 were
pledged to secure various deposits and securities sold under
agreements to repurchase at December 31, 1997 and 1996, respectively.
3. LOANS AND RESERVE FOR LOAN LOSSES
At December 31, 1997 and 1996, the Company's loan portfolio consists
of the following (in thousands):
1997 1996
=========== ==========
Real estate loans $193,424 $161,489
Commercial loans 60,929 53,836
Consumer loans 35,122 39,102
Other loans 28,081 24,214
--------- ---------
Total loans 317,556 278,641
Less:
Unearned discount (413) (393)
Reserve for loan losses (6,984) (6,778)
--------- ---------
$310,159 $271,470
========= =========
Total nonaccrual and restructured loans at December 31, 1997 and 1996
were $323,000 and $498,000, respectively. The gross amount of
interest income that would have been recorded in 1997, 1996, and
1995 on nonaccrual and restructured loans at December 31, 1997, 1996,
and 1995, if all such loans had been accruing interest at the
contractual rate, was $108,000, $123,000, and $81,000, respectively,
while interest income actually recognized was $28,000, $153,000, and
$115,000, respectively.
F-13<PAGE>
At December 31, 1997 and 1996, the recorded investment in impaired
loans was $323,000 and $449,000, respectively, and the related
valuation allowance was $32,000 and $107,000, respectively. This
valuation allowance is included in the reserve for loan losses in the
accompanying consolidated balance sheets. The average balance of
impaired loans during 1997 and 1996 was $414,000 and $1,153,000,
respectively.
A summary of transactions in the reserve for loan losses for the years
ended December 31, 1997, 1996, and 1995 is as follows (in thousands):
1997 1996 1995
====== ====== ======
Balance, beginning of year $6,778 $6,614 $6,566
Provision for loan losses 800 396 0
Recoveries of loans previously
charged off 561 667 1,254
Charge-offs (1,155) (899) (1,206)
------ ------ ------
Balance, end of year $6,984 $6,778 $6,614
====== ====== ======
4. PREMISES AND EQUIPMENT
A summary of the carrying value of premises and equipment at December
31, 1997 and 1996 is as follows (in thousands):
1997 1996
----------- ------------
Land and land improvements $ 5,526 $ 5,526
Premises and improvements 12,878 12,773
Furniture, fixtures, and equipment 5,706 5,957
Leasehold improvements 16 16
Equipment under capital lease 980 980
Construction in progress 135 36
-------- --------
25,241 25,288
Accumulated depreciation (10,744) (9,560)
-------- --------
$14,497 $15,728
======== ========
During 1995, the Company began leasing certain computer equipment
under five-year noncancelable leases expiring in 2000. The assets
acquired under the lease agreements have been capitalized in the
accompanying consolidated balance sheets and at December 31, 1997 and
1996 had a net book value of $418,000 and $614,000, respectively.
Using an interest rate of approximately 7%, the related capital lease
obligation is reflected in the accompanying consolidated balance
sheets based on the present value of the future minimum lease
payments. Amortization expense of these assets under capital lease
was $196,000 and $203,000 during 1997 and 1996, respectively, and is
included in net occupancy expense in the accompanying consolidated
statements of income.
F-14<PAGE>
Future minimum lease payments for assets under capital lease and the
present value of minimum lease payments at December 31, 1997 are as
follows (in thousands):
1998 $239
1999 239
2000 51
----
Total minimum lease payments 529
Less amount representing interest (57)
Present value of minimum lease ----
payments $472
====
5. TIME DEPOSITS
At December 31, 1997 and 1996, time deposits equal to or greater than
$100,000 were approximately $61,519,000 and $52,159,000, respectively.
During 1997 and 1996, the weighted average interest rate of total time
time deposits was 5.8% and 4.7%, respectively. As of December 31,
1997, expected maturities of total time deposits by contractual
maturity date are as follows (in thousands):
CARRYING
VALUE
==========
1998 $161,184
1999 22,915
2000 7,688
2001 3,591
2002 5,285
----------
$200,663
==========
6. FEDERAL HOME LOAN BANK ("FHLB") ADVANCES AND REVOLVING LINE OF CREDIT
FNB maintains an agreement with the FHLB of Atlanta. Under this
agreement, the FNB can borrow up to $21,000,000. At December 31, 1997
and 1996, the total amounts outstanding under this agreement were
$8,231,000 and $306,000, respectively. The weighted average interest
rate on FHLB advances was 5.55% and 8.08% at December 31, 1997 and
1996, respectively. Maximum borrowings during the years ended
December 31, 1997 and 1996 were $8,231,000 and $381,250, respectively.
The advances are due on January 25, 2001 and are collateralized by a
blanket pledge of FNB's loans secured by 1-4 unit residential
property, which at December 31, 1997 totaled approximately
$32,820,000.
The Company has an unsecured revolving line of credit of $5,000,000
(the "Revolver"). Borrowings under the Revolver bear interest at
LIBOR plus 0.6% (6.32% at December 31, 1997). Interest is payable
quarterly, and the Revolver is renewable on an annual basis. At
December 31, 1997 and 1996, the Company's outstanding borrowings under
this Revolver were $0, and the weighted average interest rate charged
on the Revolver for the years ended December 31, 1997 and 1996 was
6.26% and 6.69%, respectively. Maximum borrowings at anytime during
the years ended December 31, 1997 and 1996 were $2,300,000 and
$1,100,000, respectively. The average balances outstanding under
this Revolver during 1997 and 1996 were $808,000 and $440,000,
respectively.
F-15<PAGE>
7. INCOME TAXES
The components of the provision for income taxes in 1997, 1996, and
1995 are as follows (in thousands):
1997 1996 1995
-------- ------- --------
Current provision $3,037 $1,746 $ 640
Deferred (benefit) provision (272) (66) 364
------- ------- -------
Provision for income taxes $2,765 $1,680 $1,004
======= ======= =======
The components of the net deferred tax asset at December 31, 1997 and
1996 are as follows (in thousands):
1997 1996
========= =========
Deferred tax assets related to:
Allowance for loan losses $ 1,820 $1,671
Other 166 140
-------- -------
Total deferred tax assets 1,986 1,811
-------- -------
Deferred tax liabilities related to:
Excess of book over tax basis of
premises and equipment (1,197) (1,219)
Unrealized gain on securities
available for sale (304) (168)
Other (12) (87)
-------- -------
Total deferred tax liabilities (1,513) (1,474)
-------- -------
Net deferred tax asset $ 473 $ 337
======== =======
No valuation allowances for deferred tax assets have been recorded as
of December 31, 1997 and 1996 based on management's assessment that it
is more likely than not that these assets will be realized. This
assessment is based primarily on the level of historical taxable
income and projection for future taxable income over the period in
which the temporary differences are deductible.
The differences between the actual income tax expense and the amount
computed by applying the statutory federal income tax rate to income
before taxes are as follows (in thousands):
1997 1996 1995
======== ========= ========
Income taxes at statutory rate $2,717 $1,785 $1,437
Increase (decrease) resulting
from tax effects of:
Tax-exempt interest, net of
disallowance (372) (568) (611)
Amortization of goodwill 278 213 213
Other, net 142 250 (35)
------- ------- -------
Provision for income taxes $2,765 $1,680 $1,004
======= ======= =======
F-16<PAGE>
8. STOCK PLANS
INCENTIVE STOCK OPTION PLANS
The Company has in place two incentive stock option plans ("1988 Plan"
and "1993 Plan") for officers under which an aggregate of 200,000
shares of common stock are authorized for grant. Options granted are
at no less than the fair market value of a share of stock on the grant
date. The 1988 Plan allows for the exercise of granted options
beginning five years after the grant date. Options not exercised
expire ten years after the grant date. The 1993 Plan allows for the
exercise of granted options ratably over the five-year vesting period.
Options not exercised expire ten years after the grant date.
The Company does not recognize compensation expense in accounting for
its stock option plan, and no awards have been granted since fiscal
1994.
A summary of the changes in common stock options during the three-year
period ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Outstanding Options
-----------------------
Weighted Exercise
Average Exercisable Price Per
Number Price Options Share
---------- ----------- --------------- ---------------
---------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1994 176,250 $12.48 145,000 $12.00-$16.25
Options which became exercisable - - 3,750 $16.25
Exercised (6,250) 12.00 (6,250) $12.00
-------- ------- -------- --------------
Outstanding at December 31, 1995 170,000 12.50 142,500 $12.00-$16.25
Options which became exercisable - - 3,750 $16.25
-------- ------- -------- --------------
Outstanding at December 31, 1996 170,000 $12.50 146,250 $12.00-$16.25
Options which became exercisable - - 16,250 $12.00-$16.25
-------- ------- -------- --------------
Outstanding at December 31, 1997 170,000 $ 12.50 162,500 $12.00-$16.25
======== ======= ======== ==============
</TABLE>
The weighted average exercise price of exercisable options at
December 31, 1997, 1996, and 1995 is $12.39, $12.33, and $12.22,
respectively. The weighted average remaining contractual life of
options outstanding at December 31, 1997 is approximately 1.8
years.
F-17<PAGE>
RESTRICTED STOCK PLAN
In December 1994, the board of directors approved the Hardwick
Holding Company Restricted Stock Award Agreement (the
"Agreement"). The Agreement provides for the award of up to an
aggregate of 120,000 shares of the Company's common stock to
certain key employees. The number of shares awarded annually is
dependent upon the Company's profitability. Participants under
the Agreement are entitled to cash dividends and to vote their
respective shares. Restrictions generally limit the sale or
transfer of the shares and expire ten years from the award date.
During 1997, 1996, and 1995, the Company awarded restricted stock
shares of 36,000, 0, and 15,000, respectively, to key employees.
The Company recorded deferred compensation of approximately
$720,000, $0, and $244,000 during 1997, 1996, and 1995,
respectively, based on the estimated market price of the shares
at the award date. Deferred compensation is being amortized over
the vesting period of ten years. The Company recognized in
fiscal years 1997, 1996, and 1995 approximately $99,000, $24,000,
and $21,000, respectively, in compensation expense related to the
restricted stock awards.
9. EMPLOYEE BENEFIT PLANS
The Company has established a contributory defined contribution
plan (the "Plan") which covers substantially all salaried
employees. Employees have the option to contribute up to 6% of
their annual salaries to the Plan. The Company matches 50% of
employee contributions and makes a discretionary contribution
based on 4% of a qualifying employee's base salary, as defined
under the Plan.
The Company's discretionary and matching contributions to the
Plan were $336,000, $324,000, and $351,000, in 1997, 1996, and
1995, respectively. The assets of the Plan have a market value
of $7,486,000 and are maintained by the trust department of HBT.
10. LIMITATION ON SUBSIDIARY DIVIDENDS
Substantially all of HHC's retained earnings are undistributed
earnings of its banking subsidiaries, which are restricted as to
payment to HHC by various regulations administered by bank
regulatory authorities. For state banks, such as HBT, the
limitation on dividends payable is equal to 50% of the preceding
year's net income. For national banks, such as FNB, the
limitation on dividends payable is equal to net income in the
current year combined with its retained net income of the
preceding two years.
In 1997, 1996, and 1995, HBT paid dividends to HHC of $4,000,000,
$4,400,000, and $1,500,000, respectively. In 1997, 1996, and
1995, FNB paid dividends to HHC of $1,500,000, $1,000,000, and
$750,000, respectively. During fiscal year 1997, HBT obtained
regulatory approval to pay dividends to HHC in excess of
regulators' limitations. At December 31, 1997, HBT could have
paid additional dividends to HHC of $103,500 based on the revised
level of authorized dividends. Retained earnings of HBT and FNB
available for payment of cash dividends to HHC under the
applicable regulations totaled approximately $4,233,000 at
December 31, 1997.
F-18
<PAGE>
Dividends received by HHC from HBT and FNB are available for use
to service debt obligations, pay other expenses, and distribute
as dividends to stockholders of HHC.
11. REGULATORY REQUIREMENTS
The Federal Reserve Board requires member banks to maintain
reserves based on their average deposits in the form of vault
cash and average deposit balances at the Federal Reserve Banks.
For the year ended December 31, 1997, the Company's aggregate
reserve requirement averaged approximately $8,290,000.
The Company is subject to various regulatory capital requirements
which involve quantitative measures of the Company's assets,
liabilities, and certain off-balance sheet items. The Company's
capital amounts and classification are subject to qualitative
judgments by the regulators about components, risk weightings,
and other factors. Quantitative measures established by
regulation to ensure capital adequacy require that the Company
maintain amounts and ratios of Tier 1 and total capital to
risk-weighted assets and of Tier 1 capital to quarterly average
total assets. Management believes that as of December 31, 1997,
the Company meets all capital adequacy requirements to which it
is subject. A summary of Tier 1 and total capital (actual,
required, and to be well capitalized) and the Tier 1 leverage
ratio of the Company and its significant subsidiaries as of
December 31, 1997 and 1996 is as follows (dollars in thousands):
F-19<PAGE>
<TABLE>
<CAPTION>
Required for
Capital
Adequacy Required to Be
Actual Purposes Well Capitalized
-------------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
========== ======== ========== ========== ========== =========
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997:
Tier 1 capital:
HHC $45,457 12.02% $15,122 4.00% $22,683 6.00%
HBT 24,740 11.00 8,989 4.00 13,484 6.00
FNB 15,595 10.49 5,943 4.00 8,914 6.00
Total capital:
HHC 50,211 13.28 30,244 8.00 37,806 10.00
HBT 28,050 12.48 17,979 8.00 22,474 10.00
FNB 17,570 11.83 11,886 8.00 14,857 10.00
Tier 1 leverage:
HHC 45,457 9.55 14,286 3.00 23,810 5.00
HBT 24,740 8.97 8,274 3.00 13,790 5.00
FNB 15,595 8.06 5,805 3.00 9,674 5.00
December 31, 1996:
Tier 1 capital:
HHC $41,307 12.34% $13,385 4.00% $20,077 6.00%
HBT 24,454 12.13 8,063 4.00 12,095 6.00
FNB 14,760 11.68 5,055 4.00 7,583 6.00
Total capital:
HHC 45,522 13.60 26,770 8.00 33,463 10.00
HBT 26,996 13.39 16,126 8.00 20,158 10.00
FNB 16,351 12.94 10,110 8.00 12,638 10.00
Tier 1 leverage:
HHC 41,307 9.55 12,979 3.00 21,631 5.00
HBT 24,454 9.30 7,890 3.00 13,150 5.00
FNB 14,760 8.45 5,243 3.00 8,739 5.00
</TABLE>
12. RELATED-PARTY TRANSACTIONS
In the normal course of business, HHC and its subsidiary banks
have granted loans to the Company's executive officers and
directors. Loans to executive officers and directors and their
related interests are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the
time of origination for comparable transactions with unrelated
persons and do not involve more than a normal risk of
collectibility. Outstanding loans to executive officers and
directors, as well as entities in which the executive officers
and directors have a financial interest, were $9,635,000 and
$8,495,000 at December 31, 1997 and 1996, respectively.
The following table summarizes the change in these loans for the
year ended December 31, 1997 (in thousands):
Balance at beginning of year $8,495
New loans 4,313
Repayments (3,173)
--------
Balance at end of year $9,635
========
F-20<PAGE>
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND
CONCENTRATIONS OF CREDIT
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 the
Company's 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 accompanying 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.
The Company grants various types of loans and financial
instruments to customers within its 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 workforce in the Company's market area
is 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 December 31, 1997 and 1996 were $92,847,000 and
$73,870,000, respectively. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary, 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.
F-21<PAGE>
Standby letters of credit are conditional commitments issued by the
Company 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; residential real estate; and income-producing commercial
properties for those commitments for which collateral is deemed
necessary. The Company had $2,223,000 and $1,059,000 in standby
letters of credit outstanding at December 31, 1997 and 1996,
respectively.
14. 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.
15. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1997
and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
============ ============ ============= ===========
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 38,515 $ 38,515 $ 33,797 $ 33,797
Investment securities 119,431 119,431 120,166 120,166
Loans 310,159 308,692 271,470 270,761
Accrued interest receivable 3,988 3,988 3,865 3,865
Financial liabilities:
Deposits 409,785 410,259 393,940 393,705
Securities sold under agreements to
repurchase 19,339 19,339 3,327 3,327
Federal funds purchased 0 0 2,600 2,600
FHLB advances 8,231 8,231 306 305
Accrued interest payable 2,782 2,782 2,381 2,381
</TABLE>
F-22<PAGE>
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments:
- Cash and cash equivalents are valued at their carrying
amounts reported in the consolidated balance sheets,
which are reasonable estimates of fair value due to the
relatively short period to maturity of these instruments.
- Investment securities are valued at quoted market prices
where available. If quoted market prices are not
available, fair values are based on quoted market prices of
comparable instruments.
- Loans are valued on the basis of estimated cash flows,
discounted using the current rates at which similar loans
would be made to borrowers with similar credit ratings
and for the same remaining maturities. The carrying amount
of accrued interest receivable approximates its fair value.
- Deposits with no defined maturity, such as demand deposits,
savings accounts, NOW, and money market accounts, have a
fair value equal to the amount payable on demand which is
equal to their respective carrying amounts. Fair values
of certificates of deposit are estimated using a discounted
cash flow calculation using the rates currently offered for
deposits of similar remaining maturities. The intangible
value of long-term relationships with depositors is not
taken into account in estimating the fair value disclosed.
The carrying amount of accrued interest payable
approximates its fair value.
- Securities sold under agreements to repurchase and federal
funds purchased are valued at their carrying amounts
reported in the consolidated balance sheets, which are
reasonable estimates of fair value due to the relatively
short period to maturity of these instruments.
- The fair value of the FHLB advances is estimated using a
discounted cash flow calculation using the Company's
current incremental borrowing rates for similar types
of instruments.
- Off-balance sheet instruments include commitments to extend
credit and standby letters of credit. The fair value of
such instruments is based on fees currently charged for
similar arrangements in the marketplace, adjusted for
changes in terms and credit risk as appropriate. The
carrying values of these unamortized fees and hence the
fair values of the related commitments were not significant
as of December 31, 1997 and 1996.
F-23<PAGE>
16. HARDWICK HOLDING COMPANY (PARENT COMPANY ONLY) FINANCIAL INFORMATION
Hardwick Holding Company (Parent Company Only)
Balance Sheets--December 31, 1997 and 1996
(Dollars in Thousands)
Assets
1997 1996
----------- -----------
Cash on deposit in subsidiary bank $ 636 $ 1,392
Loans, net 4,135 0
Premises and equipment, net 144 321
Investment in banking subsidiaries 45,989 45,421
Other assets 484 431
-------- --------
Total assets $51,388 $47,565
======== ========
Liabilities and Stockholders' Equity
1997 1996
----------- -----------
Accounts payable and accrued liabilities $ 785 $ 588
Stockholders' equity: --------- ---------
Common stock, $.50 par value; 10,000,000
shares authorized, 4,161,141 and
4,125,141 shares issued, 4,021,496 and
3,999,299 shares outstanding at December
31, 1997 and 1996, respectively 2,081 2,063
Additional paid-in capital 20,935 20,233
Retained earnings 30,381 26,845
Unrealized gain on bank securities
available for sale, net of taxes
590 324
Treasury stock, at cost, 139,645 and
125,912 shares at December 31, 1997
and 1996, respectively (2,564) (2,289)
Deferred compensation (820) (199)
--------- ---------
Total stockholders' equity 50,603 46,977
Total liabilities and
stockholders' equity $51,388 $47,565
========= =========
F-24<PAGE>
Hardwick Holding Company (Parent Company Only)
Statements of Income
For the Years Ended December 31, 1997, 1996, and 1995
(In Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
========== ========== ==========
<S> <C> <C> <C>
Operating income:
Interest on deposits in subsidiary bank $ 17 $ 11 $ 12
Interest on loans 207 0 0
Dividends from banking subsidiaries 5,500 5,400 2,250
Consulting fees from subsidiaries 641 591 586
------- ------- ------
Total operating income 6,365 6,002 2,848
------- ------- ------
Operating expense:
Interest expense 55 27 48
Net occupancy expense 126 87 84
Other operating expense 1,641 1,238 1,496
------- ------- -------
Total operating expense 1,822 1,352 1,628
------- ------- -------
Income before income tax benefit
and equity in undistributed
earnings of subsidiaries 4,543 4,650 1,220
Income tax benefit 282 91 301
------- ------- -------
Income before equity in undistributed
earnings of subsidiaries 4,825 4,741 1,521
Equity in undistributed earnings of
subsidiaries (distributions in
excess of earnings) 401 (1,171) 1,702
------- ------- -------
Net income $5,226 $3,570 $3,223
======= ======= =======
</TABLE>
F-25
<PAGE>
Hardwick Holding Company (Parent Company Only)
Statements of Cash Flows
For the Years Ended December 31, 1997, 1996, and 1995
(In Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
========== ========== ==========
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $5,226 $3,570 $3,223
Adjustments to reconcile net income to
net cash provided by operating
activities:
(Equity in undistributed earnings)
distributions in excess of
earnings of subsidiaries (401) 1,171 (1,702)
Provision for depreciation and
amortization 170 159 134
Amortization of deferred compensation 99 24 21
Loss (gain) on disposal of premises
and equipment 184 (85) 9
(Increase) decrease in other assets (53) 10 (138)
(Decrease) increase in accounts
payable and accrued liabilities (287) (20) 159
------- ------- -------
Net cash provided by operating
activities 4,938 4,829 1,706
------- ------- -------
Cash flows from investing activity:
Net cash flows from loans originated
and principal collected on loans (4,135) 0 0
Purchases of premises and equipment (107) (199) (32)
Proceeds from disposal of premises and
equipment 29 0 0
------- ------- -------
Net cash used in investing activities (4,213) (199) (32)
------- ------- -------
Cash flows from financing activities:
Payments on note payable 0 (250) (500)
Cash dividends on common stock (1,206) (1,768) (898)
Purchase of treasury stock (275) (1,341) (251)
Proceeds from sale of treasury stock 0 0 75
Net cash used in financing ------- ------- -------
activities (1,481) (3,359) (1,574)
------- ------- -------
Net (decrease) increase in cash (756) 1,271 100
Cash, beginning of year 1,392 121 21
------- ------- -------
Cash, end of year $ 636 $1,392 $ 121
======= ======= =======
Supplemental disclosures of cash flow
information:
Cash paid during the year for interest $ 55 $ 27 $ 48
======= ======= =======
Income taxes received from subsidiaries $3,011 $1,020 $1,080
Income taxes paid by parent company (3,011) (1,020) (1,080)
======= ======= =======
Net income taxes received by parent
company $ 0 $ 0 $ 0
======= ======= =======
Dividends declared but not paid $ 484 $ 241 $ 0
======= ======= =======
</TABLE>
F-26<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report on Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dalton,
State of Georgia, on the 25th day of March 1998.
HARDWICK HOLDING COMPANY
(Registrant)
By:/s/ Michael Robinson
Michael Robinson
Title: Executive Vice President
(Principal Financial and Accounting Officer)
POWER OF ATTORNEY AND SIGNATURES
Know all men by these presents, that each person whose
signature appears below constitutes and appoints Kenneth E.
Boring or Michael Robinson, or either of them, as attorney-in-
fact, with each having the power of substitution, for him in any
and all capacities, to sign any amendments to this Report on Form
10-K and to file the same, with exhibits thereto, and other
documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes,
may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act
of 1934, this Report has been signed below by the following
persons on behalf of the Registrant in the capacities set forth
and on the 25th day of March, 1998.
Signature Title
/s/ Kenneth E. Boring Chairman and Chief Executive
Kenneth E. Boring Officer; Director (Principal
Executive Officer)
/s/ James M. Boring, Jr. President; Director
James M. Boring, Jr.
/s/ Thomas H. Bond Director
Thomas H. Bond
/s/ Wayne R. Broaddus
Wayne R. Broaddus Director
/s/Robert M. Chandler Director
Robert M. Chandler
/s/Richard R. Cheatham Director
Richard R. Cheatham
/s/Leon M. Ham III Director
Leon M. Ham III
/s/David J. Lance Director
David J. Lance
/s/Norman McCoy Director
Norman McCoy
/s/Marshall R. Mauldin Director
Marshall R. Mauldin
/s/Michael Robinson Executive Vice President, Secretary
Michael Robinson and Treasurer
(Principal Financial and
Accounting Officer);
Director
<PAGE>
EXHIBIT INDEX
21 List of subsidiaries of Registrant
27 Financial Data Schedule (for SEC use only)
99 Proxy Information
EXHIBIT 21
Hardwick Bank & Trust Company
One Hardwick Square
Dalton, Ga. 30720
100% Owned
First National Bank of Northwest Georgia
215 North Wall Street
Calhoun, Ga. 30701
100% Owned
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000787465
<NAME> HARDWICK HOLDING COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 25,423
<INT-BEARING-DEPOSITS> 110
<FED-FUNDS-SOLD> 12,982
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 119,431
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 317,143
<ALLOWANCE> 6,984
<TOTAL-ASSETS> 492,892
<DEPOSITS> 409,785
<SHORT-TERM> 19,547
<LIABILITIES-OTHER> 4,462
<LONG-TERM> 8,495
0
0
<COMMON> 2,081
<OTHER-SE> 48,522
<TOTAL-LIABILITIES-AND-EQUITY> 492,892
<INTEREST-LOAN> 27,578
<INTEREST-INVEST> 7,610
<INTEREST-OTHER> 8
<INTEREST-TOTAL> 35,196
<INTEREST-DEPOSIT> 14,232
<INTEREST-EXPENSE> 14,663
<INTEREST-INCOME-NET> 20,533
<LOAN-LOSSES> 800
<SECURITIES-GAINS> 71
<EXPENSE-OTHER> 18,564
<INCOME-PRETAX> 7,991
<INCOME-PRE-EXTRAORDINARY> 7,991
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,226
<EPS-PRIMARY> 1.32
<EPS-DILUTED> 1.29
<YIELD-ACTUAL> 8.60
<LOANS-NON> 323
<LOANS-PAST> 504
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,778
<CHARGE-OFFS> 1,155
<RECOVERIES> 561
<ALLOWANCE-CLOSE> 6,984
<ALLOWANCE-DOMESTIC> 6,984
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
exhibit 99
SUPPLEMENTAL INFORMATION
THE FOLLOWING ITEMS WILL BE MAILED TO OUR SHAREHOLDERS:
1. Letter from the Chairman & CEO.
2. Selected Financial Information.
3. Audited Financial Statements with Accountants Report
(incorporated by reference into Item 8 of this report).
4. Notice of Annual Shareholders' Meeting.
5. Proxy .
<PAGE>
[LOGO APPEARS HERE]
March 31, 1998
To our shareholders:
The Company had earnings of $5,226,000 for the year ended
December 31, 1997, with an ROA of 1.13% and ROE of 10.55%. Total
assets at December 31, 1997 were $492,892,000. Total
shareholders' equity was $50,603,000 at December 31, 1997, a book
value of $12.58 per share of common stock outstanding, with an
equity to total assets ratio of 10.27%. Total dividends paid for
the year were $.36 cents per share.
Our Company continues to use a conservative approach to
doing business through our underwriting practices and philosophy.
Loan loss reserves at December 31, 1997 were $6,984,000
representing a ratio of reserves to loans net of unearned
income of 2.20%. Our reserves were 6.86 times greater than the
$1,018,000 of nonperforming assets at December 31, 1997.
Our bank subsidiary, Hardwick Bank & Trust Company is
celebrating its 125TH year of doing business in the Northwest
Georgia area and our commitment is to serve the communities in
which we live and work. Data processing systems may be affected
in the year 2000, because of most programs having a two digit
field for the year instead of a four digit field; therefore,
creating a problem with differentiating between year 2000 and
1900. Our Company has developed a plan to assure that we will be
prepared for processing in the year 2000 which entails
expenditures for hardware, software and both inside and outside
personnel costs. This is in continuation of our commitment to
maintain state-of-art delivery systems for our customers.
Our Company serves Bartow, Gordon, Whitfield and surrounding
counties, which our staff, management and the Board of Directors
believes to be one of the most progressive areas within the
growing Southeast Region of our country. It is our intention to
be an active participant within our market area and to maximize
the return on your investment in the Company.
/s/ Kenneth E. Boring
Kenneth E. Boring, Chairman & CEO
<PAGE>
[LOGO GOES HERE]
Hardwick Holding Company
Hardwick Square
Post Office Box 1367
Dalton, Georgia 30722-1367
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held April 20, 1998
The annual meeting of the shareholders of Hardwick Holding
Company (the "Company") will be held on Monday, April 20,1998, at
4:00 p.m. Dalton, Georgia time, at the Northwest Georgia Trade and
Convention Center, Room A-3, 2211 Dug Gap Battle Road, Dalton,
Georgia 30720, for the purpose of considering and voting upon:
1. The election of (11) directors to constitute the Board of
Directors and to serve until the next annual meeting
and until their successors are elected and qualified.
2. Such other matters as may properly come before the
meeting or any adjournment thereof.
Only shareholders of record at the close of business March 31,
1998, will be entitled to notice of and to vote at the meeting or
any adjournment thereof.
A proxy solicited by the Board of Directors is enclosed
herewith. Please sign, date and return the Proxy promptly in the
enclosed envelope. If you attend the meeting, you may, if you
wish, withdraw your Proxy and vote in person.
By Order of the Board of Directors
/s/ Michael Robinson
Michael Robinson, Secretary
Dalton, Georgia
March 31, 1998
<PAGE>
[LOGO GOES HERE]
PROXY
HARDWICK HOLDING COMPANY
Dalton, Georgia
WHEN THIS PROXY IS PROPERLY EXECUTED AND RETURNED, AND NOT
REVOKED, THE SHARES IT REPRESENTS WILL BE VOTED AT THE MEETING IN
ACCORDANCE WITH THE CHOICE SPECIFIED BELOW, AND IF NO CHOICE IS
SPECIFIED, THE PROXY WILL BE VOTED FOR THE ELECTION OF DIRECTORS,
EXCEPT TO THE EXTENT AUTHORITY TO DO SO IS WITHHELD AS TO ANY ONE
OR MORE DIRECTORS.
The undersigned shareholders of Hardwick Holding Company
(the "Company") hereby appoints Kenneth E. Boring and James M.
Boring, Jr., or either of them with full power of substitution to
each, the proxies of the undersigned to vote, as designated
below, the shares of the undersigned at the annual meeting of
shareholders to be held on April 20, 1998 and any adjournment
thereof.
(a) THE ELECTION OF DIRECTORS
_____ For all nominees listed below (except as marked
to the contrary below).
_____ WITHHOLD AUTHORITY to vote for all nominees listed
below.
Thomas H. Bond Leon M. Ham III
James M. Boring, Jr. David J. Lance
Kenneth E. Boring Marshall R. Mauldin
Wayne R. Broaddus Norman McCoy
Robert M. Chandler Michael Robinson
Richard R. Cheatham
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Hardwick Holding Company
Proxy-Annual Meeting
April 20, 1998
Page two
(b) IN ACCORDANCE WITH THEIR BEST JUDGMENT with
respect to any other matters which may properly come before the
meeting and any adjournment thereof.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE "FOR" THE
PROPOSALS AS STATED ABOVE.
Please date and sign this Proxy exactly as your name appears
below:
Dated: __________________,1998
____________________________
____________________________
