SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of The Securities Exchange Act of 1934
For Quarter Ended MARCH 31, 1999 Commission File Number 33-43386
-------------- --------
HARDWICK HOLDING COMPANY
------------------------
(Exact name of registrant as specified in its charter)
GEORGIA 58-1408388
- -------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Hardwick Square, P. O. Box 1367, Dalton, GA. 30722-1367
- ------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (706) 217-3950
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No__
--
Number of shares of common stock outstanding
at MAY 12, 1999
4,225,996 Shares
----------------
<PAGE>
<PAGE>
HARDWICK HOLDING COMPANY AND SUBSIDIARIES
INDEX
Page No.
PART I- FINANCIAL INFORMATION
Consolidated Statements of Financial
Position at March 31, 1999 and
December 31, 1998 3
Consolidated Statements of Income
for the Three Months Ended March 31,
1999 and 1998 4
Consolidated Statements of Cash Flows
for the Three Months Ended March 31,
1999 and 1998 5-6
Notes to Unaudited Consolidated Financial Statements 7-9
Management's Discussion and Analysis of
Financial Position and Results of Operations 10-19
PART II- OTHER INFORMATION 20
SIGNATURES 21
2
<PAGE>
<PAGE>
HARDWICK HOLDING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December
------------ ------------
ASSETS 1999 31, 1998
---- --------
(unaudited)
-----------
<S> <C> <C>
Cash and due from banks $ 18,499 $ 25,305
Federal funds sold 30,764 43,648
--------- ---------
Total cash and cash equivalents 49,263 68,953
Investment securities, available-for-sale 148,819 144,169
Loans, net 291,236 298,478
Premises and equipment, net 15,029 15,055
Assets under capital lease, net 173 222
Accrued interest receivable 4,064 4,184
Excess of cost over fair value of
subsidiaries acquired, net of amortization 3,833 3,978
Other assets 2,205 1,881
--------- ---------
Total assets $ 514,622 $ 536,920
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits-
Noninterest-bearing $ 93,655 $ 102,027
Interest-bearing 342,326 340,509
--------- ---------
Total deposits 435,981 442,536
Securities sold under agreements to repurchase 9,281 25,209
Other borrowed funds 8,138 8,156
Capital lease obligation 209 264
Other liabilities 4,709 4,638
--------- ---------
Total liabilities 458,318 480,803
--------- ---------
Commitments and contingencies (Notes 2 and 4)
Stockholders' equity-
Common stock, $.50 par value, 10,000,000 shares authorized,
4,225,996 and 4,187,746 shares issued and outstanding at March 31,
1999 and December 31,1998, respectively 2,113 2,094
Additional paid-in capital 21,174 20,479
Retained earnings 34,007 33,406
Other comprehensive income-Unrealized gains on investment securities
available-for-sale, net of tax (Note 3) 336 1,104
Less deferred compensation from restricted stock plan (1,326) (966)
--------- ---------
Total stockholders' equity 56,304 56,117
--------- ---------
Total liabilities and stockholders' equity $ 514,622 $ 536,920
========= =========
(See notes to consolidated financial statements.)
</TABLE>
3
<PAGE>
<PAGE>
HARDWICK HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three Months Ended
--------------------------------
March 31, March 31,
INTEREST INCOME: 1999 1998
--------------------------------
<S> <C> <C>
Interest and fees on loans $ 6,587 $ 7,291
Interest on investment securities-
Taxable 1,732 1,479
Nontaxable 374 278
Interest on federal funds sold and bank deposits 262 140
-------- --------
Total interest income 8,955 9,188
-------- --------
INTEREST EXPENSE
Interest on deposits 3,431 3,754
Interest on securities sold under agreements to repurchase 112 56
Interest on other borrowed funds 114 112
Interest on note payable and capital lease obligations 5 9
-------- --------
Total interest expense 3,662 3,931
-------- --------
NET INTEREST INCOME BEFORE PROVISION FOR
LOAN LOSSES 5,293 5,257
PROVISION FOR LOAN LOSSES 75 150
-------- --------
NET INTEREST INCOME 5,218 5,107
-------- --------
NONINTEREST INCOME:
Service charges on deposit accounts 655 648
Securities gains, net 0 8
Other noninterest income 727 673
-------- --------
Total noninterest income 1,382 1,329
-------- --------
NONINTEREST EXPENSE:
Salaries and employee benefits 2,465 2,215
Net occupancy expense 765 790
Other noninterest expense 1,717 1,537
-------- --------
Total noninterest expense 4,947 4,542
-------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,653 1,894
PROVISION FOR INCOME TAXES 512 614
-------- --------
NET INCOME $ 1,141 $ 1,280
======== ========
BASIC NET INCOME PER SHARE $ 0.28 $ 0.32
======== ========
DILUTIVE NET INCOME PER SHARE $ 0.27 $ 0.32
======== ========
(See notes to consolidated financial statements.)
</TABLE>
4
<PAGE>
<PAGE>
HARDWICK HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the Three-
Months Ended
March 31,
CASH FLOWS FROM OPERATING ACTIVITIES: 1999 1998
--------------------------
<S> <C> <C>
Net income $ 1,141 $ 1,280
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses 75 150
Provision for depreciation and amortization 707 601
Loss on disposition of premises and equipment 47 0
(Accretion) amortization of investment security discounts and premiums (6) 33
Deferred income tax benefit (92) (45)
Securities gains, net 0 (8)
Decrease (increase) in accrued interest receivable 120 (104)
(Increase) decrease in other assets (324) 234
Increase in other liabilities 71 614
-------- --------
Net cash provided by operating activities 1,739 2,755
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities available-for-sale 670 7,179
Proceeds from sales of investment securities available-for-sale 2,000 3,875
Purchases of investment securities available-for-sale (8,035) (13,277)
Net cash flows from loans originated and principal collected on loans 7,337 8,686
Proceeds from disposal of other real estate 241 0
Purchases of premises and equipment (847) (114)
-------- --------
Net cash provided by investing activities 1,366 6,349
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand deposits, NOW accounts, and savings accounts (3,490) 2,821
Net cash flows from sales and maturities of certificates of deposit (3,065) 14,330
Net (decrease) in federal funds purchased and securities sold under agreement to
repurchase (15,928) (15,645)
(Decrease) in other borrowed funds (18) (18)
Payments on capital lease obligations (55) (51)
Proceeds from issuance of common stock due to exercise of stock options 305 0
Payments of cash dividends (544) (476)
-------- --------
Net cash (used) provided by financing activities $ (22,795) $ 961
-------- --------
</TABLE>
5
<PAGE>
<PAGE>
HARDWICK HOLDING COMPANY
& SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
For the Three Months
Ended
March 31,
----------------------------
1999 1998
----------------------------
<S> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (19,690) $ 10,065
CASH AND CASH EQUIVALENTS, beginning of period 68,953 38,515
--------- --------
CASH AND CASH EQUIVALENTS, end of period $ 49,263 $ 48,580
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 3,804 $ 3,641
========= ========
Cash paid during the period for income taxes $ 455 $ 0
========= ========
Noncash transactions during the period ended:
Increase in deferred compensation from issue of restricted stock $ 410 $ 300
========= ========
Increase in deferred compensation from issue of phantom stock $ 158 $ 0
========= ========
</TABLE>
(See notes to consolidated financial statements.)
5
<PAGE>
<PAGE>
HARDWICK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include
the accounts of Hardwick Holding Company (HHC) and its wholly owned
subsidiaries, Hardwick Bank and Trust Company (HBT) and First National
Bank of Northwest Georgia (FNBNWG), collectively referred to as the
"Company". All significant intercompany balances and transactions
have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates, although, in the opinion of management, such
differences would not be significant.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of
normal recurring adjustments) necessary for fair statement of the
consolidated financial position and the results of operations of the
Company for the interim periods. The results of operations for the
three-month period ended March 31, 1999 are not necessarily indicative
of the results which may be expected for the entire year.
(2) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a participant in financial instruments with off-balance
sheet risk. These instruments are entered into in the normal course
of business to meet the financing needs of its customers and to reduce
the Company's own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The contract amounts
of these instruments reflect the extent of involvement the Company has
in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance
by the counterparties to the financial instruments for commitments to
extend credit and standby letters of credit is represented by the
contractual amount of these instruments. The Company uses the same
credit and collateral policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
HBT and FNBNWG grant various types of loans and financial instruments
to customers within their respective market areas (primarily Northwest
Georgia). Although the Company has a diversified loan portfolio, a
significant portion of the Company's loans originates from customers
that are directly or indirectly related to the carpet industry.
Notably, approximately 40% of the work force in the Company's market
area are employed by companies directly related to the carpet industry.
7
<PAGE>
<PAGE>
Adverse economic trends in the carpet industry could impair these
customers' ability to repay their obligations and unfavorably affect
the results of operations of the Company.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. Total commitments to extend credit at March 31, 1999,
were approximately $71,901,000. HBT and FNBNWG evaluate each
customer's creditworthiness on a case-by-case basis. The amount of
collateral, if deemed necessary by HBT and FNBNWG, is based on
management's credit evaluation of the customers. Collateral held
varies but may include accounts receivable, inventory, property, plant
and equipment, residential real estate, and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by HBT
and FNBNWG to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond
financing and similar transactions. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The collateral varies but may
include accounts receivable, inventory, property, plant and equipment
and residential real estate for those commitments for which collateral
is deemed necessary. The Company had irrevocable standby letters of
credit of approximately $3,820,000 outstanding at March 31, 1999.
(3) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The Statement
establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the
income statement, and requires that a company must formally document,
designate, and assess the effectiveness of transactions that receive
hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15,
1999. A company may also implement the Statement as of the beginning
of any fiscal quarter after issuance (that is, fiscal quarters
beginning June 16, 1998 and thereafter). Statement 133 cannot be
8
<PAGE>
<PAGE>
applied retroactively. Statement 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired, or substantively modified after
December 31, 1997 (and, at the company's election, before January 1,
1998).
We have not yet quantified the impacts of adopting Statement 133 on
our financial statements and have not determined the timing of or
method of our adoption of Statement 133. However, the Statement could
increase volatility in earnings and other comprehensive income.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained After the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise," which
is effective for the fiscal quarter beginning after December 15, 1998.
This statement amends FASB No. 65, "Accounting for Certain Mortgage
Banking Activities," to require that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking
activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sell or hold
those investments. As the Company does not securitize its mortgage
loans held for sale or hold mortgage loans for sale, this statement
does not apply.
(4) CONTINGENCIES
The Company is involved in litigation and other legal proceedings
arising in the course of its normal business activities. Although the
ultimate outcome of these matters cannot be determined at this time,
it is the opinion of management that, when resolved, none of these
matters will have a significant effect on the Company's financial
condition or results of operations.
(5) EARNINGS PER SHARE
Earnings per share are calculated on the basis of basic and dilutive
weighted average number of shares outstanding. The basic weighted
average number of shares outstanding was 4,135,288 and 3,970,496 for
the three-month period ending March 31, 1999 and 1998, respectively.
The dilutive weighted average number of shares outstanding was
4,176,821 and 4,044,568 for the three-month period ending March 31,
1999 and 1998, respectively.
9
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
POSITION AND RESULTS OF OPERATIONS
FINANCIAL POSITION
Total assets decreased by approximately $22,298,000 from approximately
$536,920,000 at December 31, 1998, to approximately $514,622,000 at
March 31, 1999. The principal fluctuations were in federal funds
sold, net loans, cash and due from banks and investment securities
available-for-sale. Federal funds sold decreased approximately
$12,884,000 from approximately $43,648,000 at December 31, 1998 to
approximately $30,764,000 at March 31, 1999, an decrease of 29.5%.
Net loans decreased by approximately $7,242,000 from approximately
$298,478,000 at December 31, 1998, to approximately $291,236,000 at
March 31, 1999, a decrease of 2.4%. Cash and due from decreased
approximately $6,806,000 from approximately $25,305,000 at December
31, 1998 to approximately $18,499,000 at March 31, 1999, a decrease of
26.9%. The decreases were partially offset by an increase in
investment securities available-for-sale of approximately $4,650,000
from approximately $144,169,000 at December 31, 1998 to approximately
$148,819, 000 at March 31, 1999, an increase of 3.2%. HHC's cash and
cash equivalents reflected a decrease of approximately $19,690,000 or
28.6% for the three-month period ended March 31, 1999.
Savings and other interest-bearing deposit accounts increased
approximately $1,817,000 or 0.5% during the three-months ended March
31, 1999, to approximately $342,326,000. It is management's opinion
that HHC maintains competitive deposit rates while exercising prudent
strategies in competing with local institutions. Average rates paid on
deposits for the current period were approximately 4.1% compared with
approximately 4.5% for the same period in the preceding year.
At March 31, 1999, HHC's financial position continued to reflect
strong equity and liquidity, with an equity to assets ratio of 10.9%.
At March 31, 1999, 60% of HHC's loans were in real estate loans
(including mortgage and construction loans), 22% in commercial loans
(including agricultural loans), 8% in consumer loans (including credit
cards) and other loans were 10%. HHC's loan to deposit ratio was 67%
at March 31, 1999, and 45% of all deposits were invested in time
certificates of deposit.
In the event of higher than anticipated requirements related to loan
commitments or deposit withdrawals, HHC's bank subsidiaries maintain
federal funds lines with regional banks. Also, the bank subsidiaries
of the Company have become members of the Federal Home Loan Bank and
have credit lines with it. At March 31, 1999 approximately $8,138,000
was outstanding under the Federal Home Loan Bank lines of credit.
10
<PAGE>
<PAGE>
The following table represents the changes in consolidated
stockholders' equity for the nine months ended March 31, 1999:
<TABLE>
<S> <C>
Balance, December 31, 1998 $ 56,117,000
Net income 1,141,000
Change in unrealized gains (losses) on securities available-for-sale,
net of tax (768,000)
Amortization of deferred compensation-restricted stock plan 50,000
Issuance of common stock due to exercise of stock options 305,000
Dividends declared (541,000)
------------
Balance, March 31, 1999 $ 56,304,000
============
</TABLE>
RESULTS OF OPERATIONS
- ---------------------
For the three months ended March 31, 1999 and 1998:
NET INTEREST INCOME
Net interest income after provision for loan losses for the three
month period ended March 31, 1999 was approximately $5,218,000 which
was approximately $111,000 or 2.2% greater than the $5,107,000 for the
same period the year before. The net interest income for the current
period contained loan loss provisions of approximately $75,000
compared with approximately $150,000 for the same period in the
previous year. Total interest income decreased by approximately
$233,000 or 2.5% while total interest expense decreased approximately
$269,000 or 6.8% for the three-month period ended March 31, 1999, as
compared to the three months ended in the previous year.
Yields on interest-bearing assets averaged 7.7%, down approximately 70
basis points from the same period the year before. Total average
interest-bearing assets decreased by approximately $27,598,000 or 6.3%
for the current period when compared with the three-months ended March
31, 1998. Average loans for the three months ended March 31, 1999
decreased approximately $12,251,000 or 4.0% less than the average
loans for the three months ended March 31, 1998. The average yield on
loans for the three months ended March 31, 1999 was 8.9%, which
reflects a decrease of approximately 60 basis points when compared
with the three months ended March 31, 1998.
There were approximately $902,000 in nonaccrual loans at March 31,
1999 and accruing loans contractually past due ninety days or more
were approximately $31,000 at March 31, 1999. This compares to
approximately $900,000 in nonaccrual and approximately $499,000 in
loans past due ninety days or more and still accruing at December 31,
1998.
Interest accruals on nonaccrual loans are recorded only when they are
fully current with respect to interest and principal and when, in the
judgment of management, the loans are estimated to be fully
11
<PAGE>
<PAGE>
collectible as to both principal and interest. Interest income on
nonaccrual loans, which would have been reported on an accrual basis,
amounted to approximately $25,000 during the three-month period ended
March 31, 1999. Nonaccrual loan interest collected and reported in
the three-month period ended March 31, 1999 was approximately $4,000.
Rates paid on interest-bearing liabilities averaged 4.1% for the three
months ended March 31, 1999, down approximately 50 basis points from
the three months ended March 31, 1998. Management's liability pricing
strategies include competitive deposit rates with increased awareness
of cash flow needs within the balance sheet. Management anticipates
rates to decrease slightly during the remainder of the year.
NONINTEREST INCOME
Total other noninterest income increased approximately $53,000 or 4.0%
for the three months ended March 31, 1999, as compared with the three
months ended March 31, 1998. The increase is primarily due to an
increase in other miscellaneous income of approximately $54,000 and an
increase in service charges on deposit accounts of approximately
$7,000 while being partially offset by a decrease in net gains from
sales of investment securities available-for-sale of approximately
$8,000.
NONINTEREST EXPENSE
Total noninterest expense increased by approximately $405,000, or 8.9%
for the three months ended March 31, 1999, as compared to the same
period ended in the preceding year. The increase is due principally
to increases of approximately $250,000 in salary and employee benefits
and other noninterest expense of approximately $180,000 while being
partially offset by a decrease in net occupancy expense of
approximately $25,000.
INCOME TAX PROVISION
The effective tax rates reported for the three months ended March 31,
1999 and 1998 were 37.0% and 32.4%, respectively. The primary reason
for the increase in the effective tax rate is that HHC is now
considered a large bank for income tax purposes and the tax reserve
for loan losses will be eliminated by taking it back into income for
tax purposes by using the deferral method in which 10%, 20%, 30% and
40% will be taken in over the next four years respectively.
12
<PAGE>
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Liquidity is achieved through the continual maturing of interest-
earning assets, as well as by investing in short term marketable
securities. Liquidity is also available through deposit growth,
borrowing capacity, loan sales and repayments of principal on loans
and securities.
High levels of liquidity are normally obtained at a net interest cost
due to lower yields on short term, liquid-earning assets and higher
interest expense usually associated with the extension of deposit
maturities. The trade-off of the level of desired liquidity versus
its cost is evaluated in determining the appropriate amount of
liquidity at any one time.
For the three months ended March 31, 1999, cash and cash equivalents
decreased approximately $19,690,000 or 28.6% from December 31, 1998.
Operating activities and investing activities provided cash and cash
equivalents of approximately $1,739,000 and $1,366,000, respectively
while financing activities used cash and cash equivalents of
approximately $22,795,000. Net income of approximately $1,141,000,
provision for loan losses of approximately $75,000, depreciation and
amortization not requiring the use of cash of approximately $707,000,
a loss on disposition of premises of approximately $47,000, a decrease
in accrued interest receivable of approximately $120,000 and an
increase in other liabilities of approximately $71,000 were the
principal sources of net cash provided from operating activities,
while being partially offset principally by an increase in other
assets of approximately $324,000 and deferred tax benefits of
approximately $92,000.
The cash and cash equivalents provided by investing activities were
principally due to proceeds from maturities of investment securities
available-for-sale of approximately $670,000, proceeds from sales of
investment securities available-for-sale of approximately $2,000,000,
loans originated and principal collected on loans of approximately
$7,337,000 and proceeds from disposal of other real estate of
approximately $241,000. The cash and cash equivalents provided were
partially offset by purchases of investment securities available-for-
sale of approximately $8,035,000 and purchases of premises and
equipment of approximately $847,000.
The cash and cash equivalents used by financing activities were due
principally to decreases in federal funds purchased and securities
sold under agreement to repurchase of approximately $15,928,000,
payments of cash dividends of approximately $544,000, net cash used
from sales and maturities of certificates of deposit of approximately
$3,065,000, a net decrease in NOW accounts, demand deposits and
savings accounts of approximately $3,490,000, while being partially
offset by proceeds of approximately $305,000 from issuance of common
stock due to exercise of stock options.
13
<PAGE>
<PAGE>
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 are
being performed on the majority of the Registrant's existing systems.
These costs are being 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.
IMPACT OF THE YEAR 2000 ISSUES
- ------------------------------
Generally, the year 2000 risk involves computer programs and
computer hardware that are not able to perform without interruption
into the year 2000. The arrival of the year 2000 poses a unique
worldwide challenge to the ability of all systems to correctly
recognize such a date change; computer applications that rely on the
date field could fail or create erroneous results. Such erroneous
results could affect interest, payment or due dates or could cause the
temporary inability to process transactions, send invoices or engage
in similar normal business activities. If it is not adequately
addressed by HHC or its suppliers and borrowers, the year 2000 issue
could result in a material adverse impact on HHC's financial condition
and results of operations.
HHC'S STATE OF READINESS
- ------------------------
HHC has been assessing its Year 2000 readiness since 1996. HHC
has formed a committee charged with the task of identifying and
remediating date recognition problems in both Information Technology
("IT") and Non-IT systems. Guided by requirements as well as
examination by banking regulators, the committee has developed a
comprehensive plan to assess HHC's Year 2000 readiness with respect to
both IT and non-IT systems. HHC's inventory of such systems is
complete and HHC believes its IT and non-IT systems are Year 2000
compliant and has not found any mission critical system to be
deficient.
14
<PAGE>
<PAGE>
HHC has completed the remediation or replacement of its systems.
Testing occurred in 1998, and further testing will occur during 1999.
HHC believes that it has identified all major internal business and
operational functions that will be impacted by the year 2000 date
change. HHC's mainframe processing is outsourced to a third party
vendor and the software for year 2000 has been in service since
October 1998. The application testing was competed in October of
1998. The "street testing", i.e., testing for year end, quarter ends,
leap year and future years, was completed on March 31, 1999. Both
subsidiary banks of HHC have been through Phase II examinations by
their respective regulatory authorities without any major concerns
being brought to the attention of their Boards of Directors and or
management.
COST ASSOCIATED WITH YEAR 2000 ISSUES
- -------------------------------------
HHC does not anticipate that its year 2000 related costs will be
material to its financial condition or results of operations. HHC has
estimated that its total costs for the evaluation, remediation and
testing of its IT and non-IT systems in connection with the year 2000
issue will be approximately $745,000. Approximately $645,000 has been
incurred to date and included in the results of operations as an
expense or capitalized and is to be amortized over the respective
useful lives. The remaining $100,000 has been included in the
expenditures budget for 1999.
RISK OF THIRD-PARTY YEAR 2000 ISSUES
- ------------------------------------
The impact of year 2000 non-compliance by outside parties with
whom HHC transacts business cannot be accurately gauged. HHC has
surveyed its major business partners to ascertain their Year 2000
readiness. Although not all are Year 2000 compliant at this date, HHC
has received certain assurances that such third parties will be ready
for the Year 2000 date change by the end of 1999. HHC and its major
third party partners, except for the Federal Reserve check clearing
services division, have completed testing and reviewing of all
critical year 2000 date issues in their systems. The Federal Reserve
has stated that their systems will be compliant by the end of 1999. If
the Federal Reserve does not complete remediation of their system in
time, HHC has an alternate check-clearing partner that has completed
all Year 2000 certification tests.
The most likely worst case scenario for HHC is that there may be
no power to support its systems. This case would be handled in the
same manner in which it handles winter and summer storms that down
power lines. Members of the HHC Year 2000 committees have attended
meetings held by the State of Georgia, and the counties and cities
where the Bank subsidiaries are located. The utilities in its
operating area have stated that any embedded technology that causes
power outages due to Year 2000 will be handled by using the same
emergency procedures used during serious storms and the delay would be
minimal at most.
15
<PAGE>
<PAGE>
CUSTOMER AWARENESS AND BORROWER RISK ASSESSMENT
- -----------------------------------------------
HHC has aggressively worked to educate its depositors and
borrowers regarding the Year 2000 Issues. HHC has hosted community
seminars, developed statement stuffers, and placed detailed brochures
about the Year 2000 issue in all its branch lobby locations. Risk
assessments on borrowers have been completed and HHC has initiated a
Year 2000 assessment procedure during loan review and approval for all
new and renewed loans.
YEAR 2000 CONTINGENCY PLANNING
- ------------------------------
The Registrant's Corporate Disaster Contingency and Recovery Plan
was established in the fourth quarter of 1992. Its present contingency
plan covers both natural and man-made disasters, but was not specific
enough to handle the Year 2000 Event. For Year 2000 purposes all
financial institutions are regulated very closely by departments of
the federal government and operate in uniformity through the Federal
Financial Institutions Examination Council or "FFIEC". The FFIEC has
established specific guidelines for financial institutions to develop
a Year 2000 contingency plan. The Registrant's Board of Directors has
approved the FFIEC guidelines for use in developing our contingency
plan.
The corporate contingency plan called for a multi-phase approach
in the development process. The first phase was to develop the
responsibility and reporting line of command. Each subsidiary
appointed a command post consisting of the bank president, the
highest-ranking manager representing each division within the company,
and the Year 2000 coordinator. The command post approved a line of
business committee that represented the supervisor of each department
within the company and a backup for each one of the committee members.
This individual is referred to as the Line of Business Coordinator or
Rapid Response Team Member. Using the FFIEC guidelines as a checklist
project approach, the contingency plan format was developed and
approved by the command post. The approach and plan was communicated
to the line of business committee through officially documented
committee meetings and individual interviews.
The project approach approved by the command post and the bank's
Board of Directors was for each line of business committee member to
develop a matrix of all duties and functions performed on a daily,
weekly, monthly, quarterly, annually, as needed, or demand basis. The
matrix also reflected all personnel within a department indexed by
which employees were responsible for each duty or function, and all
employees who were cross-trained on each duty as a backup. The line of
business coordinator would develop a matrix of only critical duties or
functions from the master matrix list. The second matrix became the
critical duties and functions list that was used to develop a risk
analysis and contingency report. The risk analysis and contingency
planning report includes the following information:
* The duty or function.
* A risk category group code for each duty or function (i.e., staff
problems, utility outages, software problems).
* The degree of negative impact on business if the risk should occur.
16
<PAGE>
<PAGE>
* Pre-implementation mitigating actions that must be done to prepare
for the event and how to address it afterwards.
* Proposed workaround for each contingency and the description of the
basis for taking the approach for that duty or function.
* Name of person to contact if the situation occurs.
The risk analysis and contingency planning report was used to develop
the content for the actual contingency plan.
The Registrant's Year 2000 Contingency Plan contains the following
information:
Staffing and work schedules: Expected work and vacation
---------------------------
schedules before, during, and after the event are listed along
with a personnel contact list.
Recovery Support Team: A team of well trained and fully
---------------------
empowered employees who will identify and correct any disruption
to the business during and after the event. The employee's name,
address, home phone, alternate phone, cellular phone, and
electronic mail address are listed. The list of employees also
indicates if they are line of business or command post members
and if they live more than 30 miles from the main office.
Assumptions: Lists include certain assumptions that an employee
-----------
may use in developing the contingency plan based on decisions
already made by management. The assumptions are segmented by the
last quarter of 1999, and the periods of December 30, 1999 to
January 10, 1999 and January 11, 1999 to April 15, 1999.
Plans and Priorities: Segmented by the time periods described in
--------------------
the Assumptions section above. This section documents the
communication plan during the three periods covered by the event
plan and identifies the duties and plans to continue normal
operating procedures.
Y-2K Contingency Plan: Documentation of the steps to be taken if
---------------------
an interruption occurs and is listed by category of problem
(i.e., utility outage, software problem).
Employee Location Directions: Detailed navigational directions to
----------------------------
an employee's home for emergency purposes and possible
communication disruptions.
Unresolved Issues: Description of any issues that remain
-----------------
unresolved by the line of business coordinator. This section will
continue to be reviewed by the line of business committee and the
Year 2000 coordinator until all issues are resolved.
The Registrant's corporate contingency plan was completed by
December 31, 1998 and approved by the Board of Directors of the
Registrant and reviewed by the Board of Directors of each of the bank
subsidiaries. The board and management of each bank understand that
these plans will be reviewed and changed periodically due to staff and
17
<PAGE>
<PAGE>
procedure changes. It is the responsibility of each line of business
coordinator to review these plans with each employee in their
departments. The contingency plans will be tested in the fourth
quarter of 1999. This test will be conducted under the scrutiny of our
internal auditors, the Year 2000 coordinator, and an outside
consultant. The line of business or Y2K committee reviews progress on
the contingency plans biweekly and the command post and Board of
Directors review progress once a month.
MARKET RISK MANAGEMENT
- ----------------------
A 100 basis point increase in interest rates would result in a
decrease in interest margin of approximately $381,000 which is a
change of approximately $535,000 from the $154,000 increase in
interest margin that would have occurred at December 31, 1998 if
there had been a 100 basis points increase in interest rates at that
time. The effect of the $381,000 decrease is within the 15%
acceptable variance as prescribed by the Company's asset liability
management policy.
CAPITAL RESOURCES
- -----------------
HHC and its subsidiary banks are subject to a minimum Tier 1
capital to risk-weighted assets ratio of 4% and a total capital (Tier
1 plus Tier 2) to risk-weighted assets ratio of 8%. The Federal
Reserve Board ("Board") has also established an additional capital
adequacy guideline referred to as the Tier 1 leverage ratio that
measures the ratio of Tier 1 Capital to average quarterly assets. The
most highly rated bank holding companies will be required to maintain
a minimum Tier 1 leverage ratio of 3%. The required ratio will be
based on the Board's assessment of the individual bank holding
company's asset quality, earnings performance, interest-rate risk and
liquidity. Bank holding companies experiencing internal growth or
making acquisitions will be expected to maintain strong capital
positions substantially above the minimum supervisory levels without
significant reliance on intangible assets.
18
<PAGE>
<PAGE>
The following tables represent HHC's regulatory capital position at March 31,
1999:
<TABLE>
<CAPTION>
Risk Based Capital Ratios: Amount Ratio
----------- -----------
<S> <C> <C>
Tier 1 Capital $ 52,135 13.60%
Tier 1 Capital minimum requirement $ 15,330 4.00%
-------- -------
Excess $ 36,805 9.60%
======== =======
Total Capital $ 56,968 14.86%
Total Capital minimum requirement $ 30,660 8.00%
-------- -------
Excess $ 26,308 6.86%
======== =======
Risk adjusted assets net of goodwill and
excess loan loss allowance $ 383,253
Leverage Ratio:
Tier 1 Capital to adjusted total assets $ 52,135 10.27%
("Leverage Ratio")
Minimum leverage requirement $ 15,222 3.00%
-------- -------
Excess $ 36,913 7.27%
======== =======
Average total assets, net of goodwill <F1> $507,401
<FN>
<F1> Average total assets, net of goodwill for the nine-months ended
March 31, 1999.
</FN>
</TABLE>
HHC is a legal entity separate and distinct from the Banks. Most of
the revenues of HHC result from dividends paid to it by the Banks.
There are statutory and regulatory requirements applicable to the
payment of dividends by the subsidiary banks as well as by HHC to its
shareholders. HHC paid cash dividends of $544,000 or $.13 per share
on January 19, 1999, which had been declared at December 31, 1998. HHC
declared $549,000 or $.13 per share of common stock on February 17,
1999, which was subsequently paid on April 19, 1999.
19
<PAGE>
<PAGE>
HARDWICK HOLDING COMPANY AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
HHC is not aware of any material pending legal proceedings to which
HHC or any of its subsidiaries is a party or to which any of their
property is subject.
ITEM 2. CHANGES IN SECURITIES -None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES -None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS-
None
ITEM 5. OTHER INFORMATION -None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit 27-Financial Data Schedule (for SEC use only).
(b) Form 8-K -None.
20
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned duly authorized.
CORPORATION HARDWICK HOLDING COMPANY
- ----------- ------------------------
Date: May 12, 1999 By: /s/Michael Robinson
- ------------------ ------------------------------
Michael Robinson
Executive Vice President,
Chief Financial Officer
(Principal Financial Officer
and Duly Authorized Officer)
21
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000787465
<NAME> HARDWICK HOLDING COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 18,454
<INT-BEARING-DEPOSITS> 45
<FED-FUNDS-SOLD> 30,764
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 148,819
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 291,236
<ALLOWANCE> 7,192
<TOTAL-ASSETS> 514,622
<DEPOSITS> 435,981
<SHORT-TERM> 9,480
<LIABILITIES-OTHER> 4,709
<LONG-TERM> 8,148
0
0
<COMMON> 2,113
<OTHER-SE> 54,191
<TOTAL-LIABILITIES-AND-EQUITY> 514,622
<INTEREST-LOAN> 6,587
<INTEREST-INVEST> 2,368
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 8,955
<INTEREST-DEPOSIT> 3,431
<INTEREST-EXPENSE> 3,622
<INTEREST-INCOME-NET> 5,293
<LOAN-LOSSES> 75
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,947
<INCOME-PRETAX> 1,653
<INCOME-PRE-EXTRAORDINARY> 1,653
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,141
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.27
<YIELD-ACTUAL> 7.70
<LOANS-NON> 902
<LOANS-PAST> 31
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,119
<CHARGE-OFFS> 95
<RECOVERIES> 93
<ALLOWANCE-CLOSE> 7,192
<ALLOWANCE-DOMESTIC> 7,192
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
