F-46
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, 1999
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 27, 2000; $30,867,622 based on
1,204,356 shares outstanding times the exchange ratio of .932 shares (1,122,459)
times the closing price of BB&T common stock as of March 27, 2000, of $27.50.
At March 27, 2000, there were issued 4,211,496 shares of Common Stock,
par value $0.50 per share, of which 4,211,496 were outstanding.
<PAGE>
ITEM 1. BUSINESS.
RECENT DEVELOPMENTS
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In November 1999, HHC entered into a definitive agreement to be
acquired by BB&T Corporation ("BB&T") in a stock swap. The final stock exchange
ratio will be determined based on the average closing price of BB&T common stock
during a pricing period prior to closing. The maximum exchange ratio is .932
shares if the average price during the pricing period is $33.50 or below and the
minimum exchange ratio is .901 shares if the average price during the pricing
period is $36.00 or above. The transaction will be accounted for as a pooling of
interests. The merger is expected to close in the second quarter of 2000. HHC
granted BB&T the option to purchased 19.9% of the outstanding shares should HHC
agree to merge with another Company without prior approval from BB&T.
BB&T is based in Winston-Salem, North Carolina and is traded on the New
York Stock Exchange under the ticker symbol BBT. BB&T has made other
acquisitions in the State of Georgia during 1999 and, as a result, BB&T will
have a presence in Southeast and Central Georgia, Metro Atlanta and Northwest
Georgia.
GENERAL
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Hardwick Holding 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
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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-Busch, Inc., ConAgra Broiler Co. and Outboard Marine
Corporation.
DEPOSITS
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The Banks offer a full range of depository accounts and services to
both consumers and businesses. At December 31, 1999, Hardwick's deposit base
totaled approximately $437 million, including approximately $96 million in
noninterest-bearing transaction accounts (22% of total deposits).
Interest-bearing transaction accounts were approximately $142 million (32% of
total deposits) which includes approximately $67 million in money market
accounts, approximately $30 million in savings deposits and approximately $45
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million in NOW accounts. Also included in total deposits was approximately $138
million in time deposits in amounts of less than $100,000 (32% of total
deposits) and approximately $61 million in time deposits of $100,000 or more
(14% of total deposits).
LOANS
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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, 1999, real estate, commercial (including agricultural
loans), consumer and other loans represented approximately 65%, 19%, 7% and 9%
respectively, of Hardwick's total loan portfolio. Real estate loans made by the
Banks include 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
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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 at least annually those credit concentrations over $500,000 and
reporting to the Executive Loan Committee of the Board of Directors any
exceptions that he may find with the rating of the loan, collateral and
documentation deficiencies and any significant changes in credit quality that
may contribute to any possible losses that the Banks may have due to those
changes. The loan review officers have the responsibility of reviewing with the
full Board of each bank on a quarterly basis the reserve for loan losses and
advising the Board as to the adequacy of the allowance level based on both
present and historical account information.
ALLOWANCE FOR LOAN LOSS RESERVES
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The Registrant's allowance for loan losses has five elements; (1)
allowance based on specific loans, (2) allowance based on historical loan loss
experience (3) allowance based on general economic conditions and other factors
peculiar to the markets in which the Registrant does business, (4) allowance
based on tufted carpet industry concentration and (5) allowance based on
concentration of retail consumers being within the carpet industry workforce.
The specific allowance element is based on a continuing analysis of the loan
watch list at each subsidiary bank, a value specified based on whether the loan
is secured or unsecured and the estimated collateral shortfall if the loan is
secured. The allocated portion of the loan loss allowance is determined by using
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the individual bank's loan watch list, which is graded along the same lines as
the regulatory agency grades. A loan is assigned a percentage based upon its
loan grade and that percentage is multiplied by the outstanding balance to
arrive at the allocated portion of the allowance for each loan. The sum of all
of these specified allocations becomes the allocated portion of the loan loss
allowance. The balance of the loan loss allowance is the unallocated portion.
The historical loan loss element at Northwest Bank is determined through
statistical analysis using a loss migration analysis that examines loss
experience, internal gradings that were initially assigned to charged off loans
and how charged off loans moved through the grading path. The historical loan
loss element at Hardwick Bank is calculated based on a 5 year weighted average
calculation (25% to each of the previous two years, 20% to the third and fourth
years and 10% to the fifth year). The loss factors applied to the graded loans
and the percentages used for purposes of developing a general allowance are the
loss factors and percentages applied by the regulatory authorities that examine
each of the subsidiary banks of the Registrant. These factors are based upon
loans being graded OAEM (other assets especially mentioned), Substandard and
Doubtful. Loans for which loss gradings are applied by any regulatory authority
are immediately charged off by the individual banks. Generally, the values
assigned to those ratings of OAEM, Substandard and Doubtful are 2%, 10% and 50%,
respectively. Other values may be assigned if there is reason to believe that a
particular loan should warrant different values for collateral, documentation or
the financial condition of the repayment source.
The general economic conditions element is determined at the individual
bank subsidiary and is based upon the knowledge of the individual market by
management of each bank. The primary industry in the trade area of the
Registrant is the tufted carpet industry. The economic performance of this
industry is directly related to the number of housing starts in the United
States and abroad. The understanding of this business by the management of the
subsidiary banks is critical to the results of operations at each individual
bank and ultimately on a consolidated basis.
Over 40% of the work force in the Registrant's market area is directly
employed by the tufted carpet industry and an undetermined amount of the work
force works for the satellite business around the tufted carpet industry. A
concentrated workforce allowance is applied to the overall loan portfolio.
All loans $50,000 or more at Northwest Bank are individually reviewed,
while all unsecured consumer loans $5,000 or more, all secured consumer loans
$25,000 or more and all commercial loan concentrations $200,000 or more are
individually reviewed at Hardwick Bank. There are no loans reviewed as groups
for loan loss quantification purposes at either bank.
ASSET/LIABILITY MANAGEMENT
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The Board of Directors 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 assuring liquidity
for funding requirements and effectively controlling interest rate risk.
INVESTMENT PORTFOLIO
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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.
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EMPLOYEES
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Hardwick employs 212 persons on a full-time basis and 21 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
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The banking business is highly competitive. Hardwick competes with 21
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
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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 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 regularly examined by the Office
of Comptroller of the Currency (the "OCC"). The OCC regulates or monitors all
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areas of the Northwest Bank's operations and activities, including allowance for
loan losses, 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
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 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%) and (2) minimum Tier One Capital (as defined)
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 lesser 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%,
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a Tier One risk-based ratio of at least 6% and a leverage ratio of at least 5%;
(2) an "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% for institutions with a rating of one under the regulatory
CAMELS that are not anticipating or experiencing significant growth and have
well-diversified risk, as defined.); (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 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, 1999.
Set forth below are pertinent capital ratios for Hardwick, Hardwick
Bank and Northwest Bank as of December 31, 1999:
<TABLE>
<CAPTION>
Minimum Capital Requirements Hardwick Northwest
For Adequately Capitalized Banks Hardwick Bank Bank
-------------------------------- -------- ---- ----
<S> <C> <C> <C>
Tier 1 Capital to Risk-based 13.03% 13.12% <F1> 9.22% <F1>
Assets: 4.00%
Total Capital to Risk-based 14.29% 14.38% <F2> 10.48% <F2>
Assets: 8.00%
Leverage Ratio (Tier 1 Capital to
Total Quarterly Average Assets): 3.00% 9.98% 9.13% <F3> 7.24% <F3>
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<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
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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);
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(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
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.
At December 31, 1999, retained earnings available from the
Banks to pay dividends totaled approximately $5.4 million. For 1999, Hardwick's
cash dividend declared to stockholders was 72% of net income.
MONETARY POLICY
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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.
ITEM 2. PROPERTIES.
Hardwick Bank's main office, is located at Hardwick Square in Dalton,
Georgia 30720, and is owned by the Bank and consists of approximately 60,000
square feet of usable office space. Hardwick Bank has four branch offices, all
of which are owned, and one freestanding automated teller machine, which is on
leased premises. The Cleveland Road branch is located at 1440 Cleveland Highway,
Dalton, Georgia 30720, 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 30721, 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 30720, 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 30755, and
contains approximately 3,700 square feet of office space as well as an automated
teller machine. Hardwick Bank's freestanding automated teller machine is located
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at 1807 West Walnut Avenue, Dalton, Georgia 30720, on leased premises in the
Dalton Shopping Center. The lease expires on July 1, 2004.
Northwest Bank's main banking office, is located at 215 North Wall
Street, Calhoun, Georgia 30701, and is owned by the Bank 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 personal financial 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 30701, 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 30120, 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 the HWY 41 Branch
located at 1320 Joe Frank Harris Pkwy., Cartersville, Georgia 30120, 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.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
STOCK
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There is no established public trading market for the Registrant's
common stock.
The Registrant is aware of three transactions during 1999, 448 shares
at $21.00 per share, 1,900 shares at $32.00 per share and 825 shares at $32.00
per share. The transactions were private sales between individuals. As of March
27, 2000, the Registrant is not aware of any transactions in 2000.
The Registrant is aware of three transactions during 1998 at $21.00 per
share for blocks of 1,000; 76; and 50 shares. These transactions were private
sales between individuals.
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.
There have been no shares of treasury stock purchased by the Registrant
during 1999. There were 353 holders of record of the Registrant's common stock
as of December 31, 1999 and March 27, 2000.
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DIVIDENDS
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The Registrant paid quarterly cash dividends of $0.13 per share on
January 19, 1999 and April 19, 1999 which had been declared as of December 31,
1998 and March 31, 1999, respectively. The Registrant paid cash dividends of
$0.13 per share on July 19, 1999 ,which had been declared as of June 30, 1999.
The Registrant paid cash dividends of $0.17 on October 19, 1999, which had been
declared as of September 30, 1999. The Registrant declared the dividend for the
first quarter of 2000 at $0.17 per share for shareholders of record as of
December 31, 1999, which was paid on January 19, 2000. Total cash dividends
declared in 1999 were $0.60 per share. The Registrant intends to pay quarterly
cash dividends in 2000. 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,
--------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET
Total assets $ 521,312 536,920 492,892 452,061 444,817
Loans, net $ 319,446 298,478 310,159 271,470 239,189
Investment securities $ 148,418 144,169 119,431 120,166 135,306
Federal funds sold $ 2,370 43,648 12,982 7,000 11,000
Deposits $ 436,829 442,536 409,785 393,940 389,951
FHLB Advances $ 11,081 8,156 8,231 306 381
Federal funds purchased $ 5,000 0 0 2,600 0
Securities sold under agreements to
repurchase $ 10,958 25,209 19,339 3,327 3,536
Note payable $ 0 0 0 0 250
Stockholders' equity $ 53,073 56,117 50,603 46,977 46,830
OPERATING DATA
Interest income $ 36,707 37,268 35,196 32,273 31,526
Interest expense $ 14,594 15,838 14,663 13,169 13,062
Net interest income $ 22,113 21,430 20,533 19,104 18,464
Provision for loan losses $ 0 500 800 396 0
Net interest income after
provision for loan losses $ 22,113 20,930 19,733 18,708 18,464
Noninterest income $ 4,061 4,925 6,822 4,082 4,074
Noninterest expense $ 21,273 18,362 18,564 17,540 18,311
Income tax expense $ 1,449 2,406 2,765 1,680 1,004
Net income $ 3,452 5,087 5,226 3,570 3,223
Basic net income per share $ .83 1.27 1.32 .89 .79
Diluted net income per share $ .83 1.26 1.29 .87 .79
Dividends paid per share $ .56 .50 .36 .44 .22
SELECTED FINANCIAL RATIOS
AND OTHER DATA
Return on average assets .67% 1.03% 1.13% 0.82% 0.75%
Return on average equity 6.21% 9.55% 10.55% 7.66% 7.14%
Noninterest expense to average assets 4.11% 3.70% 4.02% 4.04% 4.28%
Equity to assets 10.18% 10.45% 10.27% 10.39% 10.53%
</TABLE>
-10-
<PAGE>
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
RESULTS OF OPERATIONS
- ---------------------
NET INCOME
- ----------
Hardwick reported net income of $3,452,000 for 1999 compared with net
income in 1998 of $5,087,000. The decrease in net income is due primarily to an
increase in noninterest expense and a decrease in noninterest income.
Noninterest expense increased by approximately $2,911,000, or 15.9% while
noninterest income decreased by approximately $864,000, or 17.5%. The increase
in noninterest expense was due principally to increases in salary and employee
benefits of approximately $1,548,000, including additional cost of the health
care benefits of approximately $330,000, pay to stay bonuses totaling
approximately $100,000 and normal salary increases. Increased competition and
the chartering and opening of new institutions within the Registrant's market
area have increased the Registrant's employment costs. The decrease in
noninterest income was principally due to net losses in excess of net gains
realized from the sale of investment securities of approximately $1,236,000.
Contributing to net income was an increase in net interest income after
provision for loan losses of approximately $1,183,000, or 5.7%. Hardwick
reported a decrease in income tax provision for 1999 of approximately $957,000
or 39.8% due to the percentage of taxable income to total income declining
during 1999 compared with 1998.
During 1999, the Registrant did not record a provision for loan losses
as compared to $500,000 in 1998. Making no provision was a result of a net
charge-offs of approximately $21,000 which represents .01% of average net loans
outstanding for 1999 as compared with approximately $365,000 or .12% for 1998.
The majority of the net chargeoffs came from consumer loans as a result of a
continued level of bankruptcies last year throughout the Registrant's market
area. Approximately 40% of the workforce in the Registrant's market area is
employed in the tufted carpet industry. In recent years the larger, vertically
integrated manufacturers have increased their market share, thereby negatively
affecting the smaller independent tufters and dyeing and finishing operators,
which make up a significant part of the Registrant's business. Downturns 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 2.17%, 2.33% and 2.20% at December 31, 1999, 1998 and 1997,
respectively. Loan loss reserves at December 31, 1999, 1998 and 1997 were 5.6,
4.3 and 6.9, respectively, times nonperforming assets.
At December 31, 1999 nonperforming assets were approximately
$1,259,000. Of the total nonperforming assets, approximately $1,036,000 is
carried as nonaccrual loans, approximately $140,000 is in loans 90 days past due
and still accruing, and approximately $83,000 is carried in other real estate
owned.
Hardwick reported net income of $5,087,000 for 1998 compared with net
income in 1997 of $5,226,000. The decrease in net income is due primarily to a
decrease in service charges on deposit accounts and a settlement with a vendor
in 1997. Service charges on deposit accounts decreased approximately $122,000 or
4.5% compared with service charges on deposit accounts for 1997. The service
charge decreases are due principally to the balances being held in accounts high
enough not to require that the banks charge them the monthly fees.
Noninterest-bearing accounts increased approximately $15,123,000 from December
31, 1997 to December 31, 1998. The Registrant received a settlement from a
vendor during 1997 of approximately $2,125,000 net of fees. Noninterest expense
decreased by approximately $202,000 or 1.1% less than noninterest expense for
1997. The decrease in noninterest expense was principally due to a decrease in
salary and employee benefits while being partially offset by an increase in data
processing expense. Hardwick reported a decrease in income tax provision for
-11-
<PAGE>
1998 of approximately $359,000 or 13.0% due to the percentage of taxable income
to total income declining during 1998 compared with 1997.
NET INTEREST INCOME (TAXABLE EQUIVALENT BASIS)
- ----------------------------------------------
In 1999 Hardwick's net interest income was $22,741,000 on average
earning assets of $470,763,000, an increase of approximately $837,000 compared
with the net interest income of $21,904,000 on average earning assets of
$449,720,,000 in the prior year. The net interest margin for 1999 was 4.8%
compared with 4.9% for 1998, reflecting a decrease of approximately 10 basis
points. The decrease was primarily attributable to the decrease in rates earned
on loans due to the continued competitive pressures within the market area of
the Registrant.
In 1998 Hardwick's net interest income was $21,904,000 on average
earning assets of $449,720,000, an increase of approximately $881,000 compared
with the net interest income of $21,023,000 on average earning assets of
$414,950,000 in the prior year. The net interest margin for 1998 was 4.9%
compared with 5.1% for 1997, reflecting a decrease of approximately 20 basis
points. The decrease was primarily attributable to the decrease in rates earned
on loans due to the competitive pressures within the market area of the
Registrant.
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 4.7%
during 1999 or approximately $21,043,000. The average yield on interest earning
assets was 7.9%. This represents a decrease of approximately 50 basis points
when compared with the average yield for 1998 of 8.4%.
During 1999, average interest-bearing liabilities increased
approximately 3.8% or approximately $13,356,000 due to increases in all of the
interest-bearing liability categories except for time deposits and capital lease
obligations, both of which had a decrease. The average cost of interest-bearing
liabilities was 4.0% during 1999 when compared with 4.5% during 1998, or a
decrease of 50 basis points. Average noninterest bearing deposits have increased
by approximately $6,238,000 or 7.0% from 1998 to 1999.
During 1998, average interest-bearing liabilities increased
approximately 7.4% or approximately $24,177,000 due to increases in all of the
interest-bearing liability categories except for notes payable and capital lease
obligations, both of which had a decrease. The average cost of interest-bearing
liabilities remained unchanged at 4.5% when compared with 1997. Average
noninterest bearing deposits have increased by approximately $5,260,000 or 6.3%
from 1997 to 1998.
NONINTEREST INCOME
- ------------------
Noninterest income decreased approximately $864,000 or 17.5% during
1999, due primarily to a change in net losses realized on the sale of investment
securities of approximately $1,236,000, while service charges on deposit
accounts, trust department income and other noninterest income increased
approximately $68,000, $75,000 and $229,000, respectively. The increase in other
income was due principally to an increase in charges for credit card merchant
accounts.
Noninterest income decreased approximately $1,897,000 or 27.8% during
1998, due primarily to a decrease in service charges on deposit accounts of
approximately $122,000 and a decrease due to a settlement with a vendor in 1997
of approximately $2,125,000. Net gains realized on the sale of investment
securities increased approximately $118,000 and trust income increased
approximately $37,000. Credit life commissions increased by approximately
$11,000, other fees increased by approximately $37,000 while other miscellaneous
income increased by approximately $147,000.
-12-
<PAGE>
NONINTEREST EXPENSE
- -------------------
Noninterest expense for 1999 was $21,273,000 compared to $18,362,000,
an increase of approximately $2,911,000 or 15.9% more than noninterest expense
for 1998. The increase was due to increases in all the noninterest expense
categories except for office supplies and printing which did not change and net
occupancy expense which decreased by approximately $48,000. Salaries and
employee benefits increased approximately $1,548,000. The increase in salary and
employee benefits was due principally to an increase in the employee health care
benefits of approximately $330,000 and to salary increases and pay to stay
bonuses.. The salary increases and pay to stay bonuses were caused principally
by the increased competition in the labor force in the Registrant's market area.
This increased competition is due to the chartering and opening of three new
banks and two, which have been chartered but not yet opened. Of the 18.0%
increase, approximately 5.5% is attributable to annual salary increases while
approximately 2.1% is due to additional employee health care costs and 10.4% is
due to competition in the labor force.
Data processing expense increased by approximately $48,000,
professional fees increased by approximately $140,000, FDIC insurance premiums
increased by approximately $10,000 and other noninterest expense increased by
approximately $1,213,000. The increase in other noninterest expense is due
primarily to an increase in charitable contributions of approximately
$1,030,000, credit card fees of approximately $137,000, change in loss on
disposal of premises and equipment of approximately $50,000, postage of
approximately $30,000, while being offset by the net decrease of other
miscellaneous expenses of approximately $34,000.
Noninterest expense for 1998 was $18,362,000 compared to $18,564,000
for 1997, a decrease of 1.1% or approximately $202,000 less than noninterest
expense for 1997. The decrease in noninterest expense was principally due to a
decrease in salary and employee benefits, professional fees, and FDIC fees
partially offset by increases in data processing cost, net occupancy expense,
office supplies expense and other noninterest expense. Salary and employee
benefits decreased approximately $386,000; a 4.3% decrease compared with 1997
salary and employee benefits. Offsetting the decrease in salary and employee
benefits, the Company incurred approximately $210,000 for an employee personal
computer program in 1997. The Company's group medical costs were down
approximately $360,000; pension and profit sharing was down approximately
$7,000; while the overall salary increases for the year were approximately
$191,000 or approximately 3.1% more than 1997.
During 1998 professional fees decreased approximately $44,000 and FDIC
fees decreased approximately $5,000. Net occupancy expense increased
approximately $24,000; data processing cost increased approximately $152,000;
office supplies and printing increased approximately $25,000 and other
noninterest expense increased approximately $32,000 when compared with 1997. Net
occupancy expense increased due to additions to the property accounts while data
processing costs increased due additional cost of providing credit cards.
Net noninterest expense (defined as noninterest expense less
noninterest income, as a percentage of average assets) was 3.3%, 2.7% and 2.5%
for 1999, 1998 and 1997, respectively.
INCOME TAXES
- ------------
Hardwick recorded an income tax provision of $1,449,000, $2,406,000,
and $2,765,000, respectively, for 1999, 1998, 1997. The provision as a
percentage of income before taxes reflects effective rates of 29.6%, 32.1%, and
34.6%, respectively, for the years 1999, 1998, and 1997. Note 7 to Hardwick's
consolidated financial statements presents additional information.
-13-
<PAGE>
INVESTMENT SECURITIES AVAILABLE-FOR-SALE
- ----------------------------------------
Investment securities available-for-sale increased approximately
$4,249,000 during 1999 from $144,169,000, at December 31, 1998, to $148,418,000,
at December 31, 1999. At December 31, 1999 there was a net unrealized loss net
of taxes of approximately $3,244,000 on securities available-for-sale compared
with a net unrealized gain net of taxes of approximately $1,104,000 at December
31, 1998. The increase in the securities portfolio was funded from the decrease
in federal funds sold. 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, 1999,
increased approximately $20,968,000, or 7.0% to $319,446,000 compared with
$298,478,000 at December 31, 1998. Average net loans represented 64.1% of total
average earning assets during 1999 while net loans at December 31, 1999
represented 61.3% of total assets.
Net loans during 1998 decreased by approximately $11,681,000 or 3.8%
when compared with net loans at December 31, 1997. Average net loans represented
67.2% of total average earning assets during 1998 while net loans at December
31, 1998 represented 55.6% of total assets.
At December 31, 1999, approximately 64.6% 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 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 70% to 50% 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.
-14-
<PAGE>
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 $1,259,000 at
December 31,1999, down approximately $381,000 from 1998, a decrease of
approximately 23.2%. Nonperforming loans decreased by approximately $223,000 or
15.9% during 1999. There was approximately $83,000 in other real estate at
December 31, 1999, down 65.6% compared to December 31, 1998. Management believes
that the nonperforming assets have been properly identified and that the
necessary allowance to cover potential losses are in place. Management believes
that the reduction in the nonperforming assets during 1999 gives rise to no
provision for loan losses being taken during 1999.
Management believes that the loan loss provision taken in 1998 was
appropriate given the increase in nonperforming assets for the year as stated
above. 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 1998 was
approximately $500,000 and approximately $800,000 in 1997.
The ratio of nonperforming assets to total loans and other real estate
was .39% and .54% at December 31,1999 and 1998, respectively, which is a
decrease of approximately 15 basis points.
At December 31,1999, the allowance for loan losses was $7,098,000 or
2.2% of net outstanding loans, as compared to $7,119,000 or 2.3% of net
outstanding loans at December 31, 1998. Management believes the allowance for
loan losses is adequate to provide for probable loss inherent in the portfolio
and continues to review the impact of prevailing and expected economic and
business conditions in order to maintain an allowance considered adequate in
relation to risk of loss and loans outstanding.
While management uses available information to recognize losses on
loans, future unexpected additions to or reductions in the allowance may become
necessary based on changes in economic conditions. Additionally, regulatory
agencies, as part of their normal examination process, periodically review the
Banks' allowance for loan losses. Such agencies may require the Banks to
recognize additions to the allowance 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
$6,662,000 or 2.0% during 1999 compared with 1998. Average time deposits
decreased $6,159,000 or 3.0% during 1999. Time deposits in denominations of
-15-
<PAGE>
$100,000 or more represented 13.9% of total deposits at December 31,1999
compared to 12.8% at December 31,1998. 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, increased
by approximately $12,851,000 or 9.9% in 1999 from 1998. Average noninterest
bearing demand deposit accounts increased approximately $6,238,000. The
increases in NOW, money market and savings deposits are partially attributable
to shifts from time deposits into those interest bearing transaction accounts.
Hardwick's average interest bearing deposits increased approximately
$18,415,000 or 5.8% during 1998 compared with 1997. Average time deposits
increased $11,278,000 or 5.8% during 1998. Time deposits in denominations of
$100,000 or more represented 12.8% of total deposits at December 31,1998
compared to 15.0% at December 31,1997. 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.
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 to two hundred basis points above the minimum
capital levels without significant reliance on intangible assets.
-16-
<PAGE>
The following tables represent Hardwick's regulatory capital position
at December 31,1999:
<TABLE>
<CAPTION>
RISK-BASED CAPITAL RATIOS
-------------------------
AS OF DECEMBER 31, 1999
-----------------------
AMOUNT RATIO
------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Tier 1 Capital $ 49,673 13.03%
Tier 1 Capital minimum requirement 15,244 4.00%
Excess 34,429 9.03%
Total Capital 54,466 14.29%
Total Capital minimum requirement 30,488 8.00%
Excess 23,978 6.29%
Risk adjusted assets net of goodwill
and allowance for loan loss as
adjusted $ 381,104
LEVERAGE RATIO
--------------
AS OF DECEMBER 31,1999
----------------------
AMOUNT RATIO
------ -----
Tier 1 Capital to adjusted total assets
(Leverage Ratio) $ 49,673 9.98%
Minimum leverage requirement 14,921 3.00%
Excess 34,752 6.98%
Average quarterly total assets, net of
goodwill <F1> $ 497,490
<FN>
<F1> Average total assets, net of goodwill for the quarter ended December 31,
1999.
</FN>
</TABLE>
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 31,1999, cash equivalents decreased approximately
$43,038,000 from December 31, 1998. Operating activities provided cash of
approximately $5,303,000 while investing and financing activities used cash of
approximately $34,072,000 and $14,269,000, respectively. Operating activities
provided cash principally from net income of approximately $3,452,000 adjusted
for non cash chares as depreciation and amortization of approximately
$2,084,000, a loss on the disposal of premises and equipment of approximately
$58,000, a loss on sale of securities of approximately $1,047,000, a loss on
sale of other real estate of approximately $40,000 and a decrease in other
assets of approximately $202,000, while being partially offset by an increse in
deferred tax benefits of approximately $240,000, and increase in accrued
interest receivable of approximately $864,000 and a decrease in other
-17-
<PAGE>
liabilities of approximately $476,000. Funds used in investing activities
included approximately $85,921,000 in purchases of investment securities
available-for-sale, net cash flows from loans originated and principal collected
on loans of approximately $21,057,000 and purchases of premises and equipment of
approximately $1,404,000. Funds provided in investing activities were
attributable to proceeds from maturities of investment securities
available-for-sale of approximately $25,101,000, proceeds from sales of
investment securities available-for-sale of approximately $48,876,000, proceeds
from sale of other real estate of approximately $281,000 and proceeds from
disposal of premises and equipment of approximately $52,000.
Significant financing activities using cash included a net decrease in
demand deposits, NOW accounts and savings accounts of approximately $5,996,000,
a net decrease in securities sold under agreements to repurchase of
approximately $14,251,000, principal payments on capital lease obligations of
approximately $225,000 and cash dividends paid on common stock of approximately
$2,315,000. Cash used in financing activities was partially offset by net cash
flows from sales of certificates of deposit of approximately $289,000, a net
increase in federal funds purchased of approximately $5,000,000, an increase in
proceeds from FHLB advances of approximately $2,925,000 and proceeds from
exercise of stock options of approximately $304,000
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, 1999, (dollars in thousands):
<TABLE>
<CAPTION>
One Over
Year Five Years
Within Through and Non-
One Five Rate
Year Years Sensitive Total
---- ----- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Total loans $ 105,877 156,428 64,451 326,756
Taxable investment securities 11,342 68,677 27,548 107,567
Nontaxable investment securities 1,990 13,780 25,081 40,851
Federal funds sold and deposits in banks 2,370 - - 2,370
----------- ---------- ---------- ----------
Total earning assets 121,579 238,885 117,080 477,544
----------- ---------- ---------- ----------
INTEREST-BEARING LIABILITIES:
Transaction accounts (a) 111,535 - - 111,535
Savings deposits 30,021 - - 30,021
Time deposits 167,255 31,987 - 199,242
Federal funds purchased and securities sold under
agreements to repurchase 15,958 - - 15,958
FHLB advances - 11,081 - 11,081
Capital lease obligations 39 - - 39
----------- ---------- ---------- ----------
Total interest-bearing liabilities 324,808 43,068 - 367,876
Noninterest-bearing funds - - 96,031 96,031
----------- ---------- ---------- ----------
Total interest-bearing and noninterest-bearing funds 324,808 43,068 96,031 463,907
----------- ---------- ---------- ----------
GAP SUMMARY
Periodic net earning assets $ (203,229) 195,817 21,049 13,637
=========== ========== ========== ==========
Ratio of earning assets to interest-bearing liabilities
and noninterest-bearing funds 37.4% 554.7% 121.9% 102.9%
=========== ========== ========== ==========
Cumulative net earning assets $ (203,229) (7,412) 13,637 13,637
=========== ========== ========== ==========
Cumulative ratio of earning assets to interest-
bearing liabilities and noninterest-bearing funds 37.4% 98.0% 102.9% 102.9%
=========== ========== ========== ==========
(a) Includes NOW and money market accounts.
</TABLE>
-18-
<PAGE>
At December 31,1999, 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 1999, Hardwick's capital expenditures approximated $1,404,000.
Included were bank buildings and improvements of approximately $290,000, land
improvements of approximately $271,000, office furniture, fixtures and office
equipment of approximately $482,000, computer equipment for the continuing
upgrade of the local and wide area networks of approximately $211,000 and
automobiles of approximately $150,000. The Registrant is projecting
approximately $100,000 in capital expenditures in 2000, comprised of computer
equipment.
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 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 dividend payout relative to the level of
projected net income
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. This statement could
increase volatility in earnings and other comprehensive income. In June, 1999,
the FASB issued SFAS No. 137, "Accounting ro Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB No. 133." This statement
delays the effective date of SFAS No. 133 for one year, to fiscal years
beginning after June 15, 2000. The Company does not hold or engage in
transactions using derivative financial instruments and does not believe that
adoption of the standard will have a material impact on either its balance sheet
or results of operations.
YEAR 2000
- ---------
The Registrant and its subsidiaries addressed the Year 2000 challenges
in a prompt and responsible manner. The Registrant dedicated resources to ensure
that systems and services would not be compromised or otherwise negatively
impacted by the century date change. The Registrant also put in place processes
to monitor liquidity, fiduciary and credit quality issues related to the Year
2000. The Registrant successfully completed its transition to the Year 2000 with
no impact to the Company's results of operations or financial condition other
than the cost of the project. The Registrant is not aware of any significant
third party relationships which were negatively impacted by their lack of Year
2000 readiness; however, the Registrant continues to monitor its third party
relationships for such problems.
-19-
<PAGE>
The total cost of the Year 2000 project since its inception was
approximately $813,000. Approximately $562,000 of equipment has been capitalized
and approximately $251,000 has been expensed to date. Approximately $5,000 is
anticipated to be expensed in the first quarter of 2000 due to follow up
procedures for the project. The total cost of the project did not materially
differ from original estimates. The expenses did not have a material effect on
the operations or financial condition of the Registrant. To make resources
available for the Year 2000 project, certain enhancements in the processing
systems of the Registrant were deferred; however, the Registrant does not
anticipate that the deferral of those enhancements will have a material negative
impact on future results of operations or financial condition.
SELECTED STATISTICAL INFORMATION
AVERAGE BALANCE SHEETS, INTEREST RATES
AND INTEREST DIFFERENTIALS
Years Ended December 31,
------------------------
(Dollars in thousands)
1999 1998 1997
---- ---- ----
ASSETS
Interest-earning assets:
Loans, net (a) $301,779 302,205 285,444
Taxable investment securities 114,000 102,129 95,098
Non-taxable investment securities 40,305 28,650 21,576
Federal funds sold and deposits in banks 14,679 16,736 12,832
-------- -------- --------
Total interest-earning assets 470,763 449,720 414,950
Cash and due from banks 21,220 21,894 22,168
Premises and equipment 14,774 14,175 14,574
Other assets 10,268 9,948 10,492
-------- -------- --------
Total assets $517,025 495,737 462,184
======== ======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Transaction accounts (b) $111,940 100,398 93,698
Savings deposits 30,890 29,581 29,144
Time deposits 198,944 205,103 193,825
Federal funds purchased and securities
sold under agreements to repurchase 11,388 5,147 4,442
FHLB advances 8,835 8,196 2,130
Note payable 0 0 808
Capital lease obligation 152 368 569
-------- -------- --------
Total interest-bearing liabilities 362,149 348,793 324,616
Noninterest-bearing demand deposits 95,454 89,216 83,956
Other liabilities 3,838 4,440 4,093
-------- -------- --------
Total liabilities 461,441 442,449 412,665
Stockholders' equity 55,584 53,288 49,519
-------- -------- --------
Total liabilities and
stockholders' equity $517,025 495,737 462,184
======== ======== ========
(a) Average loans are shown net of unearned discounts and deferred loans fees
and the allowance for loan losses. Nonperforming loans, including
nonaccrual loans, are included, but not material.
(b) Includes money market deposit accounts.
-20-
<PAGE>
AVERAGE BALANCE SHEETS, INTEREST RATES
AND INTEREST DIFFERENTIALS (continued)
<TABLE>
<CAPTION>
(Dollars in thousands) Years ended December 31,
------------------------
1999 1998 1997
---- ---- ----
Interest earned on:
<S> <C> <C> <C>
Loans, net (a) (b) $ 27,094 28,764 27,671
Taxable investment securities 7,374 6,503 5,820
Nontaxable investment securities (a) 2,172 1,605 1,502
Federal funds sold and bank deposits 695 870 693
---------- --------- ---------
Total interest income 37,335 37,742 35,686
---------- --------- ---------
Interest paid on:
Transaction accounts (c) 2,531 2,502 2,312
Savings deposits 651 741 740
Time deposits 10,426 11,911 11,180
Federal funds purchased and
securities sold under agreements to
repurchase 491 224 205
FHLB advances 481 430 126
Note payable 0 0 55
Capital lease obligation 14 30 45
---------- --------- ---------
Total interest expense 14,594 15,838 14,663
---------- --------- ---------
Net interest income $ 22,741 21,904 21,023
========== ========= =========
Average percentage earned on:
Loans, net (a)(b) 9.0% 9.5% 9.7%
Taxable investment securities 6.5% 6.4% 6.1%
Nontaxable investment securities (a) 5.4% 5.6% 7.0%
Federal funds sold and bank deposits 4.7% 5.2% 5.4%
Total interest income 7.9% 8.4% 8.6%
Average percentage paid on:
Transaction accounts(c) 2.3% 2.5% 2.5%
Savings deposits 2.1% 2.5% 2.5%
Time deposits 5.2% 5.8% 5.8%
Federal funds purchased and
securities sold under agreements to
repurchase 4.3% 4.4% 4.6%
FHLB advances 5.4% 5.2% 5.9%
Note payable - - 6.8%
Capital lease obligation 9.2% 8.2% 7.9%
Total interest expense 4.0% 4.5% 4.5%
Net interest margin 4.8% 4.9% 5.1%
</TABLE>
(a) Reflects taxable equivalent adjustments using a tax rate of 34% in
adjusting interest on nontaxable loans and securities to a fully
taxable basis.
(b) Interest income includes loan fees as follows (in thousands):
1999-$965; 1998-$1,234; 1997-$1,320.
(c) Includes money market accounts.
-21-
<PAGE>
AVERAGE BALANCE SHEETS, INTEREST RATES,
AND INTEREST DIFFERENTIALS (continued)
<TABLE>
<CAPTION>
Increase Due to
-------- Changes in
(Dollars in thousands) 1999 1998 (Decrease) Volume Rate (a)
---- ---- ---------- ------ ---------
<S> <C> <C> <C> <C> <C>
Interest earned on:
Loans, net (b) $ 27,094 28,764 (1,670) (40) (1,630)
Taxable investment securities 7,374 6,503 871 760 111
Nontaxable investment securities (b) 2,172 1,605 567 653 (86)
Federal funds sold 695 870 (175) (107) (68)
--------- ---------- -------- ------- ----------
Total interest income 37,335 37,742 (407) 1,266 (1,673)
--------- ---------- -------- ------- ----------
Interest paid on:
Transaction accounts (c) 2,531 2,502 29 289 (260)
Savings deposits 651 741 (90) 33 (123)
Time deposits 10,426 11,911 (1,485) (357) (1,128)
Federal funds purchased and
securities sold under
agreements to repurchase 491 224 267 268 (1)
Other borrowed funds 481 430 51 33 18
Note payable to bank - - - - -
Capital lease obligation 14 30 (16) (17) 1
--------- ---------- -------- ------- ----------
Total interest expense 14,594 15,838 (1,244) 249 (1,493)
--------- ---------- -------- ------- ----------
Net interest income $ 22,741 21,904 837 1,017 (180)
========= ========== ======== ======= ==========
Increase Due to
-------- Changes in
(Dollars in thousands) 1998 1997 (Decrease) Volume Rate (a)
---- ---- ---------- ------ --------
Interest earned on:
Loans, net (b) $ 28,764 27,671 1,093 977 116
Taxable investment securities 6,503 5,820 683 42 641
Nontaxable investment securities(b) 1,605 1,502 103 7 96
Federal funds sold 870 693 177 10 167
--------- ---------- -------- -------- ----------
Total interest income 37,742 35,686 2,056 1,036 1,020
--------- ---------- -------- -------- ----------
Interest paid on:
Transaction accounts (c) 2,502 2,312 190 5 185
Savings deposits 741 740 1 - 1
Time deposits 11,911 11,180 731 42 689
Federal funds purchased and
securities sold under
agreements to repurchase 224 205 19 1 18
Other borrowed funds 430 126 304 18 286
Note payable to bank 0 55 (55) (55) -
Capital lease obligation 30 45 (15) (1) (14)
--------- ---------- -------- -------- ----------
Total interest expense 15,838 14,663 1,175 10 1,165
--------- ---------- -------- -------- ----------
Net interest income $ 21,904 21,023 881 1,026 (145)
========= ========== ======== ======== ==========
</TABLE>
(a) The change in interest due to both rate and volume has been allocated to the
rate component.
(b) Reflects taxable equivalent adjustments using a tax rate of 34% in adjusting
interest on non-taxable loans and securities to a fully taxable basis.
(c) Includes money market deposit accounts.
-22-
<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, 1999
-----------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
US treasury & government agencies $ 108,707 16 (3,362) $ 105,361
Equity securities 2,206 0 0 2,206
State and municipal obligations 42,420 174 (1,743) 40,851
--------- --------- --------- ---------
Total investment securities $ 153,333 190 (5,105) $ 148,418
========= ========= ========= =========
December 31, 1998 December 31, 1997
----------------- -----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
US treasury & government agencies $ 74,997 75,635 $ 72,776 72,871
Mortgage backed and other debt and equity securities 34,592 34,605 23,345 23,324
State and municipal obligations 32,907 33,929 22,416 23,236
--------- --------- --------- ---------
Total investment securities $ 142,496 144,169 $ 118,537 119,431
========= ========= ========= =========
</TABLE>
The following table shows the contractual maturities of investment
securities, based on their estimated fair value, at December 31, 1999 (in
thousands) and the weighted average yields of securities. The yields on state
and municipal securities are computed on a taxable equivalent basis using the
statutory federal income tax rate of 34%.
<TABLE>
<CAPTION>
U.S.
Treasury & State
Government and
Agencies Municipal Total
-------- --------- -----
<S> <C> <C> <C>
Within one year -amount 11,342 1,990 13,332
-yield 6.24% 8.00%
After one year but within five years -amount 68,677 13,780 82,457
-yield 6.23% 6.52%
After five but within 10 years -amount 24,450 17,667 42,117
-yield 6.39% 6.78%
After 10 Years -amount 892 7,414 8,306
-yield 6.36% 6.59%
</TABLE>
-23-
<PAGE>
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 ( Dollars in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Real estate loans $ 211,127 190,071 193,424 161,489 137,244
Commercial loans 62,011 59,719 60,929 53,836 53,989
Consumer loans 23,851 26,738 35,122 39,102 40,595
Other loans 29,767 29,363 28,081 24,214 14,362
--------- --------- --------- --------- ---------
Total loans 326,756 305,891 317,556 278,641 246,190
Less: Unearned discounts and
deferred loan fees (212) (294) (413) (393) (387)
Allowance for loan losses (7,098) (7,119) (6,984) (6,778) (6,614)
--------- --------- --------- --------- ---------
Net loans $ 319,446 298,478 310,159 271,470 239,189
========= ========= ========= ========= =========
</TABLE>
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 31,1999. Also, included are the
related periodic and cumulative gaps for each period.
<TABLE>
<CAPTION>
One Over
Year Five Years
Within One Through and Non-Rate
Year Five Years Sensitive Total
---- ---------- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Total loans $ 105,877 156,428 64,451 326,756
Taxable investment securities 11,342 68,677 27,548 107,567
Nontaxable investment securities 1,990 13,780 25,081 40,851
Federal funds sold and deposits in banks 2,370 -- -- 2,370
--------- --------- --------- ---------
Total earning assets 121,579 238,885 117,080 477,544
--------- --------- --------- ---------
INTEREST-BEARING LIABILITIES:
Transaction accounts (a) 111,535 -- -- 111,535
Savings deposits 30,021 -- -- 30,021
Time deposits 167,255 31,987 -- 199,242
Federal funds purchased and securities sold under
agreements to repurchase 15,958 -- -- 15,958
FHLB advances -- 11,081 -- 11,081
Capital lease obligations 39 -- -- 39
--------- --------- --------- ---------
Total interest-bearing liabilities 324,808 43,068 -- 367,876
Noninterest-bearing funds -- -- 96,031 96,031
--------- --------- --------- ---------
Total interest-bearing and noninterest-bearing funds 324,808 43,068 96,031 463,907
--------- --------- --------- ---------
GAP SUMMARY
Periodic net earning assets $(203,229) 195,817 21,049 13,637
========= ========= ========= =========
Ratio of earning assets to interest-bearing liabilities
and noninterest-bearing funds 37.4% 554.7% 121.9% 102.9%
========= ========= ========= =========
Cumulative net earning assets $(203,229) (7,412) 13,637 13,637
========= ========= ========= =========
Cumulative ratio of earning assets to interest-
bearing liabilities and noninterest-bearing funds 34.4% 98.0% 102.9% 102.9%
========= ========= ========= =========
(a) Includes NOW and money market accounts
</TABLE>
-24-
<PAGE>
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 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, 1999, 1998, 1997, 1996 and 1995.
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, 1999 $1,036 140 -- 1,176
December 31, 1998 $ 900 499 -- 1,399
December 31, 1997 $ 323 504 -- 827
December 31, 1996 $ 449 551 49 1,049
December 31, 1995 $ 507 201 52 760
</TABLE>
The components of nonperforming loan categories at December 31,1999 are
presented below (in thousands)
Nonaccrual Past-Due Restructured
Loans Loans Loans Total
----- ----- ----- -----
Real estate loans $ 882 125 -- 1,007
Commercial loans 85 -- -- 85
Consumer loans 69 15 -- 84
------ ------ -------- ------
Total $1,036 140 -- 1,176
====== ====== ======== ======
-25-
<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. 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 $101,000, $98,000, and $108,000, in 1999, 1998, and 1997,
respectively, which was included in earnings only when collected. Nonaccrual
loan interest collected and reported in earnings was approximately $4,000,
$34,000 and $28,000 for 1999, 1998 and 1997, respectively.
OTHER REAL ESTATE
Set forth below is a schedule of other real estate at December 31,
1999, 1998, 1997, 1996 and 1995, 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> <C> <C>
December 31, 1999 $ 83 89 0
December 31, 1998 $ 241 292 0
December 31, 1997 $ 191 0 191
December 31, 1996 $ 0 0 0
December 31, 1995 $ 25 90 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.
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.
Of the $292,000 in loans transferred to other real estate in 1998,
there were three construction loans. Subsequent to being transferred to ORE, two
of the construction loan properties booked at approximately $187,000 were sold
for an approximate total of $203,000, which resulted in a gain of approximately
$16,000. The old Taylorsville Branch Building, which was in ORE at the beginning
of the year for approximately $55,000, was sold for approximately $65,000
resulting in a gain of approximately $10,000. The properties remaining in ORE at
December 31, 1998 were the remaining construction loan of approximately $105,000
and the old Fairmount Branch of approximately $136,000, for a total of
approximately $241,000.
Of the $89,000 in loans transferred to other real estate in 1999, there
is one piece of real estate, which has been subsequently written down to the
carrying value of $83,000 as of December 31, 1999. The carrying value of the
other real estate is not anticipated to cause a material effect on future
results of operations as a result of its disposition.
-26-
<PAGE>
SUMMARY OF LOAN EXPERIENCE
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average amount of net loans outstanding $ 301,779 302,205 285,444 255,043 236,985
=========== ============ =========== =========== ==========
Amount of reserve for possible loan losses
at beginning of period $ 7,119 6,984 6,778 6,614 6,566
----------- ------------ ----------- ----------- ----------
Amount of loans charged off during period:
Real estate loans 7 165 102 157 171
Commercial loans 203 609 528 540 466
Consumer loans 149 145 525 202 569
Other loans - - - - -
----------- ------------ ----------- ----------- ----------
Total loans charged off 359 919 1,155 899 1,206
----------- ------------ ----------- ----------- ----------
Amount of recoveries during period:
Real estate loans 15 46 108 58 117
Commercial loans 207 332 256 409 767
Consumer loans 116 176 197 200 370
Other loans - - - - -
---------- ----------- ----------- ----------- ----------
Total loans recovered 338 554 561 667 1,254
----------- ------------ ----------- ----------- ----------
Net loans (recovered) charged off during period 21 365 594 232 (48)
----------- ------------ ----------- ----------- ----------
Additions to reserve for possible loan losses
charged to operations - 500 800 396 -
----------- ------------ ----------- ----------- ----------
Amount of reserve for possible loan losses
at end of period $ 7,098 7,119 6,984 6,778 6,614
=========== ============ =========== =========== ==========
Ratio of net (recoveries) charge-offs during
period to average net loans outstanding
for the period .01% .12% .21% .09% (.02%)
=========== ============ =========== =========== ==========
Ratio of reserve for possible loan losses
at period end to:
Total loans outstanding at period end 2.17% 2.33% 2.20% 2.44% 2.69%
=========== ============ =========== =========== ==========
Nonperforming assets at period end <F1> 563.78% 434.09% 686.05% 646.14% 842.55%
=========== ============ =========== =========== ==========
<FN>
<F1> Nonperforming assets included nonperforming loans and other real estate
</FN>
</TABLE>
ALLOCATION OF ALLOWANCE FOR PROBABLE LOAN LOSSES
The allowance 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 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 and
$25,000 secured and 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.
-27-
<PAGE>
The review process described above places emphasis on nonperforming and
past-due loans and is designed to identify probable charges to the allowance for
loan losses as well as to determine the adequacy of the reserve.
The allocation of the allwance for loan loss 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. 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 allowance for
loan loss allocated to each classification. The remainder of the allowance for
loan loss not allocated is for the coverage of loan losses which have not been
either specifically identified by management or by the regulatory examination
processes, and relate to downturns in the economy and concentrations of credit
in specific industries. The allocation of the allowance for loan loss 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:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
% 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 $ 2,271 65% 2,324 62% 2,370 61%
Commercial loans 1,490 19% 1,505 20% 1,036 19%
Consumer loans 1,632 7% 1,433 9% 1,309 11%
Other loans 496 9% 549 9% 124 9%
Unallocated 1,209 N/A 1,308 N/A 2,145 N/A
--------- -------- -------- -------- --------- --------
Total $ 7,098 100% 7,119 100% 6,984 100%
======== ======== ======== ======== ========= ========
</TABLE>
December 31, 1996 December 31, 1995
----------------- -----------------
% of % of
Loans in Loans in
Amount Category Amount Category
Real estate loans $ 1,043 59% 1,453 56%
Commercial loans 2,241 19% 2,304 22%
Consumer loans 1,641 14% 993 16%
Other loans - 8% 186 6%
Unallocated 1,853 N/A 1,678 N/A
--------- -------- --------- --------
Total $ 6,778 100% 6,614 100%
========= ======== ========= ========
The loan loss allowance decreased by approximately $21,000 for the year
ended December 31, 1999, to approximately $7,098,000, from approximately
$7,119,000 at December 31, 1998. The change in nonperforming loans from
approximately $1,399,000 to approximately $1,176,000 was an decrease of
approximately 15.9%. Loans outstanding as a whole increased approximately
$20,865,000, or 6.8%. The decrease in the nonperforming loans is reflected in
the decrease in the allowance for the year ended December 31, 1999. Nonaccrual
loans increased approximately $136,000 while past due loans decreased
approximately $358,000. Allocations have been made for the concentrated work
force within the tufted carpet industry and the loss precipitated by
consolidation, which is occurring in the tufted carpet industry, resulting in
increased unemployment.
-28-
<PAGE>
The loan loss allowance allocated to real estate loans decreased by
approximately $53,000 during 1999, a decrease of approximately 2.3%. The loan
loss allowance allocated to commercial loans decreased approximately $15,000
during 1999, a decrease of approximately 1.0%. The loan loss allowance allocated
to consumer loans increased by approximately $199,000 during 1999, an increase
of approximately 13.9%. The loan loss allowance allocated to other loans
decreased approximately $53,000 during 1999, a decrease of approximately 9.7%.
The allowance for loan loss allocated to real estate, commercial, and other
loans were decreased due to grade changes within the individual categories. The
increase in the allowance for loan loss allocated to consumer loans is due
principally to the change in grades for loans within that category. The
concentrated work force in the tufted carpet industry had the majority of the
effect on those increases. The level of the allowance for loan loss is 6 times
the level of nonperforming loans at December 31, 1999. The level of the
allowance for loan loss of 2.33% at December 31, 1999, is 236.6 times greater
than the .01% of net charge-offs, which is computed as a percent of average
net-loans outstanding for the year ended December 31, 1999. The Board of
Directors of the Registrant and the Banks along with management of the Banks are
of the opinion that because a concentrated industry has such a large percentage
of the market area workforce employed, slight downturns in the economy have
significant effects on its customers to result in their inability to pay
principal and interest on their loans.
LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
(Dollars in thousands)
Over one
One year year through Over
Loan Category <F1> <F2> <F3> or less five years Five years Total
- ---------------------------- ------- ---------- ---------- -----
Real estate $ 45,298 106,376 59,453 211,127
Commercial 33,739 26,051 2,221 62,011
Consumer and other loans 26,840 24,001 2,777 53,618
-------- -------- -------- --------
Total $105,877 156,428 64,451 326,756
======== ======== ======== ========
Loans due after one year:
Having predetermined interest rates $ 175,722
Having floating interest rates 45,157
---------
Total $ 220,879
=========
[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>
-29-
<PAGE>
DEPOSITS
The average amounts of deposits for the years indicated are presented below:
(Dollars in thousands)
1999 1998 1997
-------- -------- --------
Noninterest-bearing demand deposits $ 95,454 89,216 83,956
-------- -------- --------
Interest-bearing demand and
money market deposits 111,940 100,398 93,698
Savings deposits 30,890 29,581 29,144
Time deposits 198,944 205,103 193,825
-------- -------- --------
Total interest-bearing deposits 341,774 335,082 316,667
-------- -------- --------
Total average deposits $437,228 424,298 400,623
======== ======== ========
MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
The maturity of time deposits of $100,000 or more as of December 31,1999 are
presented below (in thousands):
3 months or less $ 23,366
Over 3 months through 6 months 17,264
Over 6 months through 12 months 15,304
Over 12 months 4,996
----------
Total Outstanding $ 60,930
==========
RETURN ON EQUITY AND ASSETS
Certain financial ratios are presented below:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Return on average assets .67% 1.03% 1.13%
======= ======= =======
Return on average equity 6.21% 9.55% 10.55%
======= ======= =======
Dividend payout ratio-based on dividends declared 71.99% 40.53% 32.34%
======= ======= =======
Average equity to average assets 10.75% 10.75% 10.71%
======= ======= =======
</TABLE>
-30-
<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, 1999, the Company holds no
financial instruments for trading purposes.
Through the normal course of 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, 1999, 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
$36,000 or .16%. 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.
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.
-31-
<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 27, 2000 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 4,211,496 shares outstanding on March 27, 2000.
<TABLE>
<CAPTION>
Number of Shares Owned
Name (Age) and Business Background (Percent of Class)
- ---------------------------------- ------------------
<S> <C> <C> <C>
Thomas H. Bond (70) 1,000 *
Director of Hardwick since April 1988; Director of Northwest Bank since
January 1988; retired banker.
Kenneth E. Boring (75) 1,660,000 (39.4%) <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.
James M. Boring, Jr. (78) 1,125,063 (26.7%) <F2>
President and Director of Hardwick since March 1981; Director of
Hardwick Bank since February 1977; Director of Northwest Bank since 1986
Boring, which is engaged in real estate investment; Partner in Boring,
Boring and Minor, which is engaged in real estate investment.
Wayne R. Broaddus (66) 5,307 * <F3>
Director of Hardwick since December 1994; President & CEO of
Associated Aggregates International, Inc.
Robert M. Chandler (51) 59,530 (1.4%) <F4>
Director of Hardwick from February 1985 through March 1988, and since
February 1989;Director of Hardwick Bank since December 1985; Vice
President, Queen Carpet Corp. (Patcraft Division), a
Manufacturer of carpet.
Richard R. Cheatham (56) 1,595,300 (37.9%) <F5>
Director of Hardwick since February 1995; Vice Chairman of
Hardwick since April 1995; Partner, Kilpatrick Stockton LLP,
Attorneys at Law.
J. C. Maddox (68) 1,500 *
Director of Hardwick since October 1999;
Director of Northwest Bank since October 1981; Attorney
Norman D. McCoy (59) 5,860 *
Director of Hardwick since March 1981; Director Hardwick Bank since 1969
President and Chief Executive Officer of Dalton Supply Co.,
Inc., a wholesale distributor of industrial supplies.
Marshall R. Mauldin (54) 69,280 (1.7%) <F6>
Director of Hardwick since March 1981; President, Chief
Executive Officer and Director of Hardwick Bank since
January 1990; Director and Executive Vice President of Hardwick Bank
From 1979 through 1986
Executive Vice President and Director of Northwest Bank from July
1986 through December 1989.
Charles D. Miller (56) 5,000 *
Director of Hardwick since 1999; Director of Northwest Bank since
1987; Retired Carpet Manufacturing Executive.
-32-
<PAGE>
Michael Robinson (50) 60,600 (1.4%) <F7>
Executive Vice President of Hardwick since 1990;
Secretary, Treasurer and Director of Hardwick
since 1986 and Director of Hardwick Bank since 1988;
Vice President of Hardwick Bank from 1981 through 1989.
Director of Northwest Bank since 1987.
G. Milton Stewart (63) 1,000 *
Director of Hardwick since 1999, Director of Northwest Bank since
1988; self-employed in real estate development.
Stanley A. Crawford (56) 12,500 *
Executive Vice President of Hardwick Bank since
September 1992, Director since 1999.
All Executive Officers and Directors as a Group 3,007,140 (71.4%)
(13 Persons)
- ------------------------------
<FN>
* Represents less than one percent of class.
<F1> Includes 670,400 shares owned directly; 14,600 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 1,069,306 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 23,075 shares owned directly; 800 shares owned through an IRA;
17,160 shares in a trust in which he is beneficiary; 5,575 shares owned
by his wife; 660 shares owned by his wife through an IRA; and 12,260
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 33,360 shares owned directly and 420 shares owned through an
IRA and 35,500 shares under a restricted stock award agreement.
<F7> Includes 25,100 shares owned directly and 35,500 shares under a
restricted stock award agreement.
</FN>
</TABLE>
- ---------------------------
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.
-33-
<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, 1999, 1998, and 1997, of those persons who were at
December 31,1999, (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 1999, exceeded $100,000 (the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------------- All Other
Name & Principal Position Year Salary Bonus Other Compensation
------------------------- ---- ------ ----- ----- ------------
<S> <C> <C> <C> <C> <C>
Kenneth E. Boring 1999 $ 120,000 $ 31,200 $ 86,446 $11,378
Chairman of the Board and Chief 1998 120,000 26,400 33,791 10,178
Executive Officer, Hardwick 1997 120,000 25,200 29,424 10,094
James M. Boring, Jr. 1999 $ 90,000 $ 22,950 $ 26,047 $9,338
President, Hardwick 1998 90,000 19,800 21,975 7,637
1997 90,000 18,900 24,688 7,714
Marshall R. Mauldin 1999 $ 120,000 $ 33,600 $ 33,058 $11,150
President & CEO, Hardwick Bank 1998 120,000 26,400 18,731 10,165
1997 120,000 25,200 18,146 10,094
Michael Robinson 1999 $ 120,000 $ 31,200 $ 40,866 $11,443
Executive Vice President and 1998 120,000 26,400 24,027 10,340
CFO, Hardwick 1997 120,000 25,200 23,249 10,256
Stanley A. Crawford 1999 $ 96,000 $ 26,880 $ 47,455 $9,964
Executive Vice President 1998 96,000 23,040 20,334 7,696
Hardwick Bank 1997 93,000 21,390 20,267 7,695
</TABLE>
OPTIONS, EXERCISES AND FISCAL YEAR-END VALUES
During January 1999, named officers Marshall R. Maudlin and Michael
Robinson, each exercised 6,250 shares at $16.25 per share which had been granted
in 1994 under the 1993 plan. During January 1999, an employee who has since left
the Company, exercised 6,250 shares at $16.25 per share which had been granted
in 1994 under the 1993 plan. There are no other stock options outstanding under
any plans to be granted as of December 31, 1999.
During 1994, the Company approved a restricted stock award agreement
covering Marshall R. Mauldin 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 1995 and
as of March 27, 2000, the award of 35,500 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 have a
nonforfeitable right to that stock subject to certain limitations.
The vested shares in the plans as discussed above and the awards
granted as of March 27, 1999, have been included in the ownership section above
for the purposes of stock percentage ownership by directors and executive
officers.
DIRECTOR COMPENSATION
During 1999, each non-employee director of Hardwick was paid $800 for
regular and $400 for committee meetings attended for their services as
directors.
-34-
<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
27,1999, 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 4,211,496 shares outstanding at March 27, 1999. For information
concerning beneficial ownership of the Registrant's common stock by directors
and management, see Item 10 above.
Number of Percent of
Name and Address of Shares Owned Class
------------------- ------------ -----
Kenneth E. Boring 1,660,000 39.4% <F1>
314 N. Selvidge Street
Dalton, Ga. 30720
James M. Boring, Jr. 1,125,063 26.7% <F2>
314 N. Selvidge Street
Dalton, Ga. 30720
Boring Family Trust 881,700 20.9% <F3>
314 N. Selvidge Street
Dalton, Ga. 30720
Richard R. Cheatham 1,595,300 37.9% <F4>
1100 Peachtree Street, Suite 2800
Atlanta, Georgia 30309
- --------------------------------------
[FN]
<F1> Includes 670,400 shares owned directly; 14,600 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 1,069,306 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>
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 26.8% of total shareholders equity of Hardwick at
December 31, 1999. See Note 12 in the 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:
-35-
<PAGE>
Report of Independent Public Accountants
Consolidated Balance Sheets--December 31, 1999 and 1998.
Consolidated Statements of Income for the years ended December 31,
1999, 1998 and 1997.
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997.
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;
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 (for SEC use only).
(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.
-36-
<PAGE>
HARDWICK HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants F-1
Financial Statements
Consolidated Balance Sheets--December 31, 1999 and 1998 F-2
Consolidated Statements of Income for the Years Ended December 31,
1999, 1998, and 1997 F-3
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1999, 1998, and 1997 F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998, and 1997 F-5
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies F-7
2. Investment Securities F-10
3. Loans and Allowance for Loan Losses F-11
4. Premises and Equipment F-12
5. Time Deposits F-12
6. Federal Home Loan Bank ("FHLB") Advances and Revolving
Line of Credit F-13
7. Income Taxes F-13
8. Stock Plans F-14
9. Employee Benefit Plans F-15
10. Limitation on Subsidiary Dividends F-15
11. Regulatory Requirements F-16
12. Related-Party Transactions F-16
13. Financial Instruments With Off-Balance Sheet Risk and
Concentrations of Credit Risk F-17
14. Contingencies F-18
15. Fair Values of Financial Instruments F-18
16. Comprehensive Income F-19
17. Segment Information F-20
18. Hardwick Holding Company (Parent Company Only) Financial
Information F-22
19. Merger Agreement F-24
</TABLE>
-i-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO HARDWICK HOLDING COMPANY:
We have audited the accompanying consolidated balance sheets of HARDWICK HOLDING
COMPANY (a Georgia corporation) AND SUBSIDIARIES as of December 31, 1999 and
1998 and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 18, 2000
F-1
<PAGE>
HARDWICK HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(Dollars in Thousands, Except Par Value)
ASSETS
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH AND DUE FROM BANKS $ 23,545 $ 25,305
FEDERAL FUNDS SOLD 2,370 43,648
-------- --------
Total cash and cash equivalents 25,915 68,953
INVESTMENT SECURITIES, available for sale 148,418 144,169
LOANS, net 319,446 298,478
PREMISES AND EQUIPMENT, net 15,158 15,277
ACCRUED INTEREST RECEIVABLE 5,048 4,184
EXCESS OF COST OVER FAIR VALUE OF SUBSIDIARIES ACQUIRED, net 3,400 3,978
OTHER ASSETS 3,927 1,881
-------- --------
Total assets $ 521,312 $ 536,920
======== ========
LIABILITIES AND STOCKHOLDERS' EQUity
DEPOSITS:
Noninterest-bearing $ 96,031 $ 102,027
Interest-bearing 340,798 340,509
-------- --------
Total deposits 436,829 442,536
FEDERAL FUNDS PURCHASED 5,000 0
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE 10,958 25,209
CAPITAL LEASE OBLIGATION 39 264
FEDERAL HOME LOAN BANK ADVANCES 11,081 8,156
OTHER LIABILITIES 4,332 4,638
-------- --------
Total liabilities 468,239 480,803
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 4, 6, 11, 13, 14, and 19)
STOCKHOLDERS' EQUITY:
Common stock, $.50 par value; 10,000,000 shares authorized,
4,197,496 and 4,187,746 shares issued and outstanding at
December 31, 1999 and 1998, respectively 2,099 2,094
Additional paid-in capital 20,630 20,479
Retained earnings 34,373 33,406
Accumulated other comprehensive (loss) income (3,244) 1,104
Deferred compensation (785) (966)
-------- --------
Total stockholders' equity 53,073 56,117
-------- --------
Total liabilities and stockholders' equity $ 521,312 $ 536,920
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE
SHEETS.
F-2
<PAGE>
HARDWICK HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(In Thousands, Except Net Income Per Share Data)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $27,041 $28,698 $27,578
Interest on investment securities:
Taxable 7,374 6,503 5,820
Nontaxable 1,597 1,197 1,105
Interest on federal funds sold 689 862 685
Other 6 8 8
------ ------ ------
Total interest income 36,707 37,268 35,196
------ ------ ------
INTEREST EXPENSE:
Interest on deposits 13,608 15,154 14,232
Interest on federal funds purchased and securities
sold under agreements to repurchase 491 224 205
Interest on other borrowings 495 460 226
------ ------ ------
Total interest expense 14,594 15,838 14,663
------ ------ ------
NET INTEREST INCOME 22,113 21,430 20,533
PROVISION FOR LOAN LOSSES 0 500 800
------ ------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 22,113 20,930 19,733
------ ------ ------
NONINTEREST INCOME:
Service charges on deposit accounts 2,657 2,589 2,711
Securities (losses) gains, net (1,047) 189 71
Trust department income 542 467 430
Other noninterest income 1,909 1,680 3,610
------ ------ ------
Total noninterest income 4,061 4,925 6,822
------ ------ ------
NONINTEREST EXPENSE:
Salaries and employee benefits 10,162 8,614 9,000
Net occupancy expense 3,138 3,186 3,162
Data processing expense 1,360 1,312 1,160
Charitable contributions 1,135 106 104
Professional fees 674 534 578
FDIC insurance premiums 53 43 48
Office supplies and printing 474 474 449
Other noninterest expense 4,277 4,093 4,063
------ ------ ------
Total noninterest expense 21,273 18,362 18,564
------ ------ ------
INCOME BEFORE PROVISION FOR INCOME TAXES 4,901 7,493 7,991
PROVISION FOR INCOME TAXES 1,449 2,406 2,765
------ ------ ------
NET INCOME 3,452 $ 5,087 $ 5,226
====== ====== ======
NET INCOME PER SHARE:
Basic $0.83 $1.27 $1.32
====== ====== ======
Diluted $0.83 $1.26 $1.29
====== ====== ======
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 4,139 4,009 3,973
====== ====== ======
Diluted 4,167 4,033 4,047
====== ====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
F-3
<PAGE>
HARDWICK HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Accumulated
Other
Additional Comprehensive
Common Paid-In Retained Income Treasury Deferred
Stock Capital Earnings (Loss) Stock Compensation Total
----- ------- -------- ------ ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 2,063 $20,233 $26,845 $ 324 $(2,289) $(199) $46,977
Comprehensive income:
Net income for 1997 0 0 5,226 0 0 0
Change in unrealized gain on securities
available for sale, net of taxes 0 0 0 266 0 0
Total comprehensive income 5,492
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)
------ ------- ------- ------ ------- ----- -------
BALANCE, December 31, 1997 2,081 20,935 30,381 590 (2,564) (820) 50,603
Comprehensive income:
Net income for 1998 0 0 5,087 0 0 0
Change in unrealized gain on securities
available for sale, net of taxes 0 0 0 514 0 0
Total comprehensive income 5,601
Cash dividends, $.50 per share 0 0 (2,062) 0 0 0 (2,062)
Issuance of treasury stock and 11,605
shares of common stock in connection
with exercise of stock options 5 (748) 0 0 2,564 0 1,821
Issuance of 15,000 shares of restricted stock 8 292 0 0 0 (300) 0
Amortization of compensation element of
restricted stock 0 0 0 0 0 154 154
------ ------- ------- ------ ------- ----- -------
BALANCE, December 31, 1998 2,094 20,479 33,406 1,104 0 (966 56,117
Comprehensive income:
Net income for 1999 0 0 3,452 0 0 0
Change in unrealized loss on securities
available for sale, net of taxes 0 0 0 (4,348) 0 0
Total comprehensive loss (896)
Cash dividends, $.60 per share 0 0 (2,485) 0 0 0 (2,485)
Forfeiture and retirement of 28,500
shares of restricted stock (14) (544) 0 0 0 558 0
Issuance of 18,750 shares of common
stock in connection with exercise
of stock options 9 295 0 0 0 0 304
Issuance of 19,500 shares of restricted stock 10 400 0 0 0 (410) 0
Amortization of compensation element of
restricted stock 0 0 0 0 0 33 33
------ ------- ------- ------ ------- ----- -------
BALANCE, December 31, 1999 $2,099 $20,630 $34,373 $(3,244) $ 0 $(785) $53,073
====== ======= ======= ====== ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
Page 1 of 2
HARDWICK HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(In Thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,452 $ 5,087 $ 5,226
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 0 500 800
Provision for depreciation and amortization 1,991 2,143 2,534
Amortization of deferred compensation 33 154 99
Loss on disposal of premises and equipment 58 2 193
Premium amortization of investment securities, net 60 162 156
Deferred income tax benefit (240) (207) (272)
Securities losses (gains), net 1,047 (189) (71)
Loss (gain) on sale of other real estate 40 (26) 0
Increase in accrued interest receivable (864) (196) (123)
Decrease (increase) in other assets 202 (143) 79
(Decrease) increase in other liabilities (476) 114 (24)
------- ------- -------
Net cash provided by operating activities 5,303 7,401 8,597
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities available for
sale 25,101 27,666 18,245
Proceeds from sales of investment securities available for sale 48,876 29,280 44,211
Purchases of investment securities available for sale (85,921) (80,878) (61,404)
Net cash flows from loans originated and principal collected on
loans (21,057) 10,889 (39,489)
Proceeds from sale of other real estate 281 268 0
Purchases of premises and equipment (1,404) (2,470) (761)
Proceeds from disposal of premises and equipment 52 123 55
------- ------- -------
Net cash used in investing activities (34,072) (15,122) (39,143)
------- ------- -------
</TABLE>
F-5
<PAGE>
Page 2 of 2
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand deposits, NOW accounts, and
savings accounts $ (5,996) $35,604 $ 1,337
Net cash flows from sales (redemptions) of certificates of
deposit 289 (2,853) 14,508
Net increase (decrease) in federal funds purchased 5,000 0 (2,600)
Net (decrease) increase in securities sold under agreements to
repurchase (14,251) 5,870 16,012
Proceeds from (repayments of) FHLB advances 2,925 (75) 7,925
Principal payments on capital lease obligation (225) (208) (196)
Cash dividends on common stock (2,315) (2,000) (1,447)
Purchase of treasury stock 0 0 (275)
Proceeds from exercise of stock options 304 1,821 0
-------- -------- --------
Net cash (used in) provided by financing activities (14,269) 38,159 35,264
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (43,038) 30,438 4,718
CASH AND CASH EQUIVALENTS, beginning of year 68,953 38,515 33,797
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year $ 25,915 $68,953 $38,515
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 14,738 $15,701 $14,262
======== ======== ========
Income taxes $ 2,410 $ 2,620 $ 3,011
======== ======== ========
Transfer from loans to other real estate $ 89 $ 292 $ 0
======== ======== ========
Dividends declared but not paid $ 716 $ 546 $ 484
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
HARDWICK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO consolidated FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
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 in nine locations in suburban communities in
northwest Georgia. The Company's primary business is providing loan and
deposit services to customers who are predominately individuals and small
and middle-market businesses.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. This statement could increase
volatility in earnings and other comprehensive income. In June 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB No. 133." This
statement delays the effective date of SFAS No. 133 for one year, to
fiscal years beginning after June 15, 2000. The Company does not hold or
engage in transactions using derivative financial instruments and does not
believe that adoption of the standard will have a material impact on
either its balance sheet or results of operations.
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, included in accumulated other comprehensive income.
F-7
<PAGE>
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.
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 was $578,000 for each of the years ended December 31, 1999 and
1998 and $790,000 for 1997. At December 31, 1999 and 1998, accumulated
amortization of the goodwill was $7,487,000 and $6,909,000,
respectively.
The Company 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 asset is
considered impaired when the projected undiscounted future cash flows from
such asset are less than its carrying value. No material impairments
existed at December 31, 1999 or 1998, and accordingly, no losses were
recognized.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are recorded net of unearned discount, deferred loan fees, and an
allowance 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-8
<PAGE>
Interest income on all classifications of loans is accrued based on the
outstanding principal amounts, except for those classified as nonaccrual
loans. The Company's policy is to charge off any loan greater than 90 days
past due. Exceptions to this policy occur when management has reason to
believe some amount of the loan will be collected. At this point, the
accrual of interest is discontinued. 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 allowance for loan losses is established through a provision for loan
losses charged to expense. The allowance represents an amount which, in
management's judgment, will be adequate to absorb losses on existing loans
that are uncollectible. Management's judgment in determining the adequacy
of the allowance is based on evaluations of the loans' collectibility.
These evaluations take into consideration such factors as the balance of
impaired loans (which are defined as all nonaccrual 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. Specific provision for loan losses is made for impaired loans based
on a comparison of the recorded carrying value of the loan to either the
present value of the loan's expected cash flow, the loan's estimated
market price, or the estimated fair value of the underlying collateral.
Periodic revisions are made to the allowance 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
1999, 1998, and 1997, the maximum balance outstanding at anytime was
$28,500,000, $25,444,000, and $19,339,000, respectively, and the average
balance outstanding was $10,821,000, $5,066,000, and $3,896,000,
respectively. Interest paid on these agreements is tiered based on the
customer's account balance and the prior month's federal funds rate. The
range in interest rates during 1999 was between 3.3% and 5.0%. The range
in interest rates during 1998 was between 3.5% and 5.2%.
FEDERAL FUNDS PURCHASED
The Company periodically purchases federal funds from the Federal Reserve
Bank to meet its daily reserve requirement. During fiscal years 1999 and
1998, the maximum balance outstanding at anytime was $10,000,000 and
$4,799,000, respectively, and the average balance outstanding was $414,000
and $81,000, respectively. The range in interest rates during 1999 was
between 4.5% and 5.4%. The range in interest rates during 1998 was between
4.7% and 5.6%.
EARNINGS PER SHARE OF COMMON STOCK
Basic and diluted weighted average shares outstanding for the years ended
December 31, 1999, 1998, and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Basic weighted average shares outstanding 4,139 4,009 3,973
Incentive stock options 0 4 64
Restricted shares of common stock 28 20 10
----- ----- ------
Diluted weighted average shares outstanding 4,167 4,033 4,047
</TABLE>
The numerator utilized in the calculation of earnings per share was the
same for both basic and diluted earning per share.
F-9
<PAGE>
RECLASSIFICATIONS
Certain reclassifications have been made in the prior year financial
statements to conform with the current year 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, 1999 and
1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
-------------- -------------- -------------- --------------
Cost Gains Losses Value
<S> <C> <C> <C> <C>
1999:
U.S. Treasury and other U.S. government
agencies $108,707 $ 16 $(3,362) $105,361
Obligations of states and political
subdivisions 42,420 174 (1,743) 40,851
Equity securities 2,206 0 0 2,206
-------- ------- ------- --------
$153,333 $ 190 $(5,105) $148,418
======== ======= ======= ========
1998:
U.S. Treasury and other U.S. government
agencies $ 74,997 $ 756 $ (118) $ 75,635
Obligations of states and political
subdivisions 32,907 1,028 (6) 33,929
Mortgage-backed securities 32,633 105 (92) 32,646
Equity securities 1,959 0 0 1,959
-------- ------- ------- --------
$142,496 $1,889 $ (216) $144,169
======== ======= ======= ========
</TABLE>
The amortized cost and estimated fair value of debt securities at December
31, 1999 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.
Amortized Estimated
Cost Fair Value
------------- -----------
Due in one year or less $ 13,488 $ 13,332
Due in one year to five years 84,176 82,457
Due in five years to ten years 44,149 42,117
Due after ten years 9,314 8,306
$151,127 $146,212
Proceeds from sales of investments in debt securities during 1999, 1998,
and 1997 were approximately $48,876,000, $29,280,000, and $44,221,000,
respectively. Gross gains of approximately $2,000, $189,000, and $254,000
and gross losses of approximately $1,049,000, $0, and $183,000 were
realized on such sales in 1999, 1998, and 1997, respectively.
Securities with a carrying value of $97,544,000 and $78,449,000 were
pledged to secure various deposits and securities sold under agreements to
repurchase at December 31, 1999 and 1998, respectively.
F-10
<PAGE>
3. LOANS AND allowance FOR LOAN LOSSES
- ------------------------------------------
At December 31, 1999 and 1998, the Company's loan portfolio consists of
the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Real estate loans $211,127 $190,071
Commercial loans 62,011 59,719
Consumer loans 23,851 26,738
Other loans 29,767 29,363
Total loans 326,756 305,891
Less:
Unearned discount (212) (294)
Allowance for loan losses (7,098) (7,119)
$319,446 $298,478
</TABLE>
Total nonaccrual and restructured loans at December 31, 1999 and 1998 were
$1,036,000 and $900,000, respectively. The gross amount of interest income
that would have been recorded in 1999, 1998, and 1997 on nonaccrual and
restructured loans at December 31, 1999, 1998, and 1997, if all such loans
had been accruing interest at the contractual rate, was $101,000, $98,000,
and $108,000, respectively, while interest income actually recognized was
$4,000, $34,000, and $28,000, respectively.
At December 31, 1999 and 1998, the recorded investment in impaired loans
was $1,036,000 and $900,000, respectively, and the related valuation
allowance was $198,000 and $135,000, respectively. This valuation
allowance is included in the allowance for loan losses in the accompanying
consolidated balance sheet, and is determined based on economic
conditions, status of the borrower, and the collateral underlying the
loan. The average balance of impaired loans during 1999 and 1998 was
$1,028,000 and $767,000, respectively.
A summary of transactions in the allowance for loan losses for the years
ended December 31, 1999, 1998, and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Balance, beginning of year $7,119 $6,984 $6,778
Provision for loan losses 0 500 800
Recoveries of loans previously charged off 338 554 561
Charge-offs (359) (919) (1,155)
Balance, end of year $7,098 $7,119 $6,984
</TABLE>
F-11
<PAGE>
4. PREMISES AND EQUIPMENT
-----------------------------
A summary of the carrying value of premises and equipment at December 31,
1999 and 1998 is as follows (in thousands):
1999 1998
Land and land improvements $ 5,896 $ 5,644
Premises and improvements 14,571 13,056
Furniture, fixtures, and equipment 6,740 6,289
Leasehold improvements 23 16
Equipment under capital lease 980 980
Construction in progress 26 1,421
28,236 27,406
Accumulated depreciation (13,078) (12,129)
$15,158 $15,277
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, 1999 and 1998 had a net
book value of $28,000 and $222,000, 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. Depreciation expense of these assets
under capital lease was $194,000 and $196,000 during 1999 and 1998,
respectively, and is included in net occupancy expense in the accompanying
consolidated statements of income.
Future minimum lease payments during 2000 for assets under capital lease
are approximately $51,000 and the present value of minimum lease payments
at December 31, 1999 is approximately $39,000 with the difference of
approximately $12,000 representing interest.
5. TIME DEPOSITS
--------------------
At December 31, 1999 and 1998, time deposits equal to or greater than
$100,000 were approximately $60,930,000 and $56,436,000, respectively.
During 1999 and 1998, the weighted average interest rate of total time
deposits was 5.2% and 5.8%, respectively. As of December 31, 1999,
expected maturities of total time deposits by contractual maturity date
are as follows (in thousands):
Carrying
Value
---------
2000 $167,255
2001 18,903
2002 6,624
2003 3,514
2004 2,823
--------
$199,119
========
F-12
<PAGE>
6. FEDERAL HOME LOAN BANK ("FHLB") ADVANCES AND REVOLVING LINE OF CREDIT
----------------------------------------------------------------------------
FNB has an agreement with the FHLB of Atlanta, under which FNB can borrow
up to $21,000,000. At December 31, 1999 and 1998, the total amounts
outstanding under this agreement were $11,081,000 and $8,156,000,
respectively. The weighted average interest rate on FHLB advances was
5.39% and 5.46% at December 31, 1999 and 1998, respectively. Maximum
borrowings during the years ended December 31, 1999 and 1998 were
$11,081,000 and $8,231,000, respectively. The advances are collateralized
by a blanket pledge of FNB's loans secured by 1-4 unit residential
property, which at December 31, 1999 totaled approximately $22,395,000.
The scheduled maturities are as follows; however, advances may be called
at interim dates prior to their schedule repayment:
Scheduled repayment date:
December 18, 2002 $ 5,081,000
September 30, 2009 6,000,000
-----------
$11,081,000
===========
The Company had an unsecured revolving line of credit of $5,000,000 (the
"Revolver"), which expired during 1998. Borrowings under the Revolver were
at an interest rate of LIBOR plus .6%. Interest was payable quarterly, and
the Revolver was renewable on an annual basis. The Company did not have
any borrowings under the Revolver during 1998.
7. INCOME TAXES
- -------------------
The components of the provision for income taxes in 1999, 1998, and 1997
are as follows (in thousands):
1999 1998 1997
---- ---- ----
Current provision $1,689 $2,613 $3,037
Deferred benefit (240) (207) (272)
------ ------ ------
Provision for income taxes $1,449 $2,406 $2,765
====== ====== ======
The components of the net deferred tax asset at December 31, 1999 and 1998
are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets related to:
Allowance for loan losses $1,937 $1,892
Unrealized loss on securities available for sale 1,671 0
Other 484 233
------ -----
Total deferred tax assets 4,092 2,125
----- -----
Deferred tax liabilities related to:
Excess of tax over book basis of premises and equipment (1,077) (1,127)
Unrealized gain on securities available for sale 0 (569)
Other (120) (14)
---- ---
Total deferred tax liabilities (1,197) (1,710)
------ ------
Net deferred tax asset $2,895 $ 415
====== =======
</TABLE>
F-13
<PAGE>
No valuation allowance for deferred tax assets has been recorded as of
December 31, 1999 and 1998 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):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income taxes at statutory rate $1,666 $2,548 $2,717
Increase (decrease) resulting from tax effects of:
Tax-exempt interest, net of disallowance (510) (392) (372)
Amortization of goodwill 197 197 278
Other, net 96 53 142
Provision for income taxes $1,449 $2,406 $2,765
</TABLE>
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, 1999 is as follows:
<TABLE>
<CAPTION>
Outstanding Options
---------------------
Weighted Exercise
Average Exercisable Price Per
Number Price Options Share
-------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C>
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
Options which became exercisable 7,500 $13.50-$16.25
Options exercised (151,250) $12.04 (151,250) $12.00-$16.25
Outstanding at December 31, 1998 18,750 $16.25 18,750 $16.25
Options exercised (18,750) $16.25 (18,750) $16.25
Outstanding at December 31, 1999 0 N/A 0 N/A
</TABLE>
The weighted average exercise price of exercisable options at December 31,
1999 and 1998 was $16.25 and $12.39, respectively.
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
F-14
<PAGE>
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 1999, 1998, and 1997, the Company awarded restricted stock shares
of 19,500, 15,000, and 36,000, respectively, to key employees. The Company
recorded deferred compensation of approximately $410,000, $300,000, and
$720,000 during 1999, 1998, and 1997, 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 1999, 1998, and 1997 approximately $33,000,
$154,000, and $99,000, respectively, in compensation expense related to
the restricted stock awards. During 1999, 28,500 restricted stock shares
were forfeited.
PHANTOM STOCK PLAN
In September 1998, the board of directors approved a Hardwick Holding
Company Phantom Stock Award Plan (the "Phantom Plan"). The Phantom Plan
provides for an award of up to an aggregate of 15,000 phantom shares of
the Company's common stock to certain key employees. The number of phantom
shares awarded annually is dependent upon the Company's profitability,
adjusted to exclude unusual items. Participants under the Phantom Plan are
not entitled to voting rights, ownership, or dividends.
During 1999 and 1998, the Company awarded 7,500 and 3,000 phantom stock
shares, respectively, to key employees. The Company recognized
compensation expense of approximately $224,000 and $63,000 during 1999 and
1998, respectively, based on the estimated market price of the shares on
the award date.
9. EMPLOYEE BENEFIT PLANS
The Company does not sponsor a defined benefit plan or any other
postretirement benefits. The Company has, however, 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
$350,000, $313,000, and $336,000 in 1999, 1998, and 1997, respectively.
The assets of the Plan have a market value of $10,675,000 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 1999, 1998, and 1997, HBT paid dividends to HHC of $1,500,000,
$1,500,000, and $4,000,000, respectively. FNB paid dividends to HHC of
$1,500,000 in 1999, 1998, and 1997. Retained earnings of HBT and FNB
available for payment of cash dividends to HHC under the applicable
regulations totaled approximately $5,469,000 at December 31, 1999.
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.
F-15
<PAGE>
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 years ended December 31,
1999 and 1998, the Company's aggregate reserve requirement averaged
approximately $4,229,000 and $3,679,000, respectively.
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, 1999, 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, 1999 and 1998 is as follows (dollars in
thousands):
<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, 1999:
Tier 1 capital:
HHC $49,673 13.03% $15,244 4.00% $22,866 6.00%
HBT 27,365 13.12 8,340 4.00 12,511 6.00
FNB 15,313 9.22 6,642 4.00 9,963 6.00
Total capital:
HHC 54,466 14.29 30,488 8.00 38,110 10.00
HBT 29,989 14.38 16,681 8.00 20,851 10.00
FNB 17,401 10.48 13,284 8.00 16,606 10.00
Tier 1 leverage:
HHC 49,673 9.98 14,921 3.00 24,875 5.00
HBT 27,365 9.13 8,992 3.00 14,985 5.00
FNB 15,313 7.24 6,345 3.00 10,579 5.00
December 31, 1998:
Tier 1 capital:
HHC 52,139 13.30 15,691 4.00 23,536 6.00
HBT 27,690 12.07 9,174 4.00 13,761 6.00
FNB 16,801 10.67 6,301 4.00 9,452 6.00
Total capital:
HHC 57,070 14.56 31,381 8.00 39,226 10.00
HBT 30,572 13.33 18,348 8.00 22,935 10.00
FNB 18,783 11.92 12,602 8.00 15,753 10.00
Tier 1 leverage:
HHC 52,139 10.21 15,327 3.00 25,545 5.00
HBT 27,690 9.34 8,896 3.00 14,826 5.00
FNB 16,801 8.07 6,249 3.00 10,414 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
` F-16
<PAGE>
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 $14,233,000 and $9,125,000 at December 31, 1999
and 1998, respectively.
The following table summarizes the change in these loans for the year
ended December 31, 1999 (in thousands):
Balance at beginning of year $ 9,125
New loans 6,326
Repayments (1,218)
Balance at end of year $14,233
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. 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 in unfavorable 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, 1999 and 1998 were
$68,026,000 and $76,898,000, respectively. The Company evaluates each
customer's creditworthiness on a 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.
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
F-17
<PAGE>
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 $3,712,000 and $4,222,000
in standby letters of credit outstanding at December 31, 1999 and 1998,
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, 1999 and
1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
----------------------------- ------------------------------
Carrying Fair Carrying Fair
------------- -------------- -------------- --------------
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 25,915 $ 25,915 $ 68,953 $ 68,953
Investment securities 148,418 148,418 144,169 144,169
Loans 319,446 315,396 298,478 298,226
Accrued interest receivable 5,048 5,048 4,184 4,184
Financial liabilities:
Deposits 436,829 436,452 442,536 444,085
Federal funds purchased 5,000 5,000 0 0
Securities sold under agreements to
repurchase 9,958 9,958 25,209 25,209
FHLB advances 11,081 11,081 8,156 8,156
Accrued interest payable 2,775 2,775 2,919 2,919
</TABLE>
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments:
o 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.
o 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. Stock
that the banks are required to hold with the FHLB, Federal Reserve
Board, or Georgia Bankers' Bank is carried at cost, as these types
of securities do not have a readily determinable fair value.
Ownership of this stock is restricted to banks and lacks a market.
o 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.
o 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
F-18
<PAGE>
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.
o Federal funds purchased and securities sold under agreements to
repurchase 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.
o FHLB advances are valued at their carrying amounts reported in the
consolidated balance sheets, which are reasonable estimates of
fair value due to the fact that these advances may be called
within the next year and are therefore short-term in nature.
o 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, 1999 and 1998.
16. COMPREHENSIVE INCOME
- --------------------------
Certain transactions and other economic events that bypass the income
statement are reflected as other comprehensive income. The Company's
comprehensive income (loss) consists of net income and changes in
unrealized gains (losses) on securities available-for-sale, net of income
taxes.
Comprehensive income (loss) for 1999, 1998, and 1997 is as follows (in
thousands):
<TABLE>
<CAPTION>
Before Income Net of
Tax Tax Tax
--------- --------- ---------
<S> <C> <C> <C>
Net unrealized (losses) gains recognized in other
comprehensive income:
1999 $(6,588) $2,240 $(4,348)
1998 779 (265) 514
1997 403 (137) 266
1999 1998 1997
-------- -------- --------
Amounts reported in net income:
(Losses) gain on sale of securities $(1,047) $ 189 $ 71
Net amortization 60 162 156
Reclassification adjustment (987) 351 227
Income tax benefit (expense) 336 (120) (77)
Reclassification adjustment, net of tax $ (651) $ 231 $ 150
Amounts reported in other comprehensive income:
Unrealized (loss) gain arising during period, net of tax $(4,999) $ 745 $ 416
Reclassification adjustment, net of tax 651 (231) (150)
Unrealized (losses) gains recognized in other
comprehensive income (4,348) 514 266
Net income 3,452 5,087 5,226
Total comprehensive (loss) income $ (896) $5,601 $ 5,492
</TABLE>
F-19
<PAGE>
17. SEGMENT INFORMATION
- -----------------------------
The Company's reportable segments were determined based on management's
internal reporting approach, which is separated by each subsidiary. The
reportable segments are comprised of the two banks owned by the holding
company, as well as the holding company itself. Each bank provides a wide
array of banking services to consumer and commercial customers and earns
interest income from loans made to customers and investments in securities
available for sale. Each bank also recognizes certain fees related to
deposit, lending, and other services provided to customers. The holding
company earns income by providing loans to insiders, receiving dividends
from the two banks, and by providing management services to the banks. The
holding company incurs no interest expense, but does incur certain
administrative expenses related to operations. No transactions with a
single customer contributed 10% or more to the Company's total revenue.
The accounting policies for each segment are the same as those used by the
Company. The segment results include certain overhead allocations and
intercompany transactions that, in the opinion of management, were
recorded at estimated market prices. All intercompany transactions have
been eliminated to determine the consolidated balances. The results for
the three reportable segments are included in the following table (in
thousands):
<TABLE>
<CAPTION>
1999
-----------------------------------------------------------------
FNB HHC Eliminations Consolidated
--------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total interest income $ 20,532 $ 15,881 $ 405 111 $ 36,707
Total interest expense 8,284 6,310 0 0 14,594
Net interest income 12,248 9,571 405 111 22,113
otal noninterest income 2,829 1,232 5,775 5775 4,061
Total noninterest expense 10,343 8,188 3,463 721 21,273
Income before taxes 4,734 2,615 2,717 5,165 4,901
Provision (benefit) for income taxes 1,244 940 (735) 0 1,449
Net income 3,490 1,675 3,452 5,165 3,452
Other significant items:
Total assets 295,996 222,561 54,360 51,605 521,312
Investment in subsidiaries 0 0 46,586 46,586 0
Depreciation, amortization, and
accretion, net 696 1,213 142 0 2,051
Total expenditures for long-lived assets 385 981 38 0 1,404
Revenues from external customers:
Total interest income 20,532 15,881 294 0 36,707
Total noninterest income 2,829 1,232 0 0 4,061
Total income 23,361 17,113 294 0 40,768
Revenues from affiliates:
Total interest income 0 0 111 111 0
Total noninterest income 0 0 5,775 5,775 0
Total income 0 0 5,886 5,886 0
F-20
<PAGE>
1998
-----------------------------------------------------------------
FNB HHC Eliminations Consolidated
--------- --------- ------------ ------------
Total interest income $ 20,445 $ 16,490 $ 383 $ 50 $ 37,268
Total interest expense 8,791 7,097 0 50 15,838
Net interest income 11,654 9,393 383 0 21,430
Provision for loan losses 200 300 0 0 500
Net interest income after provision 11,454 9,093 383 0 20,930
Total noninterest income 3,367 1,558 6,264 6,264 4,925
Total noninterest expense 9,659 7,661 1,734 692 18,362
Income before taxes 5,162 2,990 4,913 5,572 7,493
Provision (benefit) for income taxes 1,485 1,095 (174) 0 2,406
Net income 3,677 1,895 5,087 5,572 5,087
Other significant items:
Total assets 317,983 217,982 56,994 56,039 536,920
Investment in subsidiaries 0 0 48,976 48,976 0
Depreciation, amortization, and
accretion, net 938 1,222 145 0 2,305
Total expenditures for long-lived assets 734 1,692 44 0 2,470
Revenues from external customers:
Total interest income 20,445 16,490 333 0 37,268
Total noninterest income 3,367 1,558 0 0 4,925
Total income 23,812 18,048 333 0 42,193
Revenues from affiliates:
Total interest income 0 0 50 50 0
Total noninterest income 0 0 6,264 6,264 0
Total income 0 0 6,314 6,314 0
1997
-----------------------------------------------------------------
FNB HHC Eliminations Consolidated
--------- --------- ------------ ------------
Total interest income $ 20,019 $ 14,970 $ 224 $ 17 $ 35,196
Total interest expense 8,496 6,129 55 17 14,663
Net interest income 11,523 8,841 169 0 20,533
Provision for loan losses 0 800 0 0 800
Net interest income after provision 11,523 8,041 169 0 19,733
Total noninterest income 4,310 2,512 6,542 6,542 6,822
Total noninterest expense 9,513 7,925 1,767 641 18,564
Income before taxes 6,320 2,628 4,944 5,901 7,991
Provision (benefit) for income taxes 2,033 1,014 (282) 0 2,765
Net income 4,287 1,614 5,226 5,901 5,226
Other significant items:
Total assets 286,435 204,568 51,388 49,499 492,892
Investment in subsidiaries 0 0 45,989 45,989 0
Depreciation, amortization, and
accretion, net 1,000 1,558 170 38 2,690
Total expenditures for long-lived assets 385 269 107 0 761
Revenues from external customers:
Total interest income 20,019 14,970 207 0 35,196
Total noninterest income 4,310 2,512 0 0 6,822
Total income 24,329 17,482 207 0 42,018
Revenues from affiliates:
Total interest income 0 0 17 17 0
Total noninterest income 0 0 6,542 6,542 0
Total income 0 0 6,559 6,559 0
</TABLE>
F-21
<PAGE>
18. HARDWICK HOLDING COMPANY (PARENT COMPANY ONLY) FINANCIAL INFORMATION
- -----------------------------------------------------------------------------
Hardwick Holding Company
(Parent Company Only)
Balance Sheets
December 31, 1999 and 1998
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
ASSETS
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash on deposit in subsidiary bank $ 687 $ 3,678
Loans, net 6,049 3,766
Premises and equipment, net 127 142
Investment in banking subsidiaries 46,586 48,976
Other assets 911 432
------- -------
Total assets $54,360 $56,994
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 1,287 $ 877
Stockholders' equity:
Common stock, $.50 par value; 10,000,000 shares authorized,
4,197,496 and 4,187,746 shares issued and outstanding at
December 31, 1999 and 1998, respectively 2,099 2,094
Additional paid-in capital 20,630 20,479
Retained earnings 34,373 33,406
Accumulated other comprehensive (loss) income (3,244) 1,104
Deferred compensation (785) (966)
------- -------
Total stockholders' equity 53,073 56,117
------- -------
Total liabilities and stockholders' equity $54,360 $56,994
======= =======
</TABLE>
Hardwick Holding Company
(Parent Company Only)
Statements of Income
for the Years Ended December 31, 1999, 1998, and 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Operating income:
Interest on deposits in subsidiary bank $ 111 $ 50 $ 17
Interest on loans 294 333 207
Dividends from banking subsidiaries 3,000 3,000 5,500
Consulting fees from subsidiaries 721 692 641
Total operating income 4,126 4,075 6,365
----- ----- -----
Operating expense:
Interest expense 0 0 55
Net occupancy expense 99 100 126
Other operating expense 3,364 1,634 1,641
----- ----- -----
Total operating expense 3,463 1,734 1,822
----- ----- -----
Income before income tax benefit and equity in
undistributed earnings of subsidiaries 663 2,341 4,543
Income tax benefit 735 174 282
----- ------ -----
Income before equity in undistributed earnings
of subsidiaries 1,398 2,515 4,825
Equity in undistributed earnings of subsidiaries 2,054 2,572 401
----- ------ ------
Net income $3,452 $5,087 $5,226
====== ====== ======
</TABLE>
F-22
<PAGE>
Hardwick Holding Company
(Parent Company Only)
Statements of Cash Flows
for the Years Ended December 31, 1999, 1998, and 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,452 $ 5,087 $ 5,226
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed earnings (2,054) (2,572) (401)
Provision for depreciation and amortization 142 145 170
Amortization of deferred compensation 33 154 99
Loss on disposal of premises and equipment 1 0 184
(Increase) decrease in other assets (479) 52 (53)
Increase (decrease) in accounts payable and accrued liabilities 240 30 (46)
------ ------ ------
Net cash provided by operating activities 1,335 2,896 5,179
------ ------ ------
Cash flows from investing activities:
Net cash flows from loans originated and principal collected on loans (2,283) 369 (4,135)
Purchases of premises and equipment (38) (44) (107)
Proceeds from disposal of premises and equipment 6 0 29
------ ------ ------
Net cash (used in) provided by investing activities (2,315) 325 (4,213)
------ ------ ------
Cash flows from financing activities:
Cash dividends on common stock (2,315) (2,000) (1,447)
Proceeds from exercise of stock options 304 1,821 0
Purchase of treasury stock 0 0 (275)
------ ------ ------
Net cash used in financing activities (2,011) (179) (1,722)
------ ------ ------
Net (decrease) increase in cash (2,991) 3,042 (756)
Cash, beginning of year 3,678 636 1,392
------ ------ ------
Cash, end of year $ 687 $ 3,678 $ 636
====== ====== =======
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 0 $ 0 $ 55
====== ====== ======
Income taxes received from subsidiaries $ 2,410 $ 2,620 $ 3,011
Income taxes paid by HHC (2,410) (2,620) (3,011)
------ ------ ------
Net income taxes received by HHC $ 0 $ 0 $ 0
====== ====== ======
Dividends declared but not paid $ 716 $ 546 $ 484
====== ====== ======
</TABLE>
F-23
<PAGE>
19. MERGER AGREEMENT
- ----------------------
In November 1999, HHC entered into a definitive agreement to be acquired
by BB&T Corporation ("BB&T") in a stock swap. The final stock exchange
ratio will be determined based on the average closing price of BB&T common
stock during a pricing period prior to closing. The transaction will be
accounted for as a pooling of interests. In the event of a change of
control of the Company, executives who have been awarded both restricted
and phantom stock shall have a nonforfeitable right to that stock, subject
to certain limitations. The merger is to be finalized in June 2000. In
conjunction with the merger agreement, the Company granted to BB&T the
option to purchase 19.9% of the outstanding shares should Hardwick agree
to merge with another company without prior approval from BB&T.
F-24
<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 27th day of March 2000.
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 27th day of March 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<S> <C>
/s/Thomas H. Bond Director
- -------------------------
Thomas H. Bond
/s/ Kenneth E. Boring Chairman and Chief Executive Officer:
- ------------------------- Director (Principal Executive Officer)
Kenneth E. Boring
/s/ James M. Boring, Jr. President; Director
- -------------------------
James M. Boring, Jr.
/s/ Wayne R. Broaddus Director
- -------------------------
Wayne R. Broaddus
/s/Robert M. Chandler Director
- -------------------------
Robert M. Chandler
/s/Richard R. Cheatham Director
- -------------------------
Richard R. Cheatham
/s/J. C. Maddox Director
- -------------------------
J. C. Maddox
/s/Norman McCoy Director
- -------------------------
Norman McCoy
/s/Marshall R. Mauldin Director
- -------------------------
Marshall R. Mauldin
/s/Charles D. Miller Director
- -------------------------
Charles D. Miller
/s/Michael Robinson Executive Vice President, Secretary and Treasurer
- ------------------------- (Principal Financial and Accounting Officer);
Michael Robinson Director
/s/G. Milton Stewart Director
- -------------------------
G. Milton Stewart
</TABLE>
<PAGE>
EXHIBIT INDEX
-------------
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 (for SEC use only).*
- ---------------
* Filed herewith
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
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 23,429
<INT-BEARING-DEPOSITS> 116
<FED-FUNDS-SOLD> 2,370
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 148,418
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 326,544
<ALLOWANCE> 7,098
<TOTAL-ASSETS> 521,312
<DEPOSITS> 436,829
<SHORT-TERM> 15,997
<LIABILITIES-OTHER> 4,316
<LONG-TERM> 11,097
0
0
<COMMON> 2,099
<OTHER-SE> 50,974
<TOTAL-LIABILITIES-AND-EQUITY> 521,312
<INTEREST-LOAN> 27,041
<INTEREST-INVEST> 9,660
<INTEREST-OTHER> 6
<INTEREST-TOTAL> 36,707
<INTEREST-DEPOSIT> 13,608
<INTEREST-EXPENSE> 14,594
<INTEREST-INCOME-NET> 22,113
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (1,047)
<EXPENSE-OTHER> 21,273
<INCOME-PRETAX> 4,901
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,452
<EPS-BASIC> 0.83
<EPS-DILUTED> 0.83
<YIELD-ACTUAL> 7.9
<LOANS-NON> 1,036
<LOANS-PAST> 140
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,119
<CHARGE-OFFS> 359
<RECOVERIES> 338
<ALLOWANCE-CLOSE> 7,098
<ALLOWANCE-DOMESTIC> 7,098
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
