<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended Commission File Number
SEPTEMBER 30, 1997 0-25938
MERIT HOLDING CORPORATION
---------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
GEORGIA 58-1934011
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5100 LAVISTA ROAD, P. O. BOX 49, TUCKER, GEORGIA 30085-0049
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 770-491-8808
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by mark whether the registrant (1) has filed all reports required 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 the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Common Stock, $2.50 Par Value 3,923,233
- ----------------------------- ----------------------------------
Class Outstanding as of November 4, 1997
<PAGE> 2
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
MERIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------------- ------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 17,397,013 $ 14,295,260
Federal funds sold and other short-term investments 17,557,742 7,759,285
Interest bearing deposits with other
financial institutions 0 100,000
Investment securities, at cost (market
value of $1,440,727 and $1,666,200 respectively) 1,521,672 1,757,813
Mortgage-backed securities available for sale 3,546,054 6,987,783
Securities available for sale (Note 4) 50,183,763 36,493,983
Federal Reserve Bank stock 299,850 299,850
Federal Home Loan Bank stock 1,262,700 1,041,600
Loans, less allowance for loan losses
of $2,579,769 and $2,771,784 (Notes 2 and 3) 169,736,145 157,915,964
Real estate owned 182,866 110,747
Premises and equipment, net 5,585,940 5,633,032
Accrued interest receivable and other assets 2,939,047 3,784,986
------------ ------------
Total assets $270,212,792 $236,180,303
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 54,790,391 $ 57,396,092
Checking with interest 41,723,186 27,227,950
Money-market accounts 39,576,551 34,457,084
Savings 2,621,323 3,508,905
Time, $100,000 and over 28,762,572 25,916,972
Other time 56,063,526 44,189,759
------------ ------------
223,537,549 192,696,762
Short-term borrowings 8,645,511 11,715,438
Long-term debt 4,578,513 3,085,796
Accrued interest payable and other liabilities 3,017,515 1,882,759
------------ ------------
Total liabilities 239,779,088 209,380,755
------------ ------------
Stockholders' equity
Common stock, $2.50 par value; 10,000,000 shares
authorized; 3,898,794 and 3,704,102 shares issued and
outstanding, respectively 9,746,985 9,260,255
Paid-in capital 8,548,582 8,061,624
Retained earnings 12,024,247 9,314,117
Unrealized (losses) gains on securities available for sale,
net of tax 113,890 163,552
------------ ------------
Total stockholders' equity 30,433,704 26,799,548
------------ ------------
Total liabilities and stockholders'
equity $270,212,792 $236,180,303
============ ============
</TABLE>
(See notes to consolidated financial statements)
<PAGE> 3
MERIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the three month period ended For the nine month period ended
September 30, September 30,
1997 1996 1997 1996
----------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 4,256,026 $ 3,555,406 $12,400,824 $10,335,136
Interest on securities 736,061 687,737 2,155,933 1,924,073
Interest on federal funds sold
and other short-term investments 286,459 313,982 435,474 538,455
Interest on time deposits with other
financial institutions 771 2,398 3,831 8,372
Dividends on Federal Reserve Bank stock 4,498 4,498 13,493 13,493
Dividends on Federal Home Loan Bank stock 22,934 15,498 65,897 41,517
----------- ----------- ----------- -----------
Total interest and dividend income 5,306,749 4,579,519 15,075,452 12,861,046
Interest expense on deposits 1,628,327 1,520,333 4,471,616 4,234,743
Interest expense on FHLB advances 78,021 52,785 214,274 136,284
Interest expense on short-term borrowings 109,921 76,549 356,917 166,658
----------- ----------- ----------- -----------
Total interest expense 1,816,269 1,649,667 5,042,807 4,537,685
----------- ----------- ----------- -----------
Net interest income 3,490,480 2,929,852 10,032,645 8,323,361
Provision for loan losses (265,000) 165,000 35,000 495,000
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 3,755,480 2,764,852 9,997,645 7,828,361
----------- ----------- ----------- -----------
Non-interest income:
Service charges and fees on deposits 273,641 200,143 803,783 577,845
Losses on sales of available-for-sale securities (11,299) (43,495)
Mutual fund sales fees 14,408 11,442 36,564 51,099
Other income 70,482 81,390 221,155 309,090
----------- ----------- ----------- -----------
Total non-interest income 347,232 292,975 1,018,007 938,034
----------- ----------- ----------- -----------
Non-interest expense:
Salaries and other personnel 1,078,776 852,665 2,893,573 2,497,318
Occupancy and equipment 322,189 243,976 881,224 698,032
Advertising and marketing 36,053 27,226 92,961 71,912
Legal 6,000 75,000 268,000 171,000
Data processing 43,888 36,670 133,212 101,591
Director's fees 61,700 59,000 195,600 185,200
Amortization of goodwill 373,060 7,150 387,360 21,450
Other operating 371,352 358,129 1,312,446 992,679
----------- ----------- ----------- -----------
Total non-interest expense 2,293,018 1,659,816 6,164,376 4,739,182
----------- ----------- ----------- -----------
Income before income taxes 1,809,694 1,398,011 4,851,276 4,027,213
Provision for income taxes 637,079 502,406 1,695,328 1,443,755
----------- ----------- ----------- -----------
Net income $ 1,172,615 $ 895,605 $ 3,155,948 $ 2,583,458
=========== =========== =========== ===========
Net income per share $ .25 $ .21 $ .69 $ .60
=========== =========== =========== ===========
</TABLE>
(See notes to consolidated financial statements)
-2-
<PAGE> 4
MERIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Unaudited)
<TABLE>
<CAPTION>
For the nine month period ended
September 30,
1997 1996
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,155,948 $ 2,583,458
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 781,496 336,226
Net amortization of premiums on securities 30,255 47,285
Provision for loan losses 35,000 495,000
Loss on sale of investment securities 43,495
Gain (loss) on sale of other real estate 299 (19,517)
Increase in interest receivable (124,218) (61,993)
Decrease in interest payable 324,961 100,375
Increase in accrued expenses and other liabilities 839,636 209,442
Decrease (increase) in prepaid expenses and other assets 378,913 (644,651)
------------ ------------
Net cash provided by operating activities 5,465,785 3,045,625
------------ ------------
Cash flows from investing activities:
Purchases of "available for sale" investment securities (21,319,814) (12,706,762)
Proceeds from sales of "available for sale" investment securities 5,365,303
Proceeds from maturities of "held to maturity" investment securities 235,000
Proceeds from maturities of "available for sale" investment securities 5,553,751 4,946,605
Purchases of Federal Home Loan Bank stock (221,100) (173,500)
Proceeds from maturities of time deposits with other financial institutions 100,000 103,750
Proceeds from sale of other real estate 110,447 568,562
Loans made to customers, net (11,855,179) (14,429,964)
Capital expenditures (326,026) (1,168,721)
------------ ------------
Net cash used in investing activities (22,357,618) (22,860,030)
------------ ------------
Cash flows from financing activities:
Repayment of short-term borrowing (2,177,890)
Net increase in Federal Home Loan Bank advances 1,492,717 646,551
Net increase in deposits 30,840,787 22,652,703
Net increase (decrease) in securities sold under
agreements to repurchase (892,037) 4,535,554
Dividends paid (445,223)
Exercise of stock options & warrants 973,689 240,383
------------ ------------
Net cash provided by financing activities 29,792,043 28,075,191
------------ ------------
Net increase in cash and cash equivalents 12,900,210 8,260,786
Cash and cash equivalents at beginning of period 22,054,545 26,752,927
------------ ------------
Cash and cash equivalents at end of period $ 34,954,755 $ 35,013,713
============ ============
Supplemental data:
Interest paid $ 4,716,926 $ 4,437,311
============ ============
Income taxes paid $ 1,370,000 $ 2,150,000
============ ============
</TABLE>
(See notes to consolidated financial statements)
- 3 -
<PAGE> 5
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements for Merit Holding
Corporation (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statement presentation. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine months ended
September 30, 1997 are not necessarily indicative of trends or results to be
expected for the year ended December 31, 1997. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1996.
NOTE 2 - LOANS
Loans are stated at unpaid principal balances, net of unearned income and
deferred loan fees. Interest is accrued only if deemed collectible. Generally
the Company's policy is not to accrue interest on loans delinquent over ninety
days unless the loan is well secured and in the process of collection.
Loans consist of :
(in thousands)
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C> <C> <C>
Commercial $ 96,112 56% $ 91,125 57%
Real estate - construction
and land development 37,953 22% 34,407 21%
Real estate - mortgages 25,995 15% 20,242 13%
Installment and other
Consumer 12,108 7% 14,686 9%
Other 148 0% 228 0%
-------- ----- -------- --
172,316 100% 160,688 100%
Less allowance for loan losses (2,580) (2,772)
-------- --------
$169,736 $157,916
======== ========
</TABLE>
-4-
<PAGE> 6
NOTE 3 - ALLOWANCE FOR LOAN LOSSES
A provision for loan losses is charged to operations based on management's
evaluation of potential losses in the loan portfolio. Such evaluation includes a
review of all loans on which full collectibility may not be reasonably assured
and considers, among other matters, management's estimate of the fair value of
the underlying collateral on specific loans, inherent losses in the loan
portfolio, and prevailing and anticipated economic conditions.
Activity in the allowance for loan losses for the nine months ended September
30, 1997 and September 30, 1996 follows:
<TABLE>
<CAPTION>
September 30, 1997 September 30,1996
----------------- -----------------
<S> <C> <C>
Balance, January 1 $2,771,784 $2,543,408
Provision charged to expense 35,000 495,000
Net charge-offs (227,015) (106,147)
---------- ----------
Balance, September 30 $2,579,769 $2,932,261
========== ==========
</TABLE>
NOTE 4 - SECURITIES AVAILABLE-FOR-SALE AND HELD -TO-MATURITY
Securities available-for-sale are securities which management believes may be
sold prior to maturity for liquidity or other reasons and are reported at fair
value, with unrealized gains and losses, net of related income taxes, reported
as a separate component of stockholders' equity. Securities held-to-maturity are
those securities for which management has both the ability and intent to hold to
maturity and are carried at amortized cost.
The amortized cost and estimated market value of investment securities
held-to-maturity at September 30, 1997 and December 31, 1996 are presented
below:
<TABLE>
<CAPTION>
September 30, 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Government Agencies $1,000,000 $ - $ 94,759 $ 905,241
Tax exempt bonds 521,672 15,252 1,437 535,487
---------- -------- ---------- ------------
$1,521,672 $ 15,252 $ 96,196 $ 1,440,728
========== ======== ========== ============
<CAPTION>
December 31, 1996
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Government Agencies $1,000,000 $ - $104,940 $ 895,060
Tax exempt bonds 757,813 14,410 1,083 771,140
---------- ---------- -------- ------------
$1,757,813 $ 14,410 $106,023 $ 1,666,200
========== ========== ======== ============
</TABLE>
-5-
<PAGE> 7
The amortized cost and estimated market value of investment securities
available-for-sale at September 30, 1997 and December 31, 1996 are presented
below:
<TABLE>
<CAPTION>
September 30, 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasuries $13,490,001 $ 56,874 $ 0 $13,546,876
U.S. Government Agencies 36,542,167 133,690 38,969 36,636,888
Mortgage-backed certificates 3,513,955 40,738 8,639 3,546,054
----------- -------- ------- -----------
$53,546,123 $231,303 $47,608 $53,729,817
=========== ======== ======= ===========
<CAPTION>
December 31, 1996
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S.Treasuries $13,950,786 $ 96,707 $ 151 $14,047,342
U.S. Government Agencies 22,286,193 205,283 44,835 22,446,641
Mortgage-backed certificates 6,980,992 34,990 28,199 6,987,783
----------- -------- ------- -----------
$43,217,971 $336,980 $73,185 $43,481,766
=========== ======== ======= ===========
</TABLE>
NOTE 5 - NET INCOME PER SHARE
The Company is required to calculate net income per share based on the "modified
treasury stock" method. Under this method, net income and weighted average
shares are adjusted for the effects of assumed exercise of common stock
equivalents. The number of shares used to compute earnings per share for the
three months and nine months ended September 30, 1997 was 4,613,135 and for the
three and nine months ended September 30, 1996 was 4,318,769.
NOTE 6 - NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"),
which prescribes accounting standards to be followed when the Company transfers
control over financial assets to third parties. SFAS 125 is effective for the
Company for transactions occurring after December 31, 1996; however, the FASB
has delayed implementation of certain of the provisions of SFAS 125 for one
year. The Company does not believe this Statement will have a significant impact
on its financial statements based upon the current scope of the Company's
operations.
-6-
<PAGE> 8
On March 3, 1997, FASB issued SFAS 128, "Earnings per Share" and SFAS 129,
"Disclosure of Information about Capital Structure." SFAS 128 changes the
methods for calculation of earnings per share and is effective for financial
statements issued for both interim and annual periods ending after December 15,
1997. If this pronouncement had been adopted, the basic earnings per share for
the third quarter of 1997 and 1996 would have been $.32 and $.24 respectively,
and for the first nine months of 1997 and 1996 would have been $.85 and $.69,
respectively.
In June 1997, FASB issued SFAS 130, "Reporting Comprehensive Income" and SFAS
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
130 establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. The
Company currently has one item, unrecognized gains or losses on
available-for-sale securities, that would be considered a component of
comprehensive income. SFAS 130 is effective for the Company in 1998. SFAS 131
requires that public business enterprises report financial and descriptive
information about its reportable operating segments using the "management
approach." This approach focuses on financial information that an enterprise's
management uses to make decisions about operating matters. SFAS 131 is effective
for 1998, however, there will be no impact to the Company as it has only one
operating segment.
-7-
<PAGE> 9
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion addresses the factors that have affected the financial
condition and results of operations of Merit Holding Corporation (the "Company")
as reflected in the unaudited consolidated financial statements for the three
and nine months ended September 30, 1997 and 1996. The Company's operating
subsidiaries are Mountain National Bank ("Mountain") and Charter Bank & Trust
Co. ("Charter").
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's net income for the third quarter of 1997 was $1,172,615, a 30.9%
increase compared to net income of $895,605 for the same period in 1996.
Earnings per share was $.25 in the third quarter of 1997 compared to $.21 for
the same period in 1996. Net income for the nine months ended September 30, 1997
was $3,155,948 compared to $2,583,458 for the same period of 1996, a 22.2%
increase. The increase in net income in the third quarter of 1997 compared to
the same period in 1996 was the result of an increase in net interest income of
$560,628, or 19.1%, a $430,000 reduction in the provision for loan losses and an
increase of $54,257 in non-interest income compared to the third quarter of
1996. These increases were offset by an increase of $633,202, or 38.1%, in
non-interest expense. The growth in net income for the nine month period ended
September 30, 1997 over the corresponding period in 1996 resulted primarily from
an increase of $1,709,284, or 20.5%, in net interest income, a reduction of
$460,000 in the provision for loan losses, and an increase of $79,973, or 8.5%,
in non-interest income, offset by an increase of $1,425,194, or 30.1%, in
non-interest expense.
Return on average equity for the three months and nine months ended September
30, 1997 was 15.87% and 14.91% on average equity of $29,554,000 and $28,227,000,
respectively, as compared to 14.10% and 14.01% on average equity of $25,409,000
and $24,582,000, respectively, for the same periods in 1996. Return on average
assets for the three months and nine months ended September 30, 1997 was 1.85%
and 1.75% on average assets of $253,101,000 and $240,844,000 respectively as
compared to 1.56% and 1.63% on average assets of $229,216,000 and $211,459,000
for the same periods in 1996.
Total assets at September 30, 1997 were $270,213,000, a 14.4% increase from
$236,180,000 at December 31, 1996. Total average assets for the first nine
months of 1997 were $240,844,000, up $29,385,000, or 13.9% from the same period
in 1996. Average loans for the first nine months of 1997 were $161,968,000, up
$25,530,000, or 18.7% over the same period in 1996. The loan growth was funded
by increased average interest-bearing deposits, up $12,133,000, or 9.4%; higher
average non-interest bearing deposits, up $7,025,000, or 14.9%; and increased
short term borrowings, up $4,355,000, or 76.9%.
-8-
<PAGE> 10
Commencing January 15, 1997, the Company has paid a regular quarterly dividend
of $.04 per share.
Net interest income for the third quarter of 1997 increased $560,628 or 19.1%
over the third quarter of 1996. Net interest income for the nine months ended
September 30, 1997 increased $1,709,284, or 20.5%, over the same period in 1996.
The net interest margin for the three months and nine months ended September 30,
1997 was 6.14% and 6.11% respectively on average total earning assets of
$227,541,000 and $218,839,000, respectively. For the same periods in 1996, the
net interest margin was 5.84% and 5.80% respectively on average earning assets
of $207,881,000 and $191,343,000. The increase in net interest income for the
first nine months reflects the 14.4% growth in earning assets in 1997 over 1996,
a decrease in the average rate paid on interest-bearing liabilities to 4.32% in
the first nine months of 1997 from 4.40% for the same period in 1996, and a
higher yield on earning assets, up 23 basis points to 9.19% in the first nine
months of 1997 compared to the same period of 1996.
The provision for loan losses for the third quarter of 1997 was a credit of
$265,000 compared to an expense of $165,000 in the third quarter of 1996. The
provision for loan losses for the first nine months of 1997 was $35,000 compared
to $495,000 for the same period in 1996. The allowance for loan losses at
September 30, 1997 was $2,579,769 compared to $2,771,784 at December 31, 1996.
At September 30, 1997 and December 31, 1996, the allowance for loan losses
represented 1.5% and 1.73% of loans outstanding, respectively. The provision for
loan losses and the adequacy of the allowance for loan losses is based upon
management's continuing evaluation of the collectibility of the loan portfolio
under current economic conditions and includes analysis of underlying collateral
value and other factors which could affect that collectibility. Management
considers the allowance for loan losses to be adequate based upon evaluations of
specific loans, internal loan rating systems, guidelines provided by the banking
regulatory authorities governing Mountain and Charter, and an annual independent
loan review performed by a consultant. In the third quarter, management of
Mountain, after an extensive review of the loan portfolio, concluded that its
allowance for loan losses was more than sufficient to absorb potential losses
and reduced the reserve by decreasing the provision for loan loss expense by
$340,000.
Through the nine months ended September 30, 1997, charged-off loans totaled
$227,015, net of recoveries, or 0.13% of total loans outstanding. This compares
to $106,147 or 0.07% through the nine months ended September 30, 1996. Total
non-performing loans as of September 30, 1997 were $308,911, compared to
$1,209,000 at December 31, 1996. The ratio of non-performing loans (including
loans 90 days or more past due) to total outstanding loans was 0.18% at
September 30, 1997 compared to 0.66% at December 31, 1996 and 1.12% at September
30, 1996. Net charge-offs in the first quarter, second quarter and third quarter
of 1997 were $73,873, $30,866, and $122,276, respectively, compared to $26,526,
$(128) (net recovery), and $79,749 in the first, second and third quarters of
1996, respectively.
-9-
<PAGE> 11
During the second quarter of 1997, Mountain received a cash settlement in a
lawsuit that was initiated in August 1995 by Mountain. Accordingly, the
Company's September 30, 1997 balance sheet and income statement reflect the
effect of this settlement.
At September 30, 1997, the Company owned one foreclosed residential property
carried in other real estate owned in the amount of $182,866. The Company does
not anticipate any material loss on the sale of this property.
At September 30, 1997, the Company had $8,645,511 in short-term borrowings
compared to $11,715,438 at December 31, 1996. Short-term borrowings include
$6,645,000 of securities sold under agreements to repurchase with customers and
$2,000,000 in borrowings from the Federal Home Loan Bank of Atlanta ("FHLB").
Long-term debt at September 30, 1997 was $4,578,513 compared to $3,085,796 at
December 31, 1996. Long-term debt consists of advances from the Federal Home
Loan Bank of Atlanta for the purpose of match funding specific loans. One new
advance of $1,000,000 was obtained in the first quarter of 1997 and one new
advance of $500,000 was obtained in the second quarter of 1997.
Non-interest income increased $54,257 or 18.5% during the third quarter of 1997
compared to the same period in 1996, and increased $79,973, or 8.5%, for the
first nine months of 1997 compared to the same period in 1996. In the third
quarter of 1997, the Company sold $1.5 million of investment securities from its
available-for-sale portfolio, incurring a net loss of $11,299, and
simultaneously purchased $1.5 million of securities for its available-for-sale
portfolio. The purchased securities have a net yield improvement of
approximately 147 basis points over those sold. There were no security sales in
1996. Other income decreased $10,908 and $87,935, for the third quarter and
first nine months of 1997, compared to the same periods in 1996. These declines
were offset by higher service charges on deposits, up $73,498, or 36.7%, in the
third quarter of 1997 compared to 1996, and up $225,938, or 39.1%, for the first
nine months of 1997 compared to 1996. This increase is the result of increased
deposit balances, as unit service charges were not substantially increased.
Non-interest expense increased $633,202, or 38.1%, for the quarter ended
September 30, 1997 as compared to the same period in 1996. Occupancy and
equipment expense increased $78,213, or 32.1%, in the third quarter of 1997
compared to the same period in 1996, partly resulting from Mountain opening a
new combined branch/operations center in April, 1996 and Charter opening a new
full service branch in November 1996. Legal expense decreased $69,000, or 92.0%,
for the third quarter of 1997 compared to the same period in 1996 as a result of
the settlement of the lawsuit previously discussed. Salaries and other personnel
expenses increased $226,111, or 26.5%, and other operating expenses increased
$13,223, or 3.7%, in the third quarter of 1997 compared to 1996, as the result
of the continued growth of the Company.
-10-
<PAGE> 12
In the third quarter, management wrote-off unamortized goodwill of $362,459,
which had originated through the purchase of the charter and one branch office
of a bank located in Gwinnett County, Georgia. Recent changes in Georgia state
banking laws have liberalized a bank's ability to open new branches in other
counties, thereby reducing the Gwinnett County charter's value to zero. In
addition, the branch office acquired in the 1993 transaction will be closed due
to unprofitable activity before year end 1997. Therefore, an impairment loss
under FAS 121 was recognized for the amount of the remaining unamortized
goodwill. Excluding this write-off, non-interest expense increased $270,743, or
16.3%, over the same quarter of 1996.
Non-interest expense for the nine months ended September 30, 1997 increased
$1,425,194, or 30.1%, over the same period in 1996. The non-interest expense for
the nine months ended September 30, 1997 includes the goodwill write-off of
$362,459 discussed above. Excluding this write-off, non-interest expense
increased $1,062,735, or 22.4%, over the same nine months of 1996. Salaries and
other personnel expenses increased $396,255, or 15.9%, to manage continued
growth. Occupancy and equipment expense increased $183,192, or 26.2% in the
first nine months of 1997 compared to the same period in 1996, the result of the
new branch facilities discussed in the preceding paragraph. Legal expense
increased $97,000, or 56.7%, for the first nine months of 1997 compared to the
same period in 1996 as a result of the lawsuit previously discussed. Other
operating expenses increased $319,767 or 32.2%, in the first nine months of 1997
compared to 1996, the result of continuing growth. Management continues to
closely monitor operating expenses.
CAPITAL ADEQUACY
Federal banking regulators have established certain capital adequacy standards
required to be maintained by banks and bank holding companies. These regulations
establish minimum requirements for risk-based capital of 4% for core capital
(tier I), 8% for total risk-based capital and 3% for the leverage ratio. At
September 30, 1997 the Company's tier I risk-based capital was 15.5% and total
risk-based capital was 16.7%, compared to 14.7% and 15.9% at year-ended December
31, 1996, respectively. At September 30, 1997 the Company's leverage ratio was
13.7% compared to 12.8% at December 31, 1996.
The Company does not have any commitments which it believes would reduce its
capital to levels inconsistent with the regulatory definition of a well
capitalized financial institution.
-11-
<PAGE> 13
LIQUIDITY AND INTEREST SENSITIVITY
The goal of liquidity management is to ensure the availability of an adequate
level of funds to meet the loan demand and deposit withdrawal needs of the
Company's customers. The Company does not anticipate any events which would
require liquidity beyond that which is available through deposit growth, federal
funds balances, or investment portfolio maturities. The Company actively manages
the levels, types and maturities of earning assets in relation to the sources
available to fund current and future needs to ensure that adequate funding will
be available at all times. At September 30, 1997, the Company had $18,070,000 in
carrying value of investment securities in its held-to-maturity and
available-for-sale portfolios that would mature in one year or less.
At September 30, 1997 and December 31, 1996, the Company had federal funds lines
of credit from other banks totaling $25,750,000 and $20,500,000, respectively to
meet short term funding needs. There was no balance outstanding under these
short term commitments at September 30, 1997.
The liquidity and maturity structure of the Company's assets and liabilities are
important to the maintenance of acceptable net interest income levels. A
decreasing interest rate environment negatively impacts earnings as the
Company's rate-sensitive assets generally reprice faster than its rate-sensitive
liabilities. Conversely, in an increasing interest rate environment, earnings
are positively impacted. This potential asset/liability mismatch in pricing is
referred to as gap and is measured as rate sensitive assets divided by rate
sensitive liabilities for a defined time period. A gap of 1.0 means that assets
and liabilities are perfectly matched as to repricing within a specific time
period and interest rate movements will not effect net interest margin, assuming
all other factors hold constant. Management has specified gap guidelines for a
one year time horizon of between .80 and 1.2. At September 30, 1997 the Company
had a gap ratio of 1.10 for the one year period ending September 30, 1998. Thus,
over the next twelve months, more rate-sensitive assets will reprice than
rate-sensitive liabilities.
There are no known trends or any known commitments or uncertainties that will
result in the Company's liquidity increasing or decreasing in any material way.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS.
Certain statements contained in this filing are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995, such
as statements relating to financial results and plans for future business
development activities, and are thus prospective. Such forward-looking
statements are subject to risks, uncertainties and other factors which could
cause actual results to differ materially from future results expressed or
implied by such forward-looking statements. Potential risks and uncertainties
include, but are not limited to, economic conditions, competition and other
uncertainties detailed from time to time in the Company's Securities and
Exchange Commission filings.
-12-
<PAGE> 14
Part II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule (SEC use only)
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1997.
-13-
<PAGE> 15
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MERIT HOLDING CORPORATION
Date: November 4, 1997 J. Randall Carroll
--------------------- ---------------------------
J. Randall Carroll
Chairman and Chief Executive Officer
Date: November 4, 1997 Ronald H. Francis
--------------------- -----------------------------
Ronald H. Francis
President and Chief Financial Officer
(principal financial and accounting officer)
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