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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
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Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 1996
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Commission File No. 0-25938
MERIT HOLDING CORPORATION
A Georgia Corporation
(IRS Employer Identification No. 58-1934011)
5100 LaVista Road
P.O. Box 49
Tucker, Georgia 30085-0049
(404) 491-8808
Securities Registered Pursuant to Section 12(b)
of the Securities Exchange Act of 1934:
NONE
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Securities Registered Pursuant to Section 12(g)
of the Securities Exchange Act of 1934:
Common Stock, $2.50 Par Value
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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
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Check if no disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is contained in this form, and no disclosure will 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-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer's revenues for its last fiscal year were $18,924,164.
The aggregate market value of the common stock of the Registrant held by
nonaffiliates of the Registrant (3,077,372 shares) on March 5, 1997 was
approximately $36,159,180. For the purposes of this response, officers,
directors and holders of 5% or more of the Registrant's common stock are
considered the affiliates of the Registrant at that date.
The number of shares outstanding of the Registrant's common stock, as of March
5, 1997: 3,713,233 shares of $2.50 par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its Annual Meeting
of Shareholders to be held in 1997 are incorporated by reference into Part III
of this Report, with the exception of information regarding executive officers
required under Item 9 of Part III, which information is included in Part I,
Item 1.
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PART I
ITEM 1. BUSINESS.
Merit Holding Corporation (the "Company") is a registered bank holding
company under the federal Bank Holding Company Act of 1956, as amended, and
owns 100% of the outstanding capital stock of Mountain National Bank, Tucker,
Georgia ("Mountain") and Charter Bank and Trust Co., Marietta, Georgia
("Charter") (collectively, the "Banks"). The Company was incorporated under
the laws of the State of Georgia on November 27, 1990 to effect the
reorganization of Mountain into a one-bank holding company structure, thereby
providing a mechanism to enhance that bank's ability to serve its future
customers' requirements for financial services. The shareholders of Mountain
approved the reorganization on May 7, 1991 and the reorganization was
consummated on May 24, 1991. The holding company structure provides
flexibility for expansion of the Company's banking business through acquisition
of other financial institutions and provision of additional banking-related
services which the traditional commercial bank may not provide under present
laws. On December 30, 1994, the Company completed the acquisition of 100% of
the outstanding shares of common stock of Charter following the approval of
such transaction by Charter's shareholders.
Mountain commenced business operations on August 2, 1988 in a permanent
facility located at 5100 LaVista Road in Tucker, Georgia. The property
consists of a two-story brick building of approximately 14,000 square feet,
which is constructed on 1.877 acres of land owned by Mountain. Improvements
include a three-lane drive through teller installation, an exterior automated
teller machine, as well as vault and safe deposit facilities. Certain
bookkeeping, accounting and personnel functions of the Company and Mountain are
conducted out of a leased 7,551 square foot facility in Stone Mountain,
Georgia. From this location, Mountain operates separately a branch banking
office and its real estate lending activities.
On September 25, 1993, the Company acquired the charter and assets, and
assumed the liabilities of, Button Gwinnett National Bank in Gwinnett County,
Georgia. Concurrently with such acquisition, the Company merged Button
Gwinnett National Bank into Mountain National Bank and opened a branch office
of Mountain at 1200 Rockbridge Road in Norcross, Georgia, approximately 5 miles
from Mountain's main office.
Charter commenced business operations on February 3, 1989 and in October
1989 moved into its present 18,460 square foot facility located at 269 Roswell
Street in Marietta, Georgia. In October 1994, Charter opened a branch office
at 3100 Cumberland Circle in the Cumberland/Galleria area of Atlanta. On
November 18, 1996, Charter opened an additional branch office in a 3,700 square
foot facility owned by Charter on Powers Ferry Road in Marietta.
Both Mountain and Charter are full service commercial banks, without
trust powers. Each operates as a locally owned community bank that targets
primarily the commercial banking needs of individuals, professionals and small
to medium sized businesses in their primary service areas, emphasizing personal
service and banking services that focus on local needs.
The Banks provide a wide range of commercial banking products and
services. The Banks' services include interest bearing and non-interest
bearing checking accounts, money market, savings and other time deposit
accounts, including retirement accounts and certificates of deposit. Loan
services include commercial and real estate loans, Small Business
Administration loans, commercial and consumer lines of credit, letters of
credit, home equity loans, mortgage loans and consumer/installment loans. In
addition, the Banks provide such consumer services as traveler's checks, money
orders, Cashier's checks, Series EE Bonds, bankcard services, safe deposit
boxes, direct deposit services, wire transfer services, and membership in a
nationwide automated teller machine network.
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MARKET AREA AND COMPETITION
The primary service area for Mountain consists of DeKalb, Gwinnett and
North Fulton counties in the Atlanta metropolitan area.
The primary service area for Charter consists of approximately 110
square miles in central and west central Cobb County, Georgia in the
metropolitan Atlanta area. Charter is located in the City of Marietta, the
county seat of Cobb County.
There are many banking offices and savings and loan associations
within the primary service areas of the Banks. Most of these offices are
affiliated with major regional bank holding companies. Many of the major
commercial banks in the Company's service areas or their affiliates offer
services such as international banking and investment and trust services which
are not offered directly by the Banks. Such competitors, because of their
capitalization, also have substantially higher lending limits than the Banks
and are better able to absorb risk. In addition, the larger competitors of the
Banks have the ability to finance extensive advertising campaigns and to
allocate and diversify their assets among loans and securities of the highest
yield in locations with the greatest demand.
The Banks also compete for deposits, loans and other business with
existing area financial institutions other than commercial banks and savings
and loan associations, including insurance companies, consumer finance
companies, brokerage houses, credit unions and other business entities which
continue to invade the traditional banking markets. Recent legislation,
regulatory changes by the primary regulators of the various types of financial
institutions and competition from unregulated entities have eliminated many
traditional distinctions between commercial banks, thrifts and other providers
of financial services. Consequently, competition among financial institutions
of all types is virtually unlimited with respect to legal ability and authority
to provide most financial services. It is anticipated that additional
competition will continue from new entrants to the market.
DEPOSITS
The Banks offer a full range of interest bearing and non-interest
bearing deposit accounts, including checking accounts, negotiable order of
withdrawal ("NOW") accounts, money market checking accounts, individual
retirement accounts, regular statement savings accounts and certificates of
deposit. The sources of deposits are residents, businesses and employees of
businesses within the Banks' market areas, obtained through the personal
solicitation of the Banks' officers and directors, direct mail solicitation and
advertisements published in the local media. The Banks pay competitive
interest rates on time and savings deposits up to the maximum permitted by law
or regulation. In addition, the Banks have implemented service charge fee
schedules competitive with other financial institutions in their market areas,
covering such matters as maintenance fees on checking accounts, per item
processing fees on checking accounts, returned check charges and the like.
LOAN PORTFOLIO
The Banks engage in a full complement of lending activities, including
commercial, consumer/installment and real estate loans, and concentrate their
lending efforts on small to medium sized businesses, professionals and
individuals. As of December 31, 1996, Mountain's loan portfolio consisted of
54% commercial loans, 41% real estate loans and 5% consumer/installment loans,
and Charter's loan portfolio consisted of 60% commercial loans, 26% real estate
loans and 14% consumer/installment loans.
Commercial lending is directed principally toward businesses whose
demands for funds fall within the Banks' legal lending limits and which are
potential deposit customers of the Bank. This category of loans includes loans
made to individual, partnership or corporate borrowers,
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and obtained for a variety of business purposes. Such loans include short-term
lines of credit, medium-term plant and equipment loans, medium-term land
acquisition and development loans, construction loans and letters of credit.
The Banks' consumer loans consist of secured and unsecured personal term
loans, revolving lines of credit, home improvement loans, home equity loans and
medium-term mortgage loans. The Banks also offer credit card services through
a third party processor at substantially no risk to the Banks. Additionally,
the Banks assist customers with residential construction lending as well as
Small Business Loans as approved SBA lenders.
Generally loans are made to businesses, secured and unsecured, for
purposes of inventory, accounts receivable, equipment financing or business
expansion, and may be either term loans or revolving lines of credit; loans to
consumers are secured and unsecured, for purposes of financing automobiles,
boats, home improvements, education, credit consolidation or to meet other
personal financial needs; and loans for purposes related to real estate are
made for residential construction, improved or unimproved real estate.
The following loans are considered to be undesirable and are avoided by
the Banks: loans to parties with questionable honesty or integrity; loans
secured by stock in a closely held corporation with no market value; loans
enabling a borrower to speculate on commodities or futures markets; capital
loans for business where the repayment source is the liquidation of the
business or borrowing from another source; loans to a business or consumer that
has previously declared bankruptcy; "floor plan" loans; and loans secured by
luxury goods, such as jewelry, furs or coins. Each loan request is reviewed to
determine its validity and whether it meets the credit criteria of the Banks.
Exceptions to loan policy must be approved by the appropriate officer or the
appropriate loan committee of the respective Banks.
The Banks' Loan Committees are authorized to approve loans up to 15% of
capital for Mountain (as of December 31, 1996, $2,266,107) and, for Charter,
15% of capital for unsecured loans and 25% of capital for secured loans
($1,669,558 and $2,782,596, respectively). Loans exceeding $250,000 must be
approved or ratified by the respective Loan Committee and reported to the Board
of Directors on a monthly basis. See "Supervision and Regulation."
Individual lending officers are provided authorized lending authorities.
Loans in excess of these limits must be approved by the Loan Committee. Loans
approved by loan officers pursuant to their individual lending authority must
be made in accordance with the loan policy. All loans in the aggregate are
considered when determining the individual loan officers' limits.
The Banks originate loans and participate with other banks with respect
to loans which exceed the lending limits imposed by the Banks' internal lending
policies or regulatory provisions. Management does not believe that loan
participations necessarily pose any greater risk of loss than loans which the
Banks originate. See "-- Correspondent Banking."
ASSET/LIABILITY MANAGEMENT
It is the objective of the Banks to manage assets and liabilities to
provide a satisfactory, consistent level of profitability within the framework
of established cash, loan, investment, borrowing and capital policies. An
Assets and Liabilities Management Committee (ALCO) is responsible for
monitoring policies and procedures that are designed to ensure acceptable
composition of the asset/liability mix, stability and leverage of all sources
of funds while adhering to prudent banking practices. It is the overall
philosophy of management to support asset growth primarily through growth of
core deposits, which include deposits of all categories made by individuals,
partnerships and corporations. Management of each Bank seeks to invest the
largest portion of the Bank's assets in commercial, consumer and real estate
loans.
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The Banks' asset/liability mix is monitored on a daily basis with a
quarterly report reflecting interest-sensitive assets and interest-sensitive
liabilities being prepared and presented to each Bank's Board of Directors.
The objective of this policy is to control interest-sensitive assets and
liabilities so as to minimize the impact of substantial movements in interest
rates on the Banks' earnings.
CORRESPONDENT BANKING
Correspondent banking involves the provision of services by one bank to
another bank which elects not to or cannot provide that service for itself from
an economic or practical standpoint. The Banks utilize correspondent services,
including check collections, purchase or sale of Federal funds, security
safekeeping, investment consulting or sales services and coin and currency
supplies. The Banks have established loan participations with other federally
insured financial institutions as well as privately owned companies. These
loan participations may be for overline or liquidity purposes or for loans
whose amounts exceed the Banks' legal lending limits. At December 31, 1996,
Mountain had $996,600 in participations sold ($596,600 of which consisted of
participations sold to Charter) and Charter had $2,837,909 in participations
sold ($392,499 of which consisted of participations sold to Mountain).
Mountain has established correspondent relationships with NationsBank,
N.A. (South) and The Bankers' Bank, all of Atlanta, Georgia and Columbus Bank
and Trust of Columbus, Georgia. Charter has established correspondent
relationships with NationsBank, N.A. (South) The Bankers Bank, SunTrust Bank,
N.A. and Wachovia Bank of Georgia, N.A., all of Atlanta, Georgia, Columbus Bank
and Trust of Columbus, Georgia and Centura Bank of Rocky Mount, North Carolina.
The Banks maintain certain balances with such correspondents. In addition,
both Banks are members of the Federal Home Loan Bank of Atlanta.
DATA PROCESSING
Mountain has a data processing servicing agreement with ProVesa, Inc. of
Thomson, Georgia and Charter has a data processing servicing agreement with
FiServe of Atlanta, Georgia. These servicing agreements provide for the Banks
to receive a full range of data processing services through remote data line
transmission, including a fully integrated deposit, loan and general ledger
system. Payments for the services are fee-based dependent on the type, kind
and volume of data processing services provided.
FACILITIES
The main office of both the Company and Mountain is located at 5100
LaVista Road in Tucker, Georgia. The property consists of a two-story brick
building of approximately 14,000 square feet, which is constructed on 1.877
acres of land owned by Mountain. Improvements include a three-lane drive
through teller installation, a drive-up night depository, an exterior automated
teller machine, as well as vault and safe deposit facilities.
Mountain's Norcross branch is located at 1200 Rockbridge Road in
Norcross, Georgia, approximately five miles from Mountain's main office. The
branch office consists of a one-story brick building of approximately 4,000
square feet, constructed on 0.795 acres of land owned by Mountain.
Improvements include a three-lane drive-up window, drive-up night depository,
automated teller machine, as well as vault and safe deposit facilities.
Mountain has opened a 7,551 square foot leased facility located at 2300
West Park Place in Stone Mountain, Georgia and has moved all bookkeeping,
accounting, personnel, advertising and marketing functions from the main office
in Tucker to this new facility. In addition, Mountain conducts its real estate
construction lending activities from this facility and operates a branch bank
from the facility as well.
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Charter's main office is located in an approximately 18,500 square foot
building owned by Charter located at 269 Roswell Street in Marietta, Georgia.
Improvements include a four-lane drive through teller installation, a drive-up
night depository, a vault and safe deposit facility. Charter maintains an
automated teller machine on leased property across the street from the main
branch. Charter's Galleria branch is located in approximately 1,100 square
feet of leased office space at 3100 Cumberland Circle, Suite 100, Atlanta,
Georgia. Improvements at Charter's Galleria branch include a walk-up night
depository. Charter's Powers Ferry branch is located in a 3,700 square foot
facility owned by Charter at 1920 Powers Ferry Road in Marietta. Improvements
include a three lane drive-up window, drive-up automated teller machine,
drive-up night depository and vault and safe deposit facilities.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<S> <C>
J. Randall Carroll Chairman of the Board, and
Chief Executive Officer
Ronald H. Francis President and Chief Financial
Officer
</TABLE>
J. RANDALL CARROLL, age 51, has served as President and Chief
Executive Officer of the Company and Mountain since November 1990 and June
1988, respectively. He relinquished the title of President of the Company upon
the Company's acquisition of Charter on December 30, 1994, although he remains
president of Mountain. Mr. Carroll was involved in the organization of
Mountain from June 1987 to August 1988, at which time Mountain opened for
business. From August 1972 until February 1987, Mr. Carroll was employed in
various management positions with National Bank of Georgia. Prior to leaving
National Bank of Georgia, Mr. Carroll was Senior Vice President in charge of
Branch Administration.
RONALD H. FRANCIS, age 53, has served as President, Chief Executive
Officer and a director of Charter since 1989. He became president of the
Company upon the Company's acquisition of Charter on December 30, 1994. Prior
to joining Charter, Mr. Francis served as Vice Chairman and President of the
Chattahoochee Bank and as President of Chattahoochee Bancorp. Inc.
EMPLOYEES
As of December 31, 1996, Mountain employed 51 persons on a
full-time equivalent basis, including 18 officers and Charter employed 48
persons on a full-time equivalent basis, including 16 officers. Each Bank
considers its employee relations to be good, and will hire additional personnel
as needed.
MONETARY POLICIES
The results of operations of the Banks and, thus, of the Company,
are affected by credit policies of monetary authorities, particularly the
Federal Reserve Board (even though Charter is not a member of the Federal
Reserve System). The instruments of monetary policy employed by the Federal
Reserve Board include open market operations in U.S. Government securities,
changes in the discount rate on member bank borrowings, changes in reserve
requirements against the deposits of member banks and other depository
institutions (including Charter) and limitations on interest rates which member
banks may pay on time and savings
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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 Board, no prediction can be made as
to possible future changes in interest rates, deposit levels, loan demand or
the business and earnings of the Banks.
SUPERVISION AND REGULATION
The Company and the Banks operate in a highly regulated
environment, and their business activities are governed by statute, regulation
and administrative policies. The business activities of the Company and the
Banks are closely supervised by a number of federal regulatory agencies,
including the Federal Reserve Board, the Comptroller of the Currency
("Comptroller") with respect to Mountain, the Georgia Department of Banking and
Finance (the "Georgia Banking Department") and the Federal Deposit Insurance
Corporation ("FDIC").
The Company is regulated by the Federal Reserve Board under the
federal Bank Holding Company Act, which requires every bank holding company to
obtain the prior approval of the Federal Reserve Board before acquiring more
than 5% of the voting shares of any bank or all or substantially all of the
assets of a bank, and before merging or consolidating with another bank holding
company. The Federal Reserve Board (pursuant to regulation and published
policy statements) has maintained that a bank holding company must serve as a
source of financial strength to its subsidiary banks. In adhering to the
Federal Reserve Board policy, the Company may be required to provide financial
support to a subsidiary bank at a time when, absent such Federal Reserve Board
policy, the Company may not deem it advisable to provide such assistance.
Under the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994, the restrictions on interstate acquisitions of banks by bank
holding companies were repealed on September 9, 1995, such that Merit and any
other bank holding company located in Georgia is able to acquire a bank located
in any other state, and a bank holding company located outside Georgia can
acquire any Georgia-based bank, in either case subject to certain deposit
percentage and other restrictions. The legislation also provides that, unless
an individual state elects beforehand either (i) to accelerate the effective
date or (ii) to prohibit out-of-state banks from operating interstate branches
within its territory, on or after June 1, 1997, adequately capitalized and
managed bank holding companies will be able to consolidate their multistate
bank operations into a single bank subsidiary and to branch interstate through
acquisitions. De novo branching by an out-of-state bank would be permitted
only if it is expressly permitted by the laws of the host state. The authority
of a bank to establish and operate branches within a state will continue to be
subject to applicable state branching laws. Pursuant to the Riegle-Neal
Interstate Banking and Branching Efficiency Act, the State of Georgia has
recently adopted an interstate banking statute that, beginning on June 1, 1997,
removes the existing restrictions on the ability of banks to branch interstate
through mergers, consolidations and acquisitions.
A bank holding company is generally prohibited from acquiring
control of any company which is not a bank and from engaging in any business
other than the business of banking or managing and controlling banks. However,
there are certain activities which have been identified by the Federal Reserve
Board to be so closely related to banking as to be a proper incident thereto
and thus permissible for bank holding companies, including the following
activities: acting as investment or financial advisor to subsidiaries and
certain outside companies; leasing personal and real property or acting as a
broker with respect thereto; providing management consulting advice to
nonaffiliated banks and nonbank depository institutions; operating collection
agencies and credit bureaus; acting as a futures commission merchant; providing
data processing and data transmission services; acting as an insurance agent or
underwriter with respect to limited types of insurance; performing real estate
appraisals; arranging commercial real estate equity financing; providing
securities brokerage services; and underwriting and dealing in obligations of
the United States, the states and their political subdivisions. In determining
whether an activity is so closely related to banking as to be
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permissible for bank holding companies, the Federal Reserve Board is required
to consider whether the performance of such activities by a bank holding
company or its subsidiaries can reasonably be expected to produce such
benefits to the public as greater convenience, increased competition and gains
in efficiency that outweigh such possible adverse effects as undue
concentration of resources, decreased or unfair competition, conflicts of
interest and unsound banking practices. Generally, bank holding companies are
required to obtain prior approval of the Federal Reserve Board to engage in any
new activity not previously approved by the Federal Reserve Board.
The Company is also regulated by the Georgia Banking Department
under the Georgia Bank Holding Company Act, which requires every Georgia bank
holding company to obtain the prior approval of the Georgia Commissioner of
Banking before acquiring more than 5% of the voting shares of any bank or all
or substantially all of the assets of a bank, or before merging or
consolidating with any other bank holding company. A Georgia bank holding
company is generally prohibited from acquiring ownership or control of 5% or
more of the voting shares of any bank unless the bank being acquired is either
a bank for purposes of the federal Bank Holding Company Act of 1956, or a
federal or state savings and loan association or a savings bank or federal
savings bank whose deposits are insured by the federal deposit insurance
program and such bank has been in existence and continuously operating as a
bank for a period of five years or more prior to the date of acquisition.
As a national bank, Mountain is subject to the supervision of the
Comptroller and, to a limited extent, the FDIC and the Federal Reserve Board.
With respect to expansion, national banks situated in the State of Georgia are
generally prohibited from establishing branch offices or facilities outside of
the county in which such main office is located, except (i) in adjacent
counties in certain situations, or (ii) by means of a merger, consolidation or
sale of assets. The Georgia Legislature has adopted legislation which reduces
the limitations imposed on banks situated in the State of Georgia to establish
branch offices. The new law permits a Georgia bank to establish three new or
additional branch banks, de novo, in any county within the State of Georgia, in
addition to establishing branch offices or facilities in adjacent counties and
by merger or consolidation. Moreover, beginning on July 1, 1998, a bank
located in the State of Georgia will be permitted to establish new or
additional branch banks anywhere in the state by relocation of the parent bank
or another branch bank, or by merger, consolidation, or purchase of assets and
assumption of liabilities involving another parent bank or branch bank.
Mountain is also subject to the Georgia banking and usury laws
restricting the amount of interest which it may charge in making loans or other
extensions of credit. In addition, Mountain, as a subsidiary of the Company,
is subject to restrictions under federal law in dealing with the Company and
other affiliates, if any. These restrictions apply to extensions of credit to
an affiliate, investments in the securities of an affiliate and the purchase of
assets from an affiliate.
Loans and extensions of credit by national banks, such as Mountain,
are subject to legal lending limitations. Under federal law, a national bank
may grant unsecured loans and extensions of credit in an amount up to 15% of
its unimpaired capital and surplus to any person. In addition, a national bank
may grant loans and extensions of credit to a single person up to 10% of its
unimpaired capital and surplus, provided that the transactions are fully
secured by readily marketable collateral having a market value determined by
reliable and continuously available price quotations. This 10% limitation is
separate from, and in addition to, the 15% limitation for unsecured loans.
Loans and extensions of credit may exceed the general lending limit if they
qualify under one of several exceptions. Such exceptions include certain loans
or extensions of credit arising from the discount of commercial or business
paper, the purchase of bankers' acceptances, loans secured by documents of
title, loans secured by U.S. obligations and loans to or guaranteed by the
federal government.
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As a state-chartered bank, most of Charter's operations are
regulated and examined by the Georgia Banking Department and the FDIC,
including reserves for loan losses and other contingencies, loans, investments,
borrowings, deposits, mergers, issuances of securities, payments of dividends,
interest rates payable on deposits, interest rates or fees chargeable on loans,
establishment of branches, consolidation or corporate reorganization, and
maintenance of books and records. The Georgia Banking Department imposes legal
lending limitations on state-chartered banks. Under these rules,
state-chartered banks may grant unsecured loans in an amount up to 15% of
capital and fully secured loans up to 25% of capital to any one person.
Charter is required by the Georgia Banking Department to prepare reports on its
financial condition and to conduct an annual internal audit of its financial
affairs, in compliance with minimum standards and procedures prescribed by the
Georgia Banking Department. Reports of Charter's auditors must be filed with
the Georgia Banking Department within 45 days after Charter's receipt of any
such report.
The Banks' loan operations are also subject to certain federal laws
applicable to credit transactions, such as the federal Truth-In-Lending Act
governing disclosures of credit terms to consumer borrowers, the Equal Credit
Opportunity Act prohibiting discrimination on the basis of race, color,
religion or other prohibited factors in extending credit, the Fair Credit
Reporting Act governing the manner in which consumer debts may be collected by
collection agencies, and the rules and regulations of the various federal
agencies charged with the responsibility of implementing such federal laws.
The deposit operations of the Banks are also subject to the Electronic Funds
Transfer Act and Regulation E issued by the Federal Reserve to implement that
act, which govern automatic deposits to and withdrawals from deposit accounts
and customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
The Banks are also subject to the provisions of the Community
Reinvestment Act of 1977, which requires the appropriate federal regulator, in
connection with its regular examination of a bank, to assess the bank's record
in meeting the credit needs of the community serviced by the bank, including
low- and moderate-income neighborhoods. The FDIC's assessment of a bank's
record is made available to the public. Further, such assessment is required
of any bank that has applied, among other things, to establish a new branch
office that will accept deposits, to relocate an existing office, or to merge
or consolidate with, or acquire the assets of or assume the liabilities of, a
federally-regulated financial institution.
Both the Company and the Banks are subject to regulatory capital
requirements imposed by the Federal Reserve Board, the Comptroller (with
respect to Mountain) and the FDIC (with respect to Charter). In 1989, each of
those agencies issued new risk-based capital guidelines for bank holding
companies and banks which made regulatory capital requirements more sensitive
to differences in risk profiles of various banking organizations. The capital
adequacy guidelines issued by the Federal Reserve Board are applied to bank
holding companies on a consolidated basis with the banks owned by the holding
company. The risk capital guidelines of the Comptroller and the FDIC apply
directly to national banks and insured state-chartered banks which are not
members of the Federal Reserve System, respectively, regardless of whether they
are a subsidiary of a bank holding company. Each agency's requirements (which
are substantially similar), provide that banking organizations must have
capital equivalent to 8% of risk-weighted assets. The risk weights assigned to
assets are based primarily on credit risks. Depending upon the riskiness of a
particular asset, it is assigned to a risk category. For example, securities
with an unconditional guarantee by the United States government are assigned to
the lowest risk category. A risk weight of 50% is assigned to loans secured by
owner- occupied one to four family residential mortgages. The aggregate amount
of assets assigned to each risk category is multiplied by the risk weight
assigned to that category to determine the weighted values, which are added
together to determine total risk-weighted assets. The Federal Reserve Board,
the Comptroller and the FDIC have also implemented new minimum capital leverage
ratios to be used in tandem with the risk-based guidelines in assessing the
overall capital adequacy of banks and bank holding companies. Under the
Federal Reserve
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Board and Comptroller rules, banking institutions are required to maintain a
ratio of 3% "Tier 1" capital to total assets (net of goodwill). Tier 1 capital
includes common stockholders equity, noncumulative perpetual preferred stock
and minority interests in the equity accounts of consolidated subsidiaries. At
December 31, 1996, capital ratios for the Company and the Banks were as
follows:
<TABLE>
<CAPTION>
Regulatory
Company Mountain Charter Minimum
------- -------- ------- -------
<S> <C> <C> <C> <C>
Total Risk-Based Capital . . . . . . . . . . . 15.9% 16.7% 14.1% 8.0%
Tier 1 Risk-Based Capital . . . . . . . . . . . 14.7% 15.4% 12.8% 4.0%
Leverage Ratios . . . . . . . . . . . . . . . . 11.3% 12.5% 9.5% 3.0%
</TABLE>
Both the risk-based capital guidelines and the leverage ratio are
minimum requirements, applicable only to top-rated banking institutions.
Institutions operating at or near these levels are expected to have
well-diversified risk, excellent asset quality, high liquidity, good earnings
and in general, have to be considered strong banking organizations, rated
composite 1 under the CAMEL rating system for banks or the BOPEC rating system
for bank holding companies. Institutions with lower ratings and institutions
with high levels of risk or experiencing or anticipating significant growth
would be expected to maintain ratios 100 to 200 basis points above the stated
minimums.
The FDIC adopted a rule substantially similar to that issued by the
Federal Reserve Board and the Comptroller. The FDIC rule also establishes a
minimum leverage ratio of 3%, but provides that FDIC-regulated banks that do
not receive a CAMEL-1 rating must maintain a ratio of at least 4%. In
addition, the FDIC rule specifies that institutions operating with Tier 1
capital of 2% of total assets or less would be determined to be operating in an
unsafe and unsound manner and would be subject to enforcement action by the
FDIC.
The Comptroller amended the risk-based capital guidelines
applicable to national banks in an effort to clarify certain questions of
interpretation and implementation, specifically with regard to treatment of
purchased mortgage servicing rights ("PMSRs") and other intangible assets. The
Comptroller's guidelines provide that intangible assets are generally deducted
from Tier 1 capital in calculating a bank's risk-based capital ratio. However,
certain intangible assets which meet specified criteria ("qualifying
intangibles") such as PMSRs are retained as a part of Tier 1 capital. The
Comptroller currently maintains that only PMSRs and purchased credit card
relationships meet the criteria to be considered qualifying intangibles. The
Comptroller's guidelines formerly provided that the amount of such qualifying
intangibles that may be included in Tier 1 capital was strictly limited to a
maximum of 25% of total Tier 1 capital. The Comptroller has amended its
guidelines to increase the limitation on such qualifying intangibles from 25%
to 50% of Tier 1 capital and further to permit the inclusion of purchased
credit card relationships as a qualifying intangible asset.
In addition, the Comptroller has adopted rules which clarify
treatment of asset sales with recourse not reported on a bank's balance sheet.
Among assets affected are mortgages sold with recourse under Fannie Mae,
Freddie Mac and Farmer Mac programs. The rules clarify that even though those
transactions are treated as asset sales for bank Call Report purposes, those
assets will still be subject to a capital charge under the risk-based capital
guidelines.
The Comptroller, the Federal Reserve Board and the FDIC recently
adopted final regulations revising their risk-based capital guidelines to
further ensure that the guidelines take adequate account of interest rate risk.
Interest rate risk is the adverse effect that changes in market interest rates
may have on a bank's financial condition and is inherent to the business of
banking. Under the new regulations, when evaluating a bank's capital adequacy,
the agencies capital standards now explicitly include a bank's exposure to
declines in the economic value of
-9-
<PAGE> 11
its capital due to changes in interest rates. The exposure of a bank's
economic value generally represents the change in the present value of its
assets, less the change in the value of its liabilities, plus the change in the
value of its interest rate off-balance sheet contracts. Concurrently, the
agencies issued a joint policy statement to bankers, effective June 26, 1996,
to provide guidance on sound practices for managing interest rate risk. In the
policy statement, the agencies emphasize the necessity of adequate oversight by
a bank's Board of Directors and senior management and of a comprehensive risk
management process. The policy statement also describes the critical factors
affecting the agencies' evaluations of a bank's interest rate risk when making
a determination of capital adequacy. The agencies' risk assessment approach
used to evaluate a bank's capital adequacy for interest rate risk relies on a
combination of quantitative and qualitative factors. Banks that are found to
have high levels of exposure and/or weak management practices will be directed
by the agencies to take corrective action.
The Federal Deposit Insurance Corporation Improvement Act of 1991
(the "Act"), enacted on December 19, 1991, provides for a number of reforms
relating to the safety and soundness of the deposit insurance system,
supervision of domestic and foreign depository institutions and improvement of
accounting standards. One aspect of the Act involves the development of a
regulatory monitoring system requiring prompt action on the part of banking
regulators with regard to certain classes of undercapitalized institutions.
While the Act did not change any of the minimum capital requirements, it
directed each of the federal banking agencies to issue regulations implementing
the monitoring plan. The Act creates five "capital categories" ("well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized") which are defined in the
Act and which are used to determine the severity of corrective action the
appropriate regulator may take in the event an institution reaches a given
level of undercapitalization. For example, an institution which becomes
"undercapitalized" must submit a capital restoration plan to the appropriate
regulator outlining the steps it will take to become adequately capitalized.
Upon approving the plan, the regulator will monitor the institution's
compliance. Before a capital restoration plan will be approved, any entity
controlling a bank (i.e., holding companies) must guarantee compliance with the
plan until the institution has been adequately capitalized for four consecutive
calendar quarters. The liability of the holding company is limited to the
lesser of five percent of the institution's total assets or the amount which is
necessary to bring the institution into compliance with all capital standards.
In addition, "undercapitalized" institutions will be restricted from paying
management fees, dividends and other capital distributions, will be subject to
certain asset growth restrictions and will be required to obtain prior approval
from the appropriate regulator to open new branches or expand into new lines of
business.
As an institution drops to lower capital levels, the extent of
action to be taken by the appropriate regulator increases, restricting the
types of transactions in which the institution may engage and ultimately
providing for the appointment of a receiver for certain institutions deemed to
be critically undercapitalized.
The Act also provides that banks have to meet new safety and
soundness standards. In order to comply with the Act, the Federal Reserve
Board, the Comptroller and the FDIC have adopted regulations defining
operational and managerial standards relating to internal controls, loan
documentation, credit underwriting, interest rate exposure, asset growth and
compensation, fees and benefits.
Both the capital standards and the safety and soundness standards
which the Act seeks to implement are designed to bolster and protect the
deposit insurance fund.
In response to the directive issued under the Act, the regulators
have issued regulations which, among other things, prescribe the capital
thresholds for each of the five capital categories established by the Act. The
following table reflects the capital thresholds:
-10-
<PAGE> 12
<TABLE>
<CAPTION>
Total Risk - Tier 1 Risk - Tier 1
Based Capital Based Capital Leverage
Ratio Ratio Ratio
--------------- --------------- ---------
<S> <C> <C> <C>
Well capitalized(1) 10% 6% 5%
Adequately Capitalized(1) 8% 4% 4% (2)
Undercapitalized(3) < 8% < 4% < 4% (4)
Significantly Undercapitalized(3) < 6% < 3% < 3%
Critically Undercapitalized - - < 2%
- ---------------------------
</TABLE>
(1) An institution must meet all three minimums.
(2) 3% for composite 1-rated institutions, subject to appropriate federal
banking agency guidelines.
(3) An institution falls into this category if it is below the specified
capital level for any of the three capital measures.
(4) Less than 3% for composite 1-rated institutions, subject to appropriate
federal banking agency guidelines.
As a national bank, Mountain is subject to examination and review by the
Comptroller. This examination is typically completed on-site at least annually
and is subject to off-site review at call. The Comptroller, at will, can
access quarterly reports of condition, as well as such additional reports as
may be required by the national banking laws.
As a state-chartered bank, Charter is subject to the supervision of the
Georgia Banking Department and the FDIC. In addition, the Banks, as
subsidiaries of the Company, are subject to restrictions under federal law in
dealing with the Company and other affiliates, if any. These restrictions
apply to extensions of credit to an affiliate, investments in the securities of
an affiliate and the purchase of assets from an affiliate.
As a bank holding company, the Company is required to file with the
Federal Reserve Board an annual report of its operations at the end of each
fiscal year and such additional information as the Federal Reserve Board may
require pursuant to the Act. The Federal Reserve Board may also make
examinations of the Company and each of its subsidiaries.
The scope of regulation and permissible activities of the Company and
the Bank is subject to change by future federal and state legislation.
-11-
<PAGE> 13
SELECTED QUARTERLY OPERATING RESULTS
(Dollars in Thousands Except Per-share Information)
<TABLE>
<CAPTION>
1996 Quarters 1995 Quarters
--------------------------------------------------------------------------------------
Fourth Third Second First Fourth Third Second First
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income from earning assets $ 4,795 $ 4,580 $ 4,229 $ 4,052 $ 4,192 $ 4,089 $ 4,036 $ 3,742
Net interest income
(taxable-equivalent) 3,164 2,941 2,756 2,662 2,687 2,604 2,661 2,542
Net interest income 3,152 2,930 2,743 2,651 2,687 2,599 2,652 2,542
Provision for credit losses 150 165 165 165 484 210 210 150
Securities gains (losses) (60)
Noninterest income 330 293 362 283 361 331 692 317
Other real estate
owned expense 11 18 6 18 44 23 11 72
Other noninterest expense 1,882 1,642 1,586 1,469 1,427 1,433 1,553 1,610
Income before taxes 1,439 1,398 1,348 1,281 1,094 1,265 1,509 1,026
Net income 919 896 863 825 675 778 928 625
Earnings per
common share .21 .21 .20 .19 .13 .19 .22 .16
Dividends per
common share .04
</TABLE>
<TABLE>
<CAPTION>
1996 Quarters 1995 Quarters
--------------------------------------------------------------------------------------
Fourth Third Second First Fourth Third Second First
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market price per share June 27th to
of common stock June 30th
High for the period $ 12 $ 10 3/4 $ 10 1/2 $ 10 1/2 $ 10 1/2 $ 9 1/4 $ 9 1/2 $ N/A
Low for the period 10 1/2 9 9 9 1/2 8 1/2 7 7 N/A
Closing price 12 10 1/2 9 1/2 9 1/2 10 1/4 8 1/2 7 1/4 N/A
</TABLE>
-12-
<PAGE> 14
SELECTED STATISTICAL INFORMATION
The following tables set forth certain consolidated statistical information
regarding the Company and its subsidiaries. The information should be read in
conjunction with the consolidated financial statements and related notes of the
Company.
Average Balances and interest Rates
Year Ended
($ thousands)
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995 December 31, 1994
-----------------------------------------------------------------------------------------------
Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/
Balances Expense Rates Balances Expense Rates Balances Expense Rates
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans (1) (2) $ 139,728 $ 14,166 10.14% $ 123,845 $ 13,018 10.51% $ 104,102 $ 9,499 9.12%
Investment securities
Taxable 41,957 2,686 6.40% 33,863 2,129 6.29% 33,757 1,905 5.64%
Tax-exempt (2) 812 66 8.13% 744 55 7.39% 645 54 8.37%
--------- -------- ----- --------- -------- ----- --------- -------- ----
42,769 2,752 6.43% 34,607 2,184 6.31% 34,402 1,959 5.69%
Federal funds sold 14,556 776 5.33% 14,273 842 5.90% 9,479 407 4.29%
Deposits in other banks 167 10 5.99% 454 29 6.39% 442 17 3.85%
--------- -------- ----- --------- -------- ----- --------- -------- ----
Total earning assets 197,220 17,704 8.98% 173,179 16,073 9.28% 148,425 11,882 8.01%
Other assets 20,294 18,051 14,682
--------- --------- ---------
Total assets $ 217,514 $ 191,230 $ 163,107
--------- --------- ---------
Liabilities and Stockholders'
Equity
Interest-bearing deposits
Now accounts $ 26,944 $ 724 2.69% $ 24,814 $ 715 2.88% $ 24,199 $ 605 2.50%
Money market accounts 33,511 1,070 3.19% 32,038 1,076 3.36% 28,839 801 2.78%
Savings 3,715 97 2.61% 4,157 119 2.86% 4,746 135 2.84%
Time, $100,000 and over 21,917 1,181 5.39% 18,120 1,026 5.66% 14,583 645 4.42%
Other time 46,604 2,659 5.71% 41,344 2,351 5.69% 33,669 1,582 4.70%
--------- -------- ----- --------- -------- ----- --------- -------- ----
132,691 5,731 4.32% 120,473 5,287 4.39% 106,036 3,768 3.55%
Long-term debt 2,915 197 6.76% 2,688 174 6.47% 2,088 138 6.60%
Short-term borrowings 6,381 253 3.96% 2,964 118 3.98% 1,845 53 2.84%
--------- -------- ----- --------- -------- ----- --------- -------- ----
Total interest-bearing
liabilities 141,987 6,181 4.35% 126,125 5,579 4.42% 109,969 3,959 3.60%
Noninterest-bearing
deposits 48,237 41,680 33,206
Other liabilities 2,222 1,893 1,272
Stockholders' equity 25,068 21,532 18,660
--------- --------- ---------
Total liabilities and
stockholders' equity $ 217,514 $ 191,230 $ 163,107
--------- --------- ---------
Spread on interest-bearing funds 4.63% 4.86% 4.41%
----- ----- ----
Net interest income $ 11,523 $ 10,494 $ 7,923
-------- -------- --------
Net interest margin 5.84% 6.06% 5.34%
----- ----- ----
</TABLE>
(1) Interest income includes loan fees of $496,845, $541,096 and $441,947 in
1996, 1995, and 1994 respectively. Non-accrual loans ($1,427,361, $612,855
and $477,095 in 1996, 1995 and 1994, respectively) are included in the
average balances and interest income on such loans is recognized on a cash
basis.
(2) Interest income includes the effects of taxable equivalent adjustments
using the Federal income tax rate of 34% for 1995 and 1994, 1996 also
includes an adjustment for the State tax of approximately 4%.
-13-
<PAGE> 15
NET INTEREST INCOME ANALYSIS (1)
<TABLE>
<CAPTION>
1996 compared to 1995 1995 compared to 1994 1994 compared to 1993
Increase (decrease) due to Increase (decrease) due to Increase (decrease) due to
Volume Rate Total Volume Rate Total Volume Rate Total
-------------------------- -------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
($ thousands)
Interest income:
Loans (1) $ 1,669 $ (521) $ 1,148 $ 1,801 $ 1,718 $ 3,519 $ 1,680 $ 800 $ 2,480
Investment securities
Taxable 509 48 557 6 218 224 325 (127) 198
Tax-exempt (2) 5 6 11 8 (7) 1 0 (1) (1)
-------- -------- ------- -------- -------- -------- -------- -------- --------
514 54 568 14 211 225 325 (128) 197
Federal funds sold 17 (83) (66) 206 229 435 7 121 128
Deposits in other banks (18) (1) (19) 0 12 12 3 (4) (1)
-------- -------- ------- -------- -------- -------- -------- -------- --------
Total interest income 2,182 (551) 1,631 2,021 2,170 4,191 2,015 789 2,804
-------- -------- ------- -------- -------- -------- -------- -------- --------
Interest expense:
Deposits
Now accounts 61 (52) 9 15 95 110 92 5 97
Money market accounts 50 (56) (6) 89 186 275 93 18 111
Savings (13) (9) (22) (17) 1 (16) 55 (4) 51
Time, $100,000 and over 215 (60) 155 156 225 381 (10) 43 33
Other time 299 9 308 360 409 769 204 (7) 197
-------- -------- ------- -------- -------- -------- -------- -------- --------
612 (168) 444 603 916 1,519 434 55 489
Long-term debt 15 8 23 36 0 36 125 2 127
Short-term borrowings 135 (1) 151 32 33 65 34 (5) 29
-------- -------- ------- -------- -------- -------- -------- -------- --------
151 7 158 68 33 101 159 (3) 156
Total interest expense 763 (161) 602 671 949 1,620 593 52 645
Net Change in Net
Interest Income $ 1,419 $ (390) $ 1,029 $ 1,350 $ 1,221 $ 2,571 $ 1,422 $ 737 $ 2,159
-------- -------- ------- -------- -------- -------- -------- -------- --------
</TABLE>
(1) As a result of the numerous and simultaneous volume and rate changes
during any year, it is not possible to allocate the changes precisely
between volume and rate. For purposes of this table, changes that are not
solely due to volume changes or solely due to rate changes have been
attributed to rates. In computing change in average volume and rate, the
average balances of non-accrual loans are included in loan balances.
(2) Interest income includes the effects of taxable equivalent adjustments
using a Federal tax rate of 34% 1993 - 1995 and a Federal tax rate of
34% plus a State tax effect of 4% in 1996.
-14-
<PAGE> 16
RETURN ON EQUITY AND ASSETS
The ratio of net income to average stockholders' equity and to average total
assets, and certain other ratios are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Percentage of net income to:
Average stockholders' equity 13.97% 13.96% 9.61%
Average total assets 1.61% 1.57% 1.10%
Percentage of average stockholders' equity
to average total assets 11.52% 11.26% 11.44%
</TABLE>
-15-
<PAGE> 17
INVESTMENT PORTFOLIO
The following table sets forth the carrying amounts of investment securities
held to maturity at the dates indicated:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
($ thousands)
U.S. Treasury and Government agencies $ 1,000 $ 1,000 $ 1,000
States and political subdivisions 758 838 643
Mortgage backed securities 0 0 9,789
-------- -------- --------
$ 1,758 $ 1,838 $ 11,432
-------- -------- --------
</TABLE>
Securities available for sale, at fair value are set forth as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
($ thousands)
U.S. Treasury $ 14,047 $ 7,566 $ 4,354
U. S. Government Agencies 22,447 20,442 13,765
Mortgage backed securities 6,988 8,982 2,625
-------- -------- --------
$ 43,482 $ 36,990 $ 20,744
-------- -------- --------
</TABLE>
The following table sets forth the maturities of investment securities held to
maturity and securities available for sale and the weighted average yields of
such securities as of December 31, 1996 (1):
<TABLE>
<CAPTION>
After One But After Five But
Within Within Within Over
One Year Five Years Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield Total
--------------- --------------- --------------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and Government
agencies $ 5,515 6.30% $ 18,106 6.36% $ 13,783 6.90% $ $ 37,494
Mortgage backed
securities 163 5.34% 4,374 6.05% 406 4.81% 2,045 6.78% 6,988
States and political
subdivisions (2) 263 9.35% 422 8.35% 101 8.40% 758
--------------- --------------- --------------- --------------- --------
$ 5,913 $ 22,480 $ 14,701 $ 2,146 $ 45,240
------- -------- -------- ------- --------
</TABLE>
(1) Investment securities available for sale are included in the
above table according to maturity as follows:
<TABLE>
<CAPTION>
Market Value Amortized Cost
------------ --------------
<S> <C> <C>
Within one year $ 5,678 $ 5,658
After one but within five years 22,480 22,353
After five but within ten years 3,279 13,186
After ten years 2,045 2,021
-------- --------
$ 43,482 $ 43,218
-------- --------
</TABLE>
By virtue of classification, these securities may be sold prior to maturity
-16-
<PAGE> 18
The following table sets forth the maturities of investment securities held to
maturity and securities available for sale and the weighted average yields of
such securities as of December 31, 1995 (1):
<TABLE>
<CAPTION>
After One But After Five But
Within Within Within Over
One Year Five Years Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield Total
--------------- --------------- --------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and Government
agencies $ 3,023 6.26% $ 15,206 6.31% $ 10,779 6.83% $ $ 29,008
Mortgage backed
securities 4,073 6.28% 2,419 5.53% 2,490 7.15% 8,982
States and political
subdivisions (2) 414 8.62% 424 7.45% 838
--------------- --------------- --------------- --------------- --------
$ 3,023 6.26% $ 19,693 6.35% $ 13,622 6.63% $ 2,490 7.15% $ 38,828
-------- -------- -------- ------- --------
</TABLE>
(1) Investment securities available for sale are included in the
above table according to maturity as follows:
<TABLE>
<CAPTION>
Market Value Amortized Cost
------------ --------------
<S> <C> <C>
Within one year $ 3,023 $ 3,007
After one but within five years 19,279 19,077
After five but within ten years 12,198 12,001
After ten years 2,490 2,494
-------- --------
$ 36,990 $ 36,579
-------- --------
</TABLE>
By virtue of classification, these securities may be sold
prior to maturity
(2) Weighted average yields on tax-exempt obligations have been computed on a
fully tax-equivalent basis using a federal tax rate of 34%
-17-
<PAGE> 19
INTEREST RATE SENSITIVITY ANALYSIS
The objectives of interest rate sensitivity management is to minimize the
effect of interest rate changes on the net interest margin while maintaining
net interest income at acceptable levels. The following table sets forth
interest rate sensitivity using contractual payment schedules at December 31,
1996. The re-pricing dates, which may differ from maturity dates for various
assets and liabilities, do not take into consideration external factors that
might effect the sensitivity of assets and liabilities.
<TABLE>
<CAPTION>
Maturing or Re-pricing Within
----------------------------------------------------------------------------------
($ thousands) 0-90 91-365 1-5 Over 5
Days Days Years Years Total
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earning assets:
Investments $ 8,494 $ 7,463 $ 22,480 $ 16,003 $ 54,440
Loans 116,715 12,024 27,667 4,282 160,688
---------- ---------- ---------- ---------- ----------
Total $ 125,209 $ 19,487 $ 50,147 $ 20,285 $ 215,128
---------- ---------- ---------- ---------- ----------
Interest-bearing liabilities (1)
Long-term borrowing 2,932 154 3,086
Short-term borrowing 8,583 3,132 11,715
Money market 11,371 23,086 34,457
NOW 27,228 27,228
Savings 3,509 3,509
Time, $100,000 and over 15,692 8,633 1,592 25,917
Other time 11,432 21,537 11,221 44,190
---------- ---------- ---------- ---------- ----------
Total $ 77,815 $ 56,388 $ 15,745 154 $ 150,102
---------- ---------- ---------- ---------- ----------
interest-sensitivity gap $ 47,394 $ (36,901) $ 34,402 $ 20,131 $ 65,026
Cumulative gap $ 47,394 $ 10,493 $ 44,895 $ 65,026
Percent of interest-sensitive
assets to interest-sensitive
liabilities 161% 35% 319% 13172% 143%
Cumulative percent of
interest-sensitive assets to
interest-sensitive liabilities 161% 108% 130% 143%
Percent of cumulative gap to
total earning assets 22% 5% 21% 30%
</TABLE>
Based on this gap analysis and assuming no change in the mix of earning assets
or interest bearing liabilities, falling interest rates could reduce the net
interest margin while rising rates could increase the net interest margin. The
present gap position is within the range acceptable to management.
(1) The re-pricing/maturity assumptions for liabilities are based on the
following schedule:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
0-90 91-365 1-5 Over 5
Days Days Years Years Total
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Money market 33% 67% 100%
NOW 100% 100%
Savings 100% 100%
Time, $100,000 and over 61% 33% 6% 100%
Other time 26% 49% 25% 100%
</TABLE>
-18-
<PAGE> 20
LOAN PORTFOLIO
Loans outstanding are presented in the accompanying table according to loan
category:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994 1993 1992
------------------------------------------------------
($ thousands)
<S> <C> <C> <C> <C> <C>
Commercial $ 91,125 $ 74,885 $ 64,134 $ 50,124 $ 32,235
Real estate - mortgage 20,242 21,198 16,717 14,676 22,723
Real estate - construction
and land development 34,407 25,898 23,785 18,005 13,266
Installment and other
consumer 14,686 10,828 12,169 11,085 6,283
Farmland 228 408 592 440 970
---------- ---------- ---------- ---------- ----------
$ 160,688 $ 133,217 $ 117,397 $ 94,330 $ 75,477
---------- ---------- ---------- ---------- ----------
</TABLE>
The following table shows the amount of loans (excluding real estate -
mortgage, installment and farmland) outstanding as of December 31, 1996 which,
based on remaining scheduled repayments of principal, are due in the periods
indicated. The amounts due after one year are also classified according to the
sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
December 31, 1996 Maturity Schedule
--------------------------------------------
After One
Within But Within After
($ thousands) One year Five Years Five Years Total
--------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 57,607 $ 27,863 $ 5,655 $ 91,125
Real estate construction and
land development 28,862 5,545 34,407
---------- ---------- ---------- -----------
$ 86,469 $ 33,408 $ 5,655 $ 125,532
---------- ---------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
Interest Sensitivity
December 31,
1996
($ thousands) -----------------------------------
Fixed Rate Variable rate
---------- -------------
<S> <C> <C>
Due after one but within five years $ 20,614 $ 12,794
Due after five years 3,889 1,766
---------- ----------
$ 24,503 $ 14,560
---------- ----------
</TABLE>
Maturity is based on contract terms. It is the Company's policy that loans
unpaid at maturity may be renewed at management's discretion based upon the
credit criteria, current market rates and terms.
-19-
<PAGE> 21
Information regarding non-performing assets is presented below:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994 1993 1992
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
($ thousands)
Loans on nonaccrual status $ 753 $ 1,298 $ 180 $ 1,043 $ 952
loans past due over 90 days 456
--------- --------- --------- --------- --------
Total $ 1,209 $ 1,298 $ 180 $ 1,043 $ 952
--------- --------- --------- --------- --------
</TABLE>
For each of the years ended December 31, 1992 through 1995, there were no loans
contractually past due 90 days and still accruing. There were no loans
classified as doubtful, substandard or special mention that have not been
disclosed in the above table, which represent or result from trends or
uncertainties which management reasonably expects will materially impact future
operational results, liquidity, or capital resources. Management is now aware
of any other material credits about which information causes doubts as to the
ability of such borrowers to comply with the loan repayment terms.
At December 31, 1996 non-performing loans were 0.75% of loans outstanding.
Information regarding foregone interest on non-accrual loans is presented below:
<TABLE>
<CAPTION>
1996 1995
------ ------
($ thousands)
<S> <C> <C>
Interest recognized $ 103 $ 148
Foregone interest 158 130
------ ------
Interest income that would have
been accrued at original terms $ 261 $ 278
------ ------
</TABLE>
Accruals on loans are discontinued when management believes, after consideration
of economic and business conditions and collection effort, that collection of
interest is doubtful. Additionally all loans contractually past due 90 days or
more which are not in the process of collection and adequately secured are
placed on nonaccrual status.
ALLOWANCE FOR LOAN LOSSES
The allocation of the Allowance for Loan Losses by loan category at the dates
indicated is presented below with percentage of loans in each category to total
loans:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------------- ---------------- ---------------- ---------------- ----------------
($ thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 1,399 57% $ 1,318 56% $ 839 55% $ 726 53% $ 570 44%
Real estate (1) 628 34% 742 36% 264 35% 166 35% 303 48%
Installment and
other consumer 128 9% 86 8% 105 10% 155 12% 82 8%
Unallocated 617 0% 397 0% 481 0% 326 0% 328 0%
--------------- --------------- --------------- --------------- ---------------
$ 2,772 100% $ 2,543 100% $ 1,689 100% $ 1,373 100% $ 1,283 100%
</TABLE>
(1) Includes all loans secured in whole or part by real estate.
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<PAGE> 22
SUMMARY OF LOAN LOSS EXPERIENCE
The Allowance for Loan Losses is maintained at a level considered by the
Company to be adequate to provide for potential loan losses. the adequacy of
the allowance and its related allocation is based on management's continuing
evaluation of the loan portfolio under current economic conditions, past loan
loss experience, underlying collateral value securing loans and such other
factors which deserve recognition in estimating potential loan losses. Loans
which are determined to be uncollectible are charged against the allowance. The
provision for loan losses and recoveries are added to the allowance. See
"Management's Discussion and Analysis of Operations and Financial Condition -
Allowance for Loan Losses".
The following table summarizes activity in the Allowance for Loan Losses for
the dates indicated:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
($ thousands)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $ 2,543 $ 1,689 $ 1,373 $ 1,283 $ 986
Loans charged-off:
Commercial 455 210 274 398 365
Real estate - construction 30 20
Real estate - mortgage 100 17 43 17 140
Installment and other consumer 24 8 40 23 8
---------- ---------- ---------- ---------- ----------
Total loans charged-off 579 265 357 458 513
Recoveries:
Commercial 145 52 63 19 7
Real estate - construction
Real estate - mortgage 17
Installment and other consumer 1 13 6 1
---------- ---------- ---------- ---------- ----------
163 65 69 20 7
Net loans charged-off 416 200 288 438 506
Provision for loan losses 645 1,054 604 528 803
---------- ---------- ---------- ---------- ----------
Balance, end of period $ 2,772 $ 2,543 $ 1,689 $ 1,373 $ 1,283
---------- ---------- ---------- ---------- ----------
Loans outstanding at end
of period $ 160,688 $ 133,217 $ 117,397 $ 94,330 $ 75,477
Ratio of allowance to loans
outstanding at end of period 1.73% 1.91% 1.44% 1.46% 1.70%
Average loans outstanding
during the period $ 139,728 $ 123,845 $ 104,102 $ 84,331 $ 66,754
Ratio of net charge-offs during the
period to average loans
outstanding 0.30% 0.16% 0.28% 0.52% 0.76%
</TABLE>
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<PAGE> 23
DEPOSITS
The following table summarizes average daily balances of deposits and rates
paid on such deposits for the periods indicated and the total weighted average
rate paid on total deposits:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------
1996 1995 1994
Amount Rate Amount Rate Amount Rate
----------------- ----------------- -----------------
($ thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 48,237 $ 41,680 $ 33,206
NOW accounts 26,944 2.69% 24,814 2.88% 24,199 2.50%
Savings 3,715 2.61% 4,157 2.86% 4,746 2.84%
Money market accounts 33,511 3.19% 32,038 3.36% 28,839 2.78%
Other time 46,604 5.71% 41,344 5.69% 33,669 4.70%
Time, $100,000 and over 21,917 5.39% 18,120 5.66% 14,583 4.42%
---------- ---------- ----------
Total $ 180,928 4.32% $ 162,153 4.39% $ 139,242 2.71%
---------- ---------- ----------
</TABLE>
Maturities of time deposits of $100,000 and over are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
-----------------------------
($ thousands)
<S> <C> <C>
Under 3 months $ 15,692 $ 10,533
3 to 6 months 5,320 3,034
6 to 12 months 3,313 3,095
Over 12 months 1,592 1,905
---------- ----------
Total $ 25,917 $ 18,567
---------- ----------
</TABLE>
-22-
<PAGE> 24
ITEM 2. PROPERTIES.
The main office of the Company and Mountain is located at 5100 LaVista
Road in Tucker, Georgia. The property consists of a two-story brick building
of approximately 14,000 square feet, which is constructed on 1.877 acres of
land owned by Mountain. Improvements include a three-lane drive through teller
installation, a drive-up night depository, an exterior automated teller
machine, as well as vault and safe deposit facilities.
Mountain's Norcross branch is located at 1200 Rockbridge Road in
Norcross, Georgia, approximately five miles from Mountain's main office. The
branch office consists of a one-story brick building of approximately 4,000
square feet, constructed on 0.795 acres of land owned by Mountain.
Improvements include a three-lane drive through window, drive-up night
depository, automated teller machine, as well as vault and safe deposit
facilities.
Mountain has opened a 7,551 square foot leased facility located
at 2300 West Park Place in Stone Mountain, Georgia and has moved all
bookkeeping, accounting, personnel, advertising and marketing functions from
the main office in Tucker to this new facility. In addition, Mountain conducts
its real estate construction lending activities from this facility and operates
a branch bank from the facility as well.
Charter's main office is located in an approximately 18,500 square foot
building owned by Charter located at 269 Roswell Street in Marietta, Georgia.
Improvements include a four-lane drive through teller installation, a drive-up
night depository, a vault and safe deposit facility. Charter maintains an
automated teller machine on leased property across the street from the main
branch. Charter's Galleria branch is located in approximately 1,100 square
feet of leased office space at 3100 Cumberland Circle, Suite 100, Atlanta,
Georgia. Improvements at Charter's Galleria branch include a walk-up night
depository. Charter's Powers Ferry branch is located in a 3,700 square foot
facility owned by Charter at 1920 Powers Ferry Road in Marietta. Improvements
include a three lane drive-up window, drive-up automated teller machine,
drive-up night depository and vault and safe deposit facilities.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which the Company or
either of the Banks is a party or of which any of their properties are subject;
nor are there material proceedings known to the Company to be contemplated by
any governmental authority; nor are there material proceedings known to the
Company, pending or contemplated, in which any director, officer, affiliate or
any principal security holder of the Company, or any associate of any of the
foregoing, is a party or has an interest adverse to the Company or the Banks.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter ended December 31,
1996 to a vote of security holders of the Company.
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<PAGE> 25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock trades on The Nasdaq Stock Market under the
symbol MRET. The following table sets forth, by fiscal quarter, the high and
low bid price of the Common Stock reported by The Nasdaq Stock Market from June
27, 1995 (the first day of trading in the Company's Common Stock) through
December 31, 1996:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31, 1995 High Bid Low Bid
----------------------------------- -------- -------
<S> <C> <C>
Second Quarter (June 27, 1995 through June 30,
1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9.50 $ 7.00
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . 9.25 7.00
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . $10.50 $ 8.50
Fiscal Year Ended December 31, 1996
-----------------------------------
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . $10.50 $ 9.50
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . 10.50 9.00
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . 10.75 9.00
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . $12.00 $10.50
</TABLE>
As of March 5, 1997, Merit Common Stock was held of record by
approximately 754 persons, representing approximately 1,500 beneficial holders.
On December 9, 1996, the Company declared the first of what it intends to be a
regular quarterly dividend of $.04 per share. The payment and amount of future
dividends on the common stock will depend on the Banks' earnings, capital
requirements, financial condition and other factors considered relevant by the
Board of Directors of the Company, including the ability of the Banks to pay
dividends to the Company, the amount of which is subject to regulatory
limitations.
Mountain is restricted in its ability to pay dividends under the
national banking laws and by regulations of the Comptroller. Pursuant to 12
U.S.C. Section 56, a national bank may not pay dividends from its capital.
All dividends must be paid out of undivided profits, subject to other
applicable provisions of law. Payments of dividends out of undivided profits
is further limited by 12 U.S.C. Section 60(a), which prohibits a bank from
declaring a dividend on its shares of common stock until its surplus equals its
share capital, unless there has been transferred to surplus not less than 1/10
of the bank's net income of the preceding two consecutive half-year periods (in
the case of an annual dividend). Pursuant to 12 U.S.C. Section 60(b), the
approval of the Comptroller is required if the total of all dividends declared
by a bank in any calendar year exceeds the total of its net income for that
year combined with its retained net income for the preceding two years, less
any required transfers to surplus.
The Comptroller maintains regulations concerning the level of allowable
dividend payments by national banks. The intended effect of these regulations
is to make the calculation of national banks' dividend-paying capacity
consistent with generally accepted accounting principles
-24-
<PAGE> 26
(GAAP). In this regard, the allowance for loan and lease losses is not
considered an element of either "undivided profits then on hand" or "net
profits." Further, a national bank may be able to use a portion of its capital
surplus account as "undivided profits then on hand," depending on the
composition of that account. In addition, the Comptroller's regulations
clarify that dividends on preferred stock are not subject to the limitations of
12 U.S.C. Section 56, while explicitly making such dividends subject to the
constraints of 12 U.S.C. Section 60. The regulations do not diminish or
impair a well-capitalized bank's ability to make cash payments to its
shareholders in the form of a return of capital.
Charter is restricted in its ability to pay dividends under Georgia law
and Georgia Banking Department regulations. Pursuant to regulations adopted by
the Georgia Banking Department, a bank needs the approval of the Georgia
Banking Department to pay cash dividends if at the time of such payment (1)
total classified assets exceed 80% of the bank's equity capital (which includes
the aggregate par value of all common stock, paid in surplus, retained
earnings, capital reserves and reserves for loan losses), or (2) the aggregate
amount of dividends to be paid or anticipated to be paid during the calendar
year exceeds 50% of the net after-tax profits of the bank for the previous
calendar year, or (3) the ratio of equity capital (as defined above) to
adjusted total assets is less than six percent (6%).
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion sets forth the major factors which affected the
Company's results of operations and financial condition. These comments should
be read in conjunction with the consolidated financial statements of the
Company included herein.
OVERVIEW
Net income for the year ended December 31, 1996 was $3,503,292, compared
to $3,006,383 in 1995. Net income per common share was $.81 in 1996 compared
to $.70 in 1995. The increase in 1996 net income resulted from a 9.5% increase
in net interest income to $11,475,753, and a decrease of 38.8% in the provision
for loan losses to $645,000, offset by a decrease of 25.5% in non-interest
income to $1,267,781 and an increase of 6.4% in non-interest expense to
$6,632,137.
Total assets were $236,180,303 at December 31, 1996, 15.1% higher than
total assets of $205,250,205 at the previous year end. Average assets for the
year 1996 were $217,514,000, compared to average assets of $191,230,000 in
1995. This 13.7% increase in average assets was funded by an 11.6% increase, or
$18,775,000, in average deposits over the prior year, and a 115.3% increase, or
$3,417,000, in average short-term borrowings.
Net income as a percentage of average total assets was 1.61% in 1996,
compared to 1.57% in 1995, and net income as a percentage of average
shareholders' equity was 13.97% in 1996 compared to 13.96% in 1995.
FINANCIAL CONDITION
EARNING ASSETS
Average earning assets in 1996 were $197,220,000, 13.9% above the
$173,179,000 average in 1995. Average total loans of $139,728,000 in 1996 and
$123,845,000 in 1995 represented 70.8% and 71.5% of average earning assets for
the respective years. The average total loan growth of 12.8% during 1996 was
accomplished while maintaining quality underwriting standards. At December 31,
1996, commercial loans comprised 56.7% of
-25-
<PAGE> 27
outstanding loan balances versus 56.2% at the prior year-end. Real estate
related loans, which include construction and land development, commercial
owner occupied, commercial income producing and mortgages, represented 34.0% of
outstanding balances versus 35.4% at December 31, 1995. Consumer and
installment related loans represented 9.1% of the loan portfolio at December
31, 1996, versus 8.1% at the prior year-end. Most of the Company's business
activity is with customers located within the Atlanta metropolitan area. The
Banks' only concentration of credit is for real estate development,
construction, and mortgage purposes, or to businesses dependent upon the real
estate market. The Company has no highly leveraged transactions and has no
foreign credits in its loan portfolio.
Average total investment securities increased $8,162,000 to $42,769,000
or 23.6% above the 1995 average of $34,607,000. The investment securities
portfolio represented 21.7% of average earning assets in 1996 and 20.0% in
1995. Proceeds from mortgage-backed securities repayments and from maturities
of investment securities available-for-sale and held-to-maturity in 1996 were
$6,191,000. There were no sales of securities in 1996. Proceeds from sales and
maturities of the same categories of investment securities in 1995 were
$15,439,000, with resulting net loss on sales of $59,788. As of December 31,
1996, $6,981,000 or 15.4% of the investment securities portfolio consisted of
mortgage-backed securities whose maturities may be adversely affected by
prepayments which tend to increase in a declining interest rate environment.
Mortgage-backed securities represented 23.1% of the investment portfolio as of
December 31, 1995.
During 1995, the Company strategically evaluated the investment
portfolios of its two subsidiary banks and determined that a repositioning of a
portion of its securities portfolio was prudent in the management of its
assets. Therefore, certain securities held in the available-for-sale portfolio
were sold at a loss of $59,788. The reinvestment of these funds provided a
greater return and improved the Company's asset/liability gap.
Included in the mortgage-backed securities portfolio at December 31,
1996, were collateralized mortgage obligations ("CMOs") with a carrying value
of $812,719, an average maturity of five years and a net unrealized loss of
$5,002. These CMO securities have a weighted-average life of approximately four
months, and are not considered high risk. If market rates increase or decrease
by 300 basis points, the weighted-average life of each CMO remains under six
months and the market price fluctuations range from a 1.2% decline to a 1.1%
increase.
At December 31, 1996, the investment portfolio included three U.S.
Government Agency investments which are defined as derivatives or structured
notes. Two are Federal Home Loan Bank ("FHLB") Floating Rate Notes with a total
book value of $1,500,000. The first FHLB security, carried in the Company's
held-to-maturity portfolio, was purchased August 4, 1993, maturing August 4,
2003, has a book value of $1,000,000 and on December 31, 1996, a market value
of $895,060. The unrealized loss is a result of the interest rate being fixed
for the first two years at 8%, then converting to a floating rate based on
indexes of CMT and LIBOR. The second FHLB security, held in the Company's
available-for-sale portfolio, was purchased October 18, 1993, maturing October
18, 2000, has a face value of $500,000 and on December 31, 1996, a market value
of $500,670, with a floating rate based on LIBOR and the prime rate. The third
security is a Federal National Mortgage Association structured note, held in
the available-for-sale portfolio, which was purchased on September 8, 1993, has
a face value of $500,000, and on December 31, 1996, a market value of $494,180.
The rate on this security at acquisition was 4.40%, then increased to a fixed
rate of 5.55% and is continuously callable. These securities are rated AAA
and have an implied guarantee of the U.S. Government and, therefore, no
perceived risk for loss of principal. Combined, these securities comprise about
4.4% of the investment portfolio.
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<PAGE> 28
As a result of the adoption of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"), the Company has segregated its investment securities
portfolio into securities held-to-maturity and those available-for-sale.
Investments held-to-maturity are those for which management has both the
ability and intent to hold to maturity and are carried at amortized cost. At
December 31, 1996, this category totaled $1,757,813. Investments
available-for-sale are securities identified by management as securities which
may be sold prior to maturity in response to various factors including
liquidity needs, capital compliance, changes in interest rates or portfolio
risk management. This portfolio provides interest income and serves as a
source of liquidity for the Company. These securities are carried at fair
value, with unrealized gains andlosses reported as a separate component of
shareholders' equity, net of related tax effects. At December 31, 1996, this
category totaled $43,481,766, with an unrealized gain of $163,552, net of tax
effect.
During December 1995, the Banks made a one-time transfer of
approximately $9,036,000 and ($54,000) in amortized cost and net unrealized
loss, respectively, of U.S. Government Agency and mortgage-backed certificates
from the held-to-maturity to the available-for-sale portfolio in accordance
with "A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities" issued by the Financial Accounting
Standards Board in November 1995.
At December 31, 1996, the investment securities held-to-maturity
portfolio had net unrealized losses of $91,613, comprised of unrealized losses
of $106,023 and unrealized gains of $14,410. At year-end 1995, the
held-to-maturity portfolio had net unrealized losses of $85,066, representing
unrealized losses of $104,520 and unrealized gains of $19,454. At December 31,
1996, the investment securities available-for-sale portfolio had net unrealized
gains of $263,795, comprised of unrealized losses of $73,185 and unrealized
gains of $336,980. At December 31, 1995, the available-for-sale portfolio had
net unrealized gains of $410,653, comprised of unrealized losses of $100,811
and unrealized gains of $511,464.
Investment securities with a carrying value of approximately $29,472,000
and $19,269,000 at December 31, 1996 and 1995, respectively, were pledged to
secure deposits of public funds, securities sold under agreements to repurchase
and certain other deposits as provided by law.
Average federal funds sold were $14,556,000 in 1996, or 7.4% of average
earning assets, compared to $14,273,000 in 1995 or 8.2% of average earning
assets.
LIABILITIES
Average interest-bearing liabilities rose 12.6% to $141,987,000 in 1996
from an average of $126,125,000 in 1995. This growth is attributed to a 5.2%
increase in NOW, money market and savings accounts and a 15.2% increase in time
deposits.
The aggregate average balance of NOW, money market and savings accounts
was $64,170,000, 5.2% greater than the 1995 aggregate average balance of
$61,009,000. The average balance of other time deposits increased 12.7% during
1996 to $46,604,000 from $41,344,000 in 1995. Average time deposits with
balances over $100,000 increased 21.0% to $21,917,000 in 1996 from $18,120,000
in 1995. This category of deposits, as a percent of average interest-bearing
liabilities, increased to 15.4% in 1996 from 14.4% in 1995.
Interest-bearing deposits, including certificates of deposit, will
continue to be a major source of funding for the Company. However, there is no
specific emphasis placed on time deposits of $100,000 and over. During 1996,
aggregate average balances of time deposits of $100,000 and over comprised
12.1% of total deposits compared to 11.2% for the prior year.
-27-
<PAGE> 29
Average non-interest bearing deposits were $48,237,000 in 1996 versus
$41,680,000 in 1995, reflecting growth of 15.7%. As a percentage of average
total deposits, these deposits increased from 25.7% in 1995 to 26.7% in 1996.
The Company maintains a funding program through which it sells
investment securities from its portfolio to customers with an agreement to
repurchase the securities at a specified future date, generally overnight.
Interest is paid to the customers at a competitive market rate while the
Company retains those monies for funding earning assets. These funds are not
deposits and are recorded as short-term borrowings. At December 31, 1996,
securities sold under agreements to repurchase were $7,538,000, compared to
$4,368,000 at December 31, 1995.
Additionally, the Company has funded longer term fixed rate loans with a
matched source of funds through advances from the Federal Home Loan Bank of
Atlanta ("FHLBA") with comparable maturities and a lower rate. This funding
source has provided customers with the convenience of a fixed rate loan, while
the Company has a fixed margin for a fixed term in a changing rate environment.
One new advance in the amount of $792,000 was obtained in 1996. At December 31,
1996, FHLBA long-term advances were approximately $3,264,000, compared to
$2,613,000 at December 31, 1995.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The goal of liquidity management is to ensure the availability of an
adequate level of funds to meet the loan demand and the deposit withdrawal
needs of the Company's customers. The Company actively manages the levels,
types and maturities of earning assets in relation to the sources available in
an effort to provide adequate funding at all times.
The Company's loan to deposit ratio averaged 77.2% in 1996, compared to
76.4% in 1995. Management plans an average loan to deposit ratio in the range
of 70-80% during 1997.
There are no known trends, demands, commitments, events or uncertainties
that will result in or are reasonably likely to result in the Company's
liquidity increasing or decreasing in any material way.
At December 31, 1996, investment securities with a carrying value of
approximately $23,857,000 are scheduled to mature within the next five years.
Of this amount, $5,750,000 is scheduled to mature within one year.
The Company has short-term funding available through various federal
funds lines of credit with other financial institutions and its membership in
the FHLBA. Further, the FHLBA membership provides the availability of
participation in loan programs with varying maturities and terms. At December
31, 1996, the Company had total short-term borrowings from the FHLBA of
$4,000,000 at an average fixed rate of 5.75%.
In the current interest rate environment, the liquidity and maturity
structure of the Company's assets and liabilities are important to the
maintenance of acceptable performance levels. A decreasing rate environment
negatively impacts earnings as the Company's rate-sensitive assets generally
reprice faster than its rate-sensitive liabilities. Conversely, in an
increasing rate environment, earnings are positively impacted. This
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. Management has specified gap guidelines for a one year time
horizon of between .80 and 1.2. At December 31, 1996, the Company had gap
ratios of approximately 1.61 for the next three month time period and 1.08 for
the one year period ending December 31, 1997. Thus, for 1997, rate-sensitive
assets will reprice slightly faster than rate-sensitive liabilities.
-28-
<PAGE> 30
The Company is not aware of any current recommendations by regulatory
authorities which, if they were to be implemented, would have a material effect
on the Company's liquidity, capital resources, or results of operations.
RESULTS OF OPERATIONS - 1996 VS. 1995
NET INTEREST INCOME
Net interest income rose 9.5% from $10,480,296 in 1995 to $11,475,753 in
1996. This increase in net interest income can be attributed to growth in loans
and investments, partly offset by growth in time deposits and short-term
borrowings and by lower margins. During 1996, the net interest margin was 5.84%
on average earning assets of $197,220,000. In 1995, the net interest margin
was 6.06% on average earning assets of $173,179,000. The average yield on
earning assets decreased 30 basis points to 8.98% in 1996 from 9.28% in 1995.
The average rate paid on interest-bearing liabilities decreased 7 basis points
to 4.35% in 1996 from 4.42% in 1995. The decreased earning assets yield was the
result of lower market rates, in particular the federal funds rate, in 1996
compared to 1995. The yield decrease exceeded the decrease in cost of funds and
led to the lower margin.
To counter potential declines in the net interest margin and the
interest rate risk inherent in the balance sheet, the Company adjusts the rates
and terms of its interest paying liabilities in response to general market rate
changes and the competitive environment. The Company monitors federal funds
sold levels throughout the year, investing any funds not necessary to maintain
appropriate liquidity in higher yielding investments. The Company will continue
to manage its balance sheet and its interest rate risk based on changing market
interest rate conditions.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management's estimate of an
amount adequate to provide for potential losses inherent in the loan portfolio.
In its continuing evaluation of the allowance and its adequacy, management
considers the Company's loan loss experience, the amount of past due and
non-performing loans, current and anticipated economic conditions, underlying
collateral values securing loans and other factors.
While it is the Company's policy to charge-off in the current period the
loans in which a loss is considered probable, there are additional risks of
future losses which cannot be quantified precisely or attributed to particular
loans or classes of loans. Because these risks include the state of the
economy, management's judgment as to the adequacy of the allowance is
necessarily approximate and imprecise.
In assessing the adequacy of the allowance, management relies
predominately on its ongoing review of the loan portfolio, which is undertaken
both to ascertain whether there are probable losses which must be charged-off
and to assess the risk characteristics of the portfolio in the aggregate. This
review encompasses the judgment of management, utilizing internal loan rating
standards, guidelines provided by the banking regulatory authorities governing
Charter and Mountain, their loan portfolio review as part of the bank
examination process, and an annual independent external loan review performed
by a consultant.
The provision for loan losses charged to operations in 1996 was
$645,000, a 38.8% decrease from the provision of $1,054,297 recorded in 1995.
Net charge-offs were $416,624 or .30% of average loans outstanding during 1996
as compared to $199,694 or .16% of average loans outstanding during 1995. The
decrease in the provision is management's evaluation of the potential for
losses in the loan portfolio and the economic outlook. At December 31, 1996,
the allowance for loan losses was $2,771,784 or 1.73% of loans outstanding as
compared to
-29-
<PAGE> 31
$2,543,408 or 1.91% of loans outstanding at December 31, 1995. The allowance
for loan losses as a multiple of net loans charged off was 6.65 times and 12.74
times for the years ended December 31, 1996 and 1995, respectively.
At December 31, 1996, the Company held one residential home property in
other real estate owned, which totaled $110,747. Management anticipates an
orderly disposition of this asset with no significant loss at sale. At December
31, 1996, the Company had aggregate non-accrual loans of $1,062,206, a decrease
from $1,298,017 at the prior year end. The ratio of non-accrual loans to total
loans was .66% at December 31, 1996, and .97% at December 31, 1995. At December
31, 1996, there were total loans of $147,068 past due 90 days or more and still
accruing.
Included in other assets is a receivable of $685,000 from SouthTrust
Bank of Georgia, N.A. ("SouthTrust") which failed to remit to Mountain amounts
it received from customers of an insolvent lender who had sold participations
in loans to Mountain. Mountain believes an additional $250,000 is due Mountain
from SouthTrust for another participation loan which SouthTrust assumed. These
transactions are the subject of a lawsuit initiated in August 1995 by Mountain
and three other lenders contending that SouthTrust improperly seized these loan
repayments which Mountain and the other plaintiffs claim are due them by virtue
of their direct ownership interest in these loans. SouthTrust contends, among
other things, that it had not consented to the original sale of these
participations to Mountain and these other lenders as permitted by its
arrangements with the originator of these loans and that it had rights superior
to Mountain and the other lenders in the loan repayments. On September 30,
1996, Mountain and the other plaintiffs amended their lawsuit against
SouthTrust alleging additional claims, including conversion and violation of
the Georgia RICO statutes. Management of Mountain intends to vigorously pursue
this action.
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS 114") was issued in May 1993. SFAS
114 requires that losses on loans be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or
the fair value of the collateral if the loan is collateral dependent. The
Company adopted SFAS 114 on January 1, 1995. At December 31, 1996 and 1995, the
Company held impaired loans as defined by SFAS 114 of approximately $960,000
and $1,900,000, respectively, for which specific allocations of approximately
$205,000 and $170,000, respectively, have been established within the allowance
for loan losses. The average recorded investment and related interest income
recognized on these loans were approximately $1,109,000 and $68,000 in 1996 and
$1,864,000 and $197,000 in 1995.
NON-INTEREST INCOME
Non-interest income was $1,267,781 for the year ended December 31, 1996,
compared to $1,701,272 for 1995, a 25.5% decrease compared to a 49.6% increase
for 1995 over 1994. This decrease resulted from higher service fees on
deposits, offset by lower gains on sale of SBA loans and lower other income.
Deposit volume growth increased fees on deposits 11.9%, or $85,650, in 1996
compared to 1995. Gain on sale of SBA loans declined 98.6% as management
decided in late 1995 not to sell SBA loans in 1996. Other income fell 37.5% in
1996 compared to 1995. Included in other income in 1995 is a one-time gain of
$347,522 from the sale of a publicly traded bank holding company stock that was
acquired by Mountain as partial settlement of a loan in 1993. Excluding this
one-time gain from 1995, other income increased $72,430, or 18.7%, in 1996 over
1995. Other income also includes fees from brokerage services the Company
provides its clients through a contractual third party relationship with INVEST
Financial Corporation. This service produced income of $60,350 in 1996 compared
to $66,155 in 1995.
-30-
<PAGE> 32
NON-INTEREST EXPENSE
Non-interest expense increased 6.4%, or $399,276, to $6,632,137 during
1996 as compared to 1995. Salaries and other personnel expense increased 7.9%
in 1996 over 1995, and other operating expense increased 8.9%, reflecting the
Company's continued growth.
Occupancy and equipment expense increased 19.6% over 1995, the result of
Mountain's opening a combined branch bank/operations center in April 1996, and
Charter's opening a new full service branch in November 1996.
FDIC insurance premiums paid in 1996 decreased $133,982, or 73.1%,
compared to 1995 because the FDIC determined in 1995 that the Bank Insurance
Fund was adequately funded in accordance with regulations and substantially
lowered the assessments beginning in the third quarter of 1995 through 1996.
Legal fees increased 11.6% in 1996 from 1995, attributable to the
Company's lawsuit discussed above involving amounts due from a servicer of
participation loans purchased by the Company.
Net non-interest expense (defined as non-interest expense less
non-interest income) as a percentage of average assets increased from 2.37% in
1995 to 2.47% in 1996. The efficiency ratio (non-interest expense divided by
the sum of net interest income and non-interest income) was 52.0% in 1996,
compared to 51.2% in 1995. These ratios have held steady as the Company's
earning asset and deposit base grows and its branch system expands, and as
management continues to focus on improving non-interest fee income and
controlling operating expenses.
INCOME TAXES
At December 31, 1996, the Company's net deferred tax asset was $731,839.
No valuation allowance was recorded for this asset since taxable income exists
in the available carryback periods in an amount which would ensure realization
of the asset.
In 1996, the Company recorded an income tax provision of $1,963,105,
reflecting an effective tax rate of 35.9%. This compared with a provision of
$1,888,027 in 1995 and a 38.6% effective tax rate.
CAPITAL RESOURCES
At December 31, 1996, the Company's core capital ratio was 14.7%
compared to 14.5% at December 31, 1995. At December 31, 1996, the Company's
total risk based capital ratio was 15.9% compared to 16.1% at the prior year
end. These ratios exceed the minimum capital adequacy guidelines imposed by
regulatory authorities on banks and bank holding companies, which are 4% for
core capital and 8% for total risk based capital.
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.
RESULTS OF OPERATIONS - 1995 VS. 1994
Net income was $3,006,383 in 1995 compared to $1,792,509 in 1994. Net
income per common share was $.70 in 1995, compared to $.45 in 1994.
-31-
<PAGE> 33
The increase in net income for the year ended December 31, 1995, was
attributable to a 32.6% increase in net interest income, or $2,576,420; an
increase of 48.5% in non-interest income, or $555,872; offset by an increase in
non- interest expense of 11.1%, or $620,934.
Net interest income was $10,480,296 in 1995, the result of a net
interest margin of 6.06% on average earning assets of $173,179,000. This
compares with a net interest margin of 5.34% on average earning assets of
$148,425,000 in 1994. The increase in the net interest margin was attributable
to higher yields on earning assets, resulting from higher market rates, partly
offset by higher rates on interest paying liabilities. The increase in margin
accounted for slightly less than one-half of the increase in net interest
income. The remainder resulted from higher volumes.
Non-interest income was $1,701,272 in 1995, compared with $1,145,400 in
1994. This increase came from increased fees on deposits and service charges as
a result of volume growth and from increased gains on sale of SBA loans, and a
gain in 1995 of $347,522 from the sale of stock in a publicly traded bank
holding company which the Company acquired in partial settlement of a loan.
Non-interest expense was $6,232,861 in 1995 versus $5,611,927 in 1994.
This increase was attributable to the Company's overall growth and Charter's
opening a branch in the last quarter of 1994, all of which generated increases
in salaries and other personnel costs, equipment and occupancy expenses, and
other operating expenses.
The provision for loan losses charged to operations was $1,054,297 in
1995 compared to $604,013 in 1994. The increase in the provision was in
response to management's assessment of potential losses in the loan portfolio
from an anticipated downturn in the area's economy, particularly its real
estate portfolio. Net charge-offs were $199,694 in 1995, representing .16% of
average loans outstanding during the year, compared to $287,837 in 1994 or .28%
of average loans outstanding during 1994. At December 31, 1995, the allowance
for loan losses was $2,543,408, or 1.91% of loans outstanding, compared to
$1,688,805, or 1.44% of loans outstanding at December 31, 1994.
In 1995 the Company recorded an income tax provision of $1,888,027
reflecting an effective tax rate of 38.6%. This compares with a provision of
$1,040,827 in 1994 reflecting a 36.7% effective tax rate.
ITEM 7. FINANCIAL STATEMENTS.
The following financial statements are filed with this report:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
-32-
<PAGE> 34
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Merit Holding Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Merit Holding Corporation and subsidiaries at December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
January 17, 1997
Atlanta, Georgia
-33-
<PAGE> 35
MERIT HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
<S> <C> <C>
ASSETS
Cash and due from banks $ 14,295,260 $ 15,214,844
Federal funds sold and other short-term investments 7,759,285 11,538,083
Interest-bearing time deposits with other financial
institutions 100,000 203,750
Investment securities, held-to-maturity at cost
(market value of $1,666,200 and $1,753,150 at
December 31, 1996 and 1995, respectively)
(Notes 2 and 4) 1,757,813 1,838,216
Securities available-for-sale (Notes 2 and 4) 43,481,766 36,989,924
Federal Reserve Bank stock 299,850 299,850
Federal Home Loan Bank stock 1,041,600 695,300
Loans, less allowance for loan losses of $2,771,784
and $2,543,408 at December 31, 1996 and 1995,
respectively (Notes 2 and 5) 157,915,964 130,674,294
Premises and equipment, net (Notes 2 and 6) 5,633,032 4,650,485
Other real estate owned 110,747 718,673
Accrued interest receivable and other assets 3,784,986 2,426,786
------------- -------------
Total assets $ 236,180,303 $ 205,250,205
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Demand $ 57,396,092 $ 51,959,459
Checking with interest 27,227,950 26,984,809
Money-market accounts 34,457,084 28,435,375
Savings 3,508,905 3,809,717
Time, $100,000 and over 25,916,972 18,567,497
Other 44,189,759 43,306,680
------------- -------------
192,696,762 173,063,537
Short-term borrowings (Note 7) 11,715,438 4,497,555
Long-term debt (Note 7) 3,085,796 2,483,716
Accrued interest payable and other liabilities 1,882,759 1,893,880
------------- -------------
Total liabilities 209,380,755 181,938,688
------------- -------------
Commitments and contingencies (Note 12)
Shareholders' equity (Note 9)
Common stock, $2.50 par value; 10,000,000
shares authorized; 3,704,102 and 3,807,815 issued;
3,704,102 and 3,665,055 outstanding at December 31,
1996 and 1995, respectively 9,260,255 9,519,537
Paid-in capital 8,061,624 8,302,438
Retained earnings 9,314,117 5,958,990
Unrealized gain on securities available-for-sale,
net of tax 163,552 271,032
Treasury stock, 0 and 142,760 shares, at cost at
December 31, 1996 and 1995, respectively - (740,480)
------------- -------------
Total shareholders' equity 26,799,548 23,311,517
------------- -------------
Total liabilities and shareholders' equity $ 236,180,303 $ 205,250,205
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-34-
<PAGE> 36
MERIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
Interest and dividend income
Interest and fees on loans (Note 2) $ 14,135,633 $ 13,017,913 $ 9,498,547
Interest on securities 2,659,263 2,102,205 1,889,643
Interest on federal funds sold and other
short-term investments 775,797 841,432 407,507
Interest on time deposits with other financial
institutions 9,928 28,813 17,134
Dividends on Federal Reserve Bank stock 17,991 17,991 17,991
Dividends on Federal Home Loan Bank stock 57,771 50,478 31,984
------------ ------------ -----------
Total interest and dividend income 17,656,383 16,058,832 11,862,806
------------ ------------ -----------
Interest expense on deposits 5,730,931 5,287,014 3,767,277
Interest expense on long-term debt 196,787 173,716 139,175
Interest expense on short-term borrowings 252,912 117,806 52,478
------------ ------------ -----------
Total interest expense 6,180,630 5,578,536 3,958,930
------------ ------------ -----------
Net interest income 11,475,753 10,480,296 7,903,876
Provision for loan losses (Notes 2 and 5) 645,000 1,054,297 604,013
------------ ------------ -----------
Net interest income after provision for loan losses 10,830,753 9,425,999 7,299,863
------------ ------------ -----------
Non-interest income
Service charges and fees on deposits 805,437 719,787 686,696
Gain on sale of SBA loans 3,409 247,458 180,219
Other income 458,935 734,027 278,485
------------ ------------ -----------
Total non-interest income 1,267,781 1,701,272 1,145,400
------------ ------------ -----------
Non-interest expense
Salaries and other personnel 3,416,451 3,167,918 2,697,803
Occupancy and equipment 946,891 791,702 737,211
Advertising and marketing 127,646 104,525 112,836
FDIC insurance premiums 49,341 183,323 296,415
Legal fees 264,420 236,925 265,869
Data processing fees 139,227 137,895 138,852
Loss on sales of securities, net - 59,788 48,300
Other operating 1,688,161 1,550,785 1,314,641
------------ ------------ -----------
Total non-interest expense 6,632,137 6,232,861 5,611,927
------------ ------------ -----------
Income before income taxes 5,466,397 4,894,410 2,833,336
Provision for income taxes (Notes 2 and 8) 1,963,105 1,888,027 1,040,827
------------ ------------ -----------
Net income $ 3,503,292 $ 3,006,383 $ 1,792,509
============ ============ ===========
Earnings per share $ 0.81 $ 0.70 $ 0.45
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-35-
<PAGE> 37
MERIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
COMMON STOCK ON SECURITIES
NUMBER AVAILABLE
OF SHARES PAID-IN RETAINED FOR SALE, TREASURY
ISSUED PAR VALUE CAPITAL EARNING NET OF TAX STOCK TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 3,605,520 $ 9,013,800 $ 7,795,572 $ 1,160,098 $ 182,876 $ (665,480) $ 17,486,866
Exercise of stock options 1,508 3,770 1,605 5,375
Net proceeds from issuance of common
stock by acquired bank 123,989 309,973 265,313 575,286
Purchase of fractional and dissenting
shares in pooling (369) (923) (927) (1,850)
Unrealized loss on available-for-sale
securities, net of tax (409,457) (409,457)
Net income 1,792,509 1,792,509
Treasury stock purchased (75,000) (75,000)
--------- ----------- ----------- ----------- ----------- ---------- ------------
Balance at December 31, 1994 3,730,648 9,326,620 8,061,563 2,952,607 (226,581) (740,480) 19,373,729
Exercise of warrants 77,167 192,917 240,875 433,792
Unrealized gain on available-for-sale
securities, net of tax 497,613 497,613
Net income 3,006,383 3,006,383
--------- ----------- ----------- ----------- ----------- ---------- ------------
Balance at December 31, 1995 3,807,815 9,519,537 8,302,438 5,958,990 271,032 (740,480) 23,311,517
Exercise of options and warrants 39,047 97,618 142,766 240,384
Retirement of treasury stock (142,760) (356,900) (383,580) 740,480 -
Dividend declared (148,165) (148,165)
Unrealized loss on available-for-sale
securities, net of tax (107,480) (107,480)
Net income 3,503,292 3,503,292
--------- ----------- ----------- ----------- ----------- ---------- ------------
Balance at December 31, 1996 3,704,102 $ 9,260,255 $ 8,061,624 $ 9,314,117 $ 163,552 $ - $ 26,799,548
========= =========== =========== =========== =========== ========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-36-
<PAGE> 38
MERIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 3,503,292 $ 3,006,383 $ 1,792,509
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 453,919 394,008 371,278
Net amortization of premiums and discounts on
securities 57,519 19,935 155,630
Provision for loan losses 645,000 1,054,297 604,013
Loss on sales of securities, net - 59,788 48,300
Gain on sale of SBA loans (3,409) (247,458) (180,219)
(Gain) loss on sale of other real estate (6,904) 56,124 7,472
(Increase) in interest receivable (166,286) (405,759) (361,565)
(Decrease) increase in interest payable (10,850) 657,275 169,982
(Increase) decrease in prepaid expenses and
other assets (1,242,259) 97,482 175,700
(Decrease) increase in accrued expenses and
other liabilities (109,057) (499,300) 662,691
------------ ------------ ------------
Net cash provided by operating activities 3,120,965 4,192,775 3,445,791
------------ ------------ ------------
Cash flows from investing activities
Purchases of held-to-maturity securities (100,410) (200,000) (2,040,975)
Proceeds from maturities of held-to-maturity securities 180,250 714,104 3,021,730
Purchases of available-for-sale securities (including
mortgage-backed securities) (12,706,762) (20,986,634) (11,387,140)
Proceeds from sales of available-for-sale securities
(including mortgage-backed securities) 2,011,107 6,590,253 1,452,891
Proceeds from maturities of available-for-sale securities 4,000,000 8,134,715 9,203,080
Purchases of time deposits with other financial
institutions - - (3,750)
Proceeds from maturities of time deposits with
other financial institutions 103,750 - 596,000
Purchases of Federal Home Loan Bank stock (346,300) (105,600) (198,400)
Proceeds from sale of other real estate 712,083 1,409,198 795,494
Loans made to customers, net (27,883,261) (17,191,150) (24,020,297)
Capital expenditures, net of retirements (1,483,372) (288,581) (202,225)
------------ ------------ ------------
Net cash used in investing activities (35,512,915) (21,923,695) (22,783,592)
------------ ------------ ------------
Cash flows from financing activities
Proceeds from short-term borrowings, net 7,217,883 2,572,644 765,536
Proceeds from long-term debt 792,000 - 2,064,219
Repayment of borrowings (189,920) (129,772) (86,119)
Net increase in deposits 19,633,221 13,906,636 27,469,514
Net proceeds from issuance of common stock - - 575,287
Exercise of stock options/warrants 240,384 433,792 5,375
Purchase of fractional and dissenting shares in pooling - - (1,850)
Purchase of treasury stock - - (75,000)
------------ ------------ ------------
Net cash provided by financing activities 27,693,568 16,783,300 30,716,962
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (4,698,382) (947,620) 11,379,161
Cash and cash equivalents at beginning of period 26,752,927 27,700,547 16,321,386
------------ ------------ ------------
Cash and cash equivalents at end of period $ 22,054,545 $ 26,752,927 $ 27,700,547
============ ============ ============
Supplemental data
Interest paid $ 6,192,409 $ 4,921,260 $ 3,788,949
============ ============ ============
Income taxes paid $ 2,670,000 $ 2,594,450 $ 421,558
============ ============ ============
Transfer from loans to real estate acquired
through foreclosure $ - $ 1,418,353 $ 233,685
============ ============ ============
Transfer of investment securities to available
for sale $ - $ 9,035,630 $ -
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-37-
<PAGE> 39
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED BALANCE SHEETS
1. DESCRIPTION OF THE BUSINESS
Merit Holding Corporation (the "Company") is a bank holding company whose
business is conducted by its wholly-owned subsidiaries, Mountain National
Bank ("Mountain"), located in Tucker, Georgia, and Charter Bank & Trust
Co. ("Charter"), located in Marietta, Georgia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Mountain and Charter (the "Banks").
All intercompany accounts and transactions have been eliminated in
consolidation. Certain prior year amounts have been reclassified to
conform to the current year presentation.
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 and other
short-term investments.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115") requires
the Company to segregate its investment securities portfolio into
securities held-to-maturity and those available-for-sale. Investments in
debt securities, for which management has both the ability and intent to
hold to maturity, are carried at amortized cost. Investments in debt
securities which management believes may be sold prior to maturity, in
connection with changes in interest rates, prepayment risk, changes in the
Company's liquidity or other similar factors, are classified as
available-for-sale and are reported at fair value, with unrealized gains
and losses reported as a separate component of shareholders' equity, net
of associated tax effects. Gains and losses on the sale of securities are
recognized on the specific identification method.
LOANS
Loans are stated at principal amounts outstanding reduced by an allowance
for loan losses. Interest income on loans is recognized to reflect a
constant rate of return on net funds outstanding. Accrual of interest
income on individual loans is discontinued when principal or interest is
past due for 90 days or more unless the loan is well secured and in the
process of collection. Interest accrued but not collected is reversed
against income when a loan is classified as nonaccruing unless the
ultimate collection of interest is probable. Fees and costs directly
related to the origination and acquisition of loans are deferred and
recognized over the life of the loans as an adjustment of yield.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
("SFAS 114") which requires that losses, if any, on impaired loans be
measured based on the present value of expected future cash
-38-
<PAGE> 40
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
flows discounted at the loan's effective interest rate or the fair value
of the collateral if the loan is collateral dependent.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level considered adequate
to provide for potential loan losses. The adequacy of the allowance is
based on management's continuing evaluation of the collectibility of the
loan portfolio under current economic conditions, which includes estimates
of underlying collateral value securing loans and such other factors which
deserve recognition in estimating loan losses. Loans which are determined
to be uncollectible are charged against the allowance.
The success of the Banks is largely dependent on the general economic
conditions in the Atlanta metropolitan area. Estimates, appraisals and
evaluations of loans are critical to the financial statements.
Accordingly, changes in such estimates, appraisals and evaluations might
be required because of changing economic conditions and the economic
prospects of borrowers.
OTHER REAL ESTATE OWNED
Other real estate acquired as a result of foreclosure is recorded at fair
market value less estimated selling costs. Costs associated with
improving the property are capitalized to the extent fair market value is
not exceeded. Costs of owning other real estate are expensed as incurred
by the Banks.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the respective assets for financial reporting purposes and
using straight-line and accelerated methods for income tax purposes.
Additions and major improvements are capitalized while routine maintenance
and repairs and gain or loss on dispositions are recognized currently.
INTANGIBLE ASSETS
Goodwill arising from acquisitions is amortized on a straight-line basis
over a period of 180 months.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of" ("SFAS 121") which requires that
an impairment of long-lived assets be recognized if the future cash flows
expected from the use of the asset and its eventual disposition is less
than the carrying amount of the asset. This Statement had no effect on
the Company's financial position or results of operations.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
("SFAS 109") which is an asset and liability approach. The asset and
liability approach requires the recognition of deferred tax
-39-
<PAGE> 41
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of
other assets and liabilities.
ESTIMATED FAIR VALUES
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 107 ("SFAS 107") which requires disclosure of
current market value information related to certain assets and
liabilities, both on- and off-balance sheet. The estimated fair values of
the Banks' financial instruments are detailed in Note 11.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS
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 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.
NET INCOME PER SHARE
The Company is required to calculate net income per share based on the
"modified treasury stock" method described in Accounting Principles Board
Opinion No. 15, "Earnings per Share." Under this method, net income and
weighted-average shares are adjusted for the effects of assumed exercise
of certain common stock equivalents subject to certain limitations. The
number of shares used to compute earnings per share in 1996, 1995, and
1994 was 4,319,004, 4,300,078, and 4,224,660, respectively.
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 at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
3. CASH AND DUE FROM BANKS
The Banks are required to maintain average reserve balances through
deposits with the Federal Reserve Bank or other banks. The Banks'
requirement for reserves at December 31, 1996 and 1995 was approximately
$1,849,000 and $1,747,000, respectively.
-40-
<PAGE> 42
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENT SECURITIES (INCLUDING MORTGAGE-BACKED CERTIFICATES)
The amortized cost and estimated market value of investment securities
held-to-maturity at December 31, 1996 and 1995 are presented below:
<TABLE>
<CAPTION>
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>
<TABLE>
<CAPTION>
1995
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Government
Agencies $ 1,000,000 $ - $ 104,520 $ 895,480
Tax exempt bonds 838,216 19,454 - 857,670
---------------- ------------ ------------- ----------------
$ 1,838,216 $ 19,454 $ 104,520 $ 1,753,150
================ ============ ============= ================
</TABLE>
The amortized cost and estimated market value of investment securities
held-to-maturity at December 31, 1996, by contractual maturity, are shown
below:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
<S> <C> <C>
Due in one year or less $ 235,000 $ 235,338
Due after one year through five years - -
Due after five years through ten years 1,422,405 1,331,537
Due after ten years 100,408 99,325
---------------- ----------------
$ 1,757,813 $ 1,666,200
================ ================
</TABLE>
During December 1995, the Banks made a one-time transfer of approximately
$9,036,000 and ($54,000) in amortized cost and net unrealized loss,
respectively, of U.S. Government Agency and mortgage-backed certificates
from the held-to-maturity to the available-for-sale portfolio in
accordance with "A Guide to Implementation of Statement 115 on Accounting
for Certain Investments in Debt and Equity Securities" issued by the
Financial Accounting Standards Board in November 1995.
-41-
<PAGE> 43
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and estimated market value for securities
available-for-sale (including mortgage-backed certificates) at December
31, 1996 and 1995 is presented below:
<TABLE>
<CAPTION>
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>
<TABLE>
<CAPTION>
1995
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Treasuries $ 7,487,573 $ 78,532 $ - $ 7,566,105
U.S. Government
Agencies 20,056,068 399,809 14,137 20,441,740
Mortgage-backed
certificates 9,035,630 33,123 86,674 8,982,079
---------------- ------------ ------------- ----------------
$ 36,579,271 $ 511,464 $ 100,811 $ 36,989,924
================ ============ ============= ================
</TABLE>
The amortized cost and estimated market value of securities
available-for-sale (including mortgage-backed certificates) at December
31, 1996, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
<S> <C> <C>
Due in one year or less $ 5,492,688 $ 5,515,188
Due after one year through five years 17,966,477 18,106,376
Due after five years through ten years 12,777,814 12,872,419
36,236,979 36,493,983
Mortgage-backed certificates 6,980,992 6,987,783
---------------- ----------------
$ 43,217,971 $ 43,481,766
================ ================
</TABLE>
The scheduled maturities for mortgage-backed certificates are not
disclosed because their expected maturities will differ from contractual
maturities as borrowers may have the right to prepay obligations with or
without prepayment penalties.
-42-
<PAGE> 44
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1995, Mountain sold common stock at a gain of approximately
$347,500 of a publicly traded bank holding company that was acquired as
partial settlement of a loan during 1993. This common stock was accounted
for in accordance with SFAS 115 and carried at its fair value in 1994.
There were no sales of investment securities during 1996; however,
proceeds from paydowns of mortgage-backed certificates were $2,011,107.
Proceeds from sales of investment securities including mortgage-backed
certificates during 1995 and 1994 were $6,590,253, and $1,452,891,
respectively. Net losses of $59,788 and $48,300 were realized on those
sales, respectively.
Investment securities with a carrying value of approximately $29,471,803
and $19,269,214 at December 31, 1996 and 1995, respectively, were pledged
to secure deposits of public funds, securities sold under agreements to
repurchase and certain other deposits as provided by law.
5. LOANS
The composition of the loan portfolio at December 31, 1996 and 1995 is
presented below:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Commercial $ 91,124,703 $ 74,884,726
Real estate - construction and land
development 34,407,374 25,898,108
Real estate - mortgage 20,241,934 21,198,324
Instalment and other consumer 14,686,037 10,828,444
Farm land 227,700 408,100
----------------- -----------------
160,687,748 133,217,702
Less: Allowance for loan losses (2,771,784) (2,543,408)
----------------- -----------------
$ 157,915,964 $ 130,674,294
================= =================
</TABLE>
Activity in the allowance for loan losses for the three years ended
December 31, 1996 is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Beginning balance $ 2,543,408 $ 1,688,805 $ 1,372,629
Provision for loan losses 645,000 1,054,297 604,013
Recoveries 162,203 64,975 68,838
Charge-offs (578,827) (264,669) (356,675)
--------------- -------------- --------------
Ending balance $ 2,771,784 $ 2,543,408 $ 1,688,805
=============== ============== ==============
</TABLE>
-43-
<PAGE> 45
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1996, 1995 and 1994, the Banks had aggregate non-accrual
or reduced rate loans of $1,062,206, $1,298,017, and $179,983,
respectively. If interest on these loans had been accrued throughout the
year, income on these loans would have been increased by approximately
$158,000 in 1996, $130,000 in 1995, and $59,000 in 1994. Additionally, at
December 31, 1996 and 1995, the Banks held impaired loans as defined by
SFAS 114 of approximately $960,000 and $1,900,000, respectively, for which
specific allocations of approximately $205,000 and $170,000, respectively,
have been established within the allowance for loan losses. The average
recorded investment and related interest income recognized on these loans
were approximately $1,109,000 and $68,000 in 1996 and $1,864,000 and
$197,000, in 1995.
6. PREMISES AND EQUIPMENT
At December 31, 1996 and 1995, premises and equipment balances are as
follows:
<TABLE>
<CAPTION>
USEFUL
LIVES 1996 1995
<S> <C> <C> <C>
Land $ 1,098,580 $ 898,580
Bank buildings 30-40 years 4,388,096 3,747,620
Equipment, furniture
and fixtures 3-10 years 2,392,526 1,850,851
-------------- -------------
7,879,202 6,497,051
Less: Accumulated depreciation (2,246,170) (1,846,566)
-------------- -------------
$ 5,633,032 $ 4,650,485
============== =============
</TABLE>
7. BORROWINGS
The Banks utilize short-term borrowings as needed for liquidity purposes
in the form of federal funds purchased and securities sold under
agreements to repurchase, which generally represent overnight borrowing
transactions. At December 31, 1996 and 1995, the Banks have federal funds
lines from other banks totalling $20,500,000 and $15,250,000,
respectively. There were no amounts outstanding under these short term
commitments at December 31, 1996 and 1995. Additionally, during December
1996, the Banks entered into $4,000,000 of short-term fixed rate advances
with an average interest rate of 5.75% from the Federal Home Loan Bank of
Atlanta (the "FHLBA").
The Banks had outstanding long-term fixed rate advances from the FHLBA of
$3,085,796 at December 31, 1996. The average interest rate paid on the
long-term advances during 1996 was 6.55%. All the advances are
collateralized by certain 1-4 family residential properties and investment
securities as required by the FHLBA. At December 31, 1996, aggregate
principal maturities of the advances are as follows:
-44-
<PAGE> 46
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
1997 $ 177,890
1998 177,890
1999 177,890
2000 765,387
2001 1,809,754
Thereafter 154,875
------------
3,263,686
Less - Current portion (177,890)
------------
$ 3,085,796
============
</TABLE>
8. INCOME TAXES
The components of income tax expense for the years ended December 31,
1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Federal:
Current $ 1,825,962 $ 2,047,701 $ 1,179,034
Deferred provision (benefit) 7,611 (282,195) (138,207)
--------------- -------------- --------------
1,833,573 1,765,506 1,040,827
State:
Current 128,959 248,325 -
Deferred (provision) benefit 573 (125,804) -
--------------- -------------- --------------
$ 1,963,105 $ 1,888,027 $ 1,040,827
=============== ============== ===============
</TABLE>
The difference between income tax expense and the tax computed by applying
the statutory federal income tax rate to income before income taxes is
explained as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
Income before income taxes $ 5,466,397 $ 4,894,410 $ 2,833,336
=============== ============== ==============
Federal income taxes at statutory
rate $ 1,858,575 $ 1,664,099 $ 963,334
Alternative minimum tax - - (30,709)
State tax 85,491 163,894 -
Nondeductible expenses 36,216 26,170 98,299
Interest on tax exempt securities (16,470) (14,153) (12,008)
Other (708) 48,017 21,911
--------------- -------------- --------------
Income tax expense $ 1,963,105 $ 1,888,027 $ 1,040,827
=============== ============== ==============
Effective income tax rate 36% 39% 37%
</TABLE>
-45-
<PAGE> 47
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1996 and 1995, were as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred tax liabilities
Premises and equipment $ 7,036 $ 11,550
Discount on investment securities 96,940 48,637
Accrual to cash conversion 46,566 69,849
Unrealized gain on securities available-for-sale 91,998 139,622
-------------- ------------
Total deferred tax liabilities 242,540 269,658
-------------- ------------
Deferred tax assets
Allowance for loan losses 844,170 795,879
Gain on SBA loans 27,400 28,802
Loan fees, net 28,988 38,024
Non-accrual loans 12,877 90,782
Other 60,944 8,570
-------------- ------------
Total deferred tax assets 974,379 962,057
-------------- ------------
Net deferred tax assets $ 731,839 $ 692,399
============== ============
</TABLE>
9. SHAREHOLDERS' EQUITY
In connection with Mountain's formation and initial offering, transferable
warrants were issued to Mountain's organizers. The warrants, which were
assumed by the Company, allow each holder to purchase one additional share
of common stock for each share purchased in connection with the initial
offering and are exercisable for ten years from the date of opening of
Mountain at the initial offering price of $5.00 per share. At December
31, 1996 and 1995, 979,799 warrants were outstanding.
During 1993 and 1994, Charter issued 98,070 and 28,350 warrants,
respectively, which entitled the purchasers to purchase additional shares
of common stock at the greater of the Company's book value at the date of
exercise or $4.35 per share. In connection with the merger of Charter
with Merit in 1994, these warrants were canceled and new warrants to
purchase the Company's common stock were issued. As of December 31, 1995,
34,214 warrants were outstanding. However, prior to their expiration date
of February 29, 1996, 32,437 of these warrants were exercised. The
remaining warrants expired.
In connection with the merger, the Company also assumed Charter's options
for 109,037 shares. These options were granted at prices ranging from
$3.52 to $4.66 per share. All of the options were declared fully vested
in August 1995. During 1996, 1,610 of the options were exercised at $4.66
per share.
The Company has an Incentive Stock Option Plan (the "Plan") under which
350,000 shares have been reserved. Expiration of the options is no later
than ten years from the date of grant. Options are granted at the average
market price, as defined in the Plan, on the date of grant.
-46-
<PAGE> 48
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options vest in accordance with a schedule as determined by the Board of
Directors at each grant date. All options granted prior to January 1,
1996 are fully vested. A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
OPTION PRICE
SHARES PER SHARE
<S> <C> <C>
Outstanding at December 31, 1994 71,200 $ 5.00 - $ 5.40
Granted 1,200 $ 5.40
Granted 22,500 $10.25
-------
Outstanding at December 31, 1995 94,900
Granted 24,000 $11.75
Exercised (5,000) $ 5.00
Expired (650) $10.25
-------
Outstanding at December 31, 1996 113,250
=======
</TABLE>
As of December 31, 1996, there were 231,750 options available for grant
and 89,250 options available for exercise under the Plan.
Additionally, the Board of Directors may grant stock options for up to
100,000 shares of the Company's common stock to the president of Mountain
pursuant to a stock bonus arrangement. As of December 31, 1996, the Board
of Directors had granted stock options of 85,000 shares at $5.00 per share
to the president. All unexercised options expire on August 2, 1998. No
options under this arrangement have been exercised as of December 31,
1996.
In December 1993, the Board of Directors agreed to purchase 15,000 shares
of stock owned by the president of Mountain at a price not to exceed $5.50
per share and agreed to grant the president an option to purchase 15,000
shares at an option price equal to the price paid by the Company when
purchasing the president's 15,000 shares. In January 1994, the president
sold 15,000 shares of his stock to the Company for $5.00 per share and the
related options under the agreement were granted at $5.00 per share. No
options under this arrangement have been exercised.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-based Compensation" ("SFAS 123") was issued by the Financial
Accounting Standards Board during 1995 and was effective for the Company
in 1996. SFAS 123 allows companies to adopt the fair value based method
or to continue using the intrinsic value based method prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25").
Since the Company has elected to continue applying APB 25 in accounting
for its plans, no compensation cost has been recognized in 1995 or 1996.
Additionally, in accordance with SFAS 123, the Company is required to
disclose fair value information about its stock-based employee
compensation plans for periods beginning after January 1, 1995. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under
those plans consistent with the method of SFAS 123, the Company's net
income
-47-
<PAGE> 49
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and earnings per share would have been reduced. In order to estimate
compensation cost, the Black-Scholes model was employed using the
following assumptions for each year: 0.3% dividend yield, an expected life
of six years and expected volatility of 30%. The risk-free interest rate
used was 6.15% for 1995 and 5.45% for 1996. The weighted-average fair
values of the options granted in 1995 and 1996 were $5.03 and $5.82,
respectively. The following table sets forth the effect on net income and
primary earnings per share:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C> <C>
Net income As reported $ 3,503,292 $ 3,006,383
Pro forma $ 3,452,070 $ 2,901,273
Primary earnings per share As reported $ .81 $ .70
Pro forma $ .80 $ .68
</TABLE>
10. PROFIT SHARING PLAN
Mountain established the Mountain National Bank Profit Sharing Plan for
all employees 21 years of age or older who are currently employed with
more than one year of eligible service as defined. Under the plan
provisions, employees may contribute up to the legal contribution limit.
Mountain will make an annual matching contribution equal to a percentage
of the amount contributed by the employee, up to 3% of the employee's
annual compensation. In 1996, 1995, and 1994, Mountain accrued matching
contributions of approximately $45,000, $35,000, and $31,000,
respectively.
Charter has adopted a 401(k) Savings Plan for all employees 21 years of
age or older who are currently employed with more than one year of
eligible service as defined. Under the plan provisions, employees may
contribute up to the legal contribution limit. Charter's matching
contribution is equal to 50% of the employee's contribution in 1996 and
1995 and 25% of the employee's contribution in 1994, up to 6% of the
employee's annual compensation. Amounts expensed in 1996, 1995 and 1994,
as a result of the employer's contributions to this plan totaled $28,898,
$26,789, and $9,377, respectively.
As of December 31, 1996, the Charter plan was renamed the Merit Holding
Corporation 401(k) Profit Sharing Plan and the Mountain profit sharing
plan was merged into it.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires the disclosure of fair
value information about financial instruments, whether or not recognized
in the balance sheet, for which it is practicable to estimate fair value.
In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. The
resulting fair values may
-48-
<PAGE> 50
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
be significantly affected by the assumptions used, including the discount
rates and estimates of future cash flows.
Certain financial instruments and all nonfinancial instruments are
excluded from the disclosure requirements. The disclosures also do not
include certain servicing rights on the Company's SBA-guaranteed loan
portfolio. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
Many of the Company's assets and liabilities are short-term financial
instruments whose carrying values approximate fair value. These items
include cash and due from banks, federal funds sold and short-term
investments, federal funds purchased and securities sold under repurchase
agreements. The methods and assumptions used to estimate the fair value
of the Company's other financial instruments are as follows:
INTEREST BEARING TIME DEPOSITS WITH OTHER FINANCIAL INSTITUTIONS.
Fair value for time deposits with other financial institutions is based on
the present value of projected future cash in-flows.
INVESTMENT SECURITIES
Fair value for investment securities and mortgage-backed certificates is
based on quoted market prices.
LOANS
The loan portfolio is segregated into categories of loans with similar
financial characteristics. The fair value of each category is calculated
using present value techniques based upon projected cash flows and
estimated discount rates. The calculated present values are then reduced
by an allocation of the allowance for loan losses.
DEPOSITS
The fair value of demand deposits, NOW accounts, money-market accounts and
savings accounts are the amounts payable on demand at the reporting date.
The fair value of fixed maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining
maturities.
BORROWINGS
Fair value has been determined by calculating the present value of future
principal and interest cash flows.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments to extend credit and standby letters of
credit is generally determined using the fees currently charged to enter
into similar agreements, taking into account the present creditworthiness
of the counterparties. The amount was deemed to be immaterial for
disclosure under SFAS 107.
-49-
<PAGE> 51
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying value of financial instruments and their related estimated
fair values as of December 31, 1996 and 1995 are presented below:
<TABLE>
<CAPTION>
1996
ESTIMATED
CARRYING FAIR
VALUE VALUE
<S> <C> <C>
Financial assets
Interest-bearing time deposits with
other financial institutions $ 100,000 $ 100,863
Investment securities
held-to-maturity 1,757,813 1,666,200
available-for-sale 36,493,983 36,493,983
Mortgage-backed certificates
available-for-sale 6,987,783 6,987,783
Loans, net of allowance for loan losses 157,915,964 154,729,893
Financial liabilities
Fixed maturity deposits 70,106,731 72,732,418
Short-term borrowings 11,715,438 11,926,190
Long-term debt 3,085,796 3,675,772
</TABLE>
<TABLE>
<CAPTION>
1995
ESTIMATED
CARRYING FAIR
VALUE VALUE
<S> <C> <C>
Financial assets
Interest-bearing time deposits with
other financial institutions $ 203,750 $ 204,467
Investment securities
held-to-maturity 1,838,216 1,753,150
available-for-sale 28,007,845 28,007,845
Mortgage-backed certificates
available-for-sale 8,982,079 8,982,079
Loans, net of allowance for loan losses 130,674,294 127,777,241
Financial liabilities
Fixed maturity deposits 62,053,780 64,705,852
Short-term borrowings 4,497,555 4,497,555
Long-term debt 2,483,716 2,968,856
</TABLE>
-50-
<PAGE> 52
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMMITMENTS AND CONTINGENCIES
The Company is party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. 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 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 other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
amounts of those instruments. The Company uses the same credit policies
in making commitments and conditional obligations as they do for
on-balance-sheet instruments.
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. At December 31, 1996 and 1995,
unfunded commitments to extend credit were approximately $52,006,000 and
$49,456,000, respectively. In many instances, customers may not draw down
on approved lines of credit or may not draw on these lines to the full
amount approved, thereby reducing the Company's need to maintain liquidity
to fund these obligations. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Company upon extension of credit is based on
management's credit evaluation of the customer. Collateral varies but may
include accounts receivable, inventory, property, plant, equipment, and
income-producing commercial properties.
Letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. At December 31,
1996 and 1995, commitments under letters of credit aggregated
approximately $2,310,000 and $1,024,000, respectively. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Collateral varies but
may include accounts receivable, inventory, equipment, certificates of
deposit, and property. Since most of the letters of credit are expected
to expire without being drawn upon, they do not necessarily represent
future cash requirements.
Most of the Company's business activity is with customers located within
the Atlanta Metropolitan area. The Bank's only concentration of credit is
for real estate development, construction, and mortgage purposes, or to
businesses dependent upon the real estate business. The Company has no
highly leveraged transactions and has no foreign credits in its loan
portfolio.
-51-
<PAGE> 53
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is a defendant in litigation arising through the normal course
of business. In the opinion of management, the liability, if any,
associated with these matters would not be material to the Company's
financial statements.
The Company leases office space under noncancellable operating leases.
The future minimum rentals payments under these leases are immaterial at
December 31, 1996.
13. RELATED PARTY TRANSACTIONS
At December 31, 1996 and 1995, deposits obtained from directors, executive
officers and their related interests were approximately $8,736,000 and
$10,915,000, respectively. These deposits were taken in the normal course
of business at market interest rates.
Loans to directors and their related interests, in the aggregate were as
follows:
<TABLE>
<S> <C>
Balance at December 31, 1994 $ 3,307,267
New loans 2,672,985
Payoffs (1,953,062)
--------------
Balance at December 31, 1995 $ 4,027,190
New loans 3,415,890
Payoffs (2,650,735)
--------------
Balance at December 31, 1996 $ 4,792,345
==============
</TABLE>
Such loans were made in the ordinary course of business at the Company's
normal credit terms, including interest and collateral, and do not
represent more than a normal risk of collection.
14. REGULATORY CAPITAL
The Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the Banks' financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Banks must meet specific capital guidelines that
involve quantitative measures of the Banks' assets, liabilities, and
certain off-balance-sheet items as calculated and are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios of total and Tier
I capital to risk-weighted assets and Tier I capital to average assets,
all as defined in the regulations. Management believes, as of December
31, 1996, that the Banks meet all capital adequacy requirements to which
they are subject.
As of December 31, 1996, the most recent notification from the Office of
the Comptroller of the Currency categorized Mountain as "well capitalized"
and the FDIC categorized Charter as
-52-
<PAGE> 54
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
"well capitalized" under the regulatory framework for prompt corrective
action. To be categorized as "well capitalized" the Banks must maintain
minimum total risk-based, Tier I risk-based and Tier I leverage ratios.
There are no conditions or events since those notifications that
management believes have changed the Banks' categories.
The Banks' actual capital amount and ratios are presented in the table
below:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(000'S) (000'S) (000'S)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Total capital (to risk-weighted assets)
Consolidated $ 28,825 15.9% > $14,484 > 8.0% N/A
Mountain National Bank $ 15,895 16.7% > $ 7,621 > 8.0% > $9,527 > 10.0%
Charter Bank & Trust $ 12,218 14.1% > $ 6,957 > 8.0% > $8,696 > 10.0%
- - - -
Tier I Capital (to risk-weighted assets)
Consolidated $ 26,556 14.7% > $ 7,242 > 4.0% N/A
Mountain National Bank $ 14,699 15.4% > $ 3,810 > 4.0% > $5,715 > 6.0%
Charter Bank & Trust $ 11,131 12.8% > $ 3,479 > 4.0% > $5,218 > 6.0%
- - - -
Tier I Capital (to average assets)
Consolidated $ 26,556 11.3% > $ 7,054 > 3.0% N/A
Mountain National Bank $ 14,699 12.5% > $ 3,536 > 3.0% > $5,893 > 5.0%
Charter Bank & Trust $ 11,131 9.5% > $ 3,515 > 3.0% > $5,858 > 5.0%
- - - -
</TABLE>
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(000'S) (000'S) (000'S)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1995
Total capital (to risk-weighted assets)
Consolidated $ 24,992 16.1% > $12,437 > 8.0% > N/A
Mountain National Bank $ 13,743 16.6% > $ 6,618 > 8.0% > $8,273 > 10.0%
Charter Bank & Trust $ 10,403 14.2% > $ 5,847 > 8.0% > $7,309 > 10.0%
- - - -
Tier I Capital (to risk-weighted assets)
Consolidated $ 22,582 14.5% > $ 6,218 > 4.0% N/A
Mountain National Bank $ 12,839 15.5% > $ 3,309 > 4.0% > $4,964 > 6.0%
Charter Bank & Trust $ 9,330 12.8% > $ 2,924 > 4.0% > $4,386 > 6.0%
- - - -
Tier I Capital (to average assets)
Consolidated $ 22,582 11.2% > $ 6,055 > 3.0% N/A
Mountain National Bank $ 12,839 12.8% > $ 3,014 > 3.0% > $5,023 > 5.0%
Charter Bank & Trust $ 9,330 9.8% > $ 2,843 > 3.0% > $4,739 > 5.0%
- - - -
</TABLE>
Banking regulations restrict the amount of dividends which the Banks may
pay to the Company without obtaining prior approval from their respective
regulators. Under these regulations, retained earnings of the Banks
available for payment of dividends to the Company without prior regulatory
approval at December 31, 1996 is approximately $5,400,000.
-53-
<PAGE> 55
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. CONDENSED FINANCIAL STATEMENTS OF HOLDING COMPANY
Following are the condensed balance sheets of Merit Holding Corporation at
December 31, 1996 and 1995, and the related condensed statements of income
and of cash flows for the three years ended December 31, 1996.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
<S> <C> <C>
ASSETS
Cash $ 425,204 $ 321,648
Investment in bank subsidiaries 26,401,318 22,902,272
Organizational costs - 4,585
Other assets 141,190 88,012
---------------- ----------------
$ 26,967,712 $ 23,316,517
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Dividends payable $ 148,165 $ -
Other liabilities 20,000 5,000
Shareholders' equity 26,799,547 23,311,517
---------------- ----------------
$ 26,967,712 $ 23,316,517
================ ================
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
Dividends from bank subsidiaries $ - $ 40,000 $ 259,000
Operating expenses (156,411) (173,043) (191,257)
------------- ------------- --------------
(Loss) income before income taxes and
equity in earnings of bank subsidiaries (156,411) (133,043) 67,743
Income tax benefit (expense) 53,179 (618) 64,947
------------- ------------- --------------
Income (loss) before equity in earnings of
bank subsidiaries (103,232) (133,661) 132,690
Undistributed equity in earnings of
subsidiaries 3,606,524 3,140,044 1,659,819
------------- ------------- --------------
Net income $ 3,503,292 $ 3,006,383 $ 1,792,509
============= ============= ==============
</TABLE>
-54-
<PAGE> 56
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 3,503,292 $ 3,006,383 $ 1,792,509
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities
Undistributed equity in income
of bank subsidiaries (3,606,524) (3,140,044) (1,659,819)
Amortization of organizational costs 4,584 11,001 11,001
(Increase) decrease in other assets (53,179) 618 (64,949)
Increase in other liabilities 15,000 3,150 1,850
--------------- --------------- --------------
Net cash (used in) provided by
operating activities (136,827) (118,892) 80,592
--------------- --------------- --------------
Cash flows from financing activities
Purchase of fractional and dissenting
shares in pooling - - (1,850)
Exercise of stock options 240,383 433,792
Purchase of treasury stock - - (75,000)
--------------- --------------- --------------
Net cash provided by (used in)
financing activities 240,383 433,792 (76,850)
--------------- --------------- --------------
Net increase in cash 103,556 314,900 3,742
Cash at beginning of the period 321,648 6,748 3,006
--------------- --------------- --------------
Cash at end of the period $ 425,204 $ 321,648 $ 6,748
=============== =============== ==============
Supplemental data
Dividend declared $ 148,165 $ - $ -
=============== =============== ==============
</TABLE>
-55-
<PAGE> 57
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
1996 QUARTERS 1995 QUARTERS
-------------------------------------- -------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest and dividend
income $ 4,795 $ 4,580 $ 4,229 $ 4,052 $ 4,192 $ 4,089 $ 4,036 $ 3,742
Net interest income 3,152 2,930 2,743 2,651 2,687 2,599 2,652 2,542
Provision for loan losses 150 165 165 165 484 210 210 150
Total non-interest income 330 293 362 283 361 331 692 317
Total non-interest expense 1,893 1,660 1,592 1,487 1,471 1,456 1,624 1,682
Income before income taxes 1,439 1,398 1,348 1,281 1,094 1,265 1,509 1,026
Net income 919 896 863 825 675 778 928 625
Earnings per share .21 .21 .20 .19 .13 .19 .22 .16
Dividends per share .04 - - - - - - -
</TABLE>
-56-
<PAGE> 58
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There has been no occurrence requiring a response to this Item.
PART III
Except as to information with respect to executive officers which is
contained in a separate heading under Item 1 to this Form 10-KSB, the
information required by Part III of Form 10-KSB is, pursuant to General
Instruction G(3) of Form 10-KSB, incorporated by reference from the Company's
definitive proxy statement (the "Proxy Statement") to be filed pursuant to
Regulation 14A for the Company's 1997 Annual Meeting of Shareholders. The
Company will, within 120 days of the end of its fiscal year, file with the
Securities and Exchange Commission a definitive Proxy Statement pursuant to
Regulation 14A.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning directors and executive officers of the
Registrant is set forth in the Proxy Statement under the headings "Election of
Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of
1934," which information is incorporated herein by reference. The name, age
and position of each executive officer of the Company is set forth under the
heading "Executive Officers" in Item 1 of this Report.
ITEM 10. EXECUTIVE COMPENSATION.
The information concerning executive compensation is set forth in the
Proxy Statement under the heading "Executive Compensation," which information
is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information concerning security ownership of certain beneficial
owners and management is set forth in the Proxy Statement under the heading
"Security Ownership of Certain Beneficial Owners and Management," which
information is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information concerning certain relationships and related
transactions is set forth in the Proxy Statement under the headings "Certain
Transactions" and "Compensation Committee Interlocks and Insider
Participation," which information is incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following exhibits are filed with or incorporated by reference into
this report. The exhibits which are denominated by an asterisk (*) were
previously filed as a part of, and are hereby incorporated by reference from
either (i) a Registration Statement on Form S-4 under the Securities Act of
1933 for the Registrant, Registration No. 33-39451 ("1991 S-4"), (ii) the
Annual Report on Form 10-K for the year ended December 31, 1991 ("1991 10-K"),
(iii) the Annual Report on Form 10-KSB for the year ended December 31, 1993
("1993 10-KSB"), (iv)
-57-
<PAGE> 59
the Annual Report on Form 10-KSB for the year ended December 31, 1994 ("1994
10-KSB"), (v) a Registration Statement on Form S-4 for the Registrant,
Registration No. 33-84634 ("1994 S-4") or (vi) the Annual Report on Form 10-KSB
for the year ended December 31, 1995 ("1995 10-KSB"). Unless otherwise
indicated, the exhibit number corresponds to the exhibit number in the
referenced document.
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ----------- ----------------------------------------------------
<S> <C> <C>
*2.1 - Agreement and Plan of Merger, including exhibits
thereto, among Mountain Holding Corporation,
Charter Bank & Trust Co. and Mountain Acquisition
Corporation, dated as of September 13, 1994 (1994
S-4).
*3(i).1 - Articles of Incorporation dated November 26, 1990
(1991 S-4, Exhibit 3.1).
*3(i).2 - Articles of Amendment dated January 8, 1991 (1991
S-4, Exhibit 3.2).
*3(i).3 - Articles of Amendment dated August 25, 1994 (1994
S-4).
*3(ii).1 - By-Laws adopted November 27, 1990 (1991 S-4,
Exhibit 3.3).
*3(ii).2 - Amendment to Bylaws adopted December 30, 1994 (1994
10-KSB).
*4.1 - Specimen Common Stock Certificate (1991 S-4).
*4.2 - Form of Merit Warrant Agreement (1994 S-4).
*10.1 - Employment Agreement dated September 1, 1995 by and
among the Registrant, Mountain National Bank and J.
Randall Carroll (1995 10-KSB).
*10.2 - Data Processing Agreement dated March 1, 1988
between Mountain National Bank and Financial Data
Dimensions, Inc. (now ProVesa, Inc.) (1991 S-4).
*10.3 - 1991 Incentive Stock Option Plan of Registrant, as
amended (1991 10-K).
*10.5 - Employment Agreement dated September 1, 1995 by and
among the Registrant, Charter Bank and Trust Co.
and Ronald H. Francis (1995 10-KSB).
*10.6 - Lease Agreement dated June 15, 1994 between Charter
Bank and Trust Co. and Stillhouse Associates, Ltd.
(1994 10-KSB).
*10.7 - Lease Agreement dated September 14, 1988 between
Charter Bank and Trust Co. and Dehco, Inc. (1994
10-KSB).
*10.8 - Data Processing Service Agreement dated December
30, 1994 between Charter Bank and Trust Co. and
FiServe Basis, Inc. (1994 10-KSB).
*10.9 - Lease Agreement dated December 1, 1995 between
Mountain National Bank and Sullivan 75, L.P. (1995
10-KSB).
</TABLE>
-58-
<PAGE> 60
<TABLE>
<S> <C> <C>
*22.1 - Subsidiaries of the Registrant (1994 10-KSB).
23.1 - Consent of Price Waterhouse LLP.
27 - Financial Data Schedule (for SEC use only)
</TABLE>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1996.
-59-
<PAGE> 61
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MERIT HOLDING CORPORATION
Date: March 17, 1997 By: /s/ J. Randall Carroll
-----------------------------
J. Randall Carroll Chairman
of the Board, and Chief
Executive Officer
Date: March 17, 1997 By: /s/ Ronald H. Francis
-----------------------------
Ronald H. Francis President
and Chief Financial Officer
(principal financial and
accounting officer)
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 and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ J. Randall Carroll Chairman of the Board, March 17, 1997
- ---------------------------- and Chief Executive Officer
J. Randall Carroll
/s/ Michael J. Coles Director March 17, 1997
- ----------------------------
Michael J. Coles
/s/ Ronald H. Francis President, Chief Financial March 17, 1997
- ---------------------------- Officer and Director
Ronald H. Francis
/s/ Patrick H. Hickok Director March 17, 1997
- ----------------------------
Patrick H. Hickok
/s/ Walter J. McCloud,II Director March 17, 1997
- ----------------------------
Walter J. McCloud, II
</TABLE>
<PAGE> 62
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
23.1 Consent of Price Waterhouse LLP
27 Financial Data Schedule (for SEC use only)
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-4310) and the Registration Statement on Form S-3
(No. 333-14307) of Merit Holding Corporation of our report dated January 17,
1997 appearing on page 33 of this Form 10-KSB.
PRICE WATERHOUSE LLP
Atlanta, Georgia
March 13, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 14,295
<INT-BEARING-DEPOSITS> 100
<FED-FUNDS-SOLD> 7,759
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 43,482
<INVESTMENTS-CARRYING> 1,758
<INVESTMENTS-MARKET> 1,666
<LOANS> 160,688
<ALLOWANCE> 2,772
<TOTAL-ASSETS> 236,180
<DEPOSITS> 192,697
<SHORT-TERM> 11,715
<LIABILITIES-OTHER> 1,883
<LONG-TERM> 3,086
0
0
<COMMON> 9,260
<OTHER-SE> 17,539
<TOTAL-LIABILITIES-AND-EQUITY> 236,180
<INTEREST-LOAN> 14,136
<INTEREST-INVEST> 3,511
<INTEREST-OTHER> 10
<INTEREST-TOTAL> 17,656
<INTEREST-DEPOSIT> 5,731
<INTEREST-EXPENSE> 6,181
<INTEREST-INCOME-NET> 11,476
<LOAN-LOSSES> 645
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,632
<INCOME-PRETAX> 5,466
<INCOME-PRE-EXTRAORDINARY> 5,466
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,503
<EPS-PRIMARY> .81
<EPS-DILUTED> .81
<YIELD-ACTUAL> 8.98
<LOANS-NON> 1,062
<LOANS-PAST> 147
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 960
<ALLOWANCE-OPEN> 2,543
<CHARGE-OFFS> 579
<RECOVERIES> 163
<ALLOWANCE-CLOSE> 2,772
<ALLOWANCE-DOMESTIC> 645
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
