<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended Commission File Number
SEPTEMBER 30, 1998 0-25938
MERIT HOLDING CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
GEORGIA 58-1934011
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5100 LAVISTA ROAD, P. O. BOX 49, TUCKER, GEORGIA 30085-0049
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 770-491-8808
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
------ --
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Common Stock, $2.50 Par Value 4,672,616
- ----------------------------- ----------------------------------
Class Outstanding as of November 5, 1998
<PAGE> 2
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
MERIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 16,121,813 $ 17,585,760
Federal funds sold and other short-term investments 34,120,810 14,293,899
Investment securities, at cost (market
value of $1,528,279 and $1,472,473 respectively) 1,520,150 1,521,291
Mortgage-backed securities available-for-sale 5,707,521 4,877,279
Securities available-for-sale (Note 4) 43,367,165 39,476,430
Federal Reserve Bank stock 299,850 299,850
Federal Home Loan Bank stock 1,331,700 1,331,700
The Banker's Bank stock 707,000
Loans, less allowance for loan losses
of $3,138,888 and $2,655,412 (Notes 2 and 3) 183,982,188 179,184,439
Real estate owned 187,587 209,570
Premises and equipment, net 5,558,892 5,529,319
Accrued interest receivable and other assets 5,888,932 3,053,342
------------- -------------
Total assets $ 298,793,608 $ 267,362,879
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 59,327,529 $ 61,672,902
Checking with interest 38,513,825 31,403,603
Money-market accounts 44,427,986 40,876,193
Savings 2,865,326 2,695,770
Time, $100,000 and over 37,292,300 26,218,536
Other time 61,574,402 57,416,727
------------- -------------
244,001,368 220,283,731
Short-term borrowings 11,256,144 6,431,752
Long-term debt 4,963,917 5,282,847
Accrued interest payable and other liabilities 2,974,621 3,298,721
------------- -------------
Total liabilities 263,196,050 235,297,051
------------- -------------
Shareholders' equity
Common stock, $2.50 par value; 10,000,000 shares
authorized; 4,846,496 and 3,990,233 shares issued and
4,672,616 and 3,989,033 shares outstanding, respectively 12,116,240 9,975,583
Paid-in capital 10,914,162 8,777,179
Retained earnings 16,080,306 13,110,971
Accumulated other comprehensive income 301,128 224,505
Treasury stock, 173,880 and 1,200 shares at cost, respectively (3,814,278) (22,410)
------------- -------------
Total shareholders' equity 35,597,558 32,065,828
------------- -------------
Total liabilities and shareholders' equity $ 298,793,608 $ 267,362,879
============= =============
</TABLE>
(See notes to consolidated financial statements)
<PAGE> 3
MERIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the three month period ended For the nine month period ended
September 30, September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 4,657,499 $ 4,256,026 $ 13,726,921 $ 12,400,824
Interest on securities 806,634 736,061 2,321,756 2,155,933
Interest on federal funds sold
and other short-term investments 452,196 286,459 1,176,198 435,474
Interest on time deposits with other
financial institutions 0 771 0 3,831
Dividends on Federal Reserve Bank stock 4,497 4,498 13,493 13,493
Dividends on Federal Home Loan Bank stock 25,015 22,934 73,277 65,897
----------- ----------- ------------ ------------
Total interest and dividend income 5,945,841 5,306,749 17,311,645 15,075,452
Interest expense on deposits 1,967,734 1,628,327 5,791,578 4,471,616
Interest expense on FHLB advances 93,397 78,021 254,435 214,274
Interest expense on short-term borrowings 120,799 109,921 297,188 356,917
----------- ----------- ------------ ------------
Total interest expense 2,181,930 1,816,269 6,343,201 5,042,807
----------- ----------- ------------ ------------
Net interest income 3,763,911 3,490,480 10,968,444 10,032,645
Provision for loan losses 50,000 (265,000) 222,500 35,000
----------- ----------- ------------ ------------
Net interest income after
provision for loan losses 3,713,911 3,755,480 10,745,944 9,997,645
----------- ----------- ------------ ------------
Non-interest income:
Service charges and fees on deposits 259,980 273,641 799,056 803,783
Losses on sales of available-for-sale securities 0 (11,299) 0 (43,495)
Mutual fund sales fees 12,967 14,408 43,060 36,564
Other income 98,451 70,482 293,563 221,155
----------- ----------- ------------ ------------
Total non-interest income 371,398 347,232 1,135,679 1,018,007
----------- ----------- ------------ ------------
Non-interest expense:
Salaries and other personnel 1,107,588 1,078,776 3,291,704 2,893,573
Occupancy and equipment 418,870 322,189 1,102,803 881,224
Advertising and marketing 36,887 36,053 95,631 92,961
Legal 37,762 6,000 108,760 268,000
Data processing 44,249 43,888 140,783 133,212
Director's fees 60,600 61,700 187,400 195,600
Amortization of goodwill 0 373,060 387,360
Other operating 430,294 371,352 1,260,578 1,312,446
----------- ----------- ------------ ------------
Total non-interest expense 2,136,250 2,293,018 6,187,659 6,164,376
----------- ----------- ------------ ------------
Income before income taxes 1,949,059 1,809,694 5,693,964 4,851,276
Provision for income taxes 711,532 637,079 2,081,854 1,695,328
----------- ----------- ------------ ------------
Net income $ 1,237,527 $ 1,172,615 $ 3,612,110 $ 3,155,948
=========== =========== ============ ============
Other comprehensive income, before tax
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising
during period $ 159,043 $ 149,148 $ 121,624 $ (78,830)
Income tax (expense) benefit related to items of other
comprehensive income (58,846) (55,185) (45,001) 29,167
----------- ----------- ------------ ------------
Other comprehensive income, net of tax $ 100,197 $ 93,963 $ 76,623 $ (49,663)
----------- ----------- ------------ ------------
Comprehensive income $ 1,337,724 $ 1,266,578 $ 3,688,733 $ 3,106,285
=========== =========== ============ ============
Basic earnings per share $ .27 $ .32 $ .86 $ .85
=========== =========== ============ ============
Diluted earnings per share $ .26 $ .25 $ .74 $ .69
=========== =========== ============ ============
</TABLE>
(See notes to consolidated financial statements)
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<PAGE> 4
MERIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Unaudited)
<TABLE>
<CAPTION>
For the nine month period ended
September 30,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,612,110 $ 3,155,948
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 455,591 781,496
Net amortization of premiums on securities 53,589 30,255
Provision for loan losses 222,500 35,000
Loss on sale of investment securities 43,495
Loss on sale of other real estate 822 299
Decrease ( increase) in interest receivable 164,653 (124,218)
Increase (decrease) in interest payable (304,308) 324,961
Increase (decrease) in accrued expenses and other liabilities (165,679) 839,636
Decrease (increase) in prepaid expenses and other assets (3,150,603) 378,913
------------ ------------
Net cash provided by operating activities 888,675 5,465,785
------------ ------------
Cash flows from investing activities:
Purchases of "available for sale" investment securities (25,315,843) (21,319,814)
Proceeds from sales of "available for sale" investment securities 5,365,303
Proceeds from maturities of "held to maturity" investment securities 235,000
Proceeds from maturities of "available for sale" investment securities 20,662,302 5,553,751
Purchases of Federal Home Loan Bank stock (221,100)
Purchases of The Banker's Bank stock (707,000)
Proceeds from maturities of time deposits with other financial institutions 100,000
Proceeds from sale of other real estate 238,827 110,447
Loans made to customers, net (5,020,249) (11,855,179)
Capital expenditures (485,164) (326,026)
------------ ------------
Net cash used in investing activities (10,627,127) (22,357,618)
------------ ------------
Cash flows from financing activities:
Repayment of short-term borrowings (2,177,890)
Net increase (decrease) in Federal Home Loan Bank advances (318,930) 1,492,717
Net increase in deposits 23,717,637 30,840,787
Net increase (decrease) in securities sold under
agreements to repurchase 4,824,392 (892,037)
Dividends paid (607,455) (445,223)
Proceeds from exercise of stock options & warrants 4,277,640 973,689
Purchase of treasury stock (3,791,868)
------------ ------------
Net cash provided by financing activities 28,101,416 29,792,043
------------ ------------
Net increase in cash and cash equivalents 18,362,964 12,900,210
Cash and cash equivalents at beginning of period 31,879,659 22,054,545
------------ ------------
Cash and cash equivalents at end of period $ 50,242,623 $ 34,954,755
============ ============
Supplemental data:
Interest paid $ 6,606,420 $ 4,716,926
============ ============
Income taxes paid $ 2,621,035 $ 1,370,000
============ ============
</TABLE>
(See notes to consolidated financial statements)
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<PAGE> 5
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements for Merit Holding
Corporation (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statement presentation. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine months ended
September 30, 1998 are not necessarily indicative of trends or results to be
expected for the year ended December 31, 1998. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
NOTE 2 - LOANS
Loans are stated at unpaid principal balances, net of unearned income and
deferred loan fees. Interest is accrued only if deemed collectible. Generally
the Company's policy is not to accrue interest on loans delinquent over ninety
days unless the loan is well secured and in the process of collection.
Loans consist of:
(in thousands)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
-------------------------- ---------------------
<S> <C> <C> <C> <C>
Commercial $ 104,848 56% $ 99,747 55%
Real estate - construction
and land development 41,649 22% 39,974 22%
Real estate - mortgages 28,445 15% 30,620 17%
Installment and other
Consumer 12,179 7% 11,491 6%
Other 0 0% 8 0%
--------- --------- --------- --------
187,121 100% 181,840 100%
Less allowance for loan losses (3,139) (2,656)
--------- ---------
$ 183,982 $ 179,184
========= =========
</TABLE>
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<PAGE> 6
NOTE 3 - ALLOWANCE FOR LOAN LOSSES
A provision for loan losses is charged to operations based on management's
evaluation of potential losses in the loan portfolio. Such evaluation includes a
review of all loans on which full collectibility may not be reasonably assured
and considers, among other matters, management's estimate of the fair value of
the underlying collateral on specific loans, inherent losses in the loan
portfolio, and prevailing and anticipated economic conditions.
Activity in the allowance for loan losses for the nine months ended September
30, 1998 and September 30, 1997 follows:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Balance, January 1 $2,655,412 $ 2,771,784
Provision charged to expense 222,500 35,000
Net recoveries (charge-offs) 260,976 (227,015)
---------- -----------
Balance, September 30 $3,138,888 $ 2,579,769
========== ===========
</TABLE>
NOTE 4 - SECURITIES AVAILABLE-FOR-SALE AND HELD-TO-MATURITY
Securities available-for-sale are securities which management believes may be
sold prior to maturity for liquidity or other reasons and are reported at fair
value, with unrealized gains and losses, net of related income taxes, reported
as a separate component of shareholders' equity. Securities held-to-maturity are
those securities for which management has both the ability and intent to hold to
maturity and are carried at amortized cost.
The amortized cost and estimated market value of investment securities
held-to-maturity at September 30, 1998 and December 31, 1997 are presented
below:
<TABLE>
<CAPTION>
September 30, 1998
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government Agencies $1,000,000 $ - $ 15,618 $ 984,382
Tax exempt bonds 520,150 23,747 543,897
---------- ------- ---------- ----------
$1,520,150 $23,747 $ 15,618 $1,528,279
========== ======= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government Agencies $1,000,000 $ - $ 69,241 $ 930,759
Tax exempt bonds 521,291 20,423 541,714
---------- ------- ---------- ----------
$1,521,291 $20,423 $ 69,241 $1,472,473
========== ======= ========== ==========
</TABLE>
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<PAGE> 7
The amortized cost and estimated market value of investment securities
available-for-sale at September 30, 1998 and December 31, 1997 are presented
below:
<TABLE>
<CAPTION>
September 30, 1998
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- -------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasuries $ 7,509,604 $142,896 $ $ 7,652,500
U.S. Government Agencies 32,793,069 337,654 236 33,130,487
Mortgage-backed certificates 5,685,217 31,801 9,497 5,707,521
Tax exempt bonds 2,604,807 0 20,629 2,584,178
----------- -------- ----------- -----------
$48,592,697 $512,351 $ 30,362 $49,074,686
=========== ======== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- -------- ----------- -----------
<S> <C> <C> <C> <C>
U.S.Treasuries $11,498,173 $ 97,452 $ $11,595,625
U.S. Government Agencies 27,638,481 256,142 13,818 27,880,805
Mortgage-backed certificates 4,854,949 35,302 12,972 4,877,279
----------- -------- ----------- -----------
$43,991,603 $388,896 $ 26,790 $44,353,709
=========== ======== =========== ===========
</TABLE>
NOTE 5 - NET INCOME PER SHARE
Statement of Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128")
requires the Company to present both basic and diluted earnings per share on the
statement of income because the Company has potential common stock outstanding.
Basic earnings per share is computed by dividing net income by the weighted
average number of shares outstanding for the period. Diluted earnings per share
is computed similarly; however, it is adjusted for the effects of the assumed
exercise of the Company's outstanding options and warrants. Net income is the
same for both the basic and diluted earnings per share calculation in the
respective periods presented. The weighted-average number of shares outstanding
used in computing basic and diluted earnings per share for the three months
ended September 30, 1998 was 4,544,412 and 4,802,184, respectively, and for the
three months ended September 30, 1997 was 3,720,056 and 4,651,190, respectively.
The weighted-average number of shares outstanding used in computing basic and
diluted earnings per share for the nine months ended September 30, 1998 was
4,200,113 and 4,891,974, respectively, and for the nine months ended September
30, 1997 was 3,715,091 and 4,572,307 respectively.
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<PAGE> 8
NOTE 6 - NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which applies to all entities
and establishes accounting and reporting standards for derivative instruments.
SFAS 133 requires that all derivatives be recognized as either assets or
liabilities in the statement of financial position and measured at fair value.
The accounting for changes in the fair value depends on the intended use of the
derivative and the resulting designation. Under SFAS 133 derivatives may be
designated as fair value hedges, cash flow hedges or foreign currency hedges as
long as they are effective in hedging the identified risks. SFAS 133 requires an
entity to establish at inception of the hedge the method it will use for
assessing effectiveness and the measurement approach for determining the
ineffective portion of the hedge. Those methods must be consistent with the
entity's approach to managing risk. SFAS 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999; however, earlier
adoption is encouraged. Upon adoption the effect must be recognized as a
cumulative effect of an accounting change in either income or other
comprehensive income, depending upon whether the derivative is designated and
effective as a hedge and, if so, the type of hedge. The Company does not expect
that adoption of SFAS 133 will have a material impact upon the consolidated
financial statements.
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<PAGE> 9
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion addresses the factors that have affected the financial
condition and results of operations of Merit Holding Corporation (the "Company")
as reflected in the unaudited consolidated financial statements for the three
and nine months ended September 30, 1998 and 1997. The Company's operating
subsidiaries are Mountain National Bank ("Mountain") and Charter Bank & Trust
Co. ("Charter").
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's net income for the third quarter of 1998 was $1,237,527 a 5.5%
increase compared to net income of $1,172,615 for the same period in 1997.
Diluted earnings per share was $.26 in the third quarter of 1998 compared to $
.25 for the same period in 1997. Net income for the nine months ended September
30, 1998 was $3,612,110 compared to $3,155,948 for the same period of 1997, a
14.4% increase. The increase in net income in the third quarter of 1998 compared
to the same period in 1997 was the result of an increase in net interest income
of $273,431, or 7.8%, an increase of $24,166, or 7.0%, in non-interest income,
and a decrease of $156,768, or 6.8%, in non-interest expense, offset by a
$315,000 increase in the provision for loan losses. The increase in net income
for the nine month period ended September 30, 1998 over the same period in 1997
resulted primarily from an increase of $935,799, or 9.3%, in net interest
income, an increase of $117,672, or 11.6%, in non-interest income, offset by an
increase in the provision for loan losses of $187,500 and an increase of
$23,283, or 0.4%, in non-interest expense.
Return on average equity for the three months and nine months ended September
30, 1998 was 14.02% and 14.37% on average equity of $35,314,000 and $33,513,000,
respectively, as compared to 15.87% and 14.91% on average equity of $29,554,000
and $28,227,000, respectively, for the same periods in 1997. Return on average
assets for the three months and nine months ended September 30, 1998 was 1.68%
and 1.69% on average assets of $293,882,000 and $284,527,000, respectively, as
compared to 1.85% and 1.75% on average assets of $253,101,000 and $240,844,000
for the same periods in 1997.
Total assets at September 30, 1998 were $298,794,000, an 11.8% increase from
$267,363,000 at December 31, 1997. Total average assets for the first nine
months of 1998 were $284,527,000, up $43,683,000, or 18.1% from the same period
in 1997. Average loans for the first nine months of 1998 were $180,018,000, up
$18,050,000 or 11.1% over the same period in 1997. The loan growth was funded by
increased average interest-bearing deposits, up $34,778,000 or 24.6% and higher
average non-interest bearing deposits, up $3,955,000, or 7.3%. Most of the
excess of the deposit growth over loan growth was placed in federal funds sold,
which increased $18,014,000 for the first nine months of 1998 compared to the
same period in 1997.
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<PAGE> 10
Commencing January 15, 1997, the Company paid a regular quarterly dividend of
$.04 per share. Effective January 15, 1998 the quarterly dividend was increased
to $.05 per share.
Net interest income for the third quarter of 1998 increased $273,431 or 7.8%
over the third quarter of 1997. Net interest income for the nine months ended
September 30, 1998 increased $935,799 or 9.3% over the same period in 1997. The
net interest margin for the three months and nine months ended September 30,
1998 was 5.62% and 5.64% respectively on average total earning assets of
$267,926,000 and $259,372,000, respectively. For the same periods in 1997, the
net interest margin was 6.14% and 6.11% respectively on average earning assets
of $227,541,000 and $218,839,000. The increase in net interest income in the
first nine months of 1998 over the same period in 1997 reflects the growth in
earning assets in 1998 over 1997, offset by an increase in the average rate paid
on interest-bearing liabilities to 4.46% in the first nine months of 1998 from
4.32% for the same period in 1997, and a lower yield on earning assets, down 29
basis points to 8.90% in the first nine months of 1998 compared to the same
period of 1997. For the third quarter of 1998, the yield on total earning assets
was 8.88% and the cost of interest bearing liabilities was 4.46%, compared to
9.33% and 4.40%, respectively, for the third quarter of 1997.
The provision for loan losses for the third quarter of 1998 was an expense of
$50,000 compared to a credit of $265,000 in the third quarter of 1997. The
provision for loan losses expense for the first nine months of 1998 was $222,500
compared to $35,000 for the same period in 1997. The allowance for loan losses
at September 30, 1998 was $3,139,000 compared to $2,655,000 at December 31,
1997. At September 30, 1998 and December 31, 1997, the allowance for loan losses
represented 1.68% and 1.46% of loans outstanding, respectively. The provision
for loan losses and the adequacy of the allowance for loan losses is based upon
management's continuing evaluation of the collectibility of the loan portfolio
under current economic conditions and includes analysis of underlying collateral
value and other factors which could affect that collectibility. Management
considers the allowance for loan losses to be adequate based upon evaluations of
specific loans, internal loan rating systems, guidelines provided by the banking
regulatory authorities governing Mountain and Charter, and an annual independent
loan review performed by a consultant.
Through the nine months ended September 30, 1998, recoveries on loans, net of
charge-offs, totaled $260,976, or 0.14% of total loans outstanding. This
compares to net charge-offs of $227,015 or 0.13% through the nine months ended
September 30, 1997. In the first quarter of 1998 net recoveries were $253,341,
in the second quarter of 1998 net charge-offs were $36,516, and in the third
quarter of 1998 net recoveries were $44,151, compared to net charge-offs of
$73,873, $30,866, and $122,276 in the first, second and third quarters of 1997,
respectively. Total non-performing loans (including loans 90 days or more past
due) as of September 30, 1998 were $252,541 compared to $476,395 at
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<PAGE> 11
December 31, 1997. The ratio of non-performing loans (including loans 90 days or
more past due) to total outstanding loans was 0.13% at September 30, 1998
compared to 0.26% at December 31, 1997 and 0.18% at September 30, 1997.
At September 30, 1998, the Company owned one foreclosed residential property
carried in other real estate owned in the amount of $187,587. The Company does
not anticipate any material loss on the sale of this property.
At September 30, 1998, the Company had $11,256,000 in short-term borrowings
compared to $6,432,000 at year ended December 31, 1997. Short-term borrowings
consist of securities sold under agreements to repurchase with customers.
Long-term debt at September 30, 1998 was $4,964,000 compared to $5,283,000 at
year-end December 31, 1997. Long-term debt consists of advances from the Federal
Home Loan Bank of Atlanta ("FHLB") for the purpose of match funding loans. No
new advances have been obtained in 1998.
Non-interest income increased $24,166 or 7.0% during the third quarter of 1998
compared to the same period in 1997, and increased $117,672, or 11.6%, for the
first nine months of 1998 compared to the same period in 1997. In the second
quarter of 1997, the Company sold $3.9 million of investment securities from its
available-for-sale portfolio, incurring a net loss of $32,196, and
simultaneously purchased $3.9 million of securities for its available-for-sale
portfolio. The purchased securities had a net yield improvement of approximately
90 basis points over those sold. In the third quarter of 1997, the Company sold
$1.5 million of investment securities from its available-for-sale portfolio,
incurring a net loss of $11,299, and simultaneously purchased $1.5 million of
securities for its available-for-sale portfolio. The purchased securities had a
net yield improvement of approximately 147 basis points over those sold. There
have been no security sales in 1998. Other income increased $27,969 and $72,408,
for the third quarter and first nine months of 1998, compared to the same
periods in 1997. Service charges and fees on deposits decreased $13,661, or
5.0%, in the third quarter of 1998 compared to 1997, and $4,727, or 0.6%, for
the first nine months of 1998 compared to 1997.
Non-interest expense decreased $156,768, or 6.8%, for the quarter ended
September 30, 1998 as compared to the same period in 1997. Occupancy and
equipment expense increased $96,681, or 30.0%, in the third quarter of 1998
compared to the same period in 1997, the result of Mountain opening a new branch
in the Peachtree Corners area in Norcross, Georgia in the first quarter of 1998
and Charter relocating a branch to larger quarters in the second quarter of
1998. Legal expense increased $31,762 for the third quarter of 1998 compared to
the same period in 1997. This expense arises from usual business activities.
Salaries and other personnel expenses increased $28,812, or 2.7%, reflecting the
continued growth of the Company. In the third quarter of 1997, management
wrote-off unamortized goodwill of $362,459 related to an acquired branch office
which was closed in 1997. Excluding the 1997 goodwill write-off, all other
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<PAGE> 12
operating expenses increased $48,436, or 9.3%, in the third quarter of 1998
compared to the same quarter in 1997. Non-interest expense for the nine months
ended September 30, 1998 increased $23,283, or 0.4%, over the same period in
1997. Salaries and other personnel expenses increased $398,131, or 13.8%, to
manage continued growth. Occupancy and equipment expense increased $221,579, or
25.1%, in the first nine months of 1998 compared to the same period in 1997, the
result of the new branch facilities discussed in the preceding paragraph. Legal
expense decreased $159,240, or 59.4%, for the first nine months of 1998 compared
to the same period in 1997 as a result of the settlement of a lawsuit in the
second quarter of 1997. All other operating expenses decreased $437,187, or
20.6%, in the first nine months of 1998 compared to 1997. Excluding the one-time
expense write-off discussed previously, all other operating expenses decreased
$74,728, or 4.2%, the result of management closely monitoring operating
expenses.
CAPITAL ADEQUACY
Federal banking regulators have established certain capital adequacy standards
required to be maintained by banks and bank holding companies. These regulations
establish minimum requirements for risk-based capital of 4% for core capital
(tier I), 8% for total risk-based capital and 3% for the leverage ratio. At
September 30, 1998 the Company's tier I risk-based capital was 16.2% and total
risk-based capital was 17.5%, compared to 15.6% and 16.9% at year-ended December
31, 1997, respectively.
The Company does not have any commitments that it believes would reduce its
capital to levels inconsistent with the regulatory definition of a
well-capitalized financial institution.
The Company has developed and is implementing a strategic plan to address Year
2000 issues. The Year 2000 issue involves the risk that various problems may
result from the improper processing of dates and date-sensitive calculations by
computers and other equipment as the year 2000 approaches. Both Mountain and
Charter have developed Year 2000 plans in accordance with Federal Financial
Institutions Examination Council (FFIEC) guidelines to address the problem. Both
banks have conducted thorough employee education on the issue and have
identified all information technology (computers, software, etc.) and
non-information technology (alarms, vaults, etc.) that may be affected by the
Year 2000 date change. Since the banks do not develop their own software, each
is in the process of contacting the various third party software vendors used to
obtain written documentation from them confirming Year 2000 compliance. Each
bank has tested its equipment for compliance; items found not in compliance have
either been renovated to be compliant or will be renovated before year-end 1998.
Hardware and systems will be retested if any changes are made to those systems
after initial testing is complete. Software has been inventoried and is in the
testing phase at Mountain; Charter has completed its testing and is completing
remediation.
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<PAGE> 13
Both banks use third party service bureaus for core data processing. Charter's
core data processing vendor has certified that its application systems are Year
2000 compliant. Mountain currently uses a different service bureau but will
convert its core systems in February 1999 to the same processor Charter uses.
This conversion decision was based on expected efficiencies and improvements
that would result from the banks using the same core processing system. The
decision was not related to Year 2000 issues, other than insuring the core
processing system selected was Year 2000 compliant.
The banks have developed a communication and assessment plan for its customers.
The banks have communicated the Year 2000 issue to their customers, both
borrowers and depositors, by various methods. Each bank has contacted its key
loan customers to determine their status and plans with respect to the Year 2000
issue and to determine the bank's exposure to any such customer's failure to
remediate its own Year 2000 problems. This customer review is scheduled to be
completed by December 31, 1998. There can be no guarantee that customers will
resolve their Year 2000 issues on a timely basis. Significant business
interruptions or failures by key clients resulting from Year 2000 problems could
have a material adverse effect on the Company.
The expected cost to the Company of the Year 2000 project is currently estimated
at $60,000 for hardware and software upgrades, customer communications, testing
and other items required to complete the plan. All remediation costs will be
expensed in the year incurred and will be funded through normal operating cash
flow. Year 2000 project costs during the nine months ended September 30, 1998
were not material.
Charter has had legal counsel review its contracts with its customers for Year
2000 compliance. Counsel recommended minor improvements which have been
implemented. Mountain will review its contracts in 1998. Charter has recently
engaged an outside auditor to review its Year 2000 project status. This review
will be completed in the fourth quarter of 1998. The Company's Directors &
Officers insurance policy will be reviewed in the fourth quarter of 1998 by
legal counsel for coverage of Year 2000 issues.
The banks are developing contingency plans to mitigate the potential effects of
a disruption in normal operations resulting from Year 2000 problems.
The preceding discussion of the Year 2000 issue includes forward-looking
statements reflecting management's current assessments and estimates and which
involve risks and uncertainties. Various factors could cause actual results to
differ materially from those expected by such assessments and forward-looking
statements. Factors that might affect the timely and satisfactory completion of
the Year 2000 project include, but are not limited to, vendor representations
and timely correction of hardware or software problems, the readiness of key
utilities, suppliers and customers, and similar uncertainties. The Company's
management of the project is an ongoing process involving continual evaluation.
Unanticipated problems could emerge and alternative solutions may be devised
that may be more costly than anticipated or more difficult to solve.
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<PAGE> 14
In January 1998, the Board of Directors of the Company approved a stock
repurchase program under which the Company may purchase up to 100,000 shares of
its common stock in the open market at prevailing market prices and up to an
additional 500,000 shares of its common stock directly from its shareholders.
During the first nine months of 1998, the Company repurchased 100,000 shares of
its common stock in the open market and 72,680 shares directly from shareholders
under this program at a total cost of $3,791,868. In addition, 682,166 warrants
to purchase common stock originally issued to Mountain's organizers in 1988 and
174,097 options to purchase common stock issued to the Company's officers were
exercised during the first nine months of 1998 for total proceeds of $4,277,640.
LIQUIDITY
The goal of liquidity management is to ensure the availability of an adequate
level of funds to meet the loan demand and deposit withdrawal needs of the
Company's customers. The Company does not anticipate any events which would
require liquidity beyond that which is available through deposit growth, federal
funds balances, or investment portfolio maturities. The Company actively manages
the levels, types and maturities of earning assets in relation to the sources
available to fund current and future needs to ensure that adequate funding will
be available at all times. At September 30, 1998 the Company had $6,753,000 in
carrying value of investment securities in its held-to-maturity and
available-for-sale portfolios that would mature in one year or less.
At September 30, 1998 and December 31, 1997, the Company had federal funds lines
of credit from other banks totaling $27,750,000 and $25,750,000, respectively,
to meet short term funding needs. There was no balance outstanding under these
short term commitments at September 30, 1998.
The liquidity and maturity structure of the Company's assets and liabilities are
important to the maintenance of acceptable net interest income levels. A
decreasing interest rate environment negatively impacts earnings as the
Company's rate-sensitive assets generally reprice faster than its rate-sensitive
liabilities. Conversely, in an increasing interest rate environment, earnings
are positively impacted. This potential asset/liability mismatch in pricing is
referred to as gap and is measured as rate sensitive assets divided by rate
sensitive liabilities for a defined time period. A gap of 1.0 means that assets
and liabilities are perfectly matched as to repricing within a specific time
period and interest rate movements will not affect net interest margin, assuming
all other factors hold constant. Management has specified gap guidelines for a
one year time horizon of between .80 and 1.2. At September 30, 1998 the Company
had a gap ratio of 0.999 for the one year period ending September 30, 1999.
Thus, over the next twelve months, slightly more rate-sensitive liabilities will
reprice than rate-sensitive assets.
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<PAGE> 15
There are no known trends or any known commitments or uncertainties that will
result in the Company's liquidity increasing or decreasing in any material way.
FORWARD LOOKING STATEMENTS
The Company may from time to time make written or oral "forward-looking
statements," including statements contained in the Company's filings with the
Securities and Exchange Commission (including this Quarterly Report on Form 10-Q
and any exhibits hereto), in its reports to shareholders and in other
communications by the Company, which are made in good faith by the Company
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995.
These forward-looking statements include statements with respect to the
Company's beliefs, plans, objectives, goals, expectations, anticipations,
estimates and intentions, that are subject to significant risks and
uncertainties and are subject to change based on various factors (some of which
are beyond the Company's control). The words "may," "could," "should," "would,"
"believe," "anticipate," "estimate," "expect," "intend," "plan" and similar
expressions are intended to identify forward-looking statements. The following
factors, among others, could cause the Company's financial performance to differ
materially from that expressed in such forward-looking statements: the strength
of the United States economy in general and the strength of the local economies
in which the Company conducts operations; the effects of, and changes in,
monetary and fiscal policies, including interest rate policies of the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board");
inflation; interest rate, market and monetary fluctuations; the timely
development of competitive new products and services by the Company and the
acceptance of such products and services by customers; the willingness of
customers to substitute the competitors' products and services for the Company's
products and services and vice versa; the impact of changes in financial
services' laws and regulations (including laws concerning taxes, banking,
securities and insurance) technological changes; future acquisitions; the growth
and profitability of the Company's noninterest or fee income being less than
expected; unanticipated regulatory or judicial proceedings; changes in consumer
spending and saving habits; and the success of the Company at managing the risks
involved in the foregoing.
The Company cautions that the foregoing list of important factors is not all
inclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
Item 3. Market Risk Disclosure
Information concerning market risk of the Company is not included because there
has not been any significant change in the Company's market risk as reported in
the Company's 1997 Annual Report filed on Form 10-K.
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<PAGE> 16
Part II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule (SEC use only)
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
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<PAGE> 17
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MERIT HOLDING CORPORATION
Date: November 5, 1998 J. Randall Carroll
--------------------- ------------------------------------
J. Randall Carroll
Chairman and Chief Executive Officer
Date: November 5, 1998 Ronald H. Francis
--------------------- ------------------------------------
Ronald H. Francis
President and Chief Financial Officer
(principal financial and accounting
officer)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MERIT HOLDING CORPORATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
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<CASH> 16,121,813
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 34,120,810
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<LOANS> 187,121,076
<ALLOWANCE> 3,138,888
<TOTAL-ASSETS> 298,793,608
<DEPOSITS> 244,001,368
<SHORT-TERM> 11,256,144
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0
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<COMMON> 12,116,240
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<INTEREST-TOTAL> 17,311,645
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<INTEREST-INCOME-NET> 10,968,444
<LOAN-LOSSES> 222,500
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<EXPENSE-OTHER> 6,187,659
<INCOME-PRETAX> 5,693,964
<INCOME-PRE-EXTRAORDINARY> 3,612,110
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<NET-INCOME> 3,612,110
<EPS-PRIMARY> .86
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