<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
JUNE 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
- --------------------------------------------------------------------------------
(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 4,700,216
- ----------------------------- --------------------------------
Class Outstanding as of August 5, 1998
<PAGE> 2
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
MERIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
------
Cash and due from banks $ 17,164,321 $ 17,585,760
Federal funds sold and other short-term investments 27,519,558 14,293,899
Investment securities, at cost (market
value of $1,493,230 and $1,472,473 respectively) 1,520,530 1,521,291
Mortgage-backed securities available-for-sale 5,120,742 4,877,279
Securities available-for-sale (Note 4) 45,121,469 39,476,430
Federal Reserve Bank stock 299,850 299,850
Federal Home Loan Bank stock 1,331,700 1,331,700
Loans, less allowance for loan losses
of $3,044,737 and $2,655,412 (Notes 2 and 3) 182,088,330 179,184,439
Real estate owned 419,329 209,570
Premises and equipment, net 5,721,937 5,529,319
Accrued interest receivable and other assets 5,986,852 3,053,342
------------ ------------
Total assets $292,294,618 $267,362,879
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits:
Demand $ 60,973,210 $ 61,672,902
Checking with interest 40,482,041 31,403,603
Money-market accounts 39,999,307 40,876,193
Savings 2,777,443 2,695,770
Time, $100,000 and over 35,218,652 26,218,536
Other time 63,609,481 57,416,727
------------ ------------
243,060,134 220,283,731
Short-term borrowings 8,418,210 6,431,752
Long-term debt 5,035,556 5,282,847
Accrued interest payable and other liabilities 2,901,507 3,298,721
------------ ------------
Total liabilities 259,415,407 235,297,051
------------ ------------
Shareholders' equity
Common stock, $2.50 par value; 10,000,000 shares
authorized; 4,299,243 and 3,990,233 shares issued and
4,177,863 and 3,989,033 shares outstanding, respectively 10,748,108 9,975,583
Paid-in capital 9,546,029 8,777,179
Retained earnings 15,076,409 13,110,971
Accumulated other comprehensive income 200,931 224,505
Treasury stock, 121,380 and 1,200 shares at cost, respectively (2,692,266) (22,410)
------------ ------------
Total shareholders' equity 32,879,211 32,065,828
------------ ------------
Total liabilities and shareholders' equity $292,294,618 $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 months ended For the six months ended
June 30, June 30,
1998 1997 1998 1997
---------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 4,577,296 $ 4,192,049 $ 9,069,422 $ 8,144,798
Interest on securities 786,872 707,705 1,515,122 1,419,872
Interest on federal funds sold
and other short-term investments 487,010 90,051 724,002 149,015
Interest on time deposits with other
financial institutions 0 1,539 0 3,060
Dividends on Federal Reserve Bank stock 4,498 4,497 8,996 8,995
Dividends on Federal Home Loan Bank stock 24,262 22,508 48,262 42,963
---------------- --------------- --------------- --------------
Total interest and dividend income 5,879,938 5,018,349 11,365,804 9,768,703
Interest expense on deposits 2,024,176 1,437,068 3,823,844 2,843,289
Interest expense on FHLB advances 75,007 74,536 161,038 136,253
Interest expense on short-term borrowings 111,539 117,667 176,389 246,996
---------------- --------------- --------------- --------------
Total interest expense 2,210,722 1,629,271 4,161,271 3,226,538
---------------- --------------- --------------- --------------
Net interest income 3,669,216 3,389,078 7,204,533 6,542,165
Provision for loan losses 75,000 150,000 172,500 300,000
---------------- --------------- --------------- --------------
Net interest income after
provision for loan losses 3,594,216 3,239,078 7,032,033 6,242,165
---------------- --------------- --------------- --------------
Non-interest income:
Service charges and fees on deposits 266,642 259,604 539,076 530,142
Loss on sales of available-for-sale securities 0 (32,196) 0 (32,196)
Mutual fund sales fees 17,360 13,374 30,093 22,156
Other income 110,151 73,537 195,112 150,673
---------------- --------------- --------------- --------------
Total non-interest income 394,153 314,319 764,281 670,775
---------------- --------------- --------------- --------------
Non-interest expense:
Salaries and other personnel 1,068,045 915,356 2,184,116 1,892,547
Occupancy and equipment 372,279 284,220 683,933 559,035
Advertising and marketing 31,037 28,749 58,744 56,908
Legal 38,499 131,000 70,998 262,000
Data processing 48,013 44,728 96,534 89,324
Directors' fees 63,100 68,500 126,800 133,900
Other operating 445,633 466,259 830,284 877,644
---------------- --------------- --------------- --------------
Total non-interest expense 2,066,606 1,938,812 4,051,409 3,871,358
---------------- --------------- --------------- --------------
Income before income taxes 1,921,763 1,614,585 3,744,905 3,041,582
Provision for income taxes 701,424 564,100 1,370,322 1,058,249
---------------- --------------- --------------- --------------
Net income $ 1,220,339 $ 1,050,485 $ 2,374,583 $ 1,983,333
================ =============== =============== ==============
Other comprehensive income, before tax
Unrealized gains (losses) on securities
Unrealized holding gains(losses) arising
during period $ (26,589) $ 124,936 $ 4,389 $ (227,978)
Income tax (expense) benefit related to items
of other comprehensive income 9,838 (46,226) (1,624) 84,352
---------------- ---------------- --------------- --------------
Other comprehensive income, net of tax $ (16,751) $ 78,710 $ 2,765 $ (143,626)
---------------- ---------------- --------------- --------------
Comprehensive income $ 1,203,588 $ 1,129,195 $ 2,377,348 $ 1,839,707
================ ================ =============== ==============
Basic earnings per share $ .30 $ .28 $ .59 $ .53
================ ================ =============== ==============
Diluted earnings per share $ .26 $ .23 $ .50 $ .44
================ ================ =============== ==============
</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 six months ended
June 30,
1998 1997
------------------ -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,374,583 $ 1,983,333
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 267,304 268,706
Net amortization of premiums on securities 31,372 21,472
Provision for loan losses 172,500 300,000
Loss on sale of investment securities 32,196
Loss (gain) on sale of other real estate (4,548) 299
Increase in interest receivable (90,595) (73,972)
Increase (decrease) in interest payable (38,769) 108,025
Increase (decrease) in accrued expenses and other liabilities (290,814) 794,336
Decrease (increase) in prepaid expenses and other assets (3,134,418) 238,280
---------------- ---------------
Net cash provided (used) by operating activities (713,385) 3,672,675
---------------- ---------------
Cash flows from investing activities:
Purchases of "available-for-sale" investment securities (16,715,825) (5,884,616)
Proceeds from sales of "available-for-sale" investment securities 3,869,209
Proceeds from maturities of "held-to-maturity" investment securities 235,000
Proceeds from maturities of "available-for-sale" investment securities 10,756,121 2,268,444
Purchases of Federal Home Loan Bank stock (221,100)
Proceeds from sale of other real estate 24,648 110,447
Loans made to customers, net (3,076,391) (3,150,717)
Capital expenditures (459,922) (278,386)
---------------- ---------------
Net cash used in investing activities (9,471,369) (3,051,719)
---------------- ---------------
Cash flows from financing activities:
Repayment of short-term borrowing (564,576)
Net increase (decrease) in Federal Home Loan Bank advances (247,291) 1,229,760
Net increase in deposits 22,776,403 741,593
Net increase (decrease) in securities sold under
agreements to repurchase 1,986,458 (615,241)
Dividends paid (398,115) (297,059)
Exercise of stock warrants 1,541,375 50,884
Purchase of treasury stock (2,669,856)
---------------- ---------------
Net cash provided by financing activities 22,988,974 545,361
---------------- ---------------
Net increase in cash and cash equivalents 12,804,220 1,166,317
Cash and cash equivalents at beginning of period 31,879,659 22,054,545
---------------- ---------------
Cash and cash equivalents at end of period $ 44,683,879 $ 23,220,862
================ ===============
Supplemental data:
Interest paid $ 4,344,776 $ 3,128,223
================ ===============
Income taxes paid $ 1,836,035 $ 720,000
================ ===============
</TABLE>
(See notes to consolidated financial statements)
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<PAGE> 5
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 six months ended June
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>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C> <C> <C>
Commercial $106,316 57% $99,747 55%
Real estate - construction and land
development 41,872 23% 39,974 22%
Real estate - mortgages 24,736 13% 30,620 17%
Installment and other
Consumer 12,159 7% 11,491 6%
Other 50 0% 8 0%
--------- ----- --------- -----
185,133 100% 181,840 100%
Less allowance for loan losses (3,045) (2,656)
--------- ---------
$182,088 $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 six months ended June 30, 1998
and June 30, 1997 follows:
<TABLE>
<CAPTION>
June 30, 1998 June 30,1997
------------- ------------
<S> <C> <C>
Balance, January 1 $2,655,412 $2,771,784
Provision charged to expense 172,500 300,000
Net recoveries (charge-offs) 216,825 (104,739)
------------ -------------
Balance, June 30 $3,044,737 $2,967,045
============ ============
</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 June 30, 1998 and December 31, 1997 are presented below:
<TABLE>
<CAPTION>
June 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 $ - $ 47,918 $ 952,082
Tax exempt bonds 520,530 20,618 541,148
---------- --------- --------- ----------
$1,520,530 $ 20,618 $ 47,918 $1,493,230
========== ========= ========= ==========
</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 June 30, 1998 and December 31, 1997 are presented below:
<TABLE>
<CAPTION>
June 30, 1998
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ --------- ------------
<S> <C> <C> <C> <C>
U.S. Treasuries $ 8,008,245 $ 95,192 $ $ 8,103,437
U.S. Government Agencies 34,214,447 246,479 18,817 34,442,109
Mortgage-backed certificates 5,092,918 36,912 9,088 5,120,742
Tax exempt bonds 2,605,087 14 29,178 2,575,923
----------- ------------ --------- ------------
$49,920,697 $ 378,597 $ 57,083 $ 50,242,211
=========== ============ ========= ============
</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 June 30, 1998 was 4,096,861 and 4,765,127, respectively, and for the three
months ended June 30, 1997 was 3,713,244 and 4,499,494, respectively. The
weighted-average number of shares outstanding used in computing basic and
diluted earnings per share for the six months ended June 30, 1998 was 4,114,057
and 4,762,999, respectively, and for the six months ended June 30, 1997 was
3,713,736 and 4,476,734, 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.
-7-
<PAGE> 9
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion addresses the factors that have affected the financial
condition and results of operations of Merit Holding Corporation (the "Company")
as reflected in the unaudited consolidated financial statements for the three
and six months ended June 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 second quarter of 1998 was $1,220,339 a 16.2%
increase compared to net income of $1,050,485 for the same period in 1997.
Diluted earnings per share was $.26 in the second quarter of 1998 compared to $
.23 for the same period in 1997. Net income for the six months ended June 30,
1998 was $2,374,583 compared to $1,983,333 for the same period of 1997, a 19.7%
increase. The increase in net income in the second quarter of 1998 compared to
the same period in 1997 was the result of an increase in net interest income of
$280,138, or 8.3%, a $75,000 reduction in the provision for loan losses compared
to the second quarter of 1997 and an increase of $79,834, or 25.4%, in
non-interest income, offset by an increase of $127,794, or 6.6%, in non-interest
expense. The growth in net income for the six month period ended June 30, 1998
over the corresponding period in 1997 resulted primarily from an increase of
$662,368, or 10.1%, in net interest income, an increase of $93,506, or 13.9%, in
non-interest income, and a decrease in the provision for loan losses of
$127,500; offset by an increase of $180,051, or 4.7%, in non-interest expense.
Return on average equity for the three months and six months ended June 30, 1998
was 14.96% and 14.57% on average equity of $32,633,000 and $32,598,000,
respectively, as compared to 14.98% and 14.39% on average equity of $28,041,000
and $27,583,000, respectively, for the same periods in 1997. Return on average
assets for the three months and six months ended June 30, 1998 was 1.67% and
1.70% on average assets of $291,801,000 and $279,771,000, respectively, as
compared to 1.77% and 1.69% on average assets of $237,517,000 and $234,564,000
for the same periods in 1997.
Total assets at June 30, 1998 were $292,295,000, a 9.3% increase from
$267,363,000 at December 31, 1997. Total average assets for the first six months
of 1998 were $279,771,000, up $45,207,000, or 19.3% from the same period in
1997. Average loans for the first six months of 1998 were $179,196,000, up
$18,147,000, or 11.3% over the same period in 1997. The loan growth was funded
by increased average interest-bearing deposits, up $37,696,000 or 27.7% and
higher average non-interest bearing deposits, up $3,646,000, or 6.8%. Most of
the excess of the deposit growth over loan growth was placed in federal funds
sold, which increased $21,260,000 for the first six 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 second quarter of 1998 increased $280,138 or 8.3%
over the second quarter of 1997. Net interest income for the six months ended
June 30, 1998 increased $662,368 or 10.1% over the same period in 1997. The net
interest margin for the three months and six months ended June 30, 1998 was
5.50% and 5.65% respectively on average total earning assets of $267,058,000 and
$255,025,000, respectively. For the same periods in 1997, the net interest
margin was 6.20% and 6.16% respectively on average earning assets of
$218,518,000 and $212,556,000. The increase in net interest income 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 six months of
1998 from 4.28% for the same period in 1997, and a lower yield on earning
assets, down 28 basis points to 8.91% in the first six months of 1998 compared
to the same period of 1997.
The provision for loan losses for the second quarter of 1998 was $75,000
compared to $150,000 in the second quarter of 1997. The provision for loan
losses for the first six months of 1998 was $172,500 compared to $300,000 for
the same period in 1997. The allowance for loan losses at June 30, 1998 was
$3,045,000 compared to $2,655,000 at December 31, 1997. At June 30, 1998 and
December 31, 1997, the allowance for loan losses represented 1.64% 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 six months ended June 30, 1998, recoveries on loans, net of
charge-offs, totaled $216,825, or 0.12% of total loans outstanding. This
compares to net charge-offs of $104,739 or 0.06% through the six months ended
June 30, 1997. Net recoveries in the first quarter of 1998 were $253,341 and net
charge-offs in the second quarter of 1998 were $36,516, respectively, compared
to net charge-offs $73,873 and $30,866 in the first and second quarters of 1997,
respectively. Total non-performing loans (including loans 90 days or more past
due) as of June 30, 1998 were $430,385 compared to $476,395 at December 31,
1997. The ratio of non-performing loans (including loans 90 days or more past
due) to total outstanding loans was 0.23% at June 30, 1998 compared to 0.26% at
December 31, 1997 and 0.34% at June 30, 1997.
-9-
<PAGE> 11
At June 30, 1998, the Company owned two foreclosed residential properties
carried in other real estate owned in the amount of $419,329. The Company does
not anticipate any material loss on the sale of these properties.
At June 30, 1998, the Company had $8,418,000 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 June 30, 1998 was $5,036,000 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 $79,834 or 25.4% during the second quarter of 1998
compared to the same period in 1997, and increased $93,506, or 13.9%, for the
first six 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. There were no security sales in 1998. Other
income increased $36,614 and $44,439, for the second quarter and first six
months of 1998, compared to the same periods in 1997. Service charges and fees
on deposits increased $7,038, or 2.7%, in the second quarter of 1998 compared to
1997, and $8,934, or 1.7%, for the first six months of 1998 compared to 1997.
Non-interest expense increased $127,794, or 6.6%, for the quarter ended June 30,
1998 as compared to the same period in 1997. Occupancy and equipment expense
increased $88,059, or 31.0%, in the second 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. Legal expense
decreased $92,501, or 70.6%, for the second quarter of 1998 compared to the same
period in 1997 as a result of the settlement of a lawsuit in 1997. Salaries and
other personnel expenses increased $152,689, or 16.7%, reflecting the continued
growth of the Company. All other operating expenses decreased $20,453, or 3.4%,
in the second quarter of 1998 compared to 1997.
Non-interest expense for the six months ended June 30, 1998 increased $180,051,
or 4.7%, over the same period in 1997. Salaries and other personnel expenses
increased $291,569, or 15.4%, to manage continued growth. Occupancy and
equipment expense increased $124,898, or 22.3%, in the first six 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 $191,002, or
72.9%, for the first half of 1998 compared to the same period in 1997 as a
result of the settlement of the lawsuit discussed above. All other operating
expenses decreased $45,414, or 3.9%, in the first half of 1998 compared to 1997,
the result of management closely monitoring operating expenses.
-10-
<PAGE> 12
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 June
30, 1998 the Company's tier I risk-based capital was 15.2% and total risk-based
capital was 16.5%, 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 problem involves the risk that various systems will
not operate correctly beyond the century date change-over on January 1, 2000.
The Company has identified the various systems impacted, assessed the risks
involved, and is currently testing the systems for compliance. The Company is
also contacting its vendors and major loan customers to address their exposure
to this problem. Thc Company plans to have most testing of its systems and
client contact completed by the end of 1998. At this time, the Company does not
believe that the cost arising from the Year 2000 project will be material,
although there can be no assurance that unforeseen difficulties or costs will
not arise.
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 six months of 1998, the Company repurchased 72,400 shares of
its common stock in the open market and 47,780 shares directly from shareholders
under this program at a total cost of $2,670,000. In addition, 292,018 warrants
to purchase common stock originally issued to Mountain's organizers in 1988 and
16,992 options to purchase common stock issued to the Company's officers were
exercised during the first six months of 1998 for total proceeds of $1,541,375.
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
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<PAGE> 13
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 June 30, 1998 the Company had $9,981,000 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 June 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 June 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 June 30, 1998 the Company had a
gap ratio of 1.02 for the one year period ending June 30, 1999. Thus, over the
next twelve months, more rate-sensitive assets will reprice than rate-sensitive
liabilities.
There are no known trends or any known commitments or uncertainties that will
result in the Company's liquidity increasing or decreasing in any material way.
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
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<PAGE> 14
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.
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<PAGE> 15
Part II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS FOR VOTE OF SECURITY HOLDERS.
On May 19, 1998, the Company held its 1998 Annual Meeting of
Shareholders. At the meeting, the following persons were elected to
serve on the Company's Board of Directors for a term of one year and
until their successors are elected and have qualified: J. Randall
Carroll, Michael J. Coles, Ronald H. Francis, Patrick H. Hickok and
Walter J. McCloud, II. The number of votes cast for and against the
election of each nominee for director was as follows:
<TABLE>
<CAPTION>
Director For Withhold
--------------------- --- --------
<S> <C> <C>
J. Randall Carroll 2,196,326 5,841
Michael J. Coles 2,184,092 18,075
Ronald H. Francis 2,196,326 5,841
Patrick H. Hickok 2,196,326 5,841
Walter J. McCloud, II 2,196,326 5,841
</TABLE>
Item 5. OTHER INFORMATION
As set forth in the Company's Proxy Statement for the 1998 Annual Meeting, any
shareholder proposals intended to be presented at the 1999 Annual Meeting of
Shareholders must be received by the Company by December 7, 1998, in order to be
considered for inclusion in the proxy statement and form of proxy for that
meeting.
Any shareholder, who intends to present a proposal at the 1999 Annual Meeting of
Shareholders and has not sought inclusion of the proposal in the Company's proxy
materials pursuant to Rule 14a-8, must provide the Company with notice of such
proposal no later than February 20, 1999.
Item 6. EXHIBITS AND REPORTS ON FORM 8-
(a) Exhibit 27 - Financial Data Schedule (SEC use only)
(b) No reports on Form 8-K were filed during the quarter ended
June 30, 1998.
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<PAGE> 16
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: August 5, 1998 /s/ J. Randall Carroll
------------------- --------------------------------
J. Randall Carroll
Chairman and Chief Executive
Officer
Date: August 5, 1998 /s/ Ronald H. Francis
------------------- --------------------------------
Ronald H. Francis
President and Chief Financial
Officer
(principal financial and
accounting officer)
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 17,164,321
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 27,519,558
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 50,242,211
<INVESTMENTS-CARRYING> 1,520,530
<INVESTMENTS-MARKET> 1,493,230
<LOANS> 185,133,067
<ALLOWANCE> 3,044,737
<TOTAL-ASSETS> 292,294,618
<DEPOSITS> 243,060,134
<SHORT-TERM> 8,418,210
<LIABILITIES-OTHER> 2,901,507
<LONG-TERM> 5,035,556
0
0
<COMMON> 10,748,108
<OTHER-SE> 22,131,103
<TOTAL-LIABILITIES-AND-EQUITY> 292,294,618
<INTEREST-LOAN> 9,069,422
<INTEREST-INVEST> 1,572,380
<INTEREST-OTHER> 724,002
<INTEREST-TOTAL> 11,365,804
<INTEREST-DEPOSIT> 3,823,844
<INTEREST-EXPENSE> 4,161,271
<INTEREST-INCOME-NET> 7,204,533
<LOAN-LOSSES> 172,500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,051,409
<INCOME-PRETAX> 3,744,905
<INCOME-PRE-EXTRAORDINARY> 2,374,583
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,374,583
<EPS-PRIMARY> .59
<EPS-DILUTED> .50
<YIELD-ACTUAL> 5.65
<LOANS-NON> 430,385
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,655,412
<CHARGE-OFFS> 186,901
<RECOVERIES> 403,727
<ALLOWANCE-CLOSE> 3,044,737
<ALLOWANCE-DOMESTIC> 3,044,737
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
