<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
MARCH 31, 1999 0-25938
MERIT HOLDING CORPORATION
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(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 4,777,316
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Class Outstanding as of May 7, 1999
<PAGE> 2
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
MERIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- -------------
ASSETS
------
<S> <C> <C>
Cash and due from banks $ 15,748,367 $ 21,592,764
Federal funds sold and other short-term investments 23,272,587 24,697,148
Investment securities, at cost (market
value of $1,979,078 and $2,009,800 respectively) 2,019,389 2,019,769
Mortgage-backed securities available-for-sale 15,351,689 10,928,720
Securities available-for-sale (Note 4) 42,112,557 44,507,226
Federal Reserve Bank stock 299,850 299,850
Federal Home Loan Bank stock 1,331,700 1,331,700
The Bankers Bank stock 707,000 707,000
Loans, less allowance for loan losses
of $3,667,058 and $3,286,602 (Notes 2 and 3) 196,108,082 188,326,955
Real estate owned 187,587 187,587
Premises and equipment, net 5,052,135 5,103,163
Accrued interest receivable and other assets 8,637,868 6,664,552
------------- -------------
Total assets $ 310,828,811 $ 306,366,434
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits:
Demand $ 71,137,693 $ 71,527,979
Checking with interest 39,589,210 42,027,075
Money-market accounts 43,075,708 42,214,042
Savings 3,480,945 3,337,770
Time, $100,000 and over 33,246,191 34,193,322
Other time 59,826,433 61,313,792
------------- -------------
250,356,180 254,613,980
Short-term borrowings 12,490,840 7,274,034
Long-term debt 4,714,611 4,786,938
Accrued interest payable and other liabilities 3,359,336 2,378,790
------------- -------------
Total liabilities 270,920,967 269,053,742
------------- -------------
Shareholders' equity
Common stock, $2.50 par value; 10,000,000 shares
authorized; 4,851,196 and 4,846,496 shares issued and
4,777,316 and 4,672,616 shares outstanding, respectively 12,127,990 12,116,240
Paid-in capital 11,285,769 11,609,162
Retained earnings 18,133,568 17,142,460
Accumulated other comprehensive income (18,805) 259,108
Treasury stock, 73,880 and 173,880 shares at cost, respectively (1,620,678) (3,814,278)
------------- -------------
Total shareholders' equity 39,907,844 37,312,692
------------- -------------
Total liabilities and shareholders' equity $ 310,828,811 $ 306,366,434
============= =============
</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
March 31,
1999 1998
----------- -----------
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 4,564,649 $ 4,492,126
Interest on securities 908,156 728,250
Interest on federal funds sold
and other short-term investments 213,436 236,992
Dividends on The Banker's Bank stock 35,000 0
Dividends on Federal Reserve Bank stock 4,498 4,498
Dividends on Federal Home Loan Bank stock 24,167 24,000
----------- -----------
Total interest and dividend income 5,749,906 5,485,866
Interest expense on deposits 1,713,125 1,799,668
Interest expense on long-term debt 77,766 86,031
Interest expense on short-term borrowings 102,254 64,850
----------- -----------
Total interest expense 1,893,145 1,950,549
----------- -----------
Net interest income 3,856,761 3,535,317
Provision for loan losses 62,202 97,500
----------- -----------
Net interest income after
provision for loan losses 3,794,559 3,437,817
----------- -----------
Non-interest income:
Service charges and fees on deposits 281,745 272,434
Mutual fund sales fees 11,589 12,733
Other income 133,757 84,961
----------- -----------
Total non-interest income 427,091 370,128
----------- -----------
Non-interest expense:
Salaries and other personnel 1,228,792 1,116,071
Occupancy and equipment 337,673 311,654
Advertising and marketing 36,909 27,707
Legal 52,600 32,499
Data processing 50,430 48,521
Directors' fees 57,150 63,700
Other operating 449,356 384,651
----------- -----------
Total non-interest expense 2,212,910 1,984,803
----------- -----------
Income before income taxes 2,008,740 1,823,142
Provision for income taxes 730,993 668,898
----------- -----------
Net income $ 1,277,747 $ 1,154,244
=========== ===========
Other comprehensive income, before tax
Unrealized gains (losses) on securities
Unrealized holding gains(losses) arising during period $ (444,795) $ 4,786
Income tax (expense) benefit related to items of other
comprehensive income 166,882 (1,771)
----------- -----------
Other comprehensive income, net of tax $ (277,913) $ 3,015
----------- -----------
Comprehensive income $ 999,834 $ 1,157,259
=========== ===========
Basic earnings per share $ .27 $ .29
=========== ===========
Diluted earnings per share $ .26 $ .24
=========== ===========
</TABLE>
(See notes to consolidated financial statements)
- 2 -
<PAGE> 4
MERIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,277,747 $ 1,154,244
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 143,559 123,638
Net amortization of premiums on securities 13,395 13,149
Provision for loan losses 62,202 97,500
Decrease in interest receivable 62,063 166,905
(Decrease) increase in interest payable (216,660) 143,942
Increase in accrued expenses and other liabilities 1,018,332 41,326
Increase in prepaid expenses and other assets (12,730) (2,881,889)
------------ ------------
Net cash provided (used) by operating activities 2,347,908 (1,141,185)
------------ ------------
Cash flows from investing activities:
Purchases of "available-for-sale" investment securities (14,639,453) (4,998,594)
Proceeds from maturities of "available-for-sale" investment securities 12,153,342 4,740,555
Loans made to customers, net (7,919,334) 3,357,490
Capital expenditures (56,170) (178,675)
Net cash from business acquisition 218,969 0
------------ ------------
Net cash provided (used) by investing activities (10,242,646) 2,920,776
------------ ------------
Cash flows from financing activities:
Repayment of Federal Home Loan Bank advances (72,327) (70,983)
Net increase (decrease) in deposits (4,257,800) 15,955,699
Net increase in securities sold under
agreements to repurchase 5,216,806 107,238
Exercise of stock warrants 19,458 448,847
Dividends paid (280,357) (198,311)
Purchase of treasury stock 0 (1,103,361)
------------ ------------
Net cash provided by financing activities 625,780 15,139,129
------------ ------------
Net increase (decrease) in cash and cash equivalents (7,268,958) 16,918,720
Cash and cash equivalents at beginning of period 46,289,912 31,879,659
------------ ------------
Cash and cash equivalents at end of period $ 39,020,954 $ 48,798,379
============ ============
Supplemental data:
Interest paid $ 2,105,707 $ 1,765,516
============ ============
Income taxes paid $ 0 $ 436,035
============ ============
</TABLE>
(See notes to consolidated financial statements)
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<PAGE> 5
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(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 three months ended
March 31, 1999 are not necessarily indicative of trends or results to be
expected for the year ended December 31, 1999. 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, 1998.
NOTE 2 - ACQUISITION
On January 29, 1999 the Company acquired Source Capital Group I, Inc., an
Atlanta-based equipment leasing company, in exchange for 100,000 shares of the
Company's treasury stock, valued at approximately $1,860,000. Tangible assets
acquired had an estimated fair market value approximating $3,783,000 and
liabilities assumed had an estimated fair market value approximating $3,233,000.
The acquisition was accounted for using the purchase method of accounting, thus,
the results of operations are included in the Company's consolidated statements
of income and comprehensive income from the date of acquisition. The purchase
price has been allocated to the individual assets and liabilities on the basis
of their respective fair market values at the date of acquisition, which were
determined based on management's best estimate. The excess (approximately
$1,310,000) of the purchase price over the assets acquired and liabilities
assumed has been recorded as goodwill and is being amortized using the
straight-line method over fifteen years.
NOTE 3 - 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.
-4-
<PAGE> 6
Loans consist of:
(in thousands)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- ------------------
<S> <C> <C> <C> <C>
Commercial $114,684 57% $108,954 57%
Real estate - construction
and land development 46,454 23% 41,955 22%
Real estate - mortgages 25,601 13% 30,290 16%
Installment and other
Consumer 13,036 7% 10,415 5%
-------- ----- -------- -----
199,775 100% 191,614 100%
Less allowance for loan losses (3,667) (3,287)
-------- --------
$196,108 $188,327
======== ========
</TABLE>
NOTE 4 - 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 three months ended March 31,
1999 and March 31, 1998 follows:
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Balance, January 1 $3,286,602 $2,655,412
Merit Leasing Corp. acquisition 292,405
Provision charged to expense 62,202 97,500
Net recoveries 25,849 253,341
---------- ----------
Balance, March 31 $3,667,058 $3,006,253
========== ==========
</TABLE>
NOTE 5 - 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.
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<PAGE> 7
The amortized cost and estimated market value of investment securities
held-to-maturity at March 31, 1999 and December 31, 1998 are presented below:
<TABLE>
<CAPTION>
March 31, 1999
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government Agencies $1,000,000 $ 0 $ 58,795 $ 941,205
Tax exempt bonds 1,019,389 21,863 3,379 1,037,873
---------- ---------- ---------- ----------
$2,019,389 $ 21,863 $ 62,174 $1,979,078
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government Agencies $1,000,000 $ 0 $ 36,218 $ 963,782
Tax exempt bonds 1,019,769 26,249 0 1,046,018
---------- ---------- ---------- ----------
$2,019,769 $ 26,249 $ 36,218 $2,009,800
========== ========== ========== ==========
</TABLE>
The amortized cost and estimated market value of investment securities
available-for-sale at March 31, 1999 and December 31, 1998 are presented below:
<TABLE>
<CAPTION>
March 31, 1999
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasuries $ 5,509,019 $ 82,544 $ 0 $ 5,591,563
U.S. Government Agencies 33,952,054 116,033 127,712 33,940,375
Mortgage-backed certificates 15,429,213 20,289 97,813 15,351,689
Tax exempt bonds 2,604,247 0 23,628 2,580,619
----------- ---------- ---------- -----------
$57,494,533 $ 218,866 $ 249,153 $57,464,246
=========== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S.Treasuries $ 6,510,685 $ 145,721 $ 0 $ 6,656,406
U.S. Government Agencies 34,947,922 308,930 19,688 35,237,164
Tax exempt bonds 2,604,527 11,611 2,483 2,613,655
Mortgage-backed certificates 10,958,304 18,414 47,997 10,928,721
----------- ---------- ---------- -----------
$55,021,438 $ 484,676 $ 70,168 $55,435,946
=========== ========== ========== ===========
</TABLE>
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<PAGE> 8
NOTE 6 - 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 and comprehensive 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 March 31, 1999 was 4,742,393 and 4,835,525,
respectively, and for the three months ended March 31, 1998 was 3,999,004 and
4,748,310, respectively.
NOTE 7 - 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.
In October 1998, the FASB issued Statement of Financial Accounting Standards No.
134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise"
("SFAS 134"). SFAS 134 is effective for the first fiscal quarter beginning after
December 15, 1998 (January 1, 1999 for the Company). SFAS 134 amends Statement
of Financial Accounting Standards No. 65, "Accounting for Certain Mortgage
Banking Activities" ("SFAS 65"), to require that after the securitization of
mortgage loans held-for-sale, an entity that engages in mortgage banking
activities classify the resulting mortgage-backed securities or other retained
interests based on its ability and intent to sell or hold those investments.
Management anticipates the adoption of SFAS 134 will not have a significant
impact on the Company's results of operations or its financial position.
-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
months ended March 31, 1999 and 1998. The Company's operating subsidiaries are
Mountain National Bank ("Mountain") and Charter Bank & Trust Co. ("Charter").
RECENT DEVELOPMENTS
On March 19, 1999, the Company entered into a letter of intent to merge with
Synovus Financial Corp. Synovus is a Columbus, Georgia based multi-financial
services company with $10.5 billion in assets, owning 36 banks serving
communities throughout Georgia, Alabama, Florida and South Carolina. The letter
of intent contemplates that Merit shareholders will receive 1.0529 shares of
Synovus common stock for each share of Merit common stock owned. The Company and
Synovus are currently negotiating a definitive merger agreement. Consummation of
the transaction is subject to the execution of a definitive agreement and prior
approval by federal and state regulatory authorities and Merit shareholders. The
transaction is expected to be completed in the third quarter of 1999.
On January 29, 1999, the Company acquired Source Capital Group I, Inc., an
Atlanta-based equipment leasing company, in exchange for 100,000 shares of the
Company's treasury stock. The leasing company was re-named Merit Leasing
Corporation and became a wholly owned subsidiary of Mountain.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's net income for the first quarter of 1999 was $1,277,747 a 10.7%
increase compared to net income of $1,154,244 for the same period in 1998.
Diluted earnings per share was $.26 in the first quarter of 1999 compared to $
.24 for the same period in 1998. The increase in net income was the result of an
increase in net interest income of $321,444, or 9.1%, an increase of $56,963, or
15.4%, in non-interest income, and a decrease of $35,298, or 36.2%, in the
provision for loan losses, offset by an increase of $228,107, or 11.5%, in
non-interest expense.
Return on average equity for the three months ended March 31, 1999 was 13.04% on
average equity of $39,186,000 compared to 14.18% on average equity of
$32,563,000 for the same period in 1998. Return on average assets for the three
months ended March 31, 1999 was 1.71% on average assets of $299,096,000,
compared to 1.73% on average assets of $267,608,000 for the same period in 1998.
-8-
<PAGE> 10
Total assets at March 31, 1999 were $310,829,000, a 1.5% increase from
$306,366,000 at December 31, 1998. Total average assets for the first three
months of 1999 were $299,096,000, up $31,488,000, or 11.8% from the same period
in 1998. Average loans for the first three months of 1999 were $189,277,000, up
$10,646,000 or 6.0% over the same period in 1998. The loan growth was funded by
increased average interest-bearing deposits, up $15,505,000 or 9.5%, higher
average non-interest bearing deposits, up $6,406,000, or 11.4% and increased
average short-term borrowings, up $4,593,000, or 73.6%. Most of the excess of
the deposit growth over loan growth was placed in investment securities, which
for the first quarter of 1999 averaged $62,389,000, up $15,578,000 or 33.3% over
the first quarter of 1998.
Net interest income for the first quarter of 1999 increased $321,444 or 9.1%
over the first quarter of 1998. The net interest margin for the three months
ended March 31, 1999 was 5.71% on average total earning assets of $270,230,000.
For the same period in 1998, the net interest margin was 5.82% on average
earning assets of $242,857,000. The increase in net interest income in the first
three months of 1999 over the same period in 1998 reflects the growth in earning
assets in 1999 over 1998, offset by the decrease in the net interest margin. The
growth in average balances accounted for an increase in net interest margin of
approximately $1,163,000. The decrease in net interest margin of 11 basis points
reflects the decline in general market rates. The yield on average earning
assets fell 53 basis points to 8.51% in the first quarter of 1999 compared to
the same quarter of 1998. This decline was only partly offset by a drop of 43
basis points in the average cost of funds to 2.94% in the first three months of
1999 from 3.37% for the same period in 1998.
The provision for loan losses for the first quarter of 1999 was an expense of
$62,202 compared to $97,500 in the same quarter of 1998. The allowance for loan
losses at March 31, 1999 was $3,667,000 compared to $3,287,000 at December 31,
1998. At March 31, 1999 and December 31, 1998, the allowance for loan losses
represented 1.83% and 1.72% 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 three months ended March 31, 1999, recoveries on loans, net of
charge-offs, totaled $25,849, or 0.01% of total loans outstanding. This compares
to recoveries, net of charge-offs, of $253,341 or 0.14% through the three months
ended March 31, 1998. Total non-performing loans (including loans 90 days or
more past due) as of March 31, 1999 were $850,063 compared to $223,270 at
December 31, 1998. The ratio of non-performing loans (including loans 90 days or
more past due) to total outstanding loans was 0.43% at March 31, 1999 compared
to 0.12% at December 31, 1998.
-9-
<PAGE> 11
At March 31, 1999, 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 March 31, 1999, the Company had $12,491,000 in short-term borrowings compared
to $7,274,000 at year ended December 31, 1998. Short-term borrowings consist of
securities sold under agreements to repurchase with customers.
Long-term debt at March 31, 1999 was $4,715,000 compared to $4,787,000 at
year-end December 31, 1998. 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 or year-to-date 1999.
Non-interest income increased $56,963 or 15.3% during the first quarter of 1999
compared to the same period in 1998. Of this increase, other income increased
$48,796 or 57.4% in the first quarter of 1999 compared to the same period in
1998, primarily attributable to an increase of $17,000 in mortgage referral fees
and an increase of $18,000 in the cash value of life insurance. Service charges
and fees on deposits increased $9,311 or 3.4% in the first quarter of 1999
compared to 1998.
Non-interest expense increased $228,107, or 11.5%, for the quarter ended March
31, 1999 as compared to the same period in 1998. Occupancy and equipment expense
increased $26,019, or 8.4%, in the first quarter of 1999 compared to the same
period in 1998, 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. Salaries
and other personnel expenses increased $112,721, or 10.1%, reflecting the
continued growth of the Company.
CAPITAL ADEQUACY
The assessment of capital adequacy depends on a number of factors such as asset
quality, liquidity, earnings performance, changing competitive conditions and
economic forces. The Company seeks to maintain a strong capital base to support
its growth and expansion activities, to provide stability to current operations
and to promote public confidence.
Capital management is a continuous process. Since December 31, 1998,
shareholders' equity has increased $2,595,000, primarily as a result of the
issuance of 100,000 shares of treasury stock as consideration for the
acquisition of Source Capital Group on January 29, 1999.
On January 15, 1999, the Company paid a regular quarterly dividend of $.06 per
share.
-10-
<PAGE> 12
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 to assets of 4% for core
capital (tier I), 8% for total risk-based capital and 3% for the leverage ratio.
At March 31, 1999 the Company's tier I risk-based capital was 16.7% and total
risk-based capital was 18.0%, compared to 16.6% and 17.8% at year-ended December
31, 1998, 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.
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 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 to fund
current and future needs to ensure that adequate funding will be available at
all times.
The Company's loan to deposit ratio averaged 78.2% during the first three months
of 1999, compared to 81.1% for the same period in 1998. Management plans an
average loan to deposit ratio in the range of 75%-85% during 1999.
At March 31, 1999, the Company had $9,043,000 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 March 31, 1999 and December 31, 1998, the Company had federal funds lines of
credit from other banks totaling $28,450,000 and $26,750,000, respectively, to
meet short term funding needs. There was no balance outstanding under these
short term commitments at March 31, 1999.
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.
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<PAGE> 13
Management has specified gap guidelines for a one year time horizon of between
.80 and 1.2. At March 31, 1999 the Company had a gap ratio of 1.05 for the one
year period ending March 31, 2000. Thus, over the next twelve months, slightly
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.
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.
YEAR 2000 READINESS
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 conduct on-going 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 has contacted
the various third party software vendors it uses to obtain written documentation
from them confirming Year 2000 compliance. All mission critical software has
been inventoried and tested and most remediation has been completed at both
banks. Each bank has tested its equipment for compliance; items found not in
compliance have been remediated to be compliant. Hardware, software and systems
will be retested if any changes are made to those systems after initial testing
is complete.
Both banks use third party service bureaus for core data processing. Charter's
core data processing vendor has certified, after testing, that its application
systems are Year 2000 compliant. Mountain used a different service bureau but
converted its core systems in April 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 new core
processing system selected was Year 2000 compliant.
Both banks have had legal counsel review their ACH and EFT contracts with
customers for Year 2000 compliance. Counsel recommended improvements which have
been implemented. Both banks have had an outside consultant review their Year
2000 project status and have implemented the consultants' recommendations.
The banks have developed a communication and assessment plan for their
customers. The banks have communicated the Year 2000 issue to both borrower and
depositor clients by
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<PAGE> 14
various methods. Each bank has contacted its key loan clients 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 initial customer review is complete and follow-up reviews of key clients
will be conducted regularly.
The expected cost to the Company of the Year 2000 project is currently estimated
at $80,000 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 three months ended March 31, 1999 were
not material.
The Company believes that its mission critical systems are compliant and that
its customers are aware of and are addressing their own Year 2000 issues.
However, in the Company's most reasonably likely worst case scenario, some
portion of a mission critical system may not function properly or some borrowers
may be unable to meet their loan commitments due to problems with their systems.
In the event that a mission critical system temporarily fails to perform
properly, the Company will invoke its contingency plan to correct the problem.
The Company will incur extra costs for salaries and for independent expert
assistance. These costs are not expected to be material. Some of the Company's
loan customers may experience financial difficulties if their mission critical
systems are not compliant and do not perform properly. 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 banks have developed contingency plans to mitigate the potential effects of
a disruption in normal operations resulting from Year 2000 problems. The plans
address, among other factors, each bank's potential increased liquidity and
currency requirements at the critical dates, security issues, and business
resumption planning. The Company intends to have in place by June 30, 1999,
written procedures to manually perform every mission critical task relating to
loan and deposit processing in the event some part of a system does not function
properly. The Company is developing forecasts of liquidity needs and will
inventory extra currency to meet any higher than normal demand during the
critical periods. Security will be augmented during these periods. Personnel
staffing will be carefully scheduled during the affected periods. These
contingency plans are frequently reviewed and updated as needed.
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.
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<PAGE> 15
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 preceding discussion of the Year 2000 issue in the Year 2000 readiness
section 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 Year 2000 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.
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> 16
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) On January 29, 1999, the Company acquired Source Capital Group
I, Inc. ("Source"), an Atlanta-based equipment leasing
company, for 100,000 shares of Merit common stock, which were
issued pro rata to the three shareholders of Source. The
issuance of such shares was made in reliance upon the
exemption from registration provided by Section 3(b) of the
Securities Act of 1993, as amended, and Regulation D
promulgated thereunder. Offers and sales were made without any
public solicitation and the securities bore a restrictive
legend. No underwriter was involved in the transaction and no
commissions were paid. Each shareholder of Source represented
to Merit that it was an "accredited investor" as defined in
Regulation D.
Item 6. EXHIBITS AND REPORTS ON FORM 8-
(a) Exhibit 10.4 - Agreement dated December 14, 1998 between
Fiserv, Inc. and Merit Holding Corporation.
Exhibit 27 - Financial Data Schedule (SEC use only)
(b) No reports on Form 8-K were filed during the quarter ended
March 31, 1999.
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<PAGE> 17
SIGNATURES
Pursuant to the requirements 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: May 7, 1999 /s/ J. Randall Carroll
----------------- ------------------------------------
J. Randall Carroll
Chairman and Chief Executive Officer
Date: May 7, 1999 /s/ Ronald H. Francis
----------------- ------------------------------------
Ronald H. Francis
President and Chief Financial Officer
(principal financial and accounting officer)
<PAGE> 1
EXHIBIT 10.4
Agreement Number:
AGREEMENT
between
FISERV SOLUTIONS, INC.
255 Fiserv Drive
Brookfield, WI 53045-5815
and
MERIT HOLDING CORPORATION
TUCKER, GEORGIA
Date: December 14, 1998
(FISERV(R) LOGO)
<PAGE> 2
AGREEMENT dated as of December 14, 1998 ("Agreement") between FISERV SOLUTIONS,
INC., a Wisconsin corporation ("Fiserv"), and MERIT HOLDING CORPORATION, a
Georgia Financial Institution ("Client").
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Fiserv and Client hereby agree as follows:
1. Term. The initial term of this Agreement shall be 5 years and, unless
written notice of non-renewal is provided by either party at least 180 days
prior to expiration of the initial term or any renewal term, this Agreement
shall automatically renew for a renewal term of 5 years. This Agreement shall
commence on the earliest of the day Fiserv Services (as defined below) are first
used by Mountain National Bank, Tucker, Georgia, and be in effect for Merit
Holding Corporation institutions.
2. Services. (a) Services Generally. Fiserv, itself and through its
affiliates, agrees to provide Client, and Client agrees to obtain from Fiserv
services ("Services") and products ("Products") (collectively, "Fiserv
Services") described in the attached Exhibits:
Exhibit A - Account Processing Services
Exhibit H - Additional Services (Disaster Recovery)
The Exhibits set forth specific terms and conditions applicable to the
Services and/or Products, and, where applicable, the Fiserv affiliate so
performing. Client may select additional services and products from time to time
by incorporating an appropriate Exhibit to this Agreement.
(b) Conversion Services. Fiserv will convert Client's existing applicable
data and/or information to the Fiserv Services. Those activities designed to
transfer the processing from Client's present servicer to the Fiserv Services
are referred to as "Conversion Services". Client agrees to cooperate with Fiserv
in connection with Fiserv's provision of Conversion Services and to provide all
necessary information and assistance to facilitate the conversion. Client is
responsible for all out-of-pocket expenses associated with the Conversion
Services. Fiserv will provide Conversion Services as required in connection with
Fiserv Services.
(c) Training Services. Fiserv shall provide training, training aids, user
manuals, and other documentation for Client's use as Fiserv finds necessary to
enable Client personnel to become familiar with Fiserv Services. If requested by
Client, classroom training in the use and operation of Fiserv Services will be
provided at a training facility designated by Fiserv. All such training aids and
manuals remain Fiserv's property.
3. Fees for Fiserv Services. (a) General. Client agrees to pay Fiserv:
(i) estimated fees for Fiserv Services for the following month as
specified in the Exhibits;
(ii) estimated out-of-pocket charges for the following month payable by
Fiserv for the account of Client; and
(iii) estimated Taxes (as defined below) thereon (collectively, "Estimated
Fees").
Fiserv shall timely reconcile Estimated Fees paid by Client for the Fiserv
Services for the month and the fees and charges actually due Fiserv based on
Client's actual use of Fiserv Services for such month. Fiserv shall either issue
a credit to Client or provide Client with
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<PAGE> 3
an invoice for any additional fees or other charges owed. Fiserv may change the
amount of Estimated Fees billed to reflect appropriate changes in actual use of
Fiserv Services. Estimated Fees may be increased from time to time as set forth
in the Exhibits. Upon notification to and acceptance by Client, Fiserv may
increase its fees in excess of amounts listed in the Exhibits in the event that
Fiserv implements major system enhancements to comply with changes in law,
government regulation, or industry practices.
(b) Additional Charges. Fees for out-of-pocket expenses, such as
telephone, microfiche, courier, and other charges incurred by Fiserv for goods
or services obtained by Fiserv on Client's behalf shall be billed to Client at
cost plus the applicable Fiserv administrative fee NOT TO EXCEED 15%. Such
out-of-pocket expenses may be changed from time to time upon notification TO
CLIENT of a fee change from a vendor/provider.
(c) Taxes. Fiserv shall add to each invoice any sales, use, excise, value
added, and other taxes and duties however designated that are levied by any
taxing authority relating to the Fiserv Services ("Taxes"). In no event shall
"Taxes" include taxes based upon the net income of Fiserv.
(d) Exclusions. The Estimated Fees do not include, and Client shall be
responsible for, furnishing transportation or transmission of information
between Fiserv's service center(s), Client's site(s), and any applicable
clearing house, regulatory agency, or Federal Reserve Bank.
(e) Payment Terms. Estimated Fees are due and payable monthly upon receipt
of invoice. Client shall pay Fiserv through the Automated Clearing House OR VIA
CHECK. In the event any amounts due remain unpaid beyond the 30th day after
payment is due, Client shall pay a late charge of 1.5% per month. Client agrees
that it shall neither make nor assert any right of deduction or set-off from
Estimated Fees on invoices submitted by Fiserv for Fiserv Services. SHOULD
FISERV INADVERTENTLY INVOICE CLIENT FOR SERVICES NOT PERFORMED UPON WRITTEN
DISPUTE TO FISERV, CLIENT MAY SET-OFF SUCH FEES FROM INVOICE UNTIL DISPUTE IS
RESOLVED.
4. Access to Fiserv Services. (a) Procedures. Client agrees to comply with
applicable regulatory requirements and procedures for use of Services
established by Fiserv.
(b) Changes. Fiserv continually reviews and modifies Fiserv systems used
in the delivery of Services (the "Fiserv System") to improve service and comply
with government regulations, if any, applicable to the data and information
utilized in providing Services. Fiserv reserves the right to make changes in
Services, including but not limited to operating procedures, type of equipment
or software resident at, and the location of Fiserv's service center(s). Fiserv
will notify Client of any material change that affects Client's normal operating
procedures OR reporting prior to implementation of such change.
(c) Communications Lines. Fiserv shall order the installation of
appropriate communication lines and equipment to facilitate Client's access to
Services. Client understands and agrees to pay charges relating to the
installation and use of such lines and equipment as set forth in the Exhibits.
(d) Terminals and Related Equipment. Client shall obtain necessary and
sufficient terminals and other equipment, approved by Fiserv and compatible with
the Fiserv System, to transmit and receive data and information between Client's
location(s), Fiserv's service center(s), and/or other necessary location(s).
Fiserv and Client may mutually agree to change the type(s) of terminal and
equipment used by Client.
5. Client Obligations. (a) Input. Client shall be solely responsible
for the input, transmission, or delivery to and from Fiserv of all information
and data required by Fiserv to perform Services unless Client has retained
Fiserv to handle such responsibilities, as specifically set forth in the
Exhibits. The information and data shall be provided in a format and manner
approved by Fiserv. Client will provide at its own expense or procure from
Fiserv all equipment, computer software, communication lines, and interface
devices required to access the Fiserv System. If Client has elected to provide
such items itself, Fiserv shall provide Client with a list of compatible
equipment and software; Client agrees to pay Fiserv's standard fee for
recertification of the Fiserv System resulting therefrom.
(b) Client Personnel. Client shall designate appropriate Client personnel
for training in the use of the Fiserv System, shall supply Fiserv with
reasonable access to Client's site during normal business hours for Conversion
Services and shall cooperate with Fiserv personnel in their performance of
Services, including Conversion Services.
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<PAGE> 4
(c) Use of Fiserv System. Client shall (i) comply with any operating
instructions on the use of the Fiserv System provided by Fiserv; (ii) review all
reports furnished by Fiserv for accuracy; and (iii) work with Fiserv to
reconcile any out of balance conditions. Client shall determine and be
responsible for the authenticity and accuracy of all information and data
submitted to Fiserv.
(d) Client's Systems. Client shall be responsible for ensuring that its
systems EXCLUSIVE OF THE FISERV SYSTEM are Year 2000 compliant and capable of
passing and/or accepting date formats from and/or to the Fiserv System.
6. Ownership and Confidentiality. (a) Definition.
(i) Client Information. "Client Information" means: (A) confidential
plans, customer lists, information, and other proprietary material of
Client that is marked with a restrictive legend, or if not so marked with
such legend or is disclosed orally, is identified as confidential at the
time of disclosure (and written confirmation thereof is promptly provided
to Fiserv); and (B) any information and data concerning the business and
financial records of Client's customers prepared by or for Fiserv, or used
in any way by Fiserv in connection with the provision of Fiserv Services
(whether or not any such information is marked with a restrictive legend).
(ii) Fiserv Information. "Fiserv Information" means: (A) confidential
plans, information, research, development, trade secrets, business affairs
(including that of any Fiserv client, supplier, or affiliate), and other
proprietary material of Fiserv that is marked with a restrictive legend,
or if not so marked with such legend or is disclosed orally, is identified
as confidential at the time of disclosure (and written confirmation
thereof is promptly provided to Client); and (B) Fiserv's proprietary
computer programs, including custom software modifications, software
documentation and training aids, and all data, code, techniques,
algorithms, methods, logic, architecture, and designs embodied or
incorporated therein (whether or not any such information is marked with a
restrictive legend).
(iii) Information. "Information" means Client Information and Fiserv
Information. No obligation of confidentiality applies to any Information
that the receiving party ("Recipient") (A) already possesses without
obligation of confidentiality; (B) develops independently; or (C)
rightfully receives without obligation of confidentiality from a third
party. No obligation of confidentiality applies to any Information that
is, or becomes, publicly available without breach of this Agreement.
(b) Obligations. Recipient agrees to hold as confidential all Information
it receives from the disclosing party ("Discloser"). All Information shall
remain the property of Discloser or its suppliers and licensors. Information
will be returned to Discloser at the termination or expiration of this
Agreement. Recipient will use the same care and discretion to avoid disclosure
of Information as it uses with its own similar information that it does not wish
disclosed, but in no event less than a reasonable standard of care. Recipient
may use Information for any purpose that does not violate such obligation of
confidentiality. Recipient may disclose Information to (i) employees and
employees of affiliates who have a need to know; and (ii) any other party with
Discloser's written consent. Before disclosure to any of the above parties,
Recipient will have a written agreement with such party sufficient to require
that party to treat Information in accordance with this Agreement. Recipient may
disclose Information to the extent required by law. However, Recipient agrees to
give Discloser prompt notice so that it may seek a protective order. The
provisions of this sub-section survive any termination or expiration of this
Agreement.
(c) Residuals. Nothing contained in this Agreement shall restrict
Recipient from the use of any ideas, concepts, know-how, or techniques contained
in Information that are related to Recipient's business activities
("Residuals"), provided that in so doing, Recipient does not breach its
obligations under this Section. However, this does not give Recipient the right
to disclose the Residuals except as set forth elsewhere in this Agreement.
(d) Fiserv System. The Fiserv System contains information and computer
software that are proprietary and confidential information of Fiserv, its
suppliers, and licensors. Client agrees not to attempt to circumvent the devices
employed by Fiserv to prevent unauthorized access to the Fiserv System,
including, but not limited to, alterations, decompiling, disassembling,
modifications, and reverse engineering thereof.
4
(FISERV. LOGO)
<PAGE> 5
(e) Confidentiality of this Agreement. Fiserv and Client agree to keep
confidential the prices, terms and conditions of this Agreement, without
disclosure to third parties; EXCEPT FOR EACH PARTY'S ACCOUNTANTS, LAWYERS,
FINANCIAL ADVISORS AND REGULATORY AGENCIES.
7. Regulatory Agencies, Regulations and Legal Requirements. (a) Client
Files. Records maintained and produced for Client ("Client Files") may be
subject to examination by such Federal, State, or other governmental regulatory
agencies as may have jurisdiction over Client's business to the same extent as
such records would be subject if maintained by Client on its own premises.
Client agrees that Fiserv is authorized to give all reports, summaries, or
information contained in or derived from the data or information in Fiserv's
possession relating to Client when formally requested to do so by an authorized
regulatory or government agency.
(b) Compliance with Regulatory Requirements. Client agrees to comply with
applicable regulatory and legal requirements, including without limitation:
(i) submitting a copy of this Agreement to the appropriate regulatory
agencies prior to the date Services commence;
(ii) providing adequate notice to the appropriate regulatory agencies of
the termination of this Agreement or any material changes in Services;
(iii) retaining records of its accounts as required by regulatory
authorities;
(iv) obtaining and maintaining, at its own expense, any Fidelity Bond
required by any regulatory or governmental agency; and
(v) maintaining, at its own expense, such casualty and business
interruption insurance coverage for loss of records from fire, disaster,
or other causes, and taking such precautions regarding the same, as may be
required by regulatory authorities.
8. Warranties. (a) Fiserv Warranties. Fiserv represents and warrants that:
(i)(A) Services will conform to the specifications set forth in the SYSTEM
DOCUMENTATION; (B) Fiserv will perform Client's work accurately provided
that Client supplies accurate data and information, and follows the
procedures described in all Fiserv documentation, notices, and advices;
(C) Fiserv personnel will exercise due care in provision of Services; (D)
FISERV WILL MAKE ALL REASONABLE EFFORTS ENSURING THE FISERV SYSTEM WILL
COMPLY WITH ALL APPLICABLE FEDERAL AND STATE REGULATIONS GOVERNING
SERVICES; and (E) the Fiserv System will be Year 2000 compliant by
December 31, 1998. In the event of an error or other default caused by
Fiserv personnel, systems, or equipment, Fiserv shall correct the data or
information and/or reprocess the affected item or report at no additional
cost to Client. Client agrees to supply Fiserv with a written request for
correction of the error within 7 days after Client's receipt of the work
containing the error. Work reprocessed due to errors in data supplied by
Client, on Client's behalf by a third party, or by Client's failure to
follow procedures set forth by Fiserv shall be billed to Client at
Fiserv's then current time and material rates; (ii) it owns or has a
license to furnish all equipment or software comprising the Fiserv System.
Fiserv shall indemnify Client and hold it harmless against any claim or
action that alleges that the Fiserv System use infringes a United States
patent, copyright, or other proprietary right of a third party;
ADDITIONALLY, Client agrees to notify Fiserv promptly of any such claim
and grants Fiserv the sole right to control the defense and disposition of
all such claims. Client shall provide Fiserv with reasonable cooperation
and assistance in the defense of any such claim; and (iii) for purposes of
this Agreement, "Year 2000 compliance" or "Year 2000 compliant" is defined
by reference to the following criteria:
<TABLE>
<CAPTION>
Criterion Description
--------- -----------
<S> <C>
General Integrity: No value for current date will cause interruptions
in normal operation
Date Integrity: All manipulations of calendar-related date (dates,
durations, days of Week, etc.) will produce desired
results for all valid date values.
Century Specifications: Either (i) date elements in interfaces and data
storage permit specifying century to eliminate
date ambiguity, or (ii) for any date element represented
without century, the correct century is unambiguous for
all manipulations involving that element.
</TABLE>
5
(FISERV. LOGO)
<PAGE> 6
THE WARRANTIES STATED ABOVE ARE LIMITED WARRANTIES AND ARE THE ONLY WARRANTIES
MADE BY FISERV. FISERV DOES NOT MAKE, AND CLIENT HEREBY EXPRESSLY WAIVES, ALL
OTHER WARRANTIES, INCLUDING WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE. THE STATED EXPRESS WARRANTIES, THE WARRANTY IN SECTION 10(E)
BELOW AND THE LIMITATION ON LIABILITY SET FORTH IN SECTION 9 BELOW ARE IN LIEU
OF ALL LIABILITIES OR OBLIGATIONS OF FISERV FOR DAMAGES ARISING OUT OF OR IN
CONNECTION WITH THE DELIVERY, USE OR PERFORMANCE OF FISERV SERVICES.
(b) Client Warranties. Client represents and warrants that: (A) no
contractual obligations exist that would prevent Client from entering into this
Agreement; (B) it has complied with all applicable regulatory requirements; and
(C) Client has requisite authority to execute, deliver, and perform this
Agreement. Client shall indemnify and hold harmless Fiserv, its officers,
directors, employees, and affiliates against any claims or actions arising out
of (X) the use by Client of the Fiserv System in a manner other than that
provided in this Agreement; and (Y) any and all claims by third parties through
Client arising out of the performance and non-performance of Fiserv Services by
Fiserv, provided that the indemnity listed in clause (Y) hereof shall not
preclude Client's recovery of direct damages pursuant to the terms and subject
to the limitations of this Agreement.
9. Limitation of Liability. (a) General. IN NO EVENT SHALL FISERV BE
LIABLE FOR LOSS OF GOODWILL, OR FOR SPECIAL, INDIRECT, INCIDENTAL, OR
CONSEQUENTIAL DAMAGES ARISING FROM CLIENT'S USE OF FISERV SERVICES, OR FISERV'S
SUPPLY OF EQUIPMENT OR SOFTWARE, REGARDLESS OF WHETHER SUCH CLAIM ARISES IN TORT
OR IN CONTRACT. CLIENT MAY NOT ASSERT ANY CLAIM AGAINST FISERV MORE THAN 2 YEARS
AFTER SUCH CLAIM ACCRUED. FISERV'S AGGREGATE LIABILITY FOR ANY AND ALL CAUSES OF
ACTION RELATING TO SERVICES SHALL BE LIMITED TO THE TOTAL FEES PAID BY CLIENT TO
FISERV FOR SERVICES RESULTING IN SUCH LIABILITY IN THE 6 MONTH PERIOD PRECEDING
THE DATE THE CLAIM ACCRUED. FISERV'S AGGREGATE LIABILITY FOR A DEFAULT RELATING
TO EQUIPMENT OR SOFTWARE SHALL BE LIMITED TO THE AMOUNT PAID BY CLIENT FOR THE
EQUIPMENT OR SOFTWARE.
(b) Lost Records. If Client's records or other data submitted for
processing are lost or damaged as a result of any failure by Fiserv, its
employees, or agents to exercise reasonable care to prevent such loss or damage,
Fiserv's liability on account of such loss or damages shall not exceed the
reasonable cost of reproducing such records or data from exact duplicates
thereof in Client's possession.
10. Disaster Recovery. (a) General. Fiserv maintains a disaster recovery
plan ("Disaster Recovery Plan") for each Service. A "Disaster" shall mean any
unplanned interruption of the operations of or inaccessibility to Fiserv's
service center in which Fiserv, using reasonable judgment, requires relocation
of processing to a recovery location AND WHICH IS BEYOND REASONABLE CONTROL OF
FISERV. Fiserv shall notify Client as soon as possible after Fiserv deems a
service outage to be a Disaster. Fiserv shall move the processing of Client's
standard services to a recovery location as expeditiously as possible and shall
coordinate the cut-over to back-up telecommunication facilities with the
appropriate carriers. Client shall maintain adequate records of all transactions
during the period of service interruption and shall have personnel available to
assist Fiserv in implementing the switchover to the recovery location. During a
Disaster, optional or on-request services shall be provided by Fiserv only to
the extent adequate capacity exists at the recovery location and only after
stabilizing the provision of base services AS OUTLINED IN EXHIBIT A-2.
(b) Communications. Fiserv shall work with Client to establish a plan for
alternative communications in the event of a Disaster.
(c) Disaster Recovery Test. Fiserv shall test the Disaster Recovery Plan
periodically. Client agrees to participate in and assist Fiserv with such test,
if requested by Fiserv. Upon Client request, test results will be made available
to Client's management, regulators, auditors, and insurance underwriters.
(d) Client Plans. Fiserv agrees to release information necessary to allow
Client's development of a disaster recovery plan that operates in concert with
the Disaster Recovery Plan.
(e) Warranty. Client understands and agrees that the Disaster Recovery
Plan is designed to minimize, but not eliminate, risks associated with a
Disaster affecting Fiserv's service center(s). Fiserv does not warrant that
Fiserv Services will be uninterrupted or error free in the event of a Disaster.
Client maintains responsibility for adopting a disaster recovery plan relating
to disasters affecting Client's facilities and for securing business
interruption insurance or other insurance necessary for Client's protection.
PRECLUDING A
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<PAGE> 7
REGIONAL ACT OF GOD DISASTER, IF THE BANK IS DOWN FOR MORE THAN TWO (2)
CONSECUTIVE BUSINESS DAYS, FISERV WILL CREDIT THE CLIENT ONE HUNDRED PERCENT
(100%) OF AVERAGE DAILY FEES, BEGINNING THE THIRD BUSINESS DAY. AVERAGE DAILY
FEES WILL BE CALCULATED BASED ON THE PRIOR FOUR (4) MONTHS TOTAL INVOICE DIVIDED
BY THE NUMBER OF BUSINESS DAYS IN EACH OF THE MONTHS.
11. Termination. (a) Material Breach. Except as provided elsewhere in this
Section 11, either party may terminate this Agreement in the event of a material
breach by the other party not cured within 60 days following written notice
stating, with particularity and in reasonable detail, the nature of the claimed
breach.
(b) Failure to Pay. In the event any invoice remains unpaid by Client 30
days after due, or Client deconverts any data or information from the Fiserv
System without prior written consent of Fiserv, Fiserv, at its sole option, may
terminate this Agreement and/or Client's access to and use of Fiserv Services.
Any invoice submitted by Fiserv shall be deemed correct unless Client provides
written notice to Fiserv within 60 days of the invoice date specifying the
nature of the disagreement.
(c) Remedies. Remedies contained in this Section 11 are cumulative and are
in addition to the other rights and remedies available to Fiserv under this
Agreement, by law or otherwise.
(d) Defaults. If Client:
(i) defaults in the payment of any sum of money due;
(ii) breaches this Agreement in any material respect or otherwise defaults
in any material respect in the performance of any of its obligations; or
(iii) commits an act of bankruptcy or becomes the subject of any
proceeding under the Bankruptcy Code or becomes insolvent or if any
substantial part of Client's property becomes subject to any levy,
seizure, assignment, application, or sale for or by any creditor or
governmental agency;
then, in any such event, Fiserv may, upon written notice, terminate this
Agreement and be entitled to recover from Client as liquidated damages an amount
equal to the present value of all payments remaining to be made hereunder for
the remainder of the initial term or any renewal term of this Agreement. For
purposes of the preceding sentence, present value shall be computed using the
"prime" rate (as published in The Wall Street Journal) in effect at the date of
termination and "all payments remaining to be made" shall be calculated based on
the average bills for the 3 months immediately preceding the date of
termination. Client agrees to reimburse Fiserv for any expenses Fiserv may
incur, including reasonable attorneys' fees, in taking any of the foregoing
actions.
IF FISERV:
(I)BREACHES THIS AGREEMENT IN ANY MATERIAL RESPECT OR OTHERWISE DEFAULTS
IN ANY MATERIAL RESPECT IN THE PERFORMANCE OF ANY OF ITS OBLIGATIONS; OR
(II)COMMITS AN ACT OF BANKRUPTCY OR BECOMES THE SUBJECT OF ANY PROCEEDING
UNDER THE BANKRUPTCY CODE OR BECOME INSOLVENT OR IF ANY SUBSTANTIAL PART
OF FISERV'S PROPERTY BECOMES SUBJECT TO ANY LEVY, SEIZURE, ASSIGNMENT,
APPLICATION, OR SALE FOR OR BY ANY CREDITOR OR GOVERNMENTAL AGENCY;
THEN, IN ANY SUCH EVENT, CLIENT MAY, UPON WRITTEN NOTICE, TERMINATE THIS
AGREEMENT, WITHOUT PENALTY OR DECONVERSION FEES.
(e) Convenience. Client may terminate this Agreement during any term by
paying a termination fee based on the remaining unused term of this Agreement,
the amount to be determined by multiplying Client's largest monthly invoice for
each Fiserv Service received by Client during the term (or if no monthly invoice
has been received, the sum of the estimated monthly billing for each Fiserv
Service to be received hereunder) BY (I) 80% TIMES THE REMAINING MONTHS OF THE
TERM DURING THE FIRST 36 MONTHS FOLLOWING CLIENT'S CONVERSION TO THE FISERV
SERVICES; OR (II) 70% TIMES THE REMAINING MONTHS OF THE TERM DURING THE MONTHS
37-48 FOLLOWING CLIENT'S CONVERSION TO THE FISERV SERVICES; OR (III) 60% TIMES
THE REMAINING MONTHS OF THE TERM DURING THE MONTHS 49-60 FOLLOWING CLIENT'S
CONVERSION TO THE FISERV SERVICES, PLUS ANY UNAMORTIZED CONVERSION FEES OR THIRD
PARTY COSTS EXISTING ON FISERV'S BOOKS ON THE DATE OF TERMINATION. Client
understands and agrees that Fiserv losses incurred as a result of early
termination of the Agreement would be difficult or impossible to calculate as of
the effective date of termination since they will vary based on, among other
things, the number of clients using the Fiserv System on the date the Agreement
terminates. Accordingly, the amount set forth in the first sentence of this
subsection represents Client's agreement to pay and Fiserv's agreement
7
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<PAGE> 8
to accept as liquidated damages (and not as a penalty) such amount for any such
Client termination. TERMINATION PRIOR TO THE 36TH MONTH SHALL BE GOVERNED BY THE
SPECIAL ADDENDUM.
(f) Merger. In the event of a merger between Client and another
organization in which Client is not the surviving organization and where the
other organization was not previously a user of Fiserv services similar to the
Services, Fiserv will allow an early termination of this Agreement upon the
following terms and conditions:
(i) written notice must be given 3 months in advance, specifying the
termination date;
(ii) Fiserv may specify a deconversion date based on its previous
commitments and work loads; and
(iii) Fiserv may charge a termination fee in accordance with subsection
(e) above.
(g) Return of Data Files. Upon expiration or termination of this
Agreement, Fiserv shall furnish to Client such copies of Client Files as Client
may request in Fiserv's standard machine readable format along with such
information and assistance as is reasonable and customary to enable Client to
deconvert from the Fiserv System, provided, however, that Client consents and
agrees and authorizes Fiserv to retain Client Files until (i) Fiserv is paid in
full for (A) all Services provided through the date such Client Files are
returned to Client; and (B) any and all other amounts that are due or will
become due under this Agreement; (ii) Fiserv is paid its then standard rates for
the services necessary to return such Client Files; (iii) if this Agreement is
being terminated, Fiserv is paid any applicable termination fee pursuant to
subsection (d), (e), or (f) above; and (iv) Client has returned to Fiserv all
Fiserv Information. Unless directed by Client in writing to the contrary, Fiserv
shall be permitted to destroy Client Files any time after 60 days from the final
use of Client Files for processing.
(h) Miscellaneous. Client understands and agrees that Client is
responsible for the deinstallation and return shipping of any Fiserv-owned
equipment located on Client's premises.
12. Arbitration. (a) General. Except with respect to disputes arising from
a misappropriation or misuse of either party's proprietary rights, any dispute
or controversy arising out of this Agreement, or its interpretation, shall be
submitted to and resolved exclusively by arbitration under the rules then
prevailing of the American Arbitration Association, upon written notice of
demand for arbitration by the party seeking arbitration, setting forth the
specifics of the matter in controversy or the claim being made. The arbitration
shall be heard before an arbitrator mutually agreeable to the parties; provided,
that if the parties cannot agree on the choice of arbitrator within 10 days
after the first party seeking arbitration has given written notice, then the
arbitration shall be heard by three arbitrators, one chosen by each party, and
the third chosen by those two arbitrators. The arbitrators will be selected from
a panel of persons having experience with and knowledge of information
technology and at least one of the arbitrators selected will be an attorney. A
hearing on the merits of all claims for which arbitration is sought by either
party shall be commenced not later than 60 days from the date demand for
arbitration is made by the first party seeking arbitration. The arbitrator(s)
must render a decision within 10 days after the conclusion of such hearing. Any
award in such arbitration shall be final and binding upon the parties and the
judgment thereon may be entered in any court of competent jurisdiction.
(b) Applicable Law. The arbitration shall be governed by the United
States Arbitration Act, 9 U.S.C. 1-16. The arbitrators shall apply the
substantive law of the State of Wisconsin, without reference to provisions
relating to conflict of laws. The arbitrators shall not have the power to alter,
modify, amend, add to, or subtract from any term or provision of this Agreement,
nor to rule upon or grant any extension, renewal, or continuance of this
Agreement. The arbitrators shall have the authority to grant any legal remedy
available had the parties submitted the dispute to a judicial proceeding.
(c) Situs. If arbitration is required to resolve any disputes between the
parties, the proceedings to resolve the first such dispute shall be held in
Atlanta, Georgia, the proceedings to resolve the second such dispute shall be
held in Tucker, Georgia, and the proceedings to resolve any subsequent disputes
shall alternate between Atlanta, Georgia and Tucker, Georgia.
13. Insurance. Fiserv carries the following types of insurance policies:
(i) Comprehensive General Liability in an amount not less than $1 million
per occurrence for claims arising out of bodily injury and property
damage;
(ii) Commercial Crime covering employee dishonesty in an amount not less
than $5 million;
(iii) All-risk property coverage including Extra Expense and Business
Income coverage; and
8
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<PAGE> 9
(iv) Workers Compensation as mandated or allowed by the laws of the state
in which Services are being performed, including $500,000 coverage for
Employer's Liability.
14. Audit. Fiserv employs an internal auditor responsible for ensuring the
integrity of its processing environments and internal controls. In addition,
Fiserv provides for periodic independent audits of its operations. Fiserv shall
provide Client with a copy of the audit of the Fiserv service center providing
Services within a reasonable time after its completion and shall charge each
client a fee based on the pro rata cost of such audit. Fiserv shall also provide
a copy of such audit to the appropriate regulatory agencies, if any, having
jurisdiction over Fiserv's provision of Services.
15. General. (a) Binding Agreement. This Agreement is binding upon the
parties and their respective successors and permitted assigns. Neither this
Agreement nor any interest may be sold, assigned, transferred, pledged, or
otherwise disposed of by Client, whether pursuant to change of control or
otherwise, without Fiserv's prior written consent. Client agrees that Fiserv may
subcontract any Services to be performed hereunder. Any such subcontractors
shall be required to comply with all applicable terms and conditions.
(b) Entire Agreement. This Agreement, including its Exhibits, which are
expressly incorporated herein by reference, constitutes the complete and
exclusive statement of the agreement between the parties as to the subject
matter hereof and supersedes all previous agreements with respect thereto.
Modifications of this Agreement must be in writing and signed by duly authorized
representatives of the parties. Each party hereby acknowledges that it has not
entered into this Agreement in reliance upon any representation made by the
other party not embodied herein. In the event any of the provisions of any
Exhibit are in conflict with any of the provisions of this Agreement, the terms
and provisions of this Agreement shall control unless the Exhibit in question
expressly provides that its terms and provisions shall control, EXCEPT THAT THE
TERMS AND PROVISIONS OF EXHIBITS A-2, A-3, A-4, A-5, H AND THE SPECIAL ADDENDUM
SHALL CONTROL OVER THIS AGREEMENT.
(c) Severability. If any provision of this Agreement is held to be
unenforceable or invalid, the other provisions shall continue in full force and
effect.
(d) Governing Law. This Agreement will be governed by the substantive laws
of the State of Wisconsin, without reference to provisions relating to conflict
of laws. The United Nations Convention of Contracts for the International Sale
of Goods shall not apply to this Agreement.
(e) Force Majeure. Neither party shall be responsible for delays or
failures in performance resulting from acts reasonably beyond the control of
that party.
(f) Notices. Any written notice required or permitted to be given
hereunder shall be given by: (i) Registered or Certified Mail, Return Receipt
Requested, postage prepaid; (ii) confirmed facsimile; or (iii) nationally
recognized courier service to the other party at the addresses listed on the
cover page or to such other address or person as a party may designate in
writing. All such notices shall be effective upon receipt.
(g) No Waiver. The failure of either party to insist on strict performance
of any of the provisions hereunder shall not be construed as the waiver of any
subsequent default of a similar nature.
(h) Financial Statements. Fiserv shall provide WITHIN A REASONABLE TIME
FRAME AFTER PRODUCTION, Client and the appropriate regulatory agencies so
requiring a copy of Fiserv, Inc.'s audited consolidated financial statements.
(i) Prevailing Party. The prevailing party in any arbitration, suit, or
action brought against the other party to enforce the terms of this Agreement or
any rights or obligations hereunder, shall be entitled to receive its reasonable
costs, expenses, and attorneys' fees of bringing such arbitration, suit, or
action.
(j) Survival. All rights and obligations of the parties under this
Agreement that, by their nature, do not terminate with the expiration or
termination of this Agreement shall survive the expiration or termination of
this Agreement.
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<PAGE> 10
(k) Exclusivity. Client agrees that Fiserv shall be the sole and exclusive
provider of the services that are the subject matter of this Agreement. For
purposes of the foregoing, the term "Client" shall include Client affiliates.
During the term of this Agreement, Client agrees not to enter into an agreement
with any other entity to provide these services (or similar services) without
Fiserv's prior written consent. If Client acquires another entity, the
exclusivity provided to Fiserv hereunder shall take effect with respect to such
acquired entity as soon as practicable after termination of such acquired
entity's previously existing arrangement for these services. If Client is
acquired by another entity, the exclusivity provided to Fiserv hereunder shall
apply with respect to the level or volume of these services provided immediately
prior to the signing of the definitive acquisition agreement relating to such
acquisition and shall continue with respect to the level or volume of these
services until any termination or expiration of this Agreement.
(l) Recruitment of Employees. Client agrees not to hire Fiserv's employees
during the term of this Agreement and for a period of 6 months after any
termination or expiration thereof, except with Fiserv's prior written consent.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized representatives as of the date indicated below.
For Client: For Fiserv:
MERIT HOLDING CORPORATION FISERV SOLUTIONS, INC.
By: /s/ J. Randall Carroll By:
---------------------------------- -------------------------------
Name: J. Randall Carroll Name: William L. Kenney
-------------------------------- -----------------------------
Title: Chief Executive Officer Title: President Fiserv Atlanta
------------------------------- ----------------------------
Date: December 17, 1998 Date:
-------------------------------- -----------------------------
10
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<PAGE> 11
Merit Holding Corporation
Form 10Q
March 31, 1999
Exhibit 10.4 Agreement between Fiserv, Inc. and Merit Holding Corporation
Exhibit Index:
ITEM NUMBER NAME
- ----------- ----
Exhibit A Account Processing Services
Exhibit A-1 Account Processing Services
Exhibit A-2 and Special Addendum Account Processing Services
Exhibit A-3 Hours of Operation
Exhibit A-4 Miscellaneous Services
Exhibit A-5 Ancillary Modules
Exhibit H Disaster Recovery Agreement
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 15,748,367
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 23,272,587
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 59,802,796
<INVESTMENTS-CARRYING> 2,019,389
<INVESTMENTS-MARKET> 2,009,800
<LOANS> 199,775,140
<ALLOWANCE> 3,667,058
<TOTAL-ASSETS> 310,828,811
<DEPOSITS> 250,356,180
<SHORT-TERM> 12,490,840
<LIABILITIES-OTHER> 3,359,336
<LONG-TERM> 4,714,611
0
0
<COMMON> 12,127,990
<OTHER-SE> 27,779,854
<TOTAL-LIABILITIES-AND-EQUITY> 310,828,811
<INTEREST-LOAN> 4,564,649
<INTEREST-INVEST> 971,821
<INTEREST-OTHER> 213,436
<INTEREST-TOTAL> 5,749,906
<INTEREST-DEPOSIT> 1,713,125
<INTEREST-EXPENSE> 1,893,145
<INTEREST-INCOME-NET> 3,856,761
<LOAN-LOSSES> 62,202
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,212,910
<INCOME-PRETAX> 2,008,740
<INCOME-PRE-EXTRAORDINARY> 1,277,747
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,277,747
<EPS-PRIMARY> .27
<EPS-DILUTED> .26
<YIELD-ACTUAL> 5.71
<LOANS-NON> 428,324
<LOANS-PAST> 536,409
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,579,007
<CHARGE-OFFS> 14,733
<RECOVERIES> 40,582
<ALLOWANCE-CLOSE> 3,667,058
<ALLOWANCE-DOMESTIC> 3,667,058
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
