<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-K
---------------------
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 1998
------------------------------
Commission File No. 0-25938
MERIT HOLDING CORPORATION
A Georgia Corporation
(IRS Employer Identification No. 58-1934011)
5100 LaVista Road
P.O. Box 49
Tucker, Georgia 30085-0049
(404) 491-8808
Securities Registered Pursuant to Section 12(b)
of the Securities Exchange Act of 1934:
NONE
Securities Registered Pursuant to Section 12(g)
of the Securities Exchange Act of 1934:
Common Stock, $2.50 Par Value
-----------------------------
Indicate by check 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock of the Registrant held by
nonaffiliates of the Registrant (3,598,521 shares) on March 19, 1999 was
approximately $82,765,983. For the purposes of this response, officers,
directors and holders of 5% or more of the Registrant's Common Stock are
considered the affiliates of the Registrant at that date.
The number of shares outstanding of the Registrant's Common Stock, as of March
19, 1999: 4,777,316 shares of $2.50 par value Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Registrant's definitive Proxy Statement for its Annual Meeting
of Shareholders to be held in 1999 are incorporated by reference into Part III
of this Report, with the exception of information regarding executive officers
required under Item 10 of Part III, which information is included in Part I,
Item 1.
<PAGE> 2
PART I
ITEM 1. BUSINESS.
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor to encourage companies to provide prospective information so long as it
is identified as forward-looking and accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed. Forward-looking statements are related
to the plans and objectives of management for the future operations, economic
performance, projections of revenues, income, earnings per share, capital
expenditures, dividends, capital structure, or other financial items. In the
following discussion and elsewhere in this report, statements containing words
such as "expect," "anticipate," "believe," "goal," "objective," or similar words
are intended to identify forward-looking statements. The Company undertakes no
obligation to update such forward-looking statements, and it wishes to identify
important factors that could cause actual results to differ materially from
those projected in the forward-looking statements contained in the following
discussion and elsewhere in this report. The risks and uncertainties that may
affect the operations, performance, development, and results of the Company's
business include but are not limited to the following: (1) heightened
competition, particularly intensified price competition; (2) general economic
and business conditions which are less favorable than expected; (3)
unanticipated changes in industry trends; and (4) other risks detailed herein
and from time to time in the Company's other reports.
OVERVIEW
Merit Holding Corporation ("Merit" or the "Company") is a registered
bank holding company under the federal Bank Holding Company Act of 1956, as
amended, and owns 100% of the outstanding capital stock of Mountain National
Bank, Tucker, Georgia ("Mountain") and Charter Bank & Trust Co., Marietta,
Georgia ("Charter") (collectively, the "Banks"). The Company was incorporated
under the laws of the State of Georgia on November 27, 1990 to effect the
reorganization of Mountain into a one-bank holding company structure, thereby
providing a mechanism to enhance that bank's ability to serve its future
customers' requirements for financial services. The shareholders of Mountain
approved the reorganization on May 7, 1991 and the reorganization was
consummated on May 24, 1991. The holding company structure provides flexibility
for expansion of the Company's banking business through acquisition of other
financial institutions and provision of additional banking-related services
which the traditional commercial bank may not provide under present laws. On
December 30, 1994, the Company completed the acquisition of 100% of the
outstanding shares of common stock of Charter following the approval of such
transaction by Charter's shareholders.
Mountain commenced business operations on August 2, 1988 and Charter
commenced business operations on February 3, 1989. Both Mountain and Charter are
full service commercial banks, without trust powers. Each operates as a locally
owned community bank that targets primarily the commercial banking needs of
individuals, professionals and small to medium sized businesses in their primary
service areas, emphasizing personal service and banking services that focus on
local needs.
The Banks provide a wide range of commercial banking products and
services. The Banks' services include interest bearing and non-interest bearing
checking accounts, money market, savings and other time deposit accounts,
including retirement accounts and certificates of deposit. Loan services include
commercial and real estate loans, Small Business Administration loans,
commercial and consumer lines of credit, letters of credit, home equity loans,
mortgage loans and consumer/installment loans. In addition, the Banks provide
such consumer services as traveler's checks, money orders, Cashier's checks,
Series EE Bonds, bankcard services, safe deposit boxes, direct deposit services,
wire transfer services, and membership in a nationwide automated teller machine
network.
<PAGE> 3
MARKET AREA AND COMPETITION
The primary service area for Mountain consists of DeKalb, Gwinnett and
North Fulton counties in the Atlanta metropolitan area.
The primary service area for Charter consists of approximately 110
square miles in central and west central Cobb County, Georgia in the
metropolitan Atlanta area. Charter is located in the City of Marietta, the
county seat of Cobb County.
There are many banking offices and savings and loan associations within
the primary service areas of the Banks. Most of these offices are affiliated
with major regional bank holding companies. Many of the major commercial banks
in the Company's service areas or their affiliates offer services such as
international banking and investment and trust services which are not offered
directly by the Banks. Such competitors, because of their capitalization, also
have substantially higher lending limits than the Banks and are better able to
absorb risk. In addition, the larger competitors of the Banks have the ability
to finance extensive advertising campaigns and to allocate and diversify their
assets among loans and securities of the highest yield in locations with the
greatest demand.
The Banks also compete for deposits, loans and other business with
existing area financial institutions other than commercial banks and savings and
loan associations, including insurance companies, consumer finance companies,
brokerage houses, credit unions and other business entities which continue to
invade the traditional banking markets. Recent legislation, regulatory changes
by the primary regulators of the various types of financial institutions and
competition from unregulated entities have eliminated many traditional
distinctions between commercial banks, thrifts and other providers of financial
services and proposed legislation would further limit such distinctions.
Consequently, competition among financial institutions of all types is virtually
unlimited with respect to legal ability and authority to provide most financial
services. It is anticipated that additional competition will continue from new
entrants to the market.
DEPOSITS
The Banks offer a full range of interest bearing and non-interest
bearing deposit accounts, including checking accounts, negotiable order of
withdrawal ("NOW") accounts, money market checking accounts, individual
retirement accounts, regular statement savings accounts and certificates of
deposit. The sources of deposits are residents, businesses and employees of
businesses within the Banks' market areas, obtained through the personal
solicitation of the Banks' officers and directors, direct mail solicitation and
advertisements published in the local media. The Banks pay competitive interest
rates on time and savings deposits up to the maximum permitted by law or
regulation. In addition, the Banks have implemented service charge fee schedules
competitive with other financial institutions in their market areas, covering
such matters as maintenance fees on checking accounts, per item processing fees
on checking accounts, returned check charges and the like.
LOAN PORTFOLIO
The Banks engage in a full complement of lending activities, including
commercial, consumer/installment and real estate loans, and concentrate their
lending efforts on small to medium sized businesses, professionals and
individuals. As of December 31, 1998, Mountain's loan portfolio consisted of 44%
commercial loans, 52% real estate loans and 4% consumer/installment loans, and
Charter's loan portfolio consisted of 71% commercial loans, 22% real estate
loans and 7% consumer/installment loans.
Commercial lending is directed principally toward businesses whose
demands for funds fall within the Banks' legal lending limits and which are
potential deposit customers of the Bank. This category of loans includes loans
made to individual, partnership or corporate borrowers and obtained for a
variety of business purposes. Such loans include short-term lines of credit,
medium-term plant
-2-
<PAGE> 4
and equipment loans, medium-term land acquisition and development loans,
construction loans and letters of credit.
The Banks' consumer loans consist of secured and unsecured personal
term loans, revolving lines of credit, home improvement loans, home equity loans
and medium-term mortgage loans. The Banks also offer credit card services
through a third party processor at substantially no risk to the Banks.
Additionally, the Banks assist customers with residential construction lending
as well as Small Business Loans as approved SBA lenders.
Generally loans are made to businesses, secured and unsecured, for
purposes of inventory, accounts receivable, equipment financing or business
expansion, and may be either term loans or revolving lines of credit; loans to
consumers are secured and unsecured, for purposes of financing automobiles,
boats, home improvements, education, credit consolidation or to meet other
personal financial needs; and loans for purposes related to real estate are made
for residential construction, or for the purchase of improved or unimproved real
estate.
The following loans are considered to be undesirable and are avoided by
the Banks: loans to parties with questionable honesty or integrity; loans
secured by stock in a closely held corporation with no market value; loans
enabling a borrower to speculate on commodities or futures markets; capital
loans for business where the repayment source is the liquidation of the business
or borrowing from another source; loans to a business or consumer that has
previously declared bankruptcy; "floor plan" loans; and loans secured by luxury
goods, such as jewelry, furs or coins. Each loan request is reviewed to
determine its validity and whether it meets the credit criteria of the Banks.
Exceptions to loan policy must be approved by the appropriate officer or the
appropriate loan committee of the respective Banks.
The Banks' Loan Committees are authorized to approve loans up to 15% of
capital for Mountain (as of December 31, 1998, $3,051,277) and, for Charter, 15%
of capital for unsecured loans and 25% of capital for secured loans ($1,559,274
and $2,598,789, respectively). Loans exceeding $250,000 must be approved or
ratified by the respective Loan Committee and loans exceeding $400,000 must be
approved by the loan committee of the Board of Directors. See "Supervision and
Regulation."
Individual lending officers are provided authorized lending
authorities. Loans in excess of these limits must be approved by the Loan
Committee. Loans approved by loan officers pursuant to their individual lending
authority must be made in accordance with the loan policy. All loans in the
aggregate are considered when determining the individual loan officers' limits.
The Banks originate loans and participate with other banks with respect
to loans which exceed the lending limits imposed by the Banks' internal lending
policies or regulatory provisions. Management does not believe that loan
participations necessarily pose any greater risk of loss than loans which the
Banks originate. See "-- Correspondent Banking."
ASSET/LIABILITY MANAGEMENT
It is the objective of the Banks to manage assets and liabilities to
provide a satisfactory, consistent level of profitability within the framework
of established cash, loan, investment, borrowing and capital policies. An Assets
and Liabilities Management Committee (ALCO) is responsible for monitoring
policies and procedures that are designed to ensure acceptable composition of
the asset/liability mix, stability and leverage of all sources of funds while
adhering to prudent banking practices. It is the overall philosophy of
management to support asset growth primarily through growth of core deposits,
which include deposits of all categories made by individuals, partnerships and
corporations. Management of each Bank seeks to invest the largest portion of the
Bank's assets in commercial, consumer and real estate loans.
-3-
<PAGE> 5
The Banks' asset/liability mix is monitored on a daily basis, with a
quarterly report reflecting interest-sensitive assets and interest-sensitive
liabilities being prepared and presented to each Bank's Board of Directors. The
objective of this policy is to control interest-sensitive assets and liabilities
so as to minimize the impact of substantial movements in interest rates on the
Banks' earnings.
CORRESPONDENT BANKING
Correspondent banking involves the provision of services by one bank to
another bank which elects not to or cannot provide that service for itself from
an economic or practical standpoint. The Banks utilize correspondent services,
including check collections, purchase or sale of Federal funds, security
safekeeping, investment consulting or sales services and coin and currency
supplies. The Banks have established loan participations with other federally
insured financial institutions as well as privately owned companies. These loan
participations may be for overline or liquidity purposes or for loans which
exceed the Banks' legal lending limits. At December 31, 1998, Mountain had
$2,700,856 in participations sold ($773,526 of which was sold to Charter) and
Charter had $6,044,905 in participations sold ($550,000 of which was sold to
Mountain).
Mountain has established correspondent relationships with NationsBank,
N.A. (South) and The Bankers' Bank, each of Atlanta, Georgia and Columbus Bank
and Trust of Columbus, Georgia. Charter has established correspondent
relationships with The Bankers Bank, SunTrust Bank, N.A. and Wachovia Bank of
Georgia, N.A., all of Atlanta, Georgia, Columbus Bank and Trust of Columbus,
Georgia, Regions Bank of Gainesville, Georgia and Centura Bank of Rocky Mount,
North Carolina. The Banks maintain certain balances with such correspondents. In
addition, both Banks are members of the Federal Home Loan Bank of Atlanta.
DATA PROCESSING
Mountain currently has a data processing servicing agreement with
ProVesa, Inc. of Thomson, Georgia and Charter has a data processing servicing
agreement with FiServe of Atlanta, Georgia. Mountain has signed an agreement to
change its data processing service provider to FiServe in April 1999. These
servicing agreements provide for the Banks to receive a full range of data
processing services through remote data line transmission, including a fully
integrated deposit, loan and general ledger system. Payments for the services
are fee-based dependent on the type, kind and volume of data processing services
provided.
-4-
<PAGE> 6
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<S> <C>
J. Randall Carroll Chairman of the Board and
Chief Executive Officer
Ronald H. Francis President and Chief Financial
Officer
</TABLE>
J. RANDALL CARROLL, age 53, has served as Chairman and Chief Executive
Officer of the Company and Mountain since November 1990 and June 1988,
respectively. He relinquished the title of President of the Company upon the
Company's acquisition of Charter on December 30, 1994, although he remains
president of Mountain. Mr. Carroll was involved in the organization of Mountain
from June 1987 to August 1988, at which time Mountain opened for business. From
August 1972 until February 1987, Mr. Carroll was employed in various management
positions with National Bank of Georgia.
RONALD H. FRANCIS, age 55, has served as President, Chief Executive
Officer and a director of Charter since 1989. He became President and Chief
Financial Officer of the Company upon the Company's acquisition of Charter on
December 30, 1994. Prior to joining Charter, Mr. Francis served as Vice Chairman
and President of the Chattahoochee Bank and as President of Chattahoochee
Bancorp. Inc.
EMPLOYEES
As of December 31, 1998, Mountain employed 52 persons on a full-time
equivalent basis, including 20 officers and Charter employed 49 persons on a
full-time equivalent basis, including 20 officers. Each Bank considers its
employee relations to be good, and will hire additional personnel as needed.
MONETARY POLICIES
The results of operations of the Banks and, thus, of the Company, are
affected by credit policies of monetary authorities, particularly the Federal
Reserve Board (even though Charter is not a member of the Federal Reserve
System). The instruments of monetary policy employed by the Federal Reserve
Board include open market operations in U.S. Government securities, changes in
the discount rate on member bank borrowings, changes in reserve requirements
against the deposits of member banks and other depository institutions
(including Charter) and limitations on interest rates which member banks may pay
on time and savings deposits. In view of changing conditions in the national
economy and in the money markets, as well as the effect of action by monetary
and fiscal authorities, including the Federal Reserve Board, no prediction can
be made as to possible future changes in interest rates, deposit levels, loan
demand or the business and earnings of the Banks.
SUPERVISION AND REGULATION
The Company and the Banks operate in a highly regulated environment,
and their business activities are governed by statute, regulation and
administrative policies. The business activities of the Company and the Banks
are closely supervised by a number of federal regulatory agencies, including the
Federal Reserve Board, the Comptroller of the Currency ("Comptroller") with
respect
-5-
<PAGE> 7
to Mountain, the Georgia Department of Banking and Finance (the "Georgia Banking
Department") and the Federal Deposit Insurance Corporation ("FDIC").
The Company is regulated by the Federal Reserve Board under the federal
Bank Holding Company Act. Among other things, the federal Bank Holding Company
Act requires every bank holding company to obtain the prior approval of the
Federal Reserve Board before acquiring more than 5% of the voting shares of any
bank or all or substantially all of the assets of a bank, and before merging or
consolidating with another bank holding company. The Federal Reserve Board
(pursuant to regulation and published policy statements) has maintained that a
bank holding company must serve as a source of financial strength to its
subsidiary banks. In adhering to the Federal Reserve Board policy, the Company
may be required to provide financial support to a subsidiary bank at a time
when, absent such Federal Reserve Board policy, the Company may not deem it
advisable to provide such assistance.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994, the restrictions on interstate acquisitions of banks by bank holding
companies were repealed on September 9, 1995. As a result, Merit and any other
bank holding company located in Georgia is able to acquire a bank located in any
other state, and a bank holding company located outside Georgia can acquire any
Georgia-based bank, in either case subject to certain deposit percentage and
other restrictions. The legislation provides that unless an individual state has
elected to prohibit out-of-state banks from operating interstate branches within
its territory, adequately capitalized and managed bank holding companies will be
able to consolidate their multistate bank operations into a single bank
subsidiary and to branch interstate through acquisitions. De novo branching by
an out-of-state bank is permitted only if it is expressly permitted by the laws
of the host state. The authority of a bank to establish and operate branches
within a state will continue to be subject to applicable state branching laws,
discussed below. The State of Georgia has adopted an interstate banking statute
that removes the existing restrictions on the ability of banks to branch
interstate through mergers, consolidations and acquisitions.
A bank holding company is generally prohibited from acquiring control
of any company which is not a bank and from engaging in any business other than
the business of banking or managing and controlling banks. However, there are
certain activities which have been identified by the Federal Reserve Board to be
so closely related to banking as to be a proper incident thereto and thus
permissible for bank holding companies. In 1997, the Federal Reserve Board
revised and expanded the list of permissible nonbanking activities, which
includes the following activities: extending credit and servicing loans; acting
as investment or financial advisor to subsidiaries and certain outside
companies; leasing personal and real property or acting as a broker with respect
thereto; providing management and employee benefits consulting advice and career
counseling services to nonaffiliated banks and nonbank depository institutions;
operating certain nonbank depository institutions; performing certain trust
company functions; providing certain agency transactional services, including
securities brokerage services, riskless principal transactions, private
placement services, and acting as a futures commission merchant; providing data
processing and data transmission services; acting as an insurance agent or
underwriter with respect to limited types of insurance; performing real estate
appraisals; arranging commercial real estate equity financing; providing
check-guaranty, collection agency and credit bureau services; engaging in asset
management, servicing and collection activities; providing real estate
settlement services; acquiring certain debt which is in default; underwriting
and dealing in obligations of the United States, the states and their political
subdivisions; engaging as a principal in foreign exchange trading and dealing in
precious metals; providing other support services such as courier services and
the printing and selling of checks; and investing in programs designed to
promote community welfare.
In determining whether an activity is so closely related to banking as
to be permissible for bank holding companies, the Federal Reserve Board is
required to consider whether the performance of such activities by a bank
holding company or its subsidiaries can reasonably be expected to produce such
benefits to the public as greater convenience, increased competition and gains
in efficiency that outweigh such possible adverse effects as undue concentration
of resources,
-6-
<PAGE> 8
decreased or unfair competition, conflicts of interest and unsound banking
practices. Generally, bank holding companies are required to obtain prior
approval of the Federal Reserve Board to engage in any new activity not
previously approved by the Federal Reserve Board.
The Company is also regulated by the Georgia Banking Department under
the Georgia Bank Holding Company Act, which requires every Georgia bank holding
company to obtain the prior approval of the Georgia Commissioner of Banking
before acquiring more than 5% of the voting shares of any bank or all or
substantially all of the assets of a bank, or before merging or consolidating
with any other bank holding company. A Georgia bank holding company is generally
prohibited from acquiring ownership or control of 5% or more of the voting
shares of any bank unless the bank being acquired is either a bank for purposes
of the federal Bank Holding Company Act of 1956, or a federal or state savings
and loan association or a savings bank or federal savings bank whose deposits
are insured by the federal deposit insurance program and such bank has been in
existence and continuously operating as a bank for a period of five years or
more prior to the date of acquisition.
As a national bank, Mountain is subject to the supervision of the
Comptroller and, to a limited extent, the FDIC and the Federal Reserve Board.
With respect to branch expansion, national banks situated in the State of
Georgia are subject to the same rules as apply to Georgia state-chartered banks.
Georgia recently adopted legislation which reduces restrictions on the ability
of a bank to establish branch offices. Under the new legislation, a bank located
in Georgia is permitted to establish new or additional branch offices anywhere
in the state (i) upon approval of the Georgia Banking Department, (ii) by
relocation of the parent bank or another branch office, or (iii) by merger,
consolidation or the purchase of assets and the assumption of liabilities
involving another parent bank or branch bank.
The Banks are also subject to the Georgia banking and usury laws
restricting the amount of interest which they may charge in making loans or
other extensions of credit. In addition, as subsidiaries of the Company, the
Banks are subject to restrictions under federal law in dealing with the Company
and other affiliates, if any. These restrictions apply to extensions of credit
to an affiliate, investments in the securities of an affiliate and the purchase
of assets from an affiliate.
Loans and extensions of credit by national banks, such as Mountain, are
subject to legal lending limitations. Under federal law, a national bank may
grant unsecured loans and extensions of credit in an amount up to 15% of its
unimpaired capital and surplus to any person. In addition, a national bank may
grant loans and extensions of credit to a single person up to 10% of its
unimpaired capital and surplus, provided that the transactions are fully secured
by readily marketable collateral having a market value determined by reliable
and continuously available price quotations. This 10% limitation is separate
from, and in addition to, the 15% limitation for unsecured loans. Loans and
extensions of credit may exceed the general lending limit if they qualify under
one of several exceptions. Such exceptions include certain loans or extensions
of credit arising from the discount of commercial or business paper, the
purchase of bankers' acceptances, loans secured by documents of title, loans
secured by U.S. obligations and loans to or guaranteed by the federal
government.
As a state-chartered bank, most of Charter's operations are regulated
and examined by the Georgia Banking Department and the FDIC, including reserves
for loan losses and other contingencies, loans, investments, borrowings,
deposits, mergers, issuances of securities, payments of dividends, interest
rates payable on deposits, interest rates or fees chargeable on loans,
establishment of branches, consolidation or corporate reorganization, and
maintenance of books and records. The Georgia Banking Department imposes legal
lending limitations on state-chartered banks. Under these rules, state-chartered
banks may grant unsecured loans in an amount up to 15% of capital and fully
secured loans up to 25% of capital to any one person. Charter is required by the
Georgia Banking Department to prepare reports on its financial condition and to
conduct an annual internal audit of its financial affairs, in compliance with
minimum standards and procedures
-7-
<PAGE> 9
prescribed by the Georgia Banking Department. Reports of Charter's auditors must
be filed with the Georgia Banking Department within 45 days after Charter's
receipt of any such report.
The Banks' loan operations are also subject to certain federal laws
applicable to credit transactions, such as the federal Truth-In-Lending Act
governing disclosures of credit terms to consumer borrowers, the Equal Credit
Opportunity Act prohibiting discrimination on the basis of race, color, religion
or other prohibited factors in extending credit, the Fair Credit Reporting Act
governing the manner in which consumer debts may be collected by collection
agencies, and the rules and regulations of the various federal agencies charged
with the responsibility of implementing such federal laws. The deposit
operations of the Banks are also subject to the Electronic Funds Transfer Act
and Regulation E issued by the Federal Reserve to implement that act, which
govern automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
The Banks are also subject to the provisions of the Community
Reinvestment Act of 1977, which requires the appropriate federal regulator, in
connection with its regular examination of a bank, to assess the bank's record
in meeting the credit needs of the community serviced by the bank, including
low- and moderate-income neighborhoods. The FDIC's assessment of a bank's record
is made available to the public. Further, such assessment is required of any
bank that has applied, among other things, to establish a new branch office that
will accept deposits, to relocate an existing office, or to merge or consolidate
with, or acquire the assets of or assume the liabilities of, a
federally-regulated financial institution.
Both the Company and the Banks are subject to regulatory capital
requirements imposed by the Federal Reserve Board, the Comptroller (with respect
to Mountain) and the FDIC (with respect to Charter). Those guidelines make
regulatory capital requirements more sensitive to differences in risk profiles
of various banking organizations. The capital adequacy guidelines issued by the
Federal Reserve Board are applied to bank holding companies on a consolidated
basis with the banks owned by the holding company. The risk capital guidelines
of the Comptroller and the FDIC apply directly to national banks and insured
state-chartered banks which are not members of the Federal Reserve System,
respectively, regardless of whether they are a subsidiary of a bank holding
company. Each agency's requirements (which are substantially similar), provide
that banking organizations must have capital equivalent to 8% of risk-weighted
assets. The risk weights assigned to assets are based primarily on credit risks.
Depending upon the riskiness of a particular asset, it is assigned to a risk
category. For example, securities with an unconditional guarantee by the United
States government are assigned to the lowest risk category. A risk weight of 50%
is assigned to loans secured by owner-occupied one to four family residential
mortgages. The aggregate amount of assets assigned to each risk category is
multiplied by the risk weight assigned to that category to determine the
weighted values, which are added together to determine total risk-weighted
assets. The Federal Reserve Board, the Comptroller and the FDIC have also
implemented new minimum capital leverage ratios to be used in tandem with the
risk-based guidelines in assessing the overall capital adequacy of banks and
bank holding companies. Under the Federal Reserve Board and Comptroller rules,
banking institutions are required to maintain a ratio of 3% "Tier 1" capital to
total assets (net of goodwill). Tier 1 capital includes common stockholders
equity, noncumulative perpetual preferred stock and minority interests in the
equity accounts of consolidated subsidiaries. At December 31, 1997, capital
ratios for the Company and the Banks were as follows:
<TABLE>
<CAPTION>
Regulatory
Company Mountain Charter Minimum
------- -------- ------- -------
<S> <C> <C> <C> <C>
Total Risk-Based Capital........................ 17.8% 19.1% 14.7% 8.0%
Tier 1 Risk-Based Capital....................... 16.6% 17.9% 13.5% 4.0%
Leverage Ratios................................. 11.8% 14.0% 8.9% 3.0%
</TABLE>
-8-
<PAGE> 10
Both the risk-based capital guidelines and the leverage ratio are
minimum requirements, applicable only to top-rated banking institutions.
Institutions operating at or near these levels are expected to have
well-diversified risk, excellent asset quality, high liquidity, good earnings
and in general, have to be considered strong banking organizations, rated
composite 1 under the CAMEL rating system for banks or the BOPEC rating system
for bank holding companies. Institutions with lower ratings and institutions
with high levels of risk or experiencing or anticipating significant growth
would be expected to maintain ratios 100 to 200 basis points above the stated
minimums.
The FDIC adopted a rule substantially similar to that issued by the
Federal Reserve Board and the Comptroller. The FDIC rule also establishes a
minimum leverage ratio of 3%, but provides that FDIC-regulated banks that do not
receive a CAMEL-1 rating must maintain a ratio of at least 4%. In addition, the
FDIC rule specifies that institutions operating with Tier 1 capital of 2% of
total assets or less would be determined to be operating in an unsafe and
unsound manner and would be subject to enforcement action by the FDIC.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"Act") provides for a number of reforms relating to the safety and soundness of
the deposit insurance system, supervision of domestic and foreign depository
institutions and improvement of accounting standards. One aspect of the Act
involves the development of a regulatory monitoring system requiring prompt
action on the part of banking regulators with regard to certain classes of
undercapitalized institutions. While the Act did not change any of the minimum
capital requirements, it directed each of the federal banking agencies to issue
regulations implementing the monitoring plan. The Act creates five "capital
categories" ("well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized") which are
defined in the Act and which are used to determine the severity of corrective
action the appropriate regulator may take in the event an institution reaches a
given level of undercapitalization. For example, an institution which becomes
"undercapitalized" must submit a capital restoration plan to the appropriate
regulator outlining the steps it will take to become adequately capitalized.
Upon approving the plan, the regulator will monitor the institution's
compliance. Before a capital restoration plan will be approved, any entity
controlling a bank (i.e., holding companies) must guarantee compliance with the
plan until the institution has been adequately capitalized for four consecutive
calendar quarters. The liability of the holding company is limited to the lesser
of five percent of the institution's total assets or the amount which is
necessary to bring the institution into compliance with all capital standards.
In addition, "undercapitalized" institutions will be restricted from paying
management fees, dividends and other capital distributions, will be subject to
certain asset growth restrictions and will be required to obtain prior approval
from the appropriate regulator to open new branches or expand into new lines of
business.
As an institution drops to lower capital levels, the extent of action
to be taken by the appropriate regulator increases, restricting the types of
transactions in which the institution may engage and ultimately providing for
the appointment of a receiver for certain institutions deemed to be critically
undercapitalized.
The Act also provides that banks have to meet new safety and soundness
standards. In order to comply with the Act, the Federal Reserve Board, the
Comptroller and the FDIC have adopted regulations defining operational and
managerial standards relating to internal controls, loan documentation, credit
underwriting, interest rate exposure, asset growth and compensation, fees and
benefits.
Both the capital standards and the safety and soundness standards which
the Act seeks to implement are designed to bolster and protect the deposit
insurance fund.
In response to the directive issued under the Act, the regulators have
issued regulations which, among other things, prescribe the capital thresholds
for each of the five capital categories established by the Act. The following
table reflects the capital thresholds:
-9-
<PAGE> 11
<TABLE>
<CAPTION>
Total Risk - Tier 1 Risk - Tier 1
Based Capital Based Capital Leverage
Ratio Ratio Ratio
------------- -------------- --------
<S> <C> <C> <C>
Well capitalized(1) 10% 6% 5%
Adequately Capitalized(1) 8% 4% 4%(2)
Undercapitalized(3) < 8% < 4% < 4%(4)
Significantly Undercapitalized(3) < 6% < 3% < 3%
Critically Undercapitalized - - < 2%
</TABLE>
_____________
(1) An institution must meet all three minimums.
(2) 3% for composite 1-rated institutions, subject to appropriate federal
banking agency guidelines.
(3) An institution falls into this category if it is below the specified
capital level for any of the three capital measures.
(4) Less than 3% for composite 1-rated institutions, subject to appropriate
federal banking agency guidelines.
As a national bank, Mountain is subject to periodic examination and
review by the Comptroller. This examination is typically completed on-site at
least every 18 months and is subject to off-site review at call. The
Comptroller, at will, can access quarterly reports of condition, as well as such
additional reports as may be required by the national banking laws.
As a bank holding company, the Company is required to file with the
Federal Reserve Board an annual report of its operations at the end of each
fiscal year and such additional information as the Federal Reserve Board may
require pursuant to the Act. The Federal Reserve Board may also make
examinations of the Company and each of its subsidiaries.
The scope of regulation and permissible activities of the Company and
the Bank are subject to change by future federal and state legislation.
-10-
<PAGE> 12
SELECTED STATISTICAL INFORMATION
The following tables set forth certain consolidated statistical
information regarding the Company and its subsidiaries. The information should
be read in conjunction with the consolidated financial statements and related
notes of the Company.
AVERAGE BALANCES AND INTEREST RATES
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------------------------------------------------------
December 31, 1998 December 31, 1997 December 31, 1996
-------------------------------- ------------------------------ ---------------------------
($ thousands)
Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/
Balances Expense Rates Balances Expense Rates Balances Expense Rates
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans (1) (2) $181,445 $18,274 10.07% $164,921 $16,902 10.25% $139,728 $14,166 10.14%
Investment securities
Taxable 52,281 3,263 6.24% 48,085 3,094 6.43% 41,957 2,686 6.40%
Tax-exempt (2) 2,199 144 6.55% 522 37 7.09% 812 66 8.13%
-------- ------ ---- -------- ------ ---- -------- ------ ----
54,480 3,407 6.25% 48,607 3,131 6.44% 42,769 2,752 6.43%
Federal funds sold 29,782 1,593 5.35% 13,024 721 5.54% 14,556 776 5.33%
Deposits in other banks 52 4 7.69% 167 10 5.99%
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total earning assets 265,707 23,274 8.76% 226,604 20,758 9.16% 197,220 17,704 8.98%
Other assets 26,080 22,006 20,294
-------- -------- --------
Total assets $291,787 $248,610 $217,514
-------- -------- --------
Liabilities and Stockholders'
Equity
Interest-bearing deposits
NOW accounts $ 38,413 $ 921 2.40% $ 31,148 $ 836 2.68% $ 26,944 $ 724 2.69%
Money market accounts 44,376 1,317 2.97% 36,880 1,133 3.07% 33,511 1,070 3.19%
Savings 2,925 68 2.32% 3,044 76 2.50% 3,715 97 2.61%
Time, $100,000 and over 33,573 1,836 5.47% 25,723 1,342 5.22% 21,917 1,181 5.39%
Other time 62,256 3,619 5.81% 51,074 2,879 5.64% 46,604 2,659 5.71%
------- ----- ---- ------- ----- ---- ------- ----- ----
181,543 7,761 4.28% 147,869 6,266 4.24% 132,691 5,731 4.32%
Long-term debt 5,057 336 6.64% 4,502 300 6.66% 2,915 197 6.76%
Short-term borrowings 8,833 416 4.71% 9,715 458 4.71% 6,381 253 3.96%
------- ----- ---- ------- ----- ---- ------- ----- ----
Total interest-bearing
liabilities 195,433 8,513 4.36% 162,086 7,024 4.33% 141,987 6,181 4.35%
Noninterest-bearing
deposits 58,789 54,689 48,237
Other liabilities 3,066 2,810 2,222
Stockholders' equity 34,499 29,025 25,068
-------- -------- --------
Total liabilities and
stockholders' equity $291,787 $248,610 $217,514
-------- -------- --------
Spread on interest-bearing funds 4.40% 4.83% 4.62%
---- ---- ----
Net interest income $14,761 $13,734 $11,523
------- ------- -------
Net interest margin 5.56% 6.06% 5.84%
---- ---- ----
</TABLE>
(1) Interest income includes loan fees of $712,487, $628,566 and $496,845
in 1998, 1997, and 1996, respectively. Non-accrual loans ($211,132,
$703,627 and $1,427,361 in 1998, 1997 and 1996, respectively) are
included in the average balances and interest income on such loans is
recognized on a cash basis.
(2) Interest income includes the effects of taxable equivalent adjustments
using the Federal income tax rate of 34% and State tax of 4% for 1996
and 3% for 1997 and 1998.
-11-
<PAGE> 13
NET INTEREST INCOME ANALYSIS (1)
<TABLE>
<CAPTION>
1998 compared to 1997 1997 compared to 1996 1996 compared to 1995
Increase (decrease) due to Increase (decrease) due to Increase (decrease) due to
Volume Rate Total Volume Rate Total Volume Rate Total
---------------------------- ------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
($thousands)
Interest income:
Loans (1) $ 1,694 $ (322) $ 1,372 $ 2,555 $ 181 $ 2,736 $ 1,669 $(521) $ 1,148
Investment securities
Taxable 270 (101) 169 392 16 408 509 48 557
Tax-exempt (2) 119 (12) 107 (24) (15) (39) 5 6 11
------- ------- ------- ------- ----- ------- ------- ----- -------
389 (113) 276 368 1 369 514 54 568
Federal funds sold 928 (56) 872 (82) 27 (55) 17 (83) (66)
Deposits in other banks (4) (4) (7) 1 (6) (18) (1) (19)
------- ------- ------- ------- ----- ------- ------- ----- -------
Total interest income 3,007 (491) 2,516 2,834 210 3,044 2,182 (551) 1,631
------- ------- ------- ------- ----- ------- ------- ----- -------
Interest expense:
Deposits
NOW accounts 195 (110) 85 113 (1) 112 61 (52) 9
Money market accounts 230 (46) 184 107 (44) 63 50 (56) (6)
Savings (3) (5) (8) (18) (3) (21) (13) (9) (22)
Time, $100,000 and over 410 84 494 205 (44) 161 215 (60) 155
Other time 631 109 740 255 (35) 220 299 9 308
------- ------- ------- ------- ----- ------- ------- ----- -------
1,463 32 1,495 662 (127) 535 612 (168) 444
Long-term debt 37 (1) 36 107 (4) 103 15 8 23
Short-term borrowings (42) (42) 132 73 205 136 (1) 135
------- ------- ------- ------- ----- ------- ------- ----- -------
(5) (1) (6) 239 69 308 151 7 158
Total interest expense 1,458 31 1,489 901 (58) 843 763 (161) 602
Net Change in Net
Interest Income $ 1,549 $ (522) $ 1,027 $ 1,933 $ 268 $ 2,201 $ 1,419 $(390) $ 1,029
------- ------- ------- ------- ----- ------- ------- ----- -------
</TABLE>
(1) As a result of the numerous and simultaneous volume and rate changes
during any year, it is not possible to allocate the changes precisely
between volume and rate. For purposes of this table, changes that are
not solely due to volume changes or solely due to rate changes have
been attributed to rates. In computing change in average volume and
rate, the average balances of non-accrual loans are included in loan
balances.
(2) Interest income includes the effects of taxable equivalent adjustments
using a federal tax rate of 34% in 1995 and a federal tax rate of 34%
plus a state tax effect of 4% in 1996 and 3% in 1997 and 1998.
-12-
<PAGE> 14
INTEREST RATE SENSITIVITY ANALYSIS
The objective of interest rate sensitivity management is to minimize
the effect of interest rate changes on the net interest margin while maintaining
net interest income at acceptable levels. The following table sets forth
interest rate sensitivity using contractual payment schedules at December 31,
1998. The repricing dates, which may differ from maturity dates for various
assets and liabilities, do not take into consideration external factors that
might affect the sensitivity of assets and liabilities.
<TABLE>
<CAPTION>
Maturing or Repricing Within
-------------------------------------------------------------------
($thousands) 0-90 91-365 1-5 Over 5
Days Days Years Years Total
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earning assets:
Investments $ 27,881 $ 15,307 $18,404 $22,899 $ 84,491
Loans 125,139 10,703 43,914 11,857 191,613
-------- -------- ------- ------- --------
Total $153,020 $ 26,010 $62,318 $34,756 $276,104
-------- -------- ------- ------- --------
Interest-bearing liabilities (1)
Borrowings 7,346 1,041 3,140 534 12,061
Money market accounts 42,214 42,214
NOW accounts 42,027 42,027
Savings 3,338 3,338
Time, $100,000 and over 19,524 10,440 4,229 34,193
Other time 18,638 28,188 14,488 61,314
-------- -------- ------- ------- --------
Total $133,087 $ 39,669 $21,857 $ 534 $195,147
-------- -------- ------- ------- --------
Interest-sensitivity gap $ 19,933 $(13,659) $40,461 $34,222 $ 80,957
Cumulative gap $ 19,933 $ 6,274 $46,735 $80,957
Percent of interest-sensitive
assets to interest-sensitive
liabilities 115% 66% 285% 6509% 141%
Cumulative percent of
interest-sensitive assets to
interest-sensitive liabilities 115% 104% 124% 141%
Percent of cumulative gap to
total earning assets 7% 2% 17% 29%
</TABLE>
(1) The re-pricing / maturity assumptions for liabilities are based on the
following schedule:
<TABLE>
<CAPTION>
0-90 91-365 1-5 Over 5
Days Days Years Years Total
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Money market 100% 100%
NOW 100% 100%
Savings 100% 100%
Time, $100,000 and over 57% 31% 12% 100%
Other time 30% 46% 24% 100%
</TABLE>
Based on this gap analysis and assuming no change in the mix of earning assets
or interest bearing liabilities, falling interest rates could reduce the net
interest margin while rising rates could increase the net interest margin. The
present gap position is within the range acceptable to management.
-13-
<PAGE> 15
INVESTMENT PORTFOLIO
The following table sets forth the carrying amounts of investment
securities held-to-maturity at the dates indicated:
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
($thousands)
U.S. Treasury and Government agencies $1,000 $1,000 $1,000
States and political subdivisions 1,020 521 758
------ ------ ------
$2,020 $1,521 $1,758
------ ------ ------
</TABLE>
Securities available-for-sale, at fair value are set forth as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997 1996
------- ------ -------
<S> <C> <C> <C>
($thousands)
U.S. Treasury $ 6,656 $11,596 $14,047
U. S. Government Agencies 35,237 27,881 22,447
Mortgage-backed securities 10,929 4,877 6,988
States and political subdivisions 2,614
------- ------- -------
$55,436 $44,354 $43,482
------- ------- -------
</TABLE>
The following table sets forth the maturities of investment securities
held-to-maturity and securities available-for-sale and the weighted average
yields of such securities as of December 31, 1998 (1):
<TABLE>
<CAPTION>
After One But After Five But
Within Within Within Over
One Year Five Years Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield Total
---------------- ---------------- --------------- ---------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and Government
agencies $9,032 5.77% $19,688 5.98% $13,668 6.79% $ 505 6.41% $42,893
Mortgage-backed securities 184 7.30% 56 9.23% 10,689 6.21% 10,929
States and political subdivisions(2) 220 8.69% 700 6.74% 2,714 7.40% 3,634
--------------- ---------------- --------------- ---------------- -------
$9,216 $19,908 $14,424 $13,908 $57,456
------ ------- ------- ------- -------
</TABLE>
(1) Investment securities available-for-sale are included in the above
table according to maturity as follows:
<TABLE>
<CAPTION>
Market Value Amortized Cost
------------ --------------
<S> <C> <C>
Within one year $ 9,216 $ 9,185
After one but within five years 18,689 18,505
After five but within ten years 13,723 13,503
After ten years 13,808 13,828
------- -------
$55,436 $55,021
------- -------
</TABLE>
By virtue of classification, these securities may be sold prior to maturity.
-14-
<PAGE> 16
The following table sets forth the maturities of investment securities
held-to-maturity and securities available-for-sale and the weighted average
yields of such securities as of December 31, 1997 (1):
<TABLE>
<CAPTION>
After One But After Five But
Within Within Within Over
One Year Five Years Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield Total
--------------- ---------------- ---------------- ----------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and Government
agencies $4,999 6.16% $15,648 6.37% $19,830 6.85% $ $40,477
Mortgage-backed securities 290 6.44% 367 7.32% 4,220 6.47% 4,877
States and political subdivisions(2) 221 8.68% 200 7.87% 100 8.40% 521
--------------- ---------------- ---------------- ----------------- ------
$5,289 $16,236 $20,030 $4,320 $45,875
------ ------- ------- ------ -------
</TABLE>
(1) Investment securities available-for-sale are included in the above
table according to maturity as follows:
<TABLE>
<CAPTION>
Market Value Amortized Cost
------------ --------------
<S> <C> <C>
Within one year $ 5,289 $ 5,282
After one but within five years 16,015 15,871
After five but within ten years 18,830 18,636
After ten years 4,220 4,202
------- -------
$44,354 $43,991
------- -------
</TABLE>
By virtue of classification, these securities may be sold prior to maturity.
(2) Weighted average yields on tax-exempt obligations have been computed on
a fully tax-equivalent basis using a federal tax rate of 34%.
-15-
<PAGE> 17
LOAN PORTFOLIO
Loans outstanding are presented in the accompanying table according to loan
category:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
($ thousands)
<S> <C> <C> <C> <C> <C>
Commercial $108,954 $ 99,747 $ 91,325 $ 75,185 $ 64,534
Real estate - mortgage 30,290 30,620 20,242 21,198 16,717
Real estate - construction
and land development 41,955 39,974 34,407 25,898 23,785
Installment and other
consumer 10,415 11,491 14,686 10,828 12,169
Farmland 0 8 28 108 192
-------- -------- -------- -------- --------
$191,614 $181,840 $160,688 $133,217 $117,397
-------- -------- -------- -------- --------
</TABLE>
The following table shows the amount of loans (excluding real estate
- - mortgage, installment and farmland) outstanding as of December 31, 1998 which,
based on remaining scheduled repayments of principal, are due in the periods
indicated. The amounts due after one year are also classified according to the
sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
December 31, 1998 Maturity Schedule
------------------------------------------------
After One
Within But Within After
($ thousands) One year Five Years Five Years Total
------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $63,712 $35,883 $ 9,359 $108,954
Real estate-construction and
land development 35,260 6,695 41,955
------- ------- -------- --------
$98,972 $42,578 $ 9,359 $150,909
------- ------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Interest Sensitivity
December 31,
1998
--------------------------
($ thousands)
Fixed Rate Variable Rate
---------- -------------
<S> <C> <C>
Due after one but within five years $27,214 $15,364
Due after five years 6,123 3,236
------- -------
$33,337 $18,600
------- -------
</TABLE>
Maturity is based on contract terms. It is the Company's policy that
loans unpaid at maturity may be renewed at management's discretion based upon
the credit criteria, current market rates and terms.
-16-
<PAGE> 18
Information regarding non-performing assets is presented below:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ------ ------ ----
<S> <C> <C> <C> <C> <C>
($ thousands)
Loans on non-accrual status $223 $394 $1,062 $1,298 $180
loans past due over 90 days 13 82 147
---- ---- ------ ------ ----
Total $236 $476 $1,209 $1,298 $180
---- ---- ------ ------ ----
</TABLE>
For each of the years ended December 31, 1994 and 1995, there were
no loans contractually past due 90 days and still accruing. There were no loans
classified as doubtful, substandard or special mention that have not been
disclosed in the above table, which represent or result from trends or
uncertainties which management reasonably expects will materially impact future
operational results, liquidity, or capital resources. Management is not aware of
any other material credits about which information causes doubts as to the
ability of such borrowers to comply with the loan repayment terms.
At December 31, 1998 non-performing loans were 0.12% of loans
outstanding.
Information regarding foregone interest on non-accrual loans is
presented below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
($ thousands)
Interest recognized $22 $ 29
Foregone interest 17 76
--- ----
Interest income that would have
been accrued at original terms $39 $105
=== ====
</TABLE>
Accruals on loans are discontinued when management believes, after
consideration of economic and business conditions and collection effort, that
collection of interest is doubtful. Additionally all loans contractually past
due 90 days or more which are not in the process of collection and adequately
secured are placed on non-accrual status.
-17-
<PAGE> 19
SUMMARY OF LOAN LOSS EXPERIENCE
The Allowance for Loan Losses is maintained at a level considered by
the Company to be adequate to provide for potential loan losses. The adequacy of
the allowance and its related allocation is based on management's continuing
evaluation of the loan portfolio under current economic conditions, past loan
loss experience, underlying collateral value securing loans and such other
factors which deserve recognition in estimating potential loan losses. Loans
which are determined to be uncollectible are charged against the allowance. The
provision for loan losses and recoveries are added to the allowance. See
"Management's Discussion and Analysis of Operations and Financial Condition -
Allowance for Loan Losses."
The following table summarizes activity in the Allowance for Loan
Losses for the dates indicated:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
($ thousands)
Balance, beginning of period $ 2,656 $ 2,772 $ 2,543 $ 1,689 $ 1,373
Loans charged-off:
Commercial 288 195 455 210 274
Real estate - construction 30
Real estate - mortgage 0 234 100 17 43
Installment and other consumer 35 63 24 8 40
--------- -------- -------- -------- --------
Total loans charged-off 323 492 579 265 357
Recoveries:
Commercial 724 146 145 52 63
Real estate - construction
Real estate - mortgage 23 17
Installment and other consumer 8 19 1 13 6
--------- -------- -------- -------- --------
Total recoveries 732 188 163 65 69
Net loans charged-off (409) 304 416 200 288
Provision for loan losses 222 188 645 1,054 604
--------- -------- -------- -------- --------
Balance, end of period $ 3,287 $ 2,656 $ 2,772 $ 2,543 $ 1,689
--------- -------- -------- -------- --------
Loans outstanding at end
of period $ 191,614 $181,840 $160,688 $133,217 $117,397
Ratio of allowance to loans
outstanding at end of period 1.72% 1.46% 1.73% 1.91% 1.44%
Average loans outstanding
during the period $ 181,445 $164,921 $139,728 $123,845 $104,102
Ratio of net charge-offs during the
period to average loans
outstanding -0.23% 0.18% 0.30% 0.16% 0.28%
</TABLE>
-18-
<PAGE> 20
ALLOWANCE FOR LOAN LOSSES
The allocation of the Allowance for Loan Losses by loan category at the
dates indicated is presented below with percentage of loans in each category to
total loans:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------------- ----------------- ---------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
($ thousands)
Commercial $1,529 46% $1,459 55% $1,399 57% $1,318 56% $ 839 55%
Real estate (1) 482 15% 400 39% 628 34% 742 36% 264 35%
Installment and
other consumer 120 4% 77 6% 128 9% 86 8% 105 10%
Unallocated 1,156 35% 720 0% 617 0% 397 0% 481 0%
--------------- --------------- --------------- --------------- ---------------
Total $3,287 100% $2,656 100% $2,772 100% $2,543 100% $1,689 100%
</TABLE>
(1) Includes all loans secured in whole or part by real estate.
-19-
<PAGE> 21
DEPOSITS
The following table summarizes average daily balances of deposits and
rates paid on such deposits for the periods indicated and the total weighted
average rate paid on total deposits:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------
1998 1997 1996
Amount Rate Amount Rate Amount Rate
---------------------- --------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
($ thousands)
Demand deposits $ 58,789 $ 54,689 $ 48,237
NOW accounts 38,413 2.40% 31,148 2.68% 26,944 2.69%
Savings 2,925 2.32% 3,044 2.50% 3,715 2.61%
Money market accounts 44,376 2.97% 36,880 3.07% 33,511 3.19%
Other time 62,256 5.81% 51,074 5.64% 46,604 5.71%
Time, $100,000 and over 33,573 5.47% 25,723 5.22% 21,917 5.39%
-------- -------- --------
Total $240,332 4.28% $202,558 4.24% $180,928 4.32%
-------- -------- --------
</TABLE>
Maturities of time deposits of $100,000 and over are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
------ -------
<S> <C> <C>
($ thousands)
Under 3 months $19,524 $12,703
3 to 6 months 4,379 3,993
6 to 12 months 6,061 8,090
Over 12 months 4,229 1,433
------- -------
Total $34,193 $26,219
------- -------
</TABLE>
-20-
<PAGE> 22
RETURN ON EQUITY AND ASSETS
The ratio of net income to average stockholders' equity and to average total
assets, and certain other ratios are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Percentage of net income to:
Average stockholders' equity 14.36% 15.30% 13.97%
Average total assets 1.70% 1.79% 1.61%
Percentage of average stockholders' equity
to average total assets 11.82% 11.67% 11.52%
</TABLE>
-21-
<PAGE> 23
ITEM 2. PROPERTIES.
The main office of both the Company and Mountain is located at 5100
LaVista Road in Tucker, Georgia. The property consists of a two-story brick
building of approximately 14,000 square feet, which is constructed on 1.877
acres of land owned by Mountain. Improvements include a three-lane drive through
teller installation, a drive-up night depository, an exterior automated teller
machine, as well as vault and safe deposit facilities.
Mountain's Peachtree Corners branch is located at 5340 Peachtree
Industrial Boulevard in Norcross, Georgia. The branch office consists of a
one-story leased brick building of approximately 3,000 square feet. Improvements
include a three-lane drive-up window, night depository, drive-up automated
teller machine, as well as vault and safe deposit facilities.
Mountain's Stone Mountain facility consists of 7,551 square feet of
leased space located at 2300 West Park Place in Stone Mountain, Georgia.
Mountain conducts all bookkeeping, accounting, personnel, advertising and
marketing functions, as well as real estate construction lending activities from
this facility. In addition, Mountain operates a branch bank from the facility as
well.
Charter's main office is located in an approximately 18,500 square foot
building owned by Charter located at 269 Roswell Street in Marietta, Georgia.
Improvements include a four-lane drive through teller installation, a drive-up
night depository, a vault and safe deposit facility. Charter maintains an
automated teller machine on leased property across the street from the main
branch. Charter's new Riverside branch is located in approximately 2,200 square
feet of leased office space at 4401 Northside Parkway in Atlanta. Improvements
at Charter's Riverside branch include an automated teller machine, a one-lane
drive through teller, night depository and vault and safe deposit facilities.
Charter's Powers Ferry branch is located in a 3,700 square foot facility owned
by Charter at 1920 Powers Ferry Road in Marietta. Improvements include a three
lane drive-up window, drive-up automated teller machine, drive-up night
depository and vault and safe deposit facilities.
ITEM 3. LEGAL PROCEEDINGS.
Except as set forth below, there are no material pending legal
proceedings to which the Company or either of the Banks is a party or of which
any of their properties are subject; nor are there material proceedings known to
the Company to be contemplated by any governmental authority; nor are there
material proceedings known to the Company, pending or contemplated, in which any
director, officer, affiliate or any principal security holder of the Company, or
any associate of any of the foregoing, is a party or has an interest adverse to
the Company or the Banks.
On November 17, 1997, a complaint was filed in the State Court of
DeKalb County, Georgia by Elizabeth L. Carnegie and 25 additional plaintiffs
against Merit and Mountain. The complaint alleged gross negligence and
violation, conspiracy to violate and aiding and abetting the violation of the
Georgia Racketeer Influenced and Corrupt Organizations (RICO) Act and sought
actual damages in the amount of $3,357,600 plus punitive damages and, in respect
of the RICO claims, treble damages. The plaintiffs alleged that Merit and
Mountain assisted in the commission of securities fraud and other illegal acts
by a former customer of Mountain through the customer's illegal use of certain
bank accounts maintained at Mountain.
In October 1998, the plaintiffs dismissed all claims against Merit. In
addition, during the course of discovery, 11 of the plaintiffs dismissed their
claims against Mountain. The remaining plaintiffs have reduced their claim for
damages against Mountain to $540,000, plus interest, punitive
-22-
<PAGE> 24
damages and treble damages in respect of the RICO claims. The discovery period
ended on February 1, 1999. Mountain denies any liability on these claims and
intend to vigorously defend the suit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter ended December 31,
1998 to a vote of security holders of the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock trades on The Nasdaq Stock Market under the
symbol "MRET." The following table sets forth, by fiscal quarter, the high and
low bid price of the Common Stock reported by The Nasdaq Stock Market and the
cash dividends per share of Common Stock declared by the Company during the last
two fiscal years.
<TABLE>
<CAPTION>
Fiscal Year Ended December 31, 1997 High Bid Low Bid Dividends
- ----------------------------------- -------- ------- ---------
<S> <C> <C> <C>
First Quarter ..................... $ 13.25 $ 11.00 $ .04
Second Quarter .................... 14.75 12.00 .04
Third Quarter ..................... 16.50 14.00 .04
Fourth Quarter .................... $ 19.50 $ 15.50 .05
Fiscal Year Ended December 31, 1998
- -----------------------------------
First Quarter ..................... $ 23.75 $ 18.25 $ .05
Second Quarter .................... 24.25 19.63 .05
Third Quarter ..................... 23.00 17.00 .05
Fourth Quarter .................... 19.50 17.38 .06
</TABLE>
As of March 19, 1999, Merit Common Stock was held of record by
approximately 700 persons, representing approximately 1,100 beneficial holders.
The payment and amount of future dividends on the Common Stock will depend on
the Banks' earnings, capital requirements, financial condition and other factors
considered relevant by the Board of Directors of the Company, including the
ability of the Banks to pay dividends to the Company, the amount of which is
subject to regulatory limitations.
Mountain is restricted in its ability to pay dividends under the
national banking laws and by regulations of the Comptroller. Pursuant to 12
U.S.C. ss. 56, a national bank may not pay dividends from its capital. All
dividends must be paid out of undivided profits, subject to other applicable
-23-
<PAGE> 25
provisions of law. Payments of dividends out of undivided profits is further
limited by 12 U.S.C. ss. 60(a), which prohibits a bank from declaring a dividend
on its shares of common stock until its surplus equals its share capital, unless
there has been transferred to surplus not less than 1/10 of the bank's net
income of the preceding two consecutive half-year periods (in the case of an
annual dividend). Pursuant to 12 U.S.C. ss. 60(b), the approval of the
Comptroller is required if the total of all dividends declared by a bank in any
calendar year exceeds the total of its net income for that year combined with
its retained net income for the preceding two years, less any required transfers
to surplus.
The Comptroller maintains regulations concerning the level of allowable
dividend payments by national banks. The intended effect of these regulations is
to make the calculation of national banks' dividend-paying capacity consistent
with generally accepted accounting principles (GAAP). In this regard, the
allowance for loan and lease losses is not considered an element of either
"undivided profits then on hand" or "net profits." Further, a national bank may
be able to use a portion of its capital surplus account as "undivided profits
then on hand," depending on the composition of that account. In addition, the
Comptroller's regulations clarify that dividends on preferred stock are not
subject to the limitations of 12 U.S.C. ss. 56, while explicitly making such
dividends subject to the constraints of 12 U.S.C. ss. 60. The regulations do not
diminish or impair a well-capitalized bank's ability to make cash payments to
its shareholders in the form of a return of capital.
Charter is restricted in its ability to pay dividends under Georgia law
and Georgia Banking Department regulations. Georgia state-chartered banks are
prohibited from paying dividends unless they have combined paid-in capital and
appropriated retained earnings of at least 20% of the bank's capital stock.
Moreover, a bank must obtain the approval of the Georgia Banking Department to
pay cash dividends if at the time of such payment (1) total classified assets
exceed 80% of the bank's equity capital (which includes the aggregate par value
of all common stock, paid in surplus, retained earnings, capital reserves and
reserves for loan losses), or (2) the aggregate amount of dividends to be paid
or anticipated to be paid during the calendar year exceeds 50% of the net
after-tax profits of the bank for the previous calendar year, or (3) the ratio
of equity capital (as defined above) to adjusted total assets is less than six
percent (6%).
RECENT SALES OF UNREGISTERED SECURITIES
On July 31, 1998, following the exercise of options to purchase Common
Stock by J. Randall Carroll, the Company's Chairman and Chief Executive Officer,
the Company issued 15,000 shares of Common Stock for a purchase price of
$75,000. The issuance of these shares was made in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended,
as a transaction by an issuer not involving a public offering. The securities
were acquired for investment and with no view toward the resale or distribution
thereof. The purchaser had a pre-existing relationship with the Company, the
offer did not involve public solicitation, no commissions were paid and the
stock certificate bears a restrictive legend.
-24-
<PAGE> 26
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
1998 1997 1996 1995 1994
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
($ thousands, except per share data)
Earnings
Interest income $ 23,235 $ 20,748 $ 17,656 $ 16,059 $ 11,863
Interest expense 8,513 7,024 6,180 5,579 3,959
Net interest income 14,722 13,724 11,476 10,480 7,904
Provision for loan losses 222 188 645 1,054 604
Non-interest income 1,550 1,449 1,268 1,701 1,145
Non-interest expense 8,239 8,145 6,632 6,233 5,612
Net income 4,955 4,441 3,503 3,006 1,793
Net income per share (basic) $ 1.15 $ 1.18 $ 0.95 $ 0.83 $ 0.50
Net income per share (diluted) $ 1.03 $ 0.96 $ 0.81 $ 0.70 $ 0.48
Average Balances
Assets $ 291,787 $ 248,610 $ 217,514 $ 191,230 $ 163,107
Deposits 240,332 202,558 180,928 162,153 139,242
Loans, net 181,445 164,921 139,728 123,845 104,102
Earning assets 265,707 226,604 197,220 173,179 148,425
Shareholders' equity 34,499 29,025 25,068 21,532 18,660
Balance Sheet Data
Assets $ 306,366 $ 267,363 $ 236,180 $ 205,250 $ 184,722
Deposits 254,614 220,284 192,697 173,064 159,157
Loans, net 188,327 179,184 157,916 130,674 115,708
Earning assets 272,818 240,985 212,356 182,239 163,735
Shareholders' equity 37,313 32,066 26,800 23,312 19,374
Book value per share $ 7.99 $ 8.04 $ 7.24 $ 6.36 $ 5.40
Dividends per share $ 0.21 $ 0.17 $ 0.04
Shares outstanding 4,672,616 3,989,033 3,704,102 3,665,055 3,587,888
Key Ratios
Return on average assets 1.70% 1.79% 1.61% 1.57% 1.10%
Return on average shareholders' equity 14.36% 15.30% 13.97% 13.96% 9.61%
Shareholders' equity to total assets 12.18% 11.99% 11.35% 11.36% 10.49%
</TABLE>
-25-
<PAGE> 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion sets forth the major factors which affected
the Company's results of operations and financial condition. This discussion
should be read in conjunction with the Selected Statistical Information and the
Consolidated Financial Statements of the Company and the Notes thereto included
herein.
OVERVIEW
Net income for the year ended December 31, 1998 was $4,954,620,
compared to $4,440,975 in 1997. Diluted earnings per share were $1.03 in 1998
and $.96 in 1997. The increase in 1998 net income resulted from a 7.3% increase
in net interest income to $14,721,734 and an increase of 7.0% in non-interest
income to $1,549,809, partially offset by an increase of 18.2% in the provision
for loan losses to $222,500 and an increase of 1.2% in non-interest expense to
$8,239,431.
Total assets were $306,366,000 at December 31, 1998, 14.6% higher than
total assets of $267,363,000 at the previous year end. Average total assets for
the year 1998 were $291,787,000, compared to $248,610,000 in 1997. This 17.4%
increase in average total assets was primarily funded by an 18.6% increase, or
$37,774,000, in average deposits over the prior year.
Net income as a percentage of average total assets was 1.70% in 1998,
compared to 1.79% in 1997 and net income as a percentage of average
shareholders' equity was 14.36% in 1998 compared to 15.30% in 1997.
In 1998, the Company paid a regular quarterly cash dividend of $.05 per
share. Effective in January 1999, the quarterly dividend was increased to $.06
per share
RECENT DEVELOPMENT
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. Consummation
of the transaction is subject to the negotiation 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.
FINANCIAL CONDITION
Earning Assets
Average earning assets in 1998 were $265,707,000, 17.3% above the
$226,604,000 average in 1997. Average total loans of $181,445,000 in 1998 and
$164,921,000 in 1997 represented 68.3% and 72.8% of average earning assets for
the respective years. The average total loan growth of 10.0% during 1998 was
accomplished while maintaining quality underwriting standards. At December 31,
1998, commercial loans composed 56.9% of outstanding loan balances versus 54.8%
at the prior year end. Real estate related loans, which include construction and
land development, commercial owner occupied, commercial income producing and
mortgages, represented 37.7% of outstanding balances versus 38.8% at December
31, 1997. Consumer and installment related loans represented
-26-
<PAGE> 28
5.4% of the loan portfolio at December 31, 1998 compared to 6.3% at the prior
year-end. Most of the Company's business activity is with customers located
within the Atlanta, Georgia metropolitan area. The Banks' only concentration of
credit is for residential real estate development, construction, and mortgage
purposes, or to businesses dependent upon the real estate market. The Company
has no highly leveraged transactions and has no foreign credits in its loan
portfolio.
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"),
the Company has segregated its investment securities portfolio into securities
held-to-maturity and those available-for-sale. Investments held-to-maturity are
those for which management has both the ability and intent to hold to maturity
and are carried at amortized cost. At December 31, 1998, this category totaled
$2,020,000. Investments available-for-sale are securities identified by
management as securities which may be sold prior to maturity in response to
various factors including liquidity needs, capital compliance, changes in
interest rates or portfolio risk management. This portfolio provides interest
income and serves as a source of liquidity for the Company. These securities are
carried at fair value, with unrealized gains and losses reported as a separate
component of shareholders' equity, net of related tax effects. At December 31,
1998, this category totaled $55,436,000, with an unrealized gain of $259,000,
net of tax effect.
At December 31, 1998, the investment securities held-to-maturity
portfolio had net unrealized losses of $9,969, comprised of unrealized losses of
$36,218 and unrealized gains of $26,249. At year-end 1997, the held-to-maturity
portfolio had net unrealized losses of $48,818, representing unrealized losses
of $69,241 and unrealized gains of $20,423. At December 31, 1998, the investment
securities available-for-sale portfolio had net unrealized gains of $414,508,
comprised of unrealized losses of $70,168 and unrealized gains of $484,676. At
December 31, 1997, the available-for-sale portfolio had net unrealized gains of
$362,106, comprised of unrealized losses of $26,790 and unrealized gains of
$388,896.
Average total investment securities increased $5,873,000 to $54,480,000
or 12.1% above the 1997 average of $48,607,000. The investment securities
portfolio represented 20.5% of total average earning assets in 1998 and 21.5% in
1997. Proceeds from sales of investment securities available-for-sale, including
mortgage-backed certificates during 1998 and 1997 were $18,446,000 and
$21,890,000, respectively. During 1998, no gains or losses were realized on
those sales. Net losses of $43,495 were realized on sales during 1997. As of
December 31, 1998, $10,928,721 or 19.0% of the investment securities portfolio
consisted of mortgage-backed securities whose maturities may be adversely
affected by prepayments which tend to increase in a declining interest rate
environment. Mortgage-backed securities represented 10.6% of the investment
portfolio as of December 31, 1997.
At December 31, 1998, the investment portfolio included two U.S.
Government Agency investments which are defined as structured notes. Both are
Federal Home Loan Bank ("FHLB") Floating Rate Notes with a total book value of
$1,500,000. The first FHLB security, carried in the Company's held-to-maturity
portfolio, was purchased August 4, 1993, maturing August 4, 2003, has a book
value of $1,000,000 and on December 31, 1998, a market value of $963,782. The
interest rate on this security was fixed for the first two years at 8%, then
converted to a floating rate based on indexes of CMT and LIBOR. The second FHLB
security, held in the Company's available-for-sale portfolio, was purchased
October 18, 1993, maturing October 18, 2000, has a face value of $500,000 and on
December 31, 1998, a market value of $504,575, with a floating rate based on
LIBOR and the prime rate. These securities are rated AAA and have an implied
guarantee of the U.S. Government and, therefore, no anticipated risk of loss of
principal. Combined, these securities make up 2.6% of the investment portfolio.
-27-
<PAGE> 29
Investment securities with a carrying value of approximately
$36,694,000 and $28,252,000 at December 31, 1998 and 1997, respectively, were
pledged to secure deposits of public funds, securities sold under agreements to
repurchase and certain other deposits as provided by law.
Average federal funds sold were $29,782,000 in 1998, or 11.2% of
average earning assets, compared to $13,024,000 in 1997 or 5.7% of average
earning assets.
Liabilities
Average interest-bearing liabilities rose 20.6% to $195,433,000 in
1998 from $162,086,000 in 1997. This growth is the result of a 20.6% increase in
NOW, money market and savings accounts and a 24.8% increase in total time
deposits.
The aggregate average balance of NOW, money market and savings
accounts was $85,714,000, 20.6% greater than the 1997 aggregate average balance
of $71,072,000. The average balance of other time deposits increased 21.9%
during 1998 to $62,256,000 from $51,074,000 in 1997. Average time deposits with
balances over $100,000 increased 30.5% to $33,573,000 in 1998 from $25,723,000
in 1997. This category of deposits, as a percent of average interest-bearing
liabilities, increased to 17.2% in 1998 from 15.9% in 1997.
Interest-bearing deposits, including certificates of deposit, will
continue to be the major source of funding for the Company. There is no specific
emphasis placed on time deposits of $100,000 and over. During 1998, aggregate
average balances of time deposits of $100,000 and over composed 14.0% of average
total deposits compared to 12.7% for the prior year.
Average non-interest bearing deposits were $58,789,000 in 1998
compared to $54,689,000 in 1997, reflecting growth of 7.5%. As a percentage of
average total deposits, these deposits decreased slightly from 27.0% in 1997 to
24.5% in 1998.
The Company maintains a funding program through which it sells
investment securities from its portfolio to customers with an agreement to
repurchase the securities at a specified future date, generally overnight.
Interest is paid to the customers at a competitive market rate while the Company
retains those moneys for funding earning assets. These funds are not deposits
and are recorded as short-term borrowings. At December 31, 1998, securities sold
under agreements to repurchase were $7,274,000 compared to $6,432,000 at
December 31, 1997.
Long-term debt at December 31, 1998 was $4,787,000 compared to
$5,283,000 at December 31, 1997. Long-term debt consists of advances from the
Federal Home Loan Bank of Atlanta ("FHLBA") for the purpose of match funding
specific longer term loans. Three new advances totaling $2,300,000 were obtained
during 1997. There were no new advances in 1998. The average interest rate paid
on this debt during 1998 and 1997 was 6.67% and 6.66%, respectively.
Liquidity and Interest Rate Sensitivity
The goal of liquidity management is to ensure the availability of an
adequate level of funds to meet the loan demand and the deposit withdrawal needs
of the Company's customers. The Company actively manages the levels, types and
maturities of earning assets in relation to the sources available in an effort
to provide adequate funding at all times.
-28-
<PAGE> 30
The Company's loan to deposit ratio averaged 75.5% in 1998, compared
to 81.4% in 1997. Management plans an average loan to deposit ratio in the range
of 75% to 85% during 1999.
At December 31, 1998, investment securities with a carrying value of
$28,940,000 are scheduled to mature within the next five years. Of this amount,
$9,032,000 is scheduled to mature within one year.
The Company has short-term funding available for liquidity purposes
through various federal funds lines of credit with other financial institutions
and its membership in the FHLBA. Further, the FHLBA membership provides the
availability of participation in loan programs with varying maturities and
terms. At December 31, 1998 and 1997, the Company had federal funds lines from
other banks totaling $26,750,000 and $25,750,000, respectively. There were no
amounts outstanding under these short-term commitments at December 31, 1998 and
1997.
The liquidity and maturity structure of the Company's assets and
liabilities are important to the maintenance of acceptable net interest income
levels. A decreasing interest rate environment negatively impacts earnings as
the Company's rate-sensitive assets generally re-price 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
December 31, 1998, the Company had a gap ratio of 1.04 for the one-year period
ending December 31, 1999. Thus, over the next twelve months, slightly more
rate-sensitive assets will reprice than rate-sensitive liabilities.
A 200 basis point decrease in interest rates spread evenly during
1999 is estimated to cause a decline in net interest income of 7.5% or
$1,195,000 as compared to net interest income if interest rates were unchanged
during 1999. This level of variation is within the Company's acceptable limits.
The simulation analysis assumed that savings and checking interest rates had a
low correlation to changes in market rates of interest and that certain asset
prepayments changed as refinancing incentives evolved. Further, in the event of
a change of such magnitude in interest rates, the Company's asset and liability
management committee would likely take actions to further mitigate its exposure
to the change. However, given the uncertainty of specific conditions and
corresponding actions which would be required, the analysis assumed no change in
the Company's asset/liability composition.
There are no known trends, demands, commitments, events or
uncertainties that will result in or are reasonably likely to result in the
Company's liquidity increasing or decreasing in any material way. 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.
Capital Resources
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.
-29-
<PAGE> 31
Capital management is a continuous process. Since December 31, 1997,
shareholders' equity has increased $5,246,864.
At December 31, 1998, the Company's tier I capital ratio was 16.6%
compared to 15.6% at December 31, 1997. At December 31, 1998, the Company's
total risk based capital ratio was 17.8% compared to 16.9% at the prior year
end. These ratios exceed the minimum capital adequacy guidelines imposed by
regulatory authorities on banks and bank holding companies, which are 4% for
tier I capital and 8% for total risk based capital. The ratios also exceed the
minimum guidelines imposed by the same regulatory authorities to be considered
"well-capitalized," which are 6% of tier I capital and 10% for total risk based
capital.
In January 1998, the Board of Directors of the Company approved a
stock repurchase program under which the Company could 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 1998, the Company repurchased 100,000 shares of its common
stock in the open market and 72,680 shares directly from shareholders under this
program at a total cost of $3,791,868. In addition, 682,166 warrants to purchase
common stock originally issued to Mountain's organizers in 1988 and 174,097
options to purchase common stock issued to the Company's officers were exercised
during 1998.
The Company does not have any commitments which it believes would
reduce its capital to levels inconsistent with the regulatory definition of a
"well capitalized" financial institution
RESULTS OF OPERATIONS 1998 VS. 1997
Net Interest Income
Net interest income rose 7.3%, or $998,163, from $13,723,570 in 1997
to $14,721,733 in 1998. This increase in net interest income can be attributed
to growth in loans and investments partly offset by growth in time deposits and
a decline in net interest margin. Of the $998,163 increase in net interest
income in 1998 over 1997, approximately $1,520,000 was due to higher balances
outstanding, offset by an approximate $522,000 decrease caused by lower yields
on earning assets. During 1998, the net interest margin was 5.56% on average
earning assets of $265,707,000. In 1997, the net interest margin was 6.06% on
average earning assets of $226,604,000. The average yield on earning assets
decreased 40 basis points to 8.76% in 1998 from 9.16% in 1997. The average rate
paid on interest-bearing liabilities increased 3 basis points to 4.36% in 1998
from 4.33% in 1997. The decreased earning assets yield was primarily the result
of the decrease in the prime rate and federal funds rates in 1998 and increased
loan pricing competition. The rate paid on interest-bearing liabilities did not
change substantially due to higher cost time deposits comprising a larger
proportion of interest-bearing liabilities in 1998 compared to 1997.
To counter potential declines in the net interest margin and the
interest rate risk inherent in the balance sheet, the Company adjusts the rates
and terms of its interest-bearing liabilities in response to general market rate
changes and the competitive environment. The Company monitors federal funds sold
levels throughout the year, investing any funds not necessary to maintain
appropriate liquidity in higher yielding investments. The Company will continue
to manage its balance sheet and its interest rate risk based on changing market
interest rate conditions.
-30-
<PAGE> 32
Allowance for Loan Losses
The allowance for loan losses represents management's estimate of an
amount adequate to provide for potential losses inherent in the loan portfolio.
In its continuing evaluation of the allowance and its adequacy, management
considers the Company's loan loss experience, the amount of past due and
nonperforming loans, current and anticipated economic conditions, underlying
collateral values securing loans and other factors.
While it is the Company's policy to charge-off in the current period
the loans in which a loss is considered probable, there are additional risks of
future losses which cannot be quantified precisely or attributed to particular
loans or classes of loans. Because these risks include the state of the economy,
management's judgment as to the adequacy of the allowance is necessarily
approximate and imprecise.
In assessing the adequacy of the allowance, management relies
predominately on its ongoing review of the loan portfolio, which is undertaken
both to ascertain whether there are probable losses which must be charged-off
and to assess the risk characteristics of the portfolio in the aggregate. This
review encompasses the judgment of management, utilizing internal loan rating
standards, guidelines provided by the banking regulatory authorities governing
Charter and Mountain, their loan portfolio review as part of the bank
examination process, and an annual independent external loan review performed by
a consultant.
The provision for loan losses charged to operations in 1998 was
$222,500, an 18.2% increase from the provision of $188,300 recorded in 1997. Net
recoveries were $408,690 or .22% of average loans outstanding during 1998 as
compared to net charge-offs of $304,672 or .18% of average loans outstanding
during 1997. At December 31, 1998, the allowance for loan losses was $3,286,602
or 1.72% of loans outstanding as compared to $2,655,412 or 1.46% of loans
outstanding at December 31, 1997.
At December 31, 1998, the Company held one residential property in
other real estate owned, in the amount of $187,587. Management anticipates an
orderly disposition of this asset with no significant loss at sale. At December
31, 1998, the Company had aggregate non-accrual loans of $223,270, a decrease
from $394,557 at the prior year end. The ratio of non-accrual loans to total
loans was .12% at December 31, 1998 and .22% at December 31, 1997. At December
31, 1998, there was one loan totaling $12,500 past due 90 days or more and still
accruing. At December 31, 1997 there were three loans totaling $81,838 past due
90 days or more and still accruing.
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS 114") requires that losses on loans
be measured based on the present value of expected future cash flows discounted
at the loan's effective interest rate or the fair value of the collateral if the
loan is collateral dependent. At December 31, 1998 and 1997, the Company held
impaired loans as defined by SFAS 114 of approximately $622,000 and $518,000,
respectively, for which specific allocations of approximately $72,000 and
$35,000, respectively, have been established within the allowance for loan
losses. The average recorded investment and related interest income recognized
on these loans were approximately $630,000 and $69,000 in 1998 and $617,000 and
$51,000 in 1997.
-31-
<PAGE> 33
Non-interest Income
Non-interest income was $1,549,809 for the year ended December 31,
1998, compared to $1,448,801 for 1997, a 7.0% increase. This increase resulted
primarily from increased other income which rose 31.7%, or $110,234, in 1998
compared to 1997. Included in other income is mutual fund fee income of $61,258
in 1998 compared to $53,103 in 1997. These fees are from brokerage services the
Company provides its clients through a contractual third-party relationship with
INVEST Financial Corporation. The Company entered into a cash value life
insurance plan in January 1998 to provide death benefits for eligible officers
and the Company, and pension benefits to eligible officers. The increase in cash
value of this plan was $77,275 in 1998, recorded as other income. Fees on
deposits remained basically unchanged in 1998 compared to 1997.
Non-interest Expense
Non-interest expense increased 1.2%, or $94,451, to $8,239,430
during 1998 compared to 1997. Salaries and other personnel expense increased
11.9% in 1998 over 1997 to support the Company's continued growth.
Occupancy and equipment expense increased 36.1%, or $400,629, over
1997, partly the result of Mountain opening a new branch in the Peachtree
Corners area in Norcross, Georgia in the first quarter of 1998 and Charter
relocating a branch to larger quarters in the second quarter of 1998.
Legal fees decreased 34.2% in 1998 from 1997, as a result of a
lawsuit settled in the second quarter of 1997.
In the third quarter of 1997, management wrote-off unamortized
goodwill of approximately $350,000 which had originated through the purchase of
the charter and one branch office of a bank located in Gwinnett County, Georgia.
Recent changes in Georgia state banking laws have liberalized a bank's ability
to open new branches in other counties, thereby reducing the Gwinnett County
charter's value to zero. In addition, the branch office acquired in the 1993
transaction was closed before year-end 1997 due to unprofitable activity.
Therefore, an impairment loss under Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("SFAS 121"), was recognized for the amount of the
remaining unamortized goodwill. Excluding this writeoff, total non-interest
expense increased 5.7% in 1998 over 1997.
Management continues to focus on improving non-interest fee income
and controlling operating expenses. Management uses the following ratios as
benchmarks to measure the effectiveness of its efforts in these areas. Net
non-interest expense (defined as non-interest expense less non-interest income)
as a percentage of average total assets decreased from 2.69% in 1997 to 2.29% in
1998. The efficiency ratio (non-interest expense divided by the sum of net
interest income and non-interest income) was 50.6% in 1998, compared to 53.7% in
1997. Both ratios signify improvement in 1998 over 1997.
Income Taxes
At December 31, 1998, the Company's net deferred tax asset was
$618,000. No valuation allowance was recorded for this asset since taxable
income exists in the available carry-back periods in an amount which would
ensure realization of the asset.
-32-
<PAGE> 34
In 1998, the Company recorded an income tax provision of $2,854,992,
reflecting an effective tax rate of 36.6%. This compared with a provision of
$2,398,116 in 1997 and a 35.0% effective tax rate.
RESULTS OF OPERATIONS 1997 VS. 1996
Net income was $4,440,975 in 1997 compared to $3,503,292 in 1996.
Basic earnings per share was $1.18 in 1997 compared to $.95 in 1996 and diluted
earnings per share was $.96 in 1997 and $.81 in 1996.
The increase in net income for the year ended December 31, 1997, was
attributable to a 19.6% increase in net interest income, or $2,247,817, a
decrease of 70.8% in the provision for loan losses, or $456,000, an increase of
14.3% in non-interest income, or $181,020; offset by an increase in non-interest
expense of 22.8%, or $1,512,843.
Net interest income was $13,723,570 in 1997 and the net interest
margin was 6.06% on average earning assets of $226,604,000. This compares with a
net interest margin of 5.84% on average earning assets of $197,220,000 in 1996.
The increase in the net interest margin was attributable to higher yields on
earning assets, up 18 basis points, as the result of improved loan pricing,
partly offset by lower rates on interest paying liabilities, down 2 basis
points. The increase in net interest margin accounted for an increase of
approximately $348,000 in net interest income. Higher volumes produced an
increase of approximately $1,900,000 in net interest margin.
Non-interest income was $1,448,801 in 1997, compared with $1,267,781
in 1996. This increase came from increased fees on deposits and service charges
as a result of volume growth, offset by lower other income.
Non-interest expense was $8,144,980 in 1997 versus $6,632,137 in
1996. This increase was attributable to the Company's overall growth and branch
system expansion, which generated increases in salaries and other personnel
costs, equipment and occupancy expenses, and other operating expenses.
The provision for loan losses charged to operations was $188,300 in
1997 compared to $645,000 in 1996. The decrease in the provision was in response
to management's assessment that its allowance for loan losses was greater than
required to absorb future loan losses. Net charge-offs were $304,672 in 1997,
representing .18% of average loans outstanding during the year, compared to
$416,624 in 1996 or .30% of average loans outstanding during 1996. At December
31, 1997, the allowance for loan losses was $2,655,000, or 1.46% of loans
outstanding, compared to $2,772,000, or 1.73% of loans outstanding at December
31, 1996.
In 1997 the Company recorded an income tax provision of $2,398,000,
reflecting an effective tax rate of 35.0%. This compares with a provision of
$1,963,000 in 1996 reflecting a 35.9% effective tax rate.
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
-33-
<PAGE> 35
banks conduct ongoing 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 currently uses a different
service bureau but will convert 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 that
have been implemented. Charter had an outside consultant review its Year 2000
project status and has implemented the consultant's recommendations. Mountain
will have an independent review completed before June 30, 1999. The Company's
Directors & Officers insurance policy has been reviewed by legal counsel for
coverage of Year 2000 issues. This review indicated that the Company has
coverage under this policy for Year 2000 related events.
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 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 $60,000 for hardware and software upgrades, customer
communications, testing and other items required to complete the plan. All
remediation costs will be expensed in the year incurred and will be funded
through normal operating cash flow. Year 2000 project costs during the year
ended December 31, 1998 were not material.
The Company believes that its mission critical systems are compliant
and its customers are aware of and are addressing their 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.
-34-
<PAGE> 36
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 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.
The preceding discussion of the Year 2000 issue includes
forward-looking statements reflecting management's current assessments and
estimates and which involve risks and uncertainties. Various factors could cause
actual results to differ materially from those expected by such assessments and
forward-looking statements. Factors that might affect the timely and
satisfactory completion of the Year 2000 project include, but are not limited
to, vendor representations and timely correction of hardware or software
problems, the readiness of key utilities, suppliers and customers, and similar
uncertainties. The Company's management of the project is an ongoing process
involving continual evaluation. Unanticipated problems could emerge and
alternative solutions may be devised that may be more costly than anticipated or
more difficult to solve.
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth certain unaudited results of
operations for the Company's last eight fiscal quarters. The unaudited
information includes all normal recurring adjustments which management considers
necessary for a fair presentation of the information shown. All amounts are
shown in thousands, except per share data.
<TABLE>
<CAPTION>
1998 Quarters 1997 Quarters
------------------------------------------- --------------------------------------------
Fourth Third Second First Fourth Third Second First
------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income from earning assets $ 5,923 $5,946 $5,880 $5,486 $ 5,673 $ 5,307 $5,018 $4,750
Net interest income
(taxable-equivalent) 3,773 3,784 3,684 3,544 3,699 3,501 3,395 3,166
Net interest income 3,754 3,764 3,669 3,535 3,691 3,490 3,389 3,153
Provision for loan losses 0 50 75 98 153 (265) 150 150
Noninterest income 415 371 394 370 387 358 346 356
Other real estate owned expense (18) 25 7 6 (4) 0 8 4
Other noninterest expense 2,070 2,111 2,059 1,979 1,941 2,304 1,963 1,929
Income before taxes 2,116 1,949 1,922 1,823 1,988 1,810 1,615 1,427
Net income 1,343 1,238 1,220 1,154 1,285 1,173 1,050 933
Earnings per
common share - basic .29 .27 .30 .29 .33 .32 .28 .25
common share - diluted .28 .26 .26 .24 .27 .25 .23 .21
Dividends per common share .06 .05 .05 .05 .05 .04 .04 .04
</TABLE>
-35-
<PAGE> 37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's financial performance is subject to risk from interest
rate fluctuations. This interest rate risk arises due to differences between the
amount of interest-earning assets and the amount of interest-bearing liabilities
subject to repricing over a specified period and the amount of change in
individual interest rates. 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
December 31, 1998, the Company had a gap ratio of 1.04 for the one-year period
ending December 31, 1999. Thus, over the next twelve months, slightly more
rate-sensitive assets will reprice than rate-sensitive liabilities.
A 200 basis point decrease in interest rates spread evenly during
1999 is estimated to cause a decline in net interest income of 7.5% or
$1,195,000 as compared to net interest income if interest rates were unchanged
during 1999. This level of variation is within the Company's acceptable limits.
This simulation analysis assumed that savings and checking interest rates had a
low correlation to changes in market rates of interest and that certain asset
prepayments changed as refinancing incentives evolved. Further, in the event of
a change of such magnitude in interest rates, the Company's asset and liability
management committee would likely take actions to further mitigate its exposure
to the change. However, given the uncertainty of specific conditions and
corresponding actions which would be required, the analysis assumed no change in
the Company's asset/liability composition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial statements are filed with this report:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
-36-
<PAGE> 38
REPORT OF INDEPENDENT ACCOUNTANTS
January 26, 1999
To the Board of Directors and
Shareholders of Merit Holding Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and comprehensive income, of changes in
shareholders' equity and of cash flows present fairly, in all material respects,
the financial position of Merit Holding Corporation and its subsidiaries at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
-37-
<PAGE> 39
MERIT HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Assets
Cash and due from banks $ 21,592,764 $ 17,585,760
Federal funds sold and other short-term investments 24,697,148 14,293,899
Investment securities (Note 4)
Held-to-maturity at cost (market value of
$2,009,800 and $1,472,473 at December 31, 1998
and 1997, respectively) 2,019,769 1,521,291
Available-for-sale at market 55,435,946 44,353,709
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 --
Loans, less allowance for loan losses of $3,286,602
and $2,655,412 at December 31, 1998 and 1997,
respectively (Note 5) 188,326,955 179,184,439
Premises and equipment, net (Note 6) 5,103,163 5,529,319
Other real estate owned 187,587 209,570
Accrued interest receivable and other assets 6,664,552 3,053,342
------------- -------------
Total assets $ 306,366,434 $ 267,362,879
============= =============
Liabilities and Shareholders' Equity
Deposits (Note 7)
Demand $ 71,527,979 $ 61,672,902
Checking with interest 42,027,075 31,403,603
Money-market accounts 42,214,042 40,876,193
Savings 3,337,770 2,695,770
Time, $100,000 and over 34,193,322 26,218,536
Other time 61,313,792 57,416,727
------------- -------------
254,613,980 220,283,731
Short-term borrowings (Note 8) 7,274,034 6,431,752
Long-term debt (Note 8) 4,786,938 5,282,847
Accrued interest payable and other liabilities 2,378,790 3,298,721
------------- -------------
Total liabilities 269,053,742 235,297,051
------------- -------------
Commitments and contingencies (Note 13)
Shareholders' equity (Note 10)
Common stock, $2.50 par value; 10,000,000
shares authorized; 4,846,496 and 3,990,233 issued;
4,672,616 and 3,989,033 outstanding at
December 31, 1998 and 1997, respectively 12,116,240 9,975,583
Paid-in capital 11,609,162 8,777,179
Retained earnings 17,142,460 13,110,971
Accumulated other comprehensive income 259,108 224,505
Treasury stock, 173,880 and 1,200 shares, at cost at
December 31, 1998 and 1997, respectively (3,814,278) (22,410)
------------- -------------
Total shareholders' equity 37,312,692 32,065,828
------------- -------------
Total liabilities and shareholders' equity $ 306,366,434 $ 267,362,879
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-38-
<PAGE> 40
MERIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the year ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Interest and dividend income
Interest and fees on loans (Note 2) $ 18,274,168 $ 16,902,123 $ 14,135,633
Interest on securities 3,250,360 3,013,084 2,659,263
Interest on federal funds sold and other
short-term investments 1,593,175 720,900 775,797
Interest on time deposits with other
institutions -- 3,831 9,928
Dividends on Federal Reserve Bank stock 17,991 17,991 17,991
Dividends on Federal Home Loan Bank stock 99,232 90,066 57,771
------------ ------------ ------------
Total interest and dividend income 23,234,926 20,747,995 17,656,383
------------ ------------ ------------
Interest expense on deposits 7,761,545 6,266,716 5,730,931
Interest expense on long-term debt 335,755 299,714 196,787
Interest expense on short-term borrowings 415,892 457,995 252,912
------------ ------------ ------------
Total interest expense 8,513,192 7,024,425 6,180,630
------------ ------------ ------------
Net interest income 14,721,734 13,723,570 11,475,753
Provision for loan losses (Notes 2 and 5) 222,500 188,300 645,000
------------ ------------ ------------
Net interest income after provision for loan losses 14,499,234 13,535,270 10,830,753
------------ ------------ ------------
Non-interest income
Service charges and fees on deposits 1,081,644 1,082,891 805,437
Gain on sale of SBA loans 10,699 18,678 3,409
Other income 457,466 347,232 458,935
------------ ------------ ------------
Total non-interest income 1,549,809 1,448,801 1,267,781
------------ ------------ ------------
Non-interest expense
Salaries and other personnel 4,387,252 3,919,086 3,416,451
Occupancy and equipment 1,510,178 1,109,549 946,891
Advertising and marketing 133,750 129,279 127,646
FDIC insurance premiums 30,658 22,114 49,341
Legal fees 187,219 284,349 264,420
Data processing fees 185,322 179,999 139,227
Loss on sales of securities, net -- 43,495 --
Other operating 1,805,052 2,457,109 1,688,161
------------ ------------ ------------
Total non-interest expense 8,239,431 8,144,980 6,632,137
------------ ------------ ------------
Income before income taxes 7,809,612 6,839,091 5,466,397
Provision for income taxes (Notes 2 and 9) 2,854,992 2,398,116 1,963,105
------------ ------------ ------------
Net income $ 4,954,620 $ 4,440,975 $ 3,503,292
============ ============ ============
Other comprehensive income, before tax
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising
during the period $ 54,926 $ 53,256 $ (170,603)
Plus: reclassification adjustment for losses
included in net income -- 43,495 --
------------ ------------ ------------
Other comprehensive income, before tax 54,926 96,751 (170,603)
Income tax (expense) benefit related to items
of other comprehensive income (20,323) (35,798) 63,123
------------ ------------ ------------
Other comprehensive income, net of tax $ 34,603 $ 60,953 $ (107,480)
============ ============ ============
Comprehensive income $ 4,989,223 $ 4,501,928 $ 3,395,812
============ ============ ============
Basic earnings per share $ 1.15 $ 1.18 $ .95
============ ============ ============
Diluted earnings per share $ 1.03 $ .96 $ .81
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-39-
<PAGE> 41
MERIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock
----------------------------------------------- Accumulated
Number Other
of Shares Paid-in Retained Comprehensive
Outstanding Par Value Capital Earnings Income
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 3,807,815 $ 9,519,537 $ 8,302,438 $ 5,958,990 $ 271,032
Exercise of options and warrants 39,047 97,618 142,766
Retirement of treasury stock (142,760) (356,900) (383,580)
Dividend declared (148,165)
Unrealized loss on available-for-sale
securities, net of tax (107,480)
Net income 3,503,292
----------- ----------- ----------- ----------- ------------
Balance at December 31, 1996 3,704,102 9,260,255 8,061,624 9,314,117 163,552
Exercise of options and warrants 286,131 715,328 715,555
Treasury stock purchased (1,200)
Dividends declared (644,121)
Unrealized gain on available-for-sale
securities, net of tax 60,953
Net income 4,440,975
----------- ----------- ----------- ----------- ------------
Balance at December 31, 1997 3,989,033 9,975,583 8,777,179 13,110,971 224,505
Exercise of options and warrants 856,263 2,140,657 2,831,983
Treasury stock purchased (172,680)
Dividends declared (923,131)
Unrealized gain on available-for-sale
securities, net of tax 34,603
Net income 4,954,620
----------- ----------- ----------- ----------- ------------
Balance at December 31, 1998 4,672,616 $12,116,240 $11,609,162 $17,142,460 $ 259,108
=========== =========== =========== =========== ============
<CAPTION>
Treasury
Stock Total
<S> <C> <C>
Balance at December 31, 1995 $ (740,480) $23,311,517
Exercise of options and warrants 240,384
Retirement of treasury stock 740,480 -
Dividend declared (148,165)
Unrealized loss on available-for-sale
securities, net of tax (107,480)
Net income 3,503,292
----------- -----------
Balance at December 31, 1996 - 26,799,548
Exercise of options and warrants 1,430,883
Treasury stock purchased (22,410) (22,410)
Dividends declared (644,121)
Unrealized gain on available-for-sale
securities, net of tax 60,953
Net income 4,440,975
----------- -----------
Balance at December 31, 1997 (22,410) 32,065,828
Exercise of options and warrants 4,972,640
Treasury stock purchased (3,791,868) (3,791,868)
Dividends declared (923,131)
Unrealized gain on available-for-sale
securities, net of tax 34,603
Net income 4,954,620
----------- -----------
Balance at December 31, 1998 $(3,814,278) $37,312,692
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-40-
<PAGE> 42
MERIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the year ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 4,954,620 $ 4,440,975 $ 3,503,292
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 593,234 908,807 453,919
Net amortization of premiums and discounts on securities (21,103) (110,002) 57,519
Provision for loan losses 222,500 188,300 645,000
Loss on sales of securities, net -- 43,495 --
Gain on sale of SBA loans (10,699) (18,678) (3,409)
Loss (gain) on sale of other real estate 822 (6,459) (6,904)
Decrease (increase) in interest receivable 54,988 (303,708) (166,286)
(Decrease) increase in interest payable (349,679) 583,061 (10,850)
(Increase) decrease in prepaid expenses and other assets (3,196,842) 196,441 (1,242,259)
(Decrease) increase in accrued expenses and
other liabilities (651,420) 745,402 (109,057)
------------ ------------ ------------
Net cash provided by operating activities 1,596,421 6,667,634 3,120,965
------------ ------------ ------------
Cash flows from investing activities
Purchases of held-to-maturity securities (500,000) -- (100,410)
Proceeds from maturities of held-to-maturity securities -- 235,000 180,250
Purchases of available-for-sale securities (including
mortgage-backed securities) (68,268,121) (42,384,369) (12,706,762)
Proceeds from sales of available-for-sale securities
(including mortgage-backed securities) 18,445,912 21,890,304 2,011,107
Proceeds from maturities of available-for-sale securities 38,815,000 19,788,462 4,000,000
Proceeds from maturities of time deposits with
other financial institutions -- 100,000 103,750
Purchases of Federal Home Loan Bank stock -- (290,100) (346,300)
Purchases of The Bankers Bank stock (707,000) -- --
Proceeds from sale of other real estate 238,827 338,170 712,083
Loans made to customers, net (9,365,016) (21,438,097) (27,883,261)
Proceeds from sale of premises and equipment 336,200 -- --
Capital expenditures, net of retirements (503,278) (396,715) (1,483,372)
------------ ------------ ------------
Net cash used in investing activities (21,507,476) (22,157,345) (35,512,915)
------------ ------------ ------------
Cash flows from financing activities
Proceeds (repayments) from short-term borrowings, net 842,282 (5,105,796) 7,039,993
Proceeds from long-term debt -- 2,300,000 969,890
Repayment of long-term debt (495,909) (280,839) (189,920)
Net increase in deposits 34,330,249 27,586,969 19,633,221
Proceeds from exercise of stock options/warrants 4,277,640 1,430,883 240,384
Dividends paid (841,086) (593,982) --
Purchase of treasury stock (3,791,868) (22,410) --
------------ ------------ ------------
Net cash provided by financing activities 34,321,308 25,314,825 27,693,568
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 14,410,253 9,825,114 (4,698,382)
Cash and cash equivalents at beginning of period 31,879,659 22,054,545 26,752,927
------------ ------------ ------------
Cash and cash equivalents at end of period $ 46,289,912 $ 31,879,659 $ 22,054,545
============ ============ ============
Supplemental data
Interest paid $ 8,868,640 $ 6,440,444 $ 6,192,409
============ ============ ============
Income taxes paid $ 3,531,035 $ 1,861,000 $ 2,670,000
============ ============ ============
Transfer from loans to real estate acquired through foreclosure $ -- $ 234,000 $ --
============ ============ ============
Tax benefit from exercise of stock options $ 695,000 $ -- $ --
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-41-
<PAGE> 43
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. DESCRIPTION OF THE BUSINESS
Merit Holding Corporation (the "Company") is a bank holding company
whose business is conducted by its wholly-owned subsidiaries, Mountain
National Bank ("Mountain"), located in Tucker, Georgia, and Charter
Bank & Trust Co. ("Charter"), located in Marietta, Georgia
(collectively, the "Banks"). With a focus on community banking, the
Banks offer banking and related financial services to commercial and
consumer customers throughout metropolitan Atlanta.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, the Banks. All intercompany
accounts and transactions have been eliminated in consolidation.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, and federal funds sold and other
short-term investments.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115")
requires the Company to segregate its investment securities portfolio
into securities held-to-maturity and those available-for-sale.
Investments in debt securities for which management has both the
ability and intent to hold to maturity are carried at amortized cost.
Investments in debt securities which management believes may be sold
prior to maturity in connection with changes in interest rates,
prepayment risk, changes in the Company's liquidity or other similar
factors are classified as available-for-sale and are reported at fair
value, with unrealized gains and losses reported as a separate
component of shareholders' equity, net of associated tax effects. Gains
and losses on the sale of securities are recognized on the specific
identification method.
LOANS
Loans are stated at principal amounts outstanding reduced by an
allowance for loan losses. Interest income on loans is recognized to
reflect a constant rate of return on net funds outstanding. Accrual of
interest income on individual loans is discontinued when principal or
interest is past due for 90 days or more unless the loan is well
secured and in the process of collection. Interest accrued but not
collected is reversed against income when a loan is classified as
nonaccruing unless the ultimate collection of interest is probable.
Fees and costs directly related to the origination and acquisition of
loans are deferred and recognized over the life of the loans as an
adjustment of yield.
-42-
<PAGE> 44
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level considered
adequate to provide for potential loan losses. The adequacy of the
allowance is based on management's continuing evaluation of the
collectibility of the loan portfolio under current economic conditions,
which includes estimates of underlying collateral value securing loans
and such other factors which deserve recognition in estimating loan
losses. Loans which are determined to be uncollectible are charged
against the allowance.
The Company follows Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114")
which requires that losses, if any, on certain impaired loans be
measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or the fair value of
the collateral if the loan is collateral dependent.
The success of the Banks is largely dependent on the general economic
conditions in the Atlanta metropolitan area. Estimates, appraisals and
evaluations of loans are critical to the financial statements.
Accordingly, changes in such estimates, appraisals and evaluations
might be required because of changing economic conditions and the
economic prospects of borrowers.
OTHER REAL ESTATE OWNED
Other real estate acquired as a result of foreclosure is initially
recorded at fair market value less estimated selling costs. Costs
associated with improving the property are capitalized to the extent
fair market value is not exceeded. Costs of owning other real estate
are expensed as incurred by the Banks.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method
over the estimated useful lives of the respective assets for financial
reporting purposes and using straight-line and accelerated methods for
income tax purposes. Additions and major improvements are capitalized
while routine maintenance and repairs and gain or loss on dispositions
are recognized currently.
INTANGIBLE ASSETS
Goodwill arising from acquisitions is amortized on a straight-line
basis over a period of 180 months.
On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS
121") which requires that an impairment of long-lived assets be
recognized if the future cash flows expected from the use of the asset
and its eventual disposition is less than the carrying amount of the
asset. This Statement had no effect on the Company's financial position
or results of operations upon adoption. However, during 1997, the
Company recognized a loss of approximately $350,000 (which is included
in other operating expense) due to the impairment of goodwill
associated with the purchase of a branch location in a prior year.
-43-
<PAGE> 45
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
("SFAS 109") which is an asset and liability approach. The asset and
liability approach requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of other
assets and liabilities.
ADVERTISING
Advertising costs are expensed as incurred.
ESTIMATED FAIR VALUES
In accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Instruments" ("SFAS 107"),
the Company discloses current market value information related to
certain assets and liabilities, both on- and off-balance sheet. The
estimated fair values of the Banks' financial instruments are detailed
in Note 12.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS
The Company adopted Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125"), which prescribes
accounting standards to be followed when the Company transfers control
over financial assets to third parties. The adoption of SFAS 125 did
not have a significant impact on the Company's results of operations or
its financial position.
NET INCOME PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted-average number of shares outstanding for the year. 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 calculations in the respective years
presented. However, the weighted-average number of shares outstanding
used in computing basic and diluted earnings per share are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Basic earnings per share 4,319,216 3,769,381 3,696,131
Dilutive options and warrants 490,536 874,966 622,873
--------- --------- ---------
Diluted earnings per share 4,809,752 4,644,347 4,319,004
========= ========= =========
</TABLE>
Options to purchase 24,500 shares of common stock at $19.50 per share
were granted at December 31, 1997, but were not included in the
computation of diluted EPS for 1998 because the options' exercise price
was greater than the average market price of the common shares. At
December 31, 1998, 23,975 of these options, which expire on December
31, 2007, were still outstanding.
-44-
<PAGE> 46
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), which establishes standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. The
purpose of reporting comprehensive income is to present a measure of
all changes in equity that result from recognized transactions and
other economic events of the period other than investments by owners
and distributions to owners. The Company has displayed the components
of comprehensive income in the accompanying consolidated statements of
income. Comprehensive income for the years ended December 31, 1997 and
1996 have been presented to provide comparable information to the year
ended December 31, 1998.
SEGMENT INFORMATION
Mountain and Charter both provide community banking services. The Banks
are subject to substantially the same regulatory requirements and their
customers share similar characteristics. Accordingly, the Banks operate
in one business segment.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal quarters
of all fiscal years beginning after June 15, 1999 (January 1, 2000 for
the Company). SFAS 133 requires all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether the derivative is designated
as part of a hedge transaction and, if it is, the type of hedge
transaction. Due to the present limited use of derivative instruments,
management anticipates the adoption of SFAS 133 will not have a
significant impact on the Company's results of operations or its
financial position.
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.
-45-
<PAGE> 47
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. CASH AND DUE FROM BANKS
The Banks are required to maintain average reserve balances through
deposits with the Federal Reserve Bank or other banks. The Banks'
requirement for reserves at December 31, 1998 and 1997 was
approximately $2,639,000 and $1,955,000, respectively.
4. INVESTMENT SECURITIES (INCLUDING MORTGAGE-BACKED CERTIFICATES)
The amortized cost and estimated market value of investment securities
held-to-maturity at December 31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
1998
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S Government Agencies $1,000,000 $ -- $ 36,218 $ 963,782
Tax exempt bonds 1,019,769 26,249 -- 1,046,018
---------- ------- ---------- ----------
$2,019,769 $26,249 $ 36,218 $2,009,800
---------- ------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
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>
The amortized cost and estimated market value of investment securities
held-to-maturity at December 31, 1998 by contractual maturity are shown
below:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
<S> <C> <C>
Due after one year through five years $1,219,442 $1,195,646
Due after five years through ten years 700,000 711,047
Due after ten years 100,327 103,107
---------- ----------
$2,019,769 $2,009,800
---------- ----------
</TABLE>
-46-
<PAGE> 48
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The amortized cost and estimated market value for securities
available-for-sale (including mortgage-backed certificates) at December
31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
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 $ -- $ 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>
<TABLE>
<CAPTION>
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>
The amortized cost and estimated market value of investment securities
available-for-sale at December 31, 1998 by contractual maturity are
shown below:
<TABLE>
<CAPTION>
Amortized Market
Cost Value
<S> <C> <C>
Due in one year or less $ 9,002,987 $ 9,032,030
Due after one year through five years 18,504,883 18,688,624
Due after five years through ten years 13,450,737 13,667,915
Due after ten years 3,104,527 3,118,656
----------- -----------
44,063,134 44,507,225
Mortgage-backed certificates 10,958,304 10,928,721
----------- -----------
$55,021,438 $55,435,946
=========== ===========
</TABLE>
The scheduled maturities for mortgage-backed certificates are not
disclosed because their expected maturities will differ from
contractual maturities as borrowers may have the right to prepay
obligations with or without prepayment penalties. Proceeds from sales
of investment securities available-for-sale, including mortgage-backed
certificates, during 1998 and 1997 were $18,445,912 and $21,890,304,
respectively. During 1998, no gains or losses were realized on those
sales. Net losses of $43,495 were realized on sales during 1997. There
were no sales of investment securities during 1996; however, proceeds
from paydowns of mortgage-backed certificates were $2,011,107.
-47-
<PAGE> 49
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Investment securities with a carrying value of approximately
$36,694,137 and $28,251,727 at December 31, 1998 and 1997,
respectively, were pledged to secure deposits of public funds,
securities sold under agreements to repurchase and certain other
deposits as provided by law.
5. LOANS
The composition of the loan portfolio at December 31, 1998 and 1997 is
presented below:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Commercial $ 108,954,191 $ 99,746,972
Real estate - construction and land
development 41,955,361 39,974,467
Real estate - mortgage 30,289,402 30,619,969
Installment and other consumer 10,414,603 11,490,743
Farm land -- 7,700
------------- -------------
191,613,557 181,839,851
Less: Allowance for loan losses (3,286,602) (2,655,412)
------------- -------------
$ 188,326,955 $ 179,184,439
============= =============
</TABLE>
Activity in the allowance for loan losses for the three years ended
December 31, 1998 is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Beginning balance $ 2,655,412 $ 2,771,784 $ 2,543,408
Provision for loan losses 222,500 188,300 645,000
Recoveries 731,633 188,287 162,203
Charge-offs (322,943) (492,959) (578,827)
----------- ----------- -----------
Ending balance $ 3,286,602 $ 2,655,412 $ 2,771,784
=========== =========== ===========
</TABLE>
At December 31, 1998, 1997 and 1996, the Banks had aggregate
non-accrual or reduced rate loans of $223,270, $394,557 and $1,062,206,
respectively. If interest on these loans had been accrued throughout
the year, income on these loans would have been increased by
approximately $16,633 in 1998, $74,163 in 1997 and $158,000 in 1996.
Additionally, at December 31, 1998 and 1997, the Banks held impaired
loans as defined by SFAS 114 of approximately $622,000 and $518,000,
respectively, for which specific allocations of approximately $72,000
and $35,000, respectively, have been established within the allowance
for loan losses. The average recorded investment and related interest
income recognized on these loans were approximately $630,000 and
$69,000 in 1998, respectively, and $617,000 and $51,000, respectively,
in 1997.
-48-
<PAGE> 50
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. PREMISES AND EQUIPMENT
At December 31, 1998 and 1997, premises and equipment balances are as
follows:
<TABLE>
<CAPTION>
Useful
Lives 1998 1997
<S> <C> <C> <C>
Land $ 1,012,580 $ 1,098,580
Bank buildings 30-40 years 4,004,739 4,458,799
Equipment, furniture and fixtures 3-10 years 3,144,264 2,657,058
----------- -----------
8,161,583 8,214,437
Less: Accumulated depreciation (3,058,420) (2,685,118)
----------- -----------
$ 5,103,163 $ 5,529,319
=========== ===========
</TABLE>
7. DEPOSITS
The maturities of the Banks' time deposits at December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999 $ 76,799,102
2000 4,224,722
2001 3,581,937
2002 5,153,571
2003 5,747,782
Thereafter -
------------
$ 95,507,114
============
</TABLE>
8. BORROWINGS
The Banks utilize short-term borrowings as needed for liquidity
purposes in the form of federal funds purchased and securities sold
under agreements to repurchase, which generally represent overnight
borrowing transactions ($7,274,034 and $6,431,752 at December 31, 1998
and 1997, respectively). At December 31, 1998 and 1997, the Banks have
federal funds lines from other banks totaling $26,750,000 and
$25,750,000, respectively. There were no amounts outstanding under
these short-term commitments at December 31, 1998 and 1997.
Additionally, during December 1996, the Banks entered into $4,000,000
of short-term fixed rate advances with an average interest rate of
5.75% from the Federal Home Loan Bank of Atlanta (the "FHLBA"). The
advances were repaid in 1997.
-49-
<PAGE> 51
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Banks had outstanding long-term fixed rate advances from the FHLBA
of $4,786,938 and $5,282,847 at December 31, 1998 and 1997,
respectively. The average interest rate paid on the long-term advances
during 1998 and 1997 was 6.67% and 6.66%, respectively. All the
advances are collateralized by certain 1-4 family residential
properties and investment securities as required by the FHLBA. At
December 31, 1998, aggregate principal maturities of the advances are
as follows:
<TABLE>
<S> <C>
1999 $ 672,766
2000 1,887,797
2001 -
2002 640,000
2003 -
Thereafter 1,586,375
----------
$4,786,938
==========
</TABLE>
9. INCOME TAXES
The components of income tax expense for the years ended December 31,
1998, 1997, and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Federal:
Current $2,553,480 $2,241,514 $1,825,962
Deferred provision 2,667 41,148 7,611
---------- ---------- ----------
2,556,147 2,282,662 1,833,573
State:
Current 298,549 110,882 128,959
Deferred provision 296 4,572 573
---------- ---------- ----------
$2,854,992 $2,398,116 $1,963,105
========== ========== ==========
</TABLE>
The difference between income tax expense and the tax computed by
applying the statutory federal income tax rate to income before income
taxes is explained as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Income before income taxes $ 7,809,612 $ 6,839,091 $ 5,466,397
=========== =========== ===========
Federal income taxes at statutory rate $ 2,655,268 $ 2,325,591 $ 1,858,575
State tax 197,238 115,454 85,491
Nondeductible expenses 64,143 37,584 36,216
Interest on tax exempt securities (59,354) (34,834) (16,470)
Other (2,303) (45,679) (707)
----------- ----------- -----------
Income tax expense $ 2,854,992 $ 2,398,116 $ 1,963,105
=========== =========== ===========
Effective income tax rate 37% 35% 36%
</TABLE>
-50-
<PAGE> 52
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Significant components of the Company's deferred tax assets and
liabilities included in other assets and other liabilities in the
accompanying consolidated balance sheets as of December 31, 1998 and
1997, were as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax liabilities
Premises and equipment $ 56,858 $ 52,791
Discount on investment securities 78,255 88,469
Accrual to cash conversion -- 23,283
Unrealized gain on securities available-for-sale 156,922 137,601
-------- --------
Total deferred tax liabilities 292,035 302,144
-------- --------
Deferred tax assets
Allowance for loan losses 811,531 799,995
Gain on SBA loans 16,265 20,309
Loan fees, net 78,937 71,552
Non-accrual loans 3,534 23,889
Other -- 26,915
-------- --------
Total deferred tax assets 910,267 942,660
-------- --------
Net deferred tax assets $618,232 $640,516
======== ========
</TABLE>
10. SHAREHOLDERS' EQUITY
In connection with Mountain's formation and initial offering,
transferable warrants were issued to Mountain's organizers. The
warrants, which were assumed by the Company, allow each holder to
purchase one additional share of common stock for each share purchased
in connection with the initial offering and are exercisable for ten
years from the date of opening of Mountain (August 1988) at the initial
offering price of $5.00 per share. At December 31, 1997, 714,599
warrants were outstanding. Prior to their expiration date of August 2,
1998, 682,166 of these warrants were exercised. The remaining warrants
expired.
In connection with the merger, the Company also assumed Charter's
options for 109,037 shares. These options were granted at prices
ranging from $3.52 to $4.66 per share. All of the options were declared
fully vested in August 1995. During 1996, 1,610 of the options were
exercised at $4.66 per share. During 1997, 8,531 of the options were
exercised at various prices ranging from $3.52 to $4.66 per share.
During 1998, 7,436 of the options were exercised at various prices
ranging from $3.73 to $4.66 per share. At December 31, 1998, 91,460 of
the Charter options are outstanding.
The Company has an Incentive Stock Option Plan (the "Plan") under which
350,000 shares have been reserved. Options are granted at the average
market price, as defined in the Plan, on the date of grant. Options
vest in accordance with a schedule as determined by the Board of
Directors at each grant date. The options expire no later than ten
years from the date of grant. All options granted prior to January 1,
1996 are fully vested.
-51-
<PAGE> 53
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A summary of stock option activity in the Plan is as follows:
<TABLE>
<CAPTION>
Option price
Shares per share
<S> <C> <C>
Outstanding at December 31, 1995 94,900 $5.00 to $10.25
Granted 24,000 $ 11.75
Exercised (5,000) $ 5.00
Expired (650) $ 10.25
-------- ---------------
Outstanding at December 31, 1996 113,250 $5.00 to $11.75
Granted 24,500 $ 19.50
Exercised (10,800) $ 5.00
Exercised (1,600) $ 10.25
Expired (250) $ 10.25
Expired (1,700) $ 11.75
-------- ---------------
Outstanding at December 31, 1997 123,400 $5.00 to $19.50
Granted 49,200 $ 18.50
Exercised (350) $ 10.25
Exercised (112) $ 11.75
Exercised (51,200) $ 5.00
Expired (338) $ 11.75
Expired (525) $ 19.50
-------- ---------------
Outstanding at December 31, 1998 120,075 $5.08 to $19.50
========
</TABLE>
As of December 31, 1998, there were 160,863 options available for grant
and 41,450 options are exercisable under the Plan.
From 1990 through 1998 and pursuant to a stock bonus arrangement, the
Board of Directors granted to the president of Mountain stock options
to purchase 100,000 shares of the Company's common stock at $5.00 per
share. All 100,000 options under this arrangement were exercised during
1998. Under another arrangement, the president of Mountain had options
to purchase an additional 15,000 shares of stock at $5.00 per share.
During 1998, all options under this arrangement were exercised. The
exercise of the 115,000 options gave rise to an income tax benefit of
$695,000 to the Company. This benefit has been reflected as an addition
to paid-in capital in the accompanying consolidated balance sheet as of
December 31, 1998.
The Company accounts for employee stock options using the intrinsic
value based method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and,
accordingly, no compensation cost has been recognized in 1996, 1997 or
1998. Additionally, in accordance with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), the Company is required to disclose fair value
information about its stock-based employee compensation plans. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under
those
-52-
<PAGE> 54
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
plans consistent with the method of SFAS 123, the Company's net income
and earnings per share would have been reduced.
In order to estimate compensation cost, the Black-Scholes model was
employed using the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Dividend yield 1.07% 0.82% 0.30%
Expected life 7 years 6 years 6 years
Expected volatility 49.67% 34.93% 30.00%
Risk-free interest rate 4.90% 5.77% 5.45%
Weighted-average fair values of
options granted $10.20 $6.30 $5.82
</TABLE>
The following table sets forth the effect on net income and diluted
earnings per share:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C> <C>
Net income As reported $ 4,954,620 $ 4,440,975 $ 3,503,292
Pro forma $ 4,903,751 $ 4,425,008 $ 3,452,070
Diluted earnings As reported $ 1.03 $ 0.96 $ 0.81
per share Pro forma $ 1.02 $ 0.96 $ 0.80
</TABLE>
11. PROFIT SHARING PLAN
Effective December 31, 1996, the Company adopted a 401(k) Savings Plan
for all employees 21 years of age or older who are currently employed
with more than one year of eligible service as defined. Under the plan
provisions, employees may contribute up to the legal contribution
limit. The Company's matching contribution is equal to 100% of the
employee's contribution, up to 3% of the employee's annual
compensation. The Company's 1998 and 1997 matching contributions were
$92,266 and $77,033, respectively. In 1996, contribution expenses for
Charter and Mountain pursuant to similar plans in effect at December
31, 1996, aggregated approximately $74,000.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107 requires the disclosure of fair value information about
financial instruments, whether or not recognized in the balance sheet,
for which it is practicable to estimate fair value. In cases where
quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. The
resulting fair values may be significantly affected by the assumptions
used, including the discount rates and estimates of future cash flows.
-53-
<PAGE> 55
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Certain financial instruments and all non-financial instruments are
excluded from the disclosure requirements. The disclosures also do not
include certain servicing rights on the Company's SBA-guaranteed loan
portfolio. Accordingly, the aggregate fair value amounts presented do
not represent the underlying value of the Company.
Many of the Company's assets and liabilities are short-term financial
instruments whose carrying values approximate fair value. These items
include cash and due from banks, federal funds sold and short-term
investments, federal funds purchased and securities sold under
repurchase agreements. The methods and assumptions used to estimate the
fair value of the Company's other financial instruments are as follows:
INVESTMENT SECURITIES
Fair value for investment securities and mortgage-backed certificates
is based on quoted market prices.
LOANS
The loan portfolio is segregated into categories of loans with similar
pricing characteristics. The fair value of each category is calculated
using present value techniques based upon projected cash flows and
estimated discount rates. The calculated present values are then
reduced by an allocation of the allowance for loan losses.
DEPOSITS
The fair value of demand deposits, checking with interest accounts,
money-market accounts and savings accounts are the amounts payable on
demand at the reporting date. The fair value of fixed-maturity time
deposits is estimated using the rates currently offered for deposits of
similar remaining maturities.
BORROWINGS
Fair value has been determined by calculating the present value of
future principal and interest cash flows.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT The fair
value of commitments to extend credit and standby letters of credit is
generally determined using the fees currently charged to enter into
similar agreements, taking into account the present creditworthiness of
the counterparties. The amount was deemed to be immaterial for
disclosure under SFAS 107.
-54-
<PAGE> 56
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The carrying value of financial instruments and their related estimated
fair values as of December 31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
1998
Estimated
Carrying Fair
Value Value
<S> <C> <C>
Financial assets
Investment securities
Held-to-maturity $ 2,019,769 $ 2,009,800
Available for sale
Mortgage-backed certificates 10,928,721 10,928,721
Other 44,507,225 44,507,225
Loans, net of allowance for loan losses 188,326,955 189,597,893
Financial liabilities
Fixed-maturity time deposits 95,507,114 94,354,485
Short-term borrowings 7,274,034 7,274,034
Long-term debt 4,786,938 4,652,065
</TABLE>
<TABLE>
<CAPTION>
1997
Estimated
Carrying Fair
Value Value
<S> <C> <C>
Financial assets
Investment securities
Held-to-maturity $ 1,521,291 $ 1,472,473
Available for sale
Mortgage-backed certificates 4,877,279 4,877,279
Other 39,476,430 39,476,430
Loans, net of allowance for loan losses 179,184,439 179,115,402
Financial liabilities
Fixed-maturity time deposits 83,635,263 83,411,712
Short-term borrowings 6,431,752 6,431,752
Long-term debt 5,282,847 5,208,749
</TABLE>
13. COMMITMENTS AND CONTINGENCIES
The Company is party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments involve,
to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the balance sheets. The contract amounts of
these instruments reflect the extent of involvement the Company has in
particular classes of financial instruments.
-55-
<PAGE> 57
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
amounts of those instruments. The Company uses the same credit policies
in making commitments and conditional obligations as they do for
on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. At December 31,
1998 and 1997, unfunded commitments to extend credit were approximately
$77,757,000 and $61,222,000, respectively. In many instances, customers
may not draw down on approved lines of credit or may not draw on these
lines to the full amount approved, thereby reducing the Company's need
to maintain liquidity to fund these obligations. The Company evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained if deemed necessary by the Company upon extension
of credit is based on management's credit evaluation of the customer.
Collateral varies but may include accounts receivable, inventory,
property, plant, equipment, and income-producing commercial properties.
Letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. At December
31, 1998 and 1997, commitments under letters of credit aggregated
approximately $2,571,000 and $2,468,000, respectively. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Collateral varies
but may include accounts receivable, inventory, equipment, certificates
of deposit, and property. Since most of the letters of credit are
expected to expire without being drawn upon, they do not necessarily
represent future cash requirements.
Most of the Company's business activity is with customers located
within the Atlanta metropolitan area. The Banks' only concentration of
credit is for real estate development, construction, and mortgage
purposes, or to businesses dependent upon the real estate business. The
Company has no highly leveraged transactions and has no foreign credits
in its loan portfolio.
The Company is a defendant in litigation arising through the normal
course of business. In the opinion of management, the ultimate outcome
of such litigation would not have a material adverse effect on the
Company's financial statements.
The Company leases office space under noncancellable operating leases.
The future minimum rental payments under these leases are immaterial at
December 31, 1998.
-56-
<PAGE> 58
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. RELATED PARTY TRANSACTIONS
At December 31, 1998 and 1997, deposits obtained from directors,
executive officers and their related interests were approximately
$11,894,375 and $11,081,289, respectively. These deposits were taken in
the normal course of business at market interest rates.
Loans to directors and their related interests, in the aggregate, were
as follows:
<TABLE>
<S> <C>
Balance at December 31, 1996 $ 4,792,345
New loans 4,546,772
Payoffs (3,885,041)
-----------
Balance at December 31, 1997 5,454,076
New loans 2,660,279
Payoffs (5,535,018)
-----------
Balance at December 31, 1998 $ 2,579,337
-----------
</TABLE>
Such loans were made in the ordinary course of business at the
Company's normal credit terms, including interest and collateral, and
do not represent more than a normal risk of collection.
15. REGULATORY CAPITAL
The Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken,
could have a direct material effect on the Banks' financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Banks must meet specific capital
guidelines that involve quantitative measures of the Banks' assets,
liabilities, and certain off-balance-sheet items as calculated and are
also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Banks to maintain minimum amounts and ratios of
total and Tier I capital to risk-weighted assets and Tier I capital to
average assets, all as defined in the regulations. Management believes,
as of December 31, 1998, that the Banks meet all capital adequacy
requirements to which they are subject.
As of December 31, 1998 and 1997, the most recent notification from the
Office of the Comptroller of the Currency categorized Mountain as "well
capitalized" and the FDIC categorized Charter as "well capitalized"
under the regulatory framework for prompt corrective action. To be
categorized as "well capitalized" the Banks must maintain minimum total
risk-based, Tier I risk-based and Tier I leverage ratios as set fort in
the table. There are no conditions or events since those notifications
that management believes have changed the Banks' categories.
-57-
<PAGE> 59
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Banks' actual capital amounts and ratios are presented in the table
below:
<TABLE>
<CAPTION>
TO BE "WELL
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(000'S) (000'S) (000'S)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total capital (to Risk-Weighted
Assets)
Consolidated $ 39,857 17.8% >= $17,899 >= 8.0% N/A
Mountain National Bank $ 21,627 19.1% >= $ 9,040 >= 8.0% >= $ 11,300 >= 10.0%
Charter Bank & Trust $ 16,155 14.7% >= $ 8,771 >= 8.0% >= $ 10,964 >= 10.0%
Tier I Capital (to Risk-Weighted
Assets)
Consolidated $ 37,054 16.6% >= $ 8,949 >= 4.0% N/A
Mountain National Bank $ 20,209 17.9% >= $ 4,520 >= 4.0% >= $ 6,780 >= 6.0%
Charter Bank & Trust $ 14,784 13.5% >= $ 4,385 >= 4.0% >= $ 6,578 >= 6.0%
Tier I Capital (to Average Assets)
Consolidated $ 37,054 11.8% >= $ 8,754 >= 3.0% N/A
Mountain National Bank $ 20,209 14.0% >= $ 4,324 >= 3.0% >= $ 7,207 >= 5.0%
Charter Bank & Trust $ 14,784 8.9% >= $ 5,005 >= 3.0% >= $ 8,342 >= 5.0%
</TABLE>
<TABLE>
<CAPTION>
TO BE "WELL
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(000'S) (000'S) (000'S)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total capital (to Risk-Weighted
Assets)
Consolidated $34,393 16.9% >= $16,325 >= 8.0% N/A
Mountain National Bank $19,044 17.2% >= $ 8,863 >= 8.0% >= $11,079 >= 10.0%
Charter Bank & Trust $14,258 15.1% >= $ 7,540 >= 8.0% >= $ 9,425 >= 10.0%
Tier I Capital (to Risk-Weighted
Assets)
Consolidated $31,841 15.6% >= $ 8,162 >= 4.0% N/A
Mountain National Bank $17,658 16.0% >= $ 4,432 >= 4.0% >= $ 6,648 >= 6.0%
Charter Bank & Trust $13,080 13.9% >= $ 3,770 >= 4.0% >= $ 5,655 >= 6.0%
Tier I Capital (to Average Assets)
Consolidated $31,841 11.7% >= $ 8,149 >= 3.0% N/A
Mountain National Bank $17,658 12.9% >= $ 4,110 >= 3.0% >= $ 6,850 >= 5.0%
Charter Bank & Trust $13,080 9.7% >= $ 4,035 >= 3.0% >= $ 6,724 >= 5.0%
</TABLE>
-58-
<PAGE> 60
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Banking regulations restrict the amount of dividends which the Banks
may pay to the Company without obtaining prior approval from their
respective regulators. Under these regulations, retained earnings of
the Banks available for payment of dividends to the Company without
prior regulatory approval at December 31, 1998 is approximately
$9,896,000. Additionally, during 1998 Charter appropriated
approximately $3,000,000 in retained earnings to meet its legal lending
limit requirements.
16. CONDENSED FINANCIAL STATEMENTS OF HOLDING COMPANY
Following are the condensed balance sheets of Merit Holding Corporation
at December 31, 1998 and 1997, and the related condensed statements of
income and of cash flows for the three years ended December 31, 1998.
<TABLE>
<CAPTION>
BALANCE SHEETS
December 31,
1998 1997
<S> <C> <C>
Assets
Cash $ 543,783 $ 1,164,744
The Bankers Bank stock 707,000 --
Investment in bank subsidiaries 35,647,266 31,119,336
Other assets 695,000 --
----------- -----------
$37,593,049 $32,284,080
=========== ===========
Liabilities and Shareholders' Equity
Dividends payable $ 280,357 $ 198,312
Other liabilities -- 19,940
Shareholders' equity 37,312,692 32,065,828
=========== ===========
$37,593,049 $32,284,080
----------- -----------
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the year ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Dividends from bank subsidiaries $ 1,200,000 $ 100,000 $ --
Operating expenses (793,667) (253,524) (156,411)
----------- ----------- -----------
Income (loss) before income taxes and
equity in earnings of bank subsidiaries 406,333 (153,524) (156,411)
Income tax benefit 293,656 93,804 53,179
----------- ----------- -----------
Income (loss) before equity in earnings
of bank subsidiaries 699,989 (59,720) (103,232)
Equity in undistributed earnings
of bank subsidiaries 4,254,631 4,500,695 3,606,524
----------- ----------- -----------
Net income $ 4,954,620 $ 4,440,975 $ 3,503,292
----------- ----------- -----------
</TABLE>
-59-
<PAGE> 61
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the year ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 4,954,620 $ 4,440,976 $ 3,503,292
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities
Undistributed equity in income
of bank subsidiaries (4,254,631) (4,500,695) (3,606,524)
Amortization of organizational costs -- -- 4,584
(Increase) decrease in other assets (238,696) (15,178) (53,179)
(Decrease) increase in other liabilities (19,940) (54) 15,000
----------- ----------- -----------
Net cash provided by (used in)
operating activities 441,353 (74,951) (136,827)
----------- ----------- -----------
Cash flows from investing activities
Purchases of The Bankers Bank stock (707,000) -- --
----------- ----------- -----------
Net cash used in investing activities (707,000) -- --
----------- ----------- -----------
Cash flows from financing activities
Dividends paid (841,086) (593,982) --
Proceeds from exercise of stock
options/warrants 4,277,640 1,430,883 240,383
Purchase of treasury stock (3,791,868) (22,410) --
----------- ----------- -----------
Net cash (used in) provided by
financing activities (355,314) 814,491 240,383
----------- ----------- -----------
Net (decrease) increase in cash (620,961) 739,540 103,556
Cash at beginning of the period 1,164,744 425,204 321,648
----------- ----------- -----------
Cash at end of the period $ 543,783 $ 1,164,744 $ 425,204
=========== =========== ===========
Supplemental data
Tax benefit from exercise of
stock options $ 695,000 $ -- $ --
=========== =========== ===========
</TABLE>
-60-
<PAGE> 62
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
17. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
1998 Quarters 1997 Quarters
(in thousands, except per share data) (in thousands, except per share data)
----------------------------------------- -----------------------------------------
Fourth Third Second First Fourth Third Second First
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest and
dividend income $5,923 $5,946 $5,880 $5,486 $ 5,673 $ 5,307 $ 5,018 $ 4,750
Net interest income 3,754 3,764 3,669 3,535 3,691 3,490 3,389 3,153
Provision for loan losses - 50 75 98 153 (265) 150 150
Total non-interest income 415 371 394 370 387 358 346 356
Total non-interest expense 2,052 2,136 2,066 1,985 1,937 2,304 1,971 1,933
Income before income taxes 2,116 1,949 1,922 1,823 1,988 1,810 1,615 1,427
Net income 1,343 1,238 1,220 1,154 1,285 1,173 1,050 933
Basic earnings per share 0.29 0.27 0.30 0.29 0.33 0.32 0.28 0.25
Diluted earnings per share 0.28 0.26 0.26 0.24 0.27 0.25 0.23 0.21
Dividends per share 0.06 0.05 0.05 0.05 0.05 0.04 0.04 0.04
</TABLE>
18. SUBSEQUENT EVENT (UNAUDITED)
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. Consummation of the transaction
is subject to the negotiation 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.
-61-
<PAGE> 63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There has been no occurrence requiring a response to this Item.
PART III
Except as to information with respect to executive officers which is
contained in a separate heading under Item 1 to this Form 10-K, the information
required by Part III of Form 10-K is, pursuant to General Instruction G(3) of
Form 10-K, incorporated by reference from the Company's definitive proxy
statement (the "Proxy Statement") to be filed pursuant to Regulation 14A for the
Company's 1999 Annual Meeting of Shareholders. The Company will, within 120 days
of the end of its fiscal year, file with the Securities and Exchange Commission
a definitive Proxy Statement pursuant to Regulation 14A.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning directors and executive officers of the
Registrant is set forth in the Proxy Statement under the headings "Election of
Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of
1934," which information is incorporated herein by reference. The name, age and
position of each executive officer of the Company is set forth under the heading
"Executive Officers" in Item 1 of this Report.
ITEM 11. EXECUTIVE COMPENSATION.
The information concerning executive compensation is set forth in the
Proxy Statement under the heading "Executive Compensation," which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information concerning security ownership of certain beneficial
owners and management is set forth in the Proxy Statement under the heading
"Security Ownership of Certain Beneficial Owners and Management," which
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information concerning certain relationships and related
transactions is set forth in the Proxy Statement under the headings "Certain
Transactions" and "Compensation Committee Interlocks and Insider Participation,"
which information is incorporated herein by reference.
-62-
<PAGE> 64
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
(a)(1). Financial Statements and Auditors' Report.
The following financial statements are filed with this report:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules.
All financial statement schedules of the Registrant have been
omitted as the required information is inapplicable or the information is
presented in the financial statements or related notes.
(3) Exhibits.
The following exhibits are filed with or incorporated by reference into
this report. The exhibits which are denominated by an asterisk (*) were
previously filed as a part of, and are hereby incorporated by reference from
either (i) a Registration Statement on Form S-4 under the Securities Act of 1933
for the Registrant, Registration No. 33-39451 ("1991 S-4"), (ii) the Annual
Report on Form 10-K for the year ended December 31, 1991 ("1991 10-K"), (iii)
the Annual Report on Form 10-KSB for the year ended December 31, 1994 ("1994
10-KSB"), (iv) a Registration Statement on Form S-4 for the Registrant,
Registration No. 33-84634 ("1994 S-4"), (v) the Annual Report on Form 10-KSB for
the year ended December 31, 1995 ("1995 10-KSB"), or (vi) the Annual Report on
Form 10-K for the year ended December 31, 1997 ("1997 10-K"). Unless otherwise
indicated, the exhibit number corresponds to the exhibit number in the
referenced document.
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ----------- ----------------------
<S> <C>
*2.1 - Agreement and Plan of Merger, including exhibits thereto, among Mountain
Holding Corporation, Charter Bank & Trust Co. and Mountain Acquisition
Corporation, dated as of September 13, 1994 (1994 S-4).
*3(i).1 - Articles of Incorporation dated November 26, 1990 (1991 S-4, Exhibit 3.1).
</TABLE>
-63-
<PAGE> 65
<TABLE>
<S> <C>
*3(i).2 - Articles of Amendment dated January 8, 1991 (1991 S-4, Exhibit 3.2).
*3(i).3 - Articles of Amendment dated August 25, 1994 (1994 S-4).
*3(ii).1 - By-Laws adopted November 27, 1990 (1991 S-4, Exhibit 3.3).
*3(ii).2 - Amendment to Bylaws adopted December 30, 1994 (1994 10-KSB).
*4.1 - Specimen Common Stock Certificate (1991 S-4).
*4.2 - Form of Merit Warrant Agreement (1994 S-4).
*10.1 - Employment Agreement dated September 1, 1995 by and among the Registrant,
Mountain National Bank and J. Randall Carroll (1995 10-KSB).
*10.2 - Data Processing Agreement dated March 1, 1988 between Mountain National
Bank and Financial Data Dimensions, Inc. (now ProVesa, Inc.) (1991 S-4).
*10.3 - 1991 Incentive Stock Option Plan of Registrant, as amended (1991 10-K).
*10.5 - Employment Agreement dated September 1, 1995 by and among the Registrant,
Charter Bank and Trust Co. and Ronald H. Francis (1995 10-KSB).
*10.6 - Lease Agreement dated June 15, 1994 between Charter Bank and Trust Co. and
Stillhouse Associates, Ltd. (1994 10-KSB).
*10.7 - Lease Agreement dated September 14, 1988 between Charter Bank and Trust
Co. and Dehco, Inc. (1994 10-KSB).
*10.8 - Data Processing Service Agreement dated December 30, 1994 between Charter
Bank and Trust Co. and FiServe Basis, Inc. (1994 10-KSB).
*10.9 - Lease Agreement dated December 1, 1995 between Mountain National Bank and
Sullivan 75, L.P. (1995 10-KSB).
*10.10 - Lease Agreement dated November 18, 1997 between Charter Bank & Trust and
Post Apartment Homes, L.P. (1997 10-K).
*10.11 - Sublease Agreement dated October 31, 1997 between NationsBank, N.A. as
Sublessor and Mountain National Bank as Subleassee (1997 10-K).
*22.1 - Subsidiaries of the Registrant (1994 10-KSB).
23.1 - Consent of PricewaterhouseCoopers LLP.
27 - Financial Data Schedule (for SEC use only).
</TABLE>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1998.
-64-
<PAGE> 66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MERIT HOLDING CORPORATION
Date: March 15, 1999
By: /s/ J. Randall Carroll
--------------------------------------
J. Randall Carroll
Chairman of the Board,
and Chief Executive Officer
Date: March 15, 1999
By: /s/ Ronald H. Francis
--------------------------------------
Ronald H. Francis
President and Chief Financial Officer
(principal financial and
accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ J. Randall Carroll Chairman of the Board March 15, 1999
- ----------------------------------- and Chief Executive Officer
J. Randall Carroll
/s/ Michael J. Coles Director March 15, 1999
- -----------------------------------
Michael J. Coles
/s/ Ronald H. Francis President, Chief Financial March 15, 1999
- ----------------------------------- Officer and Director
Ronald H. Francis
/s/ Patrick H. Hickok Director March 15, 1999
- ------------------------------------
Patrick H. Hickok
/s/ Walter J. McCloud, II Director March 15, 1999
- -----------------------------------
Walter J. McCloud, II
</TABLE>
<PAGE> 67
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
23.1 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule (for SEC use only).
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-4310) and the Registration Statement on Form S-3
(No. 333-14307) of Merit Holding Corporation of our report dated January 26,
1999 appearing on page 38 of this Form 10-K.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Atlanta, Georgia
March 23, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 21,592,764
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 24,697,148
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 57,774,496
<INVESTMENTS-CARRYING> 2,019,769
<INVESTMENTS-MARKET> 2,009,800
<LOANS> 191,613,557
<ALLOWANCE> 3,286,602
<TOTAL-ASSETS> 306,366,434
<DEPOSITS> 254,613,980
<SHORT-TERM> 7,274,034
<LIABILITIES-OTHER> 2,378,790
<LONG-TERM> 4,786,938
0
0
<COMMON> 12,116,240
<OTHER-SE> 25,196,452
<TOTAL-LIABILITIES-AND-EQUITY> 306,366,343
<INTEREST-LOAN> 18,274,168
<INTEREST-INVEST> 3,250,360
<INTEREST-OTHER> 1,710,398
<INTEREST-TOTAL> 23,234,926
<INTEREST-DEPOSIT> 7,761,545
<INTEREST-EXPENSE> 8,513,192
<INTEREST-INCOME-NET> 14,721,734
<LOAN-LOSSES> 222,500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,239,431
<INCOME-PRETAX> 7,809,612
<INCOME-PRE-EXTRAORDINARY> 4,954,620
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,954,620
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.03
<YIELD-ACTUAL> 5.56
<LOANS-NON> 223,270
<LOANS-PAST> 12,500
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,655,412
<CHARGE-OFFS> 322,943
<RECOVERIES> 731,633
<ALLOWANCE-CLOSE> 3,286,602
<ALLOWANCE-DOMESTIC> 3,286,602
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
