<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended Commission File Number
JUNE 30, 1999 0-25938
MERIT HOLDING CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
GEORGIA 58-1934011
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5100 LAVISTA ROAD, P. O. BOX 49, TUCKER, GEORGIA 30085-0049
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 770-491-8808
Not Applicable
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Common Stock, $2.50 Par Value 4,777,316
- ----------------------------- ---------------------------------
Class Outstanding as of August 10, 1999
<PAGE> 2
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
MERIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------------- --------------
ASSETS
------
<S> <C> <C>
Cash and due from banks $ 18,722,663 $ 21,592,764
Federal funds sold and other short-term investments 16,174,223 24,697,148
Investment securities, at cost (market
value of $1,962,687 and $2,009,800, respectively) 2,019,009 2,019,769
Mortgage-backed securities available-for-sale 16,177,378 10,928,720
Securities available-for-sale (Note 5) 42,428,092 44,507,226
Federal Reserve Bank stock 299,850 299,850
Federal Home Loan Bank stock 913,600 1,331,700
The Bankers Bank stock 707,000 707,000
Loans, less allowance for loan losses
of $3,388,903 and $3,286,602 (Notes 3 and 4) 203,306,532 188,326,955
Real estate owned 187,587 187,587
Premises and equipment, net 4,991,158 5,103,163
Accrued interest receivable and other assets 9,036,567 6,664,552
------------ ------------
Total assets $314,963,659 $306,366,434
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits:
Demand $ 65,489,408 $ 71,527,979
Checking with interest 41,219,167 42,027,075
Money-market accounts 47,533,295 42,214,042
Savings 3,408,265 3,337,770
Time, $100,000 and over 35,134,936 34,193,322
Other time 58,521,118 61,313,792
------------ ------------
251,306,189 254,613,980
Short-term borrowings 15,924,311 7,274,034
Long-term debt 4,536,928 4,786,938
Accrued interest payable and other liabilities 2,901,276 2,378,790
------------ ------------
Total liabilities 274,668,704 269,053,742
------------ ------------
Shareholders' equity
Common stock, $2.50 par value; 10,000,000 shares
authorized; 4,851,196 and 4,846,496 shares issued and
4,777,316 and 4,672,616 shares outstanding, respectively 12,127,990 12,116,240
Paid-in capital 11,285,769 11,609,162
Retained earnings 19,102,107 17,142,460
Accumulated other comprehensive income (600,233) 259,108
Treasury stock, 73,880 and 173,880 shares at cost, respectively (1,620,678) (3,814,278)
------------ ------------
Total shareholders' equity 40,294,955 37,312,692
------------ ------------
Total liabilities and shareholders' equity $314,963,659 $306,366,434
============ ============
</TABLE>
<PAGE> 3
MERIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months
June 30, June 30,
1999 1998 1999 1998
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 4,832,740 $ 4,577,296 $ 9,397,389 $ 9,069,422
Interest on securities 902,786 786,872 1,810,942 1,515,122
Interest on federal funds sold
and other short-term investments 160,111 487,010 373,547 724,002
Dividends The Banker's Bank stock 0 0 35,000 0
Dividends on Federal Reserve Bank stock 4,497 4,498 8,995 8,996
Dividends on Federal Home Loan Bank stock 18,703 24,262 42,870 48,262
----------- ----------- ------------ ------------
Total interest and dividend income 5,918,837 5,879,938 11,668,743 11,365,804
Interest expense on deposits 1,707,517 2,024,176 3,420,642 3,823,844
Interest expense on FHLB advances 76,281 75,007 154,047 161,038
Interest expense on short-term borrowings 113,106 111,539 215,360 176,389
----------- ----------- ------------ ------------
Total interest expense 1,896,904 2,210,722 3,790,049 4,161,271
----------- ----------- ------------ ------------
Net interest income 4,021,933 3,669,216 7,878,694 7,204,533
Provision for loan losses 113,669 75,000 175,871 172,500
----------- ----------- ------------ ------------
Net interest income after
provision for loan losses 3,908,264 3,594,216 7,702,823 7,032,033
----------- ----------- ------------ ------------
Non-interest income:
Service charges and fees on deposits 247,427 266,642 529,172 539,076
Mutual fund sales fees 26,989 17,360 38,578 30,093
Other income 186,668 110,151 320,425 195,112
----------- ----------- ------------ ------------
Total non-interest income 461,084 394,153 888,175 764,281
----------- ----------- ------------ ------------
Non-interest expense:
Salaries and other personnel 1,273,089 1,068,045 2,501,881 2,184,116
Occupancy and equipment 352,290 372,279 689,963 683,933
Advertising and marketing 33,443 31,037 70,352 58,744
Legal 80,500 38,499 133,100 70,998
Data processing 42,365 48,013 92,795 96,534
Directors' fees 67,250 63,100 124,400 126,800
Other operating 554,647 445,633 1,004,003 830,284
----------- ----------- ------------ ------------
Total non-interest expense 2,403,584 2,066,606 4,616,494 4,051,409
----------- ----------- ------------ ------------
Income before income taxes 1,965,764 1,921,763 3,974,504 3,744,905
Provision for income taxes 710,585 701,424 1,441,578 1,370,322
----------- ----------- ------------ ------------
Net income $ 1,255,179 $ 1,220,339 $ 2,532,926 $ 2,374,583
=========== =========== ============ ============
Other comprehensive income, before tax
Unrealized gains (losses) on securities
Unrealized holding gains(losses) arising during period $ (929,573) $ (26,589) $ (1,374,368) $ 4,389
Income tax (expense) benefit related to items of other
comprehensive income 348,145 9,838 515,026 (1,624)
----------- ----------- ------------ ------------
Other comprehensive income, net of tax $ (581,428) $ (16,751) $ (859,342) $ 2,765
----------- ----------- ------------ ------------
Comprehensive income $ 673,751 $ 1,203,588 $ 1,673,584 $ 2,377,348
=========== =========== ============ ============
Basic earnings per share $ .26 $ .30 $ .53 $ .59
=========== =========== ============ ============
Diluted earnings per share $ .26 $ .26 $ .52 $ .50
=========== =========== ============ ============
</TABLE>
(See notes to consolidated financial statements)
2
<PAGE> 4
MERIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
1999 1998
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,532,926 $ 2,374,583
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 297,818 267,304
Net amortization of premiums on securities 51,286 31,372
Provision for loan losses 175,871 172,500
Loss (gain) on sale of other real estate (4,548)
Increase (decrease) in interest receivable 22,987 (90,595)
Decrease in interest payable (221,386) (38,769)
Increase (decrease) in accrued expenses and other liabilities 564,995 (290,814)
Increase in prepaid expenses and other assets (46,086) (3,134,418)
------------ ------------
Net cash provided (used) by operating activities 3,378,411 (713,385)
------------ ------------
Cash flows from investing activities:
Purchases of "available-for-sale" investment securities (20,697,124) (16,715,825)
Proceeds from maturities of "available-for-sale" investment securities 16,102,708 10,756,121
Net sales of Federal Home Loan Bank stock 418,100
Proceeds from sale of other real estate 24,648
Loans made to customers, net (15,231,452) (3,076,391)
Capital expenditures (127,576) (459,922)
------------ ------------
Net cash used in investing activities (19,535,344) (9,471,369)
------------ ------------
Cash flows from financing activities:
Increase in short-term borrowing 8,650,277 1,986,458
Net (decrease) in Federal Home Loan Bank advances (250,010) (247,291)
Net (decrease) increase in deposits (3,307,791) 22,776,403
Dividends paid (566,996) (398,115)
Exercise of stock warrants 19,458 1,541,375
Purchase of treasury stock (2,669,856)
Net cash from business acquisition 218,969
------------ ------------
Net cash provided by financing activities 4,763,907 22,988,974
------------ ------------
Net (decrease) increase in cash and cash equivalents (11,393,026) 12,804,220
Cash and cash equivalents at beginning of period 46,289,912 31,879,659
------------ ------------
Cash and cash equivalents at end of period $ 34,896,886 $ 44,683,879
============ ============
Supplemental data:
Interest paid $ 4,002,502 $ 4,344,776
============ ============
Income taxes paid $ 1,310,000 $ 1,836,035
============ ============
</TABLE>
(See notes to consolidated financial statements)
3
<PAGE> 5
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements for Merit Holding
Corporation (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statement presentation. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
June 30, 1999 are not necessarily indicative of trends or results to be
expected for the year ended December 31, 1999. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
NOTE 2 - ACQUISITION
On January 29, 1999, the Company acquired Source Capital Group I, Inc., an
Atlanta-based equipment leasing company (now operated as Merit Leasing
Corporation, a subsidiary of Mountain National Bank), in exchange for 100,000
shares of the Company's treasury stock, valued at approximately $1,860,000.
Tangible assets acquired had an estimated fair market value approximating
$3,783,000 and liabilities assumed had an estimated fair market value
approximating $3,233,000. The acquisition was accounted for using the purchase
method of accounting; thus, the results of operations are included in the
Company's consolidated statements of income and comprehensive income from the
date of acquisition. The purchase price has been allocated to the individual
assets and liabilities on the basis of their respective fair market values at
the date of acquisition, which were determined based on management's best
estimate. The excess (approximately $1,310,000) of the purchase price over the
assets acquired and liabilities assumed has been recorded as goodwill and is
being amortized using the straight-line method over fifteen years.
NOTE 3 - LOANS
Loans are stated at unpaid principal balances, net of unearned income and
deferred loan fees. Interest is accrued only if deemed collectible. Generally
the Company's policy is not to accrue interest on loans delinquent over ninety
days unless the loan is well secured and in the process of collection.
4
<PAGE> 6
<TABLE>
<CAPTION>
Loans consist of:
(in thousands)
June 30, 1999 December 31, 1998
---------------------- --------------------
<S> <C> <C> <C> <C>
Commercial $ 120,042 58% $108,954 57%
Real estate - construction
and land development 46,880 23% 41,955 22%
Real estate - mortgages 27,308 13% 30,290 16%
Installment and other
Consumer 12,465 6% 10,415 5%
--------- ----- -------- -------
206,695 100% 191,614 100%
Less allowance for loan losses (3,389) (3,287)
--------- --------
$ 203,306 $188,327
========= ========
</TABLE>
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
A provision for loan losses is charged to operations based on management's
evaluation of potential losses in the loan portfolio. Such evaluation includes
a review of all loans on which full collectibility may not be reasonably
assured and considers, among other matters, management's estimate of the fair
value of the underlying collateral on specific loans, inherent losses in the
loan portfolio, and prevailing and anticipated economic conditions.
Activity in the allowance for loan losses for the six months ended June 30,
1999 and June 30, 1998 follows:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Balance, January 1 $ 3,286,602 $2,655,412
Merit Leasing Corp. acquisition 292,405
Provision charged to expense 175,871 172,500
Net recoveries (charge-offs) (365,975) 216,825
----------- ----------
Balance, June 30 $ 3,388,903 $3,044,737
=========== ==========
</TABLE>
NOTE 5 - SECURITIES AVAILABLE-FOR-SALE AND HELD-TO-MATURITY
Securities available-for-sale are securities which management believes may be
sold prior to maturity for liquidity or other reasons and are reported at fair
value, with unrealized gains and losses, net of related income taxes, reported
as a separate component of shareholders' equity. Securities held-to-maturity
are those securities for which management has both the ability and intent to
hold to maturity and are carried at amortized cost.
5
<PAGE> 7
The amortized cost and estimated market value of investment securities
held-to-maturity at June 30, 1999 and December 31, 1998 are presented below:
<TABLE>
<CAPTION>
June 30, 1999
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government Agencies $1,000,000 $ 0 $ 47,550 $ 952,450
Tax exempt bonds 1,019,009 12,762 21,533 1,010,238
---------- ---------- ---------- ----------
$2,019,009 $ 12,762 $ 69,083 $1,962,688
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
U.S. Government Agencies $1,000,000 $ 0 $ 36,218 $ 963,782
Tax exempt bonds 1,019,769 26,249 0 1,046,018
---------- ---------- ---------- ----------
$2,019,769 $ 26,249 $ 36,218 $2,009,800
========== ========== ========== ==========
</TABLE>
The amortized cost and estimated market value of investment securities
available-for-sale at June 30, 1999 and December 31, 1998 are presented below:
<TABLE>
<CAPTION>
June 30, 1999
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasuries $ 3,506,525 $ 29,725 $ 0 $ 3,536,250
U.S. Government Agencies 36,952,968 32,062 561,660 36,423,370
Mortgage-backed certificates 16,501,869 13,312 337,803 16,177,378
Tax exempt bonds 2,603,968 0 135,496 2,468,472
----------- ---------- ---------- -----------
$59,565,330 $ 75,099 $1,034,959 $58,605,470
=========== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S.Treasuries $ 6,510,685 $ 145,721 $ 0 $ 6,656,406
U.S. Government Agencies 34,947,922 308,930 19,688 35,237,164
Tax exempt bonds 2,604,527 11,611 2,483 2,613,655
Mortgage-backed certificates 10,958,304 18,414 47,997 10,928,721
----------- ---------- ---------- -----------
$55,021,438 $ 484,676 $ 70,168 $55,435,946
=========== ========== ========== ===========
</TABLE>
6
<PAGE> 8
NOTE 6 - NET INCOME PER SHARE
Statement of Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128")
requires the Company to present both basic and diluted earnings per share on
the statement of income and comprehensive income because the Company has
potential common stock outstanding. Basic earnings per share is computed by
dividing net income by the weighted average number of shares outstanding for
the period. Diluted earnings per share is computed similarly; however, it is
adjusted for the effects of the assumed exercise of the Company's outstanding
options and warrants. Net income is the same for both the basic and diluted
earnings per share calculation in the respective periods presented. The
weighted-average number of shares outstanding used in computing basic and
diluted earnings per share for the three months ended June 30, 1999 was
4,777,316 and 4,871,964, respectively, and for the three months ended June 30,
1998 was 4,096,861 and 4,765,127, respectively. The weighted-average number of
shares outstanding used in computing basic and diluted earnings per share for
the six months ended June 30, 1999 was 4,759,951 and 4,853,904, respectively,
and for the six months ended June 30, 1998 was 4,114,057 and 4,762,999,
respectively.
NOTE 7 - NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which applies to all entities
and establishes accounting and reporting standards for derivative instruments.
SFAS 133 requires that all derivatives be recognized as either assets or
liabilities in the statement of financial position and measured at fair value.
The accounting for changes in the fair value depends on the intended use of the
derivative and the resulting designation. Under SFAS 133 derivatives may be
designated as fair value hedges, cash flow hedges or foreign currency hedges as
long as they are effective in hedging the identified risks. SFAS 133 requires
an entity to establish at inception of the hedge the method it will use for
assessing effectiveness and the measurement approach for determining the
ineffective portion of the hedge. Those methods must be consistent with the
entity's approach to managing risk. SFAS 133, as amended by SFAS 137, which
delayed SFAS 133's effective date by one year, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000; however, earlier
adoption is encouraged. Upon adoption the effect must be recognized as a
cumulative effect of an accounting change in either income or other
comprehensive income, depending upon whether the derivative is designated and
effective as a hedge and, if so, the type of hedge. The Company does not expect
the adoption of SFAS 133 to have a material impact upon the consolidated
financial statements.
7
<PAGE> 9
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion addresses the factors that have affected the financial
condition and results of operations of Merit Holding Corporation (the
"Company") as reflected in the unaudited consolidated financial statements for
the three and six months ended June 30, 1999 and 1998. The Company's operating
subsidiaries are Mountain National Bank ("Mountain") and Charter Bank & Trust
Co. ("Charter").
RECENT DEVELOPMENTS
On June 28, 1999, the Company executed a definitive agreement to merge with
Synovus Financial Corp. Synovus is a Columbus, Georgia based multi-financial
services company with $10.6 billion in assets, owning 36 banks serving
communities throughout Georgia, Alabama, Florida and South Carolina. The merger
agreement contemplates that Merit shareholders will receive between 1.0537 and
1.4132 shares of Synovus common stock for each share of Merit common stock
owned, depending upon the trading price of Synovus common stock over a twenty
day measuring period. Consummation of the transaction is subject to prior
approval by federal and state regulatory authorities and Merit shareholders. A
special meeting of Merit shareholders is scheduled for September 9, 1999 to
vote on the proposed merger. The transaction is expected to be completed by the
end of September 1999.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's net income for the three months ended June 30, 1999 was
$1,255,179, a 2.85% increase compared to net income of $1,220,339 for the same
period in 1998. Diluted earnings per share was $.26 in the second quarter of
1999 compared to $ .26 for the same period in 1998. The increase in net income
was the result of an increase in net interest income of $352,717, or 9.6%, an
increase of $66,931, or 17.0%, in non-interest income, offset by an increase of
$38,669, or 51.6%, in the provision for loan losses and an increase of
$336,978, or 16.3%, in non-interest expense. Net income for the six months
ended June 30, 1999 was $2,532,926, a 6.7% increase compared to net income of
$2,374,583 for the same period in 1998. Diluted earnings per share was $.52 for
the first six months of 1999 compared to $ .50 for the same period in 1998. The
increase in net income was the result of an increase in net interest income of
$674,161, or 9.4%, an increase of $123,894, or 16.2%, in non-interest income,
offset by an increase of $565,085, or 14.0%, in non-interest expense.
8
<PAGE> 10
Return on average equity for the three months ended June 30, 1999 was 12.60% on
average equity of $39,851,000 compared to 14.96% on average equity of
$32,633,000 for the same period in 1998. Return on average equity for the six
months ended June 30, 1999 was 12.82% on average equity of $39,520,000 compared
to 14.57% on average equity of $32,598,000 for the same period in 1998. Return
on average assets for the three months ended June 30, 1999 was 1.66% on average
assets of $303,221,000, compared to 1.67% on average assets of $291,801,000 for
the same period in 1998. Return on average assets for the six months ended June
30, 1999 was 1.68% on average assets of $301,170,000, compared to 1.70% on
average assets of $279,771,000 for the same period in 1998.
Total assets at June 30, 1999 were $314,964,000, a 2.8% increase from
$306,366,000 at December 31, 1998. Total average assets for the six months
ended June 30, 1999 were $301,170,000, up $21,399,000, or 7.6% from the same
period in 1998. Average loans for the six months ended June 30, 1999 were
$193,317,000, up $14,121,000 or 7.9% over the same period in 1998. The loan
growth was funded by increased average interest-bearing deposits, up $4,912,000
or 2.8%, higher average non-interest bearing deposits, up $6,863,000, or 12.0%,
increased average short-term borrowings, up $3,957,000, or 54.7%, and decreased
federal funds sold, down $10,738,000 or 40.1%. Most of the excess funds growth
over loan growth was placed in investment securities, which for the first six
months of 1999 averaged $62,836,000, up $13,791,000 or 28.1% over 1998.
Net interest income for the three months ended June 30, 1999 increased $352,717
or 9.6% over the same period in 1998. The net interest margin for the three
months ended June 30, 1999 was 5.87% on average total earning assets of
$274,145,000. For the same period in 1998, the net interest margin was 5.50% on
average earning assets of $267,058,000. The increase in net interest income in
the second quarter of 1999 over the same period in 1998 reflects the growth in
earning assets of 2.65% in 1999 over 1998 and an increase of 37 basis points in
the net interest margin. Growth in average balances and a shift in the mix of
earning assets from lower yielding federal funds sold into higher yielding
investments and loans accounted for an increase in net interest income of
approximately $2,438,000. Declining rates earned on earning assets, partly
offset by lower rates paid on interest paying liabilities, accounted for a
decrease in net interest income of approximately $2,086,000. The yield on
average earning assets fell 17 basis points to 8.64% in the second quarter of
1999 compared to the same quarter of 1998. This decline was offset by a drop of
52 basis points in the total cost of funds to 2.94% in the second quarter of
1999 from 3.46% for the same period in 1998.
Net interest income for the six months ended June 30, 1999 increased $674,161
or 9.4 % over the same period in 1998. The net interest margin for the first
half of 1999 was 5.79% on average total earning assets of $272,199,000,
compared to net interest margin of 5.65% on average earning assets of
$255,025,000 for the same period in 1998. The increase in net interest income
in the first six months of 1999 over the same period in 1998 was the result of
an increase of 14 basis points in the net interest margin and growth
9
<PAGE> 11
in earning assets of $17,174,000 or 6.7% in 1999 over 1998. Growth in average
balances and a shift in the mix of earning assets from lower yielding federal
funds sold into higher yielding investments and loans accounted for an increase
in net interest income of approximately $1,627,000. Declining rates earned on
earning assets, partly offset by lower rates paid on interest paying
liabilities, accounted for a decrease in net interest income of approximately
$952,000. The yield on average earning assets fell 34 basis points to 8.57% in
the first half of 1999 compared to the same period of 1998. This decline was
partly offset by a drop of 49 basis points in the total cost of funds to 2.93%
in 1999 from 3.41% in 1998.
The provision for loan losses for the three months ended June 30, 1999 was an
expense of $113,669 compared to $75,000 in the same quarter of 1998 and for the
six months ended June 30, 1999 was an expense of $175,871 compared to $172,500
in the same period in 1998. The allowance for loan losses at June 30, 1999 was
$3,388,903 compared to $3,286,602 at December 31, 1998. At June 30, 1999 and
December 31, 1998, the allowance for loan losses represented 1.64% and 1.72% of
loans outstanding, respectively. The provision for loan losses and the adequacy
of the allowance for loan losses is based upon management's continuing
evaluation of the collectibility of the loan portfolio under current economic
conditions and includes analysis of underlying collateral value and other
factors which could affect that collectibility. Management considers the
allowance for loan losses to be adequate based upon evaluations of specific
loans, internal loan rating systems, guidelines provided by the banking
regulatory authorities governing Mountain and Charter, and an annual
independent loan review performed by a consultant.
For the three months ended June 30, 1999 net loan charge-offs were $391,824,
compared to net charge-offs of $36,516 for the same period in 1998. Through the
six months ended June 30, 1999, net charge-offs totaled $365,975, or 0.18% of
total loans outstanding. This compares to recoveries, net of charge-offs, of
$216,825 or 0.12% of total loans outstanding through the six months ended June
30, 1998. Total non-performing loans (including loans 90 days or more past due)
were $1,165,033 as of June 30, 1999 and $235,770 at December 31, 1998. The
ratio of non-performing loans (including loans 90 days or more past due) to
total outstanding loans was 0.56% at June 30, 1999 and 0.12% at December 31,
1998.
At June 30, 1999, the Company owned one foreclosed residential property carried
in other real estate owned in the amount of $187,587. The Company does not
anticipate any material loss on the sale of this property.
At June 30, 1999, the Company had $15,924,000 in short-term borrowings compared
to $7,274,000 at year ended December 31, 1998. Short-term borrowings consist of
$10,924,000 of securities sold under agreements to repurchase with customers
and $5,000,000 of term federal funds purchased from the Federal Home Loan Bank
of Atlanta for a term of one year.
10
<PAGE> 12
Long-term debt at June 30, 1999 was $4,537,000 compared to $4,787,000 at
December 31, 1998. Long-term debt consists of advances from the Federal Home
Loan Bank of Atlanta ("FHLB") for the purpose of match funding loans.
No new advances were obtained in 1998 or year-to-date 1999.
Non-interest income increased $66,931 or 17.0% during the three months ended
June 30, 1999 compared to the same period in 1998. Of this increase, other
income increased $76,517 or 69.5% in the second quarter of 1999 compared to the
same period in 1998, partly attributable to an increase of $33,641 in mortgage
referral fees and an increase of $15,905 in the cash surrender value of life
insurance. Service charges and fees on deposits decreased $19,215 or 7.2% in
the second quarter of 1999 compared to 1998.
Non-interest income increased $123,894 or 16.2% in the six months ended June
30, 1999 compared to the same period in 1998. Of this increase, other income
increased $125,313 or 64.2% in 1999 compared to 1998, attributable to an
increase of $50,497 in mortgage referral fees, an increase of $33,391 in the
cash surrender value of life insurance and $38,907 in other income from Merit
Leasing Corporation. Service charges and fees on deposits decreased $9,904 or
1.8% in the first six months of 1999 compared to the same period in 1998.
Non-interest expense increased $336,978, or 16.3%, for the three months ended
June 30, 1999 as compared to the same period in 1998. Occupancy and equipment
expense decreased $19,989, or 5.4%, in the second quarter of 1999 compared to
the same period in 1998, the result of large expenditures by Mountain in the
second quarter of 1998 for repairs to its main office. Salaries and other
personnel expenses increased $205,044, or 19.2%, reflecting the continued
growth of the Company.
Non-interest expense increased $565,085, or 14.0%, for the six months ended
June 30, 1999 as compared to the same period in 1998. Occupancy and equipment
expense increased $6,030, or 0.9%, in the first six months of 1999 compared to
the same period in 1998. Salaries and other personnel expenses increased
$317,765, or 14.6%.
CAPITAL ADEQUACY
The assessment of capital adequacy depends on a number of factors such as asset
quality, liquidity, earnings performance, changing competitive conditions and
economic forces. The Company seeks to maintain a strong capital base to support
its growth and expansion activities, to provide stability to current operations
and to promote public confidence.
Capital management is a continuous process. Since December 31, 1998,
shareholders' equity has increased $2,982,000, primarily as a result of the
issuance of 100,000 shares of treasury stock as consideration for the
acquisition of Source Capital Group on January 29, 1999.
11
<PAGE> 13
On April 15, 1999, the Company paid a regular quarterly dividend of $.06 per
share.
Federal banking regulators have established certain capital adequacy standards
required to be maintained by banks and bank holding companies. These
regulations establish minimum requirements for risk-based capital to assets of
4% for core capital (tier I), 8% for total risk-based capital and 3% for the
leverage ratio. At June 30, 1999 the Company's tier I risk-based capital was
16.7% and total risk-based capital was 17.9%, compared to 16.6% and 17.8% at
year-ended December 31, 1998, respectively.
The Company does not have any commitments that it believes would reduce its
capital to levels inconsistent with the regulatory definition of a
well-capitalized financial institution.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The goal of liquidity management is to ensure the availability of an adequate
level of funds to meet the loan demand and deposit withdrawal needs of the
Company's customers. The Company actively manages the levels, types and
maturities of earning assets in relation to the sources available to fund
current and future needs to ensure that adequate funding will be available at
all times.
The Company's loan to deposit ratio averaged 79.5% during the six months ended
June 30, 1999, compared to 77.5% for the same period in 1998. Management plans
an average loan to deposit ratio in the range of 75%-85% during 1999.
At June 30, 1999, the Company had $14,173,000 in carrying value of investment
securities in its held-to-maturity and available-for-sale portfolios that would
mature in one year or less.
At June 30, 1999 and December 31, 1998, the Company had federal funds lines of
credit from other banks totaling $28,450,000 and $26,750,000, respectively, to
meet short term funding needs. There was a total of $5,000,000 outstanding
under these lines at June 30, 1999.
The liquidity and maturity structure of the Company's assets and liabilities
are important to the maintenance of acceptable net interest income levels. The
financial performance of the Company is subject to risk from interest rate
fluctuations. 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
12
<PAGE> 14
movements will not affect net interest margin, assuming all other factors hold
constant. Management has specified gap guidelines for a one year time horizon
of between .80 and 1.2. At June 30, 1999 the Company had a gap ratio of 1.01
for the one year period ending June 30, 2000. Thus, over the next twelve
months, more rate-sensitive assets will reprice than rate-sensitive
liabilities.
There has not been any significant change in the Company's market risk as
reported in the Company's 1998 Annual Report filed on Form 10-K.
There are no known trends or any known commitments or uncertainties that will
result in the Company's liquidity increasing or decreasing in any material way.
The Company is not aware of any current recommendations by regulatory
authorities, which, if they were to be implemented, would have a material
effect on the Company's liquidity, capital resources, or results of operations.
YEAR 2000 READINESS
The Company has developed and is implementing a strategic plan to address Year
2000 issues. The Year 2000 issue involves the risk that various problems may
result from the improper processing of dates and date-sensitive calculations by
computers and other equipment as the year 2000 approaches. Both Mountain and
Charter have developed Year 2000 plans in accordance with Federal Financial
Institutions Examination Council (FFIEC) guidelines to address the problem.
Both banks conduct on-going employee education on the issue and have identified
all information technology (computers, software, etc.) and non-information
technology (alarms, vaults, etc.) that may be affected by the Year 2000 date
change. Since the banks do not develop their own software, each has contacted
the various third party software vendors it uses to obtain written
documentation from them confirming Year 2000 compliance. All mission critical
software has been inventoried and tested and most remediation has been
completed at both banks. Each bank has tested its equipment for compliance;
items found not in compliance have been remediated to be compliant. Hardware,
software and systems will be retested if any changes are made to those systems
after initial testing is complete.
Both banks use third party service bureaus for core data processing. The
Company's core data processing vendor has certified, after testing, that its
application systems are Year 2000 compliant.
Both banks have had legal counsel review their ACH and EFT contracts with
customers for Year 2000 compliance. Counsel recommended improvements which have
been implemented. Both banks have had an outside consultant review their Year
2000 project status and have implemented the consultants' recommendations.
The banks have developed a communication and assessment plan for their
customers. The banks have communicated the Year 2000 issue to both borrower and
depositor clients by
13
<PAGE> 15
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. Follow-up reviews of key clients will be conducted regularly.
The expected cost to the Company of the Year 2000 project is currently
estimated at $80,000 for hardware and software upgrades, customer
communications, testing and other items required to complete the plan. The
company does not track internal personnel costs expended relating to the Year
2000 project. All remediation costs will be expensed in the year incurred and
will be funded through normal operating cash flow. Year 2000 project costs
during the three months ended June 30, 1999 were not material.
The Company believes that its mission critical systems are compliant and that
its customers are aware of and are addressing their own Year 2000 issues.
However, in the Company's most reasonably likely worst case scenario, some
portion of a mission critical system may not function properly or some
borrowers may be unable to meet their loan commitments due to problems with
their systems. In the event that a mission critical system temporarily fails to
perform properly, the Company will invoke its contingency plan to correct the
problem. The Company will incur extra costs for salaries and for independent
expert assistance. These costs are not expected to be material. Some of the
Company's loan customers may experience financial difficulties if their mission
critical systems are not compliant and do not perform properly. There can be no
guarantee that customers will resolve their Year 2000 issues on a timely basis.
Significant business interruptions or failures by key clients resulting from
Year 2000 problems could have a material adverse effect on the Company.
The banks have developed contingency plans to mitigate the potential effects of
a disruption in normal operations resulting from Year 2000 problems. The plans
address, among other factors, each bank's potential increased liquidity and
currency requirements at the critical dates, security issues, and business
resumption planning. The Company has in place written procedures to manually
perform every mission critical task relating to loan and deposit processing in
the event some part of a system does not function properly. The Company is
developing forecasts of liquidity needs and will inventory extra currency to
meet any higher than normal demand during the critical periods. Security will
be augmented during these periods. Personnel staffing will be carefully
scheduled during the affected periods. These contingency plans are frequently
reviewed and updated as needed.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
The information called for by this item is provided under the caption
"Liquidity and Interest Rate Sensitivity" in Item 2, Management's Discussion
and Analysis of Financial Condition and Results of Operations.
14
<PAGE> 16
FORWARD LOOKING STATEMENTS
The Company may from time to time make written or oral "forward-looking
statements," including statements contained in the Company's filings with the
Securities and Exchange Commission (including this Quarterly Report on Form
10-Q and any exhibits hereto), in its reports to shareholders and in other
communications by the Company, which are made in good faith by the Company
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995.
These forward-looking statements include statements with respect to the
Company's beliefs, plans, objectives, goals, expectations, anticipations,
estimates and intentions, that are subject to significant risks and
uncertainties and are subject to change based on various factors (some of which
are beyond the Company's control). The words "may," "could," "should," "would,"
"believe," "anticipate," "estimate," "expect," "intend," "plan" and similar
expressions are intended to identify forward-looking statements. The following
factors, among others, could cause the Company's financial performance to
differ materially from that expressed in such forward-looking statements: the
strength of the United States economy in general and the strength of the local
economies in which the Company conducts operations; the effects of, and changes
in, monetary and fiscal policies, including interest rate policies of the Board
of Governors of the Federal Reserve System (the "Federal Reserve Board");
inflation; interest rate, market and monetary fluctuations; the timely
development of competitive new products and services by the Company and the
acceptance of such products and services by customers; the willingness of
customers to substitute the competitors' products and services for the
Company's products and services and vice versa; the impact of changes in
financial services' laws and regulations (including laws concerning taxes,
banking, securities and insurance) technological changes; future acquisitions;
the growth and profitability of the Company's noninterest or fee income being
less than expected; unanticipated regulatory or judicial proceedings; changes
in consumer spending and saving habits; and the success of the Company at
managing the risks involved in the foregoing.
The preceding discussion of the Year 2000 issue in the Year 2000 readiness
section includes forward-looking statements reflecting management's current
assessments and estimates and which involve risks and uncertainties. Various
factors could cause actual results to differ materially from those expected by
such assessments and forward-looking statements. Factors that might affect the
timely and satisfactory completion of the Year 2000 project include, but are
not limited to, vendor representations and timely correction of hardware or
software problems, the readiness of key utilities, suppliers and customers, and
similar uncertainties. The Company's management of the Year 2000 project is an
ongoing process involving continual evaluation. Unanticipated problems could
emerge and alternative solutions may be devised that may be more costly than
anticipated or more difficult to solve. The Company cautions that the foregoing
list of important factors is not all inclusive. The Company does not undertake
to update any forward-looking statement, whether written or oral, that may be
made from time to time by or on behalf of the Company.
15
<PAGE> 17
Part II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS FOR VOTE OF SECURITY HOLDERS.
On May 11, 1999, the Company held its 1999 Annual Meeting of
Shareholders. At the meeting, the following persons were elected to
serve on the Company's Board of Directors until the next annual
meeting of shareholders and until their successors are elected and
have qualified: J. Randall Carroll, Michael J. Coles, Ronald H.
Francis, Patrick H. Hickok and Walter J. McCloud, II. The number of
votes cast for and against the election of each nominee for director
was as follows:
<TABLE>
<CAPTION>
Director For Withhold
---------------------------- --------- --------
<S> <C> <C>
J. Randall Carroll 3,588,722 5,950
Michael J. Coles 3,573,069 21,603
Ronald H. Francis 3,588,722 5,950
Patrick H. Hickok 3,588,722 5,950
Walter J. McCloud, II 3,588,722 5,950
</TABLE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule (SEC use only)
(b) No reports on Form 8-K were filed during the quarter ended
June 30, 1999.
16
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MERIT HOLDING CORPORATION
Date: August 10, 1999 /S/ J. Randall Carroll
----------------- -------------------------------------------
J. Randall Carroll
Chairman and Chief Executive Officer
Date: August 10, 1999 /S/ Ronald H. Francis
----------------- -------------------------------------------
Ronald H. Francis
President and Chief Financial Officer
(principal financial and accounting officer)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MERIT HOLDING CORPORATION FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 18,722,663
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 16,174,223
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 58,605,470
<INVESTMENTS-CARRYING> 2,019,009
<INVESTMENTS-MARKET> 1,962,687
<LOANS> 206,695,435
<ALLOWANCE> 3,388,903
<TOTAL-ASSETS> 314,963,659
<DEPOSITS> 251,306,189
<SHORT-TERM> 15,924,311
<LIABILITIES-OTHER> 2,901,276
<LONG-TERM> 4,536,928
0
0
<COMMON> 12,127,990
<OTHER-SE> 28,166,965
<TOTAL-LIABILITIES-AND-EQUITY> 314,963,659
<INTEREST-LOAN> 9,397,389
<INTEREST-INVEST> 1,810,942
<INTEREST-OTHER> 417,542
<INTEREST-TOTAL> 11,668,743
<INTEREST-DEPOSIT> 3,420,642
<INTEREST-EXPENSE> 3,790,049
<INTEREST-INCOME-NET> 7,878,694
<LOAN-LOSSES> 175,871
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,616,494
<INCOME-PRETAX> 3,974,504
<INCOME-PRE-EXTRAORDINARY> 2,532,926
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,532,926
<EPS-BASIC> .53
<EPS-DILUTED> .52
<YIELD-ACTUAL> 5.79
<LOANS-NON> 790,213
<LOANS-PAST> 374,820
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,579,007
<CHARGE-OFFS> 510,587
<RECOVERIES> 144,612
<ALLOWANCE-CLOSE> 3,388,903
<ALLOWANCE-DOMESTIC> 3,388,903
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
