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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 1997
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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
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Securities Registered Pursuant to Section 12(g)
of the Securities Exchange Act of 1934:
Common Stock, $2.50 Par Value
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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
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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. [X]
The aggregate market value of the Common Stock of the Registrant held by
nonaffiliates of the Registrant (3,166,212 shares) on March 20, 1998 was
approximately $61,741,134. 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
20, 1998: 3,996,078 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 1998 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.
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PART I
ITEM 1. BUSINESS.
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 and 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 in a permanent
facility 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, an exterior automated teller
machine, as well as vault and safe deposit facilities. Certain bookkeeping,
accounting and personnel functions of the Company and Mountain are conducted out
of a leased 7,550 square foot facility in Stone Mountain, Georgia. From this
location, Mountain operates separately a branch banking office and its real
estate lending activities.
On February 2, 1998, Mountain opened an additional full service banking
branch office in the Peachtree Corners community in Gwinnett County located at
5340 Peachtree Industrial Boulevard in Norcross, Georgia.
Charter commenced business operations on February 3, 1989 and in
October 1989 moved into its present 18,460 square foot facility located at 269
Roswell Street in Marietta, Georgia. In October 1994, Charter opened a branch
office at 3100 Cumberland Circle in the Cumberland/Galleria area of Atlanta. On
November 18, 1996, Charter opened an additional branch office in a 3,700 square
foot facility owned by Charter on Powers Ferry Road in Marietta.
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.
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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. 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, 1997, Mountain's loan portfolio consisted of
44.7% commercial loans, 50.7% real estate loans and 4.0% consumer/installment
loans, and Charter's loan portfolio consisted of 68.8% commercial loans, 24.7%
real estate loans and 8.5% 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,
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and obtained for a variety of business purposes. Such loans include short-term
lines of credit, medium-term plant 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, 1997, $2,665,875) and, for Charter, 15%
of capital for unsecured loans and 25% of capital for secured loans ($1,978,570
and $3,297,617, respectively). Loans exceeding $400,000 must be approved or
ratified by the respective Loan Committee and reported to the Board of Directors
on a monthly basis. 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.
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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 whose
amounts exceed the Banks' legal lending limits. At December 31, 1997, Mountain
had $298,128 in participations sold (such amount representing one participation
which was sold to Charter) and Charter had $5,112,709 participations sold (none
of which were sold to Mountain).
Mountain has established correspondent relationships with NationsBank,
N.A. (South) and The Bankers' Bank, all of Atlanta, Georgia and Columbus Bank
and Trust of Columbus, Georgia. Charter has established correspondent
relationships with NationsBank, N.A. (South) 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 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 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. 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.
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EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
NAME POSITION
J. Randall Carroll Chairman of the Board, and
Chief Executive Officer
Ronald H. Francis President and Chief Financial
Officer
J. RANDALL CARROLL, age 52, has served as President 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. Prior to leaving National Bank of
Georgia, Mr. Carroll was Senior Vice President in charge of Branch
Administration.
RONALD H. FRANCIS, age 54, has served as President, Chief Executive
Officer and a director of Charter since 1989. He became president 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, 1996, Mountain employed 51 persons on a full-time
equivalent basis, including 20 officers and Charter employed 48 persons on a
full-time equivalent basis, including 15 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.
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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 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, which 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, such that 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. Effective June 1, 1997, 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 would be 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. Pursuant to the Riegle-Neal
Interstate Banking and Branching Efficiency Act, 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. Effective April 21, 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
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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, 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 expansion, national banks situated in the State of Georgia are
generally prohibited from establishing branch offices or facilities outside of
the county in which such main office is located, except (i) in adjacent counties
in certain situations, or (ii) by means of a merger, consolidation or sale of
assets. In 1996, the Georgia Legislature adopted legislation which reduces the
limitations imposed on banks situated in the State of Georgia to establish
branch offices. The new law permits a Georgia bank to establish three new or
additional branch banks, de novo, in any county within the State of Georgia, in
addition to establishing branch offices or facilities in adjacent counties and
by merger or consolidation. Moreover, beginning on July 1, 1998, a bank located
in the State of Georgia will be permitted to establish new or additional branch
banks anywhere in the state by relocation of the parent bank or another branch
bank, or by merger, consolidation, or purchase of assets and assumption of
liabilities involving another parent bank or branch bank.
Mountain is also subject to the Georgia banking and usury laws
restricting the amount of interest which it may charge in making loans or other
extensions of credit. In addition, Mountain, as a subsidiary of the Company, is
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
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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 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). In 1989, each of those
agencies issued new risk-based capital guidelines for bank holding companies and
banks which made 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.
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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....... 16.9% 17.2% 15.1% 8.0%
Tier 1 Risk-Based Capital...... 15.6% 16.0% 13.9% 4.0%
Leverage Ratios................ 12.9% 13.0% 10.1% 3.0%
</TABLE>
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 Comptroller amended the risk-based capital guidelines applicable to
national banks in an effort to clarify certain questions of interpretation and
implementation, specifically with regard to treatment of purchased mortgage
servicing rights ("PMSRs") and other intangible assets. The Comptroller's
guidelines provide that intangible assets are generally deducted from Tier 1
capital in calculating a bank's risk-based capital ratio. However, certain
intangible assets which meet specified criteria ("qualifying intangibles") such
as PMSRs are retained as a part of Tier 1 capital. The Comptroller currently
maintains that only PMSRs and purchased credit card relationships meet the
criteria to be considered qualifying intangibles. The Comptroller's guidelines
formerly provided that the amount of such qualifying intangibles that may be
included in Tier 1 capital was strictly limited to a maximum of 25% of total
Tier 1 capital. The Comptroller has amended its guidelines to increase the
limitation on such qualifying intangibles from 25% to 50% of Tier 1 capital and
further to permit the inclusion of purchased credit card relationships as a
qualifying intangible asset.
In addition, the Comptroller has adopted rules which clarify treatment
of asset sales with recourse not reported on a bank's balance sheet. Among
assets affected are mortgages sold with recourse under Fannie Mae, Freddie Mac
and Farmer Mac programs. The rules clarify that even though those transactions
are treated as asset sales for bank Call Report purposes, those assets will
still be subject to a capital charge under the risk-based capital guidelines.
The Comptroller, the Federal Reserve Board and the FDIC recently
adopted final regulations revising their risk-based capital guidelines to
further ensure that the guidelines take adequate account of interest rate risk.
Interest rate risk is the adverse effect that changes in
-9-
<PAGE> 11
market interest rates may have on a bank's financial condition and is inherent
to the business of banking. Under the new regulations, when evaluating a bank's
capital adequacy, the agencies capital standards now explicitly include a bank's
exposure to declines in the economic value of its capital due to changes in
interest rates. The exposure of a bank's economic value generally represents the
change in the present value of its assets, less the change in the value of its
liabilities, plus the change in the value of its interest rate off-balance sheet
contracts. Concurrently, the agencies issued a joint policy statement to
bankers, effective June 26, 1996, to provide guidance on sound practices for
managing interest rate risk. In the policy statement, the agencies emphasize the
necessity of adequate oversight by a bank's Board of Directors and senior
management and of a comprehensive risk management process. The policy statement
also describes the critical factors affecting the agencies' evaluations of a
bank's interest rate risk when making a determination of capital adequacy. The
agencies' risk assessment approach used to evaluate a bank's capital adequacy
for interest rate risk relies on a combination of quantitative and qualitative
factors. Banks that are found to have high levels of exposure and/or weak
management practices will be directed by the agencies to take corrective action.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"Act"), enacted on December 19, 1991, 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.
-10-
<PAGE> 12
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:
<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 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 state-chartered bank, Charter is subject to the supervision of the
Georgia Banking Department and the FDIC. In addition, the Banks, as subsidiaries
of the Company, 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.
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 is subject to change by future federal and state legislation.
-11-
<PAGE> 13
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.
<TABLE>
<CAPTION>
Average Balances and Interest Rates
Year Ended
($ thousands)
December 31, 1997 December 31, 1996 December 31, 1995
------------------------------ ------------------------------ ------------------------------
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) $164,921 $16,902 10.25% $139,728 $14,166 10.14% $123,845 $13,018 10.51%
Investment securities
Taxable 48,085 3,094 6.43% 41,957 2,686 6.40% 33,863 2,129 6.29%
Tax-exempt(2) 522 37 7.09% 812 66 8.13% 744 55 7.39%
-------- ------- ----- -------- ------- ----- -------- ------- -----
48,607 3,131 6.44% 42,769 2,752 6.43% 34,607 2,184 6.31%
Federal funds sold 13,024 721 5.54% 14,556 776 5.33% 14,273 842 5.90%
Deposits in other banks 52 4 7.69% 167 10 5.99% 454 29 6.39%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total earning assets 226,604 20,758 9.16% 197,220 17,704 8.98% 173,179 16,073 9.28%
Other assets 22,006 20,294 18,051
-------- -------- --------
Total assets $248,610 $217,514 $191,230
-------- -------- --------
Liabilities and
Stockholders' Equity
Interest-bearing deposits
Now accounts $ 31,148 $ 836 2.68% $ 26,944 $ 724 2.69% $ 24,814 $ 715 2.88%
Money market accounts 36,880 1,133 3.07% 33,511 1,070 3.19% 32,038 1,076 3.36%
Savings 3,044 76 2.50% 3,715 97 2.61% 4,157 119 2.86%
Time, $100,000 and over 25,723 1,342 5.22% 21,917 1,181 5.39% 18,120 1,026 5.66%
Other time 51,074 2,879 5.64% 46,604 2,659 5.71% 41,344 2,351 5.69%
-------- ------- ----- -------- ------- ----- -------- ------- -----
147,869 6,266 4.24% 132,691 5,731 4.32% 120,473 5,287 4.39%
Long-term debt 4,502 300 6.66% 2,915 197 6.76% 2,688 174 6.47%
Short-term borrowings 9,715 458 4.71% 6,381 253 3.96% 2,964 118 3.98%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-bearing
liabilities 162,086 7,024 4.33% 141,987 6,181 4.35% 126,125 5,579 4.42%
Noninterest-bearing
deposits 54,689 48,237 41,680
Other liabilities 2,810 2,222 1,893
Shareholders' equity 29,025 25,068 21,532
-------- -------- --------
Total liabilities and
shareholders' equity $248,610 $217,514 $191,230
-------- -------- --------
Spread on interest-bearing
funds 4.83% 4.62% 4.86%
----- ----- -----
Net interest income $13,734 $11,523 $10,494
------- ------- -------
Net interest margin 6.06% 5.84% 6.06%
----- ----- -----
</TABLE>
- ------------------------------
(1) Interest income includes loan fees of $628,566, $496,845 and $541,096 in
1997, 1996, and 1995 respectively. Non-accrual loans ($703,627, $1,427,361
and $612,855 in 1997, 1996 and 1995, respectively) are included in the
average balances and interest income on such loans is recognized on a cash
basis.
(2) Interest income includes the effects of taxable equivalent adjustments
using the Federal income tax rate of 34% for 1995; 1996 and 1997 also
includes an adjustment for the State tax of approximately 4% and 3%,
respectively.
-12-
<PAGE> 14
NET INTEREST INCOME ANALYSIS(1)
<TABLE>
<CAPTION>
1997 compared to 1996 1996 compared to 1995 1995 compared to 1994
Increase (decrease) due to Increase (decrease) due to Increase (decrease) due to
Volume Rate Total Volume Rate Total Volume Rate Total
--------------------------- --------------------------- ----------------------------
($ thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans (1) $2,555 $ 181 $2,736 $1,669 ($521) $1,148 $1,801 $1,718 $3,519
Investment securities
Taxable 392 16 408 509 48 557 6 218 224
Tax-exempt (2) (24) (15) (39) 5 6 11 8 (7) 1
------ ----- ------ ------ ----- ------ ------ ------ ------
368 1 369 514 54 568 14 211 225
Federal funds sold (82) 27 (55) 17 (83) (66) 206 229 435
Deposits in other banks (7) 1 (6) (18) (1) (19) 0 12 12
------ ----- ------ ------ ----- ------ ------ ------ ------
Total interest income 2,834 210 3,044 2,182 (551) 1,631 2,021 2,170 4,191
------ ----- ------ ------ ----- ------ ------ ------ ------
Interest expense:
Deposits
Now accounts 113 (1) 112 61 (52) 9 15 95 110
Money market accounts 107 (44) 63 50 (56) (6) 89 186 275
Savings (18) (3) (21) (13) (9) (22) (17) 1 (16)
Time, $100,000 and over 205 (44) 161 215 (60) 155 156 225 381
Other time 255 (35) 220 299 9 308 360 409 769
------ ----- ------ ------ ----- ------ ------ ------ ------
662 (127) 535 612 (168) 444 603 916 1,519
Long-term debt 107 (4) 103 15 8 23 36 0 36
Short-term borrowings 132 73 205 136 (1) 135 32 33 65
------ ----- ------ ------ ----- ------ ------ ------ ------
239 69 308 151 7 158 68 33 101
Total interest expense 901 (58) 843 763 (161) 602 671 949 1,620
Net Change in Net
Interest Income $1,933 $ 268 $2,201 $1,419 ($390) $1,029 $1,350 $1,221 $2,571
------ ----- ------ ------ ----- ------ ------ ------ ------
</TABLE>
- -------------------------------
(1) As a result of the numerous and simultaneous volume and rate changes during
any year, it is not possible to allocate the changes precisely between
volume and rate. For purposes of this table, changes that are not solely
due to volume changes or solely due to rate changes have been attributed to
rates. In computing change in average volume and rate, the average balances
of non-accrual loans are included in loan balances.
(2) Interest income includes the effects of taxable equivalent adjustments
using a Federal tax rate of 34% for 1994 - 1995 and a Federal tax rate of
34% plus a State tax effect of 4% and 3% in 1996 and 1997, respectively.
-13-
<PAGE> 15
INTEREST RATE SENSITIVITY ANALYSIS
The objectives of interest rate sensitivity management is to minimize the
effect of interest rate changes on the net interest margin while maintaining net
interest income at acceptable levels. The following table sets forth interest
rate sensitivity using contractual payment schedules at December 31, 1997. The
repricing dates, which may differ from maturity dates for various assets and
liabilities, do not take into consideration external factors that might affect
the sensitivity of assets and liabilities.
<TABLE>
<CAPTION>
Maturing or Repricing Within
-----------------------------------------------------------
($ thousands) 0-90 91-365 1-5 Over 5
Days Days Years Years Total
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earning assets:
Investments $ 17,651 $ 5,090 $16,237 $22,822 $ 61,800
Loans 119,236 10,465 41,191 10,948 181,840
-------- -------- ------- ------- --------
Total $136,887 $ 15,555 $57,428 $33,770 $243,640
-------- -------- ------- ------- --------
Interest-bearing liabilities (1)
Long-term borrowing 122 366 4,051 744 5,283
Short-term borrowing 6,432 6,432
Money market 40,876 40,876
NOW 31,403 31,403
Savings 2,696 2,696
Time, $100,000 and over 12,702 12,083 1,433 26,218
Other time 16,257 36,540 4,620 57,417
-------- -------- ------- ------- --------
Total $110,488 $ 48,989 $10,104 $ 744 $170,325
-------- -------- ------- ------- --------
Interest-sensitivity gap $ 26,399 $(33,434) $47,324 $33,026 $ 73,315
Cumulative gap $ 26,399 $ (7,035) $40,289 $73,315
Percent of interest-sensitive
assets to interest-sensitive
liabilities 124% 32% 569% 4539% 143%
Cumulative percent of
interest-sensitive assets to
interest-sensitive liabilities 124% 96% 124% 143%
Percent of cumulative gap to
total earning assets 11% -3% 17% 30%
</TABLE>
- -----------------------------------
(1) The repricing / 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, $100,000 and over 48% 46% 5% 100%
Other time 28% 64% 8% 100%
</TABLE>
Based on this gap analysis and assuming no change in the mix of earning
assets or interest bearing liabilities, falling interest rates could reduce the
net interest margin while rising rates could increase the net interest margin.
The present gap position is within the range acceptable to management.
-14-
<PAGE> 16
INVESTMENT PORTFOLIO
The following table sets forth the carrying amounts of investment
securities held-to-maturity at the dates indicated:
<TABLE>
<CAPTION>
December 31,
($ thousands) 1997 1996 1995
------------------------------
<S> <C> <C> <C>
U.S. Treasury and Government agencies $1,000 $1,000 $1,000
States and political subdivisions 521 758 838
Mortgage-backed securities 0 0 0
------ ------ ------
$1,521 $1,758 $1,838
------ ------ ------
</TABLE>
Securities available-for-sale, at fair value are set forth as follows :
<TABLE>
<CAPTION>
December 31,
($ thousands) 1997 1996 1995
---------------------------------
<S> <C> <C> <C>
U.S. Treasury $11,596 $14,047 $ 7,566
U. S. Government Agencies 27,881 22,447 20,442
Mortgage-backed securities 4,877 6,988 8,982
------- ------- -------
$44,354 $43,482 $36,990
------- ------- -------
</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, 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>
<S> <C> <C>
$ 5,289 $ 5,282
Within one year 16,015 15,871
After one but within five years 18,830 18,636
After five but within ten years 4,220 4,202
------- -------
After ten years $44,354 $43,991
------- -------
</TABLE>
By virtue of classification, these securities may be sold prior to
maturity
-15-
<PAGE> 17
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, 1996 (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 $5,515 6.30% $18,106 6.36% $13,873 6.90% $37,494
Mortgage-backed
securities 163 5.34% 4,374 6.05% 406 4.81% 2,045 6.78% 6,988
States and political
subdivisions (2) 235 9.35% 422 8.35% 101 8.40% 758
-------------- --------------- --------------- -------------- -------
$5,913 $22,480 $14,701 $2,146 $45,240
------ ------- ------- ------ -------
</TABLE>
- ----------------------------------
(1) Investment securities available-for-sale are included in the above table
according to maturity as follows:
<TABLE>
<CAPTION>
Market Amortized
Value Cost
------- ---------
<S> <C> <C>
Within one year $ 5,680 $ 5,658
After one but within five years 22,478 22,353
After five but within ten years 13,279 13,186
After ten years 2,045 2,021
------- -------
$43,482 $43,218
------- -------
</TABLE>
By virtue of classification, these securities may be sold prior to
maturity
(2) Weighted-average yields on tax-exempt obligations have been computed on a
fully tax-equivalent basis using a federal tax rate of 34%.
-16-
<PAGE> 18
LOAN PORTFOLIO
Loans outstanding are presented in the accompanying table according to
loan category:
<TABLE>
<CAPTION>
December 31,
($ thousands) 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Commercial $ 99,747 $ 91,325 $ 75,185 $ 64,534 $50,124
Real estate - mortgage 30,620 20,242 21,198 16,717 14,676
Real estate - construction
and land development 39,974 34,407 25,898 23,785 18,005
Installment and other
consumer 11,491 14,686 10,828 12,169 11,085
Farmland 8 28 108 192 440
-------- -------- -------- -------- -------
$181,840 $160,688 $133,217 $117,397 $94,330
-------- -------- -------- -------- -------
</TABLE>
The following table shows the amount of loans (excluding real estate -
mortgage, installment and farmland) outstanding as of December 31, 1997 which,
based on remaining scheduled repayments of principal, are due in the periods
indicated. The amounts due after one year are also classified according to the
sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
December 31, 1997 Maturity Schedule
----------------------------------------------------------
After One
Within But Within After
($ thousands) One year Five Years Five Years Total
----------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $59,463 $31,405 $8,879 $99,747
Real estate-construction and
land development 35,094 4,880 39,974
------------- ------------- -------------- --------------
$94,557 $36,285 $8,879 $139,721
------------- ------------- -------------- --------------
</TABLE>
<TABLE>
<CAPTION>
Interest Sensitivity
December 31,
1997
--------------------------
($ thousands) Fixed Rate Variable rate
---------- -------------
<S> <C> <C>
Due after one but within five years $21,235 $15,050
Due after five years 5,119 3,760
------- -------
$26,354 $18,810
------- -------
</TABLE>
Maturity is based on contract terms. It is the Company's policy that
loans unpaid at maturity may be renewed at management's discretion based upon
the credit criteria, current market rates and terms.
-17-
<PAGE> 19
Information regarding non-performing assets is presented below:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995 1994 1993
---- ------ ------ ---- ------
($ thousands)
<S> <C> <C> <C> <C> <C>
Loans on nonaccrual status $394 $1,062 $1,298 $180 $1,043
Loans past due over 90 days 82 147
---- ------ ------ ---- ------
Total $476 $1,209 $1,298 $180 $1,043
---- ------ ------ ---- ------
</TABLE>
For each of the years ended December 31, 1993 through 1995 , there were
no loans contractually past due 90 days and still accruing. There were no loans
classified as doubtful, substandard or special mention that have not been
disclosed in the above table, which represent or result from trends or
uncertainties which management reasonably expects will materially impact future
operational results, liquidity, or capital resources. Management is not aware of
any other material credits about which information causes doubts as to the
ability of such borrowers to comply with the loan repayment terms.
At December 31, 1997 non-performing loans were 0.26% of loans
outstanding.
Information regarding foregone interest on non-accrual loans is presented
below:
<TABLE>
<CAPTION>
1997 1996
---- ----
($ thousands)
<S> <C> <C>
Interest recognized $ 29 $103
Foregone interest 76 158
---- ----
Interest income that would have
been accrued at original terms $105 $261
---- ----
</TABLE>
Accruals on loans are discontinued when management believes, after
consideration of economic and business conditions and collection effort, that
collection of interest is doubtful. Additionally all loans contractually past
due 90 days or more which are not in the process of collection and adequately
secured are placed on nonaccrual status.
-18-
<PAGE> 20
SUMMARY OF LOAN LOSS EXPERIENCE
The Allowance for Loan Losses is maintained at a level considered by the
Company to be adequate to provide for potential loan losses. The adequacy of the
allowance and its related allocation is based on management's continuing
evaluation of the loan portfolio under current economic conditions, past loan
loss experience, underlying collateral value securing loans and such other
factors which deserve recognition in estimating potential loan losses. Loans
which are determined to be uncollectible are charged against the allowance. The
provision for loan losses and recoveries are added to the allowance. See
Management's Discussion and Analysis of Operations and Financial Condition
Allowance for Loan Losses."
The following table summarizes activity in the Allowance for Loan Losses
for the dates indicated:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
($ thousands)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $ 2,772 $ 2,543 $ 1,689 $ 1,373 $ 1,283
Loans charged-off:
Commercial 195 455 210 274 398
Real estate - construction 30 20
Real estate - mortgage 234 100 17 43 17
Installment and other consumer 63 24 8 40 23
-------- -------- -------- -------- -------
Total loans charged-off 492 579 265 357 458
Recoveries:
Commercial 146 145 52 63 19
Real estate - construction
Real estate - mortgage 23 17
Installment and other consumer 19 1 13 6 1
-------- -------- -------- -------- -------
188 163 65 69 20
Net loans charged-off 304 416 200 288 438
Provision for loan losses 188 645 1,054 604 528
-------- -------- -------- -------- -------
Balance, end of period $ 2,656 $ 2,772 $ 2,543 $ 1,689 $ 1,373
-------- -------- -------- -------- -------
Loans outstanding at end
of period $181,840 $160,688 $133,217 $117,397 $94,330
Ratio of allowance to loans
outstanding at end of period 1.46% 1.73% 1.91% 1.44% 1.46%
Average loans outstanding
during the period $164,921 $139,728 $123,845 $104,102 $84,331
Ratio of net charge-offs during the
period to average loans
outstanding 0.18% 0.30% 0.16% 0.28% 0.52%
</TABLE>
-19-
<PAGE> 21
ALLOWANCE FOR LOAN LOSSES
The allocation of the Allowance for Loan Losses by loan category at the
dates indicated is presented below with percentage of loans in each category to
total loans:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------------------- ------------------ ------------------- ------------------ -----------------
($ thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $1,459 55% $1,399 57% $1,318 56% $ 839 55% $ 726 53%
Real estate (1) 400 39% 628 34% 742 36% 264 35% 166 35%
Installment and
other consumer 77 6% 128 9% 86 8% 105 10% 155 12%
Unallocated 720 0% 617 0% 397 0% 481 0% 326 0%
------ --- ------ --- ------ --- ------ --- ------ ---
$2,656 100% $2,772 100% $2,543 100% $1,689 100% $1,373 100%
</TABLE>
- ----------------------
(1) Includes all loans secured in whole or in part by real estate.
-20-
<PAGE> 22
DEPOSITS
The following table summarizes average daily balances of deposits and
rates paid on such deposits for the periods indicated and the total
weighted-average rate paid on total deposits:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1997 1996 1995
Amount Rate Amount Rate Amount Rate
-------- ---- -------- ---- -------- ----
($ thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 54,689 $ 48,237 $ 41,680
NOW accounts 31,148 2.68% 26,944 2.69% 24,814 2.88%
Savings 3,044 2.50% 3,715 2.61% 4,157 2.86%
Money market accounts 36,880 3.07% 33,511 3.19% 32,038 3.36%
Other time 51,074 5.64% 46,604 5.71% 41,344 5.69%
Time, $100,000 and over 25,723 5.22% 21,917 5.39% 18,120 5.66%
-------- -------- --------
Total $202,558 4.24% $180,928 4.32% $162,153 4.39%
-------- -------- --------
</TABLE>
Maturities of time deposits of $100,000 and over are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1996
-----------------------------------
($ thousands)
<S> <C> <C>
Under 3 months $12,703 $15,692
3 to 6 months 3,993 5,320
6 to 12 months 8,090 3,313
Over 12 months 1,433 1,592
-------------- -------------
Total $26,219 $25,917
-------------- -------------
</TABLE>
-21-
<PAGE> 23
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,
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Percentage of net income to:
Average shareholders' equity 15.30% 13.97% 13.96%
Average total assets 1.79% 1.61% 1.57%
Percentage of average shareholders' equity
to average total assets 11.67% 11.52% 11.26%
</TABLE>
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<PAGE> 24
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 new 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.
In November 1997, Mountain closed its branch located at 1200 Rockbridge
Road in Norcross, Georgia.
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 Galleria branch is located in approximately 1,100 square feet
of leased office space at 3100 Cumberland Circle, Suite 100, Atlanta, Georgia.
Improvements at Charter's Galleria branch include a walk-up night depository.
Charter intends to relocate this branch to a new 2,194 square foot leased
facility at 4401 Northside Parkway, Atlanta, Georgia in May 1998. 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, Merit and Mountain were served with a complaint
filed in the State Court of DeKalb County, Georgia by Elizabeth L. Carnegie and
25 additional plaintiffs. The plaintiffs allege gross negligence and violation,
conspiracy to violate and aiding and abetting the violation of the Georgia
Racketeer Influenced and Corrupt Organizations (RICO) Act and seek actual
damages in the amount of $3,357,600 plus punitive damages and, in respect of the
RICO claims, treble damages. The plaintiffs allege 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. Merit and Mountain deny any liability on these
claims and intend to vigorously defend the suit.
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<PAGE> 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter ended December 31,
1997 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, 1996 High Bid Low Bid Dividends
- ----------------------------------- -------- ------- ---------
<S> <C> <C> <C>
First Quarter.................................................... $10.50 $ 9.50 $ 0
Second Quarter................................................... 10.50 9.00 0
Third Quarter.................................................... 10.75 9.00 0
Fourth Quarter .................................................... $12.00 $10.50 $.04
Fiscal Year Ended December 31, 1997
- -----------------------------------
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
</TABLE>
As of March 2, 1998, Merit Common Stock was held of record by 722
persons, representing approximately 1,600 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
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
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<PAGE> 26
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. Pursuant to regulations adopted by
the Georgia Banking Department, a bank needs 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%).
-25-
<PAGE> 27
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
1997 1996 1995 1994 1993
----------------------------------------------------------------------
($ thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Earnings
Interest income $ 20,748 $ 17,656 $ 16,059 $ 11,863 $ 9,059
Interest expense 7,024 6,180 5,579 3,959 3,314
Net interest income 13,724 11,476 10,480 7,904 5,745
Provision for loan losses 188 645 1,054 604 528
Non-interest income 1,449 1,268 1,701 1,145 779
Non-interest expense 8,145 6,632 6,233 5,612 4,331
Net income 4,441 3,503 3,006 1,793 1,388
Net income per share (basic) $1.18 $0.95 $0.83 $0.50 $0.42
Net income per share (diluted) $0.96 $0.81 $0.70 $0.48 $0.42
Average Balances
Assets $ 248,610 $ 217,514 $ 191,230 $ 163,107 $ 134,731
Deposits 202,558 180,928 162,153 139,242 117,106
Loans 164,921 139,728 123,845 104,102 84,331
Earning assets 226,604 197,220 173,179 148,425 122,707
Shareholders' equity 29,025 25,068 21,532 18,660 15,763
Balance Sheet Data
Assets $ 267,363 $ 236,180 $ 205,250 $ 184,722 $ 151,897
Deposits 220,284 192,697 173,064 159,157 131,688
Loans 179,184 157,916 130,674 115,708 92,957
Earning assets 240,985 212,356 182,239 163,735 136,733
Shareholders' equity 32,066 26,800 23,312 19,374 17,487
Book value per share $0.08 $7.24 $6.36 $5.40 $5.03
Dividends per share $0.17 $0.04
Shares outstanding 3,989,033 3,704,102 3,665,055 3,587,888 3,477,760
Key Ratios
Return on average assets 1.79% 1.61% 1.57% 1.10% 1.03%
Return on average shareholders' equity 15.30% 13.97% 13.96% 9.61% 8.81%
Shareholders' equity to total assets 11.99% 11.35% 11.36% 10.49% 11.51%
</TABLE>
-26-
<PAGE> 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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, of 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.
The following discussion sets forth the major factors which affected the
Company's results of operations and financial condition. These comments should
be read in conjunction with the consolidated financial statements of the Company
included herein.
OVERVIEW
Net income for the year ended December 31, 1997 was $4,440,975, 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 1997 net income resulted from a 19.6% increase in net interest
income to $13,723,570, a decrease of 70.8% in the provision for loan losses to
$188,300, and an increase of 14.3% in non-interest income to $1,448,801,
partially offset by an increase of 22.8% in non-interest expense to $8,144,980.
Total assets were $267,363,000 at December 31, 1997, 13.2% higher than
total assets of $236,180,000 at the previous year end. Average assets for the
year 1997 were $248,610,000, compared to average assets of $217,514,000 in 1996.
This 14.3% increase in average assets was funded by a 12.0% increase, or
$21,630,000, in average deposits over the prior year, and a 52.2% increase, or
$3,334,000, in average short-term borrowings.
Net income as a percentage of average total assets was 1.79% in 1997,
compared to 1.61% in 1996, and net income as a percentage of average
shareholders' equity was 15.30% in 1997 compared to 13.97% in 1996.
Commencing January 15, 1997, the Company has paid a regular quarterly
cash dividend of $.04 per share. Effective January 15, 1998 the quarterly
dividend was increased to $.05 per share.
-27-
<PAGE> 29
FINANCIAL CONDITION
Earning Assets
Average earning assets in 1997 were $226,604,000, 14.9% above the
$197,220,000 average in 1996. Average total loans of $164,921,000 in 1997 and
$139,728,000 in 1996 represented 72.8% and 70.8% of average earning assets for
the respective years. The average total loan growth of 18.0% during 1997 was
accomplished while maintaining quality underwriting standards. At December 31,
1997, commercial loans composed 54.8% of outstanding loan balances versus 56.7%
at the prior year end. Real estate related loans, which include construction and
land development, commercial owner occupied, commercial income producing and
mortgages, represented 38.8% of outstanding balances versus 34.0% at December
31, 1996. Consumer and installment related loans represented 6.4% of the loan
portfolio at December 31, 1997, compared to 9.1% 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 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.
Average total investment securities increased $5,838,000 to $48,607,000
or 13.7% above the 1996 average of $42,769,000. The investment securities
portfolio represented 21.5% of average earning assets in 1997 and 21.7% in 1996.
Proceeds from sales of investment securities available-for-sale, including
mortgage-backed certificates during 1997 were $21,890,000, with resulting net
loss on sales of $43,495. There were no sales of securities in 1996. As of
December 31, 1997, $4,877,000 or 10.6% 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 15.4% of the investment
portfolio as of December 31, 1996. Proceeds from paydowns of mortgage-backed
certificates were $1,788,462 in 1997 and $2,011,107 in 1996.
Included in the mortgage-backed securities portfolio at December 31,
1996, were collateralized mortgage obligations ("CMOs") with a carrying value of
$812,719, and an average maturity of five years. These CMO securities had a
weighted-average life of approximately four months, and were not considered high
risk. These securities paid out during 1997 in accordance with their contract
terms.
At December 31, 1997, the investment portfolio included two U.S.
Government Agency investments which are defined as derivatives or 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, 1997, a market value of
$930,759. The unrealized loss is a result of the interest rate being fixed for
the first two years at 8%, then converting 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, 1997, a market value
of $492,043, 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 perceived risk for loss of principal. Combined, these
securities compose about 3.3% of the investment 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, 1997,
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<PAGE> 30
this category totaled $1,521,291. 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, 1997, this category totaled $44,353,709, with an unrealized gain of
$224,505, net of tax effect.
At December 31, 1997, the investment securities held-to-maturity
portfolio had net unrealized losses of $48,818, comprised of unrealized losses
of $69,241 and unrealized gains of $20,423. At year-end 1996, the
held-to-maturity portfolio had net unrealized losses of $91,613, representing
unrealized losses of $106,023 and unrealized gains of $14,410. At December 31,
1997, the investment securities available-for-sale portfolio had net unrealized
gains of $362,106, comprised of unrealized losses of $26,790 and unrealized
gains of $388,896. At December 31, 1996, the available-for-sale portfolio had
net unrealized gains of $263,795, comprised of unrealized losses of $73,185 and
unrealized gains of $336,980.
Investment securities with a carrying value of approximately $28,251,727
and $29,471,803 at December 31, 1997 and 1996, 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 $13,024,000 in 1997, or 5.7% of average
earning assets, compared to $14,556,000 in 1996 or 7.4% of average earning
assets.
Liabilities
Average interest-bearing liabilities rose 14.2% to $162,086,000 in 1997
from an average of $141,987,000 in 1996. This growth is attributed to a 10.8%
increase in NOW, money market and savings accounts and a 12.1% increase in time
deposits.
The aggregate average balance of NOW, money market and savings accounts
was $71,072,000, 10.8% greater than the 1996 aggregate average balance of
$64,170,000. The average balance of other time deposits increased 9.6% during
1997 to $51,074,000 from $46,604,000 in 1996. Average time deposits with
balances over $100,000 increased 17.4% to $25,723,000 in 1997 from $21,917,000
in 1996. This category of deposits, as a percent of average interest-bearing
liabilities, increased to 15.9% in 1997 from 15.4% in 1996.
Interest-bearing deposits, including certificates of deposit, will
continue to be a major source of funding for the Company. There is no specific
emphasis placed on time deposits of $100,000 and over. During 1997, aggregate
average balances of time deposits of $100,000 and over composed 12.7% of total
deposits compared to 12.1% for the prior year.
Average non-interest bearing deposits were $54,689,000 in 1997 compared
to $48,237,000 in 1996, reflecting growth of 13.4%. As a percentage of average
total deposits, these deposits increased slightly from 26.7% in 1996 to 27.0% in
1997.
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, 1997, securities sold
under agreements to repurchase were $6,432,000, compared to $7,538,000 at
December 31, 1996.
Long-term debt at December 31, 1997 was $5,283,000 compared to
$3,264,000 at December 31, 1996. Long-term debt consists of advances from the
Federal Home Loan Bank
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<PAGE> 31
of Atlanta ("FHLBA") for the purpose of match funding specific longer term
loans. Three new advances totaling $2,300,000 were obtained during 1997. The
average interest rate paid on this debt during 1997 and 1996 was 6.66% and
6.55%, 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.
The Company's loan to deposit ratio averaged 81.4% in 1997, compared to
77.2% in 1996. Management plans an average loan to deposit ratio in the range of
75% - 85% during 1998.
At December 31, 1997, investment securities with a carrying value of
$21,525,000 are scheduled to mature within the next five years. Of this amount,
$4,998,000 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, 1997 and 1996, the Company had federal funds lines from
other banks totaling $25,750,000 and $20,500,000, respectively. There were no
amounts outstanding under these short term commitments at December 31, 1997 and
1996. At December 31, 1996, the Company had entered into $4,000,000 of
short-term fixed-rate advances from the FHLBA at an average fixed rate of 5.75%.
The advances were repaid in 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 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, 1997 the Company had a gap ratio of 0.96 for the one-year period
ending December 31, 1998. Thus, over the next twelve months, more rate-sensitive
liabilities will reprice than rate-sensitive assets.
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.
RESULTS OF OPERATIONS - 1997 VS. 1996
Net Interest Income
Net interest income rose 19.6%, or $2,247,817, from $11,475,753 in 1996
to $13,723,570 in 1997. This increase in net interest income can be attributed
to growth in loans and investments and an improved net interest margin, partly
offset by growth in time deposits and short-term borrowings. During 1997, the
net interest margin was 6.06% on average earning
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<PAGE> 32
assets of $226,604,000. In 1996, the net interest margin was 5.84% on average
earning assets of $197,220,000. The average yield on earning assets increased 18
basis points to 9.16% in 1997 from 8.98% in 1996. The average rate paid on
interest-bearing liabilities decreased 2 basis points to 4.33% in 1997 from
4.35% in 1996. The increased earning assets yield was primarily the result of
improved pricing of loans in 1997 compared to 1996. Of the $2,248,000 increase
in net interest margin in 1997 over 1996, approximately $1,900,000 was due to
increased balances.
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 paying 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.
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
non-performing 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 1997 was
$188,300, a 70.8% decrease from the provision of $645,000 recorded in 1996. Net
charge-offs were $304,672 or .18% of average loans outstanding during 1997 as
compared to $416,624 or .30% of average loans outstanding during 1996. At
December 31, 1997, the allowance for loan losses was $2,655,412 or 1.46% of
loans outstanding as compared to $2,771,784 or 1.73% of loans outstanding at
December 31, 1996. The allowance for loan losses as a multiple of net loans
charged off was 8.72 times and 6.65 times for the years ended December 31, 1997
and 1996, respectively.
At December 31, 1997, the Company held one residential home property in
other real estate owned, in the amount of $209,570. Management anticipates an
orderly disposition of this asset with no significant loss at sale. At December
31, 1997, the Company had aggregate non-accrual loans of $394,557, a decrease
from $1,062,206 at the prior year end. The ratio of non-accrual loans to total
loans was .22% at December 31, 1997, and .66% at December 31, 1996. At December
31, 1997, there were three loans totaling $81,838 past due 90 days or more and
still accruing.
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<PAGE> 33
During the second quarter of 1997, Mountain received a cash settlement
in a lawsuit that was initiated in August 1995 by Mountain. Accordingly, the
Company's December 31, 1997 balance sheet and income statement reflect the
effect of this settlement.
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, 1997 and 1996, the Company held
impaired loans as defined by SFAS 114 of approximately $518,000 and $960,000,
respectively, for which specific allocations of approximately $35,000 and
$205,000, respectively, have been established within the allowance for loan
losses. The average recorded investment and related interest income recognized
on these loans were approximately $617,000 and $51,000 in 1997 and $1,109,000
and $68,000 in 1996.
Non-Interest Income
Non-interest income was $1,448,801 for the year ended December 31, 1997,
compared to $1,267,781 for 1996, a 14.3% increase. This increase resulted
primarily from higher service charges and fees on deposits, offset by lower
other income. Deposit volume growth increased fees on deposits 34.4%, or
$277,454, in 1997 compared to 1996. Other income fell 24.3%, or $111,703, in
1997 compared to 1996. Included in other income in 1996 was a one-time gain of
$67,500 from an insurance recovery and gains on sale of real estate owned of
$29,800. Non-interest income includes fees from brokerage services the Company
provides its clients through a contractual third-party relationship with INVEST
Financial Corporation. This service produced income of $53,103 in 1997 compared
to $60,612 in 1996.
Non-Interest Expense
Non-interest expense increased 22.8%, or $1,512,843, to $8,144,980
during 1997 compared to 1996. Salaries and other personnel expense increased
14.7% in 1997 over 1996, and other operating expense increased 45.5%, reflecting
the Company's continued growth.
Occupancy and equipment expense increased 17.1%, or $162,658, over 1996,
partly the result of Mountain's opening a combined branch bank/operations center
in April 1996, and Charter's opening a new full service branch in November 1996.
Legal fees increased 7.5% in 1997 from 1996, as a result of the lawsuit
previously discussed, which was 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 due to unprofitable activity before year-end 1997.
Therefore, an impairment loss under Statement of 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 write-off, non-interest expense increased
17.5% in 1997 over 1996.
Net non-interest expense (defined as non-interest expense less
non-interest income) as a percentage of average assets increased from 2.47% in
1996 to 2.69% in 1997. The efficiency ratio (non-interest expense divided by the
sum of net interest income and non-interest income) was 53.7% in 1997, compared
to 52.0% in 1996. Excluding the goodwill write-off discussed above, the 1997 net
non-interest expense to average assets ratio was 2.55% and the efficiency
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<PAGE> 34
ratio was 51.4%, basically unchanged from 1996. These ratios have held steady
even though the Company's earning assets and deposit base grows and its branch
system expands. Management continues to focus on improving non-interest fee
income and controlling operating expenses.
Income Taxes
At December 31, 1997, the Company's net deferred tax asset was $640,516.
No valuation allowance was recorded for this asset since taxable income exists
in the available carryback periods in an amount which would ensure realization
of the asset.
In 1997, the Company recorded an income tax provision of $2,398,116,
reflecting an effective tax rate of 35.0%. This compared with a provision of
$1,963,105 in 1996 and a 35.9% effective tax rate.
Capital Resources
At December 31, 1997, the Company's tier I capital ratio was 15.6%
compared to 14.7% at December 31, 1996. At December 31, 1997, the Company's
total risk based capital ratio was 16.9% compared to 15.9% 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.
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.
The Company has developed and is implementing a strategic plan to
address Year 2000 issues. The Year 2000 problem, in brief, involves the risk
that various systems will not operate correctly beyond the century date
change-over on January 1, 2000. The Company has identified the various systems
impacted, assessed the risks involved, and is currently testing the systems for
compliance. The Company is also contacting its vendors and major loan customers
to address their exposure to this problem. At this time, the Company does not
believe that the cost arising from the Year 2000 project will be material,
although there can be no assurance that unforeseen difficulties or costs will
not arise.
In January 1998, the Board of Directors of the Company approved a stock
repurchase program under which the Company may purchase up to 100,000 shares of
its Common Stock in the open market at prevailing market prices.
RESULTS OF OPERATIONS - 1996 VS. 1995
Net income was $3,503,292 in 1996 compared to $3,006,383 in 1995. Basic
earnings per share was $.95 in 1996 compared to $.83 in 1995 and diluted
earnings per share was $.81 in 1996 and $.70 in 1995.
The increase in net income for the year ended December 31, 1996, was
attributable to a 9.5% increase in net interest income, or $995,457, a decrease
of 38.8% in the provision for loan losses, or $409,297, offset by a decrease of
25.5% in non-interest income, or $433,491; and an increase in non-interest
expense of 6.4%, or $399,276.
Net interest income was $11,475,753 in 1996, the result of a net
interest margin of 5.84% on average earning assets of $197,220,000. This
compares with a net interest margin of 6.06% on average earning assets of
$173,179,000 in 1995. The decrease in the net interest margin was attributable
to lower yields on earning assets, down 30 basis points, as the result of lower
market
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<PAGE> 35
rates, partly offset by lower rates on interest paying liabilities, down 7 basis
points. The decrease in net interest margin accounted for a decrease of
approximately $390,000 in net interest income. Higher volumes produced an
increase of approximately $1,419,000 in net interest margin.
Non-interest income was $1,267,781 in 1996, compared with $1,701,272 in
1995. This decrease came from increased fees on deposits and service charges as
a result of volume growth, offset by lower gains on sale of SBA loans and a gain
in 1995 of $347,522 from the sale of stock in a publicly traded bank holding
company which the Company acquired in partial settlement of a loan.
Non-interest expense was $6,632,137 in 1996 versus $6,232,861 in 1995.
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 $645,000 in 1996
compared to $1,054,297 in 1995. 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 $416,624 in 1996,
representing .30% of average loans outstanding during the year, compared to
$199,694 in 1995 or .16% of average loans outstanding during 1995. At December
31, 1996, the allowance for loan losses was $2,771,784, or 1.72% of loans
outstanding, compared to $2,543,408, or 1.91% of loans outstanding at December
31, 1995.
In 1996 the Company recorded an income tax provision of $1,963,105,
reflecting an effective tax rate of 35.9%. This compares with a provision of
$1,888,027 in 1995 reflecting a 38.6% effective tax rate.
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>
1997 Quarters 1996 Quarters
-------------------------------------- ------------------------------------
Fourth Third Second First Fourth Third Second First
-------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income from earning assets $5,673 $ 5,307 $5,018 $4,750 $4,795 $4,580 $4,229 $4,052
Net interest income
(taxable-equivalent) 3,699 3,501 3,395 3,166 3,164 2,941 2,756 2,662
Net interest income 3,691 3,490 3,389 3,153 3,152 2,930 2,743 2,651
Provision for loan losses 153 (265) 150 150 150 165 165 165
Noninterest income 387 358 346 356 330 293 362 283
Other noninterest expense 1,937 2,304 1,971 1,933 1,893 1,660 1,592 1,487
Income before taxes 1,988 1,810 1,615 1,427 1,439 1,398 1,348 1,281
Net income 1,285 1,173 1,050 933 919 896 863 825
Earnings per
common share - basic .33 .32 .28 .25 .25 .24 .23 .22
common share - diluted .27 .25 .23 .21 .21 .21 .20 .19
Dividends per common share .05 .04 .04 .04 .04 -- -- --
</TABLE>
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<PAGE> 36
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, 1997 the Company had a gap ratio of 0.96 for the one-year period
ending December 31, 1998. Thus, over the next twelve months, more rate-sensitive
liabilities will reprice than rate-sensitive assets.
A 100 basis point decrease in interest rates spread evenly during 1998
is estimated to cause a decline in net interest income of 4.6% or $682,000
before tax effect as compared to net interest income if interest rates were
unchanged during 1998. This low 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, 1997 and 1996
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
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<PAGE> 37
[PRICE WATERHOUSE LETTERHEAD]
Report of Independent Accountants
January 26, 1998
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, 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, 1997 and 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, 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.
/s/ Price Waterhouse LLP
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<PAGE> 38
MERIT HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
<S> <C> <C>
ASSETS
Cash and due from banks $ 17,585,760 $ 14,295,260
Federal funds sold and other short-term investments 14,293,899 7,759,285
Interest-bearing time deposits with other financial
institutions -- 100,000
Investment securities, held-to-maturity at cost
(market value of $1,472,473 and $1,666,200 at
December 31, 1997 and 1996, respectively)
(Notes 2 and 4) 1,521,291 1,757,813
Securities available-for-sale (Notes 2 and 4) 44,353,709 43,481,766
Federal Reserve Bank stock 299,850 299,850
Federal Home Loan Bank stock 1,331,700 1,041,600
Loans, less allowance for loan losses of $2,655,412
and $2,771,784 at December 31, 1997 and 1996
respectively (Notes 2 and 5) 179,184,439 157,915,964
Premises and equipment, net (Notes 2 and 6) 5,529,319 5,633,032
Other real estate owned 209,570 110,747
Accrued interest receivable and other assets 3,053,342 3,784,986
------------ ------------
Total assets $267,362,879 $236,180,303
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (Note 7)
Demand $ 61,672,902 $ 57,396,092
Checking with interest 31,403,603 27,227,950
Money-market accounts 40,876,193 34,457,084
Savings 2,695,770 3,508,905
Time, $100,000 and over 26,218,536 25,916,972
Other time 57,416,727 44,189,759
------------ ------------
220,283,731 192,696,762
Short-term borrowings (Note 8) 6,431,752 11,537,548
Long-term debt (Note 8) 5,282,847 3,263,686
Accrued interest payable and other liabilities 3,298,721 1,882,759
------------ ------------
Total liabilities 235,297,051 209,380,755
------------ ------------
Commitments and contingencies (Note 13)
Shareholders' equity (Note 10)
Common stock, $2.50 par value; 10,000,000
shares authorized; 3,990,233 and 3,704,102 issued;
3,989,033 and 3,704,102 outstanding at December 31,
1997 and 1996, respectively 9,975,583 9,260,255
Paid-in capital 8,777,179 8,061,624
Retained earnings 13,110,971 9,314,117
Unrealized gain on securities available-for-sale, net of tax 224,505 163,552
Treasury stock, 1,200 and 0 shares, at cost at
December 31, 1997 and 1996, respectively (22,410) --
------------ ------------
Total shareholders' equity 32,065,828 26,799,548
------------ ------------
Total liabilities and shareholders' equity $267,362,879 $236,180,303
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 39
MERIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
Interest and dividend income
Interest and fees on loans (Note 2) $16,902,123 $14,135,633 $13,017,913
Interest on securities 3,013,084 2,659,263 2,102,205
Interest on federal funds sold and other
short-term investments 720,900 775,797 841,432
Interest on time deposits with other
institutions 3,831 9,928 28,813
Dividends on Federal Reserve Bank stock 17,991 17,991 17,991
Dividends on Federal Home Loan Bank stock 90,066 57,771 50,478
----------- ----------- -----------
Total interest and dividend income 20,747,995 17,656,383 16,058,832
----------- ----------- -----------
Interest expense on deposits 6,266,716 5,730,931 5,287,014
Interest expense on long-term debt 299,714 196,787 173,716
Interest expense on short-term borrowings 457,995 252,912 117,806
----------- ----------- -----------
Total interest expense 7,024,425 6,180,630 5,578,536
----------- ----------- -----------
Net interest income 13,723,570 11,475,753 10,480,296
Provision for loan losses (Notes 2 and 5) 188,300 645,000 1,054,297
----------- ----------- -----------
Net interest income after provision for loan losses 13,535,270 10,830,753 9,425,999
----------- ----------- -----------
Non-interest income
Service charges and fees on deposits 1,082,891 805,437 719,787
Gain on sale of SBA loans 18,678 3,409 247,458
Other income 347,232 458,935 734,027
----------- ----------- -----------
Total non-interest income 1,448,801 1,267,781 1,701,272
----------- ----------- -----------
Non-interest expense
Salaries and other personnel 3,919,086 3,416,451 3,167,918
Occupancy and equipment 1,109,549 946,891 791,702
Advertising and marketing 129,279 127,646 104,525
FDIC insurance premiums 22,114 49,341 183,323
Legal fees 284,349 264,420 236,925
Data processing fees 179,999 139,227 137,895
Loss on sales of securities, net 43,495 -- 59,788
Other operating 2,457,109 1,688,161 1,550,785
----------- ----------- -----------
Total non-interest expense 8,144,980 6,632,137 6,232,861
----------- ----------- -----------
Income before income taxes 6,839,091 5,466,397 4,894,410
Provision for income taxes (Notes 2 and 9) 2,398,116 1,963,105 1,888,027
----------- ----------- -----------
Net income $ 4,440,975 $ 3,503,292 $ 3,006,383
=========== =========== ===========
Basic earnings per share $ 1.18 $ .95 $ .83
=========== =========== ===========
Diluted earnings per share $ .96 $ .81 $ .70
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-38-
<PAGE> 40
MERIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
COMMON STOCK ON SECURITIES
NUMBER AVAILABLE
OF SHARES PAID-IN RETAINED FOR SALE, TREASURY
OUTSTANDING PAR VALUE CAPITAL EARNINGS NET OF TAX STOCK TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 3,730,648 $9,326,620 $8,061,563 $2,952,607 $(226,581) $(740,480) $19,373,729
Exercise of warrants 77,167 192,917 240,875 433,792
Unrealized gain on available-for-sale
securities, net of tax 497,613 497,613
Net income 3,006,383 3,006,383
---------- ---------- ---------- ----------- --------- --------- -----------
Balance at December 31, 1995 3,807,815 9,519,537 8,302,438 5,958,990 271,032 (740,480) 23,311,517
Exercise of options and warrants 39,047 97,618 142,766 240,384
Retirement of treasury stock (142,760) (356,900) (383,580) 740,480 --
Dividend declared (148,165) (148,165)
Unrealized loss on available-for-sale
securities, net of tax (107,480) (107,480)
Net income 3,503,292 3,503,292
---------- ---------- ---------- ----------- --------- --------- -----------
Balance at December 31, 1996 3,704,102 9,260,255 8,061,624 9,314,117 163,552 -- 26,799,548
Exercise of options and warrants 286,131 715,328 715,555 1,430,883
Treasury stock purchased (1,200) (22,410) (22,410)
Dividends declared (644,121) (644,121)
Unrealized gain on available for sale
securities, net of tax 60,953 60,953
Net income 4,440,975 4,440,975
---------- ---------- ---------- ----------- --------- --------- -----------
Balance at December 31, 1997 3,989,033 $9,975,583 $8,777,179 $ 13,110,971 $ 224,505 $ (22,410) $32,065,828
========== ========== ========== ============ ========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 41
MERIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 4,440,975 $ 3,503,292 $ 3,006,383
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 908,807 453,919 394,008
Net amortization of premiums and discounts on
securities (110,002) 57,519 19,935
Provision for loan losses 188,300 645,000 1,054,297
Loss on sales of securities, net 43,495 -- 59,788
Gain on sale of SBA loans (18,678) (3,409) (247,458)
(Gain) loss on sale of other real estate (6,459) (6,904) 56,124
Increase in interest receivable (303,708) (166,286) (405,759)
Increase (decrease) in interest payable 583,061 (10,850) 657,275
Decrease (increase) in prepaid expenses and
other assets 196,441 (1,242,259) 97,482
Increase (decrease) in accrued expenses and
other liabilities 745,402 (109,057) (499,300)
------------ ------------ ------------
Net cash provided by operating activities 6,667,634 3,120,965 4,192,775
------------ ------------ ------------
Cash flows from investing activities
Purchases of held-to-maturity securities -- (100,410) (200,000)
Proceeds from maturities of held-to-maturity securities 235,000 180,250 714,104
Purchases of available-for-sale securities (including
mortgage-backed securities) (42,384,369) (12,706,762) (20,986,634)
Proceeds from sales of available-for-sale securities
(including mortgage-backed securities) 21,890,304 2,011,107 6,590,253
Proceeds from maturities of available-for-sale securities 19,788,462 4,000,000 8,134,715
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) (105,600)
Proceeds from sale of other real estate 338,170 712,083 1,409,198
Loans made to customers, net (21,438,097) (27,883,261) (17,191,150)
Capital expenditures, net of retirements (396,715) (1,483,372) (288,581)
------------ ------------ ------------
Net cash used in investing activities (22,157,345) (35,512,915) (21,923,695)
------------ ------------ ------------
Cash flows from financing activities
(Repayments) proceeds from short-term borrowings, net (5,105,796) 7,039,993 2,572,644
Proceeds from long-term debt 2,300,000 969,890 --
Repayment of long-term debt (280,839) (189,920) (129,772)
Net increase in deposits 27,586,969 19,633,221 13,906,636
Proceeds from exercise of stock options/warrants 1,430,883 240,384 433,792
Dividends paid (593,982) -- --
Purchase of treasury stock (22,410) -- --
------------ ------------ ------------
Net cash provided by financing activities 25,314,825 27,693,568 16,783,300
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 9,825,114 (4,698,382) (947,620)
Cash and cash equivalents at beginning of period 22,054,545 26,752,927 27,700,547
------------ ------------ ------------
Cash and cash equivalents at end of period $ 31,879,659 $ 22,054,545 $ 26,752,927
============ ============ ============
Supplemental data
Interest paid $ 6,440,444 $ 6,192,409 $ 4,921,260
============ ============ ============
Income taxes paid $ 1,861,000 $ 2,670,000 $ 2,594,450
============ ============ ============
Transfer from loans to real estate acquired
through foreclosure $ 234,000 -- $ 1,418,353
============ ============ ============
Transfer of investment securities to available
for sale -- -- $ 9,035,630
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 42
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Mountain and Charter (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.
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 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.
-41-
<PAGE> 43
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 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 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.
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.
-42-
<PAGE> 44
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
ESTIMATED FAIR VALUES
In accordance with Statement of Financial Accounting Standards No. 107
("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
In June 1996, the Financial Accounting Standards Board ("FASB") issued
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. SFAS 125 is effective for transactions occurring after December
31, 1996; however, the FASB delayed implementation of certain provisions of
SFAS 125 for one year.
NET INCOME PER SHARE
In February 1997, the FASB issued Statement of Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128"). SFAS 128 requires the Company to
present both basic and diluted earnings per share on the statement of
income because the Company has potential common stock outstanding. Basic
earnings per share is computed by dividing net income by the
weighted-average number of shares outstanding for the year. Diluted earning
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>
1997 1996 1995
<S> <C> <C> <C>
Basic earnings per share 3,769,381 3,696,131 3,636,481
Dilutive options and warrants 874,966 622,873 663,597
--------- --------- ---------
Diluted earnings per share 4,644,347 4,319,004 4,300,078
========= ========= =========
</TABLE>
Earnings per share for 1996 and 1995 have been restated to provide
comparable information to 1997.
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.
-43-
<PAGE> 45
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. 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, 1997 and 1996 was approximately
$1,955,000 and $1,849,000, respectively.
2. INVESTMENT SECURITIES (INCLUDING MORTGAGE-BACKED CERTIFICATES)
The amortized cost and estimated market value of investment securities
held-to-maturity at December 31, 1997 and 1996 are presented below:
<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>
<TABLE>
<CAPTION>
1996
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S Government Agencies $1,000,000 $ -- $ 104,940 $ 895,060
Tax exempt bonds 757,813 14,410 1,083 771,140
---------- -------- ---------- ----------
$1,757,813 $ 14,410 $ 106,023 $1,666,200
========== ======== ========== ==========
</TABLE>
-44-
<PAGE> 46
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The amortized cost and estimated market value of investment securities
held-to-maturity at December 31, 1997 by contractual maturity are shown
below:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
<S> <C> <C>
Due in one year or less $ -- $ --
Due after one year through five years 220,923 232,741
Due after five years through ten years 1,300,368 1,239,732
Due after ten years -- --
---------- ----------
$1,521,291 $1,472,473
========== ==========
</TABLE>
The amortized cost and estimated market value for securities
available-for-sale (including mortgage-backed certificates) at December 31,
1997 and 1996 are presented below:
<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>
<TABLE>
<CAPTION>
1996
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S Treasuries $13,950,786 $ 96,707 $ 151 $14,047,342
U.S Government Agencies 22,286,193 205,283 44,835 22,446,641
Mortgage-backed certificates 6,980,992 34,990 28,199 6,987,783
----------- -------- ----------- -----------
$43,217,971 $336,980 $ 73,185 $43,481,766
=========== ======== =========== ===========
</TABLE>
-45-
<PAGE> 47
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The amortized cost and estimated market value of investment securities
available-for-sale at December 31, 1997 by contractual maturity are shown
below:
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
<S> <C> <C>
Due in one year or less $ 4,991,866 $ 4,998,438
Due after one year through five years 15,508,607 15,648,285
Due after five years through ten years 18,636,182 18,829,707
----------- -----------
39,136,655 39,476,430
Mortgage-backed certificates 4,854,948 4,877,279
----------- -----------
$43,991,603 $44,353,709
=========== ===========
</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 1997 and
1995 were $21,890,304 and $6,590,253 respectively. Net losses of $43,495
and $59,788 were realized on those sales, respectively. There were no sales
of investment securities during 1996; however, proceeds from paydowns of
mortgage-backed certificates were $2,011,107.
Investment securities with a carrying value of approximately $28,251,727
and $29,471,803 at December 31, 1997 and 1996, 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, 1997 and 1996 is
presented below:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Commercial $ 99,746,972 $ 91,324,703
Real estate - construction and land
development 39,974,467 34,407,374
Real estate - mortgage 30,619,969 20,241,934
Instalment and other consumer 11,490,743 14,686,037
Farm land 7,700 27,700
------------- -------------
181,839,851 160,687,748
Less: Allowance for loan losses (2,655,412) (2,771,784)
------------- -------------
$ 179,184,439 $ 157,915,964
============= =============
</TABLE>
-46-
<PAGE> 48
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Activity in the allowance for loan losses for the three years ended
December 31, 1997 is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Beginning balance $2,771,784 $2,543,408 $1,688,805
Provision for loan losses 188,300 645,000 1,054,297
Recoveries 188,287 162,203 64,975
Charge-offs (492,959) (578,827) (264,669)
---------- ---------- ----------
Ending balance $2,655,412 $2,771,784 $2,543,408
========== ========== ==========
</TABLE>
At December 31, 1997, 1996 and 1995, the Banks had aggregate non-accrual or
reduced rate loans of $394,557, $1,062,206, and $1,298,017, respectively.
If interest on these loans had been accrued throughout the year, income on
these loans would have been increased by approximately $74,163 in 1997,
$158,000 in 1996 and $130,000 in 1995. Additionally, at December 31, 1997
and 1996, the Banks held impaired loans as defined by SFAS 114 of
approximately $518,000 and $960,000, respectively, for which specific
allocations of approximately $35,000 and $205,000 respectively, have been
established within the allowance for loan losses. The average recorded
investment and related interest income recognized on these loans were
approximately $617,000 and $51,000 in 1997 and $1,109,000 and $68,000 in
1996.
6. PREMISES AND EQUIPMENT
At December 31, 1997 and 1996, premises and equipment balances are as
follows:
<TABLE>
<CAPTION>
USEFUL
LIVES 1997 1996
<S> <C> <C> <C>
Land $ 1,098,580 $ 1,098,580
Bank buildings 30-40 years 4,458,799 4,388,096
Equipment, furniture
and fixtures 3-10 years 2,657,058 2,392,526
----------- -----------
8,214,437 7,879,202
Less: Accumulated depreciation (2,685,118) (2,246,170)
----------- -----------
$ 5,529,319 $ 5,633,032
=========== ===========
</TABLE>
-47-
<PAGE> 49
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. DEPOSITS
The maturities of the Bank's time deposits at December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998 $77,581,505
1999 2,771,509
2000 1,511,374
2001 875,828
2002 895,047
Thereafter --
-----------
$83,635,263
===========
</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
($6,431,752 and $7,537,548 at December 31, 1997 and 1996, respectively). At
December 31, 1997 and 1996, the Banks have federal funds lines from other
banks totaling $25,750,000 and $20,500,000, respectively. There were no
amounts outstanding under these short-term commitments at December 31, 1997
and 1996. 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.
The Banks had outstanding long-term fixed rate advances from the FHLBA of
$5,282,847 and $3,263,686 at December 31, 1997 and 1996, respectively. The
average interest rate paid on the long-term advances during 1997 and 1996
was 6.66% and 6.55%, respectively. All the advances are collateralized by
certain 1-4 family residential properties and investment securities as
required by the FHLBA. At December 31, 1997, aggregate principal maturities
of the advances are as follows:
<TABLE>
<S> <C>
1998 $ 487,890
1999 1,120,557
2000 2,189,025
2001 370,500
2002 370,500
Thereafter 744,375
----------
$5,282,847
==========
</TABLE>
-48-
<PAGE> 50
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. INCOME TAXES
The components of income tax expense for the years ended December 31, 1997,
1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Federal:
Current $2,241,514 $1,825,962 $2,047,701
Deferred provision (benefit) 41,148 7,611 (282,195)
---------- ---------- ----------
2,282,662 1,833,573 1,765,506
State:
Current 110,882 128,959 248,325
Deferred provision (benefit) 4,572 573 (125,804)
---------- ---------- ----------
$2,398,116 $1,963,105 $1,888,027
========== ========== ==========
</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,
1997 1996 1995
<S> <C> <C> <C>
Income before income taxes $6,839,092 $5,466,397 $4,894,410
========== ========== ==========
Federal income taxes at statutory rate 2,325,591 $1,858,575 $1,664,099
State tax 115,454 85,491 163,894
Nondeductible expenses 37,584 36,216 26,170
Interest on tax exempt securities (34,834) (16,470) (14,153)
Other (45,679) (707) 48,017
---------- ---------- ----------
Income tax expense $2,398,116 $1,963,105 $1,888,027
========== ========== ==========
Effective income tax rate 35% 36% 39%
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax liabilities
Premises and equipment $ 52,791 $ 7,036
Discount on investment securities 88,469 96,940
Accrual to cash conversion 23,283 46,566
Unrealized gain on securities available-for-sale 137,601 91,998
-------- --------
Total deferred tax liabilities 302,144 242,540
-------- --------
Deferred tax assets
Allowance for loan losses 799,995 844,170
Gain on SBA loans 20,309 27,400
Loan fees, net 71,552 28,988
Non-accrual loans 23,889 12,877
Other 26,915 60,944
-------- --------
Total deferred tax assets 942,660 974,379
-------- --------
Net deferred tax assets $640,516 $731,839
======== ========
</TABLE>
-49-
<PAGE> 51
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 and 1996, 714,599 and 979,799 warrants were outstanding,
respectively.
During 1993 and 1994, Charter issued 98,070 and 28,350 warrants,
respectively, which entitled the purchasers to purchase additional shares
of common stock at the greater of the Company's book value at the date of
exercise or $4.35 per share. In connection with the merger of Charter with
Merit in 1994, these warrants were canceled and new warrants to purchase
the Company's common stock were issued. As of December 31, 1995, 34,214
warrants were outstanding. However, prior to their expiration date of
February 29, 1996, 32,437 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. At December 31, 1997, 98,894 of the Charter
options are outstanding.
The Company has an Incentive Stock Option Plan (the "Plan") under which
350,000 shares have been reserved. Expiration of the options is no later
than ten years from the date of grant. 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. All options granted prior to January 1, 1996 are fully vested.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
OPTION PRICE
SHARES PER SHARE
<S> <C> <C>
Outstanding at December 31, 1995 94,900
Granted 24,000 $11.75
Exercised (5,000) $ 5.00
Expired (650) $10.25
-------
Outstanding at December 31, 1996 113,250
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
=======
</TABLE>
-50-
<PAGE> 52
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
As of December 31, 1997, there were 209,200 options available for grant and
82,175 options available for exercise under the Plan.
Additionally, the Board of Directors may grant stock options for up to
100,000 shares of the Company's common stock to the president of Mountain
pursuant to a stock bonus arrangement. As of December 31, 1997, the Board
of Directors had granted stock options of 92,500 shares at $5.00 per share
to the president. The remaining 7,500 options were granted at $5.00 per
share subsequent to December 31, 1997. All unexercised options expire on
August 2, 1998. No options under this arrangement have been exercised as of
December 31, 1997.
In December 1993, the Board of Directors agreed to purchase 15,000 shares
of stock owned by the president of Mountain at a price not to exceed $5.50
per share and agreed to grant the president an option to purchase 15,000
shares at an option price equal to the price paid by the Company when
purchasing the president's 15,000 shares. In January 1994, the president
sold 15,000 shares of his stock to the Company for $5.00 per share and the
related options under the agreement were granted at $5.00 per share. No
options under this arrangement have been exercised.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") was issued by FASB during 1995 and
was effective for the Company in 1996. SFAS 123 allows companies to adopt
the fair value based method of accounting or to continue using the
intrinsic value based method of accounting prescribed by APB Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"). Since the
Company has elected to continue applying APB 25 in accounting for its
plans, no compensation cost has been recognized in 1995, 1996 or 1997.
Additionally, in accordance with SFAS 123, the Company is required to
disclose fair value information about its stock-based employee compensation
plans for periods beginning after January 1, 1995. 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 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>
1997 1996 1995
<S> <C> <C> <C>
Dividend yield 0.82% 0.30% 0.30%
Expected life 6 years 6 years 6 years
Expected volatility 34.93% 30.00% 30.00%
Risk-free interest rate 5.77% 5.45% 6.15%
Weighted- average fair values of options granted $6.30 $5.82 $5.03
</TABLE>
-51-
<PAGE> 53
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table sets forth the effect on net income and diluted
earnings per share:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C> <C>
Net income As reported $4,440,975 $3,503,292 $3,006,383
Pro forma $4,425,008 $3,452,070 $2,901,273
Diluted earnings per share As reported $ 0.96 $ 0.81 $ 0.70
Pro forma $ 0.96 $ 0.80 $ 0.68
</TABLE>
11. PROFIT SHARING PLAN
Mountain established the Mountain National Bank Profit Sharing 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. Mountain will
make an annual matching contribution equal to a percentage of the amount
contributed by the employee, up to 3% of the employee's annual
compensation. In 1996 and 1995 Mountain accrued matching contributions of
approximately $45,000 and $35,000, respectively.
Charter 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. Charter's matching contribution is equal
to 50% of the employee's contribution in 1996 and 1995, up to 6% of the
employee's annual compensation. Amounts expensed in 1996 and 1995 as a
result of the employer's contributions to this plan totaled $28,898 and
$26,789, respectively.
As of December 31, 1996, the Charter plan was renamed the Merit Holding
Corporation 401(k) Profit Sharing Plan and the Mountain profit sharing plan
was merged into it. The Company's 1997 matching contribution of $77,033 is
equal to 100% of the employee's contribution in 1997, up to 3% of the
employee's annual compensation.
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.
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.
-52-
<PAGE> 54
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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:
INTEREST-BEARING TIME DEPOSITS WITH OTHER FINANCIAL INSTITUTIONS.
Fair value for time deposits with other financial institutions is based on
the present value of projected future cash in-flows.
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.
-53-
<PAGE> 55
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The carrying value of financial instruments and their related estimated
fair values as of December 31, 1997 and 1996 are presented below:
<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 39,476,430 39,476,430
Mortgage-backed certificates
available-for-sale 4,877,279 4,877,279
Loans, net of allowance for loan losses 179,184,439 181,929,814
Financial liabilities
Fixed-maturity time deposits 83,635,263 83,858,322
Short-term borrowings 6,431,752 7,256,681
Long-term debt 5,282,847 5,349,996
</TABLE>
<TABLE>
<CAPTION>
1996
ESTIMATED
CARRYING FAIR
VALUE VALUE
<S> <C> <C>
Financial assets
Interest-bearing time deposits with
other financial institutions $ 100,000 $ 100,863
Investment securities
held-to-maturity 1,757,813 1,666,200
available-for-sale 36,493,983 36,493,983
Mortgage-backed certificates
available-for-sale 6,987,783 6,987,783
Loans, net of allowance for loan losses 157,915,964 154,729,893
Financial liabilities
Fixed-maturity time deposits 70,106,731 72,732,418
Short-term borrowings 11,715,438 11,926,190
Long-term debt 3,263,686 3,675,772
</TABLE>
-54-
<PAGE> 56
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
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, 1997 and 1996,
unfunded commitments to extend credit were approximately $61,222,000 and
$52,006,000, 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 credit
worthiness 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,
1997 and 1996, commitments under letters of credit aggregated approximately
$2,468,000 and $2,310,000, 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 Bank's 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
associated with these matters would not be material to 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, 1997.
-55-
<PAGE> 57
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. RELATED PARTY TRANSACTIONS
At December 31, 1997 and 1996, deposits obtained from directors, executive
officers and their related interests were approximately $11,081,289 and
$8,736,000, 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, 1995 $ 4,027,190
New loans 3,415,890
Payoffs (2,650,735)
-----------
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
===========
</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,
1996, that the Banks meet all capital adequacy requirements to which they
are subject.
As of December 31, 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. There are no conditions or events
since those notifications that management believes have changed the Banks'
categories.
-56-
<PAGE> 58
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Banks' actual capital amount 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, 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>
<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, 1996
Total capital
(to risk-weighted assets)
Consolidated $28,825 15.9% > $14,484 > 8.0% N/A
- -
Mountain National Bank $15,895 16.7% > $ 7,621 > 8.0% > $9,527 > 10.0%
- - - -
Charter Bank & Trust $12,218 14.1% > $ 6,957 > 8.0% > $8,696 > 10.0%
- - - -
Tier I Capital (to risk-weighted assets)
Consolidated $26,556 14.7% > $ 7,242 > 4.0% N/A
- -
Mountain National Bank $14,699 15.4% > $ 3,810 > 4.0% > $5,715 > 6.0%
- - - -
Charter Bank & Trust $11,131 12.8% > $ 3,479 > 4.0% > $5,218 > 6.0%
- - - -
Tier I Capital (to average assets)
Consolidated $26,556 11.3% > $ 7,054 > 3.0% N/A
- -
Mountain National Bank $14,699 12.5% > $ 3,536 > 3.0% > $5,893 > 5.0%
- - - -
Charter Bank & Trust $11,131 9.5% > $ 3,515 > 3.0% > $5,858 > 5.0%
- - - -
</TABLE>
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, 1997 is approximately $7,100,000.
-57-
<PAGE> 59
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONDENSED FINANCIAL STATEMENTS OF HOLDING COMPANY
Following are the condensed balance sheets of Merit Holding Corporation at
December 31, 1997 and 1996, and the related condensed statements of income
and of cash flows for the three years ended December 31, 1997.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
<S> <C> <C>
ASSETS
Cash $ 1,164,744 $ 425,204
Investment in bank subsidiaries 31,119,336 26,542,508
----------- -----------
$32,284,080 $26,967,712
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Dividends payable $ 198,312 $ 148,165
Other liabilities 19,940 20,000
Shareholders' equity 32,065,828 26,799,547
----------- -----------
$32,284,080 $26,967,712
=========== ===========
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
Dividends from bank subsidiaries $ 100,000 $ -- $ 40,000
Operating expenses (253,524) (156,411) (173,043)
----------- ----------- -----------
Loss before income taxes and
equity in earnings of bank subsidiaries (153,524) (156,411) (133,043)
Income tax benefit (expense) 93,804 53,179 (618)
----------- ----------- -----------
Loss before equity in earnings of
bank subsidiaries (59,720) (103,232) (133,661)
Equity in undistributed earnings of bank subsidiaries 4,500,695 3,606,524 3,140,044
----------- ----------- -----------
Net income $ 4,440,975 $ 3,503,292 $ 3,006,383
=========== =========== ===========
</TABLE>
-58-
<PAGE> 60
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 4,440,976 $ 3,503,292 $ 3,006,383
Adjustments to reconcile net income
to net cash used in operating activities
Undistributed equity in income
of bank subsidiaries (4,500,695) (3,606,524) (3,140,044)
Amortization of organizational costs -- 4,584 11,001
(Increase) decrease in other assets (15,178) (53,179) 618
(Decrease) increase in other liabilities (54) 15,000 3,150
----------- ----------- -----------
Net cash used in operating activities (74,951) (136,827) (118,892)
----------- ----------- -----------
Cash flows from financing activities
Dividends paid (593,982) -- --
Proceeds from exercise of stock options 1,430,883 240,383 433,792
Purchase of treasury stock (22,410) -- --
----------- ----------- -----------
Net cash provided by financing activities 814,491 240,383 433,792
----------- ----------- -----------
Net increase in cash 739,540 103,556 314,900
Cash at beginning of the period 425,204 321,648 6,748
----------- ----------- -----------
Cash at end of the period $ 1,164,744 $ 425,204 $ 321,648
=========== =========== ===========
</TABLE>
-59-
<PAGE> 61
MERIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
17. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
1997 QUARTERS 1996 QUARTERS
-------------------------------------------- ------------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest and dividend
income $5,673 $5,307 $5,018 $4,750 $4,795 $4,580 $4,229 $4,052
Net interest income 3,691 3,490 3,389 3,153 3,152 2,930 2,743 2,651
Provision for loan losses 153 (265) 150 150 150 165 165 165
Total non-interest income 387 358 346 356 330 293 362 283
Total non-interest expense 1,937 2,304 1,971 1,933 1,893 1,660 1,592 1,487
Income before income taxes 1,988 1,810 1,615 1,427 1,439 1,398 1,348 1,281
Net income 1,285 1,173 1,050 933 919 896 863 825
Basic earnings per share 0.33 0.32 0.28 0.25 0.25 0.24 0.23 0.22
Diluted earnings per share 0.27 0.25 0.23 0.21 0.21 0.21 0.20 0.19
Dividends per share 0.05 0.04 0.04 0.04 0.04 0.00 0.00 0.00
</TABLE>
-60-
<PAGE> 62
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 1998 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.
-61-
<PAGE> 63
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, 1997 and 1996
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
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, 1993 ("1993
10-KSB"), (iv) the Annual Report on Form 10-KSB for the year ended December 31,
1994 ("1994 10-KSB"), (v) a Registration Statement on Form S-4 for the
Registrant, Registration No. 33-84634 ("1994 S-4") or (vi) the Annual Report on
Form 10-KSB for the year ended December 31, 1995 ("1995 10-KSB"). Unless
otherwise indicated, the exhibit number corresponds to the exhibit number in the
referenced document.
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ----------- ---------------------------------------------------------------------------
<S> <C> <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).
*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).
</TABLE>
-62-
<PAGE> 64
<TABLE>
<S> <C> <C>
*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.
10.11 - Sublease Agreement dated October 31, 1997 between NationsBank, N.A. as
Sublessor and Mountain National Bank as Subleassee.
*22.1 - Subsidiaries of the Registrant (1994 10-KSB).
23.1 - Consent of Price Waterhouse LLP.
27.1 - Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1997.
-63-
<PAGE> 65
SIGNATURES
Pursuant to the requirements of Section 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 27, 1998
By: /s/ J. Randall Carroll
-------------------------------------
J. Randall Carroll
Chairman of the Board,
and Chief Executive Officer
Date: March 27, 1998
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 27, 1998
- --------------------------------- and Chief Executive Officer
J. Randall Carroll
/s/ Michael J. Coles Director March 27, 1998
- ---------------------------------
Michael J. Coles
/s/ Ronald H. Francis President, Chief Financial March 27, 1998
- --------------------------------- Officer and Director
Ronald H. Francis
/s/ Patrick H. Hickok Director March 27, 1998
- --------------------------------
Patrick H. Hickok
/s/ Walter J. McCloud Director March 27, 1998
- --------------------------------
Walter J. McCloud, II
</TABLE>
<PAGE> 66
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.10 Lease Agreement dated November 18, 1997 between Charter Bank &
Trust and Post Apartment Homes, L.P.
10.11 Sublease Agreement dated October 31, 1997 between NationsBank,
N.A. as Sublessor and Mountain National Bank as Subleassee.
23.1 Consent of Price Waterhouse LLP
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
<PAGE> 1
EXHIBIT 10.10
<PAGE> 2
ONE RIVERSIDE(TM)
OFFICE LEASE
THIS LEASE is made and entered into as of the date stated below by and between
the Landlord and Tenant named below.
LEASE SUMMARY AND DEFINITIONS
1.01. DATE. The date of this Lease is: November 18, 1997
1.02. LANDLORD. The "Landlord" under this Lease and the Landlord's address are:
Post Apartment Homes, L.P.
c/o Post Properties, Inc.
Suite 2200
3350 Cumberland Circle
Atlanta, Georgia 30339
1.03. TENANT. The "Tenant" under this Lease and the Tenant's address are:
Charter Bank & Trust Co., a Georgia corporation
269 Roswell Street
Marietta, Georgia 30060
Attn: President
1.04. BUILDING. The "Building" and the Building name and the Building address
are:
One Riverside(TM)
4401 Northside Parkway
Atlanta, Georgia 30327
The Building consists of a planned 9-story office building and an adjoining
6-story parking deck, and related facilities.
1.05. PREMISES. The "Premises" are shown on Exhibit "A" and are otherwise
delineated as follows:
Floor(s): First
Suite No.: 120
The "Premises" include all Tenant Improvements constructed and installed in
accordance with the provisions of the Work Letter.
<PAGE> 3
1.06. TERM. The "Term" of this Lease is: seventy-two (72) months.
1.07. COMMENCEMENT DATE. The "Commencement Date" of the Term is the later of the
date on which Landlord delivers possession of the Premises to Tenant in
accordance with the Work Letter attached as Exhibit "B" or May 1, 1998. The
month, day and year of the Commencement Date shall be stated in the acceptance
agreement set forth in Exhibit "C" and described in Section 3.03. Landlord will
notify Tenant in writing of the date upon which Landlord will deliver possession
of the Premises to Tenant in accordance with the Work Letter at least ten (10)
days prior to such delivery.
1.08. EXPIRATION DATE. The "Expiration Date" of the Term is April 30, 2004,
which date shall be stated in the acceptance agreement set forth in Exhibit "C"
and described in Section 3.03, or such earlier date on which the term may expire
or be terminated pursuant to the provisions of this Lease or pursuant to law.
1.09. ANNUAL BASE RENTAL. The annual "Base Rental" for the Term is:
Lease Year 1: $35,892.00
Lease Year 2: $36,972.00
Lease Year 3: $38,076.00
Lease Year 4: $39,216.00
Lease Year 5: $40,392.00
Lease Year 6: $41,604.00
1.10. ADDITIONAL RENTAL. The Landlord's estimate of Additional Rental (operating
expenses) for calendar year 1998 is: $7.50 per rentable square foot of the
Premises.
1.11. RENTABLE AREA. The estimated rentable area of the Premises and the
Building are:
Premises: 2,175 square feet
Building: 225,069 square feet
The final Rentable Area of the Premises and the Building shall be determined as
provided in Section 2.02 and shall be stated in the acceptance agreement set
forth in Exhibit "C" and described in Section 3.03.
1.12. TENANT'S SHARE. The estimated "Tenant's Share" is: 1.0%. The actual
"Tenant's Share" shall be determined as provided in Section 6.01.
1.13. SECURITY DEPOSIT. Tenant has deposited and Landlord acknowledges receipt
of a "Security Deposit" in the amount of: $0.
- 2 -
<PAGE> 4
1.14. BROKER. The "Broker" under this Lease and the Broker's address are:
Carter & Associates, L.L.C.
1275 Peachtree Street, N.E.
Atlanta, Georgia 30367-1801
Attn: Senior Vice President -
Office Properties
1.15. CO-BROKER. The "Co-Broker" under this Lease and the Co-Broker's address
are:
Brannen/Goddard Company
3390 Peachtree Road, N.E.
Suite 1200
Atlanta, Georgia 30326
Attn: President
1.16. TENANT PARTY. A "Tenant Party" means any agent, employee, contractor,
invitee, license, assignee or subtenant of Tenant.
1.17. DEFINED TERMS. The capitalized terms in quotation marks above and the
capitalized terms used elsewhere in this Lease shall have the meaning ascribed
to them at the point where first defined, irrespective of where their use
occurs.
LEASE OF PREMISES
2.01. LEASE OF PREMISES. Landlord leases to Tenant, and Tenant leases from
Landlord, upon and subject to the covenants, agreements, terms, provisions and
conditions of this Lease, the Premises, which are located in the Building.
2.02. AREA OF PREMISES AND BUILDING. The usable and rentable areas of the
Premises and the Building, and the usable and rentable area of any relevant
portion of the Building or the Premises, shall be determined by Landlord
substantially in accordance with the American National Standard Method of
Measuring Floor Area in Office Buildings of the Building Owners and Managers
Association International (ANSl Z65.1-1996), revised and readopted June 7, 1996.
For purposes of this Lease, the rentable area of the Building shall be solely
the rentable area of the office building and shall not include in the
calculation the areas of the parking deck and other related facilities outside
of the office building. The final Rentable Area of the Premises and the Building
shall be expressed in square feet and shall be stated in the acceptance
agreement set forth on Exhibit "C" and described in Section 3.03.
ACCEPTANCE OF PREMISES
3.01. CONSTRUCTION OF BUILDING. Tenant acknowledges that construction of the
Building has not yet been completed. Landlord shall construct and complete the
Building in accordance with the
-3-
<PAGE> 5
provisions of Exhibit "G" attached hereto. Landlord's and Tenant's respective
rights and obligations with respect to the construction of the Building shall be
solely as set forth in such Exhibit "G".
3.02 CONSTRUCTION OF TENANT IMPROVEMENTS. Landlord shall complete the "Base
Building Improvements" for the Premises and shall prepare the Premises for
Tenant's occupancy in accordance with the provisions of Exhibit "B" attached
hereto. The term "Premises" shall include all Base Building Improvements and all
Tenant Improvements constructed and installed in accordance with the provisions
of Exhibit "B" attached hereto.
3.03 ACCEPTANCE AGREEMENT. Upon or at any time after the Commencement Date,
Tenant shall, upon request by Landlord, execute and deliver an agreement
confirming the Commencement Date and Expiration Date, the Rentable Areas of the
Premises and the Building, and Tenant's acceptance of the Premises, which
agreement shall be in the form attached as Exhibit "C".
TERM
4.01. TERM. The Term of this Lease shall commence an the Commencement Date, or
on such later date on which Landlord delivers possession of the Premises to
Tenant in accordance with the provisions of the Work Letter, and shall terminate
at 11:59 p.m. on the Expiration Date, or on such earlier date on which the term
may expire or be terminated pursuant to the provisions of this Lease or pursuant
to law.
BASE RENTAL
5.01. BASE RENTAL. During the term of this Lease, Tenant shall pay to Landlord
without demand, deduction or set-off, at the address of Landlord set forth
above, or elsewhere as directed from time to time by Landlord's notice to
Tenant, the Base Rental set forth above.
5.02. PAYMENT OF RENT. The Base Rental shall be payable in equal monthly
installments, in advance, on the first day of each month of the term of this
Lease. A prorated monthly installment shall be paid if the Commencement Date is
other than the first day of a month or if the Expiration Date is other than the
last day of a month.
ADDITIONAL RENTAL
6.01. CERTAIN DEFINITIONS. The following terms shall have the following
meanings: "Escalation Year" shall mean each calendar year falling, in whole or
in part, within the term of this Lease, commencing with the calendar year in
which the Commencement Date occurs; "Tenant's Share" shall mean that number,
stated as a percentage, determined by dividing the Rentable Area of the Premises
by the Rentable Area of the Building (which shall be initially as set forth
above, and in the event of any change in the area of the Premises, Tenant's
Share shall be adjusted to reflect such change on a prorated, daily basis);
"Operating Expenses" shall mean the expenses paid or incurred by Landlord for
the operation and maintenance of the Building, as more fully defined in Exhibit
"D", and as the same may be adjusted under Section 6.06 hereof; "Operating
Statement" shall mean a
4
<PAGE> 6
statement prepared by Landlord setting forth the Operating Expenses for such
Escalation Year and a computation of Additional Rental for such Escalation Year;
and "Additional Rental" shall mean, for each Escalation Year, Tenant's Share of
the Operating Expenses.
6.02. PAYMENT OF ADDITIONAL RENTAL. For each Escalation Year, Tenant shall pay
the Additional Rental to Landlord without demand, deduction or set-off in equal
monthly installments during each Escalation Year based upon a reasonable
estimate by Landlord of Tenant's Share of Operating Expenses for such Escalation
Year. Each such installment shall be due with the monthly installment of Base
Rental.
6.03 ADJUSTMENT OF ADDITIONAL RENTAL. If the Additional Rental paid by Tenant
for any given Escalation Year, based upon Landlord's estimate, differs from the
actual amount of Tenant's Share of Operating Expenses for such Escalation Year,
the difference shall be payable by Landlord or Tenant, as the case may be, in a
lump sum on the first day of the second month following the month in which
Landlord renders its Operating Statement to Tenant with respect to such
Escalation Year. If any such amount is payable by Landlord, however, Landlord
may elect, in lieu of making such payment, to credit such amount against the
next payments of Base Rental and Additional Rental coming due under this Lease.
6.04. VERIFICATION OF OPERATING STATEMENT. Upon request by Tenant, and at
Tenant's cost and expense, Landlord shall furnish Tenant such information as may
be necessary for Tenant to verify Operating Expenses and shall cooperate with
Tenant in verifying the Operating Statement. The Operating Statement shall be
rendered by Landlord to Tenant within one month after calculation of such
Operating Expenses by Landlord. Tenant shall have 60 days after receipt of any
Operating Statement to dispute the correctness or completeness thereof, after
which time the Operating Statement shall be deemed to be complete and correct
and conclusive and binding on Landlord and Tenant. Tenant shall not be entitled
to withhold Additional Rent for any reason but payment of any Additional Rent
shall not preclude Tenant from disputing the correctness or completeness of any
Operating Statement within such 60 day period. In the event Tenant shall dispute
any Operating Statement and Landlord and Tenant cannot resolve the dispute
within 4 months after Landlord renders the Operating Statement, then the matter
may be referred to arbitration as herein provided. In order to be effective, any
dispute of any Operating Statement must be made by Tenant's giving notice to
Landlord within the 60 day period following Tenant's receipt of such Operating
Statement.
6.05. ARBITRATION. Any dispute between the parties with respect to Operating
Expenses shall be settled by arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association as amended and in
effect on the date notice is given of the intention to arbitrate. The
determination of the arbitrators shall be final, binding and conclusive on all
the parties, and judgment may be rendered thereon by any court having
jurisdiction, upon application of either Landlord or Tenant. Any such
arbitration shall be conducted in Fulton County, Georgia.
6.06. ADJUSTMENT OF OPERATING EXPENSES. If the Building is not fully occupied
during any given Escalation Year, the Operating Expenses shall be equitably
adjusted so that such of those expenses as constitute variable rather than fixed
costs (as determined in accordance with sound accounting
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practices) shall be adjusted to reflect vacancies in the Building by projecting
such variable costs as if the Building were fully occupied throughout such
Operating Year; provided, however, that in no event shall Landlord by reason of
any such adjustment be entitled to receive more than 100% of the Operating
Expenses.
6.07. OTHER ADDITIONAL RENTAL. All amounts, other than the Base Rental, which
Tenant is required to pay pursuant to this Lease, including the Additional
Rental, shall constitute additional rental under this Lease, and if Tenant shall
fail to pay any such amounts, Landlord shall have all the rights, powers and
remedies with respect thereto as are provided herein or by law in the case of
nonpayment of rent.
6.08. RENT CONTROL. Tenant waives the benefit of all existing and future rent
control laws and similar governmental rules and regulations, whether in time of
war or not, to the full extent permitted by law.
SECURITY DEPOSIT
7.01. SECURITY DEPOSIT. Landlord shall hold the Security Deposit without
interest as security for the performance by Tenant of Tenant's covenants and
obligations under this Lease. The Security Deposit shall not be considered an
advance payment of Base Rental, Additional Rental or other charges provided for
herein, or as a measure of the damages which would be suffered by Landlord in
the case of a default by Tenant. Landlord may, from time to time, without
prejudice to any other remedy, use the Security Deposit to the extent necessary
to make good any arrearages or nonpayment of Base Rental, Additional Rental or
other charges provided for herein, or to satisfy any obligation of Tenant
hereunder. Following any such application of the Security Deposit, Tenant shall
pay Landlord on demand the amount so applied in order to restore the Security
Deposit to its original amount. If Tenant is not in default at the expiration of
this Lease, the balance of the Security Deposit shall be returned to Tenant
within 60 days after the Expiration Date and the delivery of the Premises to
Landlord as provided herein. If Landlord transfers Landlord's interest in the
Premises, Landlord may assign the Security Deposit to the transferee and
thereafter the transferring Landlord shall have no further liability for the
return of the Security Deposit. The Security Deposit shall not be assigned or
encumbered by Tenant and any attempted assignment or encumbrance by Tenant shall
be void.
OPERATIONS; UTILITIES; SERVICES
8.01. OPERATIONS. Landlord shall operate the Building generally in accordance
with standards customarily followed in the operation of Class "A" multi-tenant,
commercial office buildings of similar size in the north west suburban Atlanta,
Georgia, area.
8.02. HOURS OF OPERATION. The Building will be open from 8:00 a.m. to 6:00 p.m.,
Mondays through Fridays, and from 8:00 a.m. to 1:00 p.m. Saturdays. The Building
may be closed on Sundays and on the following holidays: New Year's Day,
Presidents Day, Martin Luther King, Jr. Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, Christmas
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Day and such other days as are locally observed by tenants in multi-tenant
commercial office buildings in the Atlanta, Georgia, area. Tenant shall have
access to the Premises 24 hours per day, every day of the week, subject to Legal
Requirements.
8.03. UTILITIES AND SERVICES. Landlord shall provide Tenant with the following
utilities and services:
(a) Central heat and air-conditioning in season during such hours as
the Building is open, at such temperatures and in such amounts as may be
required to reasonably heat or cool the Premises, except in extreme temperature
conditions or when limited by Legal Requirements.
(b) Warm and cold water to serve the Premises as required for lavatory
and drinking purposes and such other uses as are permitted pursuant to this
Lease.
(c) Common use restrooms and toilets available on each floor of the
Building.
(d) Janitorial services in accordance with standards customarily
followed in the operation of Class "A" mutli-tenant, commercial office buildings
of a similar size in the northwest suburban Atlanta, Georgia area on a five-day
week basis, excluding holidays, in accordance with Landlord's janitorial
contract.
(e) 5.5 watts of electricity per square foot of Rentable Area of the
Premises for purposes other than general office lighting, and 3.0 watts of
electricity per square foot of Rentable Area of the Premises for general office
lighting.
(f) Standard passenger and freight elevator service when the Building
is open, and at least one passenger elevator when the Building is closed.
8.04. EXCESS SERVICES. If Landlord is required to provide Tenant with services
in excess of those specified, such excess services shall be furnished to Tenant,
at Tenant's cost and expense, at such reasonable charges as may be determined by
Landlord but in no event at a charge less than Landlord's actual cost of
administrative services, labor, equipment and utilities incurred in connection
with such excess service. Without limitation, Landlord reserves the right to
prohibit the use of heat generating machines and equipment unless and until
arrangements are made by Tenant, acceptable to Landlord, to obtain and install
in the Premises at Tenant's cost supplementary air conditioning equipment, and
the cost of operation and maintenance of such equipment (as determined by
Landlord by submetering or otherwise) shall be paid by Tenant on the Base Rental
payment dates at such rates as are established from time to time by Landlord.
8.05. METERING ELECTRICITY. If Landlord shall determine that Tenant's proposed
or actual consumption of electricity is in excess of standard consumption for
general office use as set forth in Section 8.03(e) above, then Landlord may
either charge Tenant directly for such excess services in accordance with the
foregoing section, or require Tenant to enter into a contract for electrical
service to the Premises directly with the provider of electrical
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service to the Building, for electrical service to the Premises, and, in either
event, Tenant shall pay the entire cost and expense of installing and
maintaining meters, panels, wiring and other items required to accommodate
excess services to Tenant and separate accounting therefor. Tenant shall not,
without Landlord's prior written consent (which may be evidenced by Landlord's
approval of the final Drawings and Specifications for the Tenant Improvements
pursuant to Exhibit "B" attached hereto), use any equipment or machines which
use electric current in excess of 110 volts or which require clean circuits or
other special distribution circuits.
8.06. LICENSES, PERMITS AND CERTIFICATES. Landlord shall maintain in the
Building office for reasonable inspection by Tenant such licenses, permits and
certificates pertaining to the operation of the Building as may be necessary by
reason of Legal Requirements.
ACCESS CONTROL
9.01. ACCESS CONTROL. Landlord shall provide access control for the Building at
all times when the Building is not open; provided, however, Landlord shall have
no responsibility to prevent, and shall not be liable to Tenant or any Tenant
Party for, losses due to theft or burglary, or for damages or injury to persons
or property done by persons gaining access to the Premises or the Building
(including the Building site), and Tenant hereby releases Landlord from all
liability for such losses, damages or injury.
SIGNAGE
10.01. SIGNAGE. No sign, advertisement or notice shall be painted, fixed or
placed on any part of the inside or outside of the Building unless the color,
size and style is approved by Landlord, which approval may be granted or
withheld in Landlord's discretion.
PARKING
11.01. TENANT'S PARKING. Landlord shall make available to Tenant for use by
Tenant and Tenant's invitees, employees, assignees and subtenants parking spaces
in the deck parking facility adjacent to the Building (the "Garage") at the rate
of 3.5 parking spaces per 1,000 square feet of Rentable Area of the Premises.
Such spaces shall be used in common with Landlord and other tenants in the
Building on an unassigned "first come - first served" basis. Landlord or the
operator of the Garage may make, modify and enforce reasonable rules and
regulations relating to the parking of vehicles in the Garage, and Tenant shall,
and shall exercise its best efforts to cause its employees and invitees to,
abide by such rules and regulations.
TENANT'S USE AND ACCEPTANCE
12.01. USE. Tenant shall use the Premises for general office purposes and for
lawful activities normally incidental thereto and related to the conduct of
Tenant's business, but for no other purposes. Tenant shall not use or occupy the
Premises, or permit the Premises to be used or occupied, in violation of any
Legal Requirement, or in any manner which would violate any
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certificate of occupancy issued for the Premises, or that would vitiate or
increase the premium charged for insurance on the Premises or Building or that
would cause damage to the Building, or that would constitute a public or private
nuisance, or that would disturb the quiet enjoyment of other tenants of the
Building. Any increased cost to the Landlord resulting from a violation of such
use shall be charged to the Tenant as Additional Rental and Landlord shall have
the right to enjoin Tenant from further violation, if applicable.
12.02. ACCEPTANCE. The taking of possession of the Premises by Tenant on the
Commencement Date shall be conclusive evidence that Tenant accepts the Premises
"as is", and the Premises were in good and satisfactory condition and suitable
for the use intended by Tenant at the time such possession was taken.
LANDLORD'S ACCESS; RESERVATION OF RIGHTS; TRANSFERS
13.01. LANDLORD'S ACCESS TO PREMISES. Landlord, and Landlord's employees, agents
and contractors, shall have the right to enter and pass through the Premises
during business hours, after reasonable notice to Tenant, to examine the
Premises and to show them to prospective purchasers, mortgagees, tenants or
insurers, and for making such repairs or changes in or to the Premises or the
Building as may be provided for or permitted by this Lease or as Landlord may be
required to make by Legal Requirements; after business hours for cleaning and
maintenance and to perform janitorial services; and at any time in emergencies.
13.02. LANDLORD'S RESERVATION OF RIGHTS. Landlord reserves the right to name the
Building and to change the name or address of the Building; to install and
maintain a sign or signs on the exterior of the Building; to hold pass keys and
access cards to the Premises; to grant to Tenant, and other tenants of the
Building, a non-exclusive revocable license to use and occupy in common with
Landlord the common areas of the Building, including corridors, stairways,
elevators, restrooms, lobbies, entrance ways, parking areas, service roads,
loading facilities, sidewalks and such other facilities as may be designated
from time to time by Landlord subject to the terms and conditions of this Lease.
13.03. TRANSFER OF TENANT. Landlord reserves the right, upon 60 days prior
notice to Tenant, to remove Tenant from the Premises and to transfer Tenant to
other available space of substantially equal area in the Building. Landlord
shall bear all reasonable cost and expense of such transfer, as well as the cost
and expense of any renovations or alterations necessary to make the new space
substantially conform in layout and appointment with the original Premises. If
Landlord transfers Tenant to any such new space, this Lease shall remain in full
force and effect and be deemed applicable to such new space, and such new space
hall thereafter be the Premises as though Landlord and Tenant had entered into
an express written amendment of this Lease with respect thereto. Failure of
Tenant to cooperate with Landlord pursuant to this Section and to remove itself
from the Premises shall constitute a default under this Lease and shall entitle
Landlord to exercise all rights and remedies available to Landlord under this
Lease following the occurrence of an event of default by Tenant.
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REPAIRS AND MAINTENANCE
14.01. LANDLORD'S OBLIGATIONS. Landlord shall keep and maintain in good repair
and working order and make repairs to and perform necessary maintenance upon the
structural components and elements, and electrical, plumbing and mechanical
systems, of the Building, and all parts and appurtenances thereof, which are
required in the normal maintenance and operation of the Building. The cost and
expense of any maintenance or repair to the Building necessary due to the acts
or omissions of Tenant or any Tenant Party shall be reimbursed by Tenant to
Landlord upon demand as additional rental.
14.02. TENANT'S OBLIGATIONS. Tenant, at its sole cost and expense, shall keep
and maintain in good repair and working order and make all repairs to and
perform necessary maintenance within and upon the Premises, including the Tenant
Improvements, and all parts and appurtenances thereof, which are required in the
normal maintenance and operation of the Premises.
14.03. BUILDING ALTERATIONS. If, to maintain the Building as an office building
or otherwise, Landlord shall be required by any governmental authority to
repair, alter, remove, construct, reconstruct, or improve any part or all of the
Building or the Premises, then Tenant's obligations under this Lease shall not
be affected and Tenant waives all claims for injury, damage, or abatement of
rent because of such repair, alteration, removal, construction, reconstruction,
or improvement, or lack thereof, except to the extent of any bodily injury to
persons or damage to property resulting from Landlord's sole negligence or
intentional misconduct in performing such work; provided, however, that if such
action by Landlord shall render the Premises partially or wholly unfit for
occupancy and if, in Landlord's reasonable estimation, it cannot complete such
acts within 180 days, then at the option of Landlord to be exercised by giving
written notice to Tenant within 60 days following the date of notice to Landlord
by such governmental authority, this Lease shall terminate on the date of such
election and Tenant shall immediately surrender the Premises to Landlord. In
such event Tenant shall continue to owe and pay rent and other charges up to but
not beyond the time of such surrender. If Landlord shall elect not to terminate
this Lease as provided above, then Landlord and Tenant shall have the same
respective rights and obligations as provided above in Sections 16.01 through
16.04, as if a casualty had occurred, and the provisions of Section 16.04 shall
apply as if a casualty had occurred regardless of whether Landlord elects to
terminate this Lease.
ALTERATIONS; TENANT'S PROPERTY
15.01. ALTERATIONS BY TENANT. Tenant shall not, without Landlord's approval,
make any alterations, additions or improvements in or on the Premises, provided
Landlord shall not unreasonably withhold such approval if such alterations,
additions or improvements do not affect the structural components and elements,
or electrical, plumbing or mechanical systems, of the Building. All alterations,
additions or improvements to the Premises made by Tenant shall become the
property of Landlord at the expiration of the term of this Lease; but Landlord
reserves the right to require Tenant to remove any alteration, improvement or
addition made to the Premises by Tenant, and to repair and restore the Premises
to a condition substantially equivalent to the condition of the Premises prior
to any such alteration, addition or improvement. All alterations, additions or
improvements to the
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Premises by Tenant shall be made in compliance with the requirements of this
Lease, including without limitation Sections 28.01 through 28.08 hereof.
15.02. TENANT'S PROPERTY. Tenant, at its expense and at any time and from time
to time, may install in and remove from the Premises its trade fixtures,
equipment, removable walls and wall systems, furniture and furnishings, provided
such installation or removal is accomplished without damage to the Premises or
the Building or Tenant promptly repairs any such damage. On or prior to the
Expiration Date, Tenant shall remove all of Tenant's property from the Premises
and repair any damage to the Premises caused by such removal. All property of
Tenant remaining on the Premises after the expiration of the term of this Lease
shall be deemed to have been abandoned and may be removed by Landlord and Tenant
shall reimburse Landlord for the cost of such removal.
DESTRUCTION OR DAMAGE
16.01. DESTRUCTION. If the Building or the Premises is destroyed, or so
substantially damaged as to be partially or wholly untenantable, by fire or
other casualty, then Landlord shall have 60 days in which to commence to
reconstruct, restore and repair the Building or the Premises, as applicable, to
a condition substantially equivalent to its condition prior to such casualty;
provided, however, if in Landlord's sole judgment, the reconstruction,
restoration and repair cannot be completed by the date 180 days after the date
of such casualty, then Landlord may elect to terminate this Lease by giving
Tenant written notice of such election prior to the date 60 days after the date
of such casualty, and the date of such notice shall be the Expiration Date.
16.02. DAMAGE. If the Building or the Premises is damaged, but not so
substantially as to be partially or wholly untenantable, by fire or other
casualty, then Landlord shall promptly proceed to reconstruct, restore and
repair the damaged portions of the Building or the Premises, as applicable, to a
condition substantially equivalent to its condition prior to such casualty.
16.03. AVAILABILITY OF INSURANCE PROCEEDS. If the Building or the Premises is
destroyed or damaged, and either the holder of any Mortgage does not make the
proceeds of the insurance maintained by Landlord available to Landlord for
reconstruction, restoration and repair, or available insurance proceeds are
insufficient to pay for the reconstruction, restoration and repair, then
Landlord may elect to terminate this Lease by giving Tenant written notice of
such election prior to the date 60 days after the date of such casualty, and the
date of such notice shall be the Expiration Date.
16.04. RENT ABATEMENT. Commencing with the date of such casualty, the Base
Rental and Additional Rental provided for herein shall abate pro rata to the
extent that, and for so long as, any portion of the Premises is not reasonably
usable by Tenant in the ordinary conduct of its business; provided, however,
that no such abatement shall be made under the provisions of this Section if
such casualty shall have been caused through the negligence or willful
misconduct of Tenant or any Tenant Party.
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LIABILITY
17.01. WAIVER OF SUBROGATION. Landlord and Tenant each hereby waives any and all
rights of recovery, claim, action or cause of action against the other party and
its agents, officers and employees, for any loss or damage that may occur to the
Premises or the Building and to all property, whether real, personal or mixed,
located in the Premises or the Building, by reason of fire, the elements, or any
other cause insured against under the terms of the fire and extended coverage
insurance policies required to be maintained by Landlord and Tenant under this
Lease, regardless of cause or origin, including negligence of the parties
hereto, their respective agents and employees, and each party covenants that no
insurer shall hold any right of subrogation against such other party.
17.02. INDEMNIFICATION. Tenant agrees to indemnify and save Landlord harmless
from any and all claims with respect to bodily injury or property damage arising
from Tenant's use and occupancy of the Premises or any breach or default in the
performance of any covenant or agreement on Tenant's part to be performed
pursuant to the terms of this Lease or arising from Tenant's negligence or
intentional acts or the negligence or intentional acts of any Tenant Party,
including all costs, counsel fees, expenses and liabilities incurred in
connection with any such claim; and if any action or proceeding is brought
against Landlord by reason of any such claim, Tenant upon notice from Landlord
covenants to resist or defend such action or proceeding at its expense.
17.03. LIMITED LIABILITY OF LANDLORD. Landlord shall not be liable to Tenant or
any other person or entity for interruption in or failure to furnish any service
provided for in this Lease, for injury to persons or damage to property
resulting from the sprinkler system in the Building or water or rain which leaks
or flows from any part of the Building, or for any inconvenience or annoyance
resulting from any maintenance or repair of the Premises or the Building.
Landlord shall not be liable to Tenant or any other person or entity for any
theft, disappearance or loss of any property from the Premises, nor for the acts
of other tenants, or other persons, in the Building. Neither Landlord, nor any
partner of Landlord, nor any officer, director, shareholder or partner of a
partner of Landlord, shall have any personal liability with respect to this
Lease, and any liability with respect to this Lease shall be limited solely to
Landlord's interest in the Building.
INSURANCE
18.01. LANDLORD'S INSURANCE. Landlord shall maintain at all times during the
term of this Lease fire and extended coverage insurance insuring the Building;
and comprehensive general public liability insurance with respect to the
Building insuring against injury to or death of persons or damage to property.
Such insurance shall be maintained with an insurance company authorized to
conduct business in the State of Georgia in amounts desired by Landlord and at
the expense of Landlord (which expense is to be included in Operating Expenses).
If the annual premiums to Landlord for such casualty insurance exceed the
standard premium rates because of the nature of Tenant's operations, contents or
improvements or because the same result in extra-hazardous exposure, then Tenant
shall upon receipt of copies of appropriate premium invoices promptly reimburse
Landlord for such increases in such premiums. To the extent it would be
reasonable for
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a landlord in the same economic position of Landlord at the applicable time to
self-insure, Landlord may satisfy its insurance requirements under this Section
by self-insuring.
18.02. TENANT'S INSURANCE. Tenant shall maintain in full force and effect at all
times during the term of this Lease full replacement cost fire and extended
coverage insurance insuring Tenant's furniture, furnishings, equipment, trade
fixtures and other personal property in and about the Premises; and
comprehensive general public liability insurance with respect to the Premises,
with a single limit of liability of at least $2,000,000 for injury to or death
of persons or damage to property; provided, however, that Tenant shall carry
such greater limits of coverage as Landlord may reasonably request from time to
time. Each policy of insurance maintained by Tenant shall be issued by an
insurance company acceptable to Landlord, shall name Landlord as an additional
insured, shall provide that such insurance shall not be canceled unless 30 days
prior written notice is given to Landlord, and shall contain such other
provisions as may be requested by Landlord. The policies of insurance required
to be maintained by Tenant hereunder, or acceptable certificates thereof, shall
be delivered to Landlord on or before the Commencement Date and at least 10 days
prior to the expiration date of any policy then in effect.
CONDEMNATION
19.01. CONDEMNATION. If the Premises is taken or condemned for any public
purpose, or conveyed in lieu of such taking or condemnation, to such an extent
as to render the Premises untenantable, then this Lease shall, at the option of
either party, forthwith cease and terminate upon the giving of notice to the
other party within 30 days from the date of such condemnation or taking. If only
a portion of the Premises is so taken so as not to render the remainder
untenantable, all rent shall abate with respect to the portion so taken. If all
or substantially all of the Building, or so much thereof as to cause the
remainder not to be economically feasible to operate, as reasonably determined
by Landlord, should be taken or condemned for any public purpose or conveyance
in lieu of condemnation, then Landlord shall have the option of terminating this
Lease by notice to Tenant no later than 60 days from the date of such
condemnation or taking. All proceeds from any taking or condemnation of any part
of the Building, including but not limited to the Premises, shall belong to and
be paid to Landlord. Landlord shall be entitled to receive the entire award in
any proceeding with respect to any taking without deduction for any estate
vested in Tenant by this Lease and Tenant shall receive no part of such award.
Tenant hereby irrevocably assigns to Landlord any and all of its right, title
and interest in and to any such award.
DEFAULTS AND REMEDIES
20.01. DEFAULT BY TENANT. Tenant shall be in default under this Lease if: (i)
Tenant shall fail to pay when due any Base Rental, Additional Rental or other
payment to be made by Tenant hereunder; or (ii) Tenant shall violate or breach,
or shall fail fully and completely to observe, keep, satisfy, perform and comply
with, any agreement, term, covenant, condition, requirement, restriction or
provision of this Lease (other than the payment of Base Rental, Additional
Rental or any other payment to be made by Tenant), and shall not cure such
failure within 30 days after Landlord gives Tenant written notice thereof; or
(iii) Tenant shall fail to take possession of or cease to do business
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in or abandon any substantial portion of the Premises; or (iv) Tenant shall
assign this Lease or sublet any portion of the Premises except as permitted in
this Lease, or Tenant shall otherwise breach the provisions of Sections 22.01
through 22.05 of this Lease; or (v) if Tenant is a corporation, Tenant shall
cease to exist as a corporation in good standing in the state of its
incorporation; or (vi) if Tenant is a partnership or other entity, Tenant shall
be dissolved or otherwise liquidated, provided that if such dissolution is
threatened as a result of a failure to file annual reports and such reports are
filed prior to such dissolution, such failure shall not constitute a default
hereunder; or (vii) Tenant becomes insolvent as defined in the Georgia Uniform
Commercial Code, or makes an assignment for the benefit of creditors; or (viii)
if the interest of Tenant under this Lease shall be subjected to any attachment,
execution, levy or other judicial seizure pursuant to any order or decree
entered against Tenant and any legal proceeding that is not stayed (so as to
prevent seizure) pending appeal and such order or decree is not vacated or
bonded against so as to prevent seizure upon the earlier to occur of 15 days
prior to the sale of such interest pursuant to such order or decree or 30 days
after entry of such order; or (ix) any attachment or execution of any type shall
be issued against Tenant's assets of any type or nature whatsoever, including
but not limited to federal, state or municipal tax liens.
20.02. LANDLORD'S REMEDIES. If Tenant is in default under this Lease, Landlord
may pursue any one or more of the following remedies, separately or concurrently
or in any combination, without any further notice or demand whatsoever and
without prejudice to any other remedy which it may have for possession of the
Premises or for arrearages in Base Rental, Additional Rental or other amounts
payable by Tenant: (i) Landlord may terminate this Lease by giving Tenant
written notice of termination, in which event Tenant shall immediately quit and
vacate the Premises and deliver and surrender possession of the Premises to
Landlord, and this Lease shall be terminated at the time designated by Landlord
in its notice of termination to Tenant; (ii) with or without terminating this
Lease, Landlord may enter upon and take possession of the Premises, change the
locks on all doors to the Premises, and expel or remove Tenant and any other
person who may be occupying the Premises, without being liable for prosecution
or any claim for damages; (iii) with or without terminating this Lease, Landlord
may re-lease the Premises or any part thereof, on such terms and conditions as
Landlord may deem satisfactory, and Tenant shall reimburse to Landlord on demand
any costs and expenses of any re-leasing, including any brokerage commissions or
costs and expenses of alterations to the Premises made in connection with such
re-leasing, and Landlord may then receive the rent for any such re-leasing, in
which event Tenant shall pay to Landlord on demand from time to time any
deficiency that may arise by reason of such re-leasing; (iv) Landlord may
collect and sue Tenant from time to time for the amount of any Base Rental,
Additional Rental or other amounts then owing by Tenant to Landlord pursuant to
this Lease; (v) with or without terminating this Lease, Landlord may bring an
action against Tenant to recover from Tenant all damages suffered, incurred or
sustained by Landlord as a result of, by reason of or in connection with such
default; or (vi) Landlord may do whatever Tenant is obligated to do under the
terms of this Lease, in which event Tenant shall reimburse Landlord on demand
for any costs and expenses incurred by Landlord in carrying out tenant's duties
and obligations under this Lease. No action taken by or on behalf of Landlord
under this section shall be construed to be an acceptance or a surrender of this
Lease. No termination of this Lease shall affect Landlord's right to collect
Base Rental, Additional Rental or other amounts due for the period prior to
termination. In the event of
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any termination, in addition to any other remedies set forth above, Landlord
shall have the right to recover from Tenant upon such termination an amount
equal to the excess of the Base Rental, Additional Rental and other amounts to
be paid by Tenant during the remaining term of this Lease over the then
reasonable rental value of the Premises for the remaining term of this Lease,
discounted to present value using a reasonable discount rate.
20.03. INSOLVENCY OR BANKRUPTCY.
(a) The appointment of a receiver to take possession of all or
substantially all of the assets of Tenant, or any general assignment by Tenant
for the benefit of creditors, or any action taken or suffered by Tenant under
any insolvency, bankruptcy, or reorganization act, other than an involuntary
proceeding that is not dismissed or bonded against within 60 days after the
filing thereof, shall at Landlord's option, constitute a breach of this Lease by
Tenant. Upon the happening of any such event or at any time thereafter, this
Lease shall terminate 5 days after notice of termination from Landlord to
Tenant. In no event shall this Lease be assigned or assignable by voluntary or
involuntary bankruptcy or a proceeding in lieu thereof and, in no event shall
this Lease or any rights or privileges hereunder be an asset of Tenant under any
bankruptcy, insolvency, or reorganization proceeding.
(b) In the event this Lease is not terminated pursuant to Section
20.03(a), then the following provisions shall apply:
(i) In no event shall this Lease be assigned or assignable by
operation of law or by voluntary or involuntary bankruptcy proceedings
or otherwise and in no event shall this Lease or any rights or
privileges hereunder be an asset of Tenant under any bankruptcy,
insolvency, or reorganization proceedings. If this Lease is assigned to
any person or entity pursuant to the provisions of the Bankruptcy Code,
11 U.S.C. Section 101 et seq., or any successor statute (the
"Bankruptcy Code"), any and all consideration payable or otherwise to
be delivered in connection with such assignment shall be paid or
delivered to Landlord, shall be and remain the exclusive property of
Landlord and shall not constitute property of Tenant or of the estate
of Tenant within the meaning of the Bankruptcy Code. Any and all monies
and other consideration constituting Landlord's property under the
preceding sentence not paid or delivered to Landlord shall be held in
trust for the benefit of Landlord and be promptly paid to or turned
over to Landlord.
(ii) If Tenant assumes this Lease and proposes to assign the
same pursuant to the provisions of the Bankruptcy Code to any person or
entity who shall have made a bona fide offer to accept an assignment of
this Lease on terms acceptable to Tenant, then notice of such proposed
assignment, setting forth (i) the name and address of such person, (ii)
all of the terms and conditions of such offer, and (iii) the adequate
assurance to be provided Landlord to assure such person's future
performance under this Lease, including, without limitation,
the assurance referred to in Section 365 (b) (3) of the Bankruptcy
Code, shall be given to Landlord by Tenant no later than twenty (20)
days after receipt by Tenant but in any event no later than ten (10)
days prior to the date that Tenant shall make application to a
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<PAGE> 17
court of competent jurisdiction for authority and approval to enter
into such assignment and assumption, and Landlord shall thereupon have
the prior right and option, to be exercised by notice to Tenant given
at any time prior to the effective date of such proposed assignment, to
accept an assignment of this Lease upon the same terms and conditions
and for the same consideration, if any, as the bona fide offer made by
such person, less any brokerage commissions which may be payable out of
the consideration to be paid by such person for the assignment of this
Lease.
20.04. LANDLORD'S COSTS; ATTORNEYS FEES. Tenant shall pay all costs and expenses
incurred by Landlord as a result of any breach or default by Tenant under this
Lease, including court costs and attorneys fees paid by Landlord.
20.05. LATE PAYMENTS. If Base Rental, Additional Rental or any other amount
payable by Tenant under this Lease is not paid when due, Tenant shall pay to
Landlord a late charge equal to 5% of the amount not paid when due, and interest
on the amount not paid when due at the rate of 16% per annum until paid.
20.06. REMEDIES CUMULATIVE. The foregoing remedies are cumulative of, and in
addition to, and not restrictive or in lieu of, the other remedies provided for
herein or allowed by law or in equity, and may be exercised separately or
concurrently, or in any combination, and pursuit of any one or more of such
remedies shall not constitute an election of remedies which shall exclude any
other remedy available to Landlord.
20.07. NON-WAIVER. Landlord's forbearance in pursuing or exercising one or more
of its remedies shall not be deemed or construed to constitute a waiver of any
default or any remedy, and no waiver by Landlord of any right or remedy on one
occasion shall be construed as a waiver of that right or remedy on any
subsequent occasion or as a waiver of any right or remedy then or thereafter
existing. No failure of Landlord to pursue or exercise any of its rights or
remedies or to insist upon strict compliance by the Tenant with any term or
provision of this Lease, and no custom or practice at variance with the terms of
this Lease, shall constitute a waiver by Landlord of the right to demand strict
compliance with the terms and provisions of this Lease.
20.08. WAIVER OF JURY TRIAL. Landlord and Tenant each waive trial by jury in any
action or proceeding brought by either of them on any matters arising out of or
related to this Lease.
COMPLIANCE WITH LAWS
21.01. COMPLIANCE WITH LAWS. Tenant, at its expense, shall comply with any and
all valid and applicable laws, rules, orders, ordinances, regulations and other
requirements, present or future, affecting the Premises or the Building, that
are promulgated by any governmental authority or agency
having jurisdiction of the Building (collectively, "Legal Requirements") to the
extent the same shall affect or be applicable to Tenant or Tenant's use or
occupancy of the Premises.
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<PAGE> 18
21.02. HAZARDOUS SUBSTANCES. Tenant shall not cause or permit any hazardous,
toxic or dangerous substances (as defined or described in any applicable
federal, state or local statute, law, ordinance, code, rule, regulation, order
or decree regulating, relating to, or imposing liability or standards of conduct
concerning hazardous, toxic or dangerous substances) to be brought upon, kept or
used in or about the Premises or the Building. Tenant shall indemnify and hold
Landlord harmless from and against any and all claims, judgments, demands,
penalties, fines, losses and costs and expenses incurred by Landlord during or
after the term of this Lease as a result of any hazardous, toxic or dangerous
substances that Tenant or any Tenant Party causes or permits to be brought upon,
kept or caused in or about the Premises or the Building.
ASSIGNMENT AND SUBLETTING
22.01. APPROVAL OF LANDLORD REQUIRED. Tenant shall not sublet the Premises or
any portion thereof, or assign this Lease, or grant concessions or licenses or
other rights for the occupancy or use of the Premises or any part thereof,
without the prior approval of Landlord in each instance. The transfer of any
ownership interest in Tenant which, after such transfer, results in the
ownership, either directly or indirectly, of more than 50% of the ownership
interests of Tenant by persons or entities other than those persons or entities
which own the same, either directly or indirectly, as of the date of this Lease
shall also constitute an assignment for purposes of this Lease. For this
purpose, "ownership interests" shall include stock, partnership interests,
interests in any limited liability company, and any other form of ownership of
an interest in any entity.
22.02. NOTIFICATION OF LANDLORD. In the event Tenant desires to sublet all or a
portion of the Premises or assign this Lease, Tenant shall notify Landlord of
the terms of the proposed subletting or assignment, the identity of the proposed
sublessee or assignee, the area of the Premises affected by any such subletting,
and such other information as Landlord may request. Within 30 days after receipt
of such notice and all information requested by Landlord, Landlord shall approve
or disapprove the proposed subletting or assignment. Failure to notify Tenant of
such approval or disapproval shall be deemed to constitute disapproval by
Landlord. Tenant agrees to pay to Landlord, on demand, the reasonable costs
incurred by Landlord in connection with any request by Tenant for Landlord to
approve any assignment or subletting by Tenant.
22.03. TERMINATION RIGHT. Within such 30 day period, Landlord shall also have
the option to terminate this Lease by notice to Tenant, as of a date set forth
in such notice not more than 90 days from the date of such notice. In the event
that Tenant has proposed a subletting of less than the entire Premises, then
this Lease shall terminate only as to that portion of the Premises affecting by
such proposed subletting, and the Base Rental, Additional Rental and other
charges payable hereunder shall be reduced proportionately.
22.04. EXCESS CONSIDERATION. In the event Landlord approves any such assignment
or subletting, Landlord shall receive all consideration paid by any such
assignee or subtenant directly or indirectly related to such assignment or
subletting; provided, however, that Tenant may receive the amount of any rent
and other charges paid by any subtenant under any sublease which does not exceed
the Base Rental and Additional Rental payable under this Lease multiplied by a
fraction, the numerator
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<PAGE> 19
of which is the rentable area of such subleased portion of the Premises and the
denominator of which is the rentable area of the Premises.
22.05. TENANT'S LIABILITY. No assignment or subletting shall relieve Tenant of
Tenant's obligations under this Lease.
22.06. COLLECTION OF RENT FROM ASSIGNEE OR SUBTENANT. If Tenant assigns this
Lease or sublets all or any portion of the Premises, with or without the
required approval of Landlord, then Landlord may, after default by Tenant,
collect rent from the assignee, subtenant or occupant, and apply the net amount
collected to the Base Rental, Additional Rental and other payments for which
Tenant is obligated hereunder, but no such assignment, subletting, occupancy, or
collection shall be deemed (i) a waiver by Landlord of any of Tenant's covenants
contained in this Lease, (ii) the acceptance by Landlord of the assignee,
subtenant or occupant as Tenant, (iii) a release of Tenant from further
performance of its covenants under this Lease, or (iv) a waiver of any of
Landlord's other rights or remedies hereunder.
SUBORDINATION; ATTORNMENT
23.01. SUBORDINATION. Landlord may, from time to time, grant deeds to secure
debt, deeds of trust, mortgages or other security interests covering its estate
in the Building (each a "Mortgage"). Tenant agrees that this Lease shall be
subject and subordinate to each Mortgage, including any modifications,
extensions or renewals thereof and advances thereunder from time to time in
effect. The foregoing provisions shall be self operative, and no further
instrument of subordination shall be required to make this Lease subject and
subordinate to any Mortgage. Tenant shall, upon request, from time to time
execute and deliver to Landlord or the holder of any Mortgage any instrument
requested by Landlord or the holder of such Mortgage to evidence the
subordination of this Lease to any such Mortgage.
23.02. ATTORNMENT. Tenant agrees to recognize and attorn to any party succeeding
to the interest of Landlord as a result of the enforcement of any Mortgage, and
to be bound to such party under all the terms, covenants, and conditions of this
Lease, for the balance of the term of this Lease, including any extended term,
with the same force and effect as if such party were the original Landlord under
this Lease; provided, however, that such successor in interest shall not be (i)
subject to any credits, offsets, defenses or claims which Tenant may have
against any prior landlord (ii) bound by any payment of rent for more than one
month in advance, except prepayments in the nature of security for the
performance by Tenant of its obligations under this Lease, (iii) bound by any
amendment or modification of this lease made after such Mortgage is placed on
the Building (and Tenant has been given notice thereof), without the written
consent of the holder of such Mortgage, (iv) liable for any act, omission,
neglect or default of any prior landlord, or (v) required to make any capital
improvements to the Building or the Premises which Landlord may have agreed to
make but had not completed.
23.03. MORTGAGEE'S OPTION TO MAKE LEASE SUPERIOR. Notwithstanding the foregoing,
Tenant shall, upon demand by Landlord, at any time or time, execute, acknowledge
and deliver to Landlord
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<PAGE> 20
or to the holder of any Mortgage, without expense to Landlord or such holder,
any and all instruments that may be necessary to make this Lease superior to the
lien of any such Mortgage.
23.04. ACCEPTANCE AGREEMENT. Upon the request of Landlord, Tenant agrees to
execute a subordination and attornment agreement incorporating all or any of the
provisions set forth above and otherwise in form reasonably acceptable to
Landlord.
QUIET ENJOYMENT
24.01. QUIET ENJOYMENT. Subject to the rights of the holder of any Mortgage and
provided Tenant performs the terms, conditions and covenants of this Lease,
Landlord covenants and agrees to take all necessary steps to secure and to
maintain for the benefit of Tenant the quiet and peaceful possession of the
Premises for the term of this Lease.
RULES AND REGULATIONS
25.01. RULES AND REGULATIONS. The rules and regulations attached as Exhibit "E"
("Rules and Regulations") are Landlord's Rules and Regulations for the Building.
Tenant shall faithfully observe and comply with such Rules and Regulations and
such reasonable changes therein (whether by modification, elimination, addition
or waiver) as Landlord may hereafter make and communicate in writing to Tenant,
which shall be necessary or desirable for the reputation, safety, care or
appearance of the Building or the preservation of good order therein or the
operation or maintenance of the Building or the equipment thereof or the comfort
of tenants or others in the Building.
BROKERAGE
26.01. BROKERS. Landlord and Tenant each hereby acknowledge and agree that
Broker has acted as agent for the Landlord, not the Tenant, in this transaction
and is to be paid a commission by Landlord pursuant to a separate leasing
agreement between Landlord and Broker. In the event there is a Co-Broker,
Landlord and Tenant each hereby acknowledge and agree that Co-Broker will act as
agent for the Tenant, not the Landlord, in this transaction, but any commission
or fee payable to such Co-Broker shall be the sole responsibility of Landlord
pursuant to a separate co-brokerage agreement that Landlord shall enter into
with such Co-Broker.
26.02. INDEMNIFICATION. Landlord and Tenant represent and warrant to each other
that they have not dealt with any real estate broker or agent other than Broker
and the Co-Broker, if any, set forth above, who by reason of such dealing has a
claim against the other for a commission or fee. Landlord agrees to indemnify
Tenant and hold it harmless against any claims for commissions that may be
asserted in connection with this Lease based upon acts and agreements of
Landlord, and Tenant agrees to indemnify Landlord and hold it harmless against
any claims for commissions that may be asserted in connection with this Lease
based upon acts and agreements of Tenant.
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<PAGE> 21
EXPIRATION; HOLDING OVER
27.01. EXPIRATION. This Lease shall terminate on the Expiration Date, provided
however that all obligations and liabilities of Landlord or Tenant hereunder,
actual or contingent, which have accrued or arisen on or prior to the Expiration
Date shall survive the termination of this Lease. On the Expiration Date, Tenant
shall surrender the Premises to Landlord in the condition in which the Premises
were originally received from Landlord, except for ordinary wear and tear.
27.02. HOLDING OVER. If Tenant remains in possession of the Premises after the
Expiration Date with Landlord's written consent but without any modification of
this Lease or other written agreement between the parties, Tenant shall be a
tenant at will at two times the Base Rental rate in effect on the Expiration
Date and subject to all the other terms and provisions hereof (except as to the
term of this Lease). If Tenant remains in possession of the Premises after the
Expiration Date without Landlord's written consent, such holding over shall be
at two times the Base Rental in effect on the Expiration Date and subject to all
other terms and provisions hereof (except as to the term of this Lease), but
Tenant shall be a tenant-at-sufferance, subject to immediate eviction. There
shall be no renewal of this Lease by operation of law.
WORK ON THE PREMISES
28.01. APPROVAL OF WORK. Whenever, after the Commencement Date, Tenant is
permitted or required to maintain and repair, or make additions or alterations
to, the Premises, Tenant shall commence such work (the "Work") only after
Landlord has approved the plans for the Work and any contractor proposed by
Tenant to perform the Work. Landlord may require that the Work be performed by a
contractor that is on Landlord's list of approved contractors for the Building.
28.02. STANDARDS FOR PERFORMANCE. Tenant shall cause the Work to be done and
completed in a good, substantial and workmanlike manner, free from faults and
defects, and in compliance with all Legal Requirements, and shall utilize only
new materials and supplies. Tenant shall be solely responsible for construction
means, methods, techniques, sequences and procedures, and for coordinating all
activities related to the Work, and Landlord shall have no duty or obligation to
inspect the Work, but shall have the right to do so.
28.03. COMPLETION OF WORK. Whenever Tenant is required or permitted to perform
any Work upon the Premises, Tenant shall promptly commence the Work and, once
commenced, diligently and continually pursue the Work and complete the Work
within a reasonable time. Tenant shall supervise and direct the Work utilizing
its best efforts and reasonable care, and shall assign such qualified personnel
to the Work as may be necessary to cause the Work to be completed in an
expeditious fashion.
28.04. PAYMENT OF COSTS AND EXPENSES. Tenant shall provide and pay for all
labor, materials, goods, supplies, equipment, appliances, tools, construction
equipment and machinery and other facilities and services necessary for the
proper execution and completion of the Work. Tenant shall promptly pay when due
all costs and expenses incurred in connection with the Work, and shall not
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<PAGE> 22
permit or suffer to exist any liens against the Building. Tenant shall pay, or
cause to be paid, all fees and taxes required by law in connection with the
Work, and shall procure all permits and licenses necessary for the performance
of the Work.
28.05. PROTECTION OF PERSONS, PROPERTY. Tenant shall be responsible for the acts
and omissions of all of its employees and all other persons performing any of
the Work. Tenant shall be responsible for initiating, maintaining and
supervising all necessary safety precautions and programs in connection with the
Work, and shall take all reasonable protection to prevent damage, injury or loss
to, the Work, all persons performing Work on the Premises, all other persons who
may be involved in or affected by the Work, all materials and equipment to be
incorporated in the Work and all other property on the Premises or adjacent
thereto. Tenant shall ensure that the Work does not interrupt or otherwise
disrupt tenants in the Building.
28.06. INSURANCE. Tenant shall purchase and maintain in full force and effect,
and shall cause its contractors and subcontractors to purchase and maintain in
full force and effect, such insurance (if any) in addition to that otherwise
required of Tenant under this Lease as may be necessary to protect Tenant and
Landlord from claims under worker's compensation acts and other employee benefit
acts, from claims for damages because of bodily injury, including death, and
from claims for damage to property which arise out of performance of the Work.
Such additional insurance policies, if any, shall meet the requirements set
forth elsewhere herein with respect to the insurance policies otherwise required
to be obtained and maintained by Tenant under this Lease.
28.07. LIENS. Tenant shall not permit or suffer to exist any lien against the
Premises or the Building, and the Premises shall be kept free from any liens
arising from any Work. Notice is hereby given that Landlord shall not be liable
for any labor or materials furnished to Tenant, with any such lien in connection
therewith being null and void and of no force or effect as to Landlord. Within
10 days after the imposition of any such lien and notice from Landlord, or other
actual notice received by Tenant of the existence of any such lien, Tenant shall
cause the same to be released of record by payment or posting of a proper bond.
If Tenant fails to do so after thirty (30) days notice to Tenant, Landlord shall
have, in addition to all other remedies provided herein and by law, the right,
but not the obligation, to cause the same to be released by such means as it
shall deem proper, including payment of the claim giving rise to such lien or
posting of a bond sufficient under Georgia law to remove the lien from the
Premises without any duty to inquire into or to determine the validity thereof.
All such sums paid by Landlord and all expenses incurred by it in connection
therewith shall be considered additional rental and shall bear interest from the
date paid at the rate of sixteen percent (16%) per annum, and shall be due and
payable on demand. Landlord shall have the right at all times to post and keep
posted on the Premises any notices permitted or required by law, or which
Landlord shall deem reasonably necessary, for the protection of Landlord, the
Premises and any other party having an interest therein, from mechanics' and
materialmen's liens.
28.08. INDEMNIFICATION. Tenant shall pay and shall indemnify and save Landlord
and its officers, employees and agents harmless from all liabilities, damages,
losses, costs, expenses, causes of action, suits, claims, demands and judgments
of any nature arising out of, by reason of or in connection with the Work.
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ESTOPPEL CERTIFICATES
29.01. ESTOPPEL CERTIFICATES. Tenant shall, from time to time upon 10 days prior
request by Landlord execute, acknowledge and deliver to Landlord, or to a person
designated by Landlord, a certificate of Tenant stating (i) that this Lease is
unmodified and in full effect (or, if there have been modifications, that this
Lease is in full effect as modified, and setting forth such modifications), (ii)
the dates to which Base Rental, Additional Rental and other sums payable
hereunder have been paid, (iii) that no default exists hereunder (or specifying
each such default of which Tenant has knowledge), and (iv) such other facts as
Landlord (or any mortgagee, prospective mortgagee or prospective purchaser of
the Building) reasonably may request (including, in the case of mortgagees,
reasonable notice provisions). Landlord, at Landlord's cost and expense, shall
cause such certificate to be prepared for execution by Tenant. Any such
certificate may be relied upon by Landlord or any mortgagee or prospective
mortgagee or purchaser of the Building.
TENANT'S STATUS
Tenant represents and warrants to Landlord that:
30.01. POWER AND AUTHORITY. Tenant has the right, power and authority to execute
and deliver this Lease and to perform the provisions hereof, and is, to the
extent required, qualified to transact business and in good standing under the
laws of the State of Georgia.
30.02. AUTHORIZATION. The execution of the Lease by Tenant, or by the persons or
other entities executing them on behalf of Tenant, and the performance by Tenant
of Tenant's obligations under the Lease in accordance with the provisions hereof
have been, to the extent required, duly authorized by all necessary action of
Tenant.
MISCELLANEOUS
31.01. NOTICES. Except for legal process, which may be served as provided by law
or as provided below, any notice, demand, request, consent, approval or
communication (a "notice") under this Lease shall be in writing and shall be
deemed to have been duly given and received at the time and on the date when
personally delivered, or one day after being delivered to a nationally
recognized commercial carrier service for next-day delivery or three days after
deposit in the United States mail, certified or registered mail with a return
receipt requested, with all postage prepaid, addressed to Landlord or Tenant (as
the case may be) at its address shown above. The time period in which a response
must be made, or action taken, by a party receiving any notice shall commence on
the date of receipt by such party. Rejection or other refusal to accept
delivery, or inability to deliver because of a changed address of which no
notice was given, shall be deemed to be receipt of such notice. The parties may
designate a different address for receiving notices hereunder by notice to the
other party in accordance herewith. Neither telecopy nor electronic mail
(e-mail) shall be a method of notice under this Lease.
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<PAGE> 24
31.02. HEADINGS. The use of headings, captions and numbers in this Lease is
solely for the convenience of identifying and indexing the various paragraphs
and shall in no event be considered otherwise in construing or interpreting any
provision in this Lease.
31.03. EXHIBITS AND ATTACHMENTS. Each exhibit and attachment referred to in this
Lease is attached to this Lease and is and shall be construed to be made a part
of this Lease by such reference.
31.04. PRONOUNS; INCLUDING. Wherever appropriate in this Lease, personal
pronouns shall be deemed to include the other genders and the singular to
include the plural. Wherever used in this Lease, the term "including" means
"including, without limitation."
31.05. BINDING EFFECT. All provisions contained in this Lease shall be binding
upon, inure to the benefit of, and be enforceable by, the respective successors
and assigns of Landlord and Tenant to the same extent as if each such successor
and assign were named as a party hereto. The term "Landlord" as used in this
Lease shall mean only the owner of the Building from time to time, and in the
event of the sale or other disposition of the Building, the Landlord named
herein shall be released from any further obligations or liabilities under this
Lease, and Tenant shall look solely to such successor Landlord for performance
of the obligations of the Landlord hereunder.
31.06. SEVERABILITY. If any term, covenant, condition or provision of this
Lease, or the application thereof to any person or circumstance, shall ever be
held to be invalid or unenforceable, then in each such event the remainder of
this Lease or the application of such term, covenant, condition or provision to
any other person or any other circumstance (other than those as to which it
shall be invalid or unenforceable) shall not be thereby affected, and each term,
covenant, condition and provision hereof shall remain valid and enforceable to
the fullest extent permitted by law.
31.07. TIME OF ESSENCE. Time is of the essence of this Lease. Anywhere a day
certain is stated for payment or for performance of any obligation, the day
certain so stated enters into and becomes a part of the consideration for this
Lease.
31.08. NO ESTATE IN LAND. Tenant has only a usufruct, not subject to levy and
sale, and no estate has been granted by Landlord.
31.09. APPLICABLE LAW. This Lease shall be governed by, construed under and
interpreted and enforced in accordance with the laws of the State of Georgia.
31.10. ENTIRE AGREEMENT. This Lease (including the exhibits and attachments)
contains the entire agreement of Landlord and Tenant and no representations,
warranties, inducements, promises or agreements, oral or otherwise, between the
parties not embodied in this lease shall be of any force or effect.
31.11. MODIFICATIONS. This Lease shall not be modified or amended in any respect
except by a written agreement executed by Landlord and Tenant in the same manner
as this Lease in executed.
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<PAGE> 25
31.12. SURVIVAL. Any claim, cause of action, liability or obligation arising or
accruing during the term of this Lease and under the provisions hereof in favor
of a party hereto against or obligating the other party hereto shall survive the
expiration or any earlier termination of this Lease.
31.13. COUNTERPARTS. This Lease may be executed in several counterparts, each of
which shall be deemed an original, and all of such counterparts together shall
constitute one and the same instrument.
31.14 FINANCIAL INFORMATION. No later than seven (7) days after receipt by
Tenant of a written request from Landlord, Tenant shall provide to Landlord in
writing Tenant's most current annual and quarterly financial reports.
31.15. MEMORANDUM OF LEASE. Tenant shall not record or permit the recording of
this Lease or any memorandum or affidavits thereof. However, upon request by
Landlord, Tenant will execute and deliver a memorandum of this Lease in
recordable form, which Landlord may, at Landlord's expense, file for record.
31.16. SPECIAL STIPULATIONS. Landlord and Tenant agree to the special
stipulations, if any, set forth in Exhibit "F". In the event of any conflict
between the printed portions of this Lease and such special stipulations, the
special stipulations shall control.
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<PAGE> 26
WHEREFORE, the parties have executed, sealed and delivered this Lease
as of the date of this Lease set forth above.
<TABLE>
<CAPTION>
LANDLORD: TENANT:
<S> <C>
POST APARTMENT HOMES, L.P., -----------------------------------------
a Georgia limited partnership
By: Post Properties, Inc., By:
a Georgia corporation, -------------------------------------
Sole General Partner Authorized Signature
Name:
------------------------------------
By: Title:
---------------------------- -----------------------------------
Name:
--------------------------
By:
-------------------------------------
Title: Authorized Signature
-------------------------
[CORPORATE SEAL] Name:
------------------------------------
Title:
-----------------------------------
Attest:
----------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
[CORPORATE SEAL]
</TABLE>
NOTE: If Tenant is a corporation, two authorized corporate officers must execute
this Lease in their appropriate capacity for Tenant, and affix the corporate
seal.
WHEN EXECUTED, PLEASE RETURN ALL ORIGINAL COPIES OF THE LEASE TO
LANDLORD FOR EXECUTION BY LANDLORD. LANDLORD WILL THEN RETURN ONE
FULLY EXECUTED COPY TO TENANT.
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<PAGE> 27
EXHIBIT "A"
DRAWING OF PREMISES
A-1
<PAGE> 28
EXHIBIT "B"
WORK LETTER
DEFINITIONS
1.01. DEFINED TERMS. Capitalized terms used in the Lease and this Work Letter
shall have the same meanings ascribed to them in the Lease. Otherwise, the
capitalized terms used in this Work Letter shall have the meaning ascribed to
them at the point where defined.
1.02. "BASE BUILDING IMPROVEMENTS" shall mean the improvements to the Premises
provided by Landlord described in Schedule 1 to this Work Letter.
1.03. "DRAWINGS AND SPECIFICATIONS" shall mean the final working drawings and
specifications for the construction and installation of the improvements in the
Premises, which have been prepared by Landlord's Architect and approved by
Landlord and Tenant.
1.04. "TENANT IMPROVEMENTS" shall mean the improvements constructed and
installed in the Premises in accordance with the Drawings and Specifications.
1.05. "DESIGN FEE ALLOWANCE" shall mean the amount of $ .75 per rentable square
foot of the Premises.
1.06. "DESIGN COSTS" shall mean the total cost of preparing all drawings and
specifications provided for in this Work Letter, and the total cost of all fees
for architects, engineers, space planners, interior designers and other design
specialists incurred in connection with the Tenant Improvements.
1.07. "TENANT IMPROVEMENT ALLOWANCE" shall mean the amount of $18.10 per
rentable square foot of the Premises.
1.08. "TENANT IMPROVEMENT COSTS" shall mean the total cost of the construction
and installation of the Tenant Improvements.
1.09. "TENANT'S COSTS" shall mean the total of (i) all Tenant Improvement Costs
in excess of the Tenant Improvement Allowance; (ii) all Design Costs in excess
of the Design Fee Allowance; and (iii) a fee equal to 5% of the sum of the
foregoing items, as compensation to Landlord for Landlord's services in
supervising and administering the construction and installation of the Tenant
Improvements.
1.10. "LANDLORD'S ARCHITECT" shall mean the architect, space planner or designer
designated by Landlord.
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1.11. "LANDLORD'S CONTRACTOR" shall mean the contractor designated by Landlord.
DRAWINGS AND SPECIFICATIONS
2.01. DRAWINGS AND SPECIFICATIONS. Landlord's Architect has prepared, and
Landlord and Tenant have approved, the Drawings and Specifications.
2.02. TENANT IMPROVEMENT COSTS. Landlord has obtained from Landlord's
Contractor, and Tenant has approved, the amount of the Tenant Improvement Costs,
and Landlord has been authorized to proceed, through Landlord's Contractor, with
the work of constructing and installing the Tenant Improvements in accordance
with the Drawings and Specifications.
2.03. REVISIONS TO DRAWINGS AND SPECIFICATIONS. If Tenant desires to make
revisions to the Drawings and Specifications, Tenant shall request that
Landlord's Architect prepare, and submit to Landlord for approval, proposed
working drawings and specifications containing all such desired revisions. Upon
approval by Landlord of any such revisions, Landlord shall obtain promptly from
Landlord's Contractor the amount of any adjustment in the Tenant Improvement
Costs resulting from such revisions and submit the amount thereof to Tenant for
Tenant's approval. Tenant shall approve or disapprove the amount of such
adjustment within 3 days after submission by Landlord to Tenant, and if Tenant
fails to notify Landlord of its disapproval within such 3 day period, Tenant
shall be deemed to have given Tenant's approval thereto. Once any adjustment has
been approved, Tenant shall be deemed to have given full authorization to
Landlord to proceed with the work of constructing and installing the Tenant
Improvements in accordance with the Drawings and Specifications, as revised.
Landlord, at its option, can require Tenant to pay in lump sum to Landlord any
and all increases in Tenant's Costs which result from approved revisions to the
Drawings and Specifications.
PAYMENT OF COSTS
3.01. LANDLORD'S COSTS. Landlord shall pay for the cost of preparing the
Drawings and Specifications up to, but not exceeding, the Design Fee Allowance,
and Landlord shall pay all Tenant Improvement Costs up to, but not exceeding,
the Tenant Improvement Allowance. Landlord shall disburse the Design Fee
Allowance, the Tenant Improvement Allowance and any amounts deposited by Tenant
with Landlord for payment of Tenant's Costs to pay the Tenant Improvement Costs,
as and when the same become due and payable. Landlord shall be entitled to rely
on the accuracy of all invoices and fee statements for labor performed or
materials furnished in connection with the Tenant Improvements and to rely on
any certification as to the Tenant Improvement Costs submitted by Landlord's
Contractor or Tenant's Architect.
3.02. TENANT'S COSTS. Tenant shall pay Tenant's Costs as follows:
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(a) 50% of the amount of Tenant's Costs reasonably estimated by
Landlord shall be paid to Landlord prior to the commencement of construction and
installation of the Tenant Improvements; and
(b) The balance of Tenant's Costs shall be paid within 10 days after
Tenant's receipt of Landlord's invoice upon substantial completion of the Tenant
Improvements and Landlord's delivery of possession of the Premises to Tenant.
3.03. FAILURE TO PAY TENANT'S COSTS. Failure by Tenant to pay Tenant's Costs in
accordance with this Work Letter will constitute a failure by Tenant to pay rent
when due under the Lease and shall therefore constitute an event of default by
Tenant under the Lease, and Landlord shall have all of the remedies available to
it under this Lease for nonpayment of rent.
WORK BY TENANT
4.01. TENANT'S WORK. All work in or about the Premises which is not within the
scope of the work necessary to construct and install the Tenant Improvements
shall be furnished and installed by Tenant at Tenant's cost and expense. Tenant
shall adopt a schedule for performing such additional work consistent with the
schedule of Landlord's Contractor and shall see that such work is conducted in
such a manner as to maintain harmonious labor relations and as not to interfere
unreasonably with or to delay the work of constructing or installing the Tenant
Improvements. Landlord shall give access and entry to the Premises to Tenant and
its contractors performing such additional work and shall give reasonable
opportunity and time to enable Tenant and such contractors to perform and
complete such work. All such additional work and Tenant's use of the Premises
for such purposes shall be performed in accordance with the Lease.
DELIVERY OF POSSESSION OF THE PREMISES
5.01. DELIVERY OF POSSESSION. Landlord shall be deemed to have delivered
possession of the Premises to Tenant on the later of (i) the Commencement Date,
or (ii) the date on which the Tenant Improvements have been substantially
completed, subject only to completion of "punchlist items", which means details
of construction, mechanical adjustment and decoration which are minor in nature
and do not, in the aggregate, materially interfere with Tenant's use and
enjoyment of the Premises.
5.02. DELAYS IN DELIVERY OF POSSESSION. If, for any reason whatsoever (other
than delays caused by Tenant), the Tenant Improvements have not been
substantially completed by the Commencement Date or Landlord cannot deliver
possession of the Premises to Tenant on the Commencement Date, this Lease shall
not be void or voidable, nor shall Landlord be liable for any loss or damages
suffered by Tenant, but the Base Rental and Additional Rental shall abate from
the Commencement Date until Landlord delivers possession of the Premises to
Tenant, and the Expiration Date shall be extended on a day to day basis for each
day that Base Rental and Additional Rental is abated until
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<PAGE> 31
the date that possession of the Premises has been delivered to Tenant; provided,
however, that if possession of the Premises has not been delivered to Tenant
within 6 months following the Commencement Date, for any reason whatsoever
(other than delays caused by Tenant), then either Landlord or Tenant may, at
their option at any time thereafter but prior to the delivery of possession,
terminate this Lease by notice to the other and Landlord and Tenant thereupon
shall be released from all obligations under this Lease. If the Tenant
Improvements have not been substantially completed on the Commencement Date
because of delays caused by Tenant (including any revisions to the Drawings and
Specifications), the term of this Lease and all obligations of Tenant under this
Lease shall commence on the Commencement Date and Landlord shall be deemed to
have delivered possession of the Premises on the Commencement Date, and the
Expiration Date shall continue to be the date set forth in Section 1.08 of the
Lease.
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SCHEDULE 1 TO WORK LETTER
Description of Base Building Improvements
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<PAGE> 33
EXHIBIT "C"
ACCEPTANCE AGREEMENT
THIS AGREEMENT made as of the date set forth below between POST
APARTMENT HOMES, L.P., a Georgia limited partnership (the "Landlord") and
_____________________ (the "Tenant").
W I T N E S S E T H:
WHEREAS, Landlord and Tenant entered into an Office Lease dated
____________________, 19____ (the "Lease") for certain premises in the building
known as __________________________ in _________________Georgia (the
"Premises"); and
WHEREAS, Landlord and Tenant desire to execute this Agreement pursuant
to and as required by the Lease.
NOW THEREFORE, for good and valuable consideration, Landlord and Tenant
agree as follows:
1. The Commencement Date of the Term of the Lease is: ___________________,
19__.
2. The Expiration Date of the Term of the Lease is: ____________________,
19__.
3. The final Rentable Area of the Premises is ___________ square feet and
the final Rentable Area of the Building is _______ square feet.
4. Tenant is in possession of, and has accepted, the Premises and agrees
that all the work to be performed by Landlord in the Premises as
required by the terms of the Lease has been satisfactorily completed
except for any punch list items described in Schedule "A" attached
hereto.
5. Tenant certifies that all conditions of the Lease required of Landlord
as of this date have been fulfilled and there are no defenses or
setoffs against the enforcement of the Lease by Landlord.
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<PAGE> 34
WHEREFORE, the parties hereto have signed and sealed this Agreement, as
of the ___ day of ___________,19___
<TABLE>
<CAPTION>
LANDLORD: TENANT:
<S> <C>
POST APARTMENTS HOMES, L.P., --------------------------------------
a Georgia limited partnership
By:
-----------------------------------
By: Post Properties, Inc., a Georgia Authorized Signature
corporation Name:
Sole General Partner ---------------------------------
Title:
--------------------------------
By:
-------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
By:
-----------------------------------
Authorized Signature
[CORPORATE SEAL] Name:
---------------------------------
Title:
--------------------------------
Attest:
-------------------------------
Title:
---------------------------------
[CORPORATE SEAL]
</TABLE>
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<PAGE> 35
EXHIBIT "D"
OPERATING EXPENSES
1. OPERATING EXPENSE DEFINED. "Operating Expenses" as used in this Lease
shall mean all operating costs for a given Escalation Year, allocable
to the ownership, operation, repair and maintenance of the Building and
related land and facilities in accordance with sound accounting
practices and principles, including (without limitation) the following
categories of operating costs: ad valorem real property taxes imposed
upon the Building, fire, sewer and other assessments imposed upon the
Building, personal property taxes imposed upon any personal property
used in the operation and maintenance of the Building, all taxes based
or imposed upon receipt of rental income, and all other taxes,
assessments and similar charges imposed upon the Building by any
governmental authority or agency, and the reasonable cost of protesting
the amount of any such taxes and assessments; salaries, wages, and all
other expenses incurred for the employment of Building staff members,
including so-called "fringe benefits" and employment-related taxes, all
of which shall be allocated based upon the amount of time spent by such
members in the maintenance and operation of the Building; the cost of
the management office for the Building; the cost of materials and
supplies; the cost of replacements for tools and equipment; amounts
charged to Landlord by independent contractors for services (including
full or part-time labor), materials and supplies; amounts paid by
Landlord, or charged to Landlord by independent contractors, for window
cleaning, janitorial, security, rubbish removal and porter services;
accounting, legal and other professional fees; the reasonable cost of
repainting or otherwise redecorating any part of the Building, except
tenanted areas; the reasonable costs of seasonal and holiday
decorations for the lobby and other public portions of the Building;
the cost of telephone service, postage, office supplies, maintenance
and repair of office equipment and similar charges related to operation
of the Building management office; the cost of licenses, permits and
similar fees and charges; premiums for insurance obtained by Landlord;
charges (including applicable taxes) for all utilities required in the
operation of the Building (including the tenanted areas thereof),
including water, sewer, electricity and gas; costs of landscaping and
ground maintenance; fees for the management of the Building; the
Building's share of the maintenance, landscape maintenance and other
operating expenses of any common area maintenance or similar charges or
assessments payable with respect to the multi-use development in which
the Building is located; and amortization of capital improvements made
to the Building after the Commencement Date which are undertaken
primarily for the purpose of reducing Operating Expenses or which are
required to comply with a change in any Legal Requirement.
2. EXCLUSIONS FROM OPERATING EXPENSES. Any operating costs incurred after
the Expiration Date shall be excluded from Operating Expenses.
Operating Expenses shall be "net" only, and for that purpose shall be
reduced by the amounts of any reimbursement, refund, credit or discount
received or receivable by Landlord (net of the reasonable costs and
expenses of obtaining the same, if any) with respect to any item of
cost that is included in Operating Expenses (other than reimbursements
by other tenants in the nature of escalation or
D-1
<PAGE> 36
additional rental payments similar to those required of Tenant pursuant
to this Lease). Operating Expenses also excludes, the following: any
income, franchise or other taxes imposed upon Landlord's income or
profits, unless imposed in lieu of real property ad valorem taxes; the
cost of any work or service performed for any tenant (including Tenant)
at such tenant's cost; the cost of correcting defects in the original
construction of the Building; salaries, bonuses or payments of any
other kind to officers and executives of Landlord; except as provided
in paragraph 1 above, the cost of any work or service performed for any
facility other than the Building; the cost of any repairs, alterations,
additions, changes, replacements and other items which are made in
order to prepare for a new tenant's occupancy; the cost of any repair
in accordance with the Article of this Lease governing destruction or
damage by fire or other casualty; interest on debt or amortization
payments on any Mortgage and rental under any ground lease or other
underlying lease; all leasing expenses, including any real estate
brokerage commissions or other costs (including concessions) incurred
in procuring tenants; charges (including applicable taxes) for
utilities for which Landlord is entitled to reimbursement from any
tenant (other than reimbursements by other tenants in the nature or
escalation or additional rental payments similar to those required of
Tenant pursuant to this Lease); any costs of painting or decorating any
tenanted part of the Building; and any expenses for repairs or
maintenance covered by warranties and service contracts in existence on
the Commencement Date.
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EXHIBIT "E"
RULES AND REGULATIONS
1. The sidewalks, and public portions of the Building, such as entrances,
passages, courts, elevators, vestibules, stairways, corridors or halls,
and the streets, alleys or ways surrounding or in the vicinity of the
Building shall not be obstructed, even temporarily, or encumbered by
Tenant or used for any purpose other than ingress and egress to and
from the Premises.
2. No curtains, blinds, shades, louvered openings, tinted coating, film or
screens shall be attached to or hung in, or used in connection with,
any window, glass surface or door of the Premises, without the prior
written consent of Landlord, unless installed by Landlord.
3. Signs on entrance door or doors shall conform to building standard
signs, samples of which are on display in Landlord's rental office.
Signs on doors shall, at Tenant's expense, be inscribed, painted or
affixed by sign makers approved by Landlord. In the event of the
violation of the foregoing by Tenant, Landlord may remove same without
any liability, and may charge the expense incurred by such removal, to
Tenant.
4. The sashes, sash doors, skylights, windows, heating, ventilating and
air conditioning vents and doors that reflect or admit light and air
into the halls, passageways or other public places in the building
shall not be covered or obstructed by Tenant.
5. No show cases or other articles shall be put in front of or affixed to
any part of the exterior of the Building, nor placed in the public
halls, corridors, or vestibules without the prior written consent of
Landlord.
6. The lavatories, sinks, toilets and other plumbing fixtures shall not be
used for any purposes other than those for which they were constructed,
and no sweepings, rubbish, rags, or other substances shall be thrown
therein.
7. Tenant shall not in any way deface any part of the Premises or the
Building. If Tenant desires to use linoleum or other similar floor
covering, an interlining of building standard deadening felt shall
first be affixed to the floor, by a paste or other material that is
soluble in water; the use of cement or other similar adhesive materials
which are not water soluble, are expressly prohibited.
8. No bicycles, vehicles, or animals of any kind shall be brought into or
kept in or about the Premises. No cooking shall be done or permitted by
Tenant on the Premises except in conformity to law and then only in the
utility kitchen, if any, as set forth in Tenant's approved plans, which
is to be primarily used by Tenant's employees for heating beverages and
light snacks. Tenant shall not cause or permit any unusual or
objectionable odors to be produced upon or permeate from the Premises.
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<PAGE> 38
9. Landlord desires that the Building be a "tobacco-free" environment, and
neither Tenant, nor any of Tenant's employees, agents, visitors,
licensees, or other persons shall use tobacco or tobacco products
(including, without limitation, cigarettes, cigars or smokeless
tobacco) inside of the Building.
10. No space in the Building shall be used for manufacturing, distribution,
or for the storage of merchandise or for the sale of merchandise,
goods, or property of any kind at auction, other than lobby stores
approved and leased by Landlord expressly for such purpose.
11. Tenant shall not make, or permit to be made, any unseemly or disturbing
noises or disturb or interfere with occupants of the Building or
neighboring buildings or premises or those having business with them,
whether by the use of any musical instrument, radio, stereo (which term
includes phonographs, compact disc players, tape players and other
machines reproducing music or talking), unmusical noise, whistling,
singing, or in any other way. Tenant shall not throw anything out of
the doors, windows or skylights or down the passageways.
12. Neither Tenant, nor any of Tenant's employees, agents, visitors, or
licensees, shall at any time bring or keep upon the Premises any
inflammable, combustible or explosive fluid, or chemical substance,
other than reasonable amounts of cleaning fluids or solvents required
in the normal operation of Tenant's business offices (which shall in
any event be stored and used in compliance with all Legal
Requirements).
13. No additional locks or bolts of any kind shall be placed upon any of
the doors or windows by Tenant, nor shall any changes be made in
existing locks or the mechanism thereof, without the prior written
approval of Landlord and unless and until a duplicate key is delivered
to Landlord. Tenant shall, upon the termination of its tenancy, restore
to Landlord all keys of stores, offices and toilet rooms, either
furnished to, or otherwise procured by, Tenant, and in the event of the
loss of any keys so furnished, Tenant shall pay to Landlord the cost
thereof.
14. Tenant shall not overload any floor. Tenant shall obtain Landlord's
consent before bringing any safes, freight, furniture, or bulky
articles into the Building and Landlord can specify to Tenant the
location for the placement of such articles. All removals, or the
carrying in or out of any safes, freight, furniture, or bulky matter of
any description must take place during the hours which Landlord or the
Building manager may determine from time to time. Landlord reserves the
right to inspect all freight to be brought into the Building and to
exclude from the Building all freight which violates any of these Rules
and Regulations or the Lease of which these Rules and Regulations are a
part.
15. Tenant shall not occupy or permit any portion of the Premises to be
occupied, without Landlord's expressed prior written consent, as an
office for a public stenographer or typist, or for the possession,
storage, manufacture or sale of liquor, narcotics, tobacco in any form,
or as a barber or manicure shop, or as a public employment bureau or
agency, or for a public
E-2
<PAGE> 39
finance (personal loan) business, or for any so-called telemarketing
business, or as a cafeteria or other food service establishment, or for
a business providing photocopying services for offices or others, or as
a health club. Tenant shall not engage or pay any employees on the
Premises, except those actually working for Tenant on the Premises, nor
advertise for laborers giving an address at the Building.
16. Tenant agrees to employ such janitorial contractor as Landlord may from
time to time designate, for any waxing, polishing, and other
maintenance work of the Premises and of the Tenant's furniture,
fixtures and equipment. Tenant agrees that it shall not employ any
other cleaning or maintenance contractor, nor any individual, firm or
organization for such purpose, without Landlord's prior written
consent.
17. Landlord shall have the right to prohibit advertising by Tenant which,
in Landlord's opinion, tends to impair the reputation of the Building
or its desirability as a building for offices, and upon written notice
from Landlord, Tenant shall refrain from or discontinue such
advertising.
18. Landlord reserves the right to exclude from the Building when the
Building is closed all persons who do not sign in and out on a register
in the lobby of the Building, showing the name of the person, the place
visited and the time of arrival and departure. All such persons
entering or leaving the Building during such times may be expected to
be questioned by the Building security personnel as to their business
in the Building. Landlord shall in no case be liable for damages for
any error with regard to the admission to or exclusion from the
Building of any person. In the case of invasion, mob, riot, public
excitement or other circumstances rendering such action advisable in
the Landlord's opinion, Landlord reserves the right to prevent access
to the Building during the continuance of the same by such action as
Landlord may deem appropriate, including closing doors.
19. The Premises shall not be used for lodging or sleeping or for any
immoral or illegal purpose.
20. The requirements of Tenant will be attended to only upon application at
the management office of the Building. Building employees shall not
perform any work or do anything outside of their regular duties, unless
under special instructions from the office of Landlord.
21. Canvassing, soliciting, and peddling in the Building are prohibited and
Tenant shall cooperate to prevent the same.
22. There shall not be used in any space, or in the public halls of any
building, either by Tenant or by its jobbers or others, in the delivery
or receipt of merchandise, any hand trucks, except those equipped with
rubber tires and side guards. No hand trucks shall be used in passenger
elevators.
E-3
<PAGE> 40
23. Tenant, in order to obtain maximum effectiveness of the cooling system,
shall lower and close the blinds or drapes when the sun's rays fall
directly on windows of Premises. Tenant shall not remove the standard
blinds installed in the Premises.
24. All paneling, rounds or other wood products not considered furniture
shall be of fire retardant materials. Before installation of any such
materials, certification of the materials' fire retardant
characteristics shall be submitted to Landlord or its agents, in a
manner satisfactory to Landlord.
25. Tenant shall not install any vending machines in the Building or
Premises without Landlord's consent.
26. All articles and the arrangement, style, color and general appearance
thereof, in the interior of the Premises that will be visible from the
exterior thereof, including, without limitation, window displays,
advertising matter, signs, merchandise, and furniture shall be subject
to Landlord's approval.
27. Landlord may waive any one or more of these Rules and Regulations for
the benefit of any particular Tenant or Tenants, but no such waiver by
Landlord shall be construed as a waiver of such Rules and Regulations
in favor of any other Tenant or Tenants, nor prevent Landlord from
thereafter enforcing any such Rules and Regulations against any or all
of the Tenants of the Building.
28. These Rules and Regulations are in addition to, and shall not be
construed to in any way modify or amend, in whole or part, the terms,
covenants, agreements and conditions of the main text (including
Special Stipulations) of the Lease, which text shall control in the
instance of conflict.
29. Landlord reserves the right to make such other and reasonable rules and
regulations as in its judgment may from time to time be needed for
safety, care and cleanliness of the Building, and for the preservation
of good order therein. Such other Rules and Regulations shall be
effective upon written notification of Tenant.
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<PAGE> 41
EXHIBIT "F"
SPECIAL STIPULATIONS
1. RENEWAL OPTION.
As long as Tenant is not in default in the performance of its covenants
under this Lease, Tenant is hereby granted the option to renew the Term of this
Lease for a period of three additional years ("Renewal Term"), to commence at
the expiration of the initial Term of this Lease. Tenant shall exercise its
option to renew by delivering written notice of such election to Landlord at
least twelve (12) months prior to the expiration of the initial Term of this
Lease. The renewal of this Lease shall be upon the same terms and conditions of
this Lease, except (a) the Base Rental during the Renewal Term shall be as
agreed upon by Landlord and Tenant, (b) Tenant shall have no option to renew
this Lease beyond the expiration of the Renewal Term, (c) Tenant shall not have
the right to assign its renewal rights to any sublessee of the Premises or
assignee of the Lease, nor may any such sublessee or assignee exercise such
renewal rights, (d) the leasehold improvements will be provided in their
then-existing condition (on an "as is" basis) at the time the Renewal Term
commences, and (e) Landlord may require that Tenant pay for parking pursuant to
a program to be implemented by Landlord. If Landlord and Tenant cannot agree
upon the Base Rental during the Renewal Term within ninety (90) days after
Landlord's receipt of Tenant's written notice of its election to renew this
Lease, then this renewal option shall immediately expire and be of no further
force or effect.
2. ACCESS TO PREMISES. Section 4.01 of the Lease is hereby amended to add
the following as the last sentence thereof: "Landlord will permit Tenant to
access the Premises to install fixtures and furnish the Premises up to ten (10)
days prior to the later of (i) the Commencement Date or (ii) the date on which
Landlord is able to deliver occupancy of the Premises to Tenant."
3. RENT CONTROL. Section 6.08 of the Lease is hereby deleted in its
entirety.
4. HOURS OF OPERATION. Landlord acknowledges that Tenant shall have the
right to be open or closed in accordance with the normal operations of the
Federal Reserve Banking System. If Tenant's banking operation is open on a day
when the Building is closed, Landlord shall make available those portions of the
lobby or the first floor of the Building immediately adjacent to the Premises so
that Tenant's customers may enter the Premises from the Building's lobby.
5. AFTER HOURS UTILITY SERVICE. Landlord will provide to Tenant, upon
reasonable prior verbal notification, after-hours heating, ventilation and air
conditioning services at a cost of $45.00 per hour for each hour of such
service.
6. SIGNAGE. Landlord has approved the signage which will advertise
Tenant's business in the Building, as depicted on Exhibit "H" attached hereto
and incorporated herein by this reference.
7. PARKING.
F-1
<PAGE> 42
(a) Landlord shall provide Tenant with three (3) reserved parking
spaces located on the top level of the parking deck adjacent to the Building.
Such spaces shall be designated with signs stating "Bank Customer Parking, 15
Minute Limit". Tenant will pay the cost for designing, installing and
maintaining said signs. The design of the reserved parking designations shall be
determined by Landlord and consistent with the signage program for the Building.
(b) Landlord will designate two (2) parking spaces in front of the
Building for "10 Minute Visitor Parking".
8. ACCEPTANCE OF PREMISES. The following shall be added to Section 12.02
of the Lease as the second sentence of Section 12.02: Landlord will complete any
reasonable punch list items provided by Tenant within two (2) weeks after the
Commencement Date; provided that if such punch list items cannot reasonably be
completed in such two (2) week period, then Landlord will commence such punch
list item during said two (2) week period and work will diligently prosecute
such work to completion. In addition, Landlord shall repair any latent defects
in the Premises.
9. LANDLORD'S ACCESS. The following shall be added in Section 13.01 in the
second line after the words "business hours": "subject to Tenant's normal
security procedures."
10. TRANSFER OF TENANT. Section 13.03 of the Lease is hereby deleted in its
entirety.
11. ALTERATIONS BY TENANT. The following is hereby added as the last
sentence of Section 15.01: "In the event Tenant makes any alterations, additions
or improvements in or on the Premises with Landlord's approval, Landlord will
notify Tenant at such time of Landlord's approval as to whether Tenant will be
required to remove such alteration, addition or improvement upon termination of
the Lease.
12. RENT ABATEMENT. The following shall be added to the end of Section
16.04: "except and only to the extent Landlord has received insurance proceeds
covering the losses incurred through such casualty."
13. TENANT'S INSURANCE. The following shall be deleted from the sixth and
seventh lines of Section 18.02: " ; provided, however, that Tenant shall carry
such greater limits of coverage as Landlord may reasonably request from time to
time."
14. CONDEMNATION. The last three (3) sentences of Section 19.01 are hereby
deleted and the following inserted in lieu thereof:
"All proceeds from any taking or condemnation of any part of
the Building shall belong to and be paid to Landlord;
provided, however that the foregoing shall not interfere with
any right of Tenant under applicable laws to seek to collect
any condemnation award for a taking of the Premises or any
loss of business associated with the taking of the Premises."
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<PAGE> 43
15. DEFAULT BY TENANT. In the event Tenant is late in the payment of any
Base Rental, Additional Rental or other payment to be made by Tenant hereunder,
Landlord will give written notice to Tenant of such default, but shall not be
required to give such written notice more than two (2) times per Lease Year. In
the event such written notice is given, payment shall be due by Tenant to
Landlord within three (3) days after receipt by Tenant of such notice.
16. ASSIGNMENT AND SUBLETTING. The following shall be added after the word
"disapproval" and before the word "shall" in the seventh line of Section 22.02:
"in writing".
17. HOLDING OVER. Section 27.02 is hereby amended by deleting the words
"two times" in the third line and substituting in lieu thereof "one hundred
fifty percent (150%)".
18. ESTOPPEL CERTIFICATES. The following shall be added to the end of
Section 29.01 of the Lease: "Landlord will provide Tenant with an estoppel
certificate, reasonably approved by Landlord, upon written request by Tenant,
but in no event more than once per Lease year."
19. EXHIBIT "B" WORK LETTER.
(1) Section 3.02 of Exhibit "B" (Work Letter) is hereby deleted and the
following is substituted in lieu thereof:
"3.02 Tenant's Costs. Tenant shall pay Tenant's Costs as
follows:
(a) 10 % of the amount of Tenant's Costs reasonably estimated
by Landlord shall be paid to Landlord prior the commence of
construction and installation of the Tenant Improvements; and
(b) 50% of the amount of Tenant's Costs reasonably estimated
by Landlord shall be paid to Landlord upon completion of 50%
of the Tenant Improvement Work, as determined by Landlord; and
(c) The balance (40%) of Tenant's Costs shall be paid within
10 days after Tenant's receipt of Landlord's invoice upon
substantial completion of the Tenant Improvements and
Landlord's delivery of possession of the Premises to Tenant."
(2) The following is hereby added to Section 5.01 of Exhibit "B" (the
Work Letter) on the second line after (ii) and before the word "the":
"ten (10) business days following".
(3) 5.02 of Exhibit "B" (Work Letter) shall be amended to add the
following:
(a) "Landlord will notify Tenant in writing of any delays
which Landlord contends will change the Commencement Date."
F-3
<PAGE> 44
(b) Landlord hereby certifies that as part of the written
contract between Landlord and Landlord's Architect relating to
the Building, Landlord's Architect has agreed to comply
strictly with "all applicable national, federal, state,
municipal and local laws, regulations, codes, ordinances,
orders, requirements, and all revisions or amendments to them
and with any other regulations or other requirements of any
other governing body having jurisdiction over" the work and
services of building the Building and the Premises. To the
best of landlord's knowledge, this includes compliance with
the Americans With Disabilities Act.
20. RIGHT OF FIRST OFFER ON CONTIGUOUS SPACE. Landlord is free to market all
space contiguous to the Premises for lease, but Landlord agrees not to enter
into a written commitment to offer to lease any such contiguous space, based
upon bona fide, arm's length terms and conditions, to any third party without
first offering such space to Tenant for lease. Tenant shall have fourteen (14)
days after receipt of such written notice from Landlord to elect to lease all,
but not less than all, of such space from Landlord. If Tenant so elects to lease
such offered space, then the Premises will be expanded to include such space
upon the same terms and conditions as set forth in the Lease. If Tenant declines
to lease such space, then this right of first refusal shall terminate.
21. BANK EXCLUSIVITY. Landlord shall not lease any space in the Building to any
"Local Retail Banking Institution" (as hereinafter defined), other than Tenant,
or an entity controlling, controlled by, or under common control with Tenant,
without Tenant's prior written consent, so long as the following conditions are
satisfied: (a) Tenant continues to use and occupy the Premises for retail
banking operations, and (b) no default by Tenant exists. As used herein, the
term "Local Retail Banking Institution" shall mean a state, national, private or
foreign bank, bank holding company, savings bank, credit union or other such
entity which (i) is authorized by law to receive and actually receives deposits
on site and (ii) provides retail banking services on site. For purposes of this
Lease, a Local Retail Banking Institution specifically does not include
insurance companies, brokerage companies, financial service companies or
investment banking companies; provided further, Landlord may lease space in the
Building to a state, national, private or foreign bank, bank holding company,
savings bank, credit union or other such entity so long as such entity does not
receive deposits on site nor provide other retail banking services on site.
Notwithstanding anything to the contrary contained in this Paragraph 21 above,
so long as (a)Tenant continues to use and occupy the Premises for retail banking
operations, and (b) no default by Tenant exists, then Landlord shall in no event
lease any space in the Building (whether ground floor retail space or office
space on the ground or upper floors) to any regional or community bank which,
with respect to loans, makes loans primarily up to, but not greater than, Two
Million Dollars ($2,000,000.00) per loan. By way of example only, such regional
or community banks shall include Fidelity National Bank, Buckhead Bank,
Riverside Bank and Mount Vernon Bank, but shall not include NationsBank,
SunTrust Bank, Wachovia Bank, First Union Bank or SouthTrust Bank.
22. REGULATORY APPROVAL. This Lease is subject to approval by the Department of
Banking and Finance of the State of Georgia ("Authority"). Either Landlord or
Tenant may cancel this Lease within 60 days after the date of full execution of
this Lease if the Tenant has not received
F-4
<PAGE> 45
approval by said Authority, upon which Tenant shall immediately reimburse
Landlord for its actual out of pocket expenses related to tenant improvements.
Notwithstanding any other provisions contained in this Lease, in the
event the Tenant is closed or taken over by the Authority, the Landlord may
terminate the Lease only with the concurrence of such Authority or other Bank
Supervisory Authority with appropriate jurisdiction over the Tenant, and such
Authority shall in any event have the election either to continue or to
terminate the Lease. Provided, that in the event this Lease is terminated, the
maximum claim of Landlord for damages or indemnity for injury resulting from the
rejection or abandonment of the unexpired term of the Lease shall in no event be
in an amount exceeding all rent reserved by the Lease, without acceleration, for
the calendar year next succeeding the date of the surrender of the Premises to
the Lessor, or the date of re-entry of the Lessor, whichever first occurs,
whether before or after the closing of the bank, plus an amount equal to the
unpaid rent accrued without acceleration up to such date.
F-5
<PAGE> 46
EXHIBIT "G"
BUILDING CONSTRUCTION
1. Landlord's Construction. Landlord shall construct the Building
substantially in accordance with the approved Preliminary Building Plans,
identified on Schedule 1, attached hereto and by this reference made a part
hereof (the "Preliminary Building Plans"). The Building shall be completed in a
structurally sound and tenantable condition, free of material defects in
workmanship and material with all HVAC, mechanical and electrical systems in
good, serviceable operating condition as certified by Landlord's Architect
(defined in Exhibit "B" to this Lease). Landlord shall have the right, without
Tenant's approval, to require construction change orders with respect to the
Building so long as any such change orders do not constitute a material change
in the configuration, location, design and appearance of the Building or site
plan as reflected on the Preliminary Building Plans. In addition, Landlord shall
have the right to make any change orders required by permitting authorities in
order to issue permits or other approvals required to construct and complete the
Building. Any such change orders required by Landlord shall be made solely at
Landlord's expense.
2. Completion. Landlord shall make diligent efforts to substantially
complete construction of the Building substantially in accordance with the
requirements of Section 1 above on a date (the "Completion Date") on or before
May 1, 1998. As used in this Exhibit "G", the "Completion Date" shall be the
earlier of (A) the date on which Tenant takes occupancy of the Premises, or (B)
the fifteenth (15th) day after the date of notice from Landlord to Tenant that
(i) the Building is substantially completed in accordance with Section 1 above
as evidenced by a certificate of substantial completion from Landlord's
Architect and (ii) the governmental authority having jurisdiction thereover has
issued a certificate of occupancy for the shell of the Building. The Completion
Date shall be postponed, without liability imposed thereby upon Landlord , by a
period of time equal to the number of days during which construction is delayed
by reason of strikes, lockouts, Acts of God, governmental restriction, enemy
action, civil disturbance, fire, other casualties, inability to secure material
or labor, or any other event of force majeure beyond the control of Landlord;
provided, however, that the Completion Date shall not be postponed more than one
hundred twenty (120) days from and after May 1, 1998, that is, not later than
May 1, 1998. If the construction of the Building is not completed by the
Completion Date due to the fault of Landlord, then Tenant's sole and exclusive
remedy for such delay shall be to receive from Landlord reimbursement of any
reasonable additional rent in excess of the rent payable under Tenant's existing
lease payable by Tenant on account of, and only for the period of, such delay.
If the Completion Date occurs subsequent to April 1, 1998, Landlord shall give
Tenant notice of the anticipated Completion Date at least thirty (30) days prior
thereto. Anything herein to the contrary notwithstanding, if, for any reason not
due to Tenant's fault or delay, Landlord fails to deliver possession of the
Premises to the Tenant by November 1, 1998, Tenant may, as Tenant's sole and
exclusive remedy, terminate this Lease by written notice given to Landlord at
any time on or before
G-1
<PAGE> 47
the date on which Landlord delivers the Premises to Tenant, and all advance rent
paid, if any, shall forthwith be fully returned to Tenant.
G-2
<PAGE> 48
SCHEDULE 1
TO
EXHIBIT "G"
PRELIMINARY BUILDING PLANS
G-3
<PAGE> 49
EXHIBIT "H"
SIGNAGE
H-4
<PAGE> 1
EXHIBIT 10.11
<PAGE> 2
SUBLEASE AGREEMENT
SUBLEASE AGREEMENT ("Sublease") made and entered into this 31 day of
October 1997, by and between NATIONSBANK, N.A. ("Sublessor") and Mountain
National Bank ("Sublessee").
W I T N E S S E T H:
WHEREAS, ROSWELL ROAD INVESTORS, LTD. ("Lessor"), and BANK SOUTH, N.A.,
a national banking association ("Bank South"), entered into that certain Amended
and Restated Lease Agreement, dated November 20, 1985, as amended December 18,
1985 ("Lease"), for the lease by Lessor to Lessee of certain space including the
Subleased Premises (as defined below);
WHEREAS, Sublessor desires to sublease to Sublessee and Sublessee
desires to sublease from Sublessor all of the Subleased Premises, as hereinafter
set forth;
WHEREAS, Sublessor is the successor by operation of law to Bank South;
and
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. SUBLEASED PREMISES. Sublessor hereby sublets to Sublessee, and
Sublessee hereby hires and takes from the Sublessor that certain space
("Subleased Premises"), called Unit 3 in the Lease and more particularly
described on Exhibit A attached hereto and made a part hereof, and consisting of
land and a free standing building containing approximately 3000 rentable square
feet located at 5340 Peachtree Industrial Blvd., Norcross, Georgia.
2. TERM OF SUBLEASE. The term of this Sublease shall commence on the
earlier of (i) the date Sublessor delivers exclusive possession of the subleased
Premises to Sublessee or () October 31, 1998, and shall end on November 30, 2001
(the "Expiration Date") (or until such term shall sooner cease or expire as
hereinafter provided). Sublessor shall deliver exclusive possession of the
Subleased Premises to Sublessee immediately upon the execution and delivery of
this Sublease by both parties.
3. THE LEASE.
A. Sublessor represents and warrants that a complete and accurate copy
of the Lease is attached hereto as Exhibit B. Sublessor warrants and represents
that the Lease is in good standing and is in full force and effect in accordance
with its terms and there exists no default on the part of Sublessor, as "Tenant"
thereunder, or on the part of the "Lessor" thereunder, and that the Lease has
not been modified or amended in any respect, except as set forth in Exhibit B.
Sublessor represents and warrants that the commencement date under the Lease for
the Subleased Premises was December 18, 1985, and the expiration date under the
Lease for the
<PAGE> 3
Primary Term (as defined in the Lease) is midnight, November 30, 2011, pursuant
to the terms of the Lease.
B. Sublessee acknowledges that it has reviewed and is familiar with all
of the terms, covenants and conditions of the Lease. Sublessee shall not be
bound by the terms of the exhibits to the Lease. AR of the terms, covenants and
conditions of the Lease, as applicable to the Subleased Premises are
incorporated herein and made a part hereof as if set forth herein at length,
except that "Lessor" shall be deemed to mean Sublessor and "Lessee" shall be
deemed to mean Sublessee; provided, however, that none of the provisions of
Section 3.6, Section 3.7 or Section 4.1 of the Lease shall apply to Sublessee.
Sublessee assumes and agrees, except as otherwise provided herein, to perform,
observe and comply with all of the terms, covenants and conditions on the
Lessee's part to be performed, observed and complied with under the Lease as the
same may or shall relate to the occupancy of the Subleased Premises, but only if
and to the extent the same relate to and accrue during the term of this
Sublease, and do not arise from the act or omission of Sublessor. Sublessor
agrees to indemnify Sublessee and hold Sublessee harmless from and against all
claims, losses or damages (including attorneys' fees) arising from Sublessor's
failure to perform or observe any of the terms or covenants of the Lease prior
to the commencement date of this Sublease. This indemnity shall survive the
expiration or earlier termination of this Sublease.
C. This Sublease is expressly made subject and subordinate to all of
the terms and covenants of the Lease. So long as Sublessee performs all of its
covenants and obligations set forth in this Sublease, Sublessor agrees to pay
all accrued rent provided for under the Lease on or before the due date thereof,
and to otherwise perform all obligations thereunder that are not otherwise
required of the Sublessee in accordance to the terms of this Sublease. Sublessor
shall not commit or permit to be committed any act or omission that shall
violate or breach any term or condition of the Lease or cause the Lease to be
terminated. Sublessor agrees (i) not to amend, modify or otherwise change the
Lease in any way which would cause or result in the diminution of any rights of
the Sublessee under the Sublease; (ii) not to waive any rights of the "Lessee"
under the Lease; (iii) not to exercise any right or option to terminate the
Lease; and (iv) to give Sublessee immediately upon receipt copies of all notices
received by Sublessor and given by Lessor under the Lease, notices received from
any third party which relate to the Subleased Premises, and notices given by
Sublessor relating to the Lease. Any termination of the Lease or Sublessor's
right to the possession of the Subleased Premises shall result in a termination
of this Sublease unless Lessor elects to continue this Sublease in effect as a
direct lease between Lessor and Sublessee.
4. OCCUPANCY AND ACCEPTANCE.
A. Sublessee shall use and occupy the Subleased Premises solely for
retail banking and related uses and otherwise in compliance with all of the
terms of the Lease.
B. Except as set forth herein, Sublessee covenants that it will occupy
the Subleased Premises in accordance with the terms of the Lease and will not
suffer to be done or omit to do
2
<PAGE> 4
any act which may result in a violation of or a default under any of the terms
and conditions of the Lease, or render Sublessor liable for any charge or
expense. Sublessee further covenants and agrees to indemnify Sublessor against
and hold Sublessor harmless from any loss or liability arising out of, by reason
of, or resulting from, Sublessee's failure to perform or observe any of the
terms and conditions of the lease pertaining to the Subleased Premises. Any
other provision in this Sublease to the contrary notwithstanding, Sublessee
shall pay to Sublessor as additional rent any and all sums which Sublessor may
be required to pay to Lessor arising out of, by reason of, or resulting from
Sublessee's failure to perform or observe one or more of the terms and
conditions of the Lease pertaining to the Subleased Premises.
(C) Sublessee agrees that Sublessor shall not be required to perform
any of the covenants or any of the obligations of Lessor under the Lease or
provide Sublessee any services or construct any improvements in the Subleased
Premises. Insofar as any of the covenants and obligations of Sublessor
thereunder are required to be performed under the Lease by Lessor thereunder,
Sublessee acknowledges that Sublessor shall be entitled to look to Lessor for
such performance. Sublessor shall take such commercially reasonable action as
may be appropriate under the circumstances, to secure such performance upon
Sublessee's written request therefor. Sublessee shall not conduct business
relating to the Subleased Premises directly with Lessor but shall deal with the
Lessor only through the Sublessor.
(D) SUBLESSEE ACKNOWLEDGES AND AGREES THAT EXCEPT FOR ANY EXPRESS
REPRESENTATIONS OR WARRANTIES SET FORTH IN THIS SUBLEASE, SUBLESSOR HAS NOT
MADE, DOES NOT MAKE AND SPECIFICALLY NEGATES AND DISCLAIMS ANY REPRESENTATIONS,
WARRANTIES, PROMISES, COVENANTS, AGREEMENTS OR GUARANTIES OF ANY KIND OR
CHARACTER WHATSOEVER, WHETHER EXPRESS OR IMPLIED, ORAL OR WRITTEN, PAST, PRESENT
OR FUTURE, OF, AS TO, CONCERNING OR WITH RESPECT TO (A) THE VALUE, NATURE,
QUALITY OR CONDITION OF THE PROPERTY, INCLUDING, WITHOUT LIMITATION, THE WATER,
SOIL AND GEOLOGY; (B) THE INCOME TO BE DERIVED FROM THE PROPERTY; (C) THE
SUITABILITY OF THE PROPERTY FOR ANY AND ALL ACTIVITIES AND USES WHICH SUBLESSEE
OR ANYONE ELSE MAY CONDUCT THEREON; (D) THE COMPLIANCE OF OR BY THE PROPERTY OR
ITS OPERATION WITH ANY LAWS, RULES, ORDINANCES OR REGULATIONS OF ANY APPLICABLE
GOVERNMENTAL AUTHORITY OR BODY, (E) THE HABITABILITY, MERCHANTABILITY,
MARKETABILITY, PROFITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE
PROPERTY; (F) THE MANNER OR QUALITY OF THE CONSTRUCTION OF MATERIALS IF ANY,
INCORPORATED INTO THE PROPERTY; (G) THE MANNER, QUALITY, STATE OF REPAIR OR LACK
OF REPAIR OF THE PROPERTY, OR (H) ANY OTHER MATTER WITH RESPECT TO THE PROPERTY,
AND SPECIFICALLY, THAT SUBLESSOR HAS NOT MADE, DOES NOT MAKE AND SPECIFICALLY
DISCLAIMS ANY REPRESENTATIONS REGARDING COMPLIANCE WITH ANY ENVIRONMENTAL
PROTECTION, POLLUTION OR LAND USE LAWS, RULES, REGULATIONS, ORDERS OR EQUIPMENT,
INCLUDING SOLID WASTE, AS DEFINED BY THE U.S. ENVIRONMENTAL PROTECTION AGENCY
REGULATIONS AT
3
<PAGE> 5
40 C.F.R., PART 261, OR THE DISPOSAL OR EXISTENCE, IN OR ON THE PROPERTY, OF ANY
HAZARDOUS SUBSTANCE AS DEFINED BY THE COMPREHENSIVE ENVIRONMENTAL RESPONSE
COMPENSATION AND LIABILITY ACT OF 1980, AS AMENDED, AND REGULATIONS PROMULGATED
THEREUNDER. SUBLESSEE FURTHER ACKNOWLEDGES AND AGREES THAT, HAVING BEEN GIVEN
THE OPPORTUNITY TO INSPECT THE PROPERTY, SUBLESSEE IS RELYING SOLELY ON ITS OWN
INVESTIGATION OF THE PROPERTY AND NOT ON ANY INFORMATION PROVIDED OR TO BE
PROVIDED BY SUBLESSOR. SUBLESSEE FURTHER ACKNOWLEDGES AND AGREES THAT ANY
INFORMATION PROVIDED OR TO BE PROVIDED WITH RESPECT TO THE PROPERTY WAS OBTAINED
FROM A VARIETY OF SOURCES AND THAT SUBLESSOR HAS NOT MADE ANY INDEPENDENT
INVESTIGATION OR VERIFICATION OF SUCH INFORMATION AND MAKES NO REPRESENTATIONS
AS TO THE ACCURACY OR COMPLETENESS OF SUCH INFORMATION. SUBLESSOR IS NOT LIABLE
OR BOUND IN ANY MANNER BY ANY VERBAL OR WRITTEN STATEMENTS, REPRESENTATIONS OR
INFORMATION PERTAINING TO THE PROPERTY, OR THE OPERATION THEREOF FURNISHED BY
ANY REAL ESTATE BROKER, AGENT, EMPLOYEE, SERVANT OR OTHER PERSON. SUBLESSEE
FURTHER ACKNOWLEDGES AND AGREES THAT TO THE EXTENT PERMITTED BY LAW, THE LEASE
OF THE PROPERTY AND ANY SALE OF THE PROPERTY AS PROVIDED FOR HEREIN IS MADE ON
AN "AS-IS" CONDITION AND BASIS WITH ALL FAULTS.
(E) If any event described in Section 5.1(a) of the Lease shall occur
in respect of Sublessee, Sublessee's property or the Subleased Premises, or if
Sublessee shall default in the Payment of Rent or Additional Rent hereunder or
in the performance or observance of any of the terms, covenants and conditions
of this Sublease or of the Lease on the part of Sublessee to be performed or
observed, and if such default has not been cured within the applicable grace or
cure period, Sublessor shall be entitled to the lights and remedies herein
provided or reserved by Lessor in the Lease.
5. ANNUAL RENT. Sublessee shall pay to Sublessor annual rent ("Rent")
in equal monthly installments set forth on Exhibit C attached hereto and
incorporated herein by this reference. Rent shall be due commencing on February
1, 1998 and shall continue to be due on or before the first day of each calendar
month during the term of this Lease without notice, or except as may be
specifically permitted herein or in the Lease, offset or demand.
6. LATE PAYMENTS. From and after 10 days after Sublessee's receipt of
the due notice of any payment of Rent or Additional Rent, or any other payments
hereunder, interest shall accrued thereon, until paid in full, at the rate of
12% per annum.
7. SUBLESSEE S IMPROVEMENTS. Alterations, decorations, installations,
additions or improvements in or to the Subleased Premises shall be made at
Sublessee's sole cost and expense and shall be subject to all of the terms and
conditions of the Lease, including, without limitation, the provisions of
Section 3.4 of the Lease.
4
<PAGE> 6
8. RENTAL ADJUSTMENT. Sublessee shall, for each calendar year during
the term of this Sublease pay to Sublessor as Additional Rent, the full amount
of any real property taxes associated with the Subleased Premises within thirty
(30) days after receiving a bill for any such Additional Rent from Sublessor.
Sublessee shall be responsible for and shall pay in a timely manner all charges
for consumption of utility charges furnished to the Subleased Premises during
the term of this Sublease.
9. SECURITY DEPOSIT. Sublessee shall deposit with Sublessor upon the
execution of this agreement the sum of $0.00 as a security for the faithful
performance and observance by Sublessee of the terms, provisions and conditions
of this Sublease, including, but not limited to, the payment of rent and
additional rent. Sublessor may use, apply or retain the whole or any part of the
security so deposited to the extent required for the payment of any rent and
additional rent or any other sum as to which Sublessee is in default or for any
sum which Sublessor may expend or may be required to expend by reason of
Sublessee's default in respect of any of the terms, covenants and conditions of
the Sublease, including, but not limited to, any damages or deficiency in the
reletting of the Subleased Premises, whether such damages or deficiency shall
have accrued before or after summary proceedings or other re-entry by Sublessor
or Lessor. If Sublessee shall fully and faithfully comply with all of the terms,
provisions, covenants and conditions of this Sublease, the security shall be
returned to Sublessee after the date fixed as the end of this Sublease and after
delivery of the entire possession of the Subleased Premises to the Sublessor.
Sublessee further covenants that it will not assign or encumber or attempt to
assign or encumber the monies deposited herein as security and that neither
Sublessor nor Sublessor's legal representatives, successors or assigns shall be
bound by any such assignment, encumbrance, attempted assignment or attempted
encumbrance.
10. EMINENT DOMAIN AND CASUALTY. (A) If the whole or any part of the
Subleased Premises shall be taken or condemned in any manner by any competent
authority or for any public or quasi public use, or damaged or destroyed by
casualty, then, in addition to all other rights of Sublessee under this
Sublease, Sublessee shall have the option to terminate the Sublease by giving
written notice to the other party within thirty (30) days after such casualty or
condemnation, in which event, the term of this Sublease shall cease and
terminate as of the date of such termination and Sublessee shall assign all
insurance proceeds to Sublessor. If Sublessee does not terminate this Agreement,
Sublessee agrees to rebuild the Subleased Premises to its condition prior to the
casualty in accordance with the Lease.
(B) Sublessee agrees to carry those policies of insurance required
under the Lease with respect to the Subleased Premises, which policy or policies
shall name Lessor and Sublessor as an additional insured or loss payee, as
applicable, which policy or policies shall be issued by a company which is
reasonably acceptable to Lessor and Sublessor and licensed to do business in the
State of Georgia and such policy or policies shall provide that said insurance
shall not and may not be canceled unless thirty (30) days prior written notice
shall have been given to Lessor and Sublessor. Said policy or policies, or
certificates thereof, shall be delivered to Lessor and
5
<PAGE> 7
Sublessor by Sublessee upon commencement of the term of this Sublease and upon
each renewal of said insurance.
11. NO ASSIGNMENT OR SUBLETTING. Sublessee, for itself, its successors
and assigns, expressly covenants that it shall not assign, mortgage or encumber
this Sublease, nor sublet, nor suffer or permit the Subleased Premises or any
part thereof to be used by others, without the prior written consent of
Sublessor and, if necessary, Lessor in each instance.
12. QUIET ENJOYMENT. Sublessor covenants and agrees with Sublessee that
upon Sublessee's paying the rent and additional rent and observing and
performing all of the terms, covenants and conditions on Sublessee's part to be
observed and performed, Sublessee may peaceably and quietly enjoy the Subleased
Premises, subject, nevertheless, to the terms and conditions of this Sublease
and to the Lease.
13. "SUBLESSOR". The term "Sublessor" as used in this Sublease means
only the Tenant under the Lease at the time in question, so that if the Lease
shall be assigned and assumed, such assignor shall be thereupon released and
discharged from all covenants, conditions and agreements of Sublessor thereafter
accruing hereunder after the date of such assignment and assumption, but such
covenants and agreements shall be binding upon each successor assignee.
14. INDEMNITY . Each party hereto does hereby indemnify the other, and
agrees to hold the other harmless, of and from any claim, damage, liability cost
or expense including reasonable attorneys' fees, which either may suffer or
incur by reason of the failure of the other to perform, observe and comply with
any of the terms, covenants and conditions of this Sublease or the Lease, as
they may affect the Subleased Premises. Sublessee further indemnities Sublessor
to the same extent Sublessor is obligated to indemnify Lessor under the Lease.
15. BROKERAGE. Sublessor and Sublessee hereby covenant and agree to one
another that no brokerage fees or commissions are due with respect to or in
conjunction with this Sublease, except for Lincoln Property Company Commercial
Service Enterprises, Inc., which has represented Sublessor and which is to be
paid a real estate commission pursuant to a separate agreement with Sublessor,
and Brannon/Goddard Company, which has represented Sublessee and will be paid a
real estate commission by Sublessor. Subject to the foregoing, Sublessor and
Sublessee hereby indemnify one another, and hold one another harmless, from and
against all loss, cost, damage or expense, including, but not limited to,
attorneys' fees and court costs incurred by a party hereto as a result of any
claims for brokerage fees or commissions due which are made by, through or under
the other party thereto.
16. CONSENT OF LESSOR UNDER LEASE. Sublease is executed subject to such
right as the Lessor under the Lease may have to withhold consent in the manner
and to the extent described the Lease. Promptly upon execution hereof, Sublessor
will submit this Sublease to Lessor for consent (and will also request consent
for the alterations and improvements described in E bit C and will use all
reasonable efforts to obtain such consent as soon as reasonably possible. The
Sublessor shall also submit to Lessor and Lessor's lender such estoppel
certificates
6
<PAGE> 8
and nondisturbance agreements as may be reasonably requested by Sublessee from
time to time and Sublessor will use all reasonable efforts to cause Lessor and
its lender to execute and deliver the same to Sublessee.
17. NOTICES. Any and all notices which are or may be required to be
given pursuant to the terms of this Sublease or the Lease shall be sent by
registered or certified mail, return receipt requested, or by a nationally
recognized overnight mail carrier, to the parties hereto at their respective
addresses set forth below or to such other addresses as either party shall give
notice of in like manner:
If to Sublessor:
NationsBank, N.A.
401 N. Tryon Street
NCl-021-06-10
Charlotte, North Carolina 28255
with a copy to:
NationsBank, N.A.
715 Peachtree Street
Tenth Floor
GA2-002-10-02
Atlanta, Georgia 30308
If to Sublessee:
5100 LaVista Road
Tucker, Georgia 30085-0049
Attention: J. Randall Carroll, President
18. CONSENTS. Whenever Sublessor's consent is reasonably conditioned on
obtaining the permission, approval or consent of the Lessor under the Lease,
Sublessor agrees it shall utilize commercially reasonable efforts to obtain such
consent.
19. FURTHER ASSURANCES. Each of the parties hereto agrees to promptly
take such actions and execute and deliver such estoppel certificates and other
documents as may be reasonably requested by the other party to give effect to
the provisions of this Sublease, including, without limitation, the Purchase
Option defined in "Exhibit D" attached hereto, or to more effectively provide
the benefits intended by this Sublease. Further, in connection with any purchase
of the Subleased Premises by Sublessee as set forth in the Purchase Option,
provided that the terms and conditions of the Purchase Option have been met,
Sublessor agrees to execute any documents reasonably requested by Sublessee in
order to convey fee simple title to the Subleased Premises to Sublessee,
including, without limitation, a quitclaim deed conveying any reversionary
interest which may be held by Sublessor. This paragraph shall survive any
assignment or transfer of the Subleased Premises or this Sublease.
7
<PAGE> 9
20. MEMORANDUM OF LEASE. Upon the request of Sublessee, Sublessor
agrees to execute a short-form memorandum of this Sublease, in recordable form,
containing certain provisions of this Sublease as may be requested by Sublessee.
Sublessee shall pay any recording costs associated with recording such
memorandum.
21. BINDING EFFECT. The covenants, conditions and agreements contained
herein shall be binding upon and inure to the benefit of Sublessor and Sublessee
and their respective heirs, devisees, executors, administrators, successors and
ass, as permitted hereby.
22. GOVERNING LAW. This Sublease is entered into in the State of
Georgia, and its validity and interpretation shall be construed in accordance
with the laws of that State.
23. EXHIBITS. The following exhibits are attached to this Sublease and
are incorporated into and made a part Of this Sublease:
(A) EXHIBIT A, the Subleased Premises;
(B) EXHIBIT B, the Lease;
(C) EXHIBIT C, the Rent; and
(D) EXHIBIT D, the Purchase Option.
IN WITNESS WHEREOF, Sublessor and Sublessee have caused this Sublease
to be executed by their duly authorized partners or officers.
SUBLESSOR:
NATIONSBANK, N.A.
By: /s/ George M. Snow
------------------------------------------
George M. Snow
Vice President
SUBLESSEE:
MOUNTAIN NATIONAL BANK
By: /s/ J. Randall Carroll
------------------------------------------
Name: J. Randall Carroll
Title: Chairman, President and CEO
[CORPORATE SEAL]
8
<PAGE> 10
EXHIBIT A
(SUBLEASED PREMISES)
9
<PAGE> 11
EXHIBIT B
(LEASE)
10
<PAGE> 12
EXHIBIT C
(RENT)
Annual Rent for the Subleased Premises shall be $16.00 per rentable square foot.
11
<PAGE> 13
obligated to provide Sublessee with a title commitment or policy or a survey of
the Subleased Premises. Sublessee shall accept title to the Subleased Premises
in their "AS-IS" condition as set forth in the Sublease.
12
<PAGE> 1
EXHIBIT 23.1
<PAGE> 2
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,
1998 appearing on page 36 of this Form 10-KSB.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Atlanta, Georgia
March 24, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 17,585,760
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0
0
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<SECURITIES-GAINS> (43,495)
<EXPENSE-OTHER> 8,101,485
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