<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________
Form 10-KSB
(Mark One)
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 (fee required)
For the fiscal year ended December 31, 1996.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (no fee required)
For the transition period from___________to____________.
Commission file number 0-17539
MADISON BANCSHARES GROUP, LTD.
_______________________________
(Name of Small Business Issuer In Its Charter)
Pennsylvania 23-25132079
(State or Other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1767 Sentry Parkway West, Blue Bell, PA 19422
(Address of Principal Executive Offices) (ZipCode)
Issuer's telephone number, including area code: (215) 641-1111
Securities registered pursuant to Section 12(b) of the Act: None.
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
__________________________________ __________________________________________
__________________________________ __________________________________________
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value per share
________________________________________________________________________________
(Title of Class)
________________________________________________________________________________
(Title of Class)
EXHIBIT INDEX APPEARS ON PAGE 46 IN SEQUENTIAL NUMBERING SYSTEM OF THIS FORM
10-KSB
PAGE 1 OF 47
<PAGE>
Check whether the Issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceeding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been such filing requirements for the past 90 days.
YES X _____
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained herein, and no disclosure will 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-KSB or any amendment to
this Form 10-KSB.
[ ]
State the Issuer's revenues for its most recent fiscal year. $8,602,744
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
of the bid and asked prices of such stock, as of a specified date within the
past 60 days. $7,786,580 based on the average of the bid and asked on the
National Association of Securities Dealers Automated Quotation System on March
24.*
State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest publication date. 1,044,031 as of March 24,
1997.
Transitional Small Business Disclosure Format (check one). YES NO X
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be utilized in connection with the
Issuer's 1997 Annual Meeting of Shareholders presently scheduled for May 20,
1997 are incorporated by reference into Part III hereof.
- ------------------------
* Excluded from such market value computation are the approximately 319,698
issued and outstanding shares beneficially owned by executive officers and
directors of Issuer and its subsidiary. Included in such computation are the
50,105 shares beneficially owned by Meridian Bancorp, Inc. (constituting
approximately 4.8% of the issued and outstanding shares of the Issuer).
<PAGE>
MADISON BANCSHARES GROUP, LTD.
Form 10-KSB
INDEX
PART 1 PAGE
- ------ ----
Item 1 Description of Business.............................. 3
Item 2 Description of Property.............................. 6
Item 3 Legal Proceedings.................................... 7
Item 4 Submission of Matters to a Vote of Security Holders.. 7
PART II
- -------
Item 5 Market for Common Equity and Related Stockholder
Matters.............................................. 7
Item 6 Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 8
Item 7 Financial Statements................................. 21
Item 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 44
PART III
- --------
Item 9 Director, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act......................................... 44
Item 10 Executive Compensation............................... 44
Item 11 Security Ownership of Certain Beneficial Owners and
Management........................................... 44
Item 12 Certain Relationships and Related Transactions....... 44
Item 13 Exhibits and Reports on Form 8-K..................... 45
-2-
<PAGE>
PART I
ITEM 1 -DESCRIPTION OF BUSINESS
Madison Bancshares Group, Ltd.
Madison Bancshares Group, Ltd. (the "Company") is a one-bank holding
company registered under the Bank Holding Company Act of 1956, as amended.
It was incorporated under the laws of the Commonwealth of Pennsylvania on
May 31, 1988. The Company became a bank holding company on August 8, 1989
when it consummated the acquisition of all of the capital stock to be
issued of the Madison Bank in connection with the Bank's formation. The
Company provides banking services through The Madison Bank, and does not
engage in any activities other than banking activities. The principal
executive offices of the Company are located at The Madison Bank Building,
1767 Sentry Parkway West, Blue Bell, PA 19422. Its telephone number at such
location is (215) 641-1111. At present, the Bank has four branch offices.
As of the date hereof, the Company and Madison Bank have a total of 45
employees.
MADISON BANK
The Madison Bank (the "Bank"), the Company's sole subsidiary, commenced
operations on August 16, 1989. The Bank is a commercial bank, chartered
pursuant to the laws of the Commonwealth of Pennsylvania and is a member of
the Federal Reserve System. The deposits held by the Bank are insured, up
to applicable limits, by the Federal Deposit Insurance Corporation (the
"FDIC"). The regulatory agency with principal responsibility for oversight
of the Company and the Bank is the Federal Reserve Board.
The Bank conducts retail and commercial banking through its offices
located at 1767 Sentry Parkway West, Blue Bell, PA, 202 West Ridge Pike,
Conshohocken, PA, 1380 Skippack Pike, Center Square, PA, and 600 W.
Lancaster Avenue, Strafford, PA, offering a broad range of consumer and
commercial banking services. The Bank opened the West Ridge Pike office in
September, 1991, the Center Square office in October, 1995, and the
Strafford office in August, 1996. As of December 31, 1995 and 1996, the
Bank held deposits totaling, respectively, $82,892,196 and $87,242,280,
including deposits of the Company. As of the same dates, the Bank had gross
loans receivable of $72,708,168 and $93,945,786 (inclusive of residential
loans held for sale), respectively. The majority of such loans were made
for commercial purposes.
As of December 31, 1995 and 1996, the Company had total assets of
$91,227,698 and $105,970,875 and total shareholders' equity of $7,392,715
and $7,974,220, respectively. Investments amounted to $7,152,613 at year
end 1995, of which $2,942,869 were classified as available for sale and the
balance were classified as held to maturity and $5,693,612 at the end of
1996 of which $3,585,406 were classified as available for sale and the
balance classified as held to maturity.
The Bank is a state-chartered bank, member of the Federal Reserve System
and is FDIC insured. The Federal Reserve Board, the FDIC and federal and
state law extensively regulate various aspects of the banking business,
including, but not limited to, permissible types and amounts of loans,
investment and other activities, capital adequacy, branching, interest
rates on loans and the safety and soundness of banking practices.
-3-
<PAGE>
Any Federal Reserve member bank that does not operate in accordance
with, or conform to, Federal Reserve Board regulations, policies and
directives, may be sanctioned for non-compliance. For example, proceedings
may be instituted by the Federal Reserve Board against any bank which, or
any director, officer or employee thereof who, engages in unsafe and
unsound banking practices, including the violation of applicable laws and
regulations. As described above, the FDIC has the authority to terminate
insurance of deposit accounts pursuant to procedures established for that
purpose.
As a consequence of the extensive regulation of commercial banking
activities in the United States, the business of the Bank and the Company
will be particularly impacted by changes in federal and state legislation
and regulations.
The Bank's primary service area is Blue Bell, Whitpain Township in
Montgomery County, Pennsylvania, and the surrounding areas within an eight
mile radius. The location of the Bank's building, near the intersection of
Walton and Township Line Roads, places it at the juncture of two of the
more heavily traveled roadways in the area. In addition, its Plymouth
Square branch, located at West Ridge Pike in Conshohocken, PA, has extended
its service area to include certain sections of Whitemarsh and Plymouth
Townships and the borough of Conshohocken. The Center Square Branch has
enabled the Bank to have additional market visibility in its current trade
area. The newly opened Strafford Branch borders on three counties. The
tri-county corridor has provided the Company with an extended competitive
market in the Chester and Delaware Counties, joining the existing primary
market of Montgomery County. The Bank currently services approximately 85
Townships/Boroughs.
The Bank offers a broad range of consumer and commercial deposit banking
services, including, but not limited to, both commercial and consumer
insured deposit accounts, including checking accounts, interest-bearing
"NOW" accounts, money market accounts, certificates of deposit, savings
accounts and individual retirement accounts. The Bank places an emphasis on
serving the needs of individuals, small and medium-sized businesses,
executives, professionals and professional organizations in its service
area, offering a high level of personalized service to both its commercial
and consumer customers. The Bank actively solicits non-interest and
interest-bearing deposits from its borrowers.
The Bank also offers a broad range of loan and credit facilities to the
businesses and residents of its service area, including secured and
unsecured loans, home improvement loans, mortgages and home equity lines of
credit.
THE BANK STRESSES LOAN QUALITY. Management attempts to minimize the
Bank's credit risk through loan application evaluation, approval and
post-funding monitoring procedures.
The Bank's other services include credit cards, traveler's checks and
access to an automated teller network.
-4-
<PAGE>
COMPETITION
There is substantial competition among financial institutions in the
Bank's service areas for deposits as well as loan customers. The Bank
competes with new and established local commercial banks, as well as
numerous Philadelphia and regionally-based commercial banks. In addition,
the Bank competes directly and indirectly with savings banks, savings and
loan associations, finance companies, credit unions, mortgage brokers,
insurance companies, securities brokerage firms, mutual funds, money
market funds, private lenders and other institutions for deposits,
mortgages and consumer and commercial loans, as well as in connection with
its other services. Competition among financial institutions is based upon
a number of factors, including, but not limited to, the quality of services
rendered, interest rates offered on deposit accounts, interest rates
charged on loans and other credits, service charges, the convenience of
banking facilities, locations and hours of operation and, in the case of
loans to larger commercial borrowers, relative lending limits.
Many of the banks with which the Bank competes have established
depositor and borrowing relationships, greater financial resources than the
Bank, a wider range of deposit and credit instruments, and possess greater
depth of management than the Bank. The Bank is subject to potential
additional competition from additional branch banks which could open in its
trade areas.
In addition, there are banks and other financial institutions which
serve surrounding areas and out-of-state financial institutions which
currently, or in the future, may compete in the Bank's market. The Bank
competes to attract deposits and loan applications both from customers of
existing institutions and from customers new to its service areas.
-5-
<PAGE>
ITEM 2 -DESCRIPTION OF PROPERTY
The Company leases approximately 10,500 total square feet pursuant to
two leases on the first floor of the Madison Bank Building, 1767 Sentry
Parkway West, Blue Bell, Pennsylvania, (the "Building"). The space is
occupied by both the Company and the Bank and serves as the Bank's primary
banking location. The space contains a banking area, lobby, operations
center and a vault together with administrative and executive offices.
The Bank's space also includes a drive-thru banking facility and an
automated walk-up teller machine.
The initial term of the original lease for 9,100 square feet in the
Building (the "Lease") expired on December 31, 1994. The lease contains two
renewal options of five years each. The Company exercised its option for
the first five year renewal term.
Base rental payments under the Lease until December 31, 1999 (the
expiration of the first renewal option) are payable monthly at an annual
rate of $142,092. In the event that the Company exercises the second
renewal option, beginning January 1, 2000, the amount of base rental
payments will increase to $164,700 per annum. The Lease provides for a
redecoration allowance based on $5.00 per square foot or the sum of $45,395
for each option term. The Bank utilized its redecoration allowance for
improvements during 1995.
During 1993, the Company entered into a lease for approximately 1,400
square feet of additional space on the first floor of the building which
was utilized by the Bank's Operations Department. This lease was canceled
subsequent to December 31, 1995, with no penalty. Effective February 1,
1996, 3,381 square feet on the first floor were leased for the expansion of
the Bank's Operations and Finance Departments, at an annual rate of
approximately $58,660. On January 1, 1997, the Bank re-leased the 1,400
square feet of additional space on the first floor to accommodate further
expansion of its operations.
In addition to the base rents referred to above, the Company is required
to pay its pro rata share of the Building's operating costs, including real
estate taxes, water and sewer charges, equipment maintenance charges,
exterior maintenance and upkeep, common area electric charges, trash
removal, and certain other similar items. For 1996, the amount of such
expenses was $31,080. The Company's maximum allocable portion of the
Building's operating costs for 1997 will be $32,640 and will increase to
$51,684 for the final year of the second option term.
On May 14, 1996, the Bank entered into a ten year lease agreement for
approximately 3,000 square feet of office space and banking facilities in
Strafford, Pennsylvania, to be utilized for a branch office. The lease is
for a period of ten years, beginning July 27, 1996 through July 27, 2006.
The minimum monthly rent payable for the first three years is $5,200.00
per month. The minimum monthly rent payable subsequent to the first three
years of the term will be increased by the greater of 4% or the consumer
price index. All extensions of the original lease will have similar rent
increases.
On September 1, 1995, the Bank entered into a ten year lease agreement
for approximately 3,600 square feet of office space and banking facilities
in Center Square, Pennsylvania, to be utilized for a branch office. The
annual and monthly fixed minimum lease payments for the initial term of the
lease are $72,000 and $6,000, respectively, in year one, increasing to
$108,000 and $9,000 in year ten (10).
-6-
<PAGE>
The lease contains two five year renewal options. Real estate taxes were
$2,916 for the first year and the proportionate share each year thereafter
based upon 3,600 square feet. Common area maintenance expenses under the
lease agreement will be $14,400 per year adjusted based on the CPI index
plus increases in the base CAM (common area maintenance).
On July 31, 1991, the Bank entered into a ten year lease agreement for
3,620 square feet of office space and banking facilities in a shopping
center complex in Conshohocken, Pennsylvania, to be utilized for a branch
office. The lease contains a renewal option for a five year period. The
lease commenced on September 1, 1991. Real estate taxes and common area
maintenance expenses were approximately $8,373 for 1994, $9,073 for 1995
and $9,655 for 1996. The annual and monthly fixed minimum lease payments
for the initial term of the lease are $72,400 and $6,033, respectively,
increasing to $110,111 and $9,176 in years nine (9) through ten (10).
ITEM 3 -LEGAL PROCEEDINGS
Management is not aware of any material pending legal actions or
proceedings to which the Company or the Bank is a party, outside of the
ordinary routine litigation incidental to the banking business.
ITEM 4 -SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
PART II
ITEM 5 -MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The common stock of the Company is traded in the NASDAQ SmallCap Market.
As of March 17, 1997, there were approximately 300 holders of record of the
Company's common stock.
The high and low bid prices for the Company's common stock during each
quarter of the last two fiscal years were as follows:
1996
1ST QTR 2ND QTR 3RD QTR 4TH QTR
----------- ----------- ----------- -----------
High Bid.......... 11 11-1/2 10-1/2 10-3/4
Low Bid........... 6-3/4 8-3/4 9 9
1995
1ST QTR 2ND QTR 3RD QTR 4TH QTR
--------- ----------- ----------- -----------
High Bid.......... 7-1/4 7-1/8 7-1/2 7
Low Bid........... 6-1/16 5-3/4 6-1/4 6-1/2
-7-
<PAGE>
Such quotations reflect inter-dealer prices, without retail mark-ups,
mark-downs or commissions and may not necessarily reflect actual
transactions. Trading in the Company's common stock during such periods was
sporadic. The quotations do not reflect an adjustment for the Stock
Dividends described below.
THE COMPANY HAS NOT PAID ANY CASH DIVIDENDS. The Board of Directors does
not intend to declare cash dividends in the immediate future. In April 1995,
a 7% stock dividend was declared which resulted in the issuance of 58,599
additional shares of common stock, in January 1996, a 7.5% stock dividend
was declared which resulted in the issuance of 67,185 additional shares of
common stock, and in January 1997, a 7.5% stock dividend was declared,
resulting in the issuance of 72,673 additional shares of common stock being
issued (collectively, the "Stock Dividends").
ITEM 6 -MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This report contains "forward-looking" statements. The Company is
including this statement for the express purpose of availing itself of the
protections of the safe harbor provided by the Private Securities Litigation
Reform Act of 1995 with respect to all of such forward-looking statements.
Examples of forward-looking statements include, but are not limited to (a)
projections of revenues, income or loss, earnings or loss per share, capital
expenditures, growth prospects, dividends, capital structure and other
financial items, (b) statements of plans and objectives of the Company or
its management or Board of Directors (c) statements of future economic
performance and (d) statements of assumptions underlying other statements
and statements about the Company or its business.
The Company's ability to predict projected results or to predict the
effect of certain events on the Company's operating results is inherently
uncertain. Therefore, the Company wishes to caution each reader of this
report to carefully consider certain factors, including competition for
deposits and loans; potential changes in interest rates; changes in
governmental policy and other factors discussed herein, because such factors
in some cases have affected and in the future (together with other factors)
could affect, the ability of the Company to achieve its anticipated results
and may cause actual results to differ materially from those expressed
herein.
The Bank commenced operations on August 16, 1989. The Company's first
full fiscal year of operations was 1990.
CAPITAL RESOURCES
The Company was formed on May 31, 1988 pursuant to the laws of the
Commonwealth of Pennsylvania for the purpose of owning and operating the
Bank. On August 8, 1989, the Company completed an initial public offering of
its common stock. The Bank commenced operations on August 16, 1989.
In April and June, 1996, the Company issued 3,725 and 2,876 shares of
common stock, in connection with one former Director exercising his warrants
and one Director exercising his Stock Options, respectively. As described
above, in January, 1996, 67,185 shares of common stock were issued in
connection with a stock dividend. At December 31, 1996, the common stock
outstanding was 971,360 shares as compared to 897,574 shares at December 31,
1995. The book value per share of the Company's common stock at December 31,
1996, 1995 and 1994 was $8.21, $8.24 and $7.52, respectively. On January 21,
1997, the Board of Directors declared a 7.5% stock dividend payable to all
holders of record of the Company's common stock as of February 5, 1997.
Giving retroactive effect to the issuance of such stock dividend, the book
value of the common stock for December 31, 1996, 1995 and 1994 would be
$7.64, $7.08 and $6.47, respectively.
-8-
<PAGE>
The chart below presents various capital ratios applicable to
state-chartered, Federal Reserve member banks. The requirements are compared
to the Bank's actual ratios at December 31, 1996, which exceeded the levels
required for a bank to be classified as "well-capitalized" under applicable
Federal Deposit Insurance Corporations' regulations.
<TABLE>
<CAPTION>
RISK WEIGHTED CATEGORY
Risk Weighted Assets 0% 20% 50% 100% Total
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans......................... 30,950 62,810 93,760
Securities Available for Sale. 993 2,602 3,595
Securities Held to Maturity... 2,108 2,108
Federal Funds Sold............ 925 925
Cash and Due From Banks....... 4,166 215 4,381
Other Assets.................. 17 2,002 2,019
-------------------------------------------------------
Category totals............... 5,176 5,830 30,950 64,812 106,788
-------------------------------------------------------
Off balance-sheet items (risk
weighted)................... 1,839
-------------------------------------------------------
Total risk-weighted assets.... 0 4,680 15,475 66,651 86,806
-------------------------------------------------------
-------------------------------------------------------
Average Total Assets.......... 94,139
</TABLE>
Capital Tier 1 Tier Total
- ---------------------------------------------------------------------
Shareholders' equity............. 7,884 7,884
Allowance for loan losses........ -- 875 875
----------------------------------
Total Capital 7,884 875 8,759
----------------------------------
----------------------------------
REGULATORY
MINIMUM ACTUAL
RATIO 12/31/96 12/31/96
- ----- --------------- -----------
Qualifying Total Capital to
Risk Weighted Assets............. 8.0% 10.09%
Tier 1 Capital to Risk
Weighted Assets.................. 4.0% 9.08%
Tier 1 Ratio to Total Adjusted
Average Assets................... 4.0% 8.37%
-9-
<PAGE>
The Company's capital-to-assets ratio decreased from 8.10% as of
December 31, 1995 to 7.52% at December 31, 1996. The year-to-year decrease
in the capital-to-assets ratio was attributable to the asset growth of the
Company during 1996. Management anticipates that its capital-to-assets
ratio will continue to decline as the Company's assets grow. The Company's
return on average equity for 1996 was 7.04% and for 1995 was 7.73%; and its
return on average assets was .61% for 1996 as compared to .70% for 1995.
The decrease in the Company's return on equity and return on assets from
1995 to 1996 was directly attributable to the increased asset growth along
with the effect of Branch expansion on operating expenses.
The following table sets forth certain information from the Bank's
average consolidated statement of financial condition and reflects the
weighted average yield on its assets and weighted average cost of its
liabilities for the periods ended December 31, 1995 and 1996. Such yields
and costs were derived by dividing actual income or expense by the monthly
average balance of assets or liabilities, respectively, for the respective
period, and exclude unrecorded interest income related to non-accrual
loans.
-10-
<PAGE>
<TABLE>
<CAPTION>
1996 1995
(IN THOUSANDS) (IN THOUSANDS)
------------------------------ ---------------------------
Average Yield Average Yield
Balance Interest Cost Balance Interest Cost
--------- --------- ----- --------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans Receivable (includes mortgage loans held for sale)......... $ 81,280 $ 7,654 9.42 $ 63,432 $ 6,263 9.87%
Other Investments................................................ 6,430 371 5.77 8,853 - 483 5.45
Federal Funds Sold............................................... 1,576 89 5.65 1,772 101 5.70
--------- --------- --------- ---------
Total Interest-Earning Assets...................................... 89,286 $ 8,114 9.09 74,057 $ 6,847 9.25
--------- ----- --------- ------
Non-Interest-Earning Assets........................................ 4,853 3,710
--------- ---------
Total Assets................................................... $ 94,139 $ 77,767
--------- ---------
--------- ---------
Liabilities & Shareholders' Equity:
Interest-bearing liabilities:
Demand Interest-Bearing............................................ $ 3,755 $ 79 2.10 $ 3,342 $ 76 2.27%
Money Market & Savings............................................. 18,943 612 3.23 20,938 842 4.02
Other Time Deposits................................................ 43,583 2,475 5.68 33,542 1,988 5.93
Borrowed Funds..................................................... 5,386 281 5.22 865 57 6.59
--------- --------- --------- --------- ------
Total Interest-Bearing Liabilities................................... 71,667 $ 3,447 4.81 58,687 $ 2,963 5.05
--------- ------ --------- ------
Other Liabilities.................................................... 14,789 12,042
--------- ---------
Total Liabilities.................................................... 86,456 70,729
Shareholders' Equity................................................. 7,683 7,038
--------- ----------
Total Liabilities and Shareholders' Equity........................... $ 94,139 $ 77,767
--------- ---------
--------- ---------
Net Interest Income/Rate Spread...................................... $ 4,667 4.28% $ 3,884 4.20%
---------- -------- ------- ------
---------- -------- ------- ------
Net Interest Margin.................................................. 5.23% 5.24%
------- -----
------- -----
</TABLE>
The following table analyzes the rate/volume variances between the Bank's
interest-earning assets and interest-bearing liabilities for the fiscal years
1996 compared to 1995 and 1995 compared to 1994. For each category of
interest-bearing assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (change in volume
multiplied by prior year rate), (ii) changes to rate (change in rate
multiplied by prior year volume), and (iii) total change in rate and volume.
The combined effect of changes in both rate and volume has been allocated
proportionately to the change due to rate and the change due to volume.
11
<PAGE>
YEAR ENDED DECEMBER 31
<TABLE>
<CAPTION>
1996 VS. 1995 1995 VS. 1994
------------------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
<CAPTION>
VOLUME RATE TOTAL VOLUME RATE TOTAL
--------- --------- --------- --------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loan Portfolio (includes mortgages held for sale)................ $ 1,688 $ (273) $ 1,415 $ 1,317 $ 488 1,805
Other Investments................................................ (358) 18 (340) (52) 58 6
Federal Funds.................................................... (11) (1) (12) (39) 37 (2)
--------- --------- --------- --------- --------- ------
Total Interest Earning Assets...................................... 1,319 (256) 1,063 1,226 583 1,809
--------- --------- --------- --------- --------- ------
Interest Expense:
Demand Interest--Bearing......................................... 9 (6) 3 22 (5) 17
Money Market & Savings........................................... (75) (155) (230) 30 110 140
Other Time Deposits.............................................. 573 (86) 487 418 394 812
Borrowed Funds................................................... 239 (219) 20 37 2 39
--------- --------- --------- --------- --------- ------
746 (466) 280 507 501 1,008
--------- --------- --------- --------- --------- ------
Net Change in Net Interest Income.................................. $ 573 $ 210 $ 783 $ 719 $ 82 $ 801
--------- --------- --------- --------- --------- ------
--------- --------- --------- --------- --------- ------
</TABLE>
LIQUIDITY
The Bank's Asset/Liability Management Committee, comprised of the members
of the Bank's Executive Committee and its Treasurer, are responsible for
managing the liquidity position and interest rate sensitivity of the Bank.
The Committee's function is to balance the Bank's interest-sensitive assets
and liabilities, while providing adequate liquidity for projected needs. The
primary objective of the Asset/ Liability Management Committee is to optimize
net interest margin in an ever changing rate environment.
Due to the nature of the Company's business, some degree of interest rate
risk is inherent and appropriate. Management attempts to manage the level of
earnings exposure arising from interest rate movements.
Interest rate sensitivity is measured by the difference between
interest-earning assets and interest-bearing liabilities which mature or
reprice within a specific time interval ("Gap"). A positive gap indicates
that interest-earning assets exceed interest-bearing liabilities within a
given interval. A positive gap position results in increased net interest
income when rates increase and the opposite when rates decline.
In the opinion of the Company's management, the effect of any future
inflation, reflected in a higher costs of funds environment, would be minimal
since the Bank has the ability to quickly increase yields on its interest
earning assets (primarily short term investments and commercial loans)
through the matching of funds.
12
<PAGE>
At December 31, 1996, the risk management review indicated that if
interest rates change in the future, the general effect of the Bank's gap
position within a one year period would be a plus or minus (+ or -) $57,780
effect on profits, or .06 basis points. Management believes that any impact
will not be significant.
Management attempts to structure the Balance Sheet to provide for the
repricing of assets and liabilities in approximately equal amounts.
The table on the next page represents the interest rate sensitivity of
the Company as of December 31, 1996 by listing major categories of
interest-sensitive assets and compares them to interest-sensitive liabilities
for various time periods. The repricing intervals primarily are determined by
the first opportunity for the Company to change the interest rate on the
subject instrument. The table shows the difference between interest-sensitive
assets and interest-sensitive liabilities, or Gap, for each repricing
interval and a cumulative Gap and certain calculations based on such
information.
13
<PAGE>
<TABLE>
<CAPTION>
INTEREST RATIO SENSITIVITY REPORT
As of December 31, 1996
(Dollars in Thousands)
1-90 91-180 181-365 1-5 5 YEARS
DAYS DAYS DAYS YEARS AND OVER TOTAL
--------- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-Sensitive Assets
Federal Funds Sold................................. $ 925 $ 0 $ 0 $ 0 $ 0 $ 925
Loans.............................................. 44,166 2,537 5,212 28,714 13,142 93,771
Interest-Bearing Balances.......................... 0 0 0 0 0 0
Investment Securities Held For Sale................ 0 0 500 0 3,085 3,585
Investment Securities Held For Maturity............ 0 0 0 1,000 1,108 2,108
--------- ---------- ---------- --------- ---------- ----------
Totals............................................. $ 45,091 $ 2,537 $ 5,712 $ 29,714 $ 17,335 $ 100,389
Cumulative Total................................... $ 45,091 $ 47,628 $ 53,340 $ 83,054 $ 100,389 $ 100,389
Interest-Sensitive Liabilities
Demand-Interest-bearing............................ $ 4,565 $ 0 $ 0 $ 0 $ 0 $ 4,565
Savings Accounts................................... 4,571 0 0 0 0 4,571
Money Market Accounts.............................. 14,452 0 0 0 0 14,452
Time Deposits...................................... 10,390 7,151 18,884 12,319 250 48,994
Borrowed Funds..................................... 10,000 0 0 0 0 10,000
--------- ---------- ---------- --------- ---------- ----------
Totals............................................. $ 43,978 $ 7,151 $ 18,884 $ 12,319 $ 250 $ 82,582
Cumulative Totals.................................. $ 43,978 $ 51,129 $ 70,013 $ 82,332 $ 82,582 $ 82,582
Gap................................................ $ 1,113 $ (4,614) $ (13,172) $ 17,395 $ 17,085 $ 17,807
Cumulative Gap..................................... $ 1,113 $ (3,501) $ (16,673) $ 722 $ 17,807 $ 17,807
Interest-sensitive assets/ Interest-sensitive
liabilities (cumulative)......................... 1.03 .93 .76 1.01 1.22 1.22
Cumulative Gap/total earning assets................ 1.11% (3.49%) (16.61%) .72% 17.74% 17.74%
Total Earning Assets............................... $ 100,389
</TABLE>
14
<PAGE>
Liquidity management allows a financial institution to meet its potential
cash needs, at reasonable rates, from a variety of sources. Management
monitors projected and current cash flows to maintain adequate levels of
liquidity. Management believes that the utilization of core deposits,
maturing existing earning assets, such as securities, and relatively
short-term borrowings are the most appropriate approach to meet the Bank's
liquidity needs. Management has allocated certain liquid funds and short-term
liabilities to accommodate the slight decline in primary lending rates. As a
result of such liability repricing, management has been able to adjust for
such slight declines during the first 90 days from which interest rates
changed, with little effect on net interest income. During 1996, the Bank's
net interest spread was maintained at approximately 4.28%, as compared to
4.20% in 1995.
RESULTS OF OPERATIONS
- ---------------------
As of December 31, 1996, the Bank held deposits aggregating $87,199,991,
of which $14,660,464, or approximately 17%, were non-interest-bearing
deposits, (exclusive of the $42,289 deposits held by the Company). To the
best of the Company's knowledge, none of such deposits were brokered
deposits. As of the same date, outstanding loans receivable made to 1,272
loan customers totaled approximately $91,834,168, resulting in an average
loan size of approximately $72,197.
As of December 31, 1995, the Bank held deposits aggregating $82,870,620,
of which $14,452,481, or approximately 17%, were non-interest-bearing
deposits (exclusive of the $21,576 deposits of the Company). To the best of
the Company's knowledge none of such deposits were brokered deposits. As of
the same date, outstanding receivables in connection with loans made to 1,048
loan customers totaled approximately $72,207,628, (exclusive of residential
mortgage loans held for sale) resulting in an average loan size of
approximately $68,900.
As of December 31, 1994, the Bank held deposits aggregating $61,929,285,
of which $11,362,770, or approximately 18%, were non-interest-bearing
deposits, (exclusive of the $60,796 deposits of the Company). To the best of
the Company's knowledge, none of such deposits were brokered deposits. As of
the same date, an outstanding loans receivable in connection with loans made
to 820 loan customers totaled approximately $52,736,481 (exclusive of
residential mortgage loans held for sale), resulting in an average loan size
of approximately $64,313.
15
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
% OF % OF % OF
TYPE OF ACCOUNT BALANCE PORTFOLIO BALANCE PORTFOLIO BALANCE PORTFOLIO
- -----------------------------------------------------------------------------------------------------------
Non-Int. Bearing $14,660,464 17.00% $14,452,481 17.00% $ 11,362,770 18.00%
Interest-Bearing 4,564,916 5.00 3,262,291 4.00 3,003,113 5.00
Money Market 14,409,382 17.00 16,376,099 20.00 21,092,724 34.00
Savings....... 4,571,352 5.00 4,900,299 6.00 3,434,770 6.00
CDs over $100,000 23,344,356 23.00 16,970,990 23.00 9,662,143 16.00
CDs under $100,000 29,182,521 33.00 24,887,214 30.00 13,373,765 21.00
-------------------------------------------------------------------------------------
Total Deposits $90,732,991 100.00% $80,849,374 100.00% $ 61,929,285 100.00%
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
</TABLE>
From its inception in 1989 through December 31, 1996, the Company
incurred a cumulative deficit of $1,405,260 in connection with the issuance
of the Stock Dividends. For the year ended December 31, 1996, the Company's
total income was $8,602,744 and its total expenses were $8,062,157, resulting
in a net profit for the year of $540,587. The slight decline in net income
for the year ended December 31, 1996 was primarily due to increased operating
expenses as a result of branch expansion. For the year ended December 31,
1995, the Company's total income was $7,228,649 and its total expenses were
$6,681,993, resulting in a net profit for the year of $546,656. For the year
ended December 31, 1994, the Company's total income was $5,501,188 and its
total expenses were $5,192,693, resulting in a net profit for the year
$311,495. The increase (of net income from 1994 to 1995 was primarily
attributable to the Bank's 37% increased loan growth, partially offset by
income tax expenses and additional expense provisions put in reserve for loan
loss.
As of December 31, 1996, the Bank's allowance for loan losses equaled
approximately .96% of outstanding loans receivable, including non-accrual
loans. At December 31, 1995, the Bank's allowance for loan losses equal
approximately 1.04% of outstanding loans receivable, including non-accrual
loans. At December 31, 1994, the allowance equaled approximately 1.15%. The
chart below shows an analysis of the allowance for loan losses for the years
ended December 31, 1996, 1995 and 1994. Although the overall reserve has
decreased slightly from 1.04% of outstanding loans at December 31, 1995 to
.96% of outstanding loans at December 31, 1996, management believes it
adequately reflects the level of risk in the portfolio.
-16-
<PAGE>
<TABLE>
<CAPTION> Analysis of the Bank's Allowances for Loan Losses
DECEMBER 31,
--------------
1996 1995 1994
---------- ------------ ----------
<S> <C> <C> <C>
Balance at beginning of period:................. $ 750,318 $ 604,286 $ 624,321
Charge-offs:
Commercial.................................... (328,100) 0 (66,379)
Real estate mortgage.......................... 0 (185,968) (399,000)
Installment................................... (6,261) 0 (14,000)
---------- ------------ ----------
Total...................................... (334,361) (185,968) (479,379)
Recoveries:
Commercial.................................... 71,981 0 7,344
Real estate mortgage.......................... 0 0 0
---------- ------------ ----------
Net Charge-Offs................................. (262,380) (185,968) (472,035)
Additions charged to operations................. 387,500 332,000 452,000
---------- ------------ ----------
Balance at the end of period.................... $ 875,438 $ 750,318 $ 604,286
---------- ------------ ----------
---------- ------------ ----------
Ratio of net charge-offs during
the period to average loans
outstanding during the period.............. .41% .29% .95%
---------- ------------ ----------
---------- ------------ ----------
</TABLE>
As of December 31, 1996, the Bank had loans outstanding, totaling
$91,834,168 excluding residential mortgage loans held for sale.
The Bank manages asset quality through diversification in its loan
portfolio and adherence to its credit policy. Management strives to identify
loans experiencing difficulty early enough to correct the problems, to
recognize non-performing loans in a timely manner, to record charge-offs
promptly based on realistic assessments of current collateral values and the
borrower's ability to repay, and to maintain adequate reserves to cover any
inherent losses in the loan portfolio.
The provision for possible loan losses represents the charge against
earnings that is required to fund the allowance for possible loan losses. The
level of the allowance is determined by inherent risks within the Bank's loan
portfolio. Management's policy is to maintain the allowance for loan losses
at a level sufficient to absorb all estimated losses inherent in the loan
portfolio. The allowance for loan losses is increased by the provision for
loan losses and recoveries and is decreased by charged-off loans.
Management is currently utilizing a blended general portfolio allocation
with segregated pools of loans and a specific loan-by-loan allocation
mirroring bank regulatory classifications. Each classified credit is assigned
a specific reserve allocation based upon the severity of its classification
and its specific characteristics (i.e., industry, type of project, nature of
collateral). General reserve allocations are also established against the
unclassified major segments of the loan portfolio, as well as against
-17-
<PAGE>
unfunded commitments and exposures resulting from the issuance of letters of
credit. Each quarter a comprehensive loan portfolio analysis is undertaken,
and reserves are adjusted at such times to more adequately reflect the Bank's
exposure in its loan portfolio. Additionally, past loss experience, current
economic conditions, the results of the most recent regulatory examination,
and other relevant factors are considered in the evaluation.
The Bank places loans on non-accrual status when, (1) in the opinion of
management, the principal or interest is deemed to be not collectable due to
a deterioration in the financial position of the borrower; or (2) when the
loan is more than 90 days delinquent, unless the obligation is both well
secured and in the process of collection; or (3) when borrower declares
bankruptcy and current payment ceases.
Additions to the Bank's provision for possible loan losses for the period
ended December 31, 1996, totaled $387,500. Loans charged-off against the
reserve in 1996 amounted to $334,361. Recoveries amounted to $71,981 which
resulted in $262,380 in net charged-off loans. The principal amount of
nonaccrual loans at December 31, 1996 totaled $735,007. This is an increase
of $375,773 over year end 1995 and management expects the level to increase
to approximately $900,000 by the first quarter of 1997. A substantial portion
of the nonaccrual loans are partially or fully secured and in the process of
collection.
Additions to the Bank's provisions for possible loan losses for the
period ended December 31, 1995 totaled $332,000. Loans charged off against
the reserve in 1995 amounted to $185,968. Loans on non-accrual status as of
December 31, 1995 amounted to $359,234.
Additions to the Bank's loan loss reserve for the period ended December
31, 1994 totaled $452,000. Loans charged off against the reserve aggregated
$479,379 and recoveries were approximately $7,344. Loans on non-accrual
status at December 31, 1994 amount to $382,726.
Other real estate owned at December 31, 1996 totaled $511,618 as compared
to $552,349 at December 31, 1995. This represents one property in Bryn Mawr,
Pennsylvania which the Bank acquired at sheriff's sale. On November 4, 1996,
the Bank entered into a lease purchase agreement for a consideration of
$575,000. The terms of the agreement called for an immediate payment of
$50,000 and an additional payment of $50,000 on or before May 31, 1997. On or
before November 1, 1997, the buyer will pay the balance of $475,000 and the
Bank will convey the premises. The buyer has an option to extend the payment
of the balance until November 1, 1998, upon payment of two additional lump
sum payments of $50,000 each on or before November 4, 1997 and May 31, 1998.
Additionally, the buyer has agreed to pay to the Bank a monthly rental fee of
$500 which will not be credited to the unpaid balance.
Interest expense of $3,446,440 represented 42% of gross interest income
in 1996. Interest expense increased by 16% over 1995. Even though the average
cost of funds declined from 5.05% to 4.81% in 1996, the increase in interest
expense rose due to interest bearing liabilities increasing from an average
of $58,687 in 1995 to $71,667 in 1996, an average increase of 22%.
Interest expense of $2,962,645 represented 43% of gross interest income
in 1995. The increase in interest expense was due to the 35% growth in
interest bearing deposits and a higher cost of funds due to increased
interest rates over 1994. Interest expense of $1,954,960 represented 39% of
gross interest income in 1994.
Occupancy and equipment expenses totaled $757,482 for the year ended
December 31, 1996, as compared to $519,053 at December 31, 1995. The 46%
-18-
<PAGE>
increase represents increased rents for a full year at the Center Square
branch location and six months of rent expense on the Strafford branch
location. Increased maintenance costs and equipment leases were attributable
to the two new branch locations.
For the year ended December 31, 1995, occupancy and equipment expense
increased 9% to $519,053. The increase in those expenses was attributable to
increased rent expense for the Center Square branch that opened in the fourth
quarter. For the year ended December 31, 1994, occupancy and equipment
expenses were $474,115.
Salary and employee benefits of $1,629,752 in 1996 represented 42% of
total non-interest expense, or 22% of total bank expenses as compared to
$1,359,430 in 1995. The increase in salary and employee benefits of $270,322,
or 20%, is attributable to the hiring of additional employees for branch
expansion and to manage the asset growth of the company.
Salary and employee benefits of $1,359,430 in 1995 represented
approximately 44% of total non-interest expense or 22% of total Bank expenses
as compared to $1,084,586, or 23% of total Bank expenses in 1994. The
$309,332, or 25% increase in salary and employee benefits from 1994 to 1995
is attributable to increased staffing for branch expansion and the hiring of
two persons as a result of increased lending activities.
Other operating expenses in 1996, exclusive of occupancy and equipment
and salary and employee benefits expense totaled $1,522,108 as compared to
$1,214,462 at December 31, 1995. This increase of 25% for the 1996 year is a
result of branch expansion, asset growth and a non-recurring proxy related
expense in connection with the Company's Annual Meeting. Legal expenses
increased from $25,316 to $79,380, a 214% increase over 1995. This increase
was due to loan and collection expenses on certain non-accrual loans and loan
closings on new loan originations. Professional fees decreased from $99,638
in 1995 to $60,585 in 1996. This was a result in services from one individual
being terminated. The $578,955 in other operating expenses was comprised
primarily of increases of 32% in telephone expense, 29% increase in postage
and freight, business related auto and travel and miscellaneous expenses of
22%. Other components of other operating expenses also include insurance
expense, shares tax expense and accounting and audit fees. These expenses
increased 74% over 1995 and were directly related to branch expansion and
marketing efforts to increase business. Deposit insurance decreased by 99% in
1996 from $72,783 at December 31, 1995 to $1,500 at December 31, 1996. This
is a continuing direct result from a change in the FDIC assessment regulation
described below.
Other operating expenses in 1995, exclusive of occupancy and equipment
and salary and employee benefits costs, totaled $1,214,462 or approximately
20% of total Bank expenses as compared to other operating expenses in 1994,
exclusive of occupancy, salary and employee benefits costs, which totaled
$1,157,907 or approximately 25% of total bank expenses. Of the other
operating expenses, Business Development increased 66% from $60,665 to
$100,586. This increase was due to increased expenses to develop the asset
growth the bank experienced and the grand opening expenses of the new branch
that opened in the fall of 1995. Stationery and supplies increased 96%. This
increase over 1994 was attributable to the asset growth and purchases for the
new branch.
The 43% decrease in FDIC insurance premiums, from 1994 to 1995, was
attributable to the one time rebate declared by the FDIC as a result of the
insurance fund being recapitalized. Future payments under the FDIC assessment
regulation, Part 327, will require banks in 1A categories, like the Bank, to
pay a minimum of $500 per quarter, regardless of bank deposit size.
-19-
<PAGE>
Interest income on investment securities relates primarily to interest on
U.S. Government Obligations. Interest income of $295,389 for the year ended
December 31, 1996, decreased 27% from $404,520 at December 31, 1995. The
decrease is a direct result of the change in liquidity position of the
Company. Secondary earning assets declined and a migration to borrowed funds
resulted as funding of asset growth outpaced the deposit growth during 1996.
Secondary investments decreased by 28% from 1995 to 1996. Interest income of
$404,520 for the period ended December 31, 1995 represented a decrease of
less than 1% from interest income for the period ended December 31, 1994.
Average investments outstanding decreased $1,000,000 from 1994 even though
the yield increased from 4.83% to 5.45%. The decrease in secondary
investments was primarily due to the Bank's increased loan demand.
Interest income on temporary investments represents Federal Funds sold.
At December 31, 1996 interest income on Federal Funds sold was $88,664, as
compared to $101,698 at December 31, 1995, a 13% decrease. The decrease was a
direct result of the change in liquidity as described above. The December 31,
1995 balance of $101,698 represents a slight decrease from $103,392 for the
period ended December 31, 1994. This was due to the reduction in average
balances outstanding of over $1 million from 1994, even though the yield was
5.70% as compared to 3.96%. These funds were used to satisfy loan demand.
Interest income on Federal Funds Sold in 1994 was $103,392.
Interest income on other investments primarily represent the Bank's
investments in municipal securities. For the year ended December 31, 1996,
1995 and 1994, interest income on other investments was $75,840, $78,093 and
$70,039, respectively. The relatively small fluctuation from year to year is
due to changes in the amounts of Federal Home Loan Bank dividend payments.
The Bank did not invest in any new municipal bonds in 1995 or 1996.
Interest and fees on loans were $7,653,898 in 1996, 94% of gross interest
income, as compared to $6,263,095 or 91% in 1995. The bank experienced a 28%
growth in average loans while the average yield on the portfolio decreased
from 9.87% to 9.47%. The slight decrease in rates had little effect on
earnings due to the ability of the bank to reprice liabilities on a timely
basis with market fluctuations as described above. These factors were
directly related to the change in interest and fees on loans during 1996.
Interest and fees on loans were $6,263,095 in 1995, 91% of gross interest
income, as compared to $4,458,108 in 1994. The 40% increase over 1994 was
attributable to the growth of loans outstanding, with an average outstanding
loan portfolio of $63 million yielding 9.87% as compared to $49 million
average outstanding in 1994 yielding 8.96%.
An analysis of the Bank's loan portfolio is presented in Note 7. "Loans
and Allowance for Loan Losses", to the consolidated Financial Statements. The
primary lending activity of the Bank is to originate loans to individuals and
business entities for business related purposes. The Bank's loans receivable
earn interest at either fixed rates or rates that vary overnight with changes
in the Bank's prime rate. Certain loans receivable earn interest at rates
that are fixed to a specific spread over the rate being paid on certificates
of deposit which are pledged as collateral on the loans.
-20-
<PAGE>
ITEM 7--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report dated March 7, 1997.
Consolidated Statements of Financial Condition as of December 31, 1996 and
1995.
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994.
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for years ended December 31, 1996,
1995 and 1994.
Notes to Consolidated Financial Statements.
The remainder of this page is intentionally left blank. The Financial
Statements of the Company begin on the following page.
-21-
<PAGE>
[LOGO]
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Madison Bancshares Group, Ltd.
Blue Bell, Pennsylvania
We have audited the accompanying consolidated statements of financial
condition of Madison Bancshares Group, Ltd. and subsidiary (the "Company") as
of December 31, 1996 and 1995 and the related consolidated statements of
operations, changes in shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. 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 in accordance with generally accepted auditing
standards. Those standards 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.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Madison Bancshares
Group, Ltd. and subsidiary as of December 31, 1996 and 1995 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
- --------------------------
Philadelphia, Pennsylvania
March 7, 1997
-22-
<PAGE>
MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS 1996 1995
CASH AND CASH EQUIVALENTS:
Cash and amounts due from banks............................... $ 4,381,957 $ 3,788,002
Federal funds sold............................................ 925,000 6,685,000
-------------- ------------
Total cash and cash equivalents............................... 5,306,957 10,473,002
INVESTMENT SECURITIES:
Held to maturity (fair value--1996, $2,097,349; 1995, $4,213,449).... 2,108,206 4,209,744
Available-for-sale (amortized cost--1996, $3,595,891; 1995, $2,945,533)............... 3,585,406 2,942,869
LOANS (Net of allowance for loan losses--1996, $875,438; 1995, $750,318) 90,783,582 71,257,282
MORTGAGE LOANS HELD FOR SALE.................................. 2,111,618 500,540
REAL ESTATE OWNED............................................. 511,618 552,349
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET.......... 584,533 497,045
ACCRUED INTEREST RECEIVABLE................................... 641,570 604,093
OTHER ASSETS.................................................. 337,385 190,774
-------------- ------------
TOTAL......................................................... $ 105,970,875 $ 91,227,698
-------------- ------------
-------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing demand deposits........................... $ 14,660,464 $ 14,452,481
Interest-bearing demand deposits.............................. 4,564,916 3,262,291
Savings deposits.............................................. 4,571,352 4,900,299
Money market deposits......................................... 14,409,382 16,376,099
Time deposits................................................. 48,993,877 43,879,450
-------------- ------------
Total deposits................................................ 87,199,991 82,870,620
BORROWED FUNDS................................................ 10,000,000
ACCRUED INTEREST PAYABLE...................................... 704,707 656,895
ACCRUED EXPENSES AND OTHER LIABILITIES........................ 91,957 307,468
-------------- ------------
Total liabilities............................................. 97,996,655 83,834,983
-------------- ------------
COMMITMENTS
SHAREHOLDERS' EQUITY:
Preferred stock, $5 par value--authorized, 5,000,000 shares; issued outstanding, 0 shares;
Common stock, $1 par value--authorized, 20,000,000 shares;
issued and outstanding, 1996, 971,360 shares; 1995, 897,574 shares................ 971,360 897,574
Capital surplus............................................... 7,185,686 6,709,506
Accumulated deficit........................................... (175,907) (212,606)
Net unrealized losses on available-for-sale securities........ (6,919) (1,759)
-------------- -------------
Total shareholders' equity.................................... 7,974,220 7,392,715
-------------- -------------
TOTAL......................................................... $105,970,875 $91,227,698
-------------- -------------
-------------- -------------
</TABLE>
See notes to consolidated financial statements.
-23-
<PAGE>
MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans............................................. $ 7,653,898 $ 6,263,095 $ 4,458,108
Interest and dividends on investment securities:
U.S. Government obligations........................................... 295,389 404,520 407,118
Other securities..................................................... 75,840 78,093 70,039
Interest on temporary investments.................................... 88,664 101,698 103,392
------------- ------------ ------------
Total interest income.............................................. 8,113,791 6,847,406 5,038,657
------------- ------------ ------------
INTEREST EXPENSE:
Interest on:
Demand deposits......................................................... 78,738 76,473 59,354
Savings and money market deposits....................................... 611,151 841,898 702,185
Time deposits........................................................... 2,475,714 1,987,626 1,175,581
Other interest.......................................................... 280,837 56,648 17,840
------------- ------------ ------------
Total interest expense............................................... 3,446,440 2,962,645 1,954,960
------------- ------------ ------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES.................... 4,667,351 3,884,761 3,083,697
PROVISION FOR LOAN LOSSES............................................... 387,500 332,000 452,000
------------- ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES..................... 4,279,851 3,552,761 2,631,697
------------- ------------ ------------
OTHER NONINTEREST INCOME:
Service charges on deposit accounts..................................... 374,897 275,877 307,265
Gain on the sale of mortgage loans...................................... 59,002 49,505 99,503
Gain on sale of investments............................................. 15,812 25,435
Other................................................................... 55,054 40,049 33,328
------------- ------------ ------------
Total noninterest income............................................. 488,953 381,243 465,531
------------- ------------ ------------
OTHER NONINTEREST EXPENSES:
Salaries and employee benefits.......................................... 1,629,752 1,359,430 1,084,586
Occupancy............................................................... 556,977 396,393 359,696
Equipment............................................................... 200,505 122,660 114,419
Computer processing..................................................... 210,688 176,559 148,828
Deposit insurance....................................................... 1,500 72,783 128,462
Legal................................................................... 79,380 25,316 38,132
Professional fees....................................................... 60,585 99,638 108,942
Business development.................................................... 124,637 100,586 60,665
Office and stationery supplies.......................................... 121,628 101,925 52,087
Advertising............................................................. 82,009 70,221 48,720
Director's fees......................................................... 115,325 95,600 68,500
Proxy related expense................................................... 147,401
Other operating......................................................... 578,955 471,834 503,571
------------- ------------ ------------
Total other noninterest expenses.............................. 3,909,342 3,092,945 2,716,608
------------- ------------ ------------
INCOME BEFORE TAXES..................................................... 859,462 841,059 380,620
PROVISION FOR INCOME TAXES.............................................. 318,875 294,403 69,125
------------- ------------ ------------
NET INCOME.............................................................. $ 540,587 $ 546,656 $ 311,495
------------- ------------ ------------
------------- ------------ ------------
NET INCOME PER COMMON SHARE............................................. $ 0.52 $ 0.52 $ 0.30
------------- ------------ ------------
------------- ------------ ------------
Weighted average number of shares outstanding........................... 1,050,776 1,044,031 1,022,333
</TABLE>
See notes to consolidated financial statements.
-24-
<PAGE>
MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET
UNREALIZED
LOSSES
ON
AVAILABLE-
COMMON CAPITAL ACCUMULATED FOR-SALE
STOCK SURPLUS DEFICIT SECURITIES TOTAL
---------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 31, 1994............................. $ 826,750 $ 6,226,188 $ (616,615) $6,436,323
Issuance of common stock to director.................. 6,112 43,888 50,000
Net income............................................ 311,495 311,495
Net unrealized losses on available-for-sale securities $ (45,523) (45,523)
---------- ------------ ------------ ------------ ----------
BALANCE, DECEMBER 31, 1994............................ 832,862 6,270,076 (305,120) (45,523) 6,752,295
Issuance of common stock to director.................. 6,113 43,887 50,000
Issuance of 7% common stock dividend.................. 58,599 395,543 (454,142)
Net income............................................ 546,656 546,656
Recovery of unrealized loss on available-for-sale
securities.......................................... 43,764 43,764
---------- ------------ ------------ ------------ ----------
BALANCE, DECEMBER 31, 1995............................ 897,574 6,709,506 (212,606) (1,759) 7,392,715
---------- ------------ ------------ ------------ ----------
Exercise of stock options and stock warrants.......... 6,601 39,477 46,078
Issuance of 7 1/2% stock dividend..................... 67,185 436,703 (503,888)
Net income............................................ 540,587 540,587
Unrealized loss on available-for-sale securities...... (5,160) (5,160)
---------- ------------ ------------ ------------ ----------
BALANCE, DECEMBER 31, 1996............................ $ 971,360 $ 7,185,686 $ (175,907) $ (6,919) $7,974,220
---------- ------------ ------------ ------------ ----------
---------- ------------ ------------ ------------ ----------
</TABLE>
See notes to consolidated financial statements.
-25-
<PAGE>
MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------ ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income........................ $ 540,587 $ 546,656 $ 311,495
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation on equipment............................... 144,701 89,748 85,711
Provision for loan losses............................... 387,500 332,000 452,000
Net amortization of bond premium/discount............... 1,789 482,259 25,461
Gain on sale of mortgage loans held for sale............ (59,002) (49,505) (99,503)
Gain on sale of investments............................. (15,812) (25,435)
Originations of loans held for sale..................... (15,684,054) (7,314,677) (14,438,700)
Proceeds from sale of loans............................. 14,013,974 7,313,442 16,672,502
Changes in assets and liabilities which (used)
provided cash:
Accrued interest receivable............................. (37,477) (99,235) (112,752)
Other assets............................................ (146,611) (27,719) (52,975)
Accrued interest payable................................ 47,812 334,830 4,281
Accrued expenses and other liabilities.................. (215,511) 204,584 24,434
Deferred loan fees...................................... 24,880 (72,209) (20,535)
------------- ------------- -------------
Net cash provided by (used in) operating activities... (981,412) 1,724,362 2,825,984
------------- ------------- -------------
INVESTING ACTIVITIES:
Purchase of investment securities held-to-maturity...... (500,000) (8,993,360)
Purchase of investment securities available for sale.... (1,647,031) (1,500,000) (7,474,160)
Proceeds from maturities of investment securities
held-to-maturity...................................... 2,100,000 5,787,700 4,863,649
Proceeds from sale of investment securities available
for sale.............................................. 4,003,438 1,995,000
Proceeds from maturity of investment securities
available for sale.................................... 1,000,000
Loans purchased and originated, net of principal
repayments............................................ (19,821,593) (19,512,697) (3,246,768)
Additions to furniture, equipment and leasehold
improvements.......................................... (232,189) (269,926) (15,540)
Costs capitalized for real estate owned................. (552,349)
Proceeds on sale of real estate owned................... 40,731 150,832
------------- ------------- -------------
Net cash used in investing activities................ (18,560,082) (12,543,834) (12,720,347)
------------- ------------- -------------
FINANCING ACTIVITIES:
Net increase in demand, savings and time deposits....... 4,329,371 20,941,335 2,097,712
Proceeds from issuance of common stock.................. 50,000 50,000
Exercise of stock warrants.............................. 26,895
Exercise of stock options............................... 19,183
Advances of borrowed funds.............................. 10,000,000 3,675,000
Repayments of borrowed funds............................ (3,675,000)
------------- ------------- -------------
Net cash provided by financing activities............... 14,375,449 17,316,335 5,822,712
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... (5,166,045) 6,496,863 (4,071,651)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............ 10,473,002 3,976,139 8,047,790
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR.................. $ 5,306,957 $ 10,473,002 $ 3,976,139
------------- ------------- -------------
------------- ------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................$ 3,398,628 $ 2,627,815 $ 1,950,679
------------- ------------- -------------
------------- ------------- -------------
Income taxes............................................$ 569,956 $ 197,527 $ 146,514
------------- ------------- -------------
------------- ------------- -------------
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITY:
Issuance of 7.5% and 7% stock dividend in 1996 and 1995,
respectively:
Common stock............................................$ 67,185 $ 58,599
------------- ------------- -------------
------------- ------------- -------------
Capital surplus.........................................$ 436,703 $ 395,543
------------- ------------- -------------
------------- ------------- -------------
Accumulated deficit.....................................$ (503,888) $ (454,142)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes o consolidated financial statements.
-26-
<PAGE>
MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. ORGANIZATION AND NATURE OF OPERATIONS
Madison Bancshares Group, Ltd. (the "Company") is a one-bank holding
company formed pursuant to Section 3 (a) (1) of the Bank Holding Company
Act of 1956, as amended. The Company was incorporated under the laws of the
Commonwealth of Pennsylvania on May 31, 1988, to engage in the business of
commercial banking through its wholly owned subsidiary, The Madison Bank
(the "Bank"). The Bank is a commercial bank chartered under the applicable
laws of the Commonwealth and is regulated under the Federal Reserve System
by the Federal Reserve Bank. The Bank offers a variety of services to
individuals and businesses through its offices in Blue Bell, Conshohocken,
Center Square and its fourth branch location, Strafford, Pennsylvania,
opened in 1996. The Bank commenced its operations on August 16, 1989 after
receiving the necessary regulatory approval.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary, the Bank. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates in the Preparation of Financial Statements--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 and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the
reporting period. The most significant of these estimates is the allowance
for loan losses. Actual results could differ from those estimates.
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. Generally, federal funds are purchased and sold for one-day
periods. Cash maintained in vaults on premises of $991,352 and $596,495 at
December 31, 1996 and 1995, respectively, is sufficient to currently meet
average reserve balances under federal requirements.
Investment Securities--The Bank accounts for investment securities in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 115, Accounting for Certain Investments in Debt and Equity Securities.
The Bank classifies and accounts for debt and equity securities as follows:
- Securities Held-to-Maturity--Securities held-to-maturity are stated at
cost adjusted for unamortized purchase premiums and discounts based on
management's intent and the Bank's ability to hold until maturity
considering all reasonably foreseeable conditions and events. Purchase
premiums and discounts are amortized to income over the life of the
related security. The adjusted cost of a specific security sold is the
basis for determining the gain or loss on the sale.
-27-
<PAGE>
- Securities Available-for-Sale--Securities available for sale, carried at
approximate market or fair value, are those management might sell in
response to changes in market interest rates, increases in loan demand,
changes in liquidity needs and other conditions. Unrealized gains and
losses are excluded from earnings and are reported net of tax as a
separate component of shareholders' equity until realized. Realized
gains and losses on the sale of investment securities are reported in
the consolidated statement of operations and are determined using the
adjusted cost of the specific security sold.
Loans--Loans are stated at the principal amount outstanding, net of any
deferred loan fees. Interest income on commercial and mortgage loans is
recorded on the outstanding balance method, using actual interest rates
applied to daily principal balances. Accrual of interest income on loans
will cease when collectibility of interest and/or principal is uncertain.
If it is determined that the collection of interest previously accrued is
uncertain, the accrued interest is reversed and charged to current
earnings; thereafter, income is recognized as payments are received.
Allowance for Loan Losses--An allowance for loan losses is maintained at a
level that management considers adequate to provide for estimated losses
based upon an evaluation of known and inherent risk in the loan portfolio.
Allowances for loan losses are based on estimated net realizable value
unless it is probable that loans will be foreclosed, in which case,
allowances for loan losses are based on fair value. Management's periodic
evaluation is based upon evaluation of the portfolio, past loss experience,
current economic conditions, and other relevant factors. While management
uses the best information available to make such evaluations, future
adjustments to the allowance may be necessary if economic conditions differ
substantially from the assumptions used in making the evaluations.
The Company accounts for impairment of loans in accordance with SFAS No.
114, Accounting by Creditors for Impairment of a Loan, and No. 118,
Accounting by Creditors for of a Loan--Income Recognition and Disclosure.
SFAS Nos. 114 and 118 require that certain impaired loans be measured based
on the present value of expected future cash flows discounted at the loan's
effective interest rate, observable market price, or the fair value of the
collateral if the loan is collateral dependent.
Deferred Origination Fees--Nonrefundable fees and certain direct costs
associated with originating and acquiring loans are deferred. For loans
held for investment, the net amount of fees and costs are amortized using
a method which approximates the interest method as a yield adjustment over
the life of the loan. For loans held for sale, the net amount is deferred
and recognized as part of the gain or loss on the sale of the loans.
Mortgage Loans Held for Sale--The Company originates residential mortgage
loans for portfolio investment or for sale in the secondary market to
provide additional funds for lending. Loans held for sale are carried at
the lower of cost or market value, determined on a net aggregate basis.
Real Estate Owned--Real estate owned consists of one property acquired by
foreclosure. The asset is carried at the lower of cost or estimated fair
value less the costs to dispose. Write-downs, if any, at the time of
foreclosure are charged against the allowance for loan loss. Subsequent
losses in value are charged directly to operations. Costs relating to the
development and improvement of real estate owned are capitalized and those
relating to the holding of the properties are charged to expense.
-28-
<PAGE>
Furniture, Equipment and Leasehold Improvements, Net--Furniture, equipment
and leasehold improvements are stated at cost less accumulated depreciation
and amortization. Depreciation is computed by the straight-line method and
charged to operating expenses over the estimated useful lives of the
related assets. The average life for furniture and equipment is 7 years.
Leasehold improvements are amortized over the shorter of the estimated
useful life or the term of the lease.
Income Taxes--The Company accounts for income taxes in accordance with SFAS
No. 109, Accounting for Income Taxes. Under this method, deferred income
taxes are recognized for the tax consequences of "temporary differences" by
applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. Also, under SFAS No. 109, the
effect on deferred taxes of a change in tax rates is recognized in income
in the period that includes the enactment date.
Net Income Per Common Share--Net income per common share has been calculated
for all years presented based on the weighted average common shares
outstanding for the respective years. The average common shares outstanding
have been retroactively restated to reflect the effect of the 7.5% stock
dividend issued in 1997 and 1996 and the 7% stock dividend issued in 1995.
The calculation of net income per common share does not reflect the
exercise of outstanding common stock warrants and options as the effect of
such calculation is anti-dilutive.
Accounting for Stock Options and Warrants--The Company accounts for stock
options and warrants in accordance with SFAS No. 123, Accounting for Stock-
Based Compensation which allows the Company to account for compensation
expense of the options and warrants using the intrinsic value method as
defined in Accounting Principles Bulletin ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees. The Company is required to
disclose the pro-forma net income and earnings per share, calculated using
the fair value method for measuring compensation as defined in SFAS No. 123
at the grant date of options and warrants. The Company has not recognized
any compensation expense under the intrinsic value method.
Accounting Principles Issued and Not Adopted--In June 1996, the FASB issued
SFAS No. 125, Accounting for Transfer and Servicing of Financial Assets and
Extinguishments of Liabilities. The statement which is effective for
transactions occurring after December 31, 1996 requires an entity to
recognize, prospectively, the financial and servicing assets it controls
and the liabilities it has incurred, derecognize financial assets when
control has been surrendered, and derecognize liabilities when
extinguished. It requires that servicing assets and other retained
interests in transferred assets be measured by allocating the previous
carrying amount between the asset sold, if any, and retained interest, if
any, based on their relative fair values at the date of transfer. It also
provides implementation guidance for servicing of financial assets,
securitizations, loan sydications, and participations and transfers of
receivables with recourse. The statement supersedes SFAS No. 122,
Accounting for Mortgage Servicing Rights, which was adopted by the Company
on January 1, 1996. In December 1996, the FASB issued SFAS No. 127,
Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125. SFAS No. 127 defers for one year the effective date of SFAS
No. 125 as it relates to transactions involving secured borrowings and
collateral and transfers and servicing of financial assets. This statement
also provides additional guidance on these types of transactions.
Management of the Company does not believe the statements will have a
material impact on the Company's results of operations or financial
position when adopted.
Reclassifications--Certain items in the 1994 and 1995 consolidated
financial statements have been reclassified to conform with the
presentation in the 1996 consolidated financial statements.
-29-
<PAGE>
3. INVESTMENT SECURITIES
A summary of investment securities and their expected maturities, as well
as estimated fair values at December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ----------- ---------- ------------
<S> <C> <C> <C> <C>
Securities to be held to maturity:
December 31, 1996:
Debt securities:
U.S. Government and Federal Agencies....... $ 1,000,000 $ 11,719 $ (4,219) $ 1,007,500
Municipal and State Government bonds....... 1,108,206 (18,357) 1,089,849
------------ ----------- ---------- ------------
Total......................................... $ 2,108,206 $ 11,719 $ (22,576) $ 2,097,349
------------ ----------- ---------- ------------
------------ ----------- ---------- ------------
Securities available for sale:
December 31, 1996:
Debt securities--U.S. Government and
Federal Agencies........................... $ 2,493,491 $ 350 $ (10,835) $ 2,483,006
Equity securities:
Federal Home Loan Bank Stock............... 926,000 926,000
Federal Reserve Bank Stock................. 176,400 176,400
------------ ----------- ---------- ------------
Total......................................... $ 3,595,891 $ 350 $ (10,835) $ 3,585,406
------------ ----------- ---------- ------------
------------ ----------- ---------- ------------
Securities to be held to maturity:
December 31, 1995:
Debt securities:
U.S. Government and Federal Agencies....... $ 3,098,852 $ 27,398 $ (2,290) $ 3,123,960
Municipal and State Government bonds....... 1,110,892 (21,403) 1,089,489
------------ ----------- ---------- ------------
Total......................................... $ 4,209,744 $ 27,398 $ (23,693) $ 4,213,449
------------ ----------- ---------- ------------
------------ ----------- ---------- ------------
Securities available for sale:
December 31, 1995:
Debt securities--U.S. Government and
Federal Agencies........................... $ 2,500,633 $ (2,664) $ 2,497,969
Equity securities:
Federal Home Loan Bank Stock............... 268,500 268,500
Federal Reserve Bank Stock................. 176,400 $ 176,400
------------ ----------- ---------- ------------
$ 2,945,533 $ $ (2,664) $ 2,942,869
------------ ----------- ---------- ------------
------------ ----------- ---------- ------------
</TABLE>
The scheduled maturities of debt securities to be held to maturity and debt
securities available for sale at December 31, 1996 were as follows:
<TABLE>
<CAPTION>
SECURITIES TO BE SECURITIES
HELD TO MATURITY AVAILABLE FOR SALE
-------------------------- --------------------------
<S> <C> <C> <C> <C>
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------ ------------ ------------ ------------
Due from 1 to 5 years.................. $ 1,000,000 $ 1,007,500 $ 2,493,491 $ 2,483,006
Due from 5 to 10 years................. 937,884 921,651
Due after 10 years..................... 170,322 168,198
------------ ------------ ------------ ------------
Total.................................. $ 2,108,206 $ 2,097,349 $ 2,493,491 $ 2,483,006
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
-30-
<PAGE>
There were no sales of investment securities in 1996. Gross proceeds from
the sale of investment securities available for sale in 1995 totaled
$4,003,438, resulting in a gross gain of $16,307 and a gross loss of $495.
Gross proceeds from the sale of investment securities available for sale in
1994 totaled $1,995,000, resulting in a gross gain of $25,435.
Included in investment securities at December 31, 1995 were structured notes
with the Federal Home Loan Bank with par values $600,000. There were no
structured notes at December 31, 1996.
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
LOANS OUTSTANDING ARE SUMMARIZED AS FOLLOWS:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
<S> <C> <C>
1996 1995
------------- -------------
Real estate mortgage loans..................................... $ 44,800,169 $ 32,000,817
Commercial loans............................................... 38,685,537 34,201,976
Consumer loans................................................. 8,348,462 6,004,835
------------- -------------
Total......................................................... 91,834,168 72,207,628
Less:
Allowance for loan losses..................................... (875,438) (750,318)
Deferred origination fees, net................................ (175,148) (200,028)
------------- -------------
$ 90,783,582 $ 71,257,282
------------- -------------
------------- -------------
</TABLE>
The Bank grants loans to customers primarily in its local market area which
consists primarily of Montgomery County, Pennsylvania. The ultimate
repayment of these loans is dependent to a certain degree on the local
economy and real estate market.
At December 31, 1996, commercial loans have maturities ranging from six
months to five years. Further, these loans are granted at both fixed and
adjustable rates. Fixed rates range from 5.5% to 14.4% with adjustable
rates ranging from the Bank's prime rate to 3% in excess of prime.
The composition of fixed and adjustable rate loans as of December 31, 1996
was as follows:
<TABLE>
<CAPTION>
FIXED RATE ADJUSTABLE RATE
- -------------------------------- ---------------------------------
TERM TO RATE
TERM TO MATURITY BOOK VALUE ADJUSTMENT BOOK VALUE
- ------------------- ----------- ----------------- --------------
<S> <C> <C> <C>
1 month--1 year.... $ 9,951,661 Less than 1 month $35,439,563
1 year--3 years.... 10,563,163 1 month to 1 year 4,586,532
3 years--5 years... 17,005,182 1 year--3 years 984,043
5 years--30 years.. 13,115,827 3 years--30 years 188,197
----------- -------------
$50,635,833 $41,198,335
----------- -------------
</TABLE>
-31-
<PAGE>
An analysis of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
<S> <C> <C>
1996 1995
---------- ----------
Balance, beginning of year............................................ $ 750,318 $ 604,286
---------- ----------
Provision charged to operations....................................... 387,500 332,000
---------- ----------
Loans charged off:
Real estate mortgage loans............................................ (185,968)
Commercial loans...................................................... (328,100)
Consumer loans........................................................ (6,261)
---------- ----------
(334,361)............................................................. (185,968)
---------- ----------
Recoveries--commercial loans.......................................... 71,981
---------- ----------
Balance, end of year.................................................. $ 875,438 $ 750,318
---------- ----------
---------- ----------
</TABLE>
The provision for loan losses charged to expense is based upon past loan and
loss experience and an evaluation of losses in the current loan and lease
portfolio, including the evaluation of impaired loans under SFAS Nos. 114 and
118. A loan is considered to be impaired when, based upon current information
and events, it is probable that the Bank will be unable to collect all
amounts due according to the contractual terms of the loan. An insignificant
delay or insignificant shortfall in amount of payments does not necessarily
result in the loan being identified as impaired. For this purpose, delays
less than 90 days are considered to be insignificant. As of December 31, 1996
and 1995, 100% of the impaired loan balance was measured for impairment based
on the fair value of the loans' collateral. Impairment losses are included in
the provision for loan losses. SFAS Nos. 114 and 118 do not apply to large
groups of smaller balance homogeneous loans that are collectively evaluated
for impairment, except for those loans restructured under a troubled debt
restructuring. Loans collectively evaluated for impairment include consumer
loans and residential real estate loans, and are not included in the data
that follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1996 1995
------------ ----------
Impaired loans with related reserve for loan losses ($0) calculated
under SFAS No. 114................................................ $ 0 $ 0
Impaired loans with no related reserve for loan losses calculated
under SFAS No. 114................................................ 1,037,043 860,303
------------ ----------
Total............................................................... $ 1,037,043 $ 860,303
------------ ----------
------------ ----------
</TABLE>
-32-
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
<S> <C> <C>
1996 1995
---------- ----------
Average impaired loans................................................ $ 407,581 $ 915,405
Interest income recognized on impaired loans.......................... 43,882 95,120
Cash basis interest income recognized on impaired loans............... 3,161 0
</TABLE>
At December 31, 1996 all of the Bank's nonaccrual loans were considered to
be impaired loans.
Interest payments on impaired loans are typically applied to principal
unless collectibility of the principal amount is fully assured, in which
case interest is recognized on the cash basis.
Commercial loans and commercial real estate loans are placed on nonaccrual
at the time the loan is 90 days delinquent unless the credit is well
secured and in the process of collection. Generally, commercial loans are
charged off no later than 120 days delinquent unless the loan is well
secured and in the process of collection, or other extenuating
circumstances support collection. Residential real estate loans are
typically placed on nonaccrual at the time the loan is 90 days delinquent.
Other consumer loans are typically charged off at 90 days delinquent. In
all cases, loans must be placed on nonaccrual or charged off at an earlier
date if collection of principal or interest is considered doubtful.
The principal amount of nonaccrual loans at December 31, 1996 and 1995
totaled $735,007 and $359,234, respectively. Additional interest income
that would have been recorded in 1996 and 1995 under the original terms of
nonaccrual loans totaled approximately $58,656 and $22,668, respectively.
Accruing loans which are contractually past due 90 days or more totaled
$251,823 and $79,902 at December 31, 1996 and 1995, respectively. Interest
due on these loans totaled $7,741 and $3,152 at December 31, 1996 and 1995,
respectively.
5. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
A SUMMARY OF FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS IS AS FOLLOWS:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1996 1995
---------- ----------
Furniture and equipment.............................................. $ 850,047 $ 624,914
Leasehold improvements............................................... 315,087 308,030
---------- ----------
Total................................................................ 1,165,134 932,944
Accumulated depreciation and amortization............................ (580,601) (435,899)
---------- ----------
$ 584,533 $ 497,045
---------- ----------
---------- ----------
</TABLE>
6. DEPOSITS Interest-bearing deposits have stated rates ranging from 2.15% to
5.69% with a weighted average cost on all deposits of 4.81% at December 31,
1996 and from 2.4% to 6.45% with a weighted average cost on all deposits of
4.99% at December 31, 1995.
-33-
<PAGE>
Time deposit accounts outstanding at December 31, 1996 and 1995 mature as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
<S> <C> <C>
1996 1995
------------- -------------
Three months or less........................................... $ 10,392,000 $ 6,521,000
Three to twelve months......................................... 26,035,000 28,487,000
Over one year.................................................. 12,566,877 8,871,450
------------- -------------
$ 48,993,877 $ 43,879,450
------------- -------------
------------- -------------
</TABLE>
The aggregate amount of certificates of deposit in denominations of
$100,000 or more at December 31, 1996 and 1995 was $23,344,356 and
$16,970,990, respectively. Interest expense attributable to these
deposits for the years ended December 31, 1996, 1995 and 1994 amounted to
$962,149, $784,646 and $346,437, respectively. These certificates and their
remaining maturities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
-------------
<S> <C>
Three months or less........................................................... $ 7,843,356
Three through twelve months.................................................... 12,152,000
Over 12 months................................................................. 3,349,000
-------------
$ 23,344,356
-------------
-------------
</TABLE>
7. OTHER BORROWED MONEY
OTHER BORROWED MONEY IS SUMMARIZED AS FOLLOWS:
<TABLE>
<CAPTION>
INTEREST DECEMBER 31,
DUE RATE 1996
------------- ------------- ------------
<S> <C> <C> <C>
FHLB advance........................ February 1997 5.82% $ 5,000,000
FHLB repurchase agreements.......... January 1997 5.46 5,000,000
-----------
$10,000,000
-----------
-----------
</TABLE>
The advance was collateralized under a blanket collateral lien agreement.
-34-
<PAGE>
8. INCOME TAXES
The Bank's provision for income taxes differs from the amounts determined
by applying the statutory federal income tax rate to income before income
taxes for the following reasons:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
---------- ------------- ---------- ------------- ---------- -------------
Tax at federal tax rate.......................... $ 382,985 35.0% $ 294,371 35.0% $ 133,217 35.0%
Increase (decrease) resulting from:
Benefit of surtax exemptions..................... (10,943) (1.0) (8,411) (1.0) (3,806) (1.0)
Meals and entertainment disallowed............... 21,188 1.9 17,072 2.0 11,519 3.0
Municipal bond interest.......................... (18,331) (1.7) (13,925) (1.6) (14,429) (3.8)
Reversal of deferred tax asset................... (107,000) (28.1)
Other............................................ (56,024) (5.1) 5,296 0.6 49,624 13.1
---------- --- ---------- --- ---------- ---
$ 318,875 29.1% $ 294,403 35.0% $ 69,125 18.2%
---------- --- ---------- --- ---------- ---
---------- --- ---------- --- ---------- ---
</TABLE>
Items that give rise to significant portions of the Company's deferred tax
asset, calculated at 34%, are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Allowance for possible loan losses.................................... $ 157,723 $ 131,423
Deferred fees......................................................... 10,801 15,200
Unrealized losses on available-for-sale securities.................... 3,565 905
Other................................................................. (7,920) (37,019)
---------- ----------
Deferred tax asset at December 31..................................... $ 164,169 $ 110,509
---------- ----------
---------- ----------
</TABLE>
The deferred tax asset is included in other assets on the consolidated
statements of financial condition.
The provision for income taxes for the years ended December 31, 1996, 1995
and 1994 includes the following:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Current taxes.................................................................. $ 369,875 $ 358,355 $ 76,777
Deferred taxes................................................................. (51,000) (63,952) (7,652)
---------- ---------- ---------
Total.......................................................................... $ 318,875 $ 294,403 $ 69,125
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
9. COMMITMENTS
Letters of Credit and Commitments to Lend:
In the normal course of business, the Bank had commitments to advance funds
under outstanding letters of credit of $1,382,000 and $661,000 and
unadvanced loan commitments of $13,906,000 and $12,809,000 at December 31,
-35-
<PAGE>
1996 and 1995, respectively. The unadvanced loan commitments at
December 31, 1996 and 1995 were primarily at variable rates. In addition,
the Bank had commitments to sell fixed rate residential mortgages of
$2,111,618 and $500,540 at December 31, 1996 and 1995, respectively.
Commitments are issued in accordance with the same loan policies and
underwriting standards as settled loans and represent credit risk should
the borrowers fail to repay the amounts extended.
Leasing Arrangements:
The Company leases branch offices and certain equipment under noncancelable
agreements requiring various minimum annual rentals. In addition to the
minimum rents, the Company pays its pro rata shares of the building's
operating costs. Total operating lease expense for 1996, 1995 and 1994 was
$384,501, $346,363 and $300,660, respectively.
Future minimum lease payments under noncancelable leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1997................................. $ 514,751
1998................................. 513,070
1999................................. 522,194
1999................................. 334,416
2000 Thereafter...................... 971,366
------------
Total................................ $ 2,855,797
------------
------------
</TABLE>
10. STOCK INCENTIVE PLAN
In 1989, the Company's shareholders adopted a Stock Incentive Plan (the
"Plan") providing for the issuance of qualified and non-qualified stock
options to the officers and key executives of the Company. A total of
47,562 shares of common stock have been reserved for issuance pursuant to
this Plan. The price at which such options may be issued is determined by a
special committee which oversees the Plan. The exercise price of options
granted through December 31, 1996 has been equal to the fair market value
of the Company's common stock at the date of grant. All options expire ten
years after issuance.
In 1995, the Board of Directors approved the adjustment of the exercise
price to reflect stock dividends issued. The per share price of exercisable
options at December 31, 1996 reflects the adjusted exercise price resulting
from stock dividends.
-36-
<PAGE>
Transactions in the Plan during each of the last three years adjusted for
stock dividends are as follows:
<TABLE>
<CAPTION>
EXERCISE PRICE WEIGHTED
PER SHARE AVERAGE EXERCISE
SHARES PRICE PRICE PER SHARE
--------- -------------- -----------------
<S> <C> <C> <C>
Exercisable, January 1, 1994................ 30,830 $ 6.17--$6.68 $ 6.63
Granted..................................... 618 $ 6.17 6.17
---------
Exercisable, December 31, 1994.............. 31,448 $ 6.17--$6.68 6.63
---------
Granted..................................... 10,510 $ 7.00--$7.50 7.33
---------
Exercisable, December 31, 1995.............. 41,958 $ 5.99--$6.68 7.05
---------
Exercised................................... 3,781 $ 6.42 6.67
---------
Exercisable, December 31, 1996.............. 38,177 6.56
---------
</TABLE>
The Company accounts for stock-based compensation in accordance with SFAS No.
123, Accounting for Stock-Based Compensation which permits the use of the
intrinsic value method described in APB Opinion No. 25, Accounting for Stock
Issued to Employees, and requires the Company to disclose the pro forma
effects of accounting for stock-based compensation using the fair value
method as described in the optional accounting requirements of SFAS No. 123.
As permitted by SFAS No. 123, the Company will continue to account for
stock-based compensation under APB Opinion No. 25, under which the Company
has recognized no compensation expense.
Had compensation cost for the Company's stock option plan been determined
based on the fair value at the dates of awards under the fair value method of
SFAS No. 123, the Company's net income and income per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995
---------------
<S> <C> <C>
Net income:............................. As reported $ 540,587
Pro forma $ 508,467
Net income per common share:............ As reported 0.52
Pro forma 0.48
</TABLE>
Significant assumptions used to calculate the above fair value of the awards
are as follows:
<TABLE>
<CAPTION>
1995
-------------
<S> <C>
Risk free interest rates of return............................... 6.50%; 5.97%
Expected option life........................................... 120 months
Expected dividends............................................... $ 0
</TABLE>
-37-
<PAGE>
There were no grants of options in 1996.
11. WARRANTS AUTHORIZED
In connection with the initial offering of the Company's common stock, the
Company's directors received warrants to purchase, in the aggregate, up to
70,107 shares of common stock. These offering warrants are nontransferable
and expire between 1999 and 2002. The warrants had an initial exercise
price of $10 per share. As a result of stock dividends issued by the
Company in 1991, 1992, 1993, 1995, 1996 and 1997 (see Note 13), the
exercise price was adjusted by the Board of Directors. At December 31,
1996, warrants have an exercise price of $6.72 per share. As of
December 31, 1996, there were 97,969 warrants outstanding and 4,004 have
been exercised. Warrants outstanding have been adjusted to reflect stock
dividends.
12. PROFIT SHARING
Effective March 1, 1993, the Bank adopted a 401(k) profit sharing plan to
provide eligible employees with additional income upon their retirement.
Participants may contribute up to 15% of their annual compensation to the
plan subject to Internal Revenue Service limitations. The Bank contributes
an amount equal to 50% of each participant's contribution, up to 2% of
their compensation. Contributions made by the Bank during the years ended
December 31, 1996, 1995 and 1994 were approximately $13,977, $16,600 and
$12,400 respectively.
13. SHAREHOLDERS' EQUITY
In December 1994, in conjunction with the appointment of a new director,
the Company entered into an agreement with the new director whereby 12,225
shares of newly issued unregistered common stock would be purchased by the
director based upon the book value of the Company. As of December 31, 1994,
6,112 shares were purchased and total proceeds from the issuance were
$50,000. The remaining 6,113 shares were purchased on February 8, 1995 and
total proceeds from the issuance were $50,000.
On April 13, 1995, the Board of Directors declared a 7% stock dividend
payable to all holders of record of the Company's common stock as of
April 30, 1995.
On January 11, 1996, the Board of Directors declared a 7.5% stock dividend
payable to all holders of record of the Company's common stock as of
February 15, 1996.
On January 22, 1997, the Board of Directors declared a 7.5% stock dividend
payable to all holders of record of the Company's common stock as of
February 5, 1997. Per share computations reflect the changes in the number
of shares resulting from these dividends.
14. RELATED PARTY TRANSACTIONS
Loans to directors, officers, employees, and their affiliates and/or
business interests must be made on substantially the same terms, including
interest rates, as those prevailing for comparable transactions and must
not involve more than the normal risk of repayment.
-38-
<PAGE>
A summary of unpaid principal balances of loans outstanding to directors,
officers, employees and their business interests is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Beginning of period.............................................. $5,594,284 $3,227,234
Borrowings....................................................... 1,722,607 6,181,896
Principal repayments............................................. (1,387,832) (3,814,846)
------------ ------------
End of period.................................................... $5,929,059 $5,594,284
------------ ------------
------------ ------------
</TABLE>
Certain directors of the Company are partners in an entity from which the
Bank leases office space (Note 9). Rental payments for the office space
were approximately $256,000, $214,000, and $183,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. In the opinion of
management, all aspects of this transaction, including the lease and
amendments thereto, have been negotiated on an arms-length basis and the
resultant terms are no less favorable than those that could be obtained
from third parties.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the carrying amounts and the estimated fair
value of financial instruments is made in accordance with the requirements
of SFAS No. 107, Disclosures about Fair Value of Financial Instruments. The
estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies.
However, considerable judgment is necessarily required to interpret market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of amounts the Company
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.
<TABLE>
<CAPTION>
1996 1995
------------------------ ----------------------
<S> <C> <C> <C> <C>
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- --------- -----------
<CAPTION>
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents............................................ $ 5,307 $ 5,307 $ 10,473 $ 10,473
Investment securities held-to-maturity............................... 2,108 2,097 4,209 4,213
Investment securities available for sale............................. 3,585 3,585 2,943 2,943
Loans, net........................................................... 90,783 91,158 71,257 72,357
Mortgage loans held for sale......................................... 2,112 2,112 501 501
Liabilities:
Deposits:
Noninterest-bearing deposits......................................... 14,660 14,660 14,452 14,452
Interest-bearing deposits............................................ 4,565 4,565 3,262 3,262
Savings deposits..................................................... 4,571 4,571 4,900 4,900
Money market deposits................................................ 14,409 14,409 16,376 16,376
Time deposits........................................................ 48,994 48,664 43,879 43,648
Borrowed funds....................................................... 10,000 10,000
</TABLE>
-39-
<PAGE>
Cash and Cash Equivalents--For cash and cash equivalents, the carrying
amount is a reasonable estimate of fair value.
Investment Securities--For investment securities, fair values are based on
quoted market prices or dealer quotes.
Loans--The fair value was estimated based on quoted market prices and
current rates.
Mortgage Loans Held for Sale--The carrying amount is a reasonable estimate
of fair value.
Deposits--The fair value of all deposit accounts except time deposits is the
amount payable on demand at the reporting date. The fair value of time
deposits is estimated using rates currently offered for deposits of similar
remaining maturities.
Borrowed Funds--The fair value of borrowed funds is the amount payable on
demand at the reporting date.
Commitments to Extend Credit and Letters of Credit--The majority of the
Company's commitments to extend credit and letters of credit carry current
market interest rates if converted to loans. Because commitments to extend
credit and letters of credit are generally unassignable by either the
Company or the borrower, they only have value to the Company and the
borrower. The estimated fair value approximates the recorded deferred fee
amounts, which are not significant.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1996 and 1995. Although
management is not aware of any factors that significantly affect the fair
value amounts, such amounts have not been comprehensively revalued for
purposes of these consolidated financial statements since that date and,
therefore, current estimates of fair value may differ significantly from
the amounts presented herein.
16. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by 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 Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets and certain off-balance sheet items as
calculated under regulatory accounting practices. The Bank's capital
amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk weighting and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of capital (as defined in the regulations) to total adjusted
assets (as defined), and of risk-based capital (as defined) to risk-
weighted assets (as defined). Management believes, as of December 31, 1996,
that the Bank meets all applicable capital adequacy requirements.
The most recent notification from the Commonwealth of Pennsylvania
Department of Banking (as of June 30, 1996) categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, the Bank must maintain minimum
-40-
<PAGE>
Tier 1 Capital, Total Risk-Based Capital and Leverage Ratios as set forth
in the table. There are no conditions or events since that notification
that management believes have changed the institutions category.
The Bank's actual capital amounts and ratios are presented in the table
below:
<TABLE>
<CAPTION>
TO BE CONSIDERED
REQUIRED FOR UNDER PROMPT
CAPITAL ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- ----- --------- ----- --------- -----
At December 31, 1996:
Tier 1 risk-based capital............ $ 7,884 9.08% $ 3,332 4.00% $ 4,998 6.00%
Total risk-based capital............. 8,759 10.09 6,664 8.00 8,330 10.00
Leverage............................. 7,884 8.37 4,092 4.00 5,115 5.00
At December 31, 1995:
Tier 1 risk-based capital............ 7,310 9.75 2,999 4.00 4,498 6.00
Total risk-based capital............. 8,060 10.75 5,998 8.00 7,498 10.00
Leverage............................. 7,310 9.05 3,231 4.00 4,039 5.00
</TABLE>
The Company's Tier 1 risk-based, total risk-based and leverage capital
ratios are 9.19%, 10.20% and 7.79% at December 31, 1996 and 9.86%, 10.86%
and 8.62% at December 31, 1995, respectively.
-41-
<PAGE>
17. PARENT COMPANY FINANCIAL INFORMATION
The financial statements of Madison Bancshares Group, Ltd. (Parent Only) as
of and for the years ended December 31, 1996, 1995 and 1994 are presented
herein.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
<S> <C> <C>
BALANCE SHEETS 1996 1995
- ------------------------------------------------------------------ ------------ ------------
Deposits with subsidiary.......................................... $ 42,289 $ 21,576
Investment in subsidiary.......................................... 7,879,815 7,309,528
Other assets...................................................... 500 500
Receivable from subsidiary........................................ 63,110 88,111
------------ ------------
TOTAL............................................................. $ 7,985,714 $ 7,419,715
------------ ------------
------------ ------------
LIABILITIES--Accrued expenses and other liabilities............... $ 11,494 $ 27,000
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock...................................................... 971,360 897,574
Capital surplus................................................... 7,185,686 6,709,506
Accumulated deficit............................................... (175,907) (212,606)
Net unrealized losses on available-for-sale securities............ (6,919) (1,759)
------------ ------------
Total shareholders' equity........................................ 7,974,220 7,392,715
------------ ------------
TOTAL............................................................. $ 7,985,714 $ 7,419,715
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS 1996 1995 1994
- ------------------------------------------------------------------------------ ---------- ---------- ----------
Interest income............................................................... $ 444 $ 2,241 $ 728
Operating expenses............................................................ (235,224) (58,393) (176,617)
---------- ---------- ----------
Loss before equity in undistributed income (loss) from subsidiary............. (234,780) (56,152) (175,889)
Income tax benefit............................................................ 43,155
Equity in undistributed income of subsidiary, Madison Bank.................... 775,367 602,808 444,229
---------- ---------- ----------
NET INCOME.................................................................... $ 540,587 $ 546,656 $ 311,495
---------- ---------- ----------
---------- ---------- ----------
STATEMENTS OF CASH FLOWS
Operating Activities:
Net income.................................................................... $ 540,587 $ 546,656 $ 311,495
Adjustments to reconcile net income to net cash used in operating activities:
Equity in undistributed income of subsidiary.................................. (775,367) (602,808) (444,229)
Decrease in accrued expenses and other liabilities............................ (15,506) (18,068) (5,931)
Decrease (increase) in receivable from subsidiary............................. 25,001 (15,000) 94,889
---------- ---------- ----------
Net cash used in operating activities......................................... (225,285) (89,220) (43,776)
Investing Activities:
Exercise of stock options..................................................... 19,183
Exercise of stock warrants.................................................... 26,895
Dividend from subsidiary...................................................... 199,920
---------- ---------- ----------
Net cash provided by investing activities..................................... 245,998
---------- ---------- ----------
Financing Activities:
Proceeds from issuance of common stock........................................ 50,000 50,000
---------- ---------- ----------
Net cash provided by financing activities..................................... 50,000 50,000
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH............................................... 20,713 (39,220) 6,224
CASH, BEGINNING OF YEAR....................................................... 21,576 60,796 54,572
---------- ---------- ----------
CASH, END OF YEAR............................................................. $ 42,289 $ 21,576 $ 60,796
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
-42-
<PAGE>
18. QUARTERLY DATA (UNAUDITED)
The unaudited quarterly results of operations for 1996 and 1995 were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
------------ ------------ ------------ ------------ ----------
Interest income......................... $ 1,937,211 $ 1,959,218 $2,014,278 $2,203,084 $8,113,791
Interest expense........................ 839,125 801,971 863,348 941,996 3,446,440
------------ ------------ ------------ ------------ ----------
Net interest income..................... 1,098,086 1,157,247 1,150,930 1,261,088 4,667,351
Provision for loan losses............... 90,000 127,500 80,000 90,000 387,500
------------ ------------ ------------ ------------ ----------
Net..................................... 1,008,086 1,029,747 1,070,930 1,171,088 4,279,851
Other noninterest income................ 100,737 110,813 129,401 148,002 488,953
Other noninterest expenses.............. 870,822 970,172 964,956 1,103,392 3,909,342
------------ ------------ ------------ ------------ ----------
Net income before income taxes.......... 238,001 170,388 235,375 215,698 859,462
Provision for income taxes.............. 79,060 103,415 80,665 55,735 318,875
------------ ------------ ------------ ------------ ----------
Net income.............................. $ 158,941 $ 66,973 $ 154,710 $ 159,963 $ 540,587
------------ ------------ ------------ ------------ ----------
------------ ------------ ------------ ------------ ----------
Per share data--Net income per common
share................................. $ 0.16 $ 0.07 $ 0.16 $ 0.15 $ 0.51
------------ ------------ ------------ ------------ ----------
------------ ------------ ------------ ------------ ----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
------------ ------------ ------------ ------------ ----------
Interest income......................... $ 1,495,778 $ 1,698,983 $1,753,607 $1,899,038 $6,847,406
Interest expense........................ 656,766 740,345 745,809 819,725 2,962,645
------------ ------------ ------------ ------------ ----------
Net interest income..................... 839,012 958,638 1,007,798 1,079,313 3,884,761
Provision for loan losses............... (50,000) (77,000) (115,000) (90,000) (332,000)
------------ ------------ ------------ ------------ ----------
Net..................................... 789,012 881,638 892,798 989,313 3,552,761
Other noninterest income................ 108,163 93,082 96,425 83,573 381,243
Other noninterest expenses.............. 688,713 782,423 748,409 873,400 3,092,945
------------ ------------ ------------ ------------ ----------
Net income before income taxes.......... 208,462 192,297 240,814 199,486 841,059
Provision for income taxes.............. 70,298 60,919 90,944 72,242 294,403
------------ ------------ ------------ ------------ ----------
Net income.............................. $ 138,164 $ 131,378 $ 149,870 $ 127,244 $ 546,656
------------ ------------ ------------ ------------ ----------
------------ ------------ ------------ ------------ ----------
Per share data--Net income per common
share................................. $ 0.14 $ 0.14 $ 0.15 $ 0.13 $ 0.57
------------ ------------ ------------ ------------ ----------
------------ ------------ ------------ ------------ ----------
</TABLE>
Notes: Certain reclassifications have been made to the quarterly data from
those classifications used in reporting such data in Form 10-Q. Per
share data has been retroactively restated to reflect the effect of
stock dividends.
Net income per common share is computed independently for each
period presented. Consequently, the sum of the quarters may not
equal the total net income per common stock.
-43-
<PAGE>
ITEM 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable.
PART III
ITEM 9 Directors and Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act
The information required by this Item is incorporated by reference from
the definitive proxy materials of the Company to be filed with the Commission
in connection with the Company's 1997 annual meeting of Shareholders
presently scheduled for May 20, 1997.
ITEM 10 EXECUTIVE COMPENSATION
The information required by the Item is incorporated by reference from the
definitive proxy materials of the Company to be filed with the Commission in
connection with the Company's 1997 annual meeting of the shareholders presently
scheduled for May 20, 1997.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by the Item is incorporated by reference from the
definitive proxy materials of the Company to be filed with the Commission in
connection with the Company's 1997 annual meeting of the shareholders presently
scheduled for May 20, 1997.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by the Item is incorporated by reference from the
definitive proxy materials of the Company to be filed with the Commission in
connection with the Company's 1997 annual meeting of the shareholders presently
scheduled for May 20, 1997.
-44-
<PAGE>
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following Exhibits are filed as part of this report. (Exhibit numbers
correspond to the exhibits required by Item 601 of Regulation S-B for an annual
report on Form 10KSB)
<TABLE>
<CAPTION>
PAGE NUMBER IN
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION NUMBERING SYSTEM
- ----------- -------------------------------------------------------------------------------------- ---------------------
<S> <C> <C>
3(a) Amended and Restated Articles of Incorporation of the Company* N/A
3(b) Amended and Restated Bylaws of the Company* N/A
4(c) Form of Warrant of the Company* N/A
10(a) Lease Agreement, dated February 20, 1989, by and between Madison Bancshares Group,
Ltd. and Blue Bell Office Campus Associates* \ N/A
10(b) Lease Agreement, dated September 1, 1995, by and between Madison Bancshares Group,
Ltd. and Nansue Management and Development Corporation** \ N/A
10(c) Lease Agreement, dated February 1, 1996, by and between Madison Bancshares Group, Ltd.
and 19 Sentry West Partners** \ N/A
10(d) Lease Agreement, dated May 14, 1996, by and between Madison Bank and Michael A.
Massarella, Trustee*** \ N/A
21 Subsidiaries of the Registrant N/A
27 Financial Data Schedule
</TABLE>
- ------------------------
* Incorporated by reference from the Registration Statement on Form S-1 of the
Company, as amended, Registration No. 33-22492.
** Incorporated by reference from the Company's Annual Report on Form 10KSB for
the year ended December 31, 1995.
*** Incorporated by reference from the Company's Quarterly Report on Form 10QSB
for the quarter ended June 30, 1996.
All other schedules and exhibits are omitted because they are not applicable
or the required information is set out in the financial statements or the notes
thereto.
(b) Reports on Form 8-K:
On January 30, 1997, the Company filed a current report on Form 8-K
regarding the issuance of a 7.5% stock dividend. Other than as noted above, no
other reports on Form 8-K were filed by the Company during the last quarter of
the period covered by this Report.
-45-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Issuer has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MADISON BANCSHARES GROUP, LTD.
By: /s/ Peter DePaul
---------------------------
Chairman of the Board)
By: /s/ Vito A. DeLisi
---------------------------
Vito A. DeLisi, President
By: /s/ E. Cheryl Hinkle
---------------------------
E. Cheryl Hinkle
Assistant Secretary and Treasurer
(Principal Accounting and Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and
on the date indicated.
March 26, 1997 /s/ Gary E. Daniels
---------------------------
Gary E. Daniels, Director
March 26, 1997 /s/Vito A. DeLisi
---------------------------
Vito A. DeLisi, President
and Director
March 26, 1997 /s/ Peter DePaul
---------------------------
Peter DePaul
Chairman of the Board
March 26, 1997 /s/ John P. Horton
---------------------------
John P. Horton, Director
March 26, 1997 /s/ Philip E. Hughes, Jr.
---------------------------
Philip E. Hughes, Jr.
Director and Vice Chairman
of the Board
March 26, 1997 /s/ Frank R. Iacobucci
---------------------------
Frank R. Iacobucci, Director
-46-
<PAGE>
March 26, 1997 /s/ Arnold M. Katz
---------------------------
Arnold M. Katz, Director
March 26, 1997 /s/ Lorraine C. King
---------------------------
Lorraine C. King, Director
March 26, 1997 /s/ Kathleen A. Kucer
---------------------------
Kathleen A. Kucer, Director
March 26, 1997 /s/ Michael O'Donoghue
---------------------------
Michael O'Donoghue,
Director
March 26, 1997 /s/ Donald J. Reape
---------------------------
Donald J. Reape, Director
March 26, 1997 /s/ Alan T. Schiffman
---------------------------
Alan T. Schiffman, Director
March 26, 1997 /s/ Blaine W. Scott
---------------------------
Blaine W. Scott, Director
-47-
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<PAGE>
EXHIBIT 21
MADISON BANK, STATE OF INCORPORATION: PENNSYLVANIA
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,382
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 925
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,585
<INVESTMENTS-CARRYING> 2,108
<INVESTMENTS-MARKET> 2,097
<LOANS> 91,659
<ALLOWANCE> 875
<TOTAL-ASSETS> 105,971
<DEPOSITS> 87,200
<SHORT-TERM> 10,000
<LIABILITIES-OTHER> 797
<LONG-TERM> 0
0
0
<COMMON> 971
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 105,971
<INTEREST-LOAN> 7,654
<INTEREST-INVEST> 371
<INTEREST-OTHER> 89
<INTEREST-TOTAL> 8,114
<INTEREST-DEPOSIT> 3,166
<INTEREST-EXPENSE> 3,446
<INTEREST-INCOME-NET> 4,667
<LOAN-LOSSES> 387
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,909
<INCOME-PRETAX> 859
<INCOME-PRE-EXTRAORDINARY> 859
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 541
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.52
<YIELD-ACTUAL> 9.09
<LOANS-NON> 735
<LOANS-PAST> 252
<LOANS-TROUBLED> 277
<LOANS-PROBLEM> 1,037
<ALLOWANCE-OPEN> 750
<CHARGE-OFFS> 334
<RECOVERIES> 72
<ALLOWANCE-CLOSE> 875
<ALLOWANCE-DOMESTIC> 875
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
