<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 30, 1998
Commission file number 0-17539
MADISON BANCSHARES GROUP, LTD.
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(Exact Name of Small Business Issue as Specified In Its Charter)
Pennsylvania 23-2512079
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1767 Sentry Parkway West, Blue Bell, PA 19422
(Address of principal executive offices) (Zip Code)
(215) 641-1111
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter periods that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the Issuer's classes
of common stock, as of the latest practicable date.
1,562,018 shares of Issuer's Common Stock, par value $1 per share, issued
and outstanding as of November 10, 1998.
<PAGE>
PART 1
ITEM 1 - FINANCIAL STATEMENTS
SEE ANNEX A
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This report contains "forward-looking" statements. Madison
Bancshares Group, Ltd. 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 such forward-looking statements. Examples of
forward-looking statements include, but are not limited to (a)
projections of changes in capital-to-assets ratio, (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. In order to comply
with the terms of the safe harbor, the Company notes that a
variety of factors could cause the Company's actual results and
experience to differ materially from the anticipated results or
other expectations expressed in the Company's forward looking
statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's
business include: (i) the ability of the Company to implement its
growth strategy and manage growth; (ii) the adequacy of allowances
for loan losses and possible continued growth in delinquency
ratios; (iii) the effect of the Company's comparatively high
operating expenses and high efficiency ratios; (iv) credit risks
related to operating activities; (v) possible adverse effect of
failure to resolve "millenium bug" or "year 2000" issues; (vi)
reliance on existing management personnel; and (vii) risks
relating to federal and state government regulation.
Presented herein are the results of operations of Madison
Bancshares Group, Ltd. (the "Company") and its wholly owned
subsidiary, The Madison Bank (the "Bank"), for the quarters ended
September 30, 1998 and 1997. The Bank commenced operations in
August, 1989.
CAPITAL RESOURCES
The total number of shares of common stock outstanding on
September 30, 1998 was 1,556,051 as compared to 1,252,773 at
December 31, 1997. On June 17, 1998, 259,040 shares of common
stock were issued pursuant to a 20% stock dividend declared on May
19, 1998. During the second quarter of 1998, 42,975 shares of
common stock were issued in conjunction with the exercise of
options. During the third quarter of 1998, an additional 1,263
shares were issued in conjunction with the exercise of options.
The book value per share of the Company's common stock at December
31, 1997 was $5.82 and $5.99 per share at September 30, 1998, as
adjusted for the stock dividend.
During the nine month period, January 1, 1998 to September 30,
1998, the Company's total assets decreased by $233,847 or
approximately .18% to $133,272,966, due to the Bank repaying its
borrowings.
The chart below depicts various capital ratios applicable to state
chartered Federal Reserve member banks and compares the Bank's
actual ratios at September 30, 1998 and December 31, 1997,
respectively, each of which exceeded the levels required for a
bank to be classified as "well-capitalized".
<PAGE>
<TABLE>
<CAPTION>
Regulatory Actual Actual
Ratio Minimum 12/31/97 9/30/98
<S> <C> <C> <C>
Qualifying Total Capital to
Risk Weighted Assets 8.0% 9.98% 10.70%
Tier 1 Capital, net of intangibles
to Risk Weighted Assets 4.0% 9.02% 8.53%
Tier 1 Leverage Ratio of Capital to
Total Adjusted Average Assets 4.0% 7.17% 9.08%
</TABLE>
The Company's capital-to-assets ratio increased from 6.55% as of
December 31, 1997 to 6.99% as of September 30, 1998. The increase
in the capital-to-assets ratio for the nine months ended September
30, 1998, was attributable to the repayment of borrowed funds,
thereby decreasing cash and assets. Management anticipates that
its capital-to-assets ratio will decline in future periods as the
Company's core assets continue to grow. The Company's average
return on equity for the year ended December 31, 1997, was 9.05%;
and its return on average assets was .67%. For the nine month
period ended September 30, 1998, the Company's average return on
equity was 4.98% and its return on average assets was .34%. The
decrease in the Company's return on average equity and average
assets is directly attributable to the costs associated with the
commencing of the Company's mortgage lending business as well as
the ongoing operations of its six branch locations.
LIQUIDITY
The Bank's liquidity, represented by cash and cash equivalents, is
a product of its cash flows from operation. The Bank's primary
sources of funds are deposits, borrowings, amortization and
maturities of outstanding loans, sales of loans, maturities of
investment securities and other short-term investments and income
from operations. Changes in the cash flows of these instruments
are greatly influenced by economic conditions and competition. The
Bank attempts to balance supply and demand by managing the pricing
of its loan and deposit products consistent with the conservative
operating philosophy of its management and board of directors. Any
excess funds are invested in overnight and other short-term
interest-earning accounts. The Bank generates cash flow through
the retail deposit market, its traditional funding source, for use
in investing activities. In addition, the Bank may utilize
borrowings such as Federal Home Loan Bank advances for liquidity
or profit enhancement. At September 30, 1998, the Bank had no
outstanding advances.
The primary use of funds is to meet ongoing loan and investment
commitments, to pay maturing certificates of deposits and savings
withdrawals and expenses related to general operations of the
Bank. At September 30, 1998, commitments under unused lines of
credit and the unadvanced portion of commercial credit lines
amounted to approximately $13,000,000. Certificates of deposit
scheduled to mature in one year or less at September 30, 1998
totaled $58,585,048. Investment securities totaled
<PAGE>
$3,817,402 at September 30, 1998, of which $1,540,627 are
scheduled to mature or reprice in one year or less. Management
believes that a significant portion of maturing deposits will
remain with the Bank. The Bank anticipates that it will continue
to have sufficient cash flows to meet its current and future
commitments.
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 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.
Management attempts to structure the Balance Sheet to provide for
repricing of assets and liabilities in approximately equal
amounts. 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.
At September 30, 1998, the risk management review included an
"earnings at risk" analysis as well as a "risk sensitivity"
analysis. Potential monthly net revenue change indicated that in a
static rate environment, increased earnings would be approximately
$6,900 or 1.37% annually. If rates fell 200 basis points, monthly
revenues would increase approximately $30,100 or 5.94% annually
and a rise in rates by 200 basis points would represent a monthly
decrease in revenues of approximately $19,100 or 3.76% annually.
Management believes that any impact will not be significant.
ANALYSIS OF FINANCIAL CONDITION
As of September 30, 1998, the Company held deposits aggregating
$117,896,355, representing an increase of approximately 2.7% from
deposits of $114,832,410 held at December 31, 1997. Of the
deposits held at September 30, 1998, $19,377,410, or approximately
16%, were non-interest bearing deposits. At September 30, 1998
total deposit accounts numbered 9,202 and outstanding loans
receivable in connection with loans made to 1,608 loan accounts
totaled approximately $117,594,647 (excluding loan loss reserve
and deferred loan fees). The following tables and graphs set forth
a comparative breakdown of the Company's deposits and loans
outstanding as of September 30, 1998 and December 31, 1997,
respectively.
<PAGE>
<TABLE>
<CAPTION>
Deposit Liabilities
September 30, 1998 December 31, 1997
% of % of
Type of Account Balance Portfolio Balance Portfolio
--------------- ------- --------- ------- ---------
<S> <C> <C> <C> <C>
Non-Interest bearing (1) 19,377,410 16% 16,076,381 14%
Interest bearing (2) 9,121,973 8 8,164,080 7
Money Market (3) 14,575,649 12 14,039,724 12
Savings (4) 7,042,166 7 5,270,011 5
CD's Under 100M (5) 37,008,514 31 32,244,281 28
CD's Over 100M (6) 30,770,643 26 39,037,933 34
-------------- ------ -------------- ---
Totals $117,896,355 100% $114,832,410 100%
-------------- ------ -------------- ---
-------------- ------ -------------- ---
</TABLE>
[OBJECT OMITTED]
<PAGE>
<TABLE>
<CAPTION>
Loans Outstanding
September 30, 1998 December 31, 1997
---------------------- ------------------------
% of % of
Type of Account Balance Portfolio Balance Portfolio
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Real Estate Loans, Mortgages(1) $ 34,972,717 30% $40,594,799 39%
Commercial Loans (2) 66,283,769 56 52,722,906 51
Consumer Loans (3) 9,313,223 8 10,055,470 1
Residential Loans Held for
Sale (4) 7,024,938 6 290,900 0
--------------- ------ -------------- -----
Totals $117,594,647 100% $103,664,075 100%
--------------- ------ -------------- -----
--------------- ------ -------------- -----
</TABLE>
[OBJECT OMITTED]
RESULTS OF OPERATIONS
For the nine months ended September 30, 1998, the Company had net
income of $336,885, or $.22 per share, as compared to net income
of $553,168 or $.37 per share during the nine months ended
September 30, 1997. For the quarter ended September 30, 1998, the
Company had a net income of $161,166 or $.10 per share as compared
to net income of $226,182, or $.15 per share for the quarter ended
September 30, 1997. The decrease in net income from the quarter
and nine months ended September 30, 1998 was primarily
attributable to the impact of expenses relating to the opening of
the Bank's Mortgage Department and the ongoing operations of the
Bank's six branch locations.
Analysis of Net Interest Income
Net interest income, the difference between the interest earned on
loans and other investments and the interest paid on deposits and
other borrowings, is the primary source of the Bank's and the
Company's earnings.
The graph below sets forth the Bank's interest income and interest
expense growth for the period from September 30, 1997, through
September 30, 1998:
<PAGE>
[OBJECT OMITTED]
The Company's net interest income, after provision for loan losses
was $4,127,131 and $3,604,494 for the nine months ended September
30, 1998 and September 30, 1997, respectively. Interest income was
$8,094,452 for the nine months ended September 30, 1998, as
compared to $7,041,709 for the nine months ended September 30,
1997. For the quarters ended September 30, 1998 and 1997, the
Company's interest income was $2,864,574 and $2,440,729,
respectively. Interest expense on deposits and borrowed funds
increased from $3,167,215 for the nine months ended September 30,
1997, to $3,647,321 for the nine months ended September 30, 1998,
a 15% increase. These increases are due to growth in interest
bearing deposits.
Interest income on investment securities relates primarily to
interest on U.S. Government Obligations and Municipal Bonds.
Interest income on the investment securities for the nine months
ended September 30, 1998 was $152,231 as compared to $182,278 for
the nine months ended September 30, 1997. For the quarter ended
September 30, 1998, interest income on investment securities was
$42,792 as compared to $58,276 at September 30, 1997. The slight
decrease resulted in called Agency Bonds. The funds were placed in
Federal Funds sold to be utilized for loan funding.
Interest income on other securities is comprised primarily of
Federal Home Loan Bank stock dividends and Federal Reserve Bank
stock dividends. For the nine months and quarter ended September
30, 1998, the dividend amounts were $32,796 and $11,286,
respectively, as compared to $43,116 and $12,263 for the nine
months and quarter ended September 30, 1997, respectively. This
decrease was due to a decrease of Federal Home Loan Bank
borrowings, thereby reducing the amount of required Federal Home
Loan Bank Stock the bank had to hold in order to comply with
regulatory guidelines.
Interest income on temporary investments represents federal funds
sold. For the nine months and quarter ended September 30, 1998,
interest income on federal funds sold was $303,593 and $74,571 as
compared to $85,835 and $32,979 for the nine months and quarter
ended September 30, 1997. The increase in interest income on
federal funds sold is attributable to management
<PAGE>
employing more secondary earning assets in overnight investments
for purposes of loan funding.
Total interest and fees on loans as of September 30, 1998 was
$7,605,832 as compared to $6,730,480 for the nine months ended
September 30, 1997. For the quarter ended September 30, 1998
interest and fees on loans was $2,735,925 as compared to
$2,337,211 for the quarter ended September 30, 1997. The Bank
experienced a 16% loan growth while the yield on the portfolio
remained constant during this same period.
The increase in interest income was due primarily to growth in
loans. The increase in interest expense was due to growth in
deposits, as the graph below depicts. Interest expense for the
nine months ended September 30, 1998 represented 44% of gross
interest income or $3,647,321, as compared to $3,167,215 or 45%
for the nine months ended September 30, 1997. For the three months
ended September 30, 1998, interest expense was $1,242,921 as
compared to $1,094,673 for the three months ended September 30,
1997.
[OBJECT OMITTED]
Provision for Loan Losses
For the nine and three months ended September 30, 1998, the Bank
added to its provision for loan losses $320,000 and $90,000,
respectively. During the nine and three months ended September 30,
1997, the Bank added $270,000 and $90,000 to its provision for
loan losses, respectively.
As of December 31, 1997, the Bank had $936,974 in its allowance
for loan losses, representing .91% of outstanding loans
receivable. During the nine months ended September 30, 1998 the
Bank added $320,000 to the reserve. Loans charged off against the
reserve during the nine months ended September 30, 1998 amounted
to $152,880. There were recoveries to previously charged off loans
during the nine months ended September 30, 1998 of $8,776. The
allowance for loan loss reserve was $1,112,870 at September 30,
1998, representing .96% of outstanding loans receivable.
Management believes that the allowance for loan losses is
reasonable and
<PAGE>
adequate to cover any known losses or any losses reasonably
expected in the portfolio.
Other real estate owned at September 30, 1998 totaled $722,053.
This represents two properties: one property is located in Bryn
Mawr, Pennsylvania and the other property is located in Drexel
Hill, Pennsylvania. The bank is in the process of listing the
properties for sale, as well as the property in Drexel Hill. Based
upon recent appraisals of the properties, the Bank anticipates
sufficient proceeds from the sale of these properties to satisfy
the outstanding debts.
Non-Interest Income
Other income of $825,091 for the nine months ended September 30,
1998, was primarily comprised of service charges on deposit
accounts and gains on sales of mortgage loans in the secondary
market. During the same period in 1997, other income totaled
$544,086. The increase was due to growth in service charges and
ATM fees on deposit accounts, and the volume of mortgages sold
from the Bank's newly formed mortgage business. For the quarter
ended September 30, 1998, other income increased to $380,098 from
$198,588 for the quarter ended September 30, 1997, primarily due
to growth in the Bank's mortgage activities.
Non-Interest Expense
During the nine months ended September 30, 1998, non-interest
expense was $4,441,791 as compared to $3,295,141 during the same
period in 1997. Of this amount, $2,207,677, or approximately 50%,
was attributable to salary and related employee benefits as
compared to $1,679,600 or approximately 51% during the nine months
ended September 30, 1997. For the quarter ended September 30,
1998, non-interest expense totaled $1,675,283 as compared to
$1,106,191 during the same quarter of 1997, an increase of 51%.
Salary and employee related benefits expense was $858,061 for the
quarter ended September 30, 1998 as compared to $566,240 in the
same period in 1997, a 52% increase. The increase in salary and
related expenses was due to increased staffing for branch
expansion and the establishment of the Bank's mortgage department.
Combined occupancy and equipment expenses for the nine months
ended September 30, 1998 were $837,365 as compared to $691,688, a
21% increase, during the same period in 1997. For the quarter
ended September 30, 1998, occupancy and equipment expenses were
$303,800 as compared to $233,411 for the quarter ended September
30, 1997. The increase was due to annual increases in rent
expenses, the lease of additional space at the Bank's main office
for the Mortgage Department and the addition of 2 new branches
since September 30, 1997.
For the nine months ended September 30, 1998, computer expense
totaled $237,520 as compared to $182,287 for the nine months ended
September 30, 1997. For the quarter ended September 30, 1998,
computer expense totaled
<PAGE>
$80,240 as compared to $60,225 for the quarter ended September
30, 1997. The increase in computer expense is a result of the
increased account and item processing volumes that the Bank has
experienced.
For the nine months ended September 30, 1998, legal expense
totaled $72,997 as compared to $32,515 for the nine months ended
September 30, 1997, a 125% increase. For the quarter ended
September 30, 1998 legal expenses totaled $19,911 as compared to
$17,591 for the quarter ended September 30, 1997. Legal expense
increased due to loan and collection expenses related to the
non-accrual loans and certain collection related expenses that the
Company incurred.
For the nine months ended September 30, 1998, professional fees
totaled $63,054 as compared to $44,260 for the nine months ended
September 30, 1997. For the quarter ended September 30, 1998,
professional fees totaled $21,415 as compared to $10,260 for the
quarter ended September 30, 1997. Professional fees increased over
1997 comparatives due to Year 2000 expenses and Bank management
contracting external loan review services.
For the nine months ended September 30, 1998, business development
expenses totaled $162,025 as compared to $120,878 for the nine
months ended September 30, 1997. For the quarter ended September
30, 1998, business development expenses totaled $66,811 as
compared to $42,534 for the quarter ended September 30, 1997. The
increased expense was directly attributed to a higher level of
community involvement and sales promotions in connection with
branch expansion and the newly acquired mortgage business.
For the nine months ended September 30, 1998, stationary and
supplies expense was $126,332 as compared to $103,947 for the nine
months ended September 30, 1997. For the quarter ended September
30, 1998, supplies expense was $46,836 as compared to $18,323 for
the quarter ended September 30, 1997. Supplies expense increased
due to branch expansion and the opening of the Bank's mortgage
department as well as increased volume from growth.
For the nine months ended September 30, 1998, other operating
expenses totaled $560,478, or approximately 13% of total other
expenses, as compared to $301,842, or 9%, during the same period
in 1997. For the quarter ended September 30, 1998, these expenses
totaled $220,431 as compared to $112,719 for the quarter ended
September 30, 1997. Other operating expenses were comprised
primarily of business promotional materials, telephone, fidelity
insurance premium, shares and loan taxes, ATM expenses, accounting
fees, loan expenses, and other nominal miscellaneous expenses, as
well as the contra expenses related to FASB 91 costs on loan
origination. The increase in other operating expenses is
attributable to the branch expansion and additional mortgage
business that the Bank added during 1998.
Income tax expense for the nine months and quarter ended September
30, 1998 was $173,546 and $75,302, respectively, as compared to
$300,271 and $122,271 for the nine months and quarter ended
September 30, 1997, respectively. The tax provision decreased 42%
due to the decreased net income of the Bank.
<PAGE>
YEAR 2000 MATTERS
The "Year 2000" issue is the result of computer programs written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs, systems or devices that have time sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000.
The Company has undertaken a comprehensive upgrade of its computer systems for
Year 2000 compliance, which included the completion of a conversion of the
Bank's computer system with a Year 2000 compliant core processing system and the
replacement of personal computers with models which will role over to the Year
2000 date change. These upgrades were the main result of the completion of the
bank's awareness, assessment and renovation phases of Year 2000 planning. The
validation and implementation phases are in process as testing of mission
critical systems is currently underway and is expected to be completed by the
second quarter of 1999 in accordance with federal guidelines. Implementation of
contingency plans, should they become necessary, will occur later in 1999.
The total costs of the Year 2000 issue has not been and is not expected to be
material to the Company's financial position or results of operations in any
given year. These costs and the date on which the Company plans to complete the
year 2000 testing processes are based on Management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ from those plans. Based upon current
information, the Company continues to believe that it's Year 2000 expenditures
for 1998 will be approximately $50,000.
The risks associated with the Year 2000 issue include system failure or
miscalculations causing disruptions of operations including, among other things,
an inability to process transactions and engage in normal business activities.
Although the Company is actively working towards compliance, certain contingency
plans have been established to mitigate the impact should the aforementioned
risks be realized. Contingency plans have been established for mission critical
systems, which will be triggered by established dates during 1999, to include
core processing of transactions and the Bank is currently working on a business
resumption plan. This plan, to be completed in 1999, should enable the Bank to
temporarily resume operations in the event an unforseen problem occurs and
mission critical systems are rendered inoperable.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
None.
ITEM 2 CHANGES IN SECURITIES
As previously reported in the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 1998, on July 13, 1998,
Madison Capital Trust I, a Delaware business trust established by
the Company (the "Trust"), sold $5,000,000 in liquidation amount
of 9.00% Capital Securities, representing preferred beneficial
interest in the assets of the Trust, to seven institutional
accredited investors in a private offering exempt from
registration under Regulation D under the Securities Act of 1933.
Hopper Soliday & Co., Inc. received a fee of $150,000 for its
services as placement agent in the transaction. The Trust
contemporaneously sold $150,000 in liquidation amount of Common
Securities of the Trust to the Company. The Trust used the
proceeds of the offering of the Capital Securities and the Common
Securities to purchase a 9.00% junior subordinated deferrable
interest debenture issued by the Company in the principal amount
of $5,150,000 (the "Debenture"). The Trust will pay semi-annual
distributions to the holders of capital securities in amounts
equal to the interest payments made by the Company with respect to
the Debentures. The obligations of the Trust to pay distributions
on the Capital Securities and the Common Securities have been
fully and unconditionally guaranteed by the Company, to the extent
that the Trust as funds available for distribution. The first
distribution will be payable by the Trust on December 31, 1998.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 OTHER INFORMATION
None.
<PAGE>
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Filed
<TABLE>
<CAPTION>
Page Number in
Exhibit Number Sequential Numbering System
<S> <C> <C>
3 Amended and Restated Articles *
of Incorporation, as amended, and
Amended and Restated Bylaws of
the Issuer
10 (1) Amended and Restated Declaration **
of Trust of Madison Capital Trust I
dated July 13, 1998.
(2) Indenture between Madison Bancshares
Group, Ltd. and Christiana Bank and
Trust Company), as Trustee, dated
July 13, 1998.
(3) Capital Securities Guarantee between Madison
Bancshares Group, Ltd. and Christiana Bank
and Trust Company), as Trustee, dated
July 13, 1998.
27 Financial Data Schedule ----
(b) Reports on Form 8-K
None
</TABLE>
- --------------------------------------------------------------------------------
* Incorporated by reference from the Issuer's Registration Statement on Form S-1
No. 33-27146
** Incorporated by reference from the Issuer's Quarterly Report on Form
10-QSB for the period ended June 30, 1998
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
/s/ Vito A. DeLisi
------------------------------
Vito A. DeLisi
Executive Vice President
/s/ E. Cheryl Hinkle
------------------------------
E. Cheryl Hinkle
Senior Vice President
Date Executed: November 17, 1998
<PAGE>
ANNEX A
<PAGE>
MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Cash and Cash Equivalents:
Cash and amounts due from banks $ 7,437,377 $ 3,944,986
Federal funds sold 2,000,000 19,500,000
------------- ------------
Total cash and cash equivalents 9,437,377 23,444,986
Investment Securities:
Held to maturity (market value-1998 $1,616,017;
1997 $1,617,371) 1,603,233 1,605,407
Available for sale (amortized cost
1998 $2,203,186; 1997 $3,655,536) 2,214,169 3,656,446
Loans (net of allowance for loan losses-
1998 $1,112,870; 1997 $936,974) 109,103,224 102,180,556
Mortgage loans held for sale 6,950,235 290,900
Real estate owned 722,053 465,312
Furniture, equipment and leasehold improvements 1,576,137 916,484
Accrued interest receivable 994,806 706,448
Other assets 671,732 240,274
-------------- -------------
TOTAL $133,272,966 $133,506,813
-------------- -------------
-------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits $ 19,377,410 $ 16,076,381
Interest-bearing demand deposits 9,121,973 8,164,080
Savings deposits 7,042,166 5,270,011
Money market deposits 14,575,649 14,039,724
Time deposits 67,779,157 71,282,214
------------- ------------
Total Deposits 117,896,355 114,832,410
Borrowed Funds 9,000,000
Trust Preferred Securities 5,000,000
Accrued Interest Payable 966,180 838,513
Accrued Expenses and Other Liabilities 94,317 97,672
-------------- -------------
Total Liabilities 123,956,852 124,768,595
-------------- -------------
Commitments
Shareholders' Equity:
Preferred stock, $5 par value-authorized 5,000,000 shares; issued and
outstanding, 0 shares.
Common stock, $1 par value-authorized 20,000,000
shares; issued and outstanding, 1998 1,556,051 shares;
1997 1,252,773 shares 1,556,051 1,252,773
Capital surplus 7,543,921 7,612,835
Retained earnings (deficit) 208,894 (127,991)
Net unrealized losses on available for sale securities 7,248 601
-------------- -------------
Total shareholders' equity 9,316,114 8,738,218
-------------- -------------
TOTAL $133,272,966 $133,506,813
-------------- -------------
-------------- -------------
</TABLE>
See notes to consolidated financial statements
<PAGE>
MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $2,735,925 $2,337,211 $7,605,832 $6,730,480
Interest and dividends on investment securities:
US Government obligations 30,632 46,086 115,728 145,688
Municipal bonds 12,160 12,190 36,503 36,590
Interest on other securities 11,286 12,263 32,796 43,116
Interest on temporary investments 74,571 32,979 303,593 85,835
----------- ----------- ---------- -----------
2,864,574 2,440,729 8,094,452 7,041,709
----------- ----------- ---------- -----------
Interest expense:
Interest on:
Demand deposits 45,468 33,824 138,511 88,169
Savings and money market deposits 155,672 148,225 472,066 443,322
Time deposits 947,676 816,247 2,940,951 2,282,500
Federal funds purchased 355 96,377 2,043 353,224
Preferred trust bonds 93,750 93,750
----------- ----------- ---------- -----------
1,242,921 1,094,673 3,647,321 3,167,215
----------- ----------- ---------- -----------
Net interest income before provisions for loan losses 1,621,653 1,346,056 4,447,131 3,874,494
Provision for loan losses 90,000 90,000 320,000 270,000
----------- ----------- ---------- -----------
Net interest income after provision for loan losses 1,531,653 1,256,056 4,127,131 3,604,494
----------- ----------- ---------- -----------
Other noninterest income:
Gain on sale of mortgage loans 160,759 25,843 177,539 75,186
Service charges on deposit accounts 188,057 154,774 551,328 412,322
Other 31,282 17,971 96,224 56,578
----------- ----------- ---------- -----------
Total noninterest income 380,098 198,588 825,091 544,086
----------- ----------- ---------- -----------
Other noninterest expenses:
Salary and employee benefits 858,061 566,240 2,207,677 1,679,600
Occupancy 213,489 185,461 614,737 528,885
Equipment 90,311 47,950 222,628 162,803
Computer processing 80,240 60,225 237,520 182,287
Deposit insurance 8,839 5,443 15,633 11,811
Legal fees 19,911 17,591 72,997 32,515
Professional fees 21,415 10,260 63,054 44,260
Business development 66,811 42,534 162,025 120,878
Office and stationary supplies 46,836 18,323 126,332 103,947
Advertising 11,088 13,870 35,484 42,838
Director fees 37,851 25,575 123,226 83,475
Other operating 220,431 112,719 560,478 301,842
----------- ----------- ---------- -----------
Total other noninterest expenses 1,675,283 1,106,191 4,441,791 3,295,141
----------- ----------- ---------- -----------
Income before income taxes 236,468 348,453 510,431 853,439
Provision for income taxes 75,302 122,271 173,546 300,271
----------- ----------- ---------- -----------
Net income $ 161,166 $ 226,182 $ 336,885 $ 553,168
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
Net income per share-basic $ .10 $ .15 $ .22 $ .37
----------- ----------- ---------- -----------
Net income per share-diluted $ .10 $ .14 $ .21 $ .34
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
Weighted average number of shares-basic 1,556,793 1,504,853 1,534,359 1,504,853
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
Weighted average number of shares-diluted 1,635,210 1,625,643 1,627,550 1,621,482
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
</TABLE>
See notes to consolidated financial statements
<PAGE>
MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 336,885 $ 553,168
Adjustments for noncash items included in net income:
Depreciation and amortization 168,588 106,007
Provision for loan losses 320,000 270,000
Net amortization of bond premium/discount (1,402) (6,367)
Amortization of deferred fees and costs, net 97,970 (67,822)
Gain on sale of mortgage notes (177,539) (75,186)
Changes in assets and liabilities which provided (used) cash:
Interest receivable (288,358) (90,414)
Mortgage loans held for resale (6,481,796) 1,546,498
Other assets (431,458) 14,009
Accrued expenses and other liabilities (3,355) (35,987)
Accrued interest payable 127,667 185,564
------------- -----------
Net cash provided by (used in) operating activities (6,332,798) 2,399,470
------------- -----------
Cash flow from investing activities:
Proceeds from sale of investment securities available for sale 1,000,000 129,300
Proceeds from maturity of investments available for sale 500,000 500,000
Purchase of investments available for sale (47,500) (300,900)
Net change in loans to customers (7,340,638) (8,879,449)
Cost (capitalized) recovered for real estate owned (256,741) 53,800
Purchase of furniture, equipment and leasehold improvements (828,241) (433,252)
------------- -----------
Net cash used in investing activities (6,973,120) (8,930,501)
------------- -----------
Cash flow from financing activities:
Increase in demand, savings and time deposits 3,063,945 21,239,802
Decrease in borrowed funds (9,000,000) (1,000,000)
Exercise of stock warrants 234,364
Issuance of trust preferred securities 5,000,000
------------- -----------
Net cash provided (used in) financing activities (701,691) 20,239,802
------------- -----------
Net increase (decrease) in cash and cash equivalents (14,007,609) 13,708,771
Cash and cash equivalents, beginning of period 23,444,986 5,306,957
------------- -----------
Cash and cash equivalents, end of period $ 9,437,377 $19,015,728
------------- -----------
------------- -----------
Supplemental disclosures of cash flow information:
Interest paid $ 3,519,654 $ 2,981,651
------------- -----------
------------- -----------
Taxes paid $ 227,000 $ 275,000
------------- -----------
------------- -----------
Supplemental disclosures of noncash investing activities:
Unrealized loss (gain) on available for sale securities $ 6,647 $ 1,464
------------- -----------
------------- -----------
</TABLE>
See notes to consolidated financial statements
<PAGE>
MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. Basis of presentation:
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for quarterly reports on Form
10-Q and, therefore, do not include information or footnotes necessary
for a complete presentation of financial condition, results of
operations, shareholders' equity and cash flows in conformity with
generally accepted accounting principles. However, the financial
statements reflect all adjustments which in the opinion of management
are necessary for fair presentation of financial results and that all
adjustments are of a normal recurring nature. The results of operations
for the nine month period ended September 30, 1998 are not necessarily
indicative of the results which may be expected for the entire fiscal
year.
2. Principles of consolidation:
The consolidated financial statements include the accounts of Madison
Bancshares Group, Ltd. (the Company) and its wholly owned subsidiary,
The Madison Bank (the Bank). All material intercompany balances and
transactions have been eliminated.
3. Stock dividends:
On May 19, 1998, the Board of Directors declared a stock dividend in
the amount of twenty percent (20%), payable in shares of the Company's
common stock. Such dividend was payable on or about June 17, 1998 to
holders of the Company's shares of common stock on June 3, 1998. No
fractional shares were issued in connection with such dividend. Per
share computations reflect the changes in the number of shares
resulting from these dividends.
4. Net income per share:
Basic net income per share is based upon the weighted average number of
common shares outstanding, while diluted net income per share is based
upon the weighted average number of common shares outstanding and
common share equivalents that would arise from the exercise of stock
options and stock warrants.
5. Comprehensive income:
The Company adopted Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income, effective January 1, 1998. The
statement requires disclosure of amounts from transactions and other
events which are currently excluded from the statement of operations
and are recorded directly to shareholders' equity. Comprehensive income
for the three and nine month periods ended September 30, 1998 was
$166,889 and $343,532, respectively, and $231,484 and $561,551,
respectively, for the three and nine month periods ended September 30,
1997.
<PAGE>
MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
6. Accounting pronouncement issued:
In June, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is
effective for all fiscal quarters of fiscal years beginning after June
15, 1999. SFAS No. 133, established accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives)
and for hedging activities. Management has not completed an analysis of
the potential impact, if any, the adoption of SFAS No. 133 will have on
the Company's financial position or results of operations.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 7,437
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,214
<INVESTMENTS-CARRYING> 1,603
<INVESTMENTS-MARKET> 0
<LOANS> 117,166
<ALLOWANCE> 1,113
<TOTAL-ASSETS> 133,273
<DEPOSITS> 117,896
<SHORT-TERM> 0
<LIABILITIES-OTHER> 6,060
<LONG-TERM> 0
0
0
<COMMON> 1,556
<OTHER-SE> 7,760
<TOTAL-LIABILITIES-AND-EQUITY> 133,273
<INTEREST-LOAN> 7,606
<INTEREST-INVEST> 185
<INTEREST-OTHER> 303
<INTEREST-TOTAL> 8,094
<INTEREST-DEPOSIT> 3,554
<INTEREST-EXPENSE> 3,647
<INTEREST-INCOME-NET> 4,447
<LOAN-LOSSES> 320
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,442
<INCOME-PRETAX> 510
<INCOME-PRE-EXTRAORDINARY> 510
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 337
<EPS-PRIMARY> .22
<EPS-DILUTED> .21
<YIELD-ACTUAL> 9,086
<LOANS-NON> 1,298
<LOANS-PAST> 2,653
<LOANS-TROUBLED> 269
<LOANS-PROBLEM> 1,794
<ALLOWANCE-OPEN> 937
<CHARGE-OFFS> 153
<RECOVERIES> 9
<ALLOWANCE-CLOSE> 1,113
<ALLOWANCE-DOMESTIC> 1,113
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
