<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, 1997.
[ ] 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)
<TABLE>
<S> <C>
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) (Zip Code)
</TABLE>
Issuer's telephone number, including area code: (215) 641-1111
--- --- ----
Securities registered pursuant to Section 12(b) of the Act: None.
<TABLE>
<CAPTION>
Title of Each Class Name of Each Exchange on Which Registered
- ------------------- ---------------------------------------------
<S> <C>
- ------------------- ---------------------------------------------
- ------------------- ---------------------------------------------
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value per share
- -------------------------------------------------------------------------
(Title of Class)
- -------------------------------------------------------------------------
(Title of Class
<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. $10,376,499
-----------
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. $12,077,546 based on the average of the bid and asked on the
National Association of Securities Dealers Automated Quotation System on
March 20, 1998.*
State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest publication date. 1,252,773 as of March 20,
1998.
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 1998 Annual Meeting of Shareholders presently scheduled for May 19,
1998 are incorporated by reference into Part III hereof.
- ------------------------
* Excluded from such market value computation are the approximately 358,140
issued and outstanding shares beneficially owned by executive officers and
directors of Issuer and its subsidiary. Included in such computation are the
60,126 shares beneficially owned by CoreStates Bank, NA (constituting
approximately 4.8% of the issued and outstanding shares of the Issuer).
EXHIBIT INDEX APPEARS ON PAGE 50 IN SEQUENTIAL NUMBERING SYSTEM OF THIS
FORM 10-KSB
2
<PAGE>
MADISON BANCSHARES GROUP, LTD.
Form 10-KSB
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART 1
Item 1 Description of Business...................................... 4
Item 2 Description of Property...................................... 7
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..... 8
Item 6 Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 8
Item 7 Financial Statements......................................... 24
Item 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................... 48
PART III
Item 9 Director, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act............. 48
Item 10 Executive Compensation....................................... 48
Item 11 Security Ownership of Certain Beneficial
Owners and Management........................................ 48
Item 12 Certain Relationships and Related Transactions............... 48
Item 13 Exhibits and Reports on Form 8-K............................. 49
</TABLE>
3
<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
five branch offices.
As of the date hereof, the Company and Madison Bank have a total of 53
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 branch offices
located at 1767 Sentry Parkway West, Blue Bell, PA, 202 West Ridge Pike,
Conshohocken, PA , 1380 Skippack Pike, Center Square, PA, 600 W. Lancaster
Avenue, Strafford, PA and 100 West Main Street, Century Plaza, Suite 100,
Lansdale, 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, the Strafford office in August, 1996 and
the Lansdale office in August, 1997. As of December 31, 1996 and 1997, the Bank
held deposits totaling $87,242,280 and $114,838,976, respectively, including
deposits of the Company. As of the same dates, the Bank had gross loans
receivable of $93,945,786 and $103,664,075 (inclusive of residential loans held
for sale), respectively. The majority of such loans were made for commercial
purposes.
As of December 31, 1996 and 1997, the Company had total assets of
$105,970,875 and $133,506,813 and total shareholders' equity of $7,974,220 and
$8,738,218, respectively. Investments amounted to $5,693,612 at year end 1996,
of which $3,585,406 were classified as available for sale and the balance were
classified as held to maturity and $5,261,853 at the end of 1997, of which
$3,656,446 were classified as available for sale and the balance classified as
held to maturity.
4
<PAGE>
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 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 Lansdale office further
increases the Bank's service area into Montgomery and Bucks Counties. The Bank
currently offers services to residents of approximately 95 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, escrow
accounting deposit services 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.
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.
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 noted 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.
5
<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.
6
<PAGE>
ITEM 2--Description of Property
The Company leases approximately 13,381 total square feet on the first floor
of the Madison Bank Building, 1767 Sentry Parkway West, Blue Bell, Pennsylvania,
(the "Building"). This total includes 3,381 square feet leased by the Company on
February 1, 1996 on the first floor of the Building and additional 1,400 square
feet leased by the Company on January 21, 1997 on the first floor of the
Building. This 1,400 square feet of additional space was included in the
original lease, but the Company subsequently surrendered possession. The leased
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 (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. 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 1997, the amount of such expenses was $32,640. The maximum allocable portion
of the Building's operating costs will be $34,272 for 1998 and will ultimately
increase to $51,684 for the final year of the second option period. The
additional 3,381 square feet are leased at an annual rate of approximately
$58,660 with a 3.5% increase each year through February 1, 2000. The additional
1,400 square feet were leased for approximately $28,078 during 1997.
The Bank also leases space for branch banking facilities at the following
locations and through the years indicated in parentheses: (i) 3,965 square feet
in Lansdale, Pennsylvania (2007), (ii) 3,000 square feet in Strafford,
Pennsylvania (2006); (iii) 3,600 square feet in Center Square, Pennsylvania
(2005); and (iv) 3,620 square feet in Conshohocken, Pennsylvania (2001). The
aggregate annual rent for the space leased for branch banking facilities
(inclusive of the new Lansdale Branch) is $217,539 and is subject to annual
increase. The Bank is also responsible for its allocable share of operating
costs for such space.
ITEM 3--Legal Proceedings
The Company and the Bank are involved from time to time in legal proceedings
arising in the ordinary course of business. In the opinion of management, no
pending proceedings will have a material adverse effect on the Company's results
of operations or financial condition.
ITEM 4--Submission of Matters to a Vote of Security Holders
NONE.
7
<PAGE>
PART II
ITEM 5--Market For The Registrant's Common Stock and Related
Stockholder Matters
The common stock of the Company is traded on the NASDAQ SmallCap Market. As
of March 20, 1998, there were approximately 281 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:
<TABLE>
<CAPTION>
1997
------------------------------------------------
1ST Qtr 2ND Qtr 3RD Qtr 4TH Qtr
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
High Bid....................................... 11-3/4 10-1/2 12-3/4 15-5/8
Low Bid........................................ 9-3/4 9-1/2 9-1/2 11-3/4
</TABLE>
<TABLE>
<CAPTION>
1996
1ST Qtr 2ND Qtr 3RD Qtr 4TH Qtr
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
High Bid....................................... 11 11-1/2 10-1/2 10-3/4
Low Bid........................................ 6-3/4 8-3/4 9 9
</TABLE>
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, in January 1997, a 7.5% stock dividend was declared, resulting in the
issuance of 72,703 additional shares of common stock and in October, 1997, a 20%
stock dividend was declared, resulting in the issuance of 208,710 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
8
<PAGE>
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, 1997, 72,703 shares of common stock were issued in connection with a
stock dividend and in October, 1997, a 20% stock dividend was declared,
resulting in the issuance of 208,710 additional shares of common stock being
issued. At December 31, 1997, the common stock outstanding was 1,252,773 shares
as compared to 971,360 shares at December 31, 1996. The book value per share of
the Company's common stock at December 31, 1997, 1996 and 1995 was $6.98, $6.37
and $5.90, respectively, after giving retroactive effect to the issuance of
stock dividend.
9
<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, 1997, which exceeded the levels
required for a bank to be adequately capitalized under applicable Federal
Deposit Insurance Corporations' regulations.
RISK WEIGHTED CATEGORY
<TABLE>
<CAPTION>
RISK WEIGHTED ASSETS 0% 20% 50% 100% Total
------------------- -------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Loans.................................... 30,646 72,762 103,408
Securities Available for Sale............ 176 2,480 2,656
Securities Held to Maturity.............. 2,605 2,605
Federal Funds Sold....................... 19,500 19,500
Cash and Due From Banks.................. 3,625 320 3,945
Other Assets............................. 2,388 2,388
------- -------------- --------- --------- ---------
Category totals.......................... 3,801 24,904 30,646 75,150 134,502
------- -------------- --------- --------- ---------
Off balance-sheet items (risk weighted).. 215 2,643
------- -------------- --------- --------- ---------
Total risk-weighted assets............... 0 5,024 16,644 75,150 96,818
------- -------------- --------- --------- ---------
------- -------------- --------- --------- ---------
Average Total Assets..................... 121,750
</TABLE>
<TABLE>
<CAPTION>
CAPITAL TIER 1 TIER 2 TOTAL
- ------- --------- --------- ---------
<S> <C> <C> <C>
Shareholders' equity............. 8,729 8,729
Allowance for loan losses........ 937 937
--------- --------- ---------
Total Capital.................... 8,729 937 9,666
--------- --------- ---------
--------- --------- ---------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Regulatory
Minimum Actual
Ratio 12/31/97 12/31/97
- ----- --------------- -----------
<S> <C> <C>
Qualifying Total Capital to Risk Weighted Assets......... 8.0% 9.98%
Tier 1 Capital to Risk Weighted Assets................... 4.0% 9.02%
Tier 1 Ratio to Total Adjusted Average Assets............ 4.0% 7.17%
</TABLE>
The Company's capital-to-assets ratio decreased from 7.52% as of December
31, 1996 to 6.55% at December 31, 1997. The year-to-year decrease in the
capital-to-assets ratio was attributable to the asset growth of the Company
during 1997. 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 1997 was 9.05% and for 1996 was 7.04%; and its return on
average assets was .67% for 1997 as compared to .61% for 1996. The increase
in the Company's return on equity and return on assets from 1996 to 1997 was
directly attributable to the increased net income of the Bank.
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, 1996 and 1997. 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.
11
<PAGE>
<TABLE>
<CAPTION>
1997 1996
(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)............................. $ 97,712 $ 9,139 9.35% $ 81,280 $7,654 9.42%
Other Investments............................ 4,666 290 6.22 6,430 371 5.77
Federal Funds Sold........................... 3,750 196 5.23 1,576 89 5.65
---------- --------- --------- ---------
Total Interest-Earning Assets.................. $ 106,128 $ 9,625 9.07 89,286 $8,114 9.09
--------- ----- --------- -----
Non-Interest-Earning Assets.................... 6,257 4,853
---------- ---------
Total Assets............................... $ 112,385 $ 94,139
---------- ---------
---------- ---------
Liabilities & Shareholders' Equity:
Interest-bearing liabilities:
Demand Interest-Bearing...................... $ 6,106 $ 127 2.08 $ 3,755 $ 79 2.10
Money Market & Savings....................... 19,078 608 3.19 18,943 612 3.23
Other Time Deposits.......................... 56,437 3,257 5.77 43,583 2,475 5.68
Borrowed Funds............................... 6,550 399 6.09 5,386 281 5.22
---------- --------- --------- ---------
Total Interest-Bearing Liabilities............. 88,171 $ 4,391 4.98 71,667 $3,447 4.81
--------- ----- --------- -----
Other Liabilities.............................. 15,901 14,789
---------- --------
Total Liabilities.............................. 104,072 86,456
Shareholders' Equity........................... 8,313 7,683
---------- --------
Total Liabilities and Shareholders' Equity..... $ 112,385 $ 94,139
---------- --------
---------- --------
Net Interest Income/Rate Spread................ $ 5,234 4.09% $ 4,667 4.28%
--------- ----- --------- -----
--------- ----- --------- -----
Net Interest Margin............................ 4.93% 5.23%
----- -----
----- -----
</TABLE>
The following table analyzes the rate/volume variances between the Bank's
interest-earning assets and interest-bearing liabilities for the fiscal years
1997 compared to 1996 and 1996 compared to 1995. 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.
12
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
------------------------------- -------------------------------
(in thousands)
----------------------------------------------------------------
Volume Rate Total Volume Rate Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loan Portfolio (includes mortgages held for sale).... $ 1,537 $ (57) $ 1,480 $ 1,688 $ (273) $ 1,415
Other Investments.................................... (108) 27 (81) (358) 18 (340)
Federal Funds........................................ 114 (7) 107 (11) (1) (12)
--------- --------- --------- --------- --------- ---------
Total Interest Earning Assets........................ 1,543 (37) 1,506 1,319 (256) 1,063
--------- --------- --------- --------- --------- ---------
Interest Expense:
Demand Interest-Bearing............................. 49 (1) 48 9 (6) 3
Money Market & Savings............................... 4 (8) (4) (75) (155) (230)
Other Time Deposits.................................. 741 (102) 617 573 (86) 487
Borrowed Funds....................................... 55 (53) 2 239 (219) 20
--------- --------- --------- --------- --------- ---------
849 (164) 824 746 (466) 280
--------- --- --------- --------- --------- ---------
Net Change in Net Interest Income.................... $ 694 $ 127 $ 567 $ 573 $ 210 783
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</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.
13
<PAGE>
At December 31, 1997, 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 $12,000. If rates fell 200 basis points, monthly revenues
a year from now would increase approximately $29,000 and a rise in rates by 200
basis points would represent a monthly loss in revenues of approximately
$27,000.
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, 1997 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.
14
<PAGE>
Interest Ratio Sensitivity Report
As of December 31, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
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..................... $ 19,500 $ 0 $ 0 $ 0 $ 0 $ 19,500
Loans.................................. 41,814 3,062 5,685 38,868 13,979 103,408
Interest-Bearing Balances.............. 0 0 0 0 0 0
Investment Securities Held
For Sale.............................. 0 0 0 500 1,105 1,605
Investment Securities Held For
Maturity............................. 0 0 0 3,000 656 3,656
---------- ---------- ---------- ---------- ---------- ----------
Totals................................. $ 61,314 $ 3,062 $ 6,185 $ 42,974 $ 14,635 $128,169
Cumulative Total....................... $ 61,314 $ 64,376 $ 70,561 $113,535 $128,170 $128,169
Interest-Sensitive Liabilities
Demand-Interest-bearing................ $ 8,164 $ 0 $ 0 $ 0 $ 0 $ 8,164
Savings Accounts....................... 5,270 0 0 0 0 5,270
Money Market Accounts.................. 14,040 0 0 0 0 14,040
Time Deposits.......................... 20,796 13,238 18,418 18,830 0 71,282
Borrowed Funds......................... 9,000 0 0 0 0 9,000
---------- ---------- ---------- ---------- ---------- --------
Totals................................. $ 57,270 $ 13,238 $ 18,418 $ 18,830 $ 0 $107,756
Cumulative Totals...................... $ 57,270 $ 70,508 $ 88,926 $ 107,756 $107,756 $107,756
Gap.................................... $ 4,044 $(10,176) $(12,733) $ 23,538 $ 15,740 $ 14,635
Cumulative Gap......................... $ 4,044 $ (6,132) $(18,865) $ 4,673 $ 20,413 $ 20,408
Interest-sensitive assets/
Interest-sensitive liabilities
(cumulative).......................... 1.07 .91 .79 1.04 1.19 1.19
Cumulative Gap/total earning
assets................................ 3.16% (4.78%) (14.72%) 3.65% 15.93% 15.92%
Total Earning Assets................... $128,169
</TABLE>
15
<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 1997, the Bank's
net interest spread was maintained at approximately 4.09%, as compared to
4.28% in 1996.
Results of Operations
As of December 31, 1997, the Bank held deposits aggregating $114,832,410,
of which $16,076,381, or approximately 14%, were non-interest-bearing
deposits, (exclusive of the $6,566 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 loans receivable in connection with loans made to
1,423 loan customers totaled approximately $103,373,175 (exclusive of
residential mortgage loans held for sale), resulting in an average loan size
of approximately $72,645.
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.
16
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------- ---------------------------- ---------------------------
% of % of % of
Type of Account Balance Portfolio Balance Portfolio Balance Portfolio
- ---------------- -------------- ------------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Non-Int. Bearing $ 16,076,381 14.00% $14,660,464 17.00% $14,452,481 17.00%
Interest-Bearing 8,164,080 7.00 4,564,916 5.00 3,262,291 4.00
Money Market.... 14,039,724 12.00 14,409,382 17.00 16,376,099 20.00
Savings......... 5,270,011 5.00 4,571,352 5.00 4,900,299 6.00
CDs over
$100,000...... 32,244,281 28.00 23,344,356 23.00 16,970,990 23.00
CDs under
$100,000...... 39,037,933 34.00 25,649,521 33.00 26,908,460 30.00
-------------- ------------- ----------- --------- ------------ -------------
Total
Deposits...... $ 114,832,410 100.00% $87,199,991 100.00% $82,870,620 100.00%
-------------- ------------- ------------ --------- ------------ -------------
-------------- ------------- ------------ --------- ------------ -------------
</TABLE>
[PIE CHARTS OF 1997, 1996 and 1995]
From its inception in 1989 through December 31, 1997, the Company
incurred a cumulative deficit of $127,991, which included a charge of
approximately $2,113,821 in connection with the issuance of the Stock
Dividends. For the year ended December 31, 1997, the Company's total income
was $10,376,499 and its total expenses were $9,620,021, resulting in a net
profit for the year of $756,478. The increase in net income for the year
ended December 31, 1997 was primarily due to increased interest income on
loans. 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.
As of December 31, 1997, the Bank's allowance for loan losses equaled
approximately .91% of outstanding loans receivable, including non-accrual
loans. At December 31, 1996, the Bank's allowance for loan losses equaled
approximately .95% of outstanding loans receivable, including non-accrual
loans. At December 31, 1995, the allowance equaled approximately 1.04%. The
chart below shows an analysis of the allowance for loan losses for the years
ended December 31, 1997, 1996 and 1995. Although the overall reserve has
decreased slightly from .95% of outstanding loans at December 31, 1996 to
.91% of outstanding loans at December 31, 1997, management believes it
adequately reflects the level of risk in the portfolio.
17
<PAGE>
<TABLE>
<CAPTION>
Analysis of The Bank's Allowances for Loan Losses
December 31,
-----------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Balance at beginning of period:......................... $ 875,438 $ 750,318 $ 604,286
Charge-offs:
Commercial............................................. (295,581) (328,100) 0
Real estate mortgage................................... 0 0 (185,968)
Installment............................................ (4,283) (6,261) 0
---------------- ---------------- ----------------
Total................................................. (299,864) (334,361) (185,968)
Recoveries:
Commercial............................................. 1,400 71,981 0
Net Charge-Offs........................................ (298,464) (262,380) (185,968)
Additions charged to operations........................ 360,000 387,500 332,000
----------------- ---------------- ---------------
Balance at the end of period............................ $ 936,974 $ 875,438 $ 750,318
----------------- --------------- ----------------
----------------- --------------- ----------------
Ratio of net charge-offs during the period
to average loans outstanding during the period........ .31% .41% .29%
------ ------ ------
------ ------ ------
</TABLE>
As of December 31, 1997, the Bank had loans outstanding, totaling
$103,373,175, 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.
18
<PAGE>
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 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.
In the first quarter of 1998, the Bank contracted with an independent
consulting firm to perform an extensive review of the loan portfolio. The credit
relationships selected for review were evaluated for risk, adequacy of
documentation, compliance with laws, regulations and internal policy. There was
also an evaluation of the adequacy of the allowance for loan losses. Although
the formal report will not be received until early April, the preliminary
results indicate an adequate loan loss reserve.
Additions to the Bank's provision for possible loan losses for the period
ended December 31, 1997, totaled $360,000. Loans charged off against the reserve
in 1997 amounted to $299,864 and recoveries were $1,400, which resulted in net
charged-off loans of $298,464. The principal amount of non-accrual loans at
December 31, 1997 was $891,852, an increase of 21% over 1996. A substantial
portion of the non-accrual loans are partially or fully secured and in the
process of collection.
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.
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.
Other real estate owned at December 31, 1997 totaled $465,312 as compared to
$511,618 at December 31, 1996. 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 call for payment in full before November 1, 1998.
Interest expense of $4,391,096, represented 46% of gross interest income in
1997. Interest expense increased 27% over 1996. This increased expense was due
to an increased average growth in interest-bearing deposits to $88,171 from
$71,667 in 1996 and an increased average cost of funds to 4.98% in 1997 from
4.81% in 1996.
19
<PAGE>
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.
Occupancy and equipment expenses totaled $939,804 for the year ended
December 31, 1997, as compared to $757,482 at December 31, 1996. The 24%
increase is representative of continued increased rents to accommodate the
growth of the Bank. Additional increases in maintenance costs and equipment
leases were reflective of the Bank's fifth branch opening in August of 1997.
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%
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.
Salary and employee benefits of $2,254, 829 represented 51% of total
non-interest expenses, or 25% of total Bank expenses, at December 31, 1997. The
increase in salary and employee benefits of $625,077 or 38% over 1996 is
reflective of hiring additional employees and increased benefits expense,
including group health insurance and company match of the 401(k) Plan.
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.
Other operating expenses in 1997, exclusive of occupancy and equipment and
salary and employee benefits totaled $1,257,479 as compared to $1,522,108 in
1996. The decrease in these operating expenses was primarily related to the
non-recurrence of the additional expenses that were related to the proxy and
annual meeting expenses that occurred in 1996. Computer expenses increased from
$210,688 to $253,196, a 20% increase over 1996. This increase was due to the
increased deposit and loan accounts processed in conjunction with the asset
growth of the Bank. Deposit insurance increased from $1,500 in 1996 to $13,768
in 1997. The Bank pays premiums in accordance with the deposit size of its
portfolio and its insurance category rating which currently is 1A under the FDIC
assessment regulation, Part 327. Legal expenses decreased $29,049 or 36% from
1996. This was a result of fewer legal and collection issues arising in the
normal course of the Bank's business. Business development expenses were
$176,770 in 1997 as compared to $124,637 in 1996. This 42% increase was a direct
result of the Bank's efforts to develop business and become increasingly visible
in its branch location communities. The Bank hired two business development
officers and implemented a bank wide sales call program. The decrease in
advertising expense from $82,009 in 1996 to $56,352 in 1997 was a result of more
monies being allocated to business development rather than advertising. The
Company anticipates an increase in operating expenses of
20
<PAGE>
approximately $100,000 for 1998 associated with the newly opened Lansdale
Branch and the soon to open Northeast Philadelphia branch.
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.
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.
Interest income on investment securities relates primarily to interest on
U.S. Government Obligations. Interest income of $185,263 for the year ended
December 31, 1997 decreased 37% from $295,389 at December 31, 1996. The decrease
is a direct result of a change in investments from government obligations to
federal funds sold. The average balance of government obligations decreased from
$6,430,000 in 1996 to $4,666,000 in 1997. 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 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.
Interest income on temporary investments represents Federal Funds sold. At
December 31, 1997, interest income on Federal Funds sold was $196,425, as
compared to $88,664 at December 31, 1996, a 122% increase. The deposit growth of
the Bank allowed for an improved liquidity position as well as a growth in
federal funds to better prepare for potential loan demand. 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 represent the Bank's investments in
municipal securities and dividends paid on Federal Reserve and Federal Home Loan
Bank Stocks. For the year ended December 31, 1997, 1996 and 1995, interest
income on other investments was $104,511, $75,840 and
21
<PAGE>
$78,093, respectively. The 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, 1996 or 1997.
Interest and fees on loans were $9,138,864 in 1997, 95% of gross interest
income as compared to $7,653,898, or 94% in 1996. The average loan portfolio
grew 20% while the Bank's yield decreased slightly from 9.42% to 9.35%. 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.
Recent Accounting Pronouncements
There are several accounting pronouncements that are effective for fiscal
year 1998. These pronouncements are discussed in footnote No. 2 of the
consolidated financial statements.
Year 2000 Matters
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions and engage in
similar normal business activities.
An assessment of the readiness of external entities which the Company
interfaces with, such as vendors, counterparties, customers, payment systems and
others has been made and will continue to be ongoing.
The Company has identified all significant applications that will require
modification to ensure year 2000 compliance (Year 2000 Compliance). Internal and
external resources are being used to make the required modifications and test
Year 2000 Compliance. The modification process of all significant applications
is substantially complete. The Company plans on completing the testing process
of all significant applications by December 31, 1998.
In addition, the Company has communicated with others with whom it does
significant business to determine their Year 2000 Compliance readiness and the
extent to which the Company is
22
<PAGE>
vulnerable to any third party Year 2000 issues. However, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another
company, or a conversion that is incompatible with the Company's systems,
would not have a material adverse effect on the Company.
The total cost of the Company of these Year 2000 Compliance activities has
not been and is not anticipated to be material to its 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 modification and 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 believes
that its Year 2000 expenditures for 1998 will be approximately $50,000.
23
<PAGE>
ITEM 7--Financial Statements and Supplementary Data
Independent Auditors' Report dated March 13, 1998.
Consolidated Statements of Financial Condition as of December 31, 1997
and 1996.
Consolidated Statements of Income for the years ended December 31, 1997,
1996 and 1995.
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for years ended December 31, 1997,
1996 and 1995.
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.
24
<PAGE>
-----------------------------------------------
Madison Bancshares
Group, Ltd.
and Subsidiary
Consolidated Financial Statements as of
December 31, 1997 and 1996 and for Each of the
Three Years in the Period Ended
December 31, 1997, and Independent Auditors'
Report
25
<PAGE>
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, 1997 and 1996 and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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, 1997 and 1996 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 13, 1998
26
<PAGE>
MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and amounts due from banks $ 3,944,986 $ 4,381,957
Federal funds sold 19,500,000 925,000
------------- -------------
Total cash and cash equivalents 23,444,986 5,306,957
INVESTMENT SECURITIES:
Held to maturity (fair value - 1997, $1,617,371; 1996, $2,097,349) 1,605,407 2,108,206
Available-for-sale (amortized cost - 1997, $3,655,536; 1996, $3,595,891) 3,656,446 3,585,406
LOANS (Net of allowance for loan losses - 1997, $936,974; 1996, $875,438) 102,180,556 90,783,582
MORTGAGE LOANS HELD FOR SALE 290,900 2,111,618
REAL ESTATE OWNED 465,312 511,618
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 916,484 584,533
ACCRUED INTEREST RECEIVABLE 706,448 641,570
OTHER ASSETS 240,274 337,385
------------- -------------
TOTAL $ 133,506,813 $ 105,970,875
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing demand deposits $ 16,076,381 $ 14,660,464
Interest-bearing demand deposits 8,164,080 4,564,916
Savings deposits 5,270,011 4,571,352
Money market deposits 14,039,724 14,409,382
Time deposits 71,282,214 48,993,877
------------- -------------
Total deposits 114,832,410 87,199,991
BORROWED FUNDS 9,000,000 10,000,000
ACCRUED INTEREST PAYABLE 838,513 704,707
ACCRUED EXPENSES AND OTHER LIABILITIES 97,672 91,957
------------- -------------
Total liabilities 124,768,595 97,996,655
------------- -------------
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, 1997, 1,252,773; 1996, 971,360 shares 1,252,773 971,360
Capital surplus 7,612,835 7,185,686
Accumulated deficit (127,991) (175,907)
Net unrealized gain (loss) on available-for-sale securities 601 (6,919)
------------- -------------
Total shareholders' equity 8,738,218 7,974,220
------------- -------------
TOTAL $ 133,506,813 $ 105,970,875
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $9,138,864 $7,653,898 $6,263,095
Interest and dividends on investment securities:
U.S. Government obligations 185,263 295,389 404,520
Other securities 104,511 75,840 78,093
Interest on temporary investments 196,425 88,664 101,698
---------- ---------- ----------
Total interest income 9,625,063 8,113,791 6,847,406
---------- ---------- ----------
INTEREST EXPENSE:
Interest on:
Demand deposits 127,143 78,738 76,473
Savings and money market deposits 607,838 611,151 841,898
Time deposits 3,256,833 2,475,714 1,987,626
Other interest 399,282 280,837 56,648
---------- ---------- ----------
Total interest expense 4,391,096 3,446,440 2,962,645
---------- ---------- ----------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 5,233,967 4,667,351 3,884,761
PROVISION FOR LOAN LOSSES 360,000 387,500 332,000
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,873,967 4,279,851 3,552,761
---------- ---------- ----------
OTHER NONINTEREST INCOME:
Service charges on deposit accounts 573,493 374,897 275,877
Gain on the sale of mortgage loans 83,339 59,002 49,505
Gain on sale of investments 575 15,812
Other 94,029 55,054 40,049
---------- ---------- ----------
Total noninterest income 751,436 488,953 381,243
---------- ---------- ----------
OTHER NONINTEREST EXPENSES:
Salaries and employee benefits 2,254,829 1,629,752 1,359,430
Occupancy 715,145 556,977 396,393
Equipment 224,659 200,505 122,660
Computer processing 253,196 210,688 176,559
Deposit insurance 13,768 1,500 72,783
Legal 50,331 79,380 25,316
Professional fees 51,166 60,585 99,638
Business development 176,770 124,637 100,586
Office and stationery supplies 132,818 121,628 101,925
Advertising 56,352 82,009 70,221
Director's fees 107,025 115,325 95,600
Proxy related expense -- 147,401
Other operating 416,053 578,955 471,834
---------- ---------- ----------
Total other noninterest expenses 4,452,112 3,909,342 3,092,945
---------- ---------- ----------
INCOME BEFORE TAXES 1,173,291 859,462 841,059
PROVISION FOR INCOME TAXES 416,813 318,875 294,403
---------- ---------- ----------
NET INCOME $ 756,478 $ 540,587 $ 546,656
---------- ---------- ----------
---------- ---------- ----------
BASIC EARNINGS PER SHARE $ 0.60 $ 0.43 $ 0.44
---------- ---------- ----------
---------- ---------- ----------
DILUTED EARNINGS PER SHARE $ 0.56 $ 0.43 $ 0.44
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
28
<PAGE>
MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss)
on Available-
Common Capital Accumulated For-Sale
Stock Surplus Deficit Securities Total
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $ 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
Unrealized gain on available-for-sale
securities, net of tax 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
46,076
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, net of tax (5,160) (5,160)
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 971,360 7,185,686 (175,907) (6,919) 7,974,220
Issuance of 7 1/2% stock dividend 72,703 110,354 (183,057)
Issuance of 20% stock dividend 208,710 316,795 (525,505)
Net income 756,478 756,478
Unrealized gain on available-for-sale
securities, net of tax 7,520 7,520
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 $ 1,252,773 $ 7,612,835 $ (127,991) $ 601 $ 8,738,218
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements
29
<PAGE>
MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 756,477 $ 540,587 $ 546,656
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation on equipment 153,272 144,701 89,748
Provision for loan losses 360,000 387,500 332,000
Net amortization of bond premium/discount (1,913) 1,789 482,259
Gain on sale of mortgage loans held for sale (83,339) (59,002) (49,505)
Gain on sale of investments (575) (15,812)
Originations of loans held for sale (10,474,740) (15,684,054) (7,314,677)
Proceeds from sale of loans 12,402,193 14,013,974 7,313,442
Changes in assets and liabilities which provided (used) cash:
Accrued interest receivable 401,296 (37,477) (99,235)
Other assets (373,621) (146,611) (27,719)
Accrued interest payable 133,806 47,812 334,830
Accrued expenses and other liabilities 5,715 (215,511) 204,584
Deferred loan fees 80,497 24,880 (72,209)
----------- ----------- -----------
Net cash provided by (used in) operating activities 3,359,068 (981,412) 1,724,362
INVESTING ACTIVITIES:
Purchase of investment securities held-to-maturity (500,000)
Purchase of investment securities available for sale (2,499,308) (1,647,031) (1,500,000)
Proceeds from maturities of investment securities held-to-maturit 500,000 2,100,000 5,787,700
Proceeds from sale of investment securities available for sale 1,444,950 4,003,438
Proceeds from maturity of investment securities available for sal 1,000,000 1,000,000
Loans purchased and originated, net of principal repayments (11,864,109) (19,821,593) (19,512,697)
Additions to furniture, equipment and leasehold improvements (484,991) (232,189) (269,926)
Costs capitalized for real estate owned (552,349)
Proceeds on sale of real estate owned 50,000 40,731
Net cash used in investing activities (11,853,458) (18,560,082) (12,543,834)
FINANCING ACTIVITIES:
Net increase in demand, savings and time deposits 27,632,419 4,329,371 20,941,335
Proceeds from issuance of common stock 50,000
Exercise of stock warrants 26,895
Exercise of stock options 19,183
Advances of borrowed funds 9,000,000 10,000,000
Repayments of borrowed funds (10,000,000) (3,675,000)
Net cash provided by financing activities 26,632,419 14,375,449 17,316,335
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 18,138,029 (5,166,045) 6,496,863
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,306,957 10,473,002 3,976,139
CASH AND CASH EQUIVALENTS, END OF YEAR $ 23,444,986 $ 5,306,957 $ 10,473,002
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 3,858,282 $ 3,398,628 $ 2,627,815
Income taxes $ 363,663 $ 569,956 $ 197,527
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITY:
Issuance of 7.5% and 20% stock dividend in 1997 and 7.5%
and 7% stock dividend
in 1996 and 1995, respectively:
Common stock $ 281,413 $ 67,185 $ 58,599
Capital surplus $ 427,149 $ 436,703 $ 395,543
Accumulated deficit $ (708,562) $ (503,888) $ (454,142)
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -------------------------------------------------------------------------------
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, Strafford and its fifth branch location,
Lansdale, Pennsylvania, opened in 1997. 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 $832,167 and $991,352
and at December 31, 1997 and 1996, respectively, is sufficient to
currently meet average reserve balances under federal requirements.
Investment Securities - The Bank classifies and accounts for debt and
equity securities as follows:
o Securities Held-to-Maturity - Securities held-to-maturity are stated
at cost adjusted for unamortized purchase premiums and discounts
based on management's positive intent and the Bank's ability to hold
such investments 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.
31
<PAGE>
o 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 Statement
of Financial Accounting Standards ("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 with
servicing released 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.
32
<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.
Earnings Per Share - In March 1997, the FASB issued SFAS No. 128, Earnings
Per Share. The statement requires the Company to disclose both basic
earnings per share and diluted earnings per share for annual and interim
periods ending after December 15, 1997. Basic net income per share is
based on the weighted average number of common shares outstanding, while
diluted net income per share is based on the weighted average number of
common shares outstanding and common share equivalents that would arise
from the exercise of stock options. The average common shares outstanding
have been retroactively restated to reflect the effect of the 7.5% and 20%
stock dividends issued in 1997, the 7.5% stock dividend issued in 1996 and
the 7% stock dividend issued in 1995. The calculation of the weighted
average shares, after giving effect to the stock split, was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Average common shares outstanding 1,254,685 1,260,931 1,252,837
Increase in shares due to options and warrants--
diluted basis 86,918 -- --
Adjusted shares outstanding - diluted 1,341,603 1,260,931 1,252,837
</TABLE>
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.
33
<PAGE>
Accounting Principles Issued and Not Adopted - In June 1997, the FASB
issued SFAS No. 130, Reporting Comprehensive Income, which requires an
entity to present, as a component of comprehensive income, the amounts
from transactions and other events which currently are excluded from the
statement of income and are recorded directly to stockholders' equity.
Also in June 1997, the FASB issued SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. This statement requires
an entity to disclose financial information in a manner consistent to
internally used information and requires more detailed disclosures of
operating and reporting segments than are currently in practice. In
February 1998, the FASB issued SFAS No. 132, Employers' Disclosure About
Pensions and Other Postretirement Benefits. This statement revises
employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans.
The adoption of these statements, which concern disclosure standards only,
is not required until 1998. The adoption will not have any impact on the
Company's financial position or results of operations.
Reclassifications - Certain items in the 1995 and 1996 consolidated
financial statements have been reclassified to conform with the
presentation in the 1997 consolidated financial statements.
3. INVESTMENT SECURITIES
A summary of investment securities and their expected maturities, as well
as estimated fair values at December 31, 1997 and 1996 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, 1997:
Debt securities:
U.S. Government and Federal Agencies $ 500,000 $ 10,156 $ 510,156
Municipal and State Government bonds 1,105,407 1,808 1,107,215
----------- ----------- ----------- -----------
Total $ 1,605,407 $ 11,964 $ $ 1,617,371
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Securities available for sale:
December 31, 1997:
Debt securities - U.S. Government and Federal Agencies $ 2,999,336 $ 910 $ 3,000,246
Equity securities:
Federal Home Loan Bank Stock 479,800 479,800
Federal Reserve Bank Stock 176,400 176,400
----------- ----------- ----------- -----------
Total $ 3,655,536 $ 910 $ $ 3,656,446
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
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
----------- ----------- ----------- -----------
$ 3,595,891 $ 350 $ (10,835) $ 3,585,406
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
34
<PAGE>
The scheduled maturities of debt securities to be held to maturity and
debt securities available for sale at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Securities to be Securities
Held to Maturity Available for Sale
------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due from 1 to 5 years $ 500,000 $ 510,156 $ 2,999,336 $ 3,000,246
Due from 5 to 10 years 1,105,407 1,107,215
------------- ------------ ------------ ------------
Total $ 1,605,407 $ 1,617,371 $ 2,999,336 $ 3,000,246
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
</TABLE>
Gross proceeds from the sale of investment securities available for sale
in 1997 totaled $998,750, resulting in a gross gain of $575. Gross
proceeds from the sale of investment securities available for sale in 1995
total $4,003,438, resulting in a gross gain of $16,309 and a gross loss of
$495. There were no sales of investment securities in 1996.
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans outstanding are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1997 1996
<S> <C> <C>
Real estate mortgage loans $ 40,594,799 $ 44,800,169
Commercial loans 52,722,906 38,685,537
Consumer loans 10,055,470 8,348,462
---------------- --------------
Total 103,373,175 91,834,168
Less:
Allowance for loan losses (936,974) (875,438)
Deferred origination fees, net (255,645) (175,148)
---------------- --------------
$ 102,180,556 $ 90,783,582
---------------- --------------
---------------- --------------
</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, 1997, 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 4.7 % to 13.0% with adjustable
rates ranging from the Bank's prime rate to 3.0% in excess of prime.
35
<PAGE>
The composition of fixed and adjustable rate loans as of December 31, 1997
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 $ 12,059,968 Less than 1 month $ 33,968,585
1 year - 3 years 15,866,238 1 month to 1 year 4,494,428
3 years - 5 years 22,125,199 1 year - 3 years 880,100
5 years - 30 years 13,953,395 3 years - 30 years 25,262
-------------- --------------
$ 64,004,800 $ 39,368,375
-------------- --------------
-------------- --------------
</TABLE>
An analysis of the activity in the allowance for loan losses is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1997 1996
<S> <C> <C>
Balance, beginning of year $ 875,438 $ 750,318
--------- ---------
Provision charged to operations 360,000 387,500
--------- ---------
Loans charged off:
Commercial loans (295,581) (328,100)
Consumer loans (4,283) (6,261)
--------- ---------
(299,864) (334,361)
--------- ---------
Recoveries - commercial loans 1,400 71,981
--------- ---------
Balance, end of year $ 936,974 $ 875,438
--------- ---------
--------- ---------
</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
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, 1997 and 1996, 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:
36
<PAGE>
The following table summarizes impaired loan information.
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
------------- --------------
<S> <C> <C>
Impaired loans with related reserve for loan losses $ 0 $ 0
calculated under SFAS No. 114
Impaired loans with no related reserve for loan losses
calculated under SFAS No. 114 1,571,209 1,037,043
------------- --------------
Total $ 1,571,209 $ 1,037,043
------------- --------------
------------- --------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------------
1997 1996
<S> <C> <C>
Average impaired loans $ 1,571,209 $ 407,581
Interest income recognized on impaired loans 71,966 43,882
Cash basis interest income recognized on impaired loans 32,382 3,161
</TABLE>
At December 31, 1997, 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, 1997 and 1996
totaled $891,852 and $735,007, respectively. Additional interest income
that would have been recorded in 1997 and 1996 under the original terms of
nonaccrual loans totaled approximately $81,061 and $58,656, respectively.
Accruing loans which are contractually past due 90 days or more totaled
$778,825 and $251,823 at December 31, 1997 and 1996, respectively.
Interest due on these loans totaled $51,748 and $7,741 at December 31,
1997 and 1996, respectively.
37
<PAGE>
5. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
A summary of furniture, equipment and leasehold improvements is as
follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
<S> <C> <C>
Furniture and equipment $ 1,289,171 $ 850,047
Leasehold improvements 360,954 315,087
--------- ---------
Total 1,650,125 1,165,134
Accumulated depreciation and amortization (733,641) (580,601)
--------- ---------
$ 916,484 $ 584,533
--------- ---------
--------- ---------
</TABLE>
6. DEPOSITS
Interest-bearing deposits have stated rates ranging from 2.15% to 5.75%
with a weighted average cost on all deposits of 5.16% at December 31, 1997
and from 2.15% to 5.69% with a weighted average cost on all deposits of
4.81% at December 31, 1996
Time deposit accounts outstanding at December 31, 1997 and 1996 mature as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1997 1996
<S> <C> <C>
Three months or less $ 20,795,591 $ 10,392,000
Three to twelve months 31,657,409 26,035,000
Over one year 18,829,214 12,566,877
-------------- --------------
$ 71,282,214 $ 48,993,877
-------------- --------------
-------------- --------------
</TABLE>
The aggregate amount of certificates of deposit in denominations of
$100,000 or more at December 31, 1997 and 1996 was $34,113,040 and
$23,344,356, respectively. Interest expense attributable to these deposits
for the years ended December 31, 1997, 1996 and 1995 amounted to
$1,355,577, $962,149, and $784,646, respectively. These certificates and
their remaining maturities are as follows:
<TABLE>
<CAPTION>
December 31,
1997
<S> <C>
Three months or less $ 16,629,305
Three through twelve months 13,473,700
Over 12 months 4,010,035
--------------
$ 34,113,040
--------------
--------------
</TABLE>
38
<PAGE>
7. OTHER BORROWED MONEY
Other borrowed money is summarized as follows:
<TABLE>
<CAPTION>
December 31,
Interest ----------------------------
Due Rate 1997 1996
<S> <C> <C>
FHLB repurchase agreement January 1998 6.75 % $ 9,000,000
FHLB advance February 1997 5.82 % $ 5,000,000
FHLB repurchase agreement January 1997 5.46 % 5,000,000
------------- ------------
$ 9,000,000 $ 10,000,000
------------- ------------
------------- ------------
</TABLE>
Advances are collateralized under blanket collateral lien agreements.
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, 1997
--------------------------------------------------------------------------------------------
1997 1996 1995
Amount Percentage Amount Percentage Amount Percentage
<S> <C> <C> <C> <C> <C> <C>
Tax at federal tax rate $ 410,652 35.0% $ 382,985 35.0% $ 294,371 35.0%
Increase (decrease) resulting from:
Benefit of surtax exemptions (11,733) (1.0) (10,943) (1.0) (8,411) (1.0)
Meals and entertainment
disallowed 30,051 2.6 21,188 1.9 17,072 2.0
Tax exempt income (18,355) (1.6) (18,331) (1.7) (13,925) (1.6)
Other 6,198 0.5 (56,024) (5.1) 5,296 0.6
--------- ---- --------- ---- --------- ----
$ 416,813 35.5% $ 318,875 29.1% $ 294,403 35.0%
--------- ---- --------- ---- --------- ----
--------- ---- --------- ---- --------- ----
</TABLE>
39
<PAGE>
Items that give rise to significant portions of the Company's deferred tax
asset, calculated at 34%, are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 179,252 $ 157,723
Deferred fees 8,567 10,801
Unrealized losses on available-for-sale securities 3,565
Other 37,793
--------- ---------
Subtotal 225,612 172,089
--------- ---------
Deferred tax liabilities:
Unrealized gains on available-for-sale securities (309)
Other (7,920)
--------- ---------
Subtotal (309) (7,920)
--------- ---------
Net deferred tax asset $ 225,303 $ 164,169
--------- ---------
--------- ---------
</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, 1997, 1996
and 1995 includes the following:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current taxes $ 481,821 $ 369,875 $ 358,355
Deferred taxes (65,008) (51,000) (63,952)
--------- --------- ---------
Total $ 416,813 $ 318,875 $ 294,403
--------- --------- ---------
--------- --------- ---------
</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 $1,076,000 and $1,382,000 and
unadvanced loan commitments of $12,330,000 and $13,906,000 at December 31,
1997 and 1996, respectively. The unadvanced loan commitments at December
31, 1997 and 1996 were primarily at variable rates. In addition, the Bank
had commitments to sell fixed rate residential mortgages of $290,900 and
$2,111,618 at December 31, 1997 and 1996, 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 share
of the building's operating costs. Total operating lease expense for 1997,
1996 and 1995 was $456,489, $384,501, and $346,363, respectively.
40
<PAGE>
Future minimum lease payments under noncancelable leases are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
<S> <C>
1998 $ 545,478
1999 565,557
2000 367,074
2001 189,572
Thereafter 386,100
-------------
Total $ 2,053,781
-------------
-------------
</TABLE>
10. STOCK OPTION PLANS
In 1989, the Company's shareholders adopted a Stock Incentive Plan (the
"1989 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 had been reserved for issuance pursuant
to the 1989 Plan. The price at which such options were issued was
determined by a special committee. The exercise price of options under the
1989 Plan 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.
In 1997, the Company's shareholders adopted the 1997 Stock Option Plan
(the "Plan") providing for the issuance of qualified and non-qualified
stock options to the officers and key executives of the Company. The
purpose of the Plan is to promote the interests of the Company by
providing incentives to (i) designated officers and other key employees of
the Company and (ii) nonemployee members of the Company's Board of
Directors, to attract and retain such persons and to encourage them to
acquire or increase their proprietary interest in the Company and to
maximize the Company's performance during the term of their employment or
period of service with the Company. A total of 61,355 shares of common
stock have been reserved for issuance pursuant to the 1997 Plan. The price
at which such options may be issued is determined by a special committee.
At December 31, 1997, no options have been granted under the 1997 Plan.
The per share price of exercisable options at December 31, 1997 reflects
the adjusted exercise price resulting from stock dividends.
41
<PAGE>
Transactions 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> <C>
January 1, 1995 37,738 $4.94-$5.34 $ 5.30
Granted 12,612 $5.60-$6.02 $ 5.82
------
Exercisable, December 31, 1995 50,350 $4.79-$5.34 $ 5.64
------
Exercised 4,538 $5.13 $ 5.34
------
Exercisable, December 31, 1996 45,812 $4.79-$5.34 $ 5.24
------
Exercisable, December 31, 1997 45,812 $4.79-$5.34 $ 5.24
------
------
</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 $ 546,656
Pro forma $ 514,536
Net income per common share: As reported 0.44
Pro forma 0.41
</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>
There were no grants of options in 1997 or 1996.
42
<PAGE>
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, the exercise price was adjusted by the Board of Directors. At
December 31, 1997, warrants have an exercise price of $5.34 per share. As
of December 31, 1997, there were 117,563 warrants outstanding and 3,725
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, 1997, 1996 and 1995 were approximately $20,313, $13,977, and
$16,600 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. On October 9, 1997, the Board of Directors declared a
20% stock dividend payable to all shareholders of record on October 7,
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.
A summary of unpaid principal balances of loans outstanding to directors,
officers, employees and their business interests is as follows:
43
<PAGE>
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
<S> <C> <C>
Beginning of period $ 5,929,059 $ 5,594,284
Borrowings 816,369 1,722,607
Principal repayments (622,327) (1,387,832)
----------- -----------
End of period $ 6,123,101 $ 5,929,059
----------- -----------
----------- -----------
</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 $263,570, $256,000, and $214,000, for the years ended
December 31, 1997, 1996 and 1995, 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>
1997 1996
---------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 23,445 $ 23,445 $ 5,307 $ 5,307
Investment securities held-to-maturity 1,605 1,617 2,108 2,097
Investment securities available for sale 3,656 3,656 3,585 3,585
Loans, net 102,181 104,766 90,783 91,158
Mortgage loans held for sale 291 291 2,112 2,112
Liabilities:
Deposits:
Noninterest-bearing deposits 16,076 16,076 14,660 14,660
Interest-bearing deposits 8,164 8,164 4,565 4,565
Savings deposits 5,270 5,270 4,571 4,571
Money market deposits 14,040 14,040 14,409 14,409
Time deposits 71,282 71,464 48,994 48,664
Borrowed funds 9,000 9,000 10,000 10,000
</TABLE>
44
<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, 1997 and 1996.
Although management is not aware of any factors that would 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 Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory -- and
possibly additional discretionary -- actions by regulators, that, if
undertaken, could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Company and the Bank must meet specific
capital guidelines that involve quantitative measures of the Company's and
the Bank's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company's and the
Bank's capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier 1 capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier 1
capital (as defined) to average assets (as defined). Management believes,
as of December 31, 1997, that the Company and the Bank meet all capital
adequacy requirements to which it is subject.
P
The most recent notification from the Commonwealth of Pennsylvania
Department of Banking (as of June 30, 1997) categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action.
Due to the growth of assets, the capital ratios at December 31, 1997 do
not meet the requirement to be categorized as well capitalized. At
December 31, 1997, the Bank meets the requirement to be categorized as
adequately capitalized. To be categorized as adequately capitalized, the
Bank must maintain minimum Tier 1 Capital, Total Risk-Based Capital and
Leverage Ratios as set forth in the table.
The Bank's actual capital amounts and ratios are presented in the table
below:
<TABLE>
<CAPTION>
To be Considered
Well Capitalized
Required for Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
-------------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1997:
Tier 1 capital (to risk-weighted
assets) $ 8,729 9.02% $ 3,795 4.00% $ 5,693 6.00%
Total capital (to risk-weighted
assets) 9,666 9.98 7,749 8.00 9,685 10.00
Tier 1 capital (to average assets) 8,729 7.17 4,870 4.00 6,087 5.00
At December 31, 1996:
Tier 1 capital (to risk-weighted
assets) $ 7,884 9.08% $ 3,332 4.00% $ 4,998 6.00%
Total capital (to risk-weighted
assets) 8,759 10.09 6,664 8.00 8,330 10.00
Tier 1 capital (to average assets) 7,884 8.37 4,092 4.00 5,115 5.00
</TABLE>
The Company's Tier 1 capital (to risk-weighted assets), total capital (to
risk-weighted assets) and Tier 1 capital (to average assets) ratios 9.03%,
9.99%, and 6.55% at December 31, 1997, and 9.19%, 10.20% and 7.52% at
December 31, 1996, respectively.
45
<PAGE>
17. PARENT COMPANY FINANCIAL INFORMATION
The financial statements of Madison Bancshares Group, Ltd. (Parent Only)
as of December 31, 1997 and 1996 and for each of the three years in the
period ended December 31, 1997 are presented herein.
<TABLE>
<CAPTION>
December 31,
---------------------------
BALANCE SHEETS 1997 1996
<S> <C> <C>
Deposits with subsidiary $ 6,566 $ 42,289
Investment in subsidiary 8,731,152 7,879,815
Other assets 500 500
Receivable from subsidiary 63,110
----------- -----------
TOTAL $ 8,738,218 $ 7,985,714
----------- -----------
----------- -----------
LIABILITIES - Accrued expenses and other liabilities $ $ 11,494
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock 1,252,773 971,360
Capital surplus 7,612,835 7,185,686
Accumulated deficit (127,991) (175,907)
Net unrealized losses on available-for-sale securities 601 (6,919)
----------- -----------
Total shareholders' equity 8,738,218 7,974,220
----------- -----------
TOTAL $ 8,738,218 $ 7,985,714
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
STATEMENTS OF OPERATIONS 1997 1996 1995
<S> <C> <C> <C>
Interest income $ 274 $ 444 $ 2,241
Operating expenses (87,613) (235,224) (58,393)
--------- --------- ---------
Loss before equity in undistributed income from subsidiary (87,339) (234,780) (56,152)
Equity in undistributed income of subsidiary, Madison Bank 843,817 775,367 602,808
--------- --------- ---------
NET INCOME $ 756,478 $ 540,587 $ 546,656
--------- --------- ---------
--------- --------- ---------
STATEMENTS OF CASH FLOWS
Operating Activities:
Net income $ 756,478 $ 540,587 $ 546,656
Adjustments to reconcile net income to net
cash used in operating activities:
Equity in undistributed income of subsidiary (843,817) (775,367) (602,808)
Decrease in accrued expenses and other liabilities (11,494) (15,506) (18,068)
Decrease (increase) in receivable from subsidiary 63,110 25,001 (15,000)
--------- --------- ---------
Net cash used in operating activities (35,723) (225,285) (89,220)
--------- --------- ---------
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
---------
Net cash provided by financing activities 50,000
---------
NET INCREASE (DECREASE) IN CASH (35,723) 20,713 (39,220)
CASH, BEGINNING OF YEAR 42,289 21,576 60,796
--------- --------- ---------
CASH, END OF YEAR $ 6,566 $ 42,289 $ 21,576
--------- --------- ---------
--------- --------- ---------
</TABLE>
46
<PAGE>
18. QUARTERLY DATA (UNAUDITED)
The unaudited quarterly results of operations for 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1997
---------------------------------------------------------------------
March 31 June 30 September 30 December 31 Total
<S> <C> <C> <C> <C> <C>
Interest income $2,261,812 $2,339,168 $ 2,440,729 $2,583,354 $9,625,063
Interest expense 1,009,988 1,062,554 1,094,673 1,223,881 4,391,096
---------- ---------- ---------- ---------- ----------
Net interest income 1,251,824 1,276,614 1,346,056 1,359,473 5,233,967
Provision for loan losses 90,000 90,000 90,000 90,000 360,000
---------- ---------- ---------- ---------- ----------
Net 1,161,824 1,186,614 1,256,056 1,269,473 4,873,967
Other noninterest income 155,280 190,218 198,588 207,350 751,436
Other noninterest expenses 1,068,447 1,120,503 1,016,191 1,246,971 4,452,112
---------- ---------- ---------- ---------- ----------
Net income before income taxes 248,657 256,329 438,453 229,852 1,173,291
Provision for income taxes 86,000 92,000 122,271 116,542 416,813
---------- ---------- ---------- ---------- ----------
Net income $ 162,657 $ 164,329 $ 316,182 $ 113,310 $ 756,478
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Per share data - Diluted earnings per share $ 0.16 $ 0.16 $ 0.22 $ 0.16 $ 0.56
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
--------------------------------------------------------------------
March 31 June 30 September 30 December 31 Total
<S> <C> <C> <C> <C> <C>
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 - Diluted earnings per share $ 0.13 $ 0.06 $ 0.13 $ 0.12 $ 0.43
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</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.
******
47
<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 1998 annual meeting of Shareholders presently
scheduled for May 19, 1998.
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 1998 annual meeting of the shareholders presently
scheduled for May 19, 1998.
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 1998 annual meeting of the shareholders presently
scheduled for May 19, 1998.
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 1998 annual meeting of the shareholders presently
scheduled for May 19, 1998.
48
<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
- ----------- -------------------------------------------------------------------------------------- ---------------------
<C> <S> <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) Madison Bancshares Group, Ltd. 1997 Stock Option Plan*****........................... N/A
21 Subsidiaries of the Registrant.......................................................
27 Financial Data Schedule
</TABLE>
- ------------------------
* Incorporated by reference from Exhibit No. 3 to the Registration
Statement on Form S-1 of the Company, as amended,
Registration No. 33-22492.
** Incorporated by reference from Exhibit No. 3 to the Registration
Statement on Form S-1 of the Company, as amended,
Registration No. 33-22492.
*** Incorporated by reference from Exhibit No. 4 to the Registration
Statement on Form S-1 of the Company, as amended,
Registration No. 33-22492.
**** Incorporated by reference from Exhibit No. 10(d) to the Registration
Statement on Form S-1 of the Company, as amended, Registration No.
33-22492.
***** Incorporated by reference from Exhibit A to the Company's 1997
Proxy Statement, dated April 18, 1997.
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 October 21, 1997, the Company filed a current report on Form 8-K
regarding the issuance of a 20% stock dividend.
49
<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 20, 1998 /s/ Gary E. Daniels
-----------------------------
Gary E. Daniels, Director
March 20, 1998 /s/ Vito A. DeLisi
-----------------------------
Vito A. DeLisi, President
and Director
March 20, 1998 /s/ Peter DePaul
-----------------------------
Peter DePaul
Chairman of the Board
March 20, 1998 /s/ Philip E. Hughes, Jr.
-----------------------------
Philip E. Hughes, Jr.
Director and Vice Chairman of
the Board
March 20, 1998 /s/ Frank R. Iacobucci
-----------------------------
Frank R. Iacobucci, Director
March 20, 1998 /s/ Arnold M. Katz
-----------------------------
Arnold M. Katz, Director
50
<PAGE>
March 20, 1998 /s/ Lorraine C. King
-----------------------------
Lorraine C. King, Director
March 20, 1998 /s/ Kathleen A. Kucer
-----------------------------
Kathleen A. Kucer, Director
March 20, 1998 /s/ Michael O'Donoghue
-----------------------------
Michael O'Donoghue, Director
March 20, 1998 /s/ Donald J. Reape
-----------------------------
Donald J. Reape, Director
March 20, 1998 /s/ Alan T. Schiffman
-----------------------------
Alan T. Schiffman, Director
March 20, 1998 /s/ Blaine W. Scott Blaine
-----------------------------
W. Scott, Director
51
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<PAGE>
MADISON BANK, STATE OF INCORPORATION: PENNSYLVANIA
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0000846809
<NAME> MADISON BANCSHARES
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> DEC-31-1997 SEP-30-1997 JUN-30-1997 MAR-31-1997
<EXCHANGE-RATE> 1 1 1 1
<CASH> 3,945 6,016 6,371 5,586
<INT-BEARING-DEPOSITS> 0 0 0 0
<FED-FUNDS-SOLD> 19,500 13,000 3,460 2,840
<TRADING-ASSETS> 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 3,656 3,274 2,963 3,502
<INVESTMENTS-CARRYING> 1,605 2,106 2,107 2,178
<INVESTMENTS-MARKET> 1,617 2,116 2,110 2,092
<LOANS> 101,244 101,083 98,079 98,560
<ALLOWANCE> 937 982 955 965
<TOTAL-ASSETS> 133,507 126,922 114,185 109,638
<DEPOSITS> 114,832 108,440 95,485 90,636
<SHORT-TERM> 9,000 9,000 9,400 10,000
<LIABILITIES-OTHER> 936 946 995 869
<LONG-TERM> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 1,253 1,044 1,044 1,044
<OTHER-SE> 0 7,492 7,261 7,089
<TOTAL-LIABILITIES-AND-EQUITY> 133,507 126,922 114,185 109,638
<INTEREST-LOAN> 9,139 6,730 4,393 2,156
<INTEREST-INVEST> 290 225 155 82
<INTEREST-OTHER> 196 86 53 24
<INTEREST-TOTAL> 9,625 7,041 4,601 2,262
<INTEREST-DEPOSIT> 3,992 2,814 1,816 885
<INTEREST-EXPENSE> 4,391 3,167 2,073 1,010
<INTEREST-INCOME-NET> 5,234 3,874 2,528 1,252
<LOAN-LOSSES> 360 270 180 90
<SECURITIES-GAINS> 0 0 0 0
<EXPENSE-OTHER> 4,452 3,295 2,189 1,068
<INCOME-PRETAX> 1,173 853 505 249
<INCOME-PRE-EXTRAORDINARY> 1,173 853 505 249
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 756 553 327 163
<EPS-PRIMARY> .60 .53 .31 .16
<EPS-DILUTED> .56 .48 .24 .16
<YIELD-ACTUAL> 9.07 4.47 4.05 0
<LOANS-NON> 892 1,037 1,031 934
<LOANS-PAST> 779 1,337 702 247
<LOANS-TROUBLED> 0 274 275 276
<LOANS-PROBLEM> 1,571 2,648 2,517 1,967
<ALLOWANCE-OPEN> 875 875 875 875
<CHARGE-OFFS> 299 163 100 0
<RECOVERIES> 1 0 0 0
<ALLOWANCE-CLOSE> 937 982 955 965
<ALLOWANCE-DOMESTIC> 937 982 955 965
<ALLOWANCE-FOREIGN> 0 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 DEC-31-1995 JAN-01-1996
<PERIOD-END> DEC-31-1996 SEP-30-1996 JUN-30-1996 MAR-31-1996
<CASH> 4,362 7,098 4,082 4,702,550
<INT-BEARING-DEPOSITS> 0 0 62,849 0
<FED-FUNDS-SOLD> 925 0 3,670 3,100,000
<TRADING-ASSETS> 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 3,585 4,566 4,720 3,678,000
<INVESTMENTS-CARRYING> 2,108 2,109 2,610 3,110,000
<INVESTMENTS-MARKET> 2,097 2,078 2,560 0
<LOANS> 91,659 82,849 78,325 75,874,000
<ALLOWANCE> 875 837 766 841,000
<TOTAL-ASSETS> 105,971 100,066 95,625 91,725,000
<DEPOSITS> 87,200 81,142 77,180 83,259,000
<SHORT-TERM> 10,000 10,210 10,000 0
<LIABILITIES-OTHER> 797 895 764 929,000
<LONG-TERM> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 971 971 971 964,759
<OTHER-SE> 0 0 0 0
<TOTAL-LIABILITIES-AND-EQUITY> 105,971 100,086 95,625 7,537,000
<INTEREST-LOAN> 7,654 5,569 3,660 1,805,000
<INTEREST-INVEST> 371 277 176 93,000
<INTEREST-OTHER> 89 65 61 39,000
<INTEREST-TOTAL> 8,144 5,911 3,896 1,937,000
<INTEREST-DEPOSIT> 3,166 2,341 1,610 839,000
<INTEREST-EXPENSE> 3,446 2,504 1,641 839,000
<INTEREST-INCOME-NET> 4,667 3,406 2,225 1,098,000
<LOAN-LOSSES> 387 297 218 90,000
<SECURITIES-GAINS> 0 0 29 16,000
<EXPENSE-OTHER> 3,909 2,808 1,841 871,000
<INCOME-PRETAX> 859 644 408 238,000
<INCOME-PRE-EXTRAORDINARY> 859 0 0 238,000
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 541 416 261 159,000
<EPS-PRIMARY> 0.52 .43 .27 0.16
<EPS-DILUTED> 0.52 .43 .27 0.16
<YIELD-ACTUAL> 9.09 9.08 8.59 4.18
<LOANS-NON> 735 773 530 359,000
<LOANS-PAST> 252 51 29 292,000
<LOANS-TROUBLED> 277 0 0 0
<LOANS-PROBLEM> 1,037 1,507 720 0
<ALLOWANCE-OPEN> 750 750 841 750,000
<CHARGE-OFFS> 334 283 204 0
<RECOVERIES> 72 72 2 0
<ALLOWANCE-CLOSE> 875 837 766 841,000
<ALLOWANCE-DOMESTIC> 875 837 766 841,000
<ALLOWANCE-FOREIGN> 0 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0 778,000
</TABLE>
