<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, 1998.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (no fee required)
For the transition period from ____________________ to __________________.
Commission file number 0-17539
MADISON BANCSHARES GROUP, LTD.
----------------------------------------------
(Name of Small Business Issuer In Its Charter)
Pennsylvania 23-25132079
- ------------ -----------
(State or Other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1767 Sentry Parkway West, Blue Bell, PA 19422
- --------------------------------------- -----
(Address of Principal Executive Offices) (ZipCode)
Issuer's telephone number, including area code: (215) 641-1111
Securities registered pursuant to Section 12(b) of the Act: None.
Title of Each Class Name of Each Exchange on Which Registered
- ------------------------------ ---------------------------------------
- ------------------------------ ---------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value per share
- --------------------------------------------------------------------------------
(Title of Class)
- --------------------------------------------------------------------------------
(Title of Class)
<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
preceding 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. $12,586,029
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. $10,150,433 based on the average of the bid and asked
on the National Association of Securities Dealers Automated Quotation System on
March 26, 1999.*
State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest publication date. 1,562,018 as of March 26,
1999.
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 1999 Annual Meeting of Shareholders are incorporated by reference into
Part III hereof.
- ----------
* Excluded from such market value computation are the approximately 350,026
issued and outstanding shares beneficially owned by executive officers and
directors of Issuer and its subsidiary. Included in such computation are the
72,151 shares beneficially owned by First Union Bank, NA (constituting
approximately 4.6% of the issued and outstanding shares of the Issuer).
EXHIBIT INDEX APPEARS ON PAGE 49 IN SEQUENTIAL NUMBERING SYSTEM OF THIS FORM
10-KSB
2
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MADISON BANCSHARES GROUP, LTD.
Form 10-KSB
INDEX
PART 1 Page
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
3
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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 six branch
offices.
As of the date hereof, the Company and Madison Bank have a total of
82 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, 100 West Main Street, Century Plaza,
Suite 100, Lansdale, PA and 8000 Verree Road, Philadelphia, 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, the Lansdale office
in August, 1997 and the Northeast office in June, 1998. As of December 31,
1997 and 1998, the Bank held deposits totaling $114,838,976 and
$132,644,741, respectively, including deposits of the Company. As of the
same dates, the Bank had gross loans receivable of $132,664,741 and
$126,997,721 (inclusive of residential loans held for sale), respectively.
The majority of such loans were made for commercial purposes.
As of December 31, 1997 and 1998, the Company had total assets of
$133,506,813 and $147,925,863 and total shareholders' equity of $8,738,218
and $9,450,392, respectively. Investments amounted to $5,261,853 at year
end 1997, of which $3,656,446 were classified as available for sale and
the balance were classified as held to maturity and $3,316,193 at the end
of 1998, of which $1,713,700 were classified as available for sale and the
balance classified as held to maturity.
4
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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 recently opened its own Mortgage Department to better
service mortgage applications.
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
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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
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ITEM 2 -Description of Property
The Company leases approximately 13,381 total square feet on the
first floor and 3,355 total square feet of space on the second floor for
its mortgage department operations of the Madison Bank Building, 1767
Sentry Parkway West, Blue Bell, Pennsylvania, (the "Building"). Of the
13,381 square feet of space on the first floor, 3,381 square feet was
leased by the Company on February 1, 1996 and an additional 1,400 square
feet leased by the Company on January 21, 1997. 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
1998, the amount of such expenses was $34,272. The maximum allocable
portion of the Building's operating costs will be $35,988 for 1999 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 and increases to $29,575 through
February 1, 2000. The second floor space of 3,355 square feet was leased
at an annual rate of approximately $70,722 and increases to $75,634
through December 1, 2000.
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
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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 26, 1999, there were approximately 261 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:
1998
----
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- -------
High Bid 12-3/16 12-1/2 11 8-1/4
Low Bid 10-13/16 10-3/8 7 7
1997
----
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- -------
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
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, in October, 1997, a 20% stock dividend was declared,
resulting in the issuance of 208,710 additional shares of common stock,
and in May, 1998 a 20% stock dividend was declared, resulting in 259,040
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
8
<PAGE>
management or Board of Directors (c) statements of future economic
performance and (d) statements of assumptions underlying other statements
and statements about the Company or its business.
The Company's ability to predict projected results or to predict the
effect of certain events on the Company's operating results is inherently
uncertain. Therefore, the Company wishes to caution each reader of this
report to carefully consider certain factors, including competition for
deposits and loans; potential changes in interest rates; changes in
governmental policy and other factors discussed herein, because such
factors in some cases have affected and in the future (together with other
factors) could affect, the ability of the Company to achieve its
anticipated results and may cause actual results to differ materially from
those expressed herein.
The Bank commenced operations on August 16, 1989. The Company's
first full fiscal year of operations was 1990.
Capital Resources
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. In May, 1998, a 20% stock dividend
was declared, resulting in the issuance of 259,040 additional shares of
common stock being issued. Also, a total of 50,205 shares were exercised
in 1998 in conjunction with stock options. At December 31, 1998, the
common stock outstanding was 1,562,018 shares as compared to 1,252,773
shares at December 31, 1997. The book value per share of the Company's
common stock at December 31, 1998, 1997 and 1996 was $6.05, $5.59 and
$5.11, respectively, after giving retroactive effect to the issuance of
stock dividends.
9
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The chart below presents various capital ratios applicable to
state-chartered, Federal Reserve member banks and bank holding companies.
The requirements are compared to the Company's actual ratios at December
31, 1998, which exceeded the levels required to be adequately capitalized
under applicable Federal Deposit Insurance Corporations' regulations.
- --------------------------------------------------------------------------------
RISK WEIGHTED CATEGORY
----------------------
Risk Weighted Assets 0% 20% 50% 100% Total
-------------------------------------------------------------------------
Loans 49,926 75,487 125,413
Securities Available for Sale 176 1,538 1,714
Securities Held to Maturity 1,602 1,602
Federal Funds Sold 7,500 7,500
Cash and Due From Banks 7,406 388 7,794
Other Assets 3,903 3,903
-----------------------------------------
-------------------------------------------------------------------------
Category totals 7,582 11,028 49,926 79,390 147,926
-------------------------------------------------------------------------
Off balance-sheet items (risk
weighted) 182 7,047
-------------------------------------------------------------------------
Total risk-weighted assets 0 2,242 28,487 79,390 110,119
=========================================================================
Average Total Assets 129,507
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Capital Tier 1 Tier 2 Total
---------------------------------------------------------------------
Shareholders' equity (including 25% of
Trust Preferred Securities) 10,694 10,694
Allowance for loan losses 1,112 1,112
---------------------------------------------------------------------
Total Capital 10,694 1,112 11,806
=====================================================================
- --------------------------------------------------------------------------------
10
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Regulatory
Minimum Actual Actual
Ratio 12/31/98 12/31/98 12/31/97
----- -------- -------- --------
Qualifying Total Capital
to Risk Weighted Assets 8.0% 10.72% 9.98%
Tier 1 Capital to Risk Weighted
Assets 4.0% 9.71% 9.02%
Tier 1 Ratio to
Total Adjusted Average Assets 4.0% 8.26% 7.17%
The Company's capital-to-assets ratio decreased from 6.55% as of
December 31, 1997 to 6.39% at December 31, 1998. The year-to-year decrease
in the capital-to-assets ratio was attributable to the asset growth of the
Company during 1998. The Company's return on average equity for 1998 was
4.91% and for 1997 was 9.05%; and its return on average assets was .32%
for 1998 as compared to .67% for 1997. The decrease in the Company's
return on equity and return on assets from 1997 to 1998 was directly
attributable to decreased net income. (See "Management's Discussion and
Results of Operations.")
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, 1997 and 1998. 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
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<TABLE>
<CAPTION>
1998 1997
(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) $110,761 $ 10,507 9.49% $ 97,712 $ 9,139 9.35%
Other Investments 4,135 236 5.71 4,666 290 6.22
Federal Funds Sold 6,408 352 5.49 3,750 196 5.23
-------- -------- -------- --------
Total Interest-Earning Assets $121,304 $ 11,095 9.15 $106,128 $ 9,625 9.07
-------- ---- -------- ----
Non-Interest-Earning Assets 8,203 6,257
-------- --------
Total Assets $129,507 $112,385
======== ========
Liabilities & Shareholders' Equity:
Interest-bearing liabilities:
Demand Interest-Bearing $ 9,237 $ 189 2.05 $ 6,106 $ 127 2.08
Money Market & Savings 21,932 640 2.92 19,078 608 3.19
Other Time Deposits 69,010 3,919 5.68 56,437 3,257 5.77
Borrowed Funds 6,550 399 6.09
Preferred Trust 2,500 225 9.00
-------- -------- -------- --------
Total Interest-Bearing Liabilities 102,679 4,973 4.84 88,171 $ 4,391 4.98
-------- ---- -------- ----
Other Liabilities 18,132 15,901
-------- --------
Total Liabilities 120,811 104,072
Shareholders' Equity 8,696 8,313
-------- --------
Total Liabilities and Shareholders'
Equity $129,507 $112,385
======== ========
Net Interest Income/Rate Spread $ 6,122 4.31% $ 5,234 4.09%
======== ==== ======== ====
Net Interest Margin 5.05% 4.93%
==== ====
</TABLE>
The following table analyzes the rate/volume variances between the
Bank's interest-earning assets and interest-bearing liabilities for the
fiscal years 1998 compared to 1997 and 1997 compared to 1996. 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
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1998 vs. 1997 1997 vs. 1996
------------- -------------
(in Thousands)
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loan Portfolio (includes mortgages
held for sale) $ 1,240 $ 128 $ 1,368 $ 1,537 $ (57) $ 1,480
Other Investments (31) (23) (54) (108) 27 (81)
Federal Funds 147 9 156 114 (7) 107
------- ------- ------- ------- ------- -------
Total Interest Earning Assets 1,355 115 1,470 1,543 (37) 1,506
------- ------- ------- ------- ------- -------
Interest Expense:
Demand Interest - Bearing 64 (2) 62 49 (1) 48
Money Market & Savings 86 (54) 32 4 (8) (4)
Other Time Deposits 715 (53) 662 741 40 781
Borrowed Funds (399) (399) 66 48 114
Preferred Trust 225 225
------- ------- ------- ------- ------- -------
Total Interest Bearing Liabilities 691 (109) 582 860 79 939
------- ------- ------- ------- ------- -------
Net Change in Net Interest Income $ 604 $ 224 $ 888 $ 683 $ (116) $ 567
======= ======= ======= ======= ======= =======
</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
13
<PAGE>
positive gap position results in increased net interest income when rates
increase and the opposite when rates decline.
At December 31, 1998, the risk management review included an
"earnings at risk" analysis as well as a "risk sensitivity" analysis.
Potential monthly net revenue change indicated that in a static rate
environment, increased earnings would be approximately $19,007. If rates
fell 200 basis points, monthly revenues a year from now would increase
approximately $21,543 and a rise in rates by 200 basis points would
represent a monthly loss in revenues of approximately $16,579.
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, 1998 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
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<TABLE>
<CAPTION>
Interest Ratio Sensitivity Report
As of December 31, 1998
(Dollars in Thousands)
1-90 91-180 181-365 1-5 5 Years
days days days years and over Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest-Sensitive Assets
Federal Funds Sold $ 7,500 $ 0 $ 0 $ 0 $ 0 $ 7,500
Loans 15,225 10,046 11,810 47,980 40,352 125,413
Interest-Bearing Balances 0 0 0 0 0 0
Investment Securities Held
For Sale 0 0 1,010 0 704 1,714
Investment Securities Held
For Maturity 0 0 500 402 700 1,602
--------- --------- --------- --------- --------- ---------
Totals $ 22,725 $ 10,046 $ 13,320 $ 48,382 $ 41,756 $ 136,229
Cumulative Total $ 22,725 $ 32,771 $ 46,091 $ 94,473 $ 136,229 $ 136,229
Interest-Sensitive Liabilities
Demand-Interest-bearing $ 11,785 $ 0 $ 0 $ 0 $ 0 $ 11,785
Savings Accounts 11,089 0 0 0 0 11,089
Money Market Accounts 17,109 0 0 0 0 17,109
Time Deposits 24,816 14,856 20,948 7,152 1,416 69,188
Borrowed Funds 0 0 0 0 5,000 5,000
--------- --------- --------- --------- --------- ---------
Totals $ 64,799 $ 14,856 $ 20,948 $ 7,152 $ 6,416 $ 114,171
Cumulative Totals $ 64,799 $ 79,655 $ 100,603 $ 107,755 $ 114,171 $ 114,171
Gap $ (42,074) $ (4,810) $ (7,628) $ 41,230 $ 35,340 $ 22,058
Cumulative Gap $ (42,074) $ (46,884) $ (54,512) $ (13,282) $ 22,058 $ 22,058
Interest-sensitive assets/
Interest-sensitive liabilities
(cumulative) .35 .41 .46 .88 1.19 1.19
Cumulative Gap/total earning
assets (31%) (34%) (40%) (10%) 16% 16%
Total Earning Assets $136,229
</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 1998, the Bank's net interest spread was maintained at
approximately 4.63%, as compared to 4.09% in 1997.
Results of Operations
As of December 31, 1998, the Bank held deposits aggregating
$132,594,518, of which $23,423,200, or approximately 18%, were
non-interest-bearing deposits (exclusive of the $50,223 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 1,718 loan customers totaled approximately
$115,404,086, (exclusive of residential mortgage loans held for sale)
resulting in an average loan size of approximately $67,174.
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.
16
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
% of % of % of
Type of Account Balance Portfolio Balance Portfolio Balance Portfolio
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-Int. Bearing $ 23,423,200 18.00% $ 16,076,381 14.00% $ 14,660,464 17.00%
Interest-Bearing 11,785,117 9.00 8,164,080 7.00 4,564,916 5.00
Money Market 17,109,125 13.00 14,039,724 12.00 14,409,382 17.00
Savings 11,089,034 8.00 5,270,011 5.00 4,571,352 5.00
CDs over $100,000 31,052,033 23.00 32,244,281 28.00 23,344,356 23.00
CDs under $100,000 38,136,009 29.00 39,037,933 34.00 25,649,521 33.00
------------ ------ ------------ ------ ------------ ------
Total Deposits $132,594,518 100.00% $114,832,410 100.00% $ 87,199,991 100.00%
============ ====== ============ ====== ============ ======
</TABLE>
For the year ended December 31, 1998, the Company's total income was
$12,586,029 and its total expenses were $12,139,667, resulting in a net
profit for the year of $446,362. The decrease in net income for the year
ended December 31, 1998 was primarily due to an increase in operating
expenses due to branch expansion and the start up costs associated with
the Bank's mortgage department. 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 slight
increase in net income for the year ended December 31, 1997 as compared to
December 31, 1996 was primarily due to increased interest income on loans
due to increased loan volume. 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.
As of December 31, 1998, the Bank's allowance for loan losses
equaled approximately .96% of outstanding loans receivable, including
non-accrual loans. At 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 allowance equaled
approximately .95%. The chart below shows an analysis of the allowance for
loan losses for the years ended December 31, 1998, 1997 and 1996. The
overall reserve has increased slightly from .91% of outstanding loans at
December 31, 1997 to .96% of outstanding loans at December 31, 1998.
Management continues to believe that the reserve adequately reflects the
level of risk in the portfolio.
17
<PAGE>
<TABLE>
<CAPTION>
Analysis of the Bank's Allowances for Loan Losses
-------------------------------------------------
December 31,
------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period: $ 936,974 $ 875,438 $ 750,318
----------- ----------- -----------
Charge-offs:
Commercial (214,952) (295,581) (328,100)
Installment (61,675) (4,283) (6,261)
----------- ----------- -----------
Total (276,627) (299,864) (334,361)
Recoveries:
Commercial 9,740 1,400 71,981
Installment 1,730
----------- ----------- -----------
Net Charge-Offs (265,157) (298,464) (262,380)
----------- ----------- -----------
Additions charged to operations 440,000 360,000 387,500
----------- ----------- -----------
Balance at the end of period $ 1,111,817 $ 936,974 $ 875,438
=========== =========== ===========
Ratio of net charge-offs during
the period to average loans
outstanding during the period .24% .31% .41%
=== === ===
</TABLE>
As of December 31, 1998, the Bank had loans outstanding, totaling
$115,404,086, excluding residential mortgage loans held for sale.
The Bank manages asset quality through diversification in its loan
portfolio and adherence to its credit policy. Management strives to
identify loans experiencing difficulty early enough to correct the
problems, to recognize non-performing loans in a timely manner, to record
charge-offs promptly based on realistic assessments of current collateral
values and the borrower's ability to repay, and to maintain adequate
reserves to cover any inherent losses in the loan portfolio.
The provision for possible loan losses represents the charge against
earnings that is required to fund the allowance for possible loan losses.
The level of the allowance is determined by inherent risks within the
Bank's loan portfolio. Management's policy is to maintain the allowance
for loan losses at a level sufficient to absorb all estimated losses
inherent in the loan portfolio. The allowance for loan losses is increased
by the provision for loan losses and recoveries and is decreased by
charged-off loans.
Management is currently utilizing a blended general portfolio
allocation with segregated pools of loans and a specific loan-by-loan
allocation mirroring bank regulatory classifications. Each classified
credit is assigned a specific reserve allocation based upon the severity
of its classification and its specific characteristics (i.e., industry,
type of project, nature of collateral). General reserve
18
<PAGE>
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.
Additions to the Bank's provision for possible loan losses for the
period ended December 31, 1998, totaled $440,000. Loans charged off
against the reserve in 1998 amounted to $276,627 and recoveries were
$11,470, which resulted in net charged-off loans of $265,157. The
principal amount of non-accrual loans at December 31, 1998 was $1,088,946,
an increase of 22% over 1997. 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, 1997, totaled $360,000. Loans charged-off
against the reserve in 1997 amounted to $299,864. Recoveries amounted to
$1,400 which resulted in $298,464 in net charged-off loans. The principal
amount of nonaccrual loans at December 31, 1997 totaled $891,852. This is
an increase of $156,845 over year end 1996.
Additions to the Bank's provisions 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. Loans on non-accrual status as
of December 31, 1996 amounted to $735,007.
Other real estate owned at December 31, 1998 totaled $734,089 as
compared to $465,312 at December 31, 1997. This consists of two properties
acquired at sheriff's sale. One property in Bryn Mawr, Pennsylvania is
currently under agreement of sale for $580,000 and is scheduled for
settlement by April 15, 1999. The expected proceeds from the sale is more
than sufficient to cover the $485,420 balance in real estate accrual. The
second property is a commercial building in Upper Darby, Pennsylvania. The
property is currently listed for sale with a realtor and was appraised for
$300,000. Management continues to monitor and evaluate the Bank's exposure
on this property, which is carried at $248,669.
Interest expense of $4,973,136, represented 45% of gross interest
income in 1998. Interest expense increased 14% over 1997. This increased
expense was due to an increased average growth in interest-bearing
deposits to $102,679,000 in 1998 from $88,171,006 in 1997 even though the
average cost of funds decreased to 4.84% in 1998 from 4.98% in 1997.
Interest expense of $4,391,096 represented 46% of gross interest
income in 1997. Interest expense increased by 28% over 1996. The increase
in interest expense rose due to interest bearing liabilities increasing
from an average of $71,667,000 in 1996 to $88,171,000 in 1997, an average
increase of 23%.
Interest expense of $3,446,440 represented 42% of gross interest
income in 1996. The increase in interest expense was due to the 37% growth
in interest bearing deposits and a higher cost of funds due to increased
interest rates over 1995.
19
<PAGE>
Occupancy and equipment expenses totaled $1,169,651 for the year
ended December 31, 1998, as compared to $939,804 at December 31, 1997. The
25% 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 sixth branch opening and
the newly formed Mortgage Department in June of 1998 .
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 represents an increase in maintenance costs and equipment leases
reflective of the Bank's fifth branch opening in August, 1997.
Salary and employee benefits of $3,318,630 represented 52% of total
non-interest expenses, or 28% of total Bank expenses, at December 31,
1998. The increase in salary and employee benefits of $1,063,801 or 48%
over 1997 is reflective of hiring additional employees and increased
benefits expense (including group health insurance and company match of
the 401(k) Plan) related to the opening of the Mortgage Department and the
Bank's sixth branch.
Salary and employee benefits of $2,254,829 in 1997 represented 51%
of total non-interest expense, or 24% of total bank expenses as compared
to $1,629,752 in 1996. The increase in salary and employee benefits of
$625,077, or 38%, is attributable to the hiring of additional employees
for branch expansion and to manage the asset growth of the company.
Other operating expenses in 1998, exclusive of occupancy and
equipment and salary and employee benefits totaled $1,911,095 as compared
to $1,257,479 in 1997. The increase in these operating expenses was
primarily related to computer expense, supplies, telephone, postage, loans
expense, and outside service fees, for the opening of our sixth branch in
Philadelphia and our newly formed Mortgage Department in June of 1998.
Computer expenses increased from $253,196 to $288,378, a 14% increase over
1997. 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 $13,768 in 1997 to $22,773 in 1998. The Bank pays
premiums in accordance with the deposit size of its portfolio and its
insurance category rating. Legal expenses increased $64,682 or 129% from
1997. This was a result of the legal expenses related to the Bank setting
up a Mortgage Department and increased legal and collection services.
Business development expenses were $214,773 in 1998 as compared to
$176,770 in 1997. This 22% increase was a direct result of the Bank's
efforts to develop business and become increasingly visible in its branch
location communities. The decrease in advertising expense from $56,352 in
1997 to $43,846 in 1998 was a result of more monies being allocated to
business development rather than advertising.
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
20
<PAGE>
increasingly visible in it branch locations 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.
Other operating expenses in 1996, exclusive of occupancy and
equipment and salary and employee benefits 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
of 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.
Interest income on investment securities relates primarily to
interest on U.S. Government Obligations. Interest income of $142,652 for
the year ended December 31, 1998 decreased 23% from $185,263 at December
31, 1997. The decrease is a direct result of a change in investments from
government obligations to federal funds sold to provide liquid funds for
the mortgage activities. The average balance of government obligations
decreased from $4,666,000 in 1997 to $4,135,000 in 1998. Interest income
of $185,263 for the year ended December 31, 1997, decreased 38% from
$295,389 at December 31, 1996. 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, 1998, interest income on Federal Funds sold was
$352,432, as compared to $196,425 at December 31, 1997, an 80% 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, 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. The average balance of government obligations decreased from
$6,430,000 in 1996 to $4,666,000 in 1997. Interest income was $295,389 in
1996.
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, 1998,
1997 and 1996, interest income on other investments was $93,490, $104,511
and $75,840, 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 1996, 1997 or 1998.
Interest and fees on loans were $10,506,782 in 1998, 95% of gross
interest income as compared to $9,138,864, or 95% in 1997. The average
loan portfolio grew 14% while the Bank's yield increased
21
<PAGE>
from 9.35% in 1997 to 9.49% in 1998. 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. 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.
An analysis of the Bank's loan portfolio is presented in Note 4,
"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 written
using two digits rather than four to define the applicable year. Any of
the Company's computer programs, systems or devices that have time
sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000.
The Company has undertaken a comprehensive upgrade of its computer
systems for Year 2000 compliance. This included the completion of a
conversion of the Company's computer system with a Year 2000 compliant
core processing system, during 1998, and the replacement of personal
computers with models which will role over (or will be manually reset) to
the Year 2000 date change. These upgrades were the main result of the
completion of the Company's awareness, assessment and renovation phases of
Year 2000 planning. The validation and implementation phases are in
process. Testing of mission critical systems is currently underway and is
expected to be completed by the second quarter of 1999 in accordance with
federal guidelines. Implementation of compliant systems will take place
during 1999, based on the results of system validation. Contingency plans,
should they become necessary, will also occur later in 1999.
The total costs of the Year 2000 issue has not been and is not
expected to be material to the Company's financial position or results of
operations in any given year. These costs and the date on which the
Company plans to complete the Year 2000 testing processes are based on
Management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of
certain resources, third party modification plans and other factors.
However, there can be no guarantee that these estimates will be achieved
and actual results could differ from those plans. Based upon current
information, the Company believes that its Year 2000 expenditures for 1999
will be approximately $23,500.
22
<PAGE>
The risks associated with the Year 2000 issue include system failure
or miscalculations causing disruptions of operations including, among
other things, an inability to process transactions and engage in normal
business activities. Although the Company is actively working towards
compliance, certain contingency plans have been established to mitigate
the impact should the aforementioned risks be realized. Contingency plans
have been established for mission critical systems, which will be
triggered by established dates during 1999, to include core processing of
transactions and the Company is currently working on a business resumption
plan. This plan, to be completed by the third quarter of 1999, should
enable the Company to temporarily resume operations in the event an
unforeseen problem occurs and mission critical systems do not function
properly.
23
<PAGE>
ITEM 7 - Financial Statements and Supplementary Data
Independent Auditors' Report dated March 5, 1999.
Consolidated Statements of Financial Condition as of December 31,
1998 and 1997.
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996.
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for years ended December 31,
1998, 1997 and 1996.
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>
Deloitte &
Touche
- ----------
[LOGO]
--------------------------------------------------
Madison Bancshares
Group, Ltd.
and Subsidiary
Consolidated Financial Statements as of
December 31, 1998 and 1997 and for
Each of the Three Years in the Period
Ended December 31, 1998, and
Independent Auditors' Report
- ---------------
Deloitte Touche
Tohmatsu
- ---------------
25
<PAGE>
[Letterhead Deloitte & Touche]
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, 1998 and 1997, and the related consolidated statements of income, changes in
shareholders' equity and comprehensive income and cash flows for each of the
three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 5, 1999
26
<PAGE>
MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and amounts due from banks $ 7,793,484 $ 3,944,986
Federal funds sold 7,500,000 19,500,000
------------ ------------
Total cash and cash equivalents 15,293,484 23,444,986
INVESTMENT SECURITIES:
Held to maturity (fair value - 1998, $1,613,597; 1997, $1,617,371) 1,602,493 1,605,407
Available for sale (amortized cost - 1998, $1,000,046; 1997, $2,999,336) 1,010,000 3,000,246
Federal Home Loan Bank Stock 527,300 479,800
Federal Reserve Bank Stock 176,400 176,400
LOANS (Net of allowance for loan losses - 1998, $1,111,817; 1997, $936,974) 113,819,315 102,180,556
MORTGAGE LOANS HELD FOR SALE 11,593,638 290,900
REAL ESTATE OWNED 734,089 465,312
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 1,583,473 916,484
ACCRUED INTEREST RECEIVABLE 1,076,682 706,448
OTHER ASSETS 508,989 240,274
------------ ------------
TOTAL $ 147,925,863 $ 133,506,813
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing demand deposits $ 23,423,200 $ 16,076,381
Interest-bearing demand deposits 11,785,117 8,164,080
Savings deposits 11,089,034 5,270,011
Money market deposits 17,109,125 14,039,724
Time deposits 69,188,042 71,282,214
------------ ------------
Total deposits 132,594,518 114,832,410
BORROWED FUNDS 9,000,000
GUARANTEED PREFERRED BENEFICIAL INTEREST IN SUBORDINATED DEBT 5,000,000
ACCRUED INTEREST PAYABLE 804,222 838,513
ACCRUED EXPENSES AND OTHER LIABILITIES 76,731 97,672
------------ ------------
Total liabilities 138,475,471 124,768,595
------------ ------------
COMMITMENTS
SHAREHOLDERS' EQUITY:
Preferred stock, $5 par value - authorized, 5,000,000 shares; issued and
outstanding, 0 shares
Common stock, $1 par value - authorized, 20,000,000
shares; issued and outstanding, 1998, 1,562,018; 1997, 1,252,773 shares 1,562,018 1,252,773
Capital surplus 7,563,433 7,612,835
Accumulated earnings (deficit) 318,371 (127,991
Accumulated other comprehensive income 6,570 601
------------ ------------
Total shareholders' equity 9,450,392 8,738,218
------------ ------------
TOTAL $ 147,925,863 $ 133,506,813
============ ============
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $10,506,782 $ 9,138,864 $ 7,653,898
Interest and dividends on investment securities:
U.S. Government obligations 142,652 185,263 295,389
Other securities 93,490 104,511 75,840
Interest on temporary investments 352,432 196,425 88,664
---------- --------- ---------
Total interest income 11,095,356 9,625,063 8,113,791
---------- --------- ---------
INTEREST EXPENSE:
Interest on:
Demand deposits 188,770 127,143 78,738
Savings and money market deposits 637,589 607,838 611,151
Time deposits 3,918,856 3,256,833 2,475,714
Guaranteed preferred beneficial interest in subordinated debt 225,000
Other interest 2,921 399,282 280,837
---------- --------- ---------
Total interest expense 4,973,136 4,391,096 3,446,440
---------- --------- ---------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 6,122,220 5,233,967 4,667,351
PROVISION FOR LOAN LOSSES 440,000 360,000 387,500
---------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,682,220 4,873,967 4,279,851
---------- --------- ---------
OTHER NONINTEREST INCOME:
Service charges on deposit accounts 719,541 573,493 374,897
Gain on the sale of mortgage loans 599,065 83,339 59,002
Gain on sale of investments 575
Other 172,067 94,029 55,054
---------- --------- ---------
Total noninterest income 1,490,673 751,436 488,953
---------- --------- ---------
OTHER NONINTEREST EXPENSES:
Salaries and employee benefits 3,318,630 2,254,829 1,629,752
Occupancy 842,264 715,145 556,977
Equipment 327,387 224,659 200,505
Computer processing 288,378 253,196 210,688
Deposit insurance 22,773 13,768 1,500
Legal 115,013 50,331 79,380
Professional fees 84,775 51,166 60,585
Business development 214,773 176,770 124,637
Office and stationery supplies 167,244 132,818 121,628
Advertising 43,846 56,352 82,009
Director's fees 154,975 107,025 115,325
Proxy related expense 147,401
Amortization expense 21,050
Other operating 798,268 416,053 578,955
----------- ----------- -----------
Total other noninterest expenses 6,399,376 4,452,112 3,909,342
----------- ----------- -----------
INCOME BEFORE TAXES 773,517 1,173,291 859,462
PROVISION FOR INCOME TAXES 327,155 416,813 318,875
----------- ----------- -----------
NET INCOME $ 446,362 $ 756,478 $ 540,587
=========== =========== ===========
BASIC EARNINGS PER SHARE $ 0.29 $ 0.50 $ 0.35
=========== =========== ===========
DILUTED EARNINGS PER SHARE $ 0.27 $ 0.47 $ 0.35
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
28
<PAGE>
MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Other
Accumulated Comprehensive
Common Capital Earnings Income
Stock Surplus (Deficit) (Loss) Total
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ 897,574 $6,709,506 $ (212,606) $ (1,759) $7,392,715
Exercise of stock options and stock warrants 6,601 39,477 46,078
Issuance of 7 1/2% stock dividend 67,185 436,703 (503,888)
Comprehensive income:
Net income 540,587 540,587
Net change in unrealized loss on securities
available for sale net of taxes of ($2,778) (5,160) (5,160)
Comprehensive income -- -- -- -- --
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1996 971,360 7,185,686 (175,907) (6,919) 7,974,220
Issuance of 7 1/2% stock dividend 72,703 635,859 (708,562)
Issuance of 20% stock dividend 208,710 (208,710)
Comprehensive income:
Net income 756,478 756,478
Net change in unrealized loss on securities
available for sale net of taxes of ($4,049) 7,520 7,520
Comprehensive income
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1997 1,252,773 7,612,835 (127,991) 601 8,738,218
Exercise of stock options and stock warrants 50,205 209,638 259,843
Issuance of 20% stock dividend 259,040 (259,040)
Comprehensive income:
Net income 446,362 446,362
Net change in unrealized gain on securities
available for sale net of taxes of ($3,214) 5,969 5,969
Comprehensive income
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1998 $1,562,018 $7,563,433 $ 318,371 $ 6,570 $9,450,392
========== ========== ========== ========== ==========
<CAPTION>
Comprehensive
Income
<S> <C> <C>
BALANCE, JANUARY 1, 1996
Exercise of stock options and stock warrants
Issuance of 7 1/2% stock dividend
Comprehensive income:
Net income $ 540,587
Net change in unrealized loss on securities
available for sale net of taxes of ($2,778) (5,160)
----------
Comprehensive income $ 535,427
==========
BALANCE, DECEMBER 31, 1996
Issuance of 7 1/2% stock dividend
Issuance of 20% stock dividend
Comprehensive income:
Net income $ 756,478
Net change in unrealized loss on securities
available for sale net of taxes of ($4,049) 7,520
----------
Comprehensive income $ 763,998
==========
BALANCE, DECEMBER 31, 1997
Exercise of stock options and stock warrants
Issuance of 20% stock dividend
Comprehensive income:
Net income $ 446,362
Net change in unrealized gain on securities
available for sale net of taxes of ($3,214) 5,969
----------
Comprehensive income $ 452,331
==========
BALANCE, DECEMBER 31, 1998
</TABLE>
See notes to consolidated financial statements
29
<PAGE>
MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 446,362 $ 756,478 $ 540,587
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation on equipment 245,048 153,271 144,701
Provision for loan losses 440,000 360,000 387,500
Net amortization of bond premium/discount 2,204 (1,913) 1,789
Gain on sale of mortgage loans held for sale (599,065) (83,339) (59,002)
Gain on sale of investments (575)
Originations of loans held for sale (41,628,024) (10,474,740) (15,684,054)
Proceeds from sale of loans 30,924,351 12,402,193 14,013,974
Changes in assets and liabilities which provided (used) cash:
Accrued interest receivable (370,234) 401,296 (37,477)
Other assets (271,790) (373,621) (146,611)
Accrued interest payable (34,291) 133,806 47,812
Accrued expenses and other liabilities (20,942) 5,715 (215,511)
Deferred loan fees 129,976 80,497 24,880
----------- ----------- -----------
Net cash provided by (used in) operating activities (10,736,405) 3,359,068 (981,412)
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchase of investment securities available for sale (2,499,308) (1,647,031)
Purchase of Federal Home Loan Bank Stock (47,500)
Proceeds from maturities of investment securities held to maturity 500,000 2,100,000
Proceeds from sale of investment securities available for sale 998,750
Proceeds from maturities of investment securities available for sale 2,000,000 1,446,200 1,000,000
Loans purchased and originated, net of principal repayments (12,457,404) (11,864,109) (19,821,593)
Cost capitalized for real estate owned (20,108)
Additions to furniture, equipment and leasehold improvements (912,037) (484,991) (232,189)
Proceeds on sale of real estate owned 50,000 40,731
----------- ----------- -----------
Net cash used in investing activities (11,437,049) (11,853,458) (18,560,082)
----------- ----------- -----------
FINANCING ACTIVITIES:
Net increase in demand, savings and time deposits 17,762,109 27,632,419 4,329,371
Exercise of stock warrants 250,845 26,895
Exercise of stock options 8,998 19,183
Proceeds from issuance of capital securities 5,000,000
Advances of borrowed funds 9,000,000 10,000,000
Repayments of borrowed funds (9,000,000) (10,000,000)
----------- ----------- -----------
Net cash provided by financing activities 14,021,952 26,632,419 14,375,449
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (8,151,502) 18,138,029 (5,166,045)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 23,444,986 5,306,957 10,473,002
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $15,293,484 $23,444,986 $ 5,306,957
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 4,503,465 $ 3,858,282 $ 3,398,628
=========== =========== ===========
Income taxes $ 357,000 $ 363,663 $ 569,956
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
Issuance of 20% stock dividend in 1998,
7.5% and 20% stock dividend in 1997
and 7.5% stock dividend in 1996:
Common stock $ 259,040 $ 281,413 $ 67,185
=========== =========== ===========
Capital surplus $ (259,040) $ 427,149 $ 436,703
=========== =========== ===========
Accumulated deficit $ (708,562) $ (503,888)
=========== ===========
Transfers from loans to real estate owned $ 248,669
===========
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
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 (the "Commonwealth") 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, Lansdale and
its sixth branch location in Northeast Philadelphia opened which was in
1998. 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 $773,342 and $832,167 at
December 31, 1998 and 1997, 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.
o Securities Available for Sale - Securities available for sale,
carried at approximate 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.
31
<PAGE>
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 two properties acquired
by foreclosure. These assets are 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.
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. Buildings are depreciated over 40
years. 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.
32
<PAGE>
Earnings Per Share - 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
dilutive securities. The average common shares outstanding have been
retroactively restated to reflect the effect of the 20% stock dividend
issued in 1998, the 7.5% and 20% stock dividends issued in 1997 and the
7.5% stock dividend issued in 1996. The calculation of the weighted
average shares, after giving effect to the stock split, was as follows:
1998 1997 1996
Average common shares outstanding 1,540,453 1,505,622 1,513,117
Increase in shares due to
options and warrants -
diluted basis 88,877 104,302 --
--------- --------- ---------
Adjusted shares outstanding - diluted 1,629,330 1,609,924 1,513,117
========= ========= =========
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.
Comprehensive Income - 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 shareholders' equity.
Accounting Principles Issued and Not Yet Adopted - In June 1998, SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, was
issued. This statement requires an entity to recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. The accounting for changes in the
fair value of a derivative depends on the intended use of the derivative
and the resulting designation. This statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999, and will not be
applied retroactively to financial statements of prior periods. The impact
of this statement will depend on the extent of derivatives and embedded
derivatives at the date this statement is adopted.
Reclassifications - Certain items in the 1996 and 1997 consolidated
financial statements have been reclassified to conform with the
presentation in the 1998 consolidated financial statements.
33
<PAGE>
3. INVESTMENT SECURITIES
A summary of investment securities and their expected maturities, as well
as estimated fair values at December 31, 1998 and 1997 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, 1998:
Debt securities:
U.S. Government and Federal Agencies $ 500,000 $ 7,031 $ $ 507,031
Municipal and State Government bonds 1,102,493 4,073# 1,106,566
---------- ---------- ------------- ----------
Total $1,602,493 $ 11,104 $ $1,613,597
========== ========== ============= ==========
Securities available for sale:
December 31, 1998:
Debt securities - U.S. Government and Federal Agencies $1,000,046 $ 9,954 $ $1,010,000
---------- ---------- ------------- ----------
Total $1,000,046 $ 9,954 $ $1,010,000
========== ========== ============= ==========
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
---------- ---------- ------------- ----------
Total $2,999,336 $ 910 $ $3,000,246
========== ========== ============= ==========
</TABLE>
The scheduled maturities of debt securities to be held to maturity and
debt securities available for sale at December 31, 1998 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 in less than 1 year $ 500,000 $ 507,031 $1,000,046 $1,010,000
Due from 1 to 5 years 402,225 403,040
Due from 5 to 10 years 700,268 703,526
---------- ---------- ---------- ----------
Total $1,602,493 $1,613,597 $1,000,046 $1,010,000
========== ========== ========== ==========
</TABLE>
Gross proceeds from the sale of investment securities available for sale in 1997
totaled $998,750, resulting in a gross gain of $575. There were no sales of
investment securities in 1998 or 1996.
34
<PAGE>
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans outstanding are summarized as follows:
December 31,
------------------------------
1998 1997
Real estate mortgage loans $ 33,743,039 $ 40,594,799
Commercial loans 72,425,657 52,722,906
Consumer loans 9,235,390 10,055,470
------------ ------------
Total 115,404,086 103,373,175
Less:
Allowance for loan losses (1,111,817) (936,974)
Deferred origination fees, net (472,954) (255,645)
------------ ------------
$ 113,819,315 $ 102,180,556
============ ============
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, 1998, commercial loans have maturities ranging from six
months to five years. Further, these loans are granted at both fixed and
adjustable rates. Fixed rates range from 5.75% to 12% with adjustable
rates ranging from the Bank's prime rate to 3% in excess of prime.
The composition of fixed and adjustable rate loans as of December 31, 1998
was as follows:
Fixed Rate
- --------------------------------------------------------------------------------
Term to Maturity Book Value
1 month - 1 year $ 3,001,477
1 year - 3 years 22,897,087
3 years - 5 years 22,785,536
5 years - 30 years 27,620,284
-----------
$76,304,384
===========
Adjustable Rate
- -----------------------------------------------------------------------------
Term to Rate
Adjustment Book Value
Less than 1 month $ 3,284,243
1 month to 1 year 18,122,530
1 year - 3 years 14,458,791
3 years - 30 years 3,234,138
-----------
$39,099,702
===========
35
<PAGE>
An analysis of the activity in the allowance for loan losses is as follows:
Year Ended December 31,
-----------------------------------------
1998 1997 1996
Balance, beginning of year $ 936,974 $ 875,438 $ 750,318
---------- ---------- ----------
Provision charged to operations 440,000 360,000 387,500
---------- ---------- ----------
Loans charged off:
Commercial loans (214,952) (295,581) (328,100)
Consumer loans (61,675) (4,283) (6,261)
---------- ---------- ----------
(276,627) (299,864) (334,361)
---------- ---------- ----------
Recoveries - commercial loans 11,470 1,400 71,981
---------- ---------- ----------
Balance, end of year $1,111,817 $ 936,974 $ 875,438
========== ========== ==========
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, 1998 and 1997, 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:
The following table summarizes impaired loan information.
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
<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 2,142,265 1,571,209
----------- ------------
Total $ 2,142,265 $1,571,209
=========== ============
<CAPTION>
Year Ended
December 31,
------------------------------
1998 1997
<S> <C> <C>
Average impaired loans $1,842,643 $1,571,209
Interest income recognized on impaired loans 78,724 71,966
Cash basis interest income recognized on impaired loans 46,353 32,382
</TABLE>
At December 31, 1998, all of the Bank's nonaccrual loans were considered
to be impaired loans.
36
<PAGE>
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, 1998 and 1997
totaled $1,088,946 and $891,852, respectively. Additional interest income
that would have been recorded in 1998 and 1997 under the original terms of
nonaccrual loans totaled approximately $92,000 and $81,000, respectively.
Accruing loans which are contractually past due 90 days or more totaled
$2,321,101 and $778,825 at December 31, 1998 and 1997, respectively.
Interest due on these loans totaled $221,608 and $51,748 at December 31,
1998 and 1997, respectively.
5. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
A summary of furniture, equipment and leasehold improvements is as
follows:
December 31,
-----------------------------
1998 1997
Building and land $ 678,236 $ 262,765
Furniture and equipment 1,515,903 1,026,406
Leasehold improvements 368,022 360,954
---------- ----------
Total 2,562,161 1,650,125
Accumulated depreciation and amortization (978,688) (733,641)
---------- ----------
$1,583,473 $ 916,484
========== ==========
6. DEPOSITS
Interest-bearing deposits have stated rates ranging from 2.05% to 5.68%
with a weighted average cost on all deposits of 4.74% at December 31, 1998
and from 2.15% to 5.75% with a weighted average cost on all deposits of
5.16% at December 31, 1997.
Time deposit accounts outstanding at December 31, 1998 and 1997 mature as
follows:
Year Ended December 31,
-------------------------------
1998 1997
Three months or less $24,816,936 $20,795,591
Three to twelve months 35,803,925 31,657,409
Over one year 8,567,181 18,829,214
----------- -----------
$69,188,042 $71,282,214
=========== ===========
37
<PAGE>
The aggregate amount of certificates of deposit in denominations of
$100,000 or more at December 31, 1998 and 1997 was $31,052,033 and
$34,113,040, respectively. Interest expense attributable to certificates
of deposit in denominations of $100,000 or more for the years ended
December 31, 1998, 1997 and 1996 amounted to $1,593,915, $1,355,577, and
$784,646, respectively. These certificates and their remaining maturities
are as follows:
December 31,
1998
Three months or less $14,582,349
Three through twelve months 12,721,928
Over 12 months 3,747,756
-----------
$31,052,033
===========
7. OTHER BORROWED MONEY
Other borrowed money at December 31, 1997 consisted of a $9,000,000 FHLB
repurchase agreement. The borrowing had an interest rate of 6.75% and
matured in January 1998.
8. GUARANTEED PREFERRED BENEFICIAL INTEREST IN SUBORDINATED DEBT
On June 26, 1998, Madison Capital Trust I (the "Trust"), a statutory
business trust created under Delaware law that is a subsidiary of the
Company, issued $5,000,000, 9.00% Capital Securities ("Capital
Securities") with a stated value and liquidation preference of $1,000 per
share. The Trust's obligations under the Capital Securities issued are
fully and unconditionally guaranteed by the Company. The proceeds from the
sale of the Capital Securities of the Trust were utilized by the Trust to
invest in $5,000,000, 9.00% Junior Subordinated Debentures (the
"Debentures") of the Company. The Debentures are unsecured and rank
subordinate and junior in right of payment to all indebtedness,
liabilities and obligations of the Company. The Debentures represent the
sole assets of the Trust. Interest on the Capital Securities is cumulative
and payable semi-annually in arrears. The Company has the right to
optionally redeem the Debentures prior to the maturity date of June 30,
2028, on or after June 30, 2003, at 100% of the stated liquidation amount,
plus accrued and unpaid distributions, if any, to the redemption date.
Under the occurrence of certain events, the Company may redeem in whole,
but not in part, the Debentures prior to June 30, 2003. Proceeds from any
redemption of the Debentures would cause a mandatory redemption of the
Capital Securities having an aggregate liquidation amount equal to the
principal amount of the Debentures redeemed.
The Trust is a wholly owned subsidiary of the Company, has no independent
operations and issued securities that contained the full and unconditional
guarantee of its parent, the Company.
38
<PAGE>
9. 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
-----------------------------------------------------------------------------------------
1998 1997 1996
Amount Percentage Amount Percentage Amount Percentage
<S> <C> <C> <C> <C> <C> <C>
Tax at federal tax rate $270,731 35.0% $410,652 35.0% $382,985 35.0%
Increase (decrease) resulting from:
Benefit of surtax exemptions (7,735) (1.0) (11,733) (1.0) (10,943) (1.0)
Meals and entertainment
disallowed 36,512 4.7 30,051 2.6 21,188 1.9
Tax exempt income (18,653) (2.4) (18,355) (1.6) (18,331) (1.7)
Other 46,300 6.0 6,198 0.5 (56,024) (5.1)
------- ---- ------- ---- ------- ----
$327,155 42.3% $416,813 35.5% $318,875 29.1%
======= ==== ======= ==== ======= ====
</TABLE>
Items that give rise to significant portions of the Company's deferred tax
asset, calculated at 35%, are as follows:
December 31,
---------------------
1998 1997
Deferred tax assets:
Allowance for loan losses $ 242,381 $ 179,252
Deferred fees 7,133 8,567
Other 68,343 37,793
Unrealized gain on securities available for sale 2,234 --
--------- ---------
Subtotal 320,091 225,612
--------- ---------
Deferred tax liabilities -
Unrealized gains on securities available for sale -- (309)
--------- ---------
Subtotal -- (309)
--------- ---------
Net deferred tax asset $ 320,091 $ 225,303
========= =========
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, 1998, 1997
and 1996 includes the following:
1998 1997 1996
Current taxes $ 419,400 $ 481,821 $ 369,875
Deferred taxes (92,245) (65,008) (51,000)
--------- --------- ---------
Total $ 327,155 $ 416,813 $ 318,875
========= ========= =========
39
<PAGE>
10. 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 $911,954 and $1,076,000 and
unadvanced loan commitments of $13,074,237 and $12,330,000 at December 31,
1998 and 1997, respectively. The unadvanced loan commitments at December
31, 1998 and 1997 were primarily at variable rates. In addition, the Bank
had commitments to sell fixed rate residential mortgages of $11,593,638
and $290,900 at December 31, 1998 and 1997, 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 1998, 1997
and 1996 was $541,901, $456,489, and $384,501, respectively.
Future minimum lease payments under noncancelable leases are as follows:
Year Ending
December 31,
------------
1999 687,871
2000 714,917
2001 661,818
2002 295,328
2003 656,624
----------
Thereafter $3,288,177
==========
11. 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. 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 1996, 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 "1997 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 1997 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. The 1997 Plan replaced the 1989
Plan which was due to expire in 1999. A total of 774,633 shares of common
stock have been reserved for issuance pursuant to the 1997 Plan including
options which remained issuable under the 1989 Plan. The price at which
such options may be issued is determined by a special committee.
40
<PAGE>
At December 31, 1998, a total of 708,057 options were available for grant
under the 1997 Plan. The per share price of exercisable options at
December 31, 1998 reflects the adjusted exercise price resulting from
stock dividends.
Transactions during each of the last three years, adjusted for stock
dividends, are as follows:
Exercise Price Weighted
Per Share Average Exercise
Shares Price Price Per Share
Exercisable, January 1, 1996 58,262 $4.79 - $5.34 $ 5.64
Exercised (5,446) $5.13
------
Exercisable, December 31, 1996 52,816 $4.79 - $5.34 $ 5.24
Issued 8,698 $7.22
------
Exercisable, December 31, 1997 61,514 $4.79 - $7.22 $ 5.24
Issued 7,200 $10.40
Exercised (2,138) $4.94 - $5.13
------
Exercisable, December 31, 1998 66,576 $3.83 - $10.40 $ 4.94
======
At December 31, 1998, the options exercisable had a weighted average
remaining contractual life of 3.91 years.
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:
1998 1997
Net income: As reported $ 446,362 $ 756,478
Pro forma 412,695 699,465
Diluted earnings per share As reported $ 0.27 $ 0.47
Pro forma 0.25 0.43
Significant assumptions used to calculate the above fair value of the awards
are as follows:
1998 1997
Risk free interest rate of return 6.00% 6.00%
Expected option life 120 months 120 months
Expected dividends $0 $0
Expected volatility 35.00% 35.00%
41
<PAGE>
12. WARRANTS AUTHORIZED
In connection with the initial offering of the Company's common stock, the
Company's directors received warrants to purchase 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, 1998, warrants have an
exercise price of $4.27 per share. As of December 31, 1998, there were
84,412 warrants outstanding and 48,423 were exercised in 1998. Warrants
outstanding have been adjusted to reflect stock dividends.
13. 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, 1998, 1997 and 1996 were approximately $41,881, $20,313, and
$13,977 respectively.
14. SHAREHOLDERS' EQUITY
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.
On May 19, 1998, the Board of Directors declared a 20% stock dividend
payable to all shareholders of record on June 3, 1998. Per share
computations reflect the changes in the number of shares resulting from
these dividends.
15. 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:
December 31,
------------------------------------
1998 1997
Beginning of period $6,123,101 $5,929,059
Borrowings 2,414,893 816,369
Principal repayments (707,353) (622,327)
---------- ----------
End of period $7,830,641 $6,123,101
========== ==========
Certain directors of the Company are partners in an entity from which the
Bank leases office space (Note 10). Rental payments for the office space
were approximately $284,000, $263,000, and $256,000, for the years ended
December 31, 1998, 1997 and 1996, respectively. In the opinion of
management, all aspects of this transaction, including the lease and
amendments thereto, have been
42
<PAGE>
negotiated on an arms-length basis and the resultant terms are no less
favorable than those that could be obtained from third parties.
16. 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>
1998 1997
--------------------------- -------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 15,293 $ 15,293 $ 23,445 $ 23,445
Investment securities held to maturity 1,602 1,614 1,605 1,617
Investment securities available for sale 1,010 1,010 3,000 3,000
Federal Home Loan Bank Stock 527 527 480 480
Federal Reserve Bank Stock 176 176 176 176
Loans, net 113,819 113,957 102,181 104,766
Mortgage loans held for sale 11,594 11,594 291 291
Liabilities:
Deposits:
Noninterest-bearing deposits 23,423 23,423 16,076 16,076
Interest-bearing deposits 11,785 11,785 8,164 8,164
Savings deposits 11,089 11,089 5,270 5,270
Money market deposits 17,109 17,109 14,040 14,040
Time deposits 69,188 69,238 71,282 71,464
Borrowed funds -- -- 9,000 9,000
Guaranteed preferred beneficial
interest in subordinated debt 5,000 5,000 -- --
</TABLE>
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.
Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) Stock
Although FHLB and FRB stock is an equity interest in an FHLB or FRB, it is
carried at cost because it does not have a readily determinable fair value
as its ownership is restricted and it lacks a market. The estimated fair
value approximates the carrying amount.
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.
43
<PAGE>
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.
Guaranteed Preferred Beneficial Interest in Subordinated Debt - The fair
value is based on a present value estimate using rates currently offered
for instruments of similar remaining maturity.
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, 1998 and 1997.
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.
17. 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, 1998, that the Company and the Bank meet all capital
adequacy requirements to which it is subject.
The most recent notification from the Commonwealth of Pennsylvania
Department of Banking (as of December 31, 1998) categorized the Bank as
adequately capitalized under the regulatory framework for prompt
corrective action. Due to the growth of assets, the capital ratios at
December 31, 1998 do not meet the requirement to be categorized as well
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.
44
<PAGE>
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, 1998:
Tier 1 capital (to risk-weighted
assets) $10,694 10.72% $ 4,405 4.00% $ 6,607 6.00%
Total capital (to risk-weighted
assets) 11,806 9.71 8,809 8.00 11,012 10.00
Tier 1 capital (to average assets) 10,694 8.26 5,180 4.00 6,475 5.00
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
</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 were
10.72%, 9.71%, and 8.26% at December 31, 1998, and 9.02%, 9.98% and 7.17%
at December 31, 1997, respectively.
45
<PAGE>
18. PARENT COMPANY FINANCIAL INFORMATION
The financial statements of Madison Bancshares Group, Ltd. (Parent Only)
as of December 31, 1998 and 1997 and for each of the three years in the
period ended December 31, 1998 are presented herein.
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
<S> <C> <C>
BALANCE SHEETS
ASSETS:
Cash $ 50,223 $ 6,566
Investment in subsidiary 14,168,134 8,731,152
Other assets 232,035 500
----------- -----------
TOTAL $14,450,392 $ 8,738,218
=========== ===========
LIABILITIES:
Accrued expenses and other liabilities $ 0 $ 0
Guaranteed preferred beneficial interest in subordinated debt 5,000,000 --
----------- -----------
Total liabilities 5,000,000 0
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock 1,562,018 1,252,773
Capital surplus 7,563,433 7,612,835
Accumulated earnings (deficit) 318,371 (127,991)
Accumulated other comprehensive income 6,570 601
----------- -----------
Total shareholders' equity 9,450,392 8,738,218
----------- -----------
TOTAL $14,450,392 $ 8,738,218
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS
Interest income $ 25,512 $ 274 $ 444
Operating expenses (335,163) (87,613) (235,224)
----------- ----------- -----------
Loss before equity in undistributed income from subsidiary (309,651) (87,339) (234,780)
Equity in undistributed income of subsidiary, Madison Bank 756,013 843,817 775,367
----------- ----------- -----------
NET INCOME $ 446,362 $ 756,478 $ 540,587
=========== =========== ===========
STATEMENTS OF CASH FLOWS
Operating Activities:
Net income $ 446,362 $ 756,478 $ 540,587
Adjustments to reconcile net income to net
cash used in operating activities:
Equity in undistributed income of subsidiary (756,013) (843,817) (775,367)
Decrease in accrued expenses and other liabilities (11,494) (15,506)
Decrease (increase) in receivable from subsidiary (4,675,000) 63,110 25,001
Increase in other assets (231,535)
----------- ----------- -----------
Net cash used in operating activities (5,216,186) (35,723) (225,285)
----------- ----------- -----------
Financing Activities:
Proceeds from issuance of debentures 5,000,000
Exercise of stock options 8,998 19,183
Exercise of stock warrants 250,845 26,895
Dividend from subsidiary 199,920
----------- -----------
Net cash provided by financing activities 5,259,843 245,998
----------- -----------
NET INCREASE (DECREASE) IN CASH 43,657 (35,723) 20,713
CASH, BEGINNING OF YEAR 6,566 42,289 21,576
----------- ----------- -----------
CASH, END OF YEAR $ 50,223 $ 6,566 $ 42,289
=========== =========== ===========
</TABLE>
46
<PAGE>
19. QUARTERLY DATA (UNAUDITED)
The unaudited quarterly results of operations for 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1998
----------------------------------------------------------------------------------------
March 31 June 30 September 30 December 31 Total
<S> <C> <C> <C> <C> <C>
Interest income $ 2,633,727 $ 2,596,151 $ 2,864,574 $ 3,000,904 $11,095,356
Interest expense 1,218,746 1,185,654 1,242,921 1,325,815 4,973,136
----------- ----------- ----------- ----------- -----------
Net interest income 1,414,981 1,410,497 1,621,653 1,675,089 6,122,220
Provision for loan losses 120,000 110,000 90,000 120,000 440,000
----------- ----------- ----------- ----------- -----------
Net 1,294,981 1,300,497 1,531,653 1,555,089 5,682,220
Other noninterest income 231,404 213,589 380,098 665,582 1,490,673
Other noninterest expenses 1,266,111 1,500,397 1,675,283 1,957,585 6,399,376
----------- ----------- ----------- ----------- -----------
Net income before income taxes 260,274 13,689 236,468 263,086 773,517
Provision for income taxes 72,244 26,000 75,302 153,609 327,155
----------- ----------- ----------- ----------- -----------
Net income $ 188,030 $ (12,311) $ 161,166 $ 109,477 $ 446,362
=========== =========== =========== =========== ===========
Per share data - Diluted
earnings per share $ 0.14 $ (0.01) $ 0.11 $ 0.07 $ 0.27
=========== =========== =========== =========== ===========
</TABLE>
<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 $ 0.13 $ 0.13 $ 0.18 $ 0.13 $ 0.47
========== ========== ========== ========== ==========
</TABLE>
Notes: 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 1999 annual meeting of
Shareholders.
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 1999 annual meeting of the
shareholders.
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 1999 annual meeting of the
shareholders.
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 1999 annual meeting of the
shareholders.
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)
Page Number in
Exhibit Sequential
Number Description Numbering System
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
10(c) Amended and Restated Declaration of Trust of Madison Capital
Trust I dated July 13, 1998.****** N/A
10(d) Indenture between Madison Bancshares Group, Ltd. and Christiana
Bank and Trust Company, as Trustee, dated July 13, 1998.****** N/A
10(e) Capital Securities Guarantee between Madison Bancshares Group,
Ltd. and Christiana Bank and Trust Company, as Trustee, dated
July 13, 1998.****** N/A
10(f) Agreement, dated May 5, 1998, as Amended, to Conduct Mortgage
Banking Business
21 Subsidiaries of the Registrant
27 Financial Data Schedule
- ----------
* 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
Definitive 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.
****** Incorporated by reference from Exhibit No. 10 to the Company's
Quarterly Report on Form 10-QSB for the quarterly period ended
September 30, 1998.
49
<PAGE>
(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.
50
<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 30, 1999 /s/Vito A. DeLisi
---------------------------------------
Vito A. DeLisi, President
and Director
March 30, 1999 /s/Peter DePaul
---------------------------------------
Peter DePaul
Chairman of the Board
March 30, 1999 /s/Philip E. Hughes, Jr.
---------------------------------------
Philip E. Hughes, Jr.
Director and Vice Chairman of the Board
March 30, 1999 /s/Frank R. Iacobucci
---------------------------------------
Frank R. Iacobucci, Director
March 30, 1999 /s/Arnold M. Katz
---------------------------------------
Arnold M. Katz, Director
March 30, 1999 /s/Lorraine C. King
---------------------------------------
Lorraine C. King, Director
51
<PAGE>
March 30, 1999 /s/Kathleen A. Kucer
---------------------------------------
Kathleen A. Kucer, Director
March 30, 1999 /s/ Michael O'Donoghue
---------------------------------------
Michael O'Donoghue, Director
March 30, 1999 /s/Salvatore Paone
---------------------------------------
Salvatore Paone, Director
March 30, 1999 /s/Donald J. Reape
---------------------------------------
Donald J. Reape, Director
March 30, 1999 /s/Blaine W. Scott
---------------------------------------
Blaine W. Scott, Director
52
<PAGE>
MADISON BANK
May 5, 1998
Jonathan G. Kraus
John J. Crits
c\o Steven M. Cohen
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103
Re: Agreement to Conduct Mortgage Banking Business
Dear Messrs. Kraus and Crits:
The purpose of this letter is to set out in writing the terms of the
agreement which has been reached between Madison Bank (the "Bank"), Jonathan G.
Kraus ("Kraus") and John J. Crits ("Crits") with regard to the establishment of
a mortgage banking operation (the "Mortgage Business"), to be conducted on a
joint basis by Kraus, Crits and the Bank. While the parties hereto intend to
conduct the Mortgage Business through a Pennsylvania Limited Liability Company
(the "LLC," which will elect to be treated as a partnership for federal income
tax purposes), the operating agreement for which is attached hereto as Exhibit
A, and that Kraus and Crits will provide services to the LLC and receive certain
"guaranteed payments" for those services pursuant to the terms of the
Compensation Agreements between the LLC and each of Kraus and Crits
(substantially in the form attached hereto as Exhibit B), it is understood that
it may be necessary to conduct the Mortgage Business for some period of time as
a direct operation of the Bank rather than as an operation of the LLC, and that
Kraus and Crits will be engaged as employers of the Bank in order to conduct the
Mortgage Business during that period.
In addition, Kraus and Crits will be employed by the Bank for the
purpose of providing certain regular services, including the provision of
strategic advice to the Bank with respect to its position in the mortgage and
related businesses, and will make themselves available to the Bank from time to
time for such additional services as may reasonably be requested by the Bank.
Each of Kraus and Crits will be paid for these services a salary of $12,000 per
year, or such other amount as may be mutually agreed to by the parties.
In connection with the establishment of the Mortgage Business, the
parties hereto have agreed as follows:
1. Within ten (10) business days of the date hereof, the Bank will
contribute $150,000 and Kraus and Crits will each contribute $50,000 to the LLC.
<PAGE>
May 5. 1998
Page 2
2. Kraus and Crits will conduct the Mortgage Business as employees
of the Bank or as employees of a wholly owned subsidiary of the Bank, if such an
entity is established for this purpose, commencing as soon as possible following
the date hereof, but in no event more than fifteen (15) days following the date
hereof until such time as the LLC becomes qualified to conduct the Mortgage
Business under any applicable laws or regulations relating to the conduct of the
Mortgage Business by the LLC, at which time the Mortgage Business shall be
contributed to the LLC and Kraus and Crits will cease to conduct the Mortgage
Business as employees of the Bank or a wholly owned subsidiary of the Bank, and
will operate the Mortgage Business solely in their capacities as Members of the
LLC (notwithstanding any other duties they may continue to have as employees of
the Bank or an affiliate of the Bank).
3. The compensation paid to Kraus and Crits with respect to any
period during which they are operating the Mortgage Business in their capacities
as employees of the Bank or of a wholly owned subsidiary of the Bank will be
paid to them in the form of wages, the gross amount of which will be equal to
the amounts which would have been payable to them as guaranteed payments and as
their share of the net profits of the Mortgage Business if the Mortgage Business
had been conducted by the LLC, consistent with the terms of the Operating
Agreement and their Compensation Agreements, and shall be paid to them as nearly
as possible at the same time or times the guaranteed payments and the
distribution of net profits would have been made by the LLC if the Mortgage
Business had been conducted by it.
4. In the event it is determined by counsel to the Bank that it is
either impractical or impossible to cause the Mortgage Business to be conducted
by the LLC, the Mortgage Business will be continued as a business operation of
the Bank (or a wholly owned subsidiary of the Bank), and compensation (including
commissions, bonuses and phantom equity compensation) will be paid to Kraus and
Crits equal to the amounts which would have been payable to them as guaranteed
payments and as their share of the net profits of the Mortgage Business if the
Mortgage Business had been conducted by the LLC, consistent with the terms of
the Operating Agreement and their Compensation Agreements, and shall be paid to
them as nearly as possible at the same time or times the guaranteed payments and
the distribution of net profits would have been made by the LLC if the Mortgage
Business had been conducted by it. To the extent it is determined that there is
any additional net tax burden on any party hereto as a result of the conduct of
the Mortgage Business as an operation of the Bank or of a wholly owned
subsidiary of the Bank when compared to the tax burden that would have been
borne by that party if the Mortgage Business had been conducted by the LLC,
payments of compensation to Kraus and/or Crits shall be adjusted, up or down, as
the case may be, so as to cause any such net additional tax liability to be
borne 50% by the Bank and 25% by each of Kraus and Crits (taking into account
for these purposes the additional tax burdens or benefits which result from any
such changes in compensation payments).
<PAGE>
May 5, 1998
Page 3
5. In addition, if it is determined pursuant to the preceding
paragraph that it is either impractical or impossible to cause the Mortgage
Business to be conducted by the LLC, the capital contributed to the LLC by the
Bank will be repaid to the Bank, and the capital contributed or required to be
contributed to the LLC by Kraus and Crits will be transferred to an interest
bearing escrow account. Kraus and Crits will have an obligation to fund
operating expenses of the Mortgage Business to the same extent that their share
of the capital contributed to the LLC would have been used to pay such expenses
if the Mortgage Business had been operated by the LLC, such obligation to be
secured by and paid from the escrow accounts created pursuant to this paragraph.
A decision to release any funds held in these escrow accounts to Kraus and Crits
will be made in the same manner as a decision by the Board of the LLC to return
capital to the Members of the LLC.
6. The Bank, Kraus and Crits agree to be subject to all provisions
of the Operating Agreement and the Compensation Agreements. This agreement to be
bound by the terms of the Operating Agreement and the Compensation Agreements
shall be interpreted as nearly as possible so as to put the parties hereto in
the same economic position and subject to the same requirements and limitations
as would have in effect if the Mortgage Business had been conducted by the LLC.
The Bank, Kraus and Crits acknowledge their agreement to be bound by
the terms set forth in this letter by executing this letter where indicated.
This letter may be executed in counter-parts and shall be treated as legally
binding when all of the parties hereto have signed this letter or signed on a
counterpart hereto.
(SEAL)
Madison Bank
By: /s/ Vito DeLisi
----------------------------------------
Title: President
-------------------------------------
I have read the terms set forth above, and hereby acknowledge my agreement with
such terms, intending to be legally bound hereby:
/s/ Jonathan G. Kraus
- ----------------------------------
Jonathan G. Kraus
/s/ John J. Crits
- ----------------------------------
John J. Crits
<PAGE>
EXHIBIT A
PHILADELPHIA FINANCIAL MORTGAGE CO., LLC
OPERATING AGREEMENT
This Operating Agreement for Philadelphia Financial Mortgage Co.,
LLC, a Pennsylvania limited liability company, is entered into this __ day of
April, 1998 by and between Madison Bank (the "Bank"), Jonathan G. Kraus
("Kraus") and John J. Crits ("Crits") (the Bank, Kraus and Crits are referred to
collectively herein as the "Members")
W I T N E S S E T H
The Members have caused to be formed on May 5, 1998, by an
authorized person, a limited liability company pursuant to and in accordance
with the Pennsylvania Limited Liability Company Law of 1994 (15 Pa. Cons. Stat.
Ann. Ch. 89), as amended from time to time (the "Act"), and for good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto, intending to be legally bound hereby, agree as
follows:
I. FORMATION
1.01 Name. The name of the limited liability company is Philadelphia
Financial Mortgage Co., LLC (the "Company").
1.02 Purpose. The purpose of the Company is to engage in the
business of providing mortgage services and activities incidental or related
thereto and to engage in any other lawful business and activity permitted to be
engaged in by a limited liability company pursuant to the Act.
1.03 Term. The Company was formed on May 5, 1998 by the filing of
the Certificate of Organization of the Company (the "Certificate") with the
office of the Secretary of State of the Commonwealth of Pennsylvania and shall
continue until December 31, 2028, unless sooner dissolved and wound up in
accordance with the provisions of the Act or this Agreement or extended by the
unanimous consent of the Members.
1.04 Principal Office. The principal office of the Company shall be
at 1767 Sentry Parkway, Suite 220, Blue Bell, PA 19422, or such other place or
places as the Board may from time to time designate. The Company may maintain
such other offices and places of business as the Board may from time to time
deem advisable.
<PAGE>
II. DEFINED TERMS
The following defined terms used in this Agreement shall have the
meanings specified below, in addition to any other defined terms used herein:
"Accountants" the independent accountants regularly engaged by the
Company to review or audit its financial statements.
"Bankruptcy" means an adjudication of bankruptcy or the entry of an
order for relief or the filing of a voluntary case or petition under the federal
bankruptcy law or any state or local bankruptcy law and, in addition, any other
status constituting bankruptcy within the meaning of the Act.
"Board" means the Board of Managers responsible for the management
of the Company pursuant to Article V of this Agreement.
"Book Value" means the net value of the Company as of any relevant
date as determined, consistent with generally accepted accounting principles, by
the Company's Accountants. The Book Value of a Member's units of Membership
Interest is equal to the amount that would be distributed to such Member if the
Company liquidated all of its assets, realizing as a result of such transaction
a net cash amount equal to the Book Value of the Company and then distributed
such net amount in accordance with the terms of this Agreement as a distribution
under Section 4.03 (b)(ii).
"Capital Contribution" means the total amount of money or other
property contributed or agreed to be contributed, as the context requires, to
the Company by each Member pursuant to the terms of this Agreement. Any
reference to the Capital Contribution of a Member shall include the Capital
Contribution made by any predecessor holder of the interest in the Company of
such Member allocable to such interest.
"Code" means the Internal Revenue Code of 1986, as amended, or any
successor statute. All references to specific sections of the Internal Revenue
Code shall be deemed to include any provisions of the Internal Revenue Code
which replace or supersede the sections in effect at the time of execution of
this Agreement.
"Fair Market Value" means the net fair market value of the Company
as established in the context of an arm's-length sale of the Company or its
assets. In the absence of any such transaction, the net Fair Market Value of the
Company shall be equal to the net value of the Company established, taking all
relevant facts and circumstances into account, by the unanimous agreement of the
Board, or, absent such unanimous agreement, by a qualified appraiser engaged, by
the mutual action of all panics concerned, for this purpose. If the parties
concerned cannot agree on the identity of a qualified appraiser to be engaged
for these purposes, all parties may engage their own appraisers at their own
expense who may, if those appraisers
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<PAGE>
cannot agree upon a value, agree to the engagement of another appraiser mutually
acceptable to the appraisers engaged by the parties. In no event, however, shall
the net Fair Market Value of the Company be less than the Book Value of the
Company. The Fair Market Value of a Member's interest is equal to the amount
that would be distributed to such Member if the Company sold all of its assets,
realizing as a result of such transaction a net cash amount equal to the net
Fair Market Value of a Company, and then distributed such net amount in
accordance with the terms of this Agreement as a distribution under Section
4.03(b)(ii). Notwithstanding the determination of the Fair Market Value of the
Company as set forth above, during the first year of the Company's existence,
the Company's Fair Market Value shall be deemed to be equal to its Book Value.
"Liquidation Payment" means the payment made to a Member on the
withdrawal of the Member from the Company and the liquidation or redemption by
the Company of such Member's units of Membership Interest.
"Liquidator" means such Person or Persons (as hereinafter defined)
as shall be chosen by unanimous consent of the Board or, if there are no duly
elected Managers at the time in question, such other Person who may be appointed
in accordance with applicable law and who shall be responsible for taking all
action necessary or appropriate to wind up the affairs, and distribute the
assets of the Company upon its dissolution.
"Managers" means Managers of the Company chosen by the Members (as
hereinafter defined) pursuant to the terms of Section 5.02.
"Members" means the Bank, Jonathan C. Kraus and John J. Crits and
such other Persons as shall become Members under the terms of this Agreement.
"Membership Interest" means units of Membership Interest in the
Company. The number of units of Membership Interest owned initially by each
Member is set forth in Section 3.03. The terms "Membership Interest" or
"interests in the Company," for the purposes of this Agreement includes, without
limitation, the rights to profits, losses, gains, credits and distributions from
the Company.
"Mortgage Business" means the mortgage banking operations conducted
or to be conducted by the Company.
"Person" means any individual, trust, corporation, partnership,
proprietorship or any other entity.
"Restrictive Covenant" means the provisions, set forth in Section
7.05 of this Operating Agreement.
"Treasury Regulations" means the regulations promulgated under the
Code.
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"Unrepaid Capital Contribution" means the excess, if any, of the
total Capital Contributions theretofore made by a Member over the total
distributions theretofore made to such Member pursuant to Section 4.03.
III. MEMBERS CONTRIBUTIONS: ADMISSION TO MEMBERSHIP
3.01 The Members of the Company are the Bank, Jonathan C. Kraus and
John J. Crits.
3.02 Capital Contributions. The Members shall make the following
Contributions to the Company
(a) the Bank - $150,000.
(b) Jonathan G. Kraus - $50,000.
(c) John J. Crits - $50,000.
Additional capital contributions shall only be required to be made by Members
pursuant to action of the Board acting unanimously.
3.03 Interests in the Company. In exchange for the Capital
Contributions set forth in Section 3.02, the Initial Members shall be entitled
to the following number of units of Membership Interest in the Company.
(a) The Bank shall have 510 units of Membership Interest;
(b) Kraus shall have 245 units of Membership Interest; and
(c) Crits shall have 245 units of Membership Interest.
3.04 No Certification. Units of Membership Interest in the Company
shall not be certificated.
3.05 Capital Accounts.
(a) A separate "Capital Account" shall be established and
maintained for each Member as provided in this Section 3.05. Without
duplication, the Capital Account of each Member shall be credited with the cash
and the fair market value of any property (net of liabilities assumed by the
Company and liabilities to which such property is subject) contributed to the
Company by such Member, plus all income, gain, or Profits (as hereinafter
defined) of the Company allocated to such Member pursuant to Article IV
(including for purposes of this
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Section 3.05 income and gain exempt from tax), and shall be debited with the sum
of (i) all Losses (as hereinafter defined) or deductions of the Company
allocated to such Member pursuant to Article IV, (ii) such Member's distributive
share of expenditures of the Company described in Section 705(a)(2)(B) of the
Code, and (iii) all cash and the fair market value of any property (net of
liabilities assumed by such Member and the liabilities to which such property is
subject) distributed by the Company to such Member pursuant to Article IV. The
amount of the Capital Account of a Member shall be determined in accordance with
the rules set forth in Treasury Regulation 1,704-1 (b)(2)(iv). Any references in
any Section or subsection of this Agreement to the Capital Account of a Member
shall be deemed to refer to such Capital Account as the same may be credited or
debited from time to time as set forth above.
(b) Except as may otherwise be provided in this Agreement,
whenever it is necessary to determine the Capital Account of a Member for
purposes of Article IV, the Capita] Account of such Member shall be determined
after giving effect to all allocations and distributions for transactions
effected prior to the time as of which such determination is to be made. Any
Member, including any substitute Member, who shall acquire units of Membership
Interest or whose interest in the Company shall be increased by means of a
Transfer (as hereinafter defined) to him of all or part of the Membership
Interest of another Member, shall have a Capital Account which reflects such
Transfer.
3.06 Withdrawal and Return of Capital. Although the Company may make
distributions to the Members from time to time in return of their Capital
Contributions, no Member shall have the right to withdraw or demand a return of
all or any portion of his Capital Contribution or Capital Account, except (a)
upon the dissolution, liquidation and/or winding up of the business and affairs
of the Company in accordance with Section 8.02, and (b) upon the withdrawal of a
Member in accordance with Section 7.02.
3.07 Interest on Capital. No interest shall be payable on any
Capital Contributions made to the Company or on the balance of the Capital
Accounts of the Members.
3.08 Additional Contributions. No Member shall be required to lend
any funds to the Company or to contribute any capital to the Company in excess
of the amount which has been initially credited to such Member's Capital
Account.
3.09 Issuance of Additional Membership Interests and Securities. In
order to raise additional capital or to acquire assets, to redeem or retire
Company debt or for any other Company purpose, the Board is authorized to cause
the Company to issue in addition to the units of Membership Interest issued to
the Initial Members, additional units of Membership Interest or classes thereof
from time to time to Members or to other Persons and to admit them to the
Company as additional Members, provided that the Board obtains the unanimous
consent of the Members prior to any such issuance.
5
<PAGE>
IV. PROFITS. LOSSES AND DISTRIBUTIONS
4.01 Profit and Loss. "Profit" and "Loss" shall mean for each fiscal
year of the Company or other period, an amount equal to the Company's taxable
income or loss for such year or other period, as determined by the Company's
Accountants in accordance with Code Section 703(a), and including, without
limitation, each item of Company income, gain, loss, or deduction which must be
separately stated pursuant to Code Section 703(a), taking into account the
following adjustments:
(a) all income of the Company that is exempt from federal
income tax and not otherwise taken into account in computing Profit or Loss
shall be added to such taxable income or loss;
(b) any expenditure of the Company described in Code Section
705(a)(2)(B), or treated as such an expenditure and not otherwise taken into
account in computing Profit or Loss, shall be subtracted from such taxable
income or loss;
(c) notwithstanding any other provision of this Agreement, any
items of Company income, gain, loss or deduction which are required to be
specially allocated shall not be taken into account in computing Profit and
Loss; and
(d) with respect to property contributed to the Company, or
(at the option of the Board) any increase or decrease in the Capital Accounts of
the Members to reflect a revaluation of Company property in accordance with the
provisions of Treasury Regulation Section 1.704-1(b)(2)(iv)(f), the calculation
of Profit and Loss shall be made by taking into account book basis and book
depreciation, if any, in accordance with Treasury Regulation Section
1.704-1(b)(2)(iv)(g)(3), rather than tax depreciation which would be taken into
account in accordance with Code Section 703(a). Profit and Loss for all purposes
of this Agreement shall be determined in accordance with the accrual method of
accounting, except that any adjustments made pursuant to Code Section 754 shall
not be taken into account. Except as otherwise specifically required by this
Agreement or the Code, every item of income, gain, loss, deduction, credit, or
tax preference entering into the computation of such Profit and Loss shall be
considered allocated to each Member in the same proportion as Profit and Loss is
allocated to such Member.
Generally, expenditures for goods and services incurred by Members and approved
by the Board shall be reimbursed by and charged to the Company at an amount
equal to the cost incurred by the Member or Members in providing such goods and
services; provided, however, that the provision of funds by the Bank for
mortgage loans made or arranged by the Company shall be taken into account by
the Company for purposes of determining its Profit or Loss based on an interest
rate equal to the Bank's prime rate minus one-half (1/2) percent.
4.02 Allocation of Profit and Loss. Except as otherwise required
under the Code, all Profit or Loss shall be allocated to the Members in
accordance with the following rules:
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(a) After making the special allocations required by Section
4.02(c), (d) and (e) of this Agreement, if any, whenever the aggregate Capital
Account balances of the Members will represent a positive number after
allocation of Profit or Loss for the taxable year or other period, Profit or
Loss for such year or other period shall be allocated so as to produce, as
nearly as possible, positive Capital Account balances for each Member which
correspond to the amounts each Member would receive in a hypothetical
distribution of the proceeds of a liquidation of the Company in accordance with
the priorities set forth in Section 4.03(b)(ii) in a case where :he aggregate
amount of such proceeds equals the aggregate positive Capital Account balances
of the Members.
(b) After making the special allocations required by Section
4.02(c), (d) and (e) of this Agreement, if any, whenever the aggregate Capital
Account balances of the Members will represent zero or a negative number after
allocation of Profit and Loss for the taxable year or other period, Profit or
Loss for such year or other period shall be allocated so as to produce, as
nearly as possible, zero Capital Account balances for all the Members, or
negative Capital Account balances of the Members which are proportionate to
their units, as the case may be.
(c) Items of income, gain, loss and deduction for federal
income tax purposes with respect to any property contributed to the Company or
any property which has been revalued in accordance with the provisions of
Treasury Regulation Section 1.704-1(b)(2)(iv)(f), shall be allocated among the
Members so as to take into account any variation between the adjusted tax basis
of such property to the Company and the book basis of such property, in
accordance with Code Section 704(c) and applicable Regulations thereunder.
Without limiting the foregoing, the Company will allocate items of income, gain,
loss and deduction with respect to the property contributed to the Company by
the Principals upon formation of the Company under Treasury Regulation Section
1.704-3(b).
(d) In the event that any Member receives an unexpected
adjustment, allocation or distribution as described in Treasury Regulation
Sections 1.704-1(b)(2)(ii)(d)(4), (5) or (6), which results in such Member's
Capital Account deficit balance being in excess of the amount such Member is
obligated or treated as obligated to restore, such Member shall be allocated
items of income and gain in an amount and manner sufficient to eliminate such
excess deficit balance as quickly as possible. This provision is intended as a
"qualified income offset" as defined in Treasury Regulation Section
1.704-1(b)(2)(ii)(d).
(e) Income from cancellation of indebtedness of the Company,
if any, shall be allocated to the Members in accordance with their respective
shares of such indebtedness determined under Code Section 752 and applicable
Treasury Regulations thereunder immediately prior to such cancellation. To the
extent any such income is not recognized by such Members pursuant to Code
Section 108, the basis of Company properly shall be reduced in accordance with
any reduction in the basis of such Members' interests in the Company pursuant to
Code Sections 108(b) and 1017, and such Members shall not elect to reduce the
basis of depreciable
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property before reducing other tax attributes of such Members. The Capital
Accounts of any such Members shall be reduced to reflect any such reduction in
the basis of Company property in accordance with the reduction in their
respective bases in their interests in the Company.
4.03 Distributions.
(a) Distributions of cash and/or other assets or property of
the Company, from whatever source (including, without limitation, net proceeds
of Company operations and sale, financing or refinancing of Company assets)
shall be made to the Members at such times, and in such amounts, as the Board,
in it sole discretion, shall determine. In making such determination, the Board
may set aside funds and establish reserves for such items as the Board shall, in
its sole discretion, determine, including, without limitation, working capital,
maintenance of bonding capacity, capital expenditures, acquisition of other
assets by the Company and the satisfaction of liabilities (including, without
limitation, contingent liabilities) as they may come due.
(b) (i) All distributions that are determined by the Board to
be distributions of operating cash flow shall be made in the following order and
priority: (A) first, in payment of principal of and accrued interest on loans,
if any, to the Company from Members (notwithstanding that such principal or
interest may not be due and payable at such time), in order of priority and in
proportion to the amounts of principal and accrued interest outstanding on all
such loans of equal priority; and (B) second, to the Members pro rata according
to the number of units of Membership Interest held by each Member.
(ii) All distributions that are determined by the Board
to be distributions of the proceeds of capital shall be made in the following
order and priority: (A) first, in payment of principal of and accrued interest
on loans, if any, to the Company from Members (notwithstanding that such
principal or interest may not be due and payable at such time), in order of
priority and in proportion to the amounts of principal and accrued interest
outstanding on all such loans of equal priority; (B) second, to the Members in
proportion to their relative Unrepaid Capital Contributions, determined by
multiplying the total distribution by a fraction, the numerator of which is the
Unrepaid Capital Contribution of the Member and the denominator of which is the
aggregate Unrepaid Capital Contributions of all Members at the time of such
distribution; and (C) third, to the Members pro rata according to the number of
units of Membership Interest held by each Member.
(c) Any amount paid by the Company for or with respect to any
Member on account of any withholding tax or other tax payable with respect to
the income, profits or distributions of the Company pursuant to the Code, the
Treasury Regulations, or any state or local statute, regulation or ordinance
requiring such payment (a "Withholding Tax Act") shall be treated as a
distribution to such Member for all purposes of this Agreement, consistent with
the character or source of the income, profits or cash which gave rise to the
payment or withholding obligation. To the extent that the amount required to be
remitted by the Company
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under the Withholding Tax Act exceeds the amount then otherwise distributable to
such Member under subsection 4.03(b), the excess shall constitute a loan from
the Company to such Member (a "Tax Payment Loan") which shall be payable upon
demand and shall bear interest, from the date that the Company makes the payment
to the relevant taxing authority, at the lowest rate required to avoid the
imputation of interest under applicable provisions of the Code. So long as any
Tax Payment Loan or the interest thereon remains unpaid, the Company shall make
future distributions due to such Member under this Agreement by applying the
amount of any such distribution first to the payment of any unpaid interest on
all Tax Payment Loans of such Member and then to the repayment of the principal
of all Tax Payment Loans of such Member. The Board shall have the authority to
take all actions necessary to enable the Company to comply with the provisions
of any Withholding Tax Act applicable to the Company and to carry out the
provisions of this subsection. Nothing in this subsection shall create any
obligation on the Company to borrow funds from third parties in order to make
any payments on account of any liability of the Company under a Withholding Tax
Act.
4.04 Guaranteed Payments. The Company shall make payments to any
Member or Members as "guaranteed payments" for services as determined at the
discretion of the Board from time to time or pursuant to any compensation
agreement which may be entered into between the Company and the Member or
Members to whom such payment is to be made.
V. MANAGEMENT POWERS, DUTIES AND RESTRICTIONS
5.01 Management by Managers.
(a) The management of the business and affairs of the Company
shall be vested in the Board which shall consist of four Managers. Except for
those matters in which the approval of the Members is required by this Agreement
and/or by nonwaivable provisions of applicable law, the Board shall have all
rights and powers and shall make all decisions affecting the Company in
furtherance of the Company's purposes, including, but not limited to, the
following:
(i) to retain all or any part of the Company's assets as
long as they deem advisable, and to invest, reinvest and keep invested all or
any part thereof, without being restricted in any way with respect to the type
of assets retained or invested in or with respect to the portion of the assets
devoted to any investment;
(ii) to purchase, lease or otherwise acquire the
ownership, use or benefit of assets, properties, rights or privileges, real or
personal, tangible or intangible, of any kind or description, whether income
producing or not;
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(iii) to sell, pledge, mortgage, lease without limit of
time, exchange, or to grant options for the purchase, lease or exchange of any
Company assets, on such terms and conditions as the Board may determine;
(iv) to vote at any election or meeting of any
corporation, partnership, limited liability company, joint venture or other
asset, in person or by proxy and to appoint agents to do so in their place and
stead;
(v) to borrow money for any purpose which they consider
to be for the benefit of the Company or to facilitate its administration, and to
mortgage or pledge Company assets to secure the repayment thereof, provided,
however, that without the prior written approval of all Members, the Board may
borrow funds only if liability to the lender is limited to the assets of the
Company, the Members being specifically exonerated and released from any
personal liability;
(vi) to retain and pay a custodian, Accountants,
counsel, brokers and other agents and to incur any other expenses which are
reasonably related to the operation of the Company;
(vii) to establish a brokerage account, and to hold or
register assets in the name of a broker, nominees, the nominees of their
custodian or broker/or their agent or their agent's custodian, or in bearer
form, without disclosing any Company or fiduciary relationship; and
(viii) to invest in time deposits and savings accounts
and to maintain banking accounts in any institutions determined by them.
(b)The Board shall manage the business and affairs of the
Company and exercise its powers through (i) meetings and consents as set forth
in Sections 5.06 and 5.07; (ii) through committees pursuant to Section 5.10;
and (iii) through Officers (as hereinafter defined) to whom authority and duties
have been delegated pursuant to Section 5.12.
(c) Notwithstanding the provisions of Sections 5.01(a) and
(b), the Board may not cause the Company to take the actions described in this
subsection unless the requisite Member vote as set out below for each such
action is obtained:
(i) The affirmative vote of all of the Members shall be
required to:
(A) amend the Certificate; provided, however, that
where the amendment, (x) restates without change all of the operative provisions
of the Certificate as theretofore in effect, (y) changes the name or the
registered office of the Company, or (z)
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accomplishes any combination of the foregoing purposes, Board action alone shall
be sufficient to authorize such amendment;
(B) amend this Agreement;
(C) authorize a Manager, Member or other Person to
do any act on behalf of the Company that contravenes the Certificate or any
written provision of this Agreement;
(D) approve the dissolution of the Company;
(E) approve the issuance of additional units of
Membership Interest or classes thereof; and
(F) incur any indebtedness on behalf of the
Company other than indebtedness incurred in the ordinary course of the Company's
business operations.
(ii) After a plan of merger or consolidation is approved
and proposed by the Board, the affirmative vote of the Member(s) holding a
majority in interest of all votes entitled to be cast at a meeting at which such
action is proposed shall be required in order to adopt, approve and confirm such
plan as the action of the Company; provided, however, that where (A) the plan,
whether or not the Company is the surviving company, does not alter the status
of the Company as a domestic limited liability company or alter in any respect
the provisions of the Certificate or this Agreement, except changes that may be
made without actions by the Members, or (B) each unit of Membership Interest
outstanding immediately prior to the effective date of the merger or
consolidation is to continue as or to be converted into, except .as may be
otherwise agreed by the holder thereof, an identical membership interest in the
surviving or new company after the effective date of the merger or
consolidation, Board action alone shall be sufficient to authorize the action.
(iii) After a plan of division is approved and proposed
by the Board, the affirmative vote of the Member(s) holding a majority in
interest of all votes entitled to be cast at a meeting at which such action is
proposed shall be required in order to adopt, approve and confirm such plan as
the action of the Company; provided, however, that where such plan does not
alter the state of organization of the Company, nor amend in any respect the
provisions of the Certificate or this Agreement, except amendments which may be
made without action by the Members, and (A) the Company, on the effective date
of the division, has only one class of membership interests and the membership
interests and other securities, if any, of each company resulting from the plan
are distributed pro rata to the Members, (B) the Company survives the division
and all the membership interests and other securities and obligations, if any,
of all new companies resulting from the plan are owned solely by the Company, or
(C) the transfers of assets effected by the division, if effected by means of a
sale, lease, exchange, or other
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disposition, would not require the approval of the Members, Board action alone
shall be sufficient to authorize the action.
(iv) After a plan to sell all or substantially all of
the assets of the Company is approved and proposed by the Board, the affirmative
vote of the Members holding a majority in interest of all votes entitled to be
cast at a meeting at which such action is proposed shall be required to adopt,
approve and confirm such plan as the action of the Company
5.02 Qualification and Selection of Managers: Initial Managers.
(a) Each Manager shall be a natural person of full age who
need not be a resident of the Commonwealth of Pennsylvania or a Member.
(b) Except as otherwise provided in this Agreement, Managers
shall be elected by the Members. In elections for Managers, voting need not be
by ballot, except upon demand made by a Member entitled to vote at the election
and before the voting begins. The candidates receiving the highest number of
votes cast in an election for Managers up to the number of Managers to be
elected in such election shall be elected. Notwithstanding the foregoing, as
long as Kraus, Crits and the Bank' hold units of Membership Interest as set
forth in Section 3.03, Kraus and Crits shall each be entitled to designate one
Manager, and the Bank shall be entitled to designate two Managers.
(c) The initial Managers shall be Jonathan G. Kraus, John J.
Crits, Vito DeLisi and Donald Reape, Vito DeLisi shall serve as the Chairman of
the Board. The Bank shall, as long as the Bank is a Member, have the right to
designate which Manager shall serve as Chairman of the Board.
5.03 Term of Office: Resignation.
(a) Each Manager shall hold office until the next annual
meeting of Members and until a successor shall have been elected and qualified
or until such Manager's earlier death, resignation or removal.
(b) Any Manager may resign at any time upon written notice to
the Company. The resignation shall be effective upon receipt thereof by the
Company or at such subsequent time as shall be specified in the notice of
resignation.
5.04 Vacancies
(a) Except as provided in subsection 5.05(a), vacancies in the
Board may be filled by a majority vote of the remaining members of the Board
though less than a quorum, or by a sole remaining Manager, and each person so
selected shall be a Manager to
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serve for the balance of the unexpired term, and until a successor has been
selected and qualified or until his or her earlier death, resignation or
removal.
(b) When one or more Managers resign from the Board effective
at a future date, the Managers then in office, including those who have so
resigned, shall have power by the applicable vote to fill the vacancies, the
vote thereon to take effect when the resignations become effective.
(c) Notwithstanding any provision of this Section 5.04 to the
contrary, as long as Kraus, Crits and the Bank hold units of Membership Interest
as set forth in Section 3.03, if the Manager designated by Kraus or Crits ceases
to be a Manager for any reason, Kraus or Crits, as the case may be, shall have
the exclusive right to designate a replacement Manager to fill the vacancy, and
if either or both of the Managers designated by the Bank ceases to be a Manager
for any reason, the Bank shall have the exclusive right to designate a
replacement Manager to fill the vacancy or vacancies.
5.05. Removal of Managers.
(a) Except as otherwise provided in this Agreement, the entire
Board or any individual Manager(s) may be removed from office without assigning
any cause upon the affirmative vote of the Member(s) holding a majority in
interest of all votes entitled to be cast at a meeting at which the removal of
the entire Board or any individual Manager(s) is proposed. In case the Board or
any one or more Managers are so removed, new Managers may be elected by the
Members at the same meeting.
(b) The Board may declare vacant the office of a Manager who
has been judicially declared of unsound mind or who has been convicted of an
offense punishable by imprisonment for a term of more than one year or if within
60 days after notice of his or her selection, the Manager does not accept the
office either in writing or by attending a meeting of the Board. In case the
office of any one or more Managers has been so declared vacant, the remaining
Member(s) of the Board may fill the vacant office(s) in the manner described in
Section 5.04.
(c) Notwithstanding any provision of this Section 5.05 to the
contrary, as long as Kraus, Crits and the Bank hold units of Membership Interest
as set forth in Section 3.03, only Kraus or Crits, as the case may be, shall
have the authority to remove the Manager designated by Kraus or Crits, and only
the Bank shall have the authority to remove either or both of the Managers
designated by the Bank.
5.06 Meetings.
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(a) Regular meetings of the Board shall be held at least
annually at such time and place, either within or without the Commonwealth of
Pennsylvania, as shall be designated from time to time by the Board.
(b) Special meetings of the Board shall be held whenever
called by two or more of the Managers at such place, either within or without
the Commonwealth of Pennsylvania, as the Managers calling the meeting shall
designate.
5.07 Quorum: Action by the Managers.
(a) Presence in person or by proxy of all the Managers shall
constitute a quorum for the transaction of business of the Board. The presence
in person or by proxy of all Managers of any committee of the Board shall
constitute a quorum for the transaction of business of such committee.
(b) Each Manager shall have one vote at meetings of the Board
or of any committee hereof Any action approved by a majority of votes of
Managers, either in person or by proxy, shall be the act of the Board or of such
committee.
(c) Any action required or permitted to be taken pursuant to
authorization voted at a meeting of the Board, or any committee thereof, may be
taken without a meeting if, prior or subsequent to the action, a consent or
consents in writing thereto by all of the Managers on the Board or such
committee, as the case may be, is filed with the minutes of the proceedings of
the Board or such committee.
5.08 Participation in Meeting by Conference Telephone. Where
appropriate communication facilities are reasonably available, any or all
Managers shall have the right to participate in all or any part of a meeting of
the Board or any committee thereof by means of conference telephone or any means
of communication by which all persons participating in the meeting are able to
hear each other.
5.09 Compensation of Managers. The Board shall have the authority to
establish compensation of Managers for services to the Company.
5.10 Committees. The Board may appoint from among its members an
executive committee and one or more other committees, each of which shall have
one or more members. Any committee, to the extent provided by the Board, shall
have and may exercise all of the power and authority of the Board, except that
no such committee shall have any power or authority with respect to the
following;
(a) the submission to Members of any action requiring approval
of the Members;
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(b) the creation or filling of vacancies on the Board;
(c) the amendment or repeal of any Board action that by its
terms is amendable or repealable only by the Board; and
(d) action on matters committed by the board to another
committee thereof
5.11 Proxies. Every Manager may authorize by proxy another Manager
to act for him at a meeting of the Board or of any committee thereof. Every
proxy shall be executed in writing by the Manager or his agent, except that a
proxy may be given by a Manager or his agent by any means of electronic
communication which results in a writing. All proxies shall be revocable at
will. A grant of a later proxy shall revoke an earlier proxy.
5.12 Officers.
(a) The Board shall have the power and authority to appoint
individuals ("Officers") to provide various services to the Company similar to
those provided to a corporation by its officers. Officers shall be charged with
such duties, given such authority and compensated as the Board shall deem
appropriate.
(b) Any Officer may resign at any time upon written notice to
the Company. The resignation shall be effective upon receipt thereof by the
Company or at such subsequent time as may be specified in the notice of
resignation.
(c) An Officer shall serve the Company for a period of time
deemed appropriate by the Board and until a successor, if any, has been
appointed and qualified or until such Officer's earlier death, resignation or
removal.
(d) Any Officer may be removed by the Board with or without
cause. Any such removal, however, shall be without prejudice to any contract
rights of the Officer so removed. Appointment of an Officer shall not of itself
create contract rights.
(e) Notwithstanding any provision of this Section 5.12 to the
contrary, as long as Kraus, Crits and the Bank hold units of Membership Interest
as set forth in Section 3.03, Kraus shall serve as the President of the Company
and Crits shall serve as the Vice President of the Company, unless the Board, by
unanimous agreement, appoints different Officers.
(f) Unless their authority is limited by the unanimous action
of the Board, third parties shall be entitled to rely on the authority of Kraus
and Crits, in their capacity as Officers, to take any actions on behalf of the
Company for which they are granted authority hereunder.
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5.13 Appointment of Employees and Agents. In addition to the
employment provided for in Section 5.12, the Board may appoint, employ, contract
or otherwise deal with any Persons for the transaction of the business of the
Company, which Persons may, under supervision of the Board, perform any acts or
services for the Company as the Board may approve.
VI. MEMBERS' MEETINGS
6.01 Place of Members' Meetings. Meetings of Members may be held at
such place, within or without the Commonwealth of Pennsylvania, as shall be
designated by the Board in the notice of the meeting. If no such place is
designated by the Board, all meetings of the Members shall be held at the
principal office of the Company.
6.02 Special Meetings. Special meetings of the Members may be called
at any time by (a) the Board or (b) the Member(s) entitled to cast at least 20%
of the votes that all Members are entitled to cast at the particular meeting.
6.03 Notice of Members' Meetings
(a) Written notice of the time and place of each annual
meeting of the Members, and of the time, place and purpose(s) of each special
meeting of the Members, shall be given not less than ten nor more than 60 days
before the date of the meeting, either personally, by facsimile or by mail, to
each Member of record entitled to vote at the meeting.
(b) When a meeting is adjourned to another time or place, it
shall not be necessary to give notice of the adjourned meeting if the time and
place to which the meeting is adjourned are announced at the meeting at which
the adjournment is taken and at the adjourned meeting only such business is
transacted as might have been transacted at the original meeting, unless a
quorum is no longer present at the time of the adjourned meeting. However, if
after the adjournment the Board fixes a new record date for the adjourned
meeting, a notice of the adjourned meeting shall be given to each Member of
record on the new record date entitled to notice thereof
6.04 Waiver of Notice. Notice of a meeting need not be given to any
Member who signs a waiver of such notice, whether before or after the meeting.
The attendance of any Member at a meeting, without protesting prior to the
conclusion of the meeting the lack of notice of' such meeting, shall constitute
a waiver of notice by such Member.
6.05 Quorum.
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(a) A meeting of Members shall not be organized for the
transaction of business unless a quorum is present. The presence of all Members
entitled to vote at a meeting shall constitute a quorum.
(b) The Members present at a duly organized meeting can
continue to do business until adjournment notwithstanding the withdrawal of
enough Members to leave less than a quorum.
6.06 Voting.
(a) Unless otherwise provided by law or this Agreement,
whenever any action is to be taken by vote of the Members, it shall be
authorized by a majority of the votes cast at a duly organized meeting of
Members by the Members entitled to vote thereon. At any such meeting, each
Member shall be entitled to cast that number of votes equal to the number of
units of Membership Interest held by such Member.
(b) The Company shall keep at its principal office or its
registered office, a record or records containing the names and addresses of all
Members and the numbers of units of Membership interest held by them. The list
shall be produced (or be available by means of a visual display) at the time and
place of the meeting, be subject to the inspection of any Member for reasonable
periods during the meeting and be prima facie evidence as to who are the Members
entitled to examine such list or to vote at any meeting.
(c) The Board shall fix a date as record date for determining
the Members entitled to vote at any meeting of Members or adjournment thereof or
entitled to give a written consent without a meeting, `provided that such record
date shall not be more than 60 or less than ten days prior to the meeting or
Company action or event to which it relates.
6.07 Consent of Members in Lieu of Meeting.
(a) Any action required or permitted to be taken at a meeting
of the Members may be taken without a meeting it prior or subsequent to the
action, a consent or consents in writing thereto by all of the Members who would
be entitled to vote at a meeting for such purpose shall be filed with the
minutes of the proceedings of the Members.
(b) Any action required or permitted to be taken at a meeting
of the Members may be taken without a meeting upon the written consent of
Member(s) who would have been entitled to cast the minimum number of votes that
would be necessary to authorize the action at a meeting at which all Members
entitled to vote thereon were present and voting. `The consent(s) shall be filed
with the minutes of the proceedings of the Members. The action shall not become
effective until after at least ten days' written notice of the action has been
given to each Member entitled to vote thereon who has not consented thereto.
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VII.TRANSFERS OF MEMBERSHIP INTERESTS: WITHDRAWAL OFF MEMBERS
7.01 Restrictions on Transfers of Units of Membership Interest.
(a) Except as otherwise provided in this Agreement, no units
of Membership Interest or any rights with respect thereto may be sold, assigned,
transferred, given, bequeathed, donated, mortgaged, pledged, attached, levied
upon, seized by or for creditors, or otherwise encumbered or disposed of whether
by act of the Member or by operation of law (any such action hereinafter
referred to as a "Transfer"), without the prior written consent of other
Member(s) holding a majority of the units of Membership Interest, exclusive of
those of the Member seeking to effectuate the Transfer. Notwithstanding the
foregoing, the Bank shall have the right to transfer all or a portion of its
units of Membership Interest to any entity which, for federal income tax
purposes, is part of an affiliated group of corporations filing a consolidated
federal income tax return with the Bank (such group of corporations being
referred to herein as the "Bank Consolidated Group"), or which would be a member
of the Bank Consolidated Group if such entity were a corporation, or to any
person or entity if such transfer is made pursuant to a transaction involving
the sale of all or substantially all of the assets or business operations of the
members of the Bank Consolidated Group.
(b) Every unit of Membership Interest which is transferred in
accordance with the terms hereof shall remain subject to all of the terms and
conditions of this Agreement; and no Transfer, even though otherwise authorized
or permitted hereunder, shall be recognized as effective for any purpose
whatsoever unless the Person (or if he lacks legal capacity, some other Person
whose actions are legally binding on his behalf) acquiring the units of
Membership Interest has:
(i) agreed to assume all the obligations of his
predecessor accruing from and after the effective date of the Transfer under
this Agreement with respect to the units of Membership Interest transferred; and
(ii) delivered to the Board a written statement, in form
and substance satisfactory to the Board, acknowledging the assumption of the
transferror's obligations under this Agreement and that the transferee has read
the provisions of this Agreement and intends to be legally bound as a Member by
all the terms and conditions of this Agreement and any amendments or
modifications thereof, and executed a counterpart of this Agreement as then in
effect.
7.02 Withdrawal and Management Deadlocks.
(a) Withdrawal of Member. Any Member may withdraw from the
Company at any time. Any Member who withdraws from the Company (a "Withdrawing
Member") shall be subject to certain provisions limiting the Member's activities
which compete with continuing operation of the Mortgage Business by the Company,
as set forth in the
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Restrictive Covenant. The Withdrawing Member's units of Membership Interest
shall be deemed to have been relinquished to the Company in exchange for a
Liquidation Payment.
(i) Withdrawal on Account of Permanent Disability or
Death. In the event of the death or "Permanent Disability" of a Member, the
Member shall be deemed to have withdrawn as a Member in the Company, and the
Company shall make a Liquidation Payment with respect to such Member's units of
Membership Interest equal to the Fair Market Value of such Member's units of
Membership Interest either in up to three annual installments, with the first
installment payable no later than 60 days following the date of the Member's
death, and subsequent installments bearing interest at a variable rate per annum
at all times equal to the prime rate of interest published in The Wall Street
Journal, or in a lump sum at the option of the Company. For purposes of this
Agreement, the term "Permanent Disability" means a condition qualifying as a
permanent disability or as a long term disability under the terms of any
disability plan or insurance policy covering employees of the Company or it
affiliates, or, if no such plan or policy is then in effect, a condition which
is treated as a long term disability entitling the Member to federal social
security disability benefits.
(ii) Withdrawal on Account of Termination of Membership
by Member Without the Unanimous Consent of the Board. In the event any Member
voluntarily, and without the unanimous consent of the Board, ceases to provide
services to the Company under the terms of a Compensation Agreement between the
Member and the Company or otherwise withdraws from the Company (such Member
being referred to herein as a "Terminated Member"), such Terminated Member's
Liquidation Payment shall be equal to the Book Value of his units of Membership
Interest.
(A) If a Member is performing services for the
Company pursuant to the terms of a Compensation Agreement and the Company
terminates the services of the Member under the Compensation Agreement for
"Cause" (as hereinafter defined), the Member shall be treated as having
voluntarily withdrawn from the Company without approval by the Board and shall
be subject to this subparagraph 7.02(a)(ii).
(B) The Book Value of the Company shall be deemed
to be $0 during the first full year of operation of the Mortgage Business.
(C) "Cause" shall have the same meaning as set
forth in the Compensation Agreement between the Company and Kraus or Crits, as
the case may be. Whether Cause has occurred shall be determined by a majority
vote of the Board, or, if any members of the Board allege that Cause has
occurred, but the majority of the Board does not confirm that Cause has
occurred, a determination as to whether Cause has occurred shall be determined
by binding arbitration in Philadelphia, PA by one arbitrator in accordance with
the Commercial Arbitration Rules of the American Arbitration Association ("AAA")
except that (a) every person named on all lists of potential arbitrators shall
be a neutral and impartial lawyer with excellent academic and professional
credentials (i) who is or has been practicing law for at
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least 15 years, specializing in either general commercial litigation or general
corporate and commercial and (ii) who has had experience, and is generally
available to serve, as an arbitrator, and (b) each party shall be entitled to
strike on a peremptory basis, for any reason or no reason, any or all of the
names of potential arbitrators on any list submitted to the parties by the AAA
and any person selected by the AAA to serve as an arbitrator by administrative
appointment. In the event the parties cannot agree on a mutually acceptable
arbitrator from the one or more lists submitted by the AAA within 30 days after
the AAA transmits to the parties its first list of potential arbitrators, the
President of the Philadelphia Bar Association shall designate three persons who,
in his or her opinion, meet the criteria set forth herein, which designees may
include persons named on any list submitted by the AAA. Bach party shall be
entitled to strike one of such three designees on a peremptory basis within 10
days after its receipt of such list of designees, indicating its order of
preference with respect to the remaining designees. If two of such designees
have been stricken by the parties, the unstricken designee shall be the
arbitrator. Otherwise, the selection of the arbitrator shall be made by the APIA
from the remaining designees in accordance with their mutual order of
preference, or by random selection in the absence of a mutual order of
preference. The arbitrator(s) shall base the determination of whether Cause has
occurred on applicable law and judicial precedent and, unless both parties agree
otherwise, shall include in such award the findings of fact and conclusions of
law upon which the decision is based. Judgment on the award rendered by the
arbitrator(s) may be entered in any court having jurisdiction thereof
(b) Management Deadlock. At any time, Kraus and Crits (acting
together) or the Bank may declare that a "Deadlock" in the management of the
Company has occurred and that the Member or Members declaring the Deadlock (the
"Notifying Member or Members") have determined that they are no longer willing
to operate the Mortgage Business as Members of the Company along with the other
Member or Members (the "Responding Member or Members"). Notwithstanding the
preceding sentence, at any time following the withdrawal of either Kraus or
Crits as a Member, the remaining Member, either Kraus or Crits, as the case may
be, shall have the right to declare a Deadlock be (acting alone). Notice of
Deadlock must be in the form of a written notice provided by the Notifying
Member or Members to the Responding Member or Members and the Responding
Members' principal place of business, which shall, with respect to Kraus and
Crits, be the principal place of business of the Company, and, with respect to
the Bank, shall be the principal place of business of the Bank. Once a Deadlock
has been declared by the Notifying Member or Members, the Members have the
following rights and obligations:
(i) Election by Responding Member or Members. Upon
receipt of the notice of Deadlock, the Responding Member or Members shall have
the option to purchase all, but not less than all, of the units of Membership
Interest of the Notifying Members for a payment equal to the Fair Market Value
of those units. The Responding Member or Members must indicate their election to
purchase the units of Membership Interest of the Notifying Members in writing no
later than 10 business days following their receipt of the notice of Deadlock.
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(ii) Election by Notifying Member or Members. If the
Responding Member or Members do not exercise the option to purchase the units of
Membership Interest of the Notifying Member or Members, the Notifying Member or
Members shall have the option to purchase all, but not less than all, of the
units of Membership Interest of the Responding Member or Members for Fair Market
Value. The Notifying Member or Members must indicate their election to purchase
the units of Membership Interest of the Responding Members in writing no later
than 10 business days following the last day the Responding Member or Members
could have elected to purchase the units of Membership Interest of the Notifying
Members.
(iii) No Election by Notifying or by Responding Members.
If neither the Notifying Member or Members nor the Responding Member or Members
elect to purchase the units of Membership Interest of the other Members, all of
the Members shall be obligated to use their best efforts and to cooperate to
sell the Mortgage Business and liquidate the Company, or to sell all of their
units of Membership Interest. If the Mortgage Business or 100% of the Members'
units of Membership Interest is sold, all of the Members will, if requested by
the purchaser or purchasers of the Mortgage Business or of units of Membership
Interest, be bound by an agreement not to compete having the same provisions
limiting competition as are required under the Joint Restrictive Covenant for a
period of one year following the date of the sale transaction.
(iv) Fair Market Value and Restrictive Covenant. If, as
a result of a Deadlock, either the Notifying Member or Members or the Responding
Member or Members purchase the units of Membership Interest of the other
Member(s), resulting in the purchase of the units of Membership Interest Kraus
and/or Crits by the Bank, the following provisions shall be applicable:
(A) If an appraiser or appraisers is/are engaged
for the purpose of determining the net Fair Market Value of the Company, the
appraiser(s) shall determine its net Fair Market Value without taking into
account the services of Kraus and/or Crits, as the case may be) but taking into
account the value to the Mortgage Business of the applicable provisions of the
Restrictive Covenant.
(B) Kraus and/or Crits, following the purchase of
their units of Membership Interest by the Bank shall be subject to the
provisions of the Joint Restrictive Covenant without regard to any other
conditions (e.g., the conduct of any business by Kraus and Crits together) which
would otherwise be required to have occurred for the Joint Restrictive Covenant
to be in effect.
(C) Payment to Kraus and/or Crits will be made in
two equal installments (with interest at the minimum rate required to avoid
imputed interest under applicable federal tax rules), with the first installment
to be paid 60 days following the election
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by the Bank to purchase the units of Membership Interest, and with the second
installment payable on the anniversary of the first payment date.
(v) If as a result of a Deadlock, either the Notifying
Member or Members or the Responding Member or Members purchase the units of
Membership Interest of the other Member(s), resulting in the purchase of the
Bank's units of Membership Interest, the following provisions shall be
applicable:
(A) If an appraiser or appraisers is/are engaged
for the purpose of determining the net Fair Market Value of the Company, the
appraiser(s) shall determine its net Fair Market Value without taking into
account the services of the Bank, but taking into account the value to the
Mortgage Business of the applicable provisions of the Restrictive Covenant.
(B) The Bank shall be subject to a restrictive
covenant for a period of one year, with such agreement having the same
restrictions as would be applicable to Kraus and Crits under the Joint
Restrictive Covenant.
(C) Kraus and/or Crits shall not be subject to any
provisions of the Restrictive Covenant.
(D) Payment to the Bank will be made in two equal
installments (with interest at the minimum rate required to avoid imputed
interest under applicable federal tax rules), with the first installment to be
paid 60 days following the election by the Bank to purchase the units of
Membership Interest, and with the second installment payable on the anniversary
of the first payment date.
7.03 Compliance with Securities Laws. The Members acknowledge and
confirm that the units of Membership Interest held by them may constitute
securities and that the units of Membership Interest have not been registered
under any federal or state securities laws by virtue of exemptions from the
registration provisions thereof or otherwise, and consequently cannot be sold
except pursuant to appropriate registration or exemption from registration as
applicable.
7.04 Allocations with Respect to Transferor's Interest. Upon the
assignment by a Member of all or any part of his interest in the Company to a
Person becoming a substitute Member, the net profits, net losses and credits for
the entire fiscal year of the Company during which such assignment occurred
shall be prorated between assignor and assignee on the basis of the number of
days in the fiscal year preceding and succeeding the effective time of the
assignment, regardless of the period of the year in which such profit or loss
was actually recognized or such credit became available.
7.05 Restrictive Covenant.
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(a) Each Member (and all affiliates of each Member) shall be
subject to certain limitations on activities which would constitute competition
with the Company both during the period the Member is a Member of the Company
and for certain periods following the withdrawal of the Member from the Company.
All of the Members acknowledge that the restrictions contained in this Section
7.05 are reasonable and necessary in order to protect the legitimate interests
of Company in view of the nature of the business in which Company is engaged,
that the enforcement of these restrictions will not impose a hardship on any
Member or significantly impair the ability of any Member to earn a livelihood,
and that any violation of the restrictions set forth herein would result in
irreparable injuries to Company. Each Member, therefore, acknowledges that, in
the event of any violation of any of these restrictions, the Company shall be
entitled to obtain from any court of competent jurisdiction preliminary and
permanent injunctive relief as well as damages and an equitable accounting of
all earnings, profits and other benefits arising from such violation, which
rights shall be cumulative and in addition to any other rights or remedies to
which Company may be entitled, and acknowledges further that, in the event there
is a violation of the restrictions set forth herein by either any Member, the
Company shall be relieved of any liability to make any payment to such Member of
any amounts otherwise payable under the terms of this Agreement or any
Compensation Agreement between the Company and such Member on or after the
occurrence of any violation of the restrictions set forth herein.
(b) Restrictive Covenant Applicable to Active Members. From
the date hereof until the date that a Member withdraws as a Member of the
Company, such Member shall not engage in any activities which are in direct
competition with the Mortgage Business, including, but not limited to, any
solicitation of existing customers of the Mortgage Business, any solicitation of
other employees of the Mortgage Business, and any solicitation of business from
any contacts which may be of value in the conduct of the Mortgage Business by
the Company.
(c) Joint Restrictive Covenant. If both Kraus and Crits
terminate their relationship with the Bank or the Company and operate another
business jointly or work together for the same employer at any time during the
one year period (the "Joint Restriction Period") commencing on the later of the
date that Kraus or Crits terminates his relationship with the Bank, both Kraus
and Crits shall be subject to the restrictive covenant set forth herein as the
"Joint Restrictive Covenant." The Joint Restrictive Covenant shall be effective
until the end of the Joint Restriction Period. During the portion of the Joint
Restriction Period during which the Joint Restrictive Covenant is applicable,
Kraus and Crits agree not to engage in any activities which are in direct
competition with the Mortgage Business, including, but not limited to, any
solicitation of existing customers of the Mortgage Business, any solicitation
of other employees of the Mortgage Business, and any solicitation of business
from any contacts which either Kraus or Crits used while conducting the Mortgage
Business for the Company or as employees of the Bank or any of its affiliates.
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(d) Individual Restrictive Covenant. If either Kraus and Crits
or if both terminate their relationship with the Company or with the Bank or any
of its affiliates, but do not operate another business jointly or work together
for the same employer at any time during the Joint Restriction Period, each of
Kraus and Crits will be subject to the restrictive covenant set forth herein as
the "Individual Restrictive Covenant." The Individual Restrictive Covenant shall
be effective for a period of one year (the "Individual Restriction Period")
commencing on the date Kraus or Crits, as the case may be, terminates his
relationship with The Company, the Bank or any of its affiliates. During the
Individual Restriction Period, Kraus and/or Crits, as applicable, agree not to
(a) solicit any existing or past customers of the Company or of the Mortgage
Business, or any potential customers who have already been contacted by the
Company or by such other entity as may be conducting the Mortgage Business, (b)
solicit any employees of the Company, the Bank or any of its affiliates, and (c)
become an owner (or a phantom owner) of any entity conducting a mortgage
business operation. Klaus and/or Crits, as the case may be, shall, however, not
be restricted from becoming an employee of entity conducting mortgage business
operations at any time following the termination of their relationship with the
Company, the Bank or any of its affiliates unless Kraus and Crits become subject
to the Joint Restrictive Covenant. The applicability of the individual
Restrictive Covenant to Kraus and/or Crits shall not limit the applicability of
the Joint Restrictive Covenant if the conditions causing the Joint Restrictive
Covenant to become effective occur
(e) Notwithstanding anything contained herein to the contrary,
no provisions of this Restrictive Covenant shall be effective with respect to
any Member to the extent such provisions are in conflict with any provisions of
this Operating Agreement or of any other written agreement between the parties
which explicitly limits the effectiveness of this Restrictive Covenant.
(f) If the Individual Restrictive Period or the Joint
Restrictive Period described above should be adjudged unreasonable in any
proceeding, then the applicable period of time shall be reduced by such amount
so that the restrictions set forth in this Restrictive Covenant may be enforced
for such time as is adjudged to be reasonable. If any Member violates any of the
restrictions contained in this Section 7.05, the Joint Restriction Period or the
Individual Restriction Period, as the case may be, shall be extended with
respect to the Member or Members engaged in such violation by a period equal to
the length of time from the commencement of any such violation until such time
as such violation shall be cured by such member, to the satisfaction of the
Company. The Company shall have the right and remedy to require the Member to
account for and pay over to the Company all compensation, profits, monies,
accruals, increments or other benefits derived or received by such Member as the
result of any transactions constituting a breach of this Restrictive Covenant,
and such Member shall account for and pay over such amounts to the Company upon
the Company's request therefor. All Members hereby expressly consent to the
jurisdiction of any court within the Eastern District of Pennsylvania to enforce
the provisions of this Section 7.05, and agree to accept service of process by
mail relating to any such proceeding. The Company may supply a copy of this
Restrictive Covenant to any future or prospective employer, co-owner or partner
of a Member to
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whom such Member has supplied information if the Company determines in good
faith that there is a reasonable likelihood that the Member has violated or will
violate the provisions of this Restrictive Covenant.
VIII.TERMINATION OF TITLE COMPANY
8.01 Dissolution.
(a) The Company shall be dissolved and its affairs wound up
upon the first to occur of the following:
(i) December 31, 2028;
(ii) The unanimous written agreement or consent of all
the Members to dissolve the Company;
(iii) The death, insanity, adjudication of incompetence,
Bankruptcy, retirement, expulsion or resignation of a Member, or the occurrence
of any other event which terminates the continued membership of a Member, unless
within 90 days after such event, all of the remaining Members elect to continue
the Company;
(iv) The entry of a decree of judicial dissolution; or
(v) The sale of all or substantially all of the assets
of the Company.
(b) Certificate of Dissolution. Unless There is an election to
continue the business of the Company as provided in Section 8.01 (a)(iii), then,
following the dissolution and winding up of the affairs of the Company, the
Company shall execute a Certificate of Dissolution in the form prescribed by the
Act.
8.02 Winding Up and Distributions.
(a) In the event of a dissolution of the Company pursuant to
Section 8.01, the assets of the Company shall be liquidated and, after Company
obligations have been discharged or provided for, and any reserves which the
Liquidator deems reasonably necessary to provide for contingent and unforeseen
liabilities or obligations of the Company have been established, the net
proceeds of such liquidation shall be distributed in accordance with Section
4.03.
(b) All liquidating distributions shall be made in cash or in
kind, in the discretion of the Liquidator. In connection with the sale by the
Company and reduction to cash
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of its assets. although the Company has no obligation to offer to sell any
properties to the Members, any Member, at the option of the Liquidator, may bid
on and purchase any assets. If the Liquidator shall determine that an immediate
sale of part or all of the Company assets would cause undue loss to the Members,
the Liquidator may defer liquidation of and withhold from distribution for a
reasonable time any assets of the Company (except those necessary to satisfy the
Company's current obligations).
(c) If any assets of the Company are to be distributed in
kind, such assets shall be distributed on the basis of the fair market value
thereof and any Member entitled to any interest in such assets shall receive
such Interest therein as a tenant-in-common with all other Members so entitled.
The fair market value of such assets shall be determined by an independent
appraiser to be selected by the Liquidator.
(d) In connection with the termination of the Company, the
Company's Accountants shall prepare and furnish to each Member a statement
setting forth the assets and liabilities of the Company as of the date of
complete liquidation. After distribution of all of the assets of the Company,
the Members shall cease to be such, and the Liquidator shall cause to be
executed, acknowledged and filed all documents necessary to cancel the
Certificate and fictitious name registrations of the Company, if any, and to
terminate the Company.
(e) Following the liquidation of the Company, none of the
Members shall be subject to the provisions of Section 7.05 (the "Restrictive
Covenant").
IX. BOOKS, RECORDS AND TAX ELECTIONS
9.01 Books and Records. The Board shall cause to be kept full and
accurate books of the Company. All books and records of the Company shall be
kept at the Company's principal office and shall be available at reasonable
times for inspection and copying by the Members or their duly authorized
representatives. The books of the Company shall be kept on the accrual or cash
basis as the Board shall determine, and the fiscal period of the Company shall
also be determined by the Board. Capital accounts for each Member shall be
maintained as part of the books of the Company and the amount of profits or
losses of The Company, as well as capital contributions to the Company, and
distributions torn the Company, shall be credited or charged, as the case may
be, to the capital account of each Member. An annual statement showing the
income and expenses p f the Company (and the portion allocable to each Member),
a balance sheet of the Company at the end of the fiscal year, and a statement of
members' equity, together with all other information needed by the Members for
income tax purposes, shall be prepared by the Company's Accountants, without
audit unless otherwise determined by the Board, and furnished to each Member
within 75 days after the end of each fiscal year of the Company.
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9.02 Tax Elections. The Board may cause the Company to make such tax
elections (including, without limitation, the election under Section 754 of the
Code) as the Board deem appropriate in its sole discretion.
9.03 Tax Matters Partner. The Bank is hereby designated as the "tax
matters partner" of the Company pursuant to ss. 6231(a)(7) of the Code.
X. INDEMNIFICATION OF MANAGERS AND AGENTS
10.01 Definitions. As used in this Article X:
(a) "Company Agent" means any Person who is or was an employee
or agent of the Company and any person who is or was a director, officer,
trustee or employee of any Other Enterprise, serving or continuing to serve as
such at the request of the Company, or the legal representative of any such
person;
(b) "Other Enterprise" means any domestic or foreign
corporation, any limited liability company other than the Company) and any
partnership, joint venture, sole proprietorship, trust, employee benefit plan or
any other entity, whether or not for profit, served by a Company Agent;
(c) "Expenses" means reasonable costs, disbursements and
counsel fees;
(d) "Liabilities" means amounts paid or incurred in
satisfaction of judgments, fines (including any excise taxes assessed on a
person with respect to an employee benefit plan), penalties and settlements,
provided that, in the case of a settlement, the Company shall have given its
prior approval to the terms of the settlement;
(e) "Proceeding" means any pending, threatened or completed
civil, criminal, administrative or arbitrative action, suit or proceeding. and
any appeal therein and any inquiry or investigation which could lead to such
action, suit or proceeding.
10.02 Mandatory Indemnification of Managers.
(a) The Company shall indemnify each Manager against such
Manager's Expenses and Liabilities in connection with any Proceeding involving
the Manager by reason of his or her being or having been a Manager, other than a
Proceeding by or in the right of the Company. Indemnification shall be provided
by this Section, to the fullest extent permitted by Pennsylvania law, only if
such Manager acted in good faith and in a manner he or she reasonably believed
to be in or not opposed to the best interests of the Company, and with
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respect to any criminal Proceeding, if such Manager had no reasonable cause to
believe his or her conduct was unlawful.
(b) The Company shall indemnify, to the fullest extent
permitted by Pennsylvania law, each Manager against such Manager's Expenses in
connection with any Proceeding by or in the right, of the Company to procure a
judgment in its favor which involves the Manager by reason of his or her being
or having been a Manager, if such Manager acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the Company
The Board or a committee thereof acting by a majority
vote of Managers who were not parties to or otherwise involved in the
Proceeding, shall determine on a case by case basis, if indemnification as
described in subsection (a) or (b) above is proper in the circumstances because
the Manager met the applicable standard of conduct set forth in subsection (a)
or (b) above
(c) Notwithstanding any limitations contained in subsection
(a) and (b) above, the Company shall indemnify each Manager against such
Manager's Expenses to the extent that such Manager has been successful on the
merits or otherwise in any Proceedings or in defense of any claim, issue or
matter therein.
10.03 Optional Indemnification of Company Agents.
(a) The Company may, at its option, indemnity each Company
Agent against his or her Expenses and Liabilities in connection with any
Proceeding involving the Company Agent by reason of his or her being or having
been a Company Agent,, other than a Proceeding by or in the right of the
Company. Indemnification shall be provided by this section, to the fullest
extent permitted by Pennsylvania law, only if such Company Agent acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interests of the Company, and with respect to any criminal Proceeding,
if such Company Agent had no reasonable cause to believe his or her conduct was
unlawful.
(b) The Company may, at its option, indemnify, to the fullest
extent permitted by Pennsylvania law, each Company Agent against his or her
Expenses in connection with any Proceeding by or in the right of the Company to
procure a judgment in its favor which involves the Company Agent by reason of
has or her being or having been a Company Agent, if he or she acted in good
faith and in a manner reasonably believed to be in or not opposed to the best
interests of the Company.
(c) Notwithstanding any limitations contained in subsections
(a) and (b) above, the Company may, at its option, indemnify each Company Agent
against his or her Expenses to the extent that such Company Agent has been
successful on the merits or otherwise in any Proceedings or in defense of any
claim, issue or matter therein.
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10.04 Advances.
(a) Expenses incurred by a Manager in connection with a
Proceeding shall be paid by the Company in advance of the final disposition of
the Proceeding as authorized by the Board upon receipt of an undertaking by or
on behalf of the Manager to repay such amount if it shall ultimately be
determined that he or she is not entitled to be indemnified as provided in this
Article X.
(b) Expenses incurred by a Company Agent in connection with a
Proceeding may be paid by the Company in advance of the final disposition of the
Proceeding as authorized by the Board upon receipt of an undertaking by or on
behalf of the Company Agent to repay such amount if it shall ultimately be
determined that he or she is not entitled to be indemnified as provided in this
Article X.
10.05 Insurance. The Company may purchase and maintain insurance on
behalf of any Manager or Company Agent against any Expenses incurred in any
Proceeding and any Liabilities asserted against such Manager or Company Agent by
reason of such Manager or Company Agent having been a Manager or Company Agent.
The Company may purchase such insurance from, or such insurance may be reinsured
in whole or in part by, an insurer owned by or otherwise affiliated with the
Company, whether or not such insurer does business with other insureds.
10.06 Non-Exclusivity of Rights. The rights conferred on any Manager
or Company Agent by this Article X shall not be exclusive of any other rights
which such Manager or Company Agent may have or hereafter acquire under any
statute, provision of the Certificate, agreement, vote of Members or
disinterested Managers or otherwise.
10.07 Amendment. Any repeal or modification of this Article X shall
not adversely affect any right or protection hereunder of any Manager or Company
Agent in respect of any act or omission occurring prior to the time of such
repeal or modification.
XI. GENERAL PROVISIONS
11.01 Amendments. No amendment of this Agreement shall be binding
unless such amendment is proposed in writing by the Board and all of the Members
consent in writing thereto.
11.02 Indulgences. Etc. Neither the failure nor any delay on the
part of any party hereto to exercise any right, remedy, power or privilege under
this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, remedy, power or privilege preclude any other or
further exercise of the same or of any other right, remedy, power or privilege,
nor shall any waiver of any right, remedy, power or privilege with respect to
any
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occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence. No waiver shall be effective unless it is
in writing and is signed by the party asserted to have granted such waiver.
11.03 Controlling Law. This Agreement and all questions relating to
its validity, interpretation, performance and enforcement, shall be governed by
and construed in accordance with the substantive laws of the Commonwealth of
Pennsylvania, notwithstanding any conflict-of-law provisions to the contrary.
11.04 Notices. All notices, requests, consents or other
communications provided for or permitted to be given under this Agreement shall
be in writing and shall be given either by depositing such writing in the United
States mail, addressed to the recipient, postage prepaid and registered or
certified with return receipt requested or by delivering such writing to the
recipient in person, by courier, overnight delivery service, or by facsimile
transmission. All notices, requests, consents and other communications to be
sent or delivered to the Company must be sent or delivered to the Company's
principal place of business, or the facsimile number thereof, to the attention.
of the Board, or if to a Member, must be Lent or delivered to the address or
facsimile number shown for that Member on the Company's books or at such other
address or facsimile number as that Member may specify by notice to the Company;
provided, however, that such notice of change in address or facsimile number
shall not be effective unless and until such notice is received by the Company.
11.05 Binding Nature of Agreement. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective heirs,
personal representatives, successors and assigns, except that no party may
assign or transfer its rights or obligations under this Agreement m any manner
other than as provided in this Agreement.
11.06 Execution in Counterparts. This Agreement may be executed in
any number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
11.07 Provisions Separable. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
11.08 Paragraph Headings. The paragraph headings in this Agreement
are for convenience only; they form no part of this Agreement and shall not
affect its interpretation.
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11.09 Gender. Etc. Words used herein, regardless of the number and
gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender, masculine, feminine or neuter,
as the context requires.
11.10 Number of Days. In computing the number of days for purposes
of this Agreement, all days shall be counted, including Saturdays, Sundays and
holidays; provided, however, that if the final day of any time period falls on a
Saturday, Sunday or holiday on which federal banks are or may elect to be
closed, then the final day shall be deemed to be the next day which is not a
Saturday, Sunday or such holiday.
11.11 Interpretation. No provision of this Agreement is to be
interpreted for or against either party because that party or that party's legal
representative or counsel drafted such provision.
11.12 Reliance. Each party acknowledges that, in entering into this
Agreement and making any Capital Contributions pursuant hereto, he is relying
solely upon his own investigation and the contents of this Agreement and any
agreements executed concurrently herewith and not upon any statements made or
materials produced by any other party or such other parry's representatives.
11.13 Further Assurances. In addition to the documents and
instruments to be delivered as herein provided, each of the pasties hereto
shall, from time to time at the request of the Board, execute and deliver such
instruments and shall take such other action as may be required to carry out
more effectively the terms of this Agreement.
11.14 Corporate Authority. Any corporation signing this Agreement
represents and warrants that the execution, delivery and performance of this
Agreement by such corporation has been duly authorized by all necessary
corporate action and is valid and binding upon such corporation.
11.15 No Third-Party Beneficiaries. Notwithstanding anything to the
contrary contained herein, no provision of this Agreement is intended to benefit
any party other than the Company, the other signatories hereto and their
permitted successors and assigns, nor shall any such provision be enforceable by
any other party.
11.16 Waiver of Partition. Each party does hereby waive any right to
partition or the right to take any other action which might otherwise be
available to such party outside of the provisions of this Agreement for the
purpose of severing his relationship with the Company or such party's interest
in the property held by the Company from the interests of the other parties
until the end of the term of both this Company and any successor entity formed
pursuant to the terms hereof
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11.17 Nominal Title Holder. Any or all Company property may, at the
option of the Board, be held in the name of one or more nominal title holders
chosen by the Board for the Company.
11.18 Controversies With Internal Revenue Service. In the event of
any controversy with the Internal Revenue Service or any other taxing authority
involving the Company of any Member or Members, the outcome of which may
adversely affect the Company, directly or indirectly, or the amount of
allocation of profits, gains, credits or losses of the Company to one or more
Members, the Company may, at its option, incur expenses it deems necessary or
advisable in the interest of the Company in connection with any such
controversy, including, without limitation, attorneys' and accountants' fees.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first above written.
MADISON BANK
By:
----------------------------------------
-------------------------------------------
Jonathan O. Kraus
-------------------------------------------
John J. Crits
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EXHIBIT B
COMPENSATION AGREEMENT
THIS COMPENSATION AGREEMENT, made this 5th day of May, 1998, by and
between Philadelphia Financial Mortgage Co., LLC (hereinafter called the
"Company"), and ____________________________, an individual (hereinafter called
the "Executive").
W I T N E S S E T H
WHEREAS, the Company wishes to have the Executive provide certain
services to the Company and the Executive wishes to provide such services for
the Company on the terms and conditions contained in this Agreement.
NOW, THEREFORE, in consideration of the facts, mutual promises and
covenants contained herein and intending to be legally bound hereby, the Company
and the Executive agree as follows:
1. Definitions. As used herein, the following terms shall have the
meanings set forth below unless the contexts otherwise requires.
"Affiliate" shall mean a person who with respect to any
entity, directly or indirectly through one or more intermediaries, controls, or
is controlled by, or is under common control with, such entity.
"Base Compensation" shall mean the annual rate of compensation
set forth in Section 4(a), as such amount may be adjusted from time to time.
"Board" shall mean the Board of Managers of the Company
"Business" all mean the business conducted by the Company in
the past and on the date of execution of this agreement, including business
activities in developmental stages, business activities which may be developed
by the Company, or any subsidiary, parent or other affiliate of the Company,
during the period of the Executive's service with the Company, and all other
business activities which flow from a reasonable expansion of any of the
foregoing.
"Cause" shall mean any one or more of the following:
(a) if the Executive is convicted of a felony or a crime
involving moral turpitude or has entered a plea of nolo contendere (or similar
plea) to a charge of such an offense;
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(b) if the Executive uses alcohol or any unlawful
controlled substance to an extent that it materially interferes with the
performance of the Executive's duties under this Agreement;
(c) if the Executive breaches or neglects the material
duties that the Executive is required to perform under the terms of this
Agreement after having been warned, in writing, by the Company of the
consequences of such specific actions;
(d) if the Executive commits any act of fraud, personal
dishonesty or deliberate misappropriation relating to or involving the Company;
(e) if the Executive repeats the violation of reasonable
and material rule(s), regulation(s), policy(ies) or plan(s) governing his
performance or express direction(s) of the Board after having been warned, in
writing, by company of the consequences of such specific violations; or
(f) if the Executive engages in the willful,
unauthorized disclosure of material confidential information concerning the
Company or its Business;
"Disability" shall have the meaning set forth in the Operating
Agreement.
"Operating Agreement" shall mean the operating agreement
governing the operations of the Company
2. Term of Service. The Company hereby engages the services of the
Executive and the Executive hereby agrees to provide such services to the
Company for the period and upon the terms and conditions specified in this
Agreement. The term of this Agreement shall commence on the date hereof (the
"Commencement Date"), and shall end as of the date the Executive ceases to be a
Member of the Company.
3. Office and Duties.
(a) The Executive shall serve as President/Vice-President. In
such capacity, the Executive shall render such services as are necessary and
desirable to protect and advance the best interests of the Company, acting, in
all instances, under the supervision of and in accordance with the policies set
by the Board.
(b) For as long as the Executive continues to provide services
to the Company, the Executive's entire working time, energy, skill and best
efforts shall be devoted to the performance of the Executive's duties hereunder
in a manner which will faithfully and diligently further the business and
interests of the Company. The Executive may engage in charitable, civic,
fraternal, trade and professional association activities that do not interfere
with
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the Executive's obligations to the Company, but the Executive shall not work for
any other for profit business.
4. Base Compensation, Commissions, and Bonuses. For all of the
service rendered by the Executive to the Company, the Executive shall receive,
during the Initial Term:
(a) Base Compensation at the annual rate of Seventy Two
thousand dollars ($72,000.00) per year, payable by the Company as a "guaranteed
payment." The Base Compensation will be payable in installments in accordance
with the Company's regular payroll practices in effect from time to time during
the term of this Agreement.
(b) In addition to the foregoing compensation, the Executive
shall be eligible to receive a commission equal to 50 points for all mortgage
business originated by the Executive. Commissions, if any, will be paid to the
Executive on the last payday of each month he is providing service to the
Company for sales booked by him through the previous month. Upon the Executive's
termination of service to the Company, the Company will pay the Executive,
within thirty (30) days of such termination, his commissions, if any, on all
mortgages he originated which closed on or before his last day of actual service
with the Company.
(c) In addition to the foregoing compensation, the Executive
shall be eligible to receive an annual bonus equal to an amount, determined at
the discretion of the Board, but not less than up to 0.5% of the net profits of
the Company as determined by the accountants regularly engaged by the Company to
review or audit its financial statements.
(d) In addition to the foregoing compensation, the Executive
shall be eligible to receive additional payments as reimbursement of reasonable
automobile expenses (not in excess of $500 per month), cellular phone expenses
and other business expenses consistent with policies established with respect to
such reimbursements by the Board.
(e) Notwithstanding anything contained herein to the contrary,
the amount of the Executive's Base Compensation with respect to any period shall
be reduced by the amount of any cash compensation to the Executive that is made
by Madison Baneshares Group, Ltd. or by any subsidiary or other affiliate of
Madison Baneshares Group, Ltd. other than the Company.
5. Fringe Benefits As an inducement to the Executive to commence
service hereunder, and in consideration of the Executive's covenants under this
Agreement, the Executive shall be entitled to the benefits set forth below (the
"Fringe Benefits") daring the Term of this Agreement:
(a) The Executive shall be eligible to participate in any
health, life, accident or disability insurance, sick leave or other benefit
plans or programs made available to
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other employees of the Company, except to the extent that Executive's status as
a "partner" for federal income tax purposes prevents the Executive from
participating in such plans or programs or would cause such plans or programs to
fail to meet any applicable requirements under the Internal Revenue Code of
1986, as amended (the "Code"); and provided, further that the Executive meets
the eligibility requirements and other terms, conditions and restrictions of the
respective plans and programs.
(b) The Executive shall be entitled to four (4) weeks paid
vacation during each year, subject to the Company's generally applicable
policies relating to Vacations. The Executive shall give the Chairman of the
Board (or his or her designee) written notice at least seven (7) days prior to
the commencement of any vacation in excess of five (5) business days.
(c) The Company will reimburse the Executive for all
reasonable and necessary expenses incurred by the Executive in connection with
the performance of the Executive's duties hereunder upon receipt of
documentation therefor in accordance with the Company's regular reimbursement
procedures and practices in effect from time to time.
(d) The Executive shall be eligible to receive options to
purchase shares in Madison Bancshares Group, Ltd. to be issued under the Madison
Bancshares Group, Ltd. 1997 Stock Option Plan (the "Stock Option Plan") at an
exercise price equal to the fair market value of the shares on the date of
grant, The number of shares subject to such option shall be determined at the
discretion of the administrative committee (the "Committee") charged with
responsibility for such determinations under the terms of the Stock Option Plan.
The Executive shall be entitled to grants of options to acquire shares of
Madison Bancshares Group, Ltd. under the Stock Option Plan from time to time,
which grants shall be made at the discretion of the Committee, taking into
account all relevant facts and circumstances, and which shall be made at such
times and for such shares as it deems appropriate under all relevant facts and
circumstances, treating the Executive in a manner comparable to to other
similarly situated executives who are eligible to participate in the Stock
Option Plan.
6. Disability. If the Executive suffers a Disability, the Company
may terminate the Executive's relationship with the Company at any time
thereafter by giving the Executive ten (10) days written notice of termination.
Thereafter, the Company shall have no obligation to the Executive for Base
Compensation, Commissions, Fringe Benefits or any other form of compensation or
benefit to the Executive, except as otherwise required by law or by benefit
plans provided at the Company expense, other than (a) amounts of Base
Compensation and Commissions accrued through the date of termination, (b)
reimbursement of appropriately documented expenses incurred by the Executive
before the termination of service, to the extent that the Executive would have
been' entitled to such reimbursement but for the termination of service.
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7. Death. If the Executive dies during the Term of this Agreement,
the Term of this Agreement shall terminate as of the date of the Executive's
death. The Company shall have no obligation to the Executive or the Executive's
estate for Base Compensation, Commissions, Fringe Benefits or any other form of
compensation or benefit, except as otherwise required by law or by benefit plans
provided at the Company expense, other than (a) amounts of Base Compensation and
Commissions that have accrued through the date of the Executive's death, and (b)
reimbursement of appropriately documented expenses incurred by the Executive
before the termination of service, to the extent that the Executive would have
been entitled to such reimbursement but for the termination of service.
8. Termination for Cause. The Company may terminate the Executive's
service relationship with the Company at any time for Cause. Upon termination of
the Executive under this Section 8, the Company shall have no obligation to the
Executive for Base Compensation, Commissions, Fringe Benefits, or other form of
compensation or benefits other than (a) amounts of lease Compensation and
Commissions accrued through the date of termination, and (b) reimbursement of
appropriately documented expenses incurred by the Executive before the
termination of service, to the extent that the Executive would have been
entitled to such reimbursement but for the termination of service.
9. Termination without Cause. The Company may not terminate the
Executive's service relationship with the Company at any time without Cause
other than in connection with the withdrawal of the Executive as a Member of the
Company pursuant to the terms of the Operating Agreement.
10. Consideration. The Executive agrees and acknowledges that the
Executive is agreeing to be bound by the terms of this Agreement, in
consideration of (i) the taking and commencement of service with the Company and
(ii) the Company's agreement to pay in full all amounts due as Base
Compensation, Commissions and other amounts due after the Executive's
termination without Cause in accordance with Section 9 of this Agreement; and
the Executive further agrees and acknowledges that each of the benefits
described in clause (i) or (ii) alone constitutes full, complete and adequate
consideration for the Executive's obligations hereunder.
11. Company Property. All advertising, sales, manufacturers' and
other materials or articles or information, including without limitation data
processing reports, computer programs, software, customer information and
records, business records, price lists or information, samples, or any other
materials or data of any kind furnished to the Executive by the Company or
developed by the Executive on behalf of the Company or at the Company's
direction or for the Company's use or otherwise in connection with the
Executives service hereunder, are and shall remain the sole property of the
Company, including in each case all copies thereof in any medium including
computer tapes and other forms of information storage. If the Company requests
the return of such materials at any time during or at or after the termination
of the Executive's service, the Executive shall deliver all copies of the same
to the
-5-
<PAGE>
Company immediately. Notwithstanding the foregoing, the Executive may retain
records relevant to the filing of the Executive's personal income taxes and the
Company shall grant the Executive reasonable access during normal business
hours, to business records of the Company relevant to the Executive's discharge
of the Executive's duties as a director of the Company or any other legitimate
non-competitive business purpose.
12. Prior Agreements. The Executive represents to the Company that
there are no restrictions, agreements or understandings, oral or written, to
which the Executive is a party or by which the Executive is bound that prevent
or make unlawful the Executive's execution or performance of this Agreement.
13. Miscellaneous.
(a) Indulgences. Etc. Neither the failure nor any delay on the
part of either party to exercise any right, remedy, power or privilege under
this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, remedy, power or privilege preclude any other or
further exercise of the same or of any other right, remedy, power or privilege,
nor shall any waiver of any right, remedy, power or privilege with respect to
any occurrence be construed as a waiver of such right, remedy, power or
privilege with respect to any other occurrence. No waiver shall be effective
unless it is in writing and is signed by the party asserted to have granted such
waiver.
(b) Controlling Law. This Agreement and all questions relating
to its validity, interpretation, performance and enforcement (including, without
limitation, provisions concerning limitations of actions), shall be governed by
and construed in accordance with the laws of the Commonwealth of Pennsylvania,
notwithstanding any conflict-of-laws doctrines of such jurisdiction to the
contrary, and without the aid of any canon, custom or rule of law requiring
construction against the draftsman.
(c) Notices. All notices, requests, demands and other
communications required or permitted under this Agreement shall be in writing
and shall be deemed to have been duly given, made and received only when
personally delivered, on the day specified for delivery when deposited with a
recognized national or regional courier service for delivery to the intended
addressee or two (2) days following the day when deposited in the United States
mails, first class postage prepaid, addressed as set forth below:
If to the Executive (as applicable):
Jonathan G. Kraus John J. Crits
601 Longchamps Drive 155 Ridings Way
Devon, PA 19333 Ambler, PA 19002
-6-
<PAGE>
with a copy, given in the manner prescribed above, to:
Steven M. Cohen
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103
If to the Company:
Mr. Vito DeLisi, Chairman
1767 Sentry Parkway, Suite 220
Blue Bell, PA 19422
with a copy, given in the manner prescribed above, to:
Lawrence R. Lesser, Esquire
Wolf, Block, Schorr & Solis-Cohen
350 Sentry Parkway
Build 640
P.O. Box 3038
Blue Bell, PA 19422
In addition, notice by mail shall be by air mail if
posted outside of the continental United States. Any party may alter the address
to which communications or copies are to be sent by giving notice of such change
of address in conformity with the provisions of this Section for the giving of
notice.
(d) Binding Nature of Agreement. This Agreement shall be
binding upon the Company and shall inure to the benefit of the Company, its
present and future Subsidiaries, Affiliates, successors and assigns including
any transferee of the business operation, as a going concern, to which the
Executive provides services or in which the Executive is otherwise employed and
shall be binding upon the Executive, the Executive's heirs and personal
representatives. None of the rights or obligations of the Executive hereunder
may be assigned or delegated, except that in the event of the Executive's death
or Disability, any rights of the Executive hereunder shall be transferred to the
Executive's estate or personal representative, as the case may be. The Company
may assign its rights and obligations under this Agreement in whole or in part
to any one or more Affiliates or successors, but no such assignment shall
relieve the Company of its obligations to the Executive if any such assignee
fails to perform such obligations.
-7-
<PAGE>
(e) Execution in Counterparts. This Agreement may be executed
in any number of counterparts, each of which shall be deemed to be an original
as against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
(f) Provisions Separable. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
(g) Entire Agreement. This Agreement contains the entire
understanding among the parties hereto with respect to the service of the
Executive with the Company, and supersedes all prior and contemporaneous
agreements and understandings, inducements or conditions, express or implied,
oral or written, except as herein contained. The express terms hereof control
and supersede any course of performance and/or usage of the trade inconsistent
with any of the terms hereof This Agreement may not be modified or amended other
than by an agreement in writing. Notwithstanding the foregoing, nothing herein
shall limit the application of any generally applicable the Company policy,
practice, plan or the terms of any manual or handbook, except to the extent the
foregoing directly conflict with this Agreement, in which case the terms of this
Agreement shall prevail.
(h) Section Headings. The Section headings in this Agreement
are for convenience only; they form no part of this Agreement and shall not
affect its interpretation.
(i) Number of Days. Except as otherwise provided herein, in
computing the number of days for purposes of this Agreement, all days shall be
counted, including Saturdays, Sundays and holidays; provided, however, that if
the final day of any time period falls on a Saturday, Sunday or holiday on which
federal banks are or may elect to be closed, then the final day shall be deemed
to be the next day which is not a Saturday, Sunday or such holiday.
(j) Gender. Etc. Words used herein, regardless of the number
and gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender, masculine, feminine or neuter,
as the context indicates is appropriate.
(k) Jurisdiction of Courts. Any legal suit, action, claim,
proceeding or investigation arising out of or relating to this Agreement may be
instituted in any state or federal court in the Eastern District of
Pennsylvania, and each of the parties hereto waives any objection which parry
may now or hereafter have to such venue of any such suit, action, claim,
proceeding or investigation, and irrevocably submits to the jurisdiction of any
such court. Any and all
-8-
<PAGE>
service of process and any other notice in any such suit, action, claim,
proceeding or investigation shall be effective against any party if given by
registered or certified mail, return receipt requested, or by any other means of
mail which requires a signed receipt, postage prepaid, mailed to such party as
herein provided. Nothing herein contained shall be deemed to affect the right of
any party to serve process in any manner permitted by law or to commence legal
proceedings or otherwise proceed against any other party in any jurisdiction
other than Pennsylvania.
(l) Survival. All provisions of this agreement which by their
terms survive the termination of the Executive's service with the Company,
including without limitation the covenants of the Executive set forth in
Sections 11 and 12 and the obligations of the Company to make any
post-termination payments under this Agreement, shall survive termination of the
Executive's service with the Company and shall remain in full force and effect
thereafter in accordance with their terms.
IN WITNESS WHEREOF, the parties have duly executed and delivered
this Agreement in _________________________, Pennsylvania as of the date first
above written.
PHILADELPHIA FINANCIAL MORTGAGE CO., LLC.
(SEAL) By:
------------------------------------------
Name:
Title:
---------------------------------------------
Executive
<PAGE>
[LETTERHEAD OF MADISON BANK]
March 29, 1999
Jonathan G. Kraus
John J. Crits
Madison Bank
1767 Sentry Parkway West
Blue Bell, PA 19422
RE: Agreement to Conduct Mortgage Banking Business
dated May 5, 1998 between Jonathan G. Kraus, John
J. Crits and Madison Bank (the "Bank") (the
"Agreement")
Dear Messrs. Kraus and Crits:
This letter agreement will amend certain provisions of the above referenced
Agreement. All terms used, but not defined herein, shall have the meanings
ascribed to them in the Agreement. This Agreement is amended in the following
manner:
1. Kraus and Crits waive the requirement that the Bank contribute
$150,000 and the Bank waives the requirement that Kraus and Crits
each contribute $50,000 to a limited liability company to conduct
the Mortgage Business (as defined in the Agreement)
2. Krause and Crits and the Bank have mutually determined that the
Mortgage Business (as defined in the Agreement) pending further
agreement by the parties, shall be operated as a division of the
Bank and not as a separate limited liability company.
3 All provisions of the Agreement, except as heretofore amended,
remain in full force and effect.
Please indicate your agreement to this Amendment to the Agreement by executing
the appropriate space provided below on the original of this letter and
returning same to us.
Very truly yours,
Vito DeLisi, President
Madison Bank
Accepted and agreed this 29 day of March, 1999.
/s/ Jonathan G. Kraus /s/ John J. Crits
- ---------------------------------- ----------------------------------
Jonathan G. Kraus John J. Crits
<TABLE> <S> <C>
<PAGE>
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<NAME> MADISON BANCSHARES GROUP LTD
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 7,793,484
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7,500,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,010,000
<INVESTMENTS-CARRYING> 1,602,493
<INVESTMENTS-MARKET> 1,613,597
<LOANS> 126,524,770
<ALLOWANCE> 1,111,817
<TOTAL-ASSETS> 147,925,863
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0
0
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<TOTAL-LIABILITIES-AND-EQUITY> 147,925,863
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<INTEREST-TOTAL> 11,095,356
<INTEREST-DEPOSIT> 4,745,215
<INTEREST-EXPENSE> 4,973,136
<INTEREST-INCOME-NET> 6,122,220
<LOAN-LOSSES> 440,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,399,376
<INCOME-PRETAX> 327,155
<INCOME-PRE-EXTRAORDINARY> 773,517
<EXTRAORDINARY> 446,362
<CHANGES> 0
<NET-INCOME> 446,362
<EPS-PRIMARY> 0.29
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<LOANS-PAST> 2,321,101
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